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, manufacture, proprietary protection of our product candidates, and their market success relative to alternative products.

OVERVIEW

GenVec, Inc. ("GenVec," "we," "our," or the "Company") is a clinical stage biopharmaceutical company working to develop and commercialize innovative gene-based therapies to treat cancer, vision and hearing loss and balance disorders, and vaccines to prevent infectious diseases. We combine our patented and/or patent pending gene transfer technologies with proprietary therapeutic genes to create product candidates, such as TNFerade for cancer, currently in a pivotal trial for locally advanced pancreatic cancer, TherAtoh1 for hearing and balance impairment, and AdPEDF for age related macular degeneration. Using the same gene transfer technology we are also collaborating with the U.S. government and PATH's Malaria Vaccine Initiative (MVI) for the development of vaccine candidates against infectious diseases, for the prevention of malaria, HIV, respiratory syncytial virus, HSV-2 and influenza, and an animal health vaccine for the prevention of foot-and-mouth disease.

An element of our business strategy is to pursue, as resources permit, the research and development of a range of product candidates for a variety of indications. This is intended to allow us to diversify the risks associated with our research and development expenditures. To the extent we are unable to maintain a broad range of product candidates, our dependence on the success of one or a few product candidates would increase.

Our product candidates also have not yet received regulatory approvals, either from the FDA for the United States or from regulatory agencies outside of the United States, which approvals are required before we can market them as therapeutic and/or vaccine products. In order to proceed to subsequent clinical trial stages and to ultimately achieve regulatory approval in the United States, the FDA must conclude that our 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, our business strategy includes the option of entering into collaborative arrangements with third parties to complete the development and commercialization of our product candidates. In the event that third parties take over the clinical trial process for one or more of our product candidates, the estimated completion date would largely be under the control of that third party rather than us. We cannot forecast with any degree of certainty which proprietary products or indications, if any, will be subject to future collaborative arrangements, in whole or in part, and how such arrangements would affect our development plan or capital requirements. Our programs may also benefit from subsidies, grants, or government, or agency-sponsored studies that could reduce our development costs.

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

Our research and development expenses were $26.0 million, $29.6 million, and $30.8 million for the years ended December 31, 2007, 2006, and 2005, respectively. These expenses were divided between our research and development platforms in the following manner:

                              Year ended December 31,

(in millions)               2007         2006       2005

TNFerade                  $    15.0    $    13.0   $  7.1
Vaccines                       11.0         16.0     22.5
Other Clinical Programs           -          0.6      1.2
Total                     $    26.0    $    29.6   $ 30.8

TNFerade. Our lead cancer product candidate is currently being studied in a pivotal clinical trial for the treatment of locally advanced pancreatic cancer, in Phase II trials for rectal cancer and metastatic melanoma cancer and two Phase I/II trials for head and neck cancer. GenVec has incurred $70 million of expenses on the development of this product candidate since the commencement of this program in 1999. Costs since the commencement of this program include research, development, clinical trials, clinical supply costs, and an allocation of corporate general and administrative expenses. GenVec expects to continue to expend substantial additional amounts for the clinical development and commercialization of TNFerade.

Vaccines. Under the Company's corporate and government funded vaccine programs, GenVec continues to develop vaccine candidates against malaria, HIV, respiratory syncytial virus, and other infectious diseases, as well as an animal health vaccine for foot-and-mouth disease (FMD). Since commencement of these vaccine development programs in 2002, GenVec has incurred approximately $73 million in research and development costs, including an allocation of corporate general and administrative expenses, most of which has been funded by the various sponsors under cost-reimbursement agreements.

To date, none of our proprietary or collaborative programs has resulted in a commercial product; therefore, we have not received any revenues or royalties from the sale of products. We have funded our operations primarily through public and private placements of equity securities, payments received under collaborative programs with public and private entities, and debt financings.

We have incurred operating losses each year since inception and, as of December 31, 2007, had an accumulated deficit of approximately $187.6 million. Our losses have resulted principally from costs incurred in research and development and from general and administrative activities. Research and development expenses consist primarily of salaries and related personnel costs, sponsored research costs, patent costs, technology access fees, clinical trial costs, and other expenses related to our product development and research programs. General and administrative expenses consist primarily of compensation and benefit expenses for executive, finance and other administrative personnel, facility costs, professional fees, business development costs, insurance premiums, and other general corporate expenditures.

CRITICAL ACCOUNTING POLICIES AND THE USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires our management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an on-going basis, our management evaluates its estimates using authoritative pronouncements, historical experience and other assumptions as the basis for making estimates. Actual results could differ from those estimates. Significant accounting policies are more fully described in Note 2 to our financial statements included in this annual report on Form 10-K.

Management has discussed the development, selection and disclosure of critical accounting policies and estimates with the Audit Committee of our Board of Directors. While we base estimates and assumptions on our knowledge of current events and actions we may undertake in the future, actual results may ultimately differ from these estimates and assumptions. For a discussion of our significant accounting policies, refer to Note 2 of the Notes to Financial Statements.

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

Revenue Recognition. The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin No. 104, Revenue Recognition (SAB 104). Consequently, the Company recognizes revenues when a contract is executed, the contract price is fixed and determinable, delivery of the service or products has occurred, and collectability of the contract amounts is considered probable.

The Company's collaborative research and development agreements can provide for up-front license fees, research payments, and/or milestone payments. In accordance with SAB 104, up-front nonrefundable fees associated with license and development agreements where the Company has continuing involvement in the agreement, are recorded as deferred revenue and recognized over the estimated service period. If the estimated service period is subsequently modified, the period over which the up-front fee is recognized is modified accordingly on a prospective basis. Non-refundable research and development fees for which no future performance obligations exist are recognized when collection is assured.

Research and development revenue from cost-reimbursement and cost-plus fixed fee agreements is recognized as earned based on the performance requirements of the contract. Revisions in revenues, cost, and billing factors (e.g. indirect rate estimates) are accounted for in the period of change. Reimbursable costs under such contracts are subject to audit and retroactive adjustment. Contract revenues and accounts receivable reported in the financial statements are recorded at the amount expected to be received. Contract revenues are adjusted to actual upon final audit and retroactive adjustment. Estimated contractual allowances are provided based on management's evaluation of current contract terms and past experience with disallowed costs and reimbursement levels. Payments received in advance of work performed are recorded as deferred revenue.

Clinical Trial Expenses and Research and Development Activities. We accrue estimated costs for clinical and pre-clinical studies based on estimates of work performed. We believe that this method best aligns the expenses the Company records with the efforts it expends. We monitor the progress of the trials and their related activities to the extent possible and adjust the accruals accordingly. Adjustments to accruals are charged to expense in the period in which the facts that give rise to the adjustment become known; all adjustments to date have been inconsequential.

The expenditures that will be necessary to execute our business plan are subject to numerous uncertainties, which may adversely affect our liquidity and capital resources. Completion of clinical trials may take several years or more, but the length of time generally varies substantially according to the type, complexity, novelty, and intended use of a product candidate. We estimate that clinical trials of the type GenVec generally conducts are typically completed over the following timelines:

                 Estimated
                 Completion
Clinical Phase   Date
Phase I          1 - 3 years
Phase II         1 - 4 years
Phase III        2 - 5 years

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

· the number of patients that ultimately participate in the trial;

· the duration of patient follow-up that seems appropriate in view of the results;

· the number of clinical sites included in the trials; and

· the length of time required to enroll suitable patient subjects.

We test potential product candidates in pre-clinical studies to identify indications for which they may be product candidates. We may conduct multiple clinical trials to cover a variety of indications for each product candidate. As we obtain results from trials, we may elect to discontinue clinical trials for certain product candidates or for certain indications in order to focus our resources on more promising product candidates or indications.

RECENT ACCOUNTING PRONOUNCEMENTS

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS 157 defines "fair value" in the context of accounting and financial reporting and establishes a framework for measuring fair value under GAAP. SFAS 157 also expands the required disclosures regarding fair value measurements. In January 2008, the FASB deferred the effective date of SFAS 157 for certain nonfinancial assets and liabilities to the first quarter of 2009. SFAS 157 is effective for financial assets and liabilities in the first quarter of 2008. The Company does not expect the adoption of SFAS 157 to have a material impact on its results of operations, financial condition or cash flows.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115. SFAS 159 allows companies to choose to measure certain financial instruments and other items at fair value. SFAS 159 is effective in the first quarter of 2008. The Company does not expect the adoption of SFAS 159 to have a material impact on its results of operations, financial condition or cash flows.

In June 2007, the FASB Emerging Issues Task Force (EITF) reached consensus on EITF Issue No. 07-3, Accounting for Advance Payments for Goods or Services to Be Used in Future Research and Development Activities (EITF 07-3). EITF 07-3 applies to non-refundable advance payments to acquire goods or pay for services that will be consumed or performed in a future period in conducting research and development activities on behalf of the entity. The consensus on EITF 07-3 states such advance payments should be recorded as an asset when the advance payments are made. Capitalized amounts should be recognized as expense when the research and development activities are performed; that is, when the goods without alternative future use are acquired or the service is rendered. The consensus should be applied prospectively to new contractual arrangements entered into in fiscal years beginning after December 15, 2007. The implementation of EITF 07-3 when applied to the recently signed Cobra agreement will have a material impact on the timing of the Company's recognition of expense under this agreement since the Cobra agreement has an advance payment.

In December 2007, the FASB Emerging Issues Task Force (EITF) reached a consensus on Issue No. 07-1, Accounting for Collaborative Arrangements. The EITF concluded on the definition of a collaborative arrangement and that revenues and costs incurred with third parties in connection with collaborative arrangements would be presented gross or net based on the criteria in EITF 99-19 and other accounting literature. Based on the nature of the arrangement, payments to or from collaborators would be evaluated and its terms, the nature of the entity's business, and whether those payments are within the scope of other accounting literature would be presented. Companies are also required to disclose the nature and purpose of collaborative arrangements along with the accounting policies and the classification and amounts of significant financial-statement amounts related to the arrangements. Activities in the arrangement conducted in a separate legal entity should be accounted for under other accounting literature; however required disclosure under EITF 07-1 applies to the entire collaborative agreement. EITF 07-1 is effective for us January 1, 2008 and is to be applied retrospectively to all periods presented for all collaborative arrangements existing as of the effective date. We do not expect the adoption of EITF 07-1 to have a material impact on our consolidated financial statements.

RESULTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 2007 AND 2006

REVENUE

Revenue. Revenue decreased 26 percent to $14.0 million in 2007 from $18.9 million in 2006. The decrease in revenue is primarily a result of the successful completion of the one-time production of clinical grade HIV vaccine supplies for a Phase IIb proof-of-concept trial to be conducted by NIH for which we were reimbursed under our contract. This resulted in a year to year reduction of $6.8 million in revenues. The decrease is also due, to a lesser extent, to the expiration of funding of our collaboration with FUSO Pharmaceutical Industries of Japan, effective December 31, 2006, for the development of targeted cancer therapies. These decreases were partially offset by revenue earned under our 3-year contract signed in January 2007 with the DHS for the development of vaccine and anti-viral candidates for the prevention and containment of FMD. This contract has resulted in a year to year increase of $3.0 million in revenues. To a lesser degree, revenue declines were partially offset by the additional funding the Company received and recognized under its amended and extended Collaborative Research, Development, and Supply Agreement with the PATH Malaria Vaccine Initiative to continue advancing a new multivalent malaria vaccine toward clinical evaluation.

OPERATING EXPENSES

Research and development. Research and development expenses decreased 12 percent to $26.0 million in 2007 from $29.6 million in 2006. The decrease is primarily due to lower pass-through costs under our NIH funded HIV vaccine development contract. The decrease was partially offset by higher costs related to the continuing clinical evaluation of TNFerade in our pivotal trial for the treatment of locally advanced pancreatic cancer and increased personnel costs which includes an increase of approximately $593,000 of stock-based compensation expense in 2007 as compared to the prior year.

General and administrative. General and administrative expenses decreased 3 percent to $9.3 million in 2007 from $9.6 million in 2006. General and administrative expenses were lower in 2007 primarily due to decreased professional fees, facilities and depreciation costs, partially offset by higher administrative personnel costs (including severance expenses of approximately $349,000 for former employees), and an increase of approximately $251,000 of stock-based compensation expense in 2007 as compared to the prior year.

Loss on disposal of assets. There was a loss on disposal of assets of $5,000 in 2007 and no loss in 2006. The loss in 2005 of $1.9 million represents the loss associated with the sale of the myoblast cell therapy assets to Mytogen.

OTHER INCOME (LOSS)

Total other income increased to $2.6 million in 2007 from $978,000 in 2006.

Interest income was $1.5 million in 2007 as compared to $1.2 million in the comparable prior year period. The increase in interest income is due to higher investment balances as well as higher yields earned on our portfolio.

Interest expense, net of the change in the fair market value of the Kingsbridge warrants decreased $511,000 for the period ending December 31, 2007 as compared to the comparable prior year period. This was due to the declining balances of our debt obligations and a reduction in interest expense due to a decrease in the fair value of the warrant liability associated with our CEFF with Kingsbridge in 2007 as compared to the comparable period in 2006.

Other income (loss) increased $847,000 in 2007 resulting from the receipt of an insurance settlement of $500,000 due to a casualty loss and the receipt of equity, valued at $337,000, from a third party in exchange for the release of security interests.

YEARS ENDED DECEMBER 31, 2006 AND 2005

REVENUE

Revenue. Revenue decreased 29 percent to $18.9 million in 2006 from $26.6 million in 2005. The decrease in revenues is primarily a result of the successful completion of the one-time production of clinical grade HIV vaccine supplies. To a lesser degree, revenues declined due to the satisfactory completion of clinical material production, funded under our malaria vaccine contract with the U.S. Navy, for use in clinical testing that commenced in January 2007, as well as lower reimbursable expenses incurred under our PATH's Malaria Vaccine Initiative (MVI) vaccine development program. These reductions were partially offset by an approximately $1.0 million increase in revenue earned in 2006 under the previously announced $1.7 million expansion of our USDA funded program for the development of a foot-and-mouth disease vaccine. Revenues in 2005 also include approximately $1.1 million in amortized revenues recognized under our development agreement with Terumo Corporation prior to the previously announced assignment of the agreement to Mytogen, Inc. in December 2005.

OPERATING EXPENSES

Research and development. Research and development expenses decreased 4 percent to $29.6 million in 2006 from $30.8 million in 2005. The decrease is primarily due to lower pass-through costs for the completed production in 2005 of clinical grade supplies of HIV and malaria vaccine candidates under our funded programs with NIH and the U.S. Navy, respectively, as well as lower expenses incurred under our PATH's Malaria Vaccine Initiative (MVI) vaccine development program. These reductions were offset to a large extent by higher costs related to the continuing clinical evaluation of TNFerade in our Phase II/III pivotal trial for the treatment of locally advanced pancreatic cancer, coupled with approximately $681,000 of stock-based compensation expense recorded in connection with the Company's adoption of SFAS No.123(R) on January 1, 2006.

General and administrative. General and administrative expenses increased 15 percent to $9.6 million in 2006 from $8.3 million in 2005. General and administrative expenses were higher in 2006 primarily due to increased costs for performance-based compensation, recruitment and relocation expenses, and approximately $273,000 of stock-based compensation expense recorded in connection with the Company's adoption of SFAS No.123(R).

Loss on disposal of assets. The loss on disposal of assets decreased to $0 in 2006 from $1.9 million in 2005 due to the non-cash write-off of intangible assets in conjunction with the previously announced sale of the Company's myoblast cell therapy assets in December 2005.

OTHER INCOME (LOSS)

Other income (loss) increased from $484,000 in 2005 to $978,000 in 2006. Other interest income increased from $908,000 in 2005 to $1.2 million in 2006 due primarily to an increase in interest rates earned on invested balances. Interest expense decreased from $426,000 in 2005 to $249,000 in 2006 due to a year-to-year, $152,000 change in the non-cash market value of our interest rate swap agreement and lower interest charges due to debt repayments of $926,000 during 2006.

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, 2007, we held $23.7 million in cash and investments as compared to approximately $34.4 million at December 31, 2006. Net cash used in operating activities was $15.0 million in 2007 compared with $15.1 million used in 2006. Net cash provided by financing activities was $3.6 million in 2007, primarily reflecting net proceeds of $3.6 million from issuance of stock under our CEFF and $789,000 from purchases under stock incentive programs offset by debt repayments of $783,000. Net cash provided by investing activities was approximately $6.9 million in 2007, which consisted principally of the net proceeds of the sale and maturity of investment securities offset by the purchase of property and equipment totaling $289,000. As of December 31, 2007, our working capital was approximately $17.5 million compared to $29.9 million at December 31, 2006.

Historically we have entered into agreements with academic medical institutions and contract research organizations to perform research and development activities and with clinical sites for the treatment of patients under clinical protocols; additionally, in 2008, we have recently entered into a contract manufacturing agreement for which we were obligated to pay a $1 million non-refundable reservation fee. Such contracts expire at various dates and have differing renewal and expiration clauses. We also utilize different financing instruments, such as debt and capital and/or operating leases, to finance various equipment and facility needs. Our external research, clinical study, and financing commitments are summarized in the following table:

                                                          Payments Due by Period (in thousands)
                                                       Less than
Contractual obligations                   Total         1 year        1-3 years      4-5 years      After 5 years
Debt                                   $     1,596    $       789    $       807   $           -   $             -
Operating leases                             1,464            815            649               -                 -
Other                                          219            196             23               -                 -
Total contractual obligations          $     3,279    $     1,800    $     1,479   $           -   $             -

In addition, we have committed to make potential future milestone payments to third parties, as part of our in-licensing and development programs. Payments under these agreements generally become due and payable only upon achievement of certain developmental, regulatory and/or commercial milestones. Because the achievement of these milestones is not probable or reasonably estimable, such contingent obligations have not been recognized in our financial statements, and are not included above.

We also have a bond sinking fund requirement which totaled approximately $338,000 at December 31, 2007. Such amount is not available for unrestricted use in current operations.

We expect our revenue for the next several years to consist primarily of payments under government grants and contracts and, to a lesser extent, interest income. We intend to commit a significant portion of our resources on our lead product candidate, TNFerade, for the treatment of cancer. With respect to our other product candidates, we will seek to form strategic alliances under which we will share the risks and costs of development. We also will continue to look for funded research collaborations to help offset future anticipated 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 . . .