**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, 2007





or





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





For
      the
      transition period from _______________to_______________.





**COMMISSION
      FILE NUMBER: 0-24469**





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





**DELAWARE**
            
            **23-2705690**(State
                or other jurisdiction of incorporation or organization)
            
            (I.R.S.
                Employer Identification Number)




**65 WEST WATKINS MILL ROAD, GAITHERSBURG, MD**
            
            **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:





**Title
                of Each Class**
            
            **Name
                of Each Exchange on Which Registered****Common
                Stock, Par Value $0.001 Per Share**
            
            **The
                NASDAQ Stock Market**




SECURITIES
      REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE





Indicate
      by check mark if the Registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act. o Yes x No





Indicate
      by check mark if the Registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Securities Exchange Act of 1934. o Yes
x No





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. x Yes
o
      No





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





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, a non-accelerated filer, or a smaller reporting company.
      See
      definitions of “large accelerated filer,” “accelerated filer” and “smaller
      reporting company” in Rule 12b-2 of the Exchange Act. (Check one):





Large
                accelerated filer
            o
            
            Accelerated
                filer
            xNon-accelerated
                filer
            o
            
            Smaller
                reporting company
            o


(Do
      not
      check if a smaller reporting company)




Indicate
      by check mark whether the Registrant is a shell company (as defined in Rule
      12b-2 of the Securities Exchange Act of 1934. Yes o No x





As
      of
      June 29, 2007 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 Global Market on such date was
      $175,066,831. 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 29, 2007 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, 2008 there were 75,434,690
      shares of the Registrant's common stock, par value $0.001 per share,
      outstanding.




**DOCUMENTS
      INCORPORATED BY REFERENCE**




Certain
      portions of the Registrant’s Definitive Proxy Statement for its 2008 Annual
      Meeting of Stockholders are incorporated by reference into Part III of this
      report.









**TABLE
      OF CONTENTS**





**PART**
              **NO.**
            **ITEM**
              **NO.**
            **DESCRIPTION**
            
            **PAGE NO.**I
            1
            BUSINESS
            
            41A
            RISK
                FACTORS
            
            191B
            UNRESOLVED
                STAFF COMMENTS
            
            342
            PROPERTIES
            
            343
            LEGAL
                PROCEEDINGS
            
            344
            SUBMISSION
                OF MATTERS TO A VOTE OF SECURITY HOLDERS
            
            34II
            5
            MARKET
                FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
                PURCHASES OF EQUITY SECURITIES
            
            356
            SELECTED
                FINANCIAL DATA
            
            367
            MANAGEMENT'S
                DISCUSSION AND ANALYSIS OF FINANCIALCONDITION
                AND RESULTS OF OPERATIONS
            
            377A
            QUANTITATIVE
                AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
            
            448
            FINANCIAL
                STATEMENTS AND SUPPLEMENTARY DATA
            
            459
            CHANGES
                IN AND DISAGREEMENTS WITH ACCOUNTANTS ONACCOUNTING
                AND FINANCIAL DISCLOSURE
            
            459A
            CONTROLS
                AND PROCEDURES
            
            459B
            OTHER
                INFORMATION
            
            46


III
              10
              DIRECTORS,
                  EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
              
              47


11
            EXECUTIVE
                COMPENSATION
            
            4712
            SECURITY
                OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ANDMANAGEMENT
                AND RELATED STOCKHOLDER MATTERS
            
            4713
            CERTAIN
                RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
                INDEPENDENCE
            
            4714
            PRINCIPAL
                ACCOUNTANT FEES AND SERVICES
            
            47IV
            15
            EXHIBITS
                AND FINANCIAL STATEMENT SCHEDULES
            
            48FINANCIAL
                STATEMENTS
            
            F1 –
                F25









**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 and are
      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 words like “believe,” “expect,” “intend,” “may,” “will,”
“should,” or “anticipate” or similar terminology.**





**Although
      we believe that the expectations reflected in our forward-looking statements
      are
      reasonable as of the date we make them, actual results could differ materially
      from those currently anticipated due to a number of factors** **,
      including risks relating to:**





·
            **our
                financial condition and our ability to raise capital to fund clinical
                programs and future
                operations;**





·
              **certain
                  of our product candidates being in the early stages of
                  development;**





·
            **uncertainties
                with, and unexpected results and related analyses relating to clinical
                trials of our product candidates (including the length of time required
                to
                enroll suitable patient subjects and our ability to secure clinical
                trial
                sites);**





·
            **the
                timing, amount, and availability of revenues from our government-funded
                vaccine programs;**





·
            **the
                timing and content of future FDA regulatory actions related to us
                or our
                product candidates;**





·
            **our
                ability to find collaborators on or commercialize our product
                candidates;**





·
            **the
                scope and validity of patent protection for our product candidates
                and our
                ability to commercialize products without infringing the patent rights
                of
                others.**





**Further
      information on the factors and risks that could affect our business, financial
      condition and results of operations is set forth under Item 1A in this Annual
      Report and is contained in our other** **filings with the Securities and Exchange Commission (“SEC”). The filings are
      available on our website at www.genvec.com or at the SEC’s website,****www.sec.gov****.**





**These
      forward-looking statements speak only as of the date of this Annual Report
      and
      we assume no duty to update our forward-looking
      statements.**







**PART
      1**





**ITEM
      1.**  **BUSINESS**





**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 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 II/III pivotal trial,
      known as PACT, for
      first-line treatment of inoperable, locally **-** advanced
      pancreatic cancer. We completed enrollment in the Phase II portion of PACT
      in
      2006 and interim data supporting a potential survival advantage in the TNFerade
      group were disclosed. Based on data available from the first 51 patients,
      overall survival at one year was 70.5 percent in the TNFerade plus standard
      of
      care group versus 28 percent in the standard of care group. Enrollment in the
      Phase III portion of the trial is ongoing.





TNFerade
      is also being evaluated for possible use in the treatment of other types of
      cancer. Clinical trials are in progress in head and neck cancer, rectal cancer,
      and metastatic melanoma. Encouraging results have previously been reported
      in
      studies for esophageal cancer and in soft tissue sarcomas. Using our core
      adenovector technology, TNFerade stimulates the production of tumor necrosis
      factor alpha (TNF a ),
      a
      known anti-tumor protein, in cells of the tumor.





In
      partnership with our collaborators, we also have multiple vaccines in
      development. All of these funded programs utilize our core adenovector
      technology. We
      have a
      collaboration with the National Institute of Allergy and Infectious Diseases
      (NIAID) to develop an HIV
      vaccine, a program with the U.S. Naval Medical Research Center and the PATH
      Malaria Vaccine Initiative to develop vaccines for malaria and development
      efforts for a foot-and-mouth disease (FMD) vaccine with the U.S. Department
      of
      Homeland Security and the U.S. Department of Agriculture.





Our
        research and development activities have yielded additional novel product
        candidates that utilize our technology platform and we believe they represent
        potential commercial opportunities. We have conducted initial clinical testing
        of AdPEDF for the treatment of wet age-related macular degeneration (AMD),
        a
        leading cause of vision loss in people over 50. 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
      core
      technology has the key advantage of localizing protein delivery in the body.
      This is accomplished by using our adenovector platform to locally deliver genes
      to cells, which then directs 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 a 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.





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 this Form 10-K. The
      description of our business in this Form 10-K should be read in conjunction
      with
      the information in Item 1A and the Financial Statements found under Item 8
      of
      Part II of this annual report, which includes additional financial information
      about our total assets, revenue, and measures of profit and loss, and financial
      information.




**OUR
      STRATEGY**





Our
      primary objective is to develop and commercialize products with significant
      medical benefits. We plan to achieve this objective through the following
      strategies:




4




**Develop
        and commercialize our lead product candidate, TNFerade, for the treatment
        of
        cancer.** We
        intend
        to seek marketing approval for TNFerade for the treatment of locally advanced
        pancreatic cancer, and build the commercial value of TNFerade by expanding
        its
        clinical use in a variety of cancers. We may seek to retain significant
        commercial rights to TNFerade in North America and secure strategic partnerships
        to support TNFerade registration and commercialization efforts in Europe,
        Asia,
        and other world markets. Based on the survival data obtained to date, we
        believe
        the use of TNFerade in locally advanced pancreatic cancer represents a feasible
        path to commercialization.





**Commercialize
      vaccines to prevent foot-and-mouth disease in cloven-hoofed animals.** We
      intend
      to seek a conditional license for vaccines against FMD. We will seek to generate
      initial sales of our FMD vaccines to the Animal and Plant Health Inspection
      Services (APHIS) of the U.S. Department of Agriculture, which is responsible
      for
      maintaining the North American Vaccine Bank. We will also seek to leverage
      licensed vaccines for commercialization into other FMD free markets such as
      the
      European Union and into other markets potentially through strategic
      partnerships.




**Utilize
      our technology platform and early-stage product portfolio to take advantage
      of
      commercial opportunities.** Our
      research and development efforts have generated additional product candidates
      for vision loss and hearing loss and balance disorders including:




·
            New
                approaches to improve the treatment of AMD and other ocular diseases
                based
                on our proprietary PEDF gene and platform
                technologies.




·
            Treatments
                of hearing loss and balance disorders based on our proprietary Atoh1
                gene
                and platform technologies, which have the potential to address major
                medical needs.




**Seek
      collaborative partnerships that will leverage our
      technologies.** We will
      continue to seek to enhance our gene delivery capabilities through internal
      research as well as external collaborations and possible acquisitions. We have
      received funding from research and development collaborations to develop
      preventative vaccine candidates against malaria, HIV, and other infectious
      diseases, an anti-viral and vaccine to prevent the spread of foot-and-mouth
      disease, and a second-generation TNFerade product candidate. We have received
      peer-reviewed external funding from the U.S. Government and from non-profit
      foundations to improve our technology platform for vaccine and gene delivery
      applications. We intend to further strengthen our technologies relating to
      process development, formulation, and manufacturing through our existing and
      future relationships. Our strategy is to consider collaborative arrangements
      with third parties for some or all aspects of development, manufacturing,
      marketing, and sales of our products that will require broad marketing
      capabilities and overseas marketing.





**THERAPEUTIC
      PRODUCT DEVELOPMENT PROGRAMS**





**TNFerade.** **** Our
      most
      advanced product candidate for human disease is TNFerade, a
      novel
      approach to treating cancer. Administered directly into tumors, TNFerade is
      an
      adenovector, or DNA carrier, which contains the gene for tumor necrosis
      factor-alpha (TNF a ),
      a
      potent immune system protein with well-documented anti-cancer effects. TNFerade
      works by causing cells in the tumor to produce and secrete TNF a .
      TNF a binds to
      cells in the tumor, leading to the death of cells in the tumor. We are
      developing TNFerade for use in combination with radiation and/or chemotherapy
      for the treatment of various cancers. Emerging clinical data suggest that
      TNFerade may prolong the survival of patients with locally advanced pancreatic
      cancer when TNFerade is combined with front-line therapy. Clinical data also
      suggest that TNFerade has activity against a variety of types of cancer.





In
      two
      separate Phase I trials (solid tumors and soft tissue sarcomas), TNFerade
      demonstrated, in conjunction with standard radiation therapy, that it was
      generally well tolerated, and tumor size reduction of 25 percent or greater
      was
      observed in more than 70 percent of patients in 12 different tumor types,
      including pancreatic, rectal, melanoma, small cell lung, breast, and sarcoma.
      Results from the Phase I trial in solid tumors were published in the February
      15, 2004 issue of the *Journal
      of Clinical Oncology* .  The
      Phase
      I study of 14 patients with soft tissue sarcoma, published in the September
      1,
      2004 issue of *Clinical
      Cancer Research* ,
      demonstrated TNFerade activity in a tumor type for which the TNF a protein
      has been approved for use in Europe. In
      January 2006, we presented survival
      data from a Phase II study of TNFerade in 17 patients with locally advanced
      esophageal cancer at the ASCO Gastroenterological Symposium demonstrating 2-year
      survival of 71 percent, for all dosage levels of TNFerade, compared to an
      average 2-year survival of 33 percent based on five comparable studies.





5




Based
      on
      the results of our Phase I studies, we initiated a Phase II dose-escalation
      study in 50 patients with locally-advanced, pancreatic cancer to determine
      the
      best therapeutic dose for use of TNFerade in combination with standard
      chemoradiation. Results from this study suggested activity including an apparent
      improvement in survival. Based on these data, we initiated a randomized,
      controlled Phase II study of 74 patients. In consultation with the FDA, this
      Phase II study was amended in March 2006 to become a Phase II/III 330-patient
      pivotal (PACT) trial that would support registration of TNFerade for this
      indication. The primary endpoint for the PACT trial was originally based on
      12-month survival. Results showed that 1-year survival was 70.5 percent in
      the
      TNFerade plus standard of care group versus 28 percent in the standard of care
      group. We conducted an initial safety and efficacy analyses of the Phase II/III
      trial in the fourth quarter of 2006. In December 2006, we reported the
      preliminary analysis of safety data based on the first 40 patients treated,
      and
      survival data on the first 51 patients treated. Additional data was presented
      at
      the annual meeting of the American Society for Clinical Oncology in June 2007
      at
      which we reported an increase in overall survival from 11.1 months for patients
      receiving standard of care alone versus 19.3 months for patients receiving
      TNFerade plus standard of care. Data were also presented on tumor response,
      rates of surgical resection and other secondary endpoints. In addition, a safety
      analysis indicated that there was no significant difference in the occurrence
      of
      serious adverse events, including thrombotic events, between the treatment
      and
      control groups.





In
        January 2008, we reported an agreement with the U.S. Food and Drug
        Administration (FDA) to change the primary efficacy endpoint of the trial
        from
        12-month survival to overall survival. As a result of this change, a benefit
        in
        overall survival can be considered as a basis for full regulatory approval
        of
        TNFerade for this indication. We also agreed that we will conduct two additional
        interim analyses of overall survival following one-third (92) and two-thirds
        (184) of the total events (deaths) for the study, with
        the
        potential to stop the trial for futility or if there is clear evidence of
        the
        drug’s efficacy.





New
      treatments for pancreatic cancer are urgently needed. According to the American
      Cancer Society, pancreatic cancer is the fourth leading cause of cancer deaths
      in the United States, and the number of cases being diagnosed has been
      increasing year to year. According to American Cancer Society estimates,
      approximately 37,700 new cases of pancreatic cancer will be diagnosed this
      year
      in the United States, and nearly all of these patients will die of their
      disease.





**Additional
      Indications:** TNFerade
      is being evaluated for its potential use in the treatment of several other
      cancers:





·
            **Head
                and Neck Cancer.**According
                to the American Cancer Society, approximately 47,500 new cases of
                head and
                neck cancer will be diagnosed in the United States this year.We****are
                sponsoring two separate Phase I/II studies at the University of Chicago
                to
                explore the use of TNFerade as a component of standard of care treatment
                for head and neck cancer, a disease where local control is crucial
                for
                effective treatment and considered an accepted regulatory endpoint
                for
                this indication. The two studies were initiated in January 2007 and
                are
                being funded, in part, by the National Cancer Institute. The first
                study
                will enroll up to 70 patients and examine TNFerade as a second-line
                treatment for inoperable, recurrent tumors. The second study will
                enroll
                up to 60 elderly or frail patients with new onset, locally advanced
                disease. Investigators will first determine the best dose in each
                indication, and will assess safety and the ability of TNFerade to
                control
                the local spread of the cancer following treatment.





·
            **Rectal
                Cancer.**According
                to the American Cancer Society, approximately 40,700 new cases of
                rectal
                cancer will be diagnosed in the United States this year. A Phase
                II trial
                is in progress to assess the ability of TNFerade to improve tumor
                responses in conjunction with standard chemoradiation.This
                single-site study is being done in collaboration with the National
                Cancer
                Institute and is designed to compare TNFerade plus standard of care
                therapy versus standard of care therapy in the treatment of patients
                with
                biopsy-proven rectal cancer.One
                objective of this study is to achieve better surgical outcomes in
                these
                patients, such as avoidance of colostomy. Encouraging early data
                were
                presented at the Annual Meeting of the American Society for Therapeutic
                Radiology and Oncology in October 2007. Prior to treatment, four
                of the
                first seven patients enrolled in the study were classified as highly
                likely to need sphincter removing surgery with colostomy. Subsequent
                to
                TNFerade plus chemoradiation, all seven patients who underwent surgical
                resection had successful sphincter sparing procedures. Five of the
                seven
                patients achieved pathological complete response defined by the presence
                of less than 10% viable tumor. Based on these preliminary data, the
                NCI
                study is continuing to enroll more patients.




6




·
              **Metastatic
                  Melanoma.**According
                  to the American Cancer Society, approximately 62,000 new cases
                  of, and
                  approximately 8,400 deaths from, melanoma will occur in the United
                  States
                  this year.In
                  the Phase I study of TNFerade, all three patients with metastatic
                  melanoma
                  showed objective responses, and two of the three patients showed
                  disease-free survival greater than three years.Based
                  on these data, a Phase II trial in metastatic melanoma was
                  initiatedto
                  evaluate anti-tumor activity, time to disease progression, survival
                  and
                  safety.Patients
                  will receive TNFerade in combination with radiation therapy.Evaluation
                  of the first cohort of 10 patients treated in this protocol is
                  required
                  before enrolling additional patients. Data from the first cohort
                  are
                  currently being analyzed.





The
      following table summarizes key information regarding our ongoing TNFerade
      clinical studies:





**DISEASE
                  INDICATION**
              ****
              **DEVELOPMENT
                  STAGE**
              ****
              **TARGETED
                  # OF**
                **PATIENTS**Pancreatic
                  Cancer
              
              Phase
                  II/III - Randomized, Controlled
              
              330Head
                and Neck Cancer
              
              Phase
                I/II - Dose Escalation/Recurrent Tumors
              
              69
                  to 78Head
                  and Neck Cancer
              
              Phase
                  I/II - First-line Treatment/Elderly
              
              56
                  to
                  62Rectal
                  Cancer
              
              Phase
                  II - Dose Escalation
              
              Up
                  to
                  95Melanoma
              
              Phase
                    II - Proof of Concept
              
              29





**Additional
      Therapeutic Programs**





·
            **Ad****PEDF**is
                being developed for patients with wet age-related macular degeneration
                (AMD), the leading cause of blindness in people over the age of
                50. AMD is a progressive eye disease characterized by the growth of
                abnormal blood vessels in the macula, the area of the eye that controls
                central vision and visual acuity.Approximately
                200,000 new cases of wet age-related macular degeneration are diagnosed
                each year in the United States and there are an estimated 500,000
                cases
                diagnosed worldwide.We
                have completed a dose-escalation Phase I clinical trial of AdPEDF
                in
                patients with severe AMD. This Phase I study was expanded for testing
                of
                AdPEDF in AMD patients with less severe disease and, in March 2006,
                we
                announced the completion of enrollment of this 22-patient trial.
                Data from
                this study are currently being collected for analysis. In May 2007,
                we
                presented pre-clinical research data suggesting the ability of our
                new
                adenovector, Ad35, to induce and sustain protein production in the
                eye at
                the Association for Research in Vision and Ophthalmology (ARVO) Annual
                Meeting.





·
            **TherAtoh**is
                our pre-clinical program for delivering the human atonal gene to
                trigger
                the production of therapeutic proteins by cells in the inner ear. We
                have a research program focused on the****restoration
                of hearing or balance function through the regeneration of critical
                cells
                of the inner ear. Hearing and balance require specialized cells of
                the
                inner ear called sensory hair cells. During embryonic development,
                a gene
                termed atonal (Atoh1) induces the generation of these cells. We have
                demonstrated in multiple animal models that the production of the
                Atoh1
                protein results in the formation of new inner ear sensory hair cells,
                and
                the restoration of hearing and balance function. There are currently
                no
                effective marketed drug therapies in the U.S. to treat hearing loss
                or
                balance disorders.




**VACCINE
      DEVELOPMENT PROGRAMS**





In
      addition to our therapeutic product development programs, we are working
      with collaborators
      to develop new applications for our technology through our vaccine development
      programs. We are currently developing a vaccine in animal health against
      foot-and-mouth disease and preventative vaccines for malaria, HIV, respiratory
      syncytial virus, and HSV-2.




7




**Foot-and-mouth
      disease (FMD).** Our most
      advanced program is a vaccine for the prevention of FMD, **** which
      is
      a highly contagious viral disease affecting cows and other animals with cloven
      hoofs. With our government collaborators, we are developing vaccine and
      anti-viral candidates for the prevention and containment of FMD outbreaks.
      Initial testing with a vaccine against FMD showed that inoculated cattle
      challenged with the virus that causes foot-and-mouth disease did not develop
      symptoms. ****





We
      have
      entered into the following agreements related to our FMD vaccine
      program:





·
            **U.S.
                DEPARTMENT OF HOMELAND SECURITY
                (DHS)**





In
      January 2007, the Company signed a 3-year contract with the Department of
      Homeland Security (DHS) to support the development and manufacture of novel
      adenovector-based vaccines against foot and mouth disease (FMD). Under the
      agreement, the Company received $6.0 million in 2007 for program funding for
      the
      first year and will receive up to $15.1 million over three years if DHS
      exercises its renewal options under the contract.





In
      August
      2007, the DHS executed the first renewal option under this agreement. This
      option will provide $5.6 million in 2008 to support the development of vaccines
      for FMD. At the time this option was executed, the total value of the 3-year
      agreement was increased from up to $15.1 million to up to $17.4 million if
      all
      renewal options are exercised. The additional funds will be used for expanded
      development activities.





·
            **U.S.
                DEPARTMENT OF AGRICULTURE
                (USDA)**





In
      August
      2004, the Company signed a 1-year, $304,000 cooperative agreement, with the
      U.S.
      Department of Agriculture (USDA), for the development of vaccine candidates
      against foot-and-mouth disease (FMD).





In
      March
      2006, the Company received a 20-month, $1.7 million extension of its agreement
      with the USDA, which was funded through an interagency agreement by the U.S.
      Department of Homeland Security. The purpose of the agreement is to further
      advance the development of the Company’s proprietary cell line and adenovector
      technology for the generation of countermeasure vaccines and anti-viral agents
      to prevent the spread of FMD.





**Malaria.** With
        our
        collaborators, we are generating vaccine candidates for the prevention of
        malaria. We have produced clinical supplies of a multi-antigen vaccine candidate
        and, under the auspices of the U.S. Naval Medical Research Center (NMRC),
        a
        Phase I/II clinical study was initiated in January 2007. Data from the low
        dose
        cohort in this trial were presented at the Malaria Vaccines for the World
        Conference at the Royal Society of Medicine in London in September 2007,
        and
        showed that, at this low dose, this vaccine was well tolerated and induced
        strong T-cell responses against the target antigens in all volunteers.
        Initiation of the vaccination of volunteers in the high dose cohort has begun.
        Additionally, a five antigen vaccine is being developed in collaboration
        with
        PATH’s Malaria Vaccine Initiative (MVI) and the NMRC. This vaccine is currently
        in preclinical testing. There are currently over 300 million cases of malaria
        in
        the world each year typically resulting in over 2 million deaths annually,
        mostly among children.





We
      have
      entered into the following agreements related to our malaria vaccine
      program:





·
              **U.S.
                  Naval Medical Research Center (NMRC).**In
                  January 2003, we entered into a collaboration with the NMRC, which
                  included a Collaborative Research and Development Agreement (CRADA)
                  and a
                  2-year, $1.9 million contract to develop and construct vaccines
                  against
                  malaria and dengue virus using our proprietary adenovector technologies
                  and production cell line. Under the CRADA, NMRC will provide the
                  Company
                  with optimized malaria genes to be used in the development of the
                  adenovector-based vaccines as well as provide preclinical evaluation
                  of
                  the vaccine candidates.
                
                In
                  January 2005, we signed a 1-year, $1.6 million fixed price contract
                  for
                  the production of malaria vaccines under current Good Manufacturing
                  Practices (cGMP) standards. The NMRC tested the vaccine candidates
                  in
                  preclinical and animal models to assess safety and effectiveness.
                  In
                  conjunction with the preclinical evaluation of the vaccine, we
                  provided
                  regulatory support to NMRC for an Investigational New Drug application
                  (IND) with the FDA. A Phase I/II clinical trial being conducted
                  and funded
                  by NMRC was initiated in January 2007.
                
                In
                  September 2007, the Company entered into a CRADA with the U.S.
                  Military
                  Malaria Vaccine Program at the Walter Reed Army Institute of Research
                  and
                  the NMRC for the development and preclinical testing of a malaria
                  vaccine
                  candidate against*Plasmodium
                  vivax (P. vivax)*.
                  More than 50 percent of malaria cases in U.S. military personnel
                  are
                  caused by*P.
                  vivax*,
                  which is debilitating upon primary infection and can cause recurrent
                  illness years after infection occurs. This malaria strain has a
                  significant negative impact on world economic productivity and
                  is a threat
                  to military preparedness.




8




·
            **PATH’s
                Malaria Vaccine Initiative (MVI).**In
                March 2004, the Company signed a 2-year, $2.6 million contract for
                the
                development, production, and evaluation of vaccines against malaria.
                Under
                the contract, the Company is responsible for constructing
                adenovector-based vaccine candidates using its proprietary cell line
                and
                second-generation adenovector technology. The contract includes $547,000
                for work to be performed under a separate CRADA with the Navy Medical
                Research Center (NMRC). Under the CRADA, NMRC will provide the Company
                with optimized malaria genes to be used in the development of the
                adenovector vaccines as well as provide preclinical evaluation of
                the
                vaccine candidates. In August 2006, contract funding was increased
                to
                $3,164,000 and the term was extended through August 2007.





In
        May
        2007, the Company amended and extended its existing Collaborative
        Research, Development and Supply Agreementwith MVI. The amendment
        included up to $750,000 in additional funding in 2007 to continue advancing
        a
        new multivalent malaria vaccine toward clinical evaluation. We also received
        additional funding of approximately $72,000 under separate amendments in
        September 2007.





**Global
        HIV Vaccine** .
        With
        our collaborators, we are developing and providing adenovector-based vaccine
        candidates targeted against the major strains of HIV present in the world.
        The
        Vaccine Research Center (VRC) has completed multiple Phase I and Phase IIa
        clinical trials involving a vaccine candidate, including an international
        480
        subject study. In addition, this vaccine candidate is being tested as a
        therapeutic vaccine in a 15 subject, Phase I study with the objective to
        determine safety and collect evidence of efficacy as measured by immunogenicity
        and reduction in viral load. GenVec manufactured late-stage clinical supplies
        for a proof-of-concept efficacy trial. This study is to be conducted and
        funded
        by the National Institute of Allergy and Infectious Diseases (NIAID) and
        its
        collaborators.





We
      have
      entered into the following agreements related to our HIV vaccine
      program:





·
            **National
                Institute of Allergy and Infectious Diseases (NIAID) of the National
                Institutes of Health (NIH).**In
                December 2001, the Vaccine Research Center (VRC) at the NIAID selected
                the
                Company to collaborate in the development of a worldwide preventative
                HIV
                vaccine candidate. This collaboration was expanded to include the
                development of a SARS vaccine candidate (April 2003) and an influenza
                vaccine candidate (February 2006). The Company has a cost-plus fixed
                fee
                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 six
                option
                years. During the fourth quarter of 2007, the program entered its
                sixth
                option year, resulting in additional committed funding for fiscal
                year
                2008 of $1.9 million. As a result of this funding, the VRC contract
                now
                has a total value of approximately $55 million since it was first
                initiated in 2001.





In
        September 2006, the Company entered into an additional agreement directly
        with
        NIAID that provides up to $52 million over five years, composed of an initial
        $7
        million commitment with an additional $45 million remaining if NIAID exercises
        its annual renewal options. Under the agreement, the Company will support
        the
        transfer of its manufacturing and purification processes to the VRC to further
        clinical development of an HIV vaccine, including development of a larger-scale
        manufacturing and product-release process necessary for further, clinical
        grade
        HIV vaccine production. GenVec will also receive funding for the continued
        development of next-generation HIV vaccine candidates. In connection with
        the
        agreement, the Company granted NIAID a non-exclusive research license for
        the
        Company’s proprietary adenovector, production cell line, manufacturing process,
        and formulation technologies for HIV vaccines. The program consists of a
        base
        year and four option years. During the fourth quarter of 2007, the program
        entered its second year of funding. This resulted in $5.1 million additional
        committed funding for the fiscal year 2008.





9




Revenue
      recognized under this program amounted to $7.2 million in 2007, $13.9 million
      in
      2006, $18.8 million in 2005, and $7.2 million in each of 2004 and
      2003.





·
            **Respiratory
                Syncytial Virus (RSV)**.
                In March 2007, the Company entered into a CRADA with the NIAID, to
                develop
                vaccines for the prevention and treatment of RSV, which can cause
                severe
                lower respiratory tract infections. RSV infections can occur at any
                age,
                but occurs especially among the elderly or among those with compromised
                cardiac, pulmonary, or immune systems. In addition RSV is the single
                most
                important viral cause of lower respiratory infections in infants
                and young
                children. Initial vaccine candidates are in preclinical
                testing.





·
              **HSV-2**.
                  We are developing vaccines for the prevention and treatment of
                  HSV-2, the
                  virus responsible for most cases of genital herpes. In January
                  2008, we
                  received a 2-year $600,000 Phase I Small Business Innovation and
                  Research
                  grant from NIH. This is intended to support work being conducted
                  in a
                  collaborative effort by us, the Vaccine and Infectious Disease
                  Institute
                  at Fred Hutchinson Cancer Research Center, and the University of
                  Washington.





·
            **Seasonal
                and pandemic influenza.**We
                have****collaborated
                with the VRC to develop and supply potential vaccine candidates for
                seasonal and pandemic flu. Initial candidates are in preclinical
                testing.





**TECHNOLOGY
      PLATFORM**





**Adenovirus
      Vector Technology.** Our core
      technology is based on the use of modified adenoviruses. Adenoviruses are
      naturally occurring viruses that reproduce in certain tissues, spread, and
      can
      cause ailments such as a form of the common cold. We use modified adenoviruses,
      commonly called adenovectors, to deliver genes to cells. Our product candidates
      combine a gene with an adenovector. We design our vectors so that they cannot
      reproduce themselves or cause disease. This limits toxicity, including unwanted
      effects on target cells and the surrounding tissues. We have multiple
      proprietary versions of adenovectors to suit different applications in
      therapeutic and vaccine products.





When
      administered to tissues, our vectors enter target cells, causing them to produce
      the protein encoded by the inserted gene. In addition, adenovectors can be
      re-engineered to alter their performance characteristics, potentially including
      their ability to selectively deliver genes to targeted tissue.





We
      believe that adenoviruses are an excellent starting point for generating vectors
      because they efficiently deliver 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 generally well tolerated in clinical
                testing when administered locally. Thousands of patients have been
                treated
                with adenovectors with very few serious adverse events related to
                these
                vectors.





We
      believe that our differentiated gene delivery technology enables us
      to:





·
            Rapidly
                put genes or antigens into vectors to evaluate function and usefulness
                in
                therapy;


·
            Deliver
                our product candidates to specific organs or cell types to avoid
                systemic
                exposure;


·
            Achieve
                efficient delivery of gene or antigen to, and stimulate protein
                expressions in, target cells;


·
            Control
                the amount and duration of therapeutic protein production to allow
                flexibility in treating different diseases;
                and


·
            Scale
                our manufacturing process for commercial
                production.




10





**Local
      delivery and expression of genes.** 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 product candidates
      into diseased tissue allows us to increase effectiveness by achieving high
      concentrations of the protein at disease sites while improving safety by
      avoiding exposure throughout the body. For example, we have used percutaneous
      injection to administer TNFerade directly to tumors.





We
      believe 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.





We
      have
      developed 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 first disable the normal binding of vectors to 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 such vectors. This technology is being used to develop
      second-generation oncology drugs
      and vaccine candidates.





**New
      Adenovector Platforms.** As part
      of our vaccine collaborations, we have generated vectors based on different
      serotypes of adenovirus. We do this by using our proprietary production cell
      line 293-ORF6, which supports the growth of all virus and vector serotypes
      tested to date. These vectors have the potential to improve vaccine potency
      and
      to generate mucosal immune responses. In addition, new serotypes of adenovirus
      vectors are being explored as second-generation TNFerade products.





**Control
        of gene expression** .
        Our
        technology also allows us to modify the location, duration, and rate of
        therapeutic gene expression. We alter 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, local production of the TNF a protein
        in cancerous tissue subject to radiation treatment and/or chemotherapy is
        regulated by inserting a specific proprietary promoter that increases protein
        production after radiation and/or chemotherapy.





**INTELLECTUAL
      PROPERTY**





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 and licenses** .
      GenVec
      and its licensors 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 December 31, 2007, GenVec
      holds or has licenses to 272 issued, allowed, or pending patents worldwide,
      91
      of which 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 and
      targeting technology for enhanced target cell selectivity of our product
      candidates; cell lines used to manufacture 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. ****





***TNFerade*** **.** We have
      issued patents and pending patent applications pertaining to the adenovectors,
      the expression control elements used in TNFerade to increase production of
      the
      TNF a protein
      by the TNF a gene
      upon exposure to radiation and/or chemotherapy, and methods of using TNFerade
      for treating disease. We have an exclusive worldwide license to issued U.S.
      patents expiring in 2020 and thereafter 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 issued patents and pending patent applications of third
      parties pertaining to the delivery of adenovectors and the treatment of cancer
      and tumors. It could be alleged that TNFerade conflicts with the issued patents
      as well as patents that may issue on these patent applications. The Company
      has
      taken licenses to patents covering the use of TNFerade from private companies
      and academic institutions that involve the payment of milestones and
      royalties.





11





***AdPEDF
      therapy*** **.** We have
      issued patents, expiring in 2020 in the U.S., and pending patent applications
      pertaining to particular adenovectors and methods of use thereof, utilized
      in
      conjunction with our AdPEDF product program. However, we are aware of issued
      patents and pending patent applications of third 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.





***Targeted
      vectors.*** We have
      issued patents, expiring in 2014 and thereafter, and pending patent applications
      covering our technology that allow for the delivery of genes in adenovectors
      to
      essentially all cell types, as well as our targeted vectors, which are designed
      for the purpose of creating product candidates that deliver genes in
      adenovectors only to selected cells. We are aware, however, of issued patents
      and pending patent applications of third parties relating to such vectors.
      It
      could be alleged that our targeted vectors conflict with such existing or future
      patents.





***Licenses
      to genes.*** To
      create
      our product candidates, we combine our vectors with genes intended to produce
      proteins with therapeutic potential. We have secured licenses to applicable
      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 for our lead product candidates
      include:





**SOURCE**
            ****
            **GENE**
            ****
            **NATURE
                OF LICENSE**Scios,
                Inc.
            
            VEGF121
            
            Worldwide,
                exclusive for gene therapy applicationsNorthwestern
                University/NIH
            
            PEDF
            
            Worldwide,
                exclusive for ocular gene therapy applicationsBaylor
                College of Medicine
            
            Atoh1
            
            Worldwide,
                exclusive for gene therapy
                applications





Any
      of
      our licenses may be terminated by the licensor if we are in material breach
      of a
      term or condition of the particular license agreement, or if we become
      insolvent. In addition, some of our licenses require us to achieve specific
      milestones.





***Production,
      purification, quality assessment, and formulation
      technology*** **.** We have
      issued patents, expiring in 2019 and thereafter, and pending patent applications
      pertaining to the production, purification, quality assessment, and formulation
      of our product candidates. In particular, we have issued patents covering 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 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.





12




We
      anticipate that we and our current and future licensors 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.





Certain
      patents pertaining to our product candidates may be eligible for Patent Term
      Extension under 35 U.S.C. § 156. The term of any patent which claims a human
      drug product (including human biological products), a method of using a drug
      product, or a method of manufacturing a drug product is eligible for an
      extension to “restore” that portion of the patent term that has been “lost” as a
      result of FDA review subject to certain limitations.





***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.





**MANUFACTURING
      AND SUPPLY**





**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 vectors and the procedures for their production
      and purification enable us to minimize the presence of contaminants. We believe
      our proprietary positions provide a competitive advantage in the following
      areas:





·
              ***Production
                  and Scale-Up*****.**We
                  produce our adenovectors using cell lines grown under standardized
                  and
                  controlled conditions. We have developed specialized proprietary
                  cell
                  lines for production of our vectors. We have designed our production
                  processes to be scalable for commercial production and to reduce
                  the
                  potential for contamination.


·
            ***Purification*****.**We
                have proprietary methods for the purification of our vectors that
                we
                believe are scalable to commercial levels as well as suitable 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 physical characteristics 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 a novel product formulation that improves the stability
                of
                our vectors and is covered by issued U.S. patents. Our formulation
                allows
                products to be conveniently stored, shipped, and used. For research
                purposes, our formulation enhances the ease and reproducibility of
                testing.





**Manufacturing
      Strategy.** We
      are
      developing our capability to use third party manufacturers for cGMP production
      of our product candidates for late stage clinical trials. Our research and
      development facility is located in Gaithersburg, Maryland where we have
      established laboratories and staff to support the non-cGMP production and
      process development of more advanced manufacturing processes and product
      characterization methods for our product candidates. We believe many of the
      production and assay technologies that have been developed for TNFerade, and
      more recently under our HIV vaccine contract with NIH, are 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. Any plans to expand our internal manufacturing capabilities at
      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, and projected commercial needs will
      require significant resources and will be subject to ongoing government approval
      and oversight.





13




We
      currently have two suppliers for certain of our manufacturing components,
      including components necessary to produce TNFerade. Currently we procure raw
      materials, including specialized components 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. We have plans in place to develop more than one supplier for
      each of the critical supplies for a product candidate before the time that
      such
      product candidate is commercialized.





On
        January 18, 2008, we entered into a manufacturing development agreement with
        Cobra Biomanufacturing Plc (“Cobra”) for TNFerade. The manufacturing
        development agreement covers technology transfer, scale-up, and validation
        of
        the manufacturing process for TNFerade through cGMP consistency lots that
        will
        be produced at Cobra’s facility in Oxford, United Kingdom.





**OUR
      COMPETITION**





Competition
      in the discovery and development of new methods for treating disease is intense.
      We face, and will continue to face, intense competition from pharmaceutical
      and
      biotechnology companies, as well as academic and research institutions and
      government agencies both in the United States and abroad. We face significant
      competition from organizations that are pursuing the same or similar
      technologies used by us in our drug discovery efforts and from organizations
      that are developing pharmaceuticals that are competitive with our potential
      therapeutic and vaccine product candidates. 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.





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. Various companies are developing biopharmaceutical products that
      potentially compete with our product candidates. These include, but are not
      limited to, Introgen Therapeutics, Inc., Schering-Plough Corporation, Ark
      Therapeutics and Biogen-Idec, all of which are developing adenoviral vectors
      to
      treat cancer. In addition, Alcon Laboratories, Inc., Allergan, Inc., Novartis
      Pharmaceuticals Division, and Regeneron Pharmaceuticals, Inc. are developing
      inhibitors of blood vessel growth to treat macular degeneration. These product
      candidates are in a later stage of clinical development. Genentech, Inc.
      received FDA approval in June 2006 for Lucentis â ,
      a new
      drug to treat age-related macular degeneration.





We
        believe our competitive success will be based on the efficacy and safety
        of our
        products, as well as 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.





**GOVERNMENT
      REGULATION**





**Regulation
      of biological products.** The
      research, development, testing, manufacture, quality, safety, effectiveness,
      labeling, packaging, storage, approval, marketing, and advertising and promotion
      of any biological products developed by us or our collaborators is subject
      to
      regulation by federal, state, local, and foreign governmental authorities.
      In
      the United States, new drugs are subject to extensive regulation under the
      Federal Food, Drug, and Cosmetic Act, and biological products, such as TNFerade
      and AdPEDF and vaccines, are subject to regulation both under provisions of
      that
      Act and under the Public Health Services Act. The process of obtaining FDA
      approval for a new product is costly and time-consuming, and the outcome is
      not
      guaranteed. If approved, drug products are subject to ongoing regulation, and
      maintaining compliance with appropriate federal, state, local, and foreign
      statutes and regulations will require the expenditure of substantial time and
      financial resources.




14




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





·
            Performance
                of preclinical (animal and laboratory)
                tests;


·
            Submission
                to the FDA of an Investigational New Drug (IND) application, 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 investigational product in the intended
                target
                population for each indication for which approval is
                sought;


·
            Performance
                of a consistent and reproducible manufacturing process intended for
                commercial use;


·
            Submission
                to the FDA of a Biologics License Application (BLA);
                and


·
            FDA
                approval of the BLA before any commercial sale or shipment of the
                biologic.





Preclinical
      studies may take several years to complete. The results of these studies,
      together with manufacturing information and analytical data, are submitted
      as
      part of an IND application to the FDA. The FDA must review the IND prior to
      the
      commencement of human clinical trials. Unless the FDA raises concerns (such
      as
      concerns that human research subjects will be exposed to unreasonable risks),
      the IND will become effective 30 days following its receipt by the FDA, and
      the
      clinical trials covered by the IND may commence.





Clinical
      trials typically are conducted in three sequential phases, which often overlap.
      In Phase I, a drug typically is studied in a small number of healthy volunteers
      or patients to test the drug for safety or adverse effects, dosage tolerance,
      absorption, metabolism, excretion, and clinical pharmacology. Phase II involves
      clinical trials in the targeted patient population to determine the
      effectiveness of the drug for specific, targeted indications, determine dosage
      tolerance and optimal dosage, and gather additional safety data. Phase III
      clinical trials are commonly referred to as pivotal or registrational studies.
      These trials are conducted to further evaluate dosage, to provide substantial
      evidence of clinical efficacy, and to further test for safety in an expanded
      and
      diverse patient population. Each phase may take several years to complete.





The
      conduct of the clinical trials is subject to extensive regulation, including
      compliance with good clinical practice regulations and guidelines, obtaining
      informed patient consent, sponsor monitoring, and auditing of the clinical,
      laboratory and product manufacturing sites, and review and approval of each
      study by an independent institutional review board (IRB) for each site proposing
      to conduct the clinical trial. The FDA, the IRB, or the sponsor may, at its
      discretion, suspend or terminate a clinical trial at any time on various
      grounds, including a finding that the subjects or patients are being exposed
      to
      an unacceptable health risk.




Promising
      data in early-stage clinical trials does not necessarily assure success in
      later-stage clinical trials. The FDA may request that additional clinical trials
      be conducted as a condition to product approval. Additionally, new government
      requirements may be established that could delay or prevent regulatory approval
      of our products under development.





After
      the
      completion of the required clinical trials, if we believe the data indicate
      that
      the biologic product is safe and effective, a BLA is prepared and submitted
      to
      the FDA. This process takes substantial time and effort, and the FDA may refuse
      to file the BLA and request additional information, in which case, the
      application must be resubmitted with the supplemental information. Once a BLA
      is
      deemed filed by FDA, there is no guarantee that the FDA will approve the
      application. The FDA has substantial discretion in the approval process and
      may
      disagree with our interpretation of the preclinical or clinical data and request
      additional data and information, which could significantly delay, limit, or
      even
      prevent regulatory approval. As part of this review, the FDA may refer the
      application to an appropriate advisory committee, typically a panel of
      physicians, for review, evaluation, and an approval recommendation. Although
      the
      FDA is not bound by the opinion of the advisory committee, advisory committee
      discussions may further delay, limit, or prevent approval.




15




If
      FDA
      evaluations of the BLA are favorable, the FDA may issue an approval letter
      or,
      in some cases, a “Complete Response Letter” followed by an approval letter. A
      Complete Response Letter, commonly referred to as an “approvable” letter,
      generally contains a statement of specific conditions that must be met in order
      to secure final approval of the BLA. If and when those conditions have been
      met
      to the FDA’s satisfaction, the FDA will typically issue an approval letter. An
      approval letter authorizes commercial marketing of the drug with specific
      prescribing information for specific indications.





Prior
      to
      granting approval, the FDA generally conducts an inspection of the facilities,
      including third-party contract facilities, that will be involved in the
      manufacture, production, packaging, testing, and control of the drug substance
      and finished drug product for cGMP compliance. The FDA will not approve the
      BLA
      unless cGMP compliance is satisfactory. In addition, each manufacturing
      establishment must be registered with the FDA and is subject to periodic FDA
      inspection. To supply products for use either in the United States or outside
      the U.S., including for investigation in clinical trials, domestic, and foreign
      manufacturing establishments, including third-party facilities, must comply
      with
      cGMP regulations and are subject to periodic inspection by the corresponding
      regulatory agencies in their home country under reciprocal agreements with
      the
      FDA or by the FDA.





After
      a
      biological product is approved, it is subject to ongoing regulation and must
      comply with requirements relating to manufacturing, labeling, packaging, adverse
      event reporting, storage, advertising, promotion, distribution and
      recordkeeping. Additionally, as a condition of approval of a BLA, the FDA may
      require post-approval testing (referred to as Phase IV clinical trials) and
      surveillance to monitor the product’s safety or efficacy. In addition, holders
      of an approved BLA are required to keep extensive records, to report certain
      adverse reactions and production deviations and problems to the FDA, to provide
      updated safety and efficacy information, and to comply with requirements
      concerning advertising and promotional labeling for their products. Failure
      to
      comply with the regulatory requirements of the FDA and other applicable U.S.
      and
      foreign regulatory authorities could result in administrative or judicially
      imposed sanctions or other setbacks, including warning letters, restrictions
      on
      the product, product recalls, suspension or withdrawal of approval, seizures,
      injunctions, civil fines, and criminal sanctions.




Furthermore,
      if the FDA becomes aware of new safety information, the agency may require
      post-approval studies or clinical trials to investigate known serious risks
      or
      signals of serious risks, or in response to the occurrence of unexpected serious
      risks. If required to conduct a post-approval study, periodic status reports
      must be submitted to the FDA. Failure to conduct such post-approval studies
      in a
      timely manner may result in substantial civil fines. In addition, newly
      discovered or developed safety or efficacy data may require changes to an
      approved product’s distribution or labeling, including the addition of new
      warnings or contraindications.





In
      addition to regulatory approvals that must be obtained in the United States,
      a
      product is also subject to regulatory approval in other countries in which
      it is
      intended to be marketed. No such product can be marketed in a country until
      the
      regulatory authorities of that country have approved an appropriate license
      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.





Our
      FMD
      vaccine will also require approval prior to commercialization. In the United
      States, governmental regulation of animal health products is primarily provided
      by two agencies: the USDA and the FDA. Vaccines for animals are considered
      veterinary biologics and are regulated by the Center for Veterinary Biologics,
      or CVB, of the USDA under the auspices of the Virus-Serum-Toxin Act.





**Reimbursement
        of pharmaceutical products.** If
        and
        when our products reach commercialization, insurance companies, health
        maintenance organizations, other third-party payors and federal and state
        governments will be the primary payors of our products. The largest payor
        in
        this group will probably be the Centers for Medicare and Medicaid Services
        (CMS)
        because this is the federal agency that administers the Medicare program.
        Under
        Medicare, there are different reimbursement methodologies for certain drugs
        and
        biologicals that depend on the site of service. For physician-administered
        drugs
        and biologicals furnished in a physician’s office, currently there are two
        methodologies. If the physician purchases the drug or biological, CMS will
        reimburse the physician based upon that drug or biological’s Average Sales Price
        (ASP) plus 6 percent. The average sales price is then determined by CMS based
        upon information reported by manufacturers. As an alternative to buying drugs
        and biologicals from the manufacturer, physicians can enroll in the Competitive
        Acquisition Program (CAP) to receive necessary drugs and biologicals from
        a
        third party vendor. These third party vendors contract with CMS to provide
        drugs
        and biologicals to physicians who voluntarily enroll in the CAP. For many
        drugs
        and biologicals furnished in a hospital outpatient department, the current
        Medicare payment is ASP plus 5 percent. This payment level is subject to
        change
        each calendar year.




16




Effective
      January 1, 2006, an expanded prescription drug benefit for all Medicare
      beneficiaries known as Medicare Part D commenced to provide Medicare
      beneficiaries with drug coverage for self-administered drugs and biologicals
      and
      other drugs and biologicals not covered by Medicare, including many vaccines.
      This is a voluntary benefit that is being implemented through private plans
      under contractual arrangements with the federal government. Like pharmaceutical
      coverage through private health insurance, Medicare Part D plans establish
      formularies and use other utilization management tools when determining the
      drugs and biologicals that are offered by each plan. These formularies can
      change on an annual basis, subject to federal governmental review. These plans
      may also require beneficiaries to provide out-of-pocket payments for such
      products. Effective
      January 1, 2008, private Medicare Part D plans will pay physicians one payment
      that includes both the administration cost and the cost of the vaccine for
      those
      vaccines that are not already covered by law under Medicare.





Currently,
      federal legislation requires pharmaceutical manufacturers to pay prescribed
      rebates on certain drugs to enable them to be eligible for reimbursement under
      certain public health care programs. Various states have adopted mechanisms
      under Medicaid that seek to control drug reimbursement, including by disfavoring
      certain higher priced drugs and by seeking supplemental rebates from
      manufacturers. Private insurers may also seek to control health care costs
      through the various means by which they pay for drugs and biologicals. Managed
      care has also become a potent force in the market place that increases downward
      pressure on the prices of pharmaceutical products. We anticipate that these
      programs will still be effect when we commercialize our products.





**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.





If
      and
      when any of our products become commercialized, we could be subject to
      healthcare fraud and abuse regulation and enforcement by both the federal
      government and the states in which we conduct our business. The healthcare
      fraud
      and abuse laws and regulations that may affect our ability to operate
      include:




·
            the
                federal healthcare programs’ Anti-Kickback Law, which prohibits, among
                other things, persons orentitiesfrom soliciting, receiving, offering or providing remuneration, directly
                or indirectly, in return for or to induce either the referral of
                an
                individual for, or the purchase order or recommendation of, any item
                or
                services for which payment may be made under a federal healthcare
                program
                such as the Medicare and Medicaid programs;




·
            federal
                false claims laws which prohibit, among other things, individuals
                or
                entities from knowinglypresenting,
                or causing to be presented, claims for payment from Medicare, Medicaid,
                or
                other third-party payers that are false or fraudulent, and which
                may apply
                to entities like us to the extent that our interactions with customers
                may
                affect their billing or coding
                practices;




·
            the
                federal Health Insurance Portability and Accountability Act of 1996
                (“HIPAA”) which established new federal crimes for knowingly and willfully
                executing a scheme to defraud any healthcare benefit program or making
                false statements in connection with the delivery of or payment for
                healthcare benefits, items or services;
                and




·
            state
                law equivalents of each of the above federal laws, such as anti-kickback
                and false claims laws which may apply to items or services reimbursed
                by
                any third-party payer, including commercial
                insurers.




17




**EXECUTIVE
      OFFICERS OF THE REGISTRANT**





**NAME**
            ****
            **AGE**
            
            **PRESENT
                POSITION WITH THE REGISTRANT**Paul
                H. Fischer, Ph.D.
            
            58
            
            President
                and Chief Executive OfficerDouglas
                J. Swirsky
            
            38
            
            Sr.
                Vice President, Chief Financial Officer, Treasurer and Corporate
                SecretaryMark
                O. Thornton, M.D, MPH, Ph.D.
            
            50
            
            Sr.
                Vice President, Product DevelopmentC.
                Richter King, Ph.D.
            
            53
            
            Sr.
                Vice President, ResearchBryan
                T. Butman, Ph.D*.*
            
            55
            
            Sr.
                Vice President, Vector Operations





The
      Board
      of Directors appoints all executive officers annually. There is no family
      relationship between or among any of the executive officers or directors, or
      any
      arrangement or understandings pursuant to which the officers were
      appointed.





**Paul
      H. Fischer, Ph.D** . serves
      as President and Chief Executive Officer. Dr. Fischer has served as President
      and Chief Executive Officer and as a director of the Company since 1996. Prior
      to joining GenVec, he was Executive Vice President of Research and Development
      with Oncologix, Inc., (now Antigenics, Inc.) a biotechnology company. Previous
      experience included Manager, Cancer Research at Pfizer, Inc., a pharmaceutical
      company. Dr. Fischer received his B.S. in Biology from the University of Denver
      and his Ph.D. in Pharmacology from the University of California at San
      Francisco. Dr. Fischer performed post-doctoral research in Pharmacology at
      Yale University School of Medicine. He was an Assistant Professor of
      Pharmacology at the University of Missouri, School of Medicine and an
      Associate Professor of Human Oncology at the University of Wisconsin, prior
      to
      joining Pfizer. Dr. Fischer also serves on numerous community, academic and
      professional organizations and Boards.





**Douglas
        J. Swirsky** joined
        GenVec in 2006 and serves as Senior Vice President, Chief Financial Officer,
        Treasurer and Corporate Secretary. Prior to joining GenVec, Mr. Swirsky was
        a Managing Director and the Head of Life Sciences Investment Banking at Stifel
        Nicolaus from 2005 to 2006 and held investment banking positions at Legg
        Mason
        from 2002 until Stifel Financial’s acquisition of the Legg Mason Capital Markets
        business in 2005. Mr. Swirsky, a Certified Public Accountant and a CFA
        charterholder, has also previously held investment banking positions at UBS,
        PaineWebber and Morgan Stanley. His experience also includes positions in
        public accounting and consulting. Mr. Swirsky received his B.S. in
        Business Administration from Boston University and his M.B.A. from the
        Kellogg School of Management at Northwestern University.





**Mark
      O. Thornton, M.D., M.P.H., Ph.D.**  joined
      GenVec in 2006 as Senior Vice President of Clinical Development. Prior to
      joining GenVec, Dr. Thornton was Managing Director, Clinical and Regulatory
      Affairs at Angiotech Pharmaceuticals, Inc. from 2005 to 2006, Chief Medical
      Officer at ZioPharm, Inc. from 2004 to 2005 and Medical Officer at the Food
      and
      Drug Administration (FDA) from 2001 to 2004. Dr. Thornton has divided his
      15-year career at FDA and in the biotechnology industry equally between oncology
      and infectious disease biologics clinical development. At the FDA, he was
      on the clinical review team for Erbitux® for its initial colon cancer
      indication, and Pegasys® for its Hepatitis C indication. At the FDA he also led
      the initial efforts to establish the FDA Gene Therapy Patient Tracking System
      and published on the topic of optimizing regulatory pathways for cancer
      vaccines. In industry, Dr. Thornton has performed Phase I-III clinical
      trials in both oncology and infectious disease settings, and successfully
      submitted PLAs for CertivaTM while at North American Vaccine and WinRho® while at
      Univax Biologics.





**C.
      Richter King, Ph.D.** serves
      as Senior Vice President of Research, and previously as 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. 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 Johns Hopkins University.




18




**Bryan
        T. Butman, Ph.D** ***.*** has
        served as our Senior Vice President of Vector Operations since January 2006.
        He
        joined GenVec in 1999 and previously served as Director of Quality and
        Analytical Sciences from 1999 to 2002, Vice President of Quality from 2002
        to
        2005, and Vice President of Vector Operations from 2005 to 2006. Prior to
        joining GenVec, Dr. Butman was Executive Director of Diagnostic Product Research
        and Development with INTRACEL Corporation, a biotechnology company that
        originated from AKZO-Nobel, NV. During his 15-year career with INTRACEL,
        Dr.
        Butman developed FDA-regulated products in the areas of oncology, infectious
        disease, cardiovascular disease, and hematology. He began his product
        development career in 1983 as a Senior Scientist with Warner-Lambert, Co.
        Dr.
        Butman holds a Ph.D. in Biological Sciences from Wayne State University
        (Detroit, MI).





**EMPLOYEES**





As
      of
      February 29, 2008, we had 119 full-time employees, 19 of whom hold M.D. or
      Ph.D.
      degrees and 43 of whom hold other advanced degrees. Of our total workforce,
      92
      are engaged primarily in research and development activities and 27 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, our telephone number
      at
      that location is (240) 632-0740.





**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 website as soon as reasonably practicable after we electronically file
      them
      with or furnish them to the U.S. Securities and Exchange Commission. Our website
      also includes copies or links to selected published studies and posters of
      presentations, within the limits of copyright law and practicability, which
      contain additional information about clinical trials of our product
      candidates.





**ITEM
      1A.**  **RISK
      FACTORS**





This
      Form
      10-K contains forward-looking information based on our current expectations.
      Because our actual results may differ materially from any forward-looking
      statements made by GenVec, this section includes a discussion of important
      factors that could affect our actual future results, including, but not limited
      to, our product development programs, contract revenues, expenses, net losses
      and earnings per share.





**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 $18.7 million for the year ended December 31, 2007. As of December
      31, 2007, we had an accumulated deficit of approximately $187.6 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 are 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.




19


**We
      will need to raise additional capital to operate our business, which may not
      be
      available to us on acceptable terms or at all.**





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 from these
      products. We will require substantial additional funds to conduct research
      and
      development activities, preclinical studies, clinical trials and other
      activities prior to the commercialization of any potential products, and our
      ability to access capital depends on several factors beyond our control. 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. Our actual capital requirements will depend on, and could increase
      as a result of, many factors, including but not limited to:





·
            the
                progress and scope of our internally funded research, development,
                clinical, manufacturing and commercialization activities;


·
            our
                ability to establish new collaborations and the terms of those
                collaborations;


·
            competing
                technological and market
                developments;


·
            the
                time and cost of regulatory approvals;


·
            the
                extent to which we choose to commercialize our products internally;


·
            the
                costs we incur in obtaining, defending and enforcing patent and other
                proprietary rights or gaining the freedom to operate under the patents
                of
                others; and


·
            the
                extent to which we choose to develop our manufacturing
                capability.





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.
      From time to time, we may seek to access the public or private debt and equity
      markets. We also may seek to raise additional capital through outlicensing
      technologies or third-party collaborations. Alternatively, we may need to seek
      funds through arrangements with collaborative partners or others that require
      us
      to relinquish rights to technologies or product candidates that we would
      otherwise seek to develop or commercialize ourselves. These arrangements could
      harm our business, results of operations, financial condition, cash flow or
      future prospects.





If
      we do
      not succeed in raising additional funds on acceptable terms, we may be required
      to delay, reduce the scope of, or eliminate one or more of our research,
      development, manufacturing or clinical activities or be required to sell or
      merge the company or otherwise substantially modify or cease some or all of
      our
      current operations.





**We
        are a clinical stage company deploying unproven technologies, and we may
        never
        be able to develop, obtain regulatory approval of, or market any of our product
        candidates.**





Gene-based
      products 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. In addition, no gene therapy product has
      received regulatory approval in the United States. To date, none of our product
      candidates has been approved for sale in the United States or elsewhere.
      Gene-based products may be susceptible to various risks, including undesirable
      and unintended side effects from genes or the delivery systems, unintended
      immune responses, inadequate therapeutic efficacy, or other characteristics
      that
      may prevent or limit their approval or commercial use. Successful products
      require significant development and investment, including a lengthy and
      uncertain period of testing to show their safety and effectiveness before their
      regulatory approval or commercialization. We have not proven our ability to
      develop, obtain regulatory approval of, or commercialize gene-based medicines
      or
      vaccines. We may be unable to successfully select those genes or antigens with
      the most potential for commercial development.




20




**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 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 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 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, the FDA has not approved a gene therapy product for sale in
        the
        United States. 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 continuing oversight by Institutional Review Boards (IRB) and
        the FDA. Clinical trials are also subject to:





·
            informed
                consent;


·
            good
                clinical practices (GCP); and


·
              potential
                  suspension or termination by us, the IRB, or the FDA at any time
                  if, among
                  other reasons, 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 IND 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. For instance, the FDA Amendments
      Act
      of 2007 imposed additional obligations on pharmaceutical companies and delegated
      more enforcement authority to the FDA in the area of drug safety. Key elements
      of this legislation give the FDA new authority to (1) require that companies
      conduct post-marketing safety studies of drugs, (2) impose certain drug labeling
      changes relating to safety, (3) mandate risk mitigation measures such as the
      education of healthcare providers and the restricted distribution of medicines,
      and (4) require companies to publicly disclose data from clinical
      trials.





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.




21




**Almost
      all of our revenue is derived from agreements with government agencies. These
      agreements are subject to termination and uncertain future
      funding** ***.***




A
        substantial portion of our revenues is dependent upon continued funding of
        U.S.
        government agencies. Any significant reductions in the funding of U.S.
        government agencies or in the funding areas targeted by our businesses could
        materially and adversely affect our business, results of operations and
        financial condition. We have entered into agreements with government agencies,
        such as the NIH, DHS, and NMRC and we intend to continue entering into these
        agreements in the future. Our business is partially dependent on the continued
        performance by these government agencies of their responsibilities under
        these
        agreements, which in turn is dependent upon adequate continued funding of
        the
        agencies and their programs. We have no control over the resources and funding
        government agencies may devote to these agreements, which may be subject
        to
        annual renewal and which generally may be terminated by the government agencies
        at any time. If we fail to satisfy our contractual obligations to deliver
        in the
        manner required by the agreement, the applicable Federal Acquisition Regulations
        allow the government to cancel the agreement in whole or in part, and we
        may be
        required to perform corrective actions, including but not limited to delivering
        to the government any uncompleted or partially completed work. The performance
        of these corrective actions could have a material adverse impact on our
        financial results in the period or periods affected. Government agencies
        may
        fail to perform their responsibilities under these agreements, which could
        materially impact our financial results.





In
      addition, our contract related costs and fees, including allocated indirect
      costs, are subject to audits and adjustments by negotiation between us and
      the
      U.S. government. As part of the audit process, the government audit agency
      verifies that all charges made by a contractor against a contract are legitimate
      and appropriate. Audits may result in recalculation of contract revenues and
      non-reimbursement of some contract costs and fees. Any audits of our contract
      related costs and fees could result in material adjustments to our revenues.
      In
      addition, U.S. government contracts are conditioned upon the continuing
      availability of Congressional appropriations. Congress usually appropriates
      funds on a fiscal year basis even though contract performance may take several
      years. Consequently, at the outset of a major program, the contract is usually
      incrementally funded and additional funds are normally committed to the contract
      by the procuring agency as appropriations are made by Congress for future fiscal
      years. Any failure of such agencies to continue to fund such contracts could
      have a material adverse effect on our business, results of operations and
      financial condition.




We
      apply
      for and have received funding from government agencies under Small Business
      Technology Transfer, or STTR, and Small Business Innovation Research, or SBIR,
      grants. Eligibility of public companies to receive such grants is based on
      size
      and ownership criteria which are under review by the Small Business
      Administration, or SBA. As a result, our eligibility may change in the future,
      and additional funding from this source may not be available.





**Agreements
      with government agencies may lead to claims against us under the Federal False
      Claims Act, and these claims could result in substantial fines and other
      penalties.**





The
      biopharmaceuticals industry is, and in recent years has been, under heightened
      scrutiny as the subject of government investigations and enforcement actions.
      Our Agreements with the U.S. Government are subject to substantial financial
      penalties under the Federal Civil Monetary Penalties Act and the Federal Civil
      False Claims Act. Under the False Claims Act’s “whistleblower” provisions,
      private enforcement of fraud claims against businesses on behalf of the U.S.
      Government has increased due in part to amendments to the False Claims Act
      that
      encourage private individuals to sue on behalf of the government. These
      whistleblower suits, known as qui tam actions, may be filed by private
      individuals, including present and former employees. The False Claims Act
      statute provides for treble damages and up to $11,000 per false claim. If
      our operations are found to be in violation of any of these laws, or any other
      governmental regulations that apply to us, we may be subject to penalties,
      including civil and criminal penalties, damages, fines, exclusion from the
      Medicare and Medicaid programs, and the curtailment or restructuring of our
      operations. Any penalties, damages, fines, exclusions, curtailment, or
      restructuring of our operations could adversely affect our ability to operate
      our business and our financial results.





**We
      have experienced, and may continue to experience, delays in conducting our
      clinical trials.**





Clinical
      trials for the product candidates we are developing may be delayed by many
      factors, including a (i) limited number of, and competition for, suitable
      patients for the particular clinical trial; (ii) slower than expected rate
      of
      patient recruitment and enrollment; and/or (iii) failure of patients to complete
      the trial. We have experienced delays in enrolling patients into our TNFerade
      clinical trials and may have additional delays as we seek to expand enrollment.
      Our ability to enroll appropriate patients for any of our clinical trials also
      may be adversely affected by trials being conducted by our competitors for
      similar disease indications. The failure of any clinical trials to meet
      applicable regulatory standards or the standards of the relevant reviewing
      bodies could cause such trials to be delayed, suspended or terminated, which
      could further delay the development of any of our product candidates. Any such
      delays increase our product development costs, with the possibility that we
      could run out of funding. Delays in one clinical trial also can adversely affect
      our ability to launch clinical trials for similar or different indications.
      Consequently, if such delays are significant they could negatively affect our
      financial results and the commercial prospects for our products **.**





22


Additionally,
      our clinical trials may be suspended or terminated at any time by the FDA,
      an
      IRB, other regulatory authorities, or by us for a variety of reasons, including
      for safety reasons. Any failure or significant delay in completing clinical
      trials for our product candidates could harm our financial results and
      commercial prospects for our product candidates **.**





Any
      clinical trial may fail to produce results satisfactory to the FDA. Preclinical
      and clinical data can be interpreted in different ways, and the FDA may not
      agree with our interpretations, which could delay, limit or prevent regulatory
      approval. Negative or inconclusive results or adverse medical events during
      a
      clinical trial could cause a trial to be delayed or repeated, or a program
      to be
      terminated.





**We
      depend on clinical trial arrangements with public and private medical
      institutions to advance our technology, and the loss of these arrangements
      could
      impair the development of our products.**





We
      have
      arrangements with a number of public and private medical institutions, and
      individual investigators, for the conduct of human clinical trials for our
      clinical product candidates including TNFerade. In some cases, trials may be
      conducted by institutions without our direct control or monitoring. The early
      termination of any of these clinical trial arrangements, the failure of these
      institutions to comply with the regulations and requirements governing clinical
      trials, or reliance upon results of trials that we have not directly conducted
      or monitored could hinder the progress of our clinical trial programs or our
      development decisions. If any of these relationships are terminated, the
      clinical trials might not be completed, and the results might not be
      evaluable.





**Our
      ability to develop, obtain regulatory approval of and commercialize our
      potential products depends, in part, on collaborations with other companies
      and
      government entities. If we are unable to find collaborators, we may not be
      able
      to develop, test, and commercialize our products.**





To
      date,
      we have entered into collaborative agreements only with a limited number of
      companies and government entities, 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.





23


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 affect ownership of 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 their collaborations with us. In certain circumstances we have
      agreed not to conduct independently, or with any third party, certain research
      and development activities that are competitive with the research and
      development activities conducted under our collaborations. Therefore, our
      collaborations may have the effect of limiting the areas of research and
      development 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.





Generally
      under our academic collaborations, we retain the right to non-exclusively or
      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 or license to others the technology for any purpose,
      including the development and commercialization of products that might compete
      with our products.





**If
      we 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.**





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 develop our Gaithersburg manufacturing facilities and processes
      for the manufacture of gene therapy product candidates. Efforts to establish
      capabilities, if pursued, may not meet initial expectations as to scheduling,
      reproducibility, yield, purity, cost, potency, or quality.





If
        we 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 compete 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.





24


**If
      successful large-scale manufacturing of gene-based medicines is not possible,
      we
      may be unable to manufacture enough of our product candidates to achieve
      regulatory approval or market our products.**





Few
      companies to date have shown successful large-scale manufacturing of gene-based
      medicines, each of which has had significantly more resources than we and it
      is
      anticipated that significant challenges will be faced in the scale-up of our
      manufacturing process for commercial production. There are a limited number
      of
      contract manufacturers qualified to perform large-scale manufacturing of
      gene-based medicines. We may be unable to manufacture commercial-scale
      quantities of gene-base medicines or receive appropriate government approvals
      on
      a 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. 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 impact
      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
      and
      another supplier, Cambrex, for custom buffers. The cell culture medium is used
      to grow the cells within which our product candidates are produced. For our
      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 Pall Corporation. 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 raw materials. Any delay or interruption would likely
      lead to a delay or interruption of manufacturing operations, which could
      negatively affect our operations.


25




**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. 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 the government, 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. Our competitors may succeed in:





·
              identifying
                  important genes or delivery mechanisms before we
                  do;


·
            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.





In
      addition, our products may face competition from “generic biologics,” i.e.,
      biologics products that are approved via an abbreviated process, on the basis
      of
      a showing that the product is the same as (or perhaps similar to) our approved
      product, rather than on an independent demonstration of the new product’s safety
      and effectiveness. Although no such abbreviated approval pathway currently
      exists in the U.S. for biologics, representatives of the FDA and members of
      Congress have expressed the view that such approvals should be allowed, and
      federal legislation has been introduced to establish a legal pathway to approve
      generic versions of approved BLA products. If competitors are able to obtain
      marketing approval for generic biologics, our products may become subject to
      additional competition, with the attendant pricing pressure. We also could
      face
      increased litigation with respect to the validity and/or scope of patents
      relating to our products.





**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
      laws, rules, and regulations affecting biotechnology patent protection in the
      United States and other countries are 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.





26


Our
      ability to develop and protect a proprietary position based on biotechnological
      innovations and technologies involving genes and gene delivery systems, methods
      of use, 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 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 particular adenovectors that
      cannot reproduce themselves, and adenovectors modified to alter cell binding
      characteristics, 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. 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.





We
      also
      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 or 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 gene delivery for oncology applications, including through the
      use
      of adenovectors. It could be alleged that our development of our TNFerade
      oncology product candidate conflicts with these patents. We also are aware
      of
      other issued patents and pending patent applications that relate to various
      aspects of our manufacture of our product candidates and systems, including
      TNFerade, and it could be alleged that our manufacture of these 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 parties. In addition, the freedom to use patent searches that have been
      conducted may not have identified all relevant issued patents or 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.





27


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
      we lose our rights to use intellectual property we license from others, or
      those
      rights are not enforceable, then our ability to develop and commercialize our
      product candidates will 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 adenovectors with
      genes intended to produce therapeutic proteins. In most instances we do not
      own
      the patents or patent applications that cover these genes and certain methods
      of
      use thereof which 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 defend and enforce any issued 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 development milestones.





**The
      legal proceedings to obtain, enforce, and defend patents, and litigation of
      third party claims of intellectual property infringement, could require us
      to
      spend money and could impair our operations** .





Our
      success will depend in part on our ability to obtain patent protection for
      our
      products and processes, both in the United States and in other countries. The
      patent positions of biotechnology and pharmaceutical companies, however, can
      be
      highly uncertain and involve complex legal and factual questions. Therefore,
      it
      is difficult to predict the breadth of claims allowed in the biotechnology
      and
      pharmaceutical fields.





Protecting
      intellectual property rights can be expensive and time consuming. Litigation
      may
      be necessary to enforce patents issued to us or to determine the scope and
      validity of third party proprietary rights. Moreover, if a competitor were
      to
      file a patent application claiming technology also invented by us, we would
      have
      to participate in an interference proceeding before the U.S. Patent and
      Trademark Office to determine the priority of invention. We may be drawn into
      interferences with third parties or may have to provoke interferences ourselves
      to challenge third party patent rights to allow us or our licensees to
      commercialize products based on our technologies. Litigation could result in
      substantial costs and diversion of management efforts regardless of the results
      of the litigation. An unfavorable result in litigation could subject us to
      significant liabilities to third parties, require disputed rights to be licensed
      or require us to cease using some technologies.





Our
      products and processes may infringe, or be found to infringe, patents not owned
      or controlled by us. Patents held by others may require us to alter our products
      or processes, obtain licenses, or stop activities. If relevant claims of third
      party patents are upheld as valid and enforceable we could be prevented from
      practicing the subject matter claimed in the patent. In addition, we may be
      required to obtain licenses, redesign our products or processes to avoid
      infringement, or pay money damages. As a result, our business may suffer if
      we
      are not able to obtain licenses at all or on commercially reasonable terms
      to us
      or we are required to redesign our products or processes to avoid infringement.





28


**Adverse
      events in the field of gene therapy may negatively affect regulatory approval
      or
      public perception of our products or product candidates.**





TNFerade
      therapy and most of our other product candidates under development could be
      broadly described as recombinant DNA therapies. A number of clinical trials
      are
      being conducted by other biotechnology and pharmaceutical companies involving
      related therapies, including compounds similar to, or competitive with, our
      product candidates. The announcement of adverse results from these clinical
      trials, such as serious adverse events and unexpected side effects attributable
      to the treatment, or any response by the FDA or other similar regulatory
      authority to such clinical trials, may impede the timing of our clinical trials,
      delay or prevent us from obtaining regulatory approval, impede our ability
      to
      secure additional funding or negatively influence public perception of our
      product candidates. As a result, these conditions could harm our business and
      results of operations and depress the value of our stock.





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





**We
      may face liability claims related to the use or misuse of our drug candidates
      in
      clinical trials. If our insurance coverage is not sufficient, a product
      liability claim against us could adversely affect our
      business.**





We
      may be
      held liable if any product we develop, or any product, that 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.




29




Such
      liability claims may be expensive to defend and may result in large judgments
      or
      settlements against us. We have obtained liability coverage for clinical trials.
      However, we cannot be certain that our insurance policies will be sufficient
      to
      cover all claims that may be made against us. We may need to increase our
      coverage as we progress into late stage clinical trials and/or eventual
      commercial sale. Liability insurance is expensive, difficult to obtain, and
      may
      not be available in the future on acceptable terms.





Generally,
      our clinical trials will be conducted in patients with serious life-threatening
      diseases for whom conventional treatments have been unsuccessful or for whom
      no
      conventional treatment exists, and during the course of treatment, these
      patients could suffer adverse medical effects or die for reasons that may or
      may
      not be related to our drug candidates. Any of these events could result in
      a
      claim of liability. Any such claim against us, regardless of its merit, could
      result in a significant award against us that could materially harm our
      business, financial condition and results of operations.





**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 materials 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.





Although
      we have general liability insurance, these policies contain exclusions from
      insurance against claims arising from pollution from chemical or radioactive
      materials. Our collaborators are working with these types of hazardous materials
      in connectio n
      with
      our collaborations. In the event of a lawsuit or investigation, we could be
      held
      responsible for any injury we or our collaborators cause to persons or property
      by exposure to, or release of, any hazardous materials. Although, we believe
      that we are currently in compliance with all applicable environmental and
      occupational health and safety regulations, compliance with environmental laws
      and regulations may be expensive, and current or future environmental
      regulations may impair our research, development or production
      efforts.





**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
        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, including a reduction in reimbursement rates could cause
        potential corporate collaborators to be less willing or able to pursue research
        and development programs related to our product candidates. We cannot be
        certain
        that, if and when our products become commercialized, the pertinent
        reimbursement amounts or formulary status for our products will be sufficient
        to
        enable us to market and sell our products.





30


**Our
      business involves animal testing and changes in laws, regulations or accepted
      clinical procedures or social pressures could restrict our use of animals in
      testing and adversely affect our research and development efforts.**




Many
      of
      the research and development efforts we sponsor involve the use of laboratory
      animals. Changes in laws, regulations, or accepted clinical procedures may
      adversely affect these research and development efforts. Social pressures that
      would restrict the use of animals in testing or actions against us or our
      partners by groups or individuals opposed to testing using animals could also
      adversely affect these research and development efforts.




In
      addition, preclinical animal studies conducted by us or third parties on our
      behalf may be subject to the United States Department of Agriculture regulations
      for certain animal species. Failure to comply with applicable regulations could
      extend or delay clinical trials conducted for our drug candidates.





**Current
          healthcare laws may negatively affect our ability to obtain patient information
          for research purposes.**


U.S.
      Federal and state laws protect the confidentiality of certain health
      information, in particular individually identifiable information, and restrict
      the use and disclosure of that information. At the federal level, the Department
      of Health and Human Services promulgated health information privacy and security
      rules under the Health Insurance Portability and Accountability Act of 1996,
      or
      HIPAA. These rules protect health information by regulating its use and
      disclosure, including for research purposes. Failure of a HIPAA “covered entity”
(such as a hospital) to comply with HIPAA could constitute a violation of
      federal law, subject to civil and criminal penalties. We are not directly
      subject to HIPAA as a “covered entity,” however. Nevertheless, because conduct
      by a person that may not be prosecuted directly under HIPAA’s criminal
      provisions could potentially be prosecuted under aiding and abetting or
      conspiracy laws, we are unable to determine whether our actions could be subject
      to prosecution in the event of an impermissible disclosure of data to us. In
      addition, many state laws apply to the use and disclosure of health information,
      which could affect the manner in which we conduct our research and development,
      as well as other aspects of our operations. Moreover, such laws are not
      necessarily preempted by HIPAA, in particular those state laws that afford
      greater privacy protection to the individual than HIPAA. Such state laws may
      have their own penalty provisions, which could be applied in the event of an
      unlawful action affecting health information.




**Our
      stock price could continue to be highly volatile and you may not be able to
      resell your shares at or above the price you pay for them.**




The
      market price of our common stock, like that of many other life sciences
      companies, has been and is likely to continue to be highly volatile. From
      January 1, 2007 to December 31, 2007, our stock price has ranged from
      $1.37 to $4.51. The following factors, among others, could have a significant
      impact on the market price of our common stock:




·
            
            the
                results of our preclinical studies and clinical trials or announcements
                regarding our plans for future studies or trials, or those of our
                competitors;




·
            
            evidence
                or lack of evidence of the safety or efficacy of our potential products
                or
                those of our competitors;




·
            
            the
                announcement by us or our competitors of technological innovations
                or new
                products;




·
            
            developments
                concerning our patent or other proprietary rights or those of our
                competitors, including litigation and challenges to our proprietary
                rights;





·
            
            geopolitical
                developments, natural or man-made disease threats, or other events
                beyond
                our control;




31




·
            
            U.S.
                and foreign governmental regulatory actions;




·
            
            changes
                or announcements in reimbursement
                policies;




·
            
            period-to-period
                fluctuations in our operating results;




·
            
            market
                conditions for life science stocks in general;




·
            
            changes
                in the collective short interest in our stock;




·
            
            changes
                in estimates of our performance by securities analysts; and




·
            
            our
                cash balances, need for additional capital, and access to capital.


**Our
          common stock may be delisted from The NASDAQ Global Market, which could
          negatively impact the price of our common stock and our ability to access
          the
          capital markets** .
 
 Our
          common stock is listed on The NASDAQ Global Market. The listing standards
          of The NASDAQ Global Market provide, among other things, that a company
          may be
          delisted if the bid price of its stock drops below $1.00 for a period of
          30
          consecutive business days. Recently our stock has traded below $1.00, and
          if we
          fail to comply with the listing standards
          applicable to issuers listed on The NASDAQ Global Market, our common stock
          may
          be delisted from The NASDAQ Global Market. The delisting of our common
          stock
          would significantly affect the ability of investors to trade our securities
          and
          would significantly negatively affect the value and liquidity of our common
          stock. In addition, the delisting of our common stock could materially
          adversely
          affect our ability to raise capital on terms acceptable to us or at all.
          Delisting from The NASDAQ Global Market could also have other negative
          results,
          including the potential loss of confidence by suppliers and employees,
          the loss
          of institutional investor interest and fewer business development opportunities.




**We
      are at risk of securities class action litigation due to our expected stock
      price volatility.**




In
      the
      past, stockholders have brought securities class action litigation against
      a
      company following a decline in the market price of its securities. This risk
      is
      especially acute for us because life science companies have experienced greater
      than average stock price volatility in recent years and, as a result, have
      been
      subject to, on average, a greater number of securities class action claims
      than
      companies in other industries. To date, we have not been subject to class action
      litigation. However, we may in the future be the target of this litigation.
      Securities litigation could result in substantial costs and divert our
      management’s attention and resources, and could seriously harm our business.





**We
      have not declared any dividends on our common stock to date, and we have no
      intention of declaring dividends in the foreseeable
      future.**




The
      decision to pay cash dividends on our common stock rests with our board of
      directors and will depend on our earnings, unencumbered cash, capital
      requirements and financial condition. We do not anticipate declaring any
      dividends in the foreseeable future, as we intend to use any excess cash to
      fund
      our operations. Investors in our common stock should not expect to receive
      dividend income on their investment, and investors will be dependent on the
      appreciation of our common stock to earn a return on their investment.




**We
      depend on our key technical and management personnel to advance our technology,
      and the loss of these personnel could impair the development of our
      products.**




We
      rely
      and will continue to rely on our key management and scientific staff, all of
      whom are employed at-will. The loss of key personnel or the failure to recruit
      necessary additional qualified personnel could have a material adverse effect
      on
      our business and results of operations. There is intense competition from other
      companies, research and academic institutions and other organizations for
      qualified personnel. We may not be able to continue to attract and retain the
      qualified personnel necessary for the development of our business. If we do
      not
      succeed in retaining and recruiting necessary personnel or developing this
      expertise, our business could suffer significantly.





**We
      have implemented anti-takeover provisions which could discourage or prevent
      a
      takeover, even if an acquisition would be beneficial to our stockholders and
      may
      prevent attempts by our stockholders to replace or remove our current
      management.**




Provisions
      of our amended and restated certificate of incorporation and bylaws, as well
      as
      provisions of Delaware law, could make it more difficult for a third-party
      to
      acquire us, even if doing so would be beneficial to our stockholders. In
      addition, these provisions may frustrate or prevent any attempts by our
      stockholders to replace or remove our current management by making it more
      difficult for stockholders to replace members of our board of directors. Because
      our board of directors is responsible for appointing the members of our
      management team, these provisions could in turn affect any attempt by our
      stockholders to replace current members of our management team. These provisions
      include:




32




·
            
            establishing
                a classified board of directors requiring that members of the board
                be
                elected in different years, which lengthens the time needed to elect
                a new
                majority of the board;




·
            
            authorizing
                the issuance of “blank check” preferred stock that could be issued by our
                board of directors to increase the number of outstanding shares or
                change
                the balance of voting control and thwart a takeover attempt;




·
            
            prohibiting
                cumulative voting in the election of directors, which would otherwise
                allow for less than a majority of stockholders to elect director
                candidates;




·
            
            limiting
                the ability of stockholders to call special meetings of the stockholders;




·
            
            prohibiting
                stockholder action by written consent and requiring all stockholder
                actions to be taken at a meeting of our stockholders; and




·
            
            establishing
                90 to 120 day advance notice requirements for nominations for election
                to
                the board of directors and for proposing matters that can be acted
                upon by
                stockholders at stockholder meetings.




**We
      have adopted a stockholder rights plan that may discourage, delay, or prevent
      a
      merger or acquisition that is beneficial to our stockholders.**




In
      November 2001, our board of directors adopted a stockholder rights plan that
      may
      have the effect of discouraging, delaying or preventing a merger or acquisition
      that is beneficial to our stockholders by diluting the ability of a potential
      acquirer to acquire us. Pursuant to the terms of our plan, when a person or
      group, except under certain circumstances, acquires 20 percent or more of our
      outstanding common stock or 10 business days after commencement or announcement
      of a tender or exchange offer for 20 percent or more of our outstanding common
      stock, the rights (except those rights held by the person or group who has
      acquired or announced an offer to acquire 20 percent or more of our outstanding
      common stock) would generally become exercisable for shares of our common stock
      at a discount. Because the potential acquirer’s rights would not become
      exercisable for our shares of common stock at a discount, the potential acquirer
      would suffer substantial dilution and may lose its ability to acquire us. In
      addition, the existence of the plan itself may deter a potential acquirer from
      acquiring us. As a result, either by operation of the plan or by its potential
      deterrent effect, mergers and acquisitions of us that our stockholders may
      consider in their best interests may not occur.




**The
      issuance of debt or preferred stock could adversely affect our common
      stockholders.**




We
      have
      on file an effective shelf registration statement that allows us to raise up
      to
      $100 million from the sale of common or preferred stock, debt, or warrants
      for
      the purchase of common or preferred stock. The issuance of debt or preferred
      stock could adversely affect the voting power of holders of our common stock,
      and reduce the likelihood that our common stockholders will receive dividend
      payments and payments upon liquidation. The issuance of debt or preferred stock
      could also decrease the market price of our common stock, or have terms and
      conditions that could discourage a takeover or other transaction that might
      involve a premium price for our shares or that our stockholders might believe
      to
      be in their best interests.





**Failure
      to maintain effective internal controls over financial reporting could have
      a
      material adverse effect on our business, operating results and stock
      price.**





Section
      404 of the Sarbanes-Oxley Act of 2002 requires that we include in our annual
      report, a report containing management’s assessment of the effectiveness of our
      internal controls over financial reporting as of the end of our fiscal year
      and
      a statement as to whether or not such internal controls are effective. Such
      report must also contain a statement that our independent registered public
      accounting firm has issued an attestation report on management’s assessment of
      such internal controls.





We
      initially became subject to these requirements for our fiscal year ended
      December 31, 2005. Compliance with these requirements has resulted in, and
      is
      likely to continue to result in, significant costs and the commitment of time
      and operational resources. Growth of our business will necessitate ongoing
      changes to our internal control systems, processes and infrastructure, including
      our information systems. We cannot be certain that our current design for
      internal control over financial reporting, and any modifications necessary
      to
      reflect changes in our business, will be sufficient to enable management or
      our
      independent registered public accounting firm to determine that our internal
      controls are effective for any period, or on an ongoing basis. If we are unable
      to assert that our internal controls over financial reporting are effective
      (or
      if our independent registered public accounting firm is unable to attest that
      our management’s report is fairly stated or they are unable to express an
      opinion on our management’s assessment of the effectiveness of internal controls
      over financial reporting), our business may be harmed. Market perception of
      our
      financial condition and the trading price of our stock may be adversely affected
      and customer perception of our business may suffer.





33


**ITEM1B.**
                    **UNRESOLVED
                        STAFF
                        COMMENTS**





None.





**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 additional space within
      our Gaithersburg, Maryland facilities that can be utilized to accommodate future
      growth. We currently believe that the Gaithersburg facility is sufficient to
      meet our present needs.





**ITEM
              3.**
            **LEGAL
                PROCEEDINGS**





We
      are
      not currently a party to any material legal proceedings.





**ITEM
              4.**
            **SUBMISSION
                OF MATTERS TO A VOTE OF SECURITY HOLDERS**





No
      matters were submitted to a vote of our security holders by the Company during
      the quarter ended December 31, 2007 through the solicitation of proxies or
      otherwise.




34


**PART
      II**





**ITEM
              5.**
            **MARKET
                FOR REGISTRANT'S COMMON EQUITY, RELATED
                STOCKHOLDER** **MATTERS AND ISSUER PURCHASES OF EQUITY
                SECURITIES**




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 Global 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 Global Market for the two most recent years:




**HIGH**
            
            **LOW**First
                Quarter 2007
            
            $
            3.46
            
            $
            2.30Second
                Quarter 2007
            
            $
            4.51
            
            $
            2.35Third
                Quarter 2007
            
            $
            2.57
            
            $
            1.84Fourth
                Quarter 2007
            
            $
            2.82
            
            $
            1.37First
                Quarter 2006
            
            $
            2.29
            
            $
            1.66Second
                Quarter 2006
            
            $
            2.16
            
            $
            1.35Third
                Quarter 2006
            
            $
            1.40
            
            $
            0.92Fourth
                Quarter 2006
            
            $
            2.56
            
            $
            1.09




As
      of
      February 29, 2008, there were approximately 185 stockholders of record of our
      common stock, one of which is Cede & Co., a nominee for Depository Trust
      Company (or “DTC”). All of the shares of common stock held by brokerage firms,
      banks, and other financial institutions as nominees for beneficial owners are
      deposited into participant accounts at DTC, and are, therefore, considered
      to be
      held of record by Cede & Co. as one stockholder.





We
      have
      not paid any cash dividends since our inception and we do not anticipate paying
      any cash dividends in the foreseeable future. We did not repurchase any of
      our
      equity securities during the last fiscal year.




**Unregistered
      Sales of Equity Securities and Use of Proceeds.**




None.





**STOCK
      PERFORMANCE GRAPH**





The
      following graph shows the cumulative total return to our stockholders for the
      Company’s Common Stock from December 31, 2002 through December 31, 2007 as
      compared to (i) an overall stock market index, the NASDAQ Composite Index,
      and
      (ii) a peer group index, the NASDAQ Pharmaceutical Index. The returns were
      calculated assuming that $100 was invested on December 31, 2002 in the Company’s
      Common Stock and in each index, and that all dividends were reinvested. No
      cash
      dividends have been declared on the Company’s Common Stock. The information
      contained in the Stock Performance Graph shall not be deemed to be “soliciting
      material” or to be “filed” with the Securities and Exchange Commission, nor
      shall such information be incorporated by reference into any past or future
      filing under the Securities Act of 1933, as amended, or the Securities Exchange
      Act of 1934, as amended, except to the extent the Company specifically
      incorporates it by reference into any such filing.





The
      following graph is presented in accordance with Securities and Exchange
      Commission requirements. Stockholders are cautioned against drawing any
      conclusions from the data contained therein, as past results are not necessarily
      indicative of future performance.




35




Comparison of 5 year cumulative total return





**GenVec, Inc.**
            
            **NASDAQ Composite**
            
            **NASDAQ Pharmaceutical**12/31/02
            
            $
            100.00
            
            $
            100.00
            
            $
            100.0012/31/03
            
            $
            103.77
            
            $
            149.75
            
            $
            144.8912/31/04
            
            $
            51.26
            
            $
            164.64
            
            $
            160.4612/31/05
            
            $
            51.89
            
            $
            168.60
            
            $
            160.6512/31/06
            
            $
            75.47
            
            $
            187.83
            
            $
            163.4212/31/07
            
            $
            46.23
            
            $
            205.22
            
            $
            154.46




**ITEM
              6.**
            **SELECTED
                FINANCIAL DATA**





The
      following tables set forth our selected financial data for each of the years
      in
      the five-year period ended December 31, 2007. 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.




36




**DECEMBER 31,****SUMMARY STATEMENT OF OPERATIONS:**
              *(in
                  thousands, except per share data)*
            
            **2007**
            
            **2006**
            
            **2005**
            
            **2004**
            
            **2003**Revenue
            
            $
            14,047
            
            $
            18,923
            
            $
            26,554
            
            $
            11,853
            
            $
            10,520Operating
                expenses:Research
                and development
            
            
            26,030
            
            
            29,569
            
            
            30,802
            
            
            23,087
            
            
            23,457General
                and administrative
            
            
            9,349
            
            
            9,604
            
            
            8,333
            
            
            7,884
            
            
            8,405Loss
                on disposal of assets
            
            
            5
            
            
            -
            
            
            1,895
            
            
            2
            
            
            -Total
                operating expenses
            
            
            35,384
            
            
            39,173
            
            
            41,030
            
            
            30,973
            
            
            31,862Operating
                loss
            
            
            (21,337
            )
            
            (20,250
            )
            
            (14,476
            )
            
            (19,120
            )
            
            (21,342
            )Other
                income, net
            
            
            2,629
            
            
            978
            
            
            484
            
            
            226
            
            
            81Net
                loss
            
            $
            (18,708
            )
            $
            (19,272
            )
            $
            (13,992
            )
            $
            (18,894
            )
            $
            (21,261
            )Basic
                and diluted net loss per share
            
            $
            (0.25
            )
            $
            (0.30
            )
            $
            (0.24
            )
            $
            (0.35
            )
            $
            (0.65
            )Shares
                            used in computing of basic and diluted net loss per
                            share
            
            
            74,132
            
            
            64,038
            
            
            57,823
            
            
            54,331
            
            
            32,963


**DECEMBER
                    31,****2007**
                
                **2006**
                
                **2005**
                
                **2004**
                
                **2003****SUMMARY
                    BALANCE SHEET DATA:***(in
                    thousands)*Cash,
                    cash equivalents, and short-term investments
                
                $
                23,660
                
                $
                34,373
                
                $
                31,999
                
                $
                30,763
                
                $
                26,523Working
                    capital
                
                
                17,478
                
                
                29,880
                
                
                30,477
                
                
                26,021
                
                
                20,636Long-term
                    investments
                
                
                --
                
                
                --
                
                
                --
                
                
                2,302
                
                
                13,438Total
                    assets
                
                
                28,348
                
                
                40,168
                
                
                41,901
                
                
                44,071
                
                
                52,684Current
                    portion of debt
                
                
                789
                
                
                754
                
                
                913
                
                
                1,227
                
                
                1,462Long-term
                    debt, less current portion
                
                
                807
                
                
                1,601
                
                
                2,351
                
                
                3,264
                
                
                4,539Accumulated
                    deficit
                
                
                (187,566
                )
                
                (168,858
                )
                
                (149,586
                )
                
                (135,594
                )
                
                (116,700
                )Total
                    stockholders' equity
                
                
                18,110
                
                
                30,791
                
                
                31,422
                
                
                30,481
                
                
                37,026




**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, 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
                
                $
                7.1Vaccines
                
                
                11.0
                
                
                16.0
                
                
                22.5Other
                    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.


37




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.




38




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:




**Clinical Phase**
            
            **Estimated**
              **Completion**
              **Date**Phase
                I
            
            1
                -
                3 yearsPhase
                II
            
            1
                -
                4 yearsPhase
                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.







39







**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.




40




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
        Decembe r
        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.




41




**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).




42




**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)Contractual obligations
                
                Total
                
                Less than
                  1 year
                
                1-3 years
                
                4-5 years
                
                After 5 yearsDebt
                
                $
                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
      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
      expect
      that significant additional financing will be required as we move our product
      candidates through clinical development, including the continued advancement
      of
      TNFerade through the Phase III potion of the pivotal trial for locally advanced
      pancreatic cancer.




43




On
        March
        15, 2006, we entered into a Committed Equity Financing Facility (CEFF) with
        Kingsbridge Capital Ltd., under which Kingsbridge has committed to purchase,
        at
        our option, up to a total of $30.0 million of the Company’s common stock over a
        3-year period, subject to certain conditions and limitations. Due to the
        pricing
        formula, however, the actual amount of additional financing available to
        us
        under the CEFF may be substantially less than the committed amount. In
        particular, Kingsbridge is not obligated to purchase shares of common stock
        at a
        price lower than $1.25. Should we choose to utilize the CEFF again, net proceeds
        from the sale of common stock under the CEFF will help defray costs associated
        with expanded clinical testing of TNFerade in locally advanced pancreatic
        cancer
        and/or other indications and general corporate purposes. As part of the CEFF
        arrangement, we issued a warrant to Kingsbridge to purchase 520,000 shares
        of
        our common stock at an exercise price $2.67 per share. The warrant became
        exercisable on September 15, 2006 and will remain exercisable until September
        15, 2011.





In
        June
        2007, we initiated our first draw against the CEFF. On June 26, 2007, subsequent
        to the first 4-day pricing period, we sold 769,773 common shares for gross
        proceeds of $1.8 million. The second 4-day pricing period ended on June 29,
        2007
        at which time we sold under the CEFF, 832,441 common shares for gross proceeds
        of $1.8 million. The Variable Weighted Average Price (“VWAP”) of the Company’s
        stock during the first 4-day pricing period was $2.34, which equals or exceeds
        the minimum purchase price of $1.25 per share. The VWAP of our stock during
        the
        second 4-day pricing period was $2.16, which equals or exceeds the minimum
        purchase price of $1.25 per share.





On
      February 1, 2007, the Company filed with the Securities and Exchange Commission
      a $100 million shelf registration statement on Form S-3. The shelf registration
      was declared effective February 12, 2007 and allows the Company to obtain
      financing through the issuance of any combination of common stock, preferred
      stock, warrants, or debt. To date, the Company has not utilized the shelf
      registration but is eligible to do so at such time the Company deems
      appropriate.





On
      December 21, 2006, the Company sold 9,610,000 shares of common stock to various
      investors at $2.05 per share under a prior shelf registration on Form S-3
      declared effective on April 28, 2005. Proceeds from this sale, net of offering
      costs, totaled $18.3 million.


We
          are
          currently expecting to use approximately $17 million in the 12 months ending
          December 31, 2008, unless we pursue and obtain additional sources of funds
          in
          that timeframe. Our estimate includes approximately $1.8 million in contractual
          obligations reflected in the table above, as well as $0.5 million for capital
          expenditures, and the $1 million non-refundable reservation fee paid in
          January
          2008 as part of the Cobra manufacturing agreement. We believe that our
          existing
          cash, and anticipated cash flows from our current collaborations and short
          term-investments will be sufficient to support our operations for approximately
          15 months.
  Our
          estimated capital requirements will depend on, and could increase or decrease
          as
          a result of, many factors, including the extent to which we choose to develop
          our research, development, clinical, manufacturing, and commercialization
          activities.




We
      expect
      that significant additional capital will be required which we may seek through
      further public or private equity offerings, debt financing, additional strategic
      alliance and licensing arrangements, or some combination of these financing
      alternatives. If we are successful in raising additional funds through the
      issuance of equity securities, investors likely will experience 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 and/or clinical programs.




As
          of
          December 31, 2007, we have net operating loss carryforwards to potentially
          reduce future federal and state taxable income, and research and experimentation
          tax credit carryforwards available to potentially offset future federal
          and
          state income taxes. Use of our net operating loss and research and
          experimentation credit carryforwards may be limited due to changes in our
          ownership as defined within Section 382 of the Internal Revenue Code . At
          December 31, 2007, the Company has net operating loss carryforwards of
          approximately $232.6 million for federal income tax purposes which will
          expire
          at various dates through 2027, and research and experimentation tax credit
          carryforwards of $12.6 million which will expire at various dates through
          2027.
          The Company also has capital loss carryforwards of $0.8 million which will
          expire in 2008.




**OFF-BALANCE
      SHEET OBLIGATIONS**





We
      had no
      off-balance sheet obligations during fiscal year 2007.





**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.




44


As
      of
      December 31, 2007, we had cash and cash equivalents and short-term investments
      of $23.7 million as follows:




Cash
                and cash equivalents
            
            $
            7.3
                millionShort-term
                investments
            
            $
            16.4
                million





Our
      exposure to market risk is confined to cash and cash equivalents, which consist
      of instruments having original maturities of three months or less, and our
      short-term investment portfolio. We maintain a short-term investment portfolio
      of investment grade government agency notes and corporate bonds. The securities
      in our short-term 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, 2007, securities
      totaling $16.2 ****** million
      are scheduled to mature in 2008; the remaining $0.2 million represents the
      value
      of the equity received in consideration of the Company’s release of security
      interest upon Mytogen’s acquisition by Advanced Cell Technology, Inc. in 2007.
      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
      are
      headquartered in the United States where we conduct our pre-clinical research
      activities. Clinical trials are currently conducted in the United States and,
      to
      a lesser extent, Europe. Clinical sites in other locations outside of the United
      States are evaluated as needed. All revenues to date have been received in
      U.S.
      dollars. Accordingly, we have not had any material exposure to foreign currency
      rate fluctuations.





On December
      31, 2007, we had an outstanding industrial revenue bond payable of $1.4 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 percent plus a remarketing fee. As of
      December 31, 2007, the fair value of the interest rate swap, excluding accrued
      interest, was $38,000. We also have outstanding loans totaling $226,000 at
      fixed
      interest rates ranging from 5.0 percent to 10.5 percent. 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 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**





***Disclosure
      Controls and Procedures***




We
      have
      carried out an evaluation, under the supervision and the participation of our
      management, including our principal executive officer and principal financial
      officer, of the effectiveness of the design and operation of our disclosure
      controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under
      the Securities Exchange Act of 1934, as amended, or the Securities Exchange
      Act), as of December 31, 2007. Based upon that evaluation, our principal
      executive officer and principal financial officer concluded that, as of the
      end
      of that period, our disclosure controls and procedures are effective in
      providing reasonable assurance that (a) the information required to be
      disclosed by us in the reports that we file or submit under the Securities
      Exchange Act is recorded, processed, summarized and reported within the time
      periods specified in the SEC’s rules and forms, and (b) such information is
      accumulated and communicated to our management, including our principal
      executive officer and principal financial officer, as appropriate to allow
      timely decisions regarding required disclosure.




45




***Changes
      in Internal Control over Financial Reporting***




There
      were no changes in our internal control over financial reporting during the
      quarter ended December 31, 2007 that have materially affected, or are
      reasonably likely to materially affect, our internal control over financial
      reporting.




***Management’s
      Annual Report on Internal Control over Financial
      Reporting***




Our
      management is responsible for establishing and maintaining adequate internal
      control over financial reporting. Internal control over financial reporting
      is
      defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act
      as a process designed by, or under the supervision of, a company’s principal
      executive and principal financial officers and effected by a company’s board of
      directors, management, and other personnel to provide reasonable assurance
      regarding the reliability of financial reporting and the preparation of
      financial statements for external purposes in accordance with generally accepted
      accounting principles. Our internal control over financial reporting includes
      those policies and procedures that:




·
            pertain
                to the maintenance of records that, in reasonable detail, accurately
                and
                fairly reflect the transactions and dispositions of our assets;·
            provide
                reasonable assurance that transactions are recorded as necessary
                to permit
                preparation of financial statements in accordance with generally
                accepted
                accounting principles, and that our receipts and expenditures are
                being
                made only in accordance with authorizations of our management and
                directors; and·
            provide
                reasonable assurance regarding prevention or timely detection of
                unauthorized acquisition, use or disposition of our assets that could
                have
                a material effect on the financial statements.




Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Projections of any evaluation of effectiveness
      to future periods are subject to the risk that controls may become inadequate
      because of changes in conditions, or that the degree of compliance with the
      policies or procedures may deteriorate.





Our
      management assessed the effectiveness of our internal control over financial
      reporting as of December 31, 2007. In making this assessment, management
      used the criteria set forth by the Committee of Sponsoring Organizations of
      the
      Treadway Commission (COSO) in Internal Control — Integrated Framework.




Based
      on
      this assessment, management has concluded that, as of December 31, 2007,
      our internal control over financial reporting is effective based on those
      criteria.





KPMG
      LLP,
      independent registered public accounting firm, who audited and reported on
      our
      financial statements included in this annual report, has also audited the
      effectiveness of our internal control over financial reporting as of December
      31, 2007 as stated in its report which is included herein immediately preceding
      our audited financial statements.





**ITEM
              9B.**
            **OTHER
                INFORMATION**





None.


46


**PART
      III**





**ITEM
              10.**
            **DIRECTORS,
                EXECUTIVE OFFICERS, AND CORPORATE
                GOVERNANCE**





Information
      required by this item, with the exception of information on our executive
      officers, which appears under “Executive Officers of the Registrant,” in Part I
      of the Form 10-K, is incorporated by reference from our Proxy Statement relating
      to the 2008 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 2008 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 AND RELATED
                    STOCKHOLDER
                    MATTERS**





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 2008 Annual Meeting of Stockholders to be filed
      pursuant to General Instruction G(3) to Form 10-K.





**Equity
      Compensation Plan Information**





The
      following table discloses certain information about the options issued and
      available for issuance under all outstanding Company option plans as of December
      31, 2007:





(a)
            
            (b)
            
            (c)Plan
                category
            
            Number of
              securities to be
              issued upon
              exercise of
              outstanding
              options, warrants
              and rights
            
            Weighted-
              average exercise
              price of
              outstanding
              options, warrants
              and rights
            
            Number of
              securities
              remaining
              available for
              future issuance
              under equity
              compensation
              plans (excluding
              securities
              reflected in
              column (a))Equity
                compensation plans approved by security holders
            
            
            6,106,582
            
            $
            2.52
            
            
            3,932,335Equity
                compensation plans not approved by security holders
            
            
            —
            
            
            —
            
            
            —Total
            
            
            6,106,582
            
            $
            2.52
            
            
            3,932,335





**ITEM
              13.**
            **CERTAIN
                RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
                INDEPENDENCE**





The
      information required by this item is incorporated by reference from our Proxy
      Statement relating to the 2008 Annual Meeting of Stockholders to be filed
      pursuant to General Instruction G(3) to Form 10-K.





**ITEM 14.**
            **PRINCIPAL
                ACCOUNTANT FEES AND
                SERVICES**





The
      information required by this item is incorporated by reference from our Proxy
      Statement relating to the 2008 Annual Meeting of Stockholders to be filed
      pursuant to General Instruction G(3) to Form 10-K.


47


**PART
      IV**





**ITEM
              15.**
            **EXHIBITS
                AND FINANCIAL STATEMENT SCHEDULES**




(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 –
                The Exhibits listed in the accompanying Index to Exhibits are filed
                or
                incorporated by reference as part of this report.




**EXHIBIT**
            ******NUMBER**
            
            **DESCRIPTION**3.1
            
            Amended
                & Restated Certificate of Incorporation of GenVec, Inc.
                (7)3.1(a)
            
            Certificate
                of Designation of the Series A Junior Participating Preferred Stock.
                (7)


3.1(b)
              
              Certificate
                  of Amendment of the Amended and Restated Certificate of Incorporation
                  of
                  GenVec, Inc. (14)


3.2
            
            Amended
                & Restated Bylaws of GenVec, Inc. (1)4.1
            
            Rights
                Agreement dated as of September 7, 2001 between the Company 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 Company.
                (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 Company.
                (5)4.4
            
            Registration
                Rights Agreement, dated as of March 15, 2006 by and between Kingsbridge
                Capital Limited and the Company. (9)4.5
            
            Form
                of Warrant, dated as of March 15, 2006 by and between Kingsbridge
                Capital
                Limited and the Company. (9)10.1
            
            Form
                of Indemnification Agreement for Directors and Officers.
                (1)


10.2
              
              2002
                  Stock Incentive Plan as amended and forms of agreements thereunder.*
                  (Filed herewith)


10.3
            
            Amended
                and Restated 1993 Stock Incentive Plan and forms of agreements
                thereunder.* (2)10.4
            
            2000
                Employee Stock Purchase Plan, and form of agreement thereunder.*
                (1)10.5
            
            Amended
                and Restated 2000 Director Option Plan.* (6)10.6
            
            License
                Agreement dated May 31, 1996 between Scios, Inc. and the Company.
                (1)10.7
            
            New
                Collaboration Agreement dated January 1, 2003 between Fuso Pharmaceutical
                Industries, Ltd. and the Company. + (7)10.8
            
            New
                Commercialization Agreement dated January 1, 2003 between Fuso
                Pharmaceutical Industries Ltd. And the Company.+ (7)10.9
            
            License
                Agreement dated February 1, 1998 between Asahi Chemical Industry
                Co., Ltd.
                and the Company. (8)10.10
            
            Amendment
                to Common Stock Warrant Agreement dated March 18, 2002 between the
                Company
                and Cornell Research Foundation, Inc. (7)10.11
            
            Lease
                Agreement dated May 4, 1999 between MOR BENNINGTON LLP and the Company.
                (1)10.12
            
            Patent
                License Agreement dated January 8, 2000 between the Company and the
                Public
                Health Service, as amended, and amendment number 1 hereto dated March
                9,
                2000. (8)10.13
            
            Patent
                License Agreement dated December 20, 2000 between the Company and
                Northwestern University. (3)10.14
            
            Salary
                Continuation Agreement between the Company and Paul H. Fischer dated
                October 15, 2002. *(7)10.15
            
            Change
                in Control Agreement between the Company and Paul H. Fischer dated
                October
                15, 2002. *(7)10.16
            
            Salary
                Continuation Agreement between the Company and Douglas J. Swirsky
                dated
                September 18, 2006. *(10)10.17
            
            Change
                in Control Agreement between the Company and Douglas J. Swirsky dated
                September 18, 2006. *(10)




48




10.18
            
            Form
                of Salary Continuation Agreement between the Company and other executive
                officers and senior staff dated October 15, 2002. *(7)10.19
            
            Form
                of Indemnification and Advancement of Expenses Agreement dated December
                10, 2003. (8)10.20
            
            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.
                + (6)10.21
            
            Agreement
                with the Vaccine Research Center at the National Institute of Allergy
                and
                Infectious Diseases of the National Institutes of Health for the
                supporting the transfer of the Company’s manufacturing processes dated
                September 29, 2006. + (11)10.22
            
            Research
                Collaboration Agreement between Cordis Corporation and the Company
                dated
                as of December 22, 2003. + (8).10.23
            
            Common
                Stock Purchase Agreement, dated as of March 15, 2006 by and between
                Kingsbridge Capital Limited and the Company. (9)10.24
            
            Agreement
                with the United States Department of Homeland Security for the Development
                of Adenovector-Based Foot and Mouth Vaccine Candidates dated January
                30,
                2007. (12)


10.25
              
              Amendment
                  to Agreement with the United States Department of Homeland Security
                  for
                  the Development of Adenovector-Based Foot and Mouth Vaccine Candidates
                  dated November 9, 2007. +
                  (13)


10.26
              
              Manufacturing
                  Development Agreement with Cobra Biomanufacturing Plc dated January
                  18,
                  2008. + (filed herewith).


23.1
              
              Consent
                  of Independent Registered Public Accounting Firm (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.


(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 Annual Report on Form 10-K (File No. 0-24469)
                filed
                with the Securities and Exchange Commission on March 29,
                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 31,
                  2003.


(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 15,
                  2004.


(9)
            Incorporated
                by reference from our Annual Report on Form 10-K (File No. 0-24469)
                filed
                with the Securities and Exchange Commission on March 15,
                2006.


(10)
            Incorporated
                by reference from our Form 8-K (File No: 0-24469) filed with the
                Securities and Exchange Commission on September 19,
                2006.


(11)
              Incorporated
                  by reference from our Quarterly Report on Form 10-Q (File No. 0-24469)
                  filed with the Securities and Exchange Commission on November 9,
                  2006.
  49


(12)
            Incorporated
                by reference from our Quarterly Report on Form 10-Q (File No. 0-24469)
                filed with the Securities and Exchange Commission on May 10,
                2007.


(13)
            Incorporated
                by reference from our Quarterly Report on Form 10-Q (File No. 0-24469)
                filed with the Securities and Exchange Commission on November 9,
                2007.


(14)
            Incorporated
                by reference from our Current Report on Form 8-K (File No. 0-24469)
                filed
                with the Securities and Exchange Commission on June 14,
                2007.




50




**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. FISCHERPaul
                H. Fischer, Ph.DDate:
            
            President,
                Chief Executive Officer and Director
              March
                17, 2008





**POWER
      OF ATTORNEY**




KNOW
      ALL
      MEN BY THESE PRESENTS, that each person whose signature appears below
      constitutes and appoints Paul H. Fischer and Douglas J. Swirsky, and each of
      them individually, as his true and lawful attorneys-in-fact and agents, with
      full power of substitution and resubstitution, for him and his name, place
      and
      stead in any and all capacities, to sign the report and any and all amendments
      to this report, and to file the same, with all exhibits thereto, and other
      documents in connection therewith, with the Securities and Exchange Commission,
      granting unto said attorneys-in-fact and agents, full power and authority to
      perform each and every act and thing requisite and necessary to be done in
      and
      about the premises, as fully to all intents and purposes as he might or could
      do
      in person, hereby ratifying and confirming all that said attorneys-in-fact
      and
      agents, or their substitutes, may lawfully do or cause to be done by virtue
      thereof.





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.
            
            President,
                Chief Executive Officer
            
            March
                17, 2008Paul
                H. Fischer, Ph.D.
            
            and
                Director(Principal
                Executive Officer)/s/
                DOUGLAS J. SWIRSKY
            
            Chief
                Financial Officer,Douglas
                J. Swirsky
            
            Treasurer
                & Secretary
            
            March
                17, 2008(Principal
                Financial andAccounting
                Officer)/s/
                WAYNE T. HOCKMEYER, PH.D.
            
            DirectorWayne
                T. Hockmeyer, Ph.D.
            
            
            
            March
                13, 2008/s/
                ZOLA HOROVITZ, PH.D.
            
            DirectorZola
                Horovitz, Ph.D.
            
            
            
            March
                    13, 2008/s/
                WILLIAM N. KELLEY, M.D.
            
            DirectorWilliam
                N. Kelley, M.D.
            
            
            
            March
                    13, 2008/s/
                KEVIN M. ROONEY
            
            DirectorKevin
                M. Rooney
            
            
            
            March
                    13, 2008/s/
                JOSHUA RUCH
            
            DirectorJoshua
                Ruch
            
            
            
            March
                    13, 2008/s/
                MARC R. SCHNEEBAUM
            
            DirectorMarc
                R. Schneebaum
            
            
            
            March
                  13, 2008












**GENVEC,
      INC.**


**INDEX
      TO FINANCIAL STATEMENTS**





**PAGE
                NO.**Report**s**of
                Independent Registered Public Accounting Firm
            
            F-1
                to F-2Balance
                Sheets as of December 31, 2007 and 2006
            
            F-3Statements
                of Operations—Years Ended December 31, 2007, 2006, and
                2005
            
            F-4Statements
                of Stockholders' Equity and Comprehensive Loss —Years Ended December 31,
                2007, 2006, and 2005
            
            F-5Statements
                of Cash Flows—Years Ended December 31, 2007, 2006, and
                2005
            
            F-6Notes
                to Financial Statements
            
            F-7
                to F-25




F





**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





The
      Board
      of Directors and Stockholders


GenVec,
      Inc.:





We
      have
      audited GenVec, Inc.’s (“the Company’s”) internal control over financial
      reporting as of December 31, 2007, based on criteria established in *Internal Control—Integrated Framework issued by the Committee of Sponsoring
      Organizations of the Treadway Commission (COSO).* GenVec’s
      management is responsible for maintaining effective internal control over
      financial reporting and for its assessment of the effectiveness of internal
      control over financial reporting, included in the accompanying Management’s
      Annual Report on Internal Control Over Financial Reporting appearing under
      Item
      9A of this Form 10-K. Our responsibility is to express an opinion on Company’s
      internal control over financial reporting based on our audit.





We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether effective
      internal control over financial reporting was maintained in all material
      respects. Our audit included obtaining an understanding of internal control
      over
      financial reporting, assessing the risk that a material weakness exists, and
      testing and evaluating the design and operating effectiveness of internal
      control based on assessed risk. Our audit also included performing such other
      procedures as we considered necessary in the circumstances. We believe that
      our
      audit provides a reasonable basis for our opinion.





A
      company's internal control over financial reporting is a process designed to
      provide reasonable assurance regarding the reliability of financial reporting
      and the preparation of financial statements for external purposes in accordance
      with generally accepted accounting principles. A company's internal control
      over
      financial reporting includes those policies and procedures that (1) pertain
      to
      the maintenance of records that, in reasonable detail, accurately and fairly
      reflect the transactions and dispositions of the assets of the company; (2)
      provide reasonable assurance that transactions are recorded as necessary to
      permit preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditures of the company are
      being made only in accordance with authorizations of management and directors
      of
      the company; and (3) provide reasonable assurance regarding prevention or timely
      detection of unauthorized acquisition, use, or disposition of the company’s
      assets that could have a material effect on the financial statements.





Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Also, projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with the policies or procedures may deteriorate.





In
      our
      opinion, GenVec, Inc. maintained, in all material respects, effective internal
      control over financial reporting as of December 31, 2007, based on
      criteria established in *Internal Control—Integrated Framework issued by the Committee* *of
      Sponsoring Organizations of the Treadway Commission (COSO)* *.*





We
      also
      have audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the balance sheets of GenVec, Inc. as of
      December 31, 2007 and 2006, and the related statements of operations,
      stockholders’ equity and comprehensive loss, and cash flows for each of the
      years in the three-year period ended December 31, 2007, and our report dated
      March 17, 2008 ** expressed
      an unqualified opinion on those financial statements.




/s/
                KPMG LLP




McLean,
      Virginia


March
      17,
      2008




F-1




**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**




The
      Board
      of Directors and Stockholders


GenVec,
      Inc.:





We
      have
      audited the accompanying balance sheets of GenVec, Inc. (the Company) as of
      December 31, 2007 and 2006, and the related statements of operations,
      stockholders’ equity and comprehensive loss, and cash flows for each of the
      years in the three-year period ended December 31, 2007. 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 the standards of the Public Company
      Accounting Oversight Board (United States). 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,
      2007 and 2006, and the results of its operations and its cash flows for each
      of
      the years in the three-year period ended December 31, 2007, in conformity with
      U.S. generally accepted accounting principles.





As
      discussed in Note 2 to the financial statements, effective January 1, 2006,
      the
      Company adopted Statement of Financial Accounting Standards No. 123(R), *Share-Based
      Payment* .





We
      also
      have audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), GenVec, Inc.’s internal control over financial
      reporting as of December 31, 2007, based on criteria established in *Internal Control—Integrated Framework issued by the Committee of Sponsoring
      Organizations of the Treadway Commission (COSO)* ,
      and our
      report dated March 17, 2008 expressed an unqualified opinion on the
      effectiveness of the Company’s internal control over financial
      reporting.





/s/
                KPMG LLP




McLean,
      Virginia


March
      17,
      2008




F-2




**GENVEC,
                INC.****BALANCE
                SHEETS**




***(in
                thousands)******As
                of December 31,***
            
            **2007**
            
            **2006****ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            7,289
            
            $
            11,803Short-term
                investments (Note 4)
            
            
            16,371
            
            
            22,570Accounts
                receivable
            
            
            1,756
            
            
            1,769Prepaid
                expenses and other
            
            
            531
            
            
            756Bond
                sinking fund (Note 8)
            
            
            338
            
            
            313Total
                current assets
            
            
            26,285
            
            
            37,211Property
                and equipment, net (Notes 5 and 8)
            
            
            2,041
            
            
            2,921Other
                assets
            
            
            22
            
            
            36**Total
                assets**
            
            $
            28,348
            
            $
            40,168**LIABILITIES
                AND STOCKHOLDERS' EQUITY**Current
                liabilities:Current
                portion of long-term debt (Note 8)
            
            $
            789
            
            $
            754Accounts
                payable
            
            
            902
            
            
            492Accrued
                clinical trial expenses
            
            
            1,313
            
            
            970Accrued
                other expenses
            
            
            3,942
            
            
            4,300Unearned
                revenue
            
            
            1,861
            
            
            815**Total
                current liabilities**
            
            
            8,807
            
            
            7,331Long-term
                debt, less current portion (Note 8)
            
            
            807
            
            
            1,601Other
                liabilities
            
            
            553
            
            
            445**Total
                liabilities**
            
            
            10,167
            
            
            9,377Common
                Stock Subject to Redemption, 32 and 0 shares issued and outstanding
                as of
                December 31, 2007 and December 31, 2006
            
            
            71
            
            
            -Commitments
                (Notes 8 and 10)Stockholders'
                equity (Note 11)Preferred
                    stock, $0.001 par value, 5,000 shares authorized in 2007 and
                    2006; none
                    issued and outstanding in 2007 and 2006
            
            
            -
            
            
            -Common
                stock, $0.001 par value; 200,000 shares authorized in 2007 and 2006;
                75,353 and 73,449 shares issued and outstanding in 2007 and
                2006
            
            
            75
            
            
            73Additional
                paid-in capital
            
            
            205,746
            
            
            199,563Accumulated
                other comprehensive income (loss) (Notes 4 and 13)
            
            
            (145
            )
            
            13Accumulated
                deficit
            
            
            (187,566
            )
            
            (168,858
            )**Total
                stockholders' equity**
            
            
            18,110
            
            
            30,791**Total
                liabilities and stockholders' equity**
            
            $
            28,348
            
            $
            40,168




*See
                accompanying notes to financial
                statements.*




F-3




**GENVEC,
                INC.****STATEMENTS
                OF OPERATIONS**




***(in
                  thousands, except per share data)******Years
                  ended December 31,***
              
              **2007**
              
              **2006**
              
              **2005**Revenue
                  from strategic alliances and research contracts (Note 9)
              
              $
              14,047
              
              $
              18,923
              
              $
              26,554Operating
                  expenses:Research
                  and development
              
              
              26,030
              
              
              29,569
              
              
              30,802General
                  and administrative
              
              
              9,349
              
              
              9,604
              
              
              8,333Loss
                  on disposal of assets (Notes 3 and 7)
              
              
              5
              
              
              -
              
              
              1,895Total
                  operating expenses
              
              
              35,384
              
              
              39,173
              
              
              41,030Operating
                  loss
              
              
              (21,337
              )
              
              (20,250
              )
              
              (14,476
              )Other
                  income (loss):Interest
                  income
              
              
              1,520
              
              
              1,227
              
              
              908Interest
                  expense, net of change in fair value of Kingsbridge warrant
                  liability
              
              
              262
              
              
              (249
              )
              
              (426
              )Other
              
              
              847
              
              
              -
              
              
              2Total
                  other income, net
              
              
              2,629
              
              
              978
              
              
              484Net
                  loss
              
              $
              (18,708
              )
              $
              (19,272
              )
              $
              (13,992
              )Basic
                  and diluted net loss per share
              
              $
              (0.25
              )
              $
              (0.30
              )
              $
              (0.24
              )Shares
                  used in computation of basic and diluted net loss per
                  share
              
              
              74,132
              
              
              64,038
              
              
              57,823




*See
                accompanying notes to financial
                statements.*




F-4




**GENVEC,
      INC.**


**STATEMENTS
      OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS**





**Common
                Stock**
            
            **Additiona****l**
              **Paid-in**
            
            **Deferred**
            
            **Accumulated
                Other Comprehensive**
            
            **Accumulated*****(in
                thousands)***
            
            **Shares**
            
            **Amount**
            
            **Capital**
            
            **Compensation**
            
            **Income (Loss)**
            
            **Deficit**
            
            **Total**Balance,
                December 31, 2004
            
            
            55,588
            
            $
            56
            
            $
            166,656
            
            $
            (382
            )
            $
            (255
            )
            $
            (135,594
            )
            $
            30,481Comprehensive
                loss:Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (13,992
            )
            
            (13,992
            )Unrealized
                change in investments, net
            
            
            -
            
            
            -
            
            
            
            
            
            -
            
            
            (30
            )
            
            -
            
            
            (30
            )Unrealized
                change in cash flow derivative, net
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            240
            
            
            -
            
            
            240Total
                comprehensive loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (13,782
            )Common
                stock issued under Shelf registration, net
            
            
            7,600
            
            
            8
            
            
            13,990
            
            
            -
            
            
            -
            
            
            -
            
            
            13,998Common
                stock issued under stock incentive plans
            
            
            487
            
            
            -
            
            
            464
            
            
            -
            
            
            -
            
            
            -
            
            
            464Deferred
                compensation charge resulting from stock options
            
            
            -
            
            
            -
            
            
            **-**
            
            
            261
            
            
            -
            
            
            -
            
            
            261Balance,
                December 31, 2005
            
            
            63,675
            
            $
            64
            
            $
            181,110
            
            $
            (121
            )
            $
            (45
            )
            $
            (149,586
            )
            $
            31,422Comprehensive
                loss:Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (19,272
            )
            
            (19,272
            )Unrealized
                change in investments, net
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            58
            
            
            -
            
            
            58Total
                comprehensive loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (19,214
            )Common
                stock issued under Shelf registration, net
            
            
            9,610
            
            
            9
            
            
            18,290
            
            
            -
            
            
            -
            
            
            -
            
            
            18,299Common
                stock issued under stock incentive plans
            
            
            164
            
            
            -
            
            
            130
            
            
            -
            
            
            -
            
            
            -
            
            
            130Deferred
                financing charge resulting from warrant issued under CEFF
            
            
            -
            
            
            -
            
            
            (800
            )
            
            -
            
            
            -
            
            
            -
            
            
            (800
            )Deferred
                compensation adjustment resulting from adoption of SFAS No.
                123(R)
            
            
            -
            
            
            -
            
            
            -
            
            
            121
            
            
            -
            
            
            -
            
            
            121Stock-based
                compensation
            
            
            -
            
            
            -
            
            
            833
            
            
            -
            
            
            -
            
            
            -
            
            
            833Balance,
                December 31, 2006
            
            
            73,449
            
            $
            73
            
            $
            199,563
            
            $
            -
            
            $
            13
            
            $
            (168,858
            )
            $
            30,791Comprehensive
                loss:Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (18,708
            )
            
            (18,708
            )Unrealized
                change in investments, net
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (158
            )
            
            -
            
            
            (158
            )Total
                comprehensive loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (18,866
            )Common
                stock issued under stock benefit plans
            
            
            334
            
            
            -
            
            
            789
            
            
            -
            
            
            -
            
            
            -
            
            
            789Common
                stock issued under CEFF
            
            
            1,570
            
            
            2
            
            
            3,529
            
            
            -
            
            
            -
            
            
            -
            
            
            3,531Deferred
                financing charge resulting from stock issued under CEFF
            
            
            -
            
            
            -
            
            
            (23
            )
            
            -
            
            
            -
            
            
            -
            
            
            (23
            )Deferred
                financing charge resulting from warrant issued under CEFF
            
            
            -
            
            
            -
            
            
            90
            
            
            -
            
            
            -
            
            
            -
            
            
            90Stock-based
                compensation
            
            
            -
            
            
            -
            
            
            1,798
            
            
            -
            
            
            -
            
            
            -
            
            
            1,798**Balance,
                December 31, 2007**
            
            
            75,353
            
            $
            75
            
            $
            205,746
            
            $
            -
            
            $
            (145
            )
            $
            (187,566
            )
            $
            18,110





*See
      accompanying notes to financial statements.*


F-5




**GENVEC,
      INC.**


**STATEMENTS
      OF CASH FLOWS**





**(in
                thousands)****Years
                ended December 31,**
            
            **2007**
            
            **2006**
            
            **2005****Cash
                flows from operating activities:**Net
                loss
            
            $
            (18,708
            )
            $
            (19,272
            )
            $
            (13,992
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
                and amortization
            
            
            1,213
            
            
            1,441
            
            
            1,714Non-cash
                adjustments for premiums and discounts on investments
            
            
            (843
            )
            
            (111
            )
            
            346Non-cash
                charges for options (Note 2)
            
            
            1,798
            
            
            954
            
            
            261Non-cash
                consideration received for release of security interest
            
            
            (337
            )
            
            -
            
            
            -Change
                in fair value of warrants (Note 11)
            
            
            (445
            )
            
            44
            
            
            -Loss
                on disposal of assets (Notes 3 and 7)
            
            
            5
            
            
            -
            
            
            1,895Gain
                on investments
            
            
            -
            
            
            -
            
            
            (2
            )Change
                in accounts receivable
            
            
            13
            
            
            2,280
            
            
            (2,505
            )Change
                in accounts payable and accrued expenses
            
            
            932
            
            
            (264
            )
            
            229Change
                in unearned revenue
            
            
            1,371
            
            
            (367
            )
            
            (1,634
            )Change
                in other assets and liabilities, net
            
            
            21
            
            
            156
            
            
            180Net
                cash used in operating activities
            
            
            (14,980
            )
            
            (15,139
            )
            
            (13,508
            )**Cash
                flows from investing activities:**Purchases
                of equipment
            
            
            (289
            )
            
            (160
            )
            
            (398
            )Purchases
                of investment securities
            
            
            (35,487
            )
            
            (31,926
            )
            
            (31,570
            )Proceeds
                from sale and maturity of investment securities
            
            
            42,660
            
            
            34,695
            
            
            33,725Net
                cash provided by investing activities
            
            
            6,884
            
            
            2,609
            
            
            1,757**Cash
                flows from financing activities:**Proceeds
                from issuance of common stock subject to redemption, net of issuance
                costs
                (Note 11)
            
            
            3,576
            
            
            -
            
            
            -Proceeds
                from issuance of common stock, net of issuance costs (Note
                10)
            
            
            789
            
            
            18,429
            
            
            14,462Proceeds
                from debt borrowings
            
            
            -
            
            
            -
            
            
            -Principal
                payments of long-term debt obligations (Note 8)
            
            
            (783
            )
            
            (926
            )
            
            (1,247
            )Net
                cash provided by financing activities
            
            
            3,582
            
            
            17,503
            
            
            13,215Increase
                (decrease) in cash and cash equivalents
            
            
            (4,514
            )
            
            4,973
            
            
            1,464Beginning
                balance of cash and cash equivalents
            
            
            11,803
            
            
            6,830
            
            
            5,366Ending
                balance of cash and cash equivalents
            
            $
            7,289
            
            $
            11,803
            
            $
            6,830Supplemental
                disclosures of cash flow information:Cash
                paid for interest
            
            $
            149
            
            $
            205
            
            $
            265Supplemental
                disclosures of non-cash activities:Fair
                value of warrants granted under Kingsbridge CEFF
            
            $
            307
            
            $
            844
            
            $
            -Change
                in the fair value of interest rate swap
            
            $
            (9
            )
            $
            (52
            )
            $
            (140
            )





*See
      accompanying notes to financial statements.*





F-6




**NOTES
      TO FINANCIAL STATEMENTS**





**(1)
      ORGANIZATION AND BUSINESS DESCRIPTION**




GenVec,
        Inc. 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, 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 with the U.S. Department of Homeland Security for the development
        of an animal health vaccine for the prevention of foot-and-mouth disease.
 
 Our
        most
        advanced product candidate is TNFerade, currently in a pivotal trial for
        the
        treatment of locally advanced pancreatic cancer, Phase II trials for metastatic
        melanoma cancer and rectal cancer and two Phase I/II trials for head and
        neck
        cancer. In addition to TNFerade, we have vaccine candidates against HIV and
        malaria in Phase I clinical evaluations as well as vaccine candidates against
        foot-and-mouth disease being tested in cattle. Currently all vaccine trials
        are
        being conducted under the auspices of the U.S. Government.
 
 Our
        gene-based therapeutic product candidates are based on proprietary technology
        that uses an adenovector to deliver genes that produce proteins at the site
        of
        disease. In contrast, the medical use of many proteins has been historically
        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. Our adenovector technology for therapeutics has been
        developed to address this limitation.
 
 We
        are
        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; risks inherent in the research, development and/or
        manufacture of biotechnology products; as well as other risks.
 
 The
        Company will need to raise additional funds or enter into a strategic
        collaboration or other partnership in order to complete clinical development
        of
        its product candidates and commercialize TNFerade following regulatory approval.
        The Company's current cash and investments are expected to be sufficient
        to
        finance its activities through the first quarter of 2009. If the Company
        does
        not raise additional funds or enter into a strategic collaboration or other
        partnership, then it may not be able to further develop its product candidates,
        including TNFerade. This would negatively impact the Company's business,
        financial condition and results of operations. The Company cannot be certain
        that additional funding will be available on favorable terms, if at all,
        or that
        it will be successful in its efforts to enter into arrangements with strategic
        partners for its product candidates.




**(2)
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**





**(a)
      CASH AND CASH EQUIVALENTS**





Cash
      equivalents consist of highly liquid debt instruments, time deposits, and money
      market funds with original maturities of three months or less.





**(b)**  **INVESTMENTS**





Our
      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 accumulated other comprehensive income (loss) 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. To determine whether an impairment is
      other-than-temporary, the Company considers whether it has the ability and
      intent to hold the investment until a market price recovery and considers
      whether evidence indicating the cost of the investment is recoverable outweighs
      evidence to the contrary. Evidence considered in this assessment includes the
      reasons for the impairment, the severity and duration of the impairment, changes
      in value subsequent to year-end, forecasted performance of the investee, and
      the
      general market condition in the geographic area or industry the investee
      operates in. 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.





F-7




In
      addition to the available for sales investments noted above, the Company
      acquired 806,452 common shares of a third party in 2007, as a result of the
      Company’s relinquishment of certain rights. See additional discussion regarding
      this transaction in Note 4.





**(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, bond sinking
      fund,
      accounts receivable, accounts payable, long-term debt, and a warrant issued
      in
      connection with our Committed Equity Financing Facility.





**(d)
      PROPERTY AND EQUIPMENT**





Property
      and equipment are stated at cost and depreciated on a straight-line basis over
      the estimated useful lives of assets, which are 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 a straight-line basis
      over the shorter of the lease term or estimated useful life of the asset. The
      Company incurs maintenance costs with respect to some of its major equipment.
      Repair and maintenance costs are expensed as incurred.





**(e)
      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.





**(f)
      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.





**(g)
      CLINICAL TRIAL EXPENSES**





The
      Company accrues estimated costs for clinical and pre-clinical studies based
      on
      estimates of work performed. The Company believes that this method best aligns
      the expenses it records with the efforts it expends. The Company monitors the
      progress of the trials and their related activities and adjusts 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.





**(h)
      INCOME TAXES**





Income
      taxes are accounted for under the asset and liability method. Deferred tax
      assets and liabilities are recognized for the future tax consequences
      attributable to difference between the financial statement carrying amounts
      of
      existing assets and liabilities and their respective tax bases and operating
      loss and tax credit carryforwards. Deferred tax assets and liabilities are
      measured using enacted tax rates expected to apply to taxable income in the
      years in which those temporary differences are expected to be recovered or
      settled. The effect on deferred tax assets and liabilities of a change in tax
      rates is recognized in income in the period that includes the enactment date.
      Beginning with the adoption of FASB Interpretation No. 48, *Accounting
      for Uncertainty in Income Taxes* (FIN 48)
      as of January 1, 2007, we recognize the effect of income tax positions only
      if
      those positions are more likely than not of being sustained. Recognized income
      tax positions are measured at the largest amount that is greater than 50 percent
      likely of being realized. Changes in recognition or measurement are reflected
      in
      the period in which the change in judgment occurs.





F-8




The
        ultimate realization of deferred tax assets is dependent upon the generation
        of
        future taxable income during the periods in which those temporary differences
        become deductible. Management considers the scheduled reversal of deferred
        tax
        liabilities, projected future taxable income, and tax planning strategies
        in
        making that assessment. We recorded a full valuation allowance against all
        estimated net deferred tax assets at December 31, 2007 and 2006. The Company
        has
        significant net operating loss carryforwards to potentially reduce future
        federal and state taxable income, and research and experimentation tax credit
        carryforwards available to potentially offset future federal and state income
        taxes. Use of our net operating loss and research and experimentation credit
        carryforwards may be limited due to changes in our ownership as defined within
        Section 382 of the Internal Revenue Code.




**(i)
      NET LOSS PER SHARE**





We
        calculate net loss per share in accordance with SFAS No. 128, *Earnings
        per Share* .
        Basic
        earnings per share is computed based upon the net loss available to common
        stock
        stockholders divided by the weighted average number of common stock shares
        outstanding during the period. The dilutive effect of common stock equivalents
        is included in the calculation of diluted earnings per share only when the
        effect of the inclusion would be dilutive. For each of the years ended December
        31, 2006 and 2007, approximately 3.4 million common stock equivalent shares
        were
        excluded from the denominator in the diluted loss per share calculation as
        their
        inclusion would have been antidilutive.





**(j)
      COMPREHENSIVE LOSS**





Comprehensive
      loss consists of net loss and unrealized holding gains and losses from
      available-for-sale securities. The Company reports comprehensive income (loss)
      on the Statement of Stockholder’s Equity and Comprehensive Loss, and accumulated
      other comprehensive income (loss) on the Balance Sheets. Other information
      regarding comprehensive income (loss) is contained in Note 13.





**(k)
      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 included in interest
      expense. In addition, because the interest rate swap has been deemed by Company
      management to be ineffective, changes in the fair value of the swap agreement
      are also included in interest expense.





**(l)
      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,
      development and/or maintenance of intellectual property, including technology
      licensing costs, are expensed when incurred.





**(m)
      STOCK-BASED COMPENSATION**





Prior
      to
      fiscal year 2006, the Company applied the intrinsic value method as prescribed
      in Accounting Principles Board Opinion No. 25, *Accounting
      for Stock Issued to Employees* (APB No.
      25), and related interpretations, in accounting for stock options granted under
      stock option plans. Under the intrinsic value method, no compensation cost
      is
      recognized if the exercise price of our employee stock options was equal to
      or
      greater than the market price of the underlying stock on the date of the
      grant.





Effective
      January 1, 2006, the Company adopted FASB Statement No. 123(R), *Share-Based
      Payment* (Statement 123(R)). This statement replaces FASB Statement No.123, *Accounting
      for Stock-Based Compensation* (Statement 123) and supersedes APB No. 25. Statement 123(R) requires that all
      stock-based compensation be recognized as an expense in the financial statements
      and that such cost be measured at the fair value of the award. This Statement
      was adopted using the modified prospective method of application, which requires
      the Company to recognize compensation cost on a prospective basis. Therefore,
      financial statements prior to 2006 have not been restated. Under this method,
      the Company recorded stock-based compensation expense for awards granted prior
      to, but not yet vested as of January 1, 2006, using the fair value amounts
      determined for pro forma disclosures under Statement 123. For stock-based awards
      granted after January 1, 2006, the Company recognizes compensation expense
      based
      on estimated grant date fair value using the Black-Scholes option-pricing model.
      Share-based compensation cost that has been included in expense from continuing
      operations amounted to $1.8 million and $1.0 million for the years ended
      December 31, 2007 and December 31, 2006, respectively.





F-9




The
      following table illustrates the effect on net income for the year ended December
      31, 2005, as if the Company had applied the fair value recognition provision
      of
      Statement 123(R) to options granted under the Company’s stock plans prior to
      adoption of Statement 123(R) on January 1, 2006. No pro forma disclosure has
      been made for periods subsequent to January 1, 2006 as all stock-based
      compensation has been recognized in net income. For purposes of this pro forma
      disclosure, the value of the options are estimated using a Black-Scholes
      option-pricing model; compensation expense is amortized over the options’
service periods with forfeitures recognized as they occurred.




**For
                  the Twelve****Months
                  Ended****December 31, 2005**(in
                  thousands,except per share amounts)Net
                  loss
              
              $
              (13,992
              )Add:
                  Total stock-based employee compensation expense determined under
                  fair
                  value based method for all awards
              
              
              (835
              )Deduct:
                  Total stock-based employee compensation expense included in reported
                  net
                  loss
              
              
              109Pro
                  forma net loss
              
              $
              (14,718
              )Net
                  loss per share:Basic
                  and diluted - as reported
              
              $
              (0.24
              )Basic
                  and diluted - pro forma
              
              $
              (0.25
              )




**(n)
      USE OF ESTIMATES**


The
          preparation of financial statements in conformity with U.S. generally accepted
          accounting principles requires management to make estimates and assumptions
          that
          affect the reported amounts of assets and liabilities at the date of the
          financial statements, and revenues and expenses during the reporting period.
          Critical accounting estimates involved in applying our accounting policies
          are
          those that require management to make assumptions about matters that are
          highly
          uncertain at the time the accounting estimate was made and those for which
          different estimates reasonably could have been used for the current period.
          Critical accounting estimates are also those which are reasonably likely
          to
          change from period to period and would have a material impact on the
          presentation of our financial condition, changes in financial condition
          or
          results of operations. Our most critical accounting estimates relate to
          the
          accounting for our clinical trial accruals, research and development revenues,
          share-based arrangements and our uncertain tax positions. Management bases
          its
          estimates on historical experience and on various other assumptions that
          it
          believes are reasonable under the circumstances. Actual results could differ
          from these estimates.





**(o)
      LONG-LIVED ASSETS**





In
      accordance with FASB Statement No. 144, *Accounting
      for the Impairment or Disposal of Long-Lived Assets* ,
      long-lived assets, such as property and equipment, are reviewed for impairment
      whenever events or changes in circumstances indicate that the carrying amount
      of
      an asset may not be recoverable. If circumstances require a long-lived asset
      be
      tested for possible impairment, the Company first compares undiscounted cash
      flows expected to be generated by an asset to the carrying value of the asset.
      If the carrying value of the long-lived asset is not recoverable on an
      undiscounted cash flow basis, an impairment is recognized to the extent that
      the
      carrying value exceeds its fair value. Fair value is determined through various
      valuation techniques including discounted cash flow models, quoted market
      values, and third-party independent appraisals, as considered
      necessary.





F-10




**(p)
      COMMITMENTS AND CONTINGENCIES**





Liabilities
      for loss contingencies arising from claims, assessments, litigation, fines
      and
      penalties and other sources, are recorded when it is probable that a liability
      has been incurred and the amount of the assessment and/or remediation can be
      reasonably estimated. Legal costs incurred in connection with loss contingencies
      are expensed as incurred.





**(q)
      RECLASSIFICATIONS**





The
      Company has made certain reclassifications to prior year amounts to conform
      to
      the 2007 presentation.





**(r)
      RECENT ACCOUNTING PRONOUNCEMENTS**





***Recently
      Adopted***





In
      July
      2006, the FASB issued FASB Interpretation No. 48, *Accounting
      for Uncertainty in Income Taxes, an interpretation of FASB Statement
      109* (FIN
      48). FIN 48, which is effective for fiscal years beginning after December 15,
      2006, and clarifies the accounting for uncertainty in income taxes recognized
      in
      an enterprise’s financial statements and prescribes a threshold of
      more-likely-than-not for recognition of tax benefits of uncertain tax positions
      taken or expected to be taken in a tax return. FIN 48 also provides related
      guidance on measurement, derecognition, classification, interest and penalties,
      and disclosure. The Company adopted the provisions of Financial Accounting
      Standards Board (FASB) Interpretation No. 48 on January 1, 2007. The Company
      did
      not recognize any expense or benefit as a result of this adoption. Penalties,
      if
      incurred, would be recognized as a component of general and administrative
      expense.





***Other
      Recent Pronouncements***





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.




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
        February 2007, the FASB issued Statement of Financial Accounting Standards
        N.
        159, *The
        Fair Value Option for Financial Assets and Financial Liabilities - including
        an
        amendment of FASB Statement No. 115* (Statement
        159). Statement 159 gives the Company the irrevocable option to carry most
        financial assets and liabilities at fair value that are not currently required
        to be measured at fair value. If the fair value option is elected, changes
        in
        fair value would be recorded in earnings at each subsequent reporting date.
        SFAS
        159 is effective for the Company’s 2008 fiscal year. The Company is currently
        evaluating the impact the adoption of this statement could have on its financial
        condition, results of operations, and cash flows.





F-11




In
      September 2006, the FASB issued FASB Statement No. 157, *Fair
      Value Measurement* (Statement
      157). Statement 157 defines fair value, establishes a framework for the
      measurement of fair value, and enhances disclosures about fair value
      measurements. The Statement does not require any new fair value measures. The
      Statement is effective for fair value measures already required or permitted
      by
      other standards for fiscal years beginning after November 15, 2007. The Company
      is required to adopt SFAS 157 beginning on January 1, 2008. SFAS 157 is required
      to be applied prospectively, except for certain financial instruments. Any
      transition adjustment will be recognized as an adjustment to opening retained
      earnings in the year of adoption. In November 2007, the FASB proposed a 1-year
      deferral of Statement 157’s fair-value measurement requirements for nonfinancial
      assets and liabilities that are not required or permitted to be measured at
      fair
      value on a recurring basis. The Company is currently evaluating the impact
      of
      adopting Statement 157 on its results of operations and financial position.





**(3)**  **BUSINESS
      ACQUISITION AND DISPOSITION**





On
      December 28, 2005, the Company completed the sale of its myoblast cell therapy
      assets to Mytogen, Inc. (“Mytogen”). Royalty payments made to the Company under
      this agreement will be recognized when received. In connection with the sale
      of
      the myoblast-related assets and the termination of our cell therapy operations
      in Charlestown, Massachusetts in December 2005, the Company incurred cash
      charges of approximately $75,000 in staff termination costs, accrued $460,000
      for continuing lease obligations for the Charlestown facility (net of expected
      sublease income) and recorded non-cash write-offs of $93,000 of fixed assets
      and
      leasehold improvements and $1.8 million of intangible assets.





**(4)
      INVESTMENTS**





The
      amortized cost, gross unrealized holding gains, and fair value of
      available-for-sale securities by major security type at December 31, 2007 and
      2006, are as follows (in thousands):





2007
            
            2006Gross
            
            
            
            
            
            Grossunrealized
            
            
            
            
            
            unrealizedholding
            
            
            
            
            
            holdinggains
            
            Fair
            
            
            
            gains
            
            FairCost
            
            (losses)
            
            Value
            
            Cost
            
            (losses)
            
            ValueEquity
                securities
            
            $
            290
            
            $
            (153
            )
            $
            137
            
            $
            -
            
            $
            -
            
            $
            -Corporate
                bonds
            
            
            16,226
            
            
            8
            
            
            16,234
            
            
            22,557
            
            
            13
            
            
            22,570$
            16,516
            
            $
            (145
            )
            $
            16,371
            
            $
            22,557
            
            $
            13
            
            $
            22,570





During
      2007, the Company acquired 806,452 common shares and 150,000 warrants with
      an
      exercise price of $0.75 of a publically traded company as consideration for
      the
      release of certain security interests in a third party. The common shares are
      included in equity securities above, were valued at the closing price of the
      stock on the date of acquisition and are marked to market based on the closing
      price of the common stock at the end of each reporting period. The warrants,
      classified as an other current asset on the balance sheet, were recorded at
      fair
      value on the date of acquisition using the Black-Sholes option pricing model
      and
      are carried at cost.





Maturities
      of debt securities classified as available-for-sale had fair values as follows
      at December 31 (in thousands):





2007
            
            2006Due
                within one year
            
            $
            16,234
            
            $
            22,570Due
                after one year through four years
            
            
            -
            
            
            -$
            16,234
            
            $
            22,570





Proceeds
      from the sale or maturity of investment securities available for sale were
      $42.7
      million, $34.7 million, and $33.7 million in 2007, 2006, and 2005, respectively.
      The Company did not record any realized gains or losses during 2007 and
      2006.





F-12





**(5)
      PROPERTY AND EQUIPMENT**





Property
      and equipment consist of the following at December 31 (in
      thousands):





**2007**
            
            **2006**Equipment
            
            $
            8,883
            
            $
            8,672Leasehold
                improvements
            
            
            6,474
            
            
            6,474Furniture
                and fixtures
            
            
            414
            
            
            41415,771
            
            
            15,560Less
                accumulated depreciation and amortization
            
            
            (13,730
            )
            
            (12,639
            )$
            2,041
            
            $
            2,921





Depreciation
      and amortization expense related to property and equipment was $1,163,000,
      $1,385,000, and $1,558,000 for the years ended December 31, 2007, 2006, and
      2005, respectively.





**(6)
      ACCRUED OTHER EXPENSES**





Accrued
      other expenses consisted of the following at December 31 (in
      thousands):





2007
            
            2006Payroll,
                compensation, and benefits
            
            $
            1,952
            
            $
            1,396Accrued
                warrant liability
            
            
            307
            
            
            844Other
            
            
            1,683
            
            
            2,060Total
                other accrued expenses
            
            $
            3,942
            
            $
            4,300





**(7)
      INTANGIBLE ASSETS**





Beginning
      in January 2004, intangible assets arising from the Company’s merger with
      Diacrin were being amortized through December 2024 on a straight-line basis.
      The
      carrying value of the intangible assets was supported by the discounted value
      of
      milestone payments due under the Terumo License and Development Agreement,
      which
      was acquired as part of the merger. As of December 31, 2004, the carrying value
      of the intangible assets (net of amortization) was $1.9 million. On December
      28,
      2005, the Company completed the sale of the Company’s myoblast assets, which
      included the assignment of the Terumo License and Development Agreement, to
      Mytogen, Inc. As a result of the assignment, the Company recorded a non-cash
      write-off of the intangible assets, net of amortization, in the amount of $1.8
      million in 2005.





F-13




**(8)
      LONG-TERM DEBT**





Long-term
      debt consists of the following at December 31 (in thousands):




**2007**
            
            **2006**Industrial
                revenue bond
            
            $
            1,370
            
            $
            1,995Notes
                payable:Term
                loan from landlord
            
            
            226
            
            
            339Economic
                development loan
            
            
            -
            
            
            211,596
            
            
            2,355Less
                current maturities
            
            
            (789
            )
            
            (754
            )$
            807
            
            $
            1,601




Aggregate
      maturities of long-term debt are as follows (in thousands):





2008
            
            $
            7892009
            
            
            807$
            1,596




**(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 (MIDFA) , and a guarantee from
          The
          Warner-Lambert Company. Through June 2006, MIDFA’s and the Warner-Lambert
          Company’s guarantees were each equal in value to one-half of the outstanding
          balance of the loan. Effective
          July 2006 and thereafter, Warner-Lambert's guarantee is equal in value
          to the
          outstanding principal balance. The annual fee for the letter of credit
          is one
          percent of the outstanding balance, which totaled $15,000, $21,000, and
          $27,000
          for the years ended December 31, 2007, 2006, and 2005, respectively.





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 2007, 2006, and
      2005
      were 5.31 percent, 5.51 percent, and 3.48 percent, respectively. The Bond is
      subject to mandatory sinking fund redemption. The Company began making sinking
      fund payments in July 2000; the balance of the sinking fund at December 31,
      2007
      and 2006 was $338,000 and $313,000, 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 derivative 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 $1,370,000 and extends through
      the life of the outstanding bond.





The
      Company has determined the interest rate swap to be ineffective and, as
      such, changes in the fair value of the swap agreement are included in interest
      expense. The fair value of the swap agreement was ($38,000) and ($47,000) at
      December 31, 2007 and 2006, respectively.





**(b)
      TERM LOAN**





In
      connection with the lease of the office and laboratory facility, the landlord
      loaned $858,000 for 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.





F-14




**(c)
      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 was considered a loan, which accrued interest on the principal balance
        at 5 percent per year until the Company was required to commence payment
        as
        described below.
 
 Quarterly
        payments of principal and interest were originally scheduled to commence
        on
        January 15, 2002. Subsequent loan payments were to be deferred or forgiven
        by
        the County if the Company achieved 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; as a result, in February 2004, the Department of
        Economic Development of Montgomery County, Maryland, converted $68,408 of
        the
        $125,000 conditional loan into a grant. Repayment of the remaining $56,592,
        plus
        accrued interest of $6,251, occurs in quarterly installments of $4,360, which
        commenced in April 2004 and continues through January 2008. The interest
        rate is
        fixed at 5 percent.
 
 **(9)
        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 earned under these contracts is summarized as follows
        (in
        thousands):
 
 **2007**
              
              **2006**
              
              **2005**Department
                  of Homeland Security/U.S. Department of Agriculture
              
              $
              4,438
              
              $
              1,464
              
              $
              498PATH's
                  Malaria Vaccine Initiative
              
              
              1,115
              
              
              352
              
              
              1,496Vaccine
                  Research Center
              
              
              7,179
              
              
              13,931
              
              
              18,791U.S.
                  Naval Medical Research Center
              
              
              9
              
              
              70
              
              
              1,599Other
                  strategic alliances and research grants
              
              
              1,306
              
              
              3,106
              
              
              4,170$
              14,047
              
              $
              18,923
              
              $
              26,554
 
 Our
        results of operations included $619,000, $799,000, and $2.3 million during
        the
        years ended December 31, 2007, 2006, and 2005, of amortization of upfront
        contract and license fees which were received in prior years. Amortized revenues
        for the year ended December 31, 2005 included $1.1 million from unearned
        upfront
        contract and license fees related to the Terumo agreement, including $667,000
        of
        accelerated amortization due to the previously announced assignment of the
        Terumo agreement as part of the Company’s sale of its myoblast cell therapy
        assets in December 2005.
 
 **(a)
        U.S. DEPARTMENT OF HOMELAND SECURITY (DHS)**
 
 In
        January 2007, the Company signed a 3-year contract with the Department of
        Homeland Security (DHS) to support the development and manufacture of novel
        adenovector-based vaccines against foot and mouth disease (FMD). Under the
        agreement, the Company received $6.0 million in 2007 for program funding
        for the
        first year and will receive up to $15.1 million over three years if DHS
        exercises its renewal options under the contract.
 
 In
        August
        2007, the DHS executed the first renewal option under this agreement. This
        option will provide $5.6 million in 2008 to support the development of vaccines
        for FMD. At the time this option was exercised, the total value of the
        three-year agreement was increased from up to $15.1 million to up to $17.4
        million if all renewal options are exercised. The additional funds will be
        used
        for expanded development activities.
 
 **(b)
        U.S. DEPARTMENT OF AGRICULTURE (USDA)**
 
 In
        August
        2004, the Company signed a 1-year, $304,000 cooperative agreement, with the
        U.S.
        Department of Agriculture (USDA), for the development of vaccine candidates
        against foot-and-mouth disease (FMD).
 
 In
        March
        2006, the Company received a 20-month, $1.7 million extension of its agreement
        with the USDA, which was funded through an interagency agreement by the U.S.
        Department of Homeland Security. The purpose of the agreement is to further
        advance the development of the Company’s proprietary cell line and adenovector
        technology for the generation of countermeasure vaccines and anti-viral agents
        to prevent the spread of FMD.
 
 F-15
 
 **(c)
        PATH’S MALARIA VACCINE INITIATIVE (MVI)**
 
 In
        March
        2004, the Company signed a 2-year, $2,581,000 contract for the development,
        production and evaluation of vaccines against malaria. Under the contract,
        the
        Company is responsible for constructing adenovector-based vaccine candidates
        using its proprietary cell line and second-generation adenovector technology.
        The contract includes $547,000 for work to be performed under a separate
        Collaborative Research and Development Agreement (CRADA) with the Navy Medical
        Research Center (NMRC). Under the CRADA, NMRC will provide the Company with
        optimized malaria genes to be used in the development of the adenovector
        vaccines as well as provide preclinical evaluation of the vaccine candidates.
        In
        August 2006, contract funding was increased to $3,164,000 and the term extended
        through August 2007.
 
 In
          May
          2007, the Company amended and extended its existing Collaborative Research,
          Development and Supply Agreement with MVI. The amendment included up to
          $750,000
          in additional funding in 2007 to continue advancing a new multivalent malaria
          vaccine toward clinical evaluation. We also received $72,000 under separate
          amendments in September 2007.
 
 **(d)
        U.S. NAVAL MEDICAL RESEARCH CENTER (NMRC)**
 
 In
        January 2003, the Company signed a 2-year, $1,900,000 fixed price contract
        with
        the U.S. Naval Medical Research Center (NMRC) to aid in the development of
        vaccines against malaria and dengue fever. Under the contract, the Company
        was
        responsible for constructing and producing adenovector-based vaccine candidates
        using its proprietary cell line and second-generation adenovector
        technology.
 
 In
        January 2005, the Company signed a 1-year, $1,582,000 fixed price contract
        for
        the production of vaccines against malaria. Under the contract, the Company
        was
        responsible for producing, testing, and releasing malaria vaccines under
        current
        Good Manufacturing Practices standards for preclinical evaluation by NMRC.
        The
        Company successfully completed production of the required malaria vaccine
        supplies in 2006 and will provide, as needed, regulatory support to NMRC
        with
        regard to their Investigational New Drug (IND) application with the FDA.
 
 In
        September 2007, the Company entered into a CRADA with the U.S. Military Malaria
        Vaccine Program at the Walter Reed Army Institute of Research and the NMRC
        for
        the development and pre-clinical testing of a malaria vaccine candidate
        against *Plasmodium vivax (P. vivax)* .
        In
        addition to the CRADA, we signed a one-year, $247,000 contract with the
        Department of Defense to construct and test the adenovector-based vaccine,
        which
        carries a novel proprietary antigen against *P.
        vivax* .
 
 **(e)
        VACCINE RESEARCH CENTER**
 
 In
        December 2001, the Vaccine Research Center (VRC) at the National Institute
        of
        Allergy and Infectious Diseases of the National Institutes of Health (NIAID)
        selected the Company to collaborate in the development of a worldwide
        preventative HIV vaccine candidate. This collaboration was expanded to include
        the development of a SARS vaccine candidate (April 2003) and an influenza
        vaccine candidate (February 2006). The Company has a cost-plus fixed fee
        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 six option years. During the fourth quarter
        of 2007, the program entered its sixth option year, resulting in additional
        committed funding for fiscal year 2008 of $1.9 million. As a result of this
        funding, the VRC contract now has a total value of approximately $55 million
        since it was first initiated in 2001.
 
 In
          September 2006, the Company entered into an additional agreement with the
          VRC
          that provides up to $52 million over five years, composed of an initial
          $7
          million commitment which was expected to be realized during fiscal year
          2007,
          however due to delays at the Vaccine Pilot Plant only $5.3 million was
          realized,
          and an additional $45 million if NIAID exercises its annual renewal options.
          Under the agreement, the Company will support the transfer of its manufacturing
          and purification processes to the VRC to further clinical development of
          an HIV
          vaccine, including development of a larger-scale manufacturing and
          product-release process necessary for further, clinical grade HIV vaccine
          production. GenVec will also receive funding for the continued development
          of
          next-generation HIV vaccine candidates. In connection with the agreement,
          the
          Company granted NIAID a non-exclusive research license for the Company’s
          proprietary adenovector, production cell line, manufacturing process, and
          formulation technologies for HIV vaccines.
 
 F-16
  The
        program encompasses a base year and four option years. During the fourth
        quarter
        of 2007, the program entered its second year of funding. This resulted in
        $5.1
        million additional committed funding for the fiscal year 2008.
 
 **(f)
        OTHER STRATEGIC ALLIANCES AND RESEARCH GRANTS**
 
 Revenues
        in 2007 and 2006 include $0 and $1.7 million earned under our collaboration
        agreement with Fuso Pharmaceutical Industries, Ltd. (FUSO). In accordance
        with
        the terms of the agreement, the FUSO collaboration ended December 31, 2006.
        Revenues in 2007 and 2006 include $291,000 and $222,000 earned under our
        collaboration agreement with the Cordis Corporation (Cordis). All revenue
        earned
        in 2006 and $63,000 earned in 2007 under the Cordis agreement reflect the
        amortization of deferred revenues associated with a $1.0 million advance
        payment
        received from Cordis in January 2004. The remaining $228,000 was recognized
        in
        accordance with an additional cost sharing provision under the original Cordis
        agreement. As of December 31, 2007, the Company may receive up to an additional
        $272,000 as termination costs are incurred by the Company in connection with
        the
        previously announced decision in May 2006 to end the Phase II BIOBYPASS® trial.
 
 Revenues
        in 2005 include approximately $1.1 million in amortized revenues recognized
        under our development agreement with Terumo Corporation (Terumo) prior to
        the
        previously announced sale of our myoblast assets and assignment of the Terumo
        agreement to Mytogen, Inc. in December 2005.
 
 **(10)
        COMMITMENTS**
 
 **(a)
        LEASE AGREEMENTS**
 
 The
          Company has a non-cancelable operating lease for its Gaithersburg, MD
          facilities, which expires on November 1, 2009. **** The
          Company also had an operating lease for its Charlestown, MA facility, which
          expired in October 2006. The lease agreement for the Gaithersburg, MD facility
          includes a provision for a 3 percent annual increase in base rent. As part
          of
          the lease, the landlord’s 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. Rent expense under all operating leases
          was
          approximately $584,000, $611,000, and $1,934,000 for the years ended December
          31, 2007, 2006, and 2005, respectively.
 
 Future
        minimum lease payments under our non-cancelable operating lease are as follows
        (in thousands):
 
 2008
                
                $
                8152009
                
                
                649$
                1,464
 
 At
        December 31, 2007 and 2006, the Company had a deferred lease liability of
        $398,000 and $582,000, respectively.
 
 **(b)
        LICENSE AGREEMENTS**
 
 In
        May
        1996, the Company entered into an exclusive, worldwide license agreement
        with
        Scios, Inc. (Scios) for rights to 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. All Scios warrants expired as of December 11, 2005.
 
 In
        November 2001, the Company entered into an exclusive, worldwide license
        agreement with Baylor College of Medicine (Baylor) for the rights to related
        to
        the MATH1 and HATH1 composition of matter and methods of use thereof for
        gene
        therapy applications. As consideration for the rights, the Company agreed
        to pay
        a non-refundable initial license fee of $50,000 at the time of execution
        of the
        license agreement. In addition, the Company has agreed to pay a minimum annual
        license maintenance fee, a percentage of product royalties, and milestone
        payments based on the Company’s achievement of certain clinical and regulatory
        related milestones for these rights.
 
 F-17
  In
        December 2006, the Company terminated its license with the Public Health
        Service
        (PHS) covering certain development and commercialization rights regarding
        diagnostic and therapeutic uses of the PEDF gene and protein.
 
 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.
 
 **(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 rights to the resulting
        technology. Total grant amounts paid by the Company were approximately $202,000,
        $190,000, and $261,000 for the years ended December 31, 2007, 2006, and 2005,
        respectively.
 
 As
        discussed in Note 2, the Company has agreements with clinical sites for the
        treatment of patients under clinical protocols. Total costs under these
        agreements were $2,235,000, $1,713,000, and $3,154,000 for the years ended
        December 31, 2007, 2006, and 2005, respectively.
 
 Additionally,
        certain agreements disclosed above require the Company to pay royalties upon
        commercial sales 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.
 
 **(11)
        STOCKHOLDERS’ EQUITY**
 
 **(a)
        CAPITAL STOCK**
 
 In
        April
        2005, the Company filed with the Securities and Exchange Commission a $35.0
        million shelf registration statement on Form S-3, replacing our prior
        $25,000,000 shelf registration statement.
 
 ·
              On
                  September 26, 2005, the Company sold 7,600,000 shares of common
                  stock to
                  various investors at $2.00 per share under the shelf registration.
                  Proceeds, net of offering costs, from this sale totaled $14.0 million.
                  SG
                  Cowen & Co., LLC (“SG Cowen”) was engaged as the sole placement agent
                  for this transaction. At the time of this offering, Stelios Papadopoulos,
                  Ph.D., was a Vice Chairman in the investment banking division of
                  SG Cowen
                  and was a member of GenVec’s board of
                  directors.
 
 ·
              On
                  December 21, 2006, the Company sold 9,610,000 shares of common
                  stock to
                  various investors at $2.05 per share under the shelf registration.
                  Proceeds, net of offering costs, from this sale totaled $18.3 million.
                  Rodman and Renshaw was engaged as the sole placement agent for
                  this
                  transaction.
 
 On
        February 1, 2007, the Company filed a $100.0 million shelf registration
        statement on Form S-3 with the Securities and Exchange Commission. The shelf
        registration was declared effective February 12, 2007 and allows the Company
        to
        obtain financing through the issuance of any combination of common stock,
        preferred stock, warrants or debt. To date, the Company has not utilized
        the
        shelf registration but is eligible to do so at such time the Company deems
        appropriate.
 
 On
          March
          15, 2006, the Company entered into a Committed Equity Financing Facility
          (CEFF)
          with Kingsbridge Capital Ltd., under which Kingsbridge has committed to
          purchase
          up to $30.0 million of the Company’s common stock within a 3-year period,
          subject to certain conditions and limitations. As part of the arrangement,
          the
          Company issued a warrant to Kingsbridge to purchase 520,000 shares of the
          Company’s common stock at an exercise price equal to $2.67. The warrant is
          exercisable beginning six months after the date of grant and for a period
          of
          five years thereafter. The Company has classified the warrant as a current
          liability for deferred financing costs, which is recorded at its fair value
          as
          determined under a Black-Scholes pricing model. Assuming a 3.75 year remaining
          life for the warrant, a 3.45 percent risk-free interest rate, and an 80.4
          percent expected volatility and no dividend yield, the fair value of warrant
          liability as of December 31, 2007 was $307,000, a decrease of $445,000
          compared
          to the prior year. Changes in fair value are recorded against operations
          in the
          reporting period in which they occur; increases and decreases in fair value
          are
          recorded as interest expense.
 
 F-18
  Under
        the
        CEFF, the Company may require Kingsbridge to purchase shares of common stock
        at
        prices between 88 percent and 92 percent of the volume weighted average price
        (VWAP) on each trading day during an 8-day pricing period, broken into two
        separate 4-day pricing periods. The value of the maximum number of shares
        the
        Company may issue in any pricing period is equal to the lesser of 1.75 percent
        of the Company’s market capitalization immediately prior to the commencement of
        the pricing period, or $5.0 million. The minimum VWAP for determining the
        purchase price at which the Company’s stock may be sold in any pricing period is
        the greater of $1.25, or 75 percent of the closing price of the Company’s common
        stock on the day prior to the commencement of the pricing period. As
        required under the CEFF, the Company filed a resale registration statement
        with
        respect to the resale of shares issued pursuant to the CEFF and underlying
        the
        warrant, which was declared effective May 5, 2006. The Company is required
        to
        use commercially reasonable efforts to maintain its effectiveness. In
        June
        2007, the Company initiated its first draw against the CEFF. On June 26,
        2007,
        subsequent to the first 4-day pricing period, the Company sold 769,773 common
        shares for gross proceeds of $1.8 million. The second 4-day pricing period
        ended
        on June 29, 2007. This portion of the transaction did not settle until July
        2,
        2007, at which time the Company sold under the CEFF, 832,441 common shares
        for
        gross proceeds of $1.8 million. As of December 31, 2007, the Company has
        sold
        1,602,214 shares of common stock to Kingsbridge. Of these shares, Kingsbridge
        still holds 32,200 common shares. These shares are subject to redemption
        under
        the terms of the CEFF all other shares have been recorded in permanent equity.
 
 The
          fair
          value of the warrant issued to Kingsbridge on the date of grant, of $800,000
          or
          $1.54 per share, was initially recorded as a deferred financing cost to
          additional paid-in capital, with the opposing entry being accrued to other
          expenses in the balance sheet. Such deferred financing costs are allocated
          to
          Kingsbridge shares on an as drawn basis. Through December 31, 2007, the
          current
          liability has been marked-to-market using the Black-Scholes option-pricing
          model. Changes in fair value are recorded against operations in the reporting
          period in which they occur; increases or decreases in fair value are recorded
          as
          interest expense. During 2007, the decrease in the fair value of the warrant,
          $445,000, resulted in a decrease in interest expense. Stock drawn under
          the CEFF
          is initially recorded outside of permanent equity, until such time as
          Kingsbridge sells the shares to outside third parties, due to the existence
          of a
          cash payment feature in the agreement that compensates Kingsbridge based
          on any
          reduction in the fair value of shares held by Kingsbridge during a period
          in which GenVec fails to maintain the effectiveness of the abovementioned
          registration statement, or electively imposes a trading blackout (i.e.,
          a
“registration payment arrangement”). The amount of compensation is payable in
          cash in both circumstances, or, at the sole discretion of GenVec, in shares
          of
          the Company’s common stock in the event of a trading blackout. The Company
          follows the provisions of FASB Staff Position No. EITF 00-19-2, ** “ *Accounting
          for Registration Payment Arrangements,* ”
which
          requires that contingent obligations to make future payments under a
          registration payment arrangement be recognized and measured separately
          in
          accordance with Statement of Financial Accounting Standards
          No. 5, ** “ *Accounting
          for Contingencies.* ”
The
          Company believes the likelihood of such a cash payment is not probable
          and
          therefore does not need to recognize a liability for such
          obligations.
  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
        percent 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.
 
 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,
        2007
        and 2006:
 
 ·
              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.
 
 F-19
  **(b)
        STOCK OPTION GRANTS**
 
 **Stock
        Option Plans**
 
 In
        June
        2002, at the Company’s Annual Meeting, the stockholders of the Company approved
        the 2002 Incentive Stock Plan (“2002 Plan”) as the replacement for the 1993
        Stock Incentive Plan (“1993 Plan”) and 2000 Director Plan (“2000 Plan”). As
        originally approved by stockholders, under the 2002 Plan, the Company may
        grant
        statutory and non-statutory stock options and restricted stock awards for
        the
        purchase of newly issued common stock up to an aggregate of 1,000,000 shares,
        plus any shares remaining or that are subject to awards that expire or terminate
        under the 1993 Plan and 2000 Plan. Grants awarded under the 2002 Plan may
        be
        subject to adjustment in the event of stock splits and other similar events.
 
 The
        stockholders of the Company have subsequently approved amendments to the
        2002
        Plan to increase the number of common shares available to be issued under
        the
        2002 Plan. In June 2007, at the Company’s Annual Meeting, the stockholders of
        the Company approved an amendment to the 2002 Plan in which the total shares
        available under the 2002 Plan were increased from 8,680,000 to 11,580,000.
 
 Generally
        under the 2002 Plan, 12.5 percent of the option shares of each award are
        exercisable six months after the date of grant; thereafter, the remaining
        option
        shares are exercisable in equal monthly installments over the next three
        and
        one-half years. Stock options granted under this plan generally have a
        contractual term of ten years. The Compensation Committee administers this
        plan,
        approves the individuals to whom options will be granted, and determines
        the
        number of shares and exercise price of each option. Outstanding options under
        the 2002 Plan at December 31, 2007 expire through 2017.
 
 In
        June
        2006, at the Company’s Annual Meeting, the stockholders of the Company approved
        an amendment to the 2002 Plan in which the maximum number of shares with
        respect
        to which stock options and/or restricted shares may be granted to any one
        participant may not exceed 1,000,000 shares per calendar year and no more
        than
        500,000 shares may be issued as shares of restricted stock per calendar year.
  Options
        granted under the 1993 Plan include statutory and non-statutory awards, and
        options granted under the 2000 Plan, which were made to non-employee directors,
        generally permit 25 percent of the option shares of each award to be exercised
        on the anniversary of the grant date and typically have a contractual term
        of
        ten years. The Compensation Committee administered options granted under
        the
        1993 Plan and 2000 Plan, approved the individuals to whom options were granted,
        and determined the number of shares and exercise price of each option.
        Outstanding options under the 1993 Plan and 2000 Plan at December 31, 2007
        expire through 2011.
 
 In
        August
        2003, the Company and Diacrin consummated a business combination under which
        the
        Company acquired Diacrin through an exchange of stock. Under the terms of
        the
        agreement, the Company agreed to assume each option, vested or unvested,
        granted
        by Diacrin under its 1997 Stock Option Plan (“1997 Plan”). Additional grants
        under this plan subsequent to the merger were prohibited. Each option under
        the
        1997 Plan assumed by the Company continued to have, and be subject to, the
        same
        terms and conditions set forth in the Diacrin option plan under which the
        option
        was granted except as adjusted to reflect, among other things, the merger
        exchange ratio and any future changes to the Company’s capitalization. As of
        December 31, 2007, awards outstanding under the 1997 Plan were 125,393 shares.
        Option holders will receive newly issued shares of the Company’s common stock
        upon exercise of their options. The plan is administered by the Compensation
        Committee and includes statutory and non-statutory stock options that are
        exercisable as to 25 percent of the underlying shares per year with a
        contractual term of ten years. Outstanding options under the 1997 Plan at
        December 31, 2006 expire through 2012.
 
 **Stock
        Option Valuation and Expense Information under SFAS No. 123(R)**
 
 On
        January 1, 2006, the Company adopted Statement of Financial Accounting Standards
        No. 123 (revised 2004), “ *Share-Based
        Payment,* ”
(“SFAS
        No. 123(R)”), which requires the measurement and recognition of
        compensation expense for all share-based payment awards made to the Company’s
        employees and directors including employee stock options and employee stock
        purchases based on estimated fair values. The Company adopted SFAS No. 123(R)
        using the modified prospective application method which requires the Company
        to
        record compensation cost related to unvested option awards as of December
        31,
        2005 by recognizing the unamortized grant date fair value of these awards
        over
        the remaining service period of those awards with no change in historical
        reported earnings. Awards granted after December 31, 2005 are valued at fair
        value in accordance with SFAS No. 123(R) and compensation expense is recognized
        on a straight-line basis over the service period of each award. The following
        table summarizes stock-based compensation expense related to employee stock
        options under SFAS No. 123(R) for the years ended December 31, 2007 and
        2006, which was allocated as follows:
  F-20
 
 **December 31, 2007**
              
              **December 31, 2006***(in
                  thousands)*
              
              *(in
                  thousands)*Research
                  and development
              
              $
              1,274
              
              $
              681General
                  and administrative
              
              
              524
              
              
              273$
              1,798
              
              $
              954
  
 The
        Company uses the Black-Scholes pricing model to value stock options. The
        Black-Scholes model requires the use of a number of complex assumptions
        including expected volatility of the Company’s stock price and the expected life
        of option grants. The weighted-average estimated fair value of employee stock
        options granted during the twelve months ended December 31, 2007 and 2006
        was
        calculated using the Black-Scholes model with the following weighted-average
        assumptions:
  **December 31, 2007**
                
                **December 31, 2006**
                
                **December 31, 2005**Risk-free
                    interest rate
                
                
                4.64
                %
                
                4.60
                %
                
                3.70
                %Expected
                    dividend yield
                
                
                0.00
                %
                
                0.00
                %
                
                0.00
                %Expected
                    volatility
                
                
                80.36
                %
                
                86.53
                %
                
                75.00
                %Expected
                    life (years)
                
                
                5.59
                
                
                5.64
                
                
                4.00Weighted-average
                    fair value of options granted
                
                $
                1.87
                
                $
                1.17
                
                $
                1.10
 
 The
        volatility assumption for 2007 is based on the weighted average volatility
        for
        the most recent 1-year period as well as the volatility over the expected
        life
        of 5.59 years. For 2006, the volatility assumption is based on the 5-year
        long-term volatility of the Company’s stock price in relationship to its average
        stock price during the same period. Prior to January 1, 2006, the Company
        had
        used an average of its historical stock price volatility and an industry
        volatility index in accordance with SFAS No. 123 for purposes of its pro
        forma information.
  The
        risk-free interest rate assumption is based upon various U.S. Treasury rates
        as
        of the date of the grants, ranging from 3.28 percent to 5.13 percent and
        4.28
        percent to 5.22 percent, respectively, for the years ended December 31, 2007
        and
        2006.
  The
        dividend yield is based on the assumption that the Company is not expected
        to
        declare a dividend over the life of the options.
  The
        expected life of employee stock options represents the weighted average
        combining the actual life of the options that have already been exercised
        or
        cancelled with the expected life of all outstanding options. The expected
        life
        of outstanding options is calculated assuming the options will be exercised
        at
        the midpoint of the vesting date and the full contractual term.
 
 SFAS
          No. 123(R) requires forfeitures to be estimated at the time of grant and
          revised, if necessary, in subsequent periods if actual forfeitures differ
          from
          those estimates. Forfeitures are estimated based on the demographics of
          current
          option holders and standard probabilities of employee turnover. Stock-based
          compensation expense recognized in the statement of operations for the
          year
          ended December 31, 2007 has been revised for actual forfeitures. In the
          Company’s pro forma information required under SFAS No. 123 for the periods
          prior to January 1, 2006, the Company recorded forfeitures as they occurred
          in
          the applicable reporting period. The Company does not record tax related
          effects
          on stock-based compensation given the Company’s historical and anticipated
          operating experience and offsetting changes in our valuation allowance
          which
          fully reserves against potential deferred tax assets.
 
 F-21
  **Stock
        Options**
 
 The
        activity of the plans as of December 31, 2007 is as follows:
 
 Number
                
                Weighted
                
                Weighted
                
                Aggregateof
                    Shares
                
                Average
                
                Average
                
                Intrinsic*(in
                    thousands, except per share data)*
                
                Under Option
                
                Exercise Price
                
                Contractual Life (years)
                
                ValueOutstanding
                    at December 31, 2004
                
                
                4,785
                
                $
                3.20Granted
                
                
                1,633
                
                
                1.91Exercised
                
                
                (342
                )
                
                0.96Cancelled
                
                
                (1,235
                )
                
                3.05Outstanding
                    at December 31, 2005
                
                
                4,841
                
                
                3.01Granted
                
                
                2,041
                
                
                1.59Exercised
                
                
                (44
                )
                
                1.27Cancelled
                
                
                (1,330
                )
                
                2.90Outstanding
                    at December 31, 2006
                
                
                5,508
                
                
                2.52Granted
                
                
                1,522
                
                
                2.69Exercised
                
                
                (296
                )
                
                2.18Cancelled
                
                
                (1,147
                )
                
                2.88**Stock
                    Options outstanding at December 31, 2007**
                
                
                5,587
                
                $
                2.51
                
                
                6.7
                
                $
                177**Vested
                    or expected to vest at December 31, 2007**
                
                
                4,085
                
                $
                2.51
                
                
                6.7
                
                $
                177**Exercisable
                    at December 31, 2007**
                
                
                3,424
                
                $
                2.74
                
                
                5.5
                
                $
                65
 
 U nrecognized
        stock-based compensation expense related to stock options was approximately
        $3.3
        million as of December 31, 2007. This amount is expected to be expensed over
        a
        weighted average period of 3.6 years. The aggregate intrinsic value of stock
        options that were exercised during 2007 was $434,000. The Company realized
        proceeds of $647,000 and  $55,000
        from options exercised during the years ended December 31, 2007 and 2006,
        respectively.
  The
        following table summarizes information about the Company’s stock options
        outstanding at December 31, 2007:
 
 **Outstanding**
              
              **Exercisable****Weighted****average**
              
              **Weighted**
              
              
              
              **Weighted****remaining**
              
              **average**
              
              
              
              **average****Number**
              
              **contractual**
              
              **exercise**
              
              **Number**
              
              **exercise****Range
                      of exercise prices**
              
              **of
                  shares**
              
              **life**
              
              **price**
              
              **of
                  shares**
              
              **price**(number
                  of shares in thousands)$0.00
                  - $1.00
              
              
              -
              
              
              -
              
              $
              -
              
              
              -
              
              $
              -$1.01
                  - $3.00
              
              
              3,966
              
              
              7.7
              
              
              2.03
              
              
              1,925
              
              
              2.01$3.01
                  - $4.00
              
              
              1,121
              
              
              4.8
              
              
              3.30
              
              
              1,064
              
              
              3.30$4.01
                  - $5.00
              
              
              426
              
              
              3.4
              
              
              4.32
              
              
              361
              
              
              4.34$5.01
                  - $10.00
              
              
              74
              
              
              3.0
              
              
              6.07
              
              
              74
              
              
              6.075,587
              
              
              6.7
                  years
              
              $
              2.51
              
              
              3,424
              
              $
              2.74
  As
        of
        December 31, 2007 options covering 3,424,286 shares were exercisable at
        $1.06
        to $9.63 per share (average $2.74 per share) and options covering 3,932,335
        shares remain available to be granted.
 
 **(c)
        EMPLOYEE STOCK PURCHASE PLAN**
 
 In
        December 2000, the Company adopted the 2000 Employee Stock Purchase Plan,
        referred to as the “Purchase Plan.” Under
        the
        Purchase Plan, employees may purchase the Company’s common stock through payroll
        deductions at a purchase price equal to 85 percent of the fair market value
        of
        the Company’s common stock on either the first business day or last business day
        of the applicable six month offering period, whichever is lower. 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
        6-month offering period is 6,250 shares. In June 2006, the Board approved
        a
        resolution effectively fixing the number of shares available for issuance
        under
        the Purchase Plan. As of December 31, 2007, 1,978,218 shares were available
        for
        issuance under the Purchase Plan. In January 2008, the Company issued 50,045
        shares related to the second half 2007 purchase period, which would reduce
        the
        shares available for issuance to 1,928,173. The purchase price of these shares
        was $1.25 and the Company realized proceeds of $63,000.
 
 F-22
  Employees
        purchased 37,027 shares, 120,146 shares, and 98,357 shares during the twelve
        months ended December 31, 2007, 2006, and 2005, respectively, at a weighted
        average purchase price of $2.00, $1.19, and $1.39. The Company realized proceeds
        of $74,000, $143,000, and $137,000 from shares acquired under the Purchase
        Plan
        during the years ended December 31, 2007, 2006, and 2005,
        respectively.
 
 The
        Purchase Plan will terminate on October 18, 2010, unless terminated earlier
        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.
        Outstanding and vested warrants are summarized below (in thousands, except
        per
        share amounts):
 
 2007
                
                2006
                
                2005Exercise
                    Price
                
                Outstanding
                
                Vested
                
                Outstanding
                
                Vested
                
                Outstanding
                
                Vested$
                2.67
                
                
                520
                
                
                520
                
                
                520
                
                
                520
                
                
                —
                
                
                —$
                3.60
                
                
                —
                
                
                —
                
                
                66
                
                
                66
                
                
                66
                
                
                66$
                3.93
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                25
                
                
                25520
                
                
                520
                
                
                586
                
                
                586
                
                
                91
                
                
                91
 
 **(12)
        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):
 
 2007
              
              2006
              
              2005Tax
                  provision computed at the statutory rate
              
              $
              (6,361
              )
              $
              (6,553
              )
              $
              (4,676
              )State
                  income taxes, net of federal income tax provision
              
              
              (864
              )
              
              (404
              )
              
              (962
              )Book
                  expenses not deductible for tax purposes
              
              
              7
              
              
              6
              
              
              7Research
                  and experimentation tax credit
              
              
              (1,021
              )
              
              (1,119
              )
              
              (1,146
              )Nondeductible
                  compensation expense
              
              
              486
              
              
              322
              
              
              94Change
                  in valuation allowance for deferred tax assets
              
              
              7,753
              
              
              7,748
              
              
              6,683Income
                  tax expense
              
              $
              —
              
              $
              —
              
              $
              —
  Financial
        Accounting Standards Board Statement No. 109, “ *Accounting
        for Income Taxes* ,” provides
        for the recognition of deferred tax assets if realization of such assets
        is more
        likely than not. Based upon the weight of available evidence, which includes
        the
        Company’s historical operating performance and the reported cumulated net losses
        to date, the Company has provided a full valuation allowance against its
        deferred tax assets.
  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):
  F-23
  2007
              
              2006
              
              2005Net
                  operating loss carryforwards
              
              $
              89,838
              
              $
              83,394
              
              $
              76,689Capital
                  loss carryforwards
              
              
              328
              
              
              328
              
              
              328Research
                  and experimentation tax credit
              
              
              12,565
              
              
              11,544
              
              
              10,425Deferred
                  rent
              
              
              —
              
              
              —
              
              
              178Property
                  and equipment, principally due to differences in depreciation
              
              
              (275
              )
              
              (501
              )
              
              (507
              )Deferred
                  compensation expense
              
              
              979
              
              
              793
              
              
              747Other
              
              
              115
              
              
              178
              
              
              151Total
                  deferred tax assets
              
              
              103,550
              
              
              95,736
              
              
              88,011Valuation
                  allowance
              
              
              (103,550
              )
              
              (95,736
              )
              
              (88,011
              )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.
 
 At
        December 31, 2007, the Company has net operating loss carryforwards of
        approximately $232.6 million for federal income tax purposes of which $59.4
        million expire at various dates through 2013, and $173.2 million expire at
        various dates through 2027. The Company has research and experimentation
        tax
        credit carryforwards of $12.6 million at December 31, 2007, of which $1.7
        million expire through 2013 and $10.9 million expire through 2027. The Company
        also has capital loss carryforwards of $0.8 million which will expire in
        2008.
  The
        Company’s NOL and tax credit carryforwards may be significantly limited under
        Section 382 of the Internal Revenue Code (IRC). NOL and tax credit carryforwards
        are limited under Section 382 when there is a significant “ownership change” as
        defined in the IRC. During 2007 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 carryforwards that can be utilized. When the Company
        completes the necessary studies, the amount of NOL carryforwards available
        may
        be reduced significantly. However, since the valuation allowance fully reserves
        for all available carryforwards, 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.
 
 As
        discussed in Note 2, the Company adopted the provisions of FIN 48 as of January
        1, 2007. At January
        1, 2007 and December 31, 2007, the Company had no gross unrecognized tax
        benefits. The Company does not expect any significant changes in unrecognized
        tax benefits over the next 12 months.
  The
        Company files U.S. and state income tax returns in jurisdictions with varying
        statutes of limitations. The 2004 through 2007 tax years generally remain
        subject to examination by federal and most state tax authorities.
  **(13)
          OTHER COMPREHENSIVE INCOME (LOSS)**
 
 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):
  F-24
  **Unrealized**
                  
                  **Accumulated****Unrealized**
                  
                  **Gain
                      (Loss)**
                  
                  **Other****Gain
                      (Loss)**
                  
                  **on
                      Derivative**
                  
                  **Comprehensive****on
                      Securities**
                  
                  **Instruments**
                  
                  **Income
                      (Loss)**Balance
                      at December 31, 2004
                  
                  $
                  (15
                  )
                  $
                  (240
                  )
                  $
                  (255
                  )Net
                      current period change
                  
                  
                  (698
                  )
                  
                  -
                  
                  
                  (698
                  )Interest
                      rate swap recharacterization adjustment
                  
                  
                  (240
                  )
                  
                  240
                  
                  
                  -Reclassification
                      adjustments for gains (losses) reclassified into income
                  
                  
                  908
                  
                  
                  -
                  
                  
                  908Balance
                      at December 31, 2005
                  
                  
                  (45
                  )
                  
                  -
                  
                  
                  (45
                  )Net
                      current period change
                  
                  
                  (1,169
                  )
                  
                  -
                  
                  
                  (1,169
                  )Reclassification
                      adjustments for gains (losses) reclassified into income
                  
                  
                  1,227
                  
                  
                  -
                  
                  
                  1,227Balance
                      at December 31, 2006
                  
                  
                  13
                  
                  
                  -
                  
                  
                  13Net
                      current period change
                  
                  
                  (1,678
                  )
                  
                  -
                  
                  
                  (1,678
                  )Reclassification
                      adjustments for gains (losses) reclassified into income
                  
                  
                  1,520
                  
                  
                  -
                  
                  
                  1,520Balance
                      at December 31, 2007
                  
                  $
                  (145
                  )
                  $
                  -
                  
                  $
                  (145
                  )
  Other
        comprehensive income (loss) does not reflect the effect of income taxes because
        the Company did not have an income tax expense or benefit during the three
        years
        ended December 31, 2007.
 
 **(14)
        QUARTERLY RESULTS (UNAUDITED)**
  The
        Company’s unaudited quarterly information is as follows (in thousands, except
        per share data):
  **2007**
              
              **Q1**
              
              **Q2**
              
              **Q3**
              
              **Q4**Revenue
              
              $
              2,903
              
              $
              3,709
              
              $
              3,777
              
              $
              3,658Operating
                  Loss
              
              $
              (6,219
              )
              $
              (4,817
              )
              $
              (4,750
              )
              $
              (5,551
              )Net
                  Loss
              
              $
              (6,001
              )
              $
              (4,219
              )
              $
              (4,053
              )
              $
              (4,435
              )Basic
                  and Diluted Loss Per Share
              
              $
              (0.08
              )
              $
              (0.06
              )
              $
              (0.05
              )
              $
              (0.06
              )**2006**
              
              
              **Q1**
              
              
              **Q2**
              
              
              **Q3**
              
              
              **Q4**Revenue
              
              $
              5,923
              
              $
              5,159
              
              $
              4,342
              
              $
              3,499Operating
                  Loss
              
              $
              (4,351
              )
              $
              (4,712
              )
              $
              (5,644
              )
              $
              (5,543
              )Net
                  Loss
              
              $
              (4,062
              )
              $
              (4,102
              )
              $
              (5,288
              )
              $
              (5,820
              )Basic
                  and Diluted Loss Per Share
              
              $
              (0.06
              )
              $
              (0.06
              )
              $
              (0.08
              )
              $
              (0.09
              )
  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 may not equal
        the
        loss per share for the respective twelve-month period.
  **(15)
        SUBSEQUENT EVENT**
  On
          January 18, 2008, the Company entered into a manufacturing development
          agreement
          with Cobra Biomanufacturing Plc (“Cobra”) to produce commercial quantities of
          TNFerade, the Company’s lead product candidate. The manufacturing development
          agreement covers technology transfer, scale-up, and validation of the
          manufacturing process for TNFerade through cGMP consistency lots that will
          be
          produced at Cobra’s facility in Oxford, United Kingdom. Under the terms of
          the agreement, the Company made an advance payment to Cobra of
          approximately $1.0 million in January 2008. The total amount to be paid
          under
          the agreement by the Company to Cobra may total up to $9.4 million. The
          work
          is expected to be completed within two years.


F-25