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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

___________________FORM
10-K___________________

(Mark One)

|****x**** | ANNUAL REPORT
      PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
|--------- | ------------------------------------------------------------------------------------------------

For the fiscal year ended December
31, 2007

OR

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

For the transition period from
__________ to ___________

Commission file number
0-28272

AVIGEN, INC.(Exact name of registrant as specified in its
charter)

|Delaware                                                                | 13-3647113                               
|----------------------------------------------------------------------- | -----------------------------------------
|**(State or
      other jurisdiction ofincorporation or organization)** | (I.R.S.
      EmployerIdentification No.)

1301 Harbor Bay ParkwayAlameda,
California 94502(Address of principal
executive offices and zip code)

(510) 748-7150(Registrants telephone number,including area
code)

|Securities registered pursuant to Section 12(b) of the
      Act:
|-----------------------------------------------------------------
|Title of each
      class                                        
|Common Stock,
      $0.001 par value per share                   

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

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

Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No o

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

Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of large accelerated filer accelerated filer and smaller
reporting company in Rule 12b-2 of the Exchange Act.

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

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

The
aggregate market value of the Common Stock held by non-affiliates of the
registrant as of June 29, 2007, was approximately $181,500,000 based upon the
closing sale price of the registrants Common Stock as reported on the NASDAQ
Global Market on such date. Shares of common stock held by each officer and
director have been excluded in that such persons may be deemed to be affiliates
of the registrant. Shares held by all other stockholders have not been excluded,
as no other stockholder holds a percentage of the registrants outstanding
Common Stock that the registrant believes is necessary to exercise control over
the registrant, nor has any other stockholder otherwise exhibited any ability to
exercise control over the registrant.

The
number of outstanding shares of the registrants Common Stock as of March 6,
2008, was 29,769,115 shares.

DOCUMENTS INCORPORATED BY
REFERENCE

Portions
of the registrants definitive Proxy Statement for the 2008 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year covered
by this Form 10-K, are incorporated by reference in Part III, Items 10-14 of
this Form 10-K.

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ANNUAL REPORT ON FORM
10-K

FOR THE FISCAL YEAR ENDED DECEMBER
31,2007

TABLE OF CONTENTS

|               |                                                                                                                          |  | Page
|-------------- | ------------------------------------------------------------------------------------------------------------------------ |  | ----
|PART
      I   |                                                                                                                          |  |     
|Item
      1.  | Business                                                                                                                 |  | 3   
|Item 1A.       | Risk
      Factors                                                                                                       |  | 10  
|Item
      1B. | Unresolved Staff
      Comments                                                                                          |  | 17  
|Item 2.        | Properties                                                                                                               |  | 17  
|Item
      3.  | Legal
      Proceedings                                                                                                  |  | 17  
|Item 4.        | Submission of Matters to a Vote of Security Holders                                                                      |  | 17  
|              
|PART
      II  |                                                                                                                          |  |     
|Item
      5.  | Market for Registrants
      Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
      Securities |  | 19  
|Item 6.        | Selected Financial Data                                                                                                  |  | 21  
|Item
      7.  | Managements Discussion
      and Analysis of Financial Condition and Results of Operations                              |  | 22  
|Item 7A.       | Quantitative and Qualitative Disclosures About Market
      Risk                                                         |  | 34  
|Item
      8.  | Financial Statements
      and Supplementary Data                                                                        |  | 35  
|Item 9.        | Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure                         |  | 70  
|Item
      9A. | Controls and
      Procedures                                                                                            |  | 70  
|Item 9A(T).    | Controls and Procedures                                                                                                  |  | 72  
|Item
      9B. | Other
      Information                                                                                                  |  | 72  
|              
|PART
      III |                                                                                                                          |  |     
|Item
      10. | Directors, Executive
      Officers and Corporate Governance                                                             |  | 72  
|Item 11.       | Executive Compensation                                                                                                   |  | 72  
|Item
      12. | Security Ownership of
      Certain Beneficial Owners and Management and Related Stockholder
      Matters               |  | 73  
|Item 13.       | Certain
      Relationships and Related Transactions, and Director
      Independence                                    |  | 74  
|Item
      14. | Principal Accountant
      Fees and Services                                                                             |  | 74  
|              
|PART
      IV  |                                                                                                                          |  |     
|Item
      15. | Exhibits, Financial
      Statement Schedules                                                                            |  | 75  
|              
|Signatures     |                                                                                                                          |  | 76  

(i)

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CAUTIONARY INFORMATION REGARDING
FORWARD-LOOKING STATEMENTS

This
Annual Report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These statements are based upon current
expectations that involve known and unknown risks, uncertainties and other
factors which may cause our actual results, performance or achievements to be
materially different from any future results, performances or achievements
expressed or implied by the forward-looking statements. These statements
include, but are not limited to:

- the potential of our product development programs,
  including AV650 for neuromuscular spasm and spasticity, AV411 for neuropathic
  pain and other indications, and AV513 for the treatment of multiple bleeding
  disorders, including hemophilia;
- our expectations with respect to the clinical
  development of our product candidates, our clinical trials and the regulatory
  approval process, including the potential acceleration of clinical development
  in the U.S. of our two lead product development programs that are based on
  compounds with prior experience in human clinical trials outside the
  U.S.;
- our intention to submit an Investigational New
  Drug filings, or INDs, to the FDA regarding AV513;
- our expectations relating to our selection of
  additional disease targets for compounds we are developing;
- our expectations with regard to our ability to
  expand our drug development portfolio through a combination of internal
  research, acquisitions, and in-licensing opportunities from third
  parties;
- our expectations regarding our receipt of future
  revenues based on the development success by Genzyme Corporation in developing
  and commercializing gene therapy products based on rights included in our
  assignment agreement; and
- our expectations regarding our capital
  requirements, how long our current financial resources will last, and our
  needs for additional financing.

We have
identified the forward-looking statements we make by using such terms as may,
might, can, will, should, could, would, expect, plan, seek,
anticipate, believe, estimate, project, intend, predict,
potential, if and similar expressions which imply that the statements relate
to future events or expectations. These statements reflect our current views
with respect to future events and are based on assumptions and subject to risks
and uncertainties. Given these uncertainties, you should not place undue
reliance on these forward-looking statements. We discuss many of these risks and
uncertainties in greater detail in Item 1A Risk Factors, below. Also, these
forward-looking statements represent our estimates and assumptions only as of
the date of this Form 10-K.

You
should read this Form 10-K and the documents that we incorporate by reference
completely and with the understanding that our actual future results may be
materially different from what we currently expect. We may not update these
forward-looking statements, even though our situation may change in the future.
We qualify all of our forward-looking statements by these cautionary statements.

2

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PART I

Item 1.Business

Overview

Avigen is
a biopharmaceutical company focused on developing and commercializing small
molecule therapeutics to treat serious neurological and neuromuscular disorders.
Our current lead product candidates primarily address spasticity and
neuromuscular spasm and neuropathic pain.

Our goal
is to retain rights to commercialize our products in North America and therefore
we expect, when appropriate, to build a sales and marketing infrastructure. We
intend to seek to out-license rights to develop and market our products outside
the United States. We also intend to continue to look for opportunities to
expand our pipeline of compounds through a combination of internal research,
acquisitions, and in-licensing as appropriate. Avigen, Inc. is a Delaware
corporation that was incorporated on October 22, 1992 and is based in the San
Francisco Bay Area.

In
building our pipeline, we focus on selecting compounds with differentiating
features from existing therapies that we believe could substantially change the
standard of care for patients with chronic neurological conditions. In
particular, we believe our drug candidates address needs currently unmet by
current therapies through new mechanisms or offer reduced risks from
side-effects, such as sedation, that might otherwise interfere with a patients
normal living activities. Moreover, each of our two leading programs, AV650 and
AV411, are commercially approved pharmaceuticals outside the United States.
These compounds are New Molecular Entities in the U.S., and we will evaluate
each of them in all phases of clinical development; however, we believe their
significant human experience in markets outside the U.S. should mitigate some
development risks and may help accelerate our clinical development and the
approval for these products in North America.

In
January 2006, we acquired exclusive license rights to develop and commercialize
proprietary formulations of the compound tolperisone, which we have named AV650,
for the North American market. These rights include relevant patent filings, as
well as clinical data held by SDI Diagnostics International LTD, a division of
Sanochemia Pharmazeutika AG, or Sanochemia, relating to AV650. Sanochemia has
also agreed to supply AV650 to us exclusively for the North American market.
Under the terms of the agreement, we made an upfront payment of $3.0 million and
will make additional payments to Sanochemia based on the parties achievement of
clinical and regulatory product development milestones and commercial sales of
AV650.

Prior to
2006, Avigen focused on the development of DNA-based drug delivery technologies
and early stage research in the field of gene therapy. We received FDA approval
for three separate Investigational New Drug filings, or INDs, and initiated
corresponding phase I or phase I/II clinical trials. In December 2005, we
entered into an agreement with Genzyme Corporation, or Genzyme, whereby we
assigned to Genzyme our rights to some of our gene therapy-related intellectual
property, our gene therapy clinical trial programs for Parkinsons disease and
hemophilia, gene therapy-related contracts, and the use of previously
manufactured clinical-grade vector materials. Under the terms of the agreement,
we received a $12.0 million payment and could receive additional development
milestones, sublicensing fees and royalty payments based on the successful
development of products by Genzyme utilizing technologies previously developed
by us. In addition, if Genzyme fails to diligently pursue the commercialization
or marketing of products using the assigned technology, as specified in the
agreement, some of the rights we assigned could revert back to Avigen at a
future date.

We are a
development stage company and have supported the financial needs of our research
and development activities since our inception primarily through public
offerings and private placements of our equity securities.

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Products in
Development

AV650 Neuromuscular spasm and spasticity

We are
developing AV650 in the North American market for the treatment of spasticity
and painful muscle spasms under a license and supply agreement with SDI
Diagnostics International LTD, a division of Sanochemia Pharmazeutika AG. AV650
is an orally-administered, centrally-acting small molecule known as tolperisone.
Generic forms of tolperisone have been marketed by others in Europe and Asia for
the treatment of neuromuscular conditions, including spasticity, for 30 to 40
years. Because of tolperisones established record of successful use and safety
in many international markets, and the potential benefit of a treatment without
sedation for patients with chronic spasticity, we are seeking to bring AV650 to
the U.S. market.

In
October 2007, Sanochemia began selling in Germany the same form of tolperisone
that Avigen is using in its AV650 clinical trials. This product was launched
through Sanochemias European marketing partner, Orion Corporation, under the
brand name Viveo® at approved doses of 450 mgs per day for the treatment of
spasticity.

Spasticity is a symptom associated with a number of neurological
disorders including multiple sclerosis, stroke, spinal cord injury and cerebral
palsy. In 2006, we filed an IND application and received approval from the U.S.
Food and Drug Administration, or FDA, to initiate clinical trials with AV650 at
450 mg per day. We subsequently completed controlled studies at escalating dose
levels in healthy adult subjects that assessed the safety and pharmacokinetic
profile of the compound. These studies also assessed AV650's lack of sedation as
measured using clinically validated measures of cognitive function, including
reaction times, visual discrimination, short-term memory, and attention. AV650
was demonstrated to be well tolerated with no dose-limiting or dose-related
increases in adverse events reported and the initial findings of sedation
measures indicated no significant difference from placebo.

In 2007,
we initiated two independent Phase II double-blind, placebo-controlled clinical
trials to evaluate the efficacy of AV650 in different patient populations. One
study is enrolling approximately 150 patients suffering from spasticity related
to multiple sclerosis in a European multi-center Phase II clinical trial at
doses up to 900 mg per day and will include a six-month open-label safety
extension. The second study is enrolling approximately 120 patients suffering
from spasticity related to spinal cord injury in a U.S. multi-center Phase II
clinical trial at doses up to 450 mg per day, the currently approved dose level
for tolperisone products marketed in Europe for spasticity. Both studies will
evaluate multiple clinical endpoints, including measurements of spasticity using
the Ashworth-scale and patient-reported quality-of-life improvements. These
studies will also provide further data assessing AV650s lack of sedation or
cognitive impairment. Results from these trials, together with data from our
other development activities, will be the basis for our design of larger Phase
III pivotal studies and support future FDA submissions.

AV411- Neuropathic pain and other neurological
disorders

AV411 is
being developed as a first-in-class, non-opiate oral therapy for the treatment
of neuropathic pain. AV411 is based on an approved drug, ibudilast, that is
currently marketed by others in Japan for non-pain-related illnesses. AV411 is a
New Molecular Entity in the U.S. and Europe and is part of our program to
investigate glial attenuation as a novel approach to the treatment of
neuropathic pain. This approach is designed to suppress the activation of
specialized cells in the nervous system known as glial cells. In preclinical
models, glial cells have been shown to release neurotransmitters that relay pain
information to the spinal cord, and other substances that increase the
excitability of pain-responsive nerve cells. Recent research has demonstrated
that blocking the activation of glial cells can reverse neuropathic
pain.

Based on
our research in this area, we have filed for patents protecting the use of AV411
for treating neuropathic pain and other clinical indications. We have also filed
for patents on analogs of AV411 which we believe have the potential to be
effective second generation molecules.

In 2006,
we received approval to initiate clinical trials with AV411 at the Royal
Adelaide Hospital in Adelaide, Australia based on reciprocity rules with Japan
where ibudilast is an approved drug. As a result, we first completed a safety
and tolerability study of AV411 with dose levels significantly higher than the
prescribed dosage levels of ibudilast used in Asia for other indications, and
the results of this study will be used by us to guide the development of AV411
for neuropathic pain. In the study, two subjects ceased study medications as a
result of nausea and vomiting; however, no dose-limiting or dose-related
increases in adverse events were reported.

In 2007,
we completed a Phase IIa exploratory therapeutic clinical trial in Australia
with 34 patients that demonstrated favorable safety and tolerability at
escalating doses in patients suffering from diabetic neuropathy, a disease
affecting the nervous system caused by diabetes. The trial collected data on
preliminary indications of efficacy, but was small and not designed for
statistical significance. The trial provided valuable insight into the
responsiveness of the subjects in relation to the drug levels measured in their
blood and the results will be used to set the target dosage range for larger
Phase II clinical studies. It was also observed during the study that although
patients were allowed to continue to take other medications prescribed by their
doctors, patients that received AV411 reported using lower doses of prescribed
opioids, suggesting the drug was having some effect.

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In August
2007, we announced that we had received approval from the FDA to initiate U.S.
clinical development for AV411 with a Phase I maximum tolerated dose study. We
are currently enrolling subjects in this study, which was designed to build on
the data from our smaller Phase I and Phase IIa studies in Australia and will
also assess the effect of food on AV411 pharmacokinetics and tolerability. Once
completed, we expect to use the data collected in the Australian trials, the
U.S. Phase I maximum tolerated dose study, and other non-clinical research to
support our plans for initiating larger Phase II clinical trials in the U.S. for
neuropathic pain.

Other
indications: morphine withdrawal and chemotherapeutic-induced
neuropathy. In connection with our
development program, we have studied AV411 in multiple preclinical pain models
and have observed promising efficacy for the potential of AV411 to counteract
some effects from morphine and other opioids with regard to symptoms of
tolerance and withdrawal. Tolerance refers to the need of a patient to require
ever-increasing doses to achieve relief from pain. Withdrawal refers to the
serious physical effects of ending opioid therapy due to the addictive
properties of the drug. These observations suggest that AV411 may help
neutralize the untoward effects of opioids by suppressing the activation of
certain kinds of glial cells in the spinal cord and could extend the use of
opioids by physicians to effectively provide relief from pain and help a
patients healing process. In 2008, we intend to participate in a clinical trial
to study the effects of AV411 on symptoms of morphine withdrawal in connection
with investigators at the New York State Psychiatric Institute at Columbia
University.

We have
also observed efficacy of AV411 in preclinical pain models for
chemotherapeutic-induced neuropathy, a disease affecting the nervous system. Our
research suggests that AV411 may allow oncologists to exceed current treatment
limits of chemotherapy that often result due to the development of painful
sensitivities by their patients.

AV513 Bleeding disorders, including hemophilia

AV513 is
being developed as an oral therapy for the treatment of bleeding disorders.
AV513 is a botanical drug based on a carbohydrate molecule which is extracted
from sea algae and has a good human safety profile as documented by others.
While outside our strategic focus on neurological and neuromuscular disorders,
AV513 leverages our previous experience with hemophilia. Based on our
research, we believe that AV513 has the potential to become the first approved
non-gene therapy and non-Factor approach to treating hemophilia A and B, and
other bleeding disorders such as Factor VII deficiency and severe von
Willebrands disease. Currently approved treatments involve frequent intravenous
administration of recombinant clotting factor.

We have
observed efficacy of AV513 in preclinical bleeding models for hemophilia and are
preparing to file an IND with the FDA later in the 2008.

Gene Therapy Product Development
Interests

In
connection with our agreement with Genzyme, we do not have any advisory or
operational obligations to support the ongoing development of gene therapy
products. However, under the terms of the agreement, we retain an opportunity to
receive additional revenues in connection with the potential successful
development by Genzyme of gene therapy products based on technologies we
originally developed. The additional revenues could be from milestone payments,
sublicense fees and sales royalties. The potential for us to realize additional
revenues under this agreement could extend through approximately 2020, depending
on when the last of the patents issued or that issue and are subject to the
agreement expires. If Genzyme fails to diligently pursue the commercialization
or marketing of products using the assigned technology, as specified in the
agreement, some rights assigned to Genzyme under the agreement could revert back
to Avigen at a future date.

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Research Programs

Neuropathic Pain

We
maintain a small ongoing preclinical research effort to identify additional
opportunities to expand our product development pipeline. Our efforts primarily
focus on additional treatments for neuropathic pain and include, through
external contract laboratories, a medicinal chemistry optimization effort
focused on developing analogs with glia-attenuating characteristics similar to
those of AV411, but with improved physicochemical properties. We are also
pharmacologically testing additional therapeutic indications for AV411.

We
continue to investigate, through our collaborators, potential products based on
the potent anti-inflammatory cytokine interleukin-10, or IL-10, and related
molecules. This research, which is also based on glial cell activation, includes
our work with AV333. AV333 is a plasmid, or DNA sequence, that drives the
production of IL-10 within the spinal cord to reverse, we believe, the
neuropathic pain resulting from glial activation. AV333 is delivered by an
injection into the spinal canal similar to the routine procedure used to deliver
spinal analgesics. Standardized animal models have shown that AV333 is
well-tolerated and dramatically reverses neuropathic pain symptoms for up to
ninety days from a single course of treatment.

Research and Development Expenses

We
incurred research and development expenses of approximately $20.8 million, $15.2
million, and $13.8 million in 2007, 2006, and 2005, respectively. During these
years, we did not receive any reimbursements from governmental or other research
grants or any other third parties to offset our expenses. As of December 31,
2007, we were party to one collaborative agreement with the University of
Colorado, under which we received partial reimbursement for some research and
development expenses under a grant by the National Institutes of Health. We do
not expect future reimbursements under this agreement to have a material impact
on our financial statements.

Strategic Relationships and
Manufacturing

Research
and commercial collaborations will continue to play a significant role in our
business strategy. We have built strategic relationships with recognized
scientists, clinicians and opinion leaders in the fields that our product
candidates address. We feel these relationships, including our relationship with
theUniversity of Colorado, enhance the potential of our portfolio of products by providing us with
additional resources with the capacity to accelerate a broader array of research
testing and by advising us on the latest scientific advances relevant to our
needs. We have also established a commercial collaboration with Sanochemia.
Under the terms of this collaboration, we have acquired North American
development and marketing rights to AV650 and have access to data from
Sanochemias non-U.S. research studies that we believe may help accelerate the
pace of our clinical development in the U.S.

We also
expect to rely on strategic relationships with third-party manufacturers of the
compounds used for our product candidates. We believe that third-party
suppliers, such as Sanochemia for AV650, can manufacture high quality drug
substance and final drug products in a cost effective manner for use both in our
clinical trials and for commercial sale. We believe these third-party suppliers
are compliant with the FDAs current good manufacturing practice regulations.

In our
gene therapy transaction with Genzyme, we sought a company that we believed had
the resources and commitment to continue the development of products using
DNA-based technologies. Through this transaction, we retained the potential for
future financial participation in the success of gene therapy products through
contingent development milestones and royalty and licensing fees. In addition,
we delivered on managements commitment to enable work based on technologies we
developed to continue for the benefit of patients suffering from Parkinsons
disease and hemophilia.

As we
continue to identify new development opportunities for compounds in our product
candidate portfolio or acquire access to new product candidates, we intend to
continue to evaluate opportunities to increase the potential success of these
investments through strategic relationships. These may take the form of
additional research and development or manufacturing and supply agreements. We
may also seek to license out development and marketing rights to our existing
products outside the U.S. If we acquire access to new products or identify new
development opportunities for our compounds, including through strategic
relationships, we may fund such transactions with the issuance of additional
equity securities, which may further dilute our existing stockholders.

6

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Competition

Pharmaceutical drug development is characterized by rapidly evolving
technology and intense competition. Many companies of all sizes, including major
pharmaceutical companies and specialized biotechnology companies, engage in
activities similar to our activities. Many of the companies we compete with have
substantially greater financial and other resources and larger research and
development and clinical and regulatory affairs staffs. We expect our products,
if approved, will face competition from both branded pharmaceuticals and generic
compounds and may include other drug development technologies, other methods for
preventing or reducing the incidence of disease, including vaccines, and other
classes of therapeutic agents. In addition, colleges, universities, governmental
agencies and other public and private research organizations continue to conduct
research and are becoming more active in seeking patent protection and licensing
arrangements to collect royalties for use of technologies that they have
developed. We also must compete with these institutions in recruiting highly
qualified scientific personnel. Some of our competitors products and
technologies are in direct competition with ours. In addition, we are aware that
physicians may utilize other products in an off-label manner for the treatment
of disorders we attempt to target.

Neuromuscular Spasm and Spasticity.
Drugs marketed in the U.S. for the treatment of spasticity include tizanidine,
marketed by Acorda Therapeutics as Zanaflex, and baclofen, marketed by Novartis
as Lioresal. Drugs marketed in the U.S. for neuromuscular spasm include
metaxalone, marketed by King Pharmaceuticals as Skelaxin, cyclobenzaprine,
marketed by McNeil Consumer & Specialty Pharmaceuticals as Flexeril, and
carisoprolol, marketed by Wallace Laboratories as Soma. In addition, there are
several product candidates in development for these indications, including
long-acting forms of baclofen by Xenoport and Impax Laboratories. GW
Pharmaceuticals has also announced that they will be pursuing a spasticity
indication for Sativex, their cannabinoid product marketed in Canada for pain
associated with multiple sclerosis and in development in North America and
Europe for pain and spasticity associated with multiple sclerosis and other
diseases. These products may compete with AV650 or other products we may develop
for neuromuscular spasm and spasticity.

Neuropathic Pain.Therapies for
chronic pain range from over-the-counter compounds, such as aspirin, to opioids,
such as morphine. We anticipate that our products will compete with other drugs
that are currently prescribed by physicians, including anti-epileptics such as:
gabapentin and pregabalin, marketed by Pfizer as Neurontin and Lyrica,
respectively; and antidepressants, including duloxetine, marketed by Eli Lilly
& Co as Cymbalta. We are aware of additional compounds for chronic
neuropathic pain that are currently in development at numerous companies
including Bayer, GlaxoSmithKline, Merck & Co., Inc., Novartis AG, Pfizer,
Cognetix, Inc., GW Pharmaceuticals plc, Indevus Pharmaceuticals, Inc., Nastech
Pharmaceutical Company Inc., Avanir Pharmaceuticals, Pain Therapeutics, Inc.,
and XenoPort, Inc.

Companies
that complete clinical trials, obtain required regulatory approvals, and
commence commercial sales of their products before their competitors may achieve
a significant competitive advantage. In order to compete successfully, we must
develop proprietary or otherwise protected positions in products for therapeutic
markets that have not been satisfactorily addressed by current alternatives.
These products, even if successfully tested and developed, may not be adopted by
physicians over other products and may not offer economically feasible
alternatives to other therapies.

Marketing and Sales

We have
retained rights to develop and market our current portfolio of products, except
that we only have the right to commercialize AV650 in the North American
markets, and expect to build marketing and sales capabilities using our own
resources. However, we currently do not have a marketing or sales staff. If we
are successful in achieving FDA approval of any of our product candidates, we
will need to build a commercial capability. There is no assurance that we will
be able to build our own commercial organization with our current
resources.

7

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Patents and Intellectual
Property

Patents
and other proprietary rights are important to our business. We seek to procure
patent protection for our anticipated products, or obtain protection from the
relevant patents owned by our licensors. Our intellectual property strategy is
to file patent applications that protect our technology, inventions and
improvements to our inventions that we consider commercially important to the
development of our business. We also rely on a combination of trade secrets,
know-how and licensing opportunities to develop and protect intellectual
property rights pertaining to our products and technology.

As of
March 1, 2008, we owned, co-owned, or held licenses to 2 issued U.S.
patents which expire in 2019 and 24 pending U.S. patent applications, as well as
corresponding pending non-U.S. patent applications. The patent applications are
primarily related to our development portfolio of small molecule-based products
and are currently directed to methods of treating various indications using
AV411 and formulations of AV650 and AV513.

Some of
the compounds used in our development products have been previously patented by
others. When we identify previously patented technologies that we believe are
critical to the development and commercialization of our products, we seek to
in-license such rights under the most favorable terms. Such licenses normally
last for the life of the underlying patent. Licenses typically require us to pay
license fees and royalties based on the net sales of products that fall within
the scope of the license. Some licenses require us to exercise our best efforts
or another level of efforts to achieve research, clinical, and commercial
milestones and may require us to make additional payments upon the completion of
such milestones. Our failure to be diligent or achieve any required development
milestones or to negotiate appropriate extensions of any of our license
agreements or to make all required milestone and royalty payments when due, and
the subsequent decision of any such institution to terminate such license, could
have a material adverse effect on our financial position.

The exclusive license that we feel
is important to our future commercial interests in our development products is:

Sanochemia. In January 2006, we
entered into an agreement with Sanochemia for rights to develop and market AV650
in North America. We paid an initial license fee of $3.0 million and will make
additional milestone and royalty payments based on the success of the parties
development and commercialization of AV650. Additionally, we must pay to
purchase the supply of AV650 formulations from Sanochemia. The license is
exclusive for the duration of the patent and pending patent applications, should
they issue. Under the agreement, we must be diligent in our development of one
and under some circumstances up to two formulations of AV650, and must purchase
from Sanochemia, and Sanochemia must supply us exclusively with, our
requirements of AV650 formulations for North America. We are reliant on this
license to develop AV650.

In addition, we have the following
exclusive license:

University of Colorado.In November
2003, we entered into an agreement with the University of Colorado for rights to
specified intellectual property related to the treatment of chronic pain with
AV333. The license is exclusive for the duration of any issued patents embodying
the licensed intellectual property, or until approximately 2023. Our license may
convert to a non-exclusive license or may be terminated by the University of
Colorado if we fail to meet our diligence obligations. Although our development
of AV411 for neuropathic pain is not subject to the intellectual property
underlying this agreement, we continue to explore the use of AV411 for
additional indications in collaboration with the University of Colorado, and
have expanded the scope of the agreement to incorporate additional intellectual
property jointly developed by the two parties, including for addiction and
withdrawal indications.

We cannot
assure you that the claims in our pending patent applications will be issued as
patents, that any issued patents will provide us with significant competitive
advantages, or that the validity or enforceability of any of our patents will
not be challenged or, if instituted, that these challenges will not be
successful. The cost of litigation to uphold the validity and prevent
infringement of our patents could be substantial. Furthermore, we cannot assure
you that others will not independently develop similar technologies or duplicate
our technologies or design around the patented aspects of our technologies. We
can provide no assurance that our proposed technologies will not infringe
patents or rights owned by others, the licenses to which might not be available
to us.

In
addition, if we pursue patent applications in foreign countries, their approval
processes for patent applications may differ significantly from the processes in
the U.S. The patent authorities in each country administer that countrys laws
and regulations relating to patents independently of the laws and regulations of
any other country and the patents must be sought and obtained separately.
Therefore, issuance of a patent in one country does not necessarily indicate
that it can be obtained in other countries. Our policy is to make a case-by-case
determination as to whether to file a foreign application to correspond to each
of our U.S. applications. Sometimes we decide not to do so. We make the decision
with respect to each patent application on a country-by-country basis.

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Gene Therapy-Related Patents

In
December 2005, we transferred the intellectual property rights, including
in-licenses, for our gene therapy-based products to Genzyme. Under the terms of
the agreement, we assigned to Genzyme our rights to some or our gene
therapy-related intellectual property, our gene therapy clinical trial programs
for Parkinsons disease and hemophilia, some gene therapy-related contracts, and
the use of previously manufactured clinical-grade vector materials. These
intellectual property rights included 62 U.S. and international patents owned by
us. However, if Genzyme fails to diligently pursue the commercialization and
marketing of products using the assigned technology, as specified in the
agreement, some of the technology we assigned could revert back to Avigen at a
future date, Under the terms of the agreement, Avigen received a $12.0 million
payment and could receive significant future milestone, sublicensing fees and
royalty payments based on the successful development of products by Genzyme
utilizing technologies previously developed by us.

Government Regulation

The FDA
and comparable regulatory agencies in state and local jurisdictions and in
foreign countries regulate extensively the clinical development, manufacture,
distribution and sale of pharmaceutical products. These agencies and other
federal, state and local entities regulate research and development activities
and the testing, manufacture, quality control, safety, effectiveness, labeling,
storage, distribution, record keeping, approval and promotion of our development
products. All of our products will require regulatory approval before
commercialization. In particular, therapeutic products for human use are subject
to rigorous preclinical and clinical testing and other requirements of the
Federal Food, Drug, and Cosmetic Act, implemented by the FDA, as well as similar
statutory and regulatory requirements of foreign countries and supervisory
review boards affiliated with institutions that may perform our clinical
trials.

Obtaining
marketing approvals and subsequently complying with ongoing statutory and
regulatory requirements is costly and time consuming. Any failure by us or our
collaborators, third-party manufacturers, licensors or licensees to obtain, or
any delay in obtaining regulatory approval or in complying with other
requirements, could adversely affect the commercialization of products then
being developed by us and our ability to receive product or royalty revenues.

This
process of clinically testing drugs and seeking approval to market them can take
a number of years and typically requires substantial financial resources. The
results of preclinical studies and initial clinical trials are not necessarily
predictive of the results from large-scale clinical trials. All clinical trials
may be subject to additional costs, delays or modifications due to a number of
factors, including the difficulty in obtaining enough subjects, clinical
investigators, drug supply, or financial support, or because of unforeseen
adverse effects. In addition, as a condition of approval, the FDA also can
require further testing of the product and monitoring of the effect of
commercialized products, and the agency has the power to prevent or limit
further marketing of a product based on the results of these post-marketing
programs. Upon approval, a drug product may be marketed only in those dosage
forms and for those indications for which it is approved.

In
addition to obtaining FDA approval for each indication to be treated with each
product, each domestic drug product manufacturing establishment must register
with the FDA, list its drug products with the FDA, comply with current Good
Manufacturing Practices and pass inspections by the FDA. Manufacturers of
biological products also must comply with FDA general biological product
standards. Moreover, the submission of applications for marketing approval from
the FDA may require additional time to complete manufacturing stability studies.
Foreign establishments manufacturing drug products for distribution in the
United States also must list their products with the FDA and comply with current
Good Manufacturing Practices. They also are subject to periodic inspection by
the FDA or by local authorities under agreement with the FDA. If we rely on
strategic relationships with third-party manufacturers, with either U.S. or
foreign manufacturing establishments, as with Sanochemia, we may not be able to
ensure effective compliance with these FDA requirements, which could impact the
timing and potential success of our development and commercialization of our
potential products. Because our current facilities are located in California, if
we decide to manufacture any of our products in our facilities that are
administered to humans, including products used for testing in clinical trials,
we would also be required to obtain a drug manufacturing license from the State
of California.

*Other
Regulations*

In
addition to regulations enforced by the FDA, in the U.S. we are also subject to
regulation under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act, the Resource Conservation and
Recovery Act, and other federal, state and local regulations. Our research and
development activities involve the controlled use of hazardous materials,
chemicals, biological materials, and various radioactive compounds. Although we
believe that our safety procedures for handling and disposing of these materials
comply with the standards prescribed by state and federal regulations, we could
be held liable for any damages that result from accidental contamination or
injury and this liability could exceed our resources. In addition, our handling,
care, and use of laboratory rodents are subject to the Guide for the Care and
Use of laboratory Animals published by the National Institutes of Health.

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Our
clinical trials may also involve subjects who reside outside of the U.S. which
can involve subsequent monitoring of the subjects responses at clinical sites
outside the U.S. where other regulations apply.

Employees

As of
March 1, 2008, Avigen had 38 full-time employees, including twelve with Ph.D.
degrees and two with M.D. degrees. Approximately 25 employees are involved in
our research and development activities, including research, preclinical
development, clinical and regulatory affairs, and quality assurance and quality
control, and 13 employees are involved in general administration, finance,
legal, and business development activities. We also rely on a number of
temporary staff positions and third-party consultants to supplement our
workforce. None of our employees are represented by a collective bargaining
agreement nor have we ever experienced a work stoppage. We believe that our
relationship with our employees is good.

Revenues

No
revenues were recognized in 2007. Our revenues in 2006 and 2005 were $0.1
million and $12.0 million, respectively. Revenue for 2006 represented income
from our participation with the University of Colorado on a grant that was
funded by the National Institutes of Health. Revenue for 2005 was primarily
related to the payment received from Genzyme in connection with our transfer to
them of some of our gene therapy assets. All of our revenues were from companies
located in the United States, and all of our long-lived assets are located in
the United States. See Item 8. Financial Statements and Supplementary Data for
more information regarding our financial performance.

Available Information and Website
Address

Our
website address is www.avigen.com; however, information found on our website is
not incorporated by reference into this Annual Report on Form 10-K. We file
electronically with the Securities and Exchange Commission our annual reports on
Form 10-K, quarterly interim reports on Form 10-Q, current reports on Form 8-K,
and amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934. We make available on or through
our website, free of charge, copies of these reports as soon as reasonably
practicable after we electronically file or furnish it to the SEC. You can also
request copies of such documents by contacting our Investor Relations Department
at (510) 748-7150 or sending an email to ir@avigen.com.

Item 1A. Risk Factors

This
section briefly discusses some risks that should be considered by stockholders
and prospective investors in Avigen. Many of these risks are discussed in other
contexts in other sections of this report.

Risks Related to Our Business

We expect to continue to operate at
a loss and we may never achieve profitability

Since our
inception in 1992, we have not been profitable, and we cannot be certain that we
will ever achieve or sustain profitability. To date, we have been engaged in
research and development activities and have not generated any revenues from
product sales. As of December 31, 2007, we had an accumulated deficit of $220.7
million. Developing new compounds will require significant additional research
and development activities, including preclinical testing and clinical trials,
and regulatory approval. We expect these activities, together with our general
and administrative expenses, to result in operating losses for the foreseeable
future. Our ability to achieve profitability will depend, in part, on our
ability to successfully identify, acquire and complete development of proposed
products, and to obtain required regulatory approvals and manufacture and market
our approved products directly or through business partners.

The regulatory process is expensive,
time consuming and uncertain and may prevent us from obtaining required
approvals for the commercialization of our product candidates

Prior to
marketing in the United States, any product developed by us must undergo
rigorous preclinical testing and clinical trials as well as an extensive
regulatory approval process implemented by the FDA. This process is lengthy,
complex and expensive, and approval is never certain. Positive results from
preclinical studies and early clinical trials do not ensure that positive
results will be demonstrated in clinical trials designed to permit application
for regulatory approval.

Potential
problems we may encounter in the implementation stages of our studies include
the chance that we may not be able to conduct clinical trials at preferred
sites, obtain sufficient test subjects, or begin or successfully complete
clinical trials in a timely fashion, if at all. Furthermore, the FDA may
temporarily suspend clinical trials at any time if it believes the subjects
participating in trials are being exposed to unacceptable health risks, if it
finds deficiencies in the clinical trial process or conduct of the
investigation, or to better analyze data surrounding any unexpected
developments.

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Because
of the risks and uncertainties in biopharmaceutical development, our products
could take a significantly longer time to gain regulatory approval than we
expect or may never gain FDA approval. If we do not receive these necessary
approvals from the FDA, we will not be able to generate substantial revenues or
become profitable.

We may not be successful in
obtaining required foreign regulatory approvals, which would prevent us from
marketing our products internationally

We cannot
be certain that we will obtain any regulatory approvals in other countries. In
order to market our products outside of the United States, we must comply with
numerous and varying foreign regulatory requirements implemented by foreign
regulatory authorities. The approval procedure varies among countries and can
involve additional testing. The time required to obtain approval may differ from
that required to obtain FDA approval. Foreign regulatory approval process
includes all of the risks associated with obtaining FDA approval set forth
above, and approval by the FDA does not ensure approval by the regulatory
authorities of any other country.

The testing of our potential
products relies heavily on the voluntary participation of subjects in our
clinical trials, which is not within our control, and could substantially delay
or prevent us from completing development of such products

The
development of our potential products is dependent upon collecting sufficient
data from human clinical trials to demonstrate safe and effective results. We
experienced delays in enrolling subjects in our previous gene therapy clinical
trials, and we may experience similar difficulties with our current products in
the future. Any delay or failure to recruit sufficient numbers of subjects to
satisfy the level of data required to be collected under our clinical trial
protocols could prevent us from developing any products we may
target.

We expect to depend on third parties
to manufacture compounds for our product candidates. If these manufacturers fail
to meet our requirements and the requirements of regulatory authorities, our
business, financial condition and results of operations could be harmed

We intend
to use third parties to manufacture active pharmaceutical ingredients and
supplies for our product candidates. For example, we rely entirely on Sanochemia
to manufacture and supply to us AV650 for both clinical and commercial supply.
We have entered into an exclusive arrangement with them for this. We have no
experience in manufacturing small molecule compounds and do not have any
manufacturing facilities. If we are unable to enter into supply and processing
contracts with third party manufacturers or processors for our other product
candidates, or even if we are able to enter into supply and processing
contracts, if Sanochemia or such other manufacturers or processors are unable to
or do not satisfy our requirements, or if disputes arise between us and our
suppliers, we may experience a supply interruption and we may incur additional
cost and delay in the clinical development or commercialization of our products.
If we are required to find an additional or alternative source of supply, there
may be additional cost and delay in the development or commercialization of our
products. Furthermore, with AV650, under specified conditions specified in the
contract, Sanochemia is required to establish secondary sources. In this and any
future exclusive supply contracts for our full requirements, we are or will be
particularly reliant on our suppliers. Additionally, the FDA inspects all
commercial manufacturing facilities before approving a New Drug Application for
a drug manufactured at those sites. If any of our manufacturers or processors
fails to pass the FDA inspection, our clinical trials, the potential approval
and eventual commercialization of our products may be delayed.

If we are able to bring our
potential products to market, we will face a number of risks outside of our
control as we may be dependent on others to market our products, as well as to
facilitate demand for our products

Even if
we are able to develop our potential products and obtain necessary regulatory
approvals, we have no experience in marketing or selling any of our proposed
products. We currently do not have a marketing or sales staff. If we are
successful in achieving FDA approval of any product candidate, including any
product that we may acquire as a result of our business development efforts, we
will need to build a commercial capability. The development of a marketing and
sales capability will require significant expenditures, management resources and
time. We may be unable to build such a sales force, the cost of establishing
such a sales force may exceed any product revenues, or our marketing and sales
efforts may be unsuccessful. We may not be able to find a suitable sales and
marketing partner for our products. If we are unable to successfully establish a
sales and marketing capability in a timely manner or find suitable sales and
marketing partners, our business and results of operations will be harmed. Even
if we are able to develop a sales force or find a suitable marketing partner, we
may not successfully penetrate the markets for any of our proposed products.

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We intend
to enter into distribution and marketing agreements with other companies for our
products outside the U.S. and do not anticipate establishing our own foreign
sales and marketing capabilities for any of our potential products in the
foreseeable future. If any of our foreign marketing partners do not perform
under future agreements, we would need to identify an alternative marketing and
distribution partner, or market this product ourselves, and we may not be able
to establish adequate marketing capabilities for this product.

Our
success is dependent on acceptance of our products. We cannot assure you that
our products will achieve significant market acceptance among patients,
physicians or third-party payers, even if we obtain necessary regulatory and
reimbursement approvals. Failure to achieve significant market acceptance will
harm our business. In addition, we cannot assure you that these products will be
considered cost-effective and that reimbursement to the consumer will be
available or will be sufficient to allow us to sell our products on a profitable
basis. In both the United States and elsewhere, sales of medical products and
treatments are dependent, in part, on the availability of reimbursement to the
consumer from third-party payers, such as government and private insurance
plans. Third-party payers are increasingly challenging the prices charged for
medical products and services. We cannot predict whether any legislative or
regulatory proposals will be adopted or the effect that such potential proposals
or managed care efforts may have on our business.

If we fail to comply with regulatory
requirements, or if we experience unanticipated problems with our approved
products, our products could be subject to restrictions or withdrawal from the
market

Any
product for which we obtain marketing approval from the FDA, along with the
manufacturing processes, post-approval clinical data collection and promotional
activities for such product, will be subject to continual review and periodic
inspection by the FDA and other regulatory bodies. After approval of a product,
we will have significant ongoing regulatory compliance obligations. Later
discovery of previously unknown problems with our products or manufacturing
processes, or failure to comply with regulatory requirements, may result in
penalties or other actions, including removal of a product or products from the
market.

Many potential competitors who have
greater resources and experience than we do may develop products and
technologies that make ours non-competitive or obsolete

There are
many entities, both public and private, including well-known, large
pharmaceutical companies, chemical companies, biotechnology companies and
research institutions engaged in developing pharmaceuticals for neurological and
other applications similar to those that may be targeted by us. Competitors may
succeed in developing products that are more effective and less costly than any
that we develop and also may prove to be more successful in the manufacturing
and marketing of products, which would render the products that we develop
non-competitive or obsolete. Furthermore, many of our competitors are more
experienced than we are in drug development and commercialization, obtaining
regulatory approvals, and product manufacturing and marketing. Accordingly, our
competitors may succeed in obtaining regulatory approval for products more
rapidly and more effectively than we do. Any product that we successfully
develop and for which we gain regulatory approval must then compete for market
acceptance and market share. Accordingly, important competitive factors, in
addition to completion of clinical testing and the receipt of regulatory
approval, will include product efficacy, safety, timing and scope of regulatory
approvals, availability of supply, marketing and sales capacity, reimbursement
coverage, pricing and patent protection.

We are
aware that other companies are conducting preclinical studies and clinical
trials for products that could compete with products we intend to acquire or
develop. See "Item 1. Business -- Competition" for a more detailed discussion of
the competition we face.

We may need to secure additional
financing to acquire and complete the development and commercialization of our
products

At
December 31, 2007, we had cash, cash equivalents, available-for-sale securities,
and restricted investments of approximately $78.1 million. We anticipate that
our existing capital resources as of December 31, 2007, will be adequate to fund
our needs for at least two years. However, beyond that, or earlier if we are
successful in pursuing additional indications for compounds in our portfolio or
acquiring additional product candidates, we may require additional funding to
complete the research and development activities currently contemplated, to
acquire new products, and to commercialize our products. Our future capital
requirements will depend on many factors, including:

- continued scientific progress in research and
  development programs;
- the scope and results of preclinical studies and
  clinical trials;
- the time and costs involved in obtaining
  regulatory approvals;

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- the costs involved in filing, prosecuting and
  enforcing patent claims and other intellectual property
  rights;
- the costs involved in obtaining licenses to
  patented technologies from third-parties that may be needed to
  commercialize our products;
- how successful, if at all, we are at expanding our
  drug development portfolio through a combination of internal research,
  acquisitions, and in-licensing compounds, and the
  nature of the consideration we pay for acquiring or in-licensing compounds;
- competing technological
  developments;
- the cost of manufacturing for clinical trials and
  commercialization;
- the costs of sales, marketing and
  commercialization activities;
- our ability to continue to sublease unused
  facilities; and
- other factors which may not be within our
  control.

We will
need to obtain additional funding prior to the time, if any, that we are able to
market any product candidates. We cannot assure our investors that we will be
able to enter into financing arrangements on acceptable terms or at all. Without
additional funding, we may be required to delay, reduce the scope of, or
eliminate one or more of our research or development programs.

If we are able to enhance our
existing pipeline of product candidates through the in-license or other
acquisition of additional development candidates, we may expose ourselves to new
risks that were not identified prior to negotiating the in-license or other
acquisition agreement that may prevent us from successfully developing or
commercializing our product candidates

Even if
we are able to in-license or acquire potential products, we may fail to identify
risks during our due diligence efforts, or new risks may arise later in the
development process of our product candidates, that we may be unable to
adequately address. If we are unable to address such previously unidentified
risks in a timely manner, we will have paid too much for the acquisition or
in-license of the potential product, and our business and results of operations
will be harmed.

We may be unable to attract and
retain the qualified employees, consultants and advisors we need to be
successful

We are
highly dependent on key members of our senior management and scientific staff.
The loss of any of these persons could substantially impair our research and
development efforts and impede our ability to develop and commercialize any of
our products. Recruiting and retaining qualified scientific, technical and
managerial personnel will also be critical to our success. Biotechnology and
pharmaceutical personnel with these skills are in high demand. As a result,
competition for and retention of personnel, particularly for employees with
technical expertise, is intense and the turnover rate for these people can be
high.

In
addition, we rely on consultants and advisors to assist us in formulating our
research and development strategies. A majority of our scientific advisors are
engaged by us on a consulting basis and are employed on a full-time basis by
others. We have limited control over the activities of these scientific
collaborators which often limit their availability to us. Failure of any of
these persons to devote sufficient time and resources to our programs could
delay our progress and harm our business. In addition, some of these
collaborators may have consulting or other advisory arrangements with other
entities that may conflict or compete with their obligations to us.

We face the risk of liability claims
which may exceed the scope or amount of our insurance coverage

The
manufacture and sale of medical products entails significant risk of liability
claims. We currently carry liability insurance; however, we cannot assure you
that this coverage will remain in place or that this coverage will be adequate
to protect us from all liabilities which we might incur in connection with the
use of our products in clinical trials or the future use or sale of our products
upon commercialization. In addition, we may require increased liability coverage
as additional products are used in clinical trials and commercialized. This
insurance is expensive and may not be available on acceptable terms in the
future, if at all. A successful liability claim or series of claims brought
against us in excess of our insurance coverage could harm our business. We must
indemnify some of our licensors against any liability claims brought against
them arising out of products developed by us under these licenses.

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Our use of hazardous materials
exposes us to the risk of environmental liabilities, and we may incur
substantial additional costs to comply with environmental laws in connection
with the operation of our research and development facilities

We use
radioactive materials and other hazardous substances in our research and
development operations. As a result, we are potentially subject to substantial
liabilities related to personal injuries or property damages they may cause. In
addition, clean up costs associated with radioactivity or other hazardous
substances, and related damages or liabilities could be significant and could
harm our business. We do not believe that our current level of use of these
controlled substances will require any material capital expenditures for
environmental control facilities for the next few years. We are also required to
comply with increasingly stringent laws and regulations governing environmental
protection and workplace safety which could impose substantial fines and
criminal sanctions for violations. If we were to fail to maintain compliance
with these laws and regulations we could require substantial additional
capital.

Our historic research and
development activities have primarily focused on our gene delivery products,
which raises uncertainty about our ability to develop and commercialize more
conventional small molecule product candidates effectively

We have
limited experience in developing or commercializing conventional small molecule
product candidates. If we are unable to effectively develop any of the products
in our development portfolio or any new products we in-license or acquire, it
would significantly reduce our ability to create commercial opportunities for
such products.

The gene therapy technology we sold
to Genzyme Corporation is new and developing rapidly and Genzyme Corporation may
face delays in developing products based on technologies included in our
assignment agreement, in which case we may not receive any additional milestone,
sublicensing fees or royalty revenues in connection with the agreement

Development of drug products, including gene therapy products, is
unpredictable and is subject to many risks and uncertainties. We are not aware
of any gene therapy products that Genzyme Corporation has fully developed or for
which it has received regulatory approval for commercial sale in the U.S. As
such, we face the risk that they will not be able to develop or receive
regulatory approval for commercial sale of any product candidates that might
utilize technologies included in our assignment agreement. Therefore, we may
never receive any additional milestone, sublicensing fees or royalty revenues in
connection with our previous work on the gene therapy technology we sold to
Genzyme Corporation.

Risks Related to Our Intellectual
Property

Our success is partly dependent upon
our ability to effectively protect our patents and proprietary rights, which we
may not be able to do

Our
success will depend to a significant degree on our ability to obtain patents and
licenses to patent rights, preserve trade secrets, to obtain protection under
the Hatch-Waxman Act for our products for which we are not able to obtain patent
protection, as discussed below, and to operate without infringing on the
proprietary rights of others. If we are not successful in these endeavors, our
business will be substantially impaired.

To date,
we have filed a number of patent applications in the U.S. relating to
technologies we have developed or co-developed. In addition, we have acquired
licenses to one patent and some pending patent applications. We cannot guarantee
that patents will issue from these applications or that any patent will issue on
technology arising from additional research or, if patents do issue, that claims
allowed will be sufficient to protect our technologies.

The
patent application process takes several years and entails considerable expense.
The failure to obtain patent protection on the technologies underlying some of
our proposed products may have a material adverse effect on our competitive
position and business prospects. Important legal issues remain to be resolved as
to the scope of patent protection for biotechnology and pharmaceutical products,
and we expect that administrative proceedings, litigation, or both may be
necessary to determine the validity and scope of our and others patents. These
proceedings or litigation may require a significant commitment of our resources
in the future.

If
patents can be obtained, we cannot assure you that any of these patents will
provide us with any competitive advantage. Others may independently develop
similar technologies or duplicate any technology developed by us, and patents
may be invalidated or held unenforceable in litigation.

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Some of our
product candidates use active compounds that do not have composition-of-matter
patent protection. For example, in our AV650 program, the composition of matter
patent on the active compound has expired. For that candidate, we intend to
rely, if our patents issue, primarily on formulation and, potentially, use
patent claims, combined with any available regulatoryexclusivity, rather
than more traditional composition-of-matter patent claims on the active
ingredient itself.Formulationand use coverage may not be effective in preventing others
from marketing the active compound in competition with us. As another example,
in our AV411 program, the composition of matter patent on the active compound
has also expired. We have filed and own patent applications on its use for the
indications for which we are developing AV411. However, we cannot assure you
that these patent applications, even if they one day issue as patents, will
effectively prevent others from marketing the same drug for
different indications than those claimed by our patent
applications. We are aware that Medicinova is conducting preclinical studies and
clinical trials for a product that contains the active compound contained in our
AV411 product for use with multiple sclerosis.

We also
rely on a combination of trade secret and copyright laws, employee and
third-party nondisclosure agreements and other protective measures to protect
intellectual property rights pertaining to our products and technologies. We
cannot be certain that these measures will provide meaningful protection of our
trade secrets, know-how or other proprietary information. In addition, the laws
of a number of foreign countries do not protect our intellectual property rights
to the same extent as do the laws of the United States. We cannot assure you
that we will be able to protect our intellectual property successfully.

We may not be able to patent some
formulations of our products in development and may need to rely on protections
under the Hatch-Waxman Act to prevent generics from copying our product
candidates

Some of
our products in development, including AV650 and AV411, are molecules that are
in the public domain. While we are working to obtain patent protection for our
formulations, manufacturing processes, and uses of these molecules, there is no
guarantee that we will be able to do so. In cases where no patent protection can
be obtained, limited regulatory exclusivity providing protection against generic
competition can be obtained under the Hatch-Waxman Act if we are the first to
obtain regulatory approval to market these compounds in the U.S. There is no
guarantee that we will be able to do so. For example, Medicinova is conducting
preclinical studies and clinical trials for a product that contains the active
compound contained in our AV411 product for use with multiple sclerosis, and if
Medicinova is able to obtain new molecular entity designation for this
compound, it would limit the extent of the protection we might otherwise be able
to obtain against generic competition under the Hatch-Waxman Act for AV411.
Biotechnology or pharmaceutical companies with greater financial and personnel
resources may be able to obtain regulatory approval to market one or more of
these compounds prior to our obtaining such approval. Failure to obtain patent
protection or regulatory exclusivity will adversely impact our ability to
commercialize our products and realize a positive return on our investment.

Other persons may assert rights to
our proprietary technology, which could be costly to contest or settle

Third
parties may assert patent or other intellectual property infringement claims
against us with respect to our products, technologies, or other matters. Any
claims against us, with or without merit, as well as claims initiated by us
against third parties, can be time-consuming and expensive to defend or
prosecute and resolve. There may be third-party patents and other intellectual
property relevant to our products and technology which are not known to us. We
have not been accused of infringing any third party's patent rights or other
intellectual property, but we cannot assure you that litigation asserting claims
will not be initiated, that we would prevail in any litigation, or that we would
be able to obtain any necessary licenses on reasonable terms, if at all. If our
competitors prepare and file patent applications in the U.S. that claim
technology also claimed by us, we may have to participate in interference
proceedings declared by the Patent and Trademark Office to determine priority of
invention, which could result in substantial cost to us, even if the outcome is
favorable to us. In addition, to the extent outside collaborators apply
technological information developed independently by them or by others to our
product development programs or apply our technologies to other projects,
disputes may arise as to the ownership of proprietary rights to these
technologies.

We may be required to obtain rights
to proprietary genes and other technologies to further develop our business,
which may not be available or may be costly

We
currently investigate and use some gene sequences or proteins encoded by those
sequences, including the IL-10 gene, and manufacturing processes that are or may
become patented by others. As a result, we may be required to obtain licenses to
these gene sequences or proteins or other technology in order to test, use or
market products. We may not be able to obtain these licenses on terms favorable
to us, if at all. In connection with our efforts to obtain rights to these gene
sequences or proteins or other technology, we may find it necessary to convey
rights to our technology to others. Some of our products may require the use of
multiple proprietary technologies. Consequently, we may be required to make
cumulative royalty payments to several third parties. These cumulative royalties
could become commercially prohibitive. We may not be able to successfully
negotiate these royalty adjustments to a cost effective level, if at all.

15

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If we do not fulfill our obligations
under our in-license agreements, including our in-license for AV650, we may not
be able to retain our rights under those agreements and may be forced to cease
our activities with the affected product candidate or technology

We have
entered into license agreements with third parties for technologies related to
our product development programs. Typically, we have obligations under these
agreements to diligently pursue commercialization of products using the
technologies licensed to us, among other obligations including payment, patent
prosecution, information-sharing and licensing obligations. We have these kinds
of obligations to Sanochemia under our AV650 agreement with them. If we fail to
fulfill our obligations under these agreements and fail to obtain a waiver of
any material failure to fulfill such obligations, the licensor may terminate
these license agreements. Termination of any of our license agreements could
harm our business and force us to cease our activities with the affected product
candidate or technology.

Similarly, if disputes arise between us and our licensors, our rights to
the licensed product candidates and technologies could be threatened. In
addition, any such dispute could harm us through taking our managements time
and attention to resolve the dispute.

Risks Related to Our Stock

Anti-takeover effects of some of our
charter provisions and Delaware law may negatively affect the ability of a
potential buyer to purchase some or all of our stock at an otherwise
advantageous price, which may limit the price investors are willing to pay for
our common stock

Some
provisions of our charter and Delaware law may negatively affect the ability of
a potential buyer to attempt a takeover of Avigen, which may have a negative
effect on the price investors are willing to pay for our common stock. For
example, our board of directors has the authority to issue up to 5,000,000
shares of preferred stock and to determine the price, rights, preferences, and
privileges of those shares without any further vote or action by the
stockholders. This would enable the Board of Directors to establish a
shareholder rights plan, commonly referred to as a poison pill, which would
have the effect of making it more difficult for a third party to acquire a
majority of the outstanding voting stock of Avigen. In addition, our board of
directors is divided into three classes, and each year on a rotating basis the
directors of one class are elected for a three-year term. This provision could
have the effect of making it less likely that a third party would attempt to
obtain control of Avigen through Board representation. Furthermore, some other
provisions of our restated certificate of incorporation may have the effect of
delaying or preventing changes in control or management, which could adversely
affect the market price of our common stock. In addition, we are subject to the
provisions of Section 203 of the Delaware General Corporation Law, an
anti-takeover law.

Our stock price is volatile, and as
a result investing in our common stock is very risky

From
January 1, 2006 to March 1, 2008, our stock price has fluctuated between a range
of $2.93 and $7.44 per share. Webelieve that various factors may cause the market price of our
common stock to continue to fluctuate, perhaps substantially, including
announcements of:

- technological innovations or regulatory
  approvals;
- results of clinical trials;
- new products by us or our
  competitors;
- developments or disputes concerning patents or
  proprietary rights;
- achievement or failure to achieve some
  developmental milestones;
- public concern as to the safety of pharmaceutical
  products;
- health care or reimbursement policy changes by
  governments or insurance companies;
- developments of significant acquisitions or in
  relationships with corporate partners;
- announcements by us regarding financing
  transactions and/or future sales of equity securities; or
- changes in financial estimates or securities
  analysts' recommendations.

16

---

In
addition, in recent years, the stock market in general, and the shares of
biotechnology and health care companies in particular, have experienced extreme
price fluctuations. These broad market and industry fluctuations may cause the
market price of our common stock to decline dramatically.

Item 1B.Unresolved Staff Comments

We have no unresolved written
comments from the Securities and Exchange Commission.

Item 2.Properties

Our
headquarters are located in a commercial neighborhood of Alameda, California,
and consist of two leased buildings with an aggregate of 112,500 square feet.
These buildings include facilities for laboratory research and development,
manufacturing and office space. One building, which represents approximately
45,000 square feet, is under a 5-year lease that was scheduled to expire in May
2008. In August 2007, we amended that lease to: (1) reflect the surrender of
that portion of the premises consisting of approximately 40,348 rentable square
feet on the scheduled expiration date of May 31, 2008; and (2) extend the base
term with respect to the remaining portion of the premises consisting of
approximately 4,834 rentable square feet until November 30, 2010. A second
adjacent building, which represents approximately 67,500 square feet, is under a
10-year lease that is scheduled to expire in November 2010. The scheduled
combined annual rental expense for 2008 under these leases is approximately $2.1
million.

As of
December 31, 2007, we had sublease agreements covering 17,350 square feet and
3,400 square feet, respectively, from the two buildings to three separate
corporate tenants not affiliated with Avigen. Each sublease agreement runs
concurrent with the duration of our underlying master lease term for the
respective building. As a result, the sublease agreements for the 17,350 square
feet in the first building will expire at the end of May 2008. Under these
sublease agreements, we are scheduled to receive annual sublease rental income
in 2008 of approximately $0.3 million and reimbursement for a portion of the
related facilities overhead costs which will be recorded as a reduction to our
operating expenses. We believe that our remaining leased space not under
sublease in these two buildings is adequate for our projected needs for the
foreseeable future.

Item 3.Legal Proceedings

As of March 1, 2008, we were not
involved in any legal proceedings.

Item 4.Submission of Matters to a Vote of Security Holders

None.

17

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Executive Officers of the Registrant

Our executive officers and their
respective ages and positions as of March 14, 2008, are as follows:

|Name                            |  | Age |  | Position                                       
|------------------------------- |  | --- |  | -----------------------------------------------
|Kenneth G. Chahine, J.D., Ph.D. |  | 43  |  | President, Chief Executive Officer and Director
|                                |  |     |  |                                                
|Michael D. Coffee               |  | 62  |  | Chief Business Officer                         
|                                |  |     |  |                                                
|Kirk Johnson, Ph.D.             |  | 48  |  | Vice President, Research and Development       
|                                |  |     |  |                                                
|Andrew A. Sauter                |  | 41  |  | Chief Financial Officer                        
|                                |  |     |  |                                                
|M. Christina Thomson, J.D.      |  | 37  |  | Vice President, Corporate Counsel and
Secretary

All of
our officers are elected annually by the Board of Directors. There is no family
relationship between or among any of the officers or directors.

Kenneth G. Chahine, J.D., Ph.D.,was
appointed President, Chief Executive Officer and director of Avigen in March
2004. Dr. Chahine had previously served as Avigens Chief Operating Officer
since July 2002 and as Vice President, Business Development and Intellectual
Property since 1998. Prior to joining Avigen, Dr. Chahine worked at the patent
law firm of Madson & Metcalf, P.C. in Salt Lake City, Utah from 1994 to
1998. From 1992 to 1993, he worked as a research scientist at Parke-Davis
Pharmaceuticals, a pharmaceutical company, and held another research scientist
post at the University of Utah Department of Human Genetics from 1994 to 1996.
Dr. Chahine served as western regional news and legal correspondent forNature Biotechnologyfrom 1996 to 2002. Dr. Chahine holds a J.D. from the
University of Utah and a Ph.D. in biochemistry and molecular biology from the
University of Michigan.

Michael D. Coffeehas served as
Avigens Chief Business Officer since February 2005. Prior to joining Avigen,
Mr. Coffee co-founded the Alekta Group, LLC in 2004, a consulting firm, to
provide a comprehensive range of pharmaceutical development consulting services
to emerging pharmaceutical companies. From 2001 to 2004 Mr. Coffee served as
President and Chief Operating Officer of Amarin Pharmaceuticals, Inc., the U.S.
drug development and marketing subsidiary of Amarin Corporation PLC. Mr. Coffee
also served as President and Chief Operating Officer of Elan Pharmaceuticals,
North America from 1998 to 2001 and held marketing and executive management
positions, including President and Chief Operating Officer, of Athena
Neurosciences, Inc. between 1991 and 1998. Mr. Coffee received a B.S. in biology
from Siena College.

Kirk
Johnson, Ph.D.,was appointed Vice President,
Research and Development in December 2006. Dr. Johnson joined Avigen in January
2004 and was appointed Vice President, Preclinical Development in June 2004 and
has played a major role in redirecting the company and establishing the
pipeline. Prior to joining Avigen, Dr. Johnson was Senior Director, Pharmacology
& Preclinical Development and a member of the executive management team of
Genesoft Pharmaceuticals, a pharmaceutical company, from 2001 to 2004. From 1991
to 2001, Dr. Johnson was employed in both protein and small molecule therapeutic
research and development at Chiron Corporation, a biopharmaceutical company, and
eventually served as Director, Pharmacology and Preclinical Research. Dr.
Johnson was involved in leading IND-enabling programs, supporting clinical
development, and contributing to successful IND and NDA filings at Chiron and
Genesoft. In addition to general pharmacology and other preclinical development
responsibilities, he has led research and clinical development projects for
diverse indications including neuropathic pain, hemophilia, antibacterials,
diabetes, obesity, acute inflammation and cardiovascular disease and has
published more than 60 manuscripts and holds 5 U.S. patents. Dr. Johnson earned
a B.S. in toxicology from U.C. Davis, and a Ph.D. in pharmacology and toxicology
from the Medical College of Virginia. He completed postdoctoral fellowships
studying the mechanism of action of IL-2 from 1986-1991 at both Dartmouth
Medical School and the University of California, Berkeley.

Andrew
A. Sauterwas appointed Chief Financial
Officer in February 2008 after having served as Vice President, Finance since
January 2006. Mr. Sauter joined Avigen as Controller in November 1999. Mr.
Sauter oversees the financial reporting obligations of Avigen and its
information technology needs. From 1992 to 1999, Mr. Sauter worked for
BankAmerica Corporation in a variety of positions, including most recently as a
vice president in the Capital Markets Finance organization. From 1989 to 1992,
he worked for Ernst & Young LLP. Mr. Sauter is a certified public accountant
and holds a B.A. degree in economics from Claremont McKenna College.

18

---

M.
Christina Thomson, J.D., joined Avigen in
February 2000 and was appointed Vice President, Corporate Counsel in June 2004.
She has also served as our Chief Compliance Officer since March 2004 and
Corporate Secretary since January 2006. Ms. Thomson is a registered patent
attorney, and has managed significant growth in Avigens patent portfolio over
the last seven years. Ms. Thomson also oversees the companys litigation and
administrative patent proceedings, as well as contract administration. Prior to
joining Avigen, Ms. Thomson worked as a patent attorney with the law firm Knobbe
Martens Olson & Bear LLP in Newport Beach, California, as a patent agent
with Madson & Metcalf, P.C. in Salt Lake City, Utah, and as a scientist for
Myriad Genetic Laboratories. Ms. Thomson holds a J.D. from the University of
Utah College of Law and an M.S. in biology from the University of
Utah.

**PART II**

Item 5. Market for Registrants Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities

Our
common stock trades on the NASDAQ Global Market under the symbol AVGN. As of
March 6, 2008, there were approximately 127 holders of record of our common
stock. This figure does not represent the actual number of beneficial owners of
our common stock because shares are generally held in street name by
securities dealers and others for the benefit of individual owners who may vote
the shares.

We have
never declared or paid any cash dividends and do not anticipate declaring or
paying cash dividends in the foreseeable future.

The
following table sets forth the range of high and low sales prices for our common
stock for the two most recent fiscal years.

Year ended
      December 31, 2006
    
    
    High
    
    LowQuarter End 3/31/06
    
    $
    5.95
    
    $
    2.97Quarter End 6/30/06
    
    $
    6.76
    
    $
    4.80Quarter End 9/30/06
    
    $
    6.43
    
    $
    4.76Quarter End 12/31/06
    
    $
    6.79
    
    $
    4.95Year ended
      December 31, 2007
    
    
    High
    
    LowQuarter End 3/31/07
    
    $
    7.44
    
    $
    5.35Quarter End 6/30/07
    
    $
    7.10
    
    $
    6.11Quarter End 9/30/07
    
    $
    6.33
    
    $
    4.56Quarter End 12/31/07
    
    $
    5.55
    
    $
    3.67


On March
6, 2008, the closing sales price of Avigen common stock was $3.59 per
share.

19

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Performance Graph

The
following graph shows the total stockholder return of an investment of $100 in
cash on December 31, 2002 for (a) Avigens common stock, (b) the NASDAQ
Composite Index, and (c) the RDG MicroCap Biotechnology Index. All values assume
reinvestment of the full amount of all dividends paid by companies included in
these indicies and are calculated as of December 31 of each year. We have
selected the RDG MicroCap Biotechnology Index as the appropriate published
industry index for this comparison. The RDG MicroCap Biotechnology Index is
comprised of approximately 250 publicly traded biotech companies with a market
capitalization limit of $300 million. The stock price performance on the graph
below is not necessarily indicative of future price performance.

COMPARISON OF 5 YEAR
CUMULATIVE TOTAL RETURN*Among
Avigen, Inc., The NASDAQ Composite Index andThe RDG MicroCap Biotechnology
Index



* $100 invested on 12/31/02 in stock or
index-including reinvestment of dividends.Fiscal year ending December
31.

20

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Item 6.Selected Financial Data

The
following tables should be read in conjunction with Managements Discussion and
Analysis of Financial Condition and Results of Operations included in Item 7 of
this report and the financial statements and related notes included in Item 8 of
this report.

|                                                         |  |                               |            |              |  |          |            |          |  |          |            |      |  |         |            |   |  |   |            |   |  | Period from
|-------------------------------------------------------- |  | ----------------------------- | ---------- | ------------ |  | -------- | ---------- | -------- |  | -------- | ---------- | ---- |  | ------- | ---------- | - |  | - | ---------- | - |  | -----------
|                                                         |  |                               |            |              |  |          |            |          |  |          |            |      |  |         |            |   |  |   |            |   |  | October 22,
|                                                         |  |                               |            |              |  |          |            |          |  |          |            |      |  |         |            |   |  |   |            |   |  | 1992       
|                                                         |  |                               |            |              |  |          |            |          |  |          |            |      |  |         |            |   |  |   |            |   |  | (inception)
|                                                         |  |                               |            |              |  |          |            |          |  |          |            |      |  | through
|**Statement of Operations Data:**                        |  | Year Ended
      December 31, |            | December 31,
|(in thousands,
      except share and per share amounts) |  | **2007**                      |            | **2006**     |  | **2005** |            | **2004** |  | **2003** |            | 2007
|Revenue                                                  |  | $                             | -          |              |  | $        | 103        |          |  | $        | 12,026 (1) |      |  | $       | 2,195      |   |  | $ | 463        |   |  | $          
|                                                        
|Operating expenses:                                      |  |                               |            |              |  |          |            |          |  |          |            |      |  |         |            |   |  |   |            |   |  |            
|Research and
    development                             |  |                               | 20,818     |              |  |          | 15,219     |          |  |          | 13,775     |      |  |         | 19,344     |   |  |   | 21,805     |   |  |            
|General and
      administrative                         |  |                               | 8,496      |              |  |          | 8,860      |          |  |          | 8,264      |      |  |         | 8,367      |   |  |   | 7,399      |   |  |            
|Impairment
      loss related tolong-lived assets        |  |                               | -          |              |  |          | 450        |          |  |          | 6,130      |      |  |         | -          |   |  |   | -          |   |  |            
|In-license
      fees                                    |  |                               | -          |              |  |          | 3,000      |          |  |          | -          |      |  |         | -          |   |  |   | -          |   |  |            
|Total
      operating expenses                           |  |                               | 29,314     |              |  |          | 27,529     |          |  |          | 28,169     |      |  |         | 27,711     |   |  |   | 29,204     |   |  |            
|Loss from operations                                     |  |                               | (29,314    | )            |  |          | (27,426    | )        |  |          | (16,143    | )    |  |         | (25,516    | ) |  |   | (28,741    | ) |  |            
|Interest
      expense                                   |  |                               | (488       | )            |  |          | (467       | )        |  |          | (323       | )    |  |         | (209       | ) |  |   | (250       | ) |  |            
|Interest income                                          |  |                               | 3,954      |              |  |          | 3,002      |          |  |          | 1,682      |      |  |         | 1,905      |   |  |   | 3,282      |   |  |            
|Sublease
      income                                    |  |                               | 703        |              |  |          | 565        |          |  |          | 67         |      |  |         | -          |   |  |   | -          |   |  |            
|Other income (expense), net                              |  |                               | (19        | )            |  |          | 70         |          |  |          | 21         |      |  |         | (103       | ) |  |   | (65        | ) |  |            
|                                                        
|Net loss                                                 |  | $                             | (25,164    | )            |  | $        | (24,256    | )        |  | $        | (14,696    | )    |  | $       | (23,923    | ) |  | $ | (25,774    | ) |  | $          
|                                                        
|Basic and diluted net loss per                           |  |                               |            |              |  |          |            |          |  |          |            |      |  |         |            |   |  |   |            |   |  |            
|common share                                             |  | $                             | (0.90      | )            |  | $        | (1.03      | )        |  | $        | (0.71      | )    |  | $       | (1.17      | ) |  | $ | (1.28      | ) |  |            
|                                                        
|Shares used in basic and diluted net                     |  |                               |            |              |  |          |            |          |  |          |            |      |  |         |            |   |  |   |            |   |  |            
|loss per common share calculation                        |  |                               | 27,962,202 |              |  |          | 23,509,378 |          |  |          | 20,624,229 |      |  |         | 20,362,155 |   |  |   | 20,149,214 |   |  |            

|Balance Sheet
      Data:                                  |  | December 31,
|---------------------------------------------------------- |  | ------------
|(in
      thousands)                                       |  | 2007        
|Cash, cash equivalents, available-for-sale securities,
and |  |             
|restricted
    investments                                 |  | $           
|Working
      capital                                      |  |             
|Total assets                                               |  |             
|Long-term
      obligations                                |  |             
|Deficit accumulated during development stage               |  |             
|Stockholders'
      equity                                 |  |             

|(1) |  | See Item 7. Managements Discussion and Analysis of
      Financial Condition and Results of Operations  Overview for a
      description of our assignment of rights to Genzyme Corporation, resulting
      in the generation of $12.0 million of revenue in
2005.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

21

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Item 7.Managements Discussion and Analysis of Financial Condition
and Results of Operations

This
Managements Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements that involve risks and
uncertainties. Avigens actual results may differ significantly from the results
discussed in the forward-looking statements. Factors that might cause or
contribute to such differences include, but are not limited to, those discussed
herein and in Item 1A - Risk Factors.

Overview

Avigen is
a biopharmaceutical company focused on developing and commercializing small
molecule therapeutics to treat serious neurological and neuromuscular disorders.
Our current lead product candidates primarily address spasticity and
neuromuscular spasm and neuropathic pain. Our goal is to retain rights to
commercialize our products in North America and therefore we expect, when
appropriate, to build a sales and marketing infrastructure. We intend to seek to
out-license rights to develop and market our products outside the United States.
We also intend to continue to look for opportunities to expand our pipeline of
compounds through a combination of internal research, acquisitions, and
in-licensing as appropriate.

In
January 2006, we acquired exclusive license rights to develop and commercialize
proprietary formulations of the compound tolperisone, which we have named AV650,
for the North American market. These rights include relevant patent filings, as
well as clinical data held by SDI Diagnostics International LTD, a division of
Sanochemia Pharmazeutika AG, or Sanochemia, relating to AV650. Sanochemia has
also agreed to supply AV650 to us exclusively for the North American market.
Under the terms of the agreement, we made an upfront payment of $3.0 million and
will make additional payments to Sanochemia based on the parties achievement of
clinical and regulatory product development milestones and sales of AV650. We
are developing AV650 for the treatment of neuromuscular spasm and spasticity.

During
2007, we significantly expanded the scale and complexity of our clinical
development activities over prior years. In 2007, we initiated Phase II clinical
trials for AV650 in the U.S. and Europe and completed a Phase IIa clinical trial
for AV411 in Australia. We are developing AV411 for the treatment of neuropathic
pain and other indications. The operation of these trials and other development
activities resulted in a significant increase in our operating expenses during
the year. Our product development plans include our intention to complete Phase
II clinical trials and collect other supportive data on the safety and efficacy
of each product in our portfolio in order to design robust Phase III pivotal
trial programs that are acceptable to the FDA and, if approved, to provide
additional information that physicians and patients could use to optimize their
treatment and care.

In May
2006, we completed a private placement of common stock with institutional
investors for net proceeds of $19.4 million. Under the terms of the
transaction Avigen sold approximately 3.9 million shares of common stock at a
purchase price of $5.37 per share. The transaction did not include any warrants
or other enhancements.

In April
2007, we completed an underwritten offering of our common stock with selected
institutional investors. In May 2007, the underwriters exercised a 30-day option
to purchase additional shares to cover over-allotments. In connection with this
transaction, we sold approximately 4.4 million shares of our common stock at a
negotiated purchase price of $6.94 per share for total cash proceeds of $28.5
million, net of underwriter discounts and other issuance costs.

Prior to
2006, Avigen focused on developing a product development portfolio of DNA-based
drug delivery technologies. In December 2005, we entered into an agreement with
Genzyme Corporation, or Genzyme, whereby we assigned to Genzyme our rights to
some of our gene therapy-related intellectual property, our gene therapy
clinical trial programs for Parkinsons disease and hemophilia, gene
therapy-related contracts, and the use of previously manufactured clinical-grade
vector materials. Under the terms of the agreement, we received a $12.0 million
payment and could receive additional development milestones, sublicensing fees
and royalty payments based on the successful development of products by Genzyme
utilizing technologies previously developed by us. In addition, if Genzyme fails
to diligently pursue the commercialization or marketing of products using the
assigned technology, as specified in the agreement, some of the rights we
assigned could revert back to Avigen at a future date.

We are a
development stage company and have primarily supported the financial needs of
our research and development activities since our inception through public
offerings and private placements of our equity securities. We have not received
any revenue from the sale of our products in development, and we do not
anticipate generating revenue from the sale of products in the foreseeable
future. As a result, we expect that we will need to obtain additional funding to
support the anticipated future needs of our research and development activities,
including the costs to complete clinical trials. We expect our source of
revenue, if any, for the next several years to consist of payments under the
Genzyme agreement, under which we assigned to Genzyme our rights to some of our
gene-therapy related intellectual property, our gene therapy clinical trial
programs for Parkinsons disease and hemophilia, some of our gene
therapy-related contracts, and the use of previously manufactured clinical-grade
vector materials, and collaborative arrangements with third parties, government
grants, and non-gene therapy-related license fees. We have incurred losses since
our inception and expect to incur substantial losses over the next several years
due to lack of any substantial revenue and the continuation of our ongoing and
planned research and development efforts, including preclinical studies and
clinical trials. There can be no assurance that we will successfully develop,
commercialize, manufacture, or market our product candidates or ever achieve or
sustain product revenue for profitability. At December 31, 2007 we had an
accumulated deficit of $220.7 million and cash, cash equivalents,
available-for-sale securities, and restricted investments of approximately $78.1
million. We believe that our cash resources at December 31, 2007, will be
adequate to fund our operating needs for at least two years.

22

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Critical Accounting Policies and
Significant Judgments and Estimates

Our
financial statements have been prepared in accordance with U.S. generally
accepted accounting principles. The preparation of these financial statements
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements as well as the reported
revenues and expenses during the reporting periods. On an ongoing basis, we
evaluate our estimates and judgments related to revenue recognition, valuation
of investments in financial instruments, impairment of property and
equipment, asset retirement obligations, recognition of research and
development expenses, and share-based compensation expense. We base our
estimates on historical experience and on various other factors that we believe
are reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.

We
believe the following accounting policies are critical to the process of making
significant judgments and estimates in the preparation of our financial
statements. See also Note 1,*Summary of Significant Accounting
Policies*, in the Notes to our Financial Statements in Item 8. of this
Form 10-K.

Revenue
recognition

We
recognize revenue when the four basic criteria for revenue recognition as
described in SEC Staff Accounting Bulletin No. 104,Revenue Recognition, are met: (1)
persuasive evidence of an arrangement exists; (2) delivery has occurred or
services have been rendered; (3) the fee is fixed or determinable; and (4)
collectibility is reasonably assured.

We
recognize non-refundable license or assignment fees, including development
milestone payments associated with license or assignment agreements, for which
we have no further significant performance obligations and no continuing
involvement requirements related to product development, on the earlier of the
dates on when the payments are received or when collection is assured. For
example, in 2005, we received a $12.0 million payment under the terms of our
agreement with Genzyme. We recognized the payment as revenue, since we concluded
that as of December 31, 2005, we did not have any significant future performance
obligations under the agreement.

We
recognize revenue associated with up-front license, technology access and
research and development funding payments under collaborative agreements ratably
over the relevant periods specified in the agreements, generally the development
phase. This development phase can be defined as a specified period of time,
however, in some cases, the collaborative agreement specifies a development
phase that culminates with milestone objectives but does not have a fixed date
and requires us to estimate the time period over which to recognize this
revenue. Our estimated time periods are based on management's estimate of the
time required to achieve a particular development milestone considering the
projected level of effort and current stage of development. If our estimate of
the development-phase time period changes, the amount of revenue we recognize
related to up-front payments for a given period will accelerate or decrease
accordingly.

23

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Valuation of investments in
financial instruments

We carry
investments in financial instruments at fair value with unrealized gains and
losses included in accumulated other comprehensive income or loss in
stockholders equity. Our investment portfolio does not include equity
securities or derivative financial instruments that could subject us to material
market risk; however, we do invest in corporate, asset-based, and
other obligations that subject us to varying levels of credit risk.
Management assesses whether declines in the fair value of investment securities
are other-than-temporary. If a decline in fair value of a financial instrument
is judged to be other-than-temporary, the cost basis of the individual security
is written down to fair value and the amount of the write down is included in
earnings. In determining whether a decline is other-than-temporary, management
considers:

- the length of time and the extent to which the market value
  of the security has been less than cost;
- the financial condition and near-term prospects of the
  issuer; and
- our intention and ability to retain our investment in the
  issuer for a period of time sufficient to allow for any anticipated recovery
  in market value, which could be until maturity.

The
determination of whether a decline in fair value is other-than-temporary
requires significant judgment, and could have a material impact on our balance
sheet and results of operations. We have not had any write-downs for
other-than-temporary declines in the fair value of our financial instruments
since our inception.

In
addition, when management commits to holding individual securities until
maturity in order to avoid the recognition of an other-than-temporary
impairment, those securities would no longer be classified as
available-for-sale. In addition, management would evaluate these securities to
determine whether the security, based on the remaining duration until its
scheduled maturity, should be identified as a current or long-term asset. As of
December 31, 2007, management had not designated any individual securities as
held-to-maturity for the purposes of avoiding an other-than-temporary
impairment.

Impairment of property and
equipment and asset retirement obligation

We have
invested significant amounts on construction for improvements to leased
facilities we use for our research and development activities, with the largest
portion of our spending made to modify manufacturing facilities that are
intended to comply with requirements of government mandated manufacturing rules
for pharmaceutical production. Management assesses whether the carrying value of
long-lived assets is impaired whenever events or changes in circumstances
indicate that the asset may not be fully recoverable. We recognize an impairment
loss when the total of the estimated future cash flows expected to result from
the use of the asset and its eventual disposition are less than its carrying
value or appraised value, as appropriate. If we judge the value of our
long-lived assets to be impaired, we write down the cost basis of the property
and equipment to fair value and include the amount of the write down in our net
loss. In determining whether the value of our property and equipment is
impaired, management considers:

- failure of manufacturing facilities and equipment to comply
  with government mandated policies and procedures;
- failure of the product candidates for which the manufacturing
  facilities have been constructed to receive regulatory approval;
  and
- the extent that facilities could be idled or abandoned due to
  a decrease in the scope of our research and development activities for an
  other-than-temporary period, resulting in excess capacity.

The
determination of whether the value of our property and equipment is impaired
requires significant judgment, and could have a material impact on our balance
sheet and results of operations. In 2005, we determined that the scope of our
research and development activities had changed such that we would not
effectively utilize some portions of our leased facilities that had been
designed to support our gene therapy programs. After considering alternative
uses for these spaces, we decided it was not cost effective to re-engineer the
rooms representing approximately 40,000 square feet of manufacturing,
laboratory, and office space under lease through May 2008 and approximately
11,000 square feet of similar space we have under lease through November 2010.
We determined we would maximize our potential cost savings by subleasing the
properties. Based on market conditions for rental property at the time of the
reduction in the scope of our research and development activities, and our
subsequent completion of sublease agreements for approximately 26,000 square
feet, we did not expect to fully recover the value invested in leasehold
improvements and equipment, and reduced our net carrying value for these assets
to their then current fair value, resulting in an impairment loss for the year
ended December 31, 2005 of approximately $6.1 million. This impairment loss does
not impact our cash flows and primarily represents an acceleration of
depreciation charges that would have been recognized over the subsequent three
and five year lease periods.

24

---

Under the
terms of our building lease that expires in May 2008, we may be required, at our
landlords sole discretion, to remove, reconfigure or otherwise alter some
improvements we have made to the facility. We determine the fair value of asset
retirement obligations based on our assessment of a range of possible settlement
dates and amounts. Considerable management judgment is required in estimating
these obligations. Important assumptions include estimates of retirement costs,
the timing of the future retirement activities, and the likelihood of retirement
provisions being enforced. Changes in these assumptions based on future
information could result in adjustments to estimated liabilities. As a result of
a change in estimate in December 2006, we remeasured the fair value of this
contingent asset retirement obligation and recognized a liability for $450,000.
In order to evaluate the sensitivity of the fair value calculations in measuring
the obligation, we applied a hypothetical 10% increase to the expected future
costs underlying the fair value calculation. This hypothetical increase would
have caused a comparable increase in the retirement charge. The recognition of
this liability would have resulted in an adjustment to the carrying value of the
underlying long-lived assets. However, in June 2005, these leasehold
improvements were determined to be impaired and written-off with a charge to our
net loss. Since there was no carrying value of the underlying assets at December
31, 2006, the recognition of our asset retirement obligation resulted in an
additional charge in 2006 to impairment loss related to long-lived assets. As of
December 31, 2007, there were no material changes in our expectations with
regard to this obligation. Upon settlement of the obligation, we will recognize
any difference between the cost to retire the asset and the liability recorded
as an increase or decrease to operating expenses in our statement of operations
in the year of settlement.

Recognition of Research and
Development Expenses

Research
and development expenses consist of expenses incurred in performing research and
development activities including related salaries and benefits, facilities and
other overhead costs, clinical trial and related drug product costs, contract
services and other outside service expenses. We charge research and development
expenses to operating expense in the period incurred. These expenses consist of
costs incurred for our independent, as well as our collaborative, research and
development activities.

Pursuant
to managements assessment of the services that have been performed on clinical
trials and other contracts, we recognize expenses as the services are provided.
Several of our contracts extend across multiple reporting periods. Management
assessments include, but are not limited to, an evaluation by the project
manager of the work that has been completed during the period, measurement of
progress prepared internally, estimates of incurred costs by the third-party
service providers, and managements judgment. The determination of the
percentage of work completed that determines the amount of research and
development expense that should be recognized in a given period requires
significant judgment, and could have a material impact on our balance sheet and
results of operations. These estimated expenses may or may not match the actual
fees billed by the service providers as determined by actual work completed. We
monitor service provider activities to the extent possible; however, if we
underestimate activity levels associated with various studies at a given point
in time, we could record significant research and development expenses in future
reporting periods.

Share-based compensation
expense

Effective
January 1, 2006, we adopted Statement of Financial Accounting Standards 123(R),
(FAS 123(R)), *Share-Based Payment*, using the modified prospective
transition method, and recognize share-based compensation expense based on the
grant-date fair value of share-based awards in the results of our operations.
For awards that were granted but not yet vested prior to January 1, 2006, we
calculate the share-based compensation expense using the same estimate of
grant-date fair value previously disclosed under FAS 123 in a pro forma manner.
Fair value methods require management to make several assumptions, the most
significant of which are the selection of a fair value model, stock price
volatility and the expected average life of an option. We have available data of
all grant-by-grant historical activity for stock options we have granted that we
use in developing some of our assumptions. We use the Black-Scholes method to
value stock options. We estimate the expected average life of options granted
based on historic behavior of our option holders and we estimate the volatility
of our common stock at the date of grant based on the historical volatility of
our common stock. The assumptions we use in calculating the fair value of our
share-based awards represent our best estimates, but these estimates involve
inherent uncertainties and the application of management judgment. In addition,
FAS 123(R) requires we estimate forfeitures at the time of grant and only
recognize expense for the portion of awards that are expected to vest. Our
estimate of the forfeiture rate is based on historical experience of our
share-based awards that are forfeited prior to vesting.

If
factors change and we use different assumptions for calculating fair value of
our share-based awards, or if our actual forfeiture rate is materially different
from our estimate, our share-based compensation expense could be materially
different in future periods.

25

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Results of Operations

*Revenue*

Year Ended December
  31,(In thousands,
      except percentages)
    
    
    2007
    
    2006
    
    2005Revenue
    
    $
    -
    
    $
    103
    
    
    $
    12,026Percentage decrease over prior period
    
    
    n/a
    
    
    (99%
    )


We
recognized no revenue in 2007. Revenue in 2006 represented the $103,000 payments
from our participation with the University of Colorado on a grant that was
funded by the National Institutes of Health. Revenue in 2005 primarily reflected
the $12.0 million payment received in connection with our December 2005
agreement with Genzyme.

Total
revenue in 2005 also included research license fees of $22,500 and royalty
revenue of $3,200. These revenues were associated with research license
agreements and a single royalty license related to our gene therapy
technologies. As a result of the assignment of our gene therapy assets to
Genzyme, we are no longer a direct party to most of the license or collaboration
agreements that gave rise to the revenues prior to 2006. As a result, we do not
expect any significant revenues for the foreseeable future and that revenues, if
any, will consist solely of payments that may be received in connection with
other non-gene-therapy related activities.

*Research and Development
Expenses*

We
maintain a small staff and sublease portions of our leased operating facilities
to reduce our overhead costs. In addition, we use external resources to optimize
the pace and cost of development of our product candidates. As a result, our
current business model reduces our exposure to fixed costs for manufacturing
staff and facilities and gives us more control over the strategic timing and
application of our resources.

Our
research and development expenses can be divided into two primary functions: (1)
costs to support research and preclinical development, and (2) costs to support
preparation for and implementation of human clinical trials. Research and
preclinical development costs include activities associated with general
research and exploration, animal studies, non-clinical studies to support the
design of human clinical trials, and in-house and independent third-party
validation testing of potential acquisition or in-license drug candidates.
Clinical development costs include activities associated with preparing for
regulatory approvals, maintaining regulated and controlled processes, purchasing
manufactured drug substances for use in human clinical trials, and supporting
subject enrollment and subject administration within clinical trials.

At
December 31, 2007, the staff count associated with our current research and
development activities, which focus on our portfolio of small molecule
candidates for the treatment of serious neurological and neuromuscular
disorders, was 23, compared to 21 and 20 at December 31, 2006 and 2005,
respectively.

The costs
associated with these two primary functions of our research and development
activities approximate the following (in thousands, except
percentages):

|                                        |  |                         |        |                     |   |              |  | Percentage          |  | Year Ended |        | Percentage
|--------------------------------------- |  | ----------------------- | ------ | ------------------- | - | ------------ |  | ------------------- |  | ---------- | ------ | ----------
|                                        |  | Year Ended December 31, |        | increase
      2007 |   | December 31, |  | increase
      2006
|                                        |  | 2007                    |        | 2006                |   | over 2006    |  | 2005                |  | over 2005 
|Research and preclinical development    |  | $                       | 11,006 |                     | $ | 10,454       |  | 5%                  |  | $          | 9,350  |           
|Clinical
      development              |  |                         | 9,812  |                     |   | 4,765        |  | 106%                |  |            | 4,425  |           
|Total research and development expenses |  | $                       | 20,818 |                     | $ | 15,219       |  | 37%                 |  | $          | 13,775 |           

Because a
significant percentage of our research and development resources contribute to
multiple development programs, the majority of our costs are not directly
attributed to individual development programs. We base decisions regarding our
project management and resource allocation primarily on interpretations of
scientific data, rather than cost allocations. Our estimates of costs between
research and preclinical development and clinical development activities are
primarily based on staffing roles within our research and development
departments. As such, costs allocated to specific projects may not necessarily
reflect the actual costs of those efforts and, therefore, we do not generally
evaluate actual costs-incurred information on a project-by-project basis. In
addition, we are unable to estimate the future costs to complete any specific
projects.

26

---

As of
December 31, 2006, we revised the estimated useful life on some leasehold
improvements with a remaining carrying value of $1.2 million. As a result of
this change, we accelerated the amortization of the remaining carrying
value of these assets to match the estimated remaining term on the underlying
building operating lease, which expires in May 2008. As a result of this change
in estimate, our research and preclinical development depreciation and
amortization expense increased by $0.5 million for 2007 and is expected to
increase by $0.2 million in 2008 from the previous schedule.

*Research and preclinical
development*

|                                                          |  |              |        |            |      |              |           | Percentage |      |   |           |  | Percentage
|--------------------------------------------------------- |  | ------------ | ------ | ---------- | ---- | ------------ | --------- | ---------- | ---- | - | --------- |  | ----------
|                                                          |  |              |        |            |      |              |           | increase   |      |   |           |  | (decrease)
|                                                          |  | Year Ended   |        | (decrease) |      | Year Ended   |           | increase  
|                                                          |  | December 31, |        | 2007       |      | December 31, |           | 2006      
|(In thousands, except
      percentages)                  |  |              | 2007   |            | 2006 |              | over 2006 |            | 2005 |   | over 2005
|Personnel-related                                         |  | $            | 1,977  |            | $    | 1,891        |           | 5%         |      | $ | 3,502     |  | (46%)     
|Share-based compensation                                  |  |              | 424    |            |      | 382          |           | 11%        |      |   | -         |  | n/a       
|External research and development                         |  |              | 4,346  |            |      | 3,954        |           | 10%        |      |   | 1,234     |  | 220%      
|Depreciation and amortization                             |  |              | 1,454  |            |      | 1,075        |           | 35%        |      |   | 1,423     |  | (24%)     
|Other expenses including facilities overhead              |  |              | 2,805  |            |      | 3,152        |           | (11%)      |      |   | 3,191     |  | (1%)      
|Total
      research and preclinical development expenses |  | $            | 11,006 |            | $    | 10,454       |           | 5%         |      | $ | 9,350     |  | 12%       

Comparison of Years Ended December 31, 2007 and 2006.The increases in our total research and preclinical
development expenses for the year ended December 31, 2007, compared to 2006, of
$552,000, were primarily due to changes in costs for the following:

- $392,000 higher expenditures for external research and
  development services from third-party service providers, primarily reflecting
  an increase in costs for required long-term safety studies for AV650 and
  research and development activities of AV411 Analogs and AV513, partially
  offset by a decrease in the level of external animal studies associated with
  AV411, as the program transitioned into the clinical development phase in late
  2006, and
- $379,000 higher depreciation and amortization expenses
  as a result of the December 31, 2006 decrease in the estimated useful
  life of some leasehold improvements,

partially
offset by,

- $346,000 lower facilities and other allocated expenses,
  primarily due to lower facilities overhead.

Comparison of Years Ended December 31, 2006 and 2005.The increases in our total research and preclinical
development expenses for the year ended December 31, 2006, compared to 2005, of
$1.1 million, were primarily due to changes in costs for the
following:

- $2.7 million higher expenditures for external research and
  development services from third-party service providers, primarily related to
  an increase in external preclinical animal studies and scientific consulting
  work to support the progress of our lead product candidates, AV411 and AV650,
  as both programs transitioned into a clinical development phase,
  and
- the recognition of approximately $382,000, in non-cash
  expense for share-based compensation in compliance with FAS 123(R) adopted
  January 1, 2006,

partially
offset by,

- $1.6 million lower personnel-related expenses, reflecting a
  significantly lower average staff level in 2006 as a result of a staff
  reduction initiated in August 2005, partially offset by higher average
  salaries in 2006, and
- $0.4 million lower depreciation expenses and amortization,
  primarily as a result of the impairment charges for leasehold improvements and
  equipment that we recognized in 2005.

27

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*Clinical
development*

|                                             |  |              |       |          |      |              |           |            |      |   |           |  | Percentage
|-------------------------------------------- |  | ------------ | ----- | -------- | ---- | ------------ | --------- | ---------- | ---- | - | --------- |  | ----------
|                                             |  |              |       |          |      |              |           | Percentage |      |   |           |  | (decrease)
|                                             |  | Year Ended   |       | increase |      | Year Ended   |           | increase  
|                                             |  | December 31, |       | 2007     |      | December 31, |           | 2006      
|(In thousands, except
      percentages)     |  |              | 2007  |          | 2006 |              | over 2006 |            | 2005 |   | Over 2005
|Personnel-related                            |  | $            | 1,457 |          | $    | 1,357        |           | 7%         |      | $ | 1,403     |  | (3%)      
|Share-based compensation                     |  |              | 405   |          |      | 169          |           | 140%       |      |   | -         |  | n/a       
|External clinical development                |  |              | 7,374 |          |      | 2,819        |           | 162%       |      |   | 737       |  | 282%      
|Depreciation                                 |  |              | 11    |          |      | -            |           | n/a        |      |   | 841       |  | (100%)    
|Other expenses including facilities overhead |  |              | 565   |          |      | 420          |           | 35%        |      |   | 1,443     |  | (71%)     
|Total
      clinical development expenses    |  | $            | 9,812 |          | $    | 4,765        |           | 106%       |      | $ | 4,425     |  | 8%        

Comparison of Years Ended December 31, 2007 and 2006.The increase in our total clinical development expenses for
the year ended December 31, 2007, compared to 2006, of $5.0 million, was
primarily due to changes in costs for the following:

- $4.6 million higher expenditures for external clinical
  development services from third-party suppliers, associated with the ongoing
  support of our clinical trials for AV650 and AV411, compared to costs related
  to the preparation and initiation of clinical trials for AV650 and AV411 in
  2006, and
- higher non-cash expenses of $236,000, for the recognition of
  share-based compensation in compliance with FAS 123(R).

Comparison of Years Ended December 31, 2006 and 2005.The increase in our total clinical development expenses for
the year ended December 31, 2006, compared to 2005, of $340,000, was primarily
due to changes in costs for the following:

- $2.1 million higher expenditures for external clinical
  development services from third-party suppliers, associated with the
  preparation and initiation of clinical trials for AV650 and AV411 in 2006
  compared to the level of services incurred in connection with our gene therapy
  trials in 2005, and
- the recognition of approximately $169,000 in non-cash expense
  for share-based compensation in compliance with FAS 123(R) adopted January 1,
  2006,

partially
offset by,

- $1.0 million lower other expenses including facilities
  overhead, primarily reflecting a decrease in the amount of square footage of
  the facilities used to support our clinical development and manufacturing
  activities which have primarily been subleased, and
- no depreciation expenses in 2006, compared to depreciation
  expenses of $841,000 in 2005, primarily as a result of the impairment charges
  for leasehold improvements and equipment that were associated with our
  manufacturing facilities that we recognized in 2005.

Total
research and development expenses for 2007 were within managements
expectations. If we are successful in our efforts to develop our product
candidates, including the completion of our ongoing and additional clinical
trials over the next twelve to eighteen months and thereafter, we expect our
total research and development spending in future periods to rise.

28

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*General and Administrative
Expenses*

We have
reclassified some prior period amounts within general and administrative
expenses to conform to our current periods presentation. The reclassifications
had no impact on our financial condition, results of operations, or the net cash
flow from operating activities reported on our statement of cash
flow.

|                                                            |  |              |       |          |      |              |           | Percentage |      |   |           |  | Percentage
|----------------------------------------------------------- |  | ------------ | ----- | -------- | ---- | ------------ | --------- | ---------- | ---- | - | --------- |  | ----------
|                                                            |  |              |       |          |      |              |           | (decrease) |      |   |           |  | (decrease)
|                                                            |  | Year Ended   |       | increase |      | Year Ended   |           | increase  
|                                                            |  | December 31, |       | 2007     |      | December 31, |           | 2006      
|(In thousands, except
      percentages)                    |  |              | 2007  |          | 2006 |              | over 2006 |            | 2005 |   | over 2005
|Personnel-related                                           |  | $            | 3,013 |          | $    | 3,166        |           | (5%)       |      | $ | 3,434     |  | (8%)      
|Share-based compensation                                    |  |              | 1,097 |          |      | 944          |           | 16%        |      |   | -         |  | n/a       
|Severance                                                   |  |              | -     |          |      | 288          |           | (100%)     |      |   | 22        |  | 1,209%    
|Legal
      and professional fees                           |  |              | 1,246 |          |      | 1,194        |           | 4%         |      |   | 1,708     |  | (30%)     
|Facilities, depreciation and other allocated
      expenses |  |              | 3,140 |          |      | 3,268        |           | (4%)       |      |   | 3,100     |  | 5%        
|Total
      general and administrative expenses             |  | $            | 8,496 |          | $    | 8,860        |           | (4%)       |      | $ | 8,264     |  | 7%        

Comparison of the Years Ended December 31, 2007 and 2006. The decrease of $364,000 in our general and administrative
expenses in 2007, compared to 2006, was primarily due to changes in costs for
the following:

- $288,000 lower severance expenses largely associated with the
  resignation of an executive in January 2006,
- $153,000 lower personnel-related expenses, reflecting a
  slightly lower average staff level in 2007, partially offset by higher average
  salaries in 2007, and
- $128,000 lower facilities, depreciation and other allocated
  expenses, including costs associated with pubic relation
  activities,

partially
offset by,

- higher non-cash expenses of $154,000, for the recognition of
  share-based compensation in compliance with FAS 123(R).

Comparison of the Years Ended December 31, 2006 and 2005. The increase of $597,000 in our general and administrative
expenses in 2006, compared to 2005, was primarily due to changes in costs for
the following:

- the recognition of approximately $944,000 in non-cash expense
  for share-based compensation in compliance with FAS 123(R) adopted January 1,
  2006, and
- $266,000 higher severance expenses largely associated with
  the resignation of an executive in January 2006,

partially
offset by,

- $514,000 lower legal and professional fees, primarily
  associated with patent filings and business contracts, and
- $268,000 lower personnel-related expenses, reflecting a lower
  average staff level in 2006, partially offset by higher average salaries
  during the year.

We expect
our current level of general and administrative expenses to continue in 2008.
However, if we are successful in our efforts to develop our product candidates,
we expect general and administrative spending levels may increase to connection
with the changing needs of the company.

29

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*Impairment Loss Related to
Long-Lived Assets*

Year EndedDecember 31,(In
thousands)
    
    2007
    
    2006
    
    2005Impairment loss related to long-lived assets
    
    $
    -
    
    $
    450
    
    $
    6,130


In
connection with the organizational and structural changes initiated in 2005, we
determined that our future operations would not require the full capacity of our
leased facilities, and we began to pursue potential cost savings through a
sublease. We determined that we would not recover fully the costs of our
investment in leasehold improvements to the building and recorded an impairment
charge of $6.1 million in 2005, to reduce the carrying value of some leasehold
improvements and equipment to zero. This amount did not impact our cash flows in
2005. In 2006, we recognized a contingent asset retirement obligation associated
with some leasehold improvements which we determined to be impaired in 2005.
Since the carrying value for these assets had been reduced to zero, the
recognition of the liability resulted in an additional impairment loss related
to long-lived assets in 2006.

*In-license Fees*

Year EndedDecember 31,(In
thousands)
    
    2007
    
    2006
    
    2005In-license fees
    
    $
    -
    
    $
    3,000
    
    $
    -


In
January 2006, we entered into a license agreement and paid Sanochemia a fee of
$3.0 million as consideration for an exclusive license to develop and
commercialize proprietary formulations of the compound tolperisone, which we
have named AV650, for the North American market. We did not enter into any
in-license agreements in 2007 or 2005.

*Interest Expense*

Year EndedDecember 31,(In thousands, except
      percentages)
    
    
    2007
    
    2006
    
    2005Interest expense
    
    $
    488
    
    $
    467
    
    $
    323Percentage
      increase over prior period
    
    
    4%
    
    
    45%


The
increase in our interest expense between 2005 and 2007 reflects a rise in the
average annual rate of interest charged during this period on our line of
credit, which bears interest at a floating rate based on the London-Inter-Bank
Offered Rate, and is reset in three- or six-month increments. On December 31,
2007, we repaid $1.0 million of our outstanding borrowings and reduced our loan
payable at December 31, 2007 to $7.0 million. This should result in lower
interest expense in future periods.

*Interest Income*

Year EndedDecember 31,(In thousands, except
      percentages)
    
    
    2007
    
    2006
    
    2005Interest income
    
    $
    3,954
    
    $
    3,002
    
    $
    1,682Percentage
      increase (decrease) over prior period
    
    
    32%
    
    
    78%


Almost
all of our interest income is generated from our investments in high-grade
marketable securities of government and corporate debt. The increase in interest
income between 2005 and 2007 primarily reflects the higher average outstanding
balance of our total portfolio, including $12.0 million received from Genzyme in
December 2005, the $19.4 million net cash proceeds from the private placement
completed in May 2006, and the $28.5 million net cash proceeds from the sale of
our common stock in connection with the underwritten offering in April 2007, as
well as the impact of the increase in average yields earned on the
portfolio.

30

---

*Sublease Income*

Year EndedDecember 31,(In
      thousands)
    
    
    2007
    
    2006
    
    2005Sublease income
    
    $
    703
    
    $
    565
    
    $
    67


During
2007, we subleased 31,750 square feet of our aggregate facilities in two
buildings to four separate corporate tenants not affiliated with Avigen.
Effective December 4, 2007, we entered into a termination of sublease agreement
for approximately 11,000 square feet of laboratory and office space originally
sublet through November 2010. Unless we are able to enter into additional
sublease agreements after December 31, 2007, we expect to recognize remaining
contractual, sublease income of $0.5 million ratably over the remaining terms of
the leases, which expire in May 2008 and November 2010.

Recently Issued Accounting
Standards

See Note
1, Summary of Significant Accounting Policies - New Accounting Pronouncements, in the
Notes to our Financial Statements for a discussion of recent accounting
pronouncements and their effect, if any, on Avigen, which discussion is
incorporated by reference here.

Deferred Income Tax
Assets

In
accordance with FAS 109, Accounting for Income
Taxes, which is described in the Notes to our
Financial Statements, we have calculated a deferred tax asset based on the
potential future tax benefit we may be able to realize in future periods as a
result of the significant tax losses experienced since our inception. However,
the value of such deferred tax asset must be calculated using the tax rates
expected to apply to the taxable income in the years in which such income
occurs. Since we have no history of earnings, and cannot reliably predict when
we might generate taxable income, if at all, we have recorded a valuation
allowance for the full amount of our calculated deferred tax asset.

We
adopted the provisions of FASB Interpretation No. 48 (FIN 48), Accounting
for Uncertainty in Income Taxes  an Interpretation of FASB Statement No.
109 on January 1, 2007. Upon adoption of FIN 48, we determined that we did
not have any unrecognized tax benefits and there was no effect on our financial
condition or results of operations as a result of implementing FIN
48.

Liquidity and Capital
Resources

Since our
inception in 1992, cash expenditures have significantly exceeded our revenue. We
have funded our operations primarily through public offerings and private
placements of our equity securities. Between May 1996, the date of our initial
public offering, and December 2007, we raised $235.7 million from private
placements and public offerings of our common stock and warrants to purchase our
common stock.

In April
2007, we sold 4.4 million shares of our common stock at $6.94 per share in
an underwritten offering to selected institutional investors for total net cash
proceeds of $28.5 million after deducting underwriter discounts and other
issuance costs of $2.1 million.

In May
2006, we completed a private placement of common stock with institutional
investors, raising approximately $19.4 million in net cash proceeds. The
transaction represented the sale of approximately 3.9 million shares of common
stock at a purchase price of $5.37 per share. There were no warrants or other
enhancements included in the transaction.

In
addition to funding our operations through sales of our common stock, in
December 2005 we received a $12.0 million payment from Genzyme in connection
with the assignment of rights to most of our previously developed gene
therapy-based intellectual property, some clinical trials and other gene therapy
assets.

We have
also attempted to contain costs and reduce cash flow by renting facilities,
subleasing facilities no longer critical to our future operations, contracting
with third parties to conduct research and development and using consultants,
where appropriate. We expect to incur additional future expenses, resulting in
significant additional cash expenditures, as we continue our research and
development activities, including our efforts to develop, manufacture, and
commercialize our current drug candidates, expand our product portfolio with
additional development candidates through internal research, acquisition or
in-licensing, and undertake additional preclinical studies and clinical trials
of our product candidates. We also expect to incur substantial additional
expenses relating to the filing, prosecution, maintenance, defense and
enforcement of patent and other intellectual property claims.

31

---

At
December 31, 2007, we had cash, cash equivalents, available-for-sale securities
and restricted investments, of approximately $78.1 million, compared to
approximately $70.8 million at December 31, 2006. At December 31, 2007 and
2006, the portion of our investment portfolio pledged as collateral, which we
refer to as restricted investments, includes $7.0 million and $8.0 million,
respectively, for outstanding borrowings against our credit facility and
approximately $2.4 million in each year for letters of credit which serve as
security deposits on our building leases. The classification of $428,000 of
these restricted investments as current assets at December 31, 2007 results from
the classification of the underlying building lease liability that expires in
May 2008, as a current liability. The classification of $9.0 million of these
restricted investments as non-current assets at December 31, 2007 results from
the classification of our related loan payable that is due in November 2009, and
the underlying building lease liability that expires in November 2010, as
long-term liabilities. The reduction of $1.0 million in total restricted
investments between 2007 and 2006 was the result of a repayment of outstanding
borrowings in December 2007 which removed the need for the pledged investments.
We do not consider our restricted investments a current source of additional
liquidity.

Effective
June 1, 2007, we amended the terms of our credit facility with Wells Fargo Bank
to extend the repayment period on $8.0 million of outstanding borrowings until
November 2009. Under the terms of the amendment, we are able to make partial or
full repayments of principal at any time; however, amounts repaid cannot be
re-borrowed during the term of the credit facility. In addition, Wells Fargo
Bank will maintain our $2.4 million of currently outstanding standby letters of
credit pursuant to the terms required under our building operating leases that
expire in November 2010 and May 2008.

Operating Activities.Net cash used
for operating activities was $21.1 million for 2007 compared to $20.4 million
for 2006. The 2007 amount was primarily used to support our clinical research
and development activities, including non-clinical studies and clinical trials
performed by third parties. The 2006 amount includes the payment of $3.0 million
during the year to Sanochemia in connection with our in-license agreement for
AV650. The remainder of the cash we used in operating activities for both years
was primarily used to support our internal research and development activities,
and general and administrative expenses.

Net cash
used for operating activities in 2005 was $6.1 million. The increase in the
amount of cash used in 2006 compared to 2005 is primarily due to higher
expenditures to support our research and development activities in 2006,
including preclinical studies and clinical trials performed by third parties,
partially offset by the impact of the receipt of $12.0 million in 2005 in
connection with our transaction with Genzyme. The level of cash used in
operating activities during 2007 and 2006 were in line with managements
expectations.

Investing and Financing Activities.
Net cash used in investing activities in 2007 and 2006 was $8.4 million and $9.7
million, respectively, and consisted primarily of purchases of
available-for-sale securities, net of sales and maturities, and a reduction in
restricted investments. Net cash provided by financing activities in 2007 and
2006 was $28.1 million and $20.4 million, respectively, and consisted of $28.5
million net proceeds from the sale of our common stock in connection with the
underwritten offering in April 2007 and $19.4 million of net proceeds from the
private placement of out common stock to institutional investors in May 2006, as
well as proceeds from the exercise of stock options during both
years.

Net cash
provided by investing and financing activities in 2005 was $14.1 million and
$286,000, respectively. The cash provided by investing activities consisted
primarily of sales and maturities of available-for-sale securities, net of
purchases, and the reduction in restricted investments, offset to a small degree
by purchases of property and equipment of $277,000. Net cash provided by
financing activities consisted of proceeds from the exercise of stock options
during the year.

The
timing of and amounts realized from the exercise of previously issued stock
options and warrants are determined by the decisions of the respective option
and warrant holders, and are not controlled by us. Therefore, funds received
from exercises of stock options and warrants in past periods should not be
considered an indication of additional funds to be received in future
periods.

32

---

The
following are contractual commitments at December 31, 2007 associated with debt
obligations, lease obligations net of sublease income, and contractual
commitments to fund third-party research (in thousands):

|                                   |  | Payments Due by Period
|---------------------------------- |  | ----------------------
|                                   |  |                       
|Contractual Commitment             |  |                       
|Operating leases                   |  | $                     
|Credit
      facility              |  |                       
|Research funding for third-parties |  |                       
|Total                              |  | $                     

Our
credit facility is scheduled to expire on November 1, 2009, at which point a
balloon payment of outstanding principal is due. The debt instrument bears
interest at a floating rate based on the London Inter-Bank Offered Rate
(LIBOR), which is reset in three- or six-month increments based on the date of
each original drawdown, until expiration. As of December 31, 2007 and 2006, the
average annual rate of interest charged on the borrowing was approximately 5.81%
and 5.95%, respectively. Also under the terms of this agreement, we pledged a
portion of our portfolio of available for sale securities as collateral and have
identified the amount of the pledged securities as restricted investments on our
balance sheets. The amount of the pledged securities is equal to the amount of
utilized borrowing capacity on the credit facility. At December 31, 2007, we had
borrowed $7.0 million from the credit vehicle and had reserved the remaining
$2.0 million in borrowing capacity to secure a letter of credit in connection
with our property lease entered into in November 2000. As a result, at December
31, 2007, we have no more borrowing capacity under this facility.

Our
current office and facility includes approximately 112,500 square feet of space.
Of this, approximately 45,000 square feet of space is leased through May 2008
and approximately 67,500 square feet of space is leased through November 2010.
In addition, in August 2007, we amended our lease agreement expiring in May 2008
to extend the expiration period on approximately 4,830 square feet of laboratory
space through November 2010. Payments scheduled under our lease commitments are
included in the table above under operating leases.

Between
2005 and 2007, we completed sublease agreements for approximately 28% of our
leased facilities in order to reduce the costs of our future lease obligations.
Each sublease agreement runs concurrent with the duration of our underlying
master lease term for the respective building. In December 2007, we entered into
a termination of sublease agreement for approximately 11,000 square feet, or
10%, of our leased facilities, through November 2010. Payments scheduled under
our remaining sublease agreements total approximately $525,000 through
2010.

Under the
terms of our building lease that expires in May 2008, we may be required, at our
landlords sole discretion, to remove, reconfigure or otherwise alter some
improvements we have made to the facility. If the landlord requires us to do so,
this would impact our cash flows in future periods. As discussed above in
Critical Accounting Policies and Significant Judgments and Estimates 
Impairment of property and equipment and asset retirement obligation, we
remeasured the fair value of this contingent asset retirement obligation, and
recognized a liability of $484,000 and $450,000 at December 31, 2007 and 2006,
respectively.

We enter
into commitments to fund collaborative research and clinical work performed by
third parties. While these contracts are cancelable by either party, we expect
the research studies and clinical work to be completed as defined in the terms
of the agreements, and all amounts paid when due. Payments scheduled to be made
under these contracts are included in the table above under research funding for
third-parties.

We
believe we will continue to require substantial additional funding in order to
complete the research and development activities currently contemplated and to
commercialize our product candidates. We believe that by keeping our staff level
low and relying on a business model that allows us to leverage efficiencies
through out-sourced service providers, our financial resources as of December
31, 2007 will be adequate to fund our projected operating needs for at least two
years. However, this forward-looking statement is based upon our current plans
and assumptions regarding our future operating and capital requirements, which
may change. Our future operating and capital requirements will depend on many
factors, including:

- continued scientific progress in research and
  development programs;
- the scope and results of preclinical studies and
  clinical trials;
- the time and costs involved in obtaining
  regulatory approvals;

33

---

- the costs involved in filing, prosecuting and
  enforcing patents claims and other intellectual property
  rights;
- the costs involved in obtaining licenses to
  patented technologies from third-parties that may be needed to
  commercialize our product
  candidates;
- competing technological
  developments;
- the cost of manufacturing our product candidates
  for clinical trials and sales;
- the costs of sales, marketing and
  commercialization activities;
- how successful, if at all, we are at acquiring or
  in-licensing additional compounds, and the nature of the consideration
  we pay for acquired or in-licensed compounds;
  and
- other factors which may not be within our
  control.

We will
need to obtain additional funding before we will be able to obtain regulatory
approval to market our product candidates. We cannot assure our investors that
we will be able to enter into financing arrangements on acceptable terms or at
all. Without additional funding, we may be required to delay, reduce the scope
of, or eliminate one or more of our research or development programs.

Item 7A.Quantitative and Qualitative Disclosures About Market Risk

Our
exposure to market rate risk for changes in interest rates relates primarily to
our investment portfolio and our long-term debt. We do not hold derivative
financial investments, derivative commodity investments or other financial
investments or engage in foreign currency hedging or other transactions that
expose us to other market risks. None of our investments are held for trading
purposes. Our investment objectives are focused on preservation of principal and
liquidity. By policy, we manage our exposure to market risks by limiting
investments to high quality issuers and highly liquid instruments with effective
maturities of less than five years and an average aggregate portfolio duration
of between one and three years. Our entire portfolio is classified as
available-for-sale and, as of December 31, 2007 and 2006, consisted of 100%
fixed-rate securities and did not include any holdings of auction rate
securities.

We have
evaluated the risk associated with our portfolios of investments in marketable
securities and have deemed this market risk to be immaterial. If market interest
rates were to increase by 100 basis points, or 1%, from their December 31, 2007
levels, we estimate that the fair value of our securities portfolio would
decline by approximately $684,000. Our estimated exposure at December 31, 2007
is higher than the estimated $613,000 exposure at December 31, 2006 primarily
due to the higher dollar amount of short-term investments in the portfolio. The
modeling technique used measures duration risk sensitivity to estimate the
potential change in fair value arising from an immediate hypothetical shift in
market rates and quantifies the ending fair market value including principal and
accrued interest.

Our
long-term debt includes $7.0 million in borrowings under our credit facility
that expires in November 2009. Interest charged on the borrowing is based on
LIBOR and is reset in three- and six-month increments based on the date of each
original drawdown. As of December 31, 2007, the average annual rate of interest
charged on the borrowings was approximately 5.81% compared to 5.95% as of
December 31, 2006.

34

---

Item 8.Financial Statements and Supplementary
Data

INDEX TO FINANCIAL
STATEMENTS

The
following financial statements are filed as part of this Report on Form 10-K.
Condensed supplementary data for each of the quarters in the years ended
December 31, 2007 and 2006 are set forth under Note 15 of our financial
statements.

|                                                                |  | Page
|--------------------------------------------------------------- |  | ----
|Reports
      of Independent Registered Public Accounting Firms |  | 36  
|Balance
      Sheets                                            |  | 38  
|Statements of Operations                                        |  | 39  
|Statements of
      Stockholders Equity                        |  | 40  
|Statements of Cash Flows                                        |  | 47  
|Notes to Financial
      Statements                             |  | 49  

35

---

REPORT OF ODENBERG, ULLAKKO,
MURANISHI & CO. LLP,INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
of Avigen, Inc.

We have
audited the accompanying balance sheets of Avigen, Inc. (a development stage
company) as of December 31, 2007 and 2006, and the related statements of
operations, stockholders equity and cash flows for the years then ended and for
the period from inception (October 22, 1992) through December 31, 2007. These
financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The cumulative statements of operations, stockholders' equity and
cash flows for the period from inception (October 22, 1992) through December 31,
2005 were audited by other auditors. Our report, insofar as it relates to the
amounts included for the period from October 22, 1992 to December 31, 2005, is
based solely on the report of the other auditors.

We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our
opinion, based on our audits and the report of other auditors, the financial
statements referred to above present fairly, in all material respects, the
financial position of Avigen, Inc. (a development stage company) at December 31,
2007 and 2006, and the results of its operations and its cash flows for the
years then ended and for the period from inception (October 22, 1992) through
December 31, 2007, in conformity with U.S. generally accepted accounting
principles.

As
discussed in Note 1 to the financial statements, on January 1, 2007, the Company
adopted Financial Accounting Standards Board Interpretation No. 48,Accounting for Uncertainty in Income
Taxes,an
Interpretation of FAS 109. Also as discussed
in Note 1 to the financial statements, on January 1, 2006, the Company adopted
the provisions of Statement of Financial Accounting Standards No. 123 (revised),Share-Based Payment.

We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Avigen, Inc.s internal control over financial
reporting as of December 31, 2007, based on criteria established inInternal Control  Integrated
Frameworkissued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report datedMarch 14, 2008expressed an unqualified opinion thereon.

/s/ ODENBERG, ULLAKKO,
      MURANISHI & CO. LLP


San Francisco,
CaliforniaMarch 14, 2008

36

---

REPORT OF ERNST & YOUNG
LLP,INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM

The Board of Directors and Stockholders
of Avigen, Inc.

We have
audited the accompanying statements of operations, stockholders equity and cash
flows of Avigen, Inc. (a development stage company) for the year ended December
31, 2005. We also audited the statements of operations, stockholders equity and
cash flows for the period from inception (October 22, 1992) through December 31,
2005. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our
opinion, the financial statements referred to above present fairly, in all
material respects, the results of operations and its cash flows for Avigen, Inc.
for the year ended December 31, 2005 and for the period from inception (October
22, 1992) through December 31, 2005, in conformity with U.S. generally accepted
accounting principles.

/s/ ERNST & YOUNG
      LLP


Palo Alto, CaliforniaMarch 14, 2006

37

---

AVIGEN, INC.(a development stage
company)

BALANCE SHEETS(in thousands, except share and per share
information)

|                                                           |  | December 31, |          | December 31,
|---------------------------------------------------------- |  | ------------ | -------- | ------------
|                                                           |  | 2007         |          | 2006        
|ASSETS                                                    
|Current assets:                                            |  |              |          |             
|Cash and cash equivalents                                  |  | $            | 359      |             
|Available-for-sale securities                              |  |              | 68,327   |             
|Restricted investments                                     |  |              | 428      |             
|Accrued interest                                           |  |              | 717      |             
|Prepaid expenses and other current assets                  |  |              | 778      |             
|Total current assets                                       |  |              | 70,609   |             
|Restricted investments                                     |  |              | 9,000    |             
|Property and equipment,
      net                          |  |              | 1,263    |             
|Deposits and other assets                                  |  |              | 197      |             
|Total assets                                               |  | $            | 81,069   |             
|                                                           | 
|LIABILITIES AND STOCKHOLDERS' EQUITY                      
|Current
      liabilities:                                 |  |              |          |             
|Accounts payable and other accrued liabilities             |  | $            | 2,039    |             
|Accrued compensation and related expenses                  |  |              | 879      |             
|Loan payable                                               |  |              | -        |             
|Other current liabilities                                  |  |              | 523      |             
|Total current liabilities                                  |  |              | 3,441    |             
|Long-term loan payable                                     |  |              | 7,000    |             
|Deferred rent and other liabilities                        |  |              | 796      |             
|Total liabilities                                          |  |              | 11,237   |             
|Commitments and contingencies                              |  |              |          |             
|Stockholders'
      equity:                                |  |              |          |             
|Preferred stock, $0.001 par value, 5,000,000
      shares  |  |              |          |             
|authorized, none issued and outstanding                    |  |              | -        |             
|Common stock, $0.001 par value, 100,000,000 and 50,000,000 |  |              |          |             
|shares authorized, 29,692,709 and 25,116,131
      shares  |  |              |          |             
|issued and outstanding at December 31, 2007
    and        |  |              |          |             
|December 31, 2006, respectively                            |  |              | 29       |             
|Additional paid-in capital                                 |  |              | 290,147  |             
|Accumulated other comprehensive income (loss)              |  |              | 351      |             
|Deficit accumulated during development stage               |  |              | (220,695 | )           
|Total
      stockholders' equity                           |  |              | 69,832   |             
|Total
      liabilities and stockholders' equity           |  | $            | 81,069   |             

See accompanying
notes.

38

---

AVIGEN, INC.(a development stage
company)

STATEMENTS OF
OPERATIONS(in thousands, except for
share and per share information)

|                                                    |  |                             |            |                    |  |          |            |      |  |   |            |   |  | Period
      from
|--------------------------------------------------- |  | --------------------------- | ---------- | ------------------ |  | -------- | ---------- | ---- |  | - | ---------- | - |  | -----------------
|                                                    |  |                             |            |                    |  |          |            |      |  |   |            |   |  | October
      22,
|                                                    |  |                             |            |                    |  |          |            |      |  |   |            |   |  | 1992             
|                                                    |  |                             |            |                    |  |          |            |      |  |   |            |   |  | (inception)      
|                                                    |  |                             |            | through           
|                                                    |  | **Year Ended December 31,** |            | December
      31,
|                                                    |  | **2007**                    |            | **2006**           |  | **2005** |            | 2007
|Revenue                                             |  | $                           | -          |                    |  | $        | 103        |      |  | $ | 12,026     |   |  | $                
|                                                   
|Operating expenses:                                 |  |                             |            |                    |  |          |            |      |  |   |            |   |  |                  
|Research and development                            |  |                             | 20,818     |                    |  |          | 15,219     |      |  |   | 13,775     |   |  |                  
|General and administrative                          |  |                             | 8,496      |                    |  |          | 8,860      |      |  |   | 8,264      |   |  |                  
|Impairment loss related to long-lived assets        |  |                             | -          |                    |  |          | 450        |      |  |   | 6,130      |   |  |                  
|In-license fees                                     |  |                             | -          |                    |  |          | 3,000      |      |  |   | -          |   |  |                  
|Total operating expenses                            |  |                             | 29,314     |                    |  |          | 27,529     |      |  |   | 28,169     |   |  |                  
|Loss
      from operations                          |  |                             | (29,314    | )                  |  |          | (27,426    | )    |  |   | (16,143    | ) |  |                  
|Interest expense                                    |  |                             | (488       | )                  |  |          | (467       | )    |  |   | (323       | ) |  |                  
|Interest income                                     |  |                             | 3,954      |                    |  |          | 3,002      |      |  |   | 1,682      |   |  |                  
|Sublease income                                     |  |                             | 703        |                    |  |          | 565        |      |  |   | 67         |   |  |                  
|Other
      (expense) income, net                   |  |                             | (19        | )                  |  |          | 70         |      |  |   | 21         |   |  |                  
|                                                   
|Net
      loss                                      |  | $                           | (25,164    | )                  |  | $        | (24,256    | )    |  | $ | (14,696    | ) |  | $                
|                                                   
|Basic
      and diluted net loss per common share   |  | $                           | (0.90      | )                  |  | $        | (1.03      | )    |  | $ | (0.71      | ) |  |                  
|                                                   
|Shares
      used in basic and diluted net loss per |  |                             |            |                    |  |          |            |      |  |   |            |   |  |                  
|common
      share calculation                      |  |                             | 27,962,202 |                    |  |          | 23,509,378 |      |  |   | 20,624,229 |   |  |                  

See accompanying
notes.

39

---

AVIGEN,INC.(adevelopmentstagecompany)

STATEMENTSOFSTOCKHOLDERSEQUITY

Period fromOctober22, 1992(inception)throughDecember31, 2007(inthousands,except for shareinformation)

|                                                        |  |                 |  |              |   |              |           |         |   |                   |  |                 |  |                   |   |             |             |            |             |        |   |  | Deficit |        |   |  |  
|------------------------------------------------------- |  | --------------- |  | ------------ | - | ------------ | --------- | ------- | - | ----------------- |  | --------------- |  | ----------------- | - | ----------- | ----------- | ---------- | ----------- | ------ | - |  | ------- | ------ | - |  | -
|                                                        |  |                 |  |              |   |              |           |         |   |                   |  | Class B         |  |                   |   |             | Accumulated |            | Accumulated |        |   |  |        
|                                                        |  |                 |  |              |   |              |           |         |   |                   |  | Convertible     |  | Additional        |   | Other       |             | During the |             | Total 
|                                                        |  | Preferred Stock |  | Common Stock |   | Common Stock |           | Paid-in |   | **Comprehensive** |  | **Development** |  | **Stockholders**
|                                                        |  | Shares          |  | Amount       |   | Shares       |           | Amount  |   | Shares            |  | Amount          |  | Capital           |   | Gain (Loss) |             | Stage      |             | Equity
|Balance
      at October 22, 1992 (inception)           |  |                |  | $            |  |              |          |         | $ |                  |  |                |  | $                 |  |             | $           |           |             | $      |  |  | $       |       |   |  | $
|Issuance of common stock at $.004 per share in          |  |                 |  |              |   |              |           |         |   |                   |  |                 |  |                   |   |             |             |            |             |        |   |  |         |        |   |  |  
|November and December 1992                              |  |                |  |              |  |              | 896,062   |         |   | 1                 |  |                |  |                   |  |             |             | 4          |             |        |  |  |         |       |   |  |  
|Issuance of common stock at $.554 per share from        |  |                 |  |              |   |              |           |         |   |                   |  |                 |  |                   |   |             |             |            |             |        |   |  |         |        |   |  |  
|January to June 1993 for services rendered              |  |                |  |              |  |              | 20,316    |         |   |                  |  |                |  |                   |  |             |             | 11         |             |        |  |  |         |       |   |  |  
|Issuance of common stock at $.004 to $.222 per share    |  |                 |  |              |   |              |           |         |   |                   |  |                 |  |                   |   |             |             |            |             |        |   |  |         |        |   |  |  
|from November 1992 to March 1993 for cash               |  |                |  |              |  |              | 1,003,406 |         |   | 1                 |  |                |  |                   |  |             |             | 54         |             |        |  |  |         |       |   |  |  
|Issuance of Class B common stock at $.004 per share     |  |                 |  |              |   |              |           |         |   |                   |  |                 |  |                   |   |             |             |            |             |        |   |  |         |        |   |  |  
|in December 1992 for cash                               |  |                |  |              |  |              |          |         |   |                  |  | 90,293          |  |                   |  |             |             | 1          |             |        |  |  |         |       |   |  |  
|Issuance of Series A preferred stock at $4.43 per       |  |                 |  |              |   |              |           |         |   |                   |  |                 |  |                   |   |             |             |            |             |        |   |  |         |        |   |  |  
|share from March to June 1993 for cash (net
      of    |  |                 |  |              |   |              |           |         |   |                   |  |                 |  |                   |   |             |             |            |             |        |   |  |         |        |   |  |  
|issuance costs of $410,900)                             |  | 678,865         |  |              | 1 |              |          |         |   |                  |  |                |  |                   |  |             |             | 2,595      |             |        |  |  |         |       |   |  |  
|Issuance of Series A preferred stock at $3.85 per       |  |                 |  |              |   |              |           |         |   |                   |  |                 |  |                   |   |             |             |            |             |        |   |  |         |        |   |  |  
|share in March 1993 for cancellation of note            |  |                 |  |              |   |              |           |         |   |                   |  |                 |  |                   |   |             |             |            |             |        |   |  |         |        |   |  |  
|payable and accrued interest                            |  | 68,991          |  |              |  |              |          |         |   |                  |  |                |  |                   |  |             |             | 266        |             |        |  |  |         |       |   |  |  
|Issuance of common stock at $.004 per share in          |  |                 |  |              |   |              |           |         |   |                   |  |                 |  |                   |   |             |             |            |             |        |   |  |         |        |   |  |  
|November 1993 pursuant to antidilution
      rights     |  |                |  |              |  |              | 22,869    |         |   |                  |  |                |  |                   |  |             |             | 1          |             |        |  |  |         |       |   |  |  
|Issuance of Series A preferred stock at $4.43 per       |  |                 |  |              |   |              |           |         |   |                   |  |                 |  |                   |   |             |             |            |             |        |   |  |         |        |   |  |  
|share from July to November 1993 for cash
      and     |  |                 |  |              |   |              |           |         |   |                   |  |                 |  |                   |   |             |             |            |             |        |   |  |         |        |   |  |  
|receivable (net of issuance costs of
      $187,205)    |  | 418,284         |  |              |  |              |          |         |   |                  |  |                |  |                   |  |             |             | 1,665      |             |        |  |  |         |       |   |  |  
|Issuance of Series B preferred stock at $5.54 per       |  |                 |  |              |   |              |           |         |   |                   |  |                 |  |                   |   |             |             |            |             |        |   |  |         |        |   |  |  
|share in March 1994 for cash (net of
      issuance     |  |                 |  |              |   |              |           |         |   |                   |  |                 |  |                   |   |             |             |            |             |        |   |  |         |        |   |  |  
|costs of $34,968)                                       |  | 128,031         |  |              |  |              |          |         |   |                  |  |                |  |                   |  |             |             | 674        |             |        |  |  |         |       |   |  |  
|Issuance of Series C preferred stock at $4.87 per       |  |                 |  |              |   |              |           |         |   |                   |  |                 |  |                   |   |             |             |            |             |        |   |  |         |        |   |  |  
|share from July 1994 to June 1995 for cash
      and    |  |                 |  |              |   |              |           |         |   |                   |  |                 |  |                   |   |             |             |            |             |        |   |  |         |        |   |  |  
|receivables (net of issuance costs of
      $259,620)   |  | 739,655         |  |              | 1 |              |          |         |   |                  |  |                |  |                   |  |             |             | 3,344      |             |        |  |  |         |       |   |  |  
|Issuance of Series C preferred stock at $4.87 per share |  |                 |  |              |   |              |           |         |   |                   |  |                 |  |                   |   |             |             |            |             |        |   |  |         |        |   |  |  
|in June 1995 for cancellation of notes
      payable    |  | 35,500          |  |              |  |              |          |         |   |                  |  |                |  |                   |  |             |             | 173        |             |        |  |  |         |       |   |  |  
|Net
      loss and comprehensive loss from inception to |  |                 |  |              |   |              |           |         |   |                   |  |                 |  |                   |   |             |             |            |             |        |   |  |         |        |   |  |  
|June 30, 1995                                           |  |                |  |              |  |              |          |         |   |                  |  |                |  |                   |  |             |             |           |             |        |  |  |         | (8,608 | ) |  |  
|Balance
      at June 30, 1995 (carried forward)        |  | 2,069,326       |  | $            | 2 |              | 1,942,653 |         | $ | 2                 |  | 90,293          |  | $                 |  |             | $           | 8,788      |             | $      |  |  | $       | (8,608 | ) |  | $

40

---

AVIGEN,INC.(adevelopmentstagecompany)

STATEMENTSOFSTOCKHOLDERSEQUITY(Continued)

Period fromOctober22, 1992(inception)throughDecember31, 2007(inthousands,except for shareinformation)

|                                                                                                                             |  |                 |   |              |   |              |   |         |           |                   |  |                 |   |                   |             |             |            |       |       |        |                 |        |                 |  |   |   |  | Deficit |         |   |  |  
|---------------------------------------------------------------------------------------------------------------------------- |  | --------------- | - | ------------ | - | ------------ | - | ------- | --------- | ----------------- |  | --------------- | - | ----------------- | ----------- | ----------- | ---------- | ----- | ----- | ------ | --------------- | ------ | --------------- |  | - | - |  | ------- | ------- | - |  | -
|                                                                                                                             |  |                 |   |              |   |              |   |         |           |                   |  |                 |   |                   | Class B     |             |            |       |       |        | **Accumulated** |        | **Accumulated** |  |   |   | 
|                                                                                                                             |  |                 |   |              |   |              |   |         |           |                   |  |                 |   |                   | Convertible |             | Additional |       | Other |        | During the      |        | Total          
|                                                                                                                             |  | Preferred Stock |   | Common Stock |   | Common Stock |   | Paid-in |           | **Comprehensive** |  | **Development** |   | **Stockholders**
|                                                                                                                             |  | Shares          |   | Amount       |   | Shares       |   | Amount  |           | Shares            |  | Amount          |   | Capital           |             | Gain (Loss) |            | Stage |       | Equity
|Balance
      at June 30, 1995 (brought forward)                                                                             |  | 2,069,326       |   |              | $ | 2            |   |         | 1,942,653 |                   |  | $               | 2 |                   | 90,293      |             |            | $     |      |        | $               | 8,788  |                 |  | $ |  |  | $       | (8,608  | ) |  | $
|Issuance of Series C preferred
      stock at $4.87 per share in July 1995 for cash (net of issuance costs of
      $26,000) |  | 41,042          |   |              |   |             |   |         |          |                   |  |                 |  |                   |            |             |            |       |      |        |                 | 174    |                 |  |   |  |  |         |        |   |  |  
|Issuance of Series D preferred
      stock at $7.09 per share                                                                |  |                 |   |              |   |              |   |         |           |                   |  |                 |   |                   |             |             |            |       |       |        |                 |        |                 |  |   |   |  |         |         |   |  |  
|from October 1995 to February 1996 for cash (net ofissuance costs of $25,279)                                                |  | 205,351         |   |              |   |             |   |         |          |                   |  |                 |  |                   |            |             |            |       |      |        |                 | 1,430  |                 |  |   |  |  |         |        |   |  |  
|Issuance of Series D preferred
      stock at $7.09 per share in March 1996 in settlement of accounts
      payable          |  | 22,574          |   |              |   |             |   |         |          |                   |  |                 |  |                   |            |             |            |       |      |        |                 | 160    |                 |  |   |  |  |         |        |   |  |  
|Issuance of common stock at
      $.004 per share in March 1996 pursuant to antidilution rights                              |  |                |   |              |   |             |   |         | 17,630    |                   |  |                 |  |                   |            |             |            |       |      |        |                 | 1      |                 |  |   |  |  |         |        |   |  |  
|Issuance of stock options in
      February 1996 in settlement of certain accrued liabilities                                |  |                |   |              |   |             |   |         |          |                   |  |                 |  |                   |            |             |            |       |      |        |                 | 137    |                 |  |   |  |  |         |        |   |  |  
|Conversion of Class
      B common stock to commonstock                                                                      |  |                |   |              |   |             |   |         | 231,304   |                   |  |                 | 1 |                   | (90,293     | )           |            |       |      |        |                 | (1     | )               |  |   |  |  |         |        |   |  |  
|Issuance of warrants to
      purchase common stock in connection with 1996 bridge financing in March1996                    |  |                |   |              |   |             |   |         |          |                   |  |                 |  |                   |            |             |            |       |      |        |                 | 300    |                 |  |   |  |  |         |        |   |  |  
|Conversion of
      preferred stock to common stock inMay 1996                                                               |  | (2,338,293      | ) |              |   | (2           | ) |         | 2,355,753 |                   |  |                 | 2 |                   |            |             |            |       |      |        |                 | (1     | )               |  |   |  |  |         |        |   |  |  
|Issuance of common stock at
      $8.00 per share in connection with the May 1996 initial public                             |  |                 |   |              |   |              |   |         |           |                   |  |                 |   |                   |             |             |            |       |       |        |                 |        |                 |  |   |   |  |         |         |   |  |  
|offering (net of issuance costs of $798,414 and underwriting discount of
      $1,500,000)                                   |  |                |   |              |   |             |   |         | 2,500,000 |                   |  |                 | 2 |                   |            |             |            |       |      |        |                 | 17,699 |                 |  |   |  |  |         |        |   |  |  
|Proceeds from
      exercise of options at $0.44 per share inJune 1996                                                       |  |                |   |              |   |             |   |         | 6,178     |                   |  |                 |  |                   |            |             |            |       |      |        |                 | 3      |                 |  |   |  |  |         |        |   |  |  
|Repurchase of common
      stock                                                                                             |  |                |   |              |   |             |   |         | (18,325   | )                 |  |                 |  |                   |            |             |            |       |      |        |                 | (1     | )               |  |   |  |  |         |        |   |  |  
|Deferred
compensation                                                                                                        |  |                |   |              |   |             |   |         |          |                   |  |                 |  |                   |            |             |            |       |      |        |                 | 164    |                 |  |   |  |  |         |        |   |  |  
|Amortization of deferred
      compensation                                                                                  |  |                |   |              |   |             |   |         |          |                   |  |                 |  |                   |            |             |            |       |      |        |                 | (128   | )               |  |   |  |  |         |        |   |  |  
|Net loss and comprehensive
      loss                                                                                        |  |                |   |              |   |             |   |         |          |                   |  |                 |  |                   |            |             |            |       |      |        |                 |       |                 |  |   |  |  |         | (4,097  | ) |  |  
|Balance at June 30,
      1996 (carried forward)                                                                             |  |                |   |              | $ |             |   |         | 7,035,193 |                   |  | $               | 7 |                   |            |             |            | $     |      |        | $               | 28,725 |                 |  | $ |  |  | $       | (12,705 | ) |  | $

41

---

AVIGEN,INC.(adevelopmentstagecompany)

STATEMENTSOFSTOCKHOLDERSEQUITY(Continued)

Period fromOctober22, 1992(inception)throughDecember31, 2007(inthousands,except for shareinformation)

|                                                                                                                            |  |                 |  |              |   |              |            |         |   |                   |  |                 |  |                   |   |             |                 |            |                 |        |   |  | Deficit |         |   |  |  
|--------------------------------------------------------------------------------------------------------------------------- |  | --------------- |  | ------------ | - | ------------ | ---------- | ------- | - | ----------------- |  | --------------- |  | ----------------- | - | ----------- | --------------- | ---------- | --------------- | ------ | - |  | ------- | ------- | - |  | -
|                                                                                                                            |  |                 |  |              |   |              |            |         |   |                   |  | Class B         |  |                   |   |             | **Accumulated** |            | **Accumulated** |        |   |  |        
|                                                                                                                            |  |                 |  |              |   |              |            |         |   |                   |  | Convertible     |  | Additional        |   | Other       |                 | During the |                 | Total 
|                                                                                                                            |  | Preferred Stock |  | Common Stock |   | Common Stock |            | Paid-in |   | **Comprehensive** |  | **Development** |  | **Stockholders**
|                                                                                                                            |  | Shares          |  | Amount       |   | Shares       |            | Amount  |   | Shares            |  | Amount          |  | Capital           |   | Gain (Loss) |                 | Stage      |                 | Equity
|Balance
      at June 30, 1996 (brought forward)                                                                            |  |                |  | $            |  |              | 7,035,193  |         | $ | 7                 |  |                |  | $                 |  |             | $               | 28,725     |                 | $      |  |  | $       | (12,705 | ) |  | $
|Issuance of common stock at
      $8.00 per share in July 1996 in connection with the exercise of
      underwriters over- |  |                 |  |              |   |              |            |         |   |                   |  |                 |  |                   |   |             |                 |            |                 |        |   |  |         |         |   |  |  
|allotment option (net of underwriting discount of $150,000)                                                                 |  |                |  |              |  |              | 250,000    |         |   |                  |  |                |  |                   |  |             |                 | 1,850      |                 |        |  |  |         |        |   |  |  
|Proceeds from exercise of
      options at $0.44 to $0.71 per share                                                         |  |                |  |              |  |              | 3,387      |         |   |                  |  |                |  |                   |  |             |                 | 1          |                 |        |  |  |         |        |   |  |  
|Amortization of deferred
      compensation                                                                                 |  |                |  |              |  |              |           |         |   |                  |  |                |  |                   |  |             |                 | 41         |                 |        |  |  |         |        |   |  |  
|Net loss and comprehensive
      loss                                                                                       |  |                |  |              |  |              |           |         |   |                  |  |                |  |                   |  |             |                 |           |                 |        |  |  |         | (5,578  | ) |  |  
|Balance at June 30,
      1997                                                                                              |  |                |  |              |  |              | 7,288,580  |         |   | 7                 |  |                |  |                   |  |             |                 | 30,617     |                 |        |  |  |         | (18,283 | ) |  |  
|Proceeds from exercise of
      options at $0.44 to $0.71 per share                                                         |  |                |  |              |  |              | 17,278     |         |   |                  |  |                |  |                   |  |             |                 | 10         |                 |        |  |  |         |        |   |  |  
|Amortization of deferred
      compensation                                                                                 |  |                |  |              |  |              |           |         |   |                  |  |                |  |                   |  |             |                 | 41         |                 |        |  |  |         |        |   |  |  
|Compensation expense related
      to options granted for services                                                          |  |                |  |              |  |              |           |         |   |                  |  |                |  |                   |  |             |                 | 68         |                 |        |  |  |         |        |   |  |  
|Net loss and comprehensive
      loss                                                                                       |  |                |  |              |  |              |           |         |   |                  |  |                |  |                   |  |             |                 |           |                 |        |  |  |         | (8,877  | ) |  |  
|Balance
      at June 30, 1998                                                                                              |  |                |  |              |  |              | 7,305,858  |         |   | 7                 |  |                |  |                   |  |             |                 | 30,736     |                 |        |  |  |         | (27,160 | ) |  |  
|Proceeds from exercise of
      options at $0.44 to $4.31 per share                                                         |  |                |  |              |  |              | 181,045    |         |   |                  |  |                |  |                   |  |             |                 | 222        |                 |        |  |  |         |        |   |  |  
|Amortization of deferred
      compensation                                                                                 |  |                |  |              |  |              |           |         |   |                  |  |                |  |                   |  |             |                 | 41         |                 |        |  |  |         |        |   |  |  
|Issuance of common stock at
      $2.25 - $2.94 per share and warrants in August to September 1998 in
      connection      |  |                 |  |              |   |              |            |         |   |                   |  |                 |  |                   |   |             |                 |            |                 |        |   |  |         |         |   |  |  
|with a Private Placement (net of issuance cost of $233,584)                                                                 |  |                |  |              |  |              | 1,306,505  |         |   | 1                 |  |                |  |                   |  |             |                 | 2,734      |                 |        |  |  |         |        |   |  |  
|Issuance of common stock at
      $3.81 - $4.88 per share and warrants in December 1998 in connection with a
      Private  |  |                 |  |              |   |              |            |         |   |                   |  |                 |  |                   |   |             |                 |            |                 |        |   |  |         |         |   |  |  
|Placement (net of issuance cost of $438,183)                                                                                |  |                |  |              |  |              | 1,367,280  |         |   | 2                 |  |                |  |                   |  |             |                 | 5,195      |                 |        |  |  |         |        |   |  |  
|Issuance of common stock at
      $5.50 - $6.00 per share and warrants in February to April 1999 in
      connection with a |  |                 |  |              |   |              |            |         |   |                   |  |                 |  |                   |   |             |                 |            |                 |        |   |  |         |         |   |  |  
|Private Placement (net of issuance cost of $1,033,225)                                                                      |  |                |  |              |  |              | 2,198,210  |         |   | 2                 |  |                |  |                   |  |             |                 | 12,154     |                 |        |  |  |         |        |   |  |  
|Net loss and comprehensive
      loss                                                                                       |  |                |  |              |  |              |           |         |   |                  |  |                |  |                   |  |             |                 |           |                 |        |  |  |         | (9,611  | ) |  |  
|Balance at June 30,
      1999 (carried forward)                                                                            |  |                |  | $            |  |              | 12,358,898 |         | $ | 12                |  |                |  | $                 |  |             | $               | 51,082     |                 | $      |  |  | $       | (36,771 | ) |  | $

42

---

AVIGEN,INC.(adevelopmentstagecompany)

STATEMENTSOFSTOCKHOLDERSEQUITY(Continued)

Period fromOctober22, 1992(inception)throughDecember31, 2007(inthousands,except for shareinformation)

|                                                                                                                |  |                 |  |              |   |              |            |         |   |                   |  |                 |  |                   |   |             |                 |            |                 |        |       |   |  | Deficit |         |   |  |  
|--------------------------------------------------------------------------------------------------------------- |  | --------------- |  | ------------ | - | ------------ | ---------- | ------- | - | ----------------- |  | --------------- |  | ----------------- | - | ----------- | --------------- | ---------- | --------------- | ------ | ----- | - |  | ------- | ------- | - |  | -
|                                                                                                                |  |                 |  |              |   |              |            |         |   |                   |  | Class B         |  |                   |   |             | **Accumulated** |            | **Accumulated** |        |       |   | 
|                                                                                                                |  |                 |  |              |   |              |            |         |   |                   |  | Convertible     |  | Additional        |   | Other       |                 | During the |                 | Total 
|                                                                                                                |  | Preferred Stock |  | Common Stock |   | Common Stock |            | Paid-in |   | **Comprehensive** |  | **Development** |  | **Stockholders**
|                                                                                                                |  | Shares          |  | Amount       |   | Shares       |            | Amount  |   | Shares            |  | Amount          |  | Capital           |   | Gain (Loss) |                 | Stage      |                 | Equity
|Balance
      at June 30, 1999 (brought forward)                                                                |  |                |  | $            |  |              | 12,358,898 |         | $ | 12                |  |                |  | $                 |  |             | $               | 51,082     |                 | $      |      |   |  | $       | (36,771 | ) |  | $
|Proceeds from exercise of
      options at $0.44 to $15.50                                                      |  |                |  |              |  |              | 440,259    |         |   | 1                 |  |                |  |                   |  |             |                 | 1,533      |                 |        |      |   |  |         |        |   |  |  
|Proceeds from exercise of
      warrants at $2.81 to $31.95                                                     |  |                |  |              |  |              | 1,017,215  |         |   | 1                 |  |                |  |                   |  |             |                 | 8,427      |                 |        |      |   |  |         |        |   |  |  
|Amortization of deferred
      compensation                                                                     |  |                |  |              |  |              |           |         |   |                  |  |                |  |                   |  |             |                 | 5          |                 |        |      |   |  |         |        |   |  |  
|Compensation expense related
      to options granted for services                                              |  |                |  |              |  |              |           |         |   |                  |  |                |  |                   |  |             |                 | 89         |                 |        |      |   |  |         |        |   |  |  
|Warrants granted for patent
      licenses                                                                      |  |                |  |              |  |              |           |         |   |                  |  |                |  |                   |  |             |                 | 3,182      |                 |        |      |   |  |         |        |   |  |  
|Warrants granted for building
      lease                                                                       |  |                |  |              |  |              |           |         |   |                  |  |                |  |                   |  |             |                 | 1,738      |                 |        |      |   |  |         |        |   |  |  
|Issuance of common stock at
      $16.19 to $25.56 per share and warrants in October and November 1999
      in |  |                 |  |              |   |              |            |         |   |                   |  |                 |  |                   |   |             |                 |            |                 |        |       |   |  |         |         |   |  |  
|connection with a Private Placement (net of issuance cost of $2,804,255
      )                                 |  |                |  |              |  |              | 2,033,895  |         |   | 2                 |  |                |  |                   |  |             |                 | 37,220     |                 |        |      |   |  |         |        |   |  |  
|Issuance of common stock at
      $26 per share in April and May 2000 in connection with
    a                  |  |                 |  |              |   |              |            |         |   |                   |  |                 |  |                   |   |             |                 |            |                 |        |       |   |  |         |         |   |  |  
|Public Offering (net of issuance cost of $2,288,966)                                                            |  |                |  |              |  |              | 1,150,000  |         |   | 1                 |  |                |  |                   |  |             |                 | 27,610     |                 |        |      |   |  |         |        |   |  |  
|Comprehensive loss:                                                                                             |  |                 |  |              |   |              |            |         |   |                   |  |                 |  |                   |   |             |                 |            |                 |        |       |   |  |         |         |   |  |  
|Net loss                                                                                                        |  |                |  |              |  |              |           |         |   |                  |  |                |  |                   |  |             |                 |           |                 |        |      |   |  |         | (15,039 | ) |  |  
|Net unrealized loss on available-for-sale securities                                                            |  |                |  |              |  |              |           |         |   |                  |  |                |  |                   |  |             |                 |           |                 |        | (80   | ) |  |         |        |   |  |  
|Comprehensive loss                                                                                              |  |                 |  |              |   |              |            |         |   |                   |  |                 |  |                   |   |             |                 |            |                 |        |       |   |  |         |         |   |  |  
|Balance at June 30,
      2000                                                                                  |  |                |  | $            |  |              | 17,000,267 |         | $ | 17                |  |                |  | $                 |  |             | $               | 130,886    |                 | $      | (80   | ) |  | $       | (51,810 | ) |  | $
|Proceeds from exercise of
      options at $0.44 to $34.00 per share                                            |  |                |  |              |  |              | 165,700    |         |   |                  |  |                |  |                   |  |             |                 | 869        |                 |        |      |   |  |         |        |   |  |  
|Proceeds from exercise of
      warrants at $2.18 to $23.43                                                     |  |                |  |              |  |              | 174,255    |         |   | 1                 |  |                |  |                   |  |             |                 | 771        |                 |        |      |   |  |         |        |   |  |  
|Compensation expense related
      to options granted for services                                              |  |                |  |              |  |              |           |         |   |                  |  |                |  |                   |  |             |                 | 336        |                 |        |      |   |  |         |        |   |  |  
|Issuance of common stock at
      $37.50 to $45.06 per share in November 2000                                   |  |                 |  |              |   |              |            |         |   |                   |  |                 |  |                   |   |             |                 |            |                 |        |       |   |  |         |         |   |  |  
|Public Offering (net of issuance cost of $4,622,188)                                                            |  |                |  |              |  |              | 2,291,239  |         |   | 2                 |  |                |  |                   |  |             |                 | 86,084     |                 |        |      |   |  |         |        |   |  |  
|Issuance of common stock at
      $47.82 per share in February 2001 pursuant to a collaboration
      agreement |  |                |  |              |  |              | 313,636    |         |   |                  |  |                |  |                   |  |             |                 | 15,000     |                 |        |      |   |  |         |        |   |  |  
|Comprehensive loss:                                                                                             |  |                 |  |              |   |              |            |         |   |                   |  |                 |  |                   |   |             |                 |            |                 |        |       |   |  |         |        |   |  |  
|Net loss                                                                                                        |  |                |  |              |  |              |           |         |   |                  |  |                |  |                   |  |             |                 |           |                 |        |      |   |  |         | (16,014 | ) |  |  
|Net unrealized gain on available-for-sale securities                                                            |  |                |  |              |  |              |           |         |   |                  |  |                |  |                   |  |             |                 |           |                 |        | 1,120 |   |  |         |        |   |  |  
|Comprehensive loss                                                                                              |  |                 |  |              |   |              |            |         |   |                   |  |                 |  |                   |   |             |                 |            |                 |        |       |   |  |         |         |   |  |  
|Balance at June 30,
      2001 (carried forward)                                                                |  |                |  | $            |  |              | 19,945,097 |         | $ | 20                |  |                |  | $                 |  |             | $               | 233,946    |                 | $      | 1,040 |   |  | $       | (67,824 | ) |  | $

43

---

AVIGEN,INC.(adevelopmentstagecompany)

STATEMENTSOFSTOCKHOLDERSEQUITY(Continued)

Period fromOctober22, 1992(inception)throughDecember31, 2007(inthousands,except for shareinformation)

|                                                                      |  |                 |  |              |   |              |            |         |   |                   |  |                 |  |               |   |             |             |            |             |        |        |   |  | Deficit |          |   |  |  
|--------------------------------------------------------------------- |  | --------------- |  | ------------ | - | ------------ | ---------- | ------- | - | ----------------- |  | --------------- |  | ------------- | - | ----------- | ----------- | ---------- | ----------- | ------ | ------ | - |  | ------- | -------- | - |  | -
|                                                                      |  |                 |  |              |   |              |            |         |   |                   |  | Class B         |  |               |   |             | Accumulated |            | Accumulated |        |        |   | 
|                                                                      |  |                 |  |              |   |              |            |         |   |                   |  | Convertible     |  | Additional    |   | Other       |             | During the |             | Total 
|                                                                      |  | Preferred Stock |  | Common Stock |   | Common Stock |            | Paid-in |   | **Comprehensive** |  | **Development** |  | Stockholders
|                                                                      |  | Shares          |  | Amount       |   | Shares       |            | Amount  |   | Shares            |  | Amount          |  | Capital       |   | Gain (Loss) |             | Stage      |             | Equity
|Balance
      at June 30, 2001 (brought forward)                      |  |                |  | $            |  |              | 19,945,097 |         | $ | 20                |  |                |  | $             |  |             | $           | 233,946    |             | $      | 1,040  |   |  | $       | (67,824  | ) |  | $
|Proceeds from exercise of
      options at $2.13 to $6.75 per share   |  |                |  |              |  |              | 11,282     |         |   |                  |  |                |  |               |  |             |             | 60         |             |        |       |   |  |         |         |   |  |  
|Proceeds from exercise of
      warrants $7.50 per share              |  |                |  |              |  |              | 9,955      |         |   |                  |  |                |  |               |  |             |             | 75         |             |        |       |   |  |         |         |   |  |  
|Compensation expense related
      to options granted for services    |  |                |  |              |  |              |           |         |   |                  |  |                |  |               |  |             |             | 179        |             |        |       |   |  |         |         |   |  |  
|Comprehensive loss:                                                   |  |                 |  |              |   |              |            |         |   |                   |  |                 |  |               |   |             |             |            |             |        |        |   |  |         |          |   |  |  
|Net loss                                                              |  |                |  |              |  |              |           |         |   |                  |  |                |  |               |  |             |             |           |             |        |       |   |  |         | (11,319  | ) |  |  
|Net unrealized gain on available-for-sale securities                  |  |                |  |              |  |              |           |         |   |                  |  |                |  |               |  |             |             |           |             |        | 1,173  |   |  |         |         |   |  |  
|Comprehensive loss                                                    |  |                 |  |              |   |              |            |         |   |                   |  |                 |  |               |   |             |             |            |             |        |        |   |  |         |          |   |  |  
|Balance
      at December 31, 2001                                    |  |                |  |              |  |              | 19,966,334 |         |   | 20                |  |                |  |               |  |             |             | 234,260    |             |        | 2,213  |   |  |         | (79,143  | ) |  |  
|Proceeds from exercise of
      options at $1.875 to $8.525 per share |  |                |  |              |  |              | 34,627     |         |   |                  |  |                |  |               |  |             |             | 113        |             |        |       |   |  |         |         |   |  |  
|Proceeds from exercise of
      warrants at $7.50 per share           |  |                |  |              |  |              | 99,585     |         |   |                  |  |                |  |               |  |             |             | 747        |             |        |       |   |  |         |         |   |  |  
|Compensation expense related
      to options granted for services    |  |                |  |              |  |              |           |         |   |                  |  |                |  |               |  |             |             | 217        |             |        |       |   |  |         |         |   |  |  
|Comprehensive loss:                                                   |  |                 |  |              |   |              |            |         |   |                   |  |                 |  |               |   |             |             |            |             |        |        |   |  |         |          |   |  |  
|Net loss                                                              |  |                |  |              |  |              |           |         |   |                  |  |                |  |               |  |             |             |           |             |        |       |   |  |         | (27,739  | ) |  |  
|Net unrealized loss on available-for-sale securities                  |  |                |  |              |  |              |           |         |   |                  |  |                |  |               |  |             |             |           |             |        | (631   | ) |  |         |         |   |  |  
|Comprehensive loss                                                    |  |                 |  |              |   |              |            |         |   |                   |  |                 |  |               |   |             |             |            |             |        |        |   |  |         |          |   |  |  
|Balance
      at December 31, 2002                                    |  |                |  | $            |  |              | 20,100,546 |         | $ | 20                |  |                |  | $             |  |             | $           | 235,337    |             | $      | 1,582  |   |  | $       | (106,882 | ) |  | $
|Proceeds from exercise of
      options at $2.12 to $6.50 per share   |  |                |  |              |  |              | 63,746     |         |   |                  |  |                |  |               |  |             |             | 242        |             |        |       |   |  |         |         |   |  |  
|Proceeds from exercise of
      warrants at $2.47 to $6.09 per share  |  |                |  |              |  |              | 112,102    |         |   |                  |  |                |  |               |  |             |             | 476        |             |        |       |   |  |         |         |   |  |  
|Compensation expense related
      to options granted for services    |  |                |  |              |  |              |           |         |   |                  |  |                |  |               |  |             |             | 65         |             |        |       |   |  |         |         |   |  |  
|Comprehensive loss:                                                   |  |                 |  |              |   |              |            |         |   |                   |  |                 |  |               |   |             |             |            |             |        |        |   |  |         |          |   |  |  
|Net loss                                                              |  |                |  |              |  |              |           |         |   |                  |  |                |  |               |  |             |             |           |             |        |       |   |  |         | (25,774  | ) |  |  
|Net unrealized loss on available-for-sale securities                  |  |                |  |              |  |              |           |         |   |                  |  |                |  |               |  |             |             |           |             |        | (1,180 | ) |  |         |         |   |  |  
|Comprehensive loss                                                    |  |                 |  |              |   |              |            |         |   |                   |  |                 |  |               |   |             |             |            |             |        |        |   |  |         |          |   |  |  
|Balance
      at December 31, 2003 (carried forward)                  |  |                |  | $            |  |              | 20,276,394 |         | $ | 20                |  |                |  | $             |  |             | $           | 236,120    |             | $      | 402    |   |  | $       | (132,656 | ) |  | $

44

---

AVIGEN,INC.(adevelopmentstagecompany)

STATEMENTSOFSTOCKHOLDERSEQUITY(Continued)

Period fromOctober22, 1992(inception)throughDecember31, 2007(inthousands,except for shareinformation)

|                                                                                   |  |                 |  |              |   |              |            |         |   |                   |  |                 |  |                   |   |             |                 |            |                 |        |      |   |  | Deficit |          |   |  |  
|---------------------------------------------------------------------------------- |  | --------------- |  | ------------ | - | ------------ | ---------- | ------- | - | ----------------- |  | --------------- |  | ----------------- | - | ----------- | --------------- | ---------- | --------------- | ------ | ---- | - |  | ------- | -------- | - |  | -
|                                                                                   |  |                 |  |              |   |              |            |         |   |                   |  | Class B         |  |                   |   |             | **Accumulated** |            | **Accumulated** |        |      |   | 
|                                                                                   |  |                 |  |              |   |              |            |         |   |                   |  | Convertible     |  | Additional        |   | Other       |                 | During the |                 | Total 
|                                                                                   |  | Preferred Stock |  | Common Stock |   | Common Stock |            | Paid-in |   | **Comprehensive** |  | **Development** |  | **Stockholders**
|                                                                                   |  | Shares          |  | Amount       |   | Shares       |            | Amount  |   | Shares            |  | Amount          |  | Capital           |   | Gain (Loss) |                 | Stage      |                 | Equity
|Balance
      at December 31, 2003 (brought forward)                               |  |                |  | $            |  |              | 20,276,394 |         | $ | 20                |  |                |  | $                 |  |             | $               | 236,120    |                 | $      | 402  |   |  | $       | (132,656 | ) |  | $
|Proceeds from exercise of
      options at $0.443 to $6.313 per share              |  |                |  |              |  |              | 86,856     |         |   |                  |  |                |  |                   |  |             |                 | 403        |                 |        |     |   |  |         |         |   |  |  
|Proceeds from exercise of
      warrants at $6.05 per share                        |  |                |  |              |  |              | 18,000     |         |   |                  |  |                |  |                   |  |             |                 | 109        |                 |        |     |   |  |         |         |   |  |  
|Compensation expense related
      to options granted for services                 |  |                |  |              |  |              |           |         |   |                  |  |                |  |                   |  |             |                 | 230        |                 |        |     |   |  |         |         |   |  |  
|Warrants granted for patent
      licenses                                         |  |                |  |              |  |              |           |         |   |                  |  |                |  |                   |  |             |                 | 97         |                 |        |     |   |  |         |         |   |  |  
|Comprehensive loss:                                                                |  |                 |  |              |   |              |            |         |   |                   |  |                 |  |                   |   |             |                 |            |                 |        |      |   |  |         |          |   |  |  
|Net loss                                                                           |  |                |  |              |  |              |           |         |   |                  |  |                |  |                   |  |             |                 |           |                 |        |     |   |  |         | (23,923  | ) |  |  
|Net unrealized loss on available-for-sale securities                               |  |                |  |              |  |              |           |         |   |                  |  |                |  |                   |  |             |                 |           |                 |        | (927 | ) |  |         |         |   |  |  
|Comprehensive loss                                                                 |  |                 |  |              |   |              |            |         |   |                   |  |                 |  |                   |   |             |                 |            |                 |        |      |   |  |         |          |   |  |  
|Balance at December 31,
      2004                                                 |  |                |  |              |  |              | 20,381,250 |         |   | 20                |  |                |  |                   |  |             |                 | 236,959    |                 |        | (525 | ) |  |         | (156,579 | ) |  |  
|Proceeds from exercise of
      options at $0.487 to $3.53 per share               |  |                |  |              |  |              | 526,023    |         |   | 1                 |  |                |  |                   |  |             |                 | 286        |                 |        |     |   |  |         |         |   |  |  
|Compensation expense related
      to options granted for services                 |  |                |  |              |  |              |           |         |   |                  |  |                |  |                   |  |             |                 | 13         |                 |        |     |   |  |         |         |   |  |  
|Comprehensive loss:                                                                |  |                 |  |              |   |              |            |         |   |                   |  |                 |  |                   |   |             |                 |            |                 |        |      |   |  |         |          |   |  |  
|Net loss                                                                           |  |                |  |              |  |              |           |         |   |                  |  |                |  |                   |  |             |                 |           |                 |        |     |   |  |         | (14,696  | ) |  |  
|Net unrealized loss on available-for-sale securities                               |  |                |  |              |  |              |           |         |   |                  |  |                |  |                   |  |             |                 |           |                 |        | (15  | ) |  |         |         |   |  |  
|Comprehensive loss                                                                 |  |                 |  |              |   |              |            |         |   |                   |  |                 |  |                   |   |             |                 |            |                 |        |      |   |  |         |          |   |  |  
|Balance
      at December 31, 2005                                                 |  |                |  |              |  |              | 20,907,273 |         |   | 21                |  |                |  |                   |  |             |                 | 237,258    |                 |        | (540 | ) |  |         | (171,275 | ) |  |  
|Proceeds from exercise of
      options at $2.00 to $5.93 per share                |  |                |  |              |  |              | 269,098    |         |   | -                 |  |                |  |                   |  |             |                 | 1,012      |                 |        |     |   |  |         |         |   |  |  
|Issuance of common stock at
      $5.37 per share in May 2006 in connection with a |  |                 |  |              |   |              |            |         |   |                   |  |                 |  |                   |   |             |                 |            |                 |        |      |   |  |         |          |   |  |  
|Private Placement (net of issuance cost of $1,802,149)                             |  |                |  |              |  |              | 3,939,760  |         |   | 4                 |  |                |  |                   |  |             |                 | 19,350     |                 |        |     |   |  |         |         |   |  |  
|Stock-based compensation
      expense                                             |  |                |  |              |  |              |           |         |   |                  |  |                |  |                   |  |             |                 | 1,381      |                 |        |     |   |  |         |         |   |  |  
|Compensation expense related
      to options granted for services                 |  |                |  |              |  |              |           |         |   |                  |  |                |  |                   |  |             |                 | 114        |                 |        |     |   |  |         |         |   |  |  
|Comprehensive loss:                                                                |  |                 |  |              |   |              |            |         |   |                   |  |                 |  |                   |   |             |                 |            |                 |        |      |   |  |         |          |   |  |  
|Net loss                                                                           |  |                |  |              |  |              |           |         |   |                  |  |                |  |                   |  |             |                 |           |                 |        |     |   |  |         | (24,256  | ) |  |  
|Net unrealized gain on available-for-sale securities                               |  |                |  |              |  |              |           |         |   |                  |  |                |  |                   |  |             |                 |           |                 |        | 408  |   |  |         |         |   |  |  
|Comprehensive loss                                                                 |  |                 |  |              |   |              |            |         |   |                   |  |                 |  |                   |   |             |                 |            |                 |        |      |   |  |         |          |   |  |  
|Balance at December 31,
      2006                                                 |  |                |  | $            |  |              | 25,116,131 |         | $ | 25                |  |                |  | $                 |  |             | $               | 259,115    |                 | $      | (132 | ) |  | $       | (195,531 | ) |  | $

45

---

|                                                                        |  |                 |  |              |   |              |            |         |   |                   |  |                 |  |               |   |             |                 |            |                 |        |      |   |  | Deficit |          |   |  |  
|----------------------------------------------------------------------- |  | --------------- |  | ------------ | - | ------------ | ---------- | ------- | - | ----------------- |  | --------------- |  | ------------- | - | ----------- | --------------- | ---------- | --------------- | ------ | ---- | - |  | ------- | -------- | - |  | -
|                                                                        |  |                 |  |              |   |              |            |         |   |                   |  | Class B         |  |               |   |             | **Accumulated** |            | **Accumulated** |        |      |   | 
|                                                                        |  |                 |  |              |   |              |            |         |   |                   |  | Convertible     |  | Additional    |   | Other       |                 | During the |                 | Total 
|                                                                        |  | Preferred Stock |  | Common Stock |   | Common Stock |            | Paid-in |   | **Comprehensive** |  | **Development** |  | Stockholders
|                                                                        |  | Shares          |  | Amount       |   | Shares       |            | Amount  |   | Shares            |  | Amount          |  | Capital       |   | Gain (Loss) |                 | Stage      |                 | Equity
|Balance
      at December 31, 2006 (brought forward)                    |  |                |  | $            |  |              | 25,116,131 |         | $ | 25                |  |                |  | $             |  |             | $               | 259,115    |                 | $      | (132 | ) |  | $       | (195,531 | ) |  | $
|Proceeds from exercise of
      options at $2.68 to $6.31 per share     |  |                |  |              |  |              | 163,387    |         |   |                  |  |                |  |               |  |             |                 | 593        |                 |        |     |   |  |         |         |   |  |  
|Issuance of common stock at
      $6.94 per share in April and May 2007 |  |                 |  |              |   |              |            |         |   |                   |  |                 |  |               |   |             |                 |            |                 |        |      |   |  |         |          |   |  |  
|Public Offering (net of issuance cost of $2,110,193)                    |  |                |  |              |  |              | 4,413,191  |         |   | 4                 |  |                |  |               |  |             |                 | 28,513     |                 |        |     |   |  |         |         |   |  |  
|Stock-based compensation
      expense                                  |  |                |  |              |  |              |           |         |   |                  |  |                |  |               |  |             |                 | 1,834      |                 |        |     |   |  |         |         |   |  |  
|Compensation expense related
      to options granted for services      |  |                |  |              |  |              |           |         |   |                  |  |                |  |               |  |             |                 | 92         |                 |        |     |   |  |         |         |   |  |  
|Comprehensive loss:                                                     |  |                 |  |              |   |              |            |         |   |                  |  |                |  |               |  |             |                 |           |                 |        |     |   |  |         |         |   |  |  
|Net loss                                                                |  |                |  |              |  |              |           |         |   |                   |  |                 |  |               |   |             |                 |           |                 |        |     |   |  |         | (25,164  | ) |  |  
|Net unrealized gain on available-for-sale securities                    |  |                |  |              |  |              |           |         |   |                  |  |                |  |               |  |             |                 |           |                 |        | 483  |   |  |         |         |   |  |  
|Comprehensive loss                                                      |  |                 |  |              |   |              |            |         |   |                   |  |                 |  |               |   |             |                 |            |                 |        |      |   |  |         |          |   |  |  
|Balance at December 31,
      2007                                      |  |                |  | **$**        |  |              | 29,692,709 |         | $ | 29                |  |                |  | $             |  |             | $               | 290,147    |                 | $      | 351  |   |  | $       | (220,695 | ) |  | $

Seeaccompanyingnotes

46

---

AVIGEN, INC.(a development stage
company)

STATEMENTS OF CASH FLOWS(in
thousands)

|                                                          |  |              |          |              |  |          |          |      |  |   |         |             |  | Period from
|--------------------------------------------------------- |  | ------------ | -------- | ------------ |  | -------- | -------- | ---- |  | - | ------- | ----------- |  | -----------
|                                                          |  |              |          |              |  |          |          |      |  |   |         |             |  | October 22,
|                                                          |  |              |          |              |  |          |          |      |  |   |         |             |  | 1992       
|                                                          |  |              |          |              |  |          |          |      |  |   |         | (inception)
|                                                          |  | Year Ended   |          | through     
|                                                          |  | December 31, |          | December 31,
|                                                          |  | **2007**     |          | **2006**     |  | **2005** |          | 2007
|Operating Activities                                      |  |              |          |              |  |          |          |      |  |   |         |             |  |            
|Net loss                                                  |  | $            | (25,164  | )            |  | $        | (24,256  | )    |  | $ | (14,696 | )           |  | $          
|Adjustments to reconcile net loss to net cash used in     |  |              |          |              |  |          |          |      |  |   |         |             |  |            
|operating activities:                                     |  |              |          |              |  |          |          |      |  |   |         |             |  |            
|Depreciation and amortization                             |  |              | 1,594    |              |  |          | 1,273    |      |  |   | 2,549   |             |  |            
|Gain on disposal of property and equipment                |  |              | (37      | )            |  |          | (18      | )    |  |   | (65     | )           |  |            
|Impairment loss related to long-lived assets              |  |              | -        |              |  |          | 450      |      |  |   | 6,130   |             |  |            
|Amortization of deferred compensation                     |  |              | -        |              |  |          | -        |      |  |   | -       |             |  |            
|Non-cash rent expense for warrants issued in connection   |  |              |          |              |  |          |          |      |  |   |         |             |  |            
|with the extension of the building lease                  |  |              | 217      |              |  |          | 217      |      |  |   | 217     |             |  |            
|Amortization of deferred rent                             |  |              | (774     | )            |  |          | (162     | )    |  |   | 3       |             |  |            
|Non-cash compensation expense for common stock, warrants, |  |              |          |              |  |          |          |      |  |   |         |             |  |            
|and
      stock options issued for services               |  |              | 1,926    |              |  |          | 1,495    |      |  |   | 13      |             |  |            
|Warrants issued for patent license                        |  |              | -        |              |  |          | -        |      |  |   | -       |             |  |            
|Changes
      in operating assets and liabilities:        |  |              |          |              |  |          |          |      |  |   |         |             |  |            
|Accrued interest                                          |  |              | (65      | )            |  |          | (182     | )    |  |   | 238     |             |  |            
|Prepaid expenses and other current assets                 |  |              | (514     | )            |  |          | 292      |      |  |   | (294    | )           |  |            
|Deposits and other assets                                 |  |              | 210      |              |  |          | 79       |      |  |   | (316    | )           |  |            
|Accounts payable, other accrued liabilities and           |  |              |          |              |  |          |          |      |  |   |         |             |  |            
|accrued compensation and related expenses                 |  |              | 1,471    |              |  |          | 452      |      |  |   | 167     |             |  |            
|Net cash used in
      operating activities               |  |              | (21,136  | )            |  |          | (20,360  | )    |  |   | (6,054  | )           |  |            
|                                                         
|Investing Activities                                      |  |              |          |              |  |          |          |      |  |   |         |             |  |            
|Purchases of property
      and equipment                 |  |              | (203     | )            |  |          | (176     | )    |  |   | (277    | )           |  |            
|Proceeds from disposal of property and equipment          |  |              | 92       |              |  |          | 142      |      |  |   | 231     |             |  |            
|Decrease (increase) in
      restricted investments       |  |              | 1,000    |              |  |          | -        |      |  |   | 1,500   |             |  |            
|Purchases of available-for-sale securities                |  |              | (109,538 | )            |  |          | (109,261 | )    |  |   | (66,475 | )           |  |            
|Maturities of
      available-for-sale securities         |  |              | 100,218  |              |  |          | 99,594   |      |  |   | 79,082  |             |  |            
|Net
      cash (used in) provided by investing activities |  |              | (8,431   | )            |  |          | (9,701   | )    |  |   | 14,061  |             |  |            
|Financing
      Activities                                |  |              |          |              |  |          |          |      |  |   |         |             |  |            
|Proceeds from long-term obligations                       |  |              | -        |              |  |          | -        |      |  |   | -       |             |  |            
|Repayment of long-term
      obligations                  |  |              | (1,000   | )            |  |          | -        |      |  |   | -       |             |  |            
|Proceeds from bridge financing                            |  |              | -        |              |  |          | -        |      |  |   | -       |             |  |            
|Repayment of bridge
      financing                       |  |              | -        |              |  |          | -        |      |  |   | -       |             |  |            
|Payments on capital lease obligations                     |  |              | -        |              |  |          | -        |      |  |   | -       |             |  |            
|Proceeds from
      sale-leaseback of equipment           |  |              | -        |              |  |          | -        |      |  |   | -       |             |  |            

47

---

|                                                                   |  |              |        |              |  |          |        |      |  |   |        |             |  | Period from
|------------------------------------------------------------------ |  | ------------ | ------ | ------------ |  | -------- | ------ | ---- |  | - | ------ | ----------- |  | -----------
|                                                                   |  |              |        |              |  |          |        |      |  |   |        |             |  | October 22,
|                                                                   |  |              |        |              |  |          |        |      |  |   |        |             |  | 1992       
|                                                                   |  |              |        |              |  |          |        |      |  |   |        | (inception)
|                                                                   |  | Year Ended   |        | through     
|                                                                   |  | December 31, |        | December 31,
|                                                                   |  | **2007**     |        | **2006**     |  | **2005** |        | 2007
|Proceeds from issuance preferred stock, net of                     |  |              |        |              |  |          |        |      |  |   |        |             |  |            
|issuance costs                                                     |  |              | -      |              |  |          | -      |      |  |   | -      |             |  |            
|Proceeds from warrants
      and options exercised                 |  |              | 593    |              |  |          | 1,012  |      |  |   | 286    |             |  |            
|Proceeds from issuance of common stock, net of issuance            |  |              |        |              |  |          |        |      |  |   |        |             |  |            
|costs and repurchases                                              |  |              | 28,518 |              |  |          | 19,354 |      |  |   | -      |             |  |            
|Net cash provided by
      financing activities                    |  |              | 28,111 |              |  |          | 20,366 |      |  |   | 286    |             |  |            
|Net
      (decrease) increase in cash and cash equivalents         |  |              | (1,456 | )            |  |          | (9,695 | )    |  |   | 8,293  |             |  |            
|Cash and cash
      equivalents, beginning of period               |  |              | 1,815  |              |  |          | 11,510 |      |  |   | 3,217  |             |  |            
|Cash
      and cash equivalents, end of period                     |  | $            | 359    |              |  | $        | 1,815  |      |  | $ | 11,510 |             |  | $          
|                                                                   | 
|Supplemental disclosure                                            |  |              |        |              |  |          |        |      |  |   |        |             |  |            
|Issuance of warrants in
      connection with the extension of the |  |              |        |              |  |          |        |      |  |   |        |             |  |            
|building lease                                                     |  | $            | -      |              |  | $        | -      |      |  | $ | -      |             |  | $          
|Issuance of preferred stock for cancellation of accounts           |  |              |        |              |  |          |        |      |  |   |        |             |  |            
|payable, notes payable and accrued interest                        |  |              | -      |              |  |          | -      |      |  |   | -      |             |  |            
|Issuance of stock
      options for repayment of certain accrued   |  |              |        |              |  |          |        |      |  |   |        |             |  |            
|liabilities                                                        |  |              | -      |              |  |          | -      |      |  |   | -      |             |  |            
|Issuance of warrants in connection with bridge financing           |  |              | -      |              |  |          | -      |      |  |   | -      |             |  |            
|Deferred compensation
      related to stock option grants         |  |              | -      |              |  |          | -      |      |  |   | -      |             |  |            
|Purchase of property and equipment under capital lease             |  |              |        |              |  |          |        |      |  |   |        |             |  |            
|financing                                                          |  |              | -      |              |  |          | -      |      |  |   | -      |             |  |            
|Cash paid for
      interest                                       |  |              | 488    |              |  |          | 467    |      |  |   | 323    |             |  |            

See accompanying
notes.

48

---

AVIGEN, INC.(a development stage
company)

NOTES TO FINANCIAL STATEMENTS

1. Summary of Significant Accounting
Policies

*Description of Business and
Basis of Presentation*

Avigen,
Inc. was incorporated on 1992 in Delaware and is focused on developing and
commercializing small molecule therapeutics to treat serious chronic
neurological and neuromuscular disorders. Our current product candidates
primarily address neuromuscular spasm and spasticity and neuropathic pain. Since
our inception, our activities have consisted principally of acquiring product
rights, raising capital, establishing facilities and performing research and
development. Accordingly, we are considered to be a development stage company.
We operate in a single segment.

At
December 31, 2007, we had an accumulated deficit of $220.7 million and expect to
continue to incur substantial losses over the next several years.Our operations are subject to certain risks and uncertainties
frequently encountered by development stage companies, particularly those
encountered in the changing environment of small biotech and specialty
pharmaceutical companies. Such risks and uncertainties include, but are not
limited to, timing and uncertainty of achieving milestones in clinical
development and in obtaining approvals from the FDA and other non-U.S.
regulatory agencies. Our ability to generate revenue in the future will depend
substantially on the timing and success of reaching development milestones,
obtaining regulatory approvals from the FDA or other regulatory agencies for new
drug applications, and obtaining market acceptance of our products.We plan to meet our future capital requirements primarily
through issuances of equity securities, payments under collaborative agreements
with third parties, government grants, and license fees. We intend to seek
additional funding through public or private equity or debt financing when
market conditions allow. There can be no assurance that we will be able to enter
into financing arrangements on acceptable terms in the future, if at
all.

At December 31, 2007, we had cash,
cash equivalents, available-for-sale securities, and restricted investments, of
approximately $78.1 million.  We believe that our cash resources at
December 31, 2007 will be adequate to fund our operating needs for at least two
years.

*Use of Estimates*

The
preparation of our financial statements in conformity with U.S. generally
accepted accounting principles requires our management to make judgments,
assumptions and estimates that affect the amounts reported in our financial
statements and the accompanying notes. Actual results could differ materially
from those estimates.

*Cash and Cash Equivalents*

We
consider all highly liquid investments with a maturity of three months or less
when purchased to be cash equivalents. These amounts are recorded at cost, which
approximates fair market value.

*Available- for-Sale Securities*

We invest
our excess cash balances in marketable securities, primarily corporate debt
securities, federal agency obligations, asset-backed securities, U.S.
treasuries, and municipal bonds. Our primary investment objectives are to
preserve principal, maintain a high degree of liquidity, and maximize total
return. All marketable securities are held in our name under the custodianship
of Wells Capital Management. We have classified all our investments in
marketable securities as available-for-sale. Available-for-sale securities are
reported at market value and unrealized holding gains and losses, net of the
related tax effect, if any, are excluded from earnings and are reported in other
comprehensive income (loss) as a separate component of stockholders equity
until realized. A decline in the market value of a security below its cost that
is deemed to be other-than-temporary is charged to earnings, and would result in
the establishment of a new cost basis for the security.

Our
available-for-sale securities consist principally of obligations with a minimum
short-term rating of A1/P1 and a minimum long-term rating of A- and with
effective maturities of less than three years. The cost of securities sold is
based on the specific identification method. Interest on securities classified
as available for sale is included in interest income.

---

*Fair value of financial
instruments*

The fair
value of our cash equivalents and available-for-sale securities is based on
quoted market prices. The fair value of our loans payable is based on current
interest rates available to us for debt instruments with similar terms, degrees
of risk, and remaining maturities. Management considers the carrying amount of
these financial instruments to be representative of their respective fair value
at December 31, 2007 and 2006.

*Restricted Investments*

In June
2000, we pledged $10.0 million of our portfolio of available-for-sale securities
to secure a financing arrangement to support construction related activities. We
subsequently borrowed $8.0 million against this financing arrangement and
utilized $2.0 million of borrowing capacity to secure a letter of credit in
connection with a building lease that expires in November 2010. In May 2003, we
pledged $428,000 of our portfolio of available-for-sale securities to secure two
letters of credit that serve as security deposits in connection with a building
lease which is scheduled to terminate in May 2008.

At
December 31, 2007, $428,000 and $9.0 million of available-for-sale securities
were classified as restricted investments in current and non-current assets,
respectively. At December 31, 2006, $8.0 million and $2.4 million of
available-for-sale securities were classified as restricted investments in
current and non-current assets, respectively. The total of our current and
non-current restricted investments at the end of each period represents the
combined aggregate portion of our portfolio of available-for-sale securities
that were pledged in connection with certain liabilities at the end of each
period.The change in classification and total
amount of restricted investments betweenDecember
31, 2007 and 2006 reflect the reduction of
collateral associated with our partial repayment of $1.0 million of outstanding
borrowings and the extension of the repayment period on the remaining
outstanding borrowings of $7.0 million until November 2009, which resulted in
the reclassification of restricted investments pledged in connection with these
borrowings to non-current assets, partially offset by the reclassification of
restricted investments of $428,000 to current assets associated with the
scheduled maturities of two letters of credit in May 2008.

*Concentration of Credit Risk*

Cash,
cash equivalents, available-for-sale securities and restricted investments
consist of financial instruments that potentially subject us to concentrations
of credit risk to the extent of the value of the assets recorded on our balance
sheets. We believe that we have established guidelines for investment of our
excess cash that maintain safety and liquidity through our policies on
diversification among asset classes and issuers, as well as across investment
maturities.

*Impairment of Long-Lived
Assets*

All
long-lived assets are reviewed for potential impairment whenever events or
changes in business circumstances indicate that the carrying value of an asset
may not be fully recoverable under Statement of Financial Account Standards No.
144,Accounting for Impairment or Disposal of
Long-Lived Assets. Impairment is determined
by comparing future projected undiscounted cash flows to be generated by the
asset to its carrying value. If impairment is identified, a loss would be
recognized and reflected in net loss to the extent that the carrying amount of
the asset exceeds its estimated fair value determined by discounted cash flow
analyses or comparable fair values of similar assets.

*Property and Equipment*

Property
and equipment are stated at cost, less accumulated depreciation. Depreciation
and amortization are provided using the straight-line method over the estimated
useful lives of the respective assets, or in the case of leasehold improvements,
over the lesser of the estimated useful lives or the remaining lease terms. The
estimated useful lives of our property and equipment range from three to seven
years.

50

---

Expenses
for repairs and maintenance are charged to operations as incurred. Upon
retirement, disposition, or sale, the cost of the property and equipment
disposed of and the related accumulated depreciation are deducted from the
accounts, and any resulting gain or loss is credited or charged to operations.

*Asset Retirement
Obligation*

We
account for obligations associated with the retirement costs of long-lived
assets in accordance with Statement of Financial Accounting Standards No. 143,Accounting for Asset Retirement
Obligations, (FAS 143), as interpreted by
FASB Interpretation No. 47,Accounting for
Conditional Asset Retirement Obligations. FAS
143 requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made. Under the terms of our building lease that
expires in May 2008, we may be required, at our landlords sole discretion, to
remove, reconfigure or otherwise alter certain improvements we have made to the
facility. This obligation is subject to a conditional future event that is not
within our control. We determine the fair value of asset retirement obligations
based on our assessment of a range of possible settlement dates and amounts.
Considerable management judgment is required in estimating these obligations.
Important assumptions include estimates of retirement costs, the timing of the
future retirement activities, and the likelihood of retirement provisions being
enforced. Changes in these assumptions based on future information could result
in adjustments to our estimated liabilities.

As a
result of a change in estimate in December 2006, we remeasured the fair value of
this contingent asset retirement obligation and recorded a non-current liability
for $450,000. The recognition of this liability would have resulted in an
adjustment to the carrying value of the underlying long-lived assets. However,
in 2005, these improvements were determined to be impaired and written-off with
a charge to our net loss (see Note 4). Since there was no carrying value of the
underlying assets at December 31, 2006, the recognition of the asset retirement
obligation resulted in an additional charge in 2006 to impairment loss related
to long-lived assets. As of December 31, 2007, there were no material changes in
our expectations with regard to this obligation. Upon settlement of the
obligation, we will recognize any difference between the cost to retire the
asset and the liability recorded as an increase or decrease to operating
expenses in our statement of operations in year of settlement.

*Revenue Recognition*

We
recognize revenue when the four basic criteria for revenue recognition as
described in SEC Staff Accounting Bulletin No. 104,Revenue Recognition, are met: (1)
persuasive evidence of an arrangement exists; (2) delivery has occurred or
services have been rendered; (3) the fee is fixed or determinable; and (4)
collectibility is reasonably assured.

Revenues from the License or
Assignment of Intellectual Property Rights

We
recognize non-refundable license or assignment fees, including development
milestone payments associated with license or assignment agreements, for which
we have no further significant performance obligations and no continuing
involvement requirements related to product development, on the earlier of the
dates on when the payments are received or when collection is assured. For
example, in 2005, we received a $12.0 million payment under the terms of our
agreement with Genzyme Corporation (see Note 8). We recognized the payment as
revenue, since we concluded that as of December 31, 2005, we did not have any
significant future performance obligations under the agreement.

Revenues from Collaborative Research
and Development Agreements

We
recognize revenue associated with up-front license, technology access and
research and development funding payments under collaborative agreements ratably
over the relevant periods specified in the agreements, generally the development
phase. This development phase can be defined as a specified period of time,
however, in some cases, the collaborative agreement specifies a development
phase that culminates with milestone objectives but does not have a fixed date
and requires us to estimate the time period over which to recognize this
revenue. Our estimated time periods are based on management's estimate of the
time required to achieve a particular development milestone considering the
projected level of effort and current stage of development. If our estimate of
the development-phase time period changes, the amount of revenue we recognize
related to up-front payments for a given period will accelerate or decrease
accordingly.

51

---

Royalty Revenues

We record
royalty revenue from license agreements as earned in accordance with the
contract terms when third-party results can be reliably determined and
collectibility is reasonably assured.

Grant Revenues

We record
grant revenue in the period in which the revenue is earned as defined by the
grant agreement. Since our inception, we have recognized approximately $794,000
of grant revenue, which includes amounts earned from reimbursements under
government grants, of which all have come from the National Institutes of
Health.

*Deferred Rent*

We record
our obligations under facility operating lease agreements as rent expense. We
recognize rent expense on a straight-line basis over the term of the operating
lease. The difference in actual amounts paid and amounts recorded as rent
expense during the fiscal year is recorded as deferred rent. Amounts classified
as deferred rent totaled $760,000 and $967,000 at December 31, 2007 and 2006,
respectively.

*Comprehensive Loss*

Components of other comprehensive loss, including unrealized gains and
losses on available-for-sale investments, were included as part of total
comprehensive loss. For all periods presented, we have disclosed comprehensive
loss in our statement of stockholders equity.

*Research and Development
Expenses*

Research
and development expenses consist of expenses incurred in performing research and
development activities including related salaries and benefits, facilities and
other overhead costs, clinical trial and related drug product costs, contract
services and other outside service expenses. We charge research and development
expenses to operating expense in the period incurred. These costs consist of
costs incurred for our independent, as well as our collaborative, research and
development activities.

Pursuant
to managements assessment of the services that have been performed on clinical
trials and other contracts, we recognize expenses as the services are provided.
Several of our contracts extend across multiple reporting periods. Management
assessments include, but are not limited to, an evaluation by the project
manager of the work that has been completed during the period, measurement of
progress prepared internally, estimates of incurred costs by third-party service
providers, and managements judgment. The determination of the percentage of
work completed that determines the amount of research and development expense
that should be recognized in a given period requires significant judgment, and
could have a material impact on our balance sheet and results of operations.
These estimated expenses may or may not match the actual fees billed by the
service providers as determined by actual work completed. We monitor service
provider activities to the extent possible; however, if we underestimate
activity levels associated with various studies at a given point in time, we
could record significantly higher research and development expenses in future
reporting periods.

52

---

*Income Taxes*

Income
taxes are accounted for in accordance with Statement of Financial Accounting
Standards No. 109,Accounting for Income
Taxes, which requires the use of the asset
and liability method. Under this method, deferred tax assets and liabilities are
determined based upon the differences between the financial reporting and the
tax bases of assets and liabilities and are measured using enacted tax rules and
laws that are anticipated to be in effect when the differences are expected to
reverse. To date, we have no history of earnings. Therefore, our net deferred
tax assets are reduced by a valuation allowance to the extent that realization
of the related deferred tax asset is not assured. We have recorded a valuation
allowance for the full amount of our calculated deferred tax asset as of
December 31, 2007 and 2006.

We
adopted the provisions of FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes  an interpretation of FASB
Statement No. 109(FIN 48) effective
January 1, 2007. FIN 48 provides clarification related to the process associated
with accounting for uncertain tax positions recognized in financial statements.
FIN 48 prescribes a more-likely-than-not threshold for financial statement
recognition and measurement of a tax position taken, or expected to be taken, in
a tax return. FIN 48 also provides guidance related to, among other things,
classification, accounting for interest and penalties associated with tax
positions, and disclosure requirements. Upon adoption of FIN 48, we determined
that we did not have any unrecognized tax benefits and there was no effect on
our financial condition or results of operations as a result of implementing FIN
48 (see Note 14).







Basic net
loss per common share is computed by dividing net loss by the weighted-average
number of common shares outstanding during the period. The computation of basic
net loss per share for all periods presented is derived from the information on
the face of the statement of operations, and there are no reconciling items in
either the numerator or denominator.

Diluted
net loss per common share is computed as though all potential common shares that
are dilutive were outstanding during the year, using the treasury stock method
for the purposes of calculating the weighted-average number of dilutive common
shares outstanding during the period. Potential dilutive common shares consist
of shares issuable upon exercise of stock options and warrants. Securities that
potentially could have diluted basic earnings per common share, but were
excluded from the diluted net loss per common share computation because their
inclusion would have been anti-dilutive, were as follows:

Year Ended December 31,2007
    
    2006
    
    2005Potential dilutive stock options outstanding
    
    402,430
    
    
    
    287,853
    
    
    
    273,667Outstanding
      securities excluded from the potential dilutive
      common shares calculation (1)
    
    3,152,961
    
    
    
    2,611,068
    
    
    
    3,756,850


(1) For
purposes of computing the potential dilutive common shares, we have excluded
outstanding stock options and warrants to purchase common stock whose exercise
prices exceed the average of the closing sale prices of our common stock as
reported on the NASDAQ Global Market for the period.

53

---

*Stock-Based Compensation*

Prior to
January 1, 2006, we accounted for share-based compensation in accordance with
Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees(APB 25), and related interpretations. Under APB 25, we measured
compensation expense for share-based compensation using the intrinsic value
method. When the exercise price of our employee stock options was equal to or
greater than the market price of the underlying stock on the date of grant, no
compensation expense was recognized.

Effective
January 1, 2006, we adopted the provisions of Statement of Financial Accounting
Standards No. 123(revised),Share-Based
Payment, (FAS 123(R)) using the modified
prospective transition method and have not restated results for prior periods.
In accordance with FAS 123(R), we recognize the compensation cost for all
share-based awards to employees in our financial statements based on their
grant-date fair value. Share-based compensation expense is recognized over the
period during which the employee is required to perform service in exchange for
the award, which generally represents the scheduled vesting period. We have no
awards with market or performance conditions. Estimated compensation expense for
awards outstanding at January 1, 2006, but not yet vested as of that date, is
being recognized over the remaining service period using the compensation cost
calculated based on the same estimate of grant-date fair value previously
reported for pro forma disclosure purposes under FAS 123.

Our
adoption of FAS 123(R) using the modified prospective transition method requires
us to determine the amount of eligible windfall tax benefits (the pool of
windfall tax benefits) that are available on the adoption date to offset future
shortfalls. We have elected to calculate the historical pool of windfall tax
benefits (i.e., the amount that would have accumulated as of the adoption date
of FAS 123(R)) using the short-cut method, as provided in FASB Staff Position
No. FAS 123(R)-3,Transition Election Related
to Accounting for Tax Effects of Share-Based Payment Awardswhich includes simplified methods to establish the beginning
balance of the pool of windfall tax benefits related to the tax effects of
employee share-based compensation, and to determine the subsequent impact on the
pool of windfall tax benefits and statements of cash flows of the tax effects of
employee share-based compensation awards that are outstanding upon adoption of
FAS 123(R). We also have elected to follow the tax law ordering approach to
determine when the historic tax benefits are realized (tax benefits realized
based on provisions in the tax law that identify the sequence in which stock
option deductions are utilized for tax purposes). Subsequent to the adoption of
FAS 123(R), we will continue to track the balance of the pool of windfall tax
benefits based on windfalls or shortfalls incurred after the adoption date.

The
following table illustrates the effect on our net loss and loss per common share
if we had applied the fair value recognition provisions to share-based employee
compensation in 2005 (in thousands, except for per share data):

Year Ended**December 31,****2005**Net loss - as reported
    $
    (14,696
    )Add: Stock-based
      employee compensation included in reported net loss
    
    -Less: Total stock-based employee compensation expense determined
      underthe fair-value-based method for all
      awards
    
    (2,219
    )Net loss  pro
      forma
    $
    (16,915
    )Net loss per common share basic and diluted  as
      reported
    $
    (0.71
    )Net loss per
      common share basic and diluted  pro forma
    $
    (0.82
    )


For
equity awards to non-employees, including lenders, lessors, and consultants, we
also apply the Black-Scholes method to determine the fair value of such
instruments in accordance with FAS 123(R) and Emerging Issues Task Force Issue
No. 96-18,Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods, or Services.The options and
warrants granted to non-employees are re-measured as they vest and the resulting
value is recognized as an expense against our net loss over the period during
which the services are received or the term of the related financing.

54

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*New Accounting Pronouncements*

In
September 2006, the FASB issued Statement of Financial Accounting Standards No.
157,Fair Value Measurements(FAS 157).FAS 157 provides a new single
authoritative definition of fair value and provides enhanced guidance for
measuring the fair value of assets and liabilities. FAS 157 also requires
additional disclosures related to the extent to which companies measure assets
and liabilities at fair value, the information used to measure fair value, and
the effect of fair value measurements on earnings. FAS 157 is effective for us
as of January 1, 2008 for financial assets and financial liabilities within its
scope and it is not expected to have a material impact on our financial
statements. In February 2008, the FASB issued FASB Staff Position No. FAS 157-2Effective Date of FASB Statement No.
157(FSP FAS 157-2), which defers the
effective date of FAS 157 for all non-financial assets and non-financial
liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually), for fiscal years
beginning after November 15, 2008 and interim periods within those fiscal years
for items within the scope of FSP FAS 157-2. We are currently assessing the
impact, if any, of adopting FAS 157 and FSP FAS 157-2 for non-financial assets
and non-financial liabilities on our financial statements.

In
February 2007, the FASB issued Statement of Financial Accounting Standards No.
159,The Fair Value Option for Financial
Assets and Financial LiabilitiesIncluding an amendment of FAS 115(FAS 159).FAS 159 provides companies with an
option to irrevocably elect to measure certain financial assets and financial
liabilities at fair value on an instrument-by-instrument basis with the
resulting changes in fair value recorded in earnings. The objective of FAS 159
is to reduce both the complexity in accounting for financial instruments and the
volatility in earnings caused by using different measurement attributes for
financial assets and financial liabilities. SFAS 159 is effective for us as of
January 1, 2008 and as of this effective date, we have elected not to apply the
fair value option to any of our financial assets or financial liabilities.

In June
2007, the FASB issued Emerging Issues Task Force (EITF) Issue No. 07-03,Accounting for Nonrefundable Advance Payments
for Goods or Services Received for Use in Future Research and Development
Activities, which is effective for fiscal
years beginning after December 15, 2007. The Task Force concluded that
nonrefundable advance payments for goods or services that will be used or
rendered for future research and development activities should be deferred and
capitalized. Such amounts should be recognized as an expense as the related
goods are delivered or the services are performed, or when the goods or services
are no longer expected to be provided. We are currently evaluating the potential
impact of adopting this standard.

In
September 2007, the FASB ratified EITF Issue No. 07-1,Accounting for Collaborative Agreements(EITF 07-1). EITF 07-1 defines collaborative agreements as
contractual arrangements that involve a joint operating activity. These
arrangements involve two (or more) parties who are both active participants in
the activity and that are exposed to significant risks and rewards dependent on
the commercial success of the activity. EITF 07-1 provides that a company should
report the effects of adoption as a change in accounting principle through
retrospective application to all periods and requires additional disclosures
about a companys collaborative arrangements. EITF 07-1 is effective for us as
of January 1, 2009. The adoption of EITF 07-1 is not expected to have a material
impact on our financial statements.

In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
141(R),Business Combinations(FAS 141(R)). FAS 141(R) changes several underlying
principles in applying the purchase method of accounting. Among the significant
changes, FAS 141(R) requires a redefining of the measurement date of a business
combination, expensing direct transaction costs as incurred, capitalizing
in-process research and development costs as an intangible asset and recording a
liability for contingent consideration at the measurement date with subsequent
re-measurements recorded in the results of operations. FAS 141(R) also requires
that costs for business restructuring and exit activities related to the
acquired company will be included in the post-combination financial results of
operations and also provides new guidance for the recognition and measurement of
contingent assets and liabilities in a business combination. In addition, FAS
141(R) requires several new disclosures, including the reasons for the business
combination, the factors that contribute to the recognition of goodwill, the
amount of acquisition related third-party expenses incurred, the nature and
amount of contingent consideration, and a discussion of pre-existing
relationships between the parties. FAS 141(R) is effective for us as of January
1, 2009. While the adoption of FAS 141(R) is not expected to have a material
impact on our financial statements, we expect the application of the new
standard will likely have a significant impact on how we allocate the purchase
price of any future acquired business, if any, including the expensing of direct
transaction costs and costs to integrate the acquired business.

55

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In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
160,Noncontrolling Interests in Financial
Statements, an Amendment of ARB No. 51, (FAS
160). FAS 160 establishes accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. FAS 160 requires noncontrolling interests in subsidiaries initially
to be measured at fair value and classified as a separate component of equity.
FAS 160 also requires a new presentation on the face of the financial statements
to separately report the amounts attributable to controlling and non-controlling
interests. FAS 160 is effective for us as of January 1, 2009. The adoption of
FAS 160 is not expected to have a material impact on our financial statements.

56

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2. Cash, Available-for-Sale
Securities and Restricted Investments

The
following is a summary of cash, restricted investments, and available-for-sale
securities as of December 31, 2007 (in thousands):

|                                        |  |      |        | Gross      |   | Gross      |  |      
|--------------------------------------- |  | ---- | ------ | ---------- | - | ---------- |  | -----
|                                        |  |      |        | Unrealized |   | Unrealized |  | Fair 
|                                        |  | Cost |        | Gains      |   | Losses     |  | Value
|Cash and money market funds             |  | $    | 359    |            | $ | -          |  | $    
|Corporate debt
      securities         |  |      | 24,322 |            |   | 32         |  |      
|Federal agency obligations              |  |      | 21,871 |            |   | 164        |  |      
|Asset-backed and
      other securities |  |      | 31,212 |            |   | 183        |  |      
|Total                                   |  | $    | 77,764 |            | $ | 379        |  | $    
|Amounts reported
      as:              |  |      |        |            |   |            |  |      
|Cash and cash equivalents               |  | $    | 359    |            | $ | -          |  | $    
|Restricted investments                  |  |      | 9,428  |            |   | -          |  |      
|Available-for-sale securities           |  |      | 67,977 |            |   | 379        |  |      
|Total                                   |  | $    | 77,764 |            | $ | 379        |  | $    

The
weighted average maturity of our investment portfolio at December 31, 2007 was
333 days, with $44.6 million carrying an effective maturity of less than twelve
months, and $33.5 million carrying an effective maturity between one and three
years.

The
following is a summary of cash, restricted investments, and available-for-sale
securities as of December 31, 2006 (in thousands):

|                                        |  |      |        | Gross      |   | Gross      |  |      
|--------------------------------------- |  | ---- | ------ | ---------- | - | ---------- |  | -----
|                                        |  |      |        | Unrealized |   | Unrealized |  | Fair 
|                                        |  | Cost |        | Gains      |   | Losses     |  | Value
|Cash and money market funds             |  | $    | 1,815  |            | $ | -          |  | $    
|Corporate debt
      securities         |  |      | 28,465 |            |   | 6          |  |      
|Federal agency obligations              |  |      | 23,438 |            |   | 8          |  |      
|Asset-backed and
      other securities |  |      | 16,432 |            |   | 9          |  |      
|Treasury obligations                    |  |      | 750    |            |   | -          |  |      
|Total                                   |  | $    | 70,900 |            | $ | 23         |  | $    
|Amounts reported as:                    |  |      |        |            |   |            |  |      
|Cash and cash equivalents               |  | $    | 1,815  |            | $ | -          |  | $    
|Restricted Investments                  |  |      | 10,428 |            |   | -          |  |      
|Available-for-sale securities           |  |      | 58,657 |            |   | 23         |  |      
|Total                                   |  | $    | 70,900 |            | $ | 23         |  | $    

The
weighted average maturity of our investment portfolio at December 31, 2006 was
338 days, with $36.6 million carrying an effective maturity of less than twelve
months, and $34.2 million carrying an effective maturity between one and three
years.

Net
realized gain was approximately $6,000 for the year ended December 31, 2007, and
net realized losses were approximately $24,000 and $32,000 for the years ended
December 31, 2006 and 2005, respectively.

57

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At
December 31, 2007 and 2006, we had the following available-for-sale securities
that were in a continuous unrealized loss position but were not deemed to be
other-than-temporarily impaired (in thousands):

|                                        |  | Less Than 12 Months |     | 12 Months or Greater
|--------------------------------------- |  | ------------------- | --- | --------------------
|                                        |  | Gross               |     | Estimated           
|                                        |  | Unrealized          |     | Fair                
|December 31,
      2007                 |  | Losses              |     | Value               
|Corporate debt securities               |  | $                   | (7  | )                   
|Asset-backed and
      other securities |  |                     | (4  | )                   
|Total                                   |  | $                   | (11 | )                   
|                                       
|                                       
|                                        |  | Less Than 12 Months |     | 12 Months or Greater
|                                        |  | Gross               |     | Estimated           
|                                        |  | Unrealized          |     | Fair                
|December 31,
      2006                 |  | Losses              |     | Value               
|Corporate debt securities               |  | $                   | (38 | )                   
|Federal agency
      obligations        |  |                     | (42 | )                   
|Asset-backed and other securities       |  |                     | (14 | )                   
|Treasury
      obligations              |  |                     | (5  | )                   
|Total                                   |  | $                   | (99 | )                   

The gross
unrealized losses reported above for 2007 and 2006 were caused by general
fluctuations in market interest rates from the respective purchase date of these
securities through the end of those periods. No significant facts or
circumstances have occurred to indicate that these unrealized losses are related
to any deterioration in the creditworthiness of the issuers of the marketable
securities we own. Based on our review of these securities, including our
assessment of the duration and severity of the related unrealized losses, we
have not recorded any other-than-temporary impairments on these investments.

3. Property and Equipment

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

December 31,2007
    
    2006Leasehold improvements
    
    $
    6,742
    
    
    $
    6,742Laboratory
      equipment
    
    
    1,218
    
    
    
    1,168Office furniture and equipment
    
    
    1,403
    
    
    
    1,5429,363
    
    
    
    9,452Less: accumulated depreciation and amortization
    
    
    (8,100
    )
    
    
    (6,743
    )Property and
      equipment, net
    
    $
    1,263
    
    
    $
    2,709


Total
depreciation and amortization expense for 2007, 2006 and 2005, was $1.6 million,
$1.3 million and $2.5 million, respectively.

As of
December 31, 2006, we revised the estimated useful life on certain
leasehold improvements with a remaining carrying value of $1.2 million to
correspond with the remaining term on the underlying building operating lease
which expires in May 2008, since we no longer intended to exercise an option to
extend the lease term. These leasehold improvements had previously been
scheduled to be amortized through December 2010. The change in useful life
was accounted for as a change in accounting estimate.

58

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4.Impairment Loss related to
Long-Lived Assets

In 2005,
we determined that the scope of our research and development activities had
changed such that we would not effectively utilize certain portions of our
leased facilities that had been designed to support our gene therapy programs.
After considering alternative uses for these spaces, we determined that it was
not cost effective to re-engineer the rooms representing approximately 40,000
square feet of manufacturing, laboratory, and office space under lease through
May 2008 and approximately 11,000 square feet of similar space we have under
lease through November 2010. We determined we would maximize our potential cost
savings by subleasing the properties.

Based on
market conditions for rental property in 2005, we did not expect to fully
recover the value invested in leasehold improvements and equipment with a
carrying value of $6.1 million. In 2005, we recorded an impairment loss related
to long-lived assets in the facility and wrote down the related carrying value
of the leasehold improvements, laboratory and office equipment and furniture to
approximate their estimated fair values.

Fair
value was based on the expected incremental sublease cash flows we estimated we
could receive in excess of our prorated existing operating lease obligations
based on current market lease rental rates at the time for similar mixed use
properties. Based on market conditions during 2005, including vacancy rates and
the expected time needed to sublease the facilities, we did not expect to
receive significant incremental rents related to the long-lived
assets.

In
December 2006, we recorded an asset retirement obligation associated with our
commitment to remove or otherwise alter certain leasehold improvements at the
end of our building lease that terminates in May 2008. Because the underlying
assets had been determined to be impaired in 2005, and no longer had a carrying
value, the recognition of the asset retirement obligation resulted in an
additional impairment loss related to long-lived assets in 2006 (see Note 1).

5. License Agreement  Sanochemia
Pharmazeutika AG

In
January 2006, we entered into a license agreement with SDI Diagnostics
International LTD, a division of Sanochemia Pharmazeutika AG, or Sanochemia.
Under the terms of the agreement, we received an exclusive license to develop
and market certain formulations of the compound tolperisone in North America.
This compound is the active pharmaceutical ingredient in our product candidate,
AV650, for the treatment of spasticity and neuromuscular spasm. Under the terms
of the agreement, we paid Sanochemia $3.0 million in initial license fees
and are required to make additional future payments upon the achievement of
successful clinical and regulatory product development milestones and, following
regulatory approval, to make royalty payments on sales. We and Sanochemia have
also entered into a long-term supply agreement under which Sanochemia will
manufacture, and we will purchase for additional cost, the AV650 product for our
clinical and commercial supply. The $3.0 million initial payment was
nonrefundable, does not include any significant future performance requirements
by Sanochemia, and the licensed compound does not have an alternative future use
to us beyond the AV650 product. As such, we recognized the entire initial
payment as in-license fee expense in 2006 and expect that any future payments we
make under the terms of the agreement will also be recorded as in-license fee
expense.

6. Severance Expense

In
January 2006, an executive officer resigned from Avigen. In connection with his
resignation, we agreed to pay severance benefits including base salary for a
period of one year and continued health benefits for up to twelve months. In
addition, we agreed to modify outstanding stock options held by the executive to
allow for six months of additional vesting and an extended period to exercise
all vested stock options for up to two years. As a result of this separation and
the related modification of outstanding stock options held by the executive, we
recognized a severance expense of approximately $288,000 and a non-cash,
share-based compensation charge of approximately$108,000 in 2006.

59

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7. Termination Costs Associated with
Exit Activities

In August 2005, we took steps to
reduce our research and development spending attributable to gene therapy
activities. As a result, we reduced the level of our total staff by
approximately 19 positions, primarily in research and development. This action
qualified as an exit activity under FAS 146,Costs Associated with Exit or Disposal Activities. In connection with this reduction in staff, we incurred
approximately $646,000 in severance and other termination-related benefits.
Approximately $624,000 of the costs associated with the workforce reduction are
included in research and development expenses and approximately $22,000 are
included in general and administrative expenses for year ended December 31,
2005. We do not expect to incur any additional costs associated with the
workforce reduction.

8. AAV Gene Therapy Assignment
Agreement - Genzyme Corporation

In
December 2005, we entered into an agreement with Genzyme Corporation, or
Genzyme, whereby we assigned to Genzyme our rights to certain gene
therapy-related intellectual property, our gene therapy clinical trial programs
for Parkinsons disease and hemophilia, gene therapy-related contracts, and the
use of previously manufactured clinical-grade vector materials. Under the terms
of the agreement, we received a $12.0 million payment and could receive
significant additional development milestones, sublicensing fees and royalty
payments based on the successful development of products by Genzyme utilizing
technologies previously developed by us. The $12.0 million payment was
non-refundable and we did not have any significant additional performance
obligations associated with the agreement as of December 31, 2005. Because we
could receive significant future cash flows in connection with this agreement,
we have not accounted for this transaction as discontinued operations. As such,
we recognized the entire payment received as revenue in 2005 and expect that any
future payments we receive under the terms of the agreement will also be
recorded as revenue. We did not receive any payments from Genzyme for the
periods ended December 31, 2007 and 2006.

9. Long Term Loan Payable

In June
2000, we entered into a financing arrangement with Wells Fargo Bank, National
Association (the Bank) to support construction-related activities. Under this
arrangement, we had the right to borrow up to $10.0 million through June 1,
2003. This revolving line of credit was amended in June 2002 to extend the
expiration date to June 1, 2005, and amended again in June 2004 to extend the
expiration date to June 1, 2007. Effective June 1, 2007, we amended the
arrangement to extend the expiration date until November 30, 2009. Under the
terms of the amended agreement, as renewed, the Bank agrees to provide a loan
commitment through November 30, 2009, not to exceed the aggregate principal
amount of $8.0 million, the proceeds of which shall be used to refinance our
outstanding borrowings under our expiring line of credit and,
accordingly, the borrowings are classified as long-term loans payable.
Also under the terms of the credit facility, as renewed, we may from time to
time during the term of the Loan Commitment partially or wholly repay any
outstanding borrowings, provided that amounts repaid may not be re-borrowed, and
that the outstanding principal balance of the loan commitment shall be due and
payable in full on November 30, 2009. In addition, the Bank will separately
maintain our currently outstanding standby letters of credit issued to our
building lessors in the amounts of $2.0 million and $427,670 pursuant to the
terms required under our building operating leases that expire in November 2010
and May 2008, respectively.

Amounts
borrowed under this credit facility, as renewed, bear interest at the London
Inter-Bank Offered Rate plus a margin adjustment that varies between 0.50% and
0.75% on the date of each drawdown based on the market value of our investment
portfolio held with a subsidiary of Wells Fargo. This interest rate is
subsequently reset every three or six months. The weighted average interest rate
for all outstanding drawdowns on this long-term obligation was 5.81% and 5.95%
at December 31, 2007 and 2006, respectively. We have pledged a portion of our
portfolio of available-for-sale securities equal to the amount of outstanding
borrowings to secure this obligation, and have identified these pledged assets
as restricted investments on our balance sheets. As of December 31, 2007 and
2006, we had borrowed $7.0 million and $8.0 million, respectively, from the line
of credit. Payments of interest only are due monthly through November 30, 2009,
at which time a balloon payment of outstanding principal is due.

60

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10. Stockholders Equity

*Common Stock*

In August
and September 1998, we issued an aggregate of 1,306,505 shares of our common
stock at $2.25 to $2.94 per share to selected institutional investors. The
offering was completed through a private placement. As part of the transaction,
we issued warrants to purchase 261,301 shares of our common stock with an
exercise price of $2.18 to $3.67 per share. The exercise price was 125% of the
fair market value per share of our underlying stock on the corresponding closing
day and the warrants carried a five-year term. All of these warrants not
exercised have expired. After deducting commissions and fees from the gross
proceeds of $3.0 million, net proceeds from this transaction approximated $2.7
million.

In
December 1998, we issued 1,367,280 shares of our common stock at $3.81 to $4.88
per share to selected institutional investors. The offering was completed
through a private placement. As part of this transaction, we issued warrants to
purchase 273,456 shares of our common stock with an exercise price ranging from
$4.76 to $6.09 per share. The exercise price was 125% of the fair market value
per share of our underlying stock on the corresponding closing day and the
warrants carried a five-year term. All of these warrants not exercised have
expired. After deducting commissions and fees from the gross proceeds of $5.6
million, net proceeds from this transaction approximated $5.2 million.

In
February and April 1999, we issued an aggregate of 2,198,210 shares of our
common stock at $5.50 to $6.00 per share to selected institutional investors.
The offering was completed through a private placement. As part of this
transaction, we issued warrants to purchase 439,642 shares of our common stock
with an exercise price of $6.87 to $7.50 per share. The exercise price was 125%
of the fair market value per share of the underlying stock on the corresponding
closing day and the warrants carried a five-year term. All of these warrants not
exercised have expired. After deducting commissions and fees from the gross
proceeds of $13.2 million, net proceeds from this transaction approximated $12.2
million.

In
October and November 1999, we issued an aggregate of 2,033,895 shares of our
common stock at $16.19 to $25.56 per share to selected institutional investors.
The offering was completed through a private placement. As part of this
transaction, we issued warrants to purchase 406,779 shares of our common stock
with an exercise price of $20.25 to $31.95 per share. The exercise price was
125% of the fair market value per share of our underlying stock on the
corresponding closing day and the warrants carried a five-year term. All of
these warrants not exercised have expired. After deducting commissions and fees
from the gross proceeds of $40.0 million, net proceeds from this transaction
approximated $37.2 million.

In March
2000, we issued a warrant to purchase 40,000 shares of our common stock as
partial consideration for the extension of our building lease. The fair value of
this warrant at the date of issuance was approximately $1.7 million. This fair
value is being amortized over the life of the lease extension, or May 2008. This
warrant was issued with an exercise price equal to the fair market value per
share of our underlying stock at the time of issuance, or $56.00, and carried a
five-year term. In March 2005, this warrant expired unexercised.

Also, in
March 2000, we issued a warrant to purchase 50,000 shares of our common stock as
partial consideration for the acquisition of certain patent licenses previously
used in our gene therapy-related research and development activities. The fair
value of this warrant at the date of issuance was approximately $3.2 million and
was fully expensed in the year ended June 30, 2000. This warrant was issued with
an exercise price equal to the fair market value per share of our underlying
stock at the time of issuance, or $82.00, and carried a five-year term. In March
2005, this warrant expired unexercised.

In April
and May 2000, we issued an aggregate of 1,150,000 shares of our common stock at
$26.00 per share through a public offering. After deducting commissions and fees
from the gross proceeds of $29.9 million, net proceeds from this transaction
totaled $27.6 million.

In
November 2000, we issued an aggregate of 2,291,239 shares of our common stock
between $37.50 and $45.06 per share through a public offering. After deducting
combined commissions and fees from the gross proceeds of $90.7 million, net
proceeds from this transaction totaled $86.1 million.

61

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In
February 2001, we issued 313,636 shares of common stock at $47.82 per share to
Bayer AG, in connection with a collaboration agreement entered into with Bayer
Corporation dated November 17, 2000. Net proceeds from this transaction totaled
$15.0 million.

In March
2004, we issued a warrant to purchase 15,000 shares of our common stock as
partial consideration for the acquisition of certain intellectual property
rights used in our research and development activities. The fair value of this
warrant was approximately $97,000 when we entered into the corresponding license
agreement in October 2003. The fair value of the warrant was fully expensed and
recorded in accounts payable and other accrued liabilities as of December 31,
2003. Upon issuance, the fair value of the warrant was reclassified to
additional paid in capital for the year ended December 31, 2004. This warrant
was issued with an exercise price equal to the fair market value per share of
our underlying stock at the time of issuance, or $6.50, and carries a ten-year
term. At December 31, 2007, this was the only issued warrant Avigen had that was
outstanding.

In May
2006, we issued an aggregate of 3,939,760 shares of our common stock at $5.37
per share to selected institutional investors. The offering was completed
through a private placement. After deducting combined commissions and fees from
the gross proceeds of $21.2 million, net proceeds from this transaction totaled
$19.4 million. The resales of these shares were registered pursuant to a
registration statement that was declared effective on June 30, 2006.

In April
and May 2007, we issued an aggregate of 4,413,191 shares of our common stock at
$6.94 per share through a public offering. After deducting combined commissions
and fees from the gross proceeds of $30.6 million, net proceeds from this
transaction totaled $28.5 million.

*Shares Reserved for Future
Issuance*

We have reserved shares of our
common stock for future issuance as follows:

Year
      EndedDecember
      31,2007Stock options outstanding
    
    4,475,227Stock options
      available for grant
    
    2,076,610Warrants to purchase common stock
    
    15,000Shares available
      for Employee Stock Purchase Plan
    
    360,0006,926,837


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11. Share-based Compensation

During
the years ended December 31, 2007 and 2006, share-based compensation expense has
been recognized for all our share-based compensation plans as follows (in
thousands, except per share data):

|                                                                               |  | Year Ended December
  31,
|------------------------------------------------------------------------------ |  | -------------------------
|                                                                               |  | 2007                     
|Research and development                                                       |  | $                        
|                                                                              
|General and administrative                                                     |  |                          
|Share-based compensation
      expense before taxes                            |  |                          
|Related income tax benefits                                                    |  |                          
|Net share-based
      compensation expense                                     |  | $                        
|Net share-based compensation expenses per basic and diluted common
      share |  | $                        

Since we
have cumulative operating losses as of December 31, 2007 for which a valuation
allowance has been established, we recorded no income tax benefits for
share-based compensation arrangements during the years ended December 31, 2007
and 2006, respectively. Prior to our adoption of FAS 123(R) as of January 1,
2006, share-based employee compensation expense was not recognized in our
statements of operations. See Note 1, *Share-Based Compensation*, for the
pro-forma effect on our net loss and net loss per share if we had applied the
fair value recognition provisions to share-based employee compensation in
2005.

As of
December 31, 2007, Avigen had stock options outstanding to employees,
non-employee directors, and consultants under three share-based compensation
plans; however, only the 2006 Incentive Stock Option Plan (2006 Plan) was
available for future grants. The 1996 Equity Incentive Plan (1996 Plan) and
the 1996 Non-Employee Directors Stock Option Plan (Directors Plan) were both
approved by our stockholders, had a ten-year duration and were terminated on
March 29, 2006. The 2006 Plan was approved by stockholders in May 2006 and is an
amendment and restatement of the 2000 Equity Incentive Plan (2000 Plan) which
was adopted by Avigens Board of Directors in June 2000. The adoption of the
2006 Plan did not increase the number of shares available for grant under the
2000 Plan.

In
general, the outstanding options under these plans were granted at a price equal
to the fair market value of our stock on the date of grant with a term of 10
years. Grants under the 2006 Plan and 1996 Plan generally become exercisable on
a quarterly basis over a vesting period of either three or four years. Grants
under the Directors Plan become exercisable in three annual installments. As of
December 31, 2007, we had an aggregate of 4,475,227 shares of our common stock
reserved for issuance under these plans for outstanding awards and
2,076,610 shares available for future grants of share-based awards under the
2006 Plan.

63

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The following table summarizes
option activity with regard to all stock options:

Outstanding OptionsWeighted-Number of
    
    Average ExerciseShares
    
    Price per ShareOutstanding at December 31, 2004
    
    4,424,728
    
    
    $
    10.16Granted
    
    658,366
    
    
    
    3.17Canceled
    
    (1,069,817
    )
    
    
    8.25Exercised
    
    (526,023
    )
    
    
    0.54Outstanding at December 31, 2005
    
    3,487,254
    
    
    $
    10.87Granted
    
    1,605,500
    
    
    
    5.16Canceled
    
    (732,982
    )
    
    
    9.45Exercised
    
    (269,098
    )
    
    
    3.76Outstanding at December 31, 2006
    
    4,090,674
    
    
    $
    9.36Granted
    
    1,296,692
    
    
    
    4.96Canceled
    
    (748,752
    )
    
    
    14.26Exercised
    
    (163,387
    )
    
    
    3.63Outstanding at December 31, 2007
    
    4,475,227
    
    
    $
    7.47


The fair
value of our employee stock options granted during 2007 and 2006 were estimated
under the Black-Scholes option valuation model with the weighted average
assumptions shown in the table below. Expected volatilities are based on the
historical volatility of our common stock. The expected term of options granted
is based primarily on analyses of historical employee termination and option
exercise behavior; separate groups of employees that have similar historical
exercise behavior are considered separately for valuation purposes. The
risk-free interest rates are based on the U.S. Treasury yield for a period
consistent with the expected term of the option in effect at the time of the
grant. Share-based compensation expense recognized during the period is based on
the value of the portion of share-based payment awards that is ultimately
expected to vest during the period. The estimated forfeiture rates are based on
analyses of historical data, taking into account patterns of involuntary
termination and other factors.

Year Ended December
      31,2007
    
    2006
    
    2005Expected volatility
    
    0.5421
    
    0.6006
    
    0.6670Risk free
      interest rate
    
    4.16%
    
    4.60%
    
    4.05%Expected life of options in years
    
    4.30
    
    3.68
    
    4.50Expected
      dividend yield
    
    0%
    
    0%
    
    0%


The
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options and warrants that have no vesting restrictions and
are fully transferable. In addition, option valuation models, including
Black-Scholes, require the input of highly subjective assumptions, including the
expected stock price volatility. Because our stock options and warrants are not
traded, they have characteristics significantly different from those of traded
options and warrants, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in our opinion, the existing
option valuation models, including Black-Scholes, do not necessarily provide a
reliable single measure of the fair value of our stock options and
warrants.

64

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The
following table summarizes information with regard to total stock options
outstanding under all stock option plans at December 31, 2007:

|                        |  | Options Outstanding |  | Options Exercisable
|----------------------- |  | ------------------- |  | -------------------
|                        |  |                     |  | Weighted-          
|                        |  |                     |  | Average            
|                        |  |                     |  | Remaining          
|Range of
      Exercise |  | Number              |  | Contractual        
|Prices                  |  | Of
      Shares     |  | Life               
|$2.00 - $ 3.38          |  | 699,644             |  | 6.30               
|3.45 -
      3.69       |  | 497,707             |  | 7.57               
|3.94 - 4.42             |  | 547,358             |  | 9.14               
|4.85 -
      5.06       |  | 30,312              |  | 6.16               
|5.06 - 5.06             |  | 663,002             |  | 8.04               
|5.20 -
      5.50       |  | 768,100             |  | 8.38               
|5.51 - 6.74             |  | 449,984             |  | 6.74               
|8.10 -
      14.63      |  | 509,370             |  | 2.63               
|15.44 - 40.75           |  | 289,750             |  | 1.56               
|47.63 - 47.63           |  | 20,000              |  | 2.10               
|$2.00 -
    $47.63      |  | 4,475,227           |  | 6.70               

Our
employee stock options are granted at a price equal to the fair market value of
our stock on the date of the grant. The weighted average grant-date fair value
of options granted during 2007, 2006 and 2005 was $2.40, $2.48 and $1.79,
respectively. The total intrinsic value of options exercised during 2007, 2006
and 2005 was approximately $321,000, $514,000 and $1.4 million, respectively.
The total intrinsic value of options outstanding and options exercisable at
December 31, 2007 was $1.1 million and $757,000, respectively. The weighted
average remaining contractual life of options exercisable at December 31, 2007
was 4.9 years.

As of
December 31, 2007, there was approximately $3.7 million of total unrecognized
compensation expense related to non-vested share-based compensation
arrangements, which is expected to be recognized over a weighted average period
of 2.1 years.

As of
December 31, 2007, we had 4.1 million outstanding stock options that had vested
or are expected to vest with a weighted average exercise price of $7.73, a
weighted average remaining contractual term of 6.5 years and an aggregate
intrinsic value of $1.1 million.

In
January 2006, in connection with the resignation of an executive, we modified
the expiration terms for options representing 386,475 shares of common stock to
allow for six months of additional vesting and an extended period to exercise
all vested stock options for up to two years. The maximum contractual term was
not extended for any options. At the time of this modification, we recognized a
share-based compensation charge of approximately $108,000.

In August
2005, in connection with the resignation of an executive, we modified the
expiration terms for options representing 107,500 shares of common stock, but
did not extend the maximum contractual term. At the time of this modification,
there was no intrinsic value as the exercise price for these stock options
exceeded the market price. As a result, we did not record any compensation
expense in connection with the modification. At December 31, 2005, these options
expired unexercised.

*Employee Stock Purchase
Plan*

In
September 1997, we adopted the 1997 Employee Stock Purchase Plan (Purchase
Plan). A total of 360,000 shares of our common stock have been reserved for
issuance under the Purchase Plan. As of December 31, 2007, there have been no
employee common stock purchases under the Purchase Plan.

65

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12. Employee Profit Sharing/401(k)
Plan

In
January 1996, we adopted a Tax Deferred Savings Plan under Section 401(k) of the
Internal Revenue Code (the Plan) for all full-time employees. Under the Plan,
our eligible employees can contribute amounts to the Plan through payroll
withholding, subject to certain limitations. Our matching contributions to the
Plan are discretionary and can only be made in cash. Effective July 1, 2001, we
began matching 25% of an employees contributions up to $2,500 per Plan year.
These matching contributions vest ratably over a five-year period based on the
employees initial hire date. Our matching contributions for all employees for
the years ended December 31, 2007, 2006 and 2005 were approximately $58,000,
$51,000 and $76,000, respectively.

13. Commitments and
Contingencies

*Leases*

We lease
an aggregate of 112,000 square feet of laboratory, manufacturing, and office
facilities from two adjacent buildings in Alameda, California under two
non-cancelable operating lease agreements which expire in May 2008 and November
2010. Our lease for 45,000 square feet from one building which expires in May
2008 contains a conditional asset retirement obligation that may require us, at
our landlords sole discretion, to remove, reconfigure or otherwise alter
certain improvements we have made to the facility. We have recorded this
obligation in accordance with FAS 143,Accounting for Asset Retirement Obligations, at its estimated fair value in our financial statements at December 31,
2006 and 2007. As security for performance of future obligations under these
leases, including the conditional asset retirement obligation, we have pledged
$2.4 million of our available-for-sale securities to secure letters of credit
that serve as deposits. These amounts are classified as restricted investments
in our balance sheets. In August 2007, we amended our lease agreement for
approximately 45,000 square feet which expires in May 2008 to extend the
expiration period on approximately 4,830 square feet of laboratory space through
November 2010.  Upon the effective date of the amendment in June 2008, we
will also reduce our $427,000 letter of credit that serves as a deposit on the
lease to approximately $36,000 for the remainder of the extended
term.

As of
December 31, 2007, approximately 20,750 square feet of our aggregate facilities
is subleased to corporate tenants not affiliated with Avigen. The sublease
agreements run concurrent with the respective duration of our underlying lease
term on each building.

At
December 31, 2007, our future minimum commitments under non-cancelable
facilities operating leases, net of sublease income, are a follows (in
thousands):

Minimum Lease
    
    
    
    
    
    Net LeaseCommitments
    
    **Sublease Income**
    
    CommitmentsYear ending December 31:2008
    
    $
    2,092
    
    $
    (308
    )
    
    $
    1,7842009
    
    
    1,773
    
    
    (112
    )
    
    
    1,6612010
    
    
    1,686
    
    
    (103
    )
    
    
    1,5832011
    
    
    -
    
    
    -
    
    
    
    -2012 and
      thereafter
    
    
    -
    
    
    -
    
    
    
    -Total
    
    $
    5,551
    
    $
    (523
    )
    
    $
    5,028


Expenses
and income associated with operating leases and subleases were as follows (in
millions):

Year Ended December
  31,2007
    
    2006
    
    2005Rent expense
    
    $
    2.6
    
    
    $
    2.6
    
    
    $
    2.6Sublease income,
      net
    
    
    (0.7
    )
    
    
    (0.6
    )
    
    
    (0.1
    )


In 2005,
we recorded an investment in deferred financing leases of approximately $220,000
and recorded unearned income of approximately $155,000. This deferred financing
lease was related to equipment sold to one of our subtenants and carries a term
equal to the related sublease agreement, or 30 months. Unearned income will be
recognized ratably over the term of the lease, or approximately $5,200 per
month.

66

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*Subleases*

We
initially entered into sublease agreements for portions of our leased laboratory
and office facilities in 2005 when we determined we would not fully utilize the
capacity of our lease facilities. In connection with the sublease agreements, we
recorded initial direct costs of $114,000 in commission expenses. We amortize
initial direct costs to operating expenses on a straight-line basis over the
term of the sublease.

In
December 2007, we entered into a termination of sublease agreement for
approximately 11,000 square feet of laboratory and office space. In connection
with the termination, we wrote-off approximately $59,000 of initial direct costs
that had not yet been amortized.

*Other
Commitments*

In the
ordinary course of business, we enter into commitments to fund collaborative
research and clinical work performed by third parties. While these contracts are
cancelable, we expect the research studies and clinical work to be completed as
defined in the terms of the agreements, and all amounts paid when due. At
December 31, 2007, the estimated costs related to these commitments totaled
approximately $8.2 million, all of which is expected to be paid within the next
twelve to twenty-four months.

As
permitted under Delaware law and in accordance with our bylaws, we indemnify our
officers and directors for certain events or occurrences while the officer or
director is or was serving at Avigens request in such capacity. The term of the
indemnification period is for the officer's or director's lifetime. The maximum
amount of the potential future indemnification is unlimited. However, we have a
director or officer insurance policy that limits our exposure and may enable us
to recover a portion of any future amounts paid. We believe the fair value of
these indemnification agreements is minimal. Accordingly, we have not recorded
any liabilities for these agreements as of December 31, 2007.

In the
normal course of business, we provide indemnifications of varying scope under
our agreements with other companies, typically our clinical research
organizations, investigators, clinical sites, and suppliers. Pursuant to these
agreements, we generally indemnify, hold harmless, and agree to reimburse the
indemnified parties for losses suffered or incurred by the indemnified parties
in connection with use or testing of our products or product candidates or with
any U.S. patent or any copyright or other intellectual property infringement
claims by any third party with respect to our products. The term of these
indemnification agreements is generally perpetual. The potential future payments
we could be required to make under these indemnification agreements is
unlimited. Historically, costs related to these indemnification provisions have
been immaterial. We also maintain various liability insurance policies that
limit our exposure. As a result, we believe the fair value of these
indemnification agreements is minimal. Accordingly, we have not recorded any
liabilities for these agreements as of December 31, 2007.

67

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14. Income Taxes

Significant components of our
deferred tax assets are as follows (in thousands):

December 31,2007
    
    2006Net operating loss carryforwards
    
    $
    51,800
    
    
    $
    43,200Research and
      development credits
    
    
    2,600
    
    
    
    3,300Capitalized research and development
    
    
    3,900
    
    
    
    3,000Depreciation
    
    
    3,100
    
    
    
    3,100Other
    
    
    3,800
    
    
    
    3,500Gross deferred
      tax assets
    
    
    65,200
    
    
    
    56,100Valuation allowance
    
    
    (65,200
    )
    
    
    (56,100
    )Net deferred tax
      assets
    
    $
    
    
    
    $
    


In
accordance with FAS 123(R), we have excluded certain tax benefits resulting from
employee stock option exercises from our deferred tax assets at December 31,
2007 and 2006. In the future, if and when such tax benefits are ultimately
realized, the amount of excess tax benefit will be credited to additional
paid-in capital in our statement of stockholders equity.

No
provision has been made for income taxes because we have incurred losses since
our inception. Deferred income taxes reflect the net tax effects of temporary
differences between the carrying value of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.

Realization of deferred tax assets is dependent on future taxable income,
if any, the timing and the amount of which are uncertain. Accordingly, our
deferred tax assets have been fully offset by a valuation allowance. Our
valuation allowance increased by $9.1 million for the year ended December 31,
2007, decreased by $21.6 million for the year ended December 31, 2006, and
increased by $6.8 million for the year ended December 31, 2005.

As of
December 31, 2007, we had federal net operating loss carryforwards of $151.3
million and federal research and development tax credit carryforwards of $0.7
million, which will expire on various dates from 2008 through 2027. We also had
state net operating loss carryforwards of $45.1 million which will expire on
various dates from 2008 through 2017 and state research tax credits of $3.0
million, which carry forward indefinitely. Approximately $5.6 million of federal
and state net operating loss carryforwards represent stock option deductions
arising from activity under our stock option plans, the benefits of which will
increase additional paid-in-capital when realized.

Federal
and state laws limit the use of net operating loss and tax credit carryforwards
in certain situations where changes occur in the stock ownership of a company.
We conducted an Internal Revenue Code (IRC) Section 382 study from our inception
and have reported our deferred tax assets related to net operating loss and
research credit carryforwards after recognizing change of control limitations in
2006. The limitation of our federal and state carryforwards associated with
previous net operating losses and research credits and the associated reduction
in our deferred tax assets, was offset by a reduction in our valuation
allowance. Utilization of our net operating loss and credit carryforwards may
still be subject to additional substantial annual limitations for ownership
changes after December 31, 2006.  Such additional annual limitations could
result in the expiration of our net operating loss and credit carryforwards
available as of December 31, 2007 before their utilization.

We adopted the provisions of FIN 48
effective January 1, 2007 (see Note 1).  Upon adoption of FIN 48, we
determined that we did not have any unrecognized tax benefits and there was no
effect on our financial condition or results of operations as a result of
implementing FIN 48.  In addition, we had no unrecognized tax benefits at
December 31, 2007, nor do we expect any changes in our unrecognized tax benefits
during 2008.

Our policy is to recognize interest
and penalties related to income tax matters in income tax expense. We had no
accrual for interest or penalties on our balance sheets at December 31, 2007 and
2006, and have not recognized interest or penalties in our statements of
operations for the years ended December 31, 2007 and 2006

We are subject to taxation in the
United States and various state jurisdictions. Our tax years for 1994 through
2007 remain subject to examination by the United States and California tax
authorities due to loss carryforwards from those years.

68

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15. Condensed Quarterly Financial
Information (Unaudited)

|                                             |  | Year Ended       
|-------------------------------------------- |  | -----------------
|                                             |  | December 31, 2007
|                                             |  | First            
|(amounts in thousands except per share data) |  | Quarter          
|Total revenue                                |  | $                
|Net
    loss                                 |  |                  
|Net loss per share, basic and diluted        |  |                  
|                                            
|                                             |  | Year Ended       
|                                             |  | December 31, 2006
|                                             |  | First            
|(amounts in thousands except per share data) |  | Quarter          
|Total revenue                                |  | $                
|Net
    loss                                 |  |                  
|Net loss per share, basic and diluted        |  |                  

16. Subsequent Event  Settlement of
Asset Retirement Obligation

On March 11, 2008, Avigen, Inc.
entered into an agreement with ARE-1201 Harbor Bay, LLC to amend its building
lease in connection with approximately 45,000 square feet of laboratory and
office space at 1201 Harbor Bay Parkway, Alameda, CA that expires on May 31,
2008.  Under the terms of the building lease, Avigen could be required, at
the landlords sole discretion, to remove, reconfigure or otherwise alter some
of the improvements it had made to the facility.  At December 31, 2007,
Avigen determined the fair value of this asset retirement obligation was
approximately $484,000 based on an assessment of a range of possible settlement
dates and amounts.

Under the terms of the amendment,
Avigen was released from its obligation to remove any alterations in exchange
for, among other things, a payment to the landlord of $210,000.  As a
result of this settlement, Avigen will reduce its liability for the asset
retirement obligation during the quarter-ending March 31, 2008 by $274,000 with
a corresponding credit to operating expenses and reduce its level of restricted
assets in response to the cancellation of the corresponding letter of credit
that served as a deposit for the restoration obligation prior to the date of the
amendment.

69

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Item 9.Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure

Not Applicable.

Item 9A.Controls and Procedures

Evaluation of disclosure controls and procedures. With the supervision and with the participation of our
management, including our principal executive officer and principal financial
officer, we have evaluated the effectiveness of our disclosure controls and
procedures, as defined in the Securities Exchange Act of 1934, Rules 13a-15(e)
and 15(d)-15(e), as of December 31, 2007. Based on that evaluation, the
principal executive officer and principal financial officer have concluded that
these disclosure controls and procedures were effective to ensure, at a
reasonable assurance level, that the information required to be disclosed by us
in reports we file with the SEC is recorded, processed, summarized and reported
within the time periods specified in the SECs rules and instructions for such
reports.

Managements Report on Internal Control over Financial
Reporting. Our management is responsible
for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in Exchange Act Rules 13a-15(f) and
15d-15(f). Under the supervision and with the participation of our management,
including our principal executive officer and our principal financial officer,
we conducted an evaluation of the effectiveness of our internal control over
financial reporting as of December 31, 2007. In making this assessment, our
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) inInternal ControlIntegrated Framework.Our
management has concluded that, as of December 31, 2007, our internal control
over financial reporting was effective based on the COSO
criteria.

Odenberg, Ullakko,
Muranishi & Co. LLP, the independent registered public accounting firm that
audited our financial statements as of and for the year ended December 31, 2007,
included in this Annual Report on Form 10-K, has issued an attestation report on
our internal control over financial reporting, as set forth below.

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

70

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REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM

The Board of Directors and
Stockholders of Avigen, Inc.

We have
audited Avigen, Inc.s internal control over financial reporting as of December
31, 2007, based on criteria established inInternal Control  Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). Avigen, Inc.s management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting
included in Managements Report on Internal Control over Financial Reporting
included in Item 9A. Our responsibility is to express an opinion on the
companys internal control over financial reporting based on our
audit.

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

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

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

In our
opinion, Avigen, Inc. maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2007, based on the
COSO criteria.

We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the balance sheets of Avigen, Inc. as of
December 31, 2007 and 2006, and the related statements of operations,
stockholders equity, and cash flows for the years then ended and for the period
from inception (October 22, 1992) through December 31, 2007, and our report
datedMarch 14, 2008expressed an unqualified opinion thereon. Our report, insofar as it
relates to the amounts included for the period from October 22, 1992 to December
31, 2005, is based solely on the report of the other auditors.

/s/ ODENBERG,
      ULLAKKO, MURANISHI & CO. LLP


San Francisco,
CaliforniaMarch 14, 2008

71

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Item 9A(T).Controls and Procedures

Not
applicable.

Item 9B.Other Information

During the fourth quarter ended
December 31, 2007, we had no events that were required to be reported on Form
8-K but that were not filed to date.

On March 11, 2008, Avigen, Inc.
entered into an agreement with ARE-1201 Harbor Bay, LLC to amend its building
lease in connection with approximately 45,000 square feet of laboratory and
office space at 1201 Harbor Bay Parkway, Alameda, CA that expires on May 31,
2008.  Under the terms of the building lease, Avigen could be required, at
the landlords sole discretion, to remove, reconfigure or otherwise alter some
of the improvements it had made to the facility.  At December 31, 2007,
Avigen determined the fair value of this asset retirement obligation was
approximately $484,000 based on an assessment of a range of possible settlement
dates and amounts.

Under the terms of the amendment,
Avigen was released from its obligation to remove any alterations in exchange
for, among other things, a payment to the landlord of $210,000.  As a
result of this settlement, Avigen will reduce its liability for the asset
retirement obligation during the quarter-ending March 31, 2008 by $274,000 with
a corresponding credit to operating expenses and reduce its level of restricted
assets in response to the cancellation of the corresponding letter of credit
that served as a deposit for the restoration obligation prior to the date of the
amendment.

PART III

Item 10.Directors, Executive Officers and Corporate
Governance

The
information required by this Item with respect to Executive Officers may be
found under the caption, Executive Officers of the Registrant at the end of
Part I of this Annual Report on Form 10-K. The information required by this Item
with respect to Directors, including information with respect to our audit
committee, audit committee financial experts and procedures for Board
nominations, is incorporated herein by reference from the information under the
caption, Proposal 1  Election of Director appearing in the definitive Proxy
Statement to be delivered to Avigens stockholders in connection with the
solicitation of proxies for Avigens 2008 Annual Meeting of Stockholders to be
held on May 19, 2008 (the Proxy Statement).

*Section 16(a) Beneficial
Ownership Reporting Compliance*

The
information required by this Item with respect to compliance with Section 16(a)
of the Exchange Act is incorporated herein by reference from the section
captioned Section 16(a) Beneficial Ownership Reporting Compliance contained in
the Proxy Statement.

*Code of Business Conduct and
Ethics*

The
information required by this Item with respect to our code of ethics is
incorporated herein by reference from the section captioned Proposal 1 
Election of Directors  Code of Business Conduct and Ethics contained in the
Proxy Statement.

Item 11.Executive Compensation

The
information required by this Item is set forth in the Proxy Statement under the
captions, Executive Compensation, Compensation Committee Interlocks and
Insider Participation and Compensation Committee Report. Such information is
incorporated herein by reference.

72

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Item 12.Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters

The
information required by this Item with respect to security ownership of certain
beneficial owners and management is set forth in the Proxy Statement under the
caption, Security Ownership of Certain Beneficial Owners and Management. Such
information is incorporated herein by reference.

EQUITYCOMPENSATIONPLANINFORMATION

The
following table provides certain information with respect to all of Avigens
equity compensation plans in effect as of December 31, 2007:

|                                    |                             |                      | Number of
      securities           
|----------------------------------- | --------------------------- | -------------------- | -------------------------------------
|                                    |                             |                      | remaining available
    for          
|                                    | Number of securities
    to | Weighted-average     | future issuance under
      equity   
|                                    | be issued upon
    exercise | exercise price of    | compensation plans                   
|                                    | of outstanding
    options, | outstanding options, | (excluding securities
      reflected
|Plan
      Category                 | warrants and rights
    (1) | warrants and rights  | in column (a))(2)                    
|                                    | (a)                         | (b)                  | (c)                                  
|Equity compensation
      plans     |                             |                      |                                      
|approved by security
      holders  | 3,228,061                   | $   6.22             | 2,076,610                            
|Equity compensation
      plans not |                             |                      |                                      
|approved by security
      holders  | 1,247,166                   | 10.69                | 0                                    
|Total                               | 4,475,227                   | $ 
       7.47       | 2,076,610                            

|(1) |  | Our 2000 Equity Incentive Plan
      (the 2000 Plan) was adopted in 2000 without stockholder
      approval. The 2000 Plan was amended and restated as our 2006 Equity
      Incentive Plan (the 2006 Plan), which amendment and
      restatement was approved by our stockholders on May 31, 2006. The number
      of shares subject to options outstanding under plans not approved by our
      stockholders reflects options granted pursuant to the 2000 Plan prior to
      May 31, 2006, which number of shares is not reflected as outstanding under
      compensation plans approved by our stockholders.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|(2) |  | Reflects shares available for
      grant under our 2006 Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

***2000 Equity Incentive
Plan***

Prior to
the amendment and restatement of Avigens 2000 Equity Incentive Plan (the
2000 Plan) as the 2006 Equity Incentive Plan, the 2000 Plan
provided for the grant of nonqualified stock options, stock bonuses and
restricted stock purchase awards (collectively, stock awards). An aggregate of
5,000,000 shares of common stock had been reserved for issuance under the 2000
Plan. Stock awards could be granted under the 2000 Plan to employees (including
officers), directors and consultants of Avigen and its affiliates; provided,
however, that the aggregate number of shares issued pursuant to stock awards
granted to officers and directors under the 2000 Plan could not exceed 40% of
the number of shares reserved for issuance under the 2000 Plan, except that
stock awards granted to officers prior to their employment by Avigen as an
inducement to entering into employment contracts with Avigen were not included
in the 40% limitation. The exercise price of options and restricted stock
purchase awards could not be less than 85% of the fair market value of the stock
on the date of grant. Stock bonuses could be awarded in consideration for past
services actually rendered to Avigen or its affiliates.

Vesting.Stock awards granted under
the 2000 Plan may become exercisable (in the case of options) or released from a
repurchase option in favor of Avigen (in the case of stock bonuses and
restricted stock purchase awards) in cumulative increments (vest) as
determined by the Board. The Board has the power to accelerate the time during
which stock awards may vest or be exercised. In addition, options granted under
the 2000 Plan may permit exercise prior to vesting, but in such event the
participant may be required to enter into an early exercise stock purchase
agreement that allows Avigen to repurchase unvested shares, generally at their
exercise price, should the participants service terminate before
vesting.

73

---

Term. The term of options granted under the 2000 Plan was
determined by the Board in its discretion. Options under the 2000 Plan generally
terminate three months after termination of the participants service, subject
to extension in certain circumstances.

Effect
of Certain Corporate Events.The 2000 Plan
provides that, in the event of a dissolution, liquidation or sale of
substantially all of the assets of Avigen, specified type of merger, or other
corporate reorganization (a change in control), any surviving corporation must
either assume any stock awards outstanding under the 2000 Plan or substitute
similar stock awards for those outstanding under the 2000 Plan, or else the
outstanding stock awards will continue in full force and effect. In the event
that any surviving corporation declines to assume or continue the stock awards
outstanding under the 2000 Plan, or to substitute similar stock awards, then,
with respect to stock awards held by persons then performing services as
employees, directors, or consultants of Avigen, the vesting and the time during
which these stock awards may be exercised will be accelerated in
full.

Item 13.Certain Relationships and Related Transactions, and Director
Independence

The
information required by this Item is set forth in the Proxy Statement under the
headings Proposal 1  Election of Director and Certain Relationships and
Related Transactions. Such information is incorporated herein by reference.

Item 14.Principal Accountant Fees and Services

The
information required by this Item is set forth in the Proxy Statement under the
heading Proposal 2 - Ratification of Selection of Independent Registered Public
Accounting Firm. Such information is incorporated herein by reference.

Consistent with Section 10A(i)(2) of the Securities Exchange Act of 1934,
as added by Section 202 of the Sarbanes-Oxley Act of 2002, we are responsible
for listing the non-audit services approved by our Audit Committee to be
performed by Odenberg, Ullakko, Muranishi & Co. LLP, our external auditor.
Non-audit services are defined as services other than those provided in
connection with an audit or a review of our financial statements. Our Audit
Committee has approved our recurring engagements of non-audit services of
Odenberg, Ullakko, Muranishi & Co. LLP for the preparation of tax returns,
and tax advice in preparing for and in connection with such filings.

74

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PART IV

Item 15.Exhibits, Financial Statement Schedules

(a) The following documents are
filed as part of this Annual Report on Form 10-K:

| |  | (1)                                                                                                                                                                                                                                     |                                                                | Financial Statements:        
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------- | -----------------------------
| |  |                                                                                                                                                                                                                                        
| |  |                                                                                                                                                                                                                                         | Reports of
      Independent Registered Public Accounting Firm
| |  |                                                                                                                                                                                                                                         | Balance
      Sheets                                          
| |  |                                                                                                                                                                                                                                         | Statements
      of Operations                                
| |  |                                                                                                                                                                                                                                         | Statements
      of Stockholders Equity                      
| |  |                                                                                                                                                                                                                                         | Statements
      of Cash Flows                                
| |  |                                                                                                                                                                                                                                         | Notes to
      Financial Statements                           
| |  |                                                                                                                                                                                                                                        
| |  | (2)                                                                                                                                                                                                                                     |                                                                | Financial Statement Schedules
| |  |                                                                                                                                                                                                                                        
| |  | Financial
      statement schedules have been omitted from this Annual Report on Form 10-K
      because they are either not applicable or the required information is
      provided in the financial statements or the notes thereto.
| |  |                                                                                                                                                                                                                                        
| |  | (3)                                                                                                                                                                                                                                     |                                                                | Exhibits                     
| |  |                                                                                                                                                                                                                                        
| |  | See the
      Exhibit Index which follows the signature page of this Annual Report on
      Form 10-K, which is incorporated herein by
reference.                                                                                      

75

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SIGNATURES

Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.

|                            | AVIGEN, INC.
|--------------------------- | ------------
|                           
|                           
|                            | By:         
|                            |             
|                            |             
|Dated: March 14,
      2008 |             

POWER OF ATTORNEY

KNOW ALL
PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Kenneth Chahine and Andrew A. Sauter, and each or any
one of them, his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this Annual Report on
Form 10-K, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in connection therewith, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his substitutes or
substitute, may lawfully do or cause to be done by virtue hereof.

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.

|Signature                             |  | Title                                                 |  | Date                
|------------------------------------- |  | ----------------------------------------------------- |  | --------------------
|/s/ KENNETHG. CHAHINE                 |  | President, Chief
      Executive Officer and Director |  | March 14,
      2008
|Kenneth G.
      Chahine, J.D., Ph.D. |  | (Principal
      Executive Officer)                   |  |                     
|                                     
|/s/ ANDREWA. SAUTER                   |  | Chief Financial
      Officer                         |  | March 14,
      2008
|Andrew A.
      Sauter                |  | (Principal
      Financial and Accounting             |  |                     
|                                      |  | Officer)                                              |  |                     
|                                     
|/s/ ZOLAHOROVITZ,                     |  | Chairman of the
      Board                           |  | March 14,
      2008
|Zola Horovitz,
      Ph.D.            |  |                                                       |  |                     
|                                     
|/s/ YUICHIIWAKI                       |  | Director                                              |  | March 14,
      2008
|Yuichi Iwaki,
      M.D., Ph.D.       |  |                                                       |  |                     
|                                     
|/s/ JOHNK.A. PRENDERGAST              |  | Director                                              |  | March 14,
      2008
|John K.A.
      Prendergast, Ph.D.    |  |                                                       |  |                     
|                                     
|/s/ RICHARDWALLACE                    |  | Director                                              |  | March 14,
      2008
|Richard
      Wallace                 |  |                                                       |  |                     
|                                     
|/s/ STEPHENDILLY                      |  | Director                                              |  | March 14,
      2008
|Stephen Dilly,
      M.B.B.S., Ph.D.  |  |                                                       |  |                     
|                                     
|/s/ JANOHRSTROM                       |  | Director                                              |  | March 14,
      2008
|Jan Ohrstrom,
      M.D.              |  |                                                       |  |                     

76

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|               |  | EXHIBIT INDEX                                                                                                             
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Exhibits                                                                                                                  
|2.1            |  | See Exhibit 10.58                                                                                                         
|               |  |                                                                                                                           
|3.1(1)         |  | Amended and Restated Certificate of Incorporation                                                                         
|               |  |                                                                                                                           
|3.1.1(13)      |  | Certificate of Amendment to Certificate of
  Incorporation                                                                
|               |  |                                                                                                                           
|3.1.2(29)      |  | Certificate of Amendment to Certificate of
  Incorporation                                                                
|               |  |                                                                                                                           
|3.2 (30)       |  | Restated Bylaws of the Registrant                                                                                         
|               |  |                                                                                                                           
|4.1(1)         |  | Specimen Common Stock Certificate                                                                                         
|               |  |                                                                                                                           
|10.3 (2, 17)   |  | 1996 Equity Incentive Plan, as amended                                                                                    
|               |  |                                                                                                                           
|10.4(1, 2)     |  | Form of Incentive Stock Option Grant for 1996 Equity Incentive
      Plan                                                 
|               |  |                                                                                                                           
|10.5(1, 2)     |  | Form of Nonstatutory Stock Option Grant for 1996 Equity Incentive
      Plan                                              
|               |  |                                                                                                                           
|10.6(2, 14)    |  | 1996 Non-Employee Directors Stock Option Plan, as
  amended                                                              
|               |  |                                                                                                                           
|10.7(2, 4)     |  | 1997 Employee Stock Purchase Plan                                                                                         
|               |  |                                                                                                                           
|10.8(1, 2)     |  | Form of Indemnification Agreement between Avigen and its directors
      and executive officers.                          
|               |  |                                                                                                                           
|10.10(2, 5)    |  | 2000 Equity Incentive Plan                                                                                                
|               |  |                                                                                                                           
|10.11(2, 12)   |  | Form of Nonstatutory Stock Option Grant for 2000 Equity Incentive
      Plan                                              
|               |  |                                                                                                                           
|10.12(2, 7)    |  | 2006 Equity Incentive Plan                                                                                                
|               |  |                                                                                                                           
|10.16(2, 24)   |  | Form of Nonstatutory Stock Option Grant for 1996 Non-Employee
      Directors Stock Option Plan, as amended              
|               |  |                                                                                                                           
|10.17 (2, 25)  |  | Compensation Agreements with Named Executive Officers                                                                     
|               |  |                                                                                                                           
|10.29(2, 6)    |  | Employment Agreement dated August 14, 1996, between Avigen and
      Thomas J. Paulson.                                   
|               |  |                                                                                                                           
|10.32(15)      |  | Revolving line of credit note signed November 2, 2000 with Wells
      Fargo Bank.                                        
|               |  |                                                                                                                           
|10.33(15)      |  | Letter Agreement to the revolving line of credit note signed
      November 2, 2000 with Wells Fargo Bank.                
|               |  |                                                                                                                           
|10.36(2, 8)    |  | Management Transition Plan                                                                                                
|               |  |                                                                                                                           
|10.41(10)      |  | Property Lease Agreement between ARE-1201 Harbor Bay, LLC and
      Avigen, dated February 29, 2000                       
|               |  |                                                                                                                           
|10.45(13)      |  | Office Lease Agreement between Lincoln-RECP Empire OPCO, LLC and
      Avigen, Inc., dated November 2, 2000.              
|               |  |                                                                                                                           
|10.46(13)      |  | First Amendment to Lease Agreement between Lincoln-RECP Empire
      OPCO, LLC and Avigen, Inc., dated December 1, 2000.  
|               |  |                                                                                                                           
|10.47(13)      |  | Second Amendment to Lease Agreement between Lincoln-RECP Empire
      OPCO, LLC and Avigen, Inc., dated February 12, 2001.
|               |  |                                                                                                                           
|10.49(16)      |  | Revolving line of credit note with Wells Fargo Bank, dated June 1,
      2002.                                            
|               |  |                                                                                                                           
|10.50(16)      |  | Letter of Agreement to the revolving line of credit note signed
      June 1, 2002 with Wells Fargo Bank.                 
|               |  |                                                                                                                           
|10.53 (20)     |  | Revolving line of credit note with Wells Fargo Bank, dated June 1,
      2004                                             
|               |  |                                                                                                                           
|10.54 (20)     |  | Amendment to Letter of Agreement to the revolving line of credit
      note signed June 1, 2004 with Wells Fargo Bank     
|               |  |                                                                                                                           
|10.55 (2, 21)  |  | Arrangement Regarding Non-Employee Director
  Compensation                                                                
|               |  |                                                                                                                           
|10.57 (27)     |  | Sublease Lease Agreement, dated November 29, 2005, between Advanced
      Cell Technology, Inc. and Avigen                
|               |  |                                                                                                                           
|10.58 (9, 11)  |  | Assignment Agreement, dated December 19, 2005, by and between
      Genzyme Corporation and Avigen                        

77

---

|               |  | EXHIBIT
      INDEX                                                                                                                                           
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Exhibits                                                                                                                                                      
|10.59 (9, 11)  |  | License Agreement, dated January 12, 2006, by and between SDI
      Diagnostics International LTD, a division of Sanochemia Pharmazeutika AG,
      and Avigen
|               |  |                                                                                                                                                               
|10.60 (2, 9)   |  | Separation Agreement, dated January 6, 2006, between Avigen and
      Thomas J. Paulson, together with Amendment No. 1 thereto dated February 3,
      2006.  
|               |  |                                                                                                                                                               
|10.61 (18)     |  | Common Stock Purchase Agreement, dated as of May 10, 2006, among
      Avigen and the purchasers.                                                             
|               |  |                                                                                                                                                               
|10.62(28)      |  | Offer Letter with Mr. Richard Wallace to become an Avigen
      Director                                                                                      
|               |  |                                                                                                                                                               
|10.63 (26)     |  | Offer Letter with Dr. Stephen Dilly to become an Avigen
      Director                                                                                        
|               |  |                                                                                                                                                               
|10.64 (26)     |  | Offer Letter with Dr. Jan Ohrstrom to become an Avigen
      Director                                                                                         
|               |  |                                                                                                                                                               
|10.65 (31)     |  | Letter Agreement dated June 1, 2007 between Avigen, Inc. and Wells
      Fargo Bank, National Association                                                     
|               |  |                                                                                                                                                               
|10.66 (31)     |  | Promissory Note dated June 1, 2007, issued by Avigen, Inc. in favor
      of Wells Fargo Bank, National Association                                           
|               |  |                                                                                                                                                               
|10.67 (30)     |  | First Amendment to Property Lease Agreement between ARE-1201 Harbor
      Bay, LLC and Avigen, dated August 30, 2007                                          
|               |  |                                                                                                                                                               
|23.1           |  | Consent of Odenberg, Ullakko, Muranishi & Co. LLP, Independent
      Registered Public Accounting Firm                                                        
|               |  |                                                                                                                                                               
|23.2           |  | Consent of Ernst & Young LLP, Independent Registered Public
      Accounting Firm                                                                             
|               |  |                                                                                                                                                               
|24.1           |  | Power of Attorney (included on the signature pages
  hereto)                                                                                                  
|               |  |                                                                                                                                                               
|31.1           |  | CEO Certification required by Rule 13a-14(a) or Rule
      15d-14(a)                                                                                          
|               |  |                                                                                                                                                               
|31.2           |  | CFO Certification required by Rule 13a-14(a) or Rule
      15d-14(a)                                                                                          
|               |  |                                                                                                                                                               
|32.1(19)       |  | Certification required by Rule 13a-14(b) or Rule 15d-14(b) and
      Section 1350 of Chapter 63 of Title 18 of the United States Code (18
      U.S.C. §1350) 

78

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Keys to Exhibits:

|(1)  |  | Filed as an exhibit to
      the Registrants Registration Statement on Form S-1 (No. 333-03220) and
      incorporated herein by reference.                                                                                                                                                                                                                                                                                                    
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(2)  |  | Management Contract or
      Compensation Plan.                                                                                                                                                                                                                                                                                                                                                                                                 
|    
|(4)  |  | Incorporated by
      reference from such document filed with the SEC as an exhibit to Avigens
      Annual Report on Form 10-K for the year ended June 30, 1999, as filed with
      the SEC (Commission File No. 000-28272).                                                                                                                                                                                                                 
|    
|(5)  |  | Incorporated by
      reference from such document filed with the SEC as an exhibit to Avigens
      Registration Statement on Form S-8 (Registration No. 333-42210) filed with
      the SEC on July 25, 2000.                                                                                                                                                                                                                                
|    
|(6)  |  | Incorporated by
      reference from such document filed with the SEC as an exhibit to Avigens
      Annual Report on Form 10-K for the year ended June 30, 1997, as filed with
      the SEC (Commission File No. 000-28272).                                                                                                                                                                                                                 
|    
|(7)  |  | Incorporated by
      reference from such document filed with the SEC as Appendix A to Avigens
      Proxy Statement filed with the SEC on April 20, 2006 (Commission File No.
      000-28272).                                                                                                                                                                                                                                               
|    
|(8)  |  | Incorporated by
      reference from such document filed with the SEC as an exhibit to Avigens
      Current Report on Form 8-K filed with the SEC on May 31, 2005 (Commission
      File No. 000-28272) and participants are set forth in Item 1.01 of such
      Form 8-K (if still with Avigen) and in Item 5.02 of Avigens Current
      Report on Form 8-K filed with the SEC on February 28, 2006 (Commission
      File No. 000-28272).
|    
|(9)  |  | Incorporated by
      reference from such document filed with the SEC as an exhibit to Avigens
      Annual Report on Form 10-K for the year ended December 31, 2005, as filed
      with the SEC on March 16, 2006 (Commission File No.
  000-28272).                                                                                                                                                                                         
|    
|(10) |  | Incorporated by
      reference from such document filed with the SEC as an exhibit to Avigens
      Quarterly Report on Form 10-Q for the quarter ended March 31, 2000, as
      filed with the SEC (Commission File No. 000-28272).                                                                                                                                                                                                          
|    
|(11) |  | Portions of this
      exhibit have been omitted pursuant to a grant of confidential
      treatment.                                                                                                                                                                                                                                                                                                                                           
|    
|(12) |  | Incorporated by
      reference from such document filed with the SEC as an exhibit to Avigens
      Annual Report on Form 10-K for the year ended June 30, 2000, as filed with
      the SEC on September 27, 2000 (Commission File No.
000-28272).                                                                                                                                                                                           
|    
|(13) |  | Incorporated by
      reference from such document filed with the SEC as an exhibit to Avigens
      Quarterly Report on Form 10-Q for the quarter ended December 31, 2000, as
      filed with the SEC (Commission File No. 000- 28272).                                                                                                                                                                                                      
|    
|(14) |  | Incorporated by
      reference from such document filed with the SEC as an exhibit to Avigens
      Registration Statement on Form S-8 (Registration No. 333-56274) filed with
      the SEC on June 22, 2004.                                                                                                                                                                                                                                
|    
|(15) |  | Incorporated by
      reference from such document filed with the SEC as an exhibit to Avigens
      Annual Report on Form 10-K for the year ended June 30, 2001, as filed with
      the SEC on September 27, 2001 (Commission File No.
000-28272).                                                                                                                                                                                           
|    
|(16) |  | Incorporated by
      reference from such document filed with the SEC as an exhibit to Avigens
      Quarterly Report on Form 10-Q for the quarter ended June 30, 2002, as
      filed with the SEC (Commission File No. 000-28272).                                                                                                                                                                                                           
|    
|(17) |  | Incorporated by
      reference from such document filed with the SEC as an exhibit to Avigens
      Registration Statement on Form S-8 (Registration No. 333-90504) filed with
      the SEC on June 14, 2002.                                                                                                                                                                                                                                

79

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|(18) |  | Incorporated by
      reference from such document filed with the SEC as an exhibit to Avigens
      Quarterly Report on Form 10-Q for the quarter ended June 30, 2006, as
      filed with the SEC (Commission File No. 000-28272).                                                                                                                                                                                                                                             
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(19) |  | This certification
      accompanies the Form 10-K to which it relates, is not deemed filed with
      the Securities and Exchange Commission and is not to be incorporated by
      reference into any filing of Avigen under the Securities Act of 1933, as
      amended, or the Securities Exchange Act of 1934, as amended (whether made
      before or after the date of the Form 10-K), irrespective of any general
      incorporation language contained in such filing.
|    
|(20) |  | Incorporated by
      reference from such document filed with the SEC as an exhibit to Avigens
      Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, as
      filed with the SEC (Commission File No. 000-28272).                                                                                                                                                                                                                                             
|    
|(21) |  | Incorporated by
      reference from the disclosure contained in Item 1.01 of Avigens Current
      Report on Form 8-K filed with the SEC on February 21, 2006 discussing such
      compensation (Commission File No. 000-28272).                                                                                                                                                                                                                                               
|    
|(22) |  | Incorporated by
      reference from such document filed with the SEC as an exhibit to Avigens
      Quarterly Report on Form 10-Q for the quarter ended March 31, 2004, as
      filed with the SEC (Commission File No. 000-28272).                                                                                                                                                                                                                                            
|    
|(24) |  | Incorporated by
      reference from such document filed with the SEC as an exhibit to Avigens
      Annual Report on Form 10-K for the year ended December 31, 2004, as filed
      with the SEC on March 16, 2005 (Commission File No.
  000-28272).                                                                                                                                                                                                                           
|    
|(25) |  | Incorporated by
      reference from the description of such arrangements in Items 5.02 of
      Avigens Current Report on Form 8-K filed with the SEC on December 7, 2007
      (Commission File No. 000-28272).                                                                                                                                                                                                                                                                
|    
|(26) |  | Incorporated by
      reference from such document filed with the SEC as an exhibit to Avigens
      Annual Report on Form 10-K for the year ended December 31, 2006, as filed
      with the SEC on March 16, 2007 (Commission File No.
  000-28272).                                                                                                                                                                                                                           
|    
|(27) |  | Incorporated by
      reference from such document filed with the SEC as an exhibit to Avigens
      Current Report on Form 8-K filed with the SEC on December 16, 2005
      (Commission File No. 000-28272).                                                                                                                                                                                                                                                                   
|    
|(28) |  | Incorporated by
      reference from such document filed with the SEC as an exhibit to Avigens
      Current Report on Form 8-K filed with the SEC on March 22, 2006
      (Commission File No. 000-28272).                                                                                                                                                                                                                                                                      
|    
|(29) |  | Incorporated by
      reference from such document filed with the SEC as an exhibit to Avigens
      Current Report on Form 8-K filed with the SEC on June 26, 2007 (Commission
      File No. 000-28272).                                                                                                                                                                                                                                                                       
|    
|(30) |  | Incorporated by
      reference from such document filed with the SEC as an exhibit to Avigens
      Quarterly Report on Form 10-Q for the quarter ended September 30, 2007, as
      filed with the SEC (Commission File No. 000- 28272).                                                                                                                                                                                                                                       
|    
|(31) |  | Incorporated by
      reference from such document filed with the SEC as an exhibit to Avigens
      Current Report on Form 8-K filed with the SEC on June 6, 2007 (Commission
      File No. 000-28272).                                                                                                                                                                                                                                                                        

80

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