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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-K (MARK ONE)x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2003 or o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the transition period from  to . COMMISSION FILE NUMBER: 0-24469 GENVEC, INC. 
  DELAWARE
    
    23-2705690(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification Number)
 65 WEST WATKINS MILL ROAD, GAITHERSBURG, MARYLAND
    
    20878(Address of principal executive offices)
    
    (Zip code)
 REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE: 240-632-0740 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, PAR VALUE $0.001 PER SHARE(Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No o. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of Registrants knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). x Yes o No As of June 30, 2003, the aggregate market value of the voting and non-voting
common equity held by non-affiliates of the Registrant based on the closing
sale price of such stock as reported by the Nasdaq National Market on such date
was $39,344,962. For purposes of this calculation, shares of common stock held
by directors, officers and stockholders whose ownership exceeds ten percent of
the common stock outstanding at June 30, 2003 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 29, 2004, there were 51,464,298 shares of the Registrants
common stock, par value $0.001 per share, outstanding.




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TABLE OF CONTENTS  
 FORM 10-K
    
    FORM 10-K
    
    
    
    FORM 10-KPART NO.
    
    ITEM NO.
    
    DESCRIPTION
    
    PAGE NO.I
    
    1
    
    BUSINESS
    
    
    22
    
    PROPERTIES
    
    
    303
    
    LEGAL PROCEEDINGS
    
    
    304
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    30II
    
    5
    
    MARKET FOR THE REGISTRANTS
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
    
    
    336
    
    SELECTED FINANCIAL DATA
    
    
    337
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
    
    
    347(A)
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    418
    
    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
    
    
    429
    
    CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
    
    
    429A
    
    CONTROLS AND PROCEDURES
    
    
    42III
    
    10-13
    
    
    
    
    4314
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    44IV
    
    15
    
    EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
    
    
    45FINANCIAL STATEMENTS
    
    
    FExhibit 10.9Exhibit 10.15Exhibit 10.22Exhibit 10.26Exhibit 23.1Exhibit 24.1Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
  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. 1




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PART 1 
 ITEM 1. BUSINESS OVERVIEW We are a clinical-stage biopharmaceutical company developing and working to
commercialize innovative therapeutic proteins to treat serious and
life-threatening diseases, including cancer, heart disease and diseases of the
eye. Our lead product candidates address significant markets for which no
products are currently available or where we believe that the current standard
of care can be significantly improved. Our most advanced product candidates
are:  
    
    TNFerade, which is currently in three Phase II trials for the
treatment of locally advanced pancreatic cancer, non-metastatic
esophageal cancer, and rectal cancer;
    
    BIOBYPASS®, which has completed a Phase II trial in 71 patients
with severe heart disease who have no treatment options. We expect to
begin a randomized, placebo controlled trial with our corporate
partner, Cordis Corporation in the second half of 2004 to study the
clinical benefit of BIOBYPASS administered into targeted regions of the
heart using an injection catheter;
    
    Cell Transplantation Therapy which is currently in Phase I trials
for the treatment of congestive heart failure; and
    
    AdPEDF, which is currently in a Phase I trial for the treatment of
wet age-related macular degeneration, a leading cause of blindness in
individuals over the age of 50. Our TNFerade, BIOBYPASS and AdPEDF product candidates are based on our
proprietary technology that uses a vehicle, commonly called a vector, to
deliver genes that produce proteins at the site of disease. Proteins are
widely used in the practice of medicine, and have already become FDA-approved
products. The medical use of many proteins, however, has historically been
limited by the inability to maintain sufficient concentrations of the protein
at the site of the disease for a period of time long enough to provide a
benefit, while minimizing side effects caused by the proteins presence in
other, non-target tissues. We believe that our technology addresses these key
hurdles and may have many advantages when compared with other protein therapy
approaches including:  
    
    The efficient production of therapeutic proteins at the site of
disease;
    
    Better toleration by localized administration to the diseased
tissue thereby avoiding toxicity associated with systemic
administration of proteins; and
    
    More cost-effective development since each of our product
candidates shares common production and scale-up, purification, quality
assessment and formulation technologies. We use adenovectors to deliver protein-coded genes to cells. Adenovectors are
modified adenoviruses, which are naturally occurring viruses that cause
aliments like a common cold. Our adenovectors lack the ability to replicate
and cannot reproduce themselves inside the body. Our vectors also do not
invade or integrate with the DNA of the patients. Therefore, the insertion of
the gene coded for the therapeutic protein is not permanent. The vector
carrying the gene is delivered to the site of disease, produces the therapeutic
protein for the desired period of time, and is then eliminated from the body. 2




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TNFerade and BIOBYPASS have been well
tolerated in multiple human clinical trials using our
proprietary protein delivery approach. We believe
results to date support the broad applicability and commercial potential of our
product candidates. In addition to our internally developed therapeutic
product development programs, we are working with our collaborators and
customers to develop second-generation vectors and new applications, such as
vaccines, for our technology. Our current projects include:  
    
    A six-year, $30 million collaboration with The Vaccine Research
Center at the National Institute of Allergy and Infectious Diseases of
The National Institutes of Health to develop preventative AIDS and SARS
vaccine candidates, announced January 2002;
    
    A three-year, $4.5 million research collaboration with Fuso
Pharmaceuticals to identify a targeted cancer therapy product candidate
designed to treat not only the primary tumor but also cancer that has
spread, or metastasized, to distant sites in the body, announced
December 2002; and
    
    A two-year, $1.9 million research agreement with the U.S. Naval
Medical Research Center to develop vaccines against malaria and dengue
virus, announced January 2003. We are also developing cell transplantation technology for treating human
diseases that are characterized by cell dysfunction or cell death and for which
current therapies are either inadequate or nonexistent. We believe cell
transplantation products will address important unmet medical needs and that we
will play a leading role in developing new product candidates. As previously announced, on August 21, 2003, we merged with Diacrin, Inc., a
biotechnology company focused on developing cell transplantation technology for
treating human diseases. As a result of the Merger, we acquired a lease to Diacrins premises
located in Charlestown, Massachusetts, at which Diacrins corporate offices,
laboratories and manufacturing facilities were located. We also acquired certain patents,
laboratory equipment and supplies used in the research, development and
potential future production of biopharmaceutical products. OUR PRODUCT CANDIDATES PRODUCTCANDIDATE
    
    DISEASE INDICATION
    
    THERAPEUTICPROTEIN
    
    STATUSTNFerade
    
    Pancreatic Cancer
    
    TNF-alpha
    
    Phase IIEsophageal Cancer
    
    TNF-alpha
    
    Phase IIRectal Cancer
    
    TNF-alpha
    
    Phase IIBIOBYPASS
    
    Coronary Artery Disease
    
    VEGF121
    
    Phase II completeCell Transplantation
    
    Cardiac Disease
    
    N/A
    
    Phase IAdPEDF
    
    Wet Age-Related
    
    PEDF
    
    Phase IMacular Degeneration
 TNFerade for cancer.TNFerade, our lead product candidate, is designed for
the treatment of cancer in conjunction with radiation and chemotherapy. Cancer
is the second leading cause of death in the United States and approximately 60%
of all cancer patients in the United States receive radiation therapy as part
of their standard treatment. TNFerade produces tumor necrosis factor-alpha
(TNF-alpha), a protein with a well-documented anticancer effect, directly at
the site of disease through an injection into 3




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the tumor. The production of
TNF-alpha protein in the tumor is increased by therapies such as radiation and
chemotherapy. Using our proprietary technology, we deliver the TNF-alpha
protein using an adenovector that is designed to produce the greatest amount of protein when
exposed to radiation therapy. Our approach is intended to enable the
controlled production over a specific period of time of the TNF-alpha protein
inside the tumor while avoiding unwanted exposure to healthy tissue. We initiated Phase II clinical trials in patients with locally advanced
pancreatic cancer in July 2002 and in patients with non-metastatic esophageal
cancer in November 2002. Interim results from the pancreatic cancer Phase II
trial were presented at the American Society of Clinical Oncology (ASCO) annual
meeting in May 2003 and additional results were presented at ASCO
Gastrointestinal Cancers Symposium in January 2004 indicating that TNFerade,
when used in combination with front line therapy (chemotherapy and radiation)
was well tolerated at all dose levels evaluated to date. In addition, 67% of
the pancreatic cancer patients treated at the highest dose cohort were free of
disease progression at 3 months post-treatment and 83% of these patients showed
normalization of CA19-9, a protein marker for pancreatic cancer, at 3 months
post-treatment. Subject to a review of the emerging Phase II clinical data and
pre-Phase III meetings with the FDA, we plan to initiate a pivotal Phase III
trial of TNFerade for the treatment of either pancreatic cancer or
non-metastatic esophageal cancer as early as the end of 2004. In two separate
Phase I trials (one in solid tumors and one in soft tissue sarcomas), TNFerade
in conjunction with standard radiation therapy was shown to be well tolerated
and a dose-related 25% or greater reduction in tumor size was observed in more
than 70% of patients across 12 different tumor types, including melanoma,
pancreatic, small cell lung, rectal, breast and sarcoma. The results from the
Phase I trial in solid tumors were published in the February 15, 2004 issue of
the Journal of Clinical Oncology. In connection with a Cooperative Research and Development Agreement entered
into between the Company and the National Cancer Institute (NCI) in October
2003, the NCI has opened a single-site Phase II trial testing TNFerade in
patients with rectal cancer. BIOBYPASS for severe heart disease. BIOBYPASS is designed for the treatment of
coronary artery disease. As a result of blocked arteries in the heart,
patients with severe coronary artery disease typically experience severe, often
immobilizing, pain from minimum physical activity such as walking. This pain
is known as hypoxic pain because it results from a lack of oxygen to the
tissues. BIOBYPASS is intended to restore blood flow to areas of the heart
with insufficient blood flow through the formation of new blood vessels, a
process known as angiogenesis. BIOBYPASS produces the therapeutic protein,
vascular endothelial growth factor (VEGF121) that stimulates the growth of new
blood vessels in heart tissue and restores blood flow to areas of the heart
with poor blood flow. Our approach of directly injecting BIOBYPASS into the
heart wall through a minimally invasive catheter approach enables the
sustained, controlled production of the VEGF121 protein in the area of the
heart with poor blood flow. In May 2002, we completed a randomized, controlled study of 71 patients with
severe coronary artery disease and no treatment options. In November 2002, we
presented statistically significant, positive results from this
proof-of-principle study at the American Heart Association annual meeting
showing that these no option patients benefited when they received BIOBYPASS
administered by a surgical procedure. Patients treated with BIOBYPASS showed a
greater ability to exercise, less chest pain, less need for medication for
angina pain and an improved quality of life compared to patients receiving the
current standard of care. There were no drug-related serious adverse events or
dose limiting toxicities. Also in 2002, we completed a clinical study designed
to demonstrate the feasibility of using an injection catheter to deliver
BIOBYPASS directly to the heart muscle. This study is of importance since we
anticipate that the commercialized version of BIOBYPASS will be delivered by a
non-surgical injection catheter such as that used in our feasibility study.
Results of this study were presented at the American College of Cardiology
meeting in March 2003. 4




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In December 2003, the Company entered into a research collaboration with the
Cordis Cardiology Division of Cordis Corporation, a Johnson & Johnson company,
to study the clinical benefit of BIOBYPASS in a procedure involving guided
delivery of the angiogenic agent directly into targeted
regions of the heart in patients with severe coronary artery disease using the
Cordis NOGASTAR® Mapping Catheter and MYOSTAR Injection Catheter. The purpose of this collaboration is to conduct a randomized, double blind,
placebo controlled study of GenVecs cardiovascular product candidate,
BIOBYPASS. Clinical benefit will be assessed in a multi-center study, which
will be conducted in Europe and is expected to enroll up to 125 patients with
severe coronary artery disease. GenVec and Cordis will collaborate on
regulatory matters and share in the clinical trial costs. GenVec will supply
BIOBYPASS and Cordis will provide the injection catheters and training to the
interventional cardiologists conducting the trial. GenVec will retain
commercial rights to BIOBYPASS and Cordis will retain commercial rights to
their NOGASTAR mapping catheters and MYOSTAR injection catheters. On January 7, 2003, we announced that our 107-patient, randomized,
placebo-controlled Phase II clinical trial of BIOBYPASS for the treatment of a
separate indication, peripheral vascular disease, failed to meet its primary
endpoints due chiefly to an unexpectedly large placebo response. We believe
that this will not affect our continued clinical development of BIOBYPASS for
coronary artery disease because we have achieved statistically significant,
positive results in our BIOBYPASS Phase II trials relating to coronary artery
disease. Cell Transplantation Therapy for Congestive Heart Failure. Our scientists have
isolated and expanded muscle cells from human tissue and are studying the use
of these cells for transplantation into damaged heart muscle. We believe that
patients suffering from heart attacks would benefit if these muscle cells could
repair their damaged hearts. These cells would be isolated from a muscle
biopsy of a patient who had suffered a heart attack, thereby allowing
transplantation of the patients own muscle cells into his or her heart, which
would avoid any rejection by the bodys immune system. In April 2001, we and
our collaborators published the results of a muscle cell transplantation
preclinical study in the journal Circulation. This study showed that
transplantation of muscle cells after myocardial infarction in an animal model
was well tolerated and improved cardiac function. We have completed patient enrollment in two Phase I clinical trials treating
patients with damaged heart muscle. One of these trials involved transplanting
muscle cells into a patients heart at the same time that the patient received
a left ventricular assist device (LVAD). The LVAD is implanted in these
patients as a bridge to heart transplant. Our clinical trial involved the
implantation of 300 million myoblasts in six patients. Once a patient receives
a new heart in this trial, we are able to histologically examine their old
heart. This allowed us to evaluate cell survival and new blood vessel
formation after transplantation. In March 2003, we and our collaborators
published the results from the review of four explanted hearts in the Journal
of American College of Cardiology.Upon examination, we noted skeletal muscle
cells survived and differentiated into mature myofibers in three of the four
hearts and in one heart we noticed an increase in small vessel formation at the
site of surviving myotubes. A second Phase I clinical trial involved transplanting muscle cells into the
heart at the same time that a patient underwent coronary artery bypass surgery
(CABG). This was a 12-patient dose escalation trial with safety being
evaluated at doses ranging from 10 million to 300 million cells. Results of
this trial were presented in November 2003 at the American Heart Association
annual meeting. The FDA recently cleared our Investigational New Drug
Application, or IND, for an additional clinical trial involving the
transplantation of human muscle cells into the heart at the same time that a
patient undergoes CABG. Through this trial, with the involvement of imaging
specialists, we plan to define the primary endpoint for a pivotal clinical
trial. 5




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We are a party to a development and license agreement with Terumo Corporation.
Under the terms of the agreement, Terumo licenses our human muscle cell
transplantation technology for cardiac disease in Japan. Terumo will fund all
development in Japan while we continue to independently develop our
cardiac repair technology for commercialization in the United States and
elsewhere. Pursuant to the agreement, Terumo paid an upfront non-refundable
license fee of $2.0 million in October 2002. The agreement also includes
milestone payments of up to $8.0 million and a royalty on product sales. The
Terumo agreement remains effective until the expiration of Terumos royalty
obligations under the agreement, but may be earlier terminated by either party
upon 60 days notice of a material breach if the breach remains uncured, or by
us if Terumo decides to halt or significantly reduce the funding or the number
of employees committed to the development of a product. AdPEDF for treatment of vision loss.Another product candidate, AdPEDF, is
designed for the treatment of wet age-related macular degeneration. Macular
degeneration is a progressive eye disease in which new capillaries grow behind
the retina. In wet age-related macular degeneration, the new capillaries leak
blood or a fluid into a portion of the eye, which damages vision cells.
According to the Macular Degeneration Network, and others, there are
approximately 200,000 new cases of wet age-related macular degeneration
diagnosed each year in the United States and it is a leading cause of blindness
in individuals over the age of 50. AdPEDF uses our proprietary technology to
produce the pigment epithelium-derived factor (PEDF) protein, a natural
inhibitor of angiogenesis, in the eye. During 2002, we initiated a Phase I clinical trial of AdPEDF in patients with
wet age-related macular degeneration. We expect enrollment to be completed by
the first half of 2004. In preclinical studies in animal models, AdPEDF
inhibited the growth of new, unwanted blood vessels in the eye and caused
selective regression of established abnormal blood vessels. We expect to
present preliminary Phase I results for our AdPEDF product candidate at the
upcoming Association for Research in Vision and Ophthalmology (ARVO) meeting in
April 2004 and initiate a Phase II randomized, placebo-controlled study in
patients with less severe age-related macular degeneration during the second
half of 2004. OUR STRATEGY Our primary objective is to develop and commercialize products that are safer
and more effective for major medical needs. We intend to pursue this objective
through the following strategies: Develop and commercialize our lead product candidate, TNFerade, for the
treatment of cancer.We have chosen locally advanced pancreatic cancer and
non-metastatic esophageal cancer as lead indications for TNFerade because we
believe that current therapy for these cancers is poor and local control of the
tumor can lead to improved survival. We expect to initiate randomized
controlled Phase III trials of TNFerade as early as the second half of 2004.
We believe that TNFerade for these indications offers our most rapid path to
commercialization of a product candidate because:  
    
    The development process for cancer drugs, particularly those drugs
treating cancers where the current therapy is poor, can typically be
accomplished in a relatively cost-effective manner and short time
period; and
    
    We believe that we have or will have the ability to commercialize
and market TNFerade ourselves because we expect the marketing of
TNFerade to require a relatively small sales force. We will seek to retain significant commercial rights to TNFerade in North
America and we are currently seeking relationships to lead the registration and
commercialization efforts in Europe and Asia and to help fund clinical
development in North America. 6




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Develop and commercialize our other product candidates through corporate
alliances. We intend to form strategic alliances with other companies to
develop and commercialize BIOBYPASS for patients with severe heart disease,
Cell Transplantation Therapy for congestive heart failure and AdPEDF for
patients with wet age-related macular degeneration. We recently entered into
an agreement with Cordis
Corporation to conduct a randomized, double blind, placebo controlled Phase
II/III trial to study the clinical benefit of BIOBYPASS in a procedure
involving guided delivery of the angiogenic agent directly into targeted
regions of the heart in patients with severe coronary artery disease using the
Cordis NOGASTAR Mapping Catheter and MYOSTAR Injection Catheter. We anticipate
that we will share the risks and costs of development by partnering these
programs before completion of pivotal trials, and to attract such collaborators
we may have to grant commercialization rights to them. These relationships
will allow us to further the development of our product portfolio while we
focus our internal efforts on the development and commercialization of our lead
product candidate, TNFerade. Expand our product candidate pipeline and enhance our technology base.We will
continue to seek to enhance our gene delivery capabilities through internal
research, external collaborations and acquisitions. We have received funding
for research collaborations to develop vaccines against HIV, SARS, malaria and
dengue virus and to develop a second-generation TNFerade product candidate. We
expect improvements in our core technology to enhance our drug discovery
efforts and lead to additional product candidates. We intend to further
strengthen our technologies relating to process development, formulation and
manufacturing. We also intend to supplement our own development efforts
through the acquisition of products and technologies that complement our
general product development strategy. 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:  
    
    rapidly put genes into vectors to evaluate gene function and
usefulness in therapy;
    
    deliver our product candidates locally to specific organs or cell
types to avoid systemic exposure;
    
    achieve highly efficient gene delivery to target cells with lower
dosages;
    
    control the rate and duration of gene expression directed by our
product candidates to allow flexibility in treating different diseases;
and
    
    produce commercial quantities of our product candidates in a
stable, easy-to-use form. In constructing our product candidates, we combine a gene with a vector. We
derive our vectors from a naturally occurring virus, called an adenovirus. In
humans, adenoviruses reproduce in certain tissues, spread and can cause a form
of the common cold. We design our vectors so that they cannot reproduce
themselves or cause a cold. We do this to limit toxicity, including unwanted
effects on target cells and the surrounding tissue, and to reduce any immune
response to our vectors. We have multiple versions of vectors 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.
These are known as replication-deficient adenovector stocks. When administered to tissues, our vectors enter target cells and produce the
protein encoded by the inserted gene. These vectors can be used for functional
genomics purposes to help determine the function of a specific gene and its
potential use as a therapy, as well as to create product candidates. The
benefits of vectors can be increased measurably for both functional genomics
and product development purposes 7




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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:  
    
    adenoviruses do not integrate into the DNA of the target cell,
thereby minimizing the potential for mutations that can occur with
other vector systems;
    
    adenoviruses are naturally eliminated from cells and tissues; and
    
    vectors derived from adenoviruses have been well tolerated in
clinical testing when administered locally. Thousands of patients have
been treated, with very few serious adverse events related to the
vector. TECHNOLOGY FOR LOCAL DELIVERY AND EXPRESSION OF GENES Use of delivery devices. To achieve local production of proteins, we administer
our product candidates directly to the site of disease using standard medical
devices, such as injection catheters or syringes. Direct administration of our
products into diseased tissue allows us to increase effectiveness by achieving
high concentrations of the protein at disease sites while improving safety by
significantly avoiding exposure throughout the body. For example, we use either
endoscopic ultrasound or percutaneous injection to administer TNFerade directly
to the tumor and needle-injection catheters by the interventional cardiologist
to administer BIOBYPASS directly into the diseased areas of the heart. Delivering genes to cells. We believe that we are a leader in understanding and
modifying the molecular interactions that specify how vectors derived from
adenoviruses bind to cells. Adenoviruses enter cells by binding to receptors on
the surface of the cell. In our BIOBYPASS program, we have taken advantage of our adenovectors natural
binding to the muscle cells found in the heart. However, because not all
disease targets contain this adenovirus receptor, we have developed technology
to direct the binding of our vectors to different target receptors to enable a
broad range of therapies. We can alter our vectors so that we can add new
binding specificities. We believe that we have a broad and advanced intellectual property position in
creating adenovectors with new binding sites to deliver therapeutic genes to
specified cells.  
    
    DART Vectors. We have developed Directed And Restricted Tropism, or
DART, vectors that enable us to create product candidates that deliver
genes only to specific cells. In order to achieve selective delivery to
target cells, we remove the ability of the vector to bind to the cell
surface receptors. We then insert new binding sites into the vector
that bind to specific receptors found on the surfaces of target cells.
We have a broad proprietary position covering DART vectors, including
special cell lines required for their production.
    
    UTV Technology. Our proprietary Universal Transduction Vector, or
UTV, technology allows us to create product candidates that deliver
genes to essentially all cell types, including those types that do not
contain the adenovirus receptor on their surface. We have engineered
our vectors to contain a new binding site that allows binding to all
cells that we have tested to date. 8




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We currently use both UTV technology and DART vectors in our drug discovery
process and we may incorporate these technologies into our next generation
product candidates. Control of gene expression. Our technology also allows us to control the
location, duration and rate of therapeutic gene expression. We control gene
expression by inserting a sequence of DNA, called a promoter, into our vectors
adjacent to the therapeutic gene. For some diseases, long-term expression of
the therapeutic gene is required to achieve a clinical benefit. In TNFerade, we intend
to achieve local production of the TNF-alpha protein in cancerous tissue
undergoing radiation treatment 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 PRODUCTION, PURIFICATION, QUALITY ASSESSMENT AND FORMULATION


We believe our proprietary production technology and know-how facilitates the
production, purification, quality assessment and formulation of our product
candidates. The structure of our 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. We currently rely on
third-party manufacturers for production of our product candidates for clinical
purposes.  
    
    Production and Scale Up.We produce our adenovectors using cell
lines grown under standardized and controlled conditions. We have
developed specialized cell lines for production of our vectors. We have
designed our production processes for commercial scale production and
to reduce the potential for contamination.
    
    Purification.We have proprietary methods for the purification of
our vectors that we believe are suitable for commercial scale as well
as for small scale use in discovery and testing of new product
candidates.
    
    Quality Assessment.We have established proprietary methods to
assess and confirm the quality and purity of vectors for research
purposes and clinical testing. We use advanced techniques to determine
the molecular weight of our product candidates as a means to establish
product consistency and purity. We have an issued U.S. patent covering
this technology. We believe these methods are also suitable for quality
assessment of commercial production.
    
    Formulation.We have developed novel product formulations that
improve the stability of our vectors and are covered by an allowed U.S.
patent application. Our formulations allow products to be conveniently
stored, shipped and used. For research purposes, our formulation
enhances the ease and reproducibility of testing. COLLABORATIVE RELATIONSHIPS We have received funding to advance the clinical development of our product
candidates; to develop vaccines against HIV, SARS, malaria and dengue virus
and to develop a second-generation TNFerade product candidate. These funded
collaborations help to offset our development costs and enhance our ability
to discover, evaluate, develop and seek to commercialize multiple product
candidates. 9




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Cordis Corporation.In December 2003, the Company entered into a research
collaboration with the Cordis Cardiology Division of Cordis Corporation, a
Johnson & Johnson company, to study the clinical benefit of BIOBYPASS in a
procedure involving guided delivery of the angiogenic agent directly into
targeted regions of the heart in patients with severe coronary artery disease
using the Cordis NOGASTAR Mapping Catheter and MYOSTAR Injection Catheter.
See Our Product Candidates  BIOBYPASS for Severe Heart Disease. Terumo Corporation.In September 2002, Diacrin entered into a development and
license with Terumo Corporation, of which the Company has become a party as a
result of the business combination consummated on August 21, 2003. Under the
terms of the agreement, the Company licensed to Terumo its human muscle cell
transplantation technology for cardiac disease in Japan. Terumo will fund all
development costs in Japan while the Company continues to independently develop
its cardiac repair technology for commercialization in the U.S. and elsewhere.
On October 1, 2002, the Company received an upfront non-refundable license fee
of $2.0 million. The agreement also includes payments by Terumo to the Company
for development milestones and a royalty on product sales. Fuso Pharmaceuticals Industries, Ltd.In December 2002, we announced a new,
three-year $4.5 million funded research agreement with Fuso Pharmaceuticals.
This follows the successful conclusion of a former collaboration, which ran
from 1997 to 2002. We established the new collaboration to identify a targeted
cancer therapy product candidate designed to treat not only a primary tumor,
but also cancer that has spread, or metastasized, to distant sites in the body.
The intended targeted cancer therapy is expected to incorporate the gene for
TNF-alpha. Under the terms of the agreement, we have worldwide rights,
excluding Japan, to develop and commercialize product candidates arising from
the collaboration. Fuso has development and commercialization rights in Japan,
and an option to commercialize in Korea and Taiwan. In addition to the
research funding, the agreement includes development milestone payments and
royalties on commercial sales by Fuso of any products arising from the
collaboration. Each party will be responsible for development and
commercialization costs in their respective territories. We also are working with selected U.S. government institutions to develop new
applications, such as vaccines, for our proprietary platform technology. These
collaborations include: National Institute of Allergy and Infectious Diseases (NIAID) of The National
Institutes of Health (NIH).In December of 2001, the Vaccine Research Center
(VRC) at the National Institute of Allergy and Infectious Diseases of the
National Institutes of Health selected the Company to collaborate in the
development of a worldwide preventative AIDS vaccine candidate. In April of
2003, this collaboration was expanded to include the development of a SARS
vaccine candidate. The Company has a cost-plus sub-contract, managed for the
VRC through SAIC-Frederick, Inc., with an estimated total amount of
approximately $30 million, which became effective January 25, 2002. Under the
sub-contract, the Company is responsible for constructing and producing
adenovector-based vaccine candidates utilizing its proprietary cell line and
second-generation adenovector technology. The program encompasses a base year
and five option years. Revenue recognized under this program amounted to $7.2
million in 2003 and $4.0 million in 2002. The second option covering the year
2004 has been exercised and work is continuing under the contract. U.S. Naval Medical Research Center.On January 8, 2003, we signed an initial
contract with the U.S. Naval Medical Research Center (NMRC) allowing them to
use our proprietary adenovector technology for the development of vaccines
against malaria and dengue virus. Under the two-year contract, we will receive
$1.9 million and will be responsible for constructing and producing
adenovector-based vaccine candidates using our proprietary cell line and
second-generation adenovector technology. The NMRC will test the vaccine
candidates in preclinical, or animal, models to assess safety and
effectiveness. Clinical trials in humans could commence following successful
preclinical testing results and would be funded by the NMRC. 10




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We also sponsor research at leading academic institutions to enhance our
ability to discover, evaluate and develop new product candidates. Our academic
collaborations currently include agreements with Weill Medical College of
Cornell University, University of Chicago, University of Maryland, Johns
Hopkins University and University of Michigan. 11




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LICENSES FOR THERAPEUTIC GENES To create our product candidates, we combine our vectors with genes intended to
produce proteins with therapeutic potential. We have secured licenses to many
genes for this purpose. We often seek to obtain exclusivity, consistent with
our business needs, when securing such licenses. In return for the rights we
receive under our gene licenses, we typically are required to pay royalties
based on any commercial sales of the applicable product during a specified time
period, as well as provide additional compensation, including up-front license
fees and product development-related milestone payments. Our gene licenses
include: SOURCE
    
    GENE
        NATURE OF LICENSEAsahi Chemical Industry
Co., Ltd.
    
    TNF-alpha
    
    United States, non-exclusive, for all gene
therapy applicationsScios, Inc.
    
    VEGF121
    
    Worldwide, exclusive for all gene therapy productsPublic Health Service
and Northwestern
University
    
    PEDF
    
    Worldwide, exclusive for all ocular gene therapy
applications
 Any of our licenses may be terminated by the licensor if we are in breach of a
term or condition of the license agreement, or if we become insolvent. In
addition, some of our licenses require us to achieve specific milestones. PATENTS, LICENSES AND PROPRIETARY RIGHTS We generally seek patent protection for our technology and product candidates
in the United States and abroad. We have submitted patent applications that are
pending in the United States and other countries. The patent position of
biotechnology firms generally is highly uncertain and involves complex legal
and factual questions. Our success will depend, in part, on whether we can:  
    
    obtain patents to protect our own products;
    
    obtain licenses to use the technologies of third parties, which may be protected by patents;
    
    protect our trade secrets and know-how; and
    
    operate without infringing the intellectual property and proprietary rights of others. Patent rights; licenses. Our licensors and we have patents and continue to seek
patent protection for technologies that relate to our product candidates, as
well as technologies that may prove useful for future product candidates. As of
February 29, 2004, we held or had licenses to 379 issued, allowed or pending
patents worldwide, of which 112 are issued or allowed in the U.S. These patents
and patent applications pertain to genes that encode therapeutic proteins,
expression control elements that regulate the production of the therapeutic
proteins by such genes, vectors into which we incorporate such genes and
expression control elements to create our product candidates, cells for cardiac repair, cell lines used
to manufacture our product candidates, targeting technology for adding
specificity to our product candidates, methods of constructing, producing
(including purification, quality control and assay techniques), storing, and
shipping our product candidates, methods of administering our product
candidates, and methods of treating disease using our product candidates. 12




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TNFerade.We have a nonexclusive license under the U.S. patent, expiring
in 2006, relating to the TNF-alpha gene, which we inserted into a second
generation adenovector to create
TNFerade. In addition, we have issued patents and pending patent
applications pertaining to such adenovectors, the expression control
elements used in TNFerade to cause production of the TNF-alpha protein by
the TNF-alpha gene, and methods of using TNFerade for treating disease.
In particular, we have an issued U.S. patent, expiring in 2020, covering
the product composition and use of the TNF vector in treating tumors in
mammals, which adds to the Companys broad intellectual property position
around its lead oncology program and core adenovector technology. We have
an exclusive license to issued U.S. patents expiring between 2010 and
2015 pertaining to radiation-induced gene expression and a
radiation-inducible promoter enabling controlled production of
therapeutic proteins from gene therapy products, including TNFerade. We
are aware, however, of pending patent applications of third parties
pertaining to adenovectors contemplated for use with TNFerade. It could
be alleged that TNFerade conflicts with patents that may issue on these
patent applications. BIOBYPASS.We have an exclusive license, under a patent expiring in 2010,
for all gene therapy products using the VEGF121 gene. In addition, we
have pending patent applications pertaining to the special cell lines
required for the production of particular adenovectors, including a cell
line we use in the production of BIOBYPASS, as well as an issued patent,
expiring in 2014, pertaining to stocks of adenovectors that cannot
reproduce themselves. We also have pending patent applications pertaining
to the delivery of angiogenic substances, such as BIOBYPASS. However,
third parties have patents and pending patent applications for other
forms of the VEGF gene, and these third parties or their licensees may
develop products using these forms of the gene. Third parties also may
have pending patent applications for adenovectors, including possibly the
adenovector used in BIOBYPASS. We are aware of issued patents and pending
patent applications of third parties relating to special cell lines
required for the production of particular adenovectors, including a cell
line we use in the production of BIOBYPASS, as well as issued patents and
pending patent applications relating to the delivery, including through
the use of adenovectors, of therapeutic substances to the heart and other
tissues, similar to BIOBYPASS. It could be alleged that BIOBYPASS
conflicts with such existing or future patents. Cell Transplantation Candidates.We have an issued U.S. patent expiring
in 2019 and four pending foreign patent applications relating to
compositions that include skeletal myoblasts and fibroblast cells that
can be transplanted into the cardiac tissue of patients suffering from
diseased, damaged or insufficient cardiac function. We also have a
pending U.S. application containing additional data and supporting
additional patent claims to related methods and compositions.
Additionally, we have a pending U.S. application to an improved system
for delivering a liquid (e.g., a cell suspension) to solid tissue sites.
Both applications have pending related foreign applications. We have an
issued U.S. patent expiring in 2013 relating to an injectable culture
medium for maintaining viable myoblast cells. The medium can be used to
maintain myoblasts for an extended period of time and can be injected
into a desired transplantation site of a patient. We have a
non-exclusive license under a patent expiring in 2014 relating to a
method of forming a stable myocardial graft in a mammal by introducing
myoblast or cardiomyocytes into the myocardial tissue of the mammal. We
are aware of a U.S. patent of a third party that has been submitted for
reexamination pertaining to methods of forming stable myocardial grafts
by transplanting skeletal myoblast or fibroblasts into scar tissue in a
heart. AdPEDF product candidates. We have exclusive rights, under a patent
expiring in 2015, to use the PEDF gene for all gene therapy applications
in the eye. We have issued patents and pending patent applications
pertaining to particular adenovectors and methods of their use, including
adenovectors and related methods that may be utilized in conjunction with
our AdPEDF product program. However, we are aware of issued patents and
pending patent applications of third 13




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parties relating to various facets
of gene therapy to the eye. It could be alleged that our AdPEDF product
candidates conflict with such existing or future patents. UTV technology and DART vectors.We have issued patents, expiring in 2014
and thereafter, and pending patent applications covering our UTV
technology that allows for the delivery of genes in adenovectors to
essentially all cell types, as well as our DART vectors, which are
designed for the purpose of creating product candidates that deliver
genes in adenovectors only to selected cells, and special cell lines
required for the production of the UTV and DART vectors. We are aware,
however, of issued patents and pending patent applications of third
parties relating to such vectors. It could be alleged that our UTV and
DART vectors conflict with such existing or future patents. Production, purification, quality assessment and formulation technology.
We have issued patents, expiring in 2017 and thereafter, and pending
patent applications pertaining to the production, purification, quality
assessment and formulation of our product candidates. In particular, we
have pending patent applications covering specialized cell lines for
production of both small and large volumes of our product candidates, the
process for manufacturing our product candidates, the purification of our
product candidates applicable to both research and commercial scales,
methods of assessing and confirming the quality and purity of our product
candidates for clinical testing and commercialization, including an
issued patent on the use of techniques to determine molecular weight as a
means to establish product consistency and purity, and product
formulations that improve the stability of product candidates and allow
our product candidates to be conveniently stored, shipped and used. We
are aware, however, of issued patents and pending patent applications of
third parties relating to these and other aspects of production,
purification, quality assessment and formulation technology. It could be
alleged that our production, purification, quality assessment and
formulation technology conflicts with such existing or future patents. We anticipate that our current and future licensors and we will continue to
seek to improve existing technologies and to develop new technologies and, when
possible, secure patent protection for such improvements and new technologies. We are involved in patent interferences in the U.S., which will determine
whether we or a competitor in each instance will receive a patent directed to
particular technology. Two of the patent interferences pertain to the
adenovector contemplated for use with our TNFerade and AdPEDF product
candidates, while the third patent interference pertains to stocks of
adenovectors that cannot reproduce themselves, such as those contemplated for
use with our TNFerade, BIOBYPASS, and AdPEDF product candidates. As a result
of existing agreements, we have licenses to the applicable patent applications
involved in two of the interferences. Trade secrets.To a more limited extent, we rely on trade secret protection and
confidentiality agreements to protect our interests. It is our policy to
require our employees, consultants, contractors, manufacturers, collaborators
and other advisors to execute confidentiality agreements upon the commencement
of employment, consulting or collaborative relationships with us. We also
require signed confidentiality agreements from any entity that is to receive
confidential data. With respect to employees, consultants and contractors, the
agreements generally provide that all inventions made by the individual while
rendering services to us shall be assigned to us as our property. COMPETITION Competition in the discovery and development of new methods for treating
disease is intense. We face, and will continue to face intense competition from
pharmaceutical and biotechnology companies, as well 14




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as academic and research
institutions and government agencies, both in the United States and abroad. We
face significant competition from organizations that are pursuing the same or
similar technologies used by us in our drug discovery efforts and from
organizations that are developing pharmaceuticals that are competitive with our
potential products. Many of our competitors, either alone or together with
their
collaborative partners, have substantially greater financial resources and
larger research and development staffs than we do. In addition, many of these
organizations, either alone or together with their collaborators, have
significantly greater experience than we do in developing products, undertaking
preclinical testing and clinical trials, obtaining FDA and other regulatory
approvals of products and manufacturing and marketing products. Additional
mergers and acquisitions in the pharmaceutical industry may result in even more
resources being concentrated with our competitors. These companies, as well as
academic institutions, governmental agencies and private research
organizations, also compete with us in recruiting and retaining highly
qualified scientific personnel and consultants. Our ability to compete
successfully with other companies in the pharmaceutical and biotechnology field
will also depend to a considerable degree on the continuing availability of
capital to us. Future competition will likely come from existing competitors, including
competitors with rights to proprietary forms of the genes or proteins expressed
by the genes that we currently use in our product development programs and
competitors with rights to gene delivery technologies, as well as other
companies seeking to develop new treatments. We are aware of new product
development efforts, which may compete with BIOBYPASS, being pursued by, among
others, Chiron Corporation and Genentech, Inc. using therapeutic proteins and
by Corautus Genetics, Inc. and Genzyme General using a gene transfer approach
similar to us. Competitors or their collaborators may identify important new
drug discovery, genes or gene delivery technologies before us, or develop
gene-based therapies that are more effective than those developed by our
corporate collaborators or us or obtain regulatory approvals of their drugs
more rapidly than us. We expect that competition in this field will intensify. 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. and Schering-Plough Corporation, which are developing
adenoviral vectors to treat cancer. In addition, Alcon Laboratories, Inc.,
Allergan, EyeTech Pharmaceuticals, Inc. and Genentech, Inc. are developing
inhibitors of blood vessel growth to treat macular degeneration. Some of these
product candidates are in the later stage of 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 15




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of more
advanced manufacturing processes and product characterization methods for our
product candidates. We believe that much of the production and assay technology
that has been developed for BIOBYPASS under a previous corporate collaboration
is suitable for our other product development programs. We intend to continue developing our own product development and manufacturing
capability while utilizing third-party contractors where we lack sufficient
internal capability. Our plan is to expand our internal manufacturing
capabilities at either our Charlestown location or our Gaithersburg, Maryland
facility including the facilities necessary to manufacture, test, and package
an adequate supply of finished products in order to meet our long-term clinical
needs. 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 and TNFerade.
Currently, we procure raw materials, known as resins, for our product
purification and testing methods from a limited number of suppliers. We also
procure nutrients used to support the growth of microorganisms or other cells
from Invitrogen/Gibro. We have plans in place to develop multiple suppliers for
all critical supplies before the time we would put any of our product
candidates into commercial production. MARKETING AND SALES We continue to explore opportunities for corporate alliances and partners to
help develop and ultimately commercialize and market our product candidates.
Our strategy is to enter into collaborative arrangements with pharmaceutical
and other companies for development, manufacturing, marketing and sales of our
products that will require broad marketing capabilities and overseas marketing.
These collaborators are generally expected to be responsible for funding or
reimbursing all or a portion of the development costs, including the costs of
clinical testing necessary to obtain regulatory clearances and for commercial
scale manufacturing, in exchange for rights to market specific products in
particular geographic territories. We presently have all rights to TNFerade,
BIOBYPASS and AdPEDF product candidates GOVERNMENT REGULATION Regulation of pharmaceutical products.The development, production and
marketing of any pharmaceutical products developed by us or our collaborators
will be subject to regulation by United States and non-U.S. governmental
authorities. In the United States, new drugs are subject to extensive
regulation under the Federal Food, Drug, and Cosmetic Act, and biological
products are subject to regulation both under provisions of that Act and under
the Public Health Service Act. The FDA assesses the safety and efficacy of
products and regulates, among other things, the testing, manufacture,
labeling, storage, record keeping, 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:  
    
    performance of preclinical tests;
    
    submission to the FDA of an IND which must become effective before
human clinical trials may commence;
    
    performance of adequate and well-controlled human clinical trials
to establish the safety and efficacy of the drug or biologic in our
intended use; 16




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
    
    submission to the FDA of a New Drug Application, or NDA, for drugs,
or a Biologics License Application, or BLA, for biologics; and
    
    FDA approval of the NDA or BLA before any commercial sale or
shipment of the drug or biologic. In addition to obtaining FDA approval for each product, each domestic
manufacturing establishment must be registered with the FDA, is subject to FDA
inspection and must comply with cGMP regulations. To supply products for use in
the United States, including clinical trials, non-U.S. 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 become
effective and the product to advance to clinical testing. Clinical trials may
take two to five years to complete and are typically conducted in three
sequential phases, which often overlap. After the completion of all three
phases, if the data indicate that the drug or biologic product is safe and
effective, an 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 an 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 or biologic product is also subject to regulatory approval in other
countries in which it is marketed. No such 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, in many countries the government is involved in the
pricing of the product. In such cases, the pricing review period often begins
after market approval is granted. Other regulations. Our business is also subject to regulation under various
state and federal environmental laws, including the Occupational Safety and
Health Act, the Resource Conservation and Recovery Act and the Toxic Substances
Control Act. These and other laws govern our use, handling and disposal of
various biological, chemical and radioactive substances used in and wastes
generated by our operations. We are not aware of any costs or liabilities in
connection with any environmental laws that will have a material adverse effect
on our business or financial condition. EMPLOYEES As of February 29, 2004, we had 88 full-time employees, 23 of whom hold M.D. or
Ph.D. degrees and 35 of whom hold other advanced degrees. Of our total
workforce, 69 are engaged primarily in research and development activities and
19 are engaged primarily in business development, finance, marketing and
administration functions. None of our employees is represented by a labor union
or covered by a collective bargaining agreement, and we consider our employee
relations to be good. Principal Executive Offices We were incorporated in Delaware in 1992. Our principal executive offices are
located at 65 West Watkins Mill Road, Gaithersburg, Maryland 20878 and our
telephone number at that location is (240) 632 0740. 17




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Available Information For more information about us, visit our web site at www.genvec.com. Our
electronic filings with the U.S. Securities and Exchange Commission (including
our annual report on Form 10-K, quarterly reports on Form 10-Q and current
reports on Form 8-K, and any amendments to these reports) are available free of
charge through our web site as soon as reasonably practicable after we
electronically file with or furnish them to the U.S. Securities and Exchange
Commission. RISKS AND UNCERTAINTIES RISKS RELATED TO OUR BUSINESS We have a history of losses and anticipate future losses. We have incurred net losses in each year since our inception in December 1992,
including a net loss of $21.3 million for the year ended December 31, 2003. As
of December 31, 2003, we had an accumulated deficit of approximately $116.7
million. We are unsure if or when we will become profitable. The size of our
net losses will depend, in part, on the growth rate of our revenues and the
level of our expenses. We derive substantially all of our revenues from payments from collaborations
with corporations and government entities, and will continue to do so for the
foreseeable future. We expect that it will be several years, if ever, before we
will recognize revenue from product candidate sales or royalties. A large
portion of our expenses is fixed, including expenses related to facilities,
equipment and personnel. In addition, we expect to spend significant amounts to
fund research and development and to enhance our core technologies. We also
expect to incur substantial costs to manufacture our product candidates. As a
result, we expect that our operating expenses will increase significantly over
the next several years and, consequently, we will need to generate significant
additional revenue to achieve profitability. Even if we do achieve
profitability, we may not be able to sustain or increase profitability on a
consistent basis. We will have no product revenues in the near term and may need to raise
additional capital to operate our business. We are focused on clinical product development. Until, and unless, we receive
approval from the FDA and other regulatory authorities for our product
candidates, we cannot sell these products and will not have product revenues.
Thereafter, we will require substantial funds to conduct research and
development activities, preclinical studies, clinical trials and other
activities prior to the commercialization of any potential products. We
anticipate that such funds will be obtained from external sources and intend to
seek additional equity, debt or lease financing or collaborative agreements
with corporate, governmental or academic collaborators to fund future
operations. However, our actual capital requirements will depend on many
factors. If we experience unanticipated cash requirements, we may need to seek
additional sources of funding, which may not be available on favorable terms,
if at all. Such additional funding may only be available on terms that may
cause dilution to common stockholders, have liquidation preferences and/or
pre-emptive rights. In the past, we have secured funding on terms that
included pre-emptive rights. For example, pursuant to an Investor Rights
Agreement among GenVec and HealthCare Ventures V, L.P. dated December 21, 2001,
HealthCare Ventures V and VI have the right to purchase shares of GenVec common
that we may propose to sell in the future to prevent dilution of their interest
in the company. If we do not succeed in raising additional funds on acceptable
terms, we may be unable to complete planned preclinical studies and clinical
trials or obtain approval of our product candidates from the FDA and other
regulatory authorities. In addition, we could be forced to discontinue product
development, reduce or forego sales and marketing efforts and attractive
business opportunities or discontinue operations. 18




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Our ability to develop, obtain regulatory approval of and commercialize our
potential products depends, in part, on collaborations with other companies. If
we are unable to find collaborators, we may not be able to develop, test and
commercialize our products. To date, we only have entered into collaborative agreements with a limited
number of companies, and some of those are no longer in effect. The success of
our business strategy depends, in part, on our ability to enter into and
sustain collaborations with other companies for the development and
commercialization of our product candidates. Unless we are able to enter into
and sustain collaboration agreements, we will need to raise additional funds
for the development, testing, and commercialization of our product
candidates. If collaborations or other funding is not available, we may have to
delay or curtail the development and commercialization of certain product
candidates. We cannot be sure that our collaborators will perform as expected, and
collaborations might produce conflicts that could delay or prevent the
development or commercialization of our potential product candidates and
negatively impact our business and financial condition. We cannot control the resources that any collaborator may devote to our
products. Our present or future collaborators may not perform their obligations
as expected. These collaborators may breach or terminate their agreements with
us or otherwise fail to conduct their collaborative activities successfully and
in a timely manner. In addition, our collaborators may elect not to develop
products arising out of our collaborative arrangements or to devote sufficient
resources to the development, regulatory approval, manufacture, marketing or
sale of these products. If any of these events occur, we may not be able to
develop our technologies or commercialize our products. An important part of our strategy involves conducting multiple product
development programs. We may pursue opportunities in fields that conflict with
those of our collaborators. In addition, disagreements with our collaborators
could develop over rights to our intellectual property. The resolution of such
conflicts and disagreements may require us to relinquish rights to our
intellectual property that we believe we are entitled to. In addition, any
disagreement or conflict with our collaborators could reduce our ability to
obtain future collaboration agreements and negatively impact our relationship
with existing collaborators. Such a conflict or disagreement could also lead to
delays in collaborative research, development, regulatory approval or
commercialization of various products or could require or result in litigation
or arbitration, which would be time consuming and expensive and could have a
significant negative impact on our business, financial condition and results of
operations. Our collaboration agreements may prohibit us from conducting research in areas
that may compete with our collaboration products, while our collaborators may
not be limited to the same extent. This could negatively affect our ability to
develop products and, ultimately, prevent us from achieving a continuing source
of revenues. We anticipate that some of our corporate or academic collaborators will be
conducting multiple product development efforts within each disease area that
is the subject of its collaboration with us. In the past, we generally have
agreed not to conduct independently, or with any third party, certain research
that is competitive with the research conducted under our collaborations.
Therefore, our collaborations may have the effect of limiting the areas of
research that we may pursue, either alone or with others. Some of our
collaborators, however, may develop, either alone or with others, products in
related fields that are competitive with the products or potential products
that are the subject of their collaborations with us. In addition, competing
products, either developed by the collaborators or to which the collaborators
have rights, may result in their withdrawing support for our product
candidates. 19




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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 medicines and cell transplantation are new and rapidly evolving
medical approaches, which have not been shown to be effective on a widespread
basis. Biotechnology and pharmaceutical companies have successfully developed
and commercialized only a limited number of gene-based products to date
and no cell transplantation products have been successfully developed and
commercialized to date. In addition, no gene therapy product or cell
transplantation 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 and delivery systems. To date, none of
our product candidates has been approved for sale in the United States or
elsewhere. We may be unable to develop products or delivery systems that:  
    
    prove to be safe and effective;
    
    meet applicable regulatory standards;
    
    are capable of being manufactured at reasonable costs;
    
    do not infringe the intellectual property rights of third parties;
    
    are superior to products offered by third parties; or
    
    can be marketed successfully. Gene-based medicine and cell transplantation products may be susceptible to
various risks, including undesirable and unintended side effects from genes,
cells or the delivery systems, unintended immune responses, inadequate
therapeutic efficacy or other characteristics that may prevent or limit their
approval or commercial use. Successful products require significant development
and investment, including a lengthy and uncertain period of testing to show
their safety and effectiveness before their regulatory approval or
commercialization. We have not proven our ability to develop, obtain regulatory
approval of or commercialize gene-based medicines or cell transplantation
products. We may be unable to successfully select those genes or cells with the
most potential for commercial development. If we fail to adequately show the safety and efficacy of our product
candidates, we will not be able to obtain FDA approval of our product
candidates. We face the risk of failure involved in developing therapies based on new
technologies. While certain of our product candidates are in clinical trials,
there are others for which we have not yet initiated clinical trials. For those
product candidates not yet in clinical trials, we will need to conduct
significant additional research and animal testing, referred to as preclinical
testing, before any of these product candidates can advance to clinical trials.
In addition, we will need to conduct further clinical testing of those product
candidates currently in clinical trials. It may take us many years to complete
preclinical testing or trials, and failure could occur at any stage of testing.
Acceptable results in early testing or trials might not be repeated later. Not
all products in preclinical testing or early stage clinical trials will become
approved products. Before we can file applications with the FDA for product
approval, we must show that a particular product candidate is safe and
effective. Even with respect to those product candidates currently in clinical
trials, we must demonstrate the safety and efficacy of those product candidates
before we can 20




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secure FDA approval. Our failure to adequately show the safety
and effectiveness of our product candidates would prevent FDA approval of our
products. Our product development costs will increase if we experience delays
in testing or regulatory approvals or if we need to perform more or larger
clinical trials than planned. If the delays are significant, they could
negatively affect our financial results and the commercial prospects for our
product candidates. Because we or our collaborators must obtain regulatory approval to market our
products in the United States and in non-U.S. jurisdictions, we cannot predict
whether or when we will be permitted to commercialize our products; failure to
comply with applicable regulations can also harm our business and operations. The pharmaceutical industry is subject to stringent regulation by a wide range
of authorities. We cannot predict whether we or our collaborators will obtain
regulatory approval for any product we develop. No
one can market a pharmaceutical product in the United States until it has
completed rigorous preclinical testing and clinical trials of the product and
an extensive regulatory approval process implemented by the FDA. To date,
neither the FDA not 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 the FDA and receive approval from the FDA of an Investigational New
Drug application (IND). Clinical trials are subject to oversight by
Institutional Review Boards and the FDA. Clinical trials are also subject to:  
    
    informed consent;
    
    good clinical practices;
    
    continuing FDA oversight;
    
    potentially large numbers of test subjects; and
    
    potential suspension by us, our collaborators or the FDA at any
time if it is believed that the subjects participating in these trials
are being exposed to unacceptable health risks or if the FDA finds
deficiencies in the Investigational New Drug application or the conduct
of these trials. We may encounter delays or rejections in the regulatory approval process
because of additional government regulation from future legislation or
administrative action or changes in FDA policy during the period of product
development, clinical trials and FDA regulatory review. Failure to comply with
applicable FDA or other applicable regulatory requirements may result in
criminal prosecution, civil penalties, recall or seizure of products, total or
partial suspension of production or injunction, as well as other regulatory
action against our product candidates or us. If regulatory approval of a
product is granted, this approval will be limited to those disease indications
for which the product has shown through clinical trials to be safe and
effective. The FDA also strictly regulates promotion and labeling after
approval. Outside the United States, our ability to market a product is
contingent upon receiving clearances from the appropriate regulatory
authorities. This non-U.S. regulatory approval process includes risks similar
to those associated with FDA clearance described above. If we or our collaborators are unable to manufacture our products in sufficient
quantities or are unable to obtain regulatory approvals for a manufacturing
facility for our products, we may experience delays, and be unable to meet
demand, and may lose potential revenues. 21




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Completion of our clinical trials and commercialization of our product
candidates require access to, or development of, facilities to manufacture a
sufficient supply of our product candidates. We have limited experience
manufacturing any of our gene-based products in the volumes that will be
necessary to support large-scale clinical trials or commercial sales. We do
not yet know the extent to which we will be able to adapt our existing
Charlestown manufacturing facilities and processes to the manufacture of gene
therapy product candidates. Our Charlestown facility currently is the only manufacturer of our cell
transplantation product candidates. For the next several years, we expect to
conduct manufacturing for cell transplantation products in the facility in
Charlestown, Massachusetts. If this facility or the equipment in this facility
is significantly damaged or destroyed, we will not be able to replace quickly
or inexpensively our manufacturing capacity. We do not have any experience
manufacturing cell transplantation product candidates in the volumes that will
be necessary to support large clinical trials or commercial sales. Our present
manufacturing process may not meet initial expectations as to scheduling,
reproducibility, yield, purity, cost, potency or quality. If we or our collaborators are unable to manufacture our product candidates in
clinical quantities or, when necessary, commercial quantities, then we will
need to rely on third-parties to manufacture compounds for clinical and
commercial purposes. These third-party manufacturers must receive FDA approval
before they can produce clinical material or commercial products. Our products
may be in competition with other products for access to these facilities and
may be subject to delays in manufacture if third parties give other products
greater priority. In addition, we may not be able to enter into any necessary
third-party manufacturing arrangements on acceptable terms, or on a timely
basis. There are very few contract manufacturers who currently have the
capability to produce our proposed products, and the inability of any
of these contract manufacturers to deliver our required quantities of product
candidates on a timely basis and at commercially reasonable prices would
negatively affect our operations. Before we or our collaborators can begin commercial manufacturing of any of our
product candidates, we or our collaborators must obtain regulatory approval of
the manufacturing facility and process. Manufacturing of our proposed
products must comply with the FDAs current Good Manufacturing Practices
requirements, commonly known as cGMP, and non-U.S. regulatory requirements.
The cGMP requirements govern quality control and documentation policies and
procedures. In complying with cGMP and non-U.S. regulatory requirements, we
will be obligated to expend time, money and effort in production, record
keeping and quality control to assure that the product meets applicable
specifications and other requirements. We or our collaborators must also pass
a pre-approval inspection before FDA approval. If we or our collaborators
fail to comply with these requirements, our product candidates would not be
approved. If we or our collaborators fail to comply with these requirements
after approval, we would be subject to possible regulatory action and may be
limited in the jurisdictions in which we are permitted to sell our products.
The FDA and non-U.S. regulatory authorities also have the authority to perform
unannounced periodic inspections of our manufacturing facility to ensure
compliance with cGMP and non-U.S. regulatory requirements. If successful large-scale manufacturing of gene-based medicines or cell
transplantation products is not possible, we may be unable to manufacture
enough of our product candidates to achieve regulatory approval or market our
products. Very few companies have shown successful large-scale manufacturing of
gene-based medicines or cell transplantation products, and it is anticipated
that significant process development changes will be necessary for the
commercial process. We may be unable to manufacture commercial-scale quantities
of gene-base medicines or cell transplantation products, or receive appropriate
government approvals, on a 22




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timely basis or at all. Failure to successfully
manufacture or obtain appropriate government approvals on a timely basis or at
all would prevent us from achieving our business objectives. We may experience difficulties or delays in product manufacturing, which are
beyond our control and could harm our business, because we rely on third-party
manufacturers. We currently expect to produce our product candidates through third-party
manufacturers and to the extent possible using our existing Charlestown
facilities. Problems with any manufacturing processes could result in product
defects, which could require us to delay shipment of products or recall
products previously shipped. In addition, any prolonged interruption in the
operations of our or a third partys manufacturing facilities could result in
the cancellation of shipments. A number of factors could cause interruptions,
including equipment malfunctions or process failures, or damage to a facility
due to natural disasters or otherwise. Because our manufacturing processes are
or are expected to be highly complex and subject to a lengthy FDA approval
process, alternative qualified production capacity may not be available on a
timely basis or at all. Difficulties or delays in our manufacturing could increase our costs and damage
our reputation. The manufacture of pharmaceutical products can be an expensive,
time-consuming, and complex process. Manufacturers often encounter difficulties
in scaling-up production of new products, including problems involving the
transfer of manufacturing technology, production yields, quality control and
assurance, and shortages of personnel. Delays in formulation and scale-up to
commercial quantities could result in additional expense and delays in our
clinical trials, regulatory submissions and commercialization. We rely on a limited number of suppliers for some of our manufacturing
materials. Any problems experienced by any of these suppliers could negatively
affect our operations. We rely on third-party suppliers and vendors for some of the materials used in
the manufacture of our product candidates. Some of these materials are
available from only one supplier or vendor. For supply of early clinical trial
materials, we rely on one supplier Invitrogen Corporation, for its cell culture
medium. The cell culture medium is used to grow the cells within which our
product candidates are produced. For supply of late-stage clinical trial
materials, we currently are planning to use purification resins from the
Applied Biosystems Group of Applera Corporation and the BioSepra S.A. Process
Division of Ciphergen Biosystems, Inc. in addition to the one supplier for cell
culture medium. We do not currently have supply agreements with any of these
suppliers. Any significant problem experienced by one of our suppliers could
result in a delay or interruption in the supply of materials to us until such
supplier resolves the problem or an alternative source of supply is located.
We have limited experience with alternative sources of the aforementioned raw
materials. Any delay or interruption would likely lead to a delay or
interruption of manufacturing operations, which could negatively affect our
operations. We have limited marketing capabilities, and if we are unable to enter into
collaborations with marketing partners or develop our own sales and marketing
capability, we may not be successful in commercializing our products. We currently have limited sales, marketing and distribution capabilities. As a
result, we will depend on collaborations with third parties that have
established distribution systems and direct sales forces. To the extent that we
enter into co-promotion or other licensing arrangements, our revenues will
depend upon the efforts of third parties, over which we may have little or no
control. If we are unable to reach and maintain agreements with one or more
pharmaceutical companies or collaborators, we may be required to market our
products directly. In any case we may elect to establish our own specialized
sales force and marketing organization to market our products to physicians. In
order to do this, we would have to develop a marketing and sales force with
technical expertise and with supporting distribution capability. 23




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Developing a
marketing and sales force is expensive and time consuming and could delay a
product launch. We cannot be certain that we will be able to attract and retain
qualified sales personnel or otherwise develop this capability. We face substantial competition from other companies and research institutions
that are developing products to treat the same diseases that our product
candidates target, and we may not be able to compete successfully. We compete with pharmaceutical and biotechnology companies that are pursuing
other forms of treatment for the diseases that our product candidates target.
We may also face competition from companies that may develop competing
technology internally or acquire it from universities and other research
institutions. As these companies develop their technologies, they may develop
proprietary positions, which may prevent or limit our product commercialization
efforts. Some of our competitors are established companies with greater financial and
other resources than we have. We expect that competition in our business will
intensify. Our competitors may succeed in:  
    
    identifying important genes or delivery mechanisms before us;
    
    developing products or product candidates earlier than we do;
    
    forming collaborations before we do, or precluding us from forming
collaborations with others;
    
    obtaining approvals from the FDA or other regulatory agencies for
such products more rapidly than we do;
    
    developing and validating manufacturing processes more rapidly than
we do;
    
    obtaining patent protection to other intellectual property rights
that would limit or preclude our ability to use our technologies or
develop products; or
    
    developing products that are safer or more effective than those we
develop or propose to develop. While we seek to expand our technological capabilities to remain competitive,
research and development by others may render our technology or product
candidates obsolete or noncompetitive or result in treatments or cures superior
to any therapy developed by us. RISKS RELATED TO OUR INDUSTRY If we are unable to adequately protect our intellectual property rights, our
competitors may be able to take advantage of our research and development
efforts to compete with us. Our commercial success will depend in part on obtaining patent protection for
our products and other technologies and successfully defending these patents
against third party challenges. Our patent position, like that of other
biotechnology firms, is highly uncertain and involves complex legal and factual
questions. The biotechnology patent situation in the United States and other
countries is uncertain and is currently undergoing review and revision. Changes
in, or different interpretations of, patent laws in the United States and other
countries might allow others to use our discoveries or to develop and
commercialize our products without any compensation to us. Our ability to develop and protect a proprietary position based on
biotechnological innovations and technologies involving genes and gene therapy,
delivery systems, production, formulations and the like, is particularly
uncertain. The U.S. Patent and Trademark Office, as well as the patent offices
in other countries, have often required that patent applications concerning
biotechnology-related inventions be 24




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limited or narrowed substantially. Our
disclosures in our patent applications may not be sufficient to meet the
statutory requirements for patentability in all cases. In addition, other
companies or institutions possess issued patents and have filed and will file
patent applications that cover or attempt to cover genes, vectors, cell lines,
and methods of making and using gene therapy products that are the same as or
similar to the subject matter of our patent applications. For example, while we
have pending patent applications pertaining to various types of adenovectors
that cannot reproduce themselves, adenovectors modified to alter cell binding
characteristics and special cell lines used to grow adenovectors, we are aware
of issued patents and pending patent applications of other companies and
institutions relating to the same subject matter. Patents and patent
applications of third parties may have priority over our issued patents and our
pending or yet to be filed patent applications. Proceedings before the U.S.
Patent and Trademark Office and other patent offices to determine who properly
lays claim to inventions are costly and time consuming, and we may not win in
any such proceedings. The issued patents we already have or may obtain in the future may not provide
commercially meaningful protection against competitors. Other companies or
institutions may challenge our or our collaborators patents in the United
States and other countries. In the event a company, institution or researcher
infringes upon our or our collaborators patent rights, enforcing these rights
may be difficult and can be expensive and time consuming, with no guarantee
that our or our collaborators patent rights
will be upheld. Others may be able to design around these patents or develop
unique products providing effects similar to our products. Thus, for example,
although we have an issued U.S. patent broadly covering stocks of adenovectors
that cannot reproduce themselves, our competitors may find ways to get around
this patent. In addition, our competitors may legally challenge our patents and
they may be held to be invalid. In addition, various components used in
developing gene therapy products, such as particular genes, vectors, promoters,
cell lines and construction methods, used by others and us, are available to
the public. As a result, we are unable to obtain patent protection with respect
to such components, and third parties can freely use such components. Third
parties may develop products using such components that compete with our
potential products. Also, with respect to some of our patentable inventions, we
or our collaborators have decided not to pursue patent protection outside the
United States. Accordingly, our competitors could develop, and receive non-U.S.
patent protection for, gene therapies or technologies for which we or our
collaborators have or are seeking U.S. patent protection. Our competitors may
be free to use these gene therapies or technologies outside the United States
in the absence of patent protection. Where we believe patent protection is not appropriate we rely to a limited
extent on trade secrets to protect our technology. However, trade secrets are
difficult to protect. While we have entered into confidentiality agreements
with employees and collaborators, we may not be able to prevent the disclosure
or use of our trade secrets. In addition, other companies or institutions may
independently develop substantially equivalent information and techniques. If our potential products conflict with intellectual property rights of
competitors, universities or others, then we may be prevented from developing
those product candidates. Other companies and institutions have issued patents and have filed and will
file patent applications that may issue into patents that cover or attempt to
cover genes, vectors, cell lines and methods of making and using gene and
gene-based therapy products used in or similar to our product candidates and
technologies. For example, we are aware of issued patents and pending patent
applications relating to the delivery, including through the use of
adenovectors, of medically beneficial substances to the heart and other
tissues. It could be alleged that our BIOBYPASS angiogen conflicts with these
patents. We also are aware of other issued patents and pending patent
applications that relate to various aspects of our product candidates and
systems, and it could be alleged that our product candidates conflict with
these patents. We have not conducted freedom to use patent searches on all
aspects of our product candidates or potential product candidates, and we may
be unaware of relevant patents and patent applications of third 25




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parties. In
addition, those freedom to use patent searches that have been conducted may not
have identified all relevant issued patents or all relevant pending patent
applications that could issue into patents, particularly in view of the
characterizations of the subject matter of issued patents and pending patent
applications, as well as the fact that pending patent applications can be
maintained in secrecy for a period of time and, in some circumstances, until
issuance as patents. An issued patent gives rise to a rebuttable presumption of validity under U.S.
law and the laws of some other countries. The holder of a patent to which we or
our collaborators do not hold a license could bring legal actions against our
collaborators or us for damages or to stop us or our collaborators from using
the affected technology, which could limit or preclude our ability to develop
and commercialize our product candidates. If any of our potential products are
found to infringe a patent of a competitor or third party, we or our
collaborators may be required to pay damages and to either obtain a license in
order to continue to develop and commercialize the potential products or, at
the discretion of the competitor or third party, to stop development and
commercialization of the potential products. Since we have concentrated our
resources on developing only a limited number of products, the inability to
market one of our products would disproportionately affect us as opposed to a
competing company with many products in development. We believe that there will be significant litigation in our industry regarding
intellectual property rights. Many of our competitors have expended and are
continuing to expend significant amounts of time, money and management
resources on intellectual property litigation. If we become involved in
litigation, it could consume a substantial portion of our resources and could
adversely affect our business, financial condition and results of operations,
even if we ultimately are successful in such litigation, in view of our limited
resources. If our right to use intellectual property we license from others is affected,
our ability to develop and commercialize our product candidates may be harmed. We rely, in part, on licenses to use some technologies that are material to our
business. For example, to create our product candidates, we combine our vectors
with genes intended to produce proteins. For our current product candidates, we
have secured licenses to use the VEGF121, TNF-alpha, and PEDF genes. We do
not own the patents that underlie these licenses. For these genes, we do not
control the enforcement of the patents. We rely upon our licensors to properly
prosecute and file those patent applications and to prevent infringement of
those patents. While many of the licenses under which we have rights provide us with exclusive
rights in specified fields, the scope of our rights under these and other
licenses may be subject to dispute by our licensors or third parties. In
addition, our rights to use these technologies and practice the inventions
claimed in the licensed patents and patent applications are subject to our
licensors abiding by the terms of those licenses and not terminating them. Any
of our licenses may be terminated by the licensor if we are in breach of a term
or condition of the license agreement, or in certain other circumstances. In
addition, some of our licenses require us to achieve specific milestones. Our product candidates and potential product candidates will require several
components that may each be the subject of a license agreement. The cumulative
license fees and royalties for these components may make the commercialization
of these product candidates uneconomical. Adverse events in the field of gene therapy may negatively affect regulatory
approval or public perception of our products or product candidates. 26




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In September 1999, a patient undergoing gene therapy using an adenoviral vector
to deliver a therapeutic gene died as a result of an adverse reaction to the
treatment. This death was widely publicized. Other patient deaths have occurred
in other gene-based clinical trials. These deaths and the resulting publicity
surrounding them, as well as any other serious adverse events in the field of
gene therapy or cell transplantation that may occur in the future, may result
in greater governmental regulation of our product candidates and potential
regulatory delays relating to the testing or approval of our product
candidates. As a result of the incident in September 1999, the United States
Senate held a series of hearings to determine whether additional legislation
was required to protect patients who participate in clinical trials. Possibly
as a consequence of these hearings, a specific division within the FDA for gene
and cell therapy was established. Furthermore, extended patient follow-up for
gene therapy product candidates has been recommended. Additionally, the
National Institutes of Health and its advisory bodies routinely review the
field of gene therapy and issue reports on the adverse events reported by
investigators. The NIH has approved a proposal to establish a Gene Transfer
Safety Assessment Board to review serious adverse event reports, annual reports
and other safety information in order to assess toxicity and safety and report
these findings at NIH Recombinant DNA Advisory Committee (RAC) meetings.
Additional scrutiny cannot be ruled out. Any increased scrutiny could delay or
increase the costs of our product development efforts or clinical trials. The commercial success of our product candidates will depend in part on public
acceptance of the use of gene therapies and cell transplantations for the
prevention or treatment of human disease. Public attitudes
may be influenced by claims that gene therapy or cell transplantation is
unsafe, and gene therapy and cell transplantation may not gain the acceptance
of the public or the medical community. Negative public reaction to gene
therapy or cell transplantation could result in greater government regulation
and stricter clinical trial oversight and commercial product labeling
requirements of gene therapies and cell transplantation products and could
cause a decrease in the demand for any products we may develop. Our product candidates involve new technologies and therapeutic approaches in
the field of gene therapy, which is a new and evolving field. As discussed
above, no gene therapy product has received regulatory approval in any country,
including the United States, and adverse events in this field may negatively
affect public perception of our product candidates. Even if our product
candidates attain regulatory approval, our success will depend upon the medical
community, patients and third party payors accepting gene therapy products in
general, and our product candidates in particular, as medically useful,
cost-effective and safe. In particular, our success will depend upon physicians
specializing in the treatment of those diseases that our product candidates
target prescribing treatments that involve the use of our product candidates in
lieu of, or in addition to, existing treatments that they are already familiar
with and for which greater clinical data may be available. Even if the clinical
safety and efficacy of our product candidates is established, physicians may
elect not to recommend our products for a variety of reasons, including the
reimbursement policies of government and third-party payors. Further,
third-party payors, such as health insurance plans, may be reluctant to
authorize and pay for new forms of treatment that they may deem expensive and
less-proven that existing treatments. Even if gene therapy products, and our
product candidates in particular, are accepted by the medical community and
third-party payors, the public in general, or patients in particular, may be
uncomfortable with new therapies, including our product candidates, and it
could take substantial time for them to accept gene therapy products as a
viable treatment alternative, if ever. If gene therapy and our product
candidates do not gain widespread acceptance, we may be unable to generate
significant revenues, if any, which would adversely affect our results of
operations. In addition, even if our product candidates achieve market
acceptance, we may not be able to maintain that market acceptance over time if
new products or technologies are introduced that are more favorably received
than our product candidates or render them obsolete. We may be sued for product liability, which could damage our reputation and
expose us to unanticipated costs. 27




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We, alone or with our collaborators, may be held liable if any product we or
our collaborators develop, or any product, which is made with the use or
incorporation of any of our technologies, causes injury or is found otherwise
unsuitable during product testing, manufacturing, marketing or sale. Regardless
of the merit or eventual outcome, product liability claims may result in:  
    
    withdrawal of product candidates from our clinical trials;
    
    withdrawal of our products from the market; if they have been approved;
    
    damage to our reputation;
    
    costs of litigation;
    
    substantial monetary awards to plaintiffs; and
    
    decreased demand for our products or product candidates. Although we currently have and intend to maintain product liability insurance,
this insurance may become prohibitively expensive, or may not fully cover our
potential liabilities. Inability to obtain sufficient insurance coverage at an
acceptable cost or otherwise to protect against potential product liability
claims could prevent or inhibit the commercialization of products developed by
us or in collaboration with others. Currently, we have a total of $5 million
liability coverage under a clinical
trials and professional liability insurance policy. If we are sued for any
injury caused by our products, our liability could exceed our total resources. We use hazardous chemicals and radioactive and biological materials in our
business; any liability or disputes relating to improper handling, storage or
disposal of these materials could be time consuming and costly. Our research and development processes involve the use of hazardous materials,
including chemicals and radioactive and biological materials, and also produce
hazardous waste products. Hazardous chemicals used in our processes include,
but are not limited to, flammable solvents such as methanol and ethanol, toxic
chemicals such as ethidium bromide and formaldehyde, and corrosive chemicals
such as acetic acid and sodium hydroxide. We also use several radioactive
compounds, including phosphorous-32, carbon-14, sulfur-35, phosphorous-33,
iodine-125, hydrogen-3, and chromium-51. The hazardous biological material used in our research and development
activities include human and animal cell lines and viruses, such as
adenoviruses, and animals infected with human viruses. Some of the biological
material may be novel, including viruses with novel properties. We cannot
eliminate the risk of accidental contamination or discharge or injury from
these materials. Federal, state, and local laws and regulations govern the use,
manufacture, storage, handling and disposal of these materials. We could be
subject to civil damages in the event of an improper or unauthorized release
of, or exposure of individuals to, these hazardous materials. In addition,
claimants may sue us for injury or contamination that results from our use or
the use by third parties of these materials, and our liability may exceed our
total assets. Compliance with environmental laws and regulations may be
expensive, and current or future environmental regulations may impair our
research, development or production efforts. Although we have general liability insurance, these polices contain exclusions
from insurance against claims arising from pollution from chemical or
radioactive materials. Our collaborators are working with these types of
hazardous materials in connection with our collaborations. In the event of a
lawsuit or investigation, we could be held responsible for any injury we or our
collaborators cause to persons or 28




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property by exposure to, or release of, any
hazardous materials. However, we believe that we are currently in compliance
with all applicable environmental and occupational health and safety
regulations. If reforms in the health care industry make reimbursement for our potential
products less likely, the market for our potential products will be reduced,
and we will lose potential sources of revenue. Our success may depend, in part, on the extent to which reimbursement for the
costs of therapeutic products and related treatments will be available from
third-party payors such as government health administration authorities,
private health insurers, managed care programs, and other organizations. Over
the past decade, the cost of health care has risen significantly, and there
have been numerous proposals by legislators, regulators, and third-party health
care payors to curb these costs. Some of these proposals have involved
limitations on the amount of reimbursement for certain products. Similar
federal or state health care legislation may be adopted in the future and any
products that we or our collaborators seek to commercialize may not be
considered cost-effective. Adequate third-party insurance coverage may not be
available for us to establish and maintain price levels that are sufficient for
realization of an appropriate return on our investment in product development.
Moreover, the existence or threat of cost control measures could cause our
corporate collaborators to be less willing or able to pursue research and
development programs related to our product candidates. 29




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ITEM 2. PROPERTIES We currently lease 42,900 square feet for our corporate offices and research
and development laboratories located at 65 West Watkins Mill Road in
Gaithersburg, Maryland. The lease expires on November 1, 2009. We have options
to extend the term of this lease for an additional fourteen years. We also
lease 25,000 square feet for research and development laboratories and
manufacturing space located in Charlestown, Massachusetts. The lease expires
on October 3, 2006, we have an option to extend the term of the lease for an
additional five years. We believe that these facilities are sufficient for our
current needs. We have additional space in our current facilities to
accommodate our anticipated growth over the next several years. 
 ITEM 3. LEGAL PROCEEDINGS We are not currently a party to any material legal proceedings. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS There were no matters submitted by the Company during the fourth quarter of
2003 to a vote of security holders, through the solicitation of proxies or
otherwise. EXECUTIVE OFFICERS OF THE REGISTRANT NAME
    
    AGE
    
    PRESENT POSITION WITH THE REGISTRANTPaul H. Fischer, Ph,D.
    
    
    54
    
    
    President and Chief Executive OfficerJeffrey W. Church
    
    
    47
    
    
    Chief Financial Officer, Treasurer and Corporate SecretaryE. Michael Egan
    
    
    50
    
    
    Sr. Vice President, Commercial DevelopmentBryan T. Butman, Ph.D.
    
    
    51
    
    
    Vice President, QualityC. Richter King, Ph.D.
    
    
    49
    
    
    Vice President, ResearchRobert S. Tenerowicz
    
    
    41
    
    
    Vice President, Process Development and Clinical SuppliesAbdellah Sentissi
    
    
    54
    
    
    Vice President, Quality Systems
 Paul H. Fischerserves as our President and Chief Executive Officer and as a
director of the Company. Dr. Fischer has served as President and Chief
Executive Officer and as a director of the Company since 1995. Prior to
joining GenVec, he was Executive Vice President of Research and Development
with Oncologix, Inc., (now Antigenics, Inc.) a biotechnology company. Dr.
Fischers previous experience includes Manager, Cancer Research at Pfizer,
Inc., a pharmaceutical company. Dr. Fischer 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 Yale University School of Medicine and was an associate
Professor of Human Oncology at the University of Wisconsin. Jeffrey W. Churchjoined the Company in August of 1998 and serves as Chief
Financial Officer, Treasurer and Corporate Secretary. Prior to joining the
Company, he served from September 1997 to August 1998 as Executive Vice
President and Chief Financial Officer of Biospherics, Inc., a
telecommunications and biotechnology company. Before that Mr. Church was
employed with Meridian Medical Technologies, Inc., a medical device/drug
delivery company. In addition to his CFO duties at Meridian, Mr. Church was
also responsible for one of the companys three operating units. Previously,
Mr. Church spent seven years with PricewaterhouseCoopers as Audit Manager. Mr.
Church received his B.S. in Accounting from the University of Maryland and is a
Certified Public Accountant. 30




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E. Michael Eganserves as the Senior Vice President of Commercial Development.
He joined GenVec after having served as COO for Diacrin, which was acquired by
GenVec in 2003. Mr. Egan has over 15
years experience in business development and laboratory management. During his
career, he has been involved in the development of several key business
collaborations and partnerships. Mr. Egan was a member of the Board of
Directors of Repligen Clinical Partners, LP and Secretary/Treasurer of Repligen
Sandoz Research Corporation. Mr. Egan received a BS in Biology from Boston
College, Boston, MA and a Certificate of Special Studies in Administration and
Management from Harvard University, Boston, MA. Bryan T. Butmanhas served as our Vice President of Quality since March 2002.
He joined GenVec in 1999 and previously served as Director of Quality and
Analytical Sciences from September 1999 to March 2002. Immediately prior to
joining GenVec, Dr. Butman was Executive Director, Diagnostic Product Research
and Development with INTRACEL Corporation, a biotechnology company. Dr. Butman
has over 19 years of experience in the development, clinical testing,
registration and manufacture of medical diagnostic products and in the
development of quality control assays for parenteral biopharmaceuticals.
Throughout his biotechnology career, Dr. Butman has developed successful
products in the areas of cardiovascular disease, oncology, infectious disease
and hematology. He has held senior positions within Warner Lambert, AKZO-Nobel,
Organon Teknika, PerImmune and INTRACEL. Dr. Butman holds a Ph.D. in Cell
Biology from Wayne State University. C. Richter Kinghas served as our Vice President of Research since May 1999,
and from May 1998 to May 1999 as our Vice President of New Product Research, an
area that he still oversees. Prior to joining GenVec in 1998, Dr. King
conducted extensive research into the amplification of the erbB-2 gene, which
is associated with common human cancers. Pursuing erbB-2 as a potential target
for anticancer therapy, Dr. King directed an experienced research group at the
Georgetown University Medical Schools Lombardi Cancer Research Center in
Washington, DC, where he served as Associate Professor with the Universitys
Department of Biochemistry. Previously, Dr. King was the Director of Drug
Discovery for Oncologix (now Antigenics, Inc.). Dr. King holds a Ph.D. in
Biochemistry from the Johns Hopkins University in Baltimore, MD. Robert S. Tenerowiczhas served as Vice President, Process Development &
Clinical Supplies, since March 2002. Mr. Tenerowicz joined GenVec in 1997 as
Director of Project Management and served as Senior Director of Project
Management from March 2000 to February 2002 when he was promoted to Vice
President, Process Development and Clinical Supplies. Mr. Tenerowicz had 16
years of previous biotechnology industry and project management experience
prior to joining GenVec. Mr. Tenerowicz spent nine years at Genentech, Inc.,
serving in both the manufacturing and project management groups. Following
Genentech, Mr. Tenerowicz led the project management function at Cell Genesys,
Inc. and then at its subsidiary, Abgenix, Inc., for three years before joining
GenVec. While at Abgenix, Mr. Tenerowicz also had responsibility for the
Quality Assurance and Regulatory Affairs functions. In addition to managing
internal project management efforts, Mr. Tenerowicz has also gained extensive
experience with outside partners, collaborators and contractors such as large
pharmaceutical companies, biotechnology companies, device companies, contract
manufacturing and testing organizations, and academic institutions. Mr.
Tenerowicz received his Bachelor of Science degree in Physiology from the
University of California at Davis and his Master of Business Administration in
Operations Management from Golden Gate University. Abdellah Sentissiserves as the Vice President of Quality Systems. He joined
GenVec after having served as Senior Director of Quality Systems for Diacrin,
which was acquired by GenVec in 2003. Dr. Sentissi has over 18 years
experience in quality control and quality assurance of parenteral drugs; design
and installation of new GMP facilities; quality assurance and regulatory
submission. During the course of his career in biotechnology, Dr. Sentissi has
developed QA/QC Departments, implemented GMP in-house training
programs; designed 31




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validation programs; and managed the manufacturing of a monoclonal
antibody. He has held increasingly senior positions with Massachusetts
Biologic Laboratories and
Endocon, Inc. Dr. Sentissi holds a Ph.D. in Clinical Chemistry from
Northeastern University, Boston, MA. 32




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PART II  
 ITEM 5.
    MARKET FOR THE REGISTRANTS COMMON STOCK AND RELATED
STOCKHOLDER MATTERS Since our initial public offering of common stock on December 12, 2000, our
common stock has been traded in the over-the-counter market and is included for
quotation on the Nasdaq National Market under the symbol GNVC. Set forth below is the range of high and low closing sale prices for our common
stock as reported on the Nasdaq National Market for the two most recent years: HIGH
    
    LOWFirst Quarter 2003
    
    $
    3.20
    
    
    $
    1.30Second Quarter 2003
    
    $
    3.25
    
    
    $
    0.95Third Quarter 2003
    
    $
    3.25
    
    
    $
    2.00Fourth Quarter 2003
    
    $
    4.15
    
    
    $
    2.82First Quarter 2002
    
    $
    4.80
    
    
    $
    3.01Second Quarter 2002
    
    $
    3.50
    
    
    $
    2.20Third Quarter 2002
    
    $
    3.70
    
    
    $
    1.95Fourth Quarter 2002
    
    $
    4.30
    
    
    $
    2.60
 As of February 29, 2004, there were approximately 200 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. 
 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, 2003. 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. 33




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DECEMBER 31,2003
    
    2002
    
    2001
    
    2000
    
    1999SUMMARY STATEMENTS OF OPERATIONS:(in thousands, except per share data)Revenue
    
    $
    10,520
    
    
    $
    8,414
    
    
    $
    4,417
    
    
    $
    13,885
    
    
    $
    16,950Operating expenses:Research and development
    
    
    23,457
    
    
    
    24,352
    
    
    
    16,309
    
    
    
    15,356
    
    
    
    14,198General and administrative
    
    
    8,405
    
    
    
    9,643
    
    
    
    8,749
    
    
    
    6,917
    
    
    
    5,278Total operating expenses
    
    
    31,862
    
    
    
    33,995
    
    
    
    25,058
    
    
    
    22,273
    
    
    
    19,476Operating Loss
    
    
    (21,342
    )
    
    
    (25,581
    )
    
    
    (20,641
    )
    
    
    (8,388
    )
    
    
    (2,526
    )Other income (loss), net
    
    
    81
    
    
    
    (17
    )
    
    
    1,545
    
    
    
    539
    
    
    
    607Net loss
    
    $
    (21,261
    )
    
    $
    (25,598
    )
    
    $
    (19,096
    )
    
    $
    (7,849
    )
    
    $
    (1,919
    )Basic and diluted net loss per share
    
    $
    (0.65
    )
    
    $
    (1.17
    )
    
    $
    (1.05
    )
    
    $
    (2.80
    )
    
    $
    (1.22
    )Shares used in computing basic and diluted net
loss per share
    
    
    32,963
    
    
    
    21,816
    
    
    
    18,124
    
    
    
    2,808
    
    
    
    1,576
 AS OF DECEMBER 31,2003
    
    2002
    
    2001
    
    2000
    
    1999SUMMARY BALANCE SHEET DATA:(in thousands)Cash, cash equivalents and short-term
investments
    
    $
    26,523
    
    
    $
    17,652
    
    
    $
    19,930
    
    
    $
    39,790
    
    
    $
    13,884Working capital
    
    
    20,636
    
    
    
    12,471
    
    
    
    17,017
    
    
    
    35,837
    
    
    
    8,348Long-term investments
    
    
    13,438
    
    
    
    2,708
    
    
    
    21,988
    
    
    
    6,682
    
    
    
    2,485Total assets
    
    
    52,684
    
    
    
    31,085
    
    
    
    51,366
    
    
    
    57,179
    
    
    
    28,636Long-term debt, less current portion
    
    
    4,539
    
    
    
    5,921
    
    
    
    5,088
    
    
    
    6,026
    
    
    
    6,822Accumulated deficit
    
    
    (116,700
    )
    
    
    (95,439
    )
    
    
    (69,841
    )
    
    
    (50,745
    )
    
    
    (42,896
    )Total stockholders equity
    
    
    37,026
    
    
    
    15,629
    
    
    
    40,128
    
    
    
    44,316
    
    
    
    11,931
 
  ITEM 7.
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Financial
Statements and Notes thereto appearing elsewhere in this report. See Business
 Risks and Uncertainties regarding certain factors known to GenVec that
could cause reported financial information not to be necessarily indicative of
future results, including discussions of the risks related to the development,
regulatory approval, proprietary protection of our product candidates, and
their market success relative to alternative products. CRITICAL ACCOUNTING POLICIES AND THE USE OF ESTIMATES The discussion and analysis of GenVecs financial condition and results of
operations are based upon GenVecs financial statements. The preparation of
financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. On an on-going basis, GenVec evaluates its estimates using
authoritative pronouncements, historical experience and other assumptions as
the basis for making estimates. Actual results could differ from those
estimates. While its significant accounting policies are more fully described
in Note 2 to GenVecs financial statements included in this annual report on Form 10-K, GenVec
believes the following accounting policies to be critical: 34




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Revenue Recognition.Research and development (R & D) revenue, from
cost-reimbursement and cost-plus agreements, are recognized as earned based on
the performance requirements of the contract. Non-refundable R & D fees for
which no further performance obligations exist are recognized when collection
is assured. Contract and upfront license payments where GenVec has continued
involvement through a research or development collaboration are recognized
ratably over the contract period. Revenue associated with performance
milestones are recognized based on achievement of the milestones as defined in
the respective agreements. In accordance with Staff Accounting Bulletin 101, GenVec has deferred
recognition of up-front contract or license payments received under its
collaboration and license agreements and has amortized the related unearned
revenues over the terms of the collaboration agreements, generally ranging from
two to four years. GenVecs results of operations included $98,000, $-0- and
$1.8 million during the years ended 2003, 2002 and 2001, of amortization of
these upfront contract and license fees which were received in prior years. As
of December 31, 2003, GenVec had unearned upfront contract and license fees of
$1.5 million related to the Terumo agreement acquired in the business
combination consummated in August, 2003. As of December 31, 2003 and 2002,
GenVec had unearned revenue related to other contracts of $1.3 million and
$481,000, respectively. Clinical Trial Expenses and Research and Development Activities:GenVec is
currently focused on the development of four therapeutic product candidates,
TNFerade, BIOBYPASS, cell therapy for cardiac repair and AdPEDF which are in various stages of clinical trials.
Clinical trial expenses are payable to clinical sites and core laboratories.
Expenses for clinical sites are accrued ratably over the treatment period based
on the number of patients treated for each trial. We estimate these costs at the commencement of the trial
based on prior experience and expected timing of the treatment. At the completion of each trial, we record
an adjustment equal to the difference between the estimated amounts and the actual amounts. Expenses for core
laboratories are recognized as incurred. The expenditures that will be necessary to execute GenVecs business plan are
subject to numerous uncertainties, which may adversely affect its liquidity and
capital resources. Completion of clinical trials may take several years or
more, but the length of time generally varies substantially according to the
type, complexity, novelty and intended use of a product candidate. GenVec
estimates that clinical trials of the type GenVec generally conducts are
typically completed over the following timelines: EstimatedCompletionClinical Phase
    
    DatePhase I
    
    1 - 2 yearsPhase II
    
    1 - 3 yearsPhase III
    
    2 - 4 years
 The duration and the cost of clinical trials may vary significantly over the
life of a project as a result of differences arising during the clinical trial
protocol, including, among others, the following:  
    
    the number of patients that ultimately participate in the trial;
    
    the duration of patient follow-up that seems appropriate in view of the results;
    
    the number of clinical sites included in the trials; and 35




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
    
    the length of time required to enroll suitable patient subjects GenVec tests potential product candidates in numerous pre-clinical studies to
identify indications for which they may be product candidates. GenVec may
conduct multiple clinical trials to cover a variety of indications for each
product candidate. As GenVecs obtains results from trials, GenVec may elect
to discontinue clinical trials for certain product candidates or for certain
indications in order to focus its resources on more promising product
candidates or indications. An element of GenVecs business strategy is to pursue the research and
development of a range of product candidates for a variety of indications.
This is intended to allow GenVec to diversify the risks associated with its
research and development expenditures. As a result, GenVec believes its future
capital requirements and its future financial success are not substantially
dependent on any one product candidate. To the extent GenVec is unable to
maintain a broad range of product candidates, GenVecs dependence on the
success of one or a few product candidates would increase. GenVecs product candidates also have not yet received FDA regulatory approval,
which is required before GenVec can market them as therapeutic products. In
order to proceed to subsequent clinical trial stages and to ultimately achieve
regulatory approval, the FDA must conclude that GenVecs clinical data
establish safety and efficacy. Historically, the results from pre-clinical
testing and early clinical trials have often not been predictive of results
obtained in later clinical trials. A number of new drugs and biologies have
shown promising results in early clinical trials, but subsequently failed to
establish sufficient safety and efficacy data to obtain necessary regulatory
approvals. Furthermore, GenVecs business strategy includes the option of entering into
collaborative arrangements with third parties to complete the development and
commercialization of GenVecs product candidates. In the event that third
parties take over the clinical trial process for one or more of GenVecs
product candidates, the estimated completion date would largely be under the
control of that third party rather than GenVec. GenVec cannot forecast with
any degree of certainty which proprietary products or indications, if any, will
be subject to future collaborative arrangements, in whole or in part, and how
such arrangements would affect GenVecs development plan or capital
requirements. GenVecs programs may also benefit from subsidies, grants or
government or agency-sponsored studies that could reduce GenVecs development
costs. As a result of the uncertainties discussed above, among others, GenVec is
unable to estimate the duration and completion costs of its research and
development projects or when, if ever, and to what extent it will receive cash
inflows from the commercialization and sale of a product. GenVecs inability
to complete its research and development projects in a timely manner or its
failure to enter into collaborative agreements, when appropriate, could
significantly increase its capital requirements and could adversely impact its
liquidity. These uncertainties could force GenVec to seek additional, external
sources of financing from time to time in order to continue with its business
strategy. GenVecs inability to raise additional capital, or to do so on terms
reasonably acceptable to it, would jeopardize the future success of its
business. TNFerade, GenVecs lead oncology product candidate, is currently in Phase
II trials for the treatment of locally advanced pancreatic cancer,
non-metastic esophageal cancer and rectal cancer. GenVec has incurred approximately $25 million of expenses on the development
of this product candidate since the commencement of this program in 1999.
These costs include research, development, clinical trials and clinical
supply costs, including an allocation of corporate general and
administrative expenses. GenVec expects to continue to expend
substantial additional amounts for the development and commercialization
of TNFerade. 36




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BIOBYPASS has completed two Phase II trials in two separate indications -
coronary artery disease and peripheral vascular disease. In May 2002,
GenVec completed a randomized, controlled study of 71 patients with
severe coronary artery disease and no treatment options
demonstrating that these no option patients benefited when they
received BIOBYPASS. In January 2003, GenVec reported that its 107
patient, randomized, placebo-controlled Phase II clinical trial of
BIOBYPASS for the treatment of peripheral vascular disease failed to meet
its clinical endpoints due primarily to an unexpectedly large placebo
response. Since commencement of the research and development program of
BIOBYPASS in 1996, through December 31, 2003, GenVec has incurred
approximately $43.7 million in research, development and clinical costs,
including an allocation of corporate general and administrative expenses.
From July 1997 until July 2002, the development of BIOBYPASS was subject
to a Research, Development and Collaboration Agreement with The Warner
Lambert Company, a subsidiary of Pfizer, Inc., whereby GenVec received
approximately $62.6 million in non-refundable research and development
funding, milestone payments, equity purchases and license fees. GenVec
intends to seek strategic alliances with other organizations to continue
the clinical development of BIOBYPASS. In December 2003, the Company
entered into a research collaboration with Cordis Corporation, a Johnson
& Johnson company, to conduct a randomized, double blind, placebo
controlled study using BIOBYPASS in a procedure involving guided delivery
of the angiogenic agent directly into targeted regions of the heart in
patients with severe coronary artery disease using the Cordis NOGASTAR
Mapping Catheter and MYOSTAR Injection Catheter. Clinical benefit will
be assessed in multi-center study, which will be conducted in Europe and
is expected to enroll up to 125 patients with severe heart disease.
GenVec and Cordis will collaborate on regulatory matters and share in the
clinical trial costs. GenVec will supply all clinical material and
Cordis will provide the NOGASTAR and MYOSTAR mapping and injection
catheters and training to the interventional cardiologists conducting the
trial. GenVec will all retain commercial rights to BIOBYPASS and Cordis
will retain all commercial rights to the NOGASTAR mapping catheters and
MYOSTAR injection catheters. GenVec anticipates that it will share the
risks and costs of development by partnering this program, which it
expects may require granting commercialization rights to collaborators. Cell Transplantation Therapy for cardiac disease, is currently in Phase I
clinical testing. GenVec estimates, that since 1990, Diacrin has spent
between $15 million and $20 million on the development of this product
candidate, primarily in research and development expenses, including an
allocation of corporate general and administrative expenses. Such costs
were incurred primarily during fiscal periods prior to Diacrins business
combination with GenVec on August 21, 2003. GenVec intends to seek
strategic alliances with other organizations to continue the clinical
development of Cell Transplantation Therapy. GenVec anticipates that it
will share the risks and costs of development by partnering this program,
which it expects may require granting commercialization rights to its
collaborators. AdPEDF is currently in a Phase I trial for the treatment of wet
age-related macular degeneration, a leading cause of blindness in
individuals over the age of 50. Since commencement of the program in
2000 through December 31, 2003, GenVec has incurred approximately $17
million in research, development and clinical costs, including an
allocation of corporate general and administrative expenses. GenVec
intends to seek strategic alliances with other organizations to continue
the clinical development of AdPEDF. GenVec anticipates that it will
share the risks and costs of development by partnering this program,
which it expects may require granting commercialization rights to its
collaborators. GenVec is also developing therapeutic vaccines for the treatment of
life-threatening viruses. GenVec is currently collaborating with the U.S.
Government for the development of vaccines for the HIV, SARS, 37




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malaria and dengue virus. Each of these vaccine candidates will be evaluated in clinical
trials sponsored by the respective agencies. Research and development
activities performed by GenVec are subject to statements of work and approved
budgets under fixed price or cost plus fixed fee contracts. Since commencement
of these vaccine development programs in 2002 through December 31, 2003, GenVec has incurred approximately $13.5 million in research and development costs,
including an allocation of corporate general and administrative expenses. OVERVIEW We are clinical-stage biopharmaceutical company focused on the development and
commercialization of novel therapies that produce medically beneficial proteins
at the site of disease. GenVec combines its patented gene transfer
technologies with proprietary therapeutic genes to create product candidates,
such as TNFerade for oncology, BIOBYPASS for heart disease, cell
therapy for cardiac repair and AdPEDF program
for ophthalmology. GenVec is also collaborating with the U.S. Government for
the development of vaccine candidates for HIV, SARS, malaria and dengue virus. GenVec will focus on the clinical development of TNFerade and seek
collaborative partners to advance the development of our BIOBYPASS and Cell
Transplantation Therapy programs for heart disease and AdPEDF product candidate
for the prevention of blindness. If GenVec enters into collaborative licensing
and/or funded research arrangements, operating expenses would increase
commensurate with the increased revenues from such arrangements. To date, none of GenVecs proprietary or collaborative programs has resulted in
a commercial product; therefore, GenVec has not received any revenues or
royalties from the sale of products by GenVec or by GenVecs collaborators.
GenVec has funded its operations primarily through public and private
placements of equity securities, payments received under collaborative programs with
other companies and debt financings. We have incurred operating losses each year since inception and, as of December
31, 2003, had an accumulated deficit of approximately $116.7 million. Our
losses have resulted principally from costs incurred in research and
development and from general and administrative activities. Research and
development expenses consist primarily of salaries and related personnel costs,
sponsored research costs, patent costs, technology access fees, clinical trial
costs, and other expenses related to our product development and research
programs. General and administrative expenses consist primarily of salaries and
related expenses for executive, finance and other administrative personnel,
professional fees and other corporate expenses including business development
and general legal activities. On August 21, 2003, GenVec announced the completion of a definitive merger
agreement under which GenVec acquired Diacrin through an exchange of stock
using a fixed exchange ratio. Under the terms of the agreement, each share of
Diacrin common stock was exchanged for 1.5292 share of GenVec common stock in a
reorganization. Based on GenVecs closing per share price of $1.46 on April
14, 2003 (the date the transaction was announced), the transaction is valued at
approximately $40.4 million. The combined company had over $45 million in cash
and investments on the closing date of the merger. 38




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RESULTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2003 AND 2002 REVENUE: Revenue.Revenue, excluding related party revenue, increased 83% to $10.5
million in 2003 from $5.7 million in 2002 primarily from an increase of $4.6
million in funded research activities under our funded vaccine
programs with the National Institute of Health and the U.S. Naval Medical
Research Center. Revenue  related party.Revenue  related party was $2.7 million in 2002
from the BIOBYPASS collaboration with the Warner-Lambert Company/Pfizer, Inc.
We did not receive any related party revenues in 2003 due to the termination of
our collaboration with Warner-Lambert during 2002. OPERATING EXPENSES Research and development.Research and development expenses decreased slightly
from $24.4 million in 2002 to $23.5 million in 2003.
Research and development expenditures were focused on internal
product development efforts around the continuing clinical
development of TNFerade and AdPEDF and the expansion of the
Companys funded vaccine program with The Vaccine Research
Center at the National Institute of Allergy and Infectious Diseases
of the National Institute of Health. Offsetting these increases were
lower levels of expenditures related to the BIOBYPASS Phase II
trials for coronary artery disease and peripheral vascular disease
which were completed in late 2002 and reduced spending resulting from
the restructuring efforts described below. General and administrative.General and administrative expenses decreased 13%
to $8.4 million in 2003 from $9.6 million in 2002. This decrease reflects our
efforts to reduce outside costs and also the workforce reduction as a part of
our cost reduction program announced on April 23, 2003. Expenses included a
$1.2 million charge for severance and termination costs related to the
workforce reduction referred to above. OTHER INCOME (EXPENSE) Other income (expense), consisting primarily of interest income and investment
gains or losses offset by interest expense, increased from $17,000 in other
expense in 2002 to $81,000 in other income in 2003. This increase was due to a
$178,000 gain on sale of a security in 2003 compared to net investment losses
of $486,000 in 2002, due to the write down of a security, offset by a decrease
in interest income due to lower levels of cash available for investing for the
first three quarters of 2003 coupled with lower rates of return on these
invested funds. YEARS ENDED DECEMBER 31, 2002 AND 2001 REVENUE: Revenue.Revenue, excluding related party revenue, increased 564% to $5.7
million in 2002 from $864,000 in 2001 primarily as a result of increased levels
of funded research activities under our collaboration agreements with the
Vaccine Research Center and Fuso Pharmaceuticals. The Vaccine Research Center
contract commenced in January 2002 and our amended collaboration with FUSO,
which included increased funding, became effective in April 2002. Revenue  related party.Revenue  related decreased 25% to $2.7 million in
2002 from $3.6 million in 2001. Over 31% and 80% of our revenue in 2002 and
2001, respectively, were earned under our BIOBYPASS collaboration agreement
with The Warner-Lambert Company/Pfizer, Inc. and related settlement agreement.
As previously reported, Pfizer, Inc., which acquired Warner-Lambert in June
2000, elected to discontinue the collaboration in 2002. 39




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##### Table of Contents



OPERATING EXPENSES: Research and development. Research and development expenses increased 49% to
$24.4 million in 2002 from $16.3 million in 2001. The increase in our research
and development activities related
primarily to internal product development programs including the continuation
of clinical development of TNFerade and initiation of clinical development
efforts for our AdPEDF product program as well as development and clinical
expenses of $2.8 million related to the assumption of the BIOBYPASS program
from Pfizer in July 2002. These BIOBYPASS program expenses were partially
offset by payments totaling $2.7 million for certain manufacturing, development
and clinical costs received from Pfizer in 2002. General and administrative. General and administrative expenses increased 10%
to $9.6 million in 2002 from $8.7 million in 2001. 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 costs resulting from new hires in the sales, marketing and
commercialization areas and related recruiting and relocation costs. OTHER INCOME (EXPENSE). Other income, consisting primarily of interest income and securities gains or
losses offset by interest expense, decreased from $1.5 million in other income
in 2001 to $17,000 in other expense in 2002. This decrease was due to lower
levels of cash available for investing, lower rates of return on these invested
funds, and an investment loss of $1.0 million reported in the second quarter of
2002. LIQUIDITY AND CAPITAL RESOURCES To date, we have been engaged primarily in research and development activities.
As a result we have experienced and expect to continue to incur operating
losses for the foreseeable future until one or more of our product candidates
are commercialized. As of December 31, 2003, we held $40.0 million in cash and
investments as compared to approximately $20.4 million at December 31, 2002.
Net cash used in operating activities was $19.6 million in 2003 compared with
$20.3 million used in 2002. Net cash provided by financing activities was $2.0
million in 2003, reflecting proceeds from issuance of stock of $3.5 million
offset by debt payments of $1.5 million. Net cash provided by investing
activities was approximately $18.3 million in 2003, which consisted principally
of the net proceeds of the maturity of investment securities offset by the
purchase of property and equipment. The business combination consummated in
August 2003, provided $4.8 million in cash and equivalents. As of December 31,
2003, our working capital was approximately $20.6 million compared to $12.5
million at December 31, 2002, primarily reflecting a $8.9 million increase in
cash and equivalents and short-term investments resulting from the business
combination mentioned above. In January 2003, we raised approximately $1.8 million in an offering of
common stock from our shelf registration statement. Historically, we have contracted with various academic institutions and
research organizations to perform research and development activities and with
clinical sites for the treatment of patients under clinical protocols. Such
contracts expire at various dates and have differing renewal and expiration
clauses. Our commitments are summarized in the following table: Payments Due by Period
(000s)Less thanContractual Obligations
    
    Total
    
    1 year
    
    1-3 years
    
    4-5 years
    
    After 5 yearsLong-Term Debt
    
    $
    5,902
    
    
    $
    1,363
    
    
    $
    2,942
    
    
    $
    1,597
    
    
    $
    Capital Lease Obligations
    
    
    99
    
    
    
    99
    
    
    
    
    
    
    
    
    
    
    
    Operating Leases
    
    
    6,946
    
    
    
    1,642
    
    
    
    3,835
    
    
    
    1,469
    
    
    
    Other Obligations
    
    
    843
    
    
    
    688
    
    
    
    155
    
    
    
    
    
    
    
    Total Contractual Obligations
    
    $
    13,790
    
    
    $
    3,792
    
    
    $
    6,932
    
    
    $
    3,066
    
    
    $
    
 40




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##### Table of Contents



We expect our revenue for the next several years to consist primarily of
payments under corporate collaborations and interest income. In order to
reduce our operating expenses, we intend to focus our resources on our lead
product candidate, TNFerade, for the treatment of cancer. With respect to our
other product candidates, including Cell Transplantation Therapy and AdPEDF, we
will seek to form strategic alliances with other companies pursuant to which we
will share the risks and costs of development. We recently announced a
collaboration with Cordis Corporation to conduct further clinical studies of
our cardiovascular product candidate, BIOBYPASS. We also will continue to look
for funded research collaborations to help offset our future losses from
operations. Some of these arrangements may require us to relinquish rights to
certain of our existing or future technologies, product candidates or products
that we would otherwise seek to develop or commercialize on our own, or to
license the rights to our technologies, product candidates or products on terms
that are not favorable to us. We also will continue to seek capital through the public or private sale of
securities. If we are successful in raising additional funds through the
issuance of equity securities, investors likely will experience substantial
dilution, or the equity securities may have rights, preferences or privileges
senior to those of the holders of our common stock. If we raise funds through
the issuance of debt securities, those securities would have rights,
preferences and privileges senior to those of our common stock. In addition, if
we lack adequate funding, we may be required to delay, reduce the scope of, or
eliminate one or more of our research and development or clinical programs. We believe that our cash reserves and anticipated cash flow from our current
collaborations will be sufficient to support our operations for approximately 2
years. Without new collaborations or additional equity financing, we would use
approximately $16 million in cash over the next twelve months, including
approximately $1.1 million for capital expenditures and $3.8 million in
contractual obligations reflected in the table above. We expect that
significant additional financing will be required in the future, which we may
seek through public or private equity offerings, debt financing, additional
strategic alliance and licensing arrangements or some combination of these
financing alternatives. As of December 31, 2003, our net operating loss carry forwards were
approximately $167.5 million. If not utilized, our loss carry forwards will
expire at various dates through 2023. 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, 2003, we had cash and cash equivalents and short-term and
long-term investments of $40.0 million as follows: Cash and cash equivalents
    
    $    5.2 millionShort-term investments
    
    $  21.3 millionLong-term investments
    
    $  13.5 million
 Our exposure to market risk is confined to our cash and cash equivalents, which
consist of commercial paper having maturities of less than one year, and our
investment portfolio. We maintain an investment portfolio of investment grade
government agency notes and corporate bonds. The securities in our 41




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##### Table of Contents



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, 2003, securities totaling $21.3 million mature in
2004, $11.1 million mature in 2005 and $2.4 million mature in 2006. While we do
not believe that an increase in market rates of interest would have any significant negative impact on
the realizable value of our investment portfolio, changes in interest rates
affect the investment income we earn on our investments and, therefore, impact
our cash flow and results of operations. We have operated in the United States
and all revenues to date have been received in U.S. dollars. Accordingly, we
have not had any material exposure to foreign currency rate fluctuations. At December 31, 2003, we had an outstanding industrial revenue bond payable of $3.6 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 $2.4 million at fixed
interest rates ranging from 5.0% to 12.1%. Principal and interest on these
loans is due and payable monthly. 
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The response to this item is submitted in a separate section of this report.
See Index to Financial Statements on Page F below for a list of the financial
statements being filed herein.  
 ITEM 9.
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 
 ITEM 9A. CONTROLS AND PROCEDURES Under the supervision and with the participation of the Companys Chief
Executive Officer and the Companys Chief Financial Officer, Treasurer and
Corporate Secretary (its principal executive officer and principal financial
officer), management has reviewed and evaluated the effectiveness of the design
and operation of the Companys disclosure controls and procedures. Based on
that evaluation, the Chief Executive Officer and the Chief Financial Officer,
Treasurer and Corporate Secretary have concluded that these disclosure controls
and procedures are effective as of December 31, 2003. There were no
significant changes in the Companys internal control over financial reporting
during the quarter ended December 31, 2003 that affected, or are reasonably
likely to materially affect the internal control over financial reporting. 42




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##### Table of Contents



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, which appears under Executive Officers of the Registrant,
is incorporated by reference from our Proxy Statement relating to the 2004
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 2004 Annual Meeting of Stockholders to be filed
pursuant to General Instruction G(3) to Form 10-K. 
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item, with the exception of information
relating to compensation plans under which equity securities of the Registrant
are authorized for issue, which appears below, is incorporated by reference
from our Proxy Statement relating to the 2004 Annual Meeting of Stockholders to
be filed pursuant to General Instruction G(3) to Form 10-K. Options under Employee Benefit Plans The following table discloses certain information about the options issued and
available for issuance under all outstanding Company option plans as of
December 31, 2003: (a)
    
    (b)
    
    (c)Number ofsecuritiesNumber of
    
    
    
    remaining availablesecurities to be
    
    
    
    for future issuanceissued upon
    
    Weighted-average
    
    under equityexercise of
    
    exercise price of
    
    compensation plansoutstanding
    
    outstanding
    
    (excludingoptions, warrants
    
    options, warrants
    
    securitiesPlan category
    
    and rights
    
    and rights
    
    reflected in column(a)Equity compensation
plans approved by
security holders
    
    
    4,247,603
    
    
    $
    3.15
    
    
    
    2,678,667Equity compensation
plans not approved
by security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    4,247,603
    
    
    $
    3.15
    
    
    
    2,678,667
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference from our
Proxy Statement relating to the 2004 Annual Meeting of Stockholders to be filed
pursuant to General Instruction G(3) to Form 10-K. 43




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##### Table of Contents



ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this item is incorporated by reference from our
Proxy Statement relating to the 2004 Annual Meeting of Stockholders to be filed
pursuant to General Instruction G(3) to Form 10-K. During the fourth quarter of 2003, the Companys Audit Committee approved the provision of tax
compliance services by its independent auditor totaling $7,500. 44




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##### Table of Contents



PART IV ITEM 15. 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.
 EXHIBITNUMBER
    
    DESCRIPTION2.1
    
    Agreement and Plan of Reorganization, as amended, between GenVec, Inc. and Diacrin,
Inc. dated April 14, 2003 and related Agreement and Plan of Merger between GenVec,
Inc. and Diacrin, Inc., dated April 14, 2003. Incorporated by reference to Appendix A
to the joint proxy statement/prospectus included in our Registration Statement on Form
S-4 (File No. 333-105320), filed May 16, 2003 and declared effective by the Securities
and Exchange Commission on July 21, 2003.3.1
    
    Amended & Restated Certificate of Incorporation of GenVec, Inc. (8)3.1(a)
    
    Certificate of Designation of the Series A Junior Participating Preferred Stock. (8)3.2
    
    Amended & Restated Bylaws of GenVec, Inc. (1)4.1
    
    Rights Agreement dated as of September 7, 2001 between the Registrant and American
Stock Transfer & Trust Company, the form of Certificate of Designation of Series A
Junior Participating Preferred Stock attached as Exhibit A thereto, the form of Rights
Certificate attached as Exhibit B thereto, and the form of Summary of Rights attached
as Exhibit C thereto (4)4.2
    
    Stock Purchase Agreement dated as of December 21, 2001, by and among HealthCare
Ventures V. L.P., HealthCare Ventures VI, L.P., and the Registrant (5)4.3
    
    Investor Rights Agreement, dated as of December 21, 2001, by and among HealthCare
Ventures V. L.P., HealthCare Ventures VI, L.P., and the Registrant (5)10.1
    
    Form of Indemnification Agreement for Directors and Officers. (1)10.2
    
    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.* (7)10.5
    
    2002 Stock Incentive Plan* (6)10.6
    
    License Agreement dated May 31, 1996 between Scios, Inc. and the Registrant. (1)10.7
    
    New Collaboration Agreement dated January 1, 2003 between Fuso Pharmaceutical
Industries, Ltd. and the Registrant + (8)10.8
    
    New Commercialization Agreement dated January 1, 2003 between Fuso Pharmaceutical
Industries Ltd. and the Registrant.+ (8)10.9
    
    License Agreement dated February 1, 1998 between Asahi Chemical Industry Co., Ltd. and
the Registrant (filed herewith).10.10
    
    Sponsored Research Agreement dated April 1, 2002 between Cornell University and the
Registrant.+ (8)10.11
    
    Amended and Restated Exclusive License Agreement dated March 18, 2002 between Cornell
University and the Registrant.+ (8)
 45




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##### Table of Contents



EXHIBITNUMBER
    
    DESCRIPTION10.12
    
    Amendment to Common Stock Warrant Agreement dated March 18, 2002 between the
Registrant and Cornell Research Foundation, Inc. (8)10.13
    
    Lease Agreement dated May 4, 1999 between MOR BENNINGTON LLP and the Registrant. (1)10.14
    
    Amended and Restated Registration Rights Agreement dated December 2, 1998 between the
Registrant and certain stockholders. (1)10.15
    
    Patent License Agreement dated January 8, 2000 between the Registrant and the Public
Health Service, as amended, and amendment number 1 hereto dated March 9, 2000 (filed herewith).10.16
    
    Patent License Agreement dated December 20, 2000 between the Registrant and
Northwestern University (3).10.17
    
    Salary Continuation Agreement between the Registrant and Paul H. Fischer dated October
15, 2002*(8)10.18
    
    Change in Control Agreement between the Registrant and Paul H. Fischer dated October
15, 2002*(8)10.19
    
    Salary Continuation Agreement between the Registrant and Jeffrey W. Church dated
October 15, 2002*(8)10.20
    
    Change in Control Agreement between the Registrant and Jeffrey W. Church dated October
15, 2002*(8)10.21
    
    Form of Salary Continuation Agreement between the Registrant and other executive
officers and senior staff dated October 15, 2002*(8)10.22
    
    Form of Indemnification and Advancement of Expenses Agreement dated December 10, 2003
(filed herewith)10.23
    
    Agreement with the Vaccine Research Center at the National Institute of Allergy and
Infectious Diseases of the National Institutes of Health for the production of
adenoviral vector-based HIV vaccine candidates dated December 31, 2001, and amendment 1 thereto dated January 25, 2002 (7) +10.24
    
    Sublease dated January 24, 1991 by and among Diacrin and Building 79 Associated
Limited Partnership and Building 96 Associates Limited Partnership (10)10.25
    
    Amendment to Sublease dated April 30, 2002 (11)10.26
    
    Research Collaboration Agreement between Cordis Corporation and the Company dated as
of December 22, 2003+ (filed herewith)23.1
    
    Consent of Independent Auditors (filed herewith).24.1
    
    Power of Attorney (filed herewith).31.1
    
    Rule 13a-14(a) Certification by Chief Executive Officer (filed herewith)31.2
    
    Rule 13a-14(a) Certification by Chief Financial Officer (filed herewith)32.1
    
    Rule 13a-14(b) Certification by Chief Executive Officer pursuant to 18 United States
Code Section 1350 (filed herewith)32.2
    
    Rule 13a-14(b) Certification by Chief Financial Officer pursuant to 18 United States
Code Section 1350 (filed herewith)
  *
    
    Compensatory plan, contract or arrangement.+
    
    Certain portions of this exhibit have been omitted
based upon a request for confidential treatment. The omitted
portions have been filed with the Commission pursuant to our
application for confidential treatment.(1)
    
    Incorporated by reference to our Registration
Statement on Form S-1 (File No. 333-47408) declared effective
by the Securities and Exchange Commission on December 12, 2000.(2)
    
    Incorporated by reference from our Registration
Statement on Form S-8 (File No. 333-55590) filed with the
Securities and Exchange Commission on February 14, 2001. 46




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##### Table of Contents



(3)
    
    Incorporated by reference from our Annual Report on
Form 10-K (File No: 0-24469) filed with the Securities and
Exchange Commission on March 30, 2001.(4)
    
    Incorporated by reference from our Registration
Statement on Form 8-A (File No: 0-24469) filed with the
Securities and Exchange Commission on September 26, 2001.(5)
    
    Incorporated by reference from our Form 8-K (File
No: 0-24469) filed with the Securities and Exchange Commission
on January 3, 2002.(6)
    
    Incorporated by reference from our Quarterly Report
on Form 10-Q (File No: 0-24469) Filed with the Securities and
Exchange Commission on August 14, 2002.(7)
    
    Incorporated by reference from our Annual Report on
Form 10-K (File No. 0-24469) filed with the Securities and
Exchange Commission on March 28, 2002.(8)
    
    Incorporated by reference from our Annual Report on
Form 10-K (File No. 0-24469) filed with the Securities and
Exchange Commission on March 31, 2003.(9)
    
    Incorporated by reference from our Registration
Statement on form S-4 (File No. 333-105320) filed with the
Securities and Exchange Commission on May 16, 2003.(10)
    
    Incorporated by reference from Diacrin, Inc. Form
10-K, as amended. (File No. 0-20139), Filed on April 29, 1992.(11)
    
    Incorporated by reference from Diacrin, Inc. Form
10-K (File No. 0-20139), Filed on March 26, 2003.  (b)
    Reports on Form 8-K. On October 20, 2003, the Company filed an amendment to a current report on
Form 8-K/A to amend Items 7(a) and 7(b) of the Companys Form 8-K filed on
August 22, 2003, in connection with the Diacrin Merger. 47




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized. GENVEC, INC.By:
    /s/ Paul H. Fischer, Ph.D.Paul H. Fischer, Ph.D.President, Chief Executive Officer and DirectorMarch 15, 2004 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated. TITLE
    
    DATE/s/ PAUL H. FISCHER, PH.D.
Paul H. Fischer, Ph.D.
    
    President, Chief Executive Officer
and Director
(Principal Executive Officer)
    
    March 15, 2004/s/ JEFFREY W. CHURCH   

Jeffrey W. Church
    
    Chief Financial Officer,
Treasurer & Secretary
(Principal Financial and
Accounting Officer)
    
    March 15, 2004*
Barbara Hackman Franklin
    
    Director
    
    March 15, 2004*
Thomas Fraser, Ph.D.
    
    Director
    
    March 15, 2004*
Wayne T. Hockmeyer, Ph.D.
    
    Director
    
    March 15, 2004*
Zola Horovitz, Ph.D.
    
    Director
    
    March 15, 2004*
William N. Kelley, M.D.
    
    Director
    
    March 15, 2004*
Stelios Papadopoulos, Ph.D.
    
    Director
    
    March 15, 2004*
Joshua Ruch
    
    Director
    
    March 15, 2004*
Harold R. Werner
    
    Director
    
    March 15, 2004
 By:
    
    * /s/ PAUL H. FISCHER, PH.D.Paul H. Fischer, Ph.D.
Attorney-in-Fact
 48




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##### Table of Contents



GENVEC, INC.
INDEX TO FINANCIAL STATEMENTS PAGE NO.Independent Auditors Report
    
    
    F-1Statements
of Operations  Years Ended December 31, 2003, 2002 and 2001
    
    
    F-2Balance Sheets as of December 31, 2003 and 2002
    
    
    F-3Statements
of Cash Flows  Years Ended December 31, 2003, 2002 and 2001
    
    
    F-4Statements
of Stockholders Equity  Years Ended December 31, 2003, 2002 and 2001
    
    
    F-5Notes to Financial Statements
    
    F-6 to F-24




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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, 2003 and 2002 and the related statements of operations, stockholders
equity and cash flows for each of the years in the three-year period ended
December 31, 2003. 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, 2003 and 2002, and the results
    of its operations and its cash flows for each of the years in the three-year
    period ended December 31, 2003, in conformity with accounting principles
    generally accepted in the United States of America. /s/ KPMG LLP  Baltimore, Maryland
    February 20, 2004 F-1




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##### Table of Contents



GENVEC, INC. STATEMENTS OF OPERATIONS (in thousands, except share and per share data) Year ended December 31,
    
    2003
    
    2002
    
    2001Revenue:Revenue from strategic alliances and research contracts
    
    $
    10,520
    
    
    $
    5,738
    
    
    $
    864Revenue  related party
    
    
    
    
    
    
    2,676
    
    
    
    3,553Total revenue
    
    
    10,520
    
    
    
    8,414
    
    
    
    4,417Operating expenses:Research and development
    
    
    23,457
    
    
    
    24,352
    
    
    
    16,309General and administrative
    
    
    8,405
    
    
    
    9,643
    
    
    
    8,749Total operating expenses
    
    
    31,862
    
    
    
    33,995
    
    
    
    25,058Operating loss
    
    
    (21,342
    )
    
    
    (25,581
    )
    
    
    (20,641
    )Other income (loss):Interest income
    
    
    389
    
    
    
    1,000
    
    
    
    2,103Interest expense
    
    
    (486
    )
    
    
    (531
    )
    
    
    (580
    )Investment gain (loss)
    
    
    178
    
    
    
    (486
    )
    
    
    22Total other income (loss), net
    
    
    81
    
    
    
    (17
    )
    
    
    1,545Net loss
    
    $
    (21,261
    )
    
    $
    (25,598
    )
    
    $
    (19,096
    )Basic and diluted net loss per share
    
    $
    (0.65
    )
    
    $
    (1.17
    )
    
    $
    (1.05
    )Shares used in computation of basic and diluted net loss per share
    
    
    32,963
    
    
    
    21,816
    
    
    
    18,124
 The accompanying Notes to Financial Statements are an integral part of these statements. F-2




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##### Table of Contents



GENVEC, INC. BALANCE SHEETS (in thousands) As of December 31,
    
    2003
    
    2002ASSETSCurrent assets:Cash and cash equivalents
    
    $
    5,217
    
    
    $
    4,597Short-term investments
    
    
    21,306
    
    
    
    13,055Accounts receivable
    
    
    1,822
    
    
    
    924Prepaid expenses and other
    
    
    1,591
    
    
    
    1,229Bond sinking fund
    
    
    258
    
    
    
    241Total current assets
    
    
    30,194
    
    
    
    20,046Property and equipment, net
    
    
    6,991
    
    
    
    7,886Long-term investments
    
    
    13,438
    
    
    
    2,708Other assets
    
    
    80
    
    
    
    445Intangible assets
    
    
    1,981
    
    
    
    Total assets
    
    $
    52,684
    
    
    $
    31,085LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current portion of long-term debt
    
    $
    1,462
    
    
    $
    1,486Accounts payable
    
    
    1,641
    
    
    
    2,298Accrued clinical trial, license and intellectual property expenses
    
    
    1,462
    
    
    
    1,416Accrued other expenses
    
    
    2,202
    
    
    
    1,894Unearned revenue
    
    
    2,791
    
    
    
    481Total current liabilities
    
    
    9,558
    
    
    
    7,575Long-term debt, less current portion
    
    
    4,539
    
    
    
    5,921Other liabilities
    
    
    1,561
    
    
    
    1,960Total liabilities
    
    
    15,658
    
    
    
    15,456Commitments (Notes 6 and 8)Stockholders equity:Common stock, $0.001 par value, 100,000 and 60,000 shares authorized
in 2003 and 2002; 51,350 and 21,979 shares issued in 2003 and 2002;
51,279 and 21,908 shares outstanding in 2003 and 2002
    
    
    51
    
    
    
    22Additional paid-in capital
    
    
    154,561
    
    
    
    112,975Deferred compensation
    
    
    (611
    )
    
    
    (1,590
    )Accumulated other comprehensive loss
    
    
    (275
    )
    
    
    (339
    )Accumulated deficit
    
    
    (116,700
    )
    
    
    (95,439
    )Total stockholders equity
    
    
    37,026
    
    
    
    15,629Total liabilities and stockholders equity
    
    $
    52,684
    
    
    $
    31,085
 The accompanying Notes to Financial Statements are an integral part of these statements. F-3




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##### Table of Contents



GENVEC, INC. STATEMENTS OF CASH FLOWS (in thousands) Year ended December 31,
    
    2003
    
    2002
    
    2001Cash flows from operating activities:Net loss
    
    $
    (21,261
    )
    
    $
    (25,598
    )
    
    $
    (19,096
    )Adjustments to reconcile net loss to cash used in operating activities:Depreciation and amortization
    
    
    2,608
    
    
    
    2,118
    
    
    
    1,809Stock option and warrant compensation
    
    
    1,176
    
    
    
    1,546
    
    
    
    1,585(Gain) loss on investments
    
    
    (178
    )
    
    
    486
    
    
    
    (22
    )Loss on disposal of assets
    
    
    
    
    
    
    8
    
    
    
    129Change in accounts receivable
    
    
    (898
    )
    
    
    (924
    )
    
    
    210Change in accounts payable and accrued expenses
    
    
    (1,696
    )
    
    
    2,728
    
    
    
    180Change in unearned revenue
    
    
    746
    
    
    
    20
    
    
    
    (1,539
    )Change in other assets and liabilities, net
    
    
    (125
    )
    
    
    (670
    )
    
    
    530Net cash used in operating activities
    
    
    (19,628
    )
    
    
    (20,286
    )
    
    
    (16,214
    )Cash flows from investing activities:Purchases of property and equipment
    
    
    (568
    )
    
    
    (1,515
    )
    
    
    (1,040
    )Cash acquired in acquisition, net of transaction costs of $2,445
    
    
    4,828
    
    
    
    
    
    
    
    Purchases of investment securities
    
    
    (19,174
    )
    
    
    (22,280
    )
    
    
    (32,032
    )Proceeds from sale and maturity of investment securities
    
    
    33,181
    
    
    
    32,750
    
    
    
    18,004Net cash provided by (used in) investing activities
    
    
    18,267
    
    
    
    8,955
    
    
    
    (15,068
    )Cash flows from financing activities:Proceeds from issuance of common stock, net
    
    
    3,450
    
    
    
    187
    
    
    
    13,063Proceeds from debt borrowings
    
    
    
    
    
    
    2,500
    
    
    
    Payments of long-term debt
    
    
    (1,469
    )
    
    
    (1,275
    )
    
    
    (889
    )Net cash provided by financing activities
    
    
    1,981
    
    
    
    1,412
    
    
    
    12,174Net change in cash and cash equivalents
    
    
    620
    
    
    
    (9,919
    )
    
    
    (19,108
    )Beginning balance of cash and cash equivalents
    
    
    4,597
    
    
    
    14,516
    
    
    
    33,624Ending balance of cash and cash equivalents
    
    $
    5,217
    
    
    $
    4,597
    
    
    $
    14,516Supplemental disclosure of cash flow information:Cash paid for interest
    
    $
    388
    
    
    $
    516
    
    
    $
    488Supplemental disclosure of non-cash investing activities:Property and equipment financed by capital leases
    
    $
    50
    
    
    $
    163
    
    
    $
    
 The accompanying Notes to Financial Statements are an integral part of these statements. F-4




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##### Table of Contents



GENVEC, INC. STATEMENTS OF STOCKHOLDERS EQUITY Accumulated(in thousands)
    
    Common Stock
    
    Additional
    
    
    
    
    
    Other Comp-
    
    ComprehensiveYears ended December 31,
    
    
    
    Paid-in
    
    Deferred
    
    Accumulated
    
    rehensive
    
    Total2003, 2002 and 2001
    
    Shares
    
    Amount
    
    Capital
    
    Compensation
    
    Deficit
    
    Income (Loss)
    
    Income (Loss)Balance, December 31, 2000
    
    
    17,995
    
    
    $
    18
    
    
    $
    100,070
    
    
    $
    (5,063
    )
    
    $
    (50,745
    )
    
    $
    36
    
    
    $
    44,316Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,096
    )
    
    
    
    
    
    
    (19,096
    )
    
    $
    (19,096
    )Unrealized change in
investments, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    595
    
    
    
    595
    
    
    
    595Unrealized change in cash
flow derivative, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (336
    )
    
    
    (336
    )
    
    
    (336
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (18,837
    )Common stock issued through
private equity offering
    
    
    3,582
    
    
    
    4
    
    
    
    12,774
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,778Common stock issued under
stock incentive plans
    
    
    204
    
    
    
    
    
    
    
    286
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    286Deferred compensation charge
resulting from stock options
    
    
    
    
    
    
    
    
    
    
    (332
    )
    
    
    1,917
    
    
    
    
    
    
    
    
    
    
    
    1,585Balance, December 31, 2001
    
    
    21,781
    
    
    $
    22
    
    
    $
    112,798
    
    
    $
    (3,146
    )
    
    $
    (69,841
    )
    
    $
    295
    
    
    $
    40,128Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (25,598
    )
    
    
    
    
    
    
    (25,598
    )
    
    $
    (25,598
    )Unrealized change in
investments, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (405
    )
    
    
    (405
    )
    
    
    (405
    )Unrealized change in cash
flow derivative, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (229
    )
    
    
    (229
    )
    
    
    (229
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (26,632
    )Common stock issued under
stock incentive plans
    
    
    198
    
    
    
    
    
    
    
    187
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    187Deferred compensation charge
resulting from stock options
and warrants
    
    
    
    
    
    
    
    
    
    
    (10
    )
    
    
    1,556
    
    
    
    
    
    
    
    
    
    
    
    1,546Balance, December 31, 2002
    
    
    21,979
    
    
    $
    22
    
    
    $
    112,975
    
    
    $
    (1,590
    )
    
    $
    (95,439
    )
    
    $
    (339
    )
    
    $
    15,629Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21,261
    )
    
    
    
    
    
    
    (21,261
    )
    
    $
    (21,261
    )Unrealized change in
investments, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (105
    )
    
    
    (105
    )
    
    
    (105
    )Unrealized change in cash
flow derivative, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    169
    
    
    
    169
    
    
    
    169Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (21,197
    )Common stock issued under
shelf registration, net of
issuance costs of $13
    
    
    757
    
    
    
    1
    
    
    
    1,848
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,849Common stock issued for
acquisition
    
    
    27,665
    
    
    
    27
    
    
    
    38,504
    
    
    
    (563
    )
    
    
    
    
    
    
    
    
    
    
    37,968Common stock issued under
stock incentive plans
    
    
    949
    
    
    
    1
    
    
    
    1,600
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,601Deferred compensation charge
resulting from stock options
    
    
    
    
    
    
    
    
    
    
    (366
    )
    
    
    1,542
    
    
    
    
    
    
    
    
    
    
    
    1,176Balance, December 31, 2003
    
    
    51,350
    
    
    $
    51
    
    
    $
    154,561
    
    
    $
    (611
    )
    
    $
    (116,700
    )
    
    $
    (275
    )
    
    $
    37,026
 The accompanying Notes to Financial Statements are an integral part of these statements. F-5




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##### Table of Contents



NOTES TO FINANCIAL STATEMENTS (1) ORGANIZATION AND BUSINESS DESCRIPTION GenVec, Inc. (GenVec or the Company) is a clinical-stage biopharmaceutical
company developing innovative therapeutics to treat serious and
life-threatening diseases, including cancer, heart disease and diseases of the
eye. Our most advanced product candidates are:  
    
    TNFerade, which is currently in Phase II trials for the treatment
of locally advanced pancreatic cancer, non-metastatic esophageal cancer
and rectal cancer;
    
    BIOBYPASS®, which has completed a randomized, controlled study of
71 patients with severe coronary artery disease using a cardiac
surgical procedure. In December 2003, the Company entered into a
research collaboration with the Cordis Cardiology Division of Cordis
Corporation, a Johnson & Johnson company, to study the clinical benefit
of BIOBYPASS in a procedure involving guided delivery of the angiogenic
agent directly into targeted regions of the heart in patients with
severe coronary artery disease using the Cordis NOGASTAR® Mapping
Catheter and MYOSTAR Injection Catheter;
    
    Cell transplantation therapy, which is currently in Phase I trials
for the treatment of congestive heart failure; and
    
    AdPEDF, which is currently in a Phase I trial for the treatment of
wet age-related macular degeneration, a leading cause of blindness in
individuals over the age of 50. The medical use of many proteins has historically been limited by the inability
to maintain sufficient concentrations of the protein at the site of the disease
for a period of time long enough to provide a benefit, while minimizing side
effects caused by the proteins presence in other, non-target tissues.
GenVecs product candidates are based on proprietary technology that uses an
adenovector to deliver genes that produce proteins at the site of disease. The Company is subject to various risks common to companies within the
biotechnology industry. These include, but are not limited to, development by
competitors of new technological innovations; dependence on key personnel;
dependence on a limited number of products; risks inherent in the research and
development of biotechnology products; protection of proprietary technology;
acceptance of the Companys products by the countrys regulatory agencies in
which the Company may choose to sell its products, as well as the end customer;
health care cost containment initiatives; and product liability and compliance
with government regulations, including the U.S. Food and Drug Administration. On August 21, 2003 the Company acquired Diacrin, Inc. (Diacrin), as more fully
described in Note 3.  (2)
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) CASH AND CASH EQUIVALENTS Cash equivalents consist of highly liquid investments with original
maturities of three months or less, and are recorded at amortized cost,
which approximates fair value. F-6




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##### Table of Contents



(b) INVESTMENTS The Companys investments consist primarily of bonds, government agency
notes and commercial paper. These investments are classified as
available-for-sale securities, which are carried at fair
value, with the unrealized holding gains and losses reported as a separate
component of other comprehensive income until realized. Realized gains and
losses from the sale of available-for-sale securities are determined on a
specific identification basis. A decline in the market value of any available-for-sale security below cost
that is deemed to be other than temporary results in a reduction in carrying
amount to fair value. The impairment is charged to earnings and a new cost
basis for the security is established. Premiums and discounts are amortized
or accreted over the life of the related security as an adjustment to yield
using the effective interest method. Dividend and interest income are
recognized when earned. (c) FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of the Companys financial instruments, as reflected in
the accompanying balance sheets, approximate fair value. Financial
instruments consist of cash and cash equivalents, short-term investments,
long-term investments, bond sinking fund, interest rate swap, accounts
receivable, accounts payable, and long-term debt. (d) PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Property and equipment is
depreciated using the straight-line method over the estimated useful lives
of assets, generally three to five years for equipment and seven years for
furniture and fixtures. Leased property meeting certain criteria is
capitalized at the lower of the present value of the future minimum lease
payments or fair value at the inception of the lease. Amortization of
capitalized leased assets is computed on the straight-line method over the
term of the lease. Repair and maintenance costs are expensed as incurred. (e) INTANGIBLE ASSETS The Company adopted the provisions of FASB Statement No. 142, Goodwill and
Other Intangible Assets, as of January 1, 2002. Statement 142 requires that
intangible assets with estimable useful lives be amortized over their
respective useful lives to their estimable residual values, and reviewed for
impairment in accordance with FASB Statement No. 144, Accounting for
Impairment or Disposal of Long-Lived Assets. The Company will amortize the
intangibles over the estimated useful life of the patents. (f) REVENUE RECOGNITION The Company recognizes revenue in accordance with SEC Staff Accounting
Bulletin No. 101, Revenue Recognition(SAB 101). SAB 101 requires
companies to recognize certain upfront non-refundable fees over the period
in which they complete the performance obligations under the related
agreement when such fees are received in conjunction with an agreement that
includes performance obligations. Non-refundable research and development
fees for which no future performance obligations exist are recognized when
collection is assured. Research and development revenue under collaboration
agreements is recognized as work is performed. Research and development
revenue from cost-reimbursement and cost-plus fixed fee agreements is
recognized as earned based on the performance requirements of the contract.
Revenue associated with performance milestones is recognized based on
achievement of the milestones as defined in the respective agreements.
Revenue recognized in the accompanying statements of operations is not
subject to repayment. F-7




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(g) RESEARCH AND DEVELOPMENT Research and development costs are charged to operations as incurred. Such
costs include internal research and development expenditures (such as
salaries and benefits, raw materials and supplies) and contracted services
(such as sponsored research, consulting and testing services) of proprietary
research and development activities and similar expenses associated with
collaborative research agreements. (h) CLINICAL TRIAL EXPENSES Clinical trial expenses are payable to clinical sites and core laboratories.
Expenses for clinical sites, which consist of the costs of patient
treatment and follow-up, are accrued ratably over the estimated treatment
period based on the number of patients treated for each trial. Expenses for
core laboratories are charged to operations as incurred. (i) INCOME TAXES Deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that are expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. (j) NET LOSS PER SHARE Basic and diluted net loss per share has been computed using the weighted
average number of shares of common stock outstanding during the period. If the Company had net income, diluted earnings per share would be
presented based on the shares used in the computation of basic net loss
per share as well as potential common shares related to outstanding
options and warrants. Securities outstanding, which were excluded from the computation of diluted
net loss per share because their effect was anti-dilutive, consisted of the
following (in thousands): 2003
    
    2002
    
    2001Outstanding options
    
    
    1,223
    
    
    
    715
    
    
    
    1,148Warrants
    
    
    
    
    
    
    
    
    
    
    3
 (k) COMPREHENSIVE LOSS Comprehensive loss consists of net loss and unrealized holding gains and
losses from available-for-sale securities and cash flow hedge derivative. (l) INTEREST RATE SWAP The Company has an interest rate swap agreement to manage interest rate
exposure. Amounts to be paid or received under this agreement are recognized
over the life of the related debt and are included in interest expense. In
2001, the Company adopted SFAS No. 133. F-8




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##### Table of Contents



(m) TECHNOLOGICAL LICENSE AND INTELLECTUAL PROPERTY Technological license and intellectual property costs consist of payments
associated with license agreements and legal costs associated with the
acquisition and development of intellectual property. Costs associated
with the acquisition and development of intellectual property are expensed
when incurred. (n) STOCK OPTION PLANS AND EMPLOYEE STOCK PURCHASE PLAN The Company accounts for stock-based compensation awards to employees in
accordance with the provisions of Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees(APB 25), and
related interpretations, and complies with the disclosure provisions of SFAS
Nos. 123 and 148, Accounting for Stock-Based Compensation. Under APB 25, compensation
expense is based on the difference, if any, on the date of grant, between
the quoted market price of the Companys stock and the exercise price. All
stock-based awards to non-employees are accounted for at their fair value in
accordance with the provisions of SFAS No. 123. Option grants
to employees have been issued only at fair market value prices as of
the date of grant during the periods presented herein, and the
Companys policy does not recognize compensation costs for
options of this type. The pro forma costs of these options granted
have been calculated using the Black-Scholes option pricing model and
assuming the following for each of the three years ended
December 31, 2003, 2002 and 2001: expected volatility of
102.81%, 105.90% and 98.05%; risk free interest rate of 2.54%, 3.04%
and 4.68%; expected lives of four years and no dividend yield. The
pro forma amounts may not be representative of the effects on pro
forma net earnings for future years. The weighted-average grant date
fair market value of options issued was $1.24 per share in 2003, $2.48
per share in 2002 and $2.65 per share in 2001. The following table
illustrates the effect on net loss and net loss per share if the fair
value based method had been applied to all outstanding and unvested
awards in each year (in thousands, except per share data): 2003
    
    2002
    
    2001Net loss  as reported
    
    $
    (21,261
    )
    
    $
    (25,598
    )
    
    $
    (19,096
    )Deduct: Stock based employee compensation expense
    determined under fair value based method for all awards
    
    
    (484
    )
    
    
    (953
    )
    
    
    (295
    )Net loss  pro forma
    
    $
    (21,745
    )
    
    $
    (26,551
    )
    
    $
    (19,391
    )Basic and diluted loss per share  as
    reported
    
    $
    (0.65
    )
    
    $
    (1.17
    )
    
    $
    (1.05
    )Basic and diluted loss per share  pro
    forma
    
    $
    (0.66
    )
    
    $
    (1.22
    )
    
    $
    (1.07
    ) The Company
has a stock purchase plan that is considered to be non-compensatory
under Financial Interpretation Number 44, Accounting for
Certain Transaction Involving Stock Compensation;however, for
disclosure purposes this plan is considered to be compensatory. (o) USE OF ESTIMATES The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America may require
management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual
results could differ from those estimates. The Companys significant
accounting estimates involve recognition of revenue from research and
development agreements, accrual of clinical trial costs and valuation of
intangible assets. (p) RECENT ACCOUNTING PRONOUNCEMENTS In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. SFAS No.
150 establishes standards for the classification and measurement of
certain financial instruments with characteristics of both liabilities and
equity. SFAS No. 150 also includes required disclosures for financial
instruments within its scope. For the Company, SFAS No. 150 was effective
for instruments entered into or modified after May 31, 2003 and otherwise
will be effective as of January 1, 2004, except for mandatorily redeemable
financial instruments. For certain mandatorily redeemable financial
instruments, SFAS No. 150 will be effective for the company on January 1,
2005. The effective date has been deferred indefinitely for certain other
types of mandatorily redeemable financial instruments. The Company
currently does not have any financial instruments that are within the
scope SFAS No. 150. In December 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46R, Consolidation of Variable
Interest Entities, which addresses how a business enterprise should
evaluate whether it has a controlling financial interest in an entity
through means other than voting rights and accordingly should consolidate
the entity. The Company currently does not have any financial interests that are within the scope of FIN 46R. F-9




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##### Table of Contents



(3) ACQUISITION On August 21, 2003, the Company and Diacrin consummated the business
combination that was jointly announced in April 2003 under which GenVec
acquired Diacrin through an exchange of stock. Under the terms of the
agreement, each share of Diacrin Common Stock was exchanged for 1.5292 shares
of GenVec Common Stock in a transaction intended to qualify as a tax-free
reorganization. Based on GenVecs average closing per share price of $1.28 for
a five-day period around April 15, 2003 (the date the transaction was
announced), the transaction was valued at approximately $38.5 million. At the
time of closing, GenVecs existing shareholders owned approximately 45.4% and
Diacrins original shareholders owned approximately 54.6% of the combined
company. The Company had incurred transaction costs of approximately $2.4
million through December 31, 2003. The difference between the cash and cash equivalents acquired in the acquisition of $7.3 million and the cost incurred of $2.4 million is presented in the Statements of Cash Flows as cash from investing activities. The Company is the acquirer and the
transaction was accounted for under the purchase method pursuant to SFAS No.
141, Business Combinations. Accordingly, results of operations of Diacrin
have been included in these financial statements from August 21, 2003. The aggregate purchase price of $38.5 million includes 27,665,392 shares of
common stock issued in the exchange, valued at $35.4 million and 1,937,197
common stock options valued at $3.1 million. The value of the stock options was
computed using the Black-Scholes valuation model based on the closing price on
the date of the transaction. Of the $3.1 million computed value, $563,000
represents the intrinsic value of unvested in-the-money options as of the date
of the transaction and has been recorded as deferred compensation, to be
amortized over the remaining vesting period of the options. The excess of the
acquisition costs over the fair value of the net assets acquired has been
recorded as intangible assets. Management has allocated the $2.0 million to
the patents related to the myoblast cell therapy program. The amortization is
not deductible for tax purposes because of the tax-free nature of the business
combination. The acquisition costs are summarized as follows (in thousands): Value of GenVec common stock issued
    
    $
    35,412Value of Stock Options issued
    
    
    3,120Less amount allocated to deferred compensation
    
    
    (563
    )Transaction costs incurred by GenVec*
    
    
    2,445Acquisition costs
    
    $
    40,414
  *
    Exclusive of $16 of registration fees charged directly against additional paid-in capital.   F-10




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##### Table of Contents



The fair value of the assets acquired and liabilities assumed at the date of
acquisition are summarized as follows (in thousands): Cash and cash equivalents
    
    $
    7,273Short-term investments
    
    
    30,839Other current assets
    
    
    530Long-term investments
    
    
    2,681Property and equipment, net
    
    
    67Intangible assets
    
    
    1,981Total assets acquired
    
    
    43,371Current liabilities
    
    
    1,393Unearned revenue
    
    
    1,564Total liabilities
    
    
    2,957Net assets acquired
    
    $
    40,414
 The following unaudited pro forma information presents the combined results of
operations of GenVec and Diacrin as if the acquisition had occurred as of the
beginning of 2003 and 2002 after giving affect to certain adjustments including
amortization of intangibles and additional depreciation expense. The pro forma
financial information does not necessarily reflect the results of operations
that would have occurred had GenVec and Diacrin constituted a single entity
during such periods (in thousands, except per share data): 2003
    
    2002Revenue
    
    $
    10,715
    
    
    $
    8,659Net loss
    
    $
    (26,269
    )
    
    $
    (31,658
    )Basic and diluted net loss per share
    
    $
    (0.52
    )
    
    $
    (0.64
    )
 (4) INVESTMENTS The amortized cost, gross unrealized holding gains and fair value of
available-for-sale securities by major security type at December 31, 2003 and
2002, are as follows (in thousands): 2003GrossUnrealizedAmortized
    
    Holding
    
    FairCost
    
    Gains
    
    ValueGovernment and agency notes
    
    $
    5,300
    
    
    $
    128
    
    
    $
    5,428Corporate bonds
    
    
    29,293
    
    
    
    23
    
    
    
    29,31634,593
    
    
    
    151
    
    
    
    34,744
 2002GrossUnrealizedAmortized
    
    Holding
    
    FairCost
    
    Gains
    
    ValueGovernment agency notes
    
    $
    15,349
    
    
    $
    132
    
    
    $
    15,481Corporate bonds
    
    
    187
    
    
    
    95
    
    
    
    282$
    15,536
    
    
    $
    227
    
    
    $
    15,763
 F-11




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Maturities of securities classified as available-for-sale had fair values as
follows at December 31 (in thousands): 2003
    
    2002Due within one year
    
    $
    21,306
    
    
    $
    13,055Due after one year through four years
    
    
    13,438
    
    
    
    2,708$
    34,744
    
    
    $
    15,763
 Included in the portfolio at December 31, 2002 was a $1.2 million par value
WorldCom Incorporated (WorldCom) 6.5% note due May 14, 2004. On July 21,
2002 WorldCom filed for bankruptcy court protection under Chapter 11 of the
U.S. Bankruptcy Code. The market price of this note on June 30, 2002 was
quoted at $16 per $100 value and it remained at approximately that price for
several months. In June 2002 the Company recorded a loss of $1,000,000
treating the write-down of the WorldCom note as an other than temporary
decline in market value. After the write down, the increases and decreases in
the fair market value have been reflected in Other Comprehensive Income. The
Company recorded a gain of $178,000 when the note was sold in September 2003 at
a price of $29.875 per $100 value. (5) PROPERTY AND EQUIPMENT Property and equipment consist of the following at December 31 (in thousands): 2003
    
    2002Equipment
    
    $
    9,565
    
    
    $
    7,416Leasehold improvements
    
    
    6,498
    
    
    
    6,400Furniture and fixtures
    
    
    518
    
    
    
    39016,581
    
    
    
    14,206Less accumulated depreciation and amortization
    
    
    (9,590
    )
    
    
    (6,320
    )$
    6,991
    
    
    $
    7,886
 Depreciation and amortization expense related to property and equipment were
$1,927,000, $1,715,000, and $1,631,000, for the years ended December 31,
2003, 2002 and 2001, respectively. (6) LONG-TERM DEBT Long-term debt consists of the following at December 31 (in thousands): 2003
    
    2002Industrial revenue bond
    
    $
    3,645
    
    
    $
    4,125Notes payable:Term loan from landlord
    
    
    613
    
    
    
    686Equipment financing
    
    
    1,519
    
    
    
    2,333Economic development loan
    
    
    125
    
    
    
    125Capital lease obligations
    
    
    99
    
    
    
    1386,001
    
    
    
    7,407Less current maturities
    
    
    (1,462
    )
    
    
    (1,486
    )$
    4,539
    
    
    $
    5,921
 F-12




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Aggregate maturities of long-term debt are as follows (in thousands): 2004
    
    $
    1,4622005
    
    
    1,2372006
    
    
    9662007
    
    
    7392008
    
    
    790Thereafter
    
    
    807$
    6,001
 (a) INDUSTRIAL REVENUE BOND In June 1999, in connection with the lease of its Gaithersburg facility,
the Company borrowed $5,000,000 under an Industrial Revenue Bond with the
State of Maryland to fund leasehold improvements and additional equipment
needs of the Company. The Bond is secured by a first priority lien on all
equipment and fixtures financed, a $2,500,000 letter of credit facility
guaranteed by the Maryland Industrial Development Finance Authority, and a
$2,500,000 guarantee from The Warner-Lambert Company. The annual fee for
the letter of credit is one percent of the outstanding balance, which
totaled $42,000, $48,000, and $53,000 for the years ended December 31,
2003, 2002 and 2001, respectively. Warner-Lamberts guarantee will remain
in place as long as the outstanding principal balance on the Bond is
greater than $2,500,000 and will be reduced in value dollar for dollar as
the principal balance decreases below $2,500,000. The Bond bears interest at a variable rate based on weekly market
conditions and matures on June 1, 2009. The weighted-average interest rates
during 2003, 2002 and 2001 were 1.12 percent, 1.95 percent and 4.02
percent, respectively. The Bond is subject to mandatory sinking fund
redemption beginning July 2001. The Company began making sinking fund
payments in July 2000; the balance of the sinking fund at December 31, 2003
and 2002 was $258,000 and $241,000, respectively. In October 2000, the Company entered into an interest rate swap agreement
to reduce its exposure to adverse fluctuations in interest rates related
to the Companys outstanding bond payable. The Company does not utilize
financial instruments for trading or other speculative purposes. The
interest rate swap agreement entitles the Company, on a monthly basis, to
receive a LIBOR-based floating rate of interest and pay a fixed rate of
interest of 6.68 percent. The interest rate swap has a total notional
amount of $3,645,000 and extends through the life of the outstanding
bond. In accordance with the transition provisions of SFAS No. 133, on January 1,
2001 GenVec recorded a cumulative-effect type adjustment of $167,000, which
reduced accumulated other comprehensive income. The Company recorded a
$169,000 increase to comprehensive income in 2003 and $229,000 and $169,000
decreases to comprehensive income in 2002 and 2001 to reflect the change in
the fair value in the respective years. Amounts included in the accumulated
other comprehensive income are reclassified into earnings in the same
periods that the hedged transactions affect earnings, which occurs as
interest expense is accrued on the bond. The amounts reclassified from
accumulated other comprehensive income to the statement of operations for
the years ended December 31, 2003 and 2002 were approximately $214,000 and
$215,000, respectively. Assuming stable interest rates, the Company
estimates that it will amortize a loss of approximately $187,000 out of
accumulated other comprehensive income into interest expense over the next
12 months. The fair value of the swap at December 31, 2003 and 2002 was a liability of
$396,000 and $565,000, respectively. F-13




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##### Table of Contents



(b) TERM LOAN In connection with the lease of the office and laboratory facility, the
landlord contributed $858,000 towards the construction of leasehold
improvements in the form of a term loan. This loan is payable in monthly
installments of $11,900, including interest at a fixed rate of 10.5
percent over the remaining term of the building lease. (c) EQUIPMENT FINANCING On December 27, 2002 the Company secured $939,000 in financing for
certain assets purchased by the Company at an interest rate of 10.0
percent. The note is payable in monthly installments of $26,100 through
December 2005 followed by monthly installments of $14,000 through
December 2006. The equipment financed by the note secures the loan. On April 3, 2002 the Company secured $1,564,000 in financing for certain
assets purchased by the Company. The financing consists of two notes:
one note for $1,054,000 at an interest rate of 9.54 percent, payable in
monthly installments of $33,600 through April 2005; the second note for
$507,000 at an interest rate of 9.99 percent, payable in monthly
installments of $12,800 through April 2006. The equipment financed by
the notes secures the loan. On January 27, 1999, the Company secured $1,500,000 in financing for
certain assets purchased by the Company at an interest rate of 10.8
percent. The note was payable in monthly installments of $35,800
commencing January 1999 through December 2002, followed by a balloon
payment of $150,000 which was paid in January 2003. (d) ECONOMIC DEVELOPMENT LOAN On September 29, 1999, the Company entered into an economic development
fund agreement with Montgomery County, Maryland (the County) and received
$125,000 for the purpose of relocation and expansion related expenses. The
$125,000 received is considered a loan, which accrues interest on the
principal balance at 5 percent a year until we are required to commence payment as described below; however,
the loan is due on January 15, 2007. Quarterly payments of principal and interest were originally scheduled to
commence on January 15, 2002. Loan payments may be deferred or forgiven by
the County if the Company achieves certain incentive provisions outlined in
the loan agreement related to the hiring of new employees within the
Company. As of December 31, 2003, the Company achieved certain incentive
provisions related to increasing its workforce. No assurance can be made
that the Company will achieve the targets that would result in a deferral
or forgiveness of the loan. Should the Company sell, close, or relocate a majority of its business
interest outside the County within 5 years from the commencement date of
the loan, the Company must repay the entire balance of the outstanding
loan plus all accrued interest. (e) CAPITAL LEASES In December 2003 the Company entered into a capital lease obligation at
an interest rate of 9.9 percent. The lease obligation is payable in
monthly installments of $3,100 through January 2005. In 2002, the
Company entered into three capital leases at interest rates ranging from
8.8 percent to 12.1 percent. The lease obligations are payable in
monthly installments of $8,800 through January 2003, $8,000 through July
2003 and $5,500 through August 2004. In 2000, the Company F-14




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##### Table of Contents



entered into two capital lease obligations at an interest rate of 10.5 percent. The
capital lease obligations are payable in monthly installments of $3,400
through 2005. The capital lease obligations are collateralized by certain assets with
a gross book value of $246,000 and related accumulated amortization of
$71,000 at December 31, 2003. (7) STRATEGIC ALLIANCES AND RESEARCH CONTRACTS The Company has established collaborations and research contracts with
pharmaceutical and biotechnology companies and governmental agencies to enhance
its ability to discover, evaluate, develop and commercialize multiple product
opportunities. Revenue is summarized as follows (in thousands): 2003
    
    2002
    
    2001Vaccine Research Center
    
    $
    7,230
    
    
    $
    3,952
    
    
    $
    US Naval Medical Research Center
    
    
    1,361
    
    
    
    9
    
    
    
    FUSO Pharmaceuticals Industries, Ltd.
    
    
    1,724
    
    
    
    1,527
    
    
    
    589Warner-Lambert Company (related party)
    
    
    
    
    
    
    2,676
    
    
    
    3,553Other strategic alliances and research contracts
    
    
    205
    
    
    
    250
    
    
    
    275$
    10,520
    
    
    $
    8,414
    
    
    $
    4,417
 (a) VACCINE RESEARCH CENTER In December of 2001, the Vaccine Research Center (VRC) at the National
Institute of Allergy and Infectious Diseases of the National Institutes of
Health selected the Company to collaborate in the development of a worldwide
preventative AIDS vaccine candidate. In April of 2003 this collaboration
was expanded to include the development of a SARS vaccine candidate. The
Company has a cost-plus sub-contract, managed for the VRC through
SAIC-Frederick, Inc., which became effective January 25, 2002. Under the
sub-contract, the Company is responsible for constructing and producing
adenovector-based vaccine candidates utilizing its proprietary cell line and
second-generation adenovector technology. The program encompasses a base
year and five option years. The second option covering the year 2004 has
been exercised and work is continuing under the contract. (b) US NAVAL MEDICAL RESEARCH CENTER (NMRC) In January 2003, the Company signed a two-year, $1,900,000 fixed price
contract to aid in the development of vaccines against malaria and dengue
fever. Under the contract, the Company will be responsible for constructing
and producing adenovector-based vaccine candidates using its proprietary
cell line and second-generation adenovector technology. (c) FUSO PHARMACEUTICALS INDUSTRIES, LTD. (Fuso) In September 1997, the Company established collaboration with Fuso to
conduct research and to identify, evaluate and develop gene therapy
products for the treatment of cancer. Under the terms of the contract, the
Company received $750,000 annually for five years, subject to Fusos right
to terminate the collaboration upon 90 days prior written notice. The
annual payments are non-refundable. As part of the collaboration, the
Company granted Fuso an exclusive, royalty-bearing license to develop and
commercialize products developed under the collaboration for the treatment
of cancer in Japan and, at Fusos option, Korea and Taiwan. Fuso will be
responsible for the development and commercialization of any products in
its territory. The Company will receive additional payments for the
achievement by Fuso of specific product development and regulatory F-15




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##### Table of Contents



milestones, with the earliest of such payments not expected in the near
term. The Company will also receive royalties on the sale of any such
products commercialized by Fuso. The Company has retained all rights to
develop and commercialize these products for the treatment of cancer
in the rest of the world, and generally for all other uses worldwide,
subject to certain restrictions. In connection with establishment of the
collaboration, Fuso purchased $1,000,000 of the Companys capital stock
consisting of 75,329 shares of the Companys Class E convertible preferred
stock for $13.28 per share. All preferred shares were converted into
common shares in December 2000 in connection with the Companys initial public
offering at a rate of 1.5 common shares to each preferred share. In September 2002, the parties amended the collaboration agreement to
increase the level of funding to $1,500,000 per year, effective April 1,
2002, and extended the agreement through December 31, 2002. Effective
January 1, 2003, the Company and Fuso established a new three-year,
$4,500,000 research collaboration to identify a targeted cancer therapy
product candidate designed to treat not only the primary tumor but also
cancer that has spread, or metastasized to distant sites in the body. As of December 31, 2003 and 2002, unearned revenue related to this
collaboration was $154,000 and $303,000, respectively. (d) WARNER-LAMBERT COMPANY (Warner-Lambert) In July 1997, the Company entered into collaboration with Warner-Lambert,
a significant shareholder, to research, develop and commercialize
gene-based products incorporating the VEGF gene for the treatment of
coronary artery disease and peripheral vascular disease. The agreement
was amended effective January 1, 1999 to give Warner-Lambert the primary
responsibility for clinical development, regulatory approval,
manufacturing and commercialization of products that the Company develops
under this collaboration, including BioBypass angiogen. Through December 31, 2003, under the terms of the collaboration, the Company
had received approximately $62,632,000 in non-refundable research and
development funding, milestone payments, equity purchases and license fees.
Warner-Lamberts research and development funding obligations to the Company
extended through July 2001. On January 22, 2002, Pfizer, Inc., the parent
company of Warner-Lambert, elected to discontinue co-development of
BioBypass with GenVec, thus returning its development and commercialization
rights to the Company. Under the terms of the 1997 collaboration agreement,
Pfizer was responsible for all costs associated with the ongoing Phase II
clinical trials of BIOBYPASS through July 22, 2002, including the costs
relating to the orderly transfer of the Investigative New Drug applications
for both coronary artery disease and peripheral vascular disease to GenVec.
In May 2002 the Company received $1,154,000 from Pfizer in settlement of the
ongoing clinical trial costs; and, in December 2002 the Company received
$1,500,000 in settlement of certain manufacturing and process development
related claims, which have been reflected in Revenue  related party. Warner-Lambert purchased $15,000,000 of the Companys capital stock in
various tranches at 125% of the fair market value of the securities.
These purchases total 1,925,538 shares of common stock. Warner-Lambert
also committed to guarantee a loan to the Company in a principal amount of
$5,000,000. In 1999, the Company used $2,500,000 of the loan guarantee to
assist in the financing of leasehold improvements to the Companys new
research and development/corporate headquarters facility. In December 2001,
Pfizer provided the Company with cash payment of $343,000 representing an
interest differential in satisfaction of the remaining $2,500,000 of the
loan guarantee. The Company has deferred recognition and is amortizing
this amount as a reduction of interest expense ratably over the term of the
equipment financing that commenced in April 2002. F-16




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(e) CORDIS CORPORATION (Cordis) In December 2003, the Company entered into a research collaboration with
the Cordis Cardiology Division of Cordis Corporation, a Johnson & Johnson
company, to study the clinical benefit of BIOBYPASS in a procedure
involving guided delivery of the angiogenic agent directly into targeted
regions of the heart in patients with severe coronary artery disease using
the Cordis NOGASTAR® Mapping Catheter and MYOSTAR Injection Catheter. The purpose of this collaboration is to conduct a randomized, double blind,
placebo controlled study of the Companys cardiovascular product candidate,
BIOBYPASS. Clinical benefit will be assessed in the multi-center study,
which will be conducted in Europe and is expected to enroll up to 125
patients with severe heart disease. GenVec and Cordis will collaborate on
regulatory matters and share in the clinical trial costs. GenVec will
supply all clinical material and Cordis will provide the NOGASTAR and
MYOSTAR mapping and injection catheters and training to the interventional
cardiologists conducting the trial. GenVec will retain all commercial
rights to BIOBYPASS and Cordis will retain all commercial rights to the
NOGASTAR mapping catheters and MYOSTAR injection catheters. The Company
recorded a $1,000,000 receivable and $1,000,000 of unearned revenue as of
December 31, 2003 and will recognize the revenue as earned based on
performance of the contract. (f) TERUMO CORPORATION (Terumo) In September 2002, Diacrin entered into a development and license agreement
with Terumo Corporation, of which the Company has become a party as a
result of the acquisition consummated on August 21, 2003. Under the terms
of the agreement, the Company licensed to Terumo its human muscle cell
transplantation technology for cardiac disease in Japan. Terumo will fund
all development costs in Japan while the Company continues to independently
develop its cardiac repair technology for commercialization in the U.S. and
elsewhere. On October 1, 2002, the Company received an upfront
non-refundable license fee of $2.0 million. The agreement also includes
payments by Terumo to the Company for development milestones and a royalty
on product sales. The Company recorded the upfront license fee as unearned
revenue and will continue to recognize revenue over the development period
of the agreement. Determination of the length of the development period
requires managements judgment. Any significant changes in the assumptions
underlying the Companys estimates used could impact its revenue
recognition. Included in license and milestone payments for the year ended
December 31, 2003 is $98,000 of revenue amortization related to this
contract. (g) GENZYME CORPORATION (Genzyme) Pursuant to and as a result of the acquisition of Diacrin, the Company is
party to an agreement with Genzyme to develop and commercialize two product
candidates. (8) COMMITMENTS (a) LEASE AGREEMENTS The Company has non-cancelable operating leases for its Gaithersburg, MD and
Charlestown, MA facilities. The Gaithersburg office and laboratory lease
expires in October 2009. The agreement includes a provision for a 3 percent
annual increase in base rent. The lease contains renewal options for up to
fourteen years and requires the Company to pay all executory costs such as
maintenance and F-17




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##### Table of Contents



insurance. As part of the lease, the landlords initial
contribution of $1,300,000 in incentives is
considered a reduction of rental expense that is recognized on a
straight-line basis over the term of the lease. The Charlestown laboratory
lease expires in October 2006 with a renewal option for five additional
years. Rent expense under all operating leases was approximately $967,000,
$640,000 and $631,000 for the years ended December 31, 2003, 2002 and 2001,
respectively. Future minimum lease payments under all non-cancelable operating leases are
as follows (in thousands): 2004
    
    $
    1,6422005
    
    
    1,6382006
    
    
    1,4282007
    
    
    7692008
    
    
    792Thereafter
    
    
    677$
    6,946
 (b) LICENSE AGREEMENTS In 2000, the Company entered into agreements with Public Health Service and
Northwestern University for exclusive rights, under a patent expiring in
2015, to use the PEDF gene for all gene therapy applications in the eye. In February 1998, the Company entered into a non-exclusive license agreement
with Asahi Chemical Industry Company Limited (Asahi) for rights to all gene
therapy applications in the United States to its proprietary form of the
TNF-alpha gene. In exchange for this license, the Company paid a $200,000
non-refundable fee to Asahi and has committed to additional payments upon
the achievement of specified clinical milestones, as well as product
royalties based on net sales of a licensed product. In September 2002 the
Company paid $50,000 upon commencement of Phase II clinical trials involving
the TNF-alpha gene. In May 1996, the Company entered into an exclusive, worldwide license
agreement with Scios, inc. (Scios) for rights to all gene therapy
applications of its proprietary form of the VEGF gene. Johnson & Johnson
acquired Scios in April 2003. Scios will share in certain profits the
Company realizes from the research, development and commercialization of
products incorporating the VEGF gene. The Company has agreed to provide a
minimum royalty on revenues generated from the development of these
products, which is creditable against the profits to be shared. In
connection with the license agreement, Scios purchased 96,852 shares of
the Companys Class D convertible preferred stock at a price of $10.33 per
share. All preferred shares were converted into common shares in December
2000 in connection with the Companys initial public offering at a rate of
1.5 common shares to each preferred share. In addition, the Company
granted Scios a warrant to purchase 317,796 shares of the Companys common
stock, which vested upon the earlier of the achievement of specified
product development milestone events or certain dates. The warrants remain
outstanding as of December 31, 2003. The Companys license agreements often include event based milestone
payments, the timing of which is dependent upon a number of factors
including final approvals by regulatory agencies and the continued
enforceability of patent claims. A license agreement for intellectual
property relating to the Companys Cell Transplantation Therapy program
includes a possible future commitment of up to $800,000 if certain milestones are met. F-18




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(c) RESEARCH AND DEVELOPMENT AND CLINICAL AGREEMENTS The Company has agreed to provide grants for certain research projects under
agreements with several universities and research organizations. Under the
terms of these agreements, the Company has received exclusive licenses to the
resulting technology. Total grants paid by the Company were approximately
$1,000,000, $1,400,000 and $2,000,000 for the years ended December 31, 2003,
2002 and 2001, respectively. As discussed in Note 2, the Company has agreements with clinical sites for
the treatment of patients under clinical protocols. Total clinical costs
were $2,285,000, $2,119,000 and $393,000 for the years ended December 31,
2003, 2002 and 2001, respectively. The Company has commitments of approximately $843,000 related to these
grants and clinical agreements, which are expected to be incurred primarily
in 2004. Additionally, certain agreements disclosed above require the Company to
pay royalties upon commercial sales, if any, of specified products. The
Company generally bases the royalties on a percentage of net sales or other
product fees earned. Royalties will become due when sales are generated. (9) STOCKHOLDERS EQUITY (a) CAPITAL STOCK In December 2002, the Company filed with the Securities and Exchange
Commission a $25,000,000 shelf registration statement on Form S-3. On
January 22, 2003 the Company sold 756,800 shares of common stock to an
existing shareholder at $2.50 per share under the shelf registration.
Proceeds, net of offering costs, from this sale totaled $1,849,000. On December 21, 2001, GenVec issued 3,582,000 shares of common stock at
$3.60 per share through a private placement with HealthCare Ventures, LLC.
Net proceeds from this private placement, after deducting issuance costs,
were approximately $12.8 million. In September 2001, the Board of Directors of the Company declared a dividend
which was issued on September 28, 2001 of one preferred stock purchase right
(a Right) for each share of common stock outstanding. The Rights initially
trade with, and are inseparable from the common stock. The Rights will
become exercisable only if a person or group acquires beneficial ownership
of 20% or more of the outstanding common stock of GenVec (an Acquiring
Person), or announces the intention to commence a tender or exchange offer
the consummation of which would result in that person or group becoming an
Acquiring Person. Each Right allows its holder, other than the Acquiring
Person, to purchase from the Company one one-hundredth of a share of Series
A junior participating preferred stock (the Preferred Share), at a
purchase price of $50.00, subject to adjustment. This portion of a Preferred
Share gives the stockholder approximately the same dividend, voting, and
liquidation rights as would one share of common stock. The Rights expire on
September 7, 2011, unless redeemed earlier by the Company at a price of
$0.01 per Right at any time before the Rights become exercisable. F-19




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In addition to the Common Stock reflected on the Companys balance sheets,
the following items are reflected in the capital accounts as of December 31,
2003 and 2002:  
    
    4,400,000 shares of $0.001 par value preferred stock have
been authorized; none are issued or outstanding.
    
    600,000 shares of $0.001 par value Series A junior
participating preferred stock have been authorized in connection
with the preferred stock purchase rights referred to above, none are
issued or outstanding.
    
    70,950 shares of common stock are held in treasury and have a
carrying value of less than $1,000. (b) STOCK OPTION GRANTS At the Companys Annual Meeting of Stockholders, held on June 6, 2002, the
stockholders approved the adoption of the 2002 Stock Incentive Plan (the
Plan), which replaced the 2000 Director Option Plan and the 1993 Stock
Incentive Plan (collectively, prior plans). The Plan, which is
administered by the Compensation Committee of the Board (The Committee),
authorized for issuance 1,000,000 shares plus any shares available under the
prior plans at their termination date. On August 21, 2003, in connection
with the Diacrin acquisition, the stockholders approved an increase in the
number of common shares to be issued under the Plan by 1,000,000. Employees, non-employee directors and consultants are eligible to receive
stock option grants or restricted stock under the Plan. Under the Plan,
options are granted at not less than existing market prices and expire 10
years from the date of grant. The Committee has broad powers to determine
eligibility and terms of all awards. Grants to employees generally vest
ratably over a four-year period; grants to consultants generally vest over
the terms of their contractual agreements; and grants to non-employee
directors generally vest over 12 months. Changes in stock options were as follows: AverageNumber of Shares
    
    Exercise(in thousands, except per share data)
    
    Under Option
    
    PriceOutstanding at December 31, 2000
    
    
    3,444
    
    
    $
    2.95Granted
    
    
    554
    
    
    
    3.69Exercised
    
    
    (170
    )
    
    
    1.02Cancelled
    
    
    (139
    )
    
    
    5.03Outstanding at December 31, 2001
    
    
    3,689
    
    
    
    3.07Granted
    
    
    1,330
    
    
    
    3.44Exercised
    
    
    (124
    )
    
    
    0.74Cancelled
    
    
    (255
    )
    
    
    4.17Outstanding at December 31, 2002
    
    
    4,640
    
    
    
    3.18Assumed from acquisition
    
    
    1,937
    
    
    
    2.84Granted
    
    
    209
    
    
    
    2.73Exercised
    
    
    (914
    )
    
    
    1.69Cancelled
    
    
    (1,624
    )
    
    
    3.63Outstanding at December 31, 2003
    
    
    4,248
    
    
    $
    3.15
 As of December 31, 2003 options covering 3,324,705 shares were exercisable
at $0.39 to $9.63 per share (average $3.44 per share) and options covering
2,678,667 shares remain available to be granted. F-20




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Options outstanding at December 31, 2003 are summarized below: Outstanding
    
    ExercisableAverage
    
    Average
    
    
    
    
    
    AverageShares
    
    Exercise
    
    Remaining
    
    Shares
    
    ExerciseExercise Price
    
    (thousands)
    
    Price
    
    Life
    
    (thousands)
    
    Price$0.00  $1.00
    
    
    500
    
    
    $
    0.57
    
    
    4.1 years
    
    
    338
    
    
    $
    0.51$1.01  $3.00
    
    
    1,396
    
    
    
    2.27
    
    
    5.8
    
    
    953
    
    
    
    2.53$3.01  $4.00
    
    
    1,143
    
    
    
    3.31
    
    
    7.2
    
    
    832
    
    
    
    3.32$4.01  $5.00
    
    
    844
    
    
    
    4.37
    
    
    5.6
    
    
    844
    
    
    
    4.37$5.01  $10.00
    
    
    365
    
    
    
    6.70
    
    
    4.6
    
    
    358
    
    
    
    6.734,248
    
    
    $
    3.15
    
    
    5.8 years
    
    
    3,325
    
    
    $
    3.44
 For options granted to consultants, the Company recorded $65,000, $23,000
and $0 of gross deferred compensation for each of the three years ended December 31,
2003 and the amortization related to this and prior years deferred
compensation amounted to $191,000, $346,000, and $431,000. Option grants to employees before the initial public offering in December
2000 were issued below fair market value prices. A change in control
provision in the prior plans triggered accelerated vesting for all options
granted under these plans. As a result of the acquisition, the Company
recorded deferred compensation for the difference between the exercise price
of outstanding unvested Diacrin options and the fair value of the Companys
common stock at the date of the acquisition. The deferred compensation is
being amortized over the remaining vesting period of the related options.
Gross deferred compensation of $543,000, $0 and $0 was
recorded during each of the three years ended December 31, 2003, 2002 and 2001, and
amortization related to this and prior years deferred compensation amounted
to $984,000, $955,000 and $1,200,000. This deferred compensation is subject
to reduction for any employee who terminates employment prior to the
expiration of such employees option vesting period. (c) EMPLOYEE STOCK PURCHASE PLAN In December 2000, the Company adopted the 2000 Employee Stock Purchase
Plan, referred to as the Purchase Plan. The Company reserved a total
of 350,000 shares of common stock for issuance under the Purchase Plan,
plus annual increases on the first day of each fiscal year F-21




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##### Table of Contents



beginning 2001 equal to the lesser of 350,000 shares; 2 percent of the
outstanding shares as of such date; or a lesser amount determined by
the Board of Directors. Substantially all employees are eligible to participate. Participants
may purchase common stock through payroll deductions of up to 15 percent
of the participants compensation. The maximum number of shares a
participant may purchase during a six-month offering period is 6,250 shares. The price of stock purchased under the purchase plan is 85 percent of
the lower of the fair market value of the common stock at the beginning
of the offering period or the end of the offering period. Employees
purchased 34,939 shares, 73,792 shares and 41,397 shares during 2003,
2002 and 2001 at a weighted average exercise price of $1.74, $2.48 and
$1.83. The Purchase Plan will terminate on October 18, 2010, unless
sooner terminated by the Board of Directors. (d) WARRANTS Warrants to purchase common stock were granted to organizations and
institutions in conjunction with certain licensing and funding activities.
The warrants vested according to a combination of time and events as
prescribed in the agreements. During the year ended December 31, 1998,
101,694 common stock warrants were granted at an exercise price of $11.80
to a university research foundation. In March 2002, in connection with
the renegotiation of a license agreement with the university research
foundation, the Company amended the warrant agreement thereby reducing the
exercise price of the 101,694 warrants from $11.80 per share to $3.60 per
share. Also, as a part of the amended agreement, 66,102 previously
unvested warrants became fully vested and exercisable. The Company
recorded a non-cash charge of approximately $245,000 in the first quarter
of 2002 to reflect the fair value of the warrants. Outstanding and vested
warrants are summarized below (in thousands, except per share amounts): 2003
        
        2002
        
        2001Exercise Price
        
        Outstanding
        
        Vested
        
        Outstanding
        
        Vested
        
        Outstanding
        
        
        Vested$3.60
        
        
        66
        
        
        
        66
        
        
        
        102
        
        
        
        102
        
        
        
        
        
        
        
        $3.93
        
        
        56
        
        
        
        56
        
        
        
        56
        
        
        
        56
        
        
        
        56
        
        
        
        56$9.83
        
        
        
        
        
        
        
        
        
        
        102
        
        
        
        76
        
        
        
        102
        
        
        
        102$8.85
        
        
        318
        
        
        
        318
        
        
        
        318
        
        
        
        318
        
        
        
        318
        
        
        
        318$11.80
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        102
        
        
        
        36440
        
        
        
        440
        
        
        
        578
        
        
        
        552
        
        
        
        578
        
        
        
        512
 (10) INCOME TAXES A reconciliation of tax credits computed at the statutory federal tax rate on
loss from operations before income taxes to the actual income tax expense is as
follows (in thousands): 2003
    
    2002
    
    2001Tax provision computed at the statutory rate
    
    $
    (7,229
    )
    
    $
    (8,703
    )
    
    $
    (6,492
    )State income taxes, net of federal income tax
provision
    
    
    (982
    )
    
    
    (1,183
    )
    
    
    (882
    )Book expenses not deductible for tax purposes
    
    
    8
    
    
    
    19
    
    
    
    7Research and experimentation tax credit
    
    
    (460
    )
    
    
    (523
    )
    
    
    (457
    )Nondeductible compensation expense
    
    
    381
    
    
    
    325
    
    
    
    393Change in valuation allowance for deferred tax assets
    
    
    8,282
    
    
    
    10,065
    
    
    
    7,431Income tax expense
    
    $
    
    
    
    $
    
    
    
    $
    
 F-22




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Deferred income taxes reflect the net
effects of net operating loss carryforwards and the temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Companys deferred tax assets are as follows (in thousands): 2003
    
    2002
    
    2001Net operating loss carryforwards
    
    $
    64,695
    
    
    $
    33,790
    
    
    $
    24,293Research and experimentation tax credit
    
    
    8,492
    
    
    
    2,903
    
    
    
    2,348Cumulative effect of using cash basis method of
accounting
for income tax purposes
    
    
    
    
    
    
    110
    
    
    
    212Unearned revenue
    
    
    465
    
    
    
    197
    
    
    
    189Property and equipment, principally due to differences in
depreciation
    
    
    (727
    )
    
    
    (682
    )
    
    
    (428
    )Deferred compensation expense
    
    
    873
    
    
    
    993
    
    
    
    751Intangible asset
    
    
    (765
    )Other
    
    
    426
    
    
    
    306
    
    
    
    (58
    )Total deferred tax assets
    
    
    73,459
    
    
    
    37,617
    
    
    
    27,307Valuation allowance
    
    
    (73,459
    )
    
    
    (37,617
    )
    
    
    (27,307
    )Net deferred tax assets
    
    $
    
    
    
    $
    
    
    
    $
    
 The difference reflected in the change in the valuation allowance as it appears
in the analysis of deferred tax assets in comparison to the reconciliation of
income tax expense is the result of the tax impact of other comprehensive
income and the acquisition of Diacrin, and is reconciled as follows (in
thousands): 2003Net operating loss carryforwardDiacrin
    
    $
    23,488Research and experimentation credit carryforwardsDiacrin
    
    
    5,130Intangible assetsDiacrin
    
    
    (765
    )Unrealized gain/lossesGenvec and Diacrin
    
    
    (293
    )$
    27,560
 The valuation allowance for deferred tax assets increased approximately $35.8
million, $10.3 million and $7.3 million for the years ended December 31, 2003,
2002 and 2001. At December 31, 2003, the Company has net operating loss carryforwards of
approximately $167.5 million for federal income tax purposes of which $59.4
million expire at various dates through 2013, and $108.1 million expire at
various dates through 2023. The Company also has research and experimentation
tax credit carryforwards of $8.5 million at December 31, 2003, of which $1.7
million expire through 2013 and $6.8 million expire through 2023. The Companys NOL and tax credit carryovers may be significantly limited under
Section 382 of the Internal Revenue Code (IRC). NOL and tax credit carryovers
are limited under Section 382 when there is a significant ownership change as
defined in the IRC. During 2003 and in prior years, the Company may have
experienced such ownership changes. Diacrin might have also experienced
ownership changes in prior years and/or as a result of its merger with the
Company. The limitation imposed by Section 382 would place an annual limitation on the
amount of NOL and tax credit carryovers that can be utilized. When the Company
completes the necessary studies, the amount of NOL carryovers available may be
reduced significantly. However, since the valuation allowance fully reserves
for all available carryovers, the effect of the reduction would be offset by a
reduction in the valuation allowance. Thus, the resolution of this matter would
have no effect on the reported assets, liabilities, revenues and expenses for
the periods presented. (11) DEFINED CONTRIBUTION PLAN  401(k) The Company has a defined contribution plan (the Plan) under Internal Revenue
Code Section 401(k). All full-time employees who have completed three months of
service and are over age 21 are eligible for F-23




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##### Table of Contents



participation in the Plan. Participants may elect to have up to 15 percent of
compensation contributed to the Plan. Under the Plan, the Companys
contributions are discretionary. During the years ended December 31, 2003,
2002 and 2001, the Company made contributions of approximately $89,000, $90,000
and $83,000, respectively. (12) OTHER COMPREHENSIVE INCOME (LOSS) The purpose of reporting comprehensive income (loss) is to report a measure of
all changes in equity, other than transactions with stockholders. Total
comprehensive income (loss) is included in the Statements of Stockholders
Equity. The components of accumulated other comprehensive income (loss) are as
follows (in thousands): Unrealized
        
        
        AccumulatedUnrealized
        Gain(Loss)
        OtherGain (Loss)
        on Derivative
        Comprehensiveon Securities
        Instruments
        Income (Loss)Balance, December 31,
            2000
        
        $
        36
        
        $
        
        
        $
        36Unrealized gain from
            available-for-sale securities
        
        
        601
        
        
        
        
        
        601Loss realized in
            operations
        
        
        (6
        )
        
        
        
        
        (6
        )Unrealized loss on
            cash flow derivative
        
        
        
        
        
        (460
        )
        
        (460
        )Interest expense
            realized in operations
        
        
        
        
        
        124
        
        
        124Balance, December 31,
            2001
        
        
        631
        
        
        (336
        )
        
        295Unrealized loss from
            available-for-sale securities
        
        
        (890
        )
        
        
        
        
        (890
        )Gains realized in
            operations
        
        
        485
        
        
        
        
        
        485Unrealized loss on
            cash flow derivative
        
        
        
        
        
        (444
        )
        
        (444
        )Interest expense
            realized in operations
        
        
        
        
        
        215
        
        
        215Balance, December 31,
            2002
        
        
        226
        
        
        (565
        )
        
        (339
        )Unrealized gain from
            available-for-sale securities
        
        
        73
        
        
        
        
        
        73Loss in operations
        
        
        (178
        )
        
        
        
        
        (178
        )Unrealized loss on
            cash flow derivative
        
        
        
        
        
        (45
        )
        
        (45
        )Interest expense
            realized in operations
        
        
        
        
        
        214
        
        
        214Balance, December 31,
            2003
        
        $
        121
        
        $
        (396
        )
        $
        (275
        )
 Other comprehensive income (loss) does not reflect the affect of income taxes
because the Company had no income tax provision during the three years ended
December 31, 2003.
 (13) QUARTERLY RESULTS (UNAUDITED) The Companys unaudited quarterly information is as follows (in thousands,
except per share data): 2003
    
    Q1
    
    Q2
    
    Q3
    
    Q4Revenue
    
    $
    3,185
    
    
    $
    2,514
    
    
    $
    2,372
    
    
    $
    2,449Net loss
    
    
    (5,154
    )
    
    
    (6,001
    )
    
    
    (4,891
    )
    
    
    (5,215
    )Basic and Diluted Loss Per Share
    
    $
    (0.23
    )
    
    $
    (0.26
    )
    
    $
    (0.14
    )
    
    $
    (0.10
    )
 2002
    
    Q1
    
    Q2
    
    Q3
    
    Q4Revenue
    
    $
    628
    
    
    $
    1,575
    
    
    $
    2,722
    
    
    $
    3,489Net loss
    
    
    (6,392
    )
    
    
    (6,894
    )
    
    
    (6,933
    )
    
    
    (5,379
    )Basic and Diluted Loss Per Share
    
    $
    (0.29
    )
    
    $
    (0.32
    )
    
    $
    (0.32
    )
    
    $
    (0.25
    )
 The loss per share was calculated for each three-month period on a stand-alone
basis. As a result, the sum of the loss per share for the four quarters does
not equal the loss per share for the respective twelve-month period. F-24