**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**Form 10-K/A**

 
| **x**                                                 | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**     |
|-------------------------------------------------------|----------------------------------------------------------------------------------------------------------|
|                                                  |                                                                                                     |
| **For the fiscal year ended  December 31, 2009** |
|                                                  |                                                                                                     |
| **o**                                                 | **TRANSITION  REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |

 

**For the transition periodfrom                   to                   **

 

**Commission File Number: 001-14895**

 

**AVI BioPharma, Inc.**

(Exact name of registrant as specified in its charter)

 

| **Oregon**                                                      | ** ** | **93-0797222**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |       | (I.R.S. Employer  Identification No.) |

 

| **3450  Monte Villa Parkway, Suite 101, Bothell, Washington** | ** ** | **98021**  |
|--------------------------------------------------------------------|------------|------------|
| (Address of  principal executive offices)                          |       | (Zip Code) |

 

Registrant’s telephone number, including area code:  **(425) 354 5038**

 

Securities registered under Section 12(b) ofthe Act:**None**

 

Securities registered under Section 12(g) ofthe Act:

 

**Common Stock with $.0001 par value**

(Title of Class)

 

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

 

Indicateby check mark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Act. Yes o  No x

 

Indicateby check mark whether the Registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes x  No o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files). Yes o  No o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendmentto this Form 10-K.  x

 

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

 

| Large  accelerated filer o                |   | Accelerated  filer x         |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated  filer o                  |   | Smaller  Reporting Company o |
| (Do not check if  a smaller reporting company) |   |                              |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). Yes o   No x

 

Theaggregate market value of the voting stock held by non-affiliates of theRegistrant as of June 30, 2009 was approximately $128,954,972. This determinationof affiliate status is not necessarily a conclusive determination for otherpurposes.

 

Thenumber of outstanding shares of the Registrant’s Common Stock as of the closeof business on April 26, 2010 was 110,374,160.

 

 

 

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**Explanatory Note**

 

AVI BioPharma, Inc.is filing this Amendment No. 1 on Form 10-K/A (the “Form 10-K/A”)to amend its Annual Report on Form 10-K for the fiscal year ended December 31,2009 (the “Form 10-K”), which was filed with the Securities and ExchangeCommission (the “SEC”) on March 16, 2010. The purpose of this Form 10-K/Ais to file the financial statements in Part II and amend the SubsequentEvent footnote, and to disclose the information required in Part III,Items 10 through 14 and Part IV, Item 15 of the Form 10-K.Accordingly, AVI BioPharma, Inc. hereby amends and replaces in theirentirety Items 10 through 14 of the Form 10-K. Except as described above,this Form 10-K/A does not amend, update or change any other items ordisclosures in the Form 10-K.

 

**PART II**

 

**Item8.  Financial Statements and Supplementary Data.**

 

The information requiredby this Item 8 begins on page F-1 in Item 15 of Part IV of thisreport on Form 10-K and is incorporated into this item by reference.

 

**PART III**

 

**Item10.  Directors, Executive Officers and Corporate Governance.**

 

**ExecutiveOfficers and Directors**

 

The following table setsforth certain information with respect to the current directors and executiveofficers of AVI:

 
| **Name**                                | ** ** | **Age** | ** ** | **Position(4)**                                                                                    |
|-----------------------------------------|------------|---------|------------|----------------------------------------------------------------------------------------------------|
| J. David Boyle  II                      |       | 56      |       | Interim Chief Executive Officer and President,  Senior Vice President, and Chief Financial Officer |
| Patrick L.  Iversen, Ph.D.              |       | 54      |       | Senior Vice President of Strategic Alliances                                                       |
| Ryszard Kole,  Ph.D.                    |       | 63      |       | Senior Vice President of Discovery Research                                                        |
| Paul Medeiros                           |       | 48      |       | Senior Vice President of Business Development, Chief  Business Officer and Secretary               |
| Stephen B.  Shrewsbury, M.D.            |       | 53      |       | Senior Vice President of Preclinical, Clinical and  Regulatory Affairs and Chief Medical Officer   |
| Dwight  D. Weller, Ph.D.                |       | 59      |       | Senior Vice President  of Chemistry and Manufacturing                                              |
| Michael  D. Casey(1)(3)                 |       | 64      |       | Group I Director,  Chairman of the Board                                                           |
| William  A. Goolsbee(1)(3)              |       | 56      |       | Group I Director                                                                                   |
| John  C. Hodgman(2)                     |       | 55      |       | Group II Director                                                                                  |
| Gil  Price, M.D.(2)                     |       | 54      |       | Group I Director                                                                                   |
| M.  Kathleen Behrens, Ph.D.(2)          |       | 57      |       | Group II Director                                                                                  |
| Christopher  S. Henney, Ph.D., D.Sc.(3) |       | 69      |       | Group I Director                                                                                   |
| Anthony  Chase(3)                       |       | 55      |       | Group II Director                                                                                  |

 

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(1)                                  Member of the Compensation Committee.

 

(2)                                  Member of the Audit Committee.

 

(3)                                  Member of the Nominating and CorporateGovernance Committee.

 

(4)                                  The terms of Group I Directors expire asof the date of the 2010 Annual Meeting, and the terms of Group II Directorsexpire as of the date of the 2011 Annual Meeting.

 

***J. David Boyle II***, has served as Interim Chief Executive Officer andPresident since April 20, 2010, and as Senior Vice President and ChiefFinancial Officer of the Company since August 18, 2008.  Mr. Boyle also previously served as theCompany’s Secretary from September 29, 2008 to April 20, 2010. In thefive years prior to his appointment as the Company’s Senior Vice President andChief Financial Officer, Mr. Boyle worked for both XOMA Ltd., abiopharmaceutical company in the field of therapeutic antibody discovery anddevelopment, and Polycom, Inc., a worldwide high technology communicationscompany. Mr. Boyle served as Chief Financial Officer of XOMA Ltd.from July 2005 to August 2008. Prior to his position as ChiefFinancial Officer, Mr. Boyle served as Vice President, FinancialOperations of XOMA Ltd. from January 2005 to July 2005. Mr. Boylejoined XOMA Ltd. in January 2005 from Polycom, Inc. where heserved from March 2002 to December 2004, most recently, as VicePresident, Finance. Mr. Boyle also

 

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brings to the Companyextensive global financial leadership experience in the pharmaceutical industrythrough previous senior leadership positions. Prior to his employment withPolycom, Inc., Mr. Boyle worked for Salix Pharmaceuticals, Ltd.in the US and for Ares Serono Group both in the US and Switzerland. Mr. Boyleholds a Bachelor of Arts degree from Catholic University.

 

***Patrick L. Iversen, Ph.D.***, has served as Senior Vice President of StrategicAlliances since April 10, 2008. From 1997 until April 10, 2008, Dr. Iversenpreviously served as the Company’s Senior Vice President of Research andDevelopment. He also served as a director of the Company from 1997 through May 2005.From 1987 through 1997, Dr. Iversen was on staff at the University ofNebraska Medical Center, most recently as a Professor in the College ofMedicine. Dr. Iversen, who has published extensively on antisense researchand development, additionally served as a consultant to various pharmaceuticaland biotechnology companies, including GLAXO Inc., InnovirPharmaceuticals, Lynx Therapeutics, and Isis Pharmaceuticals, as well as to theCompany. He is a former member of the Leukemia Society of America Board ofDirectors. Dr. Iversen holds a B.S. in Biology from Westminster Collegeand a Ph.D. in Biochemical Pharmacology and Toxicology from the University ofUtah, followed by post-doctoral work at the Eppley Institute for Research inCancer and Allied Diseases. Current services activities include being areviewer for the ONC-L and BST-S study sections of the National Institutes ofHealth.

 

***Ryszard Kole, Ph.D*****.**, has served as Senior Vice President of DiscoveryResearch since April 10, 2008. Prior to his appointment as Senior VicePresident of Discovery Research, Dr. Kole had served as a consultant tothe Company after the closing of the Company’s acquisition of Ercole Biotech, Inc.,a privately held Delaware corporation (“Ercole”), on March 20, 2008. Priorto his service as a consultant with the Company and Ercole’s acquisition by theCompany, Dr. Kole served as President, Chief Scientific Officer and amember of the Board of Directors of Ercole from the time he founded Ercole in2001. He served as a compensated consultant to Ercole from September 2007until its acquisition in March 2008. As a member of Ercole’s seniormanagement, Dr. Kole had primary responsibility for managing Ercole’sinternal and collaborative research activities. At the time of its acquisition,Ercole had six full-time employees and two part-time consultants, including Dr. Kole.In addition to his work with Ercole, Dr. Kole had also been employed bythe University of North Carolina at Chapel Hill (“UNC”) in the Department ofPharmacology as a Professor from 1996 until April 2008. Dr. Koleholds a Ph.D. in Natural Sciences from the Institute of Biochemistry andBiophysics, Polish Academy of Sciences in Warsaw, Poland.

 

***PaulMedeiros***, hasserved as the Senior Vice President of Business Development and Chief BusinessOfficer since May 19, 2009, and has served as Secretary since April 20,2010. In the five years prior to his appointment as the Company’s Senior VicePresident of Business Development and Chief Business Officer, Mr. Medeirosworked for Schering-Plough. Most recently, Mr. Medeiros served as VicePresident, Global Licensing and Strategic Alliances for Schering-Plough, wherehe led worldwide specialty product licensing and strategic partneringinitiatives. Mr. Medeiros joined Schering-Plough in 1996 as marketingplanning director, and subsequently held senior positions of increasingresponsibility in marketing and business development. Prior to Schering-Plough,Medeiros was employed by Merck & Company, where he held positions inField Sales, New Product Planning and Worldwide Human Health Marketing.Medeiros holds an A.B. with honors from Brown University and an M.B.A. fromColumbia Business School. He is a member of the Licensing Executives Societyand is a *Certified Licensing Professional*TM.

 

***Stephen B. Shrewsbury, M.D.***, has served as Chief Medical Officer andSenior Vice President of Preclinical, Clinical and Regulatory Affairs since January 26,2009. In the five years prior to his appointment as the Company’s Chief MedicalOfficer and Senior Vice President of Preclinical, Clinical and RegulatoryAffairs, Dr. Shrewsbury worked as a consultant to companies in thepharmaceutical industry from August 2008 to January 2009.  Prior to his work as a consultant, Dr. Shrewsburyserved as Chief Medical Officer & Senior Vice President, ClinicalDevelopment, Medical and Regulatory Affairs of Adamas Pharmaceuticals Inc.from March 2008 to August 2008. He joined Adamas Pharmaceuticals Inc. in March 2008 from MAPPharmaceuticals Inc., where he served from February 2005 to March 2008as Chief Medical Officer, Formerly Vice President, Clinical and RegulatoryAffairs. Prior to his employment with MAP Pharmaceuticals, Inc., Dr. Shrewsburyworked as Senior Director of Clinical Development of Chiron Corporation from July 2002until February 2005. Prior to joining Chiron, Dr. Shrewsbury heldseveral senior positions at GlaxoSmithKline both in the UK and U.S. from 1993until 2002. Dr. Shrewsbury holds a Bachelor of Medicine and a Bachelor ofSurgery degree from the University of Liverpool, UK.

 

***Dwight D. Weller, Ph.D.***, has served as Senior Vice President of Chemistry andManufacturing of the Company since 1997, as Vice President of Research andDevelopment of the Company from 1992 to 1997, and as a director of the Companyfrom 1991 through May 2006. Dr. Weller received a B.S. in Chemistryfrom Lafayette College and a Ph.D. in Chemistry from the University ofCalifornia at Berkeley, followed by postdoctoral work in Bio-Organic Chemistryat the University of Illinois.  Dr. Wellerwas on the faculty of Oregon State University from 1978 to 1992.

 

***Michael D. Casey*** has served as a director of the Company since May 2006and was appointed the Chairman effective March 10, 2008. In addition toserving as Chairman of the Board, Mr. Casey also serves as Chairman of theCompensation Committee.  Mr. Casey’sexperience in leadership positions in public companies in the biopharmaceuticalindustry qualifies him for service as a member of the Board of Directors.  Since 2002, Mr. Casey has served as adirector of several public biopharmaceutical companies. Previously, Mr. Caseyserved four years as President, Chief Executive Officer and Chairman of MatrixPharmaceutical, Inc., a

 

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biopharmaceuticalcompany, until Chiron Corporation acquired Matrix in 2002. Prior to joiningMatrix, Mr. Casey was President of two divisions of Schein Pharmaceutical, Inc.from 1995 to 1997, and President and Chief Operating Officer of Genetic Therapy, Inc.from 1993 to 1995 until it was sold to Sandoz (Novartis). Mr. Casey alsospent 25 years with Johnson & Johnson, including serving as VicePresident of Sales and Marketing of Ortho Pharmaceutical Corporation andPresident of McNeil Pharmaceuticals. Mr. Casey is a director of CelgeneCorp. and Durect Corporation.  In thepast five years, Mr. Casey has also served as a director of AllosTherapeutics, Cholestech Corporation, Bone Care International, Inc.,OrthoLogic Corporation, and Sicor, Inc.

 

***William A. Goolsbee*** has served as a director of the Company since October 2007.Mr. Goolsbee’s 30-year career in the medical device and biopharmaceuticalindustries qualifies him for service as a member of the Board ofDirectors.  Mr. Goolsbee wasfounder, chairman and Chief Executive Officer of Horizon Medical Inc. from1987 until its acquisition by a unit of UBS Private Equity in 2002. Mr. Goolsbeewas a founding director of ImmunoTherapy Corporation in 1993, becoming chairmanof the board in 1995, a position he held until overseeing the successfulacquisition of the company by the Company in 1998. Experience prior to 1987includes a series of increasingly responsible executive positions withCooperVision Inc. and Cooper Laboratories Inc. Mr. Goolsbeeholds a Bachelor of Arts degree from the University of California at SantaBarbara. Mr. Goolsbee serves as chairman of privately held BMGPharma LLC, a product development and licensing company.

 

***John C. Hodgman*** has served as a director of the Company since March 2004.He also serves as the Chairman of the Audit Committee and as the AuditCommittee’s financial expert.  Mr. Hodgman’ssignificant executive-level experience as a finance executive withbiotechnology and biopharmaceutical companies qualifies him for service as amember of the Board of Directors.  He hasserved as the Senior Vice President of Finance, Chief Financial Officer ofInterMune, Inc., a biotechnology company, since August 2006. Heserved as the Chairman of Cygnus, Inc., a biopharmaceutical company, from1999 to 2008, and as President and Chief Executive Officer of that companybetween 1998 and 2006. Mr. Hodgman joined Cygnus in 1994 as Vice Presidentof Finance and Chief Financial Officer and between 1995 and 1998, he alsoserved as President of Cygnus Diagnostics. He was President and Chief ExecutiveOfficer of Aerogen, Inc., a biopharmaceutical company, from June 2005to October 2005 when the company was sold to Nektar, Inc. Mr. Hodgmanholds a Bachelor of Science degree from Brigham Young University and an M.B.A.from the University of Utah. Mr. Hodgman is a director of ImmersionCorporation.  In the past five years, Mr. Hodgmanhas also served as a director of Inflazyme Pharmaceuticals, Ltd., AlphaInnotech Corporation, and Aerogen, Inc.

 

***Gil Price, M.D.,*** has served as a director of the Company since October 2007.Dr. Price’s experience in the clinical, research and commercial sectors inthe fields of medicine and pharmaceuticals qualifies him for service as amember of the Board of Directors.  Dr. Priceis a clinical physician trained in internal medicine with a long-standinginterest in drug development, adverse drug reactions, drug utilization andregulation. Since 2002, he has been the Chief Executive Officer and ChiefMedical Officer of Drug Safety Solutions. From 1997 to 2002, Dr. Price wasthe director of clinical development for oncology at MedImmune Inc. Priorto joining MedImmune, Dr. Price worked in the CRO sector. Dr. Pricebegan his pharmaceutical career at GlaxoSmithKline Inc., where he workedfor nearly nine years on both the commercial and research sides of the company.Dr. Price is a member of the American Medical Association, the Academy ofPharmaceutical Physicians and a past member of the American Society forMicrobiology.

 

***M. Kathleen Behrens, Ph.D.***, has served as a director of the Companysince March 2009. Dr. Behrens’ significant experience in thefinancial services and biotechnology sectors, as well as in healthcare policy,qualifies her for service as a member of the Board of Directors. Dr. Behrensserved as a member of the President’s Council of Advisors on Science andTechnology (PCAST) from 2001 to early 2009 and she was Chair of PCAST’sSubcommittee on Personalized Medicine. She has served as a public-marketbiotechnology securities analyst as well as venture capitalist focusing onhealthcare, technology and related investments. She was instrumental in thefounding of several biotechnology companies including Protein Design Labs, Inc.and COR Therapeutics, Inc. She worked for Robertson Stephens & Co.from 1983 through 1996, serving as a general partner and managing director. Dr. Behrenscontinued in her capacity as a General Partner for selected venture funds forRS Investments from 1996 through 2009, after management led a buyout of thatfirm from Bank of America. From 1997 to 2005, she was a director of the Boardon Science, Technology and Economic Policy (STEP) for the National ResearchCouncil, and from 1993 to 2000 she was a director, President, Chair and PastChair of the National Venture Capital Association. Dr. Behrens holds aPh.D. in Microbiology from the University of California, Davis.  Dr. Behrens is a director of AmylinPharmaceuticals, Inc.  In the pastfive years, Dr. Behrens has also served as a director of Abgenix, Inc.

 

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***Christopher S. Henney, Ph.D., D.Sc.***, has served as a director of the Companysince March 2009. Dr. Henney’s significant executive-level and boardexperience at biotechnology companies qualifies him to serve as a member of theBoard of Directors.  Dr. Henneyco-founded three major publicly held U.S. biotechnology companies, ImmunexCorporation, ICOS Corporation and Dendreon Corporation, and was a board memberand held executive positions at each company.. From 1995 to January 2003, Dr. Henneywas Chairman and Chief Executive Officer of Dendreon Corporation. Dr. Henneyalso serves as Chairman of Oncothyreon Inc. Dr. Henney received aPh.D. in experimental pathology from the University of Birmingham and a D.Sc. fromthe same university for contributions to the field of immunology. Dr. Henneyserves as Chairman of Oncothyreon Inc., Chairman of Anthera Pharmaceuticals,and as Vice Chairman of Cyclacel Pharmaceuticals, Inc., formerly XcyteTherapies, Inc.  In the past fiveyears, Dr. Henney also served as Chairman of SGX Pharmaceuticals, Inc.

 

***Anthony Chase***, has served as a director of the CompanyApril 20, 2010.  Mr. Chase’s experiencein leadership positions in public companies qualifies him for service as amember of the Board of Directors.  SinceJanuary 2009, Mr. Chase has served as Executive Vice President of Crest InvestmentCompany.  He is also Chairman ofChaseSource, L.P., a position he has held since October 2006, and ChaseSourceReal Estate Services, L.P., a position he has held since January 2008.  Previously, he was Chairman and ChiefExecutive Officer of ChaseCom, L.P. from January 1997 to December 2007, whenChaseCom, L.P. was acquired by AT&T. Mr. Chase is a tenured Professor at the University of Houston Law Centerwhere he began teaching in 1990.  Hegraduated with honors from Harvard College, received a law degree from HarvardLaw School, and received an MBA from Harvard Business School.  Mr. Chase is a member of the American BarAssociation and State Bar of Texas.  Mr.Chase serves as lead director of the Cornell Companies and is a director ofWestern Gas Partners.   He is a member of the Council on ForeignRelations.

 

**Section ****16(a) Beneficial Ownership Reporting Compliance**

 

Section 16(a) of the Exchange Act requires AVI’s directorsand officers, and persons who own more than ten percent (10%) of a registeredclass of AVI’s equity securities, to file initial reports of ownership andreport of changes in ownership with the Commission. Such persons also arerequired to furnish AVI with copies of all Section 16(a) reports theyfile.

 

Based solely on its review of the copies of such reports received by itwith respect to fiscal year 2009, or written representations from certainreporting persons, AVI believes that all filing requirements applicable to itsdirectors, officers and persons who own more than ten percent (10%) of aregistered class of AVI’s equity securities have been complied with for fiscal2009.

 

**Code of Business Conduct and Ethics**

 

The Company has adopted a Code of Business Conduct and Ethics (the “Code”).The Code applies to all directors and employees, including all officers,managers and supervisors, and is intended to better ensure full, fair,accurate, timely and understandable disclosures in our public documents andreports, compliance with applicable laws, prompt internal reporting ofviolations of these standards and accountability for adherence to standards.The Company has contracted with Ethicspoint to provide a method for employeesand others to report violations of the Code anonymously. A copy of the Code isposted on the Company’s website *(www.avibio.com)*.

 

**Audit Committee**

 

The Board of Directors has a separately designated standing AuditCommittee, established in accordance with Section 3(a)(58)(A) of theSecurities Exchange Act of 1934, as amended. As of the date hereof, the members of the Audit Committee are Mr. Hodgman,Dr. Price, and Dr. Behrens. Former director Dr. Fara also served on the Audit Committee during2009.  Dr. Fara decided not to standfor reelection in March 2009, and ceased to be a member of the AuditCommittee when his term as a director expired on May 19, 2009.

 

**Audit Committee Financial Expert**

 

Mr. Hodgman serves as the Audit Committee’s Chairman and the AuditCommittee’s designated financial expert. All members of the Audit Committee, including Mr. Hodgman, areindependent directors, as defined under applicable listing requirements of theNasdaq Stock Market.

 

**Item 11.  Executive Compensation.**

 

TheCompany is a biopharmaceutical company developing products in the growing fieldof RNA therapeutics. Current applications of the Company’s technology platforminclude clinical trials for genetic diseases (Duchenne muscular dystrophy), andearlier programs in infectious diseases (Ebola and Marburg viruses), H1N1 andother early discovery targets. We operate in a highly complex businessenvironment and believe that a competitive compensation program is an importanttool to help attract, retain, recognize and reward the talented employees weneed to achieve our mission and deliver value to our shareholders.

 

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TheCompany intends that total compensation and each of its components, includingbase salary, incentive cash compensation, equity compensation, benefits andperquisites be competitive in the marketplace for suitable talent and in accordwith the Company’s short and long term goals. We seek to attract, retain, develop and reward employees whoseperformance helps the Company to achieve such goals and to provide value to ourshareholders.  While base compensation,benefits and perquisites are primarily a factor of being competitive in themarketplace for employees, incentive compensation is primarily merit based,with actual compensation a function of the achievement of defined and agreedcorporate and individual goals.  Towardsthis end:

 

·                   We structure our total compensation toconsist of both fixed (salary and benefits) and variable compensation (cashincentive, equity compensation and merit based annual adjustments). We believethat the variable compensation elements provide an appropriate percentage ofoverall compensation to motivate executives to focus on our performance, whilethe fixed element serves to provide an appropriate and fair compensation levelthat allows us to remain competitive in the market to obtain and retain theservices of our employees while also not encouraging executives andnon-executive employees to take unnecessary or excessive risks in theachievement of goals;

 

·                   We believe that our compensation programbalances short and long-term performance and does not place inappropriate focuson achieving short-term results at the risk of long-term, sustainedperformance;

 

·                   Most incentive plans (including the planscovering our executive officers) include a threshold, target and maximumpayment.  The threshold ensures that ifgoal achievement is not at a minimum level, no payments will be made.  The maximum ensure that payments do notexceed a certain level, keeping the compensation mix within certain ranges andlimiting excessive payments under any one element;

 

·                   All incentive plan designs and specificelements are reviewed and approved by the Compensation Committee annually;

 

·                   Performance targets for the annualperformance plan, which covers all named executives and most employees, areestablished annually by the Compensation Committee and the Board.  We have internal controls over themeasurement and calculation of these performance metrics, designed to preventmanipulation of results by any employee, including our executives.Additionally, the Committee and Board monitor the corporate performance metricsformally no less than annually and periodically on a more informal basis duringthe year;

 

·                   The Compensation Committee has the discretionto increase or decrease any plan payment upwards or downwards, allowing theCommittee to consider the circumstances surrounding corporate and/or individualperformance and adjust payments accordingly;

 

·                   There are appropriate internal controls overthe processing of payments;

 

·                   The Company’s existing governance andorganizational structure incorporates a substantial risk management componentthrough the review and actions of the Board and its standing committees; and

 

·                   The long-term component of compensationconsists of restricted stock units and stock option grants.  Vesting requirements of typically three yearsencourage employees to take a long-term perspective on overall corporateperformance, which ultimately influences share price appreciation.  We believe that long-term equity compensationbalances the cash incentives in place to motivate short-term performance.

 

In mid-2009, the Committee retained the services of a compensationconsultant, Frederick W. Cook & Co., Inc. (“FW Cook”) to assistthe Committee in its evaluation of certain aspects of executive compensationfor 2009 and 2010 melding base compensation, incentive cash compensation andequity compensation. The Compensation Committee has the independent authorityto approve the fees and other retention terms with respect to such acompensation consultant. The Compensation Committee also has the authority, asnecessary and appropriate, to consult with other outside advisors to assist inits duties to the Company.

 

**Compensation Discussion and Analysis**

 

*Introduction*

 

Throughout this section of the proxy statement, the individuals whoserved as the Company’s Chief Executive Officer and Chief Financial Officerduring fiscal year 2009, as well as the other individuals included in theSummary Compensation Table included in this proxy statement, are referred to asthe “named executive officers.”

 

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*Overview*

 

In 2008 and 2009, the Company had several significant changes to itsmanagement team. One result of these new recruits is that certain elements ofthe compensation package for certain of the named executive officers wereestablished as a result of arms-length negotiations between the Company and theindividuals the Company was recruiting to join the Company at its facility inBothell, Washington. Thus, in some cases, the base compensation and benefitspackages for our named executive officers reflect market forces rather thanbenchmarking and other tools often used by compensation consultants.  In the final analysis, however, there was nomaterial difference between negotiated compensation packages and the benchmarkspreferred by the compensation consultant.

 

Other noteworthy aspects of the Company’s compensation program include:

 

·                  Base salaries for all namedexecutives have increased 2% - 3% in 2010 compared to 2009;

 

·                  The named executiveofficers, as a group, achieved approximately 63% of the 2009 Company-widecorporate performance goals and, on average 64% of the individual goals set forthem in 2009; the bonuses for Mr. Medeiros were determined in accordancewith the terms of his employment contract entered into upon the commencement ofhis employment in 2009;

 

·                  The 2009 bonuses, which werepaid in 2010 represent in the aggregate approximately 13% of the totalcompensation paid to the named executive officers;

 

·                  The bonus for the Company’sChief Executive officer is 100% dependent on achievement of Company-wideperformance goals established by the Board and Compensation Committee and thebonus for the other named executive officers is 70% dependent on suchCompany-wide goals and 30% dependent on achievement of individual performancegoals established by the Chief Executive officer in consultation with theCompensation Committee;

 

·                    TheCompensation Committee and the Board has established Company-wide performancegoals for the named executive officers, including the Chief Executive officer,for 2010 and the Chief Executive officer, in consultation with the CompensationCommittee, has established individual performance goals for 2010 for the namedexecutive officers. If achieved at the 100% level, these bonuses wouldrepresent in the aggregate approximately 36% of the anticipated totalcompensation in 2010 for the named executive officers;

 

·                  The Compensation Committeeand the Board believe that the performance goals for 2010, like those for 2009,provide appropriate incentives to the named executive officers to align theirpersonal financial interests with the short and long term goals of the Companywithout promoting inappropriate risk-taking behavior; and

 

·                  The Compensation Committeebelieves a mixture of base cash compensation, performance- based bonuses,equity incentive compensation in the form of options and restricted shares anda fair package of health care and similar benefits is appropriate for theCompany and is in the best interests of the Company’s shareholders.

 

*Significant Management Changes in Fiscal Year 2009*

 

In 2009, the Company underwent several senior management changes, includinghiring Stephen B. Shrewsbury as the Company’s Chief Medical Officer and SeniorVice President of Preclinical, Clinical and Regulatory Affairs, and PaulMedeiros as the Company’s Senior Vice President of Business Development andChief Business Officer.

 

*The Compensation Committee*

 

The Company’s executive compensation program is administered by theCompany’s Compensation Committee. As of December 31, 2009, theCompensation Committee was composed of three directors:K. Michael Forrest, William Goolsbee, and Michael Casey(Chair). During 2009, all members of the Compensation Committee were “independent”for purposes of applicable securities and regulatory requirements. Although Mr. Forrestacted as the Company’s Interim Chief Executive Officer until February 8,2008, under applicable Nasdaq listing requirements he may be consideredindependent if the Board of Directors concludes that such former employment andany compensation received would not interfere with his exercise of independentjudgment in carrying out his responsibilities as director. The Board ofDirectors has concluded that Mr. Forrest is independent in accordance withthese applicable listing requirements. Additionally, the Board feels that hispresence on, and participation in the discussion of, the Committee is in thebest interests of the Company due to his prior experience with the managementof the Company and experience as a director in public and private companies.

 

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The Compensation Committee is responsible for reviewing, assessing, andapproving all elements of compensation for our named executive officers. Morespecifically, the Compensation Committee is directly responsible forestablishing annual Company-wide performance goals and objectives for our namedexecutive officers and for working with the Company’s Chief Executive Officerto establish individual performance goals for each of the other named executiveofficers. This responsibility includes, among other things: (a) evaluatingthe performance of our Chief Executive Officer and other executives asdetermined by the Compensation Committee in light of the approved performancegoals and objectives; (b)  setting the compensation of the Chief ExecutiveOfficer and other executives based upon the evaluation of the performance ofthe Chief Executive Officer and the other executives; (c) makingrecommendations to the Board of Directors with respect to new cash-basedincentive compensation plans and equity-based compensation plans; and (d) preparingan annual report of the Compensation Committee.

 

The Compensation Committee has independent authority to makecompensation decisions for our named executive officers. The CompensationCommittee seeks ratification from the Company’s Board of Directors of itsdecisions regarding the compensation of the Chief Executive Officer.

 

*Compensation Philosophy and Objectives*

 

The purpose of the Company’s executive compensation program is and hasbeen to attract, motivate, recognize, reward and retain key executive employeesin order to promote the success of the Company. The Company seeks, and hassought, to reward and to provide incentives to named executive officers,  including the Chief Executive Officer, for theirperformance and delivery against agreed goals. Over the past few years, theCompany has seen significantly increased demand for executives withindustry-specific skills and experience and a highly competitive market forsuch executives. Additionally, given the small size of the Company relative tocertain other members of our industry sector and the fact that there was asignificant doubt about the Company’s ability to secure the funding needed tocontinue our research and development programs at the time when certain changesin management were made, in 2009 we faced significant challenges in recruitingsenior members of our management team. Therefore, in 2009 (and we expect in2010 and beyond) the attraction and retention of executives was, and will be,one of the key purposes of the Company’s executive compensation program.

 

The Company’s executive compensation program also includes apay-for-performance component. In that respect, the compensation program isdesigned to reward the named executive officers, including the Chief ExecutiveOfficer, for meeting specific goals that are established and reviewed by theCompensation Committee for each named executive officer and for the Company asa whole. In 2009, the Committee, Board and the Chief Executive Officer agreedand set performance goals for each named executive officer and the Company as awhole. Following the completion of such fiscal year, the Chief ExecutiveOfficer and the Compensation Committee assessed the degree to which thecorporate goals were met and how each named executive officer had performedwith respect to these goals. The Compensation Committee made an independentassessment with respect to the Chief Executive Officer’s performance. TheCompensation Committee has established similar goals for 2010.

 

The at-risk component of the compensation package for each namedexecutive officer, which includes a targeted cash bonus and stockoptions/restricted stock, is determined in large part on the basis of how thatnamed executive officer performed in meeting his or her goals and recommendationsfrom the Committee’s compensation consultant. Compensation decisions are alsobased on market factors that require the Company to remain competitive in itscompensation package in order to attract and retain qualified individuals.

 

In addition to the foregoing, the following executive compensationprinciples guided the Compensation Committee during 2009 in fulfilling itsroles and responsibilities:

 

·                  Compensation levels andopportunities should be sufficiently competitive to facilitate recruitment andretention of experienced executives in the Company’s highly competitive talentmarket;

 

·                  Compensation shouldreinforce the Company’s business strategy by integrating and communicating keymetrics and operational performance objectives and by emphasizing incentives inthe total compensation mix;

 

·                  Compensation programs shouldalign executives’ long-term financial interests with those of the shareholdersby providing equity-based incentives without incentivizing the executives totake inappropriate risks to the Company in order to enhance their individualcompensation;

 

·                  Compensation programs shouldbe flexible, giving the Compensation Committee and our Board of Directorsdiscretion to make adjustments on an as-needed basis;

 

·                  Similarly situatedexecutives should be compensated similarly; and

 

8

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·                  Compensation should betransparent and easily understandable to both our executives and ourshareholders.

 

*Role of Executive Officers in Compensation Decisions*

 

Our Chief Executive Officer plays a pivotal role in determiningexecutive compensation. No less than annually, the Company’s Chief ExecutiveOfficer assesses the performance of the named executive officers. He thenrecommends to the Compensation Committee a base salary, performance-based cashbonus, and a grant of stock options for each named executive officer based onthat assessment. The Compensation Committee considers the information providedby the Chief Executive Officer, together with other information available tothe Compensation Committee and determines the compensation for each namedexecutive officer other than the Chief Executive Officer. With respect to thecompensation of our Chief Executive Officer, the Compensation Committee meetswithout the Chief Executive Officer to discuss its recommendation and makes arecommendation to the full Board of Directors.

 

*Use of Compensation Consultants and Reports*

 

In establishing compensation for 2010, the Compensation Committee didretain a compensation consultant,  In August 2009FW Cook presented its assessment and recommendations to the CompensationCommittee. Based in part on such assessment and recommendations, theCompensation Committee established for the named executive officer and withrespect to the Company’s Chief Executive Officer recommended to the Board ofDirectors that each of the Chief Executive Officer and the named executiveofficers receive an increase in base salary and be granted additional optionsto acquire shares of the Company’s common stock.  The bonuses for Mr. Medeiros wereestablished and paid in accordance with the terms of his contract entered intowhen he was hired in 2009 and the increase in his base compensation for 2010took effect on January 1, 2010.

 

*Setting Executive Compensation*

 

As a general proposition, in setting compensation for the namedexecutive officers, other than the Chief Executive Officer, and in developingits recommendations to the Board of Directors regarding compensation for theChief Executive Officer, the Compensation Committee considers a number offactors, including analyses of compensation in similarly-sized companies in thebiopharmaceutical industry, analyses of compensation levels in similarcompanies in the Company’s local geographic area, the satisfaction of (orfailure to satisfy) previously-developed performance measurements for the namedexecutive officer and the Company, and the total vested and unvested equitygrants owned by the executive. The Company competes for executive talent acrossa broad range of business sectors.

 

The Compensation Committee believes it is important when making itscompensation-related decisions to be informed as to current practices ofsimilarly situated companies in the biotechnology industry. In addition to thereport of its compensation consultant, the Compensation Committee hashistorically taken into account input from other sources, including input frommembers of the Compensation Committee based on their roles as executiveofficers and directors of other public companies, as well as other members ofthe Board of Directors.

 

The Compensation Committee believes that the total compensation packageprovided to the Company’s named executive officers, combining both short-termand long-term incentives, some of which are at risk based on individual andCompany performance, is competitive without being excessive and is at anappropriate level to assure the retention and motivation of this highly skilledand experienced segment of the Company’s workforce, and at the same time wouldbe attractive to any additional talent that might be needed in the changingworkplace without creating incentives for inappropriate risk-taking by thenamed executive officers that might be in their own self-interests, but mightnot necessarily be in the best long and short term interests of the Company’sshareholders.

 

*Performance Factors in 2009*

 

TheCompensation Committee, together with the Chief Executive Officer and fullBoard of Directors, establishes performance criteria for the named executiveofficers (other than Paul Medeiros), both in terms of individual performanceand the performance of the Company as a whole, and generally assigns a weightto the performance goals.  Mr. Medeiros‘ bonus was determined in accordance with his employment agreement, which didnot establish any performance goals for 2009.

 

Thefollowing corporate goals, along with the weighting assigned to each of thegoals, including the weight achieved, drove the Compensation Committee’sexecutive compensation decisions for fiscal year 2009:

 

9

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| **Goal**                                                                                                                                                                                                    | ** ** | **Assigned Weight** | ** ** | **Achieved Weight**                                                                                                                                                           |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                  | ** ** | ** **          | ** ** | ** **                                                                                                                                                                    |
| Develop  approved operational and other administrative plans and budget for 2009                                                                                                                            |       | 20%                 |       | 16.5%

(included  within goal was to manage expense and revenue goals to achieve an overall  2009 cash burn not to exceed $11.5 million; actual cash burn was $10.8  million) |
|                                                                                                                                                                                                        |       |                |       |                                                                                                                                                                          |
| Attain  certain preclinical and clinical development milestones                                                                                                                                             |       | 40%                 |       | 23.5%                                                                                                                                                                         |
|                                                                                                                                                                                                        |       |                |       |                                                                                                                                                                          |
| Complete  certain key business development partnerships, including partnerships  relating to collaboration on drug research and development and to  commercialization of certain products under development |       | 15%                 |       | 6.5%                                                                                                                                                                          |
|                                                                                                                                                                                                        |       |                |       |                                                                                                                                                                          |
| Advance  core discovery research projects                                                                                                                                                                   |       | 5%                  |       | 2.5%                                                                                                                                                                          |
|                                                                                                                                                                                                        |       |                |       |                                                                                                                                                                          |
| Reorganize  certain elements of the Company’s business                                                                                                                                                 |       | 20%                 |       | 5%                                                                                                                                                                            |
|                                                                                                                                                                                                        |       |                |       |                                                                                                                                                                          |
| Additional  significant value adding accomplishments relating to obtaining additional  financing for the Company and to securing the award of certain government  contracts to the Company                  |       | 0%                  |       | 9%                                                                                                                                                                            |
|                                                                                                                                                                                                        |       |                |       |                                                                                                                                                                          |
| Total                                                                                                                                                                                                       |       | 100%                |       | 63%                                                                                                                                                                           |

 

Dr. Hudson’sperformance bonus was based entirely on the Company’s achievement of thecorporate goals outlined above.  Theperformance bonus of each other named executive officer was based on theCompany’s achievement of the corporate goals (70%), with the remainder of theperformance bonus (30%) for such named executive officers based on theachievement of individual goals.

 

Thegoals for each individual officer, along with the weighting assigned to each ofthe goals, were as follows:

 

*J. David Boyle II, Chief Financial Officer*

 
| **Goal**                                                                                                                                                          | ** ** | **Assigned Weight** | ** ** | **Achieved weight** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|---------------------|
| ** **                                                                                                                                                        | ** ** | ** **          | ** ** | ** **          |
| Secure  funding through to NDA for at least two biodefense projects                                                                                               |       | 35%                 |       | 5%                  |
|                                                                                                                                                              |       |                |       |                |
| Manage  expense, revenue and budget goals to achieve prescribed financial targets  (including achievement of overall cash burn of not more than $11.5 million)    |       | 10%                 |       | 8%                  |
|                                                                                                                                                              |       |                |       |                |
| Restructure  certain elements of the Company’s agreement with a key business partner,  including restructuring certain financial components of the agreement |       | 25%                 |       | 23%                 |
|                                                                                                                                                              |       |                |       |                |
| Enhance  general and administrative support for AVI, including establishing the  Company’s new headquarters                                                  |       | 30%                 |       | 25%                 |
|                                                                                                                                                              |       |                |       |                |
| Additional  significant value adding accomplishments, including leadership in connection  with efforts to obtain additional financing for the Company             |       | 0%                  |       | 5%                  |
|                                                                                                                                                              |       |                |       |                |
| Total                                                                                                                                                             |       | 100%                |       | 66%                 |

 

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*Stephen Shrewsbury, Senior Vice President of Preclinical, Clinical andRegulatory Affairs and Chief Medical Officer*

 
| **Goal**                                                                                                                                                                                                                        | ** ** | **Assigned Weight** | ** ** | **Achieved weight** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|---------------------|
| ** **                                                                                                                                                                                                                      | ** ** | ** **          | ** ** | ** **          |
| Achieve  certain goals with respect to clinical development and regulatory affairs,  including analyzing and submitting certain data for publication in a peer  reviewed journal and completing certain two phase 1 drug trials |       | 70%                 |       | 43%                 |
|                                                                                                                                                                                                                            |       |                |       |                |
| Achieve  certain goals with respect to preclinical development                                                                                                                                                                  |       | 30%                 |       | 22.5%               |
|                                                                                                                                                                                                                            |       |                |       |                |
|                                                                                                                                                                                                                            |       | 100%                |       | 65.5%               |

 

*Patrick L. Iversen, Senior Vice President of Strategic Alliances*

 
| **Goal**                                                                                     | ** ** | **Assigned Weight** | ** ** | **Achieved weight** |
|----------------------------------------------------------------------------------------------|------------|---------------------|------------|---------------------|
| ** **                                                                                   | ** ** | ** **          | ** ** | ** **          |
| Secure  funding through to NDA for at least two biodefense projects                          |       | 25%                 |       | 5%                  |
|                                                                                         |       |                |       |                |
| Complete  animal studies for certain drug candidates                                         |       | 20%                 |       | 20%                 |
|                                                                                         |       |                |       |                |
| Achieve  prescribed goals with respect to preclinical development                            |       | 45%                 |       | 30%                 |
|                                                                                         |       |                |       |                |
| Achieve  prescribed goals with respect to ongoing drug research projects                     |       | 10%                 |       | 5%                  |
|                                                                                         |       |                |       |                |
| Additional  significant value adding accomplishments relating to internal strategic  reviews |       | 0%                  |       | 5%                  |
|                                                                                         |       |                |       |                |
| Total                                                                                        |       | 100%                |       | 65%                 |

 

*Paul Medeiros,**Senior Vice President of BusinessDevelopment and Chief Business Officer*

 

The bonuses paid to Mr. Medeiros were according to provisions inhis employment agreement and were not performance based.

 

*Determining the Total Mix of Compensation*

 

Our compensation-setting process consists of establishing a targetedoverall compensation for each executive and then allocating that compensationbetween base salary and incentive compensation (annual performance-based cashbonuses and equity incentive awards), based appropriately on publicly availableindustry and salary survey data. The Compensation Committee does not have apre-established policy for allocating total compensation between cash andnon-cash compensation, between long-term and 

 

11

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currentlypaid-out compensation, or between fixed and variable compensation. Rather,based on the competitive market assessments and benchmarks, as well as theCompensation Committee’s review of existing outstanding equity incentives on anindividual named executive officer basis, the Compensation Committee determinesthe appropriate level and mix of total compensation, keeping in mind theCompany’s compensation philosophy.

 

The total amount and mix of compensation payable to our named executiveofficers is premised upon, among other items, the degree to which the executivehas a role in determining the strategic direction of the Company, the mix ofcompensation payable to executives in similar roles by companies of a similarsize and in our business sector, geographic location, and industry, as well asthe quantity and value of unvested equity awards held by each named executiveofficer and the vesting date of such awards. As one of the Company’s primarypriorities is to retain its executives, the Company seeks to ensure its namedexecutive officers receive a base salary reflective of the Company’s size andthe marketplace in which it competes.

 

During its evaluation of the appropriate mix of compensation, theCompensation Committee typically determines what portion of each executive’scompensation will be “at risk,” with the at risk portion increasing as theCompany gives executives greater levels of responsibility. As the Companybelieves that many of its named executive officers could command highersalaries in similar roles with larger companies, including with the Company’scompetitors, the Company’s combined cash-based and equity-based bonuses havehistorically been large relative to base salaries, with the goal of ensuringcompensation serves the dual purpose of retention and rewarding exceptionalperformance.

 

*Analysis of Executive Compensation Components*

 

For the fiscal year ended December 31, 2009, the principalcomponents of compensation for named executive officers were identical to the componentsin the prior fiscal year, and included:

 

·                  Base salary;

 

·                  Performance-based cashbonuses;

 

·                  Equity Incentive Plan;

 

·                  Employee Stock PurchasePlan;

 

·                  401(k) Plan; and

 

·                  Other benefits.

 

*Base Salaries.*  As a general proposition, the base salariesof the Company’s executive officers are established as part of an annualcompensation adjustment cycle, and we also assess salaries at the time of hire,promotion or other change in responsibilities. In establishing those salaries,the Compensation Committee considers information about base salaries paid bycompanies of comparable size in the biopharmaceutical industry (including datafrom the Committee’s compensation consultant), individual performance, positionand tenure of the executive officer, how the salary compares to the salaries ofother executives in the Company, and internal comparability considerations. Asnoted above, however, in 2009 some of the initial compensation packages for ournamed executive officers were determined far more as a result of negotiationsbetween the Company and these individuals in connection with their recruitmentto the Company rather than abstract compensation data.

 

As noted previously, the Chief Executive Officer and each of the namedexecutive officer received a 3% (annualized) increase in base compensation for2010.

 

Consistent with the philosophy and events discussed above, the basesalary levels for fiscal year 2008 and fiscal year 2009 for our named executiveofficers were as follows:

 

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| **Name**                    | ** ** | **Title**                                                                                         | ** ** | **2009 Base  Salary** | ** ** | **2008 Base  Salary** | ** ** | **% Change  2008 to  2009 Base  Salary** | ** ** |
|-----------------------------|------------|---------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------------------------------|------------|
| Leslie Hudson, Ph.D.        |       | President  and Chief Executive Officer                                                            |       | $                     | 480,000    |                  | $          | 480,000                                       |       | 0 | % |
| J. David Boyle II           |       | Chief  Financial Officer and Secretary                                                            |       | $                     | 324,000    |                  | $          | 324,000                                       |       | 0 | % |
| Patrick L. Iversen, Ph.D.   |       | Senior  Vice President of Strategic Alliances                                                     |       | $                     | 265,000    |                  | $          | 265,000                                       |       | 0 | % |
| Paul Medeiros               |       | Senior  Vice President of Business Development and Chief Business Officer                         |       | $                     | 315,000    |                  | N/A        |                                          | N/A        |   |
| Stephen B. Shrewsbury, M.D. |       | Senior  Vice President of Preclinical, Clinical and Regulatory Affairs and Chief  Medical Officer |       | $                     | 310,000    |                  | N/A        |                                          | N/A        |   |

 

*Performance-Based Cash Bonuses/Equity Awards.*  The Company typically grants cash bonuses toexecutive officers as part of their annual overall compensation. In 2009, thebonuses for executive officers other than the Chief Executive Officer weretargeted to be between 0% and 30% of the executive’s base compensation.  For the Chief Executive Officer, the targetwas 60% of his base compensation.  Suchcash bonuses are in recognition of achievement of performance milestones forthe individual named executive officers and of milestones achieved by theCompany as a whole. The Compensation Committee takes into account the Company’scash resources and the need of the Company to deploy those resources to advanceits business plan, and assesses this objective against the need to maintaincompensation levels that are competitive within the biotechnology industry.

 

As noted above, the Compensation Committee and the Board, inconsultation with Dr. Hudson, established corporate performance andindividual performance goals for the named executive officers in early 2009. Inearly 2010, the Compensation Committee and the Board determined that 63% of thecorporate goals had been obtained and Dr. Hudson determined that the othernamed executive officers had achieved the percentage of individual goalsidentified above. In 2009, the Compensation Committee and the Board acceptedthe offer of the named executive officers, including Dr. Hudson, to have their2008 bonuses paid in the form of shares of stock issued under the Company’s2002 Equity Incentive Plan rather than cash, taking into account the tax impactof accepting stock rather than cash as payment of such bonuses. The followingtable shows for each of our named executive officers the aggregate dollar valueof the stock awards for fiscal year 2008 granted in February 2009 and thecash bonuses awarded for fiscal year 2009 in February 2010:

 
| **Name**                    | ** ** | **Title**                                                                                        | ** ** | **2009 Bonus** | ** ** | **2008 Bonus** | ** ** | **% Change  (2008 to  2009)** | ** ** | **2009 Bonus******** as a  % of 2009 Base  Salary** | ** ** |
|-----------------------------|------------|--------------------------------------------------------------------------------------------------|------------|----------------|------------|----------------|------------|------------------------------------|------------|----------------------------------------------------------|------------|
| Leslie Hudson,  Ph.D.       |       | President and Chief Executive Officer                                                            |       | $              | 181,440    |           | $          | 196,020                            | (1)        | -7                                                       | %          | 38 | % |
| J. David Boyle  II          |       | Chief Financial Officer and Secretary                                                            |       | $              | 62,111     |           | $          | 72,973                             | (2)        | -15                                                      | %          | 19 | % |
| Patrick L.  Iversen, Ph.D.  |       | Senior Vice President of Strategic Alliances                                                     |       | $              | 42,135     |           | $          | 49,737                             | (3)        | -15                                                      | %          | 16 | % |
| Paul Medeiros               |       | Senior Vice President of  Business Development and Chief Business Officer                        |       | $              | 150,000    |           | N/A        |                               | N/A        |                                                     | N/A        |   |
| Stephen B. Shrewsbury, M.D. |       | Senior Vice President of  Preclinical, Clinical and Regulatory Affairs and Chief Medical Officer |       | $              | 59,288     |           | N/A        |                               | N/A        |                                                     | N/A        |   |

 

----

(1)                                  Represents theaggregate value of 213,065 shares at $0.92 per share, which was the closingprice for the Company’s Common Stock on February 10, 2009, the date whichsuch bonus was paid.

 

(2)                                  Represents theaggregate value of 79,318 shares at $0.92 per share, which was the closingprice for the Company’s Common Stock on February 10, 2009, the date whichsuch bonus was paid.

 

(3)                                  Represents theaggregate value of 54,062 shares at $0.92 per share, which was the closingprice for the Company’s Common Stock on February 10, 2009, the date whichsuch bonus was paid.

 

*Equity Incentive Plan Compensation.*  The long-term compensation of named executiveofficers takes the form of stock option awards under the Company’s 2002 EquityIncentive Plan, or “2002 Plan.” The 2002 Plan is designed to align asignificant portion of the executive compensation program with long-termshareholder interests. The 2002 Plan permits the granting of several differenttypes of stock-based awards. The Compensation Committee believes thatequity-based compensation helps ensure that the Company’s named executiveofficers have a continuing stake in the long-term success of the Company, and preservesthe Company’s 

 

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cashresources. The 2002 Plan provides incentives to continue in the service of theCompany and to create in such executives a more direct interest in the futuresuccess of the operations of the Company by relating incentive compensation tothe achievement of long-term corporate economic objectives. All options grantedby the Company have been granted with an exercise price equal to the closingmarket price of the Company’s Common Stock on the date of grant and,accordingly, will only have value if the Company’s stock price increasessubsequent to the date of grant. In granting options under the 2002 Plan, theCompensation Committee generally takes into account each named executive officer’sresponsibilities, relative position in the Company, past grants, the totalnumber of vested and unvested equity incentives held by each named executiveofficer, and approximate grants to individuals in similar positions forcompanies of comparable size in the biopharmaceutical industry. The 2002 Planis administered by the Compensation Committee.

 

Thefollowing table shows the stock options granted to named executive officers infiscal year 2008 and fiscal year 2009:

 
| **Name**                    | ** ** | **Title**                                                                                         | ** ** | **FY 2009 Shares  Subject to Option  Grant** | ** ** | **FY 2008 Shares  Subject to Option  Grant** | ** ** | **% Increase /  (Decrease) 2008  to 2009** | ** ** |
|-----------------------------|------------|---------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|--------------------------------------------|------------|
| Leslie Hudson, Ph.D.        |       | President and Chief  Executive Officer                                                            |       | 350,000                                      |       | 667,000                                      |       | (48                                        | )%         |
| J. David Boyle II           |       | Chief Financial Officer and  Secretary                                                            |       | 150,000                                      |       | 500,000                                      |       | (70                                        | )%         |
| Patrick L. Iversen, Ph.D.   |       | Senior Vice President of  Strategic Alliances                                                     |       | 100,000                                      |       | 75,000                                       |       | 33                                         | %          |
| Paul Medeiros               |       | Senior Vice President of  Business Development and Chief Business Officer                         |       | 400,000                                      |       | N/A                                          |       | N/A                                        |       |
| Stephen B. Shrewsbury, M.D. |       | Senior  Vice President of Preclinical, Clinical and Regulatory Affairs and Chief  Medical Officer |       | 450.000                                      |       | N/A                                          |       | N/A                                        |       |

 

*Employee Stock Purchase Plan.*  The purpose of the Employee Stock PurchasePlan, or “ESPP,” is to attract and retain qualified employees essential to thesuccess of the Company and, like the 2002 Plan, to provide such persons with anincentive to perform in the best interests of the Company. The ESPP isadministered by the Compensation Committee, which has the power to make andinterpret all rules and regulations it deems necessary to administer theESPP and has broad authority to amend the ESPP, subject to certain amendmentsrequiring shareholder approval. All employees of the Company and itssubsidiaries, including the Company’s named executive officers, may participatein the ESPP if they: (i) are employed in a position with regular hours of20 or more hours a week and (ii) are employed more than five months in anycalendar year. Eligible employees may elect to contribute from 1% to 10% oftheir cash compensation during each pay period. The ESPP provides for twoannual six-month offering periods, beginning on May 1 and November 1each year (the “Enrollment Dates”). During the offering periods, participantsaccumulate funds in an account through payroll deduction. At the end of eachsix-month offering period, the purchase price is determined and the accumulatedfunds are used to automatically purchase shares of Common Stock from theCompany. The purchase price per share is equal to 85% of the lower of the fairmarket value of the Common Stock (i) on the beginning date of the offeringperiod or (ii) the end of the Offering Period. Unless a participantfiles a withdrawal notice before the beginning of the next offeringperiod, such participant will automatically be re-enrolled for the nextoffering period. Beginning on January 1, 2006, the Company beganaccounting for stock issued under the ESPP in accordance with the requirementsof FASB ASC Topic 718.

 

In 2009, 124,213 shares of Common Stock were purchased under the ESPP,all of which were purchased by persons other than our named executiveofficers.  In November 2009, allshares of common stock available under the ESPP were issued and theCompensation Committee decided not to renew the ESPP.

 

*401(k) Plan.*  The Company’s 401(k) Plan is a definedcontribution profit sharing plan with a 401(k) option. The plan year is January 1to December 31, and was created on November 1, 1992. Employees whoare at least twenty-one years of age and who have provided at least thirty daysof service are eligible to participate in the 401(k) Plan. Employees whoare union employees, non-resident alien employees with no U.S.-source incomeand non-common law employees are not eligible to participate. Participants maydefer up to the maximum allowed by law. At the discretion of the Company,participants may receive a match on the first 4% of compensation that theparticipant contributes to the 401(k) Plan. As of the fiscal year ended December 31,2009, the named executive officers received a 401(k) contribution match ofup to 4% of their 401(k) Plan contribution subject to the maximum amountpermitted by law.

 

*Tax and Accounting Implications of the ExecutiveCompensation Program*

 

A significant portion of the compensation paid to the Company’s namedexecutive officers is considered “performance-based compensation” for purposesof Section 162(m) of the Internal Revenue Code and, therefore, isfully deductible by the Company for federal income tax purposes. In addition,the long-term incentive compensation awarded to the named executive officers isbased on a fixed value at grant and therefore is not subject to variableaccounting treatment under FASB ASC Topic 718. The Company views preserving taxdeductibility as an important objective, but not the sole objective, inestablishing executive compensation. In specific instances the Company has andin the future will authorize compensation arrangements that are not fully taxdeductible but which promote other important objectives of the Company.

 

14

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*Repricing of Stock Options*

 

The Company did not reprice any stock options in 2009.

 

*Employment Agreements with Named Executive OfficersEntered into by the Company in 2009*

 

*Stephen B.Shrewsbury—Senior Vice President of Preclinical, Clinical and RegulatoryAffairs and Chief Medical Officer*

 

On January 26, 2009, the Company hired Stephen Bevan Shrewsbury,M.D., as the Company’s Senior Vice President of Preclinical, Clinical andRegulatory Affairs and Chief Medical Officer. In connection with his hiring,the Company and Dr. Shrewsbury entered into an Employment Agreement dated January 26,2009 providing for Dr. Shrewsbury’s at will employment by the Company.Under the terms of the Employment Agreement, Dr. Shrewsbury is entitled toan initial annual salary of $310,000, which amount is subject to review forpotential increase, but not decrease, on an annual basis. In addition to hisbase salary, Dr. Shrewsbury is eligible for an annual bonus of up to 25% of hisbase salary, based upon Dr. Shrewsbury’s achievement of performanceobjectives established by mutual agreement among Dr. Shrewsbury, theCompany’s Chief Executive Officer, and the Compensation Committee.

 

In connection with his employment as the Company’s Senior VicePresident of Preclinical, Clinical and Regulatory Affairs and Chief MedicalOfficer, the Company granted to Dr. Shrewsbury options to purchase 450,000shares of the Company’s common stock under the Company’s 2002 Plan, with anexercise price equal to the fair market value of the Company’s common stock on January26, 2009, which was $1.36 per share. Subject to certain exceptions, the optionsvest in equal annual installments over a period of three years. In addition, onthat same date the Company granted to Dr. Shrewsbury 60,000 restrictedshares of the Company’s common stock. The shares became fully vested as of July 27, 2009.  The Company is also required to reimburse Dr. Shrewsburyfor all expenses reasonably incurred by him in discharging his duties for theCompany.

 

In addition to the compensation described above, under the EmploymentAgreement Dr. Shrewsbury is entitled to receive (i) reimbursement of up to$100,000 for reasonable expenses incurred in 2008 for reasonable expensesincurred in 2008 to relocate Dr. Shrewsbury to the city of the Company’sheadquarters, including the reasonable and customary costs associated withpurchasing a new residence and moving expenses, (ii) reimbursement of upto $3,000 for reasonable legal fees incurred by Dr. Shrewsbury inconnection with the negotiation of the Employment Agreement, (iii) amonthly living allowance of $2,500 for a period of up to six months, (iv) fourweeks of paid vacation per year, as well as paid holidays generally availableto senior executives, and (v) subject to eligibility requirements,participation in benefits and programs generally available to all employees orexecutives. The Employment Agreement further provides that Dr. Shrewsburyis entitled to receive certain tax gross-up payments.

 

The Employment Agreement provides that, following Dr. Shrewsbury’stermination of employment with the Company, Dr. Shrewsbury may not engage incertain activities in competition with the Company’s business activities for aperiod between one year and two years, depending on the nature of Dr. Shrewsbury’stermination.  Dr. Shrewsbury isfurther prohibited for a period of two years following termination ofemployment with the Company from recruiting, hiring, or assisting a third partyin hiring any person then employed by the Company.

 

Dr. Shrewsbury may voluntarily terminate his employment aftergiving the Company 60 days’ notice. The Company may terminate Dr. Shrewsbury’semployment without “Cause” (as defined in the Employment Agreement) upon30 days’ written notice. Dr. Shrewsbury’s employment is also terminatedupon death, disability, or upon the effective date of a notice sent by theCompany to Dr. Shrewsbury terminating him for Cause.

 

*Paul Medeiros—Senior Vice Presidentof Business Development and Chief Business Officer*

 

Effective May 19,2009, the Company hired Paul Medeiros as the Company’s Senior Vice President ofBusiness Development and Chief Business Officer.  In connection with his hiring, the Companyand Mr. Medeiros entered into an Employment Agreement dated May 19,2009 providing for Mr. Medeiros’s at will employment by the Company.  Under the terms of his Employment Agreement, Mr. Medeirosis entitled to an initial annual salary of $315,000 per year, which amount issubject to review for potential increase, but not decrease, on an annualbasis.  In addition to his base compensation, Mr. Medeiros iseligible for an annual bonus up to 25% of his annual basis compensation amount,subject to achievement and satisfaction of goals and objectives establishedupon mutual agreement of the Company’s Chief Executive Officer, the Company’sCompensation Committee and Mr. Medeiros.  Mr. Medeiros’s EmploymentAgreement provided for a guaranteed bonus of at least $50,000 for fiscal year2009.

 

In connection withhis employment as the Company’s Senior Vice President of Business Developmentand Chief Business Officer, the Company granted to Mr. Medeiros options topurchase 400,000 shares of the Company’s common stock under the Company’s 2002Plan, with an exercise price equal to the fair market value of the Company’scommon stock on May 19, 2009, which was $1.10 per share.  Subject to certain exceptions, the optionsvest in equal annual installments over a period of three years. In addition, onthat same date the Company granted to Mr. Medeiros 100,000 restrictedshares of the Company’s common stock, which 

 

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will vest on a pro ratabasis through the first anniversary of Mr. Medeiros’s employment, subjectto certain performance-based criteria. As of the date hereof, the performance criterion has not been achievedand the Company believes the achievement thereof is unlikely.

 

In addition to hisbase compensation for 2009, the Company agreed to pay Mr. Medeiros a$100,000 sign-on bonus.  In the eventthat Mr. Medeiros separates from the Company prior to his one-yearanniversary with the Company for reasons of (i) termination of Mr. Medeirosby the Company for “Cause” (as defined in the Employment Agreement) or (ii) voluntarytermination by Mr. Medeiros other than for “Good Reason” (as defined in theEmployment Agreement), the sign-on bonus is completely refundable to theCompany. The Company is also required to reimburse Mr. Medeiros for allexpenses reasonably incurred by him in discharging his duties for the Company.

 

In addition to thecompensation described above, under the Employment Agreement Mr. Medeirosis entitled to receive (i) reimbursement of up to $120,000 in 2010 forreasonable expenses incurred in 2009 and 2010 to relocate Mr. Medeiros tothe location of the Company’s headquarters, including the reasonable andcustomary costs associated with purchasing a new residence and moving expenses,(ii) reimbursement of up to $5,000 for reasonable legal fees incurred by Mr. Medeirosin connection with the negotiation of the Employment Agreement, (iii) amonthly living allowance of $2,500 for a period of up to six months, (iv) fourweeks of paid vacation per year, as well as paid holidays generally availableto senior executives, and (v) subject to eligibility requirements,participation in benefits and programs generally available to all employees orexecutives.

 

The EmploymentAgreement provides that, following Mr. Medeiros’s termination ofemployment with the Company, Mr. Medeiros may not engage in certain activitiesin competition with the Company’s business activities for a period between oneyear and two years, depending on the nature of Mr. Medeiros’s termination.Mr. Medeiros is further prohibited for a period of two years followingtermination of employment with the Company from recruiting, hiring, orassisting a third party in hiring any person then employed by the Company.

 

Mr. Medeirosmay voluntarily terminate his employment after giving the Company 60 days’notice. The Company may terminate Mr. Medeiros’s employment without “Cause”(as defined in the Employment Agreement) upon 30 days’ writtennotice.  Mr. Medeiros’s employment isalso terminated upon death, disability, or upon the effective date of a noticesent by the Company to Mr. Medeiros terminating him for Cause.

 

*Employment Agreements with Named Executive OfficersEntered into by the Company in 2008*

 

*LeslieHudson, Ph.D.—Chief Executive Officer*

 

On February 8, 2008, the Board of Directors appointed LeslieHudson, Ph.D. as the Company’s Chief Executive Officer. In connection with hisappointment, the Company and Dr. Hudson entered into an EmploymentAgreement providing for Dr. Hudson’s at will employment by the Company.Under the terms of the Employment Agreement, Dr. Hudson is entitled to aninitial annual salary of $480,000, which amount is subject to review forpotential increase, but not decrease, on an annual basis. In addition to hisbase salary, Dr. Hudson is entitled to an annual bonus based upon theCompany’s and Dr. Hudson’s achievement of performance objectivesestablished by the Company’s Board of Directors, with the target bonus levelbeing equal to 60% of Dr. Hudson’s base salary. Dr. Hudson’s compensationpackage was extensively negotiated, and Dr. Hudson’s compensation is high relativeto the compensation payable to other executive officers of the Company,including the Company’s Interim Chief Executive Officer who served between March2007 and February 2008. The Radford Survey showed that Dr. Hudson’sbase compensation was in excess of the Company’s targeted 60th percentile. Indetermining Dr. Hudson’s compensation, the Board of Directors took intoaccount, among other things, the fact that Dr. Hudson would be required torelocate from his home in New Jersey, Dr. Hudson’s extensive experience inthe Company’s industry, and the salaries and potential bonuses commanded byprincipal executive officers at other companies in the Company’s industry.

 

In connection with his employment as the Company’s Chief ExecutiveOfficer, the Company granted to Dr. Hudson options to purchase 667,000shares of the Company’s common stock under the Company’s 2002 Plan, with anexercise price equal to the fair market value of the Company’s common stock on February 8,2008, which was $1.09 per share. Subject to certain exceptions, the optionsvest in equal annual installments over a period of four years. In addition, onthat same date the Company granted to Dr. Hudson 333,000 restricted sharesof the Company’s common stock. A portion of the shares of common stock aresubject to forfeiture, with 100,000 shares vesting on February 8, 2008 and233,000 shares vesting in equal annual installments over four years commencingon February 8, 2008. The Company is also required to reimburse Dr. Hudsonfor all expenses reasonably incurred by him in discharging his duties for theCompany.

 

In addition to the compensation described above, under the EmploymentAgreement Dr. Hudson is entitled to receive (i) health care benefits forhim and his spouse, (ii) reimbursement of up to $25,000 in legal feesincurred by Dr. Hudson in connection with the negotiation of theEmployment Agreement, (iii) a monthly living allowance of up to $4,500until October 1, 2010, (iv) a car 

 

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allowanceof $1,000 per month and airfare for one round trip per week between his homeand the Company’s headquarters, (v) reimbursement of actual travel and otherbusiness expenses, (v) reimbursement of moving expenses and reasonable andcustomary costs of selling a residence in Princeton, New Jersey, as well as tworound-trip economy fare airplane tickets for relocation purposes for each of Dr. Hudsonand his spouse, (vi) during the first year of employment, reimbursementfor up to four round trip economy airplane tickets per month for travelactually incurred between Portland, Oregon and his home in Bend, Oregon, (vii) fourweeks of paid vacation per year, as well as paid holidays generally availableto senior executives, (viii) $9,500 per year for reasonable expensesincurred in connection with Dr. Hudson’s federal and state income taxreturns and investment advice, and (ix) subject to eligibilityrequirements, participation in benefits and programs generally available to allemployees or executives. In addition, the Company is required to provide Dr. Hudsonwith the Company’s standard directors and officers insurance policy, andindemnify and hold Dr. Hudson harmless from liability arising out of hisservices to the fullest extent permitted by Oregon law. The EmploymentAgreement further provides that Dr. Hudson is entitled to receive certaintax gross-up payments.  In 2008-09, inaccordance with his Employment Agreement, he received reimbursement of movingexpenses and reasonable and customary costs of selling a residence inPrinceton, New Jersey, as well as two round-trip economy fare airplane ticketsfor relocation purposes for each of Dr. Hudson and his spouse andreimbursement of $25,000 in legal fees incurred by Dr. Hudson inconnection with the negotiation of the Employment Agreement.

 

The Employment Agreement provides that, for a period of two yearsfollowing Dr. Hudson’s termination of employment with the Company, Dr. Hudsonmay not engage in certain activities in competition with the Company’s businessactivities, to the extent those competitive activities relate to fivecompetitors specified by the Company prior to Dr. Hudson’s termination. Dr. Hudsonis further prohibited, for a period of two years following termination ofemployment with the Company, from recruiting, hiring, or assisting a thirdparty in hiring any person then employed by the Company.

 

After 2009, Dr. Hudson’s Employment Agreement provides that Dr. Hudsonmay voluntarily terminate his employment with the Company, with or without “GoodReason” (as defined in the Employment Agreement), upon not less than30 days. The Company may terminate Dr. Hudson’s employment without “Cause”(as defined in the Employment Agreement) and other than in connection with a “Changein Control” (as defined in the Employment Agreement) upon 30 days’ writtennotice. Dr. Hudson’s employment is terminated upon death, disability, orupon the effective date of a notice sent by the Company to Dr. Hudsonterminating him for Cause.  Effective April 20,2010, Dr. Hudson resigned at the request of the Board of Directors, whichresignation is being treated as a termination without Cause (as defined in theEmployment Agreement).  See note 12(Subsequent Events) to the financial statements filed with this Form 10-K/A.

 

*J. DavidBoyle II—Chief Financial Officer*

 

On August 18, 2008, the Company hired J. David Boyle II as theCompany’s Chief Financial Officer. In connection with his appointment, theCompany and Mr. Boyle entered into an Employment Agreement dated July 24,2008 providing for Mr. Boyle’s at will employment by the Company. Underthe terms of the Employment Agreement, Mr. Boyle is entitled to an initialannual salary of $324,000, which amount is subject to review for potentialincrease, but not decrease, on an annual basis. In addition to his base salary,Mr. Boyle is eligible for an annual bonus of up to 30% of his base salary,based upon Mr. Boyle’s achievement of performance objectives establishedby mutual agreement among Mr. Boyle, the Company’s Chief Executive Officer,and the Compensation Committee. As noted above, Mr. Boyle received a bonusof $62,111 (or approximately 20%) for his total cash compensation in connectionwith his services in 2009.

 

In connection with his employment as the Company’s Chief FinancialOfficer, the Company granted to Mr. Boyle options to purchase 350,000shares of the Company’s common stock under the Company’s 2002 Plan, with anexercise price equal to the fair market value of the Company’s common stock on August 18,2008, which was $1.21 per share. Subject to certain exceptions, the optionsvest in equal annual installments over a period of three years. In addition, onthat same date the Company granted to Mr. Boyle options to purchase anadditional 150,000 shares of the Company’s common stock under the Company’s2002 Plan, with an exercise price equal to the fair market value of the Company’scommon stock on August 18, 2008, which was $1.21 per share. The vesting ofthese 150,000 shares is subject to the Company’s achievement of certainmilestones, which the Company has not achieved and will not achieve. TheCompany is also required to reimburse Mr. Boyle for all expensesreasonably incurred by him in discharging his duties for the Company.

 

In addition to the compensation described above, under the EmploymentAgreement Mr. Boyle is entitled to receive (i) reimbursement of up to$100,000 for reasonable expenses incurred in 2008 for reasonable expensesincurred to relocate Mr. Boyle, his spouse and certain members of hisfamily to the city of the Company’s headquarters, including the reasonable andcustomary costs associated with selling his prior residence, moving expenses,and costs associated with purchasing a new residence (ii) reimbursement ofup to $5,000 for reasonable legal fees incurred by Mr. Boyle in connectionwith the negotiation of the Employment Agreement, (iii) a monthly livingallowance of $2,000 for a period of up to six months, (iv) four weeks ofpaid vacation per year, as well as paid holidays generally available to seniorexecutives, and (v) subject to eligibility requirements, participation inbenefits and programs 

 

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generallyavailable to all employees or executives. The Employment Agreement furtherprovides that Mr. Boyle is entitled to receive certain tax gross-uppayments.

 

The Employment Agreement provides that, following Mr. Boyle’stermination of employment with the Company, Mr. Boyle may not engage incertain activities in competition with the Company’s business activities for aperiod between one year and two years, depending on the nature of Mr. Boyle’stermination, Mr. Boyle is further prohibited for a period of two yearsfollowing termination of employment with the Company from recruiting, hiring,or assisting a third party in hiring any person then employed by the Company.

 

Mr. Boyle may voluntarily terminate his employment after givingthe Company sixty days’ notice, and the Company may terminate Mr. Boyle’semployment without Cause (as defined in the Employment Agreement) upon thirtydays’ written notice. Mr. Boyle’s employment is also terminated upon death,disability, or upon the effective date of a notice sent by the Company to Mr. Boyleterminating him for Cause.

 

Effective April 20,2010, Mr. Boyle was appointed the Company’s Interim Chief ExecutiveOfficer and President.  As a result ofthis interim appointment, Mr. Boyle’s salary has been increased by $3,000per month while serving as the Interim Chief Executive Officer and President,his bonus target percentage for 2010 has been increased to forty percent (40%),and he has been granted a fully vested option on April 20, 2010 to acquire50,000 shares of the Company’s common stock at an exercise price of $1.24.

 

*EmploymentAgreements with Other Named Executive Officers in Prior Years*

 

The Company has entered into employment contracts with each of itsother named executive officers that provide for a base annual compensation. Theemployment contracts are cancelable by the employee on sixty days’ notice andby the Company on thirty days’ notice or for Cause. Cause is defined in theemployment agreement as the named executive officer’s willful or repeatedfailure to comply with the Company’s policies, standards or regulations, or thenamed executive officer engages in conduct that is dishonest, fraudulent ordetrimental to the Company. The employment agreements provide that the namedexecutive officers may not compete with the Company or solicit the employmentof other individuals employed by the Company during their employment and for aperiod of two years thereafter. Under the employment agreements, the namedexecutive officers may not disclose the Company’s confidential information tooutsiders during employment and for a period of two years thereafter and mustassign inventions conceived by them to the Company. The respective employmentagreements provide that each named executive officer is entitled to severancebenefits and change in control payments in certain circumstances, as discussedbelow under “Post-Employment Benefits and Change in Control Arrangements.”

 

*Post-Employment Benefits and Change in ControlArrangements for the Company’s Named Executive Officers*

 

The Company does not generally provide special post-employment benefitsto its named executive officers, other than those available to its employeesgenerally. However, the Company has entered into agreements with certain namedexecutive officers relating to post-employment benefits and change in controlarrangements.

 

*ChiefExecutive Officer*

 

Upon Dr. Hudson’s voluntary termination of employment (other thanwith Good Reason) or termination of his employment for Cause, the Company mustpay to him all base compensation, unpaid reimbursements, gross-up payments, andother unpaid expenses due through the effective date of termination, and anyunused vacation accrued according to the Company’s policies. However, Dr. Hudsonwould not be entitled to any other compensation, including the right to receiveany bonus relating to the year in which such termination is effective.

 

Upon Dr. Hudson’s death or “Disability” (as defined in theEmployment Agreement), the Company must pay to his estate all basecompensation, earned but unpaid bonuses, unpaid reimbursements, gross-uppayments and other unpaid expenses due at the date of death, plus acontinuation of base compensation and benefits at the rate set forth in theEmployment Agreement for six months following the end of the month in which thedeath occurs. Dr. Hudson’s estate will also have six months to exerciseall vested stock options.

 

Upon termination of Dr. Hudson’s employment by the Company withoutCause or by Dr. Hudson for Good Reason where no Change of Control hasoccurred, the Company is required to pay to Dr. Hudson (i) all basecompensation and earned but unpaid bonuses, and unpaid reimbursements, gross-uppayments and other unpaid expenses due at the effective date of termination, (ii) thesum of (x) two years of base compensation, (y) two years of bonuscompensation based on the average of the past two years’ bonuses actually paidor, if only one year’s bonus has been paid, such bonus, or if no bonus has beenpaid, 50% of the target bonus for the current year, and (z) two times thethen current annual cost of health benefits. If termination occurs before February 8,2010, fifty percent of unvested options and fifty percent of unvested shares ofcommon stock granted pursuant to the Employment Agreement 

 

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willimmediately become fully vested and exercisable. If termination occurs on orafter February 8, 2010, all unvested options and all shares of commonstock will immediately become fully vested and exercisable. The exercise periodof all vested options granted to Dr. Hudson pursuant to the Company’s 2002Equity Incentive Plan will be the earlier of their original expiration date orsix months from the effective date of termination.

 

Upon a termination of Dr. Hudson’s employment by the Companywithout Cause or by Dr. Hudson for Good Reason that occurs within twelvemonths of a Change of Control, the Company is required to pay to Dr. Hudson(i) all base compensation, earned but unpaid bonuses, and unpaidreimbursements, gross-up payments and other unpaid expenses due at theeffective date of termination, (ii) the sum of (x) two years of basecompensation, (y) two times the target annual bonus at the effective timeof termination, and (z) two times the then current annual cost of healthbenefits, car allowance, expenses incurred in connection with tax preparationand investment advice, and continued participation in benefits available toother senior executives generally, as well as the amount of remaining livingallowance payments. In addition, all unvested options and all shares of commonstock granted pursuant to the Employment Agreement would immediately becomefully vested and exercisable and all options exercisable for a period of theearlier of their original expiration date or six months from the effective dayof termination.

 

Effective April 20, 2010, Dr. Hudson resigned at the requestof the Board of Directors, which resignation is being treated as a terminationwithout Cause (as defined in the Employment Agreement).  Accordingly, Dr. Hudson received insubstantial measure the severance benefits set forth above.  See note 12 (Subsequent Events) to thefinancial statements filed with this Form 10-K/A.

 

*ChiefFinancial Officer*

 

Upon Mr. Boyle’s voluntary termination of employment (other thanwith Good Reason), the Company must pay to him all compensation due through thedate of termination, but otherwise has no further obligation to him in respectof any period following such termination. Upon Mr. Boyle’s death, theCompany must pay to his estate all compensation due at the date of death, plusa continuation of base compensation at the rate set forth in the EmploymentAgreement or Mr. Boyle’s then-current rate, whichever is greater, from thedate of death to the final day of the month following the month in which thedeath occurs.

 

Under the terms of the Employment Agreement for Mr. Boyle, Mr. Boyleis entitled to receive severance pay of one year’s base salary followingtermination of his employment by the Company other than for Cause and otherthan in connection with a Change in Control (as those terms are defined in Mr. Boyle’sEmployment Agreement). Mr. Boyle is entitled to receive severance pay oftwo years’ base salary if he is terminated by the Company without Cause inconnection with a Change in Control or if he voluntary terminates hisemployment for Good Reason (as that term is defined in Mr. Boyle’sEmployment Agreement). Further, upon termination other than for Cause, Mr. Boyle’sEmployment Agreement provides for full vesting of all outstanding stockoptions, which are exercisable for a period of 180 days following theeffective date of termination.

 

*Senior Vice President of Business Development and Chief BusinessOfficer*

 

Upon Mr. Medeiros’s voluntary termination of employment (otherthan with Good Reason), the Company must pay to him all compensation duethrough the date of termination, but otherwise has no further obligation to himin respect of any period following such termination. Upon Mr. Medeiros’sdeath, the Company must pay to his estate all compensation due at the date ofdeath, plus a continuation of base compensation at the rate set forth in theEmployment Agreement or Mr. Medeiros’s then-current rate, whichever isgreater, from the date of death to the final day of the month following themonth in which the death occurs.

 

Under the terms of the Employment Agreement for Mr. Medeiros, Mr. Medeirosis entitled to receive severance pay of one year’s base salary followingtermination of his employment by the Company other than for Cause and otherthan in connection with a Change in Control (as those terms are defined in Mr. Medeiros’sEmployment Agreement). Mr. Medeiros is entitled to receive severance payof two year’s base salary if he is terminated by the Company without Cause inconnection with a Change in Control or if he voluntary terminates hisemployment for Good Reason (as that term is defined in Mr. Medeiros’sEmployment Agreement) in connection with a Change in Control. Further, upontermination other than for Cause, Mr. Medeiros’s Employment Agreementprovides for full vesting of all outstanding stock options, which areexercisable for a period of 180 days following the effective date oftermination.

 

*SeniorVice President of Preclinical, Clinical and Regulatory Affairs and ChiefMedical Officer*

 

Upon Dr. Shrewsbury’s voluntary termination of employment (otherthan with Good Reason), the Company must pay to him all compensation duethrough the date of termination, but otherwise has no further obligation to himin respect of any period following such termination. Upon Dr. Shrewsbury’sdeath, the Company must pay to his estate all compensation due at the date ofdeath, plus a continuation of base compensation at the rate set forth in theEmployment Agreement or Dr. Shrewsbury’s then-current rate, whichever isgreater, from the date of death to the final day of the month following themonth in which the death occurs.

 

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Under the terms of the Employment Agreement for Dr. Shrewsbury, Dr. Shrewsburyis entitled to receive severance pay of one year’s base salary followingtermination of his employment by the Company other than for Cause and otherthan in connection with a Change in Control (as those terms are defined in Dr. Shrewsbury’sEmployment Agreement). Dr. Shrewsbury is entitled to receive severance payof two year’s base salary if he is terminated by the Company without Cause inconnection with a Change in Control or if he voluntary terminates hisemployment for Good Reason (as that term is defined in Dr. Shrewsbury’sEmployment Agreement) in connection with a Change in Control. Further, upontermination other than for Cause, Dr. Shrewsbury’s Employment Agreementprovides for full vesting of all outstanding stock options, which areexercisable for a period of 180 days following the effective date oftermination.

 

*OtherNamed Executive Officers*

 

Under the employment agreement for Dr. Iversen, upon voluntarytermination of employment (other than voluntary termination after a Change ofControl) or termination of employment for Cause, the Company must pay to Dr. Iversenall compensation due through the date of termination, but otherwise has nofurther obligation to him in respect of any period following such termination.Upon the death of Dr. Iversen, the Company must pay to his estate all compensationdue at the date of death, plus a continuation of base compensation at the rateset forth in each such executive officer’s employment agreement from the dateof death to the final day of the month following the month in which the deathoccurs.

 

Under his employment agreement for Dr. Iversen,  is entitled to receive severance pay of oneyear’s base salary following either termination of the executive officerwithout Cause or a voluntary termination by Dr. Iversen following a Changeof Control (as those terms are defined in such employment agreements). Further,upon termination other than for Cause, the employment agreement provides forfull vesting of all outstanding stock options, other than performance-basedoptions.

 

*Payment of Post-Employment Benefits for the Company’sTerminated Named Executive Officers*

 

*SeniorVice President for Clinical Development and Regulatory Affairs*

 

Effective October 27, 2008, the Company entered into a Severanceand Release Agreement with Dr. Peter O’Hanley, the Company’s Senior VicePresident for Clinical Development and Regulatory Affairs. Under the terms ofthe Severance and Release Agreement, Dr. O’Hanley resigned his positioneffective January 9, 2009, and he received all wages, including accruedbut unused vacation, earned through such date.

 

Dr. O’Hanley remained a full-time employee with the Companythrough November 28, 2008. Between December 1, 2008 and January 9, 2009, Dr. O’Hanley’semployment was reduced to part-time employment of no more than two days per weekand his salary was reduced a corresponding amount during this time. Dr. O’Hanleyhas agreed to devote his best efforts to assisting in the smooth and successfultransition of knowledge and responsibilities to his replacement.

 

Under the terms ofthe Severance and Release Agreement, the Company and Dr. O’Hanley alsoagreed to terminate the March 22, 2004 Employment Agreement between theCompany and Dr. O’Hanley. Lastly, the Company and Dr. O’Hanley agreedto a mutual release of any and all claims arising out of Dr. O’Hanley’semployment with the Company.

 

**Compensation Committee Report**

 

The Compensation Committee of AVI BioPharma, Inc. has reviewed anddiscussed with management the Compensation Discussion and Analysis contained inthis Form 10-K/A as required under Item 402(b) ofRegulation S-K. Based on their review and discussions with management, theCompensation Committee recommended to the Company’s full Board of Directorsthat the Compensation Discussion and Analysis be included in this Form 10-K/A.

 
|   | COMPENSATION  COMMITTEE   |
|--------|---------------------------|
|   |                      |
|   | William  A. Goolsbee      |
|   | Michael  D. Casey (Chair) |

 

# **SummaryCompensation Table**

 

The table below summarizes the total compensation paid or earned byeach of the named executive officers for the fiscal year ended December 31,2009. Based on the fair value of equity awards granted to named executiveofficers in 2009 and the base salary of the named executive officers, “Salary”accounted for, on average, approximately 38% of the total compensation of thenamed executive officers, incentive compensation including cash bonus and stockoption grants, accounted for approximately 57% of the total compensation of thenamed executive officers and benefits accounted for approximately 5% of thetotal compensation of named executive officers:

 

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| **Name  and Principal Position**                                                                  | ** ** | **Year** | ** ** | **Salary  ($)** | ** ** | **Bonus  ($)** | ** ** | **Stock  Awards  ($)** | ** ** | **Option  Awards  ($)(1)** | ** ** | **Non-Equity  Incentive Plan  Compensation** | ** ** | **Nonqualified  Deferred  Compensation  Earnings  ($)** | ** ** | **All  Other  Compensation** | ** ** | **Total  ($)** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|----------|------------|-----------------|------------|----------------|------------|------------------------|------------|----------------------------|------------|----------------------------------------------|------------|---------------------------------------------------------|------------|------------------------------|------------|----------------|------------|
| **(a)**                                                                                           | ** ** | **(b)**  | ** ** | **(c)**         | ** ** | **(d)**        | ** ** | **(e)**                | ** ** | **(f)**                    | ** ** | **(g)**                                      | ** ** | **(h)**                                                 | ** ** | **(i)**                      | ** ** | **(j)**        | ** ** |
| Leslie  Hudson, Ph.D.,                                                                            |       | 2009     |       | 480,000         |       | 181,440        |       | 114,378                |       | 271,950                    |       |                                         |       |                                                    |       | 94,101                       | (2)        | 1,141,869      |       |
| President and  Chief Executive Officer                                                            |       | 2008     |       | 411,551         |       | 196,020        |       | 362,970                |       | 613,974                    |       | —                                       |       | —                                                  |       | 195,786                      | (2)        | 1,780,301      |       |
| J.  David Boyle II,                                                                               |       | 2009     |       | 324,000         |       | 62,111         |       | 42,579                 |       | 116,550                    |       |                                         |       |                                                    |       | 19,437                       | (3)        | 564,677        |       |
| Chief Financial  Officer and Secretary                                                            |       | 2008     |       | 93,462          |       | 72,973         |       | —                 |       | 512,300                    |       | —                                       |       | —                                                  |       | 160,550                      | (3)        | 839,285        |       |
| Patrick  L. Iversen, Ph.D.,                                                                       |       | 2009     |       | 265,000         |       | 42,135         |       | 29,021                 |       | 77,700                     |       |                                         |       |                                                    |       | 9,800                        | (4)        | 423,656        |       |
| Senior  Vice President of Strategic                                                               |       | 2008     |       | 265,000         |       | 49,737         |       | —                 |       | 87,893                     |       | —                                       |       | —                                                  |       | 9,200                        | (4)        | 411,830        |       |
| Alliances                                                                                         |       | 2007     |       | 260,000         |       | 27,700         |       | —                 |       | 320,288                    |       | —                                       |       | —                                                  |       | 9,000                        | (4)        | 616,988        |       |
| Paul  Medeiros,                                                                                   |       | 2009     |       | 165,202         |       | 150,000        |       | 110,000                |       | 371,840                    |       | —                                       |       | —                                                  |       | 11,628                       | (5)        | 808,670        |       |
| Senior Vice  President of Business Development and Chief Business Officer                         |       |     |       |            |       |           |       |                   |       |                       |       |                                         |       |                                                    |       |                         |       |           |       |
| Stephen  B. Shrewsbury, M.D.,                                                                     |       | 2009     |       | 264,295         |       | 59,288         |       | 81,600                 |       | 514,665                    |       | —                                       |       | —                                                  |       | 55,558                       | (6)        | 975,406        |       |
| Senior Vice  President of Preclinical, Clinical and Regulatory Affairs and Chief Medical  Officer |       |     |       |            |       |           |       |                   |       |                       |       |                                         |       |                                                    |       |                         |       |           |       |

 

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(1)                                  The amounts inthe option awards column reflect the aggregate grant date fair value of optionawards granted in 2009 calculated in accordance with FASB ASC Topic 718.Assumptions used in the calculation of this amount are included in Note 2 tothe financial statements set forth in our annual report on Form 10-K,filed March 16, 2010 (Commission File No. 001-14895).

 

(2)                                  The amountstated for fiscal year 2009 represents $84,301 in temporary living and travelexpenses and $9,800 contributed to Dr. Hudson’s account in Companymatching contributions under the Company’s 401(k) plan.  The amount stated for fiscal year 2008represents $186,586 in relocation and temporary living expenses and $9,200contributed to Dr. Hudson’s account in Company matching contributionsunder the Company’s 401(k) plan.

 

(3)                                  The amountstated for fiscal year 2009 represents $9,637 in relocation and temporaryliving expenses and $9,800 contributed to Mr. Boyle’s account in Companymatching contributions under the Company’s 401(k) plan. The amount statedfor fiscal year 2008 represents $158,390 in relocation and temporary livingexpenses and $2,160 contributed to Mr. Boyle’s account in Company matchingcontributions under the Company’s 401(k) plan.

 

(4)                                  The amountsstated for fiscal years 2009, 2008 and 2007 represents funds contributed to Dr. Iversen’saccount in Company matching contributions under the Company’s 401(k) plan.

 

(5)                                  The amountstated for fiscal year 2009 represents $6,328 in legal expenses and $5,250contributed to Mr. Medeiros’s account in Company matching contributionsunder the Company’s 401(k) plan.

 

(6)                                 The amountstated for fiscal year 2009 represents $45,758 in relocation expenses and$9,800 contributed to Dr. Shrewsbury’s account in Company matchingcontributions under the Company’s 401(k) plan.

 

Seethe discussion above under the heading “Employment Agreements with NamedExecutive Officers” for a discussion of our employment arrangements with ournamed executive officers.

 

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**Grants of Plan Based Awards in Fiscal Year 2009**

 
| ** **                                                                                        | ** ** | ** **         | ** ** | **Estimated  Future  Payouts Under  Non-Equity Incentive  Plan Awards(1)** | ** ** | **Estimated  Future  Payouts Under  Equity Incentive  Plan Awards** | ** ** | **All Other  Stock  Awards:  Number  of Shares  of Stock** | ** ** | **All Other  Option  Awards:  Number of  Securities  Underlying** | ** ** | **Exercise  or Base  Price of  Option** | ** ** | **Grant  Date Fair  Value of  Stock  and  Option** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|--------------------|------------|----------------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------|------------|---------------------------------------------------------|------------|
| **Name**                                                                                          | ** ** | **Grant  Date(1)** | ** ** | **Threshold  ($)**                                                         | ** ** | **Target  ($)**                                                     | ** ** | **Maximum  ($)**                                                | ** ** | **Threshold  (#)**                                                     | ** ** | **Target  (#)**                         | ** ** | **Maximum  (#)**                                        | ** ** | **or  Units  (#)** | ** ** | **Options  (#)** | ** ** | **Awards  ($)** | ** ** | **Awards  ($)** | ** ** |
| **(a)**                                                                                           | ** ** | **(b)**            | ** ** | **(c)**                                                                    | ** ** | **(d)**                                                             | ** ** | **(e)**                                                         | ** ** | **(f)**                                                                | ** ** | **(g)**                                 | ** ** | **(h)**                                                 | ** ** | **(i)** | ** ** | **(j)** | ** ** | **(k)** | ** ** | **(l)** | ** ** |
| Leslie  Hudson, Ph.D.,                                                                            |       | 2/10/2009          |       | —                                                                     |       | —                                                              |       | —                                                          |       | —                                                                 |       | —                                  |       | —                                                  |       | 124,324 |   |   |   |   |   | 114,378 |   |
| President and Chief  Executive Officer                                                            |       | 2/10/2009          |       |                                                                       |       |                                                                |       |                                                            |       |                                                                   |       |                                    |       |                                                    |       |   |   | 350,000 |   | 0.92 |   | 271,950 |   |
| J.  David Boyle II,                                                                               |       | 2/10/2009          |       | —                                                                     |       | —                                                              |       | —                                                          |       | —                                                                 |       | —                                  |       | —                                                  |       | 46,282 |   |   |   |   |   | 42,579 |   |
| Chief Financial  Officer and Secretary                                                            |       | 2/10/2009          |       |                                                                       |       |                                                                |       |                                                            |       |                                                                   |       |                                    |       |                                                    |       |   |   | 150,000 |   | 0.92 |   | 116,550 |   |
| Patrick  L. Iversen, Ph.D.,                                                                       |       | 2/10/2009          |       | —                                                                     |       | —                                                              |       | —                                                          |       | —                                                                 |       | —                                  |       | —                                                  |       | 31,545 |   |   |   |   |   | 29,021 |   |
| Senior Vice  President of Strategic Alliances                                                     |       | 2/10/2009          |       |                                                                       |       |                                                                |       |                                                            |       |                                                                   |       |                                    |       |                                                    |       |   |   | 100,000 |   | 0.92 |   | 77,700 |   |
| Paul  Medeiros                                                                                    |       | 5/19/2009          |       | —                                                                     |       | —                                                              |       | —                                                          |       | 100,000                                                                |       | 100,000                                 |       | 100,000                                                 |       |   |   |   |   |   |   | 110,000 |   |
| Senior Vice  President of Business Development and Chief Business Officer                         |       | 5/19/2009          |       |                                                                       |       |                                                                |       |                                                            |       |                                                                   |       |                                    |       |                                                    |       |   |   | 400,000 |   | 1.10 |   | 371,840 |   |
| Stephen  B. Shrewsbury, M.D.,                                                                     |       | 1/26/2009          |       | —                                                                     |       | —                                                              |       | —                                                          |       | —                                                                 |       | —                                  |       | —                                                  |       | 60,000 |   |   |   |   |   | 81,600 |   |
| Senior Vice  President of Preclinical, Clinical and Regulatory Affairs and Chief Medical  Officer |       | 1/26/2009          |       |                                                                       |       |                                                                |       |                                                            |       |                                                                   |       |                                    |       |                                                    |       |   |   | 450,000 |   | 1.36 |   | 514,665 |   |

 

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(1)                                  Subject toacceleration of vesting in accordance with the named executive officers’employment agreement, all options granted in 2009 for Drs. Hudson, Iversenand Shrewsbury and Messrs. Boyle and Medeiros become exercisable startingtwelve months after the grant date, with one-third of the options becomingexercisable at that time with an additional one-third of the options becomingexercisable on the second and third anniversary dates of the option grant,respectively.  Effective April 20,2010, Dr. Hudson resigned at the request of the Board of Directors, whichresignation is being treated as a termination without Cause (as defined in theEmployment Agreement).  Accordingly,effective April 20, 2010, all of Dr. Hudson’s options became fullyvested and exercisable until October 20, 2010.

 

**Outstanding Equity Awards at 2009 Fiscal Year End**

 
| ** **                                                                                          | ** ** | **Option  Awards** | ** ** | **Stock  Awards**                                                             | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|--------------------|------------|-------------------------------------------------------------------------------|------------|
| **Name**                                                                                            | ** ** | **Grant  Date**    | ** ** | **Number  of  Securities  Underlying  Unexercised  Options (#)  Exercisable** | ** ** | **Number  of  Securities  Underlying  Unexercised  Options (#)  Unexercisable** | ** ** | **Equity  Incentive Plan  Awards:  Number of  Securities  Underlying  Unexercised  Unearned  Options (#)** | ** ** | **Options  Exercise  Price ($)** | ** ** | **Option  Expiration  Date** | ** ** | **Number  of  Shares or  Units of Stock  That Have  Not Vested  (#)** | ** ** | **Market Value  of Shares or  Units of Stock  That Have  Not Vested  ($)** | ** ** | **Equity  Incentive Plan  Awards:  Number of  Unearned  Shares, Units or  Other Rights  That Have Not  Vested (#)** | ** ** | **Equity  Incentive Plan  Awards:  market or  payout value  of unearned  shares, units  or other rights  that have not  vested ($)** | ** ** |
| **(a)**                                                                                             | ** ** | **(b)**            | ** ** | **(c)**                                                                       | ** ** | **(d)** | ** ** | **(e)** | ** ** | **(f)** | ** ** | **(g)** | ** ** | **(h)** | ** ** | **(i)** | ** ** | **(j)** | ** ** | **(k)** | ** ** |
| Leslie Hudson,  Ph.D.,                                                                              |       | 2/8/2008           |       | 166,750                                                                       |       | 500,250 |   | — |   | 1.09 |   | 02/8/18 |   | — |   | — |   | 174,750 |   | 255,135 |   |
| President and Chief Executive Officer(1)                                                            |       | 2/10/2009          |       | 0                                                                             |       | 350,000 |   | — |   | 0.92 |   | 2/10/19 |   |   |   |   |   |   |   |   |   |
| J. David Boyle  II,                                                                                 |       | 8/18/2008          |       | 116,667                                                                       |       | 233,333 |   | — |   | 1.21 |   | 08/18/18 |   | — |   | — |   | — |   |   |   |
| Chief Financial Officer and Secretary(2)                                                            |       | 2/10/2009          |       | 0                                                                             |       | 150,000 |   | — |   | 0.92 |   | 2/10/19 |   |   |   |   |   |   |   |   |   |
| Patrick L. Iversen,  Ph.D.,                                                                         |       | 1/3/2002           |       | 84,000                                                                        |       | — |   | — |   | 5.75 |   | 01/03/10 |   | — |   | — |   | — |   |   |   |
| Senior Vice President of                                                                            |       | 12/05/2002         |       | 92,400                                                                        |       | — |   | — |   | 5.35 |   | 12/05/12 |   | — |   | — |   | — |   |   |   |
| Strategic Alliances(3)                                                                              |       | 2/22/2005          |       | 75,000                                                                        |       | — |   | — |   | 2.53 |   | 02/22/15 |   | — |   | — |   | — |   |   |   |
|                                                                                                |       | 2/16/2006          |       | 75,000                                                                        |       | — |   | — |   | 7.35 |   | 02/16/16 |   | — |   | — |   | — |   |   |   |
|                                                                                                |       | 2/06/2007          |       | 83,334                                                                        |       | 41,666 |   | — |   | 3.00 |   | 02/06/17 |   | — |   | — |   | — |   |   |   |
|                                                                                                |       | 2/28/2008          |       | 25,000                                                                        |       | 50,000 |   | — |   | 1.39 |   | 02/28/18 |   | — |   | — |   | — |   |   |   |
|                                                                                                |       | 2/10/2009          |       | —                                                                        |       | 100,000 |   | — |   | 0.92 |   | 2/10/19 |   |   |   |   |   |   |   |   |   |
| Paul  Medeiros                                                                                      |       | 5/19/2009          |       | —                                                                        |       | 400,000 |   |   |   | 1.10 |   | 05/19/19 |   | — |   | — |   | 100,000 |   | 146,000 |   |
| Senior Vice President of Business Development and  Chief Business Officer(4)                        |       |               |       |                                                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Stephen  B. Shrewsbury, M.D.                                                                        |       | 1/26/2009          |       | —                                                                        |       | 450,000 |   |   |   | 1.36 |   | 01/26/19 |   | — |   | — |   | — |   |   |   |
| Senior Vice President of Preclinical, Clinical and  Regulatory Affairs and Chief Medical Officer(5) |       |               |       |                                                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

 

22

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(1)                                  Dr. Hudson’s667,000 options granted on February 8, 2008 at $1.09 per share becameexercisable starting February 8, 2009, with one-fourth being exercisableon this date one-fourth became exercisable on February 8, 2010, andone-fourth were scheduled to become exercisable in 2011 and 2012, respectively.Options granted on February 10, 2009 at $0.92 per share became exercisablestarting February 10, 2010. with one third being exercisable on this dateand another one-third were scheduled to become exercisable on February 10,2011 and 2012 respectively. Of Dr. Hudson’s 333,000 shares of restrictedstock granted on February 8, 2008, 100,000 vested on that date, 58,250vested on February 8, 2009, 58,250 shares vested on February 8, 2010,and the remaining shares were scheduled to vest in equal annual installments of58,250 shares in 2011 and 2012. Effective April 20, 2010, Dr. Hudsonresigned at the request of the Board of Directors, which resignation is beingtreated as a termination without Cause (as defined in the EmploymentAgreement).  Upon his resignation,, (1) allof Dr. Hudson’s options became fully vested and exercisable until October 20,2010 and (2) Dr. Hudson became fully vested in all shares ofrestricted stock owned by him.

 

(2)                                  Mr. Boyle’s350,000 options granted on August 18, 2008 at $1.21 per share becameexercisable starting August 18, 2009, with one-third being exercisable onthis date and another one-third being exercisable on August 18, 2010 and2011, respectively. Options granted on February 10, 2009 at $0.92 pershare became exercisable starting February 10, 2010 with on third beingexercisable on this date and another one-third being exercisable on February 10,2011 and 2012, respectively.  EffectiveApril 20, 2010, Mr. Boyle was appointed Interim Chief Executive Officerand President.  As a result of thisappointment, Mr. Boyle was granted a fully vested option to acquire 50,000shares of the Company’s common stock at an exercise price of $1.24 per share.

 

(3)                                  Dr. Iversen’s75,000 options granted on February 16, 2006 at $7.35 per share becameexercisable starting February 16, 2007, with one-third being exercisableon this date and another one-third being exercisable on February 16, 2008and 2009, respectively. Dr. Iversen’s 125,000 options granted on February 6,2007 at $3.00 per share became exercisable starting February 6, 2008, withone-third being exercisable on this date and another one-third beingexercisable on February 6, 2009 and 2010, respectively. Dr. Iversen’s75,000 options granted on February 28, 2008 at $1.39 per share becameexercisable starting February 28, 2009, with one-third being exercisableon this date and another one-third being exercisable on February 28, 2010and 2011, respectively.  Options grantedon February 10, 2009 at $0.92 per share became exercisable starting February 10,2010 with one-third being exercisable on this date and another one-third beingexercisable on February 10, 2011 and 2012, respectively.

 

(4)                                  Mr. Medeiros’s400,000 options granted on May 19, 2009 at $1.10 per share will becomeexercisable starting May 19, 2010, with one-third being exercisable onthis date and another one-third being exercisable on May 19, 2011 and2012, respectively. Mr. Medeiros was also granted 100,000 shares ofrestricted stock that will vest on the performance of certain milestones. Theperformance milestone for these restricted shares was not achieved as of December 31,2009.

 

(5)                                  Dr. Shrewsbury’s450,000 options granted on January 26, 2009 at $1.36 per share becameexercisable starting January 26, 2010, with one-third being exercisable onthis date and another one-third being exercisable on January 26, 2011 and2012, respectively. Also on January 26, 2009, Dr. Shrewsbury wasgranted 60,000 shares of restricted stock that vested July 27, 2009.

 

23

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**2009 Option Exercises and Stock Vested**

 
| ** **                                                                                       | ** ** | **Option  awards**                                | ** ** | **Stock award**                      | ** ** |
|--------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|--------------------------------------|------------|
| **Name**                                                                                         | ** ** | **Number  of  Shares  Acquired on  Exercise (#)** | ** ** | **Value  Realized on  Exercise ($)** | ** ** | **Number  of  Shares  Acquired on  Vesting (#)** | ** ** | **Value  Realized on  Vesting ($)** | ** ** |
| **(a)**                                                                                          | ** ** | **(b)**                                           | ** ** | **(c)**                              | ** ** | **(d)** | ** ** | **(e)** | ** ** |
| Leslie Hudson, Ph.D.,                                                                            |       |                                              |       |                                 |       | 182,574 |   | 170,881 |   |
| President and Chief Executive Officer                                                            |       |                                              |       |                                 |       |   |   |   |   |
|                                                                                             |       |                                              |       |                                 |       |   |   |   |   |
| J. David Boyle II,                                                                               |       |                                              |       |                                 |       | 46,282 |   | 42,579 |   |
| Chief Financial Officer and Secretary                                                            |       |                                              |       |                                 |       |   |   |   |   |
|                                                                                             |       |                                              |       |                                 |       |   |   |   |   |
| Patrick L. Iversen, Ph.D.,                                                                       |       |                                              |       |                                 |       | 31,545 |   | 29,021 |   |
| Senior Vice President of Strategic Alliances                                                     |       |                                              |       |                                 |       |   |   |   |   |
|                                                                                             |       |                                              |       |                                 |       |   |   |   |   |
| Paul Medeiros,                                                                                   |       |                                              |       |                                 |       |   |   |   |   |
| Senior Vice President of Business Development and  Chief Business Officer                        |       |                                              |       |                                 |       |   |   |   |   |
|                                                                                             |       |                                              |       |                                 |       |   |   |   |   |
| Stephen B. Shrewsbury, M.D.,                                                                     |       |                                              |       |                                 |       | 60,000 |   | 126,000 |   |
| Senior Vice President of Preclinical, Clinical and  Regulatory Affairs and Chief Medical Officer |       |                                              |       |                                 |       |   |   |   |   |

 

Noneof our named executive officers exercised any stock options during fiscal year2009.

 

**2009 Pension Benefits**

 

None of our named executive officers are entitled to pension benefitsor other payments of benefits pursuant to any established plan followingretirement.

 

**2009 Nonqualified Deferred Compensation**

 

None of our named executive officers are entitled to benefits under anynonqualified defined contribution or nonqualified deferred compensation plans.

 

**Potential Payments Upon Termination or a Change inControl**

 

The table below reflects the amount of compensation payable to each ofthe named executive officers of the Company in the event of termination of suchexecutive’s employment. The amount of compensation payable to each named executiveofficer upon termination without cause or before and after a change in control,and for termination following a change of control, is shown below. The amountsshown assume that such termination was effective as of December 31, 2009,and thus includes amounts earned through such time and are estimates of theamounts which would be paid out to the executives upon their termination.

 

24

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| **Name**                                                                                           | ** ** | **Benefit**       | ** ** | **Before  Change in  Control,  Termination  w/o Cause ($)** | ** ** | **After Change  in Control,  Termination  w/o Cause ($)** | ** ** | **Voluntary  Termination  ($)** | ** ** | **Death  ($)** | ** ** | **Disability ($)** | ** ** | **Change  in  Control ($)** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|-------------------|------------|-------------------------------------------------------------|------------|----------------------------------------------------------------|------------|---------------------------------|------------|----------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                                         | ** ** | **(a)**           | ** ** | **(b)**                                                     | ** ** | **(c)**                                                        | ** ** | **(d)**                         | ** ** | **(e)**        | ** ** | **(f)**                 | ** ** | **(g)**                     | ** ** |
| Leslie  Hudson, Ph.D.,(8)                                                                          |       | Cash Severance    |       | 1,391,508                                                   | (1)        | 1,590,048                                                      | (1)        |                            |       | 250,000        | (2)        | 250,000                 | (2)        | 1,590,048                   | (1)        |
| President and  Chief Executive Officer                                                             |       | Stock Options     |       | 187,046                                                     | (3)        | 374,093                                                        | (4)        |                            |       |           | (5)        |                    | (5)        | 374,093                     | (4)        |
|                                                                                               |       | Restricted Stock  |       | 127,568                                                     | (6)        | 255,135                                                        | (7)        |                            |       |           |       |                    |       | 255,135                     | (7)        |
| J.  David Boyle II,                                                                                |       | Cash Severance(9) |       | 324,000                                                     |       | 648,000                                                        |       |                            |       | 37,000         | (9)        | 10,000                  | (10)       | 648,000                     |       |
| Chief Financial  Officer and Secretary                                                             |       | Stock Options     |       | 139,333                                                     | (4)        | 139,333                                                        | (4)        |                            |       |           |       |                    |       | 139,333                     | (4)        |
| Patrick  L. Iversen, Ph.D.,                                                                        |       | Cash Severance(9) |       | 265,000                                                     |       | 265,000                                                        |       |                            |       | 32,083         | (9)        | 10,000                  | (10)       | 265,000                     |       |
| Senior Vice  President of Strategic Alliances                                                      |       | Stock Options     |       | 57,500                                                      | (4)        | 57,500                                                         | (4)        |                            |       |           |       |                    |       | 57,500                      |       |
| Paul  Medeiros,                                                                                    |       | Cash Severance(9) |       | 315,000                                                     |       | 630,000                                                        |       |                            |       | 36,259         | (9)        | 10,000                  | (10)       | 630,000                     |       |
| Senior Vice  President of Business                                                                 |       | Stock Options     |       | 144,000                                                     |       | 144,000                                                        |       |                            |       |           |       |                    |       | 144,000                     |       |
| Development and  Chief Business Officer                                                            |       | Restricted  Stock |       | 146,000                                                     |       | 146,000                                                        |       |                            |       |           |       |                    |       | 146,000                     |       |
| Stephen  B. Shrewsbury, M.D.,                                                                      |       | Cash Severance(9) |       | 310,000                                                     |       | 620,000                                                        |       |                            |       | 35,833         | (9)        | 10,000                  | (10)       | 620,000                     |       |
| Senior Vice  President of Preclinical, Clinical, and Regulatory Affairs and Chief Medical  Officer |       | Stock Options     |       | 45,000                                                      |       | 45,000                                                         |       |                            |       |           |       |                    |       | 45,000                      |       |

 

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(1)                                  Cash severanceis payable in equal monthly installments over twenty-four months for Dr. Hudson.

 

(2)                                  Cash severanceis payable in equal monthly installments over six months for Dr. Hudson.

 

(3)                                  If terminationoccurs before the second anniversary of Dr. Hudson’s date of employment,50% of Dr. Hudson’s unvested stock options immediately become fullyvested. If, on the other hand, termination occurs on or after the secondanniversary of Dr. Hudson’s date of employment, all unvested stock optionsimmediately become fully vested. If Dr. Hudson had been terminated on December 31,2009, such termination would have occurred prior to his second anniversary withthe Company. Accordingly, 50% of his unvested stock options would haveimmediately become fully vested as of December 31, 2009. The stated dollaramount reflects the market value as of December 31, 2009, net of exerciseprice.

 

(4)                                  In the event ofa change in control of the Company, all stock options held by the namedexecutive officer will automatically vest and became exercisable. If the namedexecutive officer had been terminated on December 31, 2009 and suchtermination occurred after a change in control, 100% of such named executiveofficer’s unvested stock options would have been vested as of December 31,2009. The stated dollar amount reflects the market value as of December 31,2009, net of exercise price.

 

(5)                                  In the event ofdeath or disability, the stock options will cease vesting, but the exerciseperiod is automatically extended to six months following the month in which thedeath or disability occurs.

 

(6)                                  If terminationoccurs before the second anniversary of Dr. Hudson’s date of employment,50% of Dr. Hudson’s unvested shares of restricted stock immediately becomefully vested. If, on the other hand, termination occurs on or after the secondanniversary of Dr. Hudson’s date of employment, all unvested shares ofrestricted stock immediately become fully vested. If Dr. Hudson had beenterminated on December 31, 2009, such termination would have occurredprior to his second anniversary with the Company. Accordingly, 50% of hisunvested shares of restricted stock would have immediately become fully vestedas of December 31, 2009. The stated dollar amount reflects the marketvalue as of December 31, 2009, net of exercise price.

 

(7)                                  In the event ofa change in control of the Company, all unvested shares of restricted stockimmediately become fully vested. If Dr. Hudson had been terminated on December 31,2009 and such termination occurred after a change in control, 100% of hisunvested shares of restricted stock would have been vested as of December 31,2009. The stated dollar amount reflects the market value as of December 31,2009, net of exercise price.

 

(8)                                  Effective April 20,2010, Dr. Hudson resigned at the request of the Board of Directors, whichresignation is being treated as a termination without Cause (as defined in theEmployment Agreement).  Accordingly, hereceived severance benefits as described in detail in note 12 (SubsequentEvents) to the financial statements filed with this Form 10-K/A.

 

(9)                                  Cash severanceis payable as a lump sum for the respective named executive officers.

 

(10)                            In the event ofdeath, the named executive officer will receive all salary compensation due asof the last day of the month following the month in which the death occurs. Inaddition, the named executive officer will receive any unused paid time off andproceeds from life insurance. The stock options will cease vesting as of thedate of death, but the exercise period is automatically extended to one yearfrom the date of death.

 

Fora further discussion of the Company’s obligations on a change of control ortermination of a named executive officer, see also the discussion above under “Post-EmploymentBenefits and Change in Control Arrangements.”

 

25

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**2009 Director Compensation**

 

The Company uses a combination of cash and stock-based incentivecompensation to attract and retain qualified candidates to serve on the Boardof Directors. In setting director compensation, the Company considers thesignificant amount of time that directors expend in fulfilling their duties tothe Company as well as the skill-level required by the Company of directors.

 

The Company has certain policies pertaining to directorcompensation.  In 2009, compensation forcertain directors was adjusted to reflect the fact that they departed or joinedthe Board during 2009.  See discussionbelow under “Director Compensation for Fiscal 2009” for details regardingindividual director compensation.

 

The following director compensation policies were effective in thefiscal year 2009, and, as noted, have been modified for fiscal year 2010:

 

·                  annualcompensation of $30,000 for services as a director, other than the Chairman ofthe Board of Directors;

 

·                  annualcompensation of $75,000 payable to the Chairman of the Board of Directors;

 

·                  an additional$12,000 to the Chairman of the Audit Committee;

 

·                  an additional$8,000 to each member of the Audit Committee;

 

·                  an additional$5,000 to the Chairman of the Compensation Committee;

 

·                  an additional$3,000 to each member of the Compensation Committee;

 

·                  an additional$5,000 to the Chairman of the Nominating and Corporate Governance Committee;

 

·                  an additional$3,000 to each member of the Nominating and Corporate Governance Committee;

 

·                  For fiscal year2009, at the meeting of the Board of Directors held immediately following theAnnual Meeting, each non-employee director other than Dr. Behrens and Dr. Henneyreceived 5,000 shares of Common Stock. These shares vest on the anniversarydate of the grant;

 

·                  For fiscal year2009, at the meeting of the Board of Directors held immediately following the AnnualMeeting, each non-employee director other than Dr. Behrens and Dr. Henneyreceived a nonqualified option to purchase 20,000 shares of Common Stock withan exercise price equal to the fair market value of the Common Stock on thedate of the grant pursuant to AVI’s 2002 Equity Incentive Plan. These optionsvest ratably on each anniversary date of the grant over four years of continuedservice to the Board of Directors;

 

·                  Starting infiscal year 2010, each year at the meeting of the Board of Directors heldimmediately following the Annual Meeting, each non-employee director who hasserved at least six months will receive 5,000 shares of Common Stock. Theseshares will vest on the earlier of (i) the anniversary date of the grantor (ii) the date of the Annual Meeting in the year following the date ofgrant; and

 

·                  Starting infiscal year 2010, each year at the meeting of the Board of Directors heldimmediately following the Annual Meeting, each non-employee director who hasserved at least six months will receive a nonqualified option to purchase30,000 shares of Common Stock with an exercise price equal to the fair marketvalue of the Common Stock on the date of the grant pursuant to AVI’s 2002Equity Incentive Plan. These options will vest on the earlier of (i) theanniversary date of the grant or (ii) the date of the Annual Meeting inthe year following the date of grant.

 

In addition to thecompensation paid to members of the Company’s committees and instead of thecompensation paid to non-employee directors at the meeting held immediatelyfollowing the Annual Meeting, new non-employee directors receive:

 

·                  a nonqualifiedoption upon joining the Board of Directors, to purchase 60,000 shares of CommonStock at an exercise price equal to the fair market value of the Common Stockon the date of the grant pursuant to AVI’s 2002 Equity Incentive Plan. These options vest ratably over fouryears of continued service to the Board of Directors, with 1/4 of the totalamount shares vesting each year on the earlier of (i) the anniversary dateof the grant or (ii) the date of the Annual Meeting in the year followingthe date of grant.

 

Dr. Behrens and Dr. Henney joined the Board of Directors inearly 2009.  As a result, they did notreceive the annual non-employee equity awards granted to members of the Boardof Directors at the meeting of the Board of Directors held immediatelyfollowing the 2009 Annual Meeting described above.  Instead, in addition to the cash compensationpaid for service as a director as described above, Dr. Behrens and Dr. Henneyeach received a nonqualified option upon joining the Board of Directors topurchase 60,000 shares of Common Stock at an exercise price equal to the fairmarket value of the Common Stock on the date of the grant pursuant to AVI’s2002 Equity Incentive Plan. These options vest ratably over four years of continued service to theBoard of Directors, with 1/4 of the total amount shares vesting each year onthe earlier of (i) the anniversary date of the grant or (ii) the dateof the Annual Meeting in the year following the date of grant.

 

26

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The following table sets forth a summary of the compensation we paid toour non-employee directors in 2009:

 

**DirectorCompensation for Fiscal 2009**

 
| **Name**                                  | ** ** | **Fees Earned  or Paid in  Cash  ($)** | ** ** | **Stock  Awards  ($)** | ** ** | **Option  Awards  ($)(1)** | ** ** | **Non-Equity  Incentive Plan  Compensation  ($)** | ** ** | **Change in  Pension Value  and Nonqualified  Deferred  Compensation  Earnings  ($)** | ** ** | **All Other  Compensation  ($)** | ** ** | **Total  ($)** | ** ** |
|-------------------------------------------|------------|----------------------------------------|------------|------------------------|------------|----------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|----------------------------------|------------|----------------|------------|
| **(a)**                                   | ** ** | **(b)**                                | ** ** | **(c)**                | ** ** | **(d)**                    | ** ** | **(e)**                                           | ** ** | **(f)**                                                                               | ** ** | **(g)**                          | ** ** | **(h)**        | ** ** |
| Michael D. Casey(4)                       |       | 103,750                                |       | 5,500                  |       | 18,592                     |       | —                                            |       | —                                                                                |       | —                           |       | 127,842        |       |
| K. Michael Forrest(5)                     |       | 41,250                                 |       | 5,500                  |       | 18,592                     |       | —                                            |       | —                                                                                |       | —                           |       | 65,342         |       |
| William Goolsbee                          |       | 47,500                                 |       | 5,500                  |       | 18,592                     |       | —                                            |       | —                                                                                |       | —                           |       | 71,592         |       |
| John C. Hodgman                           |       | 52,500                                 |       | 5,500                  |       | 18,592                     |       | —                                            |       | —                                                                                |       | —                           |       | 76,592         |       |
| Gil Price, M.D.                           |       | 47,500                                 |       | 5,500                  |       | 18,592                     |       | —                                            |       | —                                                                                |       | —                           |       | 71,592         |       |
| M. Kathleen Behrens, Ph.D.(2)             |       | 26,500                                 |       | —                 |       | 33,498                     |       | —                                            |       | —                                                                                |       | —                           |       | 59,998         |       |
| Christopher S. Henney, Ph.D., D.Sc.(2)(4) |       | 24,000                                 |       | —                 |       | 33,498                     |       | —                                            |       | —                                                                                |       | —                           |       | 57,498         |       |
| **Former Director**                       |       |                                   |       |                   |       |                       |       |                                              |       |                                                                                  |       |                             |       |           |       |
| John W. Fara, Ph.D.(3)                    |       | 20,500                                 |       | —                 |       | —                     |       | —                                            |       | —                                                                                |       | —                           |       | 20,500         |       |

 

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| (1)    |   | The  amounts in the option awards column reflect the aggregate grant date fair  value of option awards granted in fiscal year 2009 calculated in accordance  with FASB ASC Topic 718. Assumptions used in the calculation of this amount  are included in Note 2 to the financial statements set forth in our  annual report on Form 10-K, filed March 16, 2010 (Commission File  No. 001-14895). As of December 31, 2009, each director and former  director had the following number of options outstanding: Mr. Casey:  83,000; Dr. Fara: 93,334; Mr. Forrest: 393,000; Mr. Goolsbee:  73,000; Mr. Hodgman: 103,334; Dr. Price: 73,000; Dr. Behrens  60,000; and Dr. Henney 60,000. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| (2)    |   | Dr. Henney  and Dr. Behrens were appointed to the Board of Directors on  March 31, 2009. For fiscal year 2009, Dr. Henney and  Dr. Behrens did not receive the annual grants for non-employee directors  of 5,000 shares of Common Stock and the nonqualified option to purchase  20,000 shares of Common Stock pursuant to AVI’s 2002 Equity Incentive Plan.  Both Dr. Henney and Dr. Behrens received a nonqualified option to  purchase 60,000 shares of Common Stock upon joining the Board of Directors.                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| (3)    |   | Dr. Fara  decided not to stand for reelection in March 2009, and ceased to be a  member of the Audit Committee when his term as a director expired on  May 19, 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| (4)    |   | Mr. Casey  and Dr. Henney decided not to stand for reelection in March 2010.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| (5)    |   | Mr. Forrest  resigned from the Board of Directors on April 20, 2010. Vesting of 5,000  options granted to Mr. Forrest that were to become vested on May 19, 2010 was  accelerated upon his resignation and such options became fully vested on  April 20, 2010. Vesting of 5000 shares of restricted stock granted to Mr.  Forrest that were to become vested on May 19, 2010 was accelerated upon his  resignation and such restricted stock became fully vested or April 20, 2010.                                                                                                                                                                                                                                                               |

 

**Compensation Committee Interlocks and InsiderParticipation**

 

As of December 31, 2009, the Compensation Committee was composedof three directors, namely, Mr. Casey, Mr. Forrest and Mr. Goolsbee.  Prior to his appointment as the Company’sInterim Chief Executive Officer, Mr. Forrest served on the Company’sCompensation Committee.  On March 27,2007, in connection with his appointment as the Company’s Interim ChiefExecutive Officer, Mr. Forrest resigned as a member of the CompensationCommittee and Mr. Casey was appointed as his replacement. On March 10,2008, having completed his tenure as the Company’s Interim Chief ExecutiveOfficer, Mr. Forrest was again appointed to the Compensation Committee.There were no employee directors on the Compensation Committee and no interlocks.

 

27

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**Item 12.  Security Ownership of Certain BeneficialOwners and Management and Related Stockholder Matters.**

** **

**StockOwned by AVI BioPharma, Inc. Management and Principal Shareholders**

 

The following tablesets forth certain information regarding the ownership of AVI Common Stock asof April 26, 2010, with respect to: (i) each person known by AVI tobeneficially own more than five percent (5%) of the outstanding shares of AVICommon Stock, (ii) each of AVI’s directors, (iii) each of AVI’s namedexecutive officers and (iv) all directors and executive officers as agroup.

 
| **Name and Address of Beneficial   Owner**                                                                                    | ** ** | **Amount and  Nature of  Beneficial  Ownership (# of  Shares)(1)** | ** ** | **Percent   of  Class(1)** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|----------------------------|------------|
| **Officers and Directors**                                                                                                    |       |                                                               |       |                       |       |
| J.  David Boyle II(2)                                                                                                         |       | 281,949                                                            |       | *                          |       |
| AVI  BioPharma, Inc.   3450 Monte Villa Parkway, Suite 101   Bothell, WA 98021                                      |       |                                                               |       |                       |       |
| Patrick  L. Iversen, Ph.D.(3)                                                                                                 |       | 546,037                                                            |       | *                          |       |
| AVI  BioPharma, Inc.   3450 Monte Villa Parkway, Suite 101   Bothell, WA 98021                                      |       |                                                               |       |                       |       |
| Paul  Medeiros (4)                                                                                                            |       | 133,334                                                            |       | *                          |       |
| AVI  BioPharma, Inc.   3450 Monte Villa Parkway, Suite 101   Bothell, WA 98021                                      |       |                                                               |       |                       |       |
| Stephen  B. Shrewsbury, M.D.(5)                                                                                               |       | 210,000                                                            |       | *                          |       |
| AVI  BioPharma, Inc.   3450 Monte Villa Parkway, Suite 101   Bothell, WA 98021                                      |       |                                                               |       |                       |       |
| Anthony  Chase(6)                                                                                                             |       | 309,312                                                            |       | *                          |       |
| AVI  BioPharma, Inc.   3450 Monte Villa Parkway, Suite 101   Bothell, WA 98021                                      |       |                                                               |       |                       |       |
| John  C. Hodgman(7)                                                                                                           |       | 93,334                                                             |       | *                          |       |
| AVI  BioPharma, Inc.   3450 Monte Villa Parkway, Suite 101   Bothell, WA 98021                                      |       |                                                               |       |                       |       |
| Gil  Price, M.D.(8)                                                                                                           |       | 128,482                                                            |       | *                          |       |
| AVI BioPharma, Inc.    3450 Monte Villa Parkway, Suite 101   Bothell, WA 98021                                      |       |                                                               |       |                       |       |
| Michael  D. Casey(9)                                                                                                          |       | 73,000                                                             |       | *                          |       |
| AVI  BioPharma, Inc.   3450 Monte Villa Parkway, Suite 101   Bothell, WA 98021                                      |       |                                                               |       |                       |       |
| William  A. Goolsbee(10)                                                                                                      |       | 51,500                                                             |       | *                          |       |
| AVI  BioPharma, Inc.   3450 Monte Villa Parkway, Suite 101   Bothell, WA 98021                                      |       |                                                               |       |                       |       |
| Christopher  S. Henney, Ph.D., D.Sc.(11)                                                                                      |       | 15,000                                                             |       | *                          |       |
| AVI  BioPharma, Inc.   3450 Monte Villa Parkway, Suite 101   Bothell, WA 98021                                      |       |                                                               |       |                       |       |
| M.  Kathleen Behrens, Ph.D.(12)                                                                                               |       | 15,000                                                             |       | *                          |       |
| AVI  BioPharma, Inc.   3450 Monte Villa Parkway, Suite 101   Bothell, WA 98021                                      |       |                                                               |       |                       |       |
| All directors and  officers as a group (13 persons)(13)                                                                       |       | 1,856,948                                                          |       | 1.7                        | %          |
| **5% Shareholders**                                                                                                           |       |                                                               |       |                       |       |
| George  W. Haywood(14)                                                                                                        |       | 9,804,799                                                          |       | 8.9                        | %          |
| c/o Moomjian, Waite,  Wactlar & Coleman, LLP   100 Jericho Quadrangle, Suite 225   Jericho, New York 11753 |       |                                                               |       |                       |       |
| Eastbourne  Capital Management, L.L.C.(15)                                                                                    |       | 9,795,542                                                          |       | 8.9                        | %          |
| 1101 Fifth Avenue,  Suite 370   San Rafael, CA 94901                                                                     |       |                                                               |       |                       |       |

 

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*              Less than one percent

 

(1)           Beneficial ownership is determined inaccordance with rules of the Securities and Exchange Commission andgenerally includes voting or investment power with respect to securities.Shares of Common Stock subject to options and warrants currently exercisable orconvertible, or exercisable or convertible within sixty (60) days of April 26,2010, are deemed beneficially owned and outstanding for computing thepercentage of the person holding such securities, but are not consideredoutstanding for computing the percentage of any other person.

 

28

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(2)           Includes 216,667 shares subject tooptions exercisable within sixty (60) days of April 26, 2010.

 

(3)           Includes 450,734 shares subject tooptions exercisable within sixty (60) days of April 26, 2010.

 

(4)           Includes 133,334 shares subject tooptions exercisable within sixty (60) days of April 26, 2010.

 

(5)           Includes 150,000 shares subject tooptions exercisable within sixty (60) days of April 26, 2010.

 

(6)           Includes 140,000 shares issuable uponexercise of outstanding warrants exercisable within sixty (60) days of April 26,2010.

 

(7)           Includes 88,334 shares subject to optionsexercisable within sixty (60) days of April 26, 2010.

 

(8)           Includes 41,500 shares subject to optionsexercisable within sixty (60) days of April 26, 2010.

 

(9)           Includes 68,000 shares subject to optionsexercisable within sixty (60) days of April 26, 2010.

 

(10)         Includes 41,500 shares subject to optionsexercisable within sixty (60) days of April 26, 2010.

 

(11)         Includes 15,000 shares subject to optionsexercisable within sixty (60) days of April 26, 2010.

 

(12)         Includes 15,000 shares subject to optionsexercisable within sixty (60) days of April 26, 2010.

 

(13)         Includes (i) an aggregate of1,220,069 shares subject to options exercisable within sixty (60) days of April 26,2010 and (ii) 140,000 shares issuable upon exercise of outstandingwarrants exercisable within sixty (60) days of April 26, 2010.

 

(14)         Based solely on information contained inthe Schedule 13D filed on March 26, 2010 by George W. Haywood, which reported(i) sole voting and dispositive power as to 8,804,799 shares, which amountincludes 1,475,673 shares issuable upon exercise of outstanding warrantsexercisable within sixty (60) days of April 26, 2010, and (ii) sharedvoting and dispositive power as to 1,000,000 shares held by Mr. Haywood’sspouse.

 

(15)         Eastbourne Capital Management, L.L.C. (“Eastbourne”)is an investment adviser with voting and dispositive power for shares held byits clients, which include Black Bear Offshore Master Fund, L.P., Black BearFund I, L.P., Black Bear Fund II, L.L.C., and Horse Eye Level Partners, L.P.,and thus is deemed to beneficially own shares held by its clients. By virtue ofits control of Black Bear Offshore Master Fund, L.P., Black Bear Fund I, L.P.,Black Bear Fund II, L.L.C., and Horse Eye Level Partners, L.P., Eastbourne isdeemed to share beneficial ownership of (and voting and dispositive power withrespect to) the shares of Stock beneficially owned by suchentities.  The amount stated above for Eastbourne includes (i) 2,859,140shares held by Black Bear Offshore Master Fund, L.P., which amount includes1,977,329 shares issuable upon exercise of outstanding warrants exercisablewithin sixty (60) days of April 26, 2010, (ii) 2,957,955 shares heldby Black Bear Fund I, L.P., which amount includes 2,042,107 shares issuableupon exercise of outstanding warrants exercisable within sixty (60) days of April 26,2010, (iii) 2,856,098 shares held by Black Bear Fund II, LLC, which amountincludes 1,970,284 shares issuable upon exercise of outstanding warrantsexercisable within sixty (60) days of April 26, 2010, and (iv) 1,122,349shares issuable upon exercise of outstanding warrants exercisable within sixty(60) days of April 26, 2010 held by Horse Eye Level Partners, L.P.

 

**Equity Compensation Plan Information**

 

The following table summarizes information, as of December 31,2009, with respect to shares of our common stock that may be issued under ourexisting equity compensation plans.

 
| **Plan category**                                                | ** ** | **Number of securities to  be issued upon exercise  of outstanding options,  warrants and rights  (a)** | ** ** | **Weighted-average exercise  price of outstanding  options, warrants and  rights  (b)** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation plans  (excluding securities  reflected in column (a))  (c)** | ** ** |
|------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity compensation plans approved by security  holders          |       | 8,932,811                                                                                               |       | $                                                                                       | 2.79       |                                                                                                                                                      | 681,955    | (1) |
| Equity compensation plans not approved  by security holders |       | -0-                                                                                                     |       | —                                                                                  |       | -0-                                                                                                                                                       |       |
| **Total**                                                        |       | 8,932,811                                                                                               |       | $                                                                                       | 2.79       |                                                                                                                                                      | 681,955    |   |

 

29

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(1)           The number of securities remaining available forfuture issuance under equity compensation plans includes shares from theCompany’s 2002 Equity Incentive Plan (the “2002 Plan”). The number of sharesreserved for issuance is increased by an automatic annual share increasepursuant to which the number of shares available for issuance under the 2002Plan automatically increases on the first trading day of each fiscal year (the “FirstTrading Day”), beginning with the 2003 fiscal year and continuing through thefiscal year 2011, by an amount equal to two percent (2%) of the total number ofshares outstanding on the last trading day of the immediately preceding fiscalyear; such increases being subject to the limitation in the next sentence. The2002 Plan provides that, following any such adjustment, the number of thenoutstanding options under the Company’s stock option plans and stock purchaseplans, together with options in the reserve then available for future grantsunder the Company’s stock option plans, will not exceed twenty percent (20%) ofthe then outstanding voting shares of capital stock of the Company, and all theactually outstanding stock options under the Company’s stock option plans,together with all shares in the reserve then available for future grants underthe Company’s stock option and stock purchase plans. This automatic shareincrease feature is designed to assure that a sufficient reserve of CommonStock remains available for the duration of the 2002 Plan to attract and retainthe services of key individuals essential to the Company’s long-term growth andsuccess. This feature is also designed to eliminate the uncertainty inherent inseeking an individual increase to the reserve each year as to what number ofshares will be available in the reserve for option grants. Creating a certainrate of growth under the 2002 Plan assists the Company as it makes strategicpersonnel decisions in an effort to expand its growth, as the Company will knowthe approximate number of shares that will become available for issuance underthe 2002 Plan. At the same time, the Company has attempted to minimize thedilutive effect that the issuance of Common Stock upon the exercise of optionscan have on stockholders’ percentage of ownership in the Company by adoptingonly a 2% growth rate for the 2002 Plan. This rate, while it provides room forgrowth in the 2002 Plan, is a rate which the Company believes it can reasonablysustain, minimizing the risk to stockholders that the option reserve growsfaster than the Company itself. The twenty percent (20%) limitation discussedabove further protects shareholders by capping the size of the 2002 Plan inrelation to the Company’s other securities.

 

**Item 13.  Certain Relationships and RelatedTransactions, and Director Independence.**

 

**Related Party Transactions**

 

The Company is not aware of any related party transactions that wouldrequire disclosure.

 

**DirectorIndependence**

 

The Board of Directorshas determined that all directors other than Dr. Hudson, namely, Mr. Casey,Mr. Forrest, Mr. Hodgman, Mr. Goolsbee, Dr. Price, Dr. Behrens,and Dr. Henney, are “independent,” as defined under applicable listingrequirements of the Nasdaq Stock Market. Former director Dr. Fara, who served as a member of the Board andas a member of certain committees of the Board during a portion of 2009, waslikewise “independent,”as defined under applicable listing requirements of the Nasdaq Stock Market.  All directors serving on the Company’s Audit,Compensation, and Nominating and Corporate Governance Committees are “independent,” as defined underapplicable listing requirements of the Nasdaq Stock Market.

 

**Item 14.  Principal Accountant Fees and Services.**

 

**Audit and Other Fees**

 

KPMG LLP has been the Company’s auditors since 2002. During fiscalyears 2009 and 2008, the fees for audit and other services performed byKPMG LLP for the Company were as follows:

 
| ** **             | ** ** | **Amount and Percentage of Fees** | ** **   |
|------------------------|------------|-----------------------------------|--------------|
| **Nature of Services** | ** ** | **2009**                          | ** **   | **2008** | ** ** |
| Audit Fees             |       | $                                 | 302,000 (76  | %) | $ | 333,368 (100 | %) |
| Audit Related Fees     |       | $                                 | 94,800 (24   | %)(1) | $ | — |   |
| Tax Fees               |       | $                                 | —       |   | $ | — |   |
| All Other Fees         |       | $                                 | —       |   | $ | — |   |
| Total                  |       | $                                 | 396,800 (100 | %) | $ | 333,368 (100 | %) |

 

----

(1)          Includes $78,800 paid in connection withthe issuance of comfort letters and $16,000 paid in connection with an audit ofthe Company’s 401(k) plan.

 

30

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*Responsibilities and Duties of the Audit Committee.*  The Company’s management is responsible forpreparing the Company’s financial statements and the independent auditors areresponsible for auditing those financial statements. The Committee isresponsible for overseeing the conduct of these activities by the Company’smanagement and the independent auditors. The financial management and theindependent auditors of the Company have more time, knowledge and more detailedinformation on the Company than do Committee members. Consequently, in carryingout its oversight responsibilities, the Committee does not provide any expertor special assurance as to the Company’s financial statements or anyprofessional certification as to the independent auditors’ work.

 

Asfurther described in the Charter, the specific duties of the Audit Committeeinclude the following:

 

·      Select, retain (subject toapproval by the Company’s stockholders, if required), and, when appropriate,terminate the engagement of the independent auditor and set the independentauditors’ compensation;

 

·      Select, retain (subject toapproval by the Company’s stockholders, if required), and, when appropriate,terminate the engagement of financial consultants and set such consultants’compensation;

 

·      Pre-approve all permittednon-audit services to be performed by the independent auditors and/or financialconsultants and establish policies and procedures for the engagement of theindependent auditors and/or financial consultants to provide permitted non-auditservices;

 

·      Periodically discuss andreview with the independent auditors’ their independence from management andthe Company and the matters included in the written disclosures required by theIndependence Standards Board, including whether the provision by theindependent auditors of permitted non-audit services is compatible withindependence and obtain and review a report from the independent auditorsdescribing all relationships between the independent auditors and the Company;

 

·      Receive and review: (a) areport by the independent auditors describing the independent auditors’internal quality-control procedures and any material issues raised by the mostrecent internal quality-control review, or peer review, of the independentauditors, or by any inquiry or investigation by governmental or professionalauthorities, within the preceding five years, respecting one or moreindependent audits carried out by the firm, and any steps taken to deal withany such issues; and (b) other required reports from the independentauditors;

 

·      Meet with management and theindependent auditors and/or financial consultants prior to commencement of theannual audits and internal controls analysis and testing to review and discussthe planned scope and objectives of the audit and/or such analysis and testing;

 

·      Meet with the independentauditors, with and without management present, after completion of the annualaudit to review and discuss the results of the examinations of the independentauditors and appropriate analyses of the financial statements;

 

·      Meet with the financialconsultants, with management present, after completion of the analysis andtesting of the Company’s internal controls by the financial consultants toreview and discuss the results of such analysis and testing;

 

·      Review and discuss (a) thereports of the independent auditors, with and without management present, as tothe state of the Company’s financial reporting systems and procedures, theadequacy of internal accounting and financial controls, the integrity andcompetency of the financial and accounting staff, disclosure controls andprocedures, other aspects of the financial management of the Company and (b) currentaccounting trends and developments, and (c) take such action with respectthereto as may be deemed appropriate;

 

·      Review the interim financialstatements with management and the independent auditors prior to the filing ofthe Company’s Quarterly Reports on Form 10-Q and discuss the results ofthe quarterly reviews and any other matters required to be communicated to theCommittee by the independent auditors under generally accepted auditingstandards;

 

·      Review and discuss withmanagement and the independent auditors the financial statements to be includedin the Company’s Annual Report on Form 10-K (or the annual report tostockholders if distributed prior to the filing of Form 10-K), includingthe judgment of the independent auditors about the quality, not justacceptability, of accounting principles, the reasonableness of significantjudgments, and the clarity of the disclosures in the financial statements;

 

·      Recommend to the Board ofDirectors, based upon the Committee’s review, whether the financial statementsshould be included in the annual report on Form 10-K;

 

·      Review press releases, aswell as Company policies with respect to earnings press releases, financialinformation and earnings guidance provided to analysts and rating agencies andreview such releases, information and guidance for compliance with regulationsgoverning the use of non-Generally Accepted Accounting Principles financialmeasures and related disclosure requirements;

 

31

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·      Discuss Company policieswith respect to risk assessment and risk management, and review contingentliabilities and risks that may be material to the Company and major legislativeand regulatory developments that could materially impact the Company’scontingent liabilities and risks;

 

·      Review (a) the statusof compliance with laws, regulations, and internal procedures, including,without limitation, the Company’s policies on ethical business practices; and (b) thescope and status of systems designed to promote Company compliance with laws,regulations and internal procedures, through receiving reports from management,legal counsel and third parties as determined by the Committee and report onthe same to the Board of Directors;

 

·      Establish procedures for theconfidential and anonymous receipt, retention and treatment of complaints regardingthe Company’s accounting, internal controls, auditing matters and compliancewith the Company’s ethical business policies;

 

·      Establish policies for thehiring of employees and former employees of the independent auditor;

 

·      Prepare a report of the Committeeeach year for inclusion in the Company’s proxy statement in accordance with SECrules;

 

·      Review and assess theadequacy of this Charter annually with the Board of Directors as a whole andreport to the Board of Directors any significant matters as they occur duringthe year; and

 

·      Conduct such other dutiesand undertake such other tasks as may be appropriate to the overall purposesfor the Committee and as may be assigned from time to time by the Board ofDirectors consistent with such purposes

 

**PART IV**

 

**Item 15.  Exhibits, Financial Statement Schedules.**

 

#### **(a)  Thefollowing documents are filed as part of this Report:**

#### ** **

(1) *Financial Statements*

 

#### **Thefollowing financial statements of the Company and the Report of KPMG LLP,Independent Auditors, are included in Part IV of this Report on the pages indicated:**

 
| Report of  KPMG LLP, Independent Registered Public Accounting Firm       | F-1 |
|--------------------------------------------------------------------------|-----|
| Report of Arthur  Andersen, Independent Auditors                         | F-2 |
| Balance Sheets                                                           | F-3 |
| Statements of  Operations                                                | F-4 |
| Statements  of Shareholders’ Equity and Comprehensive Income (Loss) | F-5 |
| Statements  of Cash Flows                                                | F-6 |
| Notes to Financial  Statements                                           | F-7 |

 

(2) *Financial Statement Schedules*

 

#### **Allschedules are omitted because they are not applicable or the requiredinformation is shown in the financial statements or the notes thereto.**

 

(3) *Exhibits*

 

#### **Thefollowing exhibits are filed herewith and this list is intended to constitutethe exhibit index:**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                             |
|----------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 1.1                  |       | Underwriting Agreement  dated November 14, 2005. (15)                                                                                                                                  |
| 1.2                  |       | Placement Agency  Agreement between AVI BioPharma, Inc. and Citigroup Global Markets Inc.,  Oppenheimer & Co. Inc., and Maxim Group, LLC, dated  December 12, 2007. (22) |
| 1.3                  |       | Engagement Letter dated  January 28, 2009 between AVI BioPharma, Inc. and Rodman &  Renshaw, LLC. (41)                                                                   |
| 2.1                  |       | Agreement and Plan of  Merger dated March 12, 2008 by and among AVI BioPharma, Inc., EB  Acquisition Corp., Ercole Biotech, Inc. and the Stockholder  Representative. (35)   |
| 3.1                  |       | Third Restated Articles  of Incorporation of AntiVirals Inc. (1)                                                                                                                       |
| 3.2                  |       | First Restated Bylaws  of AVI BioPharma, Inc. (28)                                                                                                                                     |
| 3.3                  |       | First Amendment to  Third Restated Articles of Incorporation. (4)                                                                                                                           |

 

32

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| 3.4         |   | Amendment to  Article 2 of the Company Third Restated Articles of Incorporation. (11)                                                                        |
|-------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.5         |   | First Amendment to  First Restated Bylaws of AVI BioPharma, Inc. (53)                                                                                        |
| 4.1         |   | Form of Specimen  Certificate for Common Stock. (1)                                                                                                          |
| 4.2         |   | Warrant to purchase  485,290 shares of the Company’s common stock dated November 14, 2005.  (16)                                                        |
| 4.3         |   | Form of Warrant to  Purchase Common Stock, issued in connection with the Placement Agency  Agreement dated December 12, 2007. (23)                      |
| 4.4         |   | Form of Common  Stock Purchase Warrant. (42)                                                                                                                 |
| 4.5         |   | Form of Common  Stock Purchase Warrant. (51)                                                                                                                 |
| 10.1†  |   | 1992 Stock Incentive  Plan (as amended through May 11, 2000). (1)                                                                                            |
| 10.2†  |   | Employment Agreement  with Denis R. Burger, Ph.D. dated November 4, 1996. (1)                                                                                |
| 10.3†  |   | Employment Agreement  with Alan P. Timmins dated November 4, 1996. (1)                                                                                       |
| 10.4†  |   | Employment Agreement  with Dwight Weller, Ph.D. dated November 4, 1996. (1)                                                                                  |
| 10.5        |   | Technology Transfer  Agreement between Anti-Gene Development Group and AntiVirals Inc., dated  February 9, 1992. (1)                                    |
| 10.6        |   | Amendment to Technology  Transfer Agreement between Anti-Gene Development Group and AntiVirals Inc.  dated January 20, 1996. (1)                             |
| 10.7        |   | License and Option Agreement  between Anti-Gene Development Group and AntiVirals Inc., dated  February 9, 1993. (1)                                     |
| 10.8        |   | Commercial Lease  between Research Way Investments, Landlord, and AntiVirals Inc., Tenant,  dated June 15, 1992. (1)                                    |
| 10.9        |   | Lease between Benjamin  Franklin Plaza, Inc., Landlord, and AntiVirals Inc., Tenant, dated  June 17, 1992. (1)                                          |
| 10.10       |   | First Amendment to  Lease between Benjamin Franklin Plaza, Inc., Landlord, and AntiVirals  Inc., Tenant, dated July 24, 1995. (1)                       |
| 10.11† |   | Employment Agreement  with Patrick L. Iversen, Ph.D. dated July 14, 1997. (2)                                                                                |
| 10.12† |   | ImmunoTherapy  Corporation 1997 Stock Option Plan. (3)                                                                                                            |
| 10.13       |   | License Agreement  between ImmunoTherapy Corporation and Ohio State University, dated  March 12, 1996. (3)                                                   |
| 10.14       |   | License Agreement  between ImmunoTherapy Corporation and Ohio State University, dated  December 26, 1996. (3)                                                |
| 10.15       |   | Amendment to License  Agreement between ImmunoTherapy Corporation and Ohio State University, dated  September 23, 1997. (3)                                  |
| 10.16       |   | Purchase Agreement,  dated December 15, 1999, by and between AVI BioPharma, Inc. and  certain Investors. (5)                                            |
| 10.17       |   | Registration Rights  Agreement, dated December 15, 1999, by and between AVI  BioPharma, Inc. and certain Investors. (5)                                 |
| 10.18       |   | Purchase Agreement,  dated December 16, 1999, by and between AVI BioPharma, Inc. and  certain Investors. (5)                                            |
| 10.19       |   | Registration Rights  Agreement, dated December 16, 1999, by and between AVI  BioPharma, Inc. and certain Investors. (5)                                 |
| 10.20       |   | Subscription Agreement,  dated December 1, 1999, by and between SuperGen, Inc. and AVI  BioPharma, Inc. (5)                                        |
| 10.21       |   | 2000 Amendment to  Technology Transfer Agreement between Anti-Gene Development Group and AVI  BioPharma, Inc. (6)                                            |
| 10.22       |   | United States of  America Sales, Distribution, and Development Agreement, dated April 4,  2000, between SuperGen, Inc. and AVI BioPharma, Inc. (7) |
| 10.23       |   | Common Stock and  Warrant Purchase Agreement, dated April 4, 2000, between  SuperGen, Inc. and AVI BioPharma, Inc. (7)                             |
| 10.24       |   | Registration Rights  Agreement, dated April 14, 2000, between SuperGen, Inc. and AVI  BioPharma, Inc. (7)                                          |
| 10.25† |   | 2000 Employee Share  Purchase Plan. (8)                                                                                                                           |
| 10.26† |   | Employment Agreement  with Mark M. Webber dated May 11, 2000. (9)                                                                                            |
| 10.27       |   | Lease Agreement with  Spieker Partners, LP dated May 8, 2001. (9)                                                                                            |
| 10.28*      |   | Investment Agreement  dated May 22, 2001 between the Company and Medtronic Asset  Management, Inc. (9)                                                  |
| 10.29       |   | Warrant dated  June 20, 2001 issued to Medtronic Asset Management, Inc. (9)                                                                             |
| 10.30       |   | Registration Rights  Agreement dated June 20, 2001 between the Company and Medtronic Asset  Management, Inc. (9)                                        |
| 10.31*      |   | License and Development  Agreement dated June 20, 2001 between the Company and  Medtronic, Inc. (9)                                                     |
| 10.32*      |   | Supply Agreement dated  June 20, 2001 between the Company and Medtronic, Inc. (9)                                                                       |
| 10.33       |   | Securities Purchase Agreement  dated March 25, 2002 between the Company and certain purchasers (“2002  SPA”). (10)                                 |
| 10.34       |   | Form of Warrant  issued by the Company to certain purchasers under the 2002 SPA. (10)                                                                        |
| 10.35       |   | Registration Rights  Agreement dated March 25, 2002 between the Company and certain  purchasers. (10)                                                        |
| 10.36† |   | 2002 Equity Incentive  Plan. (11)                                                                                                                                 |
| 10.37       |   | Securities Purchase  Agreement dated January 19, 2005 between the Company and certain  purchasers (“2005 SPA”). (12)                               |
| 10.38       |   | Form of Purchase  Warrant issued by the Company to certain purchasers under the 2005 SPA. (12)                                                               |
| 10.39† |   | Amendment to employment  agreement of Denis R. Burger, Ph.D. (14)                                                                                                 |
| 10.40† |   | Amendment to employment  agreement of Alan P. Timmins. (14)                                                                                                       |

 

33

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| 10.41†  |   | Amendment to employment  agreement of Patrick L. Iversen, Ph.D. (14)                                                                                                                                  |
|--------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.42†  |   | Amendment to employment  agreement of Dwight D. Weller, Ph.D. (14)                                                                                                                                    |
| 10.43†  |   | Amendment to employment  agreement of Peter D. O’Hanley, M.D., Ph.D. (14)                                                                                                                        |
| 10.44†  |   | Amendment to employment  agreement of Mark M. Webber. (14)                                                                                                                                            |
| 10.45        |   | Securities Purchase  Agreement dated November 14, 2005 between the Company and certain  purchasers. (16)                                                                                         |
| 10.46*       |   | Supply Agreement, dated  March 10, 2006, by and between Cook Group Incorporated and AVI  BioPharma, Inc. (17)                                                                               |
| 10.47*       |   | License and Development  Agreement, dated March 10, 2006, by and between Cook Group Incorporated  and AVI BioPharma, Inc. (17)                                                              |
| 10.48*       |   | Investment Agreement,  dated March 10, 2006, by and between Cook Group Incorporated and AVI  BioPharma, Inc. (17)                                                                      |
| 10.49*       |   | License Agreement dated  January 26, 2006 by and between with Chiron Corporation and AVI  BioPharma, Inc. (18)                                                                              |
| 10.50        |   | Stock Purchase  Agreement dated January 26, 2006 by and between with Chiron Corporation  and AVI BioPharma, Inc. (18)                                                                  |
| 10.51        |   | Second Lease Extension  and Modification Agreement dated January 24, 2006 by and between  Research Way Investments and AVI BioPharma, Inc. (19)                                             |
| 10.52*       |   | Collaboration and  License Agreement, dated December 19, 2006, by and between Ercole  Biotech, Inc. and AVI BioPharma, Inc. (20)                                                       |
| 10.53        |   | Series A-2  Preferred Stock and Common Stock Purchase Agreement, dated December 19,  2006, by and between Ercole Biotech, Inc. and AVI BioPharma, Inc.  (21)                      |
| 10.54*       |   | Cross License Agreement  dated January 8, 2007 by and between Eleos, Inc. and AVI  BioPharma, Inc. (24)                                                                                |
| 10.55        |   | Separation and Release  Agreement dated March 27, 2007 by and between Denis R. Burger, Ph.D. and  AVI BioPharma, Inc. (25)                                                                  |
| 10.56*       |   | Second License and  Collaboration Agreement dated May 1, 2007 by and between Ercole Biotech.  Inc. and AVI BioPharma, Inc. (26)                                                             |
| 10.57        |   | Real Property Purchase  Agreement, dated April 19, 2007, by and between WKL Investments Airport,  LLC and AVI BioPharma, Inc. (27)                                                          |
| 10.58*       |   | Sponsored Research  Agreement between AVI BioPharma, Inc. and Charley’s Fund, Inc.,  effective October 12, 2007. (29)                                                             |
| 10.59        |   | Shareholder’s Trust  Agreement between and among AVI BioPharma, Inc., AVI Shareholder  Advocacy Trust, The Shareholder Advocate LLC, and Richard Macary, dated  October 29, 2007. (30) |
| 10.60†  |   | Amended and Restated  Employment Agreement between Alan P. Timmins and AVI BioPharma, Inc.,  dated October 26, 2007. (31)                                                                   |
| 10.61        |   | Professional Services  Agreement between James B. Hicks Ph.D., LLC and AVI BioPharma, Inc.,  dated October 26, 2007. (32)                                                                   |
| 10.62        |   | Letter Agreement  executed by George Haywood, dated October 29, 2007. (33)                                                                                                                       |
| 10.63†  |   | Employment Agreement  dated February 8, 2008 by and between AVI BioPharma, Inc. and  Leslie Hudson, Ph.D. (34)                                                                              |
| 10.64        |   | Ercole  Biotech, Inc. Convertible Promissory Note dated March 12, 2008.  (36)                                                                                                               |
| 10.65†  |   | Employment Agreement  dated April 10, 2008 by and between AVI BioPharma, Inc. and  Dr. Ryszard Kole. (37)                                                                              |
| 10.66*† |   | Employment Agreement  dated July 24, 2008 by and between AVI BioPharma, Inc. and J. David  Boyle II. (38)                                                                                   |
| 10.67*† |   | Amendment No. 1 to  Employment Agreement dated August 1, 2008 by and between AVI  BioPharma, Inc. and J. David Boyle II. (39)                                                          |
| 10.68†  |   | Severance and Release  Agreement effective October 27, 2008 by and between AVI  BioPharma, Inc. and Peter O’Hanley. (40)                                                               |
| 10.69†  |   | Employment Agreement  dated January 26, 2009 between AVI BioPharma, Inc. and Stephen  Bevan Shrewsbury, M.D. (43)                                                                           |
| 10.70        |   | Securities Purchase  Agreement dated January 29, 2009 between AVI BioPharma, Inc. and  the Purchasers. (44)                                                                                 |
| 10.71†  |   | Letter Agreement  Regarding Board of Director Representation between AVI BioPharma, Inc.  and Eastbourne Capital Management, LLC. (45)                                                           |
| 10.72        |   | Agreement between AVI  BioPharma, Inc. and the U.S. Defense Threat Reduction Agency dated  May 5, 2009. (46)                                                                                |
| 10.73*† |   | Employment Agreement dated  May 19, 2009 between AVI BioPharma, Inc. and Paul Medeiros. (47)                                                                                                |
| 10.74        |   | Agreement between AVI  BioPharma, Inc. and the U.S. Defense Threat Reduction Agency dated  May 28, 2009. (48)                                                                               |
| 10.75*       |   | First Amendment to  Sponsored Research Agreement between AVI BioPharma, Inc. and Charley’s  Fund, Inc. dated June 2, 2009. (49)                                                   |
| 10.76        |   | Lease dated  July 24, 2009 by and between BMR-3450 Monte Villa Parkway, LLC and AVI  BioPharma, Inc. (50)                                                                                   |
| 10.77        |   | Amendment of Contract  between AVI BioPharma, Inc. and the U.S. Defense Threat Reduction Agency  (contract no HDTRA 1-07-C0010), effective September 30, 2009. (52)                         |
| 10.78*       |   | Collaboration and  License Agreement between Isis Pharmaceuticals and Ercole Biotech, Inc.  dated May 16, 2003 (filed with Form 10-K on March 16, 2010)                           |
| 10.79        |   | Settlement Agreement  dated April 20, 2010 among AVI BioPharma, Inc. and the Shareholder  Group (54)                                                                                        |

 

34

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| 10.80 |   | Separation Agreement  dated April 20, 2010 between AVI BioPharma, Inc. and Leslie Hudson,  Ph.D. (55)                                                                        |
|-------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 14.1  |   | Code of Business  Conduct and Ethics. (13)                                                                                                                                             |
| 21.1  |   | Subsidiaries of the  Registrant. (filed with Form 10-K on March 16, 2010)                                                                                                    |
| 23.1  |   | Consent of Independent  Registered Public Accounting Firm. (filed with Form 10-K on  March 16, 2010)                                                                         |
| 31.1  |   | Certification of the  Company’s Interim Chief Executive Officer and Chief Financial Officer, J.  David Boyle II, pursuant to Section 302 of the Sarbanes-Oxley Act of  2002. |
| 32.1  |   | Certification of CEO and  CFO Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                     |

 

----

| (1)    | Incorporated by  reference to Exhibits to Registrant’s Registration Statement on  Form SB-2, as amended and filed with the Securities and Exchange  Commission on May 29, 1997 (Commission Registration No. 333-20513).                            |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                   |
| (2)    | Incorporated by  reference to Exhibits to Registrant’s Annual Report on Form 10-KSB for  the fiscal year ended December 31, 1997, and filed with the Securities  and Exchange Commission on March 30, 1998.                                        |
|   |                                                                                                                                                                                                                                                                   |
| (3)    | Incorporated by  reference to Exhibits to Registrant’s Registration Statement on  Form S-4, as amended, and filed with the Securities and Exchange  Commission on August 7, 1998 (Commission Registration  No. 333-60849).                         |
|   |                                                                                                                                                                                                                                                                   |
| (4)    | Incorporated by  reference to Exhibits to Registrant’s current report on Form 8-K, as  filed with the Securities and Exchange Commission on September 30, 1998  (Commission Registration No. 000-22613).                                           |
|   |                                                                                                                                                                                                                                                                   |
| (5)    | Incorporated by  reference to Exhibits to Registrant’s Registration Statement on  Form S-3, as amended, and filed with the Securities and Exchange  Commission on December 21, 1999 (Commission Registration  No. 333-93135).                      |
|   |                                                                                                                                                                                                                                                                   |
| (6)    | Incorporated by  reference to Exhibits to Registrant’s Registration Statement on Form S-1  and filed with the Securities and Exchange Commission on June 16, 2000  (Commission Registration No. 333-39542).                                        |
|   |                                                                                                                                                                                                                                                                   |
| (7)    | Incorporated by  reference to Exhibits to Registrant’s Registrations Statement on  Form S-3, and filed with the Securities and Exchange Commission on  September 15, 2000 (Commission Registration No. 333-45888).                                 |
|   |                                                                                                                                                                                                                                                                   |
| (8)    | Incorporated by  reference to Appendix A to Registrant’s Definitive Proxy Statement on  Form 14-A, as amended, filed with the Securities and Exchange Commission  on April 12, 2000.                                                                    |
|   |                                                                                                                                                                                                                                                                   |
| (9)    | Incorporated by  reference to Exhibits to Registrant’s Quarterly Report on Form 10-Q for  the quarterly period ended June 30, 2001, and filed with the Securities  and Exchange Commission on August 14, 2001, as amended on April 23,  2002. |
|   |                                                                                                                                                                                                                                                                   |
| (10)   | Incorporated by  reference to Exhibits to Registrant’s current report on Form 8-K, as  filed with the Securities and Exchange Commission on April 2, 2002.                                                                                              |
|   |                                                                                                                                                                                                                                                                   |
| (11)   | Incorporated by  reference to appendixes to Registrant’s Definitive Proxy Statement on  Schedule 14-A, as filed with the Securities and Exchange Commission on  April 11, 2002.                                                                              |
|   |                                                                                                                                                                                                                                                                   |
| (12)   | Incorporated by  reference to registrants current report on Form 8-K, as filed with the  Securities and Exchange Commission on January 20, 2005.                                                                                                             |
|   |                                                                                                                                                                                                                                                                   |
| (13)   | Incorporated by  reference to Exhibits to Registrant’s Annual Report on Form 10-K for the  fiscal year ended December 31, 2003, and filed with the Securities and  Exchange Commission on March 15, 2004.                                          |
|   |                                                                                                                                                                                                                                                                   |
| (14)   | Incorporated by  reference to Registrant’s current report on Form 8-K, as filed with the  Securities and Exchange Commission on February 28, 2005.                                                                                                      |
|   |                                                                                                                                                                                                                                                                   |
| (15)   | Incorporated by  reference to Registrant’s current report on Form 8-K, as filed with the  Securities and Exchange Commission on November 21, 2005.                                                                                                      |
|   |                                                                                                                                                                                                                                                                   |
| (16)   | Incorporated by  reference to Exhibits to Registrant’s Annual Report on Form 10-K for the  fiscal year ended December 31, 2005, and filed with the Securities and  Exchange Commission on March 16, 2006.                                          |
|   |                                                                                                                                                                                                                                                                   |
| (17)   | Incorporated by  reference to Exhibits to Registrant’s Registrations Statement on  Form S-3, and filed with the Securities and Exchange Commission on  April 11, 2006 (Commission Registration No. 333-133211).                                    |

 

35

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| (18)   | Incorporated by  reference to Exhibits to Registrant’s Quarterly Report on Form 10-Q for  the quarterly period ended March 31, 2006, and filed with the Securities  and Exchange Commission on May 10, 2006.  |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                              |
| (19)   | Incorporated by  reference to Exhibits to Registrant’s Quarterly Report on Form 10-Q for  the quarterly period ended June 30, 2006, and filed with the Securities  and Exchange Commission on August 9, 2006. |
|   |                                                                                                                                                                                                                              |
| (20)   | Incorporated by  reference to Exhibit 10.56 to the Registrant’s Form 10-K for the  fiscal year ended December 31, 2006, filed with the Securities and  Exchange Commission on March 16, 2007.            |
|   |                                                                                                                                                                                                                              |
| (21)   | Incorporated by  reference to Exhibit 10.57 to the Registrant’s Form 10-K for the  fiscal year ended December 31, 2006, filed with the Securities and  Exchange Commission on March 16, 2007.            |
|   |                                                                                                                                                                                                                              |
| (22)   | Incorporated by  reference to Exhibit 1.01 to the Registrant’s Form 8-K filed with  the Securities and Exchange Commission on December 13, 2007.                                                              |
|   |                                                                                                                                                                                                                              |
| (23)   | Incorporated by  reference to Exhibit 4.5 to the Registrant’s Form 8-K filed with  the Securities and Exchange Commission on December 13, 2007.                                                               |
|   |                                                                                                                                                                                                                              |
| (24)   | Incorporated by  reference to Exhibit 10.58 to the Registrant’s Form 10-Q for the  quarterly period ended March 31, 2007, filed with the Securities and  Exchange Commission on May 10, 2007.            |
|   |                                                                                                                                                                                                                              |
| (25)   | Incorporated by  reference to Exhibit 10.59 to the Registrant’s Form 10-Q for the  quarterly period ended March 31, 2007, filed with the Securities and  Exchange Commission on May 10, 2007.            |
|   |                                                                                                                                                                                                                              |
| (26)   | Incorporated by  reference to Exhibit 10.60 to the Registrant’s Form 10-Q for the  quarterly period ended June 30, 2007, filed with the Securities and  Exchange Commission on August 9, 2007.           |
|   |                                                                                                                                                                                                                              |
| (27)   | Incorporated by  reference to Exhibit 10.61 to the Registrant’s Form 10-Q for the  quarterly period ended June 30, 2007, filed with the Securities and  Exchange Commission on August 9, 2007.           |
|   |                                                                                                                                                                                                                              |
| (28)   | Incorporated by  reference to Exhibit 3.5 to the Registrant’s Form 8-K filed with  the Securities and Exchange Commission on February 7, 2008.                                                                |
|   |                                                                                                                                                                                                                              |
| (29)   | Incorporated by  reference to Exhibit 10.58 to the Registrant’s Form 10-K for the  fiscal year ended December 31, 2007, filed with the Securities and  Exchange Commission on March 17, 2008.            |
|   |                                                                                                                                                                                                                              |
| (30)   | Incorporated by  reference to Exhibit 10.59 to the Registrant’s Form 10-K for the  fiscal year ended December 31, 2007, filed with the Securities and  Exchange Commission on March 17, 2008.            |
|   |                                                                                                                                                                                                                              |
| (31)   | Incorporated by  reference to Exhibit 10.60 to the Registrant’s Form 10-K for the  fiscal year ended December 31, 2007, filed with the Securities and  Exchange Commission on March 17, 2008.            |
|   |                                                                                                                                                                                                                              |
| (32)   | Incorporated by reference  to Exhibit 10.61 to the Registrant’s Form 10-K for the fiscal year  ended December 31, 2007, filed with the Securities and Exchange  Commission on March 17, 2008.            |
|   |                                                                                                                                                                                                                              |
| (33)   | Incorporated by  reference to Exhibit 10.62 to the Registrant’s Form 10-K for the fiscal  year ended December 31, 2007, filed with the Securities and Exchange  Commission on March 17, 2008.            |
| (34)   | Incorporated by  reference to Exhibit 10.63 to the Registrant’s Form 10-Q for the  quarterly period ended March 31, 2008, filed with the Securities and  Exchange Commission on May 12, 2008.            |
|   |                                                                                                                                                                                                                              |
| (35)   | Incorporated by  reference to Exhibit 2.1 to the Registrant’s Form 8-K filed with  the Securities and Exchange Commission on March 13, 2008.                                                                  |
|   |                                                                                                                                                                                                                              |
| (36)   | Incorporated by  reference to Exhibit 10.62 to the Registrant’s Form 8-K filed with  the Securities and Exchange Commission on March 13, 2008.                                                                |
|   |                                                                                                                                                                                                                              |
| (37)   | Incorporated by  reference to Exhibit 10.64 to the Registrant’s Form 10-Q for the  quarterly period ended June 30, 2008, filed with the Securities and  Exchange Commission on August 11, 2008.          |

 

36

----

 
| (38)   | Incorporated by  reference to Exhibit 10.65 to the Registrant’s Form 10-Q for the  quarterly period ended September 30, 2008, filed with the Securities and  Exchange Commission on November 10, 2008. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                            |
| (39)   | Incorporated by  reference to Exhibit 10.66 to the Registrant’s Form 10-Q for the  quarterly period ended September 30, 2008, filed with the Securities and  Exchange Commission on November 10, 2008. |
|   |                                                                                                                                                                                                                            |
| (40)   | Incorporated by reference  to Exhibit 10.68 to the Registrant’s Form 10-K for the fiscal year  ended December 31, 2008, filed with the Securities and Exchange  Commission on March 10, 2009.          |
|   |                                                                                                                                                                                                                            |
| (41)   | Incorporated by  reference to Exhibit 1.3 to the Registrant’s Form 8-K filed with  the Securities and Exchange Commission on January 30, 2009.                                                              |
|   |                                                                                                                                                                                                                            |
| (42)   | Incorporated by  reference to Exhibit 4.4 to the Registrant’s Form 8-K filed with  the Securities and Exchange Commission on January 30, 2009.                                                              |
|   |                                                                                                                                                                                                                            |
| (43)   | Incorporated by  reference to Exhibit 10.71 to the Registrant’s Form 10-Q for the  quarterly period ended March 31, 2009, filed with the Securities and  Exchange Commission on May 11, 2009.          |
|   |                                                                                                                                                                                                                            |
| (44)   | Incorporated by  reference to Exhibit 10.67 to the Registrant’s Form 8-K filed with  the Securities and Exchange Commission on January 30, 2009.                                                            |
|   |                                                                                                                                                                                                                            |
| (45)   | Incorporated by  reference to Exhibit 10.68 to the Registrant’s Form 8-K filed with  the Securities and Exchange Commission on January 30, 2009.                                                            |
|   |                                                                                                                                                                                                                            |
| (46)   | Incorporated by  reference to Exhibit 10.72 to the Registrant’s Form 10-Q for the  quarterly period ended June 30, 2009, filed with the Securities and  Exchange Commission on August 10, 2009.        |
|   |                                                                                                                                                                                                                            |
| (47)   | Incorporated by  reference to Exhibit 10.73 to the Registrant’s Form 10-Q for the  quarterly period ended June 30, 2009, filed with the Securities and  Exchange Commission on August 10, 2009.        |
|   |                                                                                                                                                                                                                            |
| (48)   | Incorporated by  reference to Exhibit 10.74 to the Registrant’s Form 10-Q for the  quarterly period ended June 30, 2009, filed with the Securities and  Exchange Commission on August 10, 2009.        |
|   |                                                                                                                                                                                                                            |
| (49)   | Incorporated by  reference to Exhibit 10.75 to the Registrant’s Form 10-Q for the  quarterly period ended June 30, 2009, filed with the Securities and  Exchange Commission on August 10, 2009.        |
|   |                                                                                                                                                                                                                            |
| (50)   | Incorporated by reference  to Exhibit 10.76 to the Registrant’s Form 10-Q for the quarterly  period ended September 30, 2009, filed with the Securities and Exchange  Commission on November 9, 2009.  |
|   |                                                                                                                                                                                                                            |
| (51)   | Incorporated by  reference to Exhibit 4.1 to the Registrant’s Form 8-K filed with  the Securities and Exchange Commission on August 24, 2009.                                                               |
|   |                                                                                                                                                                                                                            |
| (52)   | Incorporated by  reference to Exhibit 10.77 to the Registrant’s Form 10-Q for the  quarterly period ended September 30, 2009, filed with the Securities and  Exchange Commission on November 9, 2009.  |
|   |                                                                                                                                                                                                                            |
| (53)   | Incorporated by  reference to Exhibit 3.1 to the Registrant’s Form 8-K filed with  the Securities and Exchange Commission on April 22, 2010.                                                                |
|   |                                                                                                                                                                                                                            |
| (54)   | Incorporated by  reference to Exhibit 10.1 to the Registrant’s Form 8-K filed with  the Securities and Exchange Commission on April 22, 2010.                                                               |
|   |                                                                                                                                                                                                                            |
| (55)   | Incorporated by  reference to Exhibit 10.2 to the Registrant’s Form 8-K filed with  the Securities and Exchange Commission on April 22, 2010.                                                               |

 

(b)  Exhibits.

 

The exhibits listed underItem 15(a)(3) hereof are filed as part of this Form 10-K/A otherthan Exhibit 32.1, which shall be deemed furnished.

 

37

----

 

(c)  Financial Statement Schedules.

 

All schedules are omittedbecause they are not applicable or the required information is shown in thefinancial statements or the notes thereto.

 

----

* A ConfidentialTreatment Request for certain information in this document has been filed withthe Securities and Exchange Commission. The information for which treatment hasbeen sought has been deleted from such exhibit and the deleted text replaced byan asterisk (*).

 

† Indicates managementcontract or compensatory plan, contract or arrangement.

 

38

----

 

**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 
| Dated: | April 28, 2010 | AVI  BIOPHARMA, INC.                                                                          |
|--------|---------------------|----------------------------------------------------------------------------------------------------|
|   |                |                                                                                               |
|   |                | By:                                                                                                | /s/ J. David Boyle II |
|   |                | J. David Boyle II                                                                                  |
|   |                | Interim Chief Executive  Officer and President, Senior Vice President, and Chief Financial Officer |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in theircapacities indicated on April 28, 2010:

 
| **Signature**                            | ** ** | **Title**                                                                                          |
|------------------------------------------|------------|----------------------------------------------------------------------------------------------------|
|                                     |       |                                                                                               |
|  /s/ J. DAVID BOYLE II              |       | Interim Chief Executive  Officer and President, Senior Vice President, and Chief Financial Officer |
| J. David Boyle II                        |       | (Principal Executive  Officer and Principal Financial and Accounting Officer)                      |
|                                     |       |                                                                                               |
| /s/ MICHAEL D. CASEY                     |       | Chairman of the Board                                                                              |
| Michael D. Casey                         |       |                                                                                               |
|                                     |       |                                                                                               |
| /s/ M. KATHLEEN  BEHRENS, Ph.D.          |       | Director                                                                                           |
| M. Kathleen Behrens,  Ph.D.              |       |                                                                                               |
|                                     |       |                                                                                               |
| /s/ WILLIAM A. GOOLSBEE                  |       | Director                                                                                           |
| William A. Goolsbee                      |       |                                                                                               |
|                                     |       |                                                                                               |
| /s/ CHRISTOPHER S.  HENNEY, Ph.D., D.Sc. |       | Director                                                                                           |
| Christopher S. Henney,  Ph.D., D.Sc.     |       |                                                                                               |
|                                     |       |                                                                                               |
| /s/ JOHN C. HODGMAN                      |       | Director                                                                                           |
| John C. Hodgman                          |       |                                                                                               |
|                                     |       |                                                                                               |
| /s/ GIL PRICE, M.D.                      |       | Director                                                                                           |
| Gil Price, M.D.                          |       |                                                                                               |
|                                     |       |                                                                                               |
| /s/ ANTHONY CHASE                        |       | Director                                                                                           |
| Anthony Chase                            |       |                                                                                               |

 

39

----

 

 

**Report of Independent Registered Public AccountingFirm**

 

The Board of Directors and Shareholders

AVI BioPharma, Inc:

 

We have audited the accompanying balance sheets of AVIBioPharma, Inc. (a development stage enterprise) as of December 31,2009 and 2008, and the related statements of operations, shareholders’ equityand comprehensive income (loss), and cash flows for each of the years in thethree-yearperiodended December 31, 2009 and the information included in the cumulativefrom inception presentations for the period January 1, 2002 to December 31,2009 (not separately presented herein). These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits. The financialstatements of AVI BioPharma, Inc. for the period July 22, 1980(inception) to December 31, 2001 were audited by other auditors who haveceased operations. Those auditors expressed an unqualified opinion on thosefinancial statements in their report dated February 21, 2002.

 

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, 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 toabove present fairly, in all material respects, the financial position of AVIBioPharma, Inc. (a development stage enterprise) as of December 31,2009 and 2008, and the results of its operations and its cash flows for each ofthe years in the three-yearperiod ended December 31, 2009 and theinformation included in the cumulative from inception presentations for theperiod January I, 2002 to December 31, 2009 (not separately presentedherein), in conformity with U.S. generally accepted accounting principles.

 

We also have audited, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), theeffectiveness of AVI BioPharma, Inc.’s internal control over financialreporting as of December 31, 2009, based on criteria established in *Internal Control - Integrated Framework*issuedby the Committee of Sponsoring Organizations of the Treadway Commission (COSO),and our report, dated March 16, 2010 expressed an unqualified opinion onthe effectiveness of the Company’s internal control over financial reporting.

 
| /s/ KPMG LLP        |   |
|---------------------|--------|
|                |   |
| Portland, Oregon    |   |
| March 16, 2010 |   |

 

 

F-1

----

 

***THIS REPORT IS A CONFORMED COPY OF THE REPORT PREVIOUSLYISSUED BY ARTHUR ANDERSEN LLP AND HAS NOT BEEN REISSUED BY THAT FIRM.***

 

**Report of Independent Public Accountants**

 

To the Board of Directorsand Shareholders of

 

AVI BioPharma, Inc.

 

We have audited theaccompanying balance sheet of AVI BioPharma, Inc. (an Oregon corporationin the development stage) as of December 31, 2001, and the relatedstatements of operations, shareholders’ equity and cash flows for each of thetwo years in the period ended December 31, 2001 and for the period frominception (July 22, 1980) to December 31, 2001. These financialstatements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audits.

 

We conducted our auditsin accordance with auditing standards generally accepted in the United States.Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the financial position of AVI BioPharma, Inc. as of December 31,2001, and the results of its operations and its cash flows for each of the twoyears in the period ended December 31, 2001 and for the period frominception (July 22, 1980) to December 31, 2001, in conformity withaccounting principles generally accepted in the United States.

 
| /s/ Arthur Andersen LLP |   |
|-------------------------|--------|
|                    |   |
| Portland, Oregon        |   |
| February 21, 2002  |   |

 

F-2

----

 

**AVI BioPharma, Inc.**

**(A Development Stage Company)**

**Balance Sheets**

 
| ** **                                                                                                        | ** ** | **December 31,** | ** **   | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|-----------------------|--------------|-----------------------|------------|
| ** **                                                                                                        | ** ** | **2009**              | ** **   | **2008**              | ** ** |
| **Assets**                                                                                                        |       |                  |         |                  |       |
| Current Assets:                                                                                                   |       |                  |         |                  |       |
| Cash and cash equivalents                                                                                         |       | $                     |  48,275 |                  | $          |  11,192 |   |
| Short-term securities—available-for-sale                                                                     |       | 171                   |         | 282                   |       |
| Accounts receivable                                                                                               |       | 2,085                 |         | 4,971                 |       |
| Other current assets                                                                                              |       | 779                   |         | 599                   |       |
| Total Current Assets                                                                                              |       | 51,310                |         | 17,044                |       |
|                                                                                                              |       |                  |         |                  |       |
| Property held for sale                                                                                            |       | 2,372                 |         | —                |       |
| Property and Equipment, net of accumulated depreciation  and amortization of $14,026 and $12,919             |       | 2,466                 |         | 5,189                 |       |
| Patent Costs, net of accumulated amortization of  $1,762 and $1,927                                               |       | 3,759                 |         | 3,268                 |       |
| Other assets                                                                                                      |       | 120                   |         | 35                    |       |
| Total Assets                                                                                                      |       | $                     |  60,027 |                  | $          |  25,536 |   |
|                                                                                                              |       |                  |         |                  |       |
| **Liabilities and Shareholders’  Equity**                                                                    |       |                  |         |                  |       |
| Current Liabilities:                                                                                              |       |                  |         |                  |       |
| Accounts payable                                                                                                  |       | $                     |  1,381  |                  | $          |  2,014 |   |
| Accrued employee compensation                                                                                     |       | 922                   |         | 1,306                 |       |
| Long-term debt, current portion                                                                                   |       | 77                    |         | 74                    |       |
| Warrant valuation                                                                                                 |       | 27,609                |         | 1,254                 |       |
| Deferred revenue                                                                                                  |       | 3,428                 |         | 2,190                 |       |
| Other liabilities                                                                                                 |       | 90                    |         | 450                   |       |
| Total Current Liabilities                                                                                         |       | 33,507                |         | 7,288                 |       |
|                                                                                                              |       |                  |         |                  |       |
| Commitments and Contingencies                                                                                     |       | —                |         | —                |       |
|                                                                                                              |       |                  |         |                  |       |
| Long-term debt, non-current portion                                                                               |       | 1,924                 |         | 2,001                 |       |
| Other long-term liabilities                                                                                       |       | 966                   |         | 515                   |       |
|                                                                                                              |       |                  |         |                  |       |
| Shareholders’ Equity:                                                                                        |       |                  |         |                  |       |
| Preferred stock, $.0001 par value, 20,000,000  shares authorized; none issued and outstanding                     |       | —                |         | —                |       |
| Common stock, $.0001 par value, 200,000,000 shares  authorized; 110,495,587 and 71,101,738 issued and outstanding |       | 11                    |         | 7                     |       |
| Additional paid-in capital                                                                                        |       | 299,088               |         | 266,035               |       |
| Deficit accumulated during the development stage                                                                  |       | (275,469              | )            | (250,310              | )          |
| Total Shareholders’ Equity                                                                                   |       | 23,630                |         | 15,732                |       |
| Total Liabilities and Shareholders’ Equity                                                                   |       | $                     | 60,027       |                  | $          | 25,536 |   |

 

See accompanying notes to financial statements.

 

F-3

----

 

**AVI BioPharma, Inc.**

**(A Development Stage Company)**

**Statements of Operations**

 
| ** **                                                                                           | ** ** | ** **                        | ** ** | ** **                   | ** ** | ** ** | ** ** | **July 22,  1980**     | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|------------------------------|------------|------------|------------|-----------------------------|------------|
| ** **                                                                                           | ** ** | **Year  ended December 31,** | ** ** | **(Inception) through** | ** ** |
| **(in thousands)**                                                                                   | ** ** | **2009**                          | ** ** | **2008**                     | ** ** | **2007**   | ** ** | **December 31,  2009** | ** ** |
|                                                                                                 |       |                              |       |                         |       |       |       |                        |       |
| Revenues from license fees, grants and research  contracts                                      |       | $                                 | 17,585     |                         | $          | 21,258     |       | $                           | 10,985     |   | $ | 59,809 |   |
|                                                                                                 |       |                              |       |                         |       |       |       |                        |       |
| Operating expenses:                                                                                  |       |                              |       |                         |       |       |       |                        |       |
| Research and development                                                                             |       | 24,396                            |       | 27,331                       |       | 31,058     |       | 230,432                     |       |
| General and administrative                                                                           |       | 8,696                             |       | 11,469                       |       | 13,035     |       | 74,020                      |       |
| Acquired in-process research and development                                                         |       | —                            |       | 9,916                        |       | —     |       | 29,461                      |       |
| Operating loss                                                                                       |       | (15,507                           | )          | (27,458                      | )          | (33,108    | )          | (274,104                    | )          |
|                                                                                                 |       |                              |       |                         |       |       |       |                        |       |
| Other non-operating (loss) income:                                                                   |       |                              |       |                         |       |       |       |                        |       |
| Interest (expense) income and other, net                                                             |       | (454                              | )          | 344                          |       | 984        |       | 8,323                       |       |
| (Increase) decrease on warrant valuation                                                             |       | (9,198                            | )          | 3,161                        |       | 4,956      |       | 3,450                       |       |
| Realized gain on sale of short-term securities—  available-for-sale                             |       | —                            |       | —                       |       | —     |       | 3,863                       |       |
| Write-down of short-term securities  — available-for-sale                                  |       | —                            |       | —                       |       | —     |       | (17,001                     | )          |
|                                                                                                 |       | (9,652                            | )          | 3,505                        |       | 5,940      |       | (1,365                      | )          |
|                                                                                                 |       |                              |       |                         |       |       |       |                        |       |
| Net loss                                                                                             |       | $                                 | (25,159    | )                            | $          | (23,953    | )          | $                           | (27,168    | ) | $ | (275,469 | ) |
|                                                                                                 |       |                              |       |                         |       |       |       |                        |       |
| Net loss per share - basic and diluted                                                               |       | $                                 | (0.27      | )                            | $          | (0.34      | )          | $                           | (0.50      | ) |   |   |
|                                                                                                 |       |                              |       |                         |       |       |       |                        |       |
| Weighted average number of common shares  outstanding for computing basic and diluted loss per share |       | 93,090                            |       | 69,491                       |       | 53,942     |       |                        |       |

 

See accompanying notes to financial statements.

 

F-4

----

 

**AVI BioPharma, Inc.**

**(A Development Stage Company)**

**Statements of Shareholders’ Equity andComprehensive Income (Loss)**

 
| ** **                                                                                                     | ** ** | ** **      | ** ** | ** **        | ** ** | ** **  | ** ** | ** **     | ** **    | **Accumulated**   | ** ** | **Deficit**            | ** ** | ** ** | ** **     |
|----------------------------------------------------------------------------------------------------------------|------------|-----------------|------------|-------------------|------------|-------------|------------|----------------|---------------|-------------------|------------|------------------------|------------|------------|----------------|
| ** **                                                                                                     | ** ** | ** **      | ** ** | ** **        | ** ** | ** **  | ** ** | ** **     | ** **    | **Other**         | ** ** | **Accumulated**        | ** ** | ** ** | ** **     |
| ** **                                                                                                     | ** ** | ** **      | ** ** | ** **        | ** ** | ** **  | ** ** | **Additional** | ** **    | **Comprehensive** | ** ** | **During  the**        | ** ** | **Total**  | ** **     |
| ** **                                                                                                     | ** ** | **Partnership** | ** ** | **Common  Stock** | ** ** | **Paid-In** | ** ** | **Income**     | ** **    | **Development**   | ** ** | **Shareholders’** | ** ** |
| **(in thousands)**                                                                                             | ** ** | **Units**       | ** ** | **Shares**        | ** ** | **Amount**  | ** ** | **Capital**    | ** **    | **(Loss)**        | ** ** | **Stage**              | ** ** | **Equity** | ** **     |
|                                                                                                           |       |            |       |              |       |        |       |           |          |              |       |                   |       |       |           |
| BALANCE  AT JULY 22, 1980 (Inception)                                                                          |       | —          |       | —            |       | —      |       | $              |  —  |              | $          |  —           |       | $          |  —   |   | $ |  — |   |
| Issuance  of partnership units, warrants and common stock                                                      |       | 3,615           |       | 8,273             |       | 1           |       | 33,733         |          | —            |       | —                 |       | 33,734     |           |
| Compensation  expense related to issuance of warrants for common stock and partnership  units             |       | —          |       | —            |       | —      |       | 537            |          | —            |       | —                 |       | 537        |           |
| Exercise  of warrants for partnership units and common stock                                              |       | 42              |       | 2,236             |       | —      |       | 4,152          |          | —            |       | —                 |       | 4,152      |           |
| Exercise  of options for common stock                                                                          |       | —          |       | 990               |       | —      |       | 4,005          |          | —            |       | —                 |       | 4,005      |           |
| Issuance  of common stock for ESPP                                                                             |       | —          |       | 252               |       | —      |       | 810            |          | —            |       | —                 |       | 810        |           |
| Issuance  of common stock and warrants for cash and securities, net of offering costs                          |       | —          |       | 37,185            |       | 4           |       | 162,348        |          | —            |       | —                 |       | 162,352    |           |
| Issuance  of common stock and warrants for the acquisition of ImmunoTherapy Corporation                        |       | —          |       | 2,132             |       | —      |       | 17,167         |          | —            |       | —                 |       | 17,167     |           |
| Issuance  of common stock and warrants for services                                                            |       | —          |       | 536               |       | —      |       | 2,469          |          | —            |       | —                 |       | 2,469      |           |
| Compensation  expense related to issuance of options for common stock                                     |       | —          |       | —            |       | —      |       | 6,842          |          | —            |       | —                 |       | 6,842      |           |
| Conversion  of debt into common stock and partnership units                                                    |       | 9               |       | 10                |       | —      |       | 88             |          | —            |       | —                 |       | 88         |           |
| Issuance  of common stock in exchange for partnership units                                                    |       | (1,810          | )          | 1,633             |       | —      |       | (0             | )             | —            |       | —                 |       | —     |           |
| Withdrawal  of partnership net assets upon conveyance of technology                                       |       | (1,856          | )          | —            |       | —      |       | (177           | )             | —            |       | —                 |       | (177       | )              |
| Common  stock subject to rescission, net                                                                  |       | —          |       | (64               | )          | —      |       | (289           | )             | —            |       | —                 |       | (289       | )              |
| Comprehensive  income (loss):                                                                                  |       |            |       |              |       |        |       |           |          |              |       |                   |       |       |           |
| Write-down  of short-term securities—available-for-sale                                                   |       | —          |       | —            |       | —      |       | —         |          | 17,001            |       | —                 |       | 17,001     |           |
| Realized  gain on sale of short-term securities— available-for-sale                                       |       | —          |       | —            |       | —      |       | —         |          | (3,766            | )          | —                 |       | (3,766     | )              |
| Unrealized  loss on short-term securities— available-for-sale                                             |       | —          |       | —            |       | —      |       | —         |          | (13,217           | )          | —                 |       | (13,217    | )              |
| Net  loss                                                                                                      |       | —          |       | —            |       | —      |       | —         |          | —            |       | (199,189               | )          | (199,189   | )              |
| Comprehensive  loss                                                                                            |       |            |       |              |       |        |       |           |          |              |       |                   |       | (199,171   | )              |
| BALANCE  AT DECEMBER 31, 2006                                                                                  |       | —          |       | 53,183            |       | 5           |       | $              |  231,685 |              | $          |  18               |       | $          |  (199,189 | ) | $ |  32,519 |   |
| Exercise  of warrants for common stock                                                                         |       | —          |       | 12                |       | —      |       | 29             |          | —            |       | —                 |       | 29         |           |
| Exercise  of options for common stock                                                                          |       | —          |       | 39                |       | —      |       | 90             |          | —            |       | —                 |       | 90         |           |
| Issuance  of common stock for ESPP                                                                             |       | —          |       | 518               |       | —      |       | 1,450          |          | —            |       | —                 |       | 1,450      |           |
| Issuance  of common stock to vendors                                                                           |       | —          |       |              |       |        |       |           |          | —            |       | —                 |       | —     |           |
| Compensation  expense related to issuance of options for common stock                                     |       | —          |       | —            |       | —      |       | 313            |          | —            |       | —                 |       | 313        |           |
| Issuance  of common stock for cash and securities, net of offering costs                                  |       | —          |       | 10,697            |       | 1           |       | 14,447         |          | —            |       | —                 |       | 14,448     |           |
| Stock-based  compensation                                                                                      |       | —          |       | —            |       | —      |       | 4,719          |          | —            |       | —                 |       | 4,719      |           |
| Comprehensive  income (loss):                                                                                  |       |            |       |              |       |        |       |           |          |              |       |                   |       |       |           |
| Unrealized  gain on short-term securities— available-for-sale, net                                   |       | —          |       | —            |       | —      |       | —         |          | (18               | )          | —                 |       | (18        | )              |
| Net  loss                                                                                                      |       | —          |       | —            |       | —      |       | —         |          | —            |       | (27,168                | )          | (27,168    | )              |
| Comprehensive  loss                                                                                            |       |            |       |              |       |        |       |           |          |              |       |                   |       | (27,186    | )              |
| BALANCE  AT DECEMBER 31, 2007                                                                                  |       | —          |       | 64,449            |       | 6           |       | $              |  252,733 |              | $          |  —           |       | $          |  (226,357 | ) | $ |  26,382 |   |
| Exercise  of options for common stock                                                                          |       | —          |       | 7                 |       | —      |       | 9              |          | —            |       | —                 |       | 9          |           |
| Issuance  of common stock for ESPP                                                                             |       | —          |       | 84                |       | —      |       | 72             |          | —            |       | —                 |       | 72         |           |
| Issuance  of common stock and warrants to vendors                                                              |       | —          |       | 324               |       | —      |       | 828            |          | —            |       | —                 |       | 828        |           |
| Compensation  expense to non-employees on issuance of options and warrants to  purchase common stock |       | —          |       | —            |       | —      |       | 180            |          | —            |       | —                 |       | 180        |           |
| Compensation  expense on issuance of restricted stock                                                          |       | —          |       | 100               |       | —      |       | 166            |          | —            |       | —                 |       | 166        |           |
| Stock-based  compensation                                                                                      |       | —          |       | 326               |       | —      |       | 3,656          |          | —            |       | —                 |       | 3,656      |           |
| Issuance  of common stock for acquisition of Ercole                                                            |       | —          |       | 5,812             |       | 1           |       | 8,391          |          | —            |       | —                 |       | 8,392      |           |
| Comprehensive  income (loss):                                                                                  |       |            |       |              |       |        |       |           |          |              |       |                   |       |       |           |
| Unrealized  gain on short-term securities— available-for-sale, net                                   |       | —          |       | —            |       | —      |       | —         |          | —            |       | —                 |       | —     |           |
| Net  loss                                                                                                      |       | —          |       | —            |       | —      |       | —         |          | —            |       | (23,953                | )          | (23,953    | )              |
| Comprehensive  loss                                                                                            |       |            |       |              |       |        |       |           |          |              |       |                   |       | (23,953    | )              |
| BALANCE  AT DECEMBER 31, 2008                                                                                  |       | —          |       | 71,102            |       | 7           |       | $              |  266,035 |              | $          |  —           |       | $          |  (250,310 | ) | $ |  15,732 |   |
| Exercise  of options for common stock                                                                          |       | —          |       | 62                |       | —      |       | 76             |          | —            |       | —                 |       | 76         |           |
| Issuance  of common stock for ESPP                                                                             |       | —          |       | 124               |       | —      |       | 85             |          | —            |       | —                 |       | 85         |           |
| Issuance  of common stock for cash and securities, net of offering costs                                  |       | —          |       | 38,520            |       | 4           |       | 30,518         |          | —            |       | —                 |       | 30,522     |           |
| Compensation  expense on issuance of restricted stock                                                          |       | —          |       | 427               |       | —      |       | 203            |          | —            |       | —                 |       | 203        |           |
| Stock-based  compensation                                                                                      |       | —          |       | 261               |       | —      |       | 2,171          |          | —            |       | —                 |       | 2,171      |           |
| Comprehensive  income (loss):                                                                                  |       |            |       |              |       |        |       |           |          |              |       |                   |       |       |           |
| Unrealized  gain on short-term securities— available-for-sale, net                                   |       | —          |       | —            |       | —      |       | —         |          | —            |       | —                 |       | —     |           |
| Net  loss                                                                                                      |       | —          |       | —            |       | —      |       | —         |          | —            |       | (25,159                | )          | (25,159    | )              |
| Comprehensive  loss                                                                                            |       |            |       |              |       |        |       |           |          |              |       |                   |       | (25,159    | )              |
| BALANCE  AT DECEMBER 31, 2009                                                                                  |       | —          |       | 110,496           |       | 11          |       | $              |  299,088 |              | $          |  —           |       | $          |  (275,469 | ) | $ |  23,630 |   |

 

See accompanying notes to financial statements.

 

F-5

----

 

**AVI BioPharma, Inc.**

**(A Development Stage Company)**

**Statements of Cash Flows**

 
| ** **                                                                                                                             | ** ** | ** **                        | ** ** | ** **               | ** ** | ** ** | ** ** | **For the  Period**         | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|--------------------------|------------|------------|------------|-----------------------------|------------|
| ** **                                                                                                                             | ** ** | ** **                        | ** ** | ** **               | ** ** | ** ** | ** ** | **July 22,  1980**     | ** ** |
| ** **                                                                                                                             | ** ** | **Year  ended December 31,** | ** ** | **(Inception)  through** | ** ** |
| **(in thousands)**                                                                                                                     | ** ** | **2009**                          | ** ** | **2008**                 | ** ** | **2007**   | ** ** | **December 31,  2009** | ** ** |
| Cash flows from operating activities:                                                                                                  |       |                              |       |                     |       |       |       |                        |       |
| Net loss                                                                                                                               |       | $                                 | (25,159    | )                        | $          | (23,953    | )          | $                           | (27,168    | ) | $ | (275,469 | ) |
| Adjustments to reconcile net loss to net cash flows  used in operating activities:                                                     |       |                              |       |                     |       |       |       |                        |       |
| Depreciation and amortization                                                                                                          |       | 1,379                             |       | 1,469                    |       | 2,014      |       | 17,682                      |       |
| Loss on disposal of assets                                                                                                             |       | 347                               |       | 584                      |       | 59         |       | 1,305                       |       |
| Realized gain on sale of  short-term securities— available-for-sale                                                          |       | —                            |       | —                   |       | —     |       | (3,863                      | )          |
| Write-down of short-term  securities—available-for-sale                                                                           |       | —                            |       | —                   |       | —     |       | 17,001                      |       |
| Impairment charge on property held for sale                                                                                       |       | 128                               |       | 800                      |       |       |       | 928                         |       |
| Stock-based compensation                                                                                                               |       | 2,374                             |       | 4,830                    |       | 5,732      |       | 22,697                      |       |
| Conversion of interest accrued to common stock                                                                                         |       | —                            |       | —                   |       | —     |       | 8                           |       |
| Acquired in-process research and development                                                                                           |       | —                            |       | 9,916                    |       | —     |       | 29,461                      |       |
| Increase (decrease) on warrant valuation                                                                                               |       | 9,198                             |       | (3,161                   | )          | (4,956     | )          | (3,450                      | )          |
| (Increase) decrease in:                                                                                                                |       |                              |       |                     |       |       |       |                        |       |
| Accounts receivable and other assets                                                                                                   |       | 2,621                             |       | (1,850                   | )          | (2,849     | )          | (2,900                      | )          |
| Net increase in accounts payable, accrued employee  compensation, and other liabilities                                           |       | 312                               |       | (975                     | )          | 2,491      |       | 5,274                       |       |
| Net cash used in operating activities                                                                                                  |       | (8,800                            | )          | (12,340                  | )          | (24,677    | )          | (191,326                    | )          |
|                                                                                                                                   |       |                              |       |                     |       |       |       |                        |       |
| Cash flows from investing activities:                                                                                                  |       |                              |       |                     |       |       |       |                        |       |
| Purchase of property and equipment                                                                                                     |       | (931                              | )          | (369                     | )          | (1,270     | )          | (17,869                     | )          |
| Patent costs                                                                                                                           |       | (1,063                            | )          | (848                     | )          | (857       | )          | (7,243                      | )          |
| Purchase of marketable securities                                                                                                      |       | —                            |       | (11                      | )          | (110       | )          | (112,986                    | )          |
| Sale of marketable securities                                                                                                          |       | 111                               |       | —                   |       | 12,813     |       | 117,724                     |       |
| Acquisition costs                                                                                                                      |       | —                            |       | (11                      | )          | —     |       | (2,389                      | )          |
| Net cash (used in) provided by investing activities                                                                                    |       | (1,883                            | )          | (1,239                   | )          | 10,576     |       | (22,763                     | )          |
|                                                                                                                                   |       |                              |       |                     |       |       |       |                        |       |
| Cash flows from financing activities:                                                                                                  |       |                              |       |                     |       |       |       |                        |       |
| Proceeds from sale of common stock, warrants  and partnership units, net of offering costs, and exercise of options and  warrants |       | 47,840                            |       | 81                       |       | 18,745     |       | 262,937                     |       |
| Repayments of long-term debt                                                                                                           |       | (74                               | )          | (113                     | )          | —     |       | (187                        | )          |
| Buyback of common stock pursuant to rescission  offering                                                                          |       | —                            |       | —                   |       | —     |       | (289                        | )          |
| Withdrawal of partnership net assets                                                                                                   |       | —                            |       | —                   |       | —     |       | (177                        | )          |
| Issuance of convertible debt                                                                                                           |       | —                            |       | —                   |       | —     |       | 80                          |       |
| Net cash (used in) provided by financing activities                                                                                    |       | 47,766                            |       | (32                      | )          | 18,745     |       | 262,364                     |       |
|                                                                                                                                   |       |                              |       |                     |       |       |       |                        |       |
| Increase (decrease) in cash and cash equivalents                                                                                       |       | 37,083                            |       | (13,611                  | )          | 4,644      |       | 48,275                      |       |
|                                                                                                                                   |       |                              |       |                     |       |       |       |                        |       |
| Cash and cash equivalents:                                                                                                             |       |                              |       |                     |       |       |       |                        |       |
| Beginning of period                                                                                                                    |       | 11,192                            |       | 24,803                   |       | 20,159     |       | —                      |       |
| End of period                                                                                                                          |       | $                                 | 48,275     |                     | $          | 11,192     |       | $                           | 24,803     |   | $ | 48,275 |   |
|                                                                                                                                   |       |                              |       |                     |       |       |       |                        |       |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW  INFORMATION:                                                                                |       |                              |       |                     |       |       |       |                        |       |
| Cash paid during the year for interest                                                                                                 |       | $                                 | 97         |                     | $          | 104        |       | $                           | 104        |   | $ | 305 |   |
| SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING  ACTIVITIES AND FINANCING ACTIVITIES:                                                       |       |                              |       |                     |       |       |       |                        |       |
| Short-term securities—available-for-sale received  in connection with the private offering                                        |       | $                                 | —     |                     | $          | —     |       | $                           | —     |   | $ | 17,897 |   |
| Change in unrealized gain (loss) on short-term  securities—available-for-sale                                                |       | $                                 | —     |                     | $          | —     |       | $                           | (18        | ) | $ | — |   |
| Issuance of common stock and warrants in  satisfaction of liabilities                                                                  |       | $                                 | —     |                     | $          | —     |       | $                           | —     |   | $ | 545 |   |
| Issuance of common stock for building purchase                                                                                         |       | $                                 | —     |                     | $          | —     |       | $                           | 750        |   | $ | 750 |   |
| Assumption of long-term debt for building  purchase                                                                               |       | $                                 | —     |                     | $          | —     |       | $                           | 2,200      |   | $ | 2,200 |   |
| Issuance of common stock for Ercole assets                                                                                             |       | $                                 | —     |                     | $          | 8,075      |       | $                           | —     |   | $ | 8,075 |   |
| Assumption of liabilities for Ercole assets                                                                                       |       | $                                 | —     |                     | $          | 2,124      |       | $                           | —     |   | $ | 2,124 |   |

 

See accompanying notes to financial statements.

 

F-6

----

 

 

**AVI BioPharma, Inc.**

**(A Development Stage Company)**

 

# **NOTESTO FINANCIAL STATEMENTS**

# ** **

**1. ORGANIZATION AND NATURE OF BUSINESS:**

 

AVI BioPharma, Inc. (the “Company” or “AVI”) wasincorporated in the State of Oregon on July 22, 1980. The mission of theCompany is to develop and commercialize improved therapeutic products basedupon antisense and cancer immunotherapy technology.

 

Through May 1993, the financial statementsincluded the combined accounts of the Company and ANTI-GENE DEVELOPMENT GROUP,a limited partnership (AGDG or the Partnership) founded in 1981 and registeredin the State of Oregon. Substantially all income generated and proceeds fromthe Partnership unit sales through that date have been paid to the Companyunder the terms of research and development contracts entered into by thePartnership and the Company. Significant transactions between the Company andthe Partnership through that date have been eliminated.

 

In March 1993, the Company offered to allpartners in the Partnership the opportunity to exchange their partnership unitsor warrants to purchase partnership units (unit warrants) for common stock orwarrants to purchase common stock. Under the terms of the offer, which wascompleted May 1, 1993, each partner could elect to exchange each unit heldor unit warrant held for 1,100 shares of common stock or warrants to purchase1,100 shares of common stock of the Company, respectively. Total shares andwarrants to purchase shares issued in the exchange offer were 1,632,950 and381,700, respectively.

 

Effective May 19,1993, the Company and the Partnership entered into a Technology TransferAgreement wherein the Partnership conveyed all intellectual property thenwithin its control to the Company. As part of the conveyance, the Companytendered to the Partnership for liquidation all partnership units receivedpursuant to the exchange offer and received a 49.37 percent undivided interestin the intellectual property. The Company then purchased the remainingundivided interest in the intellectual property for rights to payments of4.05 percent of gross revenues in excess of $200 million, from sales ofproducts, which would, in the absence of the Technology Transfer Agreement,infringe a valid claim under any patent transferred to the Company. The Companyalso granted to the Partnership a royalty-bearing license to make, use and sellsmall quantities of product derived from the intellectual property for researchpurposes only.

 

In March 2000, theCompany and AGDG amended the Technology Transfer Agreement to give to AGDG andGene Tools LLC, related organizations, exclusive, non royalty-bearing rights toin vitro diagnostic applications of the intellectual property. In considerationfor this amendment, Gene Tools paid the Company $1 million and reduced theroyalty that the Company would pay to AGDG under the Technology TransferAgreement on future sales of therapeutic products from 4.05% to 3.00%.

 

The remaining net assetsof the Partnership, $177,000 of cash, were no longer combined with those of theCompany in May 1993. Under the terms of the Technology Transfer Agreement,the Partnership ceased active sales of partnership units and income generatingactivities and no longer will enter into research and development contractswith the Company. The Partnership currently exists primarily for the purpose ofcollecting potential future payments from the Company as called for in theTechnology Transfer Agreement.

 

*Acquisition of Ercole*

 

On March 20, 2008,the Company acquired all of the stock of Ercole Biotechnology, Inc. (“Ercole”)in exchange for 5,811,721 shares of AVI common stock. The transaction includedthe assumption of approximately $1.8 million in liabilities of Ercole. The AVIcommon stock was valued at approximately $8.4 million. AVI also issued warrantsto purchase AVI stock to settle certain outstanding warrants held in Ercole,which were valued at $437,000. These warrants are classified as equity. Theacquisition was aimed at consolidating AVI’s position in directed alternativeRNA splicing therapeutics. Ercole and the Company had been collaborating since2006 to develop drug candidates, including AVI-4658, currently in clinicaltesting in the United Kingdom for the treatment of Duchenne muscular dystrophy.Ercole has other ongoing discovery research programs.

 

The total estimatedpurchase price of $10.2 million has been allocated as follows:

 
| Accounts  Receivable                          |   | $ | 76,000    |   |
|-----------------------------------------------|--------|---|-----------|--------|
| Prepaid  Expenses                             |   | $ | 7,000     |   |
| Fixed  Assets                                 |   | $ | 10,000    |   |
| Patents                                       |   | $ | 190,000   |   |
| Acquired  In-Process Research and Development |   | $ | 9,916,000 |   |

 

F-7

----

 

The pending patentsacquired as part of the Ercole acquisition have an expected expiration date of2026. Acquired in-process research and development consists of other discoveryresearch programs in areas including beta thalassemia and soluble tumornecrosis factor receptor. As these programs were in development at the time ofacquisition, there were significant risks associated with completing theseprojects, and there were no alternative future uses for these projects, theassociated value has been considered acquired in-process research anddevelopment.

 

Ercole has been adevelopment stage company since inception and does not have a product for sale.The Company has retained a limited number of Ercole employees and plans onincorporating in-process technology of Ercole into the Company’s processes. Theacquisition of Ercole did not meet the definition of a business and it istherefore being accounted for as an asset acquisition.

 

**2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:**

 

*Basisof Accounting*

 

The financial statementshave been prepared in accordance with U.S. generally accepted accountingprinciples as outlined in the*FASBAccounting Standards CodificationTM.*

 

*Use ofEstimates*

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. Actual results could differ from those estimates. Significantitems subject to such estimates and assumptions include the valuation ofinvestments andliability classified warrants, long-lived asset impairment, and revenuerecognition.

 

*Reclassifications*

 

Certain prior yearamounts have been reclassified to conform to current year presentation. Thesechanges did not have a significant impact on Company’s net loss, assets,liabilities, shareholders’ equity or cash flows.

 

*Cash and Cash Equivalents*

 

The Company considers allhighly liquid investments with an original maturity of three months or lessfrom the date of purchase to be cash equivalents.

 

*Short-TermSecurities—Available-For-Sale*

 

Short-term securitiesinclude certificates of deposit, commercial paper and other highly liquidinvestments with original maturities in excess of 90 days at the time ofpurchase and less than one year from the balance sheet date. The Companyclassifies its investment securities as available-for-sale and, accordingly,such investment securities are stated on the balance sheet at their fair marketvalue with unrealized gains (losses) recorded as a separate component ofshareholders’ equity and comprehensive income (loss).  There were no unrealized gains or losses onthe Company’s investments in marketable securities on its balance sheets as of December 31,2009 and 2008.

 

*AccountsReceivable*

 

Accounts receivable arestated at invoiced amount and do not bear interest as they are due withintwelve months. Because a majority of accounts receivable are from the U.S.government and historically no amounts have been written off, an allowance fordoubtful accounts receivable is not considered necessary. Amounts included inaccounts receivable are as follows:

 

| **As of December 31,** | ** ** | **2009**   | ** ** | **2008**   | ** ** |
|-----------------------------|------------|------------|------------|------------|------------|
| **(in thousands)**     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Research  contract          |       | $          | 2,085      |       | $          | 4,971 |   |
|                        |       |       |       |       |       |
| Accounts  receivable        |       | $          | 2,085      |       | $          | 4,971 |   |

 

F-8

----

 

*Propertyand Equipment*

 

Property and equipment isstated at cost and depreciated over the estimated useful lives of the assets,generally five years, using the straight-line method. Leasehold improvementsare amortized over the shorter of the lease term or the estimated useful lifeof the asset, generally five years, using the straight-line method.Expenditures for repairs and maintenance are expensed as incurred. Expendituresthat increase the useful life or value are capitalized.

 

Amounts included inproperty held for sale:

 

| **As of December 31,** | ** ** | **2009**   | ** ** | **2008**   | ** ** |
|-----------------------------|------------|------------|------------|------------|------------|
| **(in thousands)**     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Property  held for sale     |       | $          | 2,372      |       | $          | — |   |
|                             |            |            |            |            |            |  |  |

 

The Company has listedfor sale an industrial property located in Corvallis Oregon for a sales priceof $2.5 million. Selling and closing expenses are estimated to be $0.1million.  The Company has decided tooutsource its large scale manufacturing activities and has listed this propertyfor sale with a commercial real estate agent.

 

Amounts included inproperty and equipment are as follows:

 

| **As of December 31,**    | ** ** | **2009**   | ** ** | **2008**   | ** ** |
|--------------------------------|------------|------------|------------|------------|------------|
| **(in  thousands)**            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Building                       |       | $          | —     |       | $          | 2,500 |   |
| Lab  equipment                 |       | 5,933      |       | 5,676      |       |
| Office  equipment              |       | 970        |       | 741        |       |
| Leasehold  improvements        |       | 9,589      |       | 9,191      |       |
|                           |       | 16,492     |       | 18,108     |       |
| Less  accumulated depreciation |       | (14,026    | )          | (12,919    | )          |
| Property  and equipment, net   |       | $          | 2,466      |       | $          | 5,189 |   |

 

Depreciation expense was$1,154,000, $1,212,000 and $1,718,000 for the years ended December 31,2009, 2008 and 2007, respectively.

 

*Patent Costs*

 

Patent costs consist primarilyof legal and filing fees incurred to file patents on proprietary technologydeveloped by the Company. Patent costs are amortized on a straight-line basisover the shorter of the estimated economic lives or the legal lives of thepatents, generally 20 years. Patent amortization was $225,000, $257,000 and$296,000 for the years ended December 31, 2009, 2008 and 2007,respectively.  The Company also expensedthe remaining net book value of previously capitalized patents that were laterabandoned of $347,000, $580,000 and $0, for 2009, 2008 and 2007 respectively.The Company expects to incur amortization expense of approximately $146,000 peryear over the following five fiscal years.

 

#### ***Revenue Recognition***

#### ** **

The Company recordsrevenue from research contracts and grants as the services are performed andpayment is reasonably assured. In 2009, 2008 and 2007, the Company recognized$17,585,000, $21,258,000 and $10,985,000, respectively, in research contractsrevenues from government funding for work performed on viral disease projectsand other grants and contracts.  Revenueassociated with research and development arrangements is recognized under theproportional performance method, using the payment received method. To date,revenue from research and development arrangements has not been material.

 

##### ***Research and Development***

##### ** **

Research and development(R&D) expenses include related salaries, contractor fees, materials,utilities and allocations of corporate costs. R&D expenses also consist ofindependent R&D costs and costs associated with collaborative developmentarrangements. In addition, the Company funds R&D at other companies andresearch institutions under agreements. Research and development costs areexpensed as incurred.

 

F-9

----

 

*OtherCurrent Assets*

 

Amounts included in other current assets are asfollows:

 

| **As of December 31,** | ** ** | **2009**   | ** ** | **2008**   | ** ** |
|-----------------------------|------------|------------|------------|------------|------------|
| **(in  thousands)**         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Prepaid  expenses           |       | $          | 337        |       | $          | 316 |   |
| Prepaid  rents              |       | 158        |       | —     |       |
| Restricted  cash            |       | 284        |       | 283        |       |
|                        |       |       |       |       |       |
| Other  current assets       |       | $          | 779        |       | $          | 599 |   |

 

Starting in April 2006,the Company was required to pledge $150,000 as collateral for company creditcards issued to certain employees. Starting in April 2007, the Company wasrequired to pledge $125,000 as collateral for payments on long-term debt. TheCompany classifies these amounts as restricted cash. As of December 31,2009, restricted cash including accrued interest was $284,000. The remainingcomponents of other current assets include normally occurring prepaid expensesand rents.

 

*Stock-basedCompensation*

 

The Company issuesstock-based compensation to certain employees, officers and directors.  These principles require companies to accountfor stock options using the fair value method, which results in the recognitionof compensation expense over the vesting period of the options.  See Note 3.

 

*IncomeTaxes*

 

Income taxes areaccounted for under the asset and liability method. Deferred tax assets andliabilities are recognized for the future tax consequences attributable todifferences between the financial statement carrying amounts of existing assetsand liabilities and their respective tax bases and operating loss and taxcredit carryforwards. Deferred tax assets and liabilities are measured usingenacted tax rates expected to apply to taxable income in the years in whichthose temporary differences are expected to be recovered and settled. Avaluation allowance is recorded to reduce the net deferred tax asset to zerobecause it is more likely than not that the deferred tax asset will not berealized. The Company recognizes the effect of income tax positions only ifthose positions are more likely than not of being sustained upon anexamination.

 

*FairValue of Financial Instruments*

 

The Company measures atfair value certain financial assets and liabilities. Generally acceptedaccounting principles specify a hierarchy of valuation techniques based onwhether the inputs to those valuation techniques are observable orunobservable. Observable inputs reflect market data obtained from independentsources, while unobservable inputs reflect the Company’s market assumptions.These two types of inputs have created the following fair-value hierarchy:

 

Level 1—Quoted prices foridentical instruments in active markets;

 

Level 2—Quoted prices forsimilar instruments in active markets, quoted prices for identical or similarinstruments in markets that are not active, and model-derived valuations inwhich all significant inputs and significant value drivers are observable inactive markets; and

 

Level 3—Valuationsderived from valuation techniques in which one or more significant valuedrivers are unobservable.

 

The Company’s assetsmeasured at fair value on a recurring basis consisted of the following as of December 31,2009:

 
| ** **                                                     | ** ** | **Fair Value Measurement as of December 31, 2009** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **(in  thousands)**                                            | ** ** | **Total**                                               | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| Short-term  securities-available- for-sale and restricted cash |       | $                                                       | 48,730     |   | $ | 48,275 |   | $ | 455 |   | $ | — |   |
| Total                                                          |       | $                                                       | 48,730     |   | $ | 48,275 |   | $ | 455 |   | $ | — |   |

 

F-10

----

 

The Company’s liabilities measured at fair value on arecurring basis consisted of the following as of the date indicated:

 
| ** **          | ** ** | **Fair Value Measurement as of December 31, 2009** | ** ** |
|---------------------|------------|---------------------------------------------------------|------------|
| **(in  thousands)** | ** ** | **Total**                                               | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| Warrants            |       | $                                                       | 27,609     |   | $ | — |   | $ | — |   | $ | 27,609 |   |
| Total               |       | $                                                       | 27,609     |   | $ | — |   | $ | — |   | $ | 27,609 |   |

 

The Company’s assetsmeasured at fair value on a recurring basis consisted of the following as of December 31,2008:

 
| ** **                                                    | ** ** | **Fair Value Measurement as of December 31, 2008** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **(in  thousands)**                                           | ** ** | **Total**                                               | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| Short-term  securities-available-for-sale and restricted cash |       | $                                                       | 11,757     |   | $ | 11,192 |   | $ | 565 |   | $ | — |   |
| Total                                                         |       | $                                                       | 11,757     |   | $ | 11,192 |   | $ | 565 |   | $ | — |   |

 

The Company’s liabilitiesmeasured at fair value on a recurring basis consisted of the following as ofthe date indicated:

 
| ** **          | ** ** | **Fair Value Measurement as of December 31, 2008** | ** ** |
|---------------------|------------|---------------------------------------------------------|------------|
| **(in  thousands)** | ** ** | **Total**                                               | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| Warrants            |       | $                                                       | 1,254      |   | $ | — |   | $ | — |   | $ | 1,254 |   |
| Total               |       | $                                                       | 1,254      |   | $ | — |   | $ | — |   | $ | 1,254 |   |

 

A reconciliation of thechange in value of the Company’s warrants for the year ended December 31,2009 is as follows:

 
| ** **                         | ** ** | **Fair Value Measurements  Using Significant  Unobservable Inputs** | ** ** |
|------------------------------------|------------|---------------------------------------------------------------------|------------|
| **(in  thousands)**                | ** ** | **(Level 3)**                                                       | ** ** |
|                               |       |                                                                |       |
| Balance  at January 1, 2009   |       | $                                                                   | 1,254      |   |
| Change  in value of warrants       |       | 9,198                                                               |       |
| Issuances                          |       | 17,157                                                              |       |
| Balance  at December 31, 2009 |       | $                                                                   | 27,609     |   |

 

A reconciliation of thechange in value of the Company’s warrants for the year ended December 31,2008 is as follows:

 
| ** **                         | ** ** | **Fair Value Measurements  Using Significant  Unobservable Inputs** | ** ** |
|------------------------------------|------------|---------------------------------------------------------------------|------------|
| **(in thousands)**            | ** ** | **(Level 3)**                                                  | ** ** |
|                               |       |                                                                |       |
| Balance  at January 1, 2008   |       | $                                                                   | 4,415      |   |
| Change  in value of warrants       |       | (3,161                                                              | )          |
|                               |       |                                                                |       |
| Balance  at December 31, 2008 |       | $                                                                   | 1,254      |   |

 

The carrying amountsreported in the balance sheets for cash and cash equivalents, accountsreceivable, accounts payable, and other current monetary assets and liabilitiesapproximate fair value because of the immediate or short-term maturity of thesefinancial instruments.

 

F-11

----

 

*Warrants*

 

Certain of the Company’s warrants issued in connectionwith financing arrangements are classified as liabilities in accordance withthe generally accepted accounting pronouncements, whereby, the fair marketvalue of these warrants is recorded on the balance sheet at issuance and markedto market at each financial reporting period. The change in the fair value ofthe warrants is recorded in the Statement of Operations as a non-cash gain(loss) and is estimated using the Black-Scholes option-pricing model with thefollowing assumptions:

 
| **Year  Ended December 31,**           | ** ** | **2009**      | ** ** | **2008**      | ** ** | **2007**      | ** ** |
|---------------------------------------------|------------|---------------|------------|---------------|------------|---------------|------------|
| Risk-free  interest rate                    |       | 0.2%-2.69     | %          | 0.3%-3.0      | %          | 3.1%-3.5      | %          |
| Expected  dividend yield                    |       | 0             | %          | 0             | %          | 0             | %          |
| Expected  lives                             |       | 0.4-4.7 years |       | 0.2-4.2 years |       | 0.9-5.0 years |       |
| Expected  volatility                        |       | 86.0%-102.1   | %          | 63.6%-104.8   | %          | 58.2%-80.7    | %          |
| Warrants  classified as liabilities         |       | 30,203,466    |       | 7,994,229     |       | 9,607,866     |       |
| Warrants  classified as equity              |       | 2,129,530     |       | 2,129,530     |       | 4,248,545     |       |
| Market  value of stock at beginning of year |       | $             | 0.66       |          | $          | 1.41          |       | $ | 3.18 |   |
| Market  value of stock at end of year       |       | $             | 1.46       |          | $          | 0.66          |       | $ | 1.41 |   |

 

The risk-free interestrate is estimated using an average of treasury bill interest rates. Theexpected dividend yield is zero as the Company has not paid any dividends todate and does not expect to pay dividends in the future. The expected lives arebased on the remaining contractual lives of the related warrants. The expectedvolatility is estimated using historical calculated volatility and considersfactors such as future events or circumstances that could impact volatility.

 

For warrants classifiedas permanent equity, the fair value of the warrants is recorded as additionalpaid-in capital and no further adjustments are made.

 

*ComprehensiveIncome (Loss)*

 

Comprehensive income(loss) includes charges or credits to equity that did not result fromtransactions with shareholders. The Company’s only component of “othercomprehensive income (loss)” is unrealized gain (loss) on cash equivalents andshort-term securities—available-for-sale.

 

*Rent Expense*

 

The Company’s operating lease agreements for itsCorvallis, Oregon facility and its Bothell, Washington facility provide forscheduled annual rent increases throughout the lease’s term.  In accordance with generally acceptedaccounting principles the Company recognizes the effects of the scheduled rentincreases on a straight-line basis over the full term of the leases, whichexpires in 2020 and 2014.

 

During the years ended December 31, 2009, 2008and 2007, the Company recognized $230,000, $133,000 and $155,000, respectively,in additional rent expense from the amortization of future scheduled rentincreases.

 

*Commitmentsand Contingencies**.*

 

In the normal course ofbusiness, the Company may be named as a party to various legal claims, actionsand complaints, including matters involving employment, intellectual property,effects from the use of drugs utilizing our technology, or others. Itis impossible to predict with certainty whether any resultingliability would have a material adverse effect on the Company’s financialposition, results of operations or cash flows.

 

*Financial Instruments**.*

 

The carrying amountsreported in the balance sheets for cash and cash equivalents, accountsreceivable, accounts payable, and other current monetary assets and liabilitiesapproximate fair value because of the immediate or short-term maturity of these financial instruments.

 

F-12

----

 

*LicenseArrangements.*

 

License arrangements mayconsist of non-refundable upfront license fees, data transfer fees, researchreimbursement payments, exclusive licensed rights to patented or patent pendingcompounds, technology access fees, various performance or sales milestones andfuture product royalty payments. Some of these arrangements are multipleelement arrangements.

 

The Company defersrecognition of non-refundable upfront fees if it has continuing performanceobligations without which the technology, right, product or service conveyed inconjunction with the non-refundable fee has no utility to the licensee that isseparate and independent of Company performance under the other elements of thearrangement. In addition, if the Company has continuing involvement throughresearch and development services that are required because its know-how andexpertise related to the technology is proprietary to the Company, or can onlybe performed by the Company, then such up-front fees are deferred andrecognized over the period of continuing involvement.

 

Payments related tosubstantive, performance-based milestones in a research and developmentarrangement are recognized as revenue upon the achievement of the milestones asspecified in the underlying agreements when they represent the culmination ofthe earnings process.

 

*Long-LivedAsset Impairment*

 

Long-lived assets heldand used by us and intangible assets with determinable lives are reviewed forimpairment whenever events or circumstances indicate that the carrying amountof assets may not be recoverable in accordance with generally acceptedaccounting pronouncements. We evaluate recoverability of assets to be held andused by comparing the carrying amount of an asset to future net undiscountedcash flows to be generated by the asset. If such assets are considered to beimpaired, the impairment to be recognized is measured as the amount by whichthe carrying amount of the assets exceeds the fair value of the assets. Suchreviews assess the fair value of the assets based upon estimates of future cashflows that the assets are expected to generate.

 

At December 31,2008, the Company determined that the ongoing decline in the real estate markethad adversely impacted the fair value of a building purchased by the Companyfor $3.3 million in 2007. Based on an independent third-party appraisal, theCompany estimated that the current fair value of the building had declined toapproximately $2.5 million. Accordingly, an impairment charge of $800,000 wasrecorded for the year ended December 31, 2008. The Company completed asecond third party appraisal in November of 2009, based on this revisedestimate the Company believes the property to have a current fair value, net ofcosts to sell of $2.4 million.  Thisproperty was listed for sale in November of 2009. Selling and closingexpenses are estimated to be $0.1 million. The Company has decided to outsource its large scale manufacturingactivities and has listed this property for sale with a commercial real estateagent.

 

In addition, at December 31,2009, the Company conducted an evaluation of the status of its patents eachquarter during 2009. Pursuant to these evaluations, the Company has recorded awrite-off of $347,000, in 2009 for previously capitalized costs related topatents that have expired or were abandoned.

 

*GovernmentResearch Contract Revenue.*

 

The Company recognizesrevenues from federal research contracts during the period in which the relatedexpenditures are incurred. The Company receives reimbursement of costsincurred, overhead and, in some cases, a fixed fee. The Company presents theserevenues and related expenses at gross in the consolidated financial statementsin accordance with the generally accepted accounting pronouncements.

 

*Recent Accounting Pronouncements*

 

Recently adoptedaccounting guidance:

 

During the first fiscalquarter of 2009, the Financial Accounting Standards Board issued StaffPositions ASC 820 10 65-65-4, “Determining Fair Value When the Volume and Levelof Activity for the Asset or Liability has Significantly Decreased and theIdentifying Transactions That Are Not Orderly”, ASC 320 10 65-65-1, “Recognitionand Presentation of Other-Than-Temporary Impairments”, and ASC 825 10 65 65-1, “InterimDisclosures about Fair Value of Financial Instruments”. These Staff Positionswere issued to clarify the application of ASC 820 10 65-65-4, “Fair ValueMeasurements” in the current economic environment, modify the recognition ofother-than-temporary impairments of debt securities, and require companies todisclose the fair value of financial instruments in interim periods. The StaffPositions are effective for interim and annual periods ending after September 15,2009, with early adoption permitted for periods ending after March 15,2009, if all three Staff Positions or both the fair-value measurement andother-than-temporary impairment Staff Positions are adopted simultaneously. TheCompany has adopted the Staff Positions in the third quarter of fiscal 2009,and there was no material impact on the Company’s Financial Statements orrelated disclosures.

 

F-13

----

 

In April 2009, theFASB issued FASB Staff Position ASC 320 10 65-65-1, “Recognition andPresentation of Other-Than-Temporary Impairments”, which requires the Companyto disclose information for interim and annual periods that enables users ofits financial statements to understand the types of available-for-sale andheld-to-maturity debt and equity securities held, including information aboutinvestments in an unrealized loss position for which an other-than-temporaryimpairment has or has not been recognized. The provisions of this pronouncementwere adopted in the second quarter of 2009. There was no material impact on theCompany’s financial statements.

 

In April 2009, theFASB issued FSP  ASC 825 10 65 65-1, “InterimDisclosures about Fair Value of Financial Instruments” , which requirespublicly traded companies to include disclosures about the fair value of itsfinancial instruments whenever it issues summarized financial information forinterim reporting periods. The provisions of these pronouncements were adoptedin the second quarter of 2009. There was no material impact on the Company’sfinancial statements.

 

**Recent accounting guidance notyet adopted:**

 

In January 2010, theFASB issued guidance to amend the disclosure requirements related to recurringand nonrecurring fair value measurements. The guidance requires new disclosureson the transfers of assets and liabilities between Level 1 (quoted prices inactive market for identical assets or liabilities) and Level 2 (significantother observable inputs) of the fair value measurement hierarchy, including thereasons and the timing of the transfers. The guidance will become effective forus with the reporting period beginning January 1, 2010, except for thedisclosure on the roll forward activities for Level 3 fair value measurements,which will become effective for us with the reporting period beginning July 1,2011. Other than requiring additional disclosures, adoption of this newguidance will not have a material impact on our financial statements.

 

**3. STOCK-BASEDCOMPENSATION:**

 

Stock-based compensationcosts are generally based on the fair value calculated from the Black-Scholesoption-pricing model on the date of grant for stock options and on the date ofenrollment for the Plan. The fair value of stock grants is amortized ascompensation expense on a straight-line basis over the vesting period of thegrants. Stock options granted to employees are service-based and typically vestover three years.

 

The fair market values ofstock options granted during 2009, 2008 and 2007 were measured on the date ofgrant using the Black-Scholes option-pricing model, with the following weightedaverage assumptions:

 

| **Year Ended December 31,** | ** ** | **2009**      | ** ** | **2008**      | ** ** | **2007**      | ** ** |
|----------------------------------|------------|---------------|------------|---------------|------------|---------------|------------|
| Risk-free  interest rate         |       | 1.2%-1.8      | %          | 1.1%-3.4      | %          | 4.4%-5.1      | %          |
| Expected  dividend yield         |       | 0             | %          | 0             | %          | 0             | %          |
| Expected  lives                  |       | 3.6-9.1 Years |       | 3.6-9.1 Years |       | 3.7-9.1 Years |       |
| Expected  volatility             |       | 92.0%-94.4    | %          | 81.0%-90.7    | %          | 84.1%-90.6    | %          |

 

The risk-free interestrate is estimated using an average of treasury bill interest rates. The expecteddividend yield is zero as the Company has not paid any dividends to date anddoes not expect to pay dividends in the future. The expected lives areestimated using expected and historical exercise behavior. The expectedvolatility is estimated using historical calculated volatility.

 

The Company is requiredto estimate potential forfeiture of stock grants and adjust compensation costrecorded accordingly. The estimate of forfeitures is adjusted over therequisite service period to the extent that actual forfeitures differ, or areexpected to differ, from such estimates. Changes in estimated forfeitures arerecognized through a cumulative catch-up in the period of change and impact theamount of stock compensation expense to be recognized in future periods.

 

F-14

----

 

A summary of the Company’s stock option activity withrespect to the years ended December 31, 2009, 2008 and 2007 is presentedin the following table:

 
| ** **                                                  | ** ** | **2009**   | ** ** | **2008**                               | ** ** | **2007**   | ** ** |
|-------------------------------------------------------------|------------|------------|------------|----------------------------------------|------------|------------|------------|
| **For the Year Ended  December 31,**                   | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| Options  outstanding at beginning of year                   |       | 7,540,873  |       | $                                      | 3.34       |       | 6,304,453  |   | $ | 4.60 |   | 5,571,470 |   | $ | 5.12 |   |
| Granted                                                     |       | 2,727,000  |       | 1.10                                   |       | 2,743,607  |       | 1.27 |   | 1,263,548 |   | 2.80 |   |
| Exercised                                                   |       | (62,711    | )          | 1.68                                   |       | (6,761     | )          | 1.31 |   | (11,639 | ) | 2.49 |   |
| Canceled                                                    |       | (1,272,351 | )          | 2.72                                   |       | (1,500,426 | )          | 4.82 |   | (518,926 | ) | 5.88 |   |
| Options  outstanding at end of year                    |       | 8,932,811  |       | 2.79                                   |       | 7,540,873  |       | 3.34 |   | 6,304,453 |   | 4.60 |   |
|                                                        |       |       |       |                                   |       |       |       |   |   |   |   |   |   |
| Exercisable  at end of year                                 |       | 5,119,227  |       | $                                      | 3.94       |       | 4,779,603  |   | $ | 4.18 |   | 4,497,526 |   | $ | 4.76 |   |
| Vested  at December 31, 2009 and expected to vest |       | 8,856,539  |       | $                                      | 2.80       |       |       |   |   |   |   |   |   |   |

 

The following tablesummarizes information about stock options outstanding at December 31,2009:

 
| ** **                    | ** ** | **Outstanding Options** | ** ** | **Exercisable Options**                | ** ** |
|-------------------------------|------------|-------------------------|------------|----------------------------------------|------------|
| **Range  of Exercise Prices** | ** ** | **Number of Shares**    | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted Average  Remaining Contractual********Life (Years)** | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| $0.60-$1.09                   |       | 2,013,950               |       | $                                      | 0.96       |   | 8.54 |   | 200,617 |   | $ | 1.06 |   |
| $1.10-$1.39                   |       | 1,895,430               |       | $                                      | 1.24       |   | 8.64 |   | 447,181 |   | $ | 1.28 |   |
| $1.42-$2.53                   |       | 1,969,357               |       | $                                      | 2.18       |   | 6.29 |   | 1,569,524 |   | $ | 2.30 |   |
| $2.55-$5.75                   |       | 2,106,291               |       | $                                      | 4.49       |   | 3.08 |   | 1,954,122 |   | $ | 4.60 |   |
| $5.88-$7.35                   |       | 947,783                 |       | $                                      | 7.21       |   | 4.26 |   | 947,783 |   | $ | 7.21 |   |
| Total                         |       | 8,932,811               |       | $                                      | 2.79       |   | 6.33 |   | 5,119,227 |   | $ | 3.94 |   |

 

The weighted average fairvalue per share of stock-based payments granted to employees during 2009, 2008and 2007 was $1.09, $1.04 and $2.27, respectively. During 2009, 2008 and 2007,the total intrinsic value of stock options exercised was $105,301, $1,831 and$4,937, and the total fair value of stock options that vested was $1,740,000,$3,040,000 and $3,661,000, respectively.

 

As of December 31,2009, there was $2,278,000 of total unrecognized compensation cost related tononvested share-based compensation arrangements granted under the Plan. Thesecosts are expected to be recognized over a weighted-average period of 2.3years.

 

During the year ended December 31,2009, $76,000 was received for the exercise of stock options. The Company isobligated to issue shares from the 2002 Equity Incentive Plan upon the exerciseof stock options. The Company does not currently expect to repurchase sharesfrom any source to satisfy its obligations under the Plan. The Company mayissue options to purchase up to an additional 681,995 shares of Common Stock atDecember 31, 2009 under stock option plans.

 

The following are thestock-based compensation costs recognized in the Company’s statements ofoperations:

 

(in thousands)

 
| ** **                  | ** ** | **Year Ended  December 31, 2009** | ** ** | **Year Ended  December 31, 2008** | ** ** | **Year Ended  December 31, 2007** | ** ** |
|-----------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| Research  and development   |       | $                                      | 1,192      |                                   | $          | 1,689                                  |       | $ | 1,878 |   |
| General  and administrative |       | 1,182                                  |       | 3,141                                  |       | 3,854                                  |       |
| Total                       |       | $                                      | 2,374      |                                   | $          | 4,830                                  |       | $ | 5,732 |   |

 

F-15

----

 

On March 27, 2007, in connection with hisresignation, the Company entered into a Separation and Release Agreement withAVI’s former Chairman and Chief Executive Officer. Pursuant to this agreement,he may exercise his previously granted options until the earlier of thetermination date specified in the respective stock option grant agreements or March 28,2010. This modification of these stock options in the first quarter of 2007increased compensation costs by $1,057,000.

 

In the first quarter of2008, the Company granted 333,000 shares of restricted stock to its new ChiefExecutive Officer. These shares vest over a period of four years. The Companyrecognized compensation expense related to these shares of for the years ended December 31,2009 and 2008, of $63,000 and $166,000.

 

In the third quarter of2008, the Company’s President and Chief Operating Officer resigned. Inaccordance with his existing employment agreement, he may exercise hispreviously granted options until the earlier of the termination date specifiedin the respective stock option grant agreements or March 18, 2010.  This acceleration of the vesting of thesestock options resulted in additional compensation costs of $382,000 for theyear ended December 31, 2008. As of December 31, 2009, these optionswere outstanding.

 

In the second quarter of2009, the Company granted a total of 25,000 shares of restricted stock tomembers of its Board of Directors. These shares vest over a period of one year.  During year ended December 31, 2009, theCompany recognized compensation expense related to these shares of $58,000.

 

Also in the secondquarter of 2009, the Company granted 100,000 shares of restricted stock to itsVice President of Business Development. These shares vest******upon the achievementof certain performance milestones. During the year ended December 31,2009, the Company did not recognize any compensation expense related to theseshares since the performance milestones was not achieved and these shares werecanceled.

 

In the first quarter of2009, the Company granted 60,000 shares of restricted stock to its ChiefMedical Officer. These shares vest over a period of 181 days.  During theyear ended December 31, 2009 the Company recognized compensation expenserelated to these shares of $82,000.

 

The Company records thefair value of stock options granted to non-employees in exchange for servicesin accordance with generally accepted accounting principles. The fair value ofthe options granted is expensed when the measurement date is known. Theperformance for services was satisfied on the grant date for stock optionsgranted to non-employees.

 

The total fair value ofthe options granted to non-employees during the years ended December 31,2009, 2008 and 2007 was $141,000, $180,000 and $313,000 respectively, which wasexpensed to general and administration.

 

**4. NET LOSS PER SHARE:**

 

Basic EPS is calculatedusing the weighted average number of common shares outstanding for the periodand diluted EPS is computed using the weighted average number of common sharesand dilutive common equivalent shares outstanding. Given that the Company is ina loss position, there is no difference between basic EPS and diluted EPS sincethe common stock equivalents would be antidilutive.

 
| **Year Ended December 31,**                                                                     | ** ** | **2009**   | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **(in  thousands)**                                                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  loss                                                                                            |       | $          | (25,159    | )          | $          | (23,953    | )          | $ | (27,168 | ) |
| Weighted  average number of shares of common stock and common stock equivalents  outstanding:   |       |       |       |       |       |       |       |
| Weighted  average number of common shares outstanding for computing basic earnings  per share   |       | 93,090     |       | 69,491     |       | 53,942     |       |
| Dilutive  effect of warrants and stock options after application of the treasury stock  method       |       | *          |       | *          |       | *          |       |
| Weighted  average number of common shares outstanding for computing diluted  earnings per share |       | 93,090     |       | 69,491     |       | 53,942     |       |
| Net  loss per share - basic and diluted                                                              |       | $          | (0.27      | )          | $          | (0. 34     | )          | $ | (0. 50 | ) |

 

----

* Warrants and stockoptions to purchase 41,266,000, 17,665,000 and 20,161,000 shares of commonstock as of December 31, 2009, 2008 and 2007, respectively, were excludedfrom the earnings per share calculation as their effect would have beenantidilutive.

 

F-16

----

 

**5. LIQUIDITY:**

 

Since its inception in 1980 through December 31,2009, the Company has incurred losses of approximately $275.5 million,substantially all of which resulted from expenditures related to research anddevelopment, general and administrative charges and acquired in-processresearch and development resulting from two acquisitions. The Company has notgenerated any material revenue from product sales to date, and there can be noassurance that revenues from product sales will be achieved. Moreover, even ifthe Company does achieve revenues from product sales, the Company expects toincur operating losses over the next several years.

 

The Company believes ithas sufficient cash to fund operations at least through the following twelvemonths, exclusive of future receipts from billings on existing governmentcontracts. For 2010, the Company expects expenditures for operations, net ofgovernment funding, including collaborative efforts and research anddevelopment activities to be approximately $23 to $27 million. The Companybelieves it will continue to receive funding from government and other sourcesto pursue the development of its product candidates, and has assumed certainrevenues from these awards in providing this guidance.  Should the Company not continue to receivefunding from its current contracts or receive additional funding, or should thetiming be delayed, it may have a significant negative impact on the Company’sguidance.

 

Our cash, cashequivalents and short-term securities were $48.4 million at December 31,2009, compared with $11.5 million at December 31, 2008, respectively. Theincrease of $36.9 million was due primarily to net proceeds of $47.8 millionfrom the sale of common stock and issuance of stock warrants from two separateequity financing transactions that closed in January and August of2009.  The cash from financing activitieswas partially offset by cash used in operations of $8.8 million, costs of $2.0million related to acquisitions of patents and fixed assets and debt repaymentsof $0.1 million.

 

In January 2009, weraised net proceeds of $15.5 million in financing through the sale of14,224,202 shares of common stock pursuant to a registered direct offering to aselect group of institutional investors. The investors also received warrantsto purchase 14,224,202 shares of the Company’s common stock at an exerciseprice of $1.16 per share. These warrants are exercisable starting July 30,2009 and expire on July 30, 2014. In addition, the placement agent usedfor the equity financing received a warrant for the purchase of an additional426,726 common shares at $1.45 per share. This warrant is exercisable starting January 30,2009 and expires on January 30, 2014. All of these warrants have been classified as liabilities as discussedin Note 7, as they require the issuance of registered shares.  These warrants are non-cash liabilities; theCompany is not required to expend any cash to settle these liabilities.

 

On August 25, 2009,the Company closed a registered equity financing for net proceeds of $32.3million with several institutional investors. The Company sold 24,295,775shares of common stock at $1.42 per share, and also issued warrants for thepurchase of 9,718,310 common shares at an exercise price of $1.78 per share.These warrants are exercisable starting February 25, 2010 and expire on August 25,2014.  All of these warrants have beenclassified as liabilities as discussed in Note 7, as they require the issuanceof registered shares. These warrants are non-cash liabilities; the Company isnot required to expend any cash to settle these liabilities.

 

The Company currently hasa total of $61.7 million of contracted development studies.  As of December 31, 2009, $48.4 millionhas been billed to the government.   TheCompany has $13.3 in development contracts remaining that have not yet beencompleted and have not been billed.  TheCompany expects to complete the remaining contract activity and receive thecontracted revenue in 2010 and early 2011.

 

In December 2006,the Company announced the execution of a two-year $28 million research contractwith the Defense Threat Reduction Agency (DTRA), an agency of the United StatesDepartment of Defense (DoD). The contract is directed toward funding theCompany’s development of antisense therapeutics to treat the effects of Ebola,Marburg and Junín hemorrhagic viruses, which are seen by DoD as potentialbiological warfare and bioterrorism agents. In May 2009, the Companyreceived an amendment from DTRA to extend the contract performance period to November 29,2009 and a cost modification of an additional $5.9 million, increasing thetotal contract amount to $33.9 million. In September 2009, the Companyreceived a second amendment from DTRA to extend the contract performance periodto February 28, 2011 and a cost modification of an additional $11.5million, increasing the total contract amount to $45.4 million. During thetwelve month period ended December 31, 2009, 2008 and 2007, the Companyrecognized $10.4 million, $16.8 million and $8.0 million, respectively, inresearch contract revenue from this contract. To date, the Company hasrecognized revenues of $35.2 million from this contract.  Funding of the remainder of the contract isanticipated in 2010 and 2011.

 

In January 2006, theCompany announced that the final version of the 2006 defense appropriations acthad been approved, which included an allocation of $11.0 million to fund theCompany’s ongoing defense-related programs. Net of government administrativecosts, it is anticipated that the Company will receive up to $9.8 million underthis allocation. The Company’s technology is expected to be used to continuedeveloping RNA based drugs against Ebola and Marburg viruses. The Company hasreceived signed contracts for all of these projects. The Company expects thatfunding under these signed contracts will be completed over the next 12months.  During the twelve month periodended December 31, 2009, 2008 and 2007, the Company recognized $2.3million, $4.2 million and $2.7 million, respectively, in research contractrevenue from this contract. To date, the Company has recognized revenues of$9.2 million on these contracts. Funding of the remainder of these contracts isanticipated in 2010.

 

F-17

----

 

In May 2009, theCompany entered into a contract with DTRA to develop H1N1 drugs. Under thiscontract, DTRA will pay up to $4.1 million to the Company for the work to beperformed by the Company. The work will involve the application of analogsbased on the Company’s proprietary PMO and PMO*plu*santisense chemistry and the Company plans to conduct preclinical development ofat least one drug candidate and demonstrate it is effective by testing it invirus infected animals. During the twelve month period ended December 31,2009, the Company recognized $1.7 million in revenue under this contract.

 

In July 2009, theCompany entered into a lease agreement with BMR-3450 Monte Villa Parkway LLCrelating to the lease of 19,108 square feet of laboratory and office space inBothell, Washington. The Company began occupying this space in August 2009,and has moved its headquarters and R&D functions to this new location.  The term of the lease is approximately 63months, although the Company has a one-time option to terminate the lease after3 years’ time upon payment of a termination fee. The Company will commencepaying base rent of approximately $43,000 per month after approximately 3months. The amount of base rent is subject to an annual increase of 3%.

 

The likelihood of thelong-term success of the Company must be considered in light of the expenses,difficulties and delays frequently encountered in the development andcommercialization of new pharmaceutical products, competitive factors in themarketplace as well as the complex regulatory environment in which the Companyoperates. There can be no assurance that the Company will ever achievesignificant revenues or profitable operations.

 

**6.  LONG-TERM DEBT**

 

TheCompany has two loans outstanding which are collateralized by a parcel of realproperty purchased in April 2007 in Corvallis, Oregon. These loans bearinterest at 4.75% and mature in February 2027. At December 31, 2009,these loans had unpaid principal balances of $1,275,000 and $726,000, for a totalindebtedness of $2,001,000.  The Companyincurred interest expense on these loans of $97,000, $104,000 and $104,000,respectively, for the years ended December 31, 2009, 2008 and 2007.

 

Thefollowing table sets forth the expected future principal payments on theseloans:

 

(inthousands)

 

| **Year ending December 31,**   |   |   |   |
|------------------------------------------|--------|--------|--------|
| 2010                                     |   | $      | 77     |   |
| 2011                                     |   | 81     |   |
| 2012                                     |   | 85     |   |
| 2013                                     |   | 90     |   |
| 2014                                     |   | 92     |   |
| Thereafter                               |   | 1,576  |   |
| Total  scheduled loan principal payments |   | $      | 2,001  |   |

 

**7. SHAREHOLDERS’ EQUITY AND WARRANT LIABILITY:**

 

In December 2007,the Company closed a private equity financing for net proceeds of $14,448,250with several institutional investors. The Company sold 10,696,616 shares ofcommon stock at $1.90 per share. These investors also received warrants for thepurchase of 5,348,308 common shares at $2.45 per share. These warrants areexercisable starting June 19, 2008 and expire on December 18, 2012.

 

On January 30, 2009,the Company closed a registered equity financing for net proceeds of $15.5million with several institutional investors. The Company sold 14,224,202shares of common stock at $1.16 per share, and also issued warrants for thepurchase of 14,224,202 common shares at $1.16 per share and a fair value at thedate of issue of $8.2 million. These warrants are exercisable starting July 30,2009 and expire on July 30, 2014. In connection with the equity financing,the placement agent received a warrant for the purchase of an additional426,726 common shares at $1.45 per share. This warrant is exercisable starting January 30,2009 and expires on January 30, 2014. All of these warrants have been classified as liabilities as theyrequire the issuance of registered shares. These warrants are non-cashliabilities; The Company does not expect to expend any cash to settle theseliabilities.

 

On August 25, 2009,the Company closed a registered equity financing for net proceeds of $32.3million with several institutional investors. The Company sold 24,295,775shares of common stock at $1.42 per share, and also issued warrants for thepurchase of 9,718,310 common shares at $1.78 per share and a fair value at thedate of issue of $9.0 million. These warrants are exercisable starting February 25,2010 and expire on August 25, 2014. All of these warrants have been classified as liabilities as, as theyrequire

 

F-18

----

 

the issuance ofregistered shares. These warrants are non-cash liabilities; The Company doesnot expect to expend any cash to settle these liabilities.

 

The Company has two stockoption plans, the 2002 Equity Incentive Plan and the 1997 Stock Option Plan(the Plans). The 2002 Plan provides for the issuance of incentive stock optionsto employees and nonqualified stock options, stock appreciation rights andbonus rights to employees, directors of the Company and consultants. The 1997Plan provides for the assumption of the ImmunoTherapy Options under the MergerAgreement. The Company has reserved 11,828,111 shares of common stock forissuance under the Plans. Options issued under the Plans generally vest ratablyover three years and expire five to ten years from the date of grant. At December 31,2009, 8,932,811 options were outstanding at a weighted-average exercise priceof $2.79 under equity compensations plans approved by security holders. At December 31,2009, 681,955 options were available for issuance under equity compensationplans approved by security holders.  SeeNote 3—“Stock-Based Compensation” for a summary of the status of the Company’sstock option plans and changes for the years ended December 31, 2009, 2008and 2007.

 

The Company has alsoissued warrants for the purchase of common stock in conjunction with financingand compensation arrangements. A summary of the status and activity withrespect to the Company’s warrants is presented in the following table:

 
| ** **                                 | ** ** | **2009**   | ** ** | **2008**                               | ** ** | **2007**   | ** ** |
|--------------------------------------------|------------|------------|------------|----------------------------------------|------------|------------|------------|
| **For the Year Ended  December 31,**  | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| Warrants  outstanding at beginning of year |       | 10,123,759 |       | $                                      | 8.54       |       | 13,856,411 |   | $ | 8.12 |   | 8,508,103 |   | $ | 11.68 |   |
| Granted                                    |       | 24,369,238 |       | 1.41                                   |       | 445,985    |       | 1.77 |   | 5,348,308 |   | 2.45 |   |
| Exercised                                  |       | —     |       | —                                 |       | —     |       | — |   | — |   | — |   |
| Expired                                    |       | (2,160,001 | )          | 5.00                                   |       | (4,178,637 | )          | 6.42 |   | — |   | — |   |
| Warrants  outstanding at end of year       |       | 32,332,996 |       | 3.40                                   |       | 10,123,759 |       | 8.54 |   | 13,856,411 |   | 8.12 |   |
|                                       |       |       |       |                                   |       |       |       |   |   |   |   |   |   |
| Exercisable  at end of year                |       | 20,948,808 |       | $                                      | 1.60       |       | 8,457,881  |   | $ | 3.21 |   | 6,842,225 |   | $ | 5.85 |   |

 

The following tablesummarizes information about warrants outstanding at December 31, 2009:

 

| **Exercise  Price** | ** **   | **Outstanding Warrants at  December 31, 2009** | ** ** | **Weighted Average  Remaining Contractual  Life (Years)** | ** **          | **Exercisable Warrants** | ** ** |
|---------------------|--------------|-----------------------------------------------------|------------|-----------------------------------------------------------|---------------------|--------------------------|------------|
| $                   |  0.0003 |                                                | 16,667     |                                                      | No expiration  date |                     | 16,667     |   |
| 0.1679              |         | 238,228                                             |       | 2.87                                                      |                | 238,228                  |       |
| 1.14                |         | 1,000                                               |       | No expiration  date                                       |                | 1,000                    |       |
| 1.16                |         | 14,224,202                                          |       | 4.58                                                      |                | 14,224,202               |       |
| 1.45                |         | 426,726                                             |       | 4.08                                                      |                | 426,726                  |       |
| 1.78                |         | 9,718,310                                           |       | 4.67                                                      |                | 0                        |       |
| 2.45                |         | 5,348,308                                           |       | 2.97                                                      |                | 5,348,308                |       |
| 3.61                |         | 207,757                                             |       | 0.37                                                      |                | 207,757                  |       |
| 5.00                |         | 485,920                                             |       | 0.37                                                      |                | 485,920                  |       |
| 35.63               |         | 1,665,878                                           |       | 0.25                                                      |                | —                   |       |
|                |         | 32,332,996                                          |       |                                                      |                | 20,948,808               |       |
|                     |              |                                                     |            |                                                           |                     |                          |            |  |

 

The warrants issued in2009 and 2007 do not require net cash settlement. However, because the warrantsrequire settlement in registered shares, the Company has recorded the warrantsas liabilities on the accompanying balance sheet. There is no effect on cashflows from these warrants, as the mark-to-market adjustment is reflected as anon-cash charge within the Company’s Statements of Operations. There were30,203,466, 9,607,866, and 4,259,558 outstanding warrants classified asliabilities at December 31, 2009, 2008, and 2007, respectively.

 

**8. SIGNIFICANT AGREEMENTS:**

 

On January 27, 2007,the Company announced that it had entered into a definitive License Agreementwith Chiron Corporation (“Chiron”) granting the Company a nonexclusive licenseto Chiron’s patents and patent applications for the research, development, andcommercialization of antisense therapeutics against hepatitis C virus, inexchange for the payment of certain milestone and royalty payments to Chiron.In lieu of the first milestone payment due under the License Agreement, theCompany and Chiron also entered into a separate agreement under which theCompany issued to Chiron 89,012 shares of the Company’s common stock with amarket value of $500,000 and which was expensed to research and development.There may be future payments made to Chiron by the Company based on milestonesin the License Agreement.

 

F-19

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On March 13, 2007,the Company announced that it had entered into agreements with Cook Group Inc.(“Cook”) for Cook’s development and commercialization of products for vascularand cardiovascular diseases. In November 2009, we announced that webelieve Cook discontinued development of our drug candidate, AVI-5126, on itscobalt-chromium stent because of an unexpectedly high rate of restenosis.

 

Effective January 1,2006, the Company extended the lease on its facility located at 4575 SWResearch Way, Suite 200, Corvallis, OR 97333. This lease now expires on December 31,2020. As of December 31, 2005, the Company had an accrued rent payable of$615,163 related to back rent payments. During the first half of 2006 theCompany issued 31,154 shares of the Company’s common stock with a market valueof $175,000, paid cash and sold fixed assets to Research Way Investments to payoff the accrued rent payable related to back rent payments.

 

In January 2006, theCompany issued 30,000 shares of the Company’s common stock with a market valueof $200,000 to the Oregon State University Foundation to secure access to certainuniversity research facilities, which was expensed to research and development.

 

On January 8, 2007,the Company announced that it had entered into a cross-license agreement withEleos Inc. for the development of antisense drugs targeting p53, a well-studiedhuman protein that controls cellular response to genetic damage. Under theterms of the agreement, the Company granted Eleos Inc. an exclusive license tothe Company’s NEUGENE® third-generationantisense chemistry to treat cancer with p53-related drugs. In return, EleosInc. granted an exclusive license to its patents to the Company for treatmentof most viral diseases with drugs that target p53. The companies are sharingrights in other medical fields where targeting p53 may be therapeutically useful.Each company will make milestone payments and royalty payments to the other ondevelopment and sales of products that utilize technology licensed under theagreement. In addition, Eleos Inc. made an upfront payment of $500,000 to theCompany. The Company recognized $125,000 in license fees for each of the yearsended December 31, 2009, 2008 and 2007; the remaining $125,000 has beenclassified as deferred revenue.

 

On March 27, 2007,in connection with the resignation of AVI’s former Chairman and Chief ExecutiveOfficer, the Company entered into a Separation and Release Agreement,pursuant to which the former Chairman and CEO is entitled to receive his basecompensation for 18 months ($562,500 in the aggregate) and medicalinsurance for the same 18 month period and may exercise hispreviously granted options until the earlier of the termination date of therespective stock option grant agreements or March 28, 2010. The Companyrecognized $1,619,872 in total compensation expense to general andadministrative in 2007, including $562,500 in cash compensation and $1,057,372in stock-based compensation.

 

On April 19, 2007,the Company entered into a real property purchase agreement with WKLInvestments Airport, LLC (“WKL”) to purchase a parcel of real property, includingimprovements situated on the land and intangibles related to the land, for$3,300,000. The Company paid the purchase price as follows: $350,000 in cash,assumption of two loans secured by the property in the amount of $2,200,000,and issuance of 270,758 shares of AVI common stock (at $2.77 per share or$750,000 in the aggregate).

 

On October 15, 2007,the Company and Charley’s Fund, Inc. announced that the Company had beenawarded a $2.45 million research grant from Charley’s Fund, a nonprofit organizationthat funds drug development and discovery initiatives specific to Duchennemuscular dystrophy (DMD). This award will support a new product developmentprogram using proprietary exon skipping technologies developed by the Companyto overcome the effects of certain genetic errors in the dystrophin gene. Theaward will allow AVI to accelerate its development of new therapeutics for DMD.Through December 31, 2009, the Company had received $2.0 million fromCharley’s Fund, and recorded the advances as Deferred Revenue, to be recognizedupon the attainment of certain milestones as specified in the agreement.  In September 2009, the Company amendedthe agreement with Charley’s Fund. The Amendment pertains to certain provisionsof the Sponsored Research Agreement by and between the Company and Charley’sFund entered into effective October 12, 2007 (the “Agreement”). Under theterms of the Amendment, the Company was awarded up to an additional $3 millionin sponsored research funds, for a total of $5 million from Charley’s Fund tosupport a new product development program using proprietary exon skippingtechnologies developed by the Company to overcome the effects of certaingenetic errors in the dystrophin gene. Revenue associated with this researchand development arrangement is recognized under the proportional performancemethod, using the payment received method.   For the years ended December 31, 2009,2008 and 2007, the Company recognized $ 0, $23,000 and $38,000, respectively,in revenues from Charley’s Fund.

 

On September 18,2008, the Company’s President and Chief Operating Officer resigned. Inaccordance with his employment agreement, he is entitled to receive severancepayments totaling $630,000.  Of thisamount, one-third ($210,000) was paid on the effective date of his termination,and the remaining $420,000 was paid in monthly installments of $35,000 over thefollowing 12 months.  The Companyrecognized compensation expense of $630,000 in 2008 pursuant to his resignation,of which $280,000 was classified as a deferred liability as of December 31,2008. In 2009 the Company recognized $315,000 of compensation expense.   In addition, in accordance with hisemployment agreement, he may exercise his previously granted stock optionsuntil the earlier of the termination date specified in the respective stockoption grant agreements or March 18, 2010. This acceleration of thevesting of these stock options resulted in additional compensation costs of$382,419 for the year ended December 31, 2008.

 

F-20

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In July 2009, theCompany entered into a lease agreement with BMR-3450 Monte Villa Parkway LLCrelating to the lease of 19,108 square feet of laboratory and office space inBothell, Washington. The Company began occupying this space in August 2009,and has moved its headquarters and R&D functions to this new location.  The term of the lease is approximately 63months, although the Company has a one-time option to terminate the lease after3 years’ time upon payment of a termination fee. The Company will commencepaying base rent of approximately $43,000 per month after approximately 3months. The amount of base rent is subject to an annual increase of 3%.

 

**9. INCOME TAXES:**

 

As of December 31,2009 the Company has federal and state net operating loss carryforwards ofapproximately $211,108,000 and $225,611,000, respectively, available to reducefuture taxable income, which expire 2009 through 2028. Of these amounts,approximately $2,007,000 and $2,046,000, respectively, relate to federal andstate net operating losses assumed as part of the Ercole acquisition.Utilization of the Ercole net operating losses is limited to approximately$425,000 per year. In addition, the Internal Revenue Code rules under Section 382and related state laws could limit the future use of the remaining netoperating losses based on ownership changes and the value of the Company’sstock. Approximately $3,930,000 of the Company’s carryforwards were generatedas a result of deductions related to exercises of stock options. When utilized,this portion of the Company’s carryforwards, as tax affected, will be accountedfor as a direct increase to contributed capital rather than as a reduction ofthe year’s provision for income taxes. The principal differences between netoperating loss carryforwards for tax purposes and the accumulated deficitresult from depreciation, amortization, investment write-downs, treatment ofresearch and development costs, limitations on the length of time that net operatinglosses may be carried forward, and differences in the recognition ofstock-based compensation.

 

The Company had netdeferred tax assets of $110,539,000 and $102,881,000 at December 31, 2009and 2008, respectively, primarily from net operating loss carryforwards andresearch and development credit carryforwards. A valuation allowance wasrecorded to reduce the net deferred tax asset to zero because it is more likelythan not that the deferred tax asset will not be realized. The net change inthe valuation allowance for deferred tax assets was an increase ofapproximately $7,658,000 and $8,250,000 for the years ended December 31,2009 and 2008, respectively, mainly due to the increase in the net operatingloss carryforwards, research and development tax credits, and a decrease in theasset related to short term securities due to the expiration of the capitalloss carryforward period as of December 31, 2009.

 

Deferred tax assetsassumed as part of the Ercole acquisition total approximately $1,407,000 andprimarily relate to accrual to cash adjustment, net operating losses, andresearch & development credits. A valuation allowance was recorded to reduce the net deferred tax assetsto zero because it is more likely than not that the deferred tax asset will notbe realized. When such deferred tax assets are utilized or at such time whenthe valuation allowance is lifted, this portion of the Company’s deferred taxassets, as tax affected, will be accounted for as a direct increase to equityrather than as a reduction of that year’s provision for income taxes.

 

An analysis of thedeferred tax assets (liabilities) is as follows:

 
| **December 31,**                        | ** ** | **2009**   | ** ** | **2008**   | ** ** |
|----------------------------------------------|------------|------------|------------|------------|------------|
| **(in thousands)**                      | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                         |       |       |       |       |       |
| Net  operating loss carryforwards            |       | $          | 83,057     |       | $          | 75,509 |   |
| Difference  in depreciation and amortization |       | 2,544      |       | 2,276      |       |
| Capital  loss carryforward                   |       | 8          |       | 8          |       |
| Research  and development tax credits        |       | 18,436     |       | 20,404     |       |
| stock  compensation                          |       | 4,197      |       | 3,326      |       |
| Stock  options for consulting services       |       | 1,012      |       | 957        |       |
| Deferred  Rent                               |       | 378        |       | 244        |       |
| Deferred  Revenue                            |       | 805        |       | —     |       |
| Other                                        |       | 102        |       | 157        |       |
|                                         |       | 110,539    |       | 102,881    |       |
|                                         |       |       |       |       |       |
| Valuation  allowance                         |       | (110,539   | )          | (102,881   | )          |
|                                         |       |       |       |       |       |
|                                         |       | $          | —     |       | $          | — |   |

 

F-21

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The Company’s policy isto recognize interest and/or penalties related to income tax matters in incometax expense. The Company had no accrual for interest or penalties on itsbalance sheet at December 31, 2009 and at December 31, 2008, and hasnot recognized interest and/or penalties in the statement of operations for theyears ended December 31, 2009, 2008 or 2007.

 

**10. COMMITMENTS AND CONTINGENCIES:**

 

##### ***Lease Obligations***

##### ** **

The Company leases officeand laboratory facilities under various noncancelable operating leases through December 2020.Rent expense under these leases was $1,467,000, $1,429,000 and $1,388,000 forthe years ended December 31, 2009, 2008 and 2007, respectively, and$12,837,000 for the period from July 22, 1980 through December 31,2009.

 

At December 31,2009, the aggregate non-cancelable future minimum payments under these leasesare as follows:

 

(in thousands)

 
| **Year ending December 31,** |   |   |   |
|----------------------------------------|--------|--------|--------|
| 2010                                   |   | $      | 2,073  |   |
| 2011                                   |   | 2,175  |   |
| 2012                                   |   | 2,230  |   |
| 2013                                   |   | 2,036  |   |
| 2014                                   |   | 2,033  |   |
| Thereafter                             |   | 9,135  |   |
| Total  minimum lease payments          |   | $      | 19,682 |   |

 

##### ***Royalty Obligations***

##### ** **

The Company has licenseagreements for which it is obligated to pay the licensors a minimum annualroyalty. Royalty payments under these agreements were $75,000, $75,000 and$125,000 for the years ended December 31, 2009, 2008 and 2007,respectively, and $1,259,000 for the period from July 22, 1980 through December 31,2009.

 

At December 31,2009, the aggregate future minimum royalty payments under these agreements areas follows:

 

( in thousands)

 
| **Year ending December 31,** |   |   |   |
|-----------------------------------|--------|--------|--------|
| 2010                              |   | $      | 100    |   |
| 2011                              |   | 80     |   |
| 2012                              |   | 80     |   |
| 2013                              |   | 80     |   |
| 2014                              |   | 55     |   |
| Thereafter                        |   | 715    |   |
| Total  minimum royalty payments   |   | $      | 1,110  |   |

 

##### ***Litigation***

##### ** **

Inthe ordinary course of business, the Company defends its patents as deemednecessary. There are no material asserted claims as of 12/31/09.

 

F-22

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**11. FINANCIAL INFORMATION BY QUARTER (UNAUDITED):**

** **
| **2009 for quarter ended (in thousands)**             | ** ** | **December 31** | ** ** | **September 30** | ** ** | **June 30** | ** ** | **March 31** | ** ** |
|-------------------------------------------------------|------------|----------------------|------------|-----------------------|------------|------------------|------------|-------------------|------------|
| Revenues from  grants and research contracts          |       | $                    | 5,141      |                  | $          | 6,349            |       | $                 | 2,945      |   | $ | 3,150 |   |
|                                                  |       |                 |       |                  |       |             |       |              |       |
| Operating expenses:                                   |       |                 |       |                  |       |             |       |              |       |
| Research and  development                             |       | 6,624                |       | 7,473                 |       | 5,804            |       | 4,495             |       |
| General and  administrative                           |       | 2,470                |       | 1,800                 |       | 2,206            |       | 2,220             |       |
| Operating loss                                        |       | (3,953               | )          | (2,924                | )          | (5,065           | )          | (3,565            | )          |
|                                                  |       |                 |       |                  |       |             |       |              |       |
| Other income  (loss):                                 |       |                 |       |                  |       |             |       |              |       |
| Interest income,  net                                 |       | (312                 | )          | (127                  | )          | (31              | )          | 16                |       |
| Increase  (decrease) on warrant valuation             |       | 7,791                |       | (5,039                | )          | (14,572          | )          | 2,622             |       |
|                                                  |       |                 |       |                  |       |             |       |              |       |
| Net  income (loss)                                    |       | $                    | 3,526      |                  | $          | (8,090           | )          | $                 | (19,668    | ) | $ | (927 | ) |
| Net  income (loss) per share — basic             |       | $                    | 0.03       |                  | $          | (0.08            | )          | $                 | (0.23      | ) | $ | (0.01 | ) |
| Net  income (loss) per share — diluted           |       | $                    | 0.03       |                  | $          | (0.08            | )          | $                 | (0.23      | ) | $ | (0.01 | ) |
| Shares  used in per share calculations — basic   |       | 110,266              |       | 95,261                |       | 85,664           |       | 80,759            |       |
| Shares  used in per share calculations — diluted |       | 125,647              |       | 95,261                |       | 85,664           |       | 80,759            |       |

 
| **2008 for quarter ended (in thousands)** | ** ** | **December 31** | ** ** | **September 30** | ** ** | **June 30** | ** ** | **March 31** | ** ** |
|--------------------------------------------------------------------|------------|----------------------|------------|-----------------------|------------|------------------|------------|-------------------|------------|
| Revenues  from grants and research contracts                       |       | $                    | 5,479      |                  | $          | 5,171            |       | $                 | 4,983      |   | $ | 5,625 |   |
|                                                               |       |                 |       |                  |       |             |       |              |       |
| Operating  expenses:                                               |       |                 |       |                  |       |             |       |              |       |
| Research  and development                                          |       | 5,070                |       | 7,680                 |       | 7,678            |       | 6,903             |       |
| General  and administrative                                        |       | 3,303                |       | 3,429                 |       | 2,184            |       | 2,553             |       |
| Acquired  in process research and development                      |       | —               |       | —                |       | —           |       | 9,916             |       |
| Operating  loss                                                    |       | (2,894               | )          | (5,938                | )          | (4,879           | )          | (13,747           | )          |
|                                                               |       |                 |       |                  |       |             |       |              |       |
| Other  income (loss):                                              |       |                 |       |                  |       |             |       |              |       |
| Interest  income, net                                              |       | 36                   |       | 60                    |       | 81               |       | 167               |       |
| Increase  (decrease) on warrant valuation                          |       | 1,718                |       | (169                  | )          | 3,047            |       | (1,435            | )          |
|                                                               |       |                 |       |                  |       |             |       |              |       |
| Net  income (loss)                                                 |       | $                    | (1,140     | )                     | $          | (6,047           | )          | $                 | (1,751     | ) | $ | (15,015 | ) |
| Net  income (loss) per share — basic                          |       | $                    | (0.01      | )                     | $          | (0.08            | )          | $                 | (0.02      | ) | $ | (0.23 | ) |
| Net  income (loss) per share — diluted                        |       | $                    | (0.01      | )                     | $          | (0.08            | )          | $                 | (0.02      | ) | $ | (0.23 | ) |
| Shares  used in per share calculations — basic                |       | 71,074               |       | 71,151                |       | 70,986           |       | 65,189            |       |
| Shares  used in per share calculations — diluted              |       | 71,074               |       | 71,151                |       | 70,986           |       | 65,189            |       |

 

**12.SUBSEQUENT EVENTS (UNAUDITED):**

 

·                  On March 18, 2010, Michael Caseyannounced to the Board of Directors his decision to not stand for re-electionat the end of his term as a director of the Company. On March 24, 2010, Dr. ChristopherHenney announced to the Board of Directors his decision to not stand forre-election at the end of his term as a director of the Company  Bothdecisions were based solely on personal reasons, and was not the result of anydisagreement with the Company on any matter relating to the Company’soperations, policies, or practices. Both will remain a director through the endof his current term which ends following the 2010 Annual Meeting of the Company’sshareholders.

 

·                  On March 25, 2010, AVI BioPharma, Inc.(“AVI” or the “Company”) entered into an amendment to its contract with theU.S. Defense Threat Reduction Agency (“DTRA”) to develop, in cooperation withthe Transformational Medical Technologies Initiative (“TMTI”) of the U.S.Department of Defense, one or more of AVI’s nucleotide-based drug candidatestargeting the pandemic H1N1 influenza virus (swine flu) and demonstrateefficacy in an appropriate preclinical model. The material terms of theoriginal contract between DTRA and the Company were previously disclosed by theCompany in the Company’s Current Report on Form 8-K filed with the U.S.Securities and Exchange Commission on May 11, 2009.

 

F-23

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Under the contract entered into by the Company in May 2009,DTRA agreed to pay up to $5.1 million to the Company for the work to beperformed by the Company, which amount was ultimately finalized at $4.1million.  The amendment entered into on March 25, 2010 provides up to$4.0 million in additional DTRA funding to support continued preclinicaldevelopment of AVI’s lead influenza drug candidate, AVI-7367, against H1N1 aswell as its expanded preclinical evaluation against H5N1 (avian flu) and drugresistant H1N1 and H3N2 flu strains. AVI’s lead influenza drug candidateutilizes AVI’s proprietary PMO*plusTM*  chemistry.

 

·                  On April 14, 2010, at the 2010American Academy of Neurology Annual Meeting, AVI BioPharma, Inc. (“AVI”or the “Company”) presented the poster entitled*  AVI-5038: Initial Efficacy and SafetyEvaluation in Cynomolgus Monkeys.*

 

AVI-5038 is AVI’s leadpre-clinical PPMO, or peptide-conjugated phosphorodiamidate morpholinooligomer, drug candidate for the potential treatment of Duchenne musculardystrophy (DMD) and is intended to cause a skip of exon 50 in the gene codingfor the protein dystrophin. PPMOs are one of a series of different chemicalanalogs being developed from AVI’s core PMO, or phosphorodiamidate morpholinooligomer, chemistry.

 

The American Academy ofNeurology poster includes previously reported data of a preclinical study inwhich cynomolgus monkeys were dosed intravenously for four weeks with AVI-5038given up to 9mg/kg.  In that study, the candidate drug appeared to be welltolerated with findings generally limited to the kidney, and includedbasophilic granule accumulation and evidence of tubular degeneration/regenerationthat was dose dependent.  Clinical chemistry and urinalysis did not detecta change in kidney function.  Significant levels of exon skipping weredetected by RT-PCR in the diaphragm, heart and quadriceps after four weeks ofdosing at 9mg/kg.

 

A preliminary summary ofthe findings from an ongoing 12-week preclinical study in which cynomolgusmonkeys were dosed intravenously with AVI-5038 at doses of 1.5, 6 and 15mg/kgwas also presented. Significant toxicological findings were observed followingbolus intravenous administration at 6 and 15mg/kg.  The preliminaryresults suggest that the toxicities seen in this study are also dose dependentand primarily involve the kidney. The in life portion of the study is complete,but the collection and analysis of data from the study is still ongoing. The Company believes that the data set is not yet sufficient to determine theultimate impact these findings might have on the future development ofAVI-5038.

 

PPMOs are chemically distinct from PMOs. AVI-4658 is AVI’s lead PMO drug candidate for the potential treatment of DMD byskipping exon 51.  AVI-4658 is currently being evaluated in an ongoingPhase 1b/2 clinical trial at two sites in the United Kingdom and has beengenerally well tolerated to date in all patients dosed up to 20mg/kg for 12weeks.

 

·                  On April 20, 2010, the Companyentered into a Settlement Agreement with George W. Haywood (“Mr. Haywood”),Cheryl Haywood (“Ms. Haywood”), Rockall Emerging Markets Master FundLimited (the “Fund”), Meldrum Asset Management, LLC (“Meldrum”), Con Egan (“Mr. Egan”)and Conor O’Driscoll (“Mr. O’Driscoll”) (“Mr. Haywood”, “Ms. Haywood”,the “Fund”, “Meldrum”, “Mr. Egan” and “Mr. O’Driscoll” each a “ShareholderParty” and, collectively, the “Shareholder Group”). The Shareholder Group hadpreviously requested that the Company call a special shareholders’ meeting to (1) removecertain members of the Company’s board of directors (“Board”) and (2) electnew directors to the Board to fill vacancies left by removal of directors.  The Settlement Agreement memorializes certainactions taken by the Board of Directors, including, among other things, (i) requestingthe resignation of Leslie Hudson as the Company’s Chief Executive Officer andPresident, and as a director, (ii) amending the Company’s Bylaws to reducethe size of the Board and to clarify that a nominee appointed by the Board tofill a vacancy would serve the remainder of the term of such seat, (iii) appointingJ. David Boyle II, the Company’s current Senior Vice President and ChiefFinancial Officer, as the Company’s Interim Chief Executive Officer andPresident, (iv) appointing Anthony R. Chase to serve as a director of theCompany to fill the vacancy created by Dr. Hudson’s resignation from theBoard, (v) appointing Mr. Chase to the Nominating and Corporate GovernanceCommittee and (vi) accepting the resignation of one of the Company’sdirectors, K. Michael Forrest, to facilitate the reduction in Board size as aresult of the Bylaw amendment.

 

·                  As the Board of Directors requested thatLeslie Hudson, Ph.D., the Company’s Chief Executive Officer and President,tender his resignation as the Company’s Chief Executive Officer and President,such resignation is being treated as an involuntary termination of hisemployment without “Cause” for purposes of Section 13(d) of theEmployment Agreement dated February 8, 2008 between the Company and Dr. Hudson(the “Employment Agreement”). In connection with his resignation, on April 20,2010, the Company entered into a separation agreement with Dr. Hudson (the“Separation Agreement”), the terms of which were previously negotiated pursuantto the Employment Agreement.  Pursuant tothe terms of the Separation Agreement, Dr. Hudson will receive total cashseverance payments of $1,412,170.00 (the “Cash Severance Payments”), calculatedby reference to two (2) times the sum of: (i) his annual base salaryin effect as of the Separation Date ($494,400), (ii) the average of hislast two annual bonuses ($188,669), and (iii) the annual cost of Pfizerretiree healthcare coverage for him and his spouse ($23,016).  The Cash Severance Payments will be made to Dr. Hudsonin twenty-four (24) equal monthly 

 

F-24

----

 

installments, lessrequired deductions and withholdings, over the twenty-four (24) month periodfollowing the effective date of the Separation Agreement.  In addition, as of the effective date of theSeparation Agreement, previously granted options to Dr. Hudson for three hundredthirty-three thousand five hundred (333,500) shares and one hundred sixteenthousand five hundred (116,500) shares of restricted stock will immediatelybecome fully vested and exercisable.

 

·                  On April 20, 2010, the Board ofDirectors appointed J. David Boyle II, 56, the Company’s current Senior VicePresident and Chief Financial Officer as its Interim Chief Executive Officerand President, to serve at the pleasure of the Board of Directors.  Mr. Boyle will continue in his positionas Chief Financial Officer.  As a resultof this interim appointment, Mr. Boyle’s salary has been increased by$3,000 per month while serving as the Interim Chief Executive Officer andPresident, his bonus target percentage for 2010 has been increased to fortypercent (40%), and he has been granted a fully vested option on April 20,2010 to acquire 50,000 shares of the Company’s common stock at an exerciseprice of $1.24.

 

·                  On April 20, 2010, the Board ofDirectors appointed Anthony R. Chase as a Group II Director to fill the vacancyon the Board left by the resignation of Leslie Hudson.  The Board also designated Mr. Chase asan independent member of the Board.  TheShareholder Group submitted Mr. Chase’s name for consideration by theCompany’s Nominating and Corporate Governance Committee and the Board.  Mr. Chase was granted an option pursuantto the Company’s 2002 Equity Incentive Plan to acquire 60,000 shares of the Company’sCommon Stock, at an exercise price of $1.24, with a four-year vesting periodcommencing on the grant date of April 20, 2010 (the “Grant Date”), 1/4thof the shares vest and become exercisable on the earlier of one year after theGrant Date or the commencement of the next succeeding annual meeting ofshareholders; 1/4th of the shares vest and become exercisable on the earlier oftwo years after the Grant Date or the commencement of the next succeedingannual meeting of shareholders, 1/4th of the shares vest and become exercisableon the earlier of three years after the Grant Date or the commencement of thenext succeeding annual meeting of shareholders and 1/4th of the shares vest andbecome exercisable on the earlier of four years after the Grant Date or thecommencement of the next succeeding annual meeting of shareholders.  Mr. Chase will hold office for theremainder of the term of a Group II director and until such director’ssuccessor shall have been elected and qualified.

 

F-25

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