STRATEGIC AND CLINICAL 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, TNFerade† 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 percent lower risk of death in the TNFerade plus standard of care (SOC) arm relative to the SOC arm alone (Hazard Ratio = 0.753; 95 percent 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. In November 2009, the FDA granted orphan drug designation for TNFerade for the treatment of patients with pancreatic cancer.

TNFerade is also being evaluated for possible use in the treatment of other types of cancer. Using our core adenovector technology, TNFerade stimulates the production of tumor necrosis factor alpha (TNF?), a known anti-tumor protein, in cells of the tumor. Encouraging results have previously been reported in studies for esophageal cancer and head and neck cancer. Encouraging preliminary data also emerged from a trial in rectal cancer, and the program is currently under review. Our melanoma program was suspended in order to dedicate resources to near-term indications.

Our core technology has the important advantage of localizing protein delivery in the body. This is accomplished by using our adenovector platform to locally deliver genes to cells, which then direct production of the desired protein. In the case of TNFerade, for example, this approach reduces the side effects typically associated with systemic delivery of the TNF? protein. For vaccines, the goal is to induce a broad immune response against a target protein or antigen. This is accomplished by using the adenovector to deliver a gene that causes production of antigen, which then stimulates the desired immune reaction by the body.

In partnership with our collaborators, we also have multiple vaccines in development. All of these funded programs utilize our core adenovector technology. Our lead vaccine candidate targets the prevention of a major animal health problem, foot-and-mouth disease (FMD). Development efforts for this program are supported by the U.S. Department of Homeland Security and the U.S. Department of Agriculture. It is anticipated that a license application for an FMD vaccine will be filed within a year. We are collaborating with the National Institute of Allergy and Infectious Diseases (NIAID) to develop a human immunodeficiency virus (HIV) vaccine and a program with the U.S. Naval Medical Research Center and the PATH Malaria Vaccine Initiative (MVI) to develop vaccines for malaria. GenVec also has grant-supported preclinical programs to develop vaccine candidates for the prevention of respiratory syncytial virus (RSV) and herpes simplex virus type 2 (HSV-2).

Our research and development activities have yielded additional therapeutic product candidates that utilize our technology platform and we believe they represent potential commercial opportunities. In the fields of hearing loss and balance disorders, preclinical research has been published suggesting that delivery of the atonal gene using a GenVec adenovector may re-establish sensory cells in the inner ear and restore both hearing and balance. There are currently no effective treatments available for patients who have lost all balance function, and hearing loss remains a major unmet medical problem.

Our product candidates have not 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.

The FDA granted orphan drug designation for TNFerade for the treatment of patients with pancreatic cancer in November 2009. The FDA grants orphan drug designation to drugs that may provide a significant therapeutic advantage over existing treatments and target conditions affecting no more than 200,000 individuals in the United States per year. Orphan drug designation provides potential financial and regulatory incentives, including study design assistance, waiver of FDA user fees, tax credits and up to seven years of market exclusivity after marketing approval. Orphan drug exclusivity would not prevent FDA approval of a different drug for the orphan indication, the same drug for a different indication or a drug based on the same active ingredient for the orphan indication if the FDA were to conclude it was clinically superior.

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. We cannot forecast with 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 capital from 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 PACT trial, 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.

In September 2009 we received a notice from The NASDAQ Stock Market stating that the minimum bid price of the Company's common stock was below $1.00 per share for 30 consecutive business days and that the Company was therefore not in compliance with Marketplace Rule 5450. The notification letter states that we will be afforded 180 calendar days, or until March 15, 2010, to regain compliance with the minimum closing bid price requirement. To regain compliance, the closing bid price of our common stock must meet or exceed $1.00 per share for at least ten consecutive business days. NASDAQ may require our common stock to maintain a bid price of at least $1.00 per share for a period in excess of ten consecutive business days, but generally no more than 20 consecutive business days, before determining we have demonstrated an ability to maintain long-term compliance. If we do not regain compliance, NASDAQ will provide written notification to us that our common stock will be delisted. Delisting from NASDAQ would adversely affect our ability to raise additional financing through the public or private sale of equity securities, would significantly affect the ability of investors to trade our securities and would negatively affect the value and liquidity of our common stock. Delisting could also have other negative results, including the potential loss of confidence by employees, the loss of institutional investor interest, and fewer business development opportunities.

If adequate funds are not available through either the capital markets, strategic alliances, or collaborators, we may be required to further delay, reduce the scope of, or eliminate our research, development, clinical programs, manufacturing, or commercialization efforts, effect additional changes to our facilities or personnel, or obtain funds through other arrangements that may require us to relinquish some of our assets or rights to certain of our existing or future technologies, product candidates, or products on terms not favorable to us.

In light of the difficulties in accessing capital, 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 eliminated 22 positions, as a result of which we incurred $269,000 of expenses in the first quarter of 2009. In addition, where possible we are minimizing our unfunded expenditures on activities not critical to the clinical development of TNFerade. This includes reducing our current spending on contract manufacturing. In March 2009, we entered into a letter agreement amending the manufacturing development agreement that we had previously entered into with Cobra Biomanufacturing Plc
(Cobra) in January 2008 to produce commercial quantities of TNFerade. Under the terms of the letter agreement, at our direction Cobra agreed to suspend its activities under the original agreement until the end of the second quarter of 2009. Effective June 30, 2009, we terminated the agreement.

As a clinical stage biopharmaceutical company, our business and our ability to execute our strategy to achieve our corporate goals are subject to numerous risks and uncertainties. Material risks and uncertainties relating to our business and our industry are described in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2008. The description of our business in this Form 10-Q should be read in conjunction with the information described in Item 1A of the 10-K.

FINANCIAL OVERVIEW FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND
2008

Results of Operations

GenVec's net loss was $3.6 million (or $0.04 per share) on revenues of $2.9 million for the three months ended September 30, 2009. This compares to a net loss of $6.8 million (or $0.08 per share) on revenues of $4.2 million in the same period in the prior year. GenVec's net loss was $14.1 million (or $0.15 per share) on revenues of $10.5 million for the nine months ended September 30, 2009. This compares to a net loss of $19.6 million (or $0.24 per share) on revenues of $11.8 million for the same period in the prior year. Included in our net loss for the first nine months of 2009 was stock-based compensation expense of $1.3 million as compared to $1.6 million for the same period in the prior year. GenVec ended the third quarter of 2009 with $14.2 million in cash and investments.

Revenue

Revenues for the three-month and nine-month periods ended September 30, 2009 were primarily derived from the Company's funded research and development programs with the Department of Homeland Security (DHS), the National Institute of Allergy and Infectious Diseases (NIAID), and the National Institutes of Health (NIH), all of which use GenVec's proprietary adenovector technology for the development of either vaccine candidates against foot-and-mouth disease for livestock or vaccines against malaria, HIV, RSV, and HSV-2.

In March 2009, we signed a one-year contract with the PATH Malaria Vaccine Initiative (MVI) to support the development of vaccines to fight malaria. This contract was valued at approximately $770,000 and will continue work funded by MVI that began in 2004. The scope of work under this contract includes the development and testing of novel adenovirus-based vaccines. In July 2009, this contract was amended and is now valued at approximately $2.0 million. We have recognized revenues of approximately $422,000 under this agreement in the nine months ending September 30, 2009. In July 2009, we received a grant from the NIAID, valued at approximately $600,000 over two years that will be used to identify new antigens for malaria vaccine development.

In August 2009, we received a Phase 2 Small Business Innovation and Research grant from the NIAID to support the development of our vector production technology. This grant is valued at approximately $2.5 million over three years. We anticipate beginning work on this grant in the fourth quarter of 2009 and therefore have not recognized any revenue in the three months ending September 30, 2009.

In September 2009, the NIAID executed its third option period (year four) under the previously announced, five-year contract with us. GenVec will receive up to $2.3 million for the fourth year, which will support the generation of HIV vaccine candidates with GenVec's alternate adenovirus serotype technology.

On November 3, 2009, we entered into a new contract with SAIC-Frederick, Inc., a subsidiary of Science Applications International Corporation for the development of influenza and HIV vaccines pursuant to their prime grant from the National Cancer Institute. Work under this contract will include generation of HIV vaccine candidates, generation of a universal flu vaccine, process and assay development for manufacture of vaccine candidates for clinical testing, and continued support of the HIV vaccine candidates currently in clinical testing. This four-year contract has a total value of over $22 million if all options are exercised. We will receive approximately $2.6 million under the base period of the contract, which runs through September 30, 2010. There is no assurance that work will be requested in future periods.

Revenues for the three-month and nine-month periods ended September 30, 2009 were $2.9 million and $10.5 million, respectively, and as compared to revenues of $4.2 million and $11.8 million in the comparable prior year periods.

Revenues recognized under our various funded research projects for the three and nine-month periods ended September 30, 2009 and 2008 are as follows:

            Three Months Ended          Nine Months Ended
               September 30,              September 30,
             2009          2008         2009          2008

FMD       $      858      $ 2,043     $   4,081     $  5,626
HIV            1,559        1,763         4,900        4,408
Malaria          213          178           422          888
Other            296          221         1,099          875

Total     $    2,926      $ 4,205     $  10,502     $ 11,797

Lower revenue under the FMD program for the three and nine months ended September 30, 2009 is mainly due to the scope of work performed in the current periods as compared to the prior year. Lower revenue under the malaria program for the nine-month period ended September 30, 2009 is due mainly to the work performed under the new contract, which did not begin until the second quarter of 2009. The increase in revenue associated with our HIV program in the nine-month period ended September 30, 2009 is due mainly to increased research, assay, and process development efforts as compared to the comparable prior year period.

Expenses

Operating expenses were $6.5 million and $24.3 million for the three-month and nine-month periods ended September 30, 2009, which represent decreases of 42 percent and 24 percent as compared to $11.2 million and $32.0 million in the comparable prior year periods. In January 2009, we announced the elimination of 22 positions, as a result of which we incurred $269,000 of expense. Of these 22 positions, 15 positions were classified in our research and development area and 7 positions were classified in our general and administrative area.

Research and development expenses for the three-month and nine-month periods ended September 30, 2009 decreased 50 percent and 25 percent to $4.8 million and $19.2 million, respectively, as compared to $9.5 million and $25.6 million for the comparable prior year periods. The decrease in both periods compared to the prior year periods is primarily due to lower personnel costs, reduced patient site, lab, data management, monitoring, and materials costs related to our TNFerade program and to a lesser extent materials related to our funded programs and reduced general lab materials and supplies. The decrease in the nine month period ended September 30, 2009 was partially offset by increased manufacturing costs related to both our TNFerade program, as it relates to the letter agreement and subsequent termination of our Cobra contract (more fully described in the following paragraph), and our FMD program. We also incurred additional personnel costs of $193,000 for severance as a result of our reduction of 15 positions in our research and development area in January 2009. There were no severance costs in the comparable period in 2008. Additionally, stock-based compensation expense allocated to research and development decreased $48,000 and $255,000, respectively, as compared to the comparable prior year periods.

In January 2008, we entered into a manufacturing development agreement with Cobra to produce commercial quantities of TNFerade, our lead product candidate. The manufacturing development agreement covered technology transfer, scale-up, and validation of the manufacturing process for TNFerade through cGMP consistency lots. Under the terms of the agreement, we made an advance payment of $1.0 million. This advance payment was recorded in accordance with ASC 730 (formerly EITF 07-3), "Research and Development Costs" (ASC 730), which required us to defer and capitalize nonrefundable advance payments until the related services are performed. As of December 31, 2008, $669,000 of the $1.0 million advance payment remained in prepaid and other assets.

In March 2009, we entered into a letter agreement amending the original agreement and the associated services. During the first quarter of 2009, we paid and expensed $1.1 million for access to the Cobra facility under the original Cobra agreement and the letter agreement amending the original agreement. As of the date of the amendment, we also waived our rights to amounts remaining unused relating to the advanced payment. As a result, in March 2009 we expensed the remaining $669,000 of the advance payment.

During the second quarter of 2009, we paid and expensed an additional $1.1 million for access to the Cobra facility in accordance with the letter agreement amending the original Cobra agreement. Effective June 30, 2009, pursuant to the terms of the letter agreement, we terminated the agreement and its associated services schedule with Cobra and paid Cobra a termination fee of $350,000.

All amounts paid to Cobra were charged to expense during the six months ending June 30, 2009. We have incurred no further expense in the three months ending September 30, 2009 and have no additional commitments under this agreement.

General and administrative expense for the three-month periods ended September 30, 2009 and 2008 were $1.7 million for both periods. General and administrative expense for the nine-month period ended September 30, 2009 decreased 21 percent to $5.1 million as compared to $6.4 million for the comparable prior year period. The decrease in the nine-month period is primarily due to lower professional costs and personnel costs. Stock-based compensation expense allocated to general and administrative expenses, which is included in the personnel costs, remained the same in the three-month period ended September 30, 2009 and decreased $72,000 for the nine-month period ended September 30, 2009 as compared to the same periods in 2008. We also incurred additional personnel costs of $103,000 for severance due mainly to our reduction of 7 positions in January 2009. We incurred $81,000 in severance costs in the comparable period in 2008.

Other Income (Expense)

Total other income (expense) decreased to $5,000 and ($293,000) for the three-month and nine-month periods ended September 30, 2009 as compared to $202,000 and $578,000 of income for the comparable periods in the prior year. Total other income (expense) is composed of interest income, interest expense, net of the change in fair value of the Kingsbridge warrants, and other income.

Interest income for the three-month and nine-month periods ending September 30, 2009 was $2,000 and $37,000 compared to $183,000 and $600,000 respectively in the comparable prior year period. The decreases in interest income were due mainly to lower investment balances and lower yields earned on our investment portfolio.

Interest expense, net of the change in the fair market value of the Kingsbridge warrants, for the three-month and nine-month periods ended September 30, 2009 was a net income of $3,000 and a net expense of $62,000 compared to a net income of $56,000 and $8,000 in the comparable prior year periods. The change in interest expense, net, in both the three-month and nine-month periods ended September 30, 2009 was primarily due to an increase in expense associated with the Kingsbridge warrant. In the three-month period ended September 30, 2009; we incurred expense of $4,000 as compared to $73,000 in the comparable prior year period. In the nine-month period ended September 30, 2009; we incurred expense of $31,000 as compared to net income of $78,000 in the comparable prior year period. Additionally, in the nine-month period ending September 30, 2009, interest expense associated with our debt obligations has decreased due to the declining balances of these obligations as compared to the corresponding period in the prior year.

Other income (expense) for the three-month and nine-month periods ended September 30, 2009 was a net expense of $0 and $268,000 as compared to net expense of $37,000 and $30,000 for the three-month and nine-month periods ended September 30, 2008. The decrease in expense in the three-month period ended September 30, 2009 resulted primarily from a bad debt expense that occurred in the comparable period in 2008. The increase in the nine-month period ended September 30, 2009 resulted primarily from the expensing of the remaining $273,000 of deferred financing charges when our Committed Equity Financing Facility (CEFF) with Kingsbridge Capital Ltd. (Kingsbridge) expired on March 15, 2009.

Liquidity and Capital Resources

We have experienced significant losses since our inception. As of September 30, 2009, we have an accumulated deficit of $227.7 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 September 30, 2009, cash and investments totaled $14.2 million as compared to $17.4 million at December 31, 2008.

For the nine months ended September 30, 2009, we used $13.8 million of cash for operating activities. This consisted of a net loss for the period of $14.1 million, which included approximately $784,000 of non-cash depreciation and amortization, $1.3 million of non-cash stock option expense, and $273,000 from the write off of our deferred financing charges due to the expiration of our CEFF with Kingsbridge. 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 nine months ended September 30, 2009 was $1.8 million. We purchased $150,000 of property and equipment during the period.

Net cash provided by financing activities during the nine months ended September 30, 2009 was $10.7 million, which included a total of $11.1 million, net of issuance costs, from the registered direct financings completed in August and May 2009 that are described below and $110,000 of cash provided from the issuance of common stock under our Employee Stock Purchase Plan. This cash provided was offset by cash used in financing activities of $452,000 for the repayment of our debt obligations.

On March 15, 2006, we entered into a CEFF with Kingsbridge, under which Kingsbridge committed to purchase up to $30.0 million of our common stock within a three-year period, subject to certain conditions and limitations. During the three-year term of the CEFF, which expired on March 15, 2009, we sold 3,284,830 shares of common stock to Kingsbridge for total gross proceeds of $6.5 million. No shares were sold during 2009 under the CEFF.

On February 1, 2007, we filed with the Securities and Exchange Commission a $100 million shelf registration statement on Form S-3. The shelf registration statement was declared effective February 12, 2007 and allows us to issue any combination of common stock, preferred stock, warrants, or debt securities.

On June 11, 2008, pursuant to our shelf registration statement, we completed a registered direct offering to various investors of 11,258,279 shares of common stock and warrants to purchase 2,251,653 shares of common stock. The shares of common stock and warrants were offered in units consisting of one share of . . .