AVIGEN INC \DE (Form: 10-K, Received: 03/16/2009 17:11:28)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

___________________

FORM 10-K
___________________

(Mark One)

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

For the fiscal year ended December 31, 2008

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 of incorporation or organization)	(I.R.S. Employer Identification No.)

1301 Harbor Bay Parkway
Alameda, 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	Name of each exchange on which registered
Common Stock, $0.001 par value per share	The NASDAQ Stock Market, LLC

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

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 filer o	Accelerated filer x

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

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

The aggregate market value of the Common Stock held by non-affiliates of the registrant as of June 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.

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)

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.

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.

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.

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.

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.

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.

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.

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

Item 1A. Risk Factors

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

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.

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.

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;

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.

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.

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.

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.

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 stock t rade s below 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.

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 for Nature Biotechnology from 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. Coffee has 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. Sauter was 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.

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	$5.35
Quarter End 6/30/07	$7.10	$6.11
Quarter End 9/30/07	$6.33	$4.56
Quarter End 12/31/07	$5.55	$3.67

Year ended December 31, 2008	High	Low
Quarter End 3/31/08	$4.84	$2.52
Quarter End 6/30/08	$3.50	$2.37
Quarter End 9/30/08	$4.66	$2.65
Quarter 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.

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

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		$	22,674

Operating expenses:
Research and development		23,607			20,681			15,219			13,775			19,344			200,787
General and administrative		8,696			8,633			8,860			8,264			8,367			86,643
Impairment loss related to
long-lived assets		139			-			450			6,130			-			6,719
In-license fees		2,500			-			3,000			-			-			10,534
Total operating expenses		34,942			29,314			27,529			28,169			27,711			304,683
Loss from operations		(27,842	)		(29,314	)		(27,426	)		(16,143	)		(25,516	)		(282,009	)
Interest expense		(293	)		(488	)		(467	)		(323	)		(209	)		(3,951	)
Interest income		2,784			3,954			3,002			1,682			1,905			38,732
Sublease income		365			703			565			67			-			1,700
Other (expense) income, net		(113	)		(19	)		70			21			(103	)		(266	)

Net loss	$	(25,099	)	$	(25,164	)	$	(24,256	)	$	(14,696	)	$	(23,923	)	$	(245,794	)

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			2007			2006			2005			2004
Cash, cash equivalents, available-for-sale
securities, and restricted investments	$	56,839		$	78,114		$	70,768		$	70,388		$	76,218
Working capital		45,513			67,168			59,467			59,649			63,873
Total assets		58,046			81,069			75,017			76,264			90,507
Long-term obligations		602			7,796			1,570			9,282			9,064
Deficit accumulated during development stage		(245,794	)		(220,695	)		(195,531	)		(171,275	)		(156,579	)
Stockholders' equity		47,204			69,832			63,477			65,464			79,875

(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.

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.

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.

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.

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.

Results of Operations

Revenue

	Year Ended December 31,
(In thousands, except percentages)	2008		2007		2006
Revenue	$	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 over 2006

Research and preclinical development $ 10,177 $ 11,004 (8%) $ 10,454 5%

Clinical development 13,430 9,577 40% 4,765 101%

Total research and development expenses $ 23,607 $ 20,681 14% $ 15,219 36%

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.

								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.

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.

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 by higher 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.

Impairment Loss Related to Long-Lived Assets

	Year Ended
	December 31,
(In thousands)	2008		2007		2006
Impairment 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 Ended
	December 31,
(In thousands)	2008		2007		2006
In-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 Ended
	December 31,
(In thousands, except percentages)	2008			2007		2006
Interest expense	$	293		$	488	$	467
Percentage (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.

Interest Income

	Year Ended
	December 31,
(In thousands, except percentages)	2008			2007		2006
Interest income	$	2,784		$	3,954	$	3,002
Percentage (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 Ended
	December 31,
(In thousands)	2008		2007		2006
Sublease 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.

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.

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 Period
			Less than
Contractual Commitment	Total		1 year		1-3 years		4-5 years
Operating 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.

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.

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.

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

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 in Internal Control — Integrated Framework issued 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

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

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		$	359
Available-for-sale securities		38,499			68,327
Restricted investments		7,036			428
Accrued interest		468			717
Prepaid expenses and other current assets		446			778
Total current assets		55,753			70,609
Restricted investments		2,000			9,000
Property and equipment, net		52			1,263
Deposits and other assets		241			197
Total assets	$	58,046		$	81,069

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued liabilities	$	2,019		$	2,039
Accrued compensation and related expenses		1,102			879
Loan payable		7,000			-
Other current liabilities		119			523
Total current liabilities		10,240			3,441
Long-term loan payable		-			7,000
Deferred rent and other liabilities		602			796
Total liabilities		10,842			11,237
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value, 5,000,000 shares
authorized, none issued and outstanding		-			-
Common stock, $0.001 par value, 100,000,000 shares
authorized, 29,769,115 and 29,692,709 shares
issued and outstanding at December 31, 2008 and
December 31, 2007, respectively		30			29
Additional paid-in capital		292,611			290,147
Accumulated other comprehensive income		357			351
Deficit accumulated during development stage		(245,794	)		(220,695	)
Total stockholders' equity		47,204			69,832
Total liabilities and stockholders' equity	$	58,046		$	81,069

See accompanying notes.

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		$	22,674

Operating expenses:
Research and development		23,607			20,681			15,219			200,787
General and administrative		8,696			8,633			8,860			86,643
Impairment loss related to long-lived assets		139			-			450			6,719
In-license fees		2,500			-			3,000			10,534
Total operating expenses		34,942			29,314			27,529			304,683
Loss from operations		(27,842	)		(29,314	)		(27,426	)		(282,009	)
Interest expense		(293	)		(488	)		(467	)		(3,951	)
Interest income		2,784			3,954			3,002			38,732
Sublease income		365			703			565			1,700
Other (expense) income, net		(113	)		(19	)		70			(266	)

Net loss	$	(25,099	)	$	(25,164	)	$	(24,256	)	$	(245,794	)

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.

AVIGEN, INC.
(a development stage company)

STATEMENTS OF STOCKHOLDERS’ EQUITY

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

Deficit

Class B

Accumulated

Convertible

Additional

Other

During the

Total

Preferred 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

–

Issuance of common stock at $.554 per share from

January to June 1993 for services rendered

–

20,316

–

Issuance of common stock at $.004 to $.222 per share

from November 1992 to March 1993 for cash

–

1,003,406

–

Issuance of Class B common stock at $.004 per share

in December 1992 for cash

–

90,293

–

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

–

2,595

–

2,596

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

–

266

Issuance of common stock at $.004 per share in

November 1993 pursuant to antidilution rights

–

22,869

–

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

–

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

–

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

–

3,344

–

3,345

Issuance of Series C preferred stock at $4.87 per share

in June 1995 for cancellation of notes payable

35,500

–

173

–

173

Net loss and comprehensive loss from inception to

June 30, 1995

–

(8,608

)

(8,608

)

Balance at June 30, 1995 (carried forward)

2,069,326

1,942,653

90,293

–

8,788

–

(8,608

)

184

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

Convertible

Additional

Other

During the

Total

Preferred Stock

Common Stock

Paid-in

Comprehensive

Development

Stockholders’

Shares

Amount

Shares

Amount

Shares

Amount

Capital

Gain (Loss)

Stage

Equity

Balance at June 30, 1995 (brought forward)

2,069,326

1,942,653

90,293

–

8,788

–

(8,608

)

184

Issuance of Series C preferred stock at $4.87

per share in July 1995 for cash (net of issuance

costs of $26,000)

41,042

–

174

–

174

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

–

1,430

–

1,430

Issuance of Series D preferred stock at $7.09 per

share in March 1996 in settlement of

accounts payable

22,574

–

160

–

160

Issuance of common stock at $.004 per share in

March 1996 pursuant to antidilution rights

–

17,630

–

Issuance of stock options in February 1996 in

settlement of certain accrued liabilities

–

137

–

137

Conversion of Class B common stock to

common stock

–

231,304

(90,293

)

–

)

–

Issuance of warrants to purchase common

stock in connection with 1996 bridge financing

in March 1996

–

300

–

300

Conversion of preferred stock to common stock

in May 1996

(2,338,293

)

2,355,753

–

)

–

)

Issuance of common stock at $8.00 per share in

connection with the May 1996 initial public

offering (net of issuance costs of $798,414 and

underwriting discount of $1,500,000)

–

2,500,000

–

17,699

–

17,701

Proceeds from exercise of options at $0.44 per

share in June 1996

–

6,178

–

Repurchase of common stock

–

(18,325

)

–

)

–

)

Deferred compensation

–

164

–

164

Amortization of deferred compensation

–

(128

)

–

(128

)

Net loss and comprehensive loss

–

(4,097

)

(4,097

)

Balance at June 30, 1996 (carried forward)

–

7,035,193

–

28,725

–

(12,705

)

16,027

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

Convertible

Additional

Other

During the

Total

Preferred 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

–

28,725

–

(12,705

)

16,027

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

–

1,850

Proceeds from exercise of options at $0.44 to

$0.71 per share

–

3,387

–

Amortization of deferred compensation

–

Net loss and comprehensive loss

–

(5,578

)

(5,578

)

Balance at June 30, 1997

–

7,288,580

–

30,617

–

(18,283

)

12,341

Proceeds from exercise of options at $0.44 to $0.71

per share

–

17,278

–

Amortization of deferred compensation

–

Compensation expense related to options granted

for services

–

Net loss and comprehensive loss

–

(8,877

)

(8,877

)

Balance at June 30, 1998

–

7,305,858

–

30,736

–

(27,160

)

3,583

Proceeds from exercise of options at $0.44 to

$4.31 per share

–

181,045

–

222

–

222

Amortization of deferred compensation

–

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

–

2,734

–

2,735

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

–

5,195

–

5,197

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

–

12,154

–

12,156

Net loss and comprehensive loss

–

(9,611

)

(9,611

)

Balance at June 30, 1999 (carried forward)

–

12,358,898

–

51,082

–

(36,771

)

14,323

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

Convertible

Additional

Other

During the

Total

Preferred 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

–

51,082

–

(36,771

)

14,323

Proceeds from exercise of options at $0.44 to $15.50

–

440,259

–

1,533

–

1,534

Proceeds from exercise of warrants at $2.81 to $31.95

–

1,017,215

–

8,427

–

8,428

Amortization of deferred compensation

–

Compensation expense related to options granted

for services

–

Warrants granted for patent licenses

–

3,182

–

3,182

Warrants granted for building lease

–

1,738

–

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

–

37,220

–

37,222

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

–

27,610

–

27,611

Comprehensive loss:

Net loss

–

(15,039

)

(15,039

)

Net unrealized loss on available-for-sale securities

–

(80

)

–

(80

)

Comprehensive loss

(15,119

)

Balance at June 30, 2000

–

17,000,267

–

130,886

(80

)

(51,810

)

79,013

Proceeds from exercise of options at $0.44 to $34.00

per share

–

165,700

–

869

–

869

Proceeds from exercise of warrants at $2.18 to $23.43

–

174,255

–

771

–

772

Compensation expense related to options granted for

services

–

336

–

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

–

86,084

–

86,086

Issuance of common stock at $47.82 per share in

February 2001 pursuant to a collaboration agreement

–

313,636

–

15,000

–

15,000

Comprehensive loss:

–

Net loss

–

(16,014

)

(16,014

)

Net unrealized gain on available-for-sale securities

–

1,120

–

1,120

Comprehensive loss

(14,894

)

Balance at June 30, 2001 (carried forward)

–

19,945,097

–

233,946

1,040

(67,824

)

167,182

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

Convertible

Additional

Other

During the

Total

Preferred 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

–

233,946

1,040

(67,824

)

167,182

Proceeds from exercise of options at $2.13 to $6.75

per share

–

11,282

–

Proceeds from exercise of warrants $7.50 per share

–

9,955

–

Compensation expense related to options granted for

services

–

179

–

179

Comprehensive loss:

Net loss

–

(11,319

)

(11,319

)

Net unrealized gain on available-for-sale securities

–

1,173

–

1,173

Comprehensive loss

(10,146

)

Balance at December 31, 2001

–

19,966,334

–

234,260

2,213

(79,143

)

157,350

Proceeds from exercise of options at $1.875 to $8.525

per share

–

34,627

–

113

–

113

Proceeds from exercise of warrants at $7.50 per share

–

99,585

–

747

–

747

Compensation expense related to options granted for

services

–

217

–

217

Comprehensive loss:

Net loss

–

(27,739

)

(27,739

)

Net unrealized loss on available-for-sale securities

–

(631

)

–

(631

)

Comprehensive loss

(28,370

)

Balance at December 31, 2002

–

20,100,546

–

235,337

1,582

(106,882

)

130,057

Proceeds from exercise of options at $2.12 to $6.50

per share

–

63,746

–

242

–

242

Proceeds from exercise of warrants at $2.47 to $6.09

per share

–

112,102

–

476

–

476

Compensation expense related to options granted

for services

–

Comprehensive loss:

Net loss

–

(25,774

)

(25,774

)

Net unrealized loss on available-for-sale securities

–

(1,180

)

–

(1,180

)

Comprehensive loss

(26,954

)

Balance at December 31, 2003 (carried forward)

–

20,276,394

–

236,120

402

(132,656

)

103,886

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

Convertible

Additional

Other

During the

Total

Preferred 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

–

236,120

402

(132,656

)

103,886

Proceeds from exercise of options at $0.443 to $6.313

per share

–

86,856

–

403

–

403

Proceeds from exercise of warrants at $6.05 per share

–

18,000

–

109

–

109

Compensation expense related to options granted for

services

–

230

–

230

Warrants granted for patent licenses

–

Comprehensive loss:

Net loss

–

(23,923

)

(23,923

)

Net unrealized loss on available-for-sale securities

–

(927

)

–

(927

)

Comprehensive loss

(24,850

)

Balance at December 31, 2004

–

20,381,250

–

236,959

(525

)

(156,579

)

79,875

Proceeds from exercise of options at $0.487 to $3.53

per share

–

526,023

–

286

–

287

Compensation expense related to options granted for

services

–

Comprehensive loss:

Net loss

–

(14,696

)

(14,696

)

Net unrealized loss on available-for-sale securities

–

(15

)

–

(15

)

Comprehensive loss

(14,711

)

Balance at December 31, 2005

–

20,907,273

–

237,258

(540

)

(171,275

)

65,464

Proceeds from exercise of options at $2.00 to $5.93 per

–

269,098

–

1,012

–

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

–

19,350

–

19,354

Stock-based compensation expense

–

1,381

–

1,381

Compensation expense related to options granted for

services

–

114

–

114

Comprehensive loss:

Net loss

–

(24,256

)

(24,256

)

Net unrealized gain on available-for-sale securities

–

408

–

408

Comprehensive loss

(23,848

)

Balance at December 31, 2006 (carried forward)

–

25,116,131

–

259,115

(132

)

(195,531

)

63,477

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

Convertible

Additional

Other

During the

Total

Preferred 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

–

259,115

(132

)

(195,531

)

63,477

Proceeds from exercise of options at $2.68 to

$6.31 per share

–

163,387

–

593

–

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

–

28,513

–

28,517

Stock-based compensation expense

–

1,834

–

1,834

Compensation expense related to options granted for

services

–

Comprehensive loss:

Net loss

–

(25,164

)

(25,164

)

Net unrealized gain on available-for-sale securities

–

483

–

483

Comprehensive loss

(24,681

)

Balance at December 31, 2007

–

29,692,709

–

290,147

351

(220,695

)

69,832

Proceeds from exercise of options at $3.13 to $3.53

per share

–

76,406

–

261

–

262

Stock-based compensation expense

–

2,174

–

2,174

Compensation expense related to options granted for

services

–

Comprehensive loss:

Net loss

–

(25,099

)

(25,099

)

Net unrealized gain on available-for-sale securities

–

Comprehensive loss

(25,093

)

Balance at December 31, 2008

–

29,769,115

–

292,611

357

(245,794

)

47,204

See accompanying notes

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	)	$	(245,794	)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization		682			1,594			1,273			22,075
Loss (gain) on disposal of property and equipment		278			(37	)		(18	)		158
Impairment loss related to long-lived assets		139			-			450			6,719
Amortization of deferred compensation		-			-			-			164
Non-cash rent expense for warrants issued in
connection with the extension of the building lease		36			217			217			1,736
Amortization of deferred rent		(194	)		(774	)		(162	)		(176	)
Non-cash compensation expense for common stock,
warrants, and stock options issued for services		2,203			1,926			1,495			7,342
Warrants issued for patent license		-			-			-			3,182
Changes in operating assets and liabilities:
Accrued interest		249			(65	)		(182	)		(284	)
Prepaid expenses and other current assets		298			(514	)		292			(845	)
Deposits and other assets		(44	)		210			79			(97	)
Accounts payable, other accrued liabilities and
accrued compensation and related expenses		284			1,471			452			4,452
Net cash used in operating activities	$	(21,168	)	$	(21,136	)	$	(20,360	)	$	(201,368	)
Investing Activities
Purchases of property and equipment		(181	)		(203	)		(176	)		(29,015	)
Proceeds from disposal of property and equipment		17			92			142			482
Settlement of asset retirement obligation		(210	)		-			-			(210	)
Decrease (increase) in restricted investments		391			1,000			-			(9,037	)
Purchases of available-for-sale securities		(21,107	)		(109,538	)		(109,261	)		(1,011,466	)
Maturities of available-for-sale securities		50,942			100,218			99,594			973,325
Net cash provided by (used in) investing activities		29,852			(8,431	)		(9,701	)		(75,921	)
Financing Activities
Proceeds from long-term obligations		-			-			-			10,133
Repayment of long-term obligations		-			(1,000	)		-			(2,710	)
Proceeds from bridge financing		-			-			-			1,937
Repayment of bridge financing		-			-			-			(2,131	)
Payments on capital lease obligations		-			-			-			(2,154	)
Proceeds from sale-leaseback of equipment		-			-			-			1,927
Proceeds from issuance of preferred stock, net of
issuance costs		-			-			-			9,885
Proceeds from warrants and options exercised		261			593			1,012			16,215
Proceeds from issuance of common stock, net of
issuance costs and repurchases		-			28,518			19,354			253,491
Net cash provided by financing activities		261			28,111			20,366			286,593
Net increase (decrease) in cash and cash equivalents		8,945			(1,456	)		(9,695	)		9,304
Cash and cash equivalents, beginning of period		359			1,815			11,510			-
Cash and cash equivalents, end of period	$	9,304		$	359		$	1,815		$	9,304
Supplemental disclosure
Issuance of warrants in connection with the extension of
the building lease	$	-		$	-		$	-		$	1,738
Issuance of preferred stock for cancellation of accounts
payable, notes payable and accrued interest		-			-			-			499
Issuance of stock options for repayment of certain
accrued liabilities		-			-			-			137
Issuance of warrants in connection with bridge financing		-			-			-			300
Deferred compensation related to stock option grants		-			-			-			164
Purchase of property and equipment under capital
lease financing		-			-			-			226
Cash paid for interest		293			488			467			3,458

See accompanying notes.

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.

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.

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

Revenues from the Sale of Intellectual Property Rights

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.

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

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.

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	2007	2006
Potential dilutive stock options outstanding	3,940	402,430	287,853

Outstanding securities excluded from the
potential dilutive common shares calculation (1)	4,241,991	3,152,961	2,611,068

(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.

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.

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	$	-	$	-		$	9,304
Corporate debt securities		8,541		11		(58	)		8,494
Federal agency obligations		25,781		488		-			26,269
Asset-backed and other securities		12,856		-		(84	)		12,772
Total	$	56,482	$	499	$	(142	)	$	56,839
Amounts reported as:
Cash and cash equivalents	$	9,304	$	-	$	-		$	9,304
Restricted investments		9,036		-		-			9,036
Available-for-sale securities		38,142		499		(142	)		38,499
Total	$	56,482	$	499	$	(142	)	$	56,839

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.

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	$	-	$	-		$	359
Corporate debt securities		24,322		32		(25	)		24,329
Federal agency obligations		21,871		164		-			22,035
Asset-backed and other securities		31,212		183		(4	)		31,391
Total	$	77,764	$	379	$	(29	)	$	78,114
Amounts reported as:
Cash and cash equivalents	$	359	$	-	$	-		$	359
Restricted investments		9,428		-		-			9,428
Available-for-sale securities		67,977		379		(29	)		68,327
Total	$	77,764	$	379	$	(29	)	$	78,114

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		Gross			Estimated
	Unrealized			Fair		Unrealized			Fair
December 31, 2008	Losses			Value		Losses			Value
Corporate debt securities	$	(14	)	$	2,239	$	(44	)	$	3,482
Asset-backed and other securities		(52	)		11,804		(32	)		968
Total	$	(66	)	$	14,043	$	(76	)	$	4,450


	Less Than 12 Months					12 Months or Greater
	Gross			Estimated		Gross			Estimated
	Unrealized			Fair		Unrealized			Fair
December 31, 2007	Losses			Value		Losses			Value
Corporate debt securities	$	(7	)	$	6,812	$	(18	)	$	2,637
Asset-backed and other securities		(4	)		1,480		-			-
Total	$	(11	)	$	8,292	$	(18	)	$	2,637

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.

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		Level 2		Level 3
	Total Carrying		Quoted prices in		Significant other		Significant
	Value as of		active markets		observable		unobservable
	December 31,				inputs		inputs
	2008
Cash and cash equivalents	$	9,304	$	9,304	$	--	$	--
Corporate debt securities		8,494		--		8,494		--
Federal agency obligations		26,269		--		26,269		--
Asset-backed and other securities		12,772		--		12,772		--
Total	$	56,839	$	9,304	$	47,535	$	--

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.

4. Property and Equipment

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

	December 31,
	2008			2007
Leasehold improvements	$	44		$	6,742
Laboratory equipment		-			1,218
Office furniture and equipment		1,341			1,403
		1,385			9,363
Less: 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.

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.

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.

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.

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.

Shares Reserved for Future Issuance

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

	Year Ended
	December 31,
	2008
Stock options outstanding	4,142,324
Stock options available for grant	2,167,247
Warrants to purchase common stock	15,000
Shares available for Employee Stock Purchase Plan	360,000
	6,684,571

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			2007			2006
Research and development	$	(597	)	$	(600	)	$	(437	)
General and administrative		(1,577	)		(1,234	)		(944	)
Share-based compensation expense before taxes		(2,174	)		(1,834	)		(1,381	)
Related income tax benefits		-			-			-
Net share-based compensation expense	$	(2,174	)	$	(1,834	)	$	(1,381	)
Net share-based compensation expenses per basic and diluted common share	$	(0.09	)	$	(0.07	)	$	(0.06	)

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.

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

	Outstanding Options
				Weighted-
	Number of			Average Exercise
	Shares			Price per Share
Outstanding at December 31, 2005		3,487,254		$	10.87
Granted		1,605,500			5.16
Canceled		(732,982	)		9.45
Exercised		(269,098	)		3.76
Outstanding at December 31, 2006		4,090,674		$	9.36
Granted		1,296,692			4.96
Canceled		(748,752	)		14.26
Exercised		(163,387	)		3.63
Outstanding at December 31, 2007		4,475,227		$	7.47
Granted		465,700			2.73
Canceled		(722,197	)		10.50
Exercised		(76,406	)		3.41
Outstanding 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	2006
Expected volatility	0.6945	0.5421	0.6006
Risk free interest rate	2.69%	4.16%	4.60%
Expected life of options in years	4.59	4.30	3.68
Expected 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.

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	Weighted-
			Remaining	Average				Weighted-
Range of Exercise		Number	Contractual	Exercise			Number	Average Exercise
Prices		Of Shares	Life	Price			Of Shares	Price
$	0.61 - $ 2.96	437,400	7.97		$	2.47	190,025		$	2.86
	2.97 - 3.38	546,450	5.72			3.26	448,523			3.29
	3.45 - 3.99	432,073	3.86			3.63	341,046			3.63
	4.06 - 4.22	15,993	0.34			4.18	6,993			4.13
	4.42 - 4.42	434,058	8.93			4.42	144,688			4.42
	4.85 - 5.06	23,750	6.82			4.88	23,750			4.88
	5.06 - 5.06	647,584	6.35			5.06	596,330			5.06
	5.20 - 5.50	662,702	6.56			5.42	452,400			5.41
	5.51 - 8.53	465,577	4.94			6.64	344,192			6.75
	8.88 - 47.63	476,737	1.60			21.72	476,737			21.72
$	0.61 - $47.63	4,142,324	5.75		$	6.48	3,024,684		$	7.33

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.

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 Financial Accounting 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 Lease
	Commitments		(1)			Commitments
Year ending December 31:
2009	$	1,697	$	(383	)	$	1,314
2010		1,543		(360	)		1,183
2011		-		-			-
2012		-		-			-
2013 and thereafter		-		-			-
Total	$	3,240	$	(743	)	$	2,497

(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			2006
Rent expense	$	1.9		$	2.6		$	2.6
Sublease 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 third party with respect to our products. The term of these indemnification agreements is generally perpetual. The potential future payments we could be required to make under these indemnification agreements is unlimited. Historically, costs related to these indemnification provisions have been immaterial. We also maintain various liability insurance policies that limit our exposure. As a result, we believe the fair value of these indemnification agreements, in excess of applicable insurance coverage, is minimal. Accordingly, we have not recorded any liabilities for these agreements as of December 31, 2008.

17. Income Taxes

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

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

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.

18. Condensed Quarterly Financial Information (Unaudited)

	Year Ended
	December 31, 2008
	First			Second			Third			Fourth
(amounts in thousands except per share data)	Quarter			Quarter			Quarter			Quarter
Total revenue	$	-		$	-		$	-		$	7,100
Net loss		(7,411	)		(7,341	)		(9,403	)		(944	)
Net loss per share, basic and diluted		(0.25	)		(0.25	)		(0.32	)		(0.03	)

	Year Ended
	December 31, 2007
	First			Second			Third			Fourth
(amounts in thousands except per share data)	Quarter			Quarter			Quarter			Quarter
Total revenue	$	-		$	-		$	-		$	-
Net loss		(5,764	)		(5,829	)		(6,840	)		(6,731	)
Net loss per share, basic and diluted		(0.23	)		(0.21	)		(0.23	)		(0.23	)

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

In response to the request by one of our stockholders to call a Special Meeting of Stockholders, we have incurred significant incremental costs associated with legal fees and other advisory expenses. We estimate the costs of responding to these stockholder actions in 2009 to exceed $600,000.

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) in Internal 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.

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 in Internal Control — Integrated Framework issued 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, California
March 13, 2009

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.

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.

E QUITY C OMPENSATION P LAN I NFORMATION

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.

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.

PART IV

Item 15. Exhibits, Financial Statement Schedules

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

	(1)	*Financial Statements:*

		Report of Independent Registered Public Accounting Firm Balance Sheets Statements of Operations Statements of Stockholders’ Equity Statements of Cash Flows Notes to Financial Statements

	(2)	*Financial Statement Schedules*

	Financial statement schedules have been omitted from this Annual Report on Form 10-K because they are either not applicable or the required information is provided in the financial statements or the notes thereto.

	(3)	*Exhibits*

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

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:		/s/ K ENNETH G. C HAHINE
			Kenneth G. Chahine, J.D., Ph.D.
			President and Chief Executive Officer

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/ K ENNETH G. C HAHINE	President, Chief Executive Officer and Director	March 13, 2009
Kenneth G. Chahine, J.D., Ph.D.	(Principal Executive Officer)

/s/ A NDREW A. S AUTER	Chief Financial Officer	March 13, 2009
Andrew A. Sauter	(Principal Financial and Accounting Officer)

/s/ Z OLA H OROVITZ	Chairman of the Board	March 13, 2009
Zola Horovitz, Ph.D.

/s/ J OHN K.A. P RENDERGAST	Director	March 13, 2009
John K.A. Prendergast, Ph.D.

/s/ R ICHARD W ALLACE	Director	March 13, 2009
Richard Wallace

/s/ S TEPHEN D ILLY	Director	March 13, 2009
Stephen Dilly, M.B.B.S., Ph.D.

/s/ J AN O HRSTROM	Director	March 13, 2009
Jan Ohrstrom, M.D.

		EXHIBIT INDEX
Exhibit Number		Exhibits
2.1		See Exhibit 10.58
2.2	(32)	Asset Purchase Agreement, dated December 17, 2008, by and between Baxter Healthcare Corporation, Baxter International Inc., and Baxter Healthcare S.A. (collectively “Baxter”) and Avigen
3.1	(33)	Amended and Restated Certificate of Incorporation
3.2	(13)	Certificate of Amendment to Certificate of Incorporation
3.3	(29)	Certificate of Amendment to Certificate of Incorporation
3.4	(34)	Certificate of Designation
3.5	(30)	Restated Bylaws of the Registrant
4.1	(1)	Specimen Common Stock Certificate
4.2	(34)	Rights Agreement dated as of November 21, 2008, by and between the Company and American Stock Transfer & Trust Co. LLC
4.3	(33)	Form of Right Certificate
10.3	(2, 17)	1996 Equity Incentive Plan, as amended
10.4	(1, 2)	Form of Incentive Stock Option Grant for 1996 Equity Incentive Plan
10.5	(1, 2)	Form of Nonstatutory Stock Option Grant for 1996 Equity Incentive Plan
10.6	(2, 14)	1996 Non-Employee Directors’ Stock Option Plan, as amended
10.7	(2, 4)	1997 Employee Stock Purchase Plan
10.8	(1, 2)	Form of Indemnification Agreement between Avigen and its directors and executive officers.
10.10	(2, 5)	2000 Equity Incentive Plan
10.11	(2, 12)	Form of Nonstatutory Stock Option Grant for 2000 Equity Incentive Plan
10.12	(2, 7)	2006 Equity Incentive Plan
10.16	(2, 24)	Form of Nonstatutory Stock Option Grant for 1996 Non-Employee Directors’ Stock Option Plan, as amended
10.17	(2)	Compensation Agreements with Named Executive Officers
10.32	(15)	Revolving line of credit note signed November 2, 2000 with Wells Fargo Bank.
10.33	(15)	Letter Agreement to the revolving line of credit note signed November 2, 2000 with Wells Fargo Bank.
10.36	(2, 8)	Management Transition Plan
10.41	(10)	Property Lease Agreement between ARE-1201 Harbor Bay, LLC and Avigen, dated February 29, 2000
10.45	(13)	Office Lease Agreement between Lincoln-RECP Empire OPCO, LLC and Avigen, Inc., dated November 2, 2000.
10.46	(13)	First Amendment to Lease Agreement between Lincoln-RECP Empire OPCO, LLC and Avigen, Inc., dated December 1, 2000.
10.47	(13)	Second Amendment to Lease Agreement between Lincoln-RECP Empire OPCO, LLC and Avigen, Inc., dated February 12, 2001.
10.49	(16)	Revolving line of credit note with Wells Fargo Bank, dated June 1, 2002.
10.50	(16)	Letter of Agreement to the revolving line of credit note signed June 1, 2002 with Wells Fargo Bank.
10.53	(20)	Revolving line of credit note with Wells Fargo Bank, dated June 1, 2004
10.54	(20)	Amendment to Letter of Agreement to the revolving line of credit note signed June 1, 2004 with Wells Fargo Bank
10.55	(2, 21)	Arrangement Regarding Non-Employee Director Compensation

		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).

(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).

(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).

EXHIBIT 2.2

{*} = C ERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN
OMITTED AND FILED SEPARATELY WITH THE S ECURITIES AND E XCHANGE C OMMISSION PURSUANT TO R ULE 24 B- 2 OF
THE S ECURITIES E XCHANGE A CT OF 1934, AS AMENDED.

CONFIDENTIAL

ASSET PURCHASE AGREEMENT

BY AND AMONG

AVIGEN, INC.,

BAXTER HEALTHCARE CORPORATION,

BAXTER INTERNATIONAL INC.,

AND

BAXTER HEALTHCARE S.A.

DECEMBER 17, 2008

ASSET PURCHASE AGREEMENT

This ASSET PURCHASE AGREEMENT (this “ Agreement ”) is made and entered into as of this 17th day of December, 2008 (the “ Effective Date ”), by and among Avigen, Inc., a Delaware corporation (“ Seller ”), and Baxter Healthcare Corporation, a Delaware corporation (“ BHC ”), Baxter International Inc., a Delaware corporation (“ BII ”), and Baxter Healthcare S.A., a Swiss Corporation (“ BHSA ”). BHC, BII and BHSA are individually and collectively referred to herein as “ Buyer ”.

RECITALS

A. Seller desires to sell to Buyer, and Buyer desires to acquire from Seller, all of the assets of Seller’s current program for the treatment of bleeding disorders, including, but not limited to, all assets related to the use of non-anticoagulant sulfated polysaccharides (“ NASPs ”) that are within the scope of Seller’s current Patent portfolio on NASPs to treat bleeding disorders and thrombotic disorders, particularly AV513 to treat these disorders and all Patents with respect to AV513 to treat these disorders (collectively, the “ Business ”). For the avoidance of doubt, the ‘Business’ excludes (i) the {*} and (ii) subject to terms and conditions of Section 6.2 and any remedies related thereto, any assets acquired or created by Seller after the Effective Date or owned independently as of the Effective Date by any entity with which Seller may merge in future.

B. Capitalized terms used in this Agreement shall have the meaning set forth in the Table of Definitions attached hereto as Schedule 1.0 or where parenthetically defined in this Agreement; derivative forms shall be interpreted accordingly; and the words “includes,” “including,” and all other forms of the verb “to include” shall be deemed followed by the phrase “without limitation” regardless of whether it is written there (and drawing no implication from the inconsistent inclusion or non-inclusion of such phrase).

AGREEMENT

NOW, THEREFORE, in consideration of the foregoing premises and the covenants, agreements, representations and warranties contained herein, the parties hereto, intending to be legally bound, agree as follows:

ARTICLE I
ASSETS AND LIABILITIES

1.1. Acquired Assets . Subject to the terms and the conditions set forth in this Agreement, Seller agrees to sell, convey, transfer, assign and deliver to Buyer, and Buyer agrees to purchase, receive, and accept from Seller all right, title, and interest in and to all of the assets, properties, and rights of every kind, character and description set forth in Schedule 1.1 hereto, whether tangible, intangible, personal or mixed, wherever located, and whether such assets, properties and rights have any value for accounting purposes or are carried or reflected on or specifically referred to in Seller’s (or its Affiliates’) books or financial statements (collectively referred to hereinafter as the “ Acquired Assets ”). The Acquired Assets, however, explicitly exclude the Excluded Assets as defined in Section 1.2 of this Agreement.

{*} = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

1.2. Excluded Assets . Notwithstanding anything contained in Section 1.1 , Buyer is not purchasing any assets or properties expressly set forth on Schedule 1.2 (such assets being referred to as the “ Excluded Assets ” and such Schedule 1.2 being referred to herein as the “ Excluded Assets Schedule ”).

1.3. Liabilities of the Business .

(a) Excluded Liabilities . SELLER ACKNOWLEDGES AND AGREES THAT SUBJECT TO SECTION 1.3(b) BELOW, BUYER DOES NOT ASSUME AND SHALL NOT BE LIABLE FOR {*} AND SELLER SHALL BE SOLELY LIABLE FOR {*} (collectively, but subject to the clarification provided in Section 1.3(b) , {*}” (as each term is defined in Section 1.3(b) ). FOR THE AVOIDANCE OF DOUBT, EXCEPT AS OTHERWISE EXPRESSLY SET FORTH IN THIS AGREEMENT, BUYER DOES NOT ASSUME AND SHALL NOT BE LIABLE FOR {*}, WHENEVER ARISING AND OF WHATEVER TYPE OR NATURE, EXCEPT FOR {*} (as each term is defined in Section 1.3(b)).

(b) Assumed Liabilities . Buyer shall be solely responsible for: (i){*} in relation to the Assigned Contracts, except to the extent {*} arise out of the failure by Seller or any Affiliate of Seller to perform any such Assigned Contract in accordance with its terms prior to the Closing and (ii) all other {*} in each case after the Closing (including {*} with respect to products sold on or after the Closing Date claimed or covered by the Transferred Intellectual Property (“ Products Liability ”) and {*} performed by or on behalf of Buyer (or any Affiliate of Buyer, or successor to the Acquired Assets) on or after the Closing Date with respect to products claimed or covered by the Transferred Intellectual Property {*} (collectively, all of the foregoing in this sentence, the “ Assumed Liabilities ”). For purposes of this Section 1.3(b) and anywhere else in this Agreement where it refers to {*} regardless of whether the entity bringing the Third Party Claim from which the Losses result alleges {*}; provided, however, that {*}. Notwithstanding anything to the contrary express or implied in any Acquisition Agreement, at law or in equity, the Losses described in the foregoing sentence (except to the extent covered by the proviso of the foregoing sentence) are “Assumed Liabilities,” and are not “Excluded Liabilities.”

1.4. Instruments of Transfer . The sale of the Acquired Assets and the assumption of the Assumed Liabilities as herein provided shall be effected at Closing by the Assignment and Assumption and Bill of Sale in the form attached hereto as Exhibit A , assignments in recordable (as applicable) form with respect to the Transferred Intellectual Property included in the Acquired Assets in the form(s) set forth in Exhibit B .

1.5. Payment of Sales Taxes . {*}. The parties will prepare and deliver and, if necessary, file at or before Closing all transfer tax returns and other filings necessary to vest in Buyer full right, title and interest in the Acquired Assets.

1.6. {*}

1.7. Non-Assignment of Certain Contracts . Seller shall use good faith reasonable efforts to obtain the written consent of each counterparty to each Assigned Contract that has not been obtained as of the Closing Date (each a “ Lacking Third Party Consent ”) to the assignment of such Assigned Contract; provided, however, that Seller shall not agree to any amendment or waiver of any of the relevant rights or obligations of any party under any of the relevant Contracts without the prior written approval of Buyer. {*} Notwithstanding anything contained in this Agreement to the contrary, the failure of Seller {*}. Notwithstanding anything to the contrary in this Agreement, to the extent the assignment of {*} to Buyer would require the consent of any Third Party (each, a “ Consent ”) that has not been obtained by Seller prior to the Closing Date, neither this Agreement, nor any action taken under any of the foregoing shall constitute an assignment or agreement to assign such contract if this would constitute a breach of the relevant Assigned Contract. If any such Consent shall not be obtained or if any attempted assignment or transfer would be ineffective or would impair Buyer’s rights under or in respect of any such Contract so that Buyer would not, in effect, acquire the benefit of any such Contract, Seller shall reasonably cooperate with Buyer to extend to Buyer the benefits of such Contract in a contractually permissible way.

ARTICLE II
PURCHASE PRICE

2.1. Purchase Price . The purchase price to be paid by Buyer to Seller for the Acquired Assets and the other rights set forth herein shall be Seven Million Dollars ($7,000,000.00) (the “ Purchase Price ”); provided, however, that Seller acknowledges that in connection with the execution of the Letter of Intent and performance by Seller of Seller’s obligations thereunder, Buyer has previously paid to Seller and Seller hereby acknowledges receipt of an amount equal to {*} that was to be credited against the Purchase Price if the Closing occurs, and Seller further acknowledges and agrees that the amount that is due and payable by Buyer to Seller in immediately available funds via wire transfer on the Closing Date shall be {*}.

2.2. Allocation of Purchase Price . Buyer and Seller acknowledge and agree that the Purchase Price shall be allocated to the Acquired Assets in accordance with Schedule 2.2 hereto. Buyer and Seller agree to report the transactions contemplated by this Agreement for federal and state income tax purposes in accordance with such allocation. The parties shall execute all forms required to be filed for tax purposes with any taxing authority in a manner consistent with the allocation on Schedule 2.2 hereto.

2.3. Negotiated Value . The parties agree that the Purchase Price and the Purchase Price allocation set forth on Schedule 2.2 reflect the fair value of the Business and the fair values of the Acquired Assets, respectively, agreed to by the parties hereto as a result of arms’ length negotiations.

ARTICLE III
CLOSING

The closing of the sale and purchase of the Acquired Assets (the “ Closing ”) shall take place on the Effective Date (the “ Closing Date ”) at the offices of Seller, or by facsimile transmission and United States or overnight mail. The Closing shall be deemed to have occurred at 12:01 a.m. local time at Seller’s offices on the Closing Date.

ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLER

Seller represents and warrants to Buyer as follows:

4.1. Organization, Good Standing, and Qualification . Seller is a corporation duly organized, validly existing, and in good standing under the provisions of the Laws of the State of Delaware, and is qualified and licensed to do business in every other jurisdiction in which it conducts the Business or the nature of the operations of the Business requires qualification as a foreign corporation. Seller has all requisite corporate power and authority to own and operate its properties and to carry on its business as now conducted. Seller has all power and authority to enter into all of the Acquisition Agreements to which Seller is a party and to carry out and perform its obligations under the Acquisition Agreements.

4.2. Authorization; Binding Obligation . Seller has full legal and corporate right, power, and authority to execute and deliver the Acquisition Agreements to which Seller is a party, and to carry out the transactions contemplated thereby. The execution and delivery by Seller of the Acquisition Agreements and all of the documents and instruments required thereby and the consummation of the transactions contemplated thereby have been duly authorized by all requisite action on the part of Seller. The Acquisition Agreements to which Seller is a party and each of the other documents and instruments required thereby or delivered in connection therewith have been duly executed and delivered by Seller, and constitute the legal, valid, and binding obligations of Seller, enforceable against Seller in accordance with their respective terms.

4.3. Consents and Approvals .

(a) Governmental Consents and Approvals . Except as set forth on Schedule 4.3 , no registration or filing with, or consent or approval of, or other action by, any federal, state or other Governmental Authority is or will be necessary for the valid execution, delivery and performance of this Agreement by Seller, or the transfer of the Acquired Assets to Buyer (each, a “ Governmental Approval ” and, collectively, the “ Governmental Approvals ”).

(b) Third Party Consents . Except as set forth in Schedule 4.3 {*} no consent, approval or authorization of any non-governmental third party is required in order to consummate the transactions or perform the related covenants and agreements contemplated hereby or to vest full right, title and interest in the Acquired Assets free and clear of any Lien upon Buyer, all without any change in the Acquired Assets and all rights therein after the Closing (each, a “ Third Party Consent ” and, collectively, the “ Third Party Consents ” (to be clear, the Third Party Consents exclude {*}.

4.4. No Violation. The execution, delivery, compliance with, and performance by Seller of the Acquisition Agreements do not and will not: (a) violate or contravene the organizational documents and agreements, as amended to date, of Seller, (b) violate or contravene any Law to which Seller is subject, (c) conflict with or result in a breach of or constitute a default by Seller under any contract, agreement, instrument or other document to which Seller is a party or by which Seller or any of its assets or properties are bound or subject or to which any entity in which Seller has an interest, is a party, or by which any such entity is bound, or (d) result in the creation of any Lien upon any of the Acquired Assets or the Business, in the cases of (c) and (d), to Seller’s Knowledge.

4.5. Licenses and Permits. Schedule 4.5 attached hereto contains a true, correct and complete list and summary description of all Licenses which have been issued to Seller with respect to any product candidate included in the Business (including the Product) including, without limitation, all Regulatory Approvals, Product Registrations and INDs on a country-by-country basis (collectively, the “ Seller Licenses ”). Except as set forth on Schedule 4.5 , each Seller License is valid and in full force and effect as of the date hereof, no Seller License is subject to any Lien, limitation, restriction, probation, or other qualification – other than, in the case of INDs, to the limitations set forth therein – and there is no default under any Seller License. There is no investigation or proceeding, threatened or to Seller’s Knowledge pending, that could result in the termination, revocation, limitation, suspension, restriction, or impairment of any Seller License or the imposition of any fine, penalty or other sanctions for violation of any legal or regulatory requirements relating to any Seller License or, to the best of Seller’s Knowledge, any basis therefor. Seller and its Affiliates have, and have had at all relevant times, all Licenses that are or were necessary in order to enable Seller and its Affiliates to own the Acquired Assets and conduct the Business except to the extent the failure to do so would not have a Seller Material Adverse Effect.

4.6. Acquired Assets . Seller is the sole and exclusive legal and equitable owner of all right, title, and interest in, and has good, clear and marketable title to, all of the Acquired Assets free of all Liens (other than Liens for Taxes that are not yet due and payable). Except for the Excluded Assets, the Acquired Assets include all assets, properties, and rights of Seller primarily used in or primarily held for the benefit of the Business that are necessary or desirable in order for Buyer to continue the Business following Closing as historically and currently conducted. Seller will convey to Buyer on the Closing Date all of the Acquired Assets free and clear of any Liens.

4.7. Legal Proceedings .

(a) There is no action, suit, litigation, proceeding or investigation to Seller’s Knowledge pending by or against Seller relating to the Business, and Seller has not received any written or oral: claim, complaint, incident, report, threat or notice of any such proceeding or investigation. Seller has not received any opinion or memorandum or advice from outside legal counsel to the effect that it is exposed, from a legal standpoint, to any liability or claim relating to the Acquired Assets or to the business, prospects, financial condition, operations, property or affairs of the Business. There are no outstanding orders, writs, judgments, injunctions or decrees of any court, Governmental Authority or arbitration tribunal against or directly involving the Business or the Acquired Assets, and to Seller’s Knowledge there are no facts or circumstances which may result in the institution of any action, suit, or claim or legal, administrative or arbitration proceeding or investigation against, involving or affecting the Business, the Acquired Assets or the transactions contemplated by the Acquisition Agreements. Seller is not in default with respect to any order, writ, injunction or decree known to or served upon it from any court or any federal, foreign, state, municipal or other Governmental Authority relating to the Business or the Acquired Assets.

(b) With respect to the Product, to Seller’s Knowledge, Schedule 4.7(b) sets forth a list of all recalls, all serious adverse events (together with a description thereof and the date received), all warning letters or their foreign equivalents and all notices of adverse findings or other correspondence suggesting a violation of the Laws of the United States Food and Drug Administrations (the “ FDA ”) or any other or similar Governmental Authority. Seller has, prior to the Effective Date, made available to Buyer all of Seller’s files relating to all Medical and Regulatory Information possessed by Seller relating to the Product. Except as set forth on Schedule 4.7(b) , Seller has no Knowledge of any other claims, complaints, regulatory letters, warning letters, serious adverse events, product failures, recalls or regulatory actions with respect to the use, manufacture, advertising, promotion, sale or distribution of the Product, pending or threatened.

4.8. Compliance with Laws . With respect to the Acquired Assets and the Business, (a) to Seller’s Knowledge, Seller has not violated and is in compliance with all applicable Laws; and (b) Seller has not received any written notice to the effect that, or to its Knowledge otherwise been advised that, it is not in compliance with any Laws. To Seller’s Knowledge there are no existing circumstances which are likely to result in a violation of any Laws by the conduct of the Business in the manner conducted by Seller prior to the Closing. There is no action or proceeding by the FDA or any other Governmental Authority pending, or to the Knowledge of Seller, threatened against Seller relating to the safety or efficacy of Product.

4.9. No Brokers . Neither Seller nor any Affiliate of Seller has employed, either directly or indirectly, or incurred any liability to, any broker, finder or other agent in connection with the transactions contemplated by this Agreement. Seller and its Affiliates agree to indemnify and hold harmless Buyer for any claims brought by any broker, finder or other agent claiming to have acted on behalf of Seller or an Affiliate of Seller in connection with the purchase and sale of the Acquired Assets or the Business.

4.10. Taxes . There are no Liens for Taxes on any of the Acquired Assets to Seller’s Knowledge (other than Liens for Taxes that are not yet due and payable), no reasonable basis exists for the imposition of any such Liens, and to Seller’s Knowledge the consummation of the transactions contemplated by this Agreement will not give rise to any such Liens for Taxes on any Acquired Assets. Notwithstanding anything to the contrary, Buyer shall have no liability for any Taxes related to the ownership or operation of the Acquired Assets or the Business for the periods prior to the Closing Date. For Taxes (other than income, sales or use Taxes) related to the ownership or operation of the Acquired Assets or the Business for a period that includes (but does not end on) the Closing Date, the Buyer’s liability will be limited to its pro rata share of such Taxes, determined by multiplying the amount of such Taxes by a fraction, the denominator equal to the number of days in the applicable period and the numerator equal to the number of days from (but not including) the Closing Date to the end of such period. For income, sales or use Taxes related to the ownership or operation of the Acquired Assets or the Business for a period that includes (but does not end on) the Closing Date, liability will be allocated between Seller and Buyer as if the relevant Tax period ended as of the Closing.

4.11. Contracts .

(a) Schedule 4.11 hereto contains a complete and correct list of all Contracts, including a complete description of any legally binding oral Contracts. Each Contract is separately designated on Schedule 4.11 as either a Contract that Seller has agreed to assign and that Buyer has agreed to assume (each, an “ Assigned Contract ”) or as a Contract that shall be retained or terminated by Seller, in its discretion and at its own expense (each, a “ Retained Contract ”).

(b) Seller is not in material default under the terms of {*}. No event has occurred that would constitute a material default by Seller under {*}, nor has Seller received any notice of any default under {*}. To Seller’s Knowledge, the counterparties to {*} are not in default under the terms thereof, nor to Seller’s Knowledge has any event occurred that would constitute a material default by any such counterparty under {*}, nor has Seller received any written notice of any such counterparty’s default under {*}.

(c) {*} are valid and binding in accordance with their respective terms and are in full force and effect, except for Contracts (i) that have been terminated or (ii) that have expired according to their terms, each as indicated in Schedule 4.11 . Seller has not received any notice from any other party to {*} of the termination or threatened termination thereof, nor any claim, dispute or controversy thereon, and has no Knowledge of the occurrence of any event which would allow any other party to terminate {*}. Seller has not received written notice of any asserted claim of default, breach or violation of, {*} by Seller and to Seller’s Knowledge there is no basis therefor.

(d) Consummation of the transactions contemplated by this Agreement will not constitute a default under {*} nor will it trigger any other provision in {*} that would result in a change in such {*}, including without limitation the requirement for a transfer fee, new deposit or termination of such {*}.

4.12. Financing Statements . With respect to the Acquired Assets and the Business and except as set forth on Schedule 4.12 , to Seller’s Knowledge there are no financing statements under the Uniform Commercial Code which name Seller or any of its Affiliates as debtor or lessee filed in any state. Except as set forth on Schedule 4.12 , neither Seller nor any of its Affiliates has signed any financing statement or any security agreement under which a secured party thereunder may file any such financing statement with respect to the Acquired Assets or the Business.

4.13. Intellectual Property . Schedule 4.13 sets forth a list of all Intellectual Property owned or controlled by Seller or its Affiliates that any of them uses primarily in or that relates primarily to the Business, other than unregistered copyrights and Know-How (collectively, the “ Transferred Intellectual Property ”). All Seller or Seller Affiliate owned Patents and Trademarks listed in Schedule 4.13 as issued or registered are in full force and effect. All patent applications listed in Schedule 4.13 as pending have been prosecuted in good faith as required by Law and to Seller’s Knowledge are in good standing. Seller owns, or possesses adequate licenses or other rights to use (and to transfer such rights to use), all the Transferred Intellectual Property and Transferred Know-How, none of which rights will be impaired by the consummation of the transactions contemplated by this Agreement, and all of the rights of Seller thereunder will be enforceable by Buyer immediately after Closing without the consent or agreement of any other party. None of the Transferred Intellectual Property is to Seller’s Knowledge involved in any interference or opposition proceeding. There has been no written notice received by Seller or to Seller’s Knowledge any other indication that any such proceeding will hereafter be commenced with respect to the Transferred Intellectual Property. Neither Seller nor its Affiliates has granted any person or entity any right to use any of the Transferred Intellectual Property or Transferred Know-How for NASPs within the Field, but excluding academic institutions’ rights to use any of the Transferred Intellectual Property or Transferred Know-How for non-commercial research or academic purposes pursuant to the Contracts listed in Schedule 4.11 .

4.14. Disclosure . To Seller’s Knowledge Seller has not made any untrue statement of a material fact and has not omitted to state a material fact necessary in order to make the statements contained in this Agreement not misleading in light of the circumstances under which they were made or necessary to provide a prospective purchaser of the Acquired Assets or the Business with all information material thereto. There is no fact within the Knowledge of Seller that has not been disclosed herein to Buyer and which would have a Seller Material Adverse Effect.

ARTICLE V
REPRESENTATIONS AND WARRANTIES OF BUYER

Each of the corporate entities that together constitute the Buyer represents and warrants to Seller as follows:

5.1. Organization, Good Standing, and Qualification . Buyer is a corporation duly organized, validly existing and in good standing under the Laws of the jurisdiction of its organization. Buyer has all requisite corporate power and authority to own and operate its properties and to carry on its business as now conducted, to enter into all of the Acquisition Agreements to which it is party and to carry out and perform its obligations under the Acquisition Agreements to which Buyer is a party.

5.2. Authorization; Binding Agreement . Buyer has the full legal and corporate right, power and authority to execute and deliver the Acquisition Agreements to which it is party, and to carry out the transactions contemplated by the Acquisition Agreements to which it is a party. The execution and delivery by Buyer of the Acquisition Agreements to which Buyer is a party and all of the documents and instruments required thereby and the consummation of the transactions contemplated hereby and thereby have been duly authorized by all requisite corporate action on the part of Buyer. The Acquisition Agreements to which Buyer is a party and each of the other documents and instruments required hereby have been duly executed and delivered by Buyer and constitute the legal, valid and binding obligations of Buyer, enforceable against Buyer in accordance with their respective terms.

5.3. Legal Proceedings . There are no actions, suits, litigation or proceedings pending or threatened against Buyer which could materially adversely affect Buyer’s ability to perform its obligations under this Agreement or the consummation of the transactions contemplated by this Agreement.

5.4. No Brokers . Buyer has not employed, either directly or indirectly, or incurred any liability to, any broker, finder or other agent in connection with the transactions contemplated by this Agreement. Buyer agrees to indemnify Seller for any claims brought by any broker, finder or other agent claiming to have acted on behalf of Buyer in connection with this sale.

5.5. No Violation . The execution, delivery, compliance with and performance by Buyer of the Acquisition Agreements to which Buyer is a party and each of the other documents and instruments delivered in connection therewith do not and will not: (a) violate or contravene the organizational certificates, documents and agreements, as amended to date, of Buyer, (b) violate or contravene any Law to which Buyer is subject, or (c) conflict with or result in a breach of or constitute a default by any party under any contract, agreement, instrument or other document or contract to which Buyer is a party or by which Buyer or any of its assets or properties are bound or to which Buyer or any of its assets or properties are subject.

ARTICLE VI
COVENANTS
CONFIDENTIALITY; NON-COMPETITION

6.1. Confidentiality .

(a) The parties agree that: (i) all information not disclosed to the public by Seller regarding the Business, which information regarding the Business is compiled by, obtained by or furnished to Buyer or any of its agents or employees in the course of its due diligence review of the Business is acknowledged to be confidential information, trade secrets and/or the exclusive property of Seller until the Closing Date, and of Buyer thereafter, (ii) all information not disclosed to the public by Buyer regarding Buyer’s business or operations is acknowledged to be confidential information, trade secrets and the exclusive property of Buyer; and (iii) all information not disclosed to the public by Seller regarding Seller’s business or operations other than the Business is acknowledged to be confidential information, trade secrets and the exclusive property of Seller (all of the foregoing being hereinafter referred to collectively as “ Confidential Information ” with the Confidential Information described in subparagraphs (i) and (ii) after the Closing being the Confidential Information of Buyer, and the Confidential Information described in subparagraph (iii) being the Confidential Information of Seller).

(b) Each of the parties hereto agrees not to divulge, directly or indirectly, any Confidential Information of the other party in any manner contrary to the interests of such party. Each of the parties acknowledges that the breach or threatened breach of the provisions of this Section may cause irreparable injury to the other party that could not be adequately compensated by money damages. Accordingly, a party may obtain a restraining order and/or injunction prohibiting a breach or threatened breach of the provisions of this Section 6.1 , in addition to any other legal or equitable remedies that may be available. If requested by any Governmental Authority or required pursuant to any Law to disclose any Confidential Information of another party, the party so requested or required shall promptly give notice thereof to the other party so that such other party may, at its own cost and expense, seek an appropriate protective order, if available. If a protective order or waiver is granted, the party subject to such legal process may disclose the Confidential Information to the extent required by such Governmental Authority or Law or as may be permitted by a waiver by the other party. If no protective order is obtained or available to apply for, then the party shall be entitled to make the legally required disclosure. Notwithstanding any part of the foregoing, Buyer and Seller shall each be permitted to disclose Confidential Information, including without limitation a copy of this Agreement, the Assignment and Assumption and Bill of Sale, and any other Acquisition Agreements for the purpose of complying with government or securities exchange filing requirements and for the purpose of issuing a press release about the transactions contemplated by this Agreement following the Closing Date.

(c) The term “Confidential Information” shall include the terms of the Acquisition Agreements (excluding those that are intended for recordation to the public record), which shall be considered the Confidential Information of both Parties (apart from such recordation documents). The term “Confidential Information” does not include information that: (i) at the time of disclosure or later becomes generally known to the public or within the industry or segment of the industry to which such information relates without violation by a party of any of its obligations hereunder and not through any action by any of its directors, officers, employees and agents which, if committed by such party, would have constituted a violation by it of any of its obligations hereunder; (ii) at the time of disclosure to the other party was already known by such other party; or (iii) after the time of the disclosure to the other party, is received by such party from a third party which, to such party’s best knowledge, is under no confidentiality obligation with respect thereto.

(d) Notwithstanding the foregoing in this Section 6.1 , each party shall be entitled to disclose the terms of this Agreement, to the extent at the time not already publicly disclosed as required by applicable law pursuant to Section 6.1(b) above, to its legal and financial advisors, and to actual and potential investors, acquirors or licensees conducting due diligence.

6.2. Non-Competition .

(a) As a material inducement to Buyer to enter into this Agreement, in consideration of the compensation payable hereunder, and for such other good and valid consideration, the receipt and sufficiency of which are hereby acknowledged, as well as in recognition of the fact that the value of the Business, including the goodwill, would be diminished substantially if Seller or any Affiliate of Seller were to engage in certain business or activities in competition with Buyer, Seller covenants and agrees that, except as required in the performance of the duties set forth in this Agreement or another written agreement with Buyer, neither Seller nor any of its Affiliates will, during the Period, directly or indirectly, become a Competitor anywhere within the Territory; provided, however, that an investment, whether direct or indirect, by Seller of {*} in an entity that is a Competitor shall not be considered a violation of this provision.

(b) The parties specifically acknowledge and agree that the remedy at law for any breach of this Section 6.2 may be inadequate and that Buyer, in addition to any other relief available to them, may be entitled to temporary and permanent injunctive relief without the necessity of proving actual damage. If any restriction contained in this Section 6.2 is held by any court to be unenforceable, or unreasonable, as to time, geographic area or business limitation, Seller agrees that such provisions shall be and are hereby reformed to the maximum time, geographic area, or business limitation permitted by applicable Laws. The parties further agree that the remaining restrictions contained in this Section 6.2 shall be severable and shall remain in effect and shall be enforceable independently of each other.

(c) Seller specifically acknowledges that the covenants set forth in this Section are reasonable and necessary to protect the legitimate interests of Buyer, and Buyer would not have entered into this Agreement in the absence of such covenants.

6.3. Technology Transfer .

(a) Seller shall reasonably cooperate with and shall make its personnel available at all reasonable times to ensure the prompt and complete transfer to Buyer of all Transferred Know-How, up to a maximum combined resource commitment of {*} until a maximum of {*} from Closing Date (the “ Tech Transfer Period ”). In connection with the foregoing, Seller shall, at its sole cost and expense (except for the payment required pursuant to Section 6.3(b) ) during the Tech Transfer Period: (i) {*}, (ii) make introductions to, arrange for site visits with and, as appropriate, audits of any of Seller’s vendors and/or suppliers vending to and supplying the Business, and (iii) undertake such other activities as are necessary to effect the transfer of the Transferred Know-How (collectively, the activities referred to in the first two (2) sentences of this Section 6.3(a) are hereinafter referred to as the “ Tech Transfer Process ”). Buyer acknowledges that Seller has publicly announced a lay-off, and that Seller has informed Buyer that the layoff includes scientific personnel familiar with the Acquired Assets, who will not be employed by Seller beyond January 2009. While Seller will {*} assist Seller in the completion of any remaining technology transfer {*} and only during an additional {*}, the parties intend that barring unforeseen circumstances the technology transfer should be completed within Tech Transfer Period.

During the Tech Transfer Period, Buyer shall compile a reasonably detailed written list (the “ Transferred Know-How List ”) of the Know-How that falls within the definition of ‘Transferred Know-How Category’ and is either (a) reflected in the documentation Seller is required to provide to Buyer under this Agreement (or has been provided to Buyer as part of the due diligence process prior to the Closing Date) or (b) provided to Buyer through the Tech Transfer Process. Buyer shall provide such Transferred Know-How List to Seller {*}. {*}. The Transferred Know-How List shall not be deemed final until agreed to in writing by Buyer and Seller.

(b) In connection with the foregoing, Buyer shall pay to Seller an amount equal to {*} of which {*} shall be paid at the Closing and {*} shall be paid on the earlier of: (i) the {*} anniversary of the Closing or (ii) the date that Buyer provides written notice to Seller that it no longer requires the technology transfer services of Seller as set forth in Section 6.3(a).

ARTICLE VII
CONDITIONS PRECEDENT TO BUYER’S PERFORMANCE AND TO SELLER’S
PERFORMANCE

7.1. Conditions to Buyer’s Obligations . The obligations of Buyer under this Agreement are subject to the satisfaction of the following conditions on or prior to the Closing Date, all or any of which may be waived in writing by Buyer:

(a) Seller shall have delivered to Buyer all documents required to be delivered by Seller, and all such documents shall have been properly executed by Seller, if applicable. Such documents (forms of which have been attached hereto) shall include, without limitation, assignments in recordable form necessary or desirable to convey the Transferred Intellectual Property included in the Acquired Assets and such other documents and instruments, each in a form reasonably satisfactory to Buyer, as may be reasonably requested by Buyer in order to carry out the transaction contemplated by this Agreement and to vest good and marketable title in the Acquired Assets in Buyer, free and clear of all Liens.

(b) Seller shall have executed and delivered to Buyer the Assignment and Assumption and Bill of Sale in the form attached hereto as Exhibit A (“ Assignment and Assumption and Bill of Sale ”), dated and effective as of the Closing Date.

(c) Buyer shall have received all Third Party Consents in form and substance satisfactory to Buyer, effective as of the Closing Date.

(d) Buyer shall have received all approvals, consents and clearances from Governmental Authorities and others in connection with the transactions contemplated by this Agreement deemed necessary by Buyer, including receipt by Buyer of all licenses, permits, consents and approvals for Buyer to own and operate the Business after the Closing Date.

7.2. Conditions to Seller’s Obligations . The obligations of Seller under this Agreement are subject to the satisfaction of the following conditions, on or prior to the Closing Date, all or any of which may be waived in writing by Seller:

(a) Buyer shall have delivered to Seller all documents required to be delivered by Buyer, and all such documents shall have been properly executed by Buyer, if applicable.

(b) Buyer shall have executed and delivered to Seller the Assignment and Assumption and Bill of Sale.

7.3. No Injunction or Action . The obligations of both Buyer and Seller under this Agreement are conditioned upon there being, as of the Closing Date, no preliminary or permanent injunction or other order, decree or ruling issued by a court of competent jurisdiction or by a Governmental Authority concerning this Agreement which would make illegal or otherwise prevent consummation of this Agreement in accordance with its terms, and no proceeding or action brought by any Governmental Authority seeking the foregoing shall be pending.

7.4. Termination for Failure to Close . Seller shall be entitled to terminate this Agreement {*} upon written notice to Buyer if Buyer fails to satisfy the condition set forth in Section 7.2(c) within {*} after the Effective Date.

ARTICLE VIII
SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION

8.1. Survival of Representations and Warranties .

(a) All Buyer and Seller representations and warranties contained in Articles IV and V of this Agreement or any other agreement, schedule, certificate, instrument or other writing delivered by Buyer or Seller in connection with the transactions contemplated by this Agreement shall survive for {*} after the Closing Date (the “ Survival Period ”). If a party hereto determines that there has been a breach by any other party hereto of any such representation or warranty and notifies the breaching party in writing (such notice an “ Indemnity Notice ”) reasonably promptly after learning of such breach but in any case within {*} following the expiration of the Survival Period, such representation or warranty and liability therefor shall survive with respect to the breach specified in the Indemnity Notice until such breach has been resolved. If no Indemnity Notice for a particular breach is received by the Indemnifying Party (as hereinafter defined) {*} following the expiration of the Survival Period, then no remedy shall be available to the Indemnified Party (as hereinafter defined) for such breach of representation and warranty. Notwithstanding the foregoing, the representations and warranties of Section 4.10 (Taxes) shall survive until the expiration of the applicable statute of limitations of the underlying Tax liability.

(b) The indemnification provided for in this Article 8 shall be the exclusive remedy for breach of each party’s representations and warranties (but not with respect to the covenants contained in Article VI) . Further, the parties agree that: (a) Seller’s total liability under the Acquisition Agreements (including pursuant to Section 8.2 of this Agreement) shall be limited to {*}, and (b) Buyer’s total liability for breach of a representation and warranty in any Acquisition Agreement (including pursuant to Section 8.3 of this agreement) shall be limited to {*}, provided that nothing contained in this Agreement shall preclude the assertion within {*} following the expiration of the Survival Period by Buyer or any of its Affiliates of any cause of action that may exist, not based upon breach of contract, for fraud. {*}.

8.2. Indemnification by Seller . Subject to the provisions of Section 8.4 below, Seller agrees unconditionally to indemnify, defend, and hold Buyer and its Affiliates, and its and their officers, directors and employees, harmless from and against any and all of the following:

(a) Any and all Losses (but, to avoid doubt, subject to Section 8.1 ) of every kind, nature or description which arise out of or result from or occur as a consequence of: (i) any false, incorrect or misleading representation or warranty or breach thereof made by or on behalf of Seller in this Agreement (including the Exhibits and Schedules hereto) or in any of the Acquisition Agreements; or (ii) any failure by Seller to perform, comply with, or observe any one or more of their covenants, agreements, or obligations contained in any of the Acquisition Agreements other than the Agreement, but excluding in all cases all Assumed Liabilities.

(b) Any and all Losses other than Assumed Liabilities which may at any time or from time to time arise out of or result from or occur as a consequence of any Third Party Claims which arise out of or result from or are a consequence of: (i) Seller’s ownership and use of the Acquired Assets, or the conduct of the Business and the production, provision, or sale by Seller or its Affiliates of the Product, in each case at any time prior to the Closing Date; (ii) any Excluded Liability; (iii) any failure by Seller to comply with the provisions of this Agreement (except to the extent covered by Section 8.2(a)(i)); and (iv) the failure by Seller to discharge any obligations of Seller which were incurred by Seller or its Affiliates or the Business during the period prior to the Closing Date (except for the Assumed Liabilities), including without limitation the following: (A) any audit or investigation or civil, administrative, or criminal proceedings arising as a result of the operation of the Business prior to the Closing Date whether or not Seller or its Affiliates had knowledge thereof as of the Closing Date, (B) any assessments, adjustments or offsets made against Buyer as a result of such an audit or investigation or in connection with the recovery by any Governmental Authority with respect to Seller’s ownership and use of the Acquired Assets or conduct of the Business prior to the Closing Date, or (C) Seller’s failure to obtain any Third Party Consent that it is required to obtain pursuant to the terms of this Agreement, which is not actually waived in writing by Buyer (to avoid doubt, Third Party Consents exclude consents under {*} and

Without limiting the generality of the foregoing provisions of this Section 8.2 with respect to the measurement of damages, Buyer shall have the right, subject to Section 8.1 , to be put in the same financial position as it would have been in had the representations and warranties of Seller been true and correct, had each of the covenants of Seller been performed in full, and had Seller paid, discharged, and performed all of its liabilities and obligations. Further, to avoid doubt, nothing in this Section 8.2 is intended to alter in any way, nor shall it be used to interpret, the definitions of Assumed Liability and Excluded Liability.

8.3. Indemnification by Buyer . Subject to the provisions of Section 8.4 below, Buyer agrees unconditionally to indemnify, defend and hold Seller and its Affiliates, and its and their officers, directors and employees, harmless from and against any and all of the following:

(a) Any and all Losses (but, to avoid doubt, subject to Section 8.1 ) of every kind, nature or description which arise out of or result from or occur as a consequence of: (i) any false, incorrect or misleading representation or warranty or breach thereof made by or on behalf of Buyer in this Agreement (including the Exhibits and Schedules hereto) or in any of the Acquisition Agreements, but excluding all Excluded Liabilities; (ii) any failure by Buyer to perform, comply with, or observe any one or more of its covenants, agreements, or obligations contained in any of the Acquisition Agreements, but excluding all Excluded Liabilities; or (iii) any counterclaim against Seller resulting from the enforcement or attempted enforcement by Buyer of any of the rights included within the scope of the Patents included in the Transferred Intellectual Property.

(b) Any and all Losses which may at any time or from time to time arise out of or result from or occur as a consequence of any Third Party Claims which arise out of or result from or are a consequence of: (i) Buyer’s ownership and use of the Acquired Assets, or the conduct of the Business at any time on or after the Closing Date; (ii) any Assumed Liability; (iii) any failure by Buyer to comply with the provisions of this Agreement; and (iv) the failure by Buyer to discharge any obligations of Buyer which were incurred by Buyer on or after the Closing Date (except for the Excluded Liabilities), including without limitation the following: (A) any audit or investigation or civil, administrative or criminal proceedings arising as a result of Buyer’s conduct of the Business on or after the Closing Date, and (B) any assessments, adjustments or offsets made against Seller as a result of such an audit or investigation or in connection with the recovery by any Governmental Authority or administrative agency with respect to Buyer’s conduct of the Business on or after the Closing Date.

Without limiting the generality of the foregoing provisions of this Section 8.2 with respect to the measurement of damages, Seller shall have the right, subject to Section 8.1 , to be put in the same financial position as it would have been in had the representations and warranties of Buyer been true and correct, had each of the covenants of Buyer been performed in full, and had Buyer paid, discharged, and performed all of its liabilities and obligations. Further, to avoid doubt, nothing in this Section 8.3 is intended to alter in any way, nor shall it be used to interpret, the definitions of Assumed Liability and Excluded Liability.

8.4. Indemnification Process . Any party seeking indemnification under this Article VIII (each, an “ Indemnified Party ”) shall give each party from whom indemnification is being sought (each, an “ Indemnifying Party ”) notice of any matter which such Indemnified Party has determined has given rise to or could give rise to a right of indemnification under this Agreement, stating the amount of the Loss, if known, and method of computation thereof, and containing a reference to the provisions of this Agreement in respect of which such right of indemnification is claimed or arises. The obligations and liabilities of an Indemnifying Party under this Article VIII with respect to Losses arising from any Third Party Claims which are subject to the indemnification provided for in this Article VIII shall be governed by and contingent upon the following additional terms and conditions:

(a) If any Indemnified Party shall receive notice of any Third Party Claim, the Indemnified Party shall give the Indemnifying Party notice of such Third Party Claim within thirty (30) days of the receipt by the Indemnified Party of such notice; provided , however , that the failure to provide such notice shall not release the Indemnifying Party from any of its obligations under this Article VIII except to the extent the Indemnifying Party is materially prejudiced by such failure.

(b) If the Indemnifying Party acknowledges in writing its obligation to indemnify the Indemnified Party hereunder against any Losses that may result from such Third Party Claim, then the Indemnifying Party shall be entitled to assume and control the defense of such Third Party Claim at its expense and through counsel of its choice if it gives notice of its intention to do so to the Indemnified Party within thirty (30) days of the receipt of such notice from the Indemnified Party; provided , further , however , that if it would be detrimental to the defense of the Indemnified Party for the same counsel to represent both the Indemnified Party and the Indemnifying Party, then the Indemnified Party shall be entitled to retain its own counsel, in each jurisdiction for which the Indemnified Party determines counsel is required, at the expense of the Indemnified Party.

(c) In the event the Indemnifying Party exercises the right to undertake any such defense against any such Third Party Claim as provided above, the Indemnified Party shall cooperate with the Indemnifying Party in such defense and make available to the Indemnifying Party, at the Indemnifying Party’s expense, all witnesses, pertinent records, materials and information in the Indemnified Party’s possession or under the Indemnified Party’s control relating thereto as is reasonably required by the Indemnifying Party. Similarly, in the event the Indemnifying Party declines to take such defense and the Indemnified Party is, directly or indirectly, conducting the defense against any such Third Party Claim, the Indemnifying Party shall cooperate with the Indemnified Party in such defense and make available to the Indemnified Party, at the Indemnifying Party’s expense, all such witnesses, records, materials, and information in the Indemnifying Party’s possession or under the Indemnifying Party’s control relating thereto as is reasonably required by the Indemnified Party.

(d) If the Indemnifying Party shall have failed to assume the defense of any claim in accordance with the provisions of this Article, then the Indemnified Party shall have the absolute right to control the defense of such claim and, if and when it is finally determined that the Indemnified Party is entitled to indemnification from the Indemnifying Party hereunder, the fees and expenses of the Indemnified Party’s counsel shall be borne by the Indemnifying Party and paid by the Indemnifying Party to the Indemnified Party within five (5) business days of written demand therefor, but the Indemnifying Party shall be entitled, at its own expense, to participate in (but not control) such defense.

(e) So long as the Indemnifying Party has assumed and is conducting the defense of the Third Party Claim in accordance with Section 8.4(b) above, (i) the Indemnifying Party shall not consent to the entry of any judgment or enter into any settlement with respect to the Third Party Claim without the prior written consent of the Indemnified Party (not to be withheld unreasonably withheld, conditioned or delayed and not to be withheld at all if the Indemnified Party is completely released from all claims and not required to make any admission of fault or wrongdoing or take any action pursuant to the terms of the settlement), and (ii) the Indemnified Party shall not consent to the entry of any judgment or enter into any settlement with respect to the Third Party Claim without the prior written consent of the Indemnifying Party (not to be withheld unreasonably).

ARTICLE IX
MISCELLANEOUS

9.1. Expenses . Each of the parties hereto shall pay its own fees, costs, and expenses incurred in connection with the negotiation, preparation, execution, and delivery of this Agreement and the consummation of the transactions contemplated hereby.

9.2. Entire Subject Matter; Amendment . This Agreement, together with its Schedules and Exhibits and all ancillary agreements and exhibits and schedules thereto to be delivered at Closing, contains the entire understanding of the parties with respect to the subject matter hereof and supersedes all prior agreements, either oral or written. The Agreement may not be amended and no term or condition may be waived unless signed by both parties to this Agreement. Each party to this Agreement acknowledges that no representations, inducements, promises, or agreements, orally or otherwise, have been made by other party(ies), or by anyone acting on behalf of any party, that are not embodied herein, and that no other agreement, statement, or promise not contained in this Agreement shall be valid or binding.

9.3. Assignment . No party hereto shall assign or otherwise transfer this Agreement or any of its rights hereunder, or delegate any of its obligations hereunder, without the prior written consent of the other party; provided , however , that Buyer shall be permitted, without the consent of Seller, to assign or otherwise transfer this Agreement or any of its rights hereunder: (a) upon the purchase or sale of all or substantially all of the assets or stock of Buyer or the transfer (by operation of law or otherwise) of the ownership or control of Buyer, to the purchaser of such assets or stock or the transferee of such interests; (b) upon the purchase, transfer or sale of all or substantially all of the Acquired Assets or the Business to the purchaser or transferee of such Acquired Assets, business or operations; or (c) to any Affiliate of Buyer. Seller shall be permitted, without the consent of Buyer, to assign or otherwise transfer this Agreement or any of its rights hereunder: (y) upon the purchase or sale of all or substantially all of the assets or stock of Seller; or (z) to any Affiliate of Seller. Subject to the foregoing, this Agreement and the rights and obligations set forth herein, including, without limitation, the obligations of Seller set forth in Section 6.2 , shall inure to the benefit of, and be binding upon the parties hereto, and each of their respective successors, heirs, and assigns.

9.4. Counterparts . This Agreement may be executed in two or more counterparts, any one of which need not contain the signatures of all parties, but all of which counterparts when taken together shall constitute one and the same agreement. One or more counterparts may be executed by facsimile or other electronic means with the intent that execution by such means shall have the same effect as execution of an original hereof.

9.5. Governing Law . This Agreement shall be governed by and construed in accordance with the Laws of the State of New York applicable to contracts made and to be performed in that State without regard to principles of conflicts of laws.

9.6. Schedules and Exhibits . The Schedules and Exhibits attached hereto are an integral part of this Agreement. All exhibits and schedules attached to this Agreement are incorporated herein by this reference and all references herein to this “Agreement” shall mean this Asset Purchase Agreement together with all such exhibits and schedules, and all ancillary agreements and exhibits and schedules thereto to be delivered at Closing.

9.7. Severability . Subject to the last two sentences of Section 6.2(b) , any provision hereof which is held to be prohibited or unenforceable in any jurisdiction will, as to such jurisdiction, be adjusted rather than avoided, if possible, in order to achieve the intent of the parties to this Agreement to the extent possible without in any manner invalidating the remaining provisions hereof.

9.8. Notices . All notices or other communications required or permitted hereunder shall be in writing and shall be deemed properly given {*} after being sent by registered or certified mail, postage prepaid, to the parties at the address listed below:

	If to Seller:	Avigen, Inc.
		1301 Harbor Bay Parkway
		Alameda, California 94502
		Attention: Michael D. Coffee,
		Chief Business Officer

	With a required copy to:	Avigen, Inc.
		1301 Harbor Bay Parkway
		Alameda, California 94502
		Attention: Christina Thomson, Esq.,
		VP and Corporate Counsel

	If to Buyer :	Baxter Healthcare Corporation
		One Baxter Parkway
		Deerfield, Illinois 60015
		Attention: General Counsel

	and	Baxter International Incorporated
		One Baxter Parkway
		Deerfield, Illinois 60015
		Attention: General Counsel

	With a required copy to:	Baxter Healthcare S.A.
		Hertistrasse 2,
		8304 Wallisellen,
		Switzerland
		Attention: Corporate Counsel

9.9. Representation by Counsel . Each party hereto acknowledges that it has been advised by legal and any other counsel retained by such party in its sole discretion. Each party acknowledges that such party has had a full opportunity to review this Agreement and all related exhibits, schedules and ancillary agreements and to negotiate any and all such documents in its sole discretion, without any undue influence by any other party hereto or any third party.

9.10. Construction . The parties have participated jointly in the negotiations and drafting of this Agreement and in the event of any ambiguity or question of intent or interpretation, no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement.

9.11. Headings . The article and section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement.

9.12. Further Assurances .

(a) On and after the Closing Date, each party shall, and shall cause its respective Affiliates to, execute such other documents and instruments of conveyance and transfer as may be reasonably requested by the other party from time to time to fully effectuate the transfer of the Acquired Assets to Buyer in accordance with the terms of this Agreement (including the execution of Intellectual Property Acquisition Agreements in recordable form with respect to the Transferred Intellectual Property).

(b) If Seller identifies after the Closing Date any additional Contracts used primarily in or held primarily for the Business, then Seller shall use good-faith reasonable efforts to assign (to the extent permitted by the Contract) such Contract to Buyer, and if Buyer agrees in writing that it accepts such assignment, such Contract shall be deemed listed in Schedule 4.11 ({*}) and deemed listed in the Assignment and Assumption Agreement (or a new version of the Assignment and Assumption Agreement will be executed between the Parties to reflect when the new Contract was identified and the date of its assignment) and if successfully assigned to Buyer (or the benefits of the Contract otherwise successfully extended to Buyer) the remedy provided in this sentence will be the sole remedy for the prior omission of the Contract, provided that it was not material to the Business.

9.13. No Public Announcement . Other than the press release set forth in Exhibit C , which Seller shall be entitled to release upon signing of this Agreement and on the Closing Date, no party to this Agreement shall, without the approval of the other parties hereto, make any press release or other public announcement concerning the transactions contemplated by this Agreement, except as and to the extent that any such party shall be so obligated by applicable requirements of Law, in which case the other parties shall be advised and the parties shall use their reasonable efforts to cause a mutually agreeable release or announcement to be issued; provided , however , that the foregoing shall not preclude communications or disclosures necessary to implement the provisions of this Agreement or to comply with the accounting and U.S. Securities and Exchange Commission disclosure obligations or the rules of any stock exchange.

9.14. Waivers . No waiver by any party, whether express or implied, of its rights under any provision of this Agreement shall constitute a waiver of the party’s rights under such provisions at any other time or a waiver of the party’s rights under any other provision of this Agreement. No failure by any party to take any action against any breach of this Agreement or default by another party shall constitute a waiver of the former party’s right to enforce any provision of this Agreement or to take action against such breach or default or any subsequent breach or default by the other party. To be effective any waiver must be in writing and signed by the waiving party.

[Signature Page Follows]

[Signature Page to Asset Purchase Agreement]

THEREFORE , the parties hereto have executed, or caused this Asset Purchase Agreement to be executed by their duly authorized representatives, as of the date first written above.

BUYER :			SELLER :

BAXTER HEALTHCARE			AVIGEN, INC.
CORPORARTION


/s/ Joy A. Amundson			/s/ Kenneth G. Chahine
By: Joy A. Amundson			By: Kenneth G. Chahine
Its: CVP, President BioScience			Its: President and Chief Executive
			Officer


BAXTER INTERNATIONAL, INC.


/s/ Joy A. Amundson
By: Joy A. Amundson
Its: CVP, President BioScience

BAXTER HEALTHCARE S.A.


/s/ Ignacio Martinez
By: Ignacio Martinez
Its: Corporate Counsel

/s/ Rebecca Binggeli
By: Rebecca Binggeli
Its: Director of Tax, Europe

TABLE OF EXHIBITS AND SCHEDULES

Exhibit A – Form of Assignment and Assumption and Bill of Sale

Exhibit B – Form of Assignments in Recordable Form

Exhibit C – Press Releases

Exhibit D – Letter of Transfer

Schedule 1.0 – Table of Definitions

Schedule 1.1 – Acquired Assets

Schedule 1.2 – Excluded Assets

Schedule 2.2 – Allocation of Purchase Price

Schedule 4.3 – Third Party Consents

Schedule 4.5 – Licenses and Permits

Schedule 4.7(b) – Recalls; Adverse Events; Governmental Authorities

Schedule 4.11 – Contracts

Schedule 4.12 – Financing Statements

Schedule 4.13 – Intellectual Property

EXHIBIT A

FORM OF ASSIGNMENT AND ASSUMPTION
AND BILL OF SALE

BILL OF SALE
AND
ASSIGNMENT AND ASSUMPTION AGREEMENT

THIS BILL OF SALE AND ASSIGNMENT AND ASSUMPTION AGREEMENT (this “ Agreement ”) is made and entered into as of this ___ day of December, 2008 (the “ Effective Date ”), by and among Avigen, Inc., a Delaware corporation (“ Seller ”), and Baxter Healthcare Corporation, a Delaware corporation (“ BHC ”), Baxter International Inc., a Delaware corporation (“ BII ”), and Baxter Healthcare S.A., a Swiss Corporation (“ BHSA ”). BHC, BII and BHSA are individually and collectively referred to herein as “ Buyer ”.

WHEREAS, Seller and Buyer are parties to that certain Asset Purchase Agreement of even date herewith (the “ Purchase Agreement ”), pursuant to which Buyer has purchased certain assets of Seller;

WHEREAS, the Asset Purchase Agreement provides for, among other things, the transfer and sale to Buyer of certain assets of Seller, all as more fully described in the Purchase Agreement, for consideration in the amount and upon the terms provided in the Purchase Agreement;

WHEREAS, by this instrument Seller is vesting in Buyer all of the properties, assets and rights of Seller hereinafter described; and

WHEREAS, pursuant to the Purchase Agreement, Seller has further agreed to assign certain rights and agreements to Buyer, and Buyer has agreed to assume certain obligations of Seller, as set forth herein.

NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein, and for other good and valuable consideration, the receipt, adequacy and legal sufficiency of which are hereby acknowledged, the parties do hereby agree as follows:

1. Capitalized Terms . Capitalized terms used but not defined herein shall have the meanings for such terms that are set forth in the Purchase Agreement.

2. Bill of Sale . Seller does hereby convey, grant, bargain, sell, transfer, set over, assign, remise, release, and confirm, effective as of 12:01 a.m. Seller’s local time on December __, 2008 (the “ Effective Time ”), all of Seller’s right, title and interest, of every nature and description, in and to the Acquired Assets, wherever located. To have and to hold all of the Acquired Assets unto Buyer, its successors and permitted assigns forever, to its and their own use forever.

3. Assignment and Assumption . Seller does hereby assign, sell, transfer and set over (collectively, the “ Assignment ”) to Buyer, as of the Effective Time, all of Seller’s right, title, benefit, privileges and interest in and to, and all of Seller’s burdens, obligations and liabilities in connection with, each of the Assumed Liabilities. Buyer does hereby accept the Assignment and assumes and agrees to observe and perform all of the duties, obligations, terms, provisions and covenants, and to pay and discharge all of the liabilities of Seller to be observed, performed, paid or discharged from and after the Closing, in connection with the Assumed Liabilities. Buyer hereby assumes the Assumed Liabilities. Buyer assumes no Excluded Liabilities, and the parties hereto agree that all such Excluded Liabilities shall remain the sole responsibility of Seller.

4. Successors and Assigns; No Third Party Beneficiaries . This Agreement is executed by Seller and shall be binding upon it and its successors and assigns, for the uses and purposes set forth above and referred to herein, effective immediately upon its delivery to Buyer. Nothing in this instrument, express or implied, is intended or shall be construed to confer upon, or give to, any person or entity other than Buyer and its successors and permitted assigns any remedy or claim under or by reason of this Agreement or any terms, covenants or conditions, promises or agreements hereof, and all the terms, covenants and conditions, promises and agreements contained in this Agreement shall be for the sole and exclusive benefit of Buyer and its successors and permitted assigns.

5. Purchase Agreement Conflict . In the event of any conflict or inconsistency between the terms of the Purchase Agreement and the terms hereof, the terms of the Purchase Agreement shall govern. Without limiting the generality of the foregoing, the assignment of any contract within the Acquired Assets is subject to Section 1.7 of the Purchase Agreement and nothing in this Agreement alters such Section 1.7.

6. Further Actions . Each of the parties hereto covenants and agrees, at its own expense, to execute and deliver, at the request of the other party hereto, such further instruments of transfer and assignment as such other party may reasonably request to more effectively consummate the assignments and assumptions contemplated by this Agreement.

7. Counterparts; Facsimile . This Agreement may be executed in one or more original counterparts, each of which shall be deemed an original, but both of which together shall constitute one and the same instrument. One or more counterparts of this Agreement may be delivered by facsimile, with the intention that delivery by such means shall have the same effect as delivery of an original counterpart hereof.

8. Governing Law . This Agreement shall be construed and enforced in accordance with and governed by the laws of the State of New York without regard to the conflicts of laws provisions thereof.

[Signature Page Follows]

[Signature Page to Bill of Sale and Assignment and Assumption Agreement]

THEREFORE , the parties hereto have executed, or caused this Bill of Sale and Assignment and Assumption Agreement to be executed by their duly authorized representatives, as of the date first written above.

BAXTER HEALTHCARE CORPORARTION				AVIGEN, INC.


By:				By:
Its:				Its:


BAXTER INTERNATIONAL INC.


By:
Its:


BAXTER HEALTHCARE S.A.


By:
Its:


By:
Its:

EXHIBIT B

FORM OF ASSIGNMENTS IN RECORDABLE FORM

PATENT ASSIGNMENT

THIS PATENT ASSIGNMENT (“ Assignment ”) is made and entered into as of this __ day of December, 2008 (“ Effective Date ”), by and among Baxter International Inc., a Delaware corporation (“ BII ”), Baxter Healthcare S.A., a Swiss corporation (“ BHSA ” and, together with BII, “ Assignee ”) and Avigen, Inc., a Delaware corporation (“ Assignor ”).

WHEREAS , Assignee and Baxter Healthcare Corporation (collectively “ Buyer ”) and Assignor have entered into that certain Asset Purchase Agreement of even date herewith (the “ Purchase Agreement ”), pursuant to which Assignor agreed, inter alia , to assign to Buyer certain assets relating to the Business (as such term is defined in the Purchase Agreement, including those [United States and foreign patents and patent applications] identified and set forth on Schedule A (collectively, the “ Patents ”); and

WHEREAS, pursuant to the Purchase Agreement, Assignee wishes to acquire and Assignor wishes to assign to Assignee all of Assignor’s right, title and interest in and to the Patents and the inventions covered thereby.

NOW, THEREFORE , for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Assignor hereby sells, assigns, transfers and sets over to Assignee: (i) its rights, title and interests in and to the Patents, including any ownership interests Assignor may have or claim to have in the Patents, and any other rights or interests Assignor may have or claim to have in the Patents, including any continuations, divisions, continuations-in-part, reissues, reexaminations, extensions or foreign equivalents thereof, and including the subject matter of all claims which may be obtained therefrom for Assignee’s own use and enjoyment and for the use and enjoyment of Assignee’s successors, assigns or other legal representatives, as fully and entirely as the same would have been held and enjoyed by Assignor if this Assignment and sale had not been made; together with (ii) all income, royalties, damages or payments due or payable from and after the Effective Date, including, without limitation, all claims for damages by reason of past, present or future infringement or other unauthorized use of the Patents, with the right to sue for, and collect the same for Assignee’s own use and enjoyment, and for the use and enjoyment of its successors, assigns, or other legal representatives.

This Assignment may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

To the extent any provision herein is inconsistent with the Purchase Agreement, the provisions of the Purchase Agreement shall control.

[Signature Page Follows]

[Signature Page to Patent Assignment]

IN TESTIMONY WHEREOF, the Assignor and Assignee have caused this Assignment to be signed and executed by the undersigned officers thereunto duly authorized this __ day of December, 2008.

BAXTER INTERNATIONAL INC.				AVIGEN, INC.

By:				By:

Name:				Name:

Title:				Title:

BAXTER HEALTHCARE S.A.

By:

Name:

Title:


By:

Name:

Title:

Remainder of Signature Page Left Blank Intentionally

STATE OF	)
COUNTY OF	)	ss.

On this __________ day of ________________ , 2008, there appeared before me _______________________ , personally known to me, who acknowledged that __he signed the foregoing Assignment and his/her voluntary act and deed on behalf and with full authority of _____________________________ .


	Notary Public

STATE OF	)
COUNTY OF	)	ss.


	Notary Public

STATE OF	)
COUNTY OF	)	ss.


	Notary Public

EXHIBIT C

PRESS RELEASE

Avigen Sells Early Stage Research Program in Hemophilia to Baxter

Alameda, CA, December 17, 2008 – Avigen, Inc. (Nasdaq: AVGN), a biopharmaceutical company, announced today that the company has sold the rights to its early stage blood coagulation compound, AV513, to Baxter Healthcare Corporation, a global leader in hemophilia therapy, for $7 million. Baxter acquired all rights to AV513, a compound poised for clinical research that has been shown to improve blood coagulation in preclinical models for hemophilia. Avigen has been developing AV513 as an oral therapy to treat patients with bleeding disorders, including hemophilia A.

“The sale of AV513 is an example of building value in a product that is differentiated from current therapies, and bringing it to a valuation point that generated a positive return on investment,” said Kenneth Chahine, Ph.D., J.D., Avigen's president and chief executive officer. “Our team identified AV513 as a drug candidate with a novel approach for treating hemophilia and other bleeding disorders, and which offered strong IP potential in a target patient population with an unmet need. Because it was outside our neurology focus, it was our goal to follow a reasonable budget to establish AV513’s value, and then move it to a better-resourced company with the expertise to develop a safe and effective therapy.”

“This technology acquisition supports Baxter’s efforts to research the application of novel technologies that will pioneer the next generation of hemophilia therapies,” said Hartmut Ehrlich, M.D., vice president of global BioScience research and development for Baxter.

“Looking ahead, our objective is to identify opportunities that represent significant potential value for patients, while balancing our investment of resources and development risk in order to provide a significant and timely return to shareholders. Along these lines, we are also in the process of partnering AV411, our non-opioid glial-attenuator product for neuropathic pain and drug addiction,” continued Chahine.

AV513 was first identified in 2004 by Avigen’s vice president of Research and Development, Kirk Johnson, Ph.D., and colleagues, seeking an existing molecule with strategic characteristics for providing an alternative delivery approach for hemophilia therapies. Pre-clinical efficacy data in hemophilic mice was first published in 2006 in the medical journal Thrombosis & Haemostasis. Efficacy data from the study of an oral form of AV513 in other hemophilia A preclinical models was published in the journal Blood in 2007. Most recently, an in vitro study on AV513 pro-coagulant efficacy in the donated blood of human hemophilia patients was presented at the American Society of Hemophilia meeting in San Francisco on December 9 ^th .

About AV513

AV513 is a drug candidate derived from a specific seaweed enriched for a particular type of non-anticoagulant sulfated polysaccharide denoted fucoidan, which has been shown to boost blood coagulation. Laboratory and preclinical studies indicated AV513’s novel mechanism of action might improve the physiological “spark” for normal blood clot initiation by reducing natural anti-coagulation at local sites of bleeding and thereby allows more normal hemostasis, or clotting. Preclinical in vitro and in vivo studies indicate that AV513 has potential stand-alone utility and might act as an adjunctive or supplementary agent to boost clotting efficiency in combination with Factor VIII or Factor IX, the standard treatments for hemophilia A and B, respectively.

About Avigen

Avigen is a biopharmaceutical company focused on identifying and developing differentiated products to treat patients with serious neurological disorders. Avigen's strategy is to identify, acquire and develop opportunities that represent a positive return to Avigen’s shareholders. Avigen is currently developing AV411 for neuropathic pain, and, in collaboration with the National Institute on Drug Abuse, for opioid withdrawal and methamphetamine addiction. For more information about Avigen, consult the company's website at www.avigen.com .

Statement under the Private Securities Litigation Reform Act

The statements in this press release relating to Avigen’s strategy, objectives and plans to identify, acquire and develop opportunities that represent a positive return to Avigen’s shareholders are forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in these forward-looking statements, including the risk that Avigen will not be able to acquire or develop such opportunities due to monetary, intellectual property, technological or other constraints. In addition, there are many other risks and uncertainties inherent in the development of drug products. Other risks and uncertainties relating to Avigen are detailed in reports filed by Avigen with the Securities and Exchange Commission, including Avigen's Annual Report on Form 10-K for the year ended December 31, 2007, under the caption "Risk Factors" in Item 1A of Part I of that report which was filed with the SEC on March 17, 2008 and Avigen’s quarterly report on Form 10-Q for the period ended September 30, 2008, under the caption "Risks Related to Our Business" in Item 2 of Part I of that report, which was filed with the SEC on November 10, 2008.

CONTACT:

Michael Coffee, Chief Business Officer

Avigen, Inc., 1301 Harbor Bay Parkway, Alameda, CA 94502

510-748-7376

ir@avigen.com

www.avigen.com

Schedule 1.0

TABLE OF DEFINITIONS

“ Acquired Assets ” has the meaning set forth in Section 1.1 .

“ Acquisition Agreements ” means this Agreement, the Assignment and Assumption and Bill of Sale and all other agreements executed in connection with this Agreement and in connection with Closing in the forms attached to this Agreement as Exhibits as of the Effective Date.

“ Affiliate ” and “ Affiliates ” has the meaning set forth in Rule 501 of Regulation D under the Securities Act of 1933, as amended.

“ Agreement ” has the meaning set forth in the preamble to this Agreement.

“ Assigned Contract ” has the meaning set forth in Section 4.11 .

“ Assignment and Assumption and Bill of Sale ” has the meaning set forth in Section 7.1(b) .

“ Assumed Liabilities ” has the meaning set forth in Section 1.3 .

“ AV513 ” means that certain botanical drug comprising a particular type of non-anticoagulant sulfated polysaccharides, fucoidan (which is extracted from brown seaweed), that is under development by Seller.

“ BHC ” has the meaning set forth in the preamble to this Agreement.

“ BHSA ” has the meaning set forth in the preamble to this Agreement.

“ BII ” has the meaning set forth in the preamble to this Agreement.

“ Books and Records ” means

(a) all Medical and Regulatory Information;

(b) all other books, records, files, drawings, bills of material, product specifications, and advertising materials (but excluding correspondence not referred to in (c));

(c) material correspondence with consultants (including any reports from such consultants), customers, suppliers, patient advocacy groups, clinical advisory boards and regulators, formal legal opinions with respect to Transferred Intellectual Property from outside counsel, and formal legal memoranda from outside counsel with respect to Transferred Intellectual Property;

(d) laboratory notes, Invention Records, adverse experience reports and files, supplier lists, business plans and

(e) manufacturing standard operating procedures and quality assurance and control records;

including each of the foregoing (a)-(e) whether in hard copy, magnetic or electronic form and solely to the extent with respect to the Business. In connection with such limitation “to the extent with respect to the Business,” if there is documentation (whether in hard copy, magnetic, or electronic form) that also contains content that is not with respect to the Business, then Seller shall be entitled to provide redacted copies of such documentation as needed to remove or blacken the content that is not with respect to the Business.

“ Business ” has the meaning set forth in the recitals of this Agreement.

“ Buyer ” has the meaning set forth in the preamble to this Agreement.

“ Closing ” has the meaning set forth in the first sentence of Article III of this Agreement.

“ Closing Date ” has the meaning set forth in Article III of this Agreement.

“ Competitor ” means {*}.

“ Confidential Information ” has the meaning set forth in Section 6.1 .

“ Contract ” means any agreement, contract and commitment, written or oral, relating to the Business to which Seller is a party or by which Seller, or any of its properties within the Acquired Assets or the Business, is bound, excluding confidentiality agreements to discuss transactions that were alternatives to the transactions contemplated in this Agreement.

“ Copyrights ” means U.S. and foreign registered and unregistered copyrighted or copyrightable works, pending applications to register the same, and all rights in or with respect to any of the foregoing.

“ Effective Date ” has the meaning set forth in the preamble to this Agreement.

“ Environmental Laws ” means all laws relating to hazardous waste, infectious medical and radioactive waste, and other environmental matters, including, without limitation, the Resource Conservation and Recovery Act, the Clean Air Act and the Comprehensive Environmental Response Compensation and Liability Act, and any regulations issued thereunder.

“ Excluded Assets ” has the meaning set forth in Section 1.2 hereof.

“ Excluded Liabilities ” has the meaning set forth in Section 1.3 hereof.

“ FDA ” has the meaning set forth in Section 4.7(b) hereof.

“ Field ” shall mean {*}.

“ Gene Therapy ” shall mean the insertion of nucleic acid comprising the sequence of a gene or genome into a chromosome in an individual’s cells to treat or prevent a disease or the replacement of a defective mutant allele with a functional one, regardless of whether accomplished in vivo or ex vivo.

“ Governmental Approval ” and “ Governmental Approvals ” have the meanings set forth in Section 4.3(a) hereof.

“ Governmental Authority ” means any governmental department, commission, board, bureau, agency, court or other instrumentality of the United States or foreign country, or any county, jurisdiction, municipality or other political subdivision thereof or any other supranational organization of sovereign states.

“ IND ” shall mean an investigational new drug application.

“ Indemnified Party ” has the meaning set forth in Section 8.4 .

“ Indemnifying Party ” has the meaning set forth in Section 8.4 .

“ Intellectual Property ” means Copyrights, Patents and Trademarks, and all rights to sue, counterclaim and to collect damages and payments for claims of past, present and future infringement, misappropriation or other violation thereof.

“ Invention Records ” means all invention disclosures shown in the records maintained by Seller in the normal course of business.

{*}.

“ Know-How ” means confidential or proprietary ideas, trade secrets, technical knowledge or designs, concepts, methods, processes, proprietary materials, unpatented inventions (whether patentable or not) other than Invention Records, improvements, know-how, formulae, reports, data, customer lists, mailing lists, business plans or other proprietary information that provides the owner with a competitive advantage and all rights in or with respect to any of the foregoing.

“ Knowledge ” means {*}.

“ Law ” or “ Laws ” means any and all foreign, federal, state, and local statutes, codes, licensing requirements, ordinances, laws, rules, regulations, decrees or orders of any foreign, federal, state or local government and any other Governmental Authority including, without limitation, all Environmental Laws and any judgment, decision, decree or order of any court or Governmental Authority.

“ Letter of Intent ” means that certain Non-Binding Letter of Intent between Buyer and Seller dated November 6, 2008.

“ License ” or “ Licenses ” means any licenses, permits, consents, approvals, authorizations, registrations, qualifications, and certifications, in each of the foregoing cases, of any Governmental Authority.

“ Lien ” or “ Liens ” means any lien, claim, security interest, mortgage, pledge, restriction, covenant, charge or encumbrance of any kind or character, direct or indirect, whether accrued, absolute, contingent or otherwise.

“ Loss ” or “ Losses ” means losses, damages, liabilities, taxes, sanctions, deficiencies, assessments, judgments, costs, interest, penalties, amounts paid in settlement and expenses (including, without limitation, reasonable attorneys’ fees, which shall exclude the costs of in-house legal counsel and staff).

“ Materials ” means all finished goods inventories of Product and all other inventories of materials for Product including clinical materials, raw materials, work in process, samples and supplies, wherever located to the extent of Seller’s rights in them as of the Effective Date.

“ Medical and Regulatory Information ” means all in vitro, animal and human pre-clinical and clinical studies and reports, reports of any assay testing, results of any pharmacokinetic, toxicity and stability tests, adverse experience reports, all data generated by outside parties (including investigators) with whom Seller has engaged in the conduct of the development of the Product and any other correspondence with any Governmental Authority relating to the Product; all of the foregoing to the extent of Seller’s rights in them.

“ NASPs ” has the meaning given in Recital A.

“ Patents ” means U.S. and foreign patents and patent applications (including provisional applications), including any continuations, continuations-in-part, re examinations, extensions, divisions, renewals, reissues, patent term extensions, supplementary protection certificates and later filed foreign counterparts thereto and all rights in or with respect to any of the foregoing.

“ Period ” means {*} from the Closing Date.

“ Product ” means the product being developed by Seller commonly referred to as “AV513,” as it is formulated as of the Closing Date.

“ Product Registration ” or “ Product Registrations ” means in each case relating to the Products or the Business, (a) all new drug applications, supplemental new drug applications, and foreign drug and product applications and registrations, (b) any amendments, supplements, or filings or communications with Governmental Authorities in connection with each of the foregoing categories, (c) Medical and Regulatory Information, and (d) Regulatory Approvals.

“ Purchase Price ” has the meaning set forth in Section 2.1 .

“ Regulatory Approval ” or “ Regulatory Approvals ” means the written approval of every Governmental Authority required for the manufacture, marketing, and sale of the Product in such Governmental Authority’s country or countries as well as any pricing and reimbursement approvals required prior to the commencement of commercial sales of Products in such country or countries.

“ Retained Contract ” has the meaning set forth in Section 4.11 .

“ Seller ” has the meaning set forth in the preamble to this Agreement.

“ Seller License ” or “ Seller Licenses ” has the meaning set forth in Section 4.5 .

“ Seller Material Adverse Effect ” means any event, circumstance or condition occurring after the Effective Date {*} which directly (but not solely or exclusively) relates to Seller or any Acquired Asset that individually or in the aggregate with all other events, circumstances and conditions occurring after the Effective Date and not announced before such time is reasonably expected to be materially adverse to: (a) the {*} of the Acquired Assets or (b) Seller’s ability to {*} ; provided, however, that “Seller Material Adverse Effect” shall not include {*}. Buyer acknowledges and agrees that employee departures from Seller in view of the already-announced layoff will not be considered a Seller Material Adverse Effect.

“ Taxes ” means all taxes of any type or nature whatsoever, including without limitation, income, gross receipts, excise, franchise, property, withholding, value added, import duties, employment, payroll, sales and use taxes and any additions to tax and any interest or penalties thereon.

“ Tech Transfer Period ” has the meaning set forth in Section 6.3(a) .

“ Tech Transfer Process ” has the meaning set forth in Section 6.3(a) .

“ Territory ” means the world.

“ Third Party ” means any entity other than Seller, Buyer, or an Affiliate of either of them.

“ Third Party Claim ” means any action, suit, proceeding, claim or demand by or brought by a Third Party.

“ Third Party Consent ” or “ Third Party Consents ” has the meaning set forth in Section 4.3 .

“ Trademarks ” means U.S., state and foreign trademarks, service marks, logos, slogans, trade dress, trade names, and other designations of origin, including all goodwill associated therewith and symbolized thereby, and any common law rights, registrations and applications to register the foregoing, and all rights in or with respect to the foregoing.

“ Transferred Know-How ” means the Know-How that is listed on the Transferred Know-How List.

“ Transferred Know-How Category ” means all Know-How owned, controlled, or used by Seller or its Affiliates that has been primarily used or primarily held for use (a) in the Business or (b) in the research, development or manufacture of the Product, including:

(1) the manufacturing process for AV513 as currently manufactured (to the extent proprietary to Seller, and, to avoid doubt, not individual steps in such process to the extent applied outside of AV513 or NASP manufacture);

(2) the preclinical data that has been generated by or for Avigen before the Closing Date with respect to NASPs within the scope of the Transferred Intellectual Property to treat disorders in the Field.

“ Transferred Know-How List ” has the meaning set forth in Section 6.3 .

“ Transferred Intellectual Property ” has the meaning set forth in Section 4.13 .

Schedule 1.1

Acquired Assets

Seller’s entire right, title and interest as of the Effective Date in and to each of the following which, collectively, reflect all assets primarily used in or primarily held for the benefit of the Business:

	1.		each of Seller’s rights, claims or causes of action accrued or accruing after the Closing Date under the Assigned Contracts;

	2.		all Medical and Regulatory Information;

	3.		all Books and Records;

	4.		all Transferred Intellectual Property;

	5.		the Transferred Know-How;

	6.		all Materials and all rights accruing after the Closing Date under Assigned Contracts against manufacturers or suppliers of any of the Materials;

	7.		all Seller Licenses;

	8.		all goodwill directly associated exclusively with the Acquired Assets or the Business, including all goodwill associated with the Transferred Intellectual Property;

	9.		Buyer’s allocable share of any refunds of any Tax of a type and for a period described in the final two sentences of Section 4.10 ; with Buyer’s share of any such refund to be determined accordance with the principles in the final two sentences of Section 4.10 .

	10.		The IND that Seller has compiled but not filed prior to the Closing.

Schedule 1.2
Excluded Assets

	1.		All real property.

	2.		All equipment (including manufacturing equipment), fixtures and furniture.

	3.		All documents other than those described in Schedule 1.1 .

	4.		All cash and cash equivalents.

	5.		All causes of action for breach of any Contracts occurring prior to the Closing Date.

	6.		All agreements with employees who did prior to the Closing Date operate the Business.

	7.		All rights that Seller may have now or in the future in connection with, under, or as a result of its agreement with Genzyme announced in December 2005.

	8.		All correspondence not included in the “Books and Records” definition.

	9.		Any refund of Taxes relating to the ownership or operation of the Acquired Assets or the conduct of the Business prior to the Closing, including Seller’s allocable share of any refunds of any Tax of a type and for a period described in the final two sentences of Section 4.10 ; with Seller’s share of any such refund to be determined in accordance with the principles set out in the final two sentences of Section 4.10.

	10.		Patent application number 60/634,321, filed December 6, 2004, entitled “Non-anticoagulant Sulfated Polysaccharides (NASPs) for the Treatment of Neuropathic Pain.”

Statement Regarding Omitted Schedules

Pursuant to Regulation S-K Item 601(b)(2), the following briefly describes all omitted schedules. The Company agrees to furnish supplementally a copy of any omitted schedule to the Securities and Exchange Commission upon request.

Schedule 2.2:		Allocation of Purchase Price – description of how purchase price is allocated among Acquired Assets
Schedule 4.3:		Third Party Consents – list of parties from whom consent is required to transfer the Acquired Assets
Schedule 4.5:		Licenses and Permits – list of license and permits required in connection with the transfer of the Acquired Assets
Schedule 4.7(b):		Recalls; Adverse Events; Governmental Authorities – list of any recalls or adverse events related to the Acquired Assets; list of governmental agencies exercising any authority over the Acquired Assets
Schedule 4.11:		Contracts – list of all Contracts
Schedule 4.12:		Financing Statements – list of all financing statement under the UCC
Schedule 4.13:		Intellectual Property – list of all the Transferred Intellectual Property

Exhibit 10.17

E XECUTIVE O FFICER C ASH C OMPENSATION A RRANGEMENTS

Annual salaries for Avigen’s “named executive officers” are, as of March 15, 2009, as follows:

Name	Position	Salary
Kenneth Chahine, J.D., Ph.D.	President, Chief Executive	$	443,251
	Officer and Director

Michael Coffee	Chief Business Officer	$	313,903

Kirk Johnson, Ph.D.	Vice President, Research and	$	278,528
	Development

Andrew Sauter	Chief Financial Officer	$	267,931

M. Christina Thomson, J.D.	Vice President, General	$	267,931
	Counsel and Secretary

The Compensation Committee has not yet established target bonuses for 2009, nor has it established criteria for corporate and individual performance objectives that are intended to be used to determine actual bonuses to be paid for serviced rendered in 2009.

E XHIBIT 10.59

{ * } = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

A MENDMENT

This A MENDMENT (the “ Amendment ”) is entered into as of and to have effect July 22, 2008 (the “ Amendment Effective Date ”), by and between SDI Diagnostics International Ltd, a limited liability company organized under the laws of Switzerland with offices at Baarerstrasse 96/PF 2252 CH-6302 Zug, Switzerland (“ SDI ”), and Avigen, Inc., a Delaware corporation with offices at 1301 Harbor Bay Parkway, Alameda, California 94502, USA (“ Avigen ”).

W HEREAS , SDI and Avigen are parties to that certain Patent and Know-How License, Development and Commercialization Agreement dated January 12, 2006 (the “ Agreement ”);

W HEREAS , the Agreement relates to a license and supply arrangement for SDI to license Avigen IR Products (as defined in the Agreement) and CR Products (as defined in the Agreement) for North America (the Territory, more particularly defined in the Agreement) and to supply Avigen with IR Products and CR Products for this Territory;

W HEREAS , certain changes to the specifications for IR Product (as defined in the Agreement), and to the specifications for the API used to make IR Product, are necessary for there to be the potential for U.S. approval (which is in the interest of both parties), and these changes relate specifically to ensuring that no more than acceptable levels of the Trace Substance (defined below) are present;

W HEREAS , there will be certain costs associated with the specifications changes for API and IR Product and related process development work;

W HEREAS , while Avigen believes that the Agreement as originally executed contemplates this situation and requires SDI to perform the work associated with the specifications changes, SDI takes a view that the Agreement as originally executed did not contemplate that new API and Finished Product could be required as in the current situation;

W HEREAS , regardless of which party is right or wrong, in the spirit of collaboration and the best interests of both parties, the parties have reached certain understandings to amend the Agreement to provide near-term relief to SDI for the costs of the additional process and formulation development work that SDI will perform, in exchange for later-term relief for Avigen as to the amount of development milestones that may later become due under the Agreement, as well as other related amendments, all as more particularly provided for in this Amendment;

N OW , THEREFORE , in consideration of the mutual covenants set forth below, SDI and Avigen agree (and hereby amend the Agreement) as follows:

1. Definitions . All initially capitalized terms used but not defined in this Amendment have the meanings given in the Agreement, except that where explicitly stated, as used in this Amendment, “Sections” will refer to the sections of this Amendment rather than those of the Agreement. As used in this Amendment and the Agreement, the terms “include,” “includes,” “including” and derivative forms of them shall be deemed followed by the phrase “without limitation” (and with no implication being drawn from inconsistent usage as to the actual inclusion of such words in the text in some places but not others). In addition, the following initially capitalized terms shall have the following meanings (with derivative forms being interpreted accordingly):

(a) “ Achievement 1 ” shall mean SDI provides documentation that accurately demonstrates that API that has been produced in a commercial batch size (meaning a batch size with a yield of at least approximately { * }; “approximately” in this context means within plus-or-minus { * }) conforms to the Working API Specification throughout (including at each testing point during) and at the end of a { * } month Stability test in which the samples are stored at { * } under conditions of { * } relative humidity for { * } months. Further details as to stability testing in connection with this definition are as set forth in Exhibit C. “Accurately” in this context means that { * }.

(b) “ Achievement 1 Deadline ” means { * } (i.e., means { * }).

(c) “ Achievement 2 ” shall mean SDI provides documentation that accurately demonstrates that Finished Product that: (a) is an IR Product the dosage of which is equal to { * } of API (not more not less), (b) has been produced in a batch size sufficient such that no bridging for commercial batch size will be required (and in any event no less than { * } tablets as the batch size) under GMP requirements, and (c) has been packaged in { * }; conforms to the Working Finished Product Specification throughout (including at each testing point during) and at the end of a { * } month Stability test in which the samples are stored at { * } and { * } relative humidity for { * } months. Further details as to stability in connection with this definition are as set forth in Exhibit C. “Accurately” in this context means that { * }.

(d) “ Achievement 2 Deadline ” means { * } (i.e., means { * }).

(e) “ Working API Specification ” shall mean the standards for API (including both release and shelf life specifications) set forth in Exhibit A (as they may be updated in accordance with the Agreement, including Sections 3.3 and 4.5 of the Supply Terms).

(f) “ Working Finished Product Specification ” shall mean the standards for Finished Product (including both release and shelf life specifications) set forth in Exhibit A (as they may be updated in accordance with the Agreement, including Sections 3.3 and 4.5 of the Supply Terms).

(g) “ Stability ” under “low,” “intermediate,” “Room Temperature” and “accelerated” conditions shall have the meanings given in Exhibit C, respectively, and as to the testing to be done as to each of API and Finished Product shall be as each is described in Exhibit C.

(h) “ Success Payment ” shall have the meaning given in Section 7.

{ * } = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

(i) “ Trace Substance ” shall mean the compound referred to as “{ * },” the formula and chemical structure of which is set forth in Exhibit D.

2. API Work/Deliverables by SDI . SDI shall develop -- to the extent not already developed -- batch records and a process to produce API conforming to the Working API Specification, subject to Section 4 of t his Amendment. By way of background, SDI has developed batch records and a process to produce API, and using them has produced quantities of API that SDI believes meets the Working API Specification. Quantities of the API thus produced are currently on Stability. However, it is not yet known whether the quantities of API on Stability will conform to the Working API Specification throughout all Stability testing. Further, SDI and Avigen recognize that until Finished Product development is completed, API process validation is performed, and Finished Product process validation is performed, the Working API Specification for the commercial product cannot be finally set; therefore, the current specification is referred to as a “working” specification, and is subject to updates in accordance with the Agreement (including under Sections 3.3 and 4.5 of the Supply Terms). SDI represents and warrants that the ongoing Stability studies conform to ICH guidelines. SDI shall continue such ongoing Stability studies to completion using Commercially Reasonable Efforts. SDI shall disclose the full results of such Stability studies to Avigen in writing promptly (and in any event within { * } Business Days) after the results of testing at each time point become available to SDI (and whether or not a time point required under Exhibit C or another time point at which additional testing is done over and above the required time points).

3. Finished Product Work/Demonstration by SDI . SDI shall develop batch records and a process to produce an IR Product in Finished Product form conforming to the Working Finished Product Specification, subject to Section 4 of this Amendment . SDI shall be responsible to conduct the Stability testing of Finished Product necessary to show whether Achievement 2 has been met. SDI shall commence and continue such Stability studies to completion using Commercially Reasonable Efforts. SDI shall disclose the full results of such Stability studies to Avigen in writing promptly (and in any event within { * } Business Days) after the results of testing at each time point become available to SDI (and whether or not a time point required under Exhibit C or another time point at which additional testing is done over and above the required time points). As is the case with the Working API Specification, currently, the specifications for Finished Product are working specifications (the Working Finished Product Specifications). They, too, remain subject to updates in accordance with the Agreement (including under Sections 3.3 and 4.5 of the Supply Terms).

4. “Stop” Decision Opportunity of SDI . SDI retains the right to make a “Stop” decision based on the technical feasibility of each project (the “projects” being the work directed at achieving each of Achievement 1 and Achievement 2). SDI must use Commercially Reasonable Efforts to complete Achievements 1 and 2 prior to any “Stop” decision. Any decision by SDI to “Stop” is irreversible. SDI must notify Avigen within { * } business days after the “Stop” decision has been made. If SDI does so, or fails to devote Commercially Reasonable Efforts towards achieving each of Achievements 1 and 2 prior to and without notifying Avigen formally in writing of the “Stop” decision, then Avigen will immediately have available to it all remedies and rights under Section 10.4 of the Agreement with respect to both API and Finished Product (if the “Stop” decision occurs before Achievement 1 is completed) or with respect to Finished Product alone (if the “Stop” decision occurs after Achievement 1 is completed). In this latter case, SDI remains responsible to supply API in accordance with the Agreement (including Section 6.4 of the Supply Terms as it applies for API supply after a Significant Supply Failure).

{ * } = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

5. Avigen Parallel Development . Notwithstanding anything express or implied in the Agreement as originally executed, Avigen shall have the full right (including both inside of and outside of the Territory) to conduct process and other development with respect to each of API and Finished Product in parallel with SDI. (To avoid doubt, to conduct such process and other technical development with respect to API and Finished Product, Avigen will (or its contractor will) be producing API and Finished Product.) Avigen shall use any API and Finished Product produced as part of its parallel development effort (and the process(as) that Avigen develops (as well as any resulting API or Finished Product)) in the Territory only for testing as part of the parallel development effort itself; for purposes of conducting clinical trials directed at obtaining Regulatory Approvals (and/or label expansions for Licensed Products that have already been approved), or for use in marketing studies; and in the manufacture of commercial supply of API or Finished Product in the case of an interruption in SDI’s API or Finished Product supply or -- as regards such API and its use -- in the case of SDI’s failure to meet Achievement 1 by the Achievement 1 Deadline (or earlier “Stop” decision), or -- as regards such Finished Product and its use -- SDI’s failure to meet Achievement 2 by the Achievement 2 Deadline (or earlier “Stop” decision). In all other cases SDI shall retain the exclusive right to supply API and Finished Product to Avigen in the Territory to the full extent provided for in the Agreement. Avigen has no intention to become a competitive API or Finished Product manufacturer; rather, it is intended that Avigen would only have the right to use API and Finished Product manufactured by it using any process(es) developed in the Territory under this Section 5 of the Amendment in the limited circumstances described above in this Section 5 of the Amendment and in connection with Avigen’s existing rights under the Agreement in the circumstances in which they apply (including as provided under Sections 4.5.5 and 10.4 of the Agreement (and Sections 6.3-6.6 and 8.3 of the Supply Terms) under the circumstances described in such Sections) and otherwise only after SDI’s applicable supply rights under the Agreement (including the Supply Terms) have expired.

6. Costs . Each Party shall bear the costs of its own activities under Sections 2-5 of this Amendment. Without limitation, this means that SDI’s costs to perform its process and other development and Stability testing obligations under Sections 2 and 3 of this Amendment shall be at SDI’s sole expense. Avigen shall not be required to reimburse SDI such costs. It is anticipated that if SDI is successful in its efforts and meets Achievements 1 and/or 2 on a timeline that leads to a Success Payment being due under Section 7 of this Amendment, SDI’s costs may be partially or wholly recouped out of such Success Payment. However, whether or not any Success Payments become due under Section 7 of this Amendment, and whether or not any such Success Payments exceed or are less than SDI’s costs to achieve the accomplishments leading to any such Success Payments, Avigen shall not owe any further or other amounts other than any that may become due under Section 7 of this Amendment. Similarly, SDI shall have no responsibility for any of the costs of Avigen’s parallel development effort under Section 5 of this Amendment. Avigen may choose to run (itself or through a contractor) its own Trace Substance assay that it (or its contractor) has developed, in parallel to the Stability testing being done by or for SDI. In that case, SDI shall provide the API or Finished Product materials to Avigen for testing at no charge, and Avigen shall be solely responsible for all other costs of the in-parallel testing (as and to the extent it chooses to conduct such testing). In connection with the provision of such API and Finished Product materials for testing, Avigen shall be entitled to make the shipping arrangements. In that case, SDI shall fully cooperate with Avigen in connection with such shipping arrangements. Further detail as to arrangements and obligations in connection with the in-parallel duplicate testing is provided in Section 7(c).

{ * } = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

7. Success Payments .

(a) If SDI achieves the corresponding event by the corresponding deadline, Avigen shall pay SDI the corresponding payment (“ Success Payments ”) in the following chart:

Success Event	Latest Deadline Met (i.e., latest	Success Payment Amount
	date by which Success Event
	achieved)
Achievement 1 (on time)	{ * }	{ * }
Achievement 1 (up to { * })	{ * }	{ * }
Achievement 1 (any	{ * }	{ * }
(including any number of
days) more than { * } and
up to { * })
Achievement 1 (any	{ * }	{ * }
(including any number of
days) more than { * } and
up to { * })
Achievement 1 (any	{ * }	{ * }
(including any number of
days) more than { * })
Achievement 2 (on time)	{ * }	{ * }
Achievement 2 (up to { * })	{ * }	{ * }
Achievement 2 (any	{ * }	{ * }
(including any number of
days) more than { * } and
up to { * })
Achievement 2 (any	{ * }	{ * }
(including any number of
days) more than { * } and
up to { * })
Achievement 2 (any	{ * }	{ * }
(including any number of
days) more than { * })

{ * } = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

To avoid doubt, only one Success Payment may become due in respect of Achievement 1 (and then only if it is achieved by one of the deadlines set forth above). Similarly to avoid doubt, only one Success Payment may become due in respect of Achievement 2 (and then only if it is achieved by one of the deadlines set forth above).

(b) As is consistent with Section 4 of this Amendment, if SDI makes a “Stop” decision as to its work with respect to API under this Amendment or its work with respect to Finished Product under this Amendment prior to achieving Achievement 1 or Achievement 2 (respectively), then all obligations for Avigen to pay Success Payments under this Section 7 of this Amendment, which Success Payments have not already accrued and become due under this Section as of the time of the “Stop” decision, shall immediately, automatically and irreversibly expire and be excised from this Amendment and the Agreement, and any remaining Success Payments shall not ever become due, regardless of whether SDI subsequently restarts any activities directed at achieving Achievement 1 or Achievement 2 or any similar accomplishment.

(c) The respective Achievement is considered achieved when SDI presents Avigen with the required documentation accurately demonstrating such Achievement. (The documentation required to show each Achievement is set forth in Exhibit B to this Amendment.) However, Avigen is entitled to verify that the documentation is correct by either itself testing or engaging a Third Party laboratory to test independently samples of the quantities of API or Finished Product that were part of the same Stability testing as those quantities analyzed in the documentation provided by SDI to show achievement of the relevant Achievement. To enable Avigen if it chooses to conduct such testing in parallel to SDI’s own testing, SDI shall provide, as samples are pulled for each time point in the Stability test and if Avigen requests, a duplicate sample from each time point for Final Product or a sample of the bulk stored under controlled room temperature storage for the API to Avigen (or Avigen’s contractor as designated by Avigen) at no additional charge. The sample from each { * } time point is deemed requested from the outset and Avigen will not be required to request these separately; instead SDI will automatically provide the sample from the { * } time point. Avigen is entitled to make the shipping arrangements for each sample; SDI shall fully cooperate with Avigen in connection with such shipping arrangements; and { * } is required to pay the costs of such shipping. SDI shall provide its documentation as to each Achievement being met promptly after the relevant Stability testing at { * } time point has been completed (and in any event no less than { * } Business Days after such completion). SDI will provide additional samples if requested for further testing. Provided that SDI has Substantially (defined in the last paragraph of this Section 7(c)) complied with its obligations under Section 14 of this Amendment (relating to assistance in establishing the relevant testing methods at Avigen’s contractor and providing adequate quantities of reference standards in advance), and has timely provided to Avigen (for Avigen’s or its contractor’s testing should Avigen choose to test), then Avigen shall have { * } days from receipt of the last required such sample to verify the result set forth in the documentation proffered (ultimately) by SDI (or if later receipt of such documentation from SDI) and in that case Avigen will have the sole responsibility for any delays beyond the { * } days. If SDI has not Substantially complied with any of the foregoing obligations, then Avigen shall have such time as is needed to establish the test methods in a repeatable, validated fashion or obtain the reference standards (as applicable), plus additionally { * } days from the time that Avigen receives the last samples to be tested, in order to verify any Stability results asserted by SDI.

{ * } = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

If the results of the testing under this Section on behalf of Avigen disagree with SDI’s results, and SDI -- within { * } days after Avigen notifies SDI in writing of its disagreement -- disputes Avigen’s result in writing, then an independent Third-Party laboratory selected by both Parties shall verify the results within { * } days after SDI disputes Avigen’s results in writing. SDI shall provide the necessary samples from each time point and needed reference standards, as well as complete disclosure of the analytical methods referred to in Section 14, to such laboratory. Such laboratory shall not be affiliated with either of the Parties and shall not have as a major customer either of the Parties (unless they agree otherwise in their sole discretions). If the Parties cannot agree as to such a laboratory, then one shall be appointed by the arbitral body referred to in Section 12.9.1 of the Agreement. Such laboratory shall be under contract with the Parties jointly and shall disclose its results in writing simultaneously to both Parties. The determination by such laboratory shall be final, conclusive and not disputable by either Avigen or SDI. If such laboratory determines that SDI did achieve the respective Achievement, then SDI’s results shall be considered verified in accordance with this Section 7(c). Otherwise, SDI’s results shall be considered as not verified for purposes of this Agreement. If SDI’s results are considered verified in accordance with the foregoing sentences, then, for purposes of determining the amount of Success Payment due to SDI under Section 7(a), the respective Achievement shall be deemed to have occurred on the day of receipt by Avigen of the last required sample to verify the result set forth in the documentation proffered (ie, the beginning of the { * } verification period referred to in the paragraph above) (“Actual Delivery Date for Testing”) and SDI shall be entitled to payment of the respective “Success Payment” in the amount that would be due based on achievement of the respective Achievement being verified as of the Actual Delivery Date for Testing.

“Substantially” complied with SDI’s obligations under Section 14 means that { * }.

(d) The corresponding Success Payment is due within { * } days after SDI provided its documentation (if Avigen does not choose to verify or have verified the results), or thirty (30) days after the results are verified as described in Section 7(c) of this Amendment (if Avigen does choose verification).

8. API Supply by SDI . SDI shall provide { * } of the API that is currently (as of the Amendment Effective Date) on Stability (or, if the quantities that are currently on Stability fail Stability testing, then other quantities of API that have passed the same Stability testing), within { * } Business Days after Avigen pays to SDI the first Success Payment. SDI shall provide these { * }. Avigen will be responsible to make the shipping arrangements. SDI shall fully cooperate with Avigen in connection with these shipping arrangements. { * } will be responsible for the shipping costs with respect to these { * }. Along with these { * }, SDI shall provide to Avigen (at no charge) the physical characterization information and data as outlined in Exhibit E. If Avigen requests additional amounts of the API that was on Stability as of the Amendment Effective Date, then SDI shall provide the additional amounts requested by Avigen { * } (and with Avigen making the shipping arrangements with SDI’s full cooperation and { * } paying the shipping costs), promptly after (and in any event no more than { * } days after) Avigen’s written request.

{ * } = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

9. Changes to Working API Specification as Finished Product Development Proceeds .
As Finished Product development proceeds, it is possible that the Working API Specification may need to be tightened (i.e., that it may need to be modified in order to provide for lower levels of the Trace Substance than the Working API Specification attached at signing of this Amendment) in order to achieve an ultimate Finished Product with a level of the Trace Substance that is sufficiently low as to be acceptable to the FDA. (This is because the Trace Substance forms { * } under certain conditions and depends on the technically feasible conditions of the process for Finished Product production and how much those conditions lead to the formation of the Trace Substance.) In that case, and subject to Section 4 of this Amendment , SDI will do the necessary development work to develop API to the new specification, at no additional charge. This Amendment (including this Section 9 of the Amendment) shall not be read, used or deemed to modify or limit (or used to interpret) in any way Avigen’s rights under Sections 3.3 and 4.5 of the Supply Terms as originally executed (rather, this Section 9 of the Amendment describes one potential situation circumstance under which a change to the specification for API could be necessary and describes SDI’s responsibilities under that circumstance).

10. Amendments to Milestones Under the Agreement .

(a) The amount of the first milestone payment listed in Section 4.2 of the Agreement (“{ * }”) is hereby reduced by { * } so that the amount that will be due if such milestone is achieved shall be { * }.

(b) The amount of the fifth milestone payment in Section 4.2 of the Agreement (“{ * }”) shall be reduced by { * } so that the amount that will be due if such milestone is achieved shall be { * }.

11. Remedies . SDI agrees that it will not seek further changes to the Agreement (as amended by this Amendment and including as regards work to seek to develop a CR Product Finished Product with sufficiently low levels of Trace Substance so as to be acceptable to FDA) and will honor and substantially perform its commitments with reasonably commercial efforts under the Agreement (as amended by this Amendment and including as regards work to seek to develop a CR Product Finished Product with sufficiently low levels of Trace Substance so as to be acceptable to FDA) without requesting additional compensation to perform such commitments.

12. Commitments . If SDI does not “ substantially honor and perform ” (as described at the end of this Section 12) its supply and related commitments (including its commitments for market authorization and commercial product (including its commitments in connection with process development in order ultimately to be able to supply API or Finished Product to standards acceptable to FDA , and with regard to supply as required of each API and Finished Product)), then Avigen shall immediately have available to it all rights and remedies under Section 10.4 of the Agreement. In addition, all royalty rates specified in the Agreement shall be lowered by { * } of Net Sales. This reduction shall occur automatically without the need for further action by the parties . To “substantially honor and perform,” in the context of this Section 12, means that { * }. As applied to supply commitment in the Agreement, to “substantially honor and perform” means to { * }.

{ * } = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

13. Audit . Avigen is entitled to audit SDI’s records as to conformity of API and Finished Product to the Working API Specification and Working Finished Product Specification, respectively, and Stability data (i.e., data as to Stability testing conducted in connection with the work provided for in this Amendment). SDI shall provide Avigen with copies of (or access to) the relevant finished and approved records promptly upon Avigen’s written request.

14. Assay Establishment at Contractor . In order to support Third Party verification of laboratory data in order to demonstrate whether or not Achievement 1 and Achievement 2 are met, SDI shall provide, upon request from Avigen, and to the extent it is in SDI`s possession or control , all reference, impurity and degradation standards, detailed test methods (in writing), and support for and participation in formal method transfer of critical assays (including at a minimum { * }). To avoid doubt, this includes SDI being reasonably available to answer questions and provide guidance while the methods are being established (and validated as working in the same manner as in SDI’s or its contractor’s hands) at Avigen’s contractor.

15. Product Development Team .

(a) The Parties shall establish a “Product Development Team” with members from both Parties, who shall communicate regularly (at least { * }) to promote a team effort and so as for both parties to be fully informed of all development strategies, work, progress and data of each Party. The Product Development Team shall also produce a { * } written report, which will include the then-most-current Stability data and progress of the clinical program. The Product Development Team shall continue to meet until the earlier of SDI’s achievement of Achievement 2 (or earlier “Stop” decision) or termination or expiration of the Agreement and this Amendment.

(b) Members of Avigen’s Product Development Team may visit SDI’s manufacturing/process development facilities on a regular basis with reasonable advance notice and without undue interruptions. SDI will use its commercially reasonable efforts so that Avigen may also, on advanced notice (not to be required to exceed { * } calendar days), visit and/or audit Catalent or other critical contract research organizations engaged by SDI.

(c) Avigen will provide SDI with any information Avigen develops during its own API and Finished Product development, unless SDI fails to supply Avigen with API after completing Achievement 1, in which case Avigen shall be under no such obligation to provide SDI with information developed during Avigen’s API and Finished Product development. If SDI fails to supply Avigen with API after having completed Achievement 1, Avigen is not required to provide SDI with any information Avigen gains from its own API and Finished Product development. Similarly, if SDI makes a “Stop” decision, then Avigen is not required to provide SDI with any information Avigen gains from its own Finished Product development (in the case of a “Stop” decision after Achievement 1 but before Achievement 2) or from its own API and Finished Product development (in the case of a “Stop” decision before Achievements 1 and 2).

{ * } = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

16. Confidentiality . Section 3.7 of the Agreement applies to this Amendment in the same manner as it applies to the Agreement. The Parties agree that the initial public announcement of this Amendment shall be made by each Party in the form of such Party’s press release attached as Exhibit F-1 (in Avigen’s case) or Exhibit F-2 (in SDI’s case).

17. Legal Miscellany .

(a) This Amendment shall come into effect on the Amendment Effective Date and shall terminate or expire concurrently with the termination or expiration of the Agreement. This Amendment (and the amendments that it effects) shall not separately or independently terminate or expire under any circumstances.

(b) This Amendment (including the amendments to the Agreement that it effects) shall remain in full force and effect regardless of any change in regulatory policies by FDA or any other Regulatory Body.

(c) This Amendment amends and supersedes the Agreement to the extent -- and solely to the extent -- explicitly provided in this Amendment. Obligations of each party and of the parties under this Amendment are deemed to be obligations under the Agreement. Any breach of this Amendment shall be considered a breach of the Agreement (including for purposes of Article 10 of the Agreement). This Amendment and its subject matter shall not be used to interpret the Parties’ original obligations under the Agreement or the meaning of the Agreement as originally executed, including the obligations set forth in and meaning of Sections 3.3 and 4.5 of the Supply Terms. This Amendment only amends the Agreement as explicitly stated in this Amendment, and does not otherwise affect the Agreement or its meaning as originally executed. Both parties reserve their rights as to the meaning of the Agreement as originally executed and make no admission as to any given interpretation by the negotiation and execution of this Agreement . This Amendment is not and shall not be interpreted as an admission by either party as to any particular interpretation of the Agreement (without limitation, Avigen continues to believe that the current circumstances were fully contemplated by the Agreement as originally executed and that the Agreement as originally executed required SDI to do the work described in this Amendment to implement Required Proposed Specifications Changes; SDI continues to assert this in not the case). Nothing in this Amendment shall be deemed to amend Sections 3.3 and 4.5 of the Supply Terms as originally executed, to waive a party’s rights under its interpretation of such Sections of the Supply Terms, or to make any admission as to any interpretation of such Sections of the Supply Terms (nor shall this Amendment be used to interpret such Section). The Agreement remains in full force and effect except as amended by this Amendment.

{ * } = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

It is understood and agreed, however, that for any failure to perform an API or Finished Product process development activity or Specifications change prior to the Amendment Effective Date, and any obligation to implement a Proposed Specification Change that is Required based on the Trace Substance requirement of FDA disclosed to the Parties before the Amendment Effective Date, SDI’s obligations shall be as set forth in this Amendment, not as set forth in the Agreement (to the extent there is a difference, and with each Party reserving all rights as to its interpretation of the requirements of the Agreement as executed) and SDI shall not be subject to damages claims by Avigen on the Agreement as originally executed as regards any such failure to perform or obligation (to be clear, as each of the foregoing is described in this sentence). Without limitation, this last paragraph of Section 17(c), to avoid any shadow of a doubt, does not apply to SDI’s obligations with respect to other Proposed Specification Changes that may be Required, that are based on new requirements of FDA (and each Party reserves all rights as to its interpretation of the Agreement as applied to that situation), and SDI if its fails to perform in connection with such Proposed Specifications Changes that may be Required, shall be subject to damages claims by Avigen to the extent available under the Agreement (or at law or in equity) and nothing in this Amendment shall be read to derogate in any way from Avigen’s rights in such a situation to the extent provided by the Agreement (or at law or in equity).

(d) Article 12 of the Agreement shall apply to this Amendment as if set forth herein in its entirety.

IN WITNESS WHEREOF , the Parties have executed this Agreement in duplicate.

AVIGEN, INC.		SDI DIAGNOSTICS
		INTERNATIONAL LTD

/s/	Kenneth G. Chahine	/s/	Hope Maximillian
Name:	Kenneth G. Chahine	Name:	Hope Maximillian
Title:	CEO	Title:	General Manager
Date:	22 July, 2008	Date:	15 July, 2008

		/s/	Herbert Frantses
		Name:	Herbert Frantses
		Title:	CEO/CFO
		Date:	15 July, 2008

{ * } = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

E XHIBITS L IST

Exhibit A	–	Detailed Specifications for API and Finished Product

Exhibit B	–	Documentation Details

Exhibit C	–	Stability Study Details

Exhibit D	–	Formula and Structure of Trace Substance.

Exhibit E	–	Physical Characterization Information and Data

Exhibit F-1	–	Avigen’s Form of Press Release

Exhibit F-2	–	SDI’s Form of Press Release

{ * } = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

E XHIBIT A
D ETAILED S PECIFICATIONS FOR API AND F INISHED P RODUCT

{ * }

{ * } = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

E XHIBIT B
D OCUMENTATION D ETAILS

{ * }

{ * } = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

E XHIBIT C
S TABILITY S TUDY D ETAILS

{ * }

{ * } = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

E XHIBIT D
F ORMULA AND S TRUCTURE OF T RACE S UBSTANCE.

{ * }

{ * } = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

E XHIBIT E
P HYSICAL C HARACTERIZATION I NFORMATION AND D ATA

{ * }

{ * } = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

E XHIBIT F-1
A VIGEN ’ S F ORM OF P RESS R ELEASE

Avigen’s AV650 Patent Strategy Leads to Expanded Development Agreement

ALAMEDA, Calif., July XX, 2008 (PRIME NEWSWIRE) -- Avigen, Inc. (Nasdaq:AVGN), a biopharmaceutical company innovating the rapeutics for neurological care, today announced an amendment to the company’s contract with Sanochemia Pharmazeutika AG, Avigen’s development partner for AV650 (tolperisone). Under the terms of the amendment, Avigen has agreed to share up to $5 million of the incremental costs to develop a proprietary, purer form of AV650. Avigen and Sanochemia have filed composition-of-matter patents in the United States for a purer form of AV650 that is expected to provide exclusivity through 2027. Avigen is developing AV650 for commercialization in the North American market for the treatment of disabling neuromuscular spasticity and spasm under a license and supply agreement with Sanochemia. Avigen expects to announce the results of its Phase IIb clinical trial for AV650 in patients with spasticity associated with multiple sclerosis in the fourth quarter of 2008. AV650 is a new chemical entity (NCE) in the United States and therefore must comply with all current U.S. Food and Drug Administration (FDA) regulatory requirements for clinical research and marketing. During the clinical development of AV650, Avigen and Sanochemia identified an impurity in tolperisone products commercialized in Europe that exceed the FDA’s standards for the purity of chronically used medicines in the United States. Over the last year, Avigen and Sanochemia reduced the levels of the impurity in the active pharmaceutical ingredient (API) of AV650 below the FDA’s standards. Finished product using this purer API is expected to be used in Avigen’s Phase III clinical trials in 2009. Avigen’s ongoing AV650 trials use drug product that complies with the FDA’s purity standards. Kenneth G. Chahine, Ph.D., J.D., Avigen's President and Chief Executive Officer commented “There is a long-standing precedent in the pharmaceutical industry for the filing and granting of new composition-of-matter patents on purer versions of existing medicines. Our purer form of AV650 has allowed us to file multiple composition-of-matter patents that we believe will significantly enhance the value of this program by extending exclusivity of AV650 in the United States through 2027. The first of our filed patents is expected to be published later in 2008. The additional development costs were anticipated and are reflected in our previous cash burn forecasts.” Tolperisone is an orally administered, centrally acting small molecule marketed for the treatment of neuromuscular spasticity and spasm in Europe and Asia. Avigen's U.S. development program is designed to build on the extensive ex-U.S. safety and efficacy experience with this compound. Versions of tolperisone have been approved for marketing in Germany for over 10 years. Sanochemia and its European marketing partner, Orion Pharma, have recently launched a proprietary 150mg tablet formulation of tolperisone in Germany under the brand name Viveo®.

About Avigen

Avigen is a biopharmaceutical company focused on developing and commercializing small molecule therapeutics to treat serious neurological disorders, including neuropathic pain and neuromuscular spasm and spasticity. Avigen's strategy is to complete the requirements of clinical development for each of the candidates in its product pipeline, and continue to look for opportunities to expand its pipeline through a combination of internal research, acquisitions, and in-licensing, with the goal of becoming a fully integrated commercial biopharmaceutical company that remains committed to its neurology products. Avigen is currently developing AV650 for spasticity and neuromuscular spasm and AV411 for neuropathic pain. Additionally, the company is advancing AV513, a novel therapy for the treatment of multiple bleeding disorders, including hemophilia A and B, toward clinical trials. For more information about Avigen, consult the company’s website at www.avigen.com.

{ * } = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

Forward-looking Statement [TBD]

Contact: Michael Coffee
Chief Business Officer
Avigen, Inc.
1301 Harbor Bay Parkway, Alameda, CA 94502
Tel: 510-748-7372
Fax: 510-748-7155
E-mail: ir@avigen.com

{ * } = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

E XHIBIT F-2
SDI’ S F ORM OF P RESS R ELEASE

Ad hoc Announcement pursuant to Section 15
of the German Securities Trading Act (WpHG)
Sanochemia Pharmazeutika AG – ISIN AT0000776307

SANOCHEMIA receives additional financing for further development
of tolperisone for the US market

Vienna, ……July 2008 SANOCHEMIA Pharmazeutika AG, Vienna, listed in the Prime Standard of the Frankfurt Stock Exchange (ISIN AT0000776307) today announced jointly with its US partner Avigen Inc. an amendment to their common agreement. SANOCHEMIA will now receive an additional payment of up to five million dollars, over and above the agreed sums, for its development work on a highly pure formulation of tolperisone.

Avigen, which holds the exclusive marketing and distribution rights for the North American market, is currently developing tolperisone (AV650) for the treatment of spasticity and painful spasms under a licensing and production deal with SANOCHEMIA. In the fourth quarter of 2008, Avigen plans to announce the results of a clinical phase IIb trial on the efficacy of and tolerance to tolperisone in the treatment of spasticity associated with multiple sclerosis.

Highly pure form of tolperisone should extends marketing exclusivity

The new development programme of tolperisone to produce this highly pure form represents a major technical achievement for Sanochemia and Avigen.. In the US market, tolperisone is classified as a new chemical entity (NCE) and therefore must meet the regulatory requirements for clinical development and marketing imposed by the FDA. In terms of the strict standards for the purity of medicinal products for marketing in the USA, Sanochemia and Avigen have been successful in meeting these standards for the active pharmaceutical ingredient (API).

This newly developed form of tolperisone has been protected through the filing of several composition of matter patents in the United States. The first associated patent application is expected to publish before the end of 2008. The value of this new development is underpinned by the expected extended marketing exclusivity of Avigen’s AV650 in the USA (until 2027).

“This patent strategy is a key element of the US development cooperation with Avigen,” says CEO of SANOCHEMIA, Herbert Frantsits, “the development of the highly pure form of tolperisone as an API and the associated market exclusivity significantly improve the growth and earnings outlooks for SANOCHEMIA and Avigen." The new formulation of the API will be used in the finished medicinal product and is intended to form the basis of the clinical phase III trial scheduled for 2009. Tolperisone is a substance with a proven track record as a muscle relaxant and has been available in various presentations, particularly in Eastern Europe, Germany and Asia, for a number of years. Avigen's development programme in the US is based on the many years of safety and efficacy data previously obtained with this substance. Orion Pharma GmbH, SANOCHEMIA’s marketing and distribution partner in several European markets, has recently launched a 150mg formulation of tolperisone in Germany under the brand name Viveo ^® .

{ * } = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

-------End of the announcement
About Sanochemia

Sanochemia Pharmazeutika AG is a specialty pharmaceutical company with outstanding development skills and its own API production facilities. The company has elected to focus on the areas of the central nervous system, pain, oncology and clinical diagnostics – indication areas with high therapeutic demands and urgent medical need for new and innovative drugs as the means to improving patient quality of life. In its manufacturing activities, Sanochemia concentrates on the development of complex synthetic APIs. Sanochemia is the exclusive supplier to Janssen-Cilag of synthetic galantamine – a substance used in the treatment of Alzheimer’s disease. Tolperisone, a substance used in the treatment of neuromuscular spasms, has already been approved in Germany in the indication spasticity associated with neurological disorders such as stroke and multiple sclerosis. Another development focus lies on PVP hypericin, a development candidate for the diagnosis of bladder cancer for which Sanochemia recently received US patents for the formulation and use of the active ingredient. To learn more about Sanochemia please visit the company’s website at www.sanochemia.at

About Avigen

Avigen is a biopharmaceutical company focused on developing and commercializing small molecule therapeutics to treat serious neurological disorders, including neuropathic pain and neuromuscular spasm and spasticity. Avigen's strategy is to complete the requirements of clinical development for each of the candidates in its product pipeline, and continue to look for opportunities to expand its pipeline through a combination of internal research, acquisitions, and in-licensing, with the goal of becoming a fully integrated commercial biopharmaceutical company that remains committed to its neurology products. Avigen is currently developing AV650 for spasticity and neuromuscular spasm and AV411 for neuropathic pain. Additionally, the company is advancing AV513, a novel therapy for the treatment of multiple bleeding disorders, including haemophilia A and B, toward clinical trials. For more information about Avigen, consult the company’s website at www.avigen.com.

For further details please contact:
Margarita Hoch,
Investor Relations
Phone: +43 / 1 / 3191456 / 335
Fax: +43 / 1 / 3191456 / 344
m.hoch@sanochemia.at

770676 v3/HN

{ * } = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

Exhibit 23.1

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

We consent to the incorporation by reference in the Registration Statements on Form S-8 (Reg. Nos. 333-12087, 333-68637, 333-94111, 333-42210, 333-56274, 333-90504 and 333-116740) pertaining to the 1993 Stock Option Plan, the 1996 Equity Incentive Plan, the 1996 Non-Employee Directors’ Stock Option Plan, the 1997 Employee Stock Purchase Plan, the 2000 Equity Incentive Plan and the 2006 Equity Incentive Plan, and Registration Statement on Form S-3 (Reg. No. 333-144153) of our reports dated March 13, 2009, with respect to the financial statements of Avigen, Inc. and our assessment of the effectiveness of internal control over financial reporting of Avigen, Inc., included in this Annual Report on Form 10-K for the year ended December 31, 2008.

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

San Francisco, California
March 13, 2009

Exhibit 23.2

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

We consent to the incorporation by reference in the Registration Statements on Form S-8 (Reg. Nos. 333-12087, 333-68637, 333-94111, 333-42210, 333-56274, 333-90504 and 333-116740) pertaining to the 1993 Stock Option Plan, the 1996 Equity Incentive Plan, the 1996 Non-Employee Directors’ Stock Option Plan, the 1997 Employee Stock Purchase Plan, the 2000 Equity Incentive Plan and the 2006 Equity Incentive Plan, and Registration Statement on Form S-3 (Reg. No. 333-144153) and in the related Prospectus of Avigen, Inc. of our reports dated March 14, 2006, with respect to the 2005 financial statements of Avigen, Inc., included in this Annual Report (Form 10-K) for the year ended December 31, 2008.

/s/ ERNST & YOUNG LLP

Palo Alto, California
March 13, 2009

E XHIBIT 31.1

CERTIFICATION

I, Kenneth Chahine, certify that:

1. I have reviewed this Form 10-K of Avigen, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: March 13, 2009

/s/ K ENNETH G. C HAHINE
Kenneth G. Chahine
Chief Executive Officer and President
(Principal Executive Officer)

E XHIBIT 31.2

CERTIFICATION

I, Andrew A. Sauter, certify that:

1. I have reviewed this Form 10-K of Avigen, Inc.;

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: March 13, 2009

/s/ A NDREW A. S AUTER
Andrew A. Sauter
Chief Financial Officer
(Principal Financial Officer)

E XHIBIT 32.1

CERTIFICATION

Pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350), Kenneth Chahine, Chief Executive Officer of Avigen, Inc. (the “Company”), and Andrew A. Sauter, Chief Financial Officer of the Company, each hereby certifies that, to the best of his knowledge:

1. The Company’s Annual Report on Form 10-K for the period ended December 31, 2008, and to which this Certification is attached as Exhibit 32.1, (the “Annual Report”) fully complies with the requirements of Section 13(a) or Section 15(d) of the Exchange Act, and

2. The information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

In Witness Whereof, the undersigned have set their hands hereto as of the 13th day of March, 2009.

	/s/ K ENNETH G. C HAHINE
	Kenneth G. Chahine
	Chief Executive Officer

	/s/ A NDREW A. S AUTER
	Andrew A. Sauter
	Chief Financial Officer