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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,
2008

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                   

**Securities registered pursuant to Section
12(g) of the Act:**

**Preferred Share Purchase Rights(Title
of class)**

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

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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

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 filero                      | Accelerated
      filer x       
| | --------------------------------------------------- | --------------------------------
| |                                                    
| | Non-accelerated
      filero                        | Smaller
      reporting companyo
| | (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). YesoNo x

The
aggregate market value of the Common Stock held by non-affiliates of the
registrant as of June 30, 2008, was approximately $85,900,000 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 held 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,
2009, was 29,769,115 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions
of the registrants definitive Proxy Statement for the 2009 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, 2008

TABLE OF CONTENTS

|               |                                                                                                                          | Page
|-------------- | ------------------------------------------------------------------------------------------------------------------------ | ----
|PART I         |                                                                                                                          |     
|Item
      1.  | Business                                                                                                                 | 2   
|Item 1A.       | Risk Factors                                                                                                             | 7   
|Item
      1B. | Unresolved Staff
      Comments                                                                                          | 15  
|Item 2.        | Properties                                                                                                               | 15  
|Item
      3.  | Legal
      Proceedings                                                                                                  | 15  
|Item 4.        | Submission of Matters to a Vote of Security Holders                                                                      | 15  
|              
|PART II        |                                                                                                                          |     
|Item
      5.  | Market for
      Registrants Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities | 17  
|Item 6.        | Selected Financial Data                                                                                                  | 19  
|Item
      7.  | Managements
      Discussion and Analysis of Financial Condition and Results of
      Operations                        | 20  
|Item 7A.       | Quantitative and Qualitative Disclosures About Market
      Risk                                                         | 33  
|Item
      8.  | Financial
      Statements and Supplementary Data                                                                        | 34  
|Item 9.        | Changes in and Disagreements with Accountants on Accounting and
      Financial Disclosure                               | 69  
|Item
      9A. | Controls and
      Procedures                                                                                            | 69  
|Item 9A(T).    | Controls and Procedures                                                                                                  | 69  
|Item
      9B. | Other
      Information                                                                                                  | 71  
|              
|PART III       |                                                                                                                          |     
|Item
      10. | Directors,
      Executive Officers and Corporate Governance                                                             | 71  
|Item 11.       | Executive Compensation                                                                                                   | 71  
|Item
      12. | Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters               | 72  
|Item 13.       | Certain Relationships and Related Transactions, and Director
      Independence                                          | 73  
|Item
      14. | Principal
      Accounting Fees and Services                                                                             | 73  
|              
|PART IV        |                                                                                                                          |     
|Item
      15. | Exhibits,
      Financial Statement Schedules                                                                            | 74  
|              
|Signatures     |                                                                                                                          | 75  

(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:

- our expectations regarding considering strategic
  opportunities that may include a favorable merger and acquisition transaction
  that could increase value for stockholders;
- the potential of our product development programs,
  including AV411 for neuropathic pain, opioid withdrawal, methamphetamine
  addiction, and other indications;
- our expectations with respect to the clinical
  development of our product candidates, our clinical trials and the regulatory
  approval process;
- 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.

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PART I

Item 1.Business

Overview

Avigen is
a biopharmaceutical company that has focused on identifying and developing
differentiated products to treat patients with serious disorders. Our strategy
is to conceive or acquire and develop opportunities that represent a positive
return to Avigens stockholders. Our current potential product is AV411, a glial
attenuator, for neuropathic pain and opioid withdrawal and methamphetamine
addiction.

Prior to
October 2008, we had been developing a product candidate, AV650, for the
treatment of spasticity associated with multiple sclerosis. In that month, we
announced that top-line data from a Phase 2b clinical trial of AV650
(tolperisone HCl) did not achieve statistical significance on its primary
endpoint or most secondary endpoints. There were no safety issues. We believe
that the trial was adequately powered and all statistical parameters were in
line with expectations. Based on these results, we terminated the AV650 program
and initiated a restructuring to immediately reduce our expenses and preserve
our remaining financial resources in order to evaluate other strategic
opportunities.

Subsequent to the termination of our AV650 program, we quickly completed
the restructuring, which included a significant staff reduction and closure of
portions of our leased facilities, and received $7.1 million for the sale of our
early-stage AV513 program to Baxter Healthcare Corporation.

In
January 2009, we engaged independent strategic advisors to oversee an orderly
and competitive process to review merger and acquisition opportunities and to
assist in the monetization of our AV411 program. We believe that the strength of
our financial position may allow us to enter into a favorable merger and
acquisition transaction which could lead to increased value for our
stockholders. In reviewing potential transactions, we place the most value on
the following criteria: short time to commercialization and self-sustaining cash
flow; product differentiation; lower commercial and regulatory risks; capital
needs; strong intellectual property; and experienced management team. If at any
point during the review, it becomes evident to our Board that a favorable
transaction is unlikely, we intend to continue to consider all other strategic
options, including monetizing the remaining company assets, selling the company,
or a full or partial distribution of cash to stockholders.

Avigen, Inc. is a Delaware
corporation that was incorporated on October 22, 1992 and is based in the San
Francisco Bay Area.

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 primarily supported the financial needs of
our research and development activities since our inception through public
offerings and private placements of our equity securities.

Products in
Development

AV411- Neuropathic pain, opioid withdrawal and methamphetamine
addiction

The AV411
portfolio, which includes the phase 2-stage lead drug compound and proprietary
analogs, represents novel, first-in-class, non-opioid drugs for the treatment of
several large pain and drug addiction indications. AV411 is a first-in-class,
orally bioavailable small molecule, a glial attenuator that suppresses
pro-inflammatory cytokines IL-1 beta, TNF alpha, and IL-6, and may upregulate
the anti-inflammatory cytokine IL-10. It has additionally been shown to be a
toll-like receptor 4 (TLR4) functional antagonist that may contribute to its
attenuation of neuroinflammation. While considered a New Molecular Entity (NME)
in the United States and Europe, it involves redirection of an approved drug,
ibudilast, that was first approved in Japan more than 15 years ago. Ibudilast
has been prescribed to over one million patients for a different indication and
has a good post-marketing safety profile as reported in nearly 15,000 patients
studied at the prescribed doses.

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Based on
its research, Avigen has filed for patents protecting multiple uses of AV411 in
neurological conditions, as well as for patents on AV411 analogs which the
company believes have the potential to be effective second generation molecules.
As NMEs, AV411 and its analogs are additionally entitled to five years of
marketing exclusivity from launch in the U.S. under Hatch-Waxman provisions and
up to 10 years of exclusivity in the European Union.

Neuropathic pain:Glial activation in
the brain and spinal cord contribute to the establishment and amplification of
the chronic pain state. As part of our program investigating glial attenuation
as a novel approach to the treatment of neuropathic pain, we conceived and
demonstrated that AV411 (ibudilast) was efficacious in preclinical models of
neuropathic pain and may be effective in a wide range of neuropathic pain
syndromes including neuropathy, post-herpetic neuralgia, HIV neuropathy,
radiculopathy, spinal cord injury and chemotherapy-induced neuropathy. While
ibudilast was initially developed as a non-selective phosphodiesterase (PDE)
inhibitor for the treatment of bronchial asthma, its efficacy in some
neuropathic pain models appears to be independent of this activity and yet still
linked to glial attenuation.

AV411 has
advanced through multiple Phase 1 and 2a clinical trials in both healthy
volunteers and patients for neuropathic pain and the program, under current U.S.
Food and Drug Administration standards, is able to enter Phase 2 development for
pain in the United States based on completed Avigen preclinical and clinical
development.

Opioid
withdrawal:AV411 is currently in a Phase
1b/2a clinical trial funded by the National Institute on Drug Abuse (NIDA) and
conducted at Columbia University by leading specialists in the study and
treatment of substance abuse. AV411 and analogs have been shown in preclinical
models of opioid (morphine or oxycodone) withdrawal to significantly reduce
withdrawal symptoms. Moreover, AV411 attenuates both behavioral and
neurochemical markers of opioid reward. AV411 and analogs are differentiated
from other drug candidates in clinical trials that may demonstrate similar
effects, in that AV411 and analogs are not narcotics and do not, themselves,
provide reward or reinforcement in behavioral models of dependence. Thus,
while current therapies involve substitution of one opioid for another (e.g.
methadone for heroin), AV411 represents a novel, non-opioid, approach for the
treatment of opioid withdrawal and dependence.

Methamphetamine addiction:In
collaborative studies with NIDA, AV411 has demonstrated utility in
methamphetamine relapse in animals which is being translated to a NIDA-funded
exploratory clinical trial with UCLA investigators in 2009.

Other
indications: cancer chemotherapeutic-induced neuropathy. In connection with our development program, we have 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 extend current treatment limits of chemotherapy
that often result due to the development of painful sensitivities by their
patients.

Sale of AV513 Program

AV513 was 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. In December 2008, we completed a
sale of our early-stage AV513 program to Baxter Healthcare Corporation and
received $7.1 million.

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.

Research Programs

Neuropathic Pain

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.

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Research and Development Expenses

We
incurred research and development expenses of approximately $23.6 million, $20.7
million, and $15.2 million in 2008, 2007, and 2006, 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,
2008, we were party to one collaborative agreement with the University of
Colorado, under which we received partial reimbursement for some research and
development expenses in 2007 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

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
review potential strategic opportunities, we will continue to evaluate
opportunities as favorable that demonstrate an ability to leverage strategic
relationships such as additional research and development or manufacturing and
supply agreements. We are also seeking to license out development and marketing
rights to AV411 and our other existing products. We have built strategic
relationships with recognized scientists, clinicians and opinion leaders in the
fields that AV411 address and we believe these relationships, including our
research relationship with the University of Colorado, enhance the potential of
our AV411 product candidates. If we acquire access to new products or identify
new development opportunities for our compounds, including through strategic
relationships, we may seek to fund such transactions with the issuance of
additional equity securities, which may further dilute our existing
stockholders.

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 potential
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.

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, Solace Pharmaceuticals,
Pain Therapeutics, Inc., and XenoPort, Inc.

Opioid
Withdrawal and Methamphetamine Addiction.Management of opioid induced withdrawal symptoms often involve the
substitution of one opioid with a longer-acting opioid, followed by a gradual
reduction in the dosage of the substitute drug or the use of various medications
which are not approved, but are used off-label to mitigate physical symptoms and
signs of withdrawal such as benzodiazepines and/or clonidine. We anticipate that
our products will compete with other drugs that are currently prescribed by
physicians to treat withdrawal symptoms, including narcotics such as generic
methadone and buprenorphine, marketed in the U.S. by Reckitt Benckiser
Pharmaceuticals, Inc, as Suboxone (buprenorphine) and Subutex (buprenorphine +
the narcotic antagonist naloxone). Limited non-narcotic drug candidates for
withdrawal symptoms exist. Lofexidine, marketed in the U.K. by Britannia
Pharmaceuticals as BritLofex and licensed for development in U.S. clinical
trials to US WorldMeds is an alpha adrenoceptor agonist like clonidine which may
have somewhat less orthostatic hypotension limitations. Importantly, the
commercial potential for a new-class alternative is great as the existing
buprenorphine treatments are exceeding initial sales projections and yet still
carry the opioid class concerns. Besides lofexidine, we believe there are
currently no other clinically-advanced nor clinical proof-of-concept enabled
drug candidates that would compete with AV411 although we are aware of no more
than a few other compounds potentially useful for opioid withdrawal that are in
development.

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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 AV411, but do not have a marketing or
sales staff. We do not currently intend to independently pursue FDA approval of
AV411 or any of our other product candidates and do not intend to build a
commercial capability with our current resources.

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, 2009, we owned, co-owned, or held licenses to 1 issued U.S. patent
which expires in 2019 and 16 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 analogs.

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.

We are currently party to 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.

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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.

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 of 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.

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*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.

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, 2009, Avigen had 12 full-time employees, including four with Ph.D.
degrees and one with an M.D. degree. Approximately four employees are involved
in our research and development activities, including research, preclinical
development, and clinical affairs, and eight employees are involved in general
administration, finance, legal, and business development activities. 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

Our
revenues in 2008 and 2006 were $7.1 million and $0.1 million, respectively. No
revenues were recognized in 2007. Revenue for 2008 represented income from the
sale of the rights to our early stage blood coagulation compound, AV513, to
Baxter. 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. 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 iswww.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 toir@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. As discussed in the first risk factor
below, we are exploring strategic alternatives, which include a potential sale
of the company or a potential dissolution of the company. Many of the risk
factors below address risks that we may face if we continue as a company, but
would not be a risk if we were to determine to dissolve the company.

Risks Related to Our Business

Our company is in a transition
phase, and so the future of our company is uncertain

In
October 2008 we terminated our lead product candidate, AV650, when the trial for
that product candidate did not meet its primary endpoint. We quickly downsized
our company, including a staff reduction of over 70 percent of our total
workforce, and sold the rights to our early stage AV513 program. As a result,
our only current clinical stage product candidate is AV411. We have engaged
independent strategic advisors to oversee an orderly and competitive process to
review merger and acquisition opportunities and to assist in the monetization of
our AV411 program. If at any point during the review, it becomes evident to our
Board that a favorable transaction is unlikely, we intend to continue to
consider all other strategic options, including monetizing the remaining company
assets, selling the company, or a full or partial distribution of cash to
stockholders. Consequently, within the next year, we expect to either, acquire
another company and begin developing a new product or products, sell the
company, or distribute our cash and wind up. Any of these three events is a
realistic possibility.

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

Even if
we are able to 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 of the potential product,
and our business and results of operations will be harmed.

If we acquire another company or
product and we are not able to integrate them with our business, or we do not
realize the anticipated goals for such a transaction, our business would be
harmed.

We are
investigating the possible acquisition of another company or product. We only
have limited experience in doing so, and for any such company or product that we
successfully acquire, we will be exposed to a number of risks,
including:

- we may find that we overpaid for the company or
  product;
- we may have difficulty integrating the assets,
  technologies, operations or personnel of an acquired company, or
  retaining the key personnel of the acquired
  company;
- our ongoing business and managements attention
  may be disrupted or diverted by transition or integration issues and
  the complexity of managing geographically or
  culturally diverse enterprises;
- we may encounter difficulty entering and competing
  in new product markets; and
- we may experience significant problems or
  liabilities associated with product quality, technology and legal
  contingencies relating to the acquired business
  or technology, such as intellectual property or employment matters.

We expect
that any such acquisition will be by an issuance of shares of our common stock,
in which case our existing stockholders would be diluted. In addition,
acquisitions may result in the incurrence of debt, large one-time write-offs,
such as of acquired in-process research and development costs, and restructuring
charges.

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, 2008, we had an accumulated deficit of $245.8
million. If we continue as a company, developing new compounds will require
significant additional research and development activities, including
preclinical testing and clinical trials, and regulatory approval. We expect that
these activities, together with our general and administrative expenses, would
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. We are evaluating other strategic opportunities
which could create additional requirements that could effect our ability to
achieve profitability.

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, prior to the termination of
our agreement with Sanochemia, we relied entirely on Sanochemia to manufacture
and supply to us AV650 for both clinical and commercial supply through 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 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. For any future exclusive
supply contracts for our full requirements, we 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.

We intend
to enter into distribution and marketing agreements with other companies for our
products outside the United States 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.

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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, 2008 we had cash, cash equivalents, available-for-sale securities,
and restricted investments of approximately $56.8 million. We do not intend to
initiate Phase 2 clinical trials for AV411 for neuropathic pain without a
partner. We anticipate that our existing capital resources as of December 31,
2008, after considering our anticipated decrease in spending as a result of the
restructuring and staff reduction announced on November 3, 2008, will be
adequate to fund our operating needs for the foreseeable future while we
evaluate other strategic opportunities. However, if we are successful entering
into a merger and acquisition transaction or in acquiring additional product
candidates or pursuing additional indications for compounds in our portfolio, we
may require additional funding to complete the research and development
activities necessary to fully develop and commercialize such products. Our
future capital requirements will depend on many factors, including:

- how successful, if at all, we are at entering into
  a merger and acquisition transaction, acquiring additional compounds,
  and the nature of the consideration we pay for
  acquired compounds;
- the costs involved in filing, prosecuting and
  enforcing patent claims and other intellectual property rights;

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- the costs involved in obtaining licenses to
  patented technologies from third-parties that may be needed to commercialize
  our product candidates;
- 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;
- competing technological
  developments;
- the cost of manufacturing our product candidates
  for clinical trials and sales;
- the costs of sales, marketing and
  commercialization activities; and
- other factors which may not be within our
  control.

If we are
unable to partner with third parties to develop our product candidates and
obtain regulatory approval, or monetize existing development assets, and we
determine to continue the development of our product portfolio, we may need to
obtain additional funding before we will be able to obtain regulatory approval
to market our product candidates. The U.S. capital markets have recently
experienced significant volatility, compounded by the risk of a U.S. or global
recession, which is expected to impair issuers ability to raise capital in the
near term. In addition, the substantial reduction in the availability of credit
increases the risk that traditional credit facilities may not be available or
may not be available on favorable terms. 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, and we may be
required to enter into collaborative arrangements at an earlier stage of
development on less favorable terms than we would otherwise elect. If we require
additional capital that we are unable to obtain on favorable terms, it may
adversely affect our ability to operate as a going concern.

We may not currently have adequate
personnel to successfully develop and commercialize our product candidates and
we may be unable to attract and retain the qualified employees, consultants and
advisors we need to be successful

In
November 2008, we announced a significant restructuring, including a reduction
in force, aimed at preserving cash and reassessing strategic opportunities. In
connection with this reduction in force, we eliminated approximately 27
positions, or 70 percent of our workforce, thereby reducing our continuing staff
level to 10 employees. As a result, although we have retained certain key
members of our senior management and scientific staff, we may not have adequate
personnel to monetize and out-license our current assets or perform additional
research and development efforts, or develop and commercialize any of our
products. Our ability to recruit and retain qualified scientific, technical and
managerial personnel, if needed, may be negatively impacted as a result of our
response to the negative results and subsequent termination of our AV650
program. In addition, 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.

We also
have historically relied on consultants and advisors to assist us in formulating
our research and development strategies. A majority of these scientific advisors
have been engaged by us on a consulting basis and may be 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 may not currently have adequate
personnel to successfully maintain effective disclosure controls and procedures
and internal control over financial reporting.

Our
reduction in force may impact the effectiveness of our disclosure controls and
procedures and internal control over financial reporting, including certain
segregation of duties and other controls to reduce the risk that a potential
material misstatement of the financial statements could occur without being
prevented or detected. Effective internal controls are necessary for us to
provide reliable financial reports, maintain investor confidence and prevent
fraud. As a result of our restructuring, we have significantly reduced our
number of employees and there can be no guarantee that we will be able to retain
employees with the requisite expertise to maintain an effective system of
internal controls. Any failure to implement required new or improved controls,
or difficulties encountered in their implementation, could harm our operating
results or cause us to fail to meet our reporting obligations. Inferior internal
controls could also cause investors to lose confidence in our reported financial
information, which could have a negative effect on the trading price of our
common stock.

If we fail to maintain an effective
system of internal controls, we may not be able to accurately report our
financial results.  As a result, current and potential shareholders could
lose confidence in our financial reporting, which could have a negative market
reaction.

Section
404 of the Sarbanes-Oxley Act of 2002 requires us to report on, and requires our
independent registered public accounting firm to attest to, the effectiveness of
our internal control over financial reporting. At December 31, 2008, we
were compliant and have implemented an ongoing program to perform the system and
process evaluation and testing necessary to continue to comply with these
requirements. Accordingly, we continue to incur expenses and will devote
management resources to Section 404 compliance as necessary. Further,
effective internal controls and procedures are necessary for us to provide
reliable financial reports. If our internal controls and procedures become
ineffective, we may not be able to provide reliable financial reports, our
business and operating results could be harmed and current and potential
shareholders may not have confidence in our financial reporting.

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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.

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 manufacturing 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.

Prior to 2006, our research and
development activities were primarily focused on 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 acquire, it would
significantly reduce our ability to create commercial opportunities for such
products. In October 2008, we announced that the top-line data from our AV650
trial for the treatment of spasticity in patients with multiple sclerosis did
not meet its primary endpoint, as a result of which we have discontinued all
AV650-related activities.

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 United
States. 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 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 United States 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.

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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.

In our
AV411 program, the composition-of-matter patent on the active compound has
expired. We have filed and own patent applications on the use of AV411 for the
indications for which we are developing the product, rather than more
traditional composition-of-matter patent claims on the active ingredient itself.
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 the indications currently 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 products in development and may not be able to obtain adequate
protection under the Hatch-Waxman Act to prevent generics from copying our
product candidates

AV411 is
a molecule in the public domain, and other products we may acquire may also be
in the public domain. While we are working, and expect to work, 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 chemical 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 United States 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.

13

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Risks Related to Our Stock

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

From
January 1, 2006 to December 31, 2008, our stock price has fluctuated between a
range of $0.49 and $7.44 per share. In October 2008, following our announcement
that the top-line data from our AV650 trial for the treatment of spasticity in
patients with multiple sclerosis did not meet its primary endpoint, our stock
price fell to $0.51 per share. We believe that various factors may cause the
market price of our common stock to continue to fluctuate, perhaps
substantially, including announcements of:

- announcements by us regarding progress in
  evaluating strategic opportunities;
- developments
  of significant acquisitions or in relationships with corporate
  partners;
- announcements
  by significant stockholders of Avigen regarding their opinions of our Boards
  business plan;
- 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, as was the case when AV650 failed to meet its
  primary endpoint;
- public concern as to the safety of pharmaceutical
  products;
- health care or
  reimbursement policy changes by governments or insurance
  companies;
- announcements
  by us regarding financing transactions and/or future sales of equity
  securities; or
- changes in
  financial estimates or securities analysts' recommendations.

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. The recent volatility in the U.S. capital markets and the
risk of a U.S. or global recession has further compounded this risk. These broad
market and industry fluctuations may cause the market price of our common stock
to decline dramatically.

Our largest stockholders may take
actions that are contrary to all of our stockholders' interests

A group
of affiliated stockholders collectively hold approximately 29% of our
outstanding stock. This stockholders interests could differ from the interests
of other stockholders, and they could be in a position to affect us in a way
that is detrimental to the interests of other stockholders. Sales by this
stockholder of our common stock could adversely affect the market price for our
stock. In addition, their actions and votes would be important, and possibly
determinative, in the event we consider a transaction that requires stockholder
approval or in the event a third party makes a tender offer or a hostile
take-over offer for our outstanding shares. As a result, this group of
stockholders may oppose a transaction that our board of directors and management
submit to stockholders and believe is in all of our stockholders' best
interests.

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. In
addition, our Board of Directors has established a shareholder rights plan,
commonly referred to as a poison pill, which makes 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.

14

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We may not be able to maintain our
listing on The NASDAQ Global Market, which would adversely affect the price and
liquidity of our common stock

To
maintain the listing of our common stock on The NASDAQ Global Market we are
required to meet certain listing requirements, including a minimum closing bid
price of $1.00 per share. Our common stock traded as low as $0.51 per share in
2008. Under normal circumstances, companies traded on Nasdaq would receive a
deficiency notice from Nasdaq if their common stock has traded below the $1.00
minimum bid price for 30 consecutive business days. Due to market conditions,
however, on October 16, 2008, Nasdaq announced suspension of the enforcement of
rules requiring a minimum $1.00 closing bid price, with the suspension to remain
in place until Monday, April 20, 2009. If our common stocktradesbelow the $1.00 minimum
bid price for 30 consecutive business days following the end of Nasdaqs
enforcement suspension, we would likely receive a deficiency notice. Following
receipt of a deficiency notice, we expect we would have 180 calendar days to
regain compliance by having our common stock trade over the $1.00 minimum bid
price for at least a 10-day period. If we were to fail to meet the minimum bid
price for at least 10 consecutive days during the grace period, our common stock
could be delisted. Even if we are able to comply with the minimum bid
requirement, there is no assurance that in the future we will continue to
satisfy Nasdaq listing requirements, with the result that our common stock may
be delisted. Should our common stock be delisted from Nasdaq, and the delisting
determination was based solely on non-compliance with the $1.00 minimum bid
price, we may consider applying to transfer our common stock to The NASDAQ
Capital Market provided that we satisfy all criteria for initial inclusion on
such market other than the minimum bid price rule. In the event of such a
transfer, the NASDAQ Marketplace Rules provide that we would have an additional
180 calendar days to comply with the minimum bid price rule while on The NASDAQ
Capital Market. If our stock is delisted from The NASDAQ Global Market and The
NASDAQ Capital Market, it would likely be more difficult to trade in or obtain
accurate quotations as to the market price of our common stock. Delisting of our
common stock could materially adversely affect the market price and market
liquidity of our common stock and our ability to raise necessary capital.

Item 1B.Unresolved Staff Comments

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

Item 2.Properties

We lease
our facility which has approximately 67,000 square feet of laboratory and office
space in a commercial neighborhood of Alameda, California under a 10-year lease
that is scheduled to expire in November 2010.

As of
March 1, 2009, we had sublease agreements covering 31,100 square feet, or 46%,
of the building to three separate corporate tenants not affiliated with Avigen.
Each sublease agreement runs concurrent with the duration of the underlying
master lease term. Under these sublease agreements, we are scheduled to receive
annual sublease rental income in 2009 of approximately $0.8 million in addition
to reimbursement for portions of the related facilities overhead costs which
will be recorded as a reduction to our operating expenses.

As of
December 31, 2008, we also continued to lease approximately 4,800 square feet in
an adjacent building under a separate lease agreement. Under the terms of this
agreement, which was scheduled to expire in November 2010, we and the building
owner each had a right to elect to terminate the lease at any time subject to an
eight-month notification period. Effective October 31, 2008, we notified the
building owner of our intention to terminate the lease and vacated the property
shortly thereafter. We do not expect to have any further financial obligations
in connection with this building lease after June 30, 2009.

Item 3.Legal Proceedings

As of March 1, 2009, we were not
involved in any legal proceedings.

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

None.

15

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Executive Officers of the Registrant

Our executive officers and their
respective ages and positions as of March 13, 2009, are as follows:

|Name                            |  | Age |  | Position                                       
|------------------------------- |  | --- |  | -----------------------------------------------
|Kenneth G. Chahine, J.D., Ph.D. |  | 44  |  | President, Chief Executive Officer and Director
|Michael D.
      Coffee         |  | 63  |  | Chief Business
      Officer                   
|Kirk Johnson, Ph.D.             |  | 49  |  | Vice President, Research and Development       
|Andrew A.
      Sauter          |  | 42  |  | Chief Financial
      Officer                  
|M. Christina Thomson, J.D.      |  | 38  |  | Vice President, General 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.
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 50 manuscripts and holds 4 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 1986-1989 with Dr. Kendall Smith
at Dartmouth College and from 1990-1991 with Dr. Marian Koshland at 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.

16

---

M.
Christina Thomson, J.D.,joined Avigen in
February 2000 and was appointed Vice President, Corporate Counsel in June 2004
and General Counsel in January 2009. 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, 2009, there were approximately 104 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, 2007
    
    
    **High**
    
    **Low**Quarter 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
    
    $3.67Year ended December
      31, 2008
    
    
    High
    
    LowQuarter End 3/31/08
    
    
    $4.84
    
    $2.52Quarter End
      6/30/08
    
    
    $3.50
    
    $2.37Quarter End 9/30/08
    
    
    $4.66
    
    $2.65Quarter End
      12/31/08
    
    
    $4.00
    
    $0.49


On March 6, 2009, the closing sales
price of Avigen common stock was $1.00 per share.

17

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Performance Graph

The following graph shows the total
stockholder return of an investment of $100 in cash on December 31, 2003 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 indices 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 And The RDG MicroCap Biotechnology Index



*$100
invested on 12/31/03 in stock & index-including reinvestment of dividends.
Fiscal year ending December 31.



|                           | 12/03  |  | 12/04  |  | 12/05  |  | 12/06  |  | 12/07  |  | 12/08
|-------------------------- | ------ |  | ------ |  | ------ |  | ------ |  | ------ |  | -----
|Avigen, Inc.               | 100.00 |  | 55.35  |  | 51.44  |  | 89.64  |  | 72.16  |  | 12.90
|NASDAQ
      Composite     | 100.00 |  | 110.08 |  | 112.88 |  | 126.51 |  | 138.13 |  | 80.47
|RDG MicroCap Biotechnology | 100.00 |  | 86.91  |  | 64.26  |  | 50.42  |  | 31.96  |  | 12.28

18

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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) |  | **2008**                      |            | **2007**     |  | **2006** |            | **2005** |  | **2004** |            | 2008
|Revenue                                                  |  | $                             | 7,100      |              |  | $        | -          |          |  | $        | 103        |      |  | $       | 12,026     |   |  | $ | 2,195      |   |  | $          
|                                                        
|Operating expenses:                                      |  |                               |            |              |  |          |            |          |  |          |            |      |  |         |            |   |  |   |            |   |  |            
|Research and
    development                             |  |                               | 23,607     |              |  |          | 20,681     |          |  |          | 15,219     |      |  |         | 13,775     |   |  |   | 19,344     |   |  |            
|General and
      administrative                         |  |                               | 8,696      |              |  |          | 8,633      |          |  |          | 8,860      |      |  |         | 8,264      |   |  |   | 8,367      |   |  |            
|Impairment
      loss related to                         |  |                               |            |              |  |          |            |          |  |          |            |      |  |         |            |   |  |   |            |   |  |            
|long-lived
      assets                                  |  |                               | 139        |              |  |          | -          |          |  |          | 450        |      |  |         | 6,130      |   |  |   | -          |   |  |            
|In-license
      fees                                    |  |                               | 2,500      |              |  |          | -          |          |  |          | 3,000      |      |  |         | -          |   |  |   | -          |   |  |            
|Total
      operating expenses                           |  |                               | 34,942     |              |  |          | 29,314     |          |  |          | 27,529     |      |  |         | 28,169     |   |  |   | 27,711     |   |  |            
|Loss from operations                                     |  |                               | (27,842    | )            |  |          | (29,314    | )        |  |          | (27,426    | )    |  |         | (16,143    | ) |  |   | (25,516    | ) |  |            
|Interest expense                                         |  |                               | (293       | )            |  |          | (488       | )        |  |          | (467       | )    |  |         | (323       | ) |  |   | (209       | ) |  |            
|Interest income                                          |  |                               | 2,784      |              |  |          | 3,954      |          |  |          | 3,002      |      |  |         | 1,682      |   |  |   | 1,905      |   |  |            
|Sublease income                                          |  |                               | 365        |              |  |          | 703        |          |  |          | 565        |      |  |         | 67         |   |  |   | -          |   |  |            
|Other (expense) income, net                              |  |                               | (113       | )            |  |          | (19        | )        |  |          | 70         |      |  |         | 21         |   |  |   | (103       | ) |  |            
|                                                        
|Net loss                                                 |  | $                             | (25,099    | )            |  | $        | (25,164    | )        |  | $        | (24,256    | )    |  | $       | (14,696    | ) |  | $ | (23,923    | ) |  | $          
|                                                        
|Basic and diluted net loss per                           |  |                               |            |              |  |          |            |          |  |          |            |      |  |         |            |   |  |   |            |   |  |            
|common share                                             |  | $                             | (0.84      | )            |  | $        | (0.90      | )        |  | $        | (1.03      | )    |  | $       | (0.71      | ) |  | $ | (1.17      | ) |  |            
|                                                        
|Shares used in basic and diluted net                     |  |                               |            |              |  |          |            |          |  |          |            |      |  |         |            |   |  |   |            |   |  |            
|loss per common share
      calculation                  |  |                               | 29,765,651 |              |  |          | 27,962,202 |          |  |          | 23,509,378 |      |  |         | 20,624,229 |   |  |   | 20,362,155 |   |  |            

|Balance Sheet Data:                          |  | Year Ended December
      31,
|-------------------------------------------- |  | -----------------------------
|(in
      thousands)                         |  | 2008                         
|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 and our sale of
      rights to Baxter Healthcare Corporation, resulting in the generation of
      $7.1 million of revenue in 2008.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

19

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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 that has focused on identifying and developing
differentiated products to treat patients with serious neurological and other
disorders. Our strategy is to identify, acquire and develop opportunities that
represent a positive return to Avigens stockholders. Our current potential
product is AV411, a glial attenuator, for neuropathic pain and opioid withdrawal
and methamphetamine addiction.

Between
January 2006 and October 2008, we were primarily focused on the development of
AV650 for the treatment of spasticity and neuromuscular spasm. In January 2006,
we acquired exclusive license rights from SDI Diagnostics International LTD, a
division of Sanochemia Pharmazeutika AG, or Sanochemia, to develop and
commercialize proprietary formulations of the compound tolperisone, which we
named AV650, for the North American market. In 2007, we initiated Phase 2
clinical trials for AV650 in the United States and Europe and in July 2008, we
expanded our agreement with Sanochemia for the development of a proprietary,
purer form of AV650 that was identified and supported by patent filings during
our clinical development. We paid Sanochemia $3.0 million in 2006 in connection
with the initial license and $2.5 million in 2008 for the achievement of a
development milestone on the purer form of the compound.

During
2007, we also expanded the scope of our clinical development activities to
include a Phase 2a trial for AV411 in Australia, and a maximum-tolerable-dose
trial for AV411 in the U.S. The operation of these trials and other development
activities resulted in a significant increase in our operating expenses during
2007, which continued into 2008.

In
October 2008, we announced that the results of the AV650 Phase 2 clinical trial
in patients with spasticity associated with multiple sclerosis did not meet its
primary endpoint and we terminated the program. We also immediately terminated
our agreement with Sanochemia to avoid further financial obligations to
them.

In
November 2008, we announced a significant restructuring of the company aimed at
preserving financial resources and reassessing strategic opportunities. This
restructuring included a 70% reduction of our staff and consolidation and
closure of portions of our leased facilities. While the NIDA-funded Phase 1b/2a
trials for AV411 in opioid withdrawal and methamphetamine relapse will continue,
we announced that it was our intention to seek a partner for the further
development of AV411.

In
December 2008, we entered into an agreement with Baxter Healthcare Corporation,
Baxter International Inc., and Baxter Healthcare S.A. (collectively "Baxter"),
providing for the sale of the rights to our early stage blood coagulation
compound, AV513, to Baxter. We received a cash payment of $7.1 million from
Baxter as proceeds from the sale of AV513.

As a
result of the termination of the AV650 program and our subsequent restructuring,
our current plans are focused on monetizing our existing development assets
through development partnerships or sales of assets. We intend to seek a
development partner for AV411, and do not intend to initiate Phase 2 clinical
trials with AV411 for neuropathic pain without the support of a partner. We are
reviewing strategic opportunities, including potential merger and acquisition
transactions, which could increase stockholder value. The terms and structure of
such a transaction could have a significant impact on our future sources of
revenue and expense needs. Meanwhile, we expect our source of revenue, if any,
for the next few years to consist of (1) payments under the Genzyme agreement,
which we entered into in December 2005 and under which we assigned to Genzyme
Corporation 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 (2) 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
additional losses over the next few years due to lack of any substantial
revenue. There can be no assurance that we will enter into a merger and
acquisition transaction or successfully develop, commercialize, manufacture, or
market our product candidates or ever achieve or sustain product revenue for
profitability.

In May
2006, we completed a private placement of common stock with institutional
investors for gross proceeds of $21.2 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.

20

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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.

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 commercial sale of our products in development, and we do
not anticipate generating revenue from the commercialization of AV411 in the
foreseeable future. Currently we have suspended development for AV411 for
neuropathic pain and our ongoing clinical development for AV411 for opioid
addition and withdrawal is being primarily funded by third-parties. We do not
anticipate the need to obtain additional funding to support the needs of our
current research and development activities. We currently expect that any
expansion of our AV411 development activities will be supported through
partners. However, if we are successful entering into a merger and acquisition
transaction or in acquiring additional product candidates or pursuing additional
indications for compounds in our portfolio, we may require additional funding to
complete the research and development activities necessary to fully develop and
commercialize such products.

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 stock-based compensation. 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 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 2008, we received a $7.1 million payment under the terms of our
agreement with Baxter Healthcare Corporation (see Note 10). We recognized the
payment as revenue, since we concluded that as of December 31, 2008, 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.

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 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.

21

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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, 2008, 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

Prior to
2003, we have invested significant amounts in construction for modifications and
improvements to leased facilities we previously used for our research and
development activities. Most of our spending was made to modify facilities for
manufacturing, general laboratory, and other research facilities which we either
no longer lease or, in connection with our November 2008 restructuring, no
longer use. Management assesses whether the carrying value of long-lived assets
is impaired whenever events or changes in circumstances, such as the November
2008 restructuring, 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. For example, in November 2008, in connection
with the termination of our AV650 program, we determined that the scope of our
research and development activities had changed and we would no longer
effectively utilize approximately 12,000 square feet of general laboratories in
our leased facilities 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 assessment, and our
subsequent completion of a sublease agreement for the majority of the general
laboratory space, 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, 2008 of approximately $413,000. This impairment
loss does not impact our cash flows and primarily represents an acceleration of
depreciation charges that would have been recognized through 2009.

Under the
original terms of our building lease that expired in May 2008, we had an
obligation, at our landlords sole discretion, to remove, reconfigure or
otherwise alter some improvements we have made to the facility. We determined
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.

22

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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, we determined that these leasehold
improvements were impaired and wrote them 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. In March 2008,
we amended the lease which resulted in a settlement of the obligation at an
amount below the value of the liability and recorded the difference totaling
$274,000 in our statement of operations as a credit to impairment loss related
to long-lived assets.

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 granted, exercised and cancelled.

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.

23

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Results of Operations

*Revenue*

Year Ended December
  31,(In thousands,
      except percentages)
    
    
    2008
    
    2007
    
    2006Revenue
    
    $
    7,100
    
    $
    -
    
    $
    103


Revenue
in 2008 reflected income from the sale of the rights to our early stage blood
coagulation compound, AV513, to Baxter. We recognized no revenue in 2007.
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.

*Research and Development
Expenses*

Historically, we have maintained a small staff level and subleased
portions of our leased operating facilities to reduce our overhead costs. In
November 2008, we completed a significant restructuring plan to further reduce
infrastructure expenses including a reduction of our staff level by
approximately 70 percent. All remaining research and development activities
associated with our potential products are performed with external resources to
optimize the pace and cost of these activities. This is intended to preserve our
financial resources, minimize our exposure to fixed costs for staff and
facilities and increase our control over the strategic timing and use of all of
our resources.

Prior to
the restructuring in November 2008, 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, 2008, the number of our staff overseeing research and development
activities associated with AV411 and related compounds, was four, compared to
the number of staff we employed in connection with all our research and
development activities at December 31, 2007 and 2006 of 23 and 21,
respectively.

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



|                                        |  |                      |        | **Percentage**      |   |              |  |                    
|--------------------------------------- |  | -------------------- | ------ | ------------------- | - | ------------ |  | -------------------
|                                        |  | **Year
      Ended** |        | (decrease)          |   | Year Ended   |  | Percentage         
|                                        |  | December 31,         |        | increase
      2008 |   | December 31, |  | increase
      2007
|                                        |  | 2008                 |        | 2007                |   | over 2007    |  | 2006               
|Research and preclinical development    |  | $                    | 10,177 |                     | $ | 11,004       |  | (8%)               
|Clinical
      development              |  |                      | 13,430 |                     |   | 9,577        |  | 40%                
|Total research and development expenses |  | $                    | 23,607 |                     | $ | 20,681       |  | 14%                

During
these years, a significant percentage of our research and development resources
contributed to multiple development programs, the majority of our costs were not
directly attributed to individual development programs. We based 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 were 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.

*Research and preclinical
development*

We have
reclassified some prior period amounts within research and preclinical, clinical
development and 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.

24

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|                                                          |  |              |        |            |      |              |           |            |      |   |           |  | Percentage
|--------------------------------------------------------- |  | ------------ | ------ | ---------- | ---- | ------------ | --------- | ---------- | ---- | - | --------- |  | ----------
|                                                          |  |              |        |            |      |              |           | Percentage |      |   |           |  | increase  
|                                                          |  | Year Ended   |        | (decrease) |      | Year Ended   |           | (decrease)
|                                                          |  | December 31, |        | 2008       |      | December 31, |           | 2007      
|(In thousands, except
      percentages)                  |  |              | 2008   |            | 2007 |              | over 2007 |            | 2006 |   | over 2006
|Personnel-related                                         |  | $            | 1,957  |            | $    | 1,977        |           | (1%)       |      | $ | 1,891     |  | 5%        
|Share-based compensation                                  |  |              | 516    |            |      | 522          |           | (1%)       |      |   | 382       |  | 37%       
|Severance                                                 |  |              | 682    |            |      | -            |           | n/a        |      |   | -         |  | n/a       
|External research and development                         |  |              | 4,131  |            |      | 4,346        |           | (5%)       |      |   | 3,954     |  | 10%       
|Depreciation                                              |  |              | 579    |            |      | 1,454        |           | (60%)      |      |   | 1,075     |  | 35%       
|Other expenses including facilities overhead              |  |              | 2,312  |            |      | 2,805        |           | (18%)      |      |   | 3,152     |  | (11%)     
|Total research and preclinical development
      expenses |  | $            | 10,177 |            | $    | 11,104       |           | (8%)       |      | $ | 10,454    |  | 6%        

Comparison of Years Ended December 31, 2008 and 2007.The decreases in our total research and preclinical
development expenses for the year ended December 31, 2008, compared to 2007, of
$927,000, were primarily due to changes in costs for the following:

- lower depreciation expenses of $875,000,
  reflecting the acceleration of depreciation expense in 2007 in connection with
  a change in estimate that shortened the depreciable life for approximately
  $2.7 million of leasehold improvements and other assets, and the fact that
  almost all of our other depreciable equipment had reached their original
  depreciable life early in 2008,
- lower facilities and other allocated expenses of $493,000, primarily
  due to reductions in overall facilities overhead, and
- lower expenditures for external research and development services from
  third-party service providers of $215,000, primarily reflecting a decrease in
  costs for external animal studies associated with AV411 and
  AV650,

partially offset by,

- severance expenses recorded in 2008 of $682,000,
  primarily related to the severance expense accrued in connection with the
  staff reduction in November 2008.

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
$651,000, were primarily due to changes in costs for the following:

- higher expenditures for external research and
  development services from third-party service providers of $392,000, 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
- higher depreciation expenses of $379,000, as a
  result of the December 31, 2006 decrease in estimated depreciable life of some
  leasehold improvements,

partially offset by,

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

25

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*Clinical development*

|                                             |              |        |            |      |              |           | Percentage |      |   |           |  |           
|-------------------------------------------- | ------------ | ------ | ---------- | ---- | ------------ | --------- | ---------- | ---- | - | --------- |  | ----------
|                                             |              |        |            |      |              |           | increase   |      |   |           |  | Percentage
|                                             | Year Ended   |        | (decrease) |      | Year Ended   |           | increase  
|                                             | December 31, |        | 2008       |      | December 31, |           | 2007      
|(In thousands, except
      percentages)     |              | 2008   |            | 2007 |              | over 2007 |            | 2006 |   | Over 2006
|Personnel-related                            | $            | 1,648  |            | $    | 1,457        |           | 13%        |      | $ | 1,357     |  | 7%        
|Share-based compensation                     |              | 110    |            |      | 170          |           | (35%)      |      |   | 169       |  | 1%        
|Severance                                    |              | 478    |            |      | -            |           | n/a        |      |   | -         |  | n/a       
|External clinical development                |              | 10,596 |            |      | 7,374        |           | 44%        |      |   | 2,819     |  | 162%      
|Other expenses including facilities overhead |              | 598    |            |      | 576          |           | 4%         |      |   | 420       |  | 37%       
|Total
      clinical development expenses    | $            | 13,430 |            | $    | 9,577        |           | 40%        |      | $ | 4,765     |  | 101%      

Comparison of Years Ended December 31, 2008 and 2007.The increase in our total clinical development expenses for
the year ended December 31, 2008, compared to 2007, of $3.9 million, was
primarily due to changes in costs for the following:

- higher expenditures for external clinical development services from
  third-party suppliers of $3.2 million, primarily reflecting the higher level
  of spending in 2008 for services from third-party suppliers associated with
  our clinical trials and drug manufacturing support for AV650,
- severance expenses recorded in 2008 of $478,000, primarily related to
  the severance expense accrued in connection with the staff reduction in
  November 2008, and
- higher personnel-related expenses of $191,000, reflecting higher
  average salaries in 2008, partially offset by lower staff
  level.

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 $4.8 million, was
primarily due to changes in costs for the following:

- higher expenditures for external clinical development services from
  third-party suppliers of $4.6 million, 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 personnel-related expenses of $100,000, reflecting slightly
  higher staff level and higher average salaries in 2007.

Total
research and development expenses for 2008 were within managements
expectations. In October 2008, we announced that the top-line data from our
AV650 trial for the treatment of spasticity in patients with multiple sclerosis
did not meet its primary endpoint. As a result, we discontinued all
AV650-related activities and expenses. In addition, we announced a significant
restructuring and staff reduction aimed at preserving cash and reassessing
strategic opportunities. As a result of this restructuring, we expect our total
research and development spending to be significantly less in 2009 while we
pursue efforts to acquire additional development assets. If we are successful in
our efforts to acquire new development assets, our total research and
development spending will likely increase to meet the development needs of the
products.

26

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*General and Administrative
Expenses*

|                                                            |              |       |          |      |              |           | Percentage |      |   |           |  | Percentage
|----------------------------------------------------------- | ------------ | ----- | -------- | ---- | ------------ | --------- | ---------- | ---- | - | --------- |  | ----------
|                                                            |              |       |          |      |              |           | (decrease) |      |   |           |  | (decrease)
|                                                            | Year Ended   |       | increase |      | Year Ended   |           | increase  
|                                                            | December 31, |       | 2008     |      | December 31, |           | 2007      
|(In thousands, except
      percentages)                    |              | 2008  |          | 2007 |              | over 2007 |            | 2006 |   | over 2006
|Personnel-related                                           | $            | 2,693 |          | $    | 3,013        |           | (11%)      |      | $ | 3,166     |  | (5%)      
|Share-based compensation                                    |              | 1,577 |          |      | 1,234        |           | 28%        |      |   | 944       |  | 31%       
|Severance                                                   |              | 352   |          |      | -            |           | n/a        |      |   | 288       |  | (100%)    
|Legal
      and professional fees                           |              | 1,440 |          |      | 1,246        |           | 16%        |      |   | 1,194     |  | 4%        
|Facilities, depreciation and other allocated
      expenses |              | 2,634 |          |      | 3,140        |           | (16%)      |      |   | 3,268     |  | (4%)      
|Total
      general and administrative expenses             | $            | 8,696 |          | $    | 8,633        |           | 1%         |      | $ | 8,860     |  | (3%)      

Comparison of the Years Ended December 31, 2008 and 2007. The increase of $63,000 in our general and administrative
expenses in 2008, compared to 2007, was primarily due to changes in costs for
the following:

- severance expenses recorded in 2008
  of $352,000, primarily related to the severance expense accrued in connection
  with the staff reduction in November 2008,
- higher non-cash expenses of $343,000,
  for the recognition of share-based compensation in compliance with FAS 123(R),
  and
- higher legal and professional fees of $194,000, primarily due to higher
  legal services associated with due-diligence and contract-related matters,

partially offset by,

- lower facilities, depreciation and other allocated expenses of
  $506,000, due to decrease in costs associated with recruiting additional
  members to our board of directors and the reduction of rent and other overhead
  expenses associated with our leased facility that expired in May 2008, and
- lower personnel-related expenses of $320,000, reflecting lower bonus
  expense accrued in 2008, partially offset by higher average salaries in
  2008.

Comparison of the Years Ended December 31, 2007 and 2006. The decrease of $227,000 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 byhigher average salaries in 2007,
  and
- $128,000 lower facilities, depreciation and other allocated expenses,
  including costs associated with public relation activities,

partially offset by,

- higher non-cash expenses of $290,000, for the recognition of
  share-based compensation in compliance with FAS 123(R).

We expect
our total general and administrative spending to be significantly less in 2009,
despite the costs we are incurring in connection with our current proxy fight
and hostile tender offer, while we pursue efforts to acquire additional
development assets. If we are successful in our efforts to acquire new
development assets, we expect general and administrative spending levels to
increase in connection with the changing needs of the company.

27

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*Impairment Loss Related to
Long-Lived Assets*

Year EndedDecember 31,(In
      thousands)
    2008
    
    2007
    
    2006Impairment loss related to long-lived assets
    $
    139
    
    $
    -
    
    $
    450


In
connection with the settlement of our asset retirement obligation, we reduced
our liability for the asset retirement obligation in March 2008 by $274,000 with
a corresponding credit to impairment loss related to long-lived assets. In
December 2008, as a result of the termination of our AV650 program, we ceased
the use of our leased laboratory facilities and recorded an impairment charge of
$413,000 to reduce the carrying value of our leasehold improvements and
laboratory equipment to zero. Net impairment losses for 2008 were
$139,000.

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)
    2008
    
    2007
    
    2006In-license fees
    $
    2,500
    
    $
    -
    
    $
    3,000


In August
2008, we paid Sanochemia $2.5 million upon the timely achievement of a
development-based milestone for the development of a proprietary, purer form of
AV650. In October 2008, we announced that the top-line data from our AV650 trial
for the treatment of spasticity in patients with multiple sclerosis did not meet
its primary endpoint. As a result, we discontinued all AV650-related activities
and notified Sanochemia in October 2008 of our intent to terminate the agreement
under which such in-license fees were incurred. We do not expect to incur any
future in-license fees associated with this agreement. We did not enter into any
in-license agreements in 2008.

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.

*Interest Expense*

Year EndedDecember 31,(In thousands, except
      percentages)
    
    2008
    
    2007
    
    2006Interest expense
    $
    293
    
    
    $
    488
    
    $
    467Percentage (decrease) increase over prior period
    
    (40%
    )
    
    
    4%


The
decrease in our interest expense between 2008 and 2007 reflects a lower loan
payable level as a result of the repayment of $1.0 million to our outstanding
borrowings at the end of the year in 2007, and a decrease in the average annual
rate of interest charged during this period on our line of credit.

The
increase in our interest expense between 2007 and 2006 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.

28

---

*Interest Income*

Year EndedDecember 31,(In thousands, except
      percentages)
    
    2008
    
    2007
    
    2006Interest income
    $
    2,784
    
    
    $
    3,954
    
    $
    3,002Percentage (decrease) increase over prior period
    
    (30%
    )
    
    
    32%


Almost
all of our interest income is generated from our investments in high-grade
marketable securities of government and corporate debt. The decrease in interest
income between 2008 and 2007 was primarily due to the decrease in our
outstanding interest-bearing cash and securities balances, due to the use of
such resources to fund our on-going operations, as well as the general decline
in market interest rates.

The
increase in interest income between 2007 and 2006 primarily reflects the higher
average outstanding balance of our total portfolio, including 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. 2006 included the $19.4 million net cash
proceeds from the private placement completed in May 2006.

*Sublease Income*

Year EndedDecember 31,(In thousands)
    
    2008
    
    2007
    
    2006Sublease income
    $
    365
    
    $
    703
    
    $
    565


During
2008, we subleased portions of our aggregate facilities in two buildings which
totaled up to 31,750 square feet at any given time, to as many as four separate
corporate tenants not affiliated with Avigen. In 2008, one tenant defaulted on
sublease payments for 15,250 square feet that we deemed to be uncollectible and
therefore we did not recognize any sublease income from that tenant in 2008. In
addition, on May 31, 2008, a second tenants sublease for approximately 2,100
square feet expired in connection with the expiration of our underlying building
lease. As a result of these events, our total sublease income for 2008 decreased
by $338,000, compared to 2007. Unless we are able to enter into additional
sublease agreements after December 31, 2008, we expect to recognize remaining
contractual, sublease income of $743,000 ratably over the remaining terms of the
lease, which expires in November 2010.

Recently Issued Accounting
Standards

See Note
1, Unaudited Interim Financial Statements -Recent Accounting Pronouncements,in
the Notes to Condensed Financial Statements for a discussion of recent
accounting pronouncements and their effect, if any, on us, which discussion is
incorporated by reference here.

Deferred Income Tax Assets

In
accordance with FAS 109,Accounting for Income
Taxes, 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. 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 deferred tax assets. 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. In 2008 and 2007, we
conducted an Internal Revenue Code (IRC) Section 382 study and have reported our
deferred tax assets related to net operating loss and research credit
carryforwards after recognizing change of control limitations in 2008 and
2006. Utilization of our net operating loss and research and development
credit carryforwards may still be subject to substantial annual limitations due
to ownership change limitations after December 31, 2008.

29

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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 2008, we raised $235.7 million from private
placements and public offerings of our common stock and warrants to purchase our
common stock.

In
December 2008, we received $7.1 million in cash proceeds from Baxter Healthcare
Corporation in connection with the sale of the rights to our early stage blood
coagulation compound, AV513.

In April
2007, we sold 4.4 million shares of our common stock 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, we
received payments of $12.0 million in December 2005 and $7.1 million in December
2008 from the assignment of most of our gene therapy assets to Genzyme and the
sale of our AV513 program to Baxter, respectively.

We have
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. In November 2008, we completed a significant restructuring
and staff reduction intended to reduce our future expenses and preserve our
financial resources while we assess strategic opportunities. We expect to incur
future expenses in connection with efforts to monetize our AV411 assets and
evaluate merger and acquisition proposals with independent financial advisors
through an orderly and competitive review process. We do not intend to initiate
Phase 2 clinical trials for AV411 for neuropathic pain without a partner. As a
result, we expect expenses for 2009 to be significantly below the spending
levels of recent years related to our previous research and development
activities, depending on whether we pursue any of the strategic opportunities
identified through our competitive review process.

At
December 31, 2008, we had cash, cash equivalents, available-for-sale securities
and restricted investments, of approximately $56.8 million, compared to
approximately $78.1 million at December 31, 2007. At December 31, 2008 and 2007,
the portion of our investment portfolio pledged as collateral to secure some of
our current and long-term liabilities, which we refer to as restricted
investments, includes $7.0 million for outstanding borrowings against our credit
facility and approximately $2.0 million for a letter of credit which serves as
the security deposit on a building lease. At December 2007, we also had an
additional $428,000 of restricted investments for a letter of credit associated
with the building lease that expired in May 2008. The classification of $7.0
million of these restricted investments as current assets at December 31, 2008
results from the classification of related loan payable that is due in November
2009, as a current liability. The classification of $2.0 million of these
restricted investments as non-current assets at December 31, 2008 results from
the classification of our underlying building lease liability that expires in
November 2010, as a long-term liability. The reduction of $392,000 in total
restricted investments between 2008 and 2007 was the result of: (1) the
settlement of our asset retirement obligation for $210,000, and (2) the decrease
in our security obligation by $182,000 as a result of the lease amendment that
reduced the rentable space on our building lease that expired in May 2008. The
cancellation of an equivalent portion of our letter of credit 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 $2.0 million of currently outstanding standby letters of
credit pursuant to the terms required under our building operating lease that
expire in November 2010.

Operating Activities.Net cash used
for operating activities was $21.2 million for 2008 compared to $21.1 million
for 2007. The 2008 and 2007 amounts were primarily used to support our clinical
research and development activities, including non-clinical studies and clinical
trials performed by third parties. The 2008 amount also includes payment of $2.5
million to Sanochemia upon the achievement of certain development-based
milestones. 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.

30

---

Net cash
used for operating activities in 2006 was $20.4 million. 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 increase in the amount of cash used
in 2007 compared to 2006 is primarily due to higher expenditures to support our
research and development activities in 2007, including preclinical studies and
clinical trials performed by third parties.

The level of cash used in operating
activities during 2008 and 2007 were in line with managements
expectations.

Investing and Financing Activities.
Net cash provided by investing activities and financing activities in 2008 was
$29.9 million and $261,000, respectively. Net cash used in investing activities
and provided by financing activities in 2007 was $8.4 million and $28.1 million,
respectively. The cash provided by or used in investing activities in 2008 and
2007 consisted primarily of maturities of available-for-sale securities, net of
purchases. The cash provided by financing activities in 2008 and 2007 consisted
primarily of proceeds from the issuance of common stock in connection with the
underwritten offering in 2007 and the exercise of stock options during both
years.

Net cash
used in investing and provided by financing activities in 2006 was $9.7 million
and $20.4 million, respectively. The cash used in investing activities consisted
primarily of sales and maturities of available-for-sale securities, net of
purchases. Net cash provided by financing activities consisted of proceeds from
the private placement of our common stock to institutional investors in May 2006
and 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.

The
following are contractual commitments at December 31, 2008 associated with debt
obligations, lease obligations and contractual commitments to fund third-party
research (in thousands):

Payments Due by PeriodLess
      thanContractual Commitment
    Total
    
    1 year
    
    1-3 years
    
    4-5 yearsOperating leases
    $
    3,240
    
    $
    1,697
    
    $
    1,543
    
    $
    -Credit
      facility
    
    7,000
    
    
    7,000
    
    
    -
    
    
    -Research funding for third-parties
    
    1,800
    
    
    1,800
    
    
    -
    
    
    -Total
    $
    12,040
    
    $
    10,497
    
    $
    1,543
    
    $
    -


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 currently
bears interest at the floating prime rate, as adjusted periodically by Wells
Fargo, plus a margin adjustment. As of December 31, 2008 and 2007, the average
annual rate of interest charged on the borrowing was approximately 2.50% and
5.81%, 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, 2008, 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, 2008, we have no more borrowing capacity under this facility.

Our
current office and facility includes approximately 67,000 square feet of space
leased through November 2010. Payments scheduled under our lease commitments are
included in the table above under operating leases. As of March 1, 2009, we had
sublease agreements covering 31,100 square feet, or 46%, of the building to
three separate corporate tenants not affiliated with Avigen. Each sublease
agreement runs concurrent with the duration of the underlying master lease term.
Under these sublease agreements, we are scheduled to receive annual sublease
rental income in 2009 of approximately $0.8 million and reimbursement for
portions of the related facilities overhead costs which will be recorded as a
reduction to our operating expenses.

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.

31

---

Currently
we have suspended development for AV411 for neuropathic pain and our ongoing
clinical development for AV411 for opioid addiction and withdrawal is being
primarily funded by third-parties. We do not anticipate obtaining additional
funding to support the needs of our current research and development activities.
We currently expect that any expansion of our AV411 development activities will
be supported through partners. However, this forward-looking statement is based
upon our current plans and assumptions regarding our future operating and
capital requirements, which may change. If we are successful entering into a
merger and acquisition transaction or in acquiring additional product candidates
or pursuing additional indications for compounds in our portfolio, we may
require additional funding to complete the research and development activities
necessary to fully develop and commercialize such products. Our future operating
and capital requirements will depend on many factors, including:

- how successful, if at all, we are at entering into
  potential merger and acquisition transactions, acquiring additional
  compounds, and the nature of the consideration we pay
  for acquired compounds;
- 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 product
  candidates;
- 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;
- competing technological
  developments;
- costs incurred in proxy fights and hostile tender
  offers from our largest stockholder;
- the cost of manufacturing our product candidates
  for clinical trials and sales;
- the costs of sales, marketing and
  commercialization activities; and
- other factors which may not be within our
  control.

If we are
unable to partner with third parties to develop our product candidates and
obtain regulatory approval, or monetize existing development assets, and we
determine to continue the development of our product portfolio, we may need to
obtain additional funding before we will be able to obtain regulatory approval
to market our product candidates. The U.S. capital markets have recently
experienced significant volatility, compounded by the U.S. and global recession,
which is expected to impair issuers ability to raise capital in the near term.
In addition, the substantial reduction in the availability of credit increases
the risk that traditional credit facilities may not be available or may not be
available on favorable terms. 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.

Off-Balance Sheet
Arrangements

At
December 31, 2008, we did not have any off-balance sheet arrangements or
relationships with unconsolidated entities or financial partnerships, such as
entities often referred to as structured finance or special purposes entities,
which are typically established for the purpose of facilitating off-balance
sheet arrangements or other contractually narrow or limited purposes.

32

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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, 2008 and 2007, consisted of 98%
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, 2008
levels, we estimate that the fair value of our securities portfolio would
decline by approximately $341,000. Our estimated exposure at December 31, 2008
is lower than the estimated $684,000 exposure at December 31, 2007 primarily due
to the reduction in size of our overall investment 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 is currently charged on the outstanding
borrowings based on a fluctuating rate 0.75% below the Banks established Prime
Rate in effect from time to time. As of December 31, 2008, the average annual
rate of interest charged on the borrowings was approximately 2.50% compared to
5.81% as of December 31, 2007.

33

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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, 2008 and 2007 are set forth under Note 18 of our financial
statements.

|                                                                | Page
|--------------------------------------------------------------- | ----
|Reports of Independent Registered Public Accounting
      Firms | 35  
|Balance
      Sheets                                            | 37  
|Statements of Operations                                        | 38  
|Statements of
      Stockholders Equity                        | 39  
|Statements of Cash Flows                                        | 46  
|Notes to
      Financial Statements                             | 47  

34

---

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, 2008 and 2007, and the related statements of
operations, stockholders equity and cash flows for each of the three years in
the period ended December 31, 2008 and for the period from inception (October
22, 1992) through December 31, 2008. 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,
2008 and 2007, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2008 and for the period from
inception (October 22, 1992) through December 31, 2008, in conformity with U.S.
generally accepted accounting principles.

As
discussed in Note 1 to the financial statements, on January 1, 2008, the Company
adopted Statement of Financial Accounting Standards (SFAS) No. 157,Fair Value Measurements. Also 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.

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, 2008, based on criteria established inInternal Control  Integrated
Frameworkissued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report dated March
13, 2009 expressed an unqualified opinion thereon.

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


San Francisco, California March 13,
2009

35

---

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 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 cash flows for Avigen, Inc. 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, California March 14,
2006

36

---

AVIGEN,
INC. (a development stage company)

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

|                                                          | December 31, |          | December 31,
|--------------------------------------------------------- | ------------ | -------- | ------------
|                                                          | 2008         |          | 2007        
|ASSETS                                                    |              |          |             
|Current
      assets:                                     |              |          |             
|Cash and cash equivalents                                 | $            | 9,304    |             
|Available-for-sale securities                             |              | 38,499   |             
|Restricted investments                                    |              | 7,036    |             
|Accrued interest                                          |              | 468      |             
|Prepaid expenses and other current
      assets           |              | 446      |             
|Total current assets                                      |              | 55,753   |             
|Restricted investments                                    |              | 2,000    |             
|Property and
      equipment, net                         |              | 52       |             
|Deposits and other assets                                 |              | 241      |             
|Total
      assets                                        | $            | 58,046   |             
|                                                         
|LIABILITIES AND STOCKHOLDERS' EQUITY                      |              |          |             
|Current
      liabilities:                                |              |          |             
|Accounts payable and other accrued
      liabilities      | $            | 2,019    |             
|Accrued compensation and related expenses                 |              | 1,102    |             
|Loan payable                                              |              | 7,000    |             
|Other current liabilities                                 |              | 119      |             
|Total current liabilities                                 |              | 10,240   |             
|Long-term loan payable                                    |              | -        |             
|Deferred rent and other
liabilities                       |              | 602      |             
|Total liabilities                                         |              | 10,842   |             
|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 shares        |              |          |             
|authorized, 29,769,115 and 29,692,709 shares              |              |          |             
|issued and outstanding at December 31, 2008 and           |              |          |             
|December 31, 2007, respectively                           |              | 30       |             
|Additional paid-in capital                                |              | 292,611  |             
|Accumulated other comprehensive income                    |              | 357      |             
|Deficit accumulated during development
      stage        |              | (245,794 | )           
|Total
      stockholders' equity                          |              | 47,204   |             
|Total liabilities and stockholders' equity                | $            | 58,046   |             

See accompanying notes.

37

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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,
|                                              | 2008                        |            | 2007         |  | 2006       |         | 2008
|Revenue                                       | $                           | 7,100      |              |  | $          | -       |      |  | $          | 103     |   |  | $               
|                                             
|Operating expenses:                           |                             |            |              |  |            |         |      |  |            |         |   |  |                 
|Research and development                      |                             | 23,607     |              |  |            | 20,681  |      |  |            | 15,219  |   |  |                 
|General and administrative                    |                             | 8,696      |              |  |            | 8,633   |      |  |            | 8,860   |   |  |                 
|Impairment loss related to long-livedassets   |                             | 139        |              |  |            | -       |      |  |            | 450     |   |  |                 
|In-license fees                               |                             | 2,500      |              |  |            | -       |      |  |            | 3,000   |   |  |                 
|Total operating expenses                      |                             | 34,942     |              |  |            | 29,314  |      |  |            | 27,529  |   |  |                 
|Loss from operations                          |                             | (27,842    | )            |  |            | (29,314 | )    |  |            | (27,426 | ) |  |                 
|Interest
      expense                        |                             | (293       | )            |  |            | (488    | )    |  |            | (467    | ) |  |                 
|Interest income                               |                             | 2,784      |              |  |            | 3,954   |      |  |            | 3,002   |   |  |                 
|Sublease
      income                         |                             | 365        |              |  |            | 703     |      |  |            | 565     |   |  |                 
|Other (expense) income, net                   |                             | (113       | )            |  |            | (19     | )    |  |            | 70      |   |  |                 
|                                             
|Net loss                                      | $                           | (25,099    | )            |  | $          | (25,164 | )    |  | $          | (24,256 | ) |  | $               
|                                             
|Basic and diluted net loss per common share   | $                           | (0.84      | )            |  | $          | (0.90   | )    |  | $          | (1.03   | ) |  |                 
|                                             
|Shares used in basic and diluted net loss per |                             |            |              |  |            |         |      |  |            |         |   |  |                 
|common share calculation                      |                             | 29,765,651 |              |  | 27,962,202 |         |      |  | 23,509,378 |         |   |  |                 

See accompanying notes.

38

---

AVIGEN,INC. (adevelopmentstagecompany)

STATEMENTSOFSTOCKHOLDERSEQUITY

Period fromOctober22, 1992(inception)throughDecember31, 2008 (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 | ) |  | $

39

---

AVIGEN, INC.(a development stage
company)

STATEMENTS OF STOCKHOLDERS EQUITY
(Continued)

Period from October 22,
1992 (inception) through December 31,
2008(in thousands, except for share information)

|                                                           |                 |   | Deficit      |   |              |   |           
|---------------------------------------------------------- | --------------- | - | ------------ | - | ------------ | - | ----------
|                                                           |                 |   |              |   |              |   |           
|                                                           |                 |   |              |   |              |   |           
|                                                           | Preferred Stock |   | Common Stock |   | Common Stock |   | Paid-in   
|                                                           | **Shares**      |   | **Amount**   |   | **Shares**   |   | **Amount**
|Balance at June 30, 1995 (brought forward)                 | 2,069,326       |   |              | $ | 2            |   |           
|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          |   |              |   |             |   |           
|Issuance of Series D preferred
      stock at              |                 |   |              |   |              |   |           
|$7.09 per share
      from October 1995 to                 |                 |   |              |   |              |   |           
|February 1996 for
      cash (net of issuance              |                 |   |              |   |              |   |           
|costs of
    $25,279)                                      | 205,351         |   |              |   |             |   |           
|Issuance of Series D preferred
      stock at $7.09 per    |                 |   |              |   |              |   |           
|share in March 1996 in settlement of                       |                 |   |              |   |              |   |           
|accounts payable                                           | 22,574          |   |              |   |             |   |           
|Issuance of common stock at
      $.004 per share in       |                 |   |              |   |              |   |           
|March 1996 pursuant to antidilution rights                 |                |   |              |   |             |   |           
|Issuance of stock options in
      February 1996 in        |                 |   |              |   |              |   |           
|settlement of
      certain accrued liabilities            |                |   |              |   |             |   |           
|Conversion of Class B common stock to                      |                 |   |              |   |              |   |           
|common stock                                               |                |   |              |   |             |   |           
|Issuance of warrants to
      purchase common              |                 |   |              |   |              |   |           
|stock in connection with 1996 bridge financing             |                 |   |              |   |              |   |           
|in March 1996                                              |                |   |              |   |             |   |           
|Conversion of preferred stock to common stock              |                 |   |              |   |              |   |           
|in May
      1996                                          | (2,338,293      | ) |              |   | (2           | ) |           
|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)                 |                |   |              |   |             |   |           
|Proceeds from exercise of options at $0.44 per             |                 |   |              |   |              |   |           
|share in June 1996                                         |                |   |              |   |             |   |           
|Repurchase of common
      stock                           |                |   |              |   |             |   |           
|Deferred
      compensation                                |                |   |              |   |             |   |           
|Amortization of deferred
      compensation                |                |   |              |   |             |   |           
|Net loss and comprehensive
      loss                      |                |   |              |   |             |   |           
|Balance at June
      30, 1996 (carried forward)           |                |   |              | $ |             |   |           

40

---

AVIGEN, INC.(a development stage
company)

STATEMENTS OF STOCKHOLDERS EQUITY
(Continued)

Period from October 22,
1992 (inception) through December 31,
2008(in thousands, except for share information)

|                                                          |                 |  |              |   |              |            |         |   |                   |  |                 |  |                   |   |             |                 |            |                 |        |   |  | 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 | ) |  | $

41

---

AVIGEN, INC.(a development stage
company)

STATEMENTS OF STOCKHOLDERS EQUITY
(Continued)

Period from October 22,
1992 (inception) through December 31,
2008(in thousands, except for share information)

|                                                            |                   |  |              |   |              |            |            |   |                   |  |                 |  |               |   |                 |                 |            |                 |            |       |   |  | 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 | ) |  | $

42

---

AVIGEN,INC.(adevelopmentstagecompany)

STATEMENTSOFSTOCKHOLDERSEQUITY(Continued)

Period fromOctober22, 1992(inception)throughDecember31, 2008(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 | ) |  | $

43

---

AVIGEN, INC.(a development stage
company)

STATEMENTS OF STOCKHOLDERS EQUITY
(Continued)

Period from October 22,
1992 (inception) through December 31,
2008(in thousands, except for share information)

|                                                            |                 |  |              |   |              |            |            |   |                   |  |                 |  |                   |   |             |                 |            |                 |        |      |   |  | 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 (carried forward)        |                |  | $            |  |              | 25,116,131 |            | $ | 25                |  |                |  | $                 |  |             | $               | 259,115    |                 | $      | (132 | ) |  | $       | (195,531 | ) |  | $

44

---

AVIGEN, INC.(a development stage
company)

STATEMENTS OF STOCKHOLDERS EQUITY
(Continued)

Period from October 22,
1992 (inception) through December 31,
2008(in thousands, except for share information)

|                                                           |  |                 |  |              |   |              |            |         |   |                   |  |                 |  |                   |   |             |                 |            |                 |        |      |   |  | 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 | ) |  |  
|Proceeds from exercise of options at $3.13 to
      $3.53  |  |                 |  |              |   |              |            |         |   |                   |  |                 |  |                   |   |             |                 |            |                 |        |      |   |  |         |          |   |  |  
|per share                                                  |  |                |  |              |  |              | 76,406     |         |   | 1                 |  |                |  |                   |  |             |                 | 261        |                 |        |     |   |  |         |         |   |  |  
|Stock-based compensation expense                           |  |                |  |              |  |              |           |         |   |                  |  |                |  |                   |  |             |                 | 2,174      |                 |        |     |   |  |         |         |   |  |  
|Compensation expense related to options granted for        |  |                 |  |              |   |              |            |         |   |                   |  |                 |  |                   |   |             |                 |            |                 |        |      |   |  |         |          |   |  |  
|services                                                   |  |                |  |              |  |              |           |         |   |                  |  |                |  |                   |  |             |                 | 29         |                 |        |     |   |  |         |         |   |  |  
|Comprehensive loss:                                        |  |                 |  |              |   |              |            |         |   |                   |  |                 |  |                   |   |             |                 |            |                 |        |      |   |  |         |          |   |  |  
|Net loss                                                   |  |                |  |              |  |              |           |         |   |                  |  |                |  |                   |  |             |                 |           |                 |        |     |   |  |         | (25,099  | ) |  |  
|Net unrealized gain
      on available-for-sale securities |  |                |  |              |  |              |           |         |   |                  |  |                |  |                   |  |             |                 |           |                 |        | 6    |   |  |         |         |   |  |  
|Comprehensive loss                                         |  |                 |  |              |   |              |            |         |   |                   |  |                 |  |                   |   |             |                 |            |                 |        |      |   |  |         |          |   |  |  
|Balance at
      December 31, 2008                         |  |                |  | **$**        |  |              | 29,769,115 |         | $ | 30                |  |                |  | $                 |  |             | $               | 292,611    |                 | $      | 357  |   |  | $       | (245,794 | ) |  | $

See accompanying notes

45

---

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,
|                                                         | 2008                 |         | 2007         |  | 2006 |          | 2008
|Operating Activities                                     |                      |         |              |  |      |          |      |  |   |          |   |  |            
|Net loss                                                 | $                    | (25,099 | )            |  | $    | (25,164  | )    |  | $ | (24,256  | ) |  | $          
|Adjustments to reconcile net loss to net cash used in    |                      |         |              |  |      |          |      |  |   |          |   |  |            
|operating
      activities:                              |                      |         |              |  |      |          |      |  |   |          |   |  |            
|Depreciation
      and amortization                      |                      | 682     |              |  |      | 1,594    |      |  |   | 1,273    |   |  |            
|Loss (gain)
      on disposal of property and equipment  |                      | 278     |              |  |      | (37      | )    |  |   | (18      | ) |  |            
|Impairment
      loss related to long-lived assets       |                      | 139     |              |  |      | -        |      |  |   | 450      |   |  |            
|Amortization
      of deferred compensation              |                      | -       |              |  |      | -        |      |  |   | -        |   |  |            
|Non-cash rent
      expense for warrants issued in       |                      |         |              |  |      |          |      |  |   |          |   |  |            
|connection with the extension of the building lease      |                      | 36      |              |  |      | 217      |      |  |   | 217      |   |  |            
|Amortization
      of deferred rent                      |                      | (194    | )            |  |      | (774     | )    |  |   | (162     | ) |  |            
|Non-cash compensation expense for common stock,          |                      |         |              |  |      |          |      |  |   |          |   |  |            
|warrants, and
      stock options issued for services    |                      | 2,203   |              |  |      | 1,926    |      |  |   | 1,495    |   |  |            
|Warrants
      issued for patent license                 |                      | -       |              |  |      | -        |      |  |   | -        |   |  |            
|Changes in operating assets and liabilities:             |                      |         |              |  |      |          |      |  |   |          |   |  |            
|Accrued
      interest                                   |                      | 249     |              |  |      | (65      | )    |  |   | (182     | ) |  |            
|Prepaid
      expenses and other current assets          |                      | 298     |              |  |      | (514     | )    |  |   | 292      |   |  |            
|Deposits and
      other assets                          |                      | (44     | )            |  |      | 210      |      |  |   | 79       |   |  |            
|Accounts
      payable, other accrued liabilities and    |                      |         |              |  |      |          |      |  |   |          |   |  |            
|accrued compensation and related expenses                |                      | 284     |              |  |      | 1,471    |      |  |   | 452      |   |  |            
|Net cash used in operating activities                    | $                    | (21,168 | )            |  | $    | (21,136  | )    |  | $ | (20,360  | ) |  | $          
|Investing Activities                                     |                      |         |              |  |      |          |      |  |   |          |   |  |            
|Purchases of property and equipment                      |                      | (181    | )            |  |      | (203     | )    |  |   | (176     | ) |  |            
|Proceeds from disposal of property and equipment         |                      | 17      |              |  |      | 92       |      |  |   | 142      |   |  |            
|Settlement of asset retirement obligation                |                      | (210    | )            |  |      | -        |      |  |   | -        |   |  |            
|Decrease (increase) in restricted investments            |                      | 391     |              |  |      | 1,000    |      |  |   | -        |   |  |            
|Purchases of available-for-sale securities               |                      | (21,107 | )            |  |      | (109,538 | )    |  |   | (109,261 | ) |  |            
|Maturities of available-for-sale securities              |                      | 50,942  |              |  |      | 100,218  |      |  |   | 99,594   |   |  |            
|Net cash provided by (used in) investing activities      |                      | 29,852  |              |  |      | (8,431   | )    |  |   | (9,701   | ) |  |            
|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                |                      | -       |              |  |      | -        |      |  |   | -        |   |  |            
|Proceeds from issuance of preferred stock, net of        |                      |         |              |  |      |          |      |  |   |          |   |  |            
|issuance
      costs                                     |                      | -       |              |  |      | -        |      |  |   | -        |   |  |            
|Proceeds from warrants and options exercised             |                      | 261     |              |  |      | 593      |      |  |   | 1,012    |   |  |            
|Proceeds from issuance of common stock, net of           |                      |         |              |  |      |          |      |  |   |          |   |  |            
|issuance
      costs and repurchases                     |                      | -       |              |  |      | 28,518   |      |  |   | 19,354   |   |  |            
|Net cash provided by financing activities                |                      | 261     |              |  |      | 28,111   |      |  |   | 20,366   |   |  |            
|Net increase (decrease) in cash and cash equivalents     |                      | 8,945   |              |  |      | (1,456   | )    |  |   | (9,695   | ) |  |            
|Cash and cash equivalents, beginning of period           |                      | 359     |              |  |      | 1,815    |      |  |   | 11,510   |   |  |            
|Cash and cash equivalents, end of period                 | $                    | 9,304   |              |  | $    | 359      |      |  | $ | 1,815    |   |  | $          
|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                                   |                      | 293     |              |  |      | 488      |      |  |   | 467      |   |  |            

See accompanying notes.

46

---

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 has focused on identifying and
developing differentiated products to treat patients with serious disorders. Our
current product candidates primarily address large markets in pain and
addiction. 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, 2008, we had an accumulated deficit of $245.8 million and expect to
continue to incur losses over the next few years. Since October 2008, we
terminated our lead program AV650, downsized the company, sold the rights to our
early stage AV513 program and engaged independent strategic advisors to oversee
an orderly and competitive process to review merger and acquisition
opportunities and to assist in the monetization of our remaining assets.
Consequently, within the next year we expect to either acquire another company
and begin developing a new product or products, sell the company, or distribute
our cash and wind up operations. Our ability to generate revenue in the future
will depend substantially on the timing and success of acquiring another company
or product, reaching development and commercial milestones, obtaining regulatory
approvals from the FDA or other regulatory agencies, and obtaining market
acceptance of our products. There can be no assurance that we will be able to
acquire another company or new products on acceptable terms in the future, if at
all.

*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. Realized gains and
losses, if any, are included in earnings and are reported in other
income.

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.

47

---

*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 that expired in May 2008. Effective June 2008, we extended the lease on a
portion of the building and decreased the amount of the outstanding letter of
credit to $36,255. This building lease has been terminated effective June 30,
2009.

At
December 31, 2008, $7.0 million and $2.0 million of available-for-sale
securities were classified as restricted investments in current and non-current
assets, respectively. 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. 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 total amount of restricted investments at December 31,
2008 reflects the reduction in the letter of credit, associated with one of our
building leases that expired in May 2008 with only a smaller portion extended.

*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.

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.

48

---

*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 expired in May 2008, we could have been
required, at the landlords sole discretion, to remove, reconfigure or otherwise
alter certain improvements we had made to the facility. Prior to settlement,
this obligation was subject to a conditional future event that was not within
our control. We had previously determined the fair value of asset retirement
obligation 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, resulted in adjustments to our estimated liabilities over
time.

In
December 2006, as a result of a change in accounting estimate, 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. 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 was no
material change in our expectations with regard to this obligation. In March
2008, we entered into an amendment of the related building lease and settled the
obligation for a payment of approximately $210,000. In connection with the
settlement of the obligation, we recognized the difference between the cost to
retire the asset and the liability previously recorded as a decrease to
operating expenses in our statement of operations for 2008.

*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 Sale 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 2008, we received a $7.1 million payment under the terms of our
agreement with Baxter Healthcare Corporation (see Note 10). We recognized the
payment as revenue, since we concluded that as of December 31, 2008, 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.

49

---

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.

*Fair Value*

On
January 1, 2008, we adopted SFAS No. 157, *Fair Value Measurements*, and effective
October 10, 2008, we adopted FSP FAS 157-3, *Determining Fair Value of a
Financial Asset When the Market for That Asset is Not Active*, except as it
applies to nonfinancial assets and nonfinancial liabilities subject to FSP FAS
157-2.  Adoption of the provisions of this standard did not have a material
effect on our financial position.  Our cash equivalents and
available-for-sale securities are carried at fair value and we make estimates
regarding the valuation of these assets measured at fair value in preparing our
financial statements (see Note 3, Fair Value Measures, for fair value
disclosures).

*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 $529,000 and $760,000 at December 31, 2008 and 2007,
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 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.

*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
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, 2008 and 2007.

50

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Effective
January 1, 2007, we adopted the provisions of FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes 
an interpretation of FASB Statement No. 109(FIN 48). 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.

As of
December 31, 2008, we continue to have no unrecognized tax benefits and expect
no significant changes in the unrecognized tax benefits in the next 12 months
(see Note 17).

*Basic and Diluted Net Loss Per
Common Share*

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,
|------------------------------------------------------ | -------------------------
|                                                       | 2008                     
|Potential dilutive stock options outstanding           | 3,940                    
|                                                      
|Outstanding securities excluded from the               |                          
|potential
      dilutive common shares calculation (1) | 4,241,991                

|(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.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

*Stock-Based Compensation*

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.

51

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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 Awards which 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.

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.

*New Accounting Pronouncements*

Effective
January 1, 2008, we adopted the provisions of SFAS No. 159,The Fair Value Option for Financial Assets and Financial
LiabilitiesIncluding an amendment of FAS 115(SFAS 159),which gives a company the 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 SFAS 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. We chose not to elect the fair value option for our financial
assets and liabilities existing at January 1, 2008, and did not elect the fair
value option on financial assets and liabilities transacted during 2008.
Therefore, the adoption of SFAS 159 had no impact on our financial
statements.

Effective January 1, 2008, we
adopted the provisions of 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(EITF 07-03). 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. Our adoption of EITF 07-03 did
not have a material effect on our financial statements.

52

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In
September 2007, the FASB ratified EITF Issue No. 07-01,Accounting for Collaborative Agreements(EITF 07-01). EITF 07-01 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 07-01 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 07-01 is
effective for us as of January 1, 2009. The adoption of EITF 07-01 is not
expected to have a material impact on our financial statements.

In
December 2007, the FASB issued SFAS No. 141(R),Business Combinations(SFAS 141(R)).
SFAS 141(R) changes several underlying principles in applying the purchase
method of accounting. Among the significant changes, SFAS 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. SFAS 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, SFAS 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. SFAS 141(R) is effective for us as of January 1, 2009. While the
adoption of SFAS 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.

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, 2008 (in thousands):

|                                        |               |        |            | Gross |            | Gross |       |      |  
|--------------------------------------- | ------------- | ------ | ---------- | ----- | ---------- | ----- | ----- | ---- | -
|                                        | **Amortized** |        | Unrealized |       | Unrealized |       | Fair 
|                                        | Cost          |        | Gains      |       | Losses     |       | Value
|Cash and money market funds             | $             | 9,304  |            | $     | -          |       | $     | -    |  
|Corporate debt
      securities         |               | 8,541  |            |       | 11         |       |       | (58  | )
|Federal agency obligations              |               | 25,781 |            |       | 488        |       |       | -    |  
|Asset-backed and
      other securities |               | 12,856 |            |       | -          |       |       | (84  | )
|Total                                   | $             | 56,482 |            | $     | 499        |       | $     | (142 | )
|Amounts reported
      as:              |               |        |            |       |            |       |       |      |  
|Cash and cash
      equivalents         | $             | 9,304  |            | $     | -          |       | $     | -    |  
|Restricted
      investments            |               | 9,036  |            |       | -          |       |       | -    |  
|Available-for-sale securities           |               | 38,142 |            |       | 499        |       |       | (142 | )
|Total                                   | $             | 56,482 |            | $     | 499        |       | $     | (142 | )

The
weighted average maturity of our investment portfolio at December 31, 2008 was
233 days, with $41.5 million carrying an effective maturity of less than twelve
months, and $15.3 million carrying an effective maturity between one and two
years.

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

|                                        |  |               |        |                | **Gross** |                | **Gross** |           |      
|--------------------------------------- |  | ------------- | ------ | -------------- | --------- | -------------- | --------- | --------- | -----
|                                        |  | **Amortized** |        | **Unrealized** |           | **Unrealized** |           | **Fair** 
|                                        |  | **Cost**      |        | **Gains**      |           | **Losses**     |           | **Value**
|Cash and
      money market funds       |  | $             | 359    |                | **$**     | **-**          |           | **$**     | **-**
|Corporate debt
      securities         |  |               | 24,322 |                |           | 32             |           |           | (25  
|Federal agency obligations              |  |               | 21,871 |                |           | 164            |           |           | -    
|Asset-backed and
      other securities |  |               | 31,212 |                |           | 183            |           |           | (4   
|Total                                   |  | $             | 77,764 |                | $         | 379            |           | $         | (29  
|Amounts reported
      as:              |  |               |        |                |           |                |           |           |      
|Cash
      and cash equivalents         |  | $             | 359    |                | $         | -              |           | $         | -    
|Restricted investments                  |  |               | 9,428  |                |           | -              |           |           | -    
|Available-for-sale securities           |  |               | 67,977 |                |           | 379            |           |           | (29  
|Total                                   |  | $             | 77,764 |                | $         | 379            |           | $         | (29  

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.

Net
realized gains were approximately $60,000 and $6,000 for the years ended
December 31, 2008 and 2007, respectively, and net realized loss was $24,000 for
the year ended December 31, 2006.

At
December 31, 2008 and 2007, 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,
      2008                 |  | **Losses**                    |     | Value                         
|Corporate debt securities               |  | $                             | (14 | )                             
|Asset-backed and
      other securities |  |                               | (52 | )                             
|Total                                   |  | $                             | (66 | )                             
|                                       
|                                       
|                                        |  | **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 | )                             

The gross
unrealized losses reported above for 2008 and 2007 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, and
our intent and ability to retain these securities for a period of time
sufficient to allow for the anticipated recovery value, we have not recorded any
other-than-temporary impairments on these investments.

54

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3. Fair Value
Measures

Effective
January 1, 2008, we adopted SFAS No. 157, *Fair Value Measurements*
(SFAS 157). SFAS 157 applies to all fair value measurements not otherwise
specified in an existing standard, clarifies how to measure fair value, and
expands fair value disclosures. SFAS 157 does not significantly change our
previous practice with regard to asset valuation. The SFAS 157 framework
clarifies that fair value is an exit price, representing the amount that would
be received to sell an asset or the amount paid to transfer a liability in an
orderly transaction between market participants. As such, fair value is a
market-based measurement that should be determined based on assumptions that
market participants would use in pricing an asset or liability.

SFAS 157 establishes a valuation
hierarchy for disclosure of the inputs to valuation used to measure fair value.
This hierarchy prioritizes the inputs into levels of objectivity associated with
the inputs used as follows:

- Level 1 inputs are quoted prices (unadjusted) in
  active markets for identical assets or liabilities.
- Level 2 inputs are quoted prices for similar
  assets and liabilities in active markets or inputs that are observable for the
  asset or liability, either directly or indirectly through market
  corroboration, for substantially the full term of the financial
  instrument.
- Level 3 inputs are unobservable inputs based on
  managements own assumptions used to measure assets and liabilities at fair
  value.

The following methods and
assumptions were used to determine the fair value of each class of assets
recorded at fair value in the balance sheets:

*Cash equivalents:* 
Cash equivalents consist of highly rated money market funds with maturities of
three months or less, and are purchased daily at par value with specified yield
rates. Due to the high ratings and short-term nature of these funds, the Company
considers all cash equivalents as Level I inputs.

*Available-for-sale securities at
fair value:*  Fair values are based on quoted market prices, where
available. These fair values are obtained primarily from third party pricing
services, which generally use Level I or Level II inputs for the determination
of fair value in accordance with SFAS 157. Third party pricing services normally
derive the security prices through recently reported trades for identical or
similar securities making adjustments through the reporting date based upon
available market observable information. For securities not actively traded, the
third party pricing services may use quoted market prices of comparable
instruments or discounted cash flow analyses, incorporating inputs that are
currently observable in the markets for similar securities. Inputs that are
often used in valuation methodologies include, but are not limited to, benchmark
yields, reported trades, broker/dealer quotes, issuer spreads, benchmark
securities, bids, offers, and reference data.  We utilize
multiple third-party pricing services to obtain fair value; however, we
generally obtain one price for each individual security. We also review the fair
value hierarchy classifications. Changes in the observability of valuation
inputs may result in a reclassification of levels for certain securities within
the fair value hierarchy.

A
financial assets classification within the hierarchy is determined based on the
lowest level input that is significant to the fair value measurement. The inputs
or methodology used for valuing securities are not necessarily an indication of
credit risk associated with investing in those securities. The following table
provides the fair value measurements of our financial assets according to the
fair value levels defined by SFAS 157 as of December 31, 2008:

|                                       |  |                |        |                  | Fair Value Measurements at December
      31, 2008 Using
|-------------------------------------- |  | -------------- | ------ | ---------------- | --------------------------------------------------------
|                                       |  |                |        |                  | Level 1                                                 
|                                       |  | Total Carrying |        | Quoted prices in |                                                         
|                                       |  | Value as of    |        | active markets   |                                                         
|                                       |  | December 31,   |        |                  |                                                         
|                                       |  | 2008           |        |                  |                                                         
|Cash and cash equivalents              |  | $              | 9,304  |                  | $                                                       
|Corporate debt securities              |  |                | 8,494  |                  |                                                         
|Federal agency obligations             |  |                | 26,269 |                  |                                                         
|Asset-backed and
      othersecurities |  |                | 12,772 |                  |                                                         
|Total                                  |  | $              | 56,839 |                  | $                                                       

Investment securities are exposed to various risks, such as interest
rate, market and credit. Due to the level of risk associated with certain
investment securities and the level of uncertainty related to changes in the
value of investment securities, it is possible that changes in these risk
factors in the near term could have an adverse material impact on our results of
operations or stockholders equity.

In addition to the preceding
disclosures on assets recorded at fair value in our balance sheets, FAS 107,
*Disclosures About Fair Value of Financial Instruments*, also requires
disclosure of fair values of certain other financial instruments for which it is
practicable to estimate fair value, whether or not such fair values are
recognized in the balance sheets. At December 31, 2008 and 2007, the carrying
amounts reported in the balance sheets for accrued interest receivable, accounts
payable and accrued expenses, short-term loan payable and certain other current
liabilities approximate fair value because of the short-term nature of these
items.  At December 31, 2007, the carrying amount of our long-term loan
payable approximates its fair value, based on current interest rates available
to us for debt instruments with similar terms, degrees of risk, and remaining
maturities.

55

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4. Property and Equipment

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

December 31,2008
    
    2007Leasehold improvements
    $
    44
    
    
    $
    6,742Laboratory
      equipment
    
    -
    
    
    
    1,218Office furniture and equipment
    
    1,341
    
    
    
    1,4031,385
    
    
    
    9,363Less: accumulated depreciation and amortization
    
    (1,333
    )
    
    
    (8,100
    )Property and
      equipment, net
    $
    52
    
    
    $
    1,263


Total
depreciation and amortization expense for 2008, 2007 and 2006, was $0.7 million,
$1.6 million and $1.3 million, respectively.

During
2008, Avigen recorded two transactions that resulted in decreases of assets
representing leasehold improvements and laboratory equipment and their
corresponding accumulated depreciation.  At May 31, 2008, in connection
with the expiration of an underlying building operating lease, Avigen decreased
the balances of leasehold improvements and laboratory equipment of approximately
$2.7 million and $0.5 million, respectively.  These assets were fully
depreciated and resulted in a corresponding decrease of accumulated depreciation
of $3.2 million.  At December 31, 2008, after recording an impairment loss
related to long-lived assets (see Note 6), Avigen decreased the balances of
leasehold improvements and laboratory equipment of approximately $4.0 million
and $0.7 million, respectively, and corresponding accumulated depreciation of
$4.3 million to reduce the carrying value of the impaired long-lived assets to
zero.

5. Settlement of Asset Retirement
Obligation

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

Under the
terms of the amendment, we were released from our 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, we reduced our liability for the asset
retirement obligation in March 2008 by $274,000 with a corresponding credit to
impairment loss related to long-lived assets and reduced the level of restricted
assets in response to the cancellation of the corresponding letter of credit
that served as a deposit for the asset retirement obligation prior to the date
of the amendment.

6. Impairment Loss related to
Long-Lived Assets

In
December 2008, in connection with the termination of our AV650 program, we
ceased use of our leased laboratory facilities and determined we would maximize
our potential cost savings by subleasing the properties. Based on market
conditions for rental property in 2008, and preliminary negotiations with a
potential subtenant, we did not expect to fully recover the value invested in
leasehold improvements and equipment. In 2008, we recorded an impairment loss of
$413,000 related to long-lived assets and reduced the related carrying value of
the leasehold improvements and laboratory equipment to zero 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 2008, 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.

56

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7. 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 costs and
were 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 also
entered into a long-term supply agreement under which Sanochemia would
manufacture, and we would purchase for additional cost, the AV650 product for
our clinical and commercial supply. The $3.0 million initial payment was
nonrefundable, did not include any significant future performance requirements
by Sanochemia, and the licensed compound did 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 expected that any subsequent
payments made under the terms of the agreement would also be recorded as
in-license fee expense.

During
the clinical development of the product AV650 for the North American Market, the
parties identified the existence of levels of impurities in tolperisone products
that are marketed in Europe, that exceed the levels permitted by the FDA for
chronic drug products marketed in the United States. The parties filed for
patents covering a purer form of AV650 and amended the License Agreement in July
2008 primarily to provide the following:

- We would share with Sanochemia the cost of
  development, up to $5 million, upon the timely achievement of
  development-based milestones for the development of a proprietary, purer form
  of AV650; and
- future payments from us to Sanochemia that are
  based on the achievement of sales-level milestones would be reduced by $2
  million.

In
September 2008, we paid Sanochemia $2.5 million which represented amounts due
upon the timely achievement of a development-based milestone for the development
of a proprietary, purer form of AV650, and is reflected in our Statements of
Operations for 2008.

In
October 2008, in connection with the termination of our AV650-related
activities, we notified Sanochemia of our intent to terminate the License
Agreement, as amended. We do not expect to incur any future costs associated
with this agreement.

8. 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.

9. Termination and Other Costs
Associated with Exit Activities

In
October 2008 we announced that the top-line data from our AV650 trial for the
treatment of spasticity in patients with multiple sclerosis did not meet its
primary endpoint. As a result, we discontinued all AV650-related activities. In
November 2008, we announced a significant restructuring of the company,
including a workforce reduction and the consolidation and closure of portions of
our facilities, aimed at preserving cash and reassessing strategic
opportunities.

In
connection with this restructuring, we eliminated approximately 27 positions, or
70 percent of our workforce, and incurred approximately $1.5 million in
severance and other one-time personnel-related termination benefits.
Approximately $1.2 million of the costs associated with this severance are
included in research and development expenses and approximately $300,000 are
included in general and administrative expenses for the year ended December 31,
2008.

57

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At December
31, 2008, approximately $580,000 was unpaid and included on our balance sheet
under accrued compensation and related expenses. These accrued amounts primarily
represent deferred severance payments and extended health care benefits for
certain impacted employees and are expected to be paid in the first half of
2009. We do not expect to incur any additional costs associated with the
workforce reduction.

Effective October 31, 2008 we notified the landlord of our building lease
for approximately 4,800 square feet of lab space at 1201 Harbor Bay Parkway, of
our intent to exercise our termination rights and accelerate the expiration date
on the remaining lease term to 240 days. Costs associated with the termination
of this contract totaling $96,000 were accrued as of December 31, 2008 and will
be paid over the remaining period of the lease agreement until June 30, 2009.

Based on
market conditions for rental property in the area and preliminary negotiations
with a potential subtenant, we determined that our expected sublease income for
approximately 12,000 square feet of our laboratory facilities under lease
through November 2010 would be less than our scheduled lease liability. As a
result, for the period ended December 31, 2008, we recorded exit costs
associated with the abandonment of these facilities of approximately $50,000.

10. Asset Purchase Agreement 
Baxter Healthcare Corporation

In
December 2008, we entered into an asset purchase agreement with Baxter
Healthcare Corporation, or Baxter, whereby we sold to Baxter the rights to our
early stage blood coagulation compound, AV513.

We
received a cash payment of $7.0 million from Baxter as proceeds of the sale of
AV513 and transferred the technology to Baxter in December 2008. The $7.0
million was non-refundable and we did not have any significant additional
performance obligations associated with the agreement as of December 31, 2008.
We also agreed to provide technology transfer support for approximately three
months to allow Baxter a reasonable period of time to identify all intangible
items of interest and know-how. We received a cash payment of $100,000 in
December and are scheduled to receive $100,000 at the completion of the agreed
upon technology transfer support period in 2009. Because these technology
transfer support activities are considered perfunctory, in that they are not
essential to the know-how transferred but represent a convenience for Baxter,
there are no specific performance criteria that, if not completed, would result
in a partial refund of the sale price to Baxter, we have demonstrated a
history of completing similar activities in past transactions, and these
activities are not costly or lengthy to perform, we recorded the payment
received as revenue in 2008 and expect to record the remaining scheduled payment
as revenue upon receipt.

**11. 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, 2008, 2007
and 2006.

12. 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 several times to extend the
expiration date. This loan commitment is currently scheduled to expire on
November 30, 2009, or less than one year from the date of these financial
statements. Accordingly, as of December 31, 2008, the loan was classified as a
current liability. 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 letter of credit in
the amounts of $2.0 million pursuant to the terms required under our building
operating lease that expires in November 2010 and is issued in favor of the
property owner.

Amounts
borrowed under this credit facility, as renewed, bear interest based on either
a) a floating rate between 0.25 to 0.75 percentage points below the Banks
established Prime Rate, or b) at a fixed rate determined by the Bank that is the
London Inter-Bank Offered Rate plus a margin adjustment that varies between
0.50% and 1.0% on the date of each drawdown which is dependent on the
level of the market value of our investment portfolio held with a subsidiary of
Wells Fargo on that date. This interest rate, if based on the Prime Rate, is
adjusted periodically, and if based on LIBOR, is subsequently reset every three
or six months. The weighted average interest rate for all outstanding drawdowns
on this obligation was 2.50% and 5.81% at December 31, 2008 and 2007,
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, 2008 and 2007, we had borrowed $7.0
million 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.

58

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13. 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.

59

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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.

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, 2008, 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.

*Stockholders Rights Plan*

On
November 21, 2008, our Board of Directors adopted a preferred stock rights plan
and declared a dividend of one preferred share purchase right (a Right) for
each outstanding share of Common Stock, par value $0.001 per share (the Common
Shares), of the Company. The dividend was payable on December 1, 2008 (the
Record Date) to the stockholders of record on that date. Each Right entitles
the registered holder to purchase from the Company one one-hundredth of a share
of Series A Junior Participating Preferred Stock, par value $0.001 per share
(the Preferred Shares), and will become exercisable only if a person or group
acquires beneficial ownership of 20% or more of the Companys common stock
(Acquiring Person). If such Acquiring Person acquires beneficial ownership of
20% or more of the Companys common stock, all Rights holders, except the
Acquiring Person, will be entitled to purchase one one-hundredth of a Preferred
Share at a price of $8.00 per one one-hundredth of a Preferred Share (the
Purchase Price), subject to adjustment. The rights plan has been designed to
discourage acquisitions of more than 20% of the Companys common stock without
negotiations with the board of directors. The rights expire on December 1, 2018.
The rights will trade with the Companys common stock, unless and until they are
separated upon the occurrence of certain future events. The board of directors
may terminate the rights plan at any time or redeem the rights prior to the time
the rights are triggered.

60

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Shares
Reserved for Future Issuance

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

Year
      EndedDecember
      31,2008Stock options outstanding
    4,142,324Stock options
      available for grant
    2,167,247Warrants to purchase common stock
    15,000Shares available
      for Employee Stock Purchase Plan
    360,0006,684,571


14. Share-based Compensation

During
the years ended December 31, 2008, 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,
|----------------------------------------------------------------------------------- |  | -----------------------
|                                                                                    |  | 2008                   
|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 dilutedcommon
      share |  | $                      

Since we
have cumulative operating losses as of December 31, 2008 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, 2008,
2007 and 2006, respectively.

As of
December 31, 2008, we 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 our stockholders in May 2006 and is an amendment and
restatement of the 2000 Equity Incentive Plan (2000 Plan) which was adopted by
our 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, 2008, we had an aggregate of 4,142,324 shares of our common stock
reserved for issuance under these plans subject to outstanding awards and
2,167,247 shares available for future grants of share-based awards under the
2006 Plan.

61

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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, 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
    
    
    $
    7.47Granted
    
    465,700
    
    
    
    2.73Canceled
    
    (722,197
    )
    
    
    10.50Exercised
    
    (76,406
    )
    
    
    3.41Outstanding at December 31, 2008
    
    4,142,324
    
    
    $
    6.48


The fair
value of our employee stock options granted during 2008, 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 31,2008
    
    2007
    
    2006Expected volatility
    
    0.6945
    
    0.5421
    
    0.6006Risk free
      interest rate
    
    2.69%
    
    4.16%
    
    4.60%Expected life of options in years
    
    4.59
    
    4.30
    
    3.68Expected
      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.

62

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The
following table summarizes information with regard to total stock options
outstanding under all stock option plans at December 31, 2008:

|                  |                   |  |           | Options Outstanding |             | Options Exercisable
|----------------- | ----------------- |  | --------- | ------------------- | ----------- | -------------------
|                  |                   |  |           |                     |             | Weighted-          
|                  |                   |  |           |                     |             | Average            
|                  |                   |  |           |                     |             | Remaining          
|Range of Exercise |                   |  | Number    |                     | Contractual |                    
|Prices            |                   |  | Of Shares |                     | Life        |                    
|$                 | 0.61 - $ 2.96     |  |           | 437,400             |             | 7.97               
|                  | 2.97 -
      3.38 |  |           | 546,450             |             | 5.72               
|                  | 3.45 - 3.99       |  |           | 432,073             |             | 3.86               
|                  | 4.06 -
      4.22 |  |           | 15,993              |             | 0.34               
|                  | 4.42 - 4.42       |  |           | 434,058             |             | 8.93               
|                  | 4.85 -
      5.06 |  |           | 23,750              |             | 6.82               
|                  | 5.06 - 5.06       |  |           | 647,584             |             | 6.35               
|                  | 5.20 -
      5.50 |  |           | 662,702             |             | 6.56               
|                  | 5.51 - 8.53       |  |           | 465,577             |             | 4.94               
|                  | 8.88 - 47.63      |  |           | 476,737             |             | 1.60               
|$                 | 0.61 - $47.63     |  |           | 4,142,324           |             | 5.75               

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 2008, 2007 and 2006 was $1.42, $2.40 and $2.48,
respectively. The total intrinsic value of options exercised during 2008, 2007
and 2006 was approximately $91,000, $321,000 and $514,000, respectively. The
total intrinsic value of options outstanding at December 31, 2008 was $12,000.
All options exercisable at December 31, 2008 do not have
any intrinsic value. The weighted average remaining contractual life of options
exercisable at December 31, 2008 was 4.9 years.

As of
December 31, 2008, there was approximately $2.1 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 1.7 years.

As of
December 31, 2008, we had 3.9 million outstanding stock options that had vested
or are expected to vest with a weighted average exercise price of $6.62, a
weighted average remaining contractual term of 5.6 years and an aggregate
intrinsic value of $10,000.

In May
2008, our board of directors modified the terms of certain stock options
previously granted to a member of our board of directors who did not stand for
re-election at our 2008 Annual Meeting of Stockholders. Our board of directors
decided to modify the options in recognition of the directors twelve years of
service to Avigen. Our board of directors modified stock options exercisable for
115,000 shares of common stock such that (1) unvested options exercisable for
36,700 shares of common stock became immediately vested, and (2) each option
remained exercisable until the end of its original contract life. 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
$47,400.

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.

63

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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
investments in accordance with Statement of FinancialAccounting Standards No. 123(R) (SFAS 123(R)),Share-Based Payment, 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. During the years ended December
31, 2008, 2007 and 2006, respectively, we granted 40,000, 20,000, and 60,000
stock options to non-employees.

*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, 2008, there have been no
employee stock purchases under the Purchase Plan.

15. 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 via 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, 2008, 2007 and 2006 were approximately $55,000,
$58,000 and $51,000, respectively.

16. Commitments and Contingencies

*Leases*

We lease
67,000 square feet of laboratory, manufacturing, and office facilities in
Alameda, California under a non-cancelable operating lease agreement that
expires in November 2010. As security for performance of our future obligations
under this lease, we have pledged $2.0 million of our available-for-sale
securities to secure a letter of credit that serves as our deposit. This amount
is classified as restricted investments in our balance sheets.

Effective October 31, 2008 we
notified the landlord of our building lease for 4,800 square feet of lab space
in an adjacent building in Alameda, California of our intent to exercise our
termination rights and accelerate the expiration date on the remaining lease to
June 30, 2009. As of December 31, 2008, we have vacated the facility and accrued
exit costs associated with the early termination of the lease. We maintain a
letter of credit of approximately $36,000 as our security deposit that will be
held by the landlord until approximately June 30, 2009, the amount of which is
classified as restricted investments under current assets in our balance sheet
as of December 31, 2008.

As of
December 31, 2008, approximately 14,400 square feet of our facilities that are
leased through November 2010, are subleased to corporate tenants not affiliated
with Avigen. The sublease agreements run concurrent with the respective duration
of our underlying lease term.

At
December 31, 2008, our future minimum commitments under non-cancelable
facilities operating leases, net of sublease income, are a follows (in
thousands):

Minimum Lease
    
    Sublease Income
    
    
    Net LeaseCommitments
    
    (1)
    
    
    CommitmentsYear ending
      December 31:2009
    
    $
    1,697
    
    $
    (383
    )
    
    $
    1,3142010
    
    
    1,543
    
    
    (360
    )
    
    
    1,1832011
    
    
    -
    
    
    -
    
    
    
    -2012
    
    
    -
    
    
    -
    
    
    
    -2013
      and thereafter
    
    
    -
    
    
    -
    
    
    
    -Total
    
    $
    3,240
    
    $
    (743
    )
    
    $
    2,497


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| | (1) |  | Excludes sublease
      income under a sublease agreement for approximately 16,500 square feet
      entered into in February 2009, commencing March 1, 2009 through November
      30, 2010. Under the terms of the February 2009 sublease, we expect to
      receive approximately $905,000 in additional sublease income with
      approximately $425,000 expected to be recognized in 2009 and approximately
      $480,000 to be recognized in 2010.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Prior to May 31, 2008, we had leased
an additional 40,000 square feet of laboratory, manufacturing and office
facilities adjacent to our current leased space. For the first five months of
2008, approximately 5,000 square feet was subleased to an independent tenant. As
a result of the expiration of this lease and sublease, rent expense and net
sublease income decreased in 2008 from the 2007 levels.

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

Year Ended December 31,2008
    
    2007
    
    2006Rent expense
    
    $
    1.9
    
    
    $
    2.6
    
    
    $
    2.6Sublease income,
      net
    
    
    (0.4
    )
    
    
    (0.7
    )
    
    
    (0.6
    )


*Subleases*

We have
entered into sublease agreements for portions of our leased laboratory and
office facilities. In February 2009, we entered into a sublease agreement
commencing March 1, 2009 through November 30, 2010 for approximately 16,500
square feet of laboratory and office facilities that will expire November 2010.
Under the terms of this sublease, we expect to receive approximately $905,000 in
sublease income and recovery of operating costs over the future lease
period.

Based on market conditions for
rental property in the area at the time we listed portions of our leased
laboratory and office facilities for sublease, we determined that our expected
sublease income would be less than our scheduled lease liability. As a result,
for the period ended December 31, 2008, we recorded exit costs associated with
the abandonment of these facilities of approximately $50,000.

*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, 2008, the estimated costs related to these commitments totaled
approximately $1.8 million, all of which is expected to be paid within the next
twelve 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 and 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 in excess of the applicable insurance coverage, is minimal. Accordingly, we have not recorded
any liabilities for these agreements as of December 31, 2008.

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 thirdparty 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, in excess of applicable
insurance coverage, is minimal. Accordingly, we have not recorded any
liabilities for these agreements as of December 31, 2008.

65

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17. Income Taxes

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

December 31,2008
    
    2007Net operating loss carryforwards
    
    $
    1,600
    
    
    $
    51,800Research and
      development credits
    
    
    100
    
    
    
    2,600Capitalized research and development
    
    
    100
    
    
    
    3,900Depreciation
    
    
    3,400
    
    
    
    3,100Other
    
    
    4,500
    
    
    
    3,800Gross deferred
      tax assets
    
    
    9,700
    
    
    
    65,200Valuation allowance
    
    
    (9,700
    )
    
    
    (65,200
    )Net deferred tax
      assets
    
    $
    
    
    
    $
    


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 decreased by $55.5 million for the year ended December 31,
2008, increased by $9.1 million for the year ended December 31, 2007, and
decreased by $21.6 million for the year ended December 31, 2006. The
decrease in the valuation allowance in 2008 and 2006 results from the loss of
net operating loss carryforwards, research and development tax credit
carryforwards, and capitalized research and development due to federal and state
ownership change limitations.

As of
December 31, 2008, we had federal net operating loss carryforwards of $4.4
million and federal research and development tax credit carryforwards of $0.1
million, which will expire in 2028. We also had state net operating loss
carryforwards of $2.5 million which will expire in 2018 and state research tax
credits of $0.1 million, which carry forward indefinitely.

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.
In 2008 and 2007, we conducted an Internal Revenue Code (IRC) Section 382 study
and have reported our deferred tax assets related to net operating loss and
research credit carryforwards after recognizing change of control limitations in
2008 and 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 research and development
credit carryforwards may still be subject to substantial  annual
limitations due to ownership change limitations after December 31,
2008.Such annual limitations could
result in the expiration of our net operating loss and research and development
credit carryforwards available as of December 31, 2008 before utilization.

66

---

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, 2008, nor do we expect any changes in
our unrecognized tax benefits during 2009.

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, 2008, 2007 and 2006, and have not recognized interest or
penalties in our statements of operations for the years ended December 31, 2008,
2007 and 2006.

We are
subject to taxation in the United States and various state jurisdictions. Our
tax years from 1994 through 2008 remain subject to examination by the United
States and California tax authorities due to the loss carryforwards from those
years.

67

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18. Condensed Quarterly Financial
Information (Unaudited)

|                                                   |  | Year Ended       
|-------------------------------------------------- |  | -----------------
|                                                   |  | December 31, 2008
|                                                   |  | First            
|(amounts in
      thousands except per share data) |  | Quarter          
|Total revenue                                      |  | $                
|Net loss                                           |  |                  
|Net loss per share, basic and diluted              |  |                  
|                                                  
|                                                   |  | 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              |  |                  

19. Subsequent Event -  Costs
incurred in connection with Stockholder Actions

68

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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, 2008. 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 Annual 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, 2008. 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, 2008, our internal control
over financial reporting was effective based on these criteria.

Odenberg, Ullakko,
Muranishi & Co. LLP, the independent registered public accounting firm that
audited our financial statements, 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, 2008 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.

Item 9A(T).Controls and Procedures

Not applicable.

69

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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, 2008, 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 Annual 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 effective internal control over financial
reporting as of December 31, 2008, 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, 2008 and 2007, and the related statements of operations,
stockholders equity, and cash flows for each of the three years in the period
ended December 31, 2008 and for the period from inception (October 22, 1992)
through December 31, 2008, and our report dated March 13, 2009
expressed 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 13,
2009

70

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Item 9B.Other Information

During
the fourth quarter ended December 31, 2008, we had no events that were required
to be reported on Form 8-K but that were not filed to date.

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 Directors appearing in the definitive Proxy
Statement to be delivered to Avigens stockholders in connection with the
solicitation of proxies for Avigens 2009 Annual Meeting of Stockholders (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.

71

---

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.

In
November 2008, Biotechnology Fund, L.P. and certain of its affiliates
(collectively, BVF), purchased approximately 29% of our outstanding shares of
common stock. In January 2009, BVF gave notice to Avigen that it is calling a
special meeting of our stockholders for the purpose of removing our entire Board
of Directors, without cause, and replacing it with four nominees selected by
BVF. Also in January 2009, BVF launched a tender offer to acquire the remaining
outstanding shares of our common stock for $1.00 per share, contingent on BVF
being successful in removing our entire Board of Directors, without cause, and
replacing it with their four nominees, and the redemption of the preferred stock
purchase rights under our shareholder rights agreement.

EQUITYCOMPENSATIONPLANINFORMATION

The
following table provides certain information with respect to all of Avigens
equity compensation plans in effect as of December 31, 2008:

|                                             |                      |                      | Number of
      securities 
|-------------------------------------------- | -------------------- | -------------------- | ---------------------------
|                                             |                      |                      | remaining
      available  
|                                             | Number of securities |                      | for future
      issuance  
|                                             | to be issued upon    |                      | under
      equity         
|                                             | exercise of          | Weighted-average     | compensation
      plans   
|                                             | outstanding options, | exercise price of    | (excluding
      securities
|                                             | warrants and rights  | outstanding options, | reflected in
      column  
|                                             | (1)                  | warrants and rights  | (a))(2)                    
|Plan
      Category                          | (a)                  | (b)                  | (c)                        
|Equity compensation plans                    |                      |                      |                            
|approved by security
      holders           | 3,165,283            | $5.80                | 2,167,247                  
|Equity compensation plans not
      approved |                      |                      |                            
|by security
      holders                    | 977,041              | $8.68                | 0                          
|Total                                        | 4,142,324            | $6.48                | 2,167,247                  

(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.

72

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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.

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 Directors and Transactions with Related
Persons. Such information is incorporated herein by reference.

Item 14.Principal Accounting 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.

73

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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)                                                                                                                                                                                                                                    
|   
|    |  |                                                                                                                                                                                                                                        
|    |  |                                                                                                                                                                                                                                        
|    |  | (2)                                                                                                                                                                                                                                    
|    |  |                                                                                                                                                                                                                                        
|    |  | 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)                                                                                                                                                                                                                                    
|    |  |                                                                                                                                                                                                                                        
|    |  | See the Exhibit Index which
      follows the signature page of this Annual Report on Form 10-K, which is
      incorporated herein by reference.                                                                                      
|   

74

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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 13, 2009

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 13,
      2009
|Kenneth G.
      Chahine, J.D., Ph.D. |  | (Principal
      Executive Officer)                   |  |                     
|                                     
|/s/ ANDREWA. SAUTER                   |  | Chief Financial
      Officer                         |  | March 13,
      2009
|Andrew A.
      Sauter                |  | (Principal
      Financial and Accounting Officer)    |  |                     
|                                     
|/s/ ZOLAHOROVITZ                      |  | Chairman of the
      Board                           |  | March 13,
      2009
|Zola Horovitz,
      Ph.D.            |  |                                                       |  |                     
|                                     
|/s/ JOHNK.A. PRENDERGAST              |  | Director                                              |  | March 13,
      2009
|John K.A.
      Prendergast, Ph.D.    |  |                                                       |  |                     
|                                     
|/s/ RICHARDWALLACE                    |  | Director                                              |  | March 13,
      2009
|Richard
      Wallace                 |  |                                                       |  |                     
|                                     
|/s/ STEPHENDILLY                      |  | Director                                              |  | March 13,
      2009
|Stephen Dilly,
      M.B.B.S., Ph.D.  |  |                                                       |  |                     
|                                     
|/s/ JANOHRSTROM                       |  | Director                                              |  | March 13,
      2009
|Jan Ohrstrom,
      M.D.              |  |                                                       |  |                     

75

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|                     |               | EXHIBIT
      INDEX
|-------------------- | ------------- | -------------------
|Exhibit
      Number |               | Exhibits           
|2.1                  |               |                    
|2.2                  | (32)          |                    
|3.1                  | (33)          |                    
|3.2                  | (13)          |                    
|3.3                  | (29)          |                    
|3.4                  | (34)          |                    
|3.5                  | (30)          |                    
|4.1                  | (1)           |                    
|4.2                  | (34)          |                    
|4.3                  | (33)          |                    
|10.3                 | (2, 17)       |                    
|10.4                 | (1,
      2)  |                    
|10.5                 | (1, 2)        |                    
|10.6                 | (2,
      14) |                    
|10.7                 | (2, 4)        |                    
|10.8                 | (1,
      2)  |                    
|10.10                | (2, 5)        |                    
|10.11                | (2,
      12) |                    
|10.12                | (2, 7)        |                    
|10.16                | (2,
      24) |                    
|10.17                | (2)           |                    
|10.32                | (15)          |                    
|10.33                | (15)          |                    
|10.36                | (2,
      8)  |                    
|10.41                | (10)          |                    
|10.45                | (13)          |                    
|10.46                | (13)          |                    
|10.47                | (13)          |                    
|10.49                | (16)          |                    
|10.50                | (16)          |                    
|10.53                | (20)          |                    
|10.54                | (20)          |                    
|10.55                | (2, 21)       |                    

76

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|               |         |          | EXHIBIT
      INDEX                                                                                                                                          
|-------------- | ------- | -------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |         | Exhibits
|10.58          | (9, 11) |          | Assignment Agreement, dated
      December 19, 2005, by and between Genzyme Corporation and
    Avigen                                                       
|10.59          | (32)    |          | Amendment Agreement,
      effective July 22, 2008 between SDI Diagnostics International Ltd., and
      Avigen                                              
|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                                   
|10.68          | (35)    |          | Second Amendment to Property
      Lease Agreement between ARE-1201 Harbor Bay, LLC and Avigen, dated March
      6, 2008                                    
|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)

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 Schedule 14D-9
      filed with the SEC on February 6, 2009 (Commission File No. 000-28272) and
      participants are set forth in Item 5.02 of Avigens Current Report on Form
      8-K filed with the SEC on November 5, 2008 (Commission File No.
      000-28272).
|   

77

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|(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.                                                                                                                                                                                                                                                                  
|    
|(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).                                                                                                                                                                                                                             
|    

78

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|(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).                                           
|    
|(32) |  | Confidential treatment has been
      requested for portions of this agreement.                                                                                                                                                                      
|    
|(33) |  | 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 November 24, 2008 (Commission File No.
      000-28272).                                      
|    
|(34) |  | Incorporated by reference from
      such document filed with the SEC as an exhibit to Avigens Current Report
      on Form 8-K/A filed with the SEC on November 24, 2008 (Commission File No.
      000-28272).                                    
|    
|(35) |  | 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, 2008, as filed with
      the SEC (Commission File No. 000-28272).               
|    

79

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