10-Q

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

FORM 10-Q

(Mark One)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2005
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 0-28272

AVIGEN, INC.
(Exact name of registrant as specified in its charter)
Delaware	13-3647113
(State or other jurisdiction 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)

          Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 of 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).  Yes x    No     o

          The number of outstanding shares of the registrant’s Common Stock as of August 1, 2005, was 20,899,498 shares.

AVIGEN, INC.
FORM 10-Q
Quarter Ended June 30, 2005

INDEX

		PAGE
PART I.  FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)	3
	Condensed Balance Sheets at June 30, 2005 and December 31, 2004	3
	Condensed Statements of Operations -
	For three and six months ended June 30, 2005 and 2004 and the period from October 22, 1992 (inception) through June 30, 2005	4
	Condensed Statements of Cash Flows -
	For six months ended June 30, 2005 and 2004 and the period from October 22, 1992 (inception) through June 30, 2005	5
	Notes to Condensed Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34
Item 4.	Controls and Procedures	34
PART II.  OTHER INFORMATION
Item 1.	Legal Proceedings	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 3.	Defaults Upon Senior Securities	34
Item 4.	Submission of Matters to a Vote of Security Holders	35
Item 5.	Other Information	35
Item 6.	Exhibits	36
SIGNATURES		39

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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

AVIGEN, INC.
(a development stage company)

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

	June 30, 2005			December 31, 2004
		(Unaudited)			Note 1
ASSETS
Current Assets:
Cash and cash equivalents	$	1,522		$	3,217
Available-for-sale securities		55,187			61,073
Restricted investments – current		500			—
Accrued interest		690			708
Prepaid expenses and other current assets		564			443
Total current assets		58,463			65,441
Restricted investments		10,428			11,928
Property and equipment, net		6,255			12,497
Deposits and other assets		532			641
Total assets	$	75,678		$	90,507
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable and other accrued liabilities	$	751		$	641
Accrued compensation and related expenses		1,022			927
Total current liabilities		1,773			1,568
Long-term loan payable		8,000			8,000
Deferred rent		1,079			1,064
Stockholders’ equity:
Preferred Stock, $0.001 par value, 5,000,000 shares authorized, none issued and outstanding		—			—
Common Stock, $0.001 par value, 50,000,000 shares authorized, 20,381,750 and 20,381,250 shares Issued and outstanding at June 30, 2005 and December 31, 2004, respectively		20			20
Additional paid-in capital		236,960			236,959
Accumulated other comprehensive income		(537	)		(525	)
Deficit accumulated during development stage		(171,617	)		(156,579	)
Total stockholders’ equity		64,826			79,875
Total liabilities and stockholders’ equity	$	75,678		$	90,507

See accompanying notes.

3

AVIGEN, INC.
(a development stage company)

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

	Three Months Ended June 30,						Six Months Ended June 30,						Period from October 22, 1992 (inception through) June 30, 2005
	2005			2004			2005			2004
Revenue	$	11		$	2,002		$	20		$	2,152		$	3,465
Operating expenses:
Research and development		3,665			4,963			7,306			10,062			134,811
General and administrative		2,013			1,944			3,892			4,771			56,082
Impairment loss related to long-lived assets		4,490			—			4,490			—			4,490
In-license fees		—			—			—			—			5,034
Total operating expenses		10,168			6,907			15,688			14,833			200,417
Loss from operations		(10,157	)		(4,905	)		(15,668	)		(12,681	)		(196,952	)
Interest expense		(74	)		(55	)		(137	)		(107	)		(2,517	)
Interest income		408			481			793			1,047			28,103
Other expense, net		(25	)		(34	)		(26	)		(53	)		(251	)
Net loss	$	(9,848	)	$	(4,513	)	$	(15,038	)	$	(11,794	)	$	(171,617	)
Basic and diluted net loss per common share	$	(0.48	)	$	(0.22	)	$	(0.74	)	$	(0.58	)
Shares used in basic and diluted net loss per common share calculation		20,381,506			20,371,852			20,381,378			20,348,763

See accompanying notes.

4

AVIGEN, INC.
(a development stage company)

CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

	Six Months Ended June 30,						Period from October 22, 1992 (inception) through June 30, 2005
	2005			2004
Operating Activities
Net cash used in operating activities	$	(8,544	)	$	(11,013	)	$	(141,194	)
Investing Activities
Purchases of property and equipment		(26	)		(346	)		(28,204	)
Decrease (increase) in restricted investments		1,000			—			(10,928	)
Purchases of available-for-sale securities		(19,885	)		(12,375	)		(724,970	)
Maturities of available-for-sale securities		25,759			23,281			669,248
Net cash provided by (used in) investing activities....		6,848			10,560			(94,854	)
Financing Activities
Proceeds from long-term obligations		—			—			10,133
Proceeds from warrants and options exercised		1			485			14,064
Proceeds from issuance of common stock, net of issuance costs and repurchases		—			—			205,619
Other financing activities		—			—			7,754
Net cash provided by financing activities		1			485			237,570
Net (decrease) increase in cash and cash equivalents		(1,695	)		32			1,522
Cash and cash equivalents, beginning of period		3,217			2,384			—
Cash and cash equivalents, end of period	$	1,522		$	2,416		$	1,522

See accompanying notes.

5

AVIGEN, INC.
(a development stage company)

NOTES TO CONDENSED FINANCIAL STATEMENTS

1.       Interim Financial Statements

          Our accompanying unaudited condensed financial statements of Avigen, Inc. have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.  In the opinion of management, all adjustments, consisting only of normal recurring adjustments and accruals, considered necessary for a fair presentation of the results for the interim periods presented have been included.  Operating results reported for the three and six months ended June 30, 2005 are not necessarily indicative of the results that may be expected for any other interim period or for the entire year ending December 31, 2005.  These unaudited interim financial statements should be read in conjunction with our audited financial statements and the notes thereto included in our Annual Report on Form 10-K for the period ended December 31, 2004, filed with the Securities and Exchange Commission on March 16, 2005.

          The balance sheet at December 31, 2004 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

          Use of Estimates

          The preparation of 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.

2.       Stock-Based Compensation

          We have elected to continue to follow APB 25 and related interpretations, to account for stock options granted to our employees and directors.  Under APB 25, using the prescribed intrinsic value method of accounting, no compensation expense is recognized when the exercise price of the stock options equals the market price of the underlying stock on the date of the option grant.

          In April 2005, the SEC adopted a new rule that amends the compliance dates for FASB Statement No. 123(R), (“FAS 123(R)”), “Share-Based Payment.”  FAS 123(R) will require us to expense employee stock options and other share-based payments in our statements of operations.  Under the Commission’s new rule, we are required to implement FAS 123(R) at the beginning of our next fiscal year that begins after June 15, 2005, or effective January 1, 2006.  The Commission’s new rule does not change the accounting required by FAS 123(R); it changes only the dates of compliance.  The new standard may be adopted in one of two ways - the modified prospective transition method or the modified retrospective transition method. We are currently evaluating the requirements of FAS 123(R) and what the impact will be on our compensation practices and our financial statements.  We have not yet determined how we will adopt the standard, but do expect that it will have a material impact on our results of operations and net loss per share. 

          The following table illustrates the effect on our net loss and loss per common share if we had applied the fair value recognition provisions of FAS 123 to our stock-based employee compensation (in thousands, except for per share data):

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	Three Months Ended June 30,						Six Months Ended June 30,
	2005			2004			2005			2004
Net loss - as reported	$	(9,848	)	$	(4,513	)	$	(15,038	)	$	(11,794	)
Add: Stock-based employee compensation included in reported net loss		—			—			—			220
Less: Total stock-based employee compensation expense determined under the fair-value-based method for all awards		(758	)		(1,613	)		(1,547	)		(4,877	)
Net loss - pro forma	$	(10,606	)	$	(6,126	)	$	(16,585	)	$	(16,451	)
Net loss per common share basic and diluted – as reported	$	(0.48	)	$	(0.22	)	$	(0.74	)	$	(0.58	)
Net loss per common share basic and diluted - pro forma	$	(0.52	)	$	(0.30	)	$	(0.81	)	$	(0.81	)

          For purposes of disclosure pursuant to FAS 123, as amended by FAS 148, the estimated fair value of our employee stock options is amortized to expense on a straight-line basis over the vesting period of the options, generally over four years.  We use the Black-Scholes option valuation model to estimate the fair value of our options on the date of grant.  Options that were granted during the three and six month periods ended June 30, 2005 and 2004 were valued with the following weighted average assumptions:

	Three Months Ended June 30,						Six Months Ended June 30,
	2005			2004			2005			2004
Expected volatility		0.6888			0.8212			0.7046			0.8242
Risk free interest rate		3.93	%		3.72	%		3.90	%		3.36	%
Expected life of options in years		5			5			5			5
Expected dividend yield		—			—			—			—

          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.

          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 estimated fair values of stock options granted during the six-month period ended June 30, 2005 and 2004 as calculated using the Black-Scholes option pricing model were $3.01 and $5.40, respectively.

          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 FAS 123 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. 

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3.       Cash and cash Equivalents, Available-For-Sale Securities, and Restricted Investments

          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, with the primary investment objectives of preservation of principal, a high degree of liquidity, and maximum total return.  We have classified 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 and as a separate component of stockholders’ equity until realized.  A decline in the market value of a security below its cost that is deemed to be other than temporary is charged to earnings, and would result in the establishment of a new cost basis for the security. 

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

          Restricted Investments

          At June 30, 2005, $10.4 million and $0.5 million were classified as restricted investments in long term and current assets, respectively.  At December 31, 2004, $11.9 million was classified as restricted investments in long term assets.  The sum of our long term and current restricted investments represent the combined aggregate portion of our portfolio of available-for-sale securities that were pledged in connection with certain long-term liabilities at the end of each period.

8

          The following is a summary of cash, restricted investments, and available-for-sale securities as of June 30, 2005 (in thousands):

	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Cash	$	1,522	$	—	$	—		$	1,522
Corporate debt securities		30,325		—		(220	)		30,105
Federal agency obligations		28,743		1		(288	)		28,456
Asset-backed and other securities		2,198		—		(2	)		2,196
Treasury obligations		5,386		—		(28	)		5,358
Total	$	68,174	$	1	$	(538	)	$	67,637
Amounts reported as:
Cash and cash equivalents		1,522		—		—			1,522
Restricted Investments		10,928		—		—			10,928
Available for sale securities	$	55,724	$	1	$	(538	)	$	55,187
Total	$	68,174	$	1	$	(538	)	$	67,637

          The weighted average maturity of our investment portfolio at June 30, 2005 was 329 days, with $43.1 million carrying an effective maturity of less than twelve months, and $24.5 million carrying an effective maturity between one and three years.

          The following is a summary of cash, restricted investments, and available-for-sale securities as of December 31, 2004 (in thousands):

	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Cash	$	3,217	$	—	$	—		$	3,217
Corporate debt securities		33,438		1		(210	)		33,229
Federal agency obligations		27,362		—		(248	)		27,114
Asset-backed and other securities		3,200		—		(34	)		3,166
Auction rate certificates		3,350		—		—			3,350
Treasury obligations		6,176		—		(34	)		6,142
Total	$	76,743	$	1	$	(526	)	$	76,218
Amounts reported as:
Cash and cash equivalents		3,217		—		—			3,217
Restricted investments		11,928		—		—			11,928
Available-for-sale securities	$	61,598	$	1	$	(526	)	$	61,073
Total	$	76,743	$	1	$	(526	)	$	76,218

          The weighted average maturity of our investment portfolio at December 31, 2004 was 354 days, with $42.7 million carrying an effective maturity of less than twelve months, and $33.5 million carrying an effective maturity between one and three years.

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          Net realized loss was approximately $11,000 for the six months ended June 30, 2005 and net realized gain was approximately $117,000 for the six months ended June 30, 2004.

4.       Property and Equipment

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

	June 30,  2005			December 31, 2004
Leasehold improvements	$	9,242		$	18,439
Laboratory equipment		1,539			6,930
Office furniture and equipment		1,804			2,301
		12,585			27,670
Less accumulated depreciation and amortization		(6,330	)		(15,173	)
Property and equipment, net	$	6,255		$	12,497

          The decrease in leasehold improvements, laboratory equipment, and office furniture and equipment reflects the reduction in our cost basis for these long-lived assets due to impairment at June 30, 2005 of $9.2 million, $5.4 million, and $260,000, respectively.  Accumulated depreciation was also reduced by $10.4 million at June 30, 2005 in connection with the impairment adjustment.

5.       Impairment Loss related to Long-lived Assets

          As announced in April 2005, during the three-month period ended June 30, 2005, we took steps to discontinue funding for our AAV-based gene therapy programs and thereby reduced the scope of our research and development activities.  Accordingly, we determined that our future operations would not require the full capacity of all of our currently leased facilities, and that we could maximize the efficiency of our space usage through consolidation of our research and development activities into a single building.

          As a result, we evaluated the ongoing value of the leasehold improvements and equipment associated with approximately 40,000 square feet of manufacturing, laboratory, and office space, which we have a lease through July 2008.  Based on this evaluation, we determined that long-lived assets with a net carrying value of $4.5 million were no longer recoverable and were in fact impaired.  At June 30, 2005, we recorded an impairment loss related to long-lived assets in the facility and wrote down the full carrying value of the leasehold improvements and equipment to approximate their estimated fair value.  Fair value was based on the expected incremental sublease cash flows we believe we could receive in excess of current market lease rental rates for similar mixed use properties.  Based on current market conditions, including vacancy rates and the expected time needed to sublease the facility, we do not expect to receive significant incremental rents related to the long-lived assets.

          This charge primarily represents accelerated depreciation expense, which is a non-cash expense, that was scheduled to be recognized over the remaining three-year term of the building lease.

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6.       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 both periods presented, we have disclosed comprehensive loss in the statement of stockholders’ equity.

	Three Months Ended June 30,						Six Months Ended June 30,
(Amounts in thousands)	2005			2004			2005			2004
Net loss	$	(9,848	)	$	(4,513	)	$	(15,038	)	$	(11,794	)
Net unrealized gain (loss) on available-for-sale securities		200			(930	)		(12	)		(886	)
Comprehensive loss	$	(9,648	)	$	(5,443	)	$	(15,050	)	$	(12,680	)

7.       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:

	Three Months Ended June 30,				Six Months Ended June 30,
	2005		2004		2005		2004
Potential dilutive stock options outstanding		474,330		522,050		462,989		575,787
Potential dilutive warrants to purchase common stock outstanding		—		—		—		105
Potential dilutive common shares		474,330		522,050		462,989		575,892
Outstanding securities excluded from the potential dilutive common shares calculation (1)		3,826,199		4,252,279		3,851,767		4,070,347

(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 National Market for the period.

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8.       Subsequent Event

          In July 2005, we took additional steps to reduce the costs associated with our gene therapy programs and initiated a reduction of our total staff by approximately 30%, or 17 positions, primarily in research and development.  All of the terminations were completed by August 1, 2005.  This action was consistent with our announcement in April 2005, that we intended to discontinue internal funding of our development programs based on AAV technologies.  As a result of this staff reduction, we expect to report a charge in the quarter ending September 30, 2005, of approximately $650,000.

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

          The following discussion may be understood more fully by reference to the financial statements, notes to the financial statements, and management’s discussion and analysis of financial conditions and results of operations contained in our Annual Report on Form 10-K for the year ended December 31, 2004, filed with the Securities and Exchange Commission on March 16, 2005.

          This Quarterly Report on Form 10-Q contains forward-looking statements, which include, but are not limited to, statements of our expectations regarding our future financial results, and statements about future events and results regarding our drug development programs, clinical trials, our intention to acquire or in-license drug candidates from third parties and the possibility of completing a transaction in 2005, sources of revenue, our intention to redirect our financial resources toward non-AAV neuropathic pain programs and other potential drug candidates, receipt of regulatory approvals, expense savings and cash burn rate resulting from the implementation of our strategic plan and our intention to sublease a portion of our facilities, our expectations regarding future levels of research and development expenses and general and administrative expenses, our intention to enter into distribution and marketing agreements for sales or our products outside the U.S., our expectations related to our need to obtain additional funding to continue the progress of our research and development programs, capital needs, intellectual property, our expectations related to savings in personnel costs attributable to our workforce reduction, and our estimates of the fair value of our securities portfolio at assumed market interest rates.  In some cases, you can identify forward-looking statements by such terms as “may,” “might,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “intend,” “predict,” “potential,” “if” and similar expressions which imply that the statements relate 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 the risks we believe are most important in greater detail under the heading “Risk Factors” below and elsewhere in this report.  Also, these forward-looking statements represent our estimates and assumptions only as of the date of this Form 10-Q.  Avigen undertakes no obligation to update any of the forward- looking statements contained in this report to reflect any future events or developments.

Overview

          Avigen is focused on building a pipeline of innovative therapeutics for the treatment of neurological conditions with the goal of becoming a fully integrated pharmaceutical company that will develop, manufacture, market, and sell its products.  Our strategy is to build a robust pipeline through a combination of internal research, acquisitions and in-licensing of product candidates.  We are primarily working with small molecule compounds and have several novel internal candidates.  A number of these candidates are approved human therapeutics for other indications.  In the last year, we have shifted our focus away from DNA-based drugs, which were primarily based on our proprietary AAV-vector technology.  This shift is made possible by the strength of our senior management team, which has extensive small molecule development and commercialization experience, as well as our current level of financial resources. 

          In order to compliment our internal product development candidates, we are actively seeking to identify and acquire rights to product candidates in later-stage clinical development with good human safety and efficacy data.  In addition, we are committed to continuing our ongoing clinical trial for AV201 for the treatment of Parkinson’s disease.  AV201 utilizes our proprietary AAV-vector technology and has generated encouraging results that have indicated increased activity of the gene product, aromatic L-amino acid decarboxylase (AADC), in the targeted area of the patient’s brain.  These results have reinforced the confidence we have always had in the potential of our AAV technology.  However, consistent with our longer term strategic vision, we still intend to seek external funding for the continuation of this trial and for the further development of our gene therapy technologies.

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Second Quarter and Other Recent Events

          In July 2005, we announced encouraging results from the first patient treated in a phase I/II clinical trial of AV201, our drug candidate for the treatment of mid- to late-stage Parkinson’s disease.  The results from positron emission tomography (PET) brain scans obtained six months after AV201 infusion indicated increased activity of the gene product, AADC, in the targeted area of the brain, compared with the patient’s pre-treatment PET scans.  These findings are consistent with increased dopamine production and transgene expression.  We also treated a second patient in the trial and have scheduled an additional patient treatment in the near future.

          As of August 1, 2005, we had reduced our workforce approximately 30%, or 17 positions, from the June 30, 2005 level in connection with the shift of our focus away from the development of our gene therapy programs.  This reduced our total headcount to approximately 40.  We took this action to reduce our ongoing operating expenses and extend the life of our current financial resources.  We are also in the process of consolidating our research and development operations in order to pursue a sublease of a significant portion of our facilities.  These actions are consistent with our prior announcement to discontinue funding of our proprietary programs using AAV-based technologies.  In connection with the staff reduction, we expect to record a charge for termination benefits of approximately $650,000 in the three months ending September 30, 2005, and we believe that the future annual savings in personnel costs, including salaries and benefits, will approximate $2.1 million. 

          We are a development stage company and have primarily supported the financial needs of our research and development activities since our inception through public offerings and private placements of our equity securities.  We have not received any revenue from the sale of our products in development, and we do not anticipate generating revenue from the sale of products in the foreseeable future.  As a result, we expect that we will need to obtain additional funding to support the anticipated future needs of our research and development activities, including the costs to acquire or in-license drug candidates in later-stage development.  We expect our source of revenue, if any, for the next several years to consist of payments under collaborative arrangements with third parties, government grants, and license fees.  We have incurred losses since our inception and expect to incur substantial losses over the next several years due to lack of any substantial revenue and the continuation of our ongoing and planned research and development efforts, including preclinical studies and clinical trials.  There can be no assurance that we will successfully develop, commercialize, manufacture, or market our product candidates or ever achieve or sustain product revenue for profitability.  At June 30, 2005 we had an accumulated deficit of $171.6 million and cash, cash equivalents, available-for-sale securities, and restricted investments of approximately $67.6 million.  We believe that our capital resources at June 30, 2005, after considering our anticipated decrease in spending on AAV-based technologies, will be adequate to fund our operating needs for at least the next three to four years.

Critical Accounting Policies and Significant Judgments and Estimates

          Our management’s discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. 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, and allocation of research and development expenses. 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.

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Revenue recognition

          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 certain 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.  For example, in March 2003, we received a $2.5 million payment from Bayer under the terms of a collaboration agreement for Coagulin-B, for hemophilia administered to the liver.  The revenue associated with the payment was being recognized ratably over the development phase, which was initially estimated to be five years.  In May 2004, we suspended subject enrollment in the phase I clinical trial for this product and, as a result, ended the development phase for this product and recognized as revenue $2.0 million, constituting the portion of the $2.5 million payment not previously recognized as revenue, during the quarter ended June 30, 2004.

          We recognize non-refundable product license fees, including fees associated with research license agreements, for which we have no further performance obligations, and no continuing involvement requirements, on the earlier of the dates on when the payments are received or when collection is assured.

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.

Impairment of property and equipment

          We have invested significant amounts on construction for improvements to leased facilities we use for our research and development activities, with the largest portion of our spending made to modify manufacturing facilities that are intended to comply with requirements of government mandated manufacturing rules for pharmaceutical production.  Management assesses whether the carrying value of long-lived assets is impaired whenever events or changes in circumstances indicate that the asset may not be fully recoverable.  An impairment loss is recognized 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 the value of our long-lived assets is judged to be impaired, the cost basis of the property and equipment is written down to fair value and the amount of the write down is included in our net loss.  In determining whether the value of our property and equipment is impaired, management considers:

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• failure of manufacturing facilities and equipment to comply with government mandated policies and procedures;

• failure of the products 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.  As of June 30, 2005, we determined that the scope of our research and development activities had been reduced and had initiated steps to seek to sublease approximately 40,000 square feet of our facilities.  Based on market conditions for rental property, we do not expect to fully recover the value invested in leasehold improvements and equipment, and have reduced our net carrying value for these assets to their current fair value, resulting in an impairment loss of approximately $4.5 million.    

Research and development expenses

          Our research and development expenses include certain expenses that are incurred over multiple reporting periods, such as fees for contractors and consultants, fees to collaborators for preclinical research studies, subject treatment costs related to clinical trials and related clinical manufacturing costs, and license fees for use of third-party intellectual property rights.  Management assesses how much of these multi-period costs should be charged to research and development expense in each reporting period.  In determining whether clinical trial activities and preclinical animal studies performed by third parties should be recognized in a specific reporting period, management considers:

• estimates of the percentage of work completed over the life of the individual study in accordance with agreements established with the third-party service providers; and

• estimates of the percentage of work completed over the life of the individual study in accordance with discussions with internal clinical and preclinical personnel and outside service providers as to the progress or stage of completion of trials or services and the agreed upon fee to be paid for such services.

          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 estimates may or may not match the actual services performed by the service providers as determined by subject enrollment levels, preclinical animal study schedules, and related activities.  We monitor service provider activities to the extent possible; however, if we underestimated activity levels associated with various studies at a given point in time, we could record significant research and development expenses in future periods.

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Results of Operations

          Revenue

	Three Months Ended June 30,					Six Months Ended June 30,
(In thousands except percentages)	2005			2004		2005			2004
Revenue	$	11		$	2,002	$	20		$	2,152
Percentage decrease over prior period		(99	)%				(99	)%

          During the three-month period ended June 30, 2005, revenue included $10,000 from research license fees, and $1,300 in royalty revenue.  During the three months ended June 30, 2004, revenue primarily consisted of the recognition of deferred revenue associated with the $2.5 million payment received from Bayer in March 2003 in connection with our Coagulin-B, for the treatment of hemophilia B, to the liver.  The payment from Bayer was being recognized ratably over the estimated development period of our hemophilia B product candidate, which was estimated at five years from the date of the payment in 2003.  In May 2004, we suspended patient enrollment in the trial, which resulted in the termination of the development of the liver-targeted product candidate associated with the Bayer payment and we accelerated the recognition of all remaining deferred revenue.  Our research license agreements allow licensees to make or use products using our patented AAV technologies for research purposes only, and do not allow for the use of our technologies in products for commercial sale. These licenses usually include initiation fees and annual maintenance fees.  The royalty revenue was attributed to a single royalty license that was entered into in July 2000, which allows for the development, manufacture, use and commercial sale of products using our patented AAV technologies.   

          Revenue for the six-month period ended June 30, 2005 included $19,000 from research license fees, and $1,300 in royalty revenue and revenue for the six-month period ended June 30, 2004 included $24,000 from research license fees, $3,000 from royalty revenue, and $2.1 million from the recognition of deferred revenue.

          As a result of the recognition of the remaining amount of the Bayer payment in the second quarter of 2004, we expect that our revenues for the foreseeable future will consist solely of research license fees and royalty revenue, which we expect to be immaterial.

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          Research and Development Expenses

          Our research and development expenses can be divided into two primary functions, costs to support research and preclinical development and 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, production of vector for use by external collaborators in general research and exploration, development of processes to translate research achievements into commercial scale capabilities, 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, manufacturing vector for use in human clinical trials, and supporting subject enrollment and subject administration within clinical trials. 

          During the first half of 2004, our staff count dedicated to research and development activities averaged approximately 76 employees.  In July 2004, consistent with our decision to suspend subject enrollment in the clinical trial for hemophilia B, in order to begin the shift of our resources toward our programs for serious neurological disorders, we reduced our workforce by approximately 36%, and reduced the number of employees dedicated to our research and development activities to approximately 45 at December 31, 2004, compared to an average for the six months ended June 30, 2005 of 43.  As a result, our research and development activities for the three- and six-months ended June 30, 2005 were significantly lower than the levels of research and development activities during the same periods in 2004.   In July 2005, we took additional steps to reduce the costs associated with our gene therapy programs by reducing our total staff by approximately 30%, or 17 positions, primarily in research and development.  All terminations were completed by August 1, 2005.

          During the three- and six-months ended June 30, 2005 and 2004, our research and preclinical development expenses included activities for our AAV-based development programs, primarily for Parkinson’s disease, our non-AAV programs for neuropathic pain and other neurological targets, as well as validation activities associated with potential acquisition or in-license of non-gene therapy drug products.  During the three- and six-months ended June 30, 2005 and 2004, our clinical development expenses included activities to support our AAV-based development programs for the treatment of Parkinson’s disease and hemophilia.

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

	Three Months Ended June 30,				Percentage decrease over prior year			Six Months Ended June 30,				Percentage decrease over prior year
	2005		2004					2005		2004
Research and preclinical development	$	2,446	$	3,311		(26	)%	$	4,787	$	6,616		(28	)%
Clinical development		1,219		1,652		(26	)%		2,519		3,446		(27	)%
Total research and development expenses	$	3,665	$	4,963		(26	)%	$	7,306	$	10,062		(27	)%

          Because a significant percentage of our research and development resources are dedicated to activities that focus on fundamental platform technologies that may be used in many different product applications, including production and administration techniques, the majority of our costs are not directly attributed to individual development programs.  Decisions regarding our project management and resource allocation are primarily based on interpretations of scientific data, rather than cost allocations.  Our estimates of costs between research and preclinical development and clinical development are primarily based on staffing roles within our research and development departments.  As such, costs allocated to specific projects may not necessarily reflect the actual costs of those efforts and, therefore, we do not generally evaluate actual costs-incurred information on a project-by-project basis.  In addition, we are unable to estimate the future costs to completion for any specific projects.

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Research and preclinical development

	Three Months Ended June 30,				Six Months Ended June 30,
	2005		2004		2005		2004
Personnel-related	$	907	$	1,384	$	1,864	$	2,773
External research and development		126		410		214		889
Facilities, depreciation and other allocated		1,413		1,517		2,709		2,954
Total research and preclinical development expenses	$	2,446	$	3,311	$	4,787	$	6,616

          The decreases in our research and preclinical development expenses for the three- and six-month periods ended June 30, 2005, compared to the same periods in 2004, of $865,000 and $1.8 million, respectively, were primarily due to changes in costs for the following:

• lower personnel-related expenses of $477,000 and $909,000, respectively, reflecting an average staff level of approximately 22 fewer individuals, primarily related to the staff reduction in July 2004, partially offset by higher average salaries in 2005, and

• lower expenditures for external research and development services from third-party collaborators associated with our preclinical animal studies of $284,000 and $675,000, respectively, primarily related to our completion of significant preclinical work with Parkinson’s disease in early 2004 as it transitioned into a clinical development phase.

Clinical development

	Three Months Ended  June 30,				Six Months Ended June 30,
	2005		2004		2005		2004
Personnel-related	$	375	$	692	$	824	$	1,361
External clinical development		90		96		167		294
Facilities, depreciation and other allocated		754		864		1,528		1,791
Total clinical development expenses	$	1,219	$	1,652	$	2,519	$	3,446

          The decrease in our clinical development expenses of $433,000 for the three-month period ended June 30, 2005, compared to the same period in 2004, was primarily due to lower personnel-related expenses of $317,000.  This decrease in personnel-related expenses reflects a decrease in our average staff level of approximately 20 fewer than the prior year, primarily as a result of the staff reduction in July 2004, partially offset by higher average salaries in 2005.

          The decrease in our clinical development expenses for the six-month period ended June 30, 2005, compared to the same period in 2004, of $927,000 was primarily due to changes in costs for the following:

• lower personnel-related expenses of $537,000 reflecting an average staff level of approximately 20 fewer individuals, primarily related to the staff reduction in July 2004, partially offset by higher average salaries in 2005,

• lower expenditures for external clinical development services from third-party collaborators associated with recruiting and treating subjects in our clinical trials of $127,000, primarily associated with the irregular pace of recruitment we have experienced in our gene therapy trials for hemophilia and Parkinson’s disease, and

• lower materials expenses of $263,000 included in facilities, depreciation, and other allocated expenses, reflecting higher levels of materials consumed in the prior year in connection with the production of clinical-grade AAV vectors to support the needs of our clinical trials.

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          Total research and development expenses for the six months ended June 30, 2005 were within management’s expectations, taking into account the scheduled pace of subject recruitment in our AAV-based Parkinson’s disease clinical trial and the lengthy time periods common to negotiations with external parties.  We believe delays in regulatory approvals and scheduling of participants will continue to be factors that contribute to a measured pace of progress in our current and future clinical trials.  As a result, we have taken steps reduce our costs associated with our gene therapy programs in order to extend the life of our financial resources available to support the development of our non-gene therapy drug candidates which are focused on neuropathic pain and other neurological conditions.  If we are successful in our efforts to acquire or in-license drug candidates in later-stage development, our total research and development spending will be likely to rise significantly in order to meet the development needs of such products.  However, if we are not successful in our efforts, we would expect to see total research and development spending decline in future periods.

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          General and Administrative Expenses

	Three Months Ended June 30,					Six Months Ended June 30,
	2005			2004		2005			2004
Personnel-related	$	877		$	792	$	1,698		$	1,663
Legal and professional fees		495			465		957			789
Non-recurring severance		—			—		—			923
Facilities, depreciation and other allocated		641			687		1,237			1,396
Total general and administrative expenses	$	2,013		$	1,944	$	3,892		$	4,771
Percentage increase (decrease) over prior period		4	%				(18	)%

          The increase of $69,000 in our general and administrative expenses for the three months ended June 30, 2005, compared to 2004, was primarily due to higher personnel-related expenses, reflecting higher average salaries in 2005.

          The decrease of $879,000 in our general and administrative expenses for the six months ended June 30, 2005, compared to 2004, was primarily due to changes in costs for the following:

	•	non-recurring severance expenses of $923,000, which was accrued in March 2004 in connection with the resignation of our former CEO,
partially offset by,
	•	higher legal and professional fees of $168,000, primarily related to an increase in audit fees associated with the audit of our internal control over financial reporting for the year ended December 31, 2004.

          We expect our general and administrative expenses for 2005 to remain below our 2004 levels, primarily due to the non-recurring nature of the severance expenses incurred in 2004.  However, if we are successful in our efforts to acquire or in-license later-stage clinical development drug candidates, our expected general and administrative spending levels may increase to connection with the changing needs of the company.

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          Impairment Loss Related to Long-Lived Assets

	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands except percentages)	2005		2004		2005		2004
Impairment loss related to long-lived assets	$	4,490	$	—	$	4,490	$	—

          In April 2005, we announced our intention to discontinue funding of our AAV-based programs in order to reduce operating costs.  As of June 30, 2005, we had begun the process of consolidating our research and development activities and seeking to sublease approximately 40,000 square feet of our leased facilities.  Based on our assessment of current rental market conditions, we do not believe that we are likely to receive incremental rents that reflect the carrying value of our investment in leasehold improvements and equipment.  Therefore, we have adjusted the cost basis of these long-lived assets to zero, to reflect their estimated fair value.  This charge represents an acceleration of depreciation expense that was scheduled to be recognized over the next three years.  As a result of recording this charge at June 30, 2005, and the decrease in scheduled depreciation charges, we expect that our reported research and development expenses will decline.

          Interest Income

	Three Months Ended June 30,					Six Months Ended June 30,
(In thousands except percentages)	2005			2004		2005			2004
Interest income	$	408		$	481	$	793		$	1,047
Percentage change over prior period		(15	)%				(24	)%

          Almost all of our interest income is generated from our investments in high-grade marketable securities of government and corporate debt.  The declines in interest income for the six months ended June 30, 2005 as compared to the same period in 2004 were 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, partially offset by slightly higher average yield earned on our portfolio of investments during the six months ended June 30, 2005.

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Recently Issued Accounting Standard

          In April 2005, the SEC adopted a new rule that amends the compliance dates for FASB Statement No. 123(R), (“FAS 123(R)”), “Share-Based Payment.”  FAS 123(R) requires public companies to recognize compensation expense in an amount equal to the fair value of employee stock options and other share-based payments granted to employees.  Under the Commission’s new rule, we are required to implement FAS 123(R) at the beginning of our next fiscal year that begins after June 15, 2005, or effective January 1, 2006.  The Commission’s new rule does not change the accounting required by FAS 123(R); it changes only the dates of compliance.  The new standard may be adopted in one of two ways - the modified prospective transition method or the modified retrospective transition method.  We are currently evaluating how we will adopt the standard and how the requirements may impact our compensation practices and our financial statements.  The impact of adoption of the standard cannot be predicted at this time because it will depend on levels of share-based payments granted in future periods, however we do expect that it will have a material impact on our results of operations and net loss per share.

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.  After our initial public offering in May 1996, we raised $189 million from private placements and public offerings of our common stock and warrants to purchase our common stock, and from the receipt of $2.5 million in research support from Bayer Corporation in March 2003. 

          In addition to funding our operations through sales of our common stock, we have attempted to contain costs and reduce cash flow requirements by renting scientific equipment and facilities, contracting with third parties to conduct research and development and using consultants, where appropriate. We expect to incur additional future expenses, resulting in significant additional cash expenditures, as we continue our research and development activities, including our efforts to acquire or in-license later-stage clinical development drug candidates, and undertake additional preclinical studies and clinical trials of our product candidates. We also expect to incur substantial additional expenses relating to the filing, prosecution, maintenance, defense and enforcement of patent and other intellectual property claims.

          At June 30, 2005, we had cash, cash equivalents, available-for-sale securities, and restricted investments, of approximately $67.6 million, compared to approximately $76.2 million at December 31, 2004.  At June 30, 2005 and December 31, 2004, $10.9 million and $11.9 million, respectively, were pledged to secure certain short- and long-term liabilities.  The reduction of $1.0 million in restricted investments at June 30, 2005, was directly associated with our pledge to collateralize certain equipment operating leases.  As these liabilities are due to be fully paid in less than twelve months, the remaining restricted investments are classified as short-term.  At June 30, 2005 and December 31, 2004, our long-term liabilities which required a pledge of our investment portfolio as collateral included $10.0 million for our line of credit and approximately $428,000 for letters of credit which serve as security deposits on our building lease.  Our restricted investments would not be considered a current source of additional liquidity.

          During the three months ended June 30, 2005, we began the process of consolidating our research and development activities into one of our facilities and are seeking to sublease approximately 40,000 square feet of space for the remaining lease term through June 2008.  This facility has the capacity to support manufacturing, research, and office functions.  As of June 30, 2005, our commitments under leases and other obligations were not materially different from that reported as of December 31, 2004.  As of December 31, 2004, we had commitments under leases and other obligations totaling approximately $21.2 million, payable in varying amounts over more than five years, as more fully described in Item 7 of our Annual Report on From 10-K filed with the SEC on March 16, 2005.

          During the six months ended June 30, 2005, net cash used in operating activities was $8.5 million, primarily due to the net loss of $15.0 million for the period, less the adjustment for non-cash expenses of $4.5 million for the impairment of long-lived assets and $1.8 million in depreciation.  The cash used in operating activities was primarily used to support our internal research and development activities, as well as preclinical studies and clinical trials performed by third parties.  The level of cash used for operating activities during the six months ended June 30, 2005 was in line with management’s expectations. 

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          During the six months ended June 30, 2005, $6.8 million and $1,000 was provided by investing and financing activities, respectively.  The cash provided by investing activities consisted primarily of sales and maturities, net of purchases, of available-for-sale securities and a reduction in the amount of restricted investments pledged in connection with the collateralization of certain equipment operating leases.  The cash provided by investing activities was slightly offset by purchases of property and equipment of $26,000.  The cash provided by financing activities consisted of proceeds from the exercise of stock options during the period.

          We continue to actively seek to broaden our portfolio of drug development candidates through an acquisition or in-licensing program, and have identified several validated compounds that are being investigated, some of which have experience in human clinical trials.  If we are successful with in-licensing or otherwise acquiring compounds, and we pay for such programs in cash, our liquidity and capital resources would be reduced.  Further, any in-license of compounds in greater amounts than we currently project could cause our expenses to increase beyond our current expectations. 

          We believe we will continue to require substantial additional funding in order to complete the research and development activities currently contemplated and to commercialize our proposed products.  We believe that with the reductions in our staff since July 2004, and our projected lower levels of spending to support our gene therapy programs, our financial resources at June 30, 2005 will be adequate to fund our current operating needs for at least three to four years.  However, this forward-looking statement does not include any estimates of expenses we will incur to complete a product acquisition or the related operating expenses that we would likely incur to advance any acquired or in-licensed drug candidates through clinical development and is based on our current expected program needs.  These assumptions regarding our future operating and capital requirements may change.  Our future operating and capital requirements will depend on many factors, including: 

• how successful, if at all, we are at acquiring or in-licensing compounds, and the nature of the consideration we pay for acquired or in-licensing compounds;

• 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;

• the costs involved in filing, prosecuting and enforcing patents claims and other intellectual property rights;

• the costs involved in obtaining licenses to patented technologies from third-parties that may be needed to commercialize our products;

• competing technological developments;

• the cost of manufacturing scale-up;

• the costs of commercialization activities; and

• other factors which may not be within our control.

          We intend to continue to seek additional funding through public or private equity or debt financing, when market conditions allow, or through additional collaborative arrangements with corporate partners. If we raise additional funds by issuing equity securities, there may be further dilution to existing stockholders. We cannot assure our investors that we will be able to enter into such financing arrangements on acceptable terms or at all. Without such additional funding, we may be required to delay, reduce the scope of, or eliminate one or more of our research or development programs.

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RISK FACTORS

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

Risks Related to Our Business

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

          Since our inception in 1992, we have not been profitable, and we cannot be certain that we will ever achieve or sustain profitability.  To date, we have been engaged in research and development activities and have not generated any revenues from product sales. As of June 30, 2005, we had an accumulated deficit of $171.6 million. Acquiring and developing new compounds will require significant additional business development activities and research and development activities, including preclinical testing and clinical trials, and regulatory approval. We expect these activities, together with our general and administrative expenses, to result in operating losses for the foreseeable future. Our ability to achieve profitability will depend, in part, on our ability to successfully identify, acquire, complete development of proposed products, and obtain required regulatory approvals and manufacture and market our approved products directly or through business partners.

Our success could depend on our ability to enhance our existing pipeline of product candidates through the in-license or other acquisition of clinical development candidates.  If our business development efforts are not successful, our ability to achieve profitability will depend on the successful development of our early stage product candidates and our ability to finance the development of such product candidates

          Our current product portfolio consists of early stage product candidates. We intend to expand this portfolio and pursue the in-license or the acquisition of more conventional pharmaceutical products in later-stage clinical development.  If we are not successful in acquiring products in later-stage clinical development, then we will be dependent upon our ability to raise financing for, and the successful development and commercialization of, our current product candidates.  Many other large and small companies within the pharmaceutical and biotechnology industry seek to establish collaborative arrangements for product research and development, or otherwise acquire products in later-stage clinical development, in competition with us. We face additional competition from public and private research organizations, academic institutions and governmental agencies in establishing collaborative arrangements for products in later-stage clinical development. Many of the companies and institutions that compete against us have substantially greater capital resources, research and development staffs and facilities than we have, and greater experience in conducting business development activities. These entities represent significant competition to us as we seek to expand our pipeline through the in-license or acquisition of compounds. Moreover, while it is not feasible to predict the actual cost of acquiring additional product candidates, that cost could be substantial and we may need to raise additional financing or issue additional equity securities, either of which may further dilute existing stockholders, in order to acquire new products.

If we are able to enhance our existing pipeline of product candidates through the in-license or other acquisition of later-stage clinical development candidates, we may expose ourselves to new risks or encounter difficulties that may prevent us from successfully developing or commercializing our product candidates

          If we are able to in-license or acquire potential product candidates alone or as a result of our acquisition of another company, we may fail to identify scientific, clinical, intellectual property, or other 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.  We may further have difficulty integrating potential products or technologies and related operations and personnel, which may disrupt our ongoing operations, distract our management and increase our expenses.  If we are unable to address these risks in a timely manner, we may be unsuccessful developing and commercializing any new product candidates and our business and results of operations could be harmed.

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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 applications similar to those that may be targeted by us.  Developments by these or other entities may render the products that we acquire or 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.  Our competitors may also succeed in developing products that are more effective and less costly than any that we develop and may prove to be more successful in the manufacturing and marketing of products.  Any product that we successfully acquire or 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 conventional and gene therapy products that could compete with products we intend to acquire or develop. 

If our product candidates are not approved by regulatory agencies, including the Food and Drug Administration, we will be unable to commercialize them.

          The Food and Drug Administration (FDA) must approve any new medicine before it can be marketed and sold in the United States. We must provide the FDA and similar foreign regulatory authorities with data from preclinical and clinical studies that demonstrate that our product candidates are safe and effective for a defined indication before they can be approved for commercial distribution.  In order to market our medicines in the European Union and other foreign jurisdictions, we must obtain separate regulatory approvals in each country. The approval procedure varies among countries and can involve additional testing, and the time required to obtain approval may differ from that required to obtain FDA approval. Approval by the FDA does not ensure approval by regulatory authorities in other countries, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or by the FDA.

          Clinical studies involving our product candidates may reveal that those candidates are ineffective, inferior to existing approved medicines, unacceptably toxic or have other unacceptable side effects.  Other 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 or similar foreign regulatory authorities may temporarily suspend clinical trials at any time if they believe the subjects participating in trials are being exposed to unacceptable health risks, if they find deficiencies in the clinical trial process or conduct of the investigation, or to better analyze data surrounding any unexpected developments.  For example, progress in two of our AAV-based clinical trials to treat hemophilia were interrupted to better analyze data from unexpected observations.  These included the identification of vector fragments in the seminal fluid of two early subjects beyond an expected timeframe and the development reported in December 2002 of a temporary elevation in the levels of two liver enzymes in one subject treated with a higher dose.

          Furthermore, the results of preclinical studies do not necessarily predict clinical success, and larger and later-stage clinical studies may not produce the same results as earlier-stage clinical studies. Frequently, product candidates that have shown promising results in early preclinical or clinical studies have subsequently suffered significant setbacks or failed in later clinical studies. In addition, clinical studies of potential products often reveal that it is not possible or practical to continue development efforts for these product candidates. If our clinical studies are substantially delayed or fail to prove the safety and effectiveness of our product candidates, we may not receive regulatory approval of any of our product candidates and our business and financial condition will be materially harmed.

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

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 from the market.

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

          We anticipate that our existing capital resources as of June 30, 2005 will be adequate to fund our currently planned needs for at least the next three to four years. However, beyond that we may require additional funding to acquire new products, to complete the research and development activities currently contemplated, and to commercialize our products. Also, our needs may change upon completing one or more in-licensing or acquisition transactions.  Our future capital requirements will depend on many factors, including:.

• continued scientific progress in research and development programs;

• the scope and results of preclinical studies and clinical trials;

• the time and costs involved in obtaining regulatory approvals;

• the costs involved in filing, prosecuting, defending and enforcing patents claims and other intellectual property rights;

• the costs involved in obtaining licenses to patented technologies from third-parties that may be needed to commercialize our products;

• competing technological developments;

• the cost of manufacturing scale-up;

• the costs of commercialization activities; and

• other factors which may not be within our control.

          We intend to continue to seek additional funding through public or private equity or debt financing, when market conditions are favorable, or through additional collaborative arrangements with corporate partners. If we raise additional funds by issuing equity securities there may be further dilution to existing stockholders. We cannot assure our investors that we will be able to enter into such financing arrangements on acceptable terms or at all. Without such additional funding, we may be required to delay, reduce the scope of, or eliminate one or more of our research or development programs.

We may not be able to obtain terms to facilitate the continued development of our AAV-based programs through external sources that are favorable to us or if we are able, our partners may fail to advance the technologies.  If our efforts to provide external funding for our AAV-based programs are not successful, we may not realize any significant future value from our past research and development activities

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          We have taken steps to discontinue our direct funding for our AAV-based development programs and are in discussions with external sources to provide funding to support the continuation of these programs.  We expect that external funding of these programs could allow us to realize future financial benefits if the continued development of these programs is successful.  Such benefits could provide additional financial support for the clinical development of our potential product candidates.  However, we may not be able to enter into such external funding arrangements on acceptable terms or at all.  In addition, our partners may fail to advance the technologies or may breach obligations under contract.  If we are unable to realize future financial value from our past research and development activities, we may need to raise additional financing or issue additional equity securities, either of which may further dilute existing stockholders, in order to support the clinical development of our potential product candidates, or we may be required to delay, reduce the scope of, or eliminate one or more of our research and development programs.

We have limited experience in manufacturing potential products we may acquire and may in the future depend on third parties to manufacture our products.  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 may not have the internal capability to manufacture commercial quantities of the pharmaceutical products we acquire following the FDA’s regulations concerning current good manufacturing practices (cGMP). In order to continue to develop products, apply for regulatory approvals and commercialize our products, we may need to contract for or otherwise arrange for the necessary manufacturing capabilities. If we are unable to enter into supply and processing contracts on favorable terms or at all, with any of these manufacturers or processors, there may be additional costs and delay in the development and commercialization of our products. Even if we are able to enter into supply and processing contracts with any of these manufacturers or processors, such manufacturers or processors may be unable to satisfy our requirements, which may lead to additional cost and delay in the 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. 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 this the FDA inspection, the approval and eventual commercialization of our products may be delayed.

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If our product manufacturers fail to comply with regulatory requirements, our product commercialization could be delayed or subject to restrictions

          Any contract manufacturers that we use must adhere to the FDA’s regulations on cGMP, which are enforced by the FDA through its facilities inspection program. These facilities must pass a plant inspection before the FDA will issue an approval of the product. The manufacture of product at these facilities will be subject to strict quality control, testing and recordkeeping requirements. Moreover, while we may choose to manufacture our products in the future, we have limited experience in the manufacture of pharmaceutical products for clinical trials or commercial purposes. If we decide to manufacture products, we would be subject to the regulatory requirements described above. In addition, we may require substantial additional capital and would be subject to delays or difficulties encountered in manufacturing pharmaceutical products.

          No matter who manufactures the product, we will be subject to continuing obligations regarding the submission of safety reports and other post-market information. If we encounter delays or difficulties with contract manufacturers, packagers or distributors, market introduction and subsequent sales of our products could be delayed. If we change the source or location of supply or modify the manufacturing process, regulatory authorities will require us to demonstrate that the product produced by the new source or from the modified process is equivalent to the product used in any clinical trials that were conducted. If we are unable to demonstrate this equivalence, we will be unable to manufacture products from the new source or location of supply, or use the modified process, we may incur substantial expenses in order to ensure equivalence, and it may harm our ability to generate revenues.

We have limited experience in manufacturing our potential products at a commercial scale, which raises uncertainty about our ability to manufacture our potential products cost-effectively

          Even if we are able to develop our potential products and obtain necessary regulatory approvals, we have limited experience in manufacturing any of our proposed products on a commercial basis.  If we are unable to manufacture our products in a cost-effective manner, we are not likely to become profitable.  We have not yet received a license from the FDA for our manufacturing facilities, and cannot apply for one until we submit our product for commercial approval.  Even if we do receive a manufacturing license, we may fail to maintain adequate compliance with the FDA’s cGMP, in which case the license, and our authorization to manufacture product, could be revoked. 

We, or our manufacturers, may lose access to critical materials from single source suppliers, which is not within our control and could delay us from manufacturing materials needed to support our clinical trials or future commercialization

          We, and any manufacturers with whom we may contract, may be required to obtain materials used in the manufacture of our clinical products from suppliers, some of whom could be the sole qualified source of these materials.  These suppliers of our clinical materials must be qualified according to cGMP regulations.  If these sources are unable or unwilling to provide critical materials to us, or our manufacturers, in required quantities or on acceptable terms, we would likely incur significant costs and delays in order to identify and qualify a new source of the materials.  It could take us several months to qualify new suppliers before we could use their materials in the manufacture of our clinical products.

If we are able to bring our potential products to market, we continue to face a number of risks including our inexperience in marketing or selling our potential products, the acceptance of our products by physicians and insurers, our ability to price our products effectively and to obtain adequate reimbursement for sales of 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 an adequate 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 an adequate sales force, the cost of establishing such a sales force may exceed any product revenues, or our marketing and sales efforts may be unsuccessful and we may not be able to find a suitable sales and

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

          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.

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

          We are highly dependent on key members of our senior management and scientific staff.  The loss of any of these persons could substantially impair our research and development efforts and impede our ability to develop and commercialize any of our products. Recruiting and retaining qualified scientific, technical and managerial personnel will also be critical to our success.  Biotechnology and pharmaceutical personnel with these skills are in high demand.  As a result, competition for and retention of personnel, particularly for employees with technical expertise, is intense and the turnover rate for these people can be high.  Additionally, because of the reductions to our workforce in 2004, and the initiation of the further reduction of 17 positions in July 2005, it may be more difficult to recruit or retain personnel in the future.

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

Recent changes in the required accounting treatment for stock options will have a material negative impact on our financial statements and may affect our stock price.

          In December 2004, the FASB issued FAS No. 123(R), pursuant to which we must measure all stock-based compensation awards, including grants of employee stock options, using a fair value based method and record such expense in our consolidated financial statements.  We are scheduled to adopt this requirement to expense stock-based compensation awards beginning January 1, 2006.  Currently, we disclose such expenses on a pro forma basis in the notes to our consolidated financial statements, but we do not record a charge for employee stock option expense in the financial statements. Once we begin to comply with FAS No. 123(R), our reported net loss will increase, which may affect our stock price.

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 entail 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

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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 certain of our licensors and/or other third parties with whom we contract, 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 and manufacturing 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 are 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.  Maintaining compliance with these laws and regulations could require substantial additional capital.

Risks Related to Our Current Gene Delivery Products

Our clinical trial to date for AV201 for the treatment of Parkinson’s disease has only treated two subjects over a short period of time, and the results we observe may not be indicative of future results in a larger number of subjects or have lasting effects

          Our current Parkinson’s disease clinical trial has only treated two subjects and any observed progress or results may not be indicative of subsequent progress or results achieved from larger populations or at a higher dose.  At this early stage of our AV201 clinical trial, we do not yet know if we will achieve any favorable results, or if any favorable results achieved will have a lasting effect.  Further, in our previous clinical trials for hemophilia, we did not achieve positive results in humans reflective of the positive results we obtained in animal models.  In the current trial, if a larger population of subjects does not experience positive results, or if any favorable results that we achieve do not demonstrate a lasting effect, this product candidate may not receive approval from the FDA for further studies or commercialization.

The success of our current gene delivery technologies in animal models does not guarantee that the same results will be replicated in humans

          Even though our current product candidates have shown successful results in mouse, dog, and non-human primate models, animals are different than humans and results in animal models may not be replicated in our clinical trials with humans. For example, while the results of our gene therapy treatment for hemophilia B were favorable and demonstrated sustained long-term expression in both dogs and mice for multiple years, one human subject who demonstrated therapeutic levels of circulating factor IX when given a comparable dose size to that used in the successful animal studies was not able to sustain steady factor IX expression beyond five weeks.  In addition, this human subject experienced a mild, temporary elevation of two liver enzymes, which was not seen in any of the animal models.  Further, we experienced an immune system response to our hemophilia product candidate that we did not observe in the animal models, which we have not yet been able to, and may not be able to, adequately address.  Consequently, you should not rely on the results in any of our animal models as being predictive of the results that we will see in our clinical trials with humans.

Adverse events in the field of gene therapy may negatively impact regulatory approval or public perception of our potential gene delivery products

          The commercial success of our potential gene delivery products will depend in part on public acceptance of the use of gene therapy for the prevention or treatment of human diseases.  Public attitudes may be influenced by claims that gene therapy is unsafe, and consequently our products may not gain the acceptance of the public or the medical

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community.  Negative public reaction to gene therapy in general could result in greater government regulation and stricter labeling requirements for gene therapy products, including any of our products, and could cause a decrease in the demand for any products we may develop.

          Our stock price is also influenced by public perception.  For example, in January 2003, a report of serious adverse events in a retroviral trial for infants diagnosed with severe combined immunodeficiency (SCID) in France and subsequent FDA actions putting related trials on hold in the United States had a significant impact on the public perception and stock price of all companies involved in gene therapy.  Our stock declined despite the fact that we do not work with retroviruses or with infants diagnosed with SCID and our clinical trial was not affected by the FDA’s actions in this case.

          Other potential adverse events in the field of gene therapy may occur in the future that could result in greater governmental regulation of our potential products and potential regulatory delays relating to the testing or approval of our potential products.

Gene delivery technology is new and developing rapidly; there is limited clinical data and new information may arise which may cause delays in designing our protocols, submitting applications that satisfy all necessary regulatory review requirements, and ultimately completing the clinical trials of our products

          Clinical trials are governed by regulations enforced by the FDA. Our technology is fairly new, and we have limited historical data from preclinical studies or clinical trials that are often necessary to satisfy the FDA’s regulatory review process. In addition, as new information about the technology becomes available, it may change perceptions of previously accepted data, which could require additional periods of time to review and interpret these data.  For example, we experienced what appears to be an immune system response to our hemophilia product candidate that was not previously seen in, and we have not yet been able to reproduce in, any animal model and which we have not yet been able to, and may not be able to, adequately address.  Further clinical testing is required to confirm to what extent our product candidates might cause human patients to develop immune responses to these potential products or the proteins produced by these potential products.  Such responses could make our product ineffective or lead to unwanted side effects. In addition, as previously discussed, one human subject in our clinical trial experienced a mild, temporary elevation of two liver enzymes, which was not seen in any of the animal models, and was not able to sustain steady factor IX expression beyond five weeks. Consequently, we may encounter deficiencies in the design or application stages while developing our clinical trial studies, or in the subsequent implementation stages of such studies, which could cause us or the FDA to delay, suspend or terminate our trials at any time.

Because our gene delivery product candidates are in an early state of development, there is a high risk that they may never be commercialized

          All of our product candidates are in early stages of development.  We do not have any product candidates that have received regulatory approval for commercial sale, and we face the risk that none of our product candidates will ever receive regulatory approval. We have one product candidate in clinical trials, AV201 for the treatment of Parkinson’s disease.  This product candidate is only in phase I/II of the clinical trial process.  We are not aware of any other gene therapy products of other companies that have received regulatory approval for commercial sale in the U.S., and do not expect any of our prospective products, including AV201, to be commercially available for at least several years.  As results of our clinical trial become available and are evaluated, we may decide at any time to discontinue any further development of one or more of our product candidates.

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 now suspended clinical trials for hemophilia B, and we may experience similar difficulties 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.

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Risks Related to Our Intellectual Property

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

          Our success will depend to a significant degree on our ability to obtain patents and licenses to patent rights, preserve trade secrets, and to operate without infringing on the proprietary rights of others. If we are not successful in these endeavors, our business will be substantially impaired.

          To date, we have filed a number of patent applications in the U.S. relating to technologies we have developed or co-developed. In addition, we have acquired exclusive and non-exclusive licenses to certain issued patents and 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 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 products, and we expect that administrative proceedings, litigation, or both may be necessary to determine the validity and scope of our and others’ biotechnology 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. For example, others may independently develop similar technologies or duplicate any technology developed by us, and any or all of our patents may be invalidated or held unenforceable in litigation.

          In addition, several of our patents and patent applications are co-owned with co-inventors or institutions. To date, we have negotiated exclusive licenses for many of our co-owned technologies. However, if we cannot negotiate exclusive rights to other co-owned technology, each co-inventor may have rights to independently make, use, and offer to sell or sell the patented technology. Commercialization, assignment or licensing of the technology by a co-owner could harm our business.

          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 certain 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.

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. We cannot assure you that litigation asserting claims will not be initiated, that we would prevail in any litigation, or that we would be able to obtain any necessary licenses on reasonable terms, if at all. If our competitors prepare and file patent applications in the U.S. that claim technology also claimed by us, we may have to participate in interference proceedings declared by the Patent and Trademark Office to determine priority of invention, which could result in substantial cost to us, even if the outcome is favorable to us. In addition, to the extent outside collaborators apply technological information developed independently by them or by others to our product development programs or apply our technologies to other projects, disputes may arise as to the ownership of proprietary rights to these technologies.

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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 certain gene sequences, proteins encoded by those sequences, and compounds, including the IL-10 gene, and manufacturing processes that may be 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.

If we do not achieve certain milestones, we may not be able to retain certain licenses to our intellectual property

          We have entered into license agreements with third parties for technologies related to our gene delivery product development programs. Some of these license agreements provide for the achievement of development milestones. If we fail to achieve these milestones or to obtain extensions, the licensor may terminate these license agreements with relatively short notice to us. Termination of any of our license agreements could harm our business.

Risks Related to Our Stock

Anti-takeover effects of certain 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

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

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

          From June 1, 2003 to July 31, 2005, our stock price has fluctuated between a range of $2.75 and $7.98 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:

• technological innovations or regulatory approvals;

• results of clinical trials;

• new products by us or our competitors;

• developments or disputes concerning patents or proprietary rights;

• achieving or failing to achieve certain developmental milestones;

• public concern as to the safety of gene therapy, recombinant biotechnology or traditional pharmaceutical products;

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• health care or reimbursement policy changes by governments or insurance companies;

• developments in relationships with corporate partners;

• developments in negotiations with parties interested in providing external funding for our AV201 clinical trial for Parkinson’s disease and the further development of our AAV-based technologies; and

• a change 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. These broad market and industry fluctuations may cause the market price of our common stock to decline dramatically.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

          Our market risk disclosures set forth in Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2004, have not changed significantly.  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 June 30, 2005 levels, we estimate that the fair value of our securities portfolio would decline by approximately $588,000 compared to our estimated exposure of $740,000 at December 31, 2004, primarily due to the reduction in size of our overall portfolio.

Item 4. Controls and Procedures

          Evaluation of disclosure controls and procedures.  Based on the evaluation as of June 30, 2005, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) were effective to ensure, at a reasonable assurance level, that the information required to be disclosed by us in reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and instructions for such reports.

          Changes in Internal Control over Financial Reporting.  Based on an evaluation as of June 30, 2005, management, including our chief executive officer and chief financial officer, has concluded that there were no changes in our internal control over financial reporting during the quarter ended June 30, 2005 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

          As of August 1, 2005, we were not involved in any legal proceedings.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

          None.

Item 3. Defaults Upon Senior Securities

          None.

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

Our Annual Meeting of Stockholders for the year ended December 31, 2004 was held on May 26, 2005.

The matters voted upon at the Annual Meeting and the voting of stockholders with respect thereto are as follows:

1. Each of Yuichi Iwaki, M.D., Ph.D. and Zola Horovitz, Ph.D., were elected as a Class I director to hold office until our 2008 Annual Meeting of Stockholders and until his successor is elected and has qualified, or until his earlier death, resignation or removal.  The voting results were as follows:

Yuichi Iwaki, M.D., Ph.D.
For	16,519,403
Withhold	1,973,216
Zola Horovitz, Ph.D.
For	15,985,128
Withhold	2,507,491

Our Class II directors, Philip J. Whitcome, Ph.D. and John K.A. Prendergast, Ph.D., will each continue to serve on our Board of Directors until our 2006 Annual Meeting of Stockholders and until his successor is elected and has qualified, or until his earlier death, resignation or removal.   Our Class III directors, Kenneth G. Chahine, Ph.D., J.D. and Daniel Vapnek, Ph.D., will each continue to serve on our Board of Directors until our 2007 Annual Meeting of Stockholders and until his successor is elected and has qualified, or until his earlier death, resignation or removal.

2.

The adoption of Avigen’s 2005 Equity Incentive Stock Option Plan, which was an amendment and restatement of our currently existing 2000 Equity Incentive Stock Option Plan, was not approved.  The voting results were as follows:

For	4,910,589
Against	4,934,248
Abstain	49,207
Broker non-votes	-0-

3. The selection of Ernst & Young LLP as our independent auditors for our fiscal year ending December 31, 2005 was ratified.  The voting results were as follows:

For	18,265,395
Against	182,737
Abstain	44,487
Broker non-votes	-0-

Item 5. Other Information

          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 Ernst & Young 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. The Audit Committee has not approved, and Ernst & Young LLP has not provided, any non-audit services other than those that Avigen has disclosed in previous SEC filings.

35

Item 6. Exhibits

          The following exhibits are included herein:

Exhibit Number	Exhibits
3.1(1)	Amended and Restated Certificate of Incorporation
3.1.1(13)	Certificate of Amendment to Certificate of Incorporation
3.2(1)	Restated Bylaws of the Registrant
4.1(1)	Specimen Common Stock Certificate
10.1(2, 7)	Nonstatutory Stock Option Outside of Plans to Philip J. Whitcome
10.2(1, 2)	1993 Stock Option Plan
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.
10.9(1)	Form of Common Stock Warrant
10.10(2, 5)	2000 Equity Incentive Plan
10.11(2, 12)	Form of Nonstatutory Stock Option Grant for 2000 Equity Incentive Plan
10.14(2, 15)	Form of Incentive Stock Option Grant for 1993 Stock Option Plan
10.15(2, 15)	Form of Nonstatutory Stock Option Grant for 1993 Stock Option Plan
10.16(2, 24)	Form of Nonstatutory Stock Option Grant for 1996 Non-Employee Directors’ Stock Option Plan, as amended
10.17 (2, 24)	Compensation Agreements with Named Executive Officers
10.27(1, 2)	Employment Agreement dated August 10, 1992, between Avigen and John Monahan
10.29(2, 6)	Employment Agreement dated August 14, 1996, between Avigen and Thomas J. Paulson.
10.32(15)	Revolving line of credit note signed November 2, 2000 with Wells Fargo Bank.
10.33(15)	Letter Agreement to the revolving line of credit note signed November 2, 2000 with Wells Fargo Bank.
10.36(2, 8)	Management Transition Plan
10.38(4, 11)	Factor IX patent and Know-How Exclusive License Agreement Between The Children’s Hospital of Philadelphia and Avigen, dated May 20, 1999.
10.39(9, 11)	License Agreement between Avigen and the University of Florida Research Foundation, Inc., dated November 13, 1992, and its First Amendment, dated March 25, 1996.
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.

36

Exhibit Number	Exhibits
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.
10.51(11, 23)	License Agreement, dated November 21, 2003, by and between University of Colorado and Avigen
10.52 (2, 22)	Separation Agreement dated March 8, 2004 between Avigen and John Monahan
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
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	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)

(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 an exhibit to Avigen’s Registration Statement on Form S-8 (Registration No. 333-12087) filed with the SEC on September 16, 1996.
(8)	Incorporated by reference from such document filed with the SEC as an exhibit to Avigen’s Current Report on Form 8-K for the period ended May 26, 2005, as filed with the SEC on May 31, 2005 (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/A for the year ended June 30, 1999, as filed with the SEC (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).

37

(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.
(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 such document filed with the SEC as an exhibit to Avigen’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, as filed with the SEC (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).
(23)	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, 2003, as filed with the SEC on March 15, 2004 (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).

38

SIGNATURES

          Pursuant to the requirements of the Securities and 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.
Date: August 8, 2005	By:	/s/ KENNETH G. CHAHINE
		Kenneth G. Chahine
		Chief Executive Officer and President
Date: August 8, 2005	By:	/s/ THOMAS J. PAULSON
		Thomas J. Paulson
		Vice President Finance,
		Chief Financial and Accounting Officer, and Secretary

39

EXHIBIT INDEX

Exhibit Number	Exhibits
3.1(1)	Amended and Restated Certificate of Incorporation
3.1.1(13)	Certificate of Amendment to Certificate of Incorporation
3.2(1)	Restated Bylaws of the Registrant
4.1(1)	Specimen Common Stock Certificate
10.1(2, 7)	Nonstatutory Stock Option Outside of Plans to Philip J. Whitcome
10.2(1, 2)	1993 Stock Option Plan
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.
10.9(1)	Form of Common Stock Warrant
10.10(2, 5)	2000 Equity Incentive Plan
10.11(2, 12)	Form of Nonstatutory Stock Option Grant for 2000 Equity Incentive Plan
10.14(2, 15)	Form of Incentive Stock Option Grant for 1993 Stock Option Plan
10.15(2, 15)	Form of Nonstatutory Stock Option Grant for 1993 Stock Option Plan
10.16(2, 24)	Form of Nonstatutory Stock Option Grant for 1996 Non-Employee Directors’ Stock Option Plan, as amended
10.17 (2, 24)	Compensation Agreements with Named Executive Officers
10.27(1, 2)	Employment Agreement dated August 10, 1992, between Avigen and John Monahan
10.29(2, 6)	Employment Agreement dated August 14, 1996, between Avigen and Thomas J. Paulson.
10.32(15)	Revolving line of credit note signed November 2, 2000 with Wells Fargo Bank.
10.33(15)	Letter Agreement to the revolving line of credit note signed November 2, 2000 with Wells Fargo Bank.
10.36(2, 8)	Management Transition Plan
10.38(4, 11)	Factor IX patent and Know-How Exclusive License Agreement Between The Children’s Hospital of Philadelphia and Avigen, dated May 20, 1999.
10.39(9, 11)	License Agreement between Avigen and the University of Florida Research Foundation, Inc., dated November 13, 1992, and its First Amendment, dated March 25, 1996.
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.

40

Exhibit Number	Exhibits
10.50(16)	Letter of Agreement to the revolving line of credit note signed June 1, 2002 with Wells Fargo Bank.
10.51(11, 23)	License Agreement, dated November 21, 2003, by and between University of Colorado and Avigen
10.52 (2, 22)	Separation Agreement dated March 8, 2004 between Avigen and John Monahan
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
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	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)

(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 an exhibit to Avigen’s Registration Statement on Form S-8 (Registration No. 333-12087) filed with the SEC on September 16, 1996.
(8)	Incorporated by reference from such document filed with the SEC as an exhibit to Avigen’s Current Report on Form 8-K for the period ended May 26, 2005, as filed with the SEC on May 31, 2005 (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/A for the year ended June 30, 1999, as filed with the SEC (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).

41

(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.
(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 such document filed with the SEC as an exhibit to Avigen’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, as filed with the SEC (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).
(23)	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, 2003, as filed with the SEC on March 15, 2004 (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).

42

EX-31.1

EXHIBIT 31.1

CERTIFICATION

I, Kenneth Chahine, certify that:

1.     I have reviewed this Quarterly Report on Form 10-Q 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: August 8, 2005

/s/ KENNETH G. CHAHINE

Kenneth G. Chahine

Chief Executive Officer and President

(Principal Executive Officer)

EX-31.2

EXHIBIT 31.2

CERTIFICATION

I, Thomas J. Paulson, certify that:

1.     I have reviewed this Quarterly Report on Form 10-Q 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: August 8, 2005

/s/ THOMAS J. PAULSON

Thomas J. Paulson

Vice President, Finance,
Chief Financial and Accounting Officer, and Secretary

(Principal Financial Officer)

EX-32.1

EXHIBIT 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 Thomas J. Paulson, Chief Financial Officer of the Company, each hereby certify that, to the best of his knowledge:

          1. The Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2005, and to which this Certification is attached as Exhibit 32.1, (the “Periodic 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 Periodic 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 8th day of August, 2005.

/s/ KENNETH G. CHAHINE

Kenneth G. Chahine

Chief Executive Officer

/s/ THOMAS J. PAULSON

Thomas J. Paulson

Chief Financial Officer

This certification accompanies the Form 10-Q to which it relates, is not deemed filed with the SEC and is not to be incorporated by reference into any filing of the Company 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-Q), irrespective of any general incorporation language contained in such filing.