The following discussion should be read in conjunction with the "Financial Statements and Notes" thereto appearing elsewhere in this report. See "Item 1A:
Risk Factors" regarding certain factors known to GenVec that could cause reported financial information not to be necessarily indicative of future results, including discussions of the risks related to the development, regulatory approval, manufacture, proprietary protection of our product candidates, and their market success relative to alternative products.

OVERVIEW

GenVec, Inc. (GenVec, we, our, or the Company) is a clinical stage biopharmaceutical company developing novel, gene-based therapeutic drugs and vaccines. Our lead therapeutic product candidate, TNFeradeTM biologic (TNFerade), is being developed for use in the treatment of cancer. TNFerade is currently the subject of a

randomized, controlled, Phase III pivotal trial, known as PACT, for first-line treatment of inoperable, locally advanced pancreatic cancer. Interim data supporting a potential survival advantage in the TNFerade group were disclosed in November 2008. Interim data, based on an analysis after one-third of deaths expected in the trial, demonstrated an approximately 25% lower risk of death in the TNFerade plus standard of care (SOC) arm relative to the SOC arm alone (Hazard Ratio = 0.753; 95% Confidence Interval [0.494 - 1.15]). An independent Data Safety Monitoring Board reviewed the interim analysis data and recommended the trial continue as planned. In November 2008, TNFerade was granted Fast Track designation by the U.S. Food and Drug Administration (FDA) for its proposed use in the treatment of locally advanced pancreatic cancer. Fast Track designation can potentially expedite the regulatory review of TNFerade by the FDA.

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 preclinical testing and early clinical trials have often not been predictive of results obtained in later clinical trials. A number of new drugs and biologic products have shown promising results in early clinical trials, but subsequently failed to establish sufficient safety and efficacy data to obtain necessary regulatory approvals.

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

Furthermore, our business strategy includes the option of entering into collaborative arrangements with third parties to complete the development and commercialization of our product candidates. In the event that third parties take over the clinical trial process for one or more of our product candidates, the estimated completion date would largely be under the control of that third party rather than us. We cannot forecast with any degree of certainty which proprietary products or indications, if any, will be subject to future collaborative arrangements, in whole or in part, and how such arrangements would affect our development plan or capital requirements. Our programs may also benefit from subsidies, grants, or government or agency-sponsored studies that could reduce our development costs.

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

Furthermore, the current domestic and global economic conditions have made it more difficult for companies like us to access the financial and credit markets. Prolonged negative changes in domestic and global economic conditions, such as the current economic conditions, or further disruptions of either or both of the financial and credit markets will further adversely affect our ability to access additional capital. While our estimated future capital requirements are uncertain and will depend on, and could increase or decrease as a result of many factors, including the extent to which we choose to advance our research, development, clinical, manufacturing, and commercialization activities, it is clear we will need significant additional capital to develop our product candidates through clinical development, manufacturing, and commercialization. The continued advancement of TNFerade through the Phase III portion of the pivotal trial for locally advanced pancreatic cancer, the FDA regulatory review process, and the establishment of manufacturing capabilities will continue to require capital, and we expect to have to incur significant additional costs to manufacture and commercialize TNFerade if we receive marketing approval. We do not know whether we will be able to access additional capital when needed or on terms favorable to us or our stockholders.

Our research and development expenses were $33.8 million, $26.0 million, and $29.6 million for the years ended December 31, 2008, 2007, and 2006, respectively. These expenses were divided between our research and development platforms in the following manner:

[[Image Removed]]         [[Image Removed]]     [[Image Removed]]     [[Image Removed]]
                                              Year Ended December 31,
(In Millions)                    2008                  2007                  2006
TNFerade                  $            21.3     $            15.0     $            13.0
Vaccines                               11.6                  11.0                  16.0
Other Clinical Programs                 0.9                     -                   0.6
Total                                 $33.8                 $26.0                 $29.6

TNFerade. Our lead cancer product candidate is currently being studied in a pivotal clinical trial for the treatment of locally advanced pancreatic cancer and two Phase I/II trials for head and neck cancer. GenVec has incurred $91 million of expenses on the development of this product candidate since the commencement of this program in 1999. Costs since the commencement of this program include research, development, clinical trials, clinical supply costs, and an allocation of corporate general and administrative expenses. GenVec expects to continue to expend substantial additional amounts for the clinical development and commercialization of TNFerade.

Vaccines. Under our corporate and government funded vaccine programs, GenVec continues to develop vaccine candidates against malaria, HIV, RSV, HSV-2, and other infectious diseases, as well as an animal health vaccine for foot-and-mouth disease (FMD). Since commencement of these vaccine development programs in 2002, GenVec has incurred approximately $85 million in research and development costs, including an allocation of corporate general and administrative expenses, most of which have been funded by various sponsors under cost-reimbursement agreements.

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

We have incurred operating losses each year since inception and, as of December 31, 2008, had an accumulated deficit of approximately $213.6 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.

The current domestic and global economic conditions have made it more difficult for companies like us to access the financial and credit markets or to otherwise obtain liquidity. While we expect that overall revenues from funded collaborations in 2009 will have a modest increase as compared to the 2008 revenues from funded collaborations, we have taken and are continuing to take steps to lower our operating costs in order to reduce costs. These steps included announcing on January 29, 2009 that we were eliminating 22 positions. Further, where possible, we are minimizing our unfunded expenditures on activities that are not critical to the clinical development of TNFerade. This includes reducing our spending on contract manufacturing. We are currently discussing with our contract manufacturer amending the service schedule to our contract manufacturing agreement to reduce both services and costs during the 2-year period of the agreement or potentially terminating the agreement. We expect that lowering costs, in addition to increased revenues from funded collaborations, will provide us with operating capital through at least the second quarter of 2010. We estimate that we will incur approximately $270,000 of expenses in the first quarter of 2009 due to the reduction of our workforce.

CRITICAL ACCOUNTING POLICIES AND THE USE OF ESTIMATES

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

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

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

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

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

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

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

The expenditures necessary to execute our business plan are subject to numerous uncertainties, which may adversely affect our liquidity and capital resources. Completion of clinical trials may take several years or more, but the length of time generally varies substantially according to the type, complexity, novelty, and intended use of a product candidate.

We estimate that clinical trials of the type we generally conduct are typically completed over the following timelines:

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

Stock Based Compensation

We account for our stock based compensation under FASB Statement No. 123(R), Share-Based Payment (Statement 123(R)). Statement 123(R) requires that all stock-based compensation be recognized as an expense in the financial statements and such cost be measured at the fair value of the award. For stock-based awards granted after January 1, 2006, we recognize compensation expense based on estimated grant date fair value using the Black-Scholes option-pricing model.

RECENT ACCOUNTING PRONOUNCEMENTS

In October 2008, the FASB issued FSP FAS 157-3, "Determining the Fair Value of a Financial Asset When the Market For That Asset Is Not Active" (FSP FAS 157-3), with an immediate effective date including prior periods for which financial statements have not been issued. FSP FAS 157-3 amends FAS 157 to clarify the application of fair value in inactive markets and allows for the use of management's internal assumptions about future cash flows with appropriately risk-adjusted discount rates when relevant observable market data do not exist. The objective of FAS 157 has not changed and continues to determine the price that would be received in an orderly transaction not a forced liquidation or distressed sale at the measurement date. The adoption of FSP FAS 157-3 did not have a material effect on our results of operations, financial position, or liquidity.

In December 2007, the FASB ratified Emerging Issues Task Force (EITF) Issue No. 07-1, "Accounting for Collaborative Arrangements" (EITF 07-1), which defines collaborative arrangements and establishes reporting and disclosure requirements for transactions between participants in a collaborative arrangement and between participants in the arrangements and third parties. EITF 07-1 is effective for periods beginning after December 15, 2008 and applies to arrangements in existence as of the effective date. Our adoption of EITF 07-01 in 2009 is not expected to have a material impact on our financial position or results of operations.

Other new pronouncements issued but not effective until after December 31, 2008 are not expected to have a significant effect on our financial position or results of operations.

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

RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2008 AND 2007
REVENUE

Revenue. Revenue increased 8 percent to $15.1 million in 2008 from $14.0 million in 2007. The increase in 2008 is primarily due to increased revenue associated with our agreement with the Department of Homeland Security (DHS) of $3.4 million. The higher revenue under the DHS agreement is a result of increased work scope and effort in 2008 as a result of the exercise of the first and second renewal options under the agreement as compared to the 2007 period. The increased revenue associated with our DHS agreement has been partially offset by decreased revenue of $2.0 million under our HIV program as compared to the comparable prior year period. This decrease is mostly due to the successful completion of the defined process development, technology transfer, and analytical method transfer activities under our HIV agreements.

OPERATING EXPENSES

Research and development. Research and development expenses increased 30 percent to $33.8 million in 2008 from $26.0 million in 2007. The increase is primarily due to higher costs related to the development of TNFerade including manufacturing and materials costs, patient and data management costs, professional service costs related to our TNFerade pancreatic clinical trial, and increased personnel costs, which includes an increase of approximately $307,000 of stock-based compensation expense in 2008 as compared to the prior year. Also contributing to the increased costs, but to a lesser extent, are increased pass-through costs associated with our funded programs, most notably pass-through costs associated with our FMD program.

General and administrative. General and administrative expenses decreased 15 percent to $8.0 million in 2008 from $9.3 million in 2007. General and administrative expenses were lower in 2008 primarily due to lower personnel costs, recruiting costs, and depreciation expense, partially offset by higher professional service costs. Administrative personnel costs includes severance expenses of approximately $76,000 for former employees, a decrease of approximately $273,000 as compared to 2007, and an increase of approximately $21,000 of stock-based compensation expense in 2008 as compared to the prior year.

Gain/loss on disposal of assets. There was a gain on the disposal of assets of $3,000 in 2008 and a loss of $5,000 in 2007.

OTHER INCOME (LOSS)

Total other income decreased from $2.6 million in 2007 to $611,000 in 2008.

Interest income was $700,000 in 2008 as compared to $1.5 million in the comparable prior year period. The decrease in interest income is due to lower investment balances and lower yields earned on our portfolio.

Interest expense for the period ending December 31, 2008 decreased $140,000 as compared to the comparable prior year period due to the declining balances of our debt obligations and a decrease due to adjustments in the fair value of the warrant liability associated with our Committed Equity Financing Facility (CEFF) with Kingsbridge Capital Ltd. (Kingsbridge) in 2008 as compared to the comparable period in 2007.

Other income (loss) was a loss of ($206,000) in 2008 as compared to income of $847,000 in 2007. The loss in 2008 is due mainly to the recording of a $218,000 loss associated with an other-than-temporary decline in the fair value of a marketable equity security, partially offset by miscellaneous discounts and interest payments received from the government associated with late payments. The income in 2007 is due primarily to the receipt of an insurance settlement of $500,000 due to a casualty loss, the receipt of equity, valued at $337,000, from a third party in exchange for the release of security interests and miscellaneous discounts and interest payments from the government associated with late payments.

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 we received and recognized under our 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.

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 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.

LIQUIDITY AND CAPITAL RESOURCES

We have experienced significant losses since our inception. As of December 31, 2008 we have an accumulated deficit of $213.6 million. The process of developing and commercializing our product candidates requires significant research and development work and clinical trial work, as well as significant manufacturing and process development efforts. These activities, together with our general and administrative expenses, are expected to continue to result in significant operating losses for the foreseeable future.

As of December 31, 2008, cash and investments totaled $17.4 million as compared to $23.7 million at December 31, 2007.

For the 12 months ended December 31, 2008, we used net cash of $23.7 million for operating activities. This consisted of a net loss for the period of $26.1 million, which included approximately $900,000 of non-cash depreciation and amortization and $2.1 million of non-cash stock option expenses. Net cash was used primarily for the advancement of our TNFerade pancreatic clinical trial, including our manufacturing activities, and to a lesser extent general and administrative activities.

Net cash provided from investing activities during the 12 months ended December 31, 2008 was $12.8 million, which was net of approximately $400,000 of property and equipment purchases.

Net cash provided from financing activities during the 12 months ended December . . .