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, 2006 

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	(I.R.S. Employer
incorporation or organization)	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 a large accelerated filer, an accelerated filer. or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act).

Large accelerated filer o   Accelerated filer x  Non-accelerated filer o  

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

The number of outstanding shares of the registrant’s Common Stock as of August 1, 2006, was 25,001,187 shares.

1

AVIGEN, INC.
FORM 10-Q
Quarter Ended June 30, 2006

INDEX

PART I. FINANCIAL INFORMATION

		PAGE
Item 1.	Financial Statements (unaudited)	3
	Condensed Balance Sheets at June 30, 2006 and December 31, 2005	3
	Condensed Statements of Operations -	4
	For the three and six months ended June 30, 2006 and 2005 and the period
	from October 22, 1992 (inception) through June 30, 2006
	Condensed Statements of Cash Flows -	5
	For the six months ended June 30, 2006 and 2005 and the period from
	October 22, 1992 (inception) through June 30, 2006
	Notes to Condensed Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of
	Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33
Item 4.	Controls and Procedures	33
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	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		37

2

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,		December 31,
		2006		2005
		(Unaudited)		Note 1
ASSETS
Current Assets:
Cash and cash equivalents	$	7,583	$	11,510
Available-for-sale securities		61,861		48,450
Restricted investments - current		8,000		-
Accrued interest		564		470
Prepaid expenses and other current assets		542		737
Total current assets		78,550		61,167
Restricted investments		2,428		10,428
Property and equipment, net		3,208		3,929
Deposits and other assets		576		740
Total assets	$	84,762	$	76,264
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and other accrued liabilities	$	1,783	$	984
Accrued compensation and related expenses		582		534
Loan payable - current		8,000		-
Total current liabilities		10,365		1,518
Long-term loan payable		-		8,000
Deferred rent and other liabilities		1,189		1,282
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,
24,974,386 and 20,907,273 shares issued and outstanding at
June 30, 2006 and December 31, 2005, respectively		25		21
Additional paid-in capital		257,864		237,258
Accumulated other comprehensive loss		(551)		(540)
Deficit accumulated during development stage		(184,130)		(171,275)
Total stockholders' equity		73,208		65,464
Total liabilities and stockholders' equity	$	84,762	$	76,264

See accompanying notes.

3

     AVIGEN, INC.
(a development stage company)

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

									Period
									from
									October
									22, 1992
	Three Months Ended				Six Months Ended				(inception)
	June 30,				June 30,				through
	2006		2005		2006		2005		June 30, 2006
Revenue	$	-	$	11	$	103	$	20	$	15,574
Operating expenses:
Research and development		3,551		3,665		6,552		7,306		147,832
General and administrative		1,971		2,013		4,786		3,892		65,240
Impairment loss related to long-lived assets		-		4,490		-		4,490		6,130
In-license fees		-		-		3,000		-		8,034
Total operating expenses		5,522		10,168		14,338		15,688		227,236
Loss from operations		(5,522)		(10,157)		(14,235)		(15,668)		(211,662)
Interest expense		(112)		(74)		(214)		(137)		(2,917)
Interest income		724		408		1,291		793		30,283
Sublease income		141		-		282		-		282
Other (expense) income, net		(64)		(25)		21		(26)		(116)
Net loss	$	(4,833)	$	(9,848)	$	(12,855)	$	(15,038)	$	(184,130)
Basic and diluted net loss per commonshare	$	(0.21)	$	(0.48)	$	(0.59)	$	(0.74)
Shares used in basic and diluted net loss per common share calculation	23,014,205		20,381,506		21,959,027		20,381,378

See accompanying notes.

4

AVIGEN, INC.
(a development stage company)

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

					Period from
					October 22,
					1992
	Six Months Ended				(inception)
	June 30,				through
	2006		2005		June 30, 2006
Operating Activities
Net cash used in operating activities	$	(10,395)	$	(8,544)	$	(149,099)
Investing Activities
Purchases of property and equipment		(56)		(26)		(28,511)
Proceeds from disposal of property and equipment		142		-		373
Increase (decrease) in restricted investments		-		1,000		(10,428)
Purchases of available-for-sale securities		(76,479)		(19,885)		(848,039)
Maturities of available-for-sale securities		63,057		25,759		785,628
Net cash (used in) provided by investing activities		(13,336)		6,848		(100,977)
Financing Activities
Proceeds from long-term obligations		-		-		10,133
Proceeds from warrants and options exercised		451		1		14,800
Proceeds from issuance of common stock, net ofissuance costs and repurchases		19,353		-		224,972
Other financing activities		-		-		7,754
Net cash provided by financing activities		19,804		1		257,659
Net (decrease) increase in cash and cash equivalents		(3,927)		(1,695)		7,583
Cash and cash equivalents, beginning of period		11,510		3,217		-
Cash and cash equivalents, end of period	$	7,583	$	1,522	$	7,583

See accompanying notes.

5

AVIGEN, INC.
(a development stage company)

NOTES TO CONDENSED FINANCIAL STATEMENTS

1.Unaudited Interim Financial Statements

     Our accompanying unaudited condensed financial statements of Avigen, Inc. have been prepared in accordance with U.S. generally accepted accounting principles 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 U.S. generally accepted accounting principles 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, 2006 are not necessarily indicative of the results that may be expected for any other interim period or for the entire year ending December 31, 2006. 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, 2005, filed with the Securities and Exchange Commission on March 16, 2006.

     The balance sheet at December 31, 2005 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by U.S. 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. Share-Based Compensation

     We adopted the provisions of FASB Statement No. 123(R), (“FAS 123(R)”), “Share-Based Payment,” effective January 1, 2006, using the modified prospective transition method, and thereby recognize the compensation cost for all share-based awards to employees in the financial statements based on their grant-date fair value. Share-based compensation expense is recognized over the period during which the employee is required to perform service in exchange for the award, which generally represents the scheduled vesting period. We have no awards with market or performance conditions. Estimated compensation expense for awards outstanding at January 1, 2006, but not yet vested as of the date we adopted FAS 123(R), will be recognized over the remaining service period using the compensation cost calculated based on the same estimate of grant-date fair value previously reported for pro forma disclosure purposes under FAS 123.

     As of January 1, 2006, Avigen had three share-based compensation plans available for employee, nonemployee director, and consultant grants. The 1996 Equity Incentive Plan (“1996 Plan”) and the 1996 Non-Employee Directors’ Stock Option Plan (“Directors’ Plan”) were both approved by our stockholders and had a ten-year duration which terminated on March 29, 2006. As of June 30, 2006, we had an aggregate of 2,280,843 shares of our common stock reserved for issuance under these plans subject to outstanding awards and there was no longer any shares reserved under these plans for future grants. In general, the outstanding options under these plans were granted at fair market value on the date of grant with a term of 10 years. Grants under the 1996 Plan generally become exercisable on a quarterly basis over a vesting period of either three or four years. Grants under the Directors’ Plan become exercisable in three annual installments.

6

     The third plan was the 2000 Equity Incentive Plan (“2000 Plan”), which was adopted by Avigen’s Board of Directors in June 2000 and amended and restated as the 2006 Incentive Stock Option Plan (“2006 Plan”) in February 2006. The 2006 Plan was approved by stockholders on May 31, 2006, and currently represents the only outstanding stock option plan with shares available for future grant. The adoption of the 2006 Plan did not increase the number of shares available for grant under the 2000 Plan, but enables Avigen to grant incentive stock options to its employees, which enhance the after tax value of these options to the recipients, use a greater array of stock awards than was previously available under the 2000 Plan, and removed the forty percent limitation on the number of shares that could be granted to directors and officers under the 2000 Plan. As of June 30, 2006, we had (1) an aggregate of 1,951,877 shares of our common stock reserved for issuance under the 2006 Plan that are subject to options outstanding prior to May 31, 2006, and are therefore subject to the terms of the 2000 Plan; and (2) an aggregate of 16,000 shares of our common stock reserved for issuance under the 2006 Plan subject to outstanding options granted since May 31, 2006, and are therefore subject to the terms of the 2006 Plan, and 2,941,730 shares available for future grants of share-based awards under the 2006 Plan.

     In general, options have been granted under these plans at fair market value on the date of grant with a term of 10 years and become exercisable on a quarterly basis over a four-year vesting period.

     The amount of compensation expense recognized under FAS 123(R) during the three and six months ended June 30, 2006 under all plans was comprised of the following (in thousands, except per share data):

	Three Months		Six Months
	Ended		Ended
	June 30, 2006		June 30, 2006
Research and development	$	(131)	$	(256)
General and administrative		(210)		(516)
Share-based compensation expense before taxes		(341)		(772)
Related income tax benefits		-		-
Share-based compensation expense	$	(341)	$	(772)
Net share-based compensation expenses per basic and diluted common share	$	(0.02)	$	(0.04)

     Since we have cumulative operating losses as of June 30, 2006 for which a valuation allowance has been established, we recorded no income tax benefits for share-based compensation arrangements. Additionally, no incremental tax benefits were recognized from stock options exercised during the three- and six-month periods ended June 30, 2006, which would have resulted in a reclassification to reduce net cash provided by operating activities with an offsetting increase in net cash provided by financing activities. Prior to our adoption of FAS 123(R) as of January 1, 2006, share-based compensation expense was not recognized in our Statements of Operations. As of June 30, 2006, there was approximately $3.4 million of total unrecognized compensation expense related to non-vested, share-based compensation arrangements granted under the 1996 Plan, Directors’ Plan, and 2006 Plan.

     The fair value of each option award is estimated on the date of grant using a Black-Scholes-Merton option pricing model (“Black-Scholes model”) that uses the assumptions noted in the following table. Expected volatilities are based on the historical volatility of our common stock. The expected term of options granted is based on analyses of historical employee termination rates and option exercises. The risk-free interest rates are based on the U.S. Treasury yield for a period consistent with the expected term of the option in effect at the time of the grant. Share-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. The estimated forfeiture rates are based on analyses of historical data, taking into account patterns of involuntary termination and other factors. The following assumptions were used to determine share-based compensation expense for the three- and six-month periods ended June 30, 2006:

	Three months	Six months
	ended	ended
	June 30, 2006	June 30, 2006
Expected volatility	0.5725 - 0.6217	0.5725 - 0.6334
Risk free interest rate	4.99%	4.77%
Expected life of options in years	3.5 - 4.5	3.5 - 4.5
Expected dividend yield	0%	0%

7

     A summary of the option activity under all of our plans during the six-month period ended June 30, 2006 is presented below:

				Weighted
		Weighted		average
		average		remaining	Aggregate
	Number of	exercise price		contractual	Intrinsic
	Shares	per share		term (inyears)	Value
Outstanding at December 31, 2005	3,487,254	$	10.87
Granted	1,261,500	$	5.10
Exercised	(127,353)	$	3.54
Forfeited or expired	(372,681)	$	5.11
Outstanding at June 30, 2006	4,248,720	$	9.88	6.59	$	2,722,000
Exercisable at June 30, 2006	2,454,636		$ 13.87	4.78	$	1,222,000

     The weighted average grant-date fair value of options granted during the six-month periods ended June 30, 2006 and 2005 were $2.48 per share and $1.71 per share. The total intrinsic value of options exercised during the six months ended June 30, 2006 and 2005, were approximately $276,134 and $161, respectively.

     A summary of the status of our nonvested stock options as of June 30, 2006 and the changes during the six-month period then ended are presented below:

		Weighted
		average
		grant-date
	Number of	fair value
	Shares	per share
Nonvested at December 31, 2005	1,160,302	$         3.77
Granted	1,261,500	$         5.10
Vested or Cancelled	(627,718)	$         4.53
Nonvested at June 30, 2006	1,794,084	$         4.44

Pro Forma Information under FAS 123

     Prior to the adoption of FAS 123(R), we accounted for stock option grants in accordance with Accounting Principals Board (“APB”) Opinion 25, “ Accounting for Stock Issued to Employees ” (APB 25) and related interpretations. Under APB 25, when the exercise price of employee stock options equals the market price of the underlying stock on the date of the grant, no compensation expense is recognized.

8

     The following table illustrates the pro forma 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 for the periods ended June 30, 2005 (in thousands, except for per share data):

	Three Months		Six Months
	Ended		Ended
	June 30, 2005		June 30, 2005
Net loss - as reported	$	(9,848)	$	(15,038)
Add: Stock-based employee compensation included in reported net loss		-		-
Less: Total stock-based employee compensation expense determined under
the fair-value-based method for all awards		(756)		(1,545)
Net loss - pro forma	$	(10,604)	$	(16,583)
Net loss per common share basic and diluted – as reported	$	(0.48)	$	(0.74)
Net loss per common share basic and diluted - pro forma	$	(0.52)	$	(0.81)

     For purposes of disclosure pursuant to FAS 123, 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. The assumptions used to determine the pro forma expenses under the Black-Scholes option valuation model for the three and six months ended June 30, 2005 were based upon the following:

	Three months	Six months
	ended	ended
	June 30, 2005	June 30, 2005
Expected volatility	0.6771	0.6900
Risk free interest rate	3.87%	3.88%
Expected life of options in years	4.5	4.5
Expected dividend yield	0%	0%

     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(R) and Emerging Issues Task Force Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods, or Services.” The options and warrants granted to non-employees are re-measured as they vest and the resulting value is recognized as an expense against our net loss over the period during which the services are received or the term of the related financing.

9

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, 2006, $8.0 million and $2.4 million were classified as restricted investments in current and long term assets, respectively. At December 31, 2005, $10.4 million was classified as long term restricted investments. The sum of our long term and current restricted investments at the end of each period represents the combined aggregate portion of our portfolio of available-for-sale securities that were pledged in connection with certain liabilities at the end of each period. The change in classification of $8.0 million of long term restricted investments to current assets at June 30, 2006 represents the scheduled repayment of the outstanding borrowings of our loan payable in June 2007, which is less than one year from the date of these financial statements.

10

     The following is a summary of cash, restricted investments, and available-for-sale securities as of June 30, 2006 (in thousands):

			Gross		Gross
			Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Cash	$	7,583	$	-	$	-	$	7,583
Corporate debt securities		26,300		-		(227)		26,073
Federal agency obligations		19,119		-		(206)		18,913
Asset-backed and other securities		26,521		-		(104)		26,417
Auction rate certificates		-		-		-		-
Treasury obligations		900		-		(14)		886
Total	$	80,423	$	-	$	(551)	$	79,872
Amounts reported as:
Cash and cash equivalents	$	7,583	$	-	$	-	$	7,583
Restricted Investments		10,428		-		-		10,428
Available for sale securities		62,412		-		(551)		61,861
Total	$	80,423	$	-	$	(551)	$	79,872

     The weighted average maturity of our investment portfolio at June 30, 2006 was 318 days, with $54.9 million carrying an effective maturity of less than twelve months, and $25.0 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, 2005 (in thousands):

			Gross		Gross
			Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Cash	$	11,510	$	-	$	-	$	11,510
Corporate debt securities		21,415		-		(197)		21,218
Federal agency obligations		26,013		-		(306)		25,707
Asset-backed and other securities		9,882		5		(24)		9,863
Treasury obligations		2,108		-		(18)		2,090
Total	$	70,928	$	5	$	(545)	$	70,388
Amounts reported as:
Cash and cash equivalents	$	11,510	$	-	$	-	$	11,510
Restricted Investments		10,428		-		-		10,428
Available for sale securities		48,990		5		(545)		48,450
Total	$	70,928	$	5	$	(545)	$	70,388

     The weighted average maturity of our investment portfolio at December 31, 2005 was 291 days, with $37.7 million carrying an effective maturity of less than twelve months, and $32.7 million carrying an effective maturity between one and three years.

11

     Net realized losses were approximately $2,000 and $11,000 for the six months ended June 30, 2006 and 2005, respectively.

     At June 30, 2006 and December 31, 2005, we had the following available-for-sale securities that were in an unrealized loss position but were not deemed to be other-than-temporarily impaired (in thousands):

June 30, 2006	Less Than 12 Months				12 Months or Greater
	Gross				Gross
	Unrealized		Fair		Unrealized		Fair
	Losses		Value		Losses		Value
Corporate debt securities	$	(121)	$	12,616	$	(107)	$	13,457
Federal agency obligations		(179)		13,833		(26)		5,081
Asset-backed and other securities		(64)		26,753		(40)		6,436
Treasury obligations		(14)		886		-		-
Total	$	(378)	$	54,088	$	(173)	$	24,974
December 31, 2005	Less Than 12 Months				12 Months or Greater
	Gross		Estimated		Gross		Estimated
	Unrealized		Fair		Unrealized		Fair
	Losses		Value		Losses		Value
Corporate debt securities	$	(108)	$	11,246	$	(88)	$	8,883
Federal agency obligations		(101)		12,789		(205)		12,918
Asset-backed and other securities		(4)		996		(20)		5,385
Treasury obligations		(8)		1,201		(11)		889
Total	$	(221)	$	26,232	$	(324)	$	28,075

     The gross unrealized losses reported above for periods ended June 30, 2006 and December 31, 2005 were caused by rises in market interest rates during those periods. No significant facts or circumstances have occurred to indicate that these unrealized losses are related to any deterioration in the creditworthiness of the issuers of the marketable securities we own. Based on our review of these securities, including our assessment of the duration and severity of the related unrealized losses, we have not recorded any other-than-temporary impairments on these investments.

4.Impairment Loss related to Long-Lived Assets

     At June 30, 2005, in connection with the preparation of our financial statements, we evaluated the ongoing value of the leasehold improvements and equipment associated with approximately 40,000 square feet of manufacturing, laboratory, and office space we have under lease through July 2008. We determined to initiate this evaluation as a result of actions we had taken to discontinue funding of our AAV-based programs in order to focus our development efforts and financial resources on our small molecule product candidates.

     Based on these evaluations, we determined that our future operations would not require the full capacity of these leased facilities and 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 related carrying value of the leasehold improvements, laboratory and office equipment and furniture to approximate their estimated fair value.

12

     Fair value was based on the expected incremental sublease cash flows we estimated we could receive in excess of our prorated existing operating lease obligations based on current market lease rental rates at the time for similar mixed use properties. Based on market conditions at June 30, 2005, including vacancy rates and the expected time needed to sublease the facilities, we did not expect to receive significant incremental rents related to the long-lived assets. The impairment charges primarily represent accelerated depreciation expense, which is a non-cash expense that was scheduled to be recognized over the next five years.

5. License Agreement – Sanochemia Pharmazeutika AG

     In January 2006, we entered into a license agreement with SDI Diagnostics International LTD, a division of Sanochemia Pharmazeutika AG (Sanochemia). Under the terms of the agreement, Avigen received an exclusive license to develop and commercialize the compound tolperisone in North America. This compound is the active pharmaceutical ingredient in our product candidate, AV650, for the treatment of spasticity and neuromuscular spasm. Under the terms of the agreement, Avigen paid Sanochemia $3.0 million in initial license costs and is required to make additional future payments in the event of achievement of successful clinical and regulatory product development milestones and to make royalty payments on sales. Avigen and Sanochemia have also entered into a long-term supply agreement under which Sanochemia will manufacture, and Avigen will purchase for additional cost, the AV650 product for Avigen’s clinical and commercial supply. The $3.0 million initial payment was nonrefundable, does not include any significant future performance requirements by Sanochemia, and the licensed compound does not have an alternative future use to Avigen beyond the AV650 product. As such, we recognized the entire initial payment as expense during the period ended March 31, 2006 and expect that any future payments we make under the terms of the agreement will also be recorded as expense.

6. Severance Expense

     In January 2006, our Chief Financial Officer resigned from Avigen. In connection with his resignation, Avigen agreed to pay severance benefits including base salary for a period of one year and continued health benefits for up to twelve months. In addition, Avigen agreed to modify outstanding stock options held by the executive to allow for six months of additional vesting and an extended period to exercise all vested stock options for up to two years. As a result of this separation and the related modification of outstanding stock options held by the executive, we recognized a severance expense of approximately $288,000 and a non-cash, share-based compensation charge of approximately $108,000 for the period ending March 31, 2006.

7. 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.

	Three Months Ended		Six Months Ended
(Amounts in thousands)	June 30,		June 30,
	2006	2005	2006	2005
Net loss	$(4,833)	$(9,848)	$(12,855)	$(15,038)
Net unrealized (loss) gain on available-for-sale securities	(17)	200	(11)	(12)
Comprehensive loss	$(4,850)	$(9,648)	$(12,866)	$(15,050)

8. 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.

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     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		Six Months Ended
	June 30,		June 30,
	2006	2005	2006	2005
Potential dilutive stock options outstanding	367,926	474,330	249,497	462,989
Outstanding securities excluded from the potential
dilutive common shares calculation (1)	2,669,864	3,826,199	2,607,571	3,851,767

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

9. Stockholder’s Equity

     On May 12, 2006, we completed a private placement to selected institutional investors. In connection with the transaction, we sold 3,939,760 shares of our common stock at $5.37 per share for total cash proceeds of $19.4 million, net of issuance costs.

     During the six-month period ended June 30, 2006, we received $451,000 in cash proceeds related to the exercise of stock options for 127,353 shares of common stock.

     As of June 30, 2006, we had one warrant outstanding for 15,000 shares of our common stock with an exercise price equal to $6.50. The warrant was issued in March 2004 as partial consideration for the acquisition of certain intellectual property rights used in our research and development activities and has a ten-year term.

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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, 2005, filed with the Securities and Exchange Commission on March 16, 2006.

     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, sources of revenue, receipt of regulatory approvals, our expectations related to savings in personnel costs and facilities overhead attributable to our workforce reduction and subleasing of portions of our operating facilities, our expectations regarding future levels of research and development expenses and general and administrative expenses, our expectations related to our need to obtain additional funding to support the anticipated future needs of our research and development activities, 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,” “can,” “will,” “should,” “could,” “would,” “expect,” “plan,” “seek,” “anticipate,” “believe,” “estimate,” “project,” “intend,” “predict,” “potential,” “if” and similar expressions which imply that the statements relate to future events 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 Relating to our Business” 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. Avigenundertakes no obligation to update any of the forward- looking statements contained in this report to reflect any future events or developments.

Overview

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

     In building our pipeline, we focus on selecting compounds we believe have the potential to strongly differentiate themselves from existing therapies and address needs currently unmet by, or with an improved risk-benefit profile when compared to, alternative available treatments. In particular, we believe our drug candidates have unique mechanisms of action in the indications being pursued and have the potential to minimize side-effects, such as sedation, that can interfere markedly with resumption of normal activity. Moreover, our two leading programs, AV650 and AV411, are commercially approved pharmaceuticals outside the United States. We believe this significant human experience in markets outside the U.S. will help accelerate our clinical development and approval for these products in North America.

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

     In May 2006, we completed a private placement of common stock with institutional investors of approximately $21.2 million. Under the terms of the transaction Avigen sold approximately 3.9 million shares of common stock at a purchase price of $5.37 per share. The transaction did not include any warrants or other enhancements.

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     In June 2006, we announced that we had received approval to initiate a Phase IIa exploratory therapeutic clinical trial with AV411 (ibudilast) at the Royal Adelaide Hospital in Adelaide, Australia to assess safety, tolerability and preliminary indication of efficacy in neuropathic pain patients. The Phase IIa trial is a placebo-controlled, double-blinded study primarily in patients suffering from diabetic neuropathy. We intend to use our experience in this dose-escalating trial to improve the design of a larger U.S. clinical trial.

     In June 2006, we also announced that we had received approval from the U.S. Food and Drug Administration to commence an initial clinical trial of AV650. AV650 is a New Chemical Entity (NCE) in the U.S. The initial clinical trial will be a Phase I study to assess the safety and pharmacokinetic profile, as well as AV650's lack of sedation in normal volunteers.

     Prior to 2003, Avigen focused exclusively on building a product development portfolio of DNA-based drug delivery technologies based primarily on adeno-associated virus (AAV) vectors we developed. Our efforts included significant investment in early stage research in the field of gene therapy, which led to our filing of three separate INDs and our initiation of three corresponding phase I or phase I/II clinical trials. In 2003, we began to pursue the development of non-gene therapy products to diversify our portfolio, which is now our focus. In December 2005, we entered into an agreement with Genzyme Corporation, whereby we assigned to Genzyme our rights to certain AAV-related intellectual property, our gene therapy clinical trial programs for Parkinson’s disease and hemophilia, AAV-related contracts, and the use of previously manufactured clinical-grade vector materials. Under the terms of the agreement, we received a $12.0 million initial payment and could receive significant additional development milestones, sublicensing fees and royalty payments based on the successful development of products by Genzyme utilizing technologies previously developed by us. In addition, if Genzyme fails to diligently pursue the commercialization or marketing of products using the assigned technology, as specified in the agreement, certain of the rights we assigned could revert back to Avigen at a future date.

     We are a development stage company and have primarily supported the financial needs of our research and development activities since our inception through public offerings and private placements of our equity securities. We have not received any revenue from the sale of our products in development, and we do not anticipate generating revenue from the sale of products in the foreseeable future. As a result, we expect that we will need to obtain additional funding to support the anticipated future needs of our research and development activities, including the costs to complete clinical trials. We expect our source of revenue, if any, for the next several years to consist of payments under the Genzyme agreement, collaborative arrangements with third parties, government grants, and non-gene therapy-related license fees. We have incurred losses since our inception and expect to incur substantial losses over the next several years due to lack of any substantial revenue and the continuation of our ongoing and planned research and development efforts, including preclinical studies and clinical trials. There can be no assurance that we will successfully develop, commercialize, manufacture, or market our product candidates or ever achieve or sustain product revenue for profitability. At June 30, 2006 we had an accumulated deficit of $184.1 million and cash, cash equivalents, available-for-sale securities, and restricted investments of approximately $79.9 million. We believe that our capital resources at June 30, 2006, will be adequate to fund our operating needs for approximately the next two to three years.

Critical Accounting Policies and Significant Judgments and Estimates

     Our financial statements have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments related to revenue recognition, valuation of investments in financial instruments, impairment of property and equipment, and recognition 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.

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     We believe the following accounting policies are critical to the process of making significant judgments and estimates in the preparation of our financial statements. These policies are consistent with those presented in our Annual Report on Form 10-K for the period ended December 31, 2005.

Revenue recognition

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

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

     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.

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

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

     In addition, when management commits to holding individual securities until maturity in order to avoid the recognition of an other-than-temporary impairment, those securities would no longer be classified as available-for-sale. In addition, such securities would be further evaluated to determine whether the security, based on the remaining duration until its scheduled maturity, should be identified as a current or long-term asset. As of June 30, 2006, management had not designated any individual securities as held-to-maturity for the purposes of avoiding an other-than-temporary impairment.

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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:

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

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

Research and development expenses

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

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

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Share-based compensation expense

     Effective January 1, 2006, we adopted FAS 123(R) using the modified prospective transition method and therefore have not restated prior periods’ results. Under the fair value recognition provisions of FAS 123(R), we recognize share-based compensation expense net of estimated forfeitures, and therefore only recognize compensation expense for the portion of share-based payment awards that are expected to vest over the service period. Prior to our adoption of FAS 123(R), we accounted for share-based payments in accordance with APB 25, and accordingly, generally recognized compensation expense related to share-based payments with intrinsic value and accounted for forfeitures as they occurred.

     We calculate the fair value of share-based compensation expense using a Black-Scholes options pricing model which requires the input of highly subjective assumptions, including the expected term of the share-based awards, stock price volatility, and pre-vesting option forfeitures. We estimate the expected life of options granted based on historic behavior of our option holders and we estimate the volatility of our common stock at the date of grant based on the historical volatility of our common stock. The assumptions used in calculating the fair value of our share-based awards represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our share-based compensation expense could be materially different in future periods. In addition, FAS 123(R) requires we estimate forfeitures at the time of grant and only recognize expense for the portion of awards that are expected to vest. Our estimate of the forfeiture rate is based on historical experience of our share-based awards that are granted, exercised and cancelled. If our actual forfeiture rate is materially different from our estimate, the share-based compensation expense in future periods could be significantly different from what we have recorded in the current period.

     If factors change and we employ different assumptions in the application of FAS 123(R) in future periods, the compensation expense that we record under SFAS 123(R) may differ significantly from what we have recorded in the current period. Therefore, we believe it is important for investors to be aware of the high degree of subjectivity involved when using option pricing models to estimate share-based compensation under FAS 123(R). Option-pricing models were developed for use in estimating the value of traded options, which are listed on organized exchange markets, that have no vesting or hedging restrictions, are fully transferable and do not cause dilution. Because our share-based payments have characteristics significantly different from those of freely traded, listed options, and because changes in the subjective input assumptions can materially affect our estimates of fair values, in our opinion, existing valuation models, including the Black-Scholes, may not provide reliable measures of the fair values of our share-based compensation. Consequently, there is a risk that our estimates of the fair values of our share-based compensation awards on the grant dates may bear little resemblance to the actual values realized upon the exercise, expiration, early termination or forfeiture of those share-based payments in the future. Employee stock options, may expire worthless or otherwise result in zero intrinsic value as compared to the fair values originally estimated on the grant date and reported in our financial statements. Alternatively, value may be realized from these instruments that are significantly in excess of the fair values originally estimated on the grant date and reported in our financial statements. Estimates of share-based compensation expenses are significant to our financial statements, but do not impact our statements of cash flows.

     The guidance in FAS 123(R) is relatively new, and best practices are not well established. The application of these principles may be subject to further interpretation and refinement over time. There are significant differences among option valuation models, and this may result in a lack of comparability of our recognition of share-based compensation expenses versus other companies that use different models, methods and assumptions.

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Results of Operations

Revenue

	Three Months Ended		Six Months Ended
(In thousands, except percentages)	June 30,		June 30,
	2006	2005	2006	2005
Revenue	$          -	$          11	$          103	$          20
Percentage (decrease) increase over prior period	(100%)		415%

     No revenues were reported for the three-month period ended June 30, 2006 compared to $11,000 for the three-month period ended June 30, 2005. 2005 revenues represented license fees associated with intellectual property we have subsequently assigned to Genzyme Corporation.

     Revenues for the six-month periods ended June 30, 2006 and 2005 were $103,000 and $20,000, respectively. 2006 revenues represented income from our participation with the University of Colorado on a grant that was funded by the National Institutes of Health.

Research and Development Expenses

     As a result of organizational changes made in 2005, our current operations allow us to better use external resources to optimize the pace and cost of development of our product candidates. These changes included a reduction of our headcount and the sublease of a portion of our operating facilities in the second half of 2005. As a result, our current business model reduces our exposure to fixed costs for manufacturing staff and facilities and gives us more control over the strategic timing and application of our resources.

     Our research and development expenses can be divided into two primary functions, 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 drug substances 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 drug substances for use in human clinical trials, and supporting subject enrollment and subject administration within clinical trials.

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

		Three Months Ended			Percentage		Six Months Ended			Percentage
					increase					increase
					(decrease)					(decrease)
	June 30,				over	June 30,				over
	2006		2005		prior year	2006		2005		prior year
Research and preclinical development	$	2,673	$	2,446	9%	$	4,982	$	4,787	4%
Clinical development		878		1,219	(28%)		1,570		2,519	(38%)
Total research and development expenses	$	3,551	$	3,665	(3%)	$	6,552	$	7,306	(10%)

     Because a significant percentage of our research and development resources are dedicated to activities that focus on broad methods and mechanisms that may be used in multiple 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		Percentage	Six Months Ended		Percentage
			increase			increase
			(decrease)			(decrease)
(In thousands, except percentages)	June 30,		over	June 30,		over
	2006	2005	prior year	2006	2005	prior year
Personnel-related	$    469	$    907	(48%)	$    949	$ 1,864	(49%)
Share-based compensation	78	-	na	142	-	na
External research and development	1,046	242	333%	1,690	376	349%
Depreciation	271	473	(43%)	546	947	(42%)
Other expenses including facilities overhead	809	824	(2%)	1,655	1,600	3%
Total research and preclinical development expenses	$ 2,673	$ 2,446	9%	$ 4,982	$ 4,787	4%

     The increase in our research and preclinical development expenses for the three- and six-month periods ended June 30, 2006, compared to the same periods in 2005, of $227,000 and $195,000, respectively, were primarily due to changes in costs for the following:

• higher expenditures for external research and development services from third-party service providers of $804,000 and $1.3 million, respectively, primarily related to an increase in external preclinical animal studies and scientific consulting work to support the progress of our lead drug candidates, AV411 and AV650, and
   
• the recognition of approximately $78,000 and $142,000, respectively, in non-cash expense for stock-based compensation in compliance with FAS 123(R) adopted January 1, 2006, 

partially offset by,

• lower personnel-related expenses of $438,000 and $915,000, respectively, reflecting a significantly lower average staff level as a result of a staff reduction in August 2005, partially offset by higher average salaries in 2006, and
   
• lower depreciation charges of $202,000 and $401,000, respectively, primarily as a result of the impairment charges for leasehold improvements and equipment that were recognized in 2005.

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Clinical development

	Three Months Ended				Percentage	Six Months Ended				Percentage
					increase					increase
					(decrease)					(decrease)
(In thousands, except percentages)	June 30,				over	June 30,				over
	2006		2005		prior year	2006		2005		prior year
Personnel-related	$	319	$	375	(15%)	$	700	$	824	(15%)
Share-based compensation		54		-	na		114		-	na
External clinical development		194		111	74%		297		219	36%
Depreciation		-		336	(100%)		-		672	(100%)
Other expenses including facilities overhead		311		397	(22%)		459		804	(43%)
Total clinical development expenses	$	878	$	1,219	(28%)	$	1,570	$	2,519	(38%)

     The decrease in our total clinical development expenses for the three- and six-month periods ended June 30, 2006, compared to the same periods in 2005, of $341,000 and $949,000, respectively, were primarily due to changes in costs for the following:

• lower personnel-related expenses of $56,000 and $124,000, respectively, reflecting a lower average staff level as a result of a staff reduction in August 2005, partially offset by higher average salaries in 2006,
   
• no depreciation charges in 2006, compared to depreciation charges of $336,000 and $672,000, respectively, in the 2005 periods, primarily as a result of the impairment charges for leasehold improvements and equipment that were associated with our manufacturing facilities, that were recognized in 2005 and subsequently subleased, and
   
• lower other expenses of $86,000 and $345,000, respectively, including facilities overhead, primarily reflecting a decrease in the amount of square footage of the facilities used to support our clinical development and manufacturing activities which have primarily been subleased,

partially offset by,

• higher expenditures for external clinical development services from third-party suppliers of $83,000 and $78,000, respectively, associated with the preparation for our scheduled small molecule clinical trials in 2006 compared to the level of services incurred in connection with our gene therapy trials in 2005, and
   
• the recognition of approximately $54,000 and $114,000, respectively, in non-cash expense for stock option compensation in compliance with FAS 123(R) adopted January 1, 2006.

     Total research and development expenses for the three and six months ended June 30, 2006 were within management’s expectations. If we are successful in our efforts to develop our product candidates, including the costs of supporting multiple clinical trials in the second half of 2006, our total research and development spending in 2006 will likely rise.

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General and Administrative Expenses

	Three Months Ended				Percentage	Six Months Ended				Percentage
					increase					increase
					(decrease)					(decrease)
(In thousands, except percentages)	June 30,				over	June 30,				over
	2006		2005		prior year	2006		2005		prior year
Personnel-related	$	732	$	876	(16%)	$	1,675	$	1,698	(1%)
Share-based compensation		210		-	na		516		-	na
Severance		-		-	-		288		-	100%
Legal and professional fees		228		387	(41%)		586		743	(21%)
Facilities, depreciation and other allocated expenses		801		750	7%		1,721		1,451	18%
Total general and administrative expenses	$	1,971	$	2,013	(2%)	$	4,786	$	3,892	23%

     The decrease in our total general and administrative expenses for the three months period ended June 30, 2006, compared to the same period in 2005, of $42,000, was primarily due to changes in costs for the following:

• lower personnel-related expenses of $144,000, reflecting a lower average staff level, partially offset by higher average salaries in 2006, and 

• lower legal and professional fees of $159,000, primarily associated with patent filings and business contracts,

partially offset by,

• the recognition of approximately $210,000 in non-cash expense for stock option compensation in compliance with FAS 123(R) adopted January 1, 2006. 

     The $894,000 increase in our total general and administrative expenses for the six months ended June 30, 2006, compared to the same period in 2005 was primarily due to changes in costs for the following:

• the recognition of approximately $408,000 in non-cash expense for stock option compensation in compliance with FAS 123(R) adopted January 1, 2006, and $108,000 in non-cash expense in connection with the severance-related modification of previously issued stock options, 

• the recognition of approximately $288,000, in severance expenses in connection with the resignation of our former CFO, and  

• higher facilities, depreciation and other allocated expenses of $270,000, primarily representing recruiting and other administrative costs,

partially offset by,

• lower legal and professional fees of $157,000, primarily associated with patent filings and business contracts.

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

Impairment Loss Related to Long-Lived Assets

	Three Months Ended		Six Months Ended
(In thousands except percentages)	June 30,		June 30,
	2006	2005	2006	2005
Impairment loss related to long-lived assets	$      -	$4,490	$      -	$    4,490

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     In connection with the organizational and structual changes initiated last year, as of June 30, 2005, we determined that our future operations would not require the full capacity of our leased facilities, and we began to pursue potential cost savings through a sublease. However, based on the current market conditions at the time, we did not expect sublease rates to allow us to recover fully the costs of our investment in leasehold improvements to the building. As a result, we recorded an impairment charge of $4.5 million during the quarter ended June 30, 2005 to reduce the carrying value of certain leasehold improvements and equipment to zero. This amount did not impact our cash flows and represented an acceleration of depreciation charges that would have been recognized over the remainder of the assets’ lives. We did not recognize any impairments to our long-lived assets in 2006.

In-license Fees

	Three Months Ended		Six Months Ended
(In thousands except percentages)	June 30,		June 30,
	2006	2005	2006	2005
In-license fees	$      -	$      -	$      3,000	$      -

     In January 2006, we entered into a license agreement and paid Sanochemia an initial fee of $3.0 million as consideration for an exclusive license to develop and commercialize proprietary formulations of the neuroactive compound in AV650 in North America. We did not enter into any in-license agreements in 2005.

Interest Income

	Three Months Ended		Six Months Ended
(In thousands except percentages)	June 30,		June 30,
	2006	2005	2006	2005
Interest income	$      724	$      408	$      1,291	$      793
Percentage change over prior period	77%		63%

     Almost all of our interest income is generated from our investments in high-grade marketable securities of government and corporate debt. The increase in interest income for the three- and six-month periods ended June 30, 2006, as compared to the same periods in 2005 was due to increase in the average outstanding balance of our total portfolio, reflecting the $12 million received from Genzyme Corporation in December 2005 and the $21.2 million proceeds from the private placement completed in May 2006, as well as the rising average yield earned on our portfolio.

Sublease Income

	Three Months Ended		Six Months Ended
(In thousands except percentages)	June 30,		June 30,
	2006	2005	2006	2005
Sublease income	$      141	$      -	$      282	$      -

     As of December 2005, approximately 26,250 square feet of our aggregate facilities in two buildings was subleased to two separate corporate tenants not affiliated with Avigen. Remaining contractual, sublease income of $1.7 million will be recognized ratably over the remaining terms of the leases, which expire in May 2008 and November 2010.

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Liquidity and Capital Resources

     Since our inception in 1992, cash expenditures have significantly exceeded our revenue. We have funded our operations primarily through public offerings and private placements of our equity securities. Between May 1996, the date of our initial public offering, and December 2005, we raised $189 million from private placements and public offerings of our common stock and warrants to purchase our common stock.

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

     In addition to funding our operations through sales of our common stock, in March 2003, we received $2.5 million in research support from Bayer Corporation in connection with our collaboration on a gene therapy product for hemophilia, and in December 2005, we received a $12.0 million payment from Genzyme Corporation in connection with the agreement transferring to Genzyme rights to most of our AAV-based intellectual property, our gene therapy clinical trial programs for Parkinson’s disease and hemophilia, and clinical grade vector materials. We have attempted to contain costs and reduce cash flow by renting facilities, subleasing facilities no longer critical to our future operations, contracting with third parties to conduct research and development and using consultants, where appropriate. We expect to incur additional future expenses, resulting in significant additional cash expenditures, as we continue our research and development activities, including our efforts to develop, manufacture, and commercialize our current drug candidates, expand our product portfolio with additional development candidates through internal research, acquisition or in-licensing, and undertake additional preclinical studies and clinical trials of our product candidates. We also expect to incur substantial additional expenses relating to the filing, prosecution, maintenance, defense and enforcement of patent and other intellectual property claims.

     At June 30, 2006, we had cash, cash equivalents, available-for-sale securities, and restricted investments, of approximately $79.9 million, compared to approximately $70.4 million at December 31, 2005. At June 30, 2006 and December 31, 2005, $10.4 million of restricted assets were pledged to secure certain current and long-term liabilities. At June 30, 2006 and December 31, 2005, the portion of our investment portfolio pledged as collateral, which we refer to as restricted investments, includes $10.0 million for our line of credit and approximately $428,000 for letters of credit which serve as security deposits on a building leases. The classification of $8.0 million of these restricted investments as current at June 30, 2006, represents the scheduled repayment of outstanding borrowings of our loan payable in June 2007, or less than one year from the date of these financial statements. As these liabilities are due to be fully paid in less than twelve months, the remaining restricted investments are classified as short-tem. Our restricted investments would not be considered a current source of additional liquidity.

     As of June 30, 2006, our commitments under leases and other obligations, net of scheduled cost recoveries under sublease agreements, were not materially different from that reported as of December 31, 2005. As of December 31, 2005, we had net commitments under leases and other obligations totaling approximately $16.7 million, payable in varying amounts over more than five years, as more fully described in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2005 filed with the SEC on March 16, 2006.

     Operating Activities. Net cash used in operating activities was $10.4 million during the six months ended June 30, 2006, which includes the payment of $3.0 million to Sanochemia in connection with our in-license agreement for AV650. The remainder of 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 in operating activities during this quarter was in line with management’s expectations.

     Investing and Financing Activities. Net cash used in investing and provided by financing activities during the six months ended June 30, 2006 was $13.3 million and $19.8 million, respectively. The cash used in investing activities consisted primarily of purchases of available-for-sale securities, net of sales and maturities, offset to a small degree by $142,000 proceeds from our sale of laboratory and office equipment and furniture in connection with our consolidation of facilities previously used for our gene therapy activities. The cash provided by financing activities consisted of proceeds from the private placement of out common stock to institutional investors in May 2006, as well as proceeds from the exercise of stock options during the period. 

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     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 over the past two years and the consolidation of our operations and sublease of portions of our facilities, and the proceeds of the private placement in May 2006, our financial resources at June 30, 2006 will be adequate to fund our projected operating needs for approximately two to three years. However, this forward-looking statement is based upon our current plans and assumptions regarding our future operating and capital requirements, which may change. Our future operating and capital requirements will depend on many factors, including:

• 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 product candidates;

• competing technological developments;

• the cost of manufacturing our product candidates for clinical trials and sales;

• the costs of sales, marketing and commercialization activities;

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

• other factors which may not be within our control.

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

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, 2006, we had an accumulated deficit of $184.1 million. Developing new compounds will require significant additional research and development activities, including preclinical testing and clinical trials, and regulatory approval. We expect these activities, together with our general and administrative expenses, to result in operating losses for the foreseeable future. Our ability to achieve profitability will depend, in part, on our ability to successfully identify, acquire and complete development of proposed products, and to obtain required regulatory approvals and manufacture and market our approved products directly or through business partners.

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

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

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

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

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

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

     We are aware that other companies are conducting preclinical studies and clinical trials for products that could compete with products we intend to acquire or develop. See "Item 1. Business -- Competition" of our Annual Report on From 10-K for the year-ended December 31, 2005, for a more detailed discussion of the competition we face.

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

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

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

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

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

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

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

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

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

     At June 30, 2006 we had cash, cash equivalents, available-for-sale securities, and restricted investments of approximately $79.9 million. We anticipate that our existing capital resources as of June 30, 2006 will be adequate to fund our needs for approximately two to three years. However, beyond that, or earlier if we are successful in pursuing additional indications for compounds in our portfolio or acquiring additional product candidates, we may require additional funding to complete the research and development activities currently contemplated, to acquire new products, and to commercialize our products. Our future capital requirements will depend on many factors, including:

• continued scientific progress in research and development programs;

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

• the time and costs involved in obtaining regulatory approvals;

• 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;

• how successful, if at all, we are at expanding our drug development portfolio through a combination of internal research, acquisitions, and in-licensing compounds, and the nature of the consideration we pay fo acquiring or in-licensing compounds;

• competing technological developments;

• the cost of manufacturing for clinical trials and commercialization;

• the costs of marketing and commercialization activities; and

• other factors which may not be within our control.

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

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

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

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

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

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

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

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

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

     In addition, we rely on consultants and advisors to assist us in formulating our research and development 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.

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

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

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

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

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

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

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

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

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 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 certain of our proposed products may have a material adverse effect on our competitive position and business prospects. Important legal issues remain to be resolved as to the scope of patent protection for biotechnology and pharmaceutical products, and we expect that administrative proceedings, litigation, or both may be necessary to determine the validity and scope of our and others' patents. These proceedings or litigation may require a significant commitment of our resources in the future.

     If patents can be obtained, we cannot assure you that any of these patents will provide us with any competitive advantage. For example, others may independently develop similar technologies or duplicate any technology developed by us, and patents may be invalidated or held unenforceable in litigation. For example, for at least one of our product candidates, the compound in it is no longer patented. For that candidate, we intend to rely (if they issue) primarily on formulation and potentially use patent claims (combined with any available regulatory exclusivity) rather than more traditional composition-of-matter patent claims on the active ingredient itself. Formulation and use coverage may not be effective in preventing others from marketing the active compound in competition with us. As another example, in our AV411 program, the compound is off-patent. We have filed and own a patent application on its use for the indications for which we are developing. However, we cannot assure you that this patent application, even if it one day issues as a patent, will effectively prevent others from marketing the same drug for the indications currently claimed by our patent application.

     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.

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

     Certain of our products in development are molecules that are in the public domain. While we are working to obtain patent protection for our formulations, manufacturing processes, and uses of these molecules, there is no guarantee that we will be able to do so. In cases where no patent protection can be obtained, regulatory exclusivity providing protection against generic competition can be obtained under the Hatch-Waxman Act if we are the first to obtain regulatory approval to market these compounds. There is no guarantee that we will be able to do so. Biotechnology or pharmaceutical companies with greater financial and personnel resources may be able to obtain regulatory approval to market one or more of these compounds prior to our obtaining such approval. Failure to obtain patent protection or regulatory exclusivity will adversely impact our ability to commercialize our products and realize a positive return on our investment.

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

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

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

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

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

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

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

Our future financial results will be affected by changes in the accounting rules governing the recognition of stock-based compensation expense.

Through December 31, 2005, we measured share-based compensation expense for our employee stock compensation plans under the intrinsic value method of accounting prescribed by Accounting Principles Board Opinion No. 25 (“APB No. 25”), “Accounting for Stock Issued to Employees.” Beginning January 1, 2006, we measure share-based compensation expense using the fair value method, which adversely affects our results of operations by increasing our reported losses or reducing future reported income and which may adversely affect our stock price. Had we accounted for our compensation expense under the fair value method of accounting prescribed by FAS 123, our equity compensation expenses for 2005 would have been significantly higher, increasing by approximately $2.2 million for the year, net of reported amounts prescribed under APB No. 25.

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, 2005, 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, 2006 levels, we estimate that the fair value of our securities portfolio would decline by approximately $651,000 compared to our estimated exposure of $533,000 at December 31, 2005, primarily due to the increase in size of our overall portfolio.

Item 4. Controls and Procedures

     Evaluation of disclosure controls and procedures. With the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we have evaluated the effectiveness of our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934, Rules 13a-15(e) and 15(d)-15(e)), as of June 30, 2006. Based on that evaluation, the principal executive officer and principal financial officer have concluded that these disclosure controls and procedures were effective to ensure, at a reasonable assurance level, that the information required to be disclosed by us in reports we file with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and instructions for such reports.

     Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting during the quarter ended June 30, 2006, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

As of August 1, 2006, we were not involved in any legal proceedings.

Item 1A. Risk Factors

     We include in Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risks Related to Our Business” a description of risk factors related to our business in order to enable readers to assess, and be appropriately apprised of, many of the risks and uncertainties applicable to the forward-looking statements made in this Quarterly Report on Form 10-Q. We do not claim that the risks and uncertainties set forth in that section are all of the risks and uncertainties facing our business, but do believe that they reflect the more important ones.

     The risk factors set forth in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2005, as filed with the SEC on March 16, 2006, have not substantively changed, except for the following risk factors, which have been restated as set forth in Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risks Related to Our Business” of this Quarterly Report on Form 10-Q:

1.	We have updated the risk factors “We expect to continue to operate at a loss and we may never achieve profitability” and “We may need to secure additional financing to acquire and complete the development and commercialization of our potential products” to reflect our June 30, 2006 financial results; and
2.	We have updated the risk factor “We may need to secure additional financing to acquire and complete the development and commercialization of our potential products” to reflect our assessment that our existing capital resources as of June 30, 2006 will be adequate to fund our needs for approximately two to three years.
3.	We have removed the risk factor “Changes in board and management composition could adversely disrupt our operations” to reflect our assessment that we have not experienced difficulties in integrating new members of our board and management team into new roles with respect to our business.

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

Avigen completed a private placement which raised $21.2 million in gross proceeds in May 2006. After incurring approximately $1.8 million in expenses for placement agent fees and commissions and other transaction expenses, the net proceeds were approximately $19.4 million. RBC Capital Markets acted as placement agent in the private placement. Aggregate placement agent fees were $1.7 million.

Pursuant to the common stock purchase agreement dated as of May 10, 2006, Avigen offered and sold 3,939,760 shares of common stock, par value $0.001 per share, at a price of $5.37 per share. The closing of the private placement occurred on May 12, 2006. The securities were issued to nineteen institutional investment funds associated with registered investment advisors in reliance on Rule 506 of Regulation D and Section 4(2) under the Securities Act of 1933, as amended.

Item 3. Defaults Upon Senior Securities

None.

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

Our 2006 Annual Meeting of Stockholders was held on May 31, 2006.
The matters voted upon at the Annual Meeting and the voting of stockholders with respect thereto are as follows:

1. Each of John K.A. Prendergast, Ph.D. and Richard J. Wallace, were elected as a Class II director to hold office until our 2009 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:

John K.A. Prendergast, Ph.D.
	For	17,943,714
	Withhold	516,283
Richard J. Wallace
	For	18,235,115
	Withhold	224,882

Our Class I directors, Yuichi Iwaki, M.D., Ph.D. and Zola Horovitz, Ph.D., will each continue to serve on our Board of Directors until our 2008 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 approval of Avigen’s 2006 Equity Incentive Stock Option Plan, which was an amendment and restatement of our currently existing 2000 Equity Incentive Stock Option Plan, was approved. The voting results were as follows:

For	14,415,551
Against	3,983,980
Abstain	60,466
Broker non-votes	-0-

3. The selection of Ernst & Young LLP as our independent auditors for our fiscal year ending December 31, 2006 was ratified. The voting results were as follows:

For	18,248,882
Against	204,951
Abstain	6,165
Broker non-votes	-0-

Item 5. Other Information

None.

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Item 6. Exhibits

The following exhibits are included herein:

Exhibit Number		Exhibits
2.1	(2)	Assignment Agreement, dated December 19, 2005, by and between Genzyme
		Corporation and Avigen
3.1	(1)	Amended and Restated Certificate of Incorporation
3.1	.1(3)	Certificate of Amendment to Certificate of Incorporation
3.2	(1)	Restated Bylaws of the Registrant
4.1	(1)	Specimen Common Stock Certificate
10.1		Common Stock Purchase Agreement, dated as of May 10, 2006, among the
		registrant and the purchasers
10.1	2	2006 Incentive Stock Option Plan
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	(4)	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)	Incorporated by reference from such document filed with the SEC as an exhibit to Avigen’s Annual Report on Form 10-K for the year ended December 31, 2005, as filed with the SEC on March 16, 2006 (Commission File No. 000-28272).
(3)	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).
(4)	This certification accompanies the Form 10-K to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Avigen under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-K), irrespective of any general incorporation language contained in such filing.

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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 3, 2006	By:	/s/ KENNETH G. CHAHINE
		Kenneth G. Chahine
		Chief Executive Officer and President
Date: August 3, 2006	By:	/s/ ANDREW A. SAUTER
		Andrew A. Sauter
		Vice President, Finance

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		EXHIBIT INDEX
Exhibit Number		Exhibits
2.1	(2)	Assignment Agreement, dated December 19, 2005, by and between Genzyme
		Corporation and Avigen
3.1	(1)	Amended and Restated Certificate of Incorporation
3.1	.1(3)	Certificate of Amendment to Certificate of Incorporation
3.2	(1)	Restated Bylaws of the Registrant
4.1	(1)	Specimen Common Stock Certificate
10.1		Common Stock Purchase Agreement, dated as of May 10, 2006, among the
		registrant and the purchasers.
10.1	2	2006 Incentive Stock Option Plan
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	(4)	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)	Incorporated by reference from such document filed with the SEC as an exhibit to Avigen’s Annual Report on Form 10-K for the year ended December 31, 2005, as filed with the SEC on March 16, 2006 (Commission File No. 000-28272).
(3)	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).
(4)	This certification accompanies the Form 10-K to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Avigen under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-K), irrespective of any general incorporation language contained in such filing.

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EX-10.1

EXHIBIT 10.1

COMMON STOCK PURCHASE AGREEMENT

     This Common Stock Purchase Agreement (this “Agreement”) is dated as of May 10, 2006, among Avigen, Inc., a Delaware corporation (the “Company”), and each purchaser identified on the signature pages hereto (each, including its successors and assigns, a “Purchaser” and collectively the “Purchasers”).

     WHEREAS, subject to the terms and conditions set forth in this Agreement and pursuant to Section 4(2) of the Securities Act of 1933, as amended and Rule 506 promulgated thereunder, the Company desires to issue and sell to each Purchaser, and each Purchaser, severally and not jointly, desires to purchase from the Company, common stock of the Company as more fully described in this Agreement.

     NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in this Agreement, and for other good and valuable consideration the receipt and adequacy of which are hereby acknowledged, the Company and each Purchaser agree as follows:

ARTICLE I.
DEFINITIONS

     1.1Definitions. In addition to the terms defined elsewhere in this Agreement, for all purposes of this Agreement, the following terms have the meanings indicated in this Section 1.1:

     “Action” shall have the meaning ascribed to such term in Section 3.1(j) .

     “Affiliate” means any Person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a Person as such terms are used in and construed under Rule 144 under the Securities Act. With respect to a Purchaser, any investment fund or managed account that is managed on a discretionary basis by the same investment manager as such Purchaser will be deemed to be an Affiliate of such Purchaser.

     “Closing” means the closing of the purchase and sale of the Shares pursuant to Section 2.1.

     “Closing Date” means the Trading Day when this Agreement has been executed and delivered by the applicable parties hereto, and all conditions precedent to (i) the Purchasers’ obligations to pay the Subscription Amount and (ii) the Company’s obligations to deliver the Shares have been satisfied or waived.

     “Commission” means the Securities and Exchange Commission.

     “Common Stock” means the common stock of the Company, par value $0.001 per share, and any other class of securities into which such securities may hereafter be reclassified or changed into.

     “Common Stock Equivalents” means any securities of the Company which would entitle the holder thereof to acquire at any time Common Stock, including, without limitation, any debt, preferred stock, rights, options, warrants or other instrument that is at any time convertible into or exercisable or exchangeable for, or otherwise entitles the holder thereof to receive, Common Stock. 

     “Company Counsel” means Cooley Godward LLP.

     “Company Form 10-K” means the Company’s Annual Report on Form 10-K, as filed with the Commission on March 16, 2006.

     “Effective Date” means the date that the initial Registration Statement filed by the Company is first declared effective by the Commission.

     “Evaluation Date” shall have the meaning ascribed to such term in Section 3.1(p) .

     “Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.

     “Exempt Issuance” means the issuance of (a) shares of Common Stock or options to employees, officers or directors of the Company pursuant to any stock or option plan duly adopted by the Board of Directors of the Company or a majority of the members of a committee of non-employee directors established for such purpose, (b) securities upon the exchange of any Shares issued hereunder and/or other securities exercisable or exchangeable for or convertible into shares of Common Stock issued and outstanding on the date of this Agreement, provided that such securities have not been amended since the date of this Agreement to increase the number of such securities or to decrease the exercise, exchange or conversion price of any such securities, and (c) securities issued pursuant to acquisitions or strategic transactions approved by a majority of the directors (excluding any directors who are “interested” under the Delaware General Corporation Law), provided any such issuance shall only be to a Person which is, itself or through its subsidiaries, an operating company in a business synergistic with the business of the Company and in which the Company receives benefits in addition to the investment of funds, but shall not include a transaction in which the Company is issuing securities primarily for the purpose of raising capital or to an entity whose primary business is investing in securities.

      “FW” means Feldman Weinstein LLP with offices located at 420 Lexington Avenue, Suite 2620, New York, New York 10170-0002.

     “GAAP” shall have the meaning ascribed to such term in Section 3.1(h) .

     “Intellectual Property Rights” means all of the following: (i) patents, patent applications, patent disclosures, and inventions (whether or not patentable and whether or not reduced to practice); (ii) trademarks, trademark applications, service marks, trade names,; (iii) copyrights and copyrightable works; (iv) registrations, applications and renewals for any of the foregoing; and (v) trade secrets, licenses (including licenses of any Intellectual Property Rights).

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     “Liens” means a lien, charge, security interest, encumbrance, right of first refusal, preemptive right or other restriction.

     “Material Adverse Effect” shall have the meaning assigned to such term in Section 3.1(b) .

     “Material Permits” shall have the meaning ascribed to such term in Section 3.1(m) .

     “Per Share Purchase Price” equals $5.37.

     “Person” means an individual or corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, sole proprietorship, government (or an agency or subdivision thereof) or other entity of any kind.

     “Proceeding” means an action, claim, suit, investigation or proceeding (including, without limitation, an investigation or partial proceeding, such as a deposition), whether commenced or threatened.

     “Prohibited Transaction” shall have the meaning assigned to such term in Section 3.2(h) .

     Prospectus” means the prospectus included in the Registration Statement (including, without limitation, a prospectus that includes any information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A promulgated under the Securities Act), as amended or supplemented by any prospectus supplement, with respect to the terms of the Offering of any portion of the Registrable Securities covered by the Registration Statement, and all other amendments and supplements to the Prospectus, including post-effective amendments, and all material incorporated by reference or deemed to be incorporated by reference in such Prospectus.

     “Registration Statement” means the registration statement required to be filed under Article V, including the Prospectus, amendments and supplements to such registration statement or Prospectus, including pre- and post-effective amendments, all exhibits thereto, and all material incorporated by reference or deemed to be incorporated by reference in such registration statement.

     “Registrable Securities” shall mean any Shares issued or issuable pursuant to this Agreement together with any securities issued or issuable upon any stock split, dividend or other distribution, adjustment, recapitalization or similar event with respect to the foregoing; provided, however, that any such Shares and securities shall cease to be Registrable Securities at such time as they are sold pursuant to Rule 144 or pursuant to the Registration Statement.

     “Required Approvals” shall have the meaning ascribed to such term in Section 3.1(e) .

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     “Required Effectiveness Date” shall have the meaning ascribed to such term in Section 5.1(d)(ii).

      “Rule 144” means Rule 144 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule.

     “SEC Reports” shall have the meaning ascribed to such term in Section 3.1(h).

     “Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.

     “Shares” means the shares of Common Stock issued or issuable to each Purchaser pursuant to this Agreement.

     “Short Sales” shall include all “short sales” as defined in Rule 200 of Regulation SHO under the Exchange Act (but shall not be deemed to include the location and/or reservation of borrowable shares of Common Stock).

     “Subscription Amount” means, as to each Purchaser, the aggregate amount to be paid for Shares purchased hereunder as specified below such Purchaser’s name on the signature page of this Agreement and next to the heading “Subscription Amount”, in United States Dollars and in immediately available funds.

     “Trading Day” means a day on which the Common Stock is traded on a Trading Market.

     “Trading Market” means the following markets or exchanges on which the Common Stock is listed or quoted for trading on the date in question: the Nasdaq Capital Market, the American Stock Exchange, the New York Stock Exchange, the Nasdaq National Market or the OTC Bulletin Board.

ARTICLE II.
PURCHASE AND SALE

     2.1Closing. On the Closing Date, upon the terms and subject to the conditions set forth herein, substantially concurrent with the execution and delivery of this Agreement by the parties hereto, the Company agrees to sell, and each Purchaser agrees to purchase, severally and not jointly, such Purchaser’s Subscription Amount which, together with the Subscription Amounts of the other Purchasers, in the aggregate, shall be up to $22,457,340 of Shares. Each Purchaser shall deliver to the Company via wire transfer to the account identified in Section 2.2(b)(ii) or a certified check immediately available funds equal to their Subscription Amount and the Company shall deliver to each Purchaser their respective Shares as determined pursuant to Section 2.2(a) and the other items set forth in Section 2.2 to be delivered at the Closing. Upon satisfaction of the conditions set forth in Sections 2.2 and 2.3, the Closing shall occur at the offices of FW, or such other location as the parties shall mutually agree.

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     2.2Deliveries.

          (a)On or prior to the Closing Date, the Company shall deliver or cause to be delivered to each Purchaser the following:

               (i)this Agreement duly executed by the Company;

               (ii)a legal opinion of Company Counsel, in form and substance previously agreed to by RBC Capital Markets Corporation (“RBC”) and BVF Partners L.P. (“BVF”); and

               (iii)a copy of the irrevocable instructions to the Company’s transfer agent instructing the transfer agent to deliver, on an expedited basis, a certificate evidencing a number of Shares equal to such Purchaser’s Subscription Amount divided by the Per Share Purchase Price, registered in the name of such Purchaser.

          (b)On or prior to the Closing Date, each Purchaser shall deliver or cause to be delivered to the Company the following:

               (i)this Agreement duly executed by such Purchaser; and

               (ii)such Purchaser’s Subscription Amount by wire transfer to the account as specified in writing by the Company or a certified check immediately available funds.

     2.3Closing Conditions.

          (a) The obligations of the Company hereunder in connection with the Closing are subject to the following conditions being met:

               (i)the accuracy in all material respects when made and on the Closing Date of the representations and warranties of the Purchasers contained herein;

               (ii)all obligations, covenants and agreements of the Purchasers required to be performed at or prior to the Closing Date shall have been performed; and

               (iii)the delivery by the Purchasers of the items set forth in Section 2.2(b) of this Agreement.

          (b)The respective obligations of the Purchasers hereunder in connection with the Closing are subject to the following conditions being met:

               (i)the accuracy in all material respects when made and on the Closing Date of the representations and warranties of the Company contained herein;

               (ii)all obligations, covenants and agreements of the Company required to be performed at or prior to the Closing Date shall have been performed;

               (iii)the delivery by the Company of the items set forth in Section 2.2(a) of this Agreement;

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               (iv) there shall have been no Material Adverse Effect with respect to the Company since the date hereof;

               (v) Subscriptions for at least $10,000,000 have been received by the Company; and

               (vi) from the date hereof to the Closing Date, trading in the Common Stock shall not have been suspended by the Commission or the Company’s principal Trading Market (except for any suspension of trading of limited duration agreed to by the Company, which suspension shall be terminated prior to the Closing), and, at any time prior to the Closing Date, trading in securities generally as reported by Bloomberg Financial Markets shall not have been suspended or limited, or minimum prices shall not have been established on securities whose trades are reported by such service, or on any Trading Market, nor shall a banking moratorium have been declared either by the United States or New York State authorities nor shall there have occurred any material escalation of hostilities or other national or international calamity of such magnitude in its effect on, or any material adverse change in, any financial market which, in each case, in the reasonable judgment of such Purchaser, makes it impracticable or inadvisable to purchase the Shares at the Closing.

ARTICLE III.
REPRESENTATIONS AND WARRANTIES

     3.1 Representations and Warranties of the Company. The Company hereby makes the following representations and warranties set forth below to each Purchaser:

          (a) Subsidiaries. The Company has no subsidiaries.

          (b)Organization and Qualification. The Company is an entity duly incorporated or otherwise organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization (as applicable), with the requisite power and authority to own and use its properties and assets and to carry on its business as currently conducted. The Company is not in violation or default of any of the provisions of its certificate of incorporation, bylaws or other organizational or charter documents. The Company is duly qualified to conduct business and is in good standing as a foreign corporation or other entity in each jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary, except where the failure to be so qualified or in good standing, as the case may be, would not reasonably be expected to result in a Material Adverse Effect and no Proceeding has been instituted in any such jurisdiction revoking, limiting or curtailing or seeking to revoke, limit or curtail such power and authority or qualification. For purposes of this Agreement, “Material Adverse Effect” means a material adverse effect on (i) the legality, validity or enforceability of this Agreement, (ii) the results of operations, assets, liabilities, business, prospects or condition (financial or otherwise) of the Company, or (iii) the Company’s ability to perform its obligations under this Agreement.

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          (c) Authorization; Enforcement. The Company has the requisite corporate power and authority to enter into and to consummate the transactions contemplated by this Agreement and otherwise to carry out its obligations hereunder. The execution and delivery of this Agreement by the Company and the consummation by it of the transactions contemplated hereby (including authorization and issuance of the Shares and delivery thereof) have been duly authorized by all necessary action on the part of the Company and no further action is required by the Company, its board of directors or its stockholders in connection therewith other than in connection with the Required Approvals. This Agreement has been duly executed by the Company and, when delivered in accordance with the terms hereof and thereof, will constitute the valid and binding obligation of the Company enforceable against the Company in accordance with its terms except (i) as limited by general equitable principles and applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors’ rights generally, and (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies.

          (d) No Conflicts. The execution, delivery and performance of this Agreement by the Company, the issuance and sale of the Shares and the consummation by the Company of the other transactions contemplated hereby do not and will not (i) conflict with or violate any provision of the Company’s certificate of incorporation or the Company’s bylaws, as in effect on the date hereof and the Closing Date, (ii) conflict with, or constitute a default (or an event that with notice or lapse of time or both would become a default) under, result in the creation of any Lien upon any of the properties or assets of the Company, or give to others any rights of termination, amendment, acceleration or cancellation (with or without notice, lapse of time or both) of, any agreement, credit facility, debt or other instrument (evidencing a Company debt or otherwise) or other understanding to which the Company is a party or by which any property or asset of the Company is bound or affected, (iii) subject to the Required Approvals, conflict with or result in a violation of any law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or governmental authority to which the Company is subject (including federal and state securities laws and regulations), or by which any property or asset of the Company is bound or affected, or (iv) conflict with, or result in a breach or violation of any material term and provision of, or constitute a default under any agreement or instrument to which the Company is a party or by which the Company is bound or to which any of its assets or properties is subject; except in the case of each of clauses (ii), (iii) and (iv), such as has not or would not reasonably be expected to result in a Material Adverse Effect.

          (e) Filings, Consents and Approvals. The Company is not required to obtain any consent, waiver, authorization or order of, give any notice to, or make any filing or registration with, any court or other federal, state, local or other governmental authority or other Person in connection with the execution, delivery and performance by the Company of this Agreement, other than (i) filings required pursuant to Section 4.4 of this Agreement, (ii) the filing with the Commission of the Registration Statement, (iii) application(s) to each applicable Trading Market for the listing of the Shares for trading thereon in the time and manner required thereby, and (iv) the filing of Form D with the Commission and such filings as are required to be made under applicable state securities laws (collectively, the “Required Approvals”). The Company does not have a shareholder rights plan, commonly referred to as a “poison pill.”

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          (f)Issuance of the Shares. The Shares are duly authorized and, when issued and paid for in accordance with this Agreement, will be duly and validly issued, fully paid and nonassessable, free and clear of all Liens imposed by the Company other than restrictions on transfer provided for in this Agreement. The Company has reserved from its duly authorized capital stock the maximum number of shares of Common Stock issuable pursuant to this Agreement. 

          (g)Capitalization. The capitalization of the Company is as set forth in the most recent periodic SEC Report as of the date set forth therein and no material change has occurred since the date of said SEC Report. The Company has not issued any capital stock since its most recently filed periodic report under the Exchange Act, other than pursuant to the exercise of employee stock options under the Company’s stock option plans, and pursuant to the conversion or exercise of Common Stock Equivalents outstanding as of the date of the most recently filed periodic report under the Exchange Act. No Person has any right of first refusal, preemptive right, right of participation, or any similar right to participate in the transactions contemplated by this Agreement. Except as a result of the purchase and sale of the Shares, and except as set forth in the most recent periodic SEC Report (and for the grant of employee stock options under the Company’s stock option plans), there are no outstanding options, warrants, script rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities, rights or obligations convertible into or exercisable or exchangeable for, or giving any Person any right to subscribe for or acquire, any shares of Common Stock, or contracts, commitments, understandings or arrangements by which the Company is or may become bound to issue additional shares of Common Stock or Common Stock Equivalents. The issuance and sale of the Shares will not obligate the Company to issue shares of Common Stock or other securities to any Person (other than the Purchasers) and will not result in a right of any holder of Company securities to adjust the exercise, conversion, exchange or reset price under any of such securities. All of the outstanding shares of capital stock of the Company are validly issued, fully paid and nonassessable, have been issued in compliance with all federal and state securities laws, and none of such outstanding shares was issued in violation of any preemptive rights or similar rights to subscribe for or purchase securities. No further approval or authorization of any stockholder, the Board of Directors of the Company or others is required for the issuance and sale of the Shares. There are no stockholders agreements, voting agreements or other similar agreements with respect to the Company’s capital stock to which the Company is a party or, to the knowledge of the Company, between or among any of the Company’s stockholders. Except as provided in this Agreement, no Person has the right to require the Company to register any securities of the Company under the Securities Act, whether on a demand basis or in connection with the registration of securities of the Company for its own account or for the account of any other person.

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          (h) SEC Reports; Financial Statements; Eligibility for Form S-3. Since December 31, 2004, the Company has filed all reports, schedules, forms, statements and other documents required to be filed by it under the Securities Act and the Exchange Act, including pursuant to Section 13(a) or 15(d) thereof (the foregoing materials, including the exhibits thereto and documents incorporated by reference therein, being collectively referred to herein as the “SEC Reports”) on a timely basis or has received a valid extension of such time of filing and has filed any such SEC Reports prior to the expiration of any such extension, except where the failure to timely file would not cause the Company to lose its ability to use Form S-3. To the Company’s knowledge and belief (i) the Company is eligible to use Form S-3 to register the Shares hereunder for sale by the Purchasers as contemplated in Article V hereof, and (ii) no facts or circumstances currently exist or are pending or threatened which would prevent the Company from remaining eligible to use Form S-3 to register the Shares on the basis contemplated hereunder. As of their respective dates, the SEC Reports complied in all material respects with the requirements of the Securities Act and the Exchange Act and the rules and regulations of the Commission promulgated thereunder, as applicable, and none of the SEC Reports, when filed, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The financial statements of the Company included in the SEC Reports comply in all material respects with applicable accounting requirements and the rules and regulations of the Commission with respect thereto as in effect at the time of filing. Such financial statements have been prepared in accordance with United States generally accepted accounting principles applied on a consistent basis during the periods involved (“GAAP”), except as may be otherwise specified in such financial statements or the notes thereto and except that unaudited financial statements may not contain all footnotes required by GAAP, and fairly present in all material respects the financial position of the Company as of and for the dates thereof and the results of operations and cash flows for the periods then ended, subject, in the case of unaudited statements, to normal, immaterial, year-end audit adjustments. The Company is engaged in all material respects only in the business described in the SEC Filings and the SEC Filings contain a complete and accurate description in all material respects of the business of the Company.

          (i) Material Changes; Undisclosed Events, Liabilities or Developments. Since the date of the latest audited financial statements included within the SEC Reports, except as specifically disclosed prior to the date hereof in a subsequent SEC Report, (i) there has been no event, occurrence or development that has had or that would reasonably be expected to have or result in a Material Adverse Effect, (ii) the Company has not incurred any liabilities (contingent or otherwise) other than (A) trade payables and accrued expenses incurred in the ordinary course of business consistent with past practice and (B) liabilities not required to be reflected in the Company’s financial statements pursuant to GAAP and which were immaterial, (iv) the Company has not declared or made any dividend or distribution of cash or other property to its stockholders or purchased, redeemed or made any agreements to purchase or redeem any shares of its capital stock, (v) there has been no damage, destruction or loss, whether or not covered by insurance to any assets or properties of the Company, in each case in excess of $100,000 individually or $250,000 in the aggregate, (vi) there has been no change or amendment to any material contract or arrangement or waiver, other than in the ordinary course of business, by the Company of any material right or of a material debt owed to it, (vii) the Company has not lost the services of or terminated or changed the status of any key employee and there has been no change in the composition or duties of the senior management of the Company, other than the departure of the Company’s Chief Medical Officer disclosed by press release on March 27, 2006, and (viii) the Company has not issued any equity securities to any officer, director or Affiliate, except pursuant to existing Company stock option plans. Except with respect to Exhibits 10.58 and 10.59 to the Company Form 10-K, the Company does not have pending before the Commission any request for confidential treatment of information. Except for the entering into of this Agreement and the issuance of the Shares contemplated by this Agreement, no event, liability or development has occurred or exists with respect to the Company or its business, properties, operations or financial condition, that would be required to be disclosed by the Company under applicable securities laws at the time this representation is made that has not been publicly disclosed at least one Trading Day prior to the date that this representation is made.

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          (j)Litigation. There is no action, suit, inquiry, notice of violation, proceeding or investigation pending or, to the knowledge of the Company, threatened against or affecting the Company or any of its properties before or by any court, arbitrator, governmental or administrative agency or regulatory authority (federal, state, county, local or foreign) (collectively, an “Action”) which (i) adversely affects or challenges the legality, validity or enforceability of this Agreement or the Shares or (ii) together with any other such actions, suits, inquiries, notices of violations, proceedings or investigations, has had or would reasonably be expected to have or result in a Material Adverse Effect. Neither the Company nor any director or officer thereof, is or has been the subject of any Action involving a claim of violation of or liability under federal or state securities laws or a claim of breach of fiduciary duty. There has not been, and to the knowledge of the Company, there is not pending or contemplated, any investigation by the Commission involving the Company or any current or former director or officer of the Company. The Commission has not issued any stop order or other order suspending the effectiveness of any registration statement filed by the Company under the Exchange Act or the Securities Act.

          (k)Employment Matters.

               (i) No executive officer, to the knowledge of the Company, is, or is now expected to be, in violation of any material term of any employment contract, confidentiality, disclosure or proprietary information agreement or non-competition agreement, or any other contract or agreement or any restrictive covenant, and the continued employment of each such executive officer does not subject the Company to any liability with respect to any of the foregoing matters. The Company is in compliance with all U.S. federal, state, local and foreign laws and regulations relating to employment and employment practices, terms and conditions of employment and wages and hours, except where the failure to be in compliance would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.

               (ii) Except as disclosed in the SEC Reports, the Company is not a party to or bound by any collective bargaining agreements or other agreements with labor organizations. The Company has not violated in any material respect any laws, regulations, orders or contract terms, affecting the collective bargaining rights of employees, labor organizations or any laws, regulations or orders affecting employment discrimination, equal opportunity employment, or employees’ health, safety, welfare, wages and hours.

               (iii) The Company is, and at all times has been, in compliance in all material respects with all applicable laws respecting employment (including laws relating to classification of employees and independent contractors) and employment practices, terms and conditions of employment, wages and hours, and immigration and naturalization. There are no claims pending against the Company before the Equal Employment Opportunity Commission or any other administrative body or in any court asserting any violation of Title VII of the Civil Rights Act of 1964, the Age Discrimination Act of 1967, 42 U.S.C. §§ 1981 or 1983 or any other federal, state or local Law, statute or ordinance barring discrimination in employment.

               (iv) Except as disclosed in the SEC Filings, the Company is not a party to, or bound by, any employment or other contract or agreement that contains any severance, termination pay or change of control liability or obligation, including, without limitation, any “excess parachute payment,” as defined in Section 2806(b) of the Internal Revenue Code.

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               (v) To the Company’s knowledge, each of the Company’s employees is a Person who is either a United States citizen or a permanent resident entitled to work in the United States. To the Company’s knowledge, the Company has no liability for the improper classification by the Company of such employees as independent contractors or leased employees prior to the Closing.

          (l)Compliance. The Company (i) is not in default under or in violation of (and no event has occurred that has not been waived that, with notice or lapse of time or both, would result in a default by the Company under), nor has the Company received notice of a claim that it is in default under or that it is in violation of, any indenture, loan or credit agreement or any other agreement or instrument to which it is a party or by which it or any of its properties is bound (whether or not such default or violation has been waived), (ii) is not in violation of any order of any court, arbitrator or governmental body, and (iii) is not nor has been in violation of any statute, rule or regulation of any governmental authority, including without limitation all foreign, federal, state and local laws applicable to its business and all such laws that affect the environment, except in each case as would not reasonably be expected to result in a Material Adverse Effect.

          (m)Regulatory Permits. The Company possesses all certificates, authorizations and permits issued by the appropriate federal, state, local or foreign regulatory authorities necessary to conduct its business as described in the Company Form 10-K, except where the failure to possess such permits would not reasonably be expected to result in a Material Adverse Effect (“Material Permits”), and the Company has not received any notice of proceedings relating to the revocation or modification of any Material Permit.

          (n)Title to Assets. The Company has good and marketable title in all personal property owned by it that is material to the business of the Company, in each case free and clear of all Liens, except for Liens as do not materially affect the value of such property and do not materially interfere with the use made and proposed to be made of such property by the Company and Liens for the payment of federal, state or other taxes, the payment of which is neither delinquent nor subject to penalties. Any facilities held under lease by the Company are held under valid, subsisting and enforceable leases with which the Company is in compliance in all material respects.

          (o)Patents and Trademarks. Except as described in the SEC Reports, to the Company’s knowledge and in all material respects:

               (i) All Intellectual Property Rights of the Company or licensed by it and necessary for the conduct of its business are currently in compliance with all legal requirements (including timely filings, proofs and payments of fees) and are valid and enforceable, subject, in the case of any patent application, to any modification or other action that may be taken by the Patent and Trademark Office. No Intellectual Property Rights of the Company which are necessary for the conduct of Company’s business as currently conducted or as currently proposed to be conducted has been or is now involved in any cancellation, dispute or litigation, and no such action is threatened. No patent of the Company has been or is now involved in any interference, reissue, re-examination or opposition proceeding.

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               (ii) All of the licenses and sublicenses and consent, royalty or other agreements concerning Intellectual Property Rights which are necessary for the conduct of the Company’s business as currently conducted or as currently proposed to be conducted to which the Company is a party or by which any of its assets are bound (other than commercially available, off-the-shelf software application programs having a retail acquisition price of less than $25,000 per license) (collectively, “License Agreements”) are valid and binding obligations of the Company and the other parties thereto, enforceable in accordance with their terms, except to the extent that enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar laws affecting the enforcement of creditors’ rights generally, and there exists no event or condition which will result in a material violation or breach of or constitute (with or without due notice or lapse of time or both) a default by the Company or any of its Subsidiaries under any such License Agreement.

               (iii) The Company has filed for, and will use commercially reasonable efforts to obtain, patent rights that it believes will be material for use in connection with its business as described in the Company Form 10-K and which the failure to so have would reasonably be expected to have a Material Adverse Effect. The Company has not received any written notice that the Intellectual Property Rights used by the Company violates or infringes upon the rights of any Person. The Company has taken reasonable security measures to protect the secrecy, confidentiality and value of all of its Intellectual Property Rights, except where failure to do so would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.

          (p)Sarbanes-Oxley; Internal Accounting Controls. The Company is in material compliance with all provisions of the Sarbanes-Oxley Act of 2002 which are applicable to it as of the Closing Date. The Company maintains a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management’s general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management’s general or specific authorization, and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. The Company has established disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and designed such disclosure controls and procedures to provide reasonable assurance that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. The Company’s certifying officers have evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by the Company’s most recently filed periodic report under the Exchange Act (such date, the “Evaluation Date”). The Company presented in its most recently filed periodic report under the Exchange Act the conclusions of the certifying officers about the effectiveness of the disclosure controls and procedures based on their evaluations as of the Evaluation Date. Since the Evaluation Date, there have been no changes in the Company’s internal control over financial reporting (as such term is defined in the Exchange Act) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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          (q)Certain Fees. Except for fees to be paid to RBC and the legal fees described in Section 6.2, no brokerage or finder’s fees or commissions are or will be payable by the Company to any broker, financial advisor or consultant, finder, placement agent, investment banker, bank or other Person with respect to the transactions contemplated by this Agreement. The Purchasers shall have no obligation with respect to any fees or with respect to any claims made by or on behalf of other Persons for fees of a type contemplated in this Section that may be due in connection with the transactions contemplated by this Agreement.

          (r)Private Placement. Assuming the accuracy of the Purchasers representations and warranties set forth in Section 3.2, no registration under the Securities Act is required for the offer and sale of the Shares by the Company to the Purchasers as contemplated hereby. The issuance and sale of the Shares hereunder does not contravene the rules and regulations of the Trading Market.

          (s)Investment Company. The Company is not, and is not an Affiliate of, and immediately after receipt of payment for the Shares, will not be or be an Affiliate of, an “investment company” within the meaning of the Investment Company Act of 1940, as amended.

          (t)Registration Rights. Other than each of the Purchasers, no Person has any right to cause the Company to effect the registration under the Securities Act of any securities of the Company.

          (u)Listing and Maintenance Requirements. The Company’s Common Stock is registered pursuant to Section 12(g) of the Exchange Act, and the Company has taken no action designed to, or which to its knowledge is likely to have the effect of, terminating the registration of the Common Stock under the Exchange Act nor has the Company received any notification that the Commission is contemplating terminating such registration. The Company has not, in the 12 months preceding the date hereof, received notice from any Trading Market on which the Common Stock is or has been listed or quoted to the effect that the Company is not in compliance with the listing or maintenance requirements of such Trading Market. The Company is, and has no reason to believe that it will not in the foreseeable future continue to be, in compliance with all such listing and maintenance requirements.

          (v)Disclosure. Except for the material terms and conditions of the transactions contemplated by this Agreement, the Company confirms that, neither it nor any other Person acting on its behalf has provided any of the Purchasers or their agents or counsel with any information that it believes constitutes material, non-public information. The Company understands and confirms that the Purchasers will rely on the foregoing representation in effecting transactions in securities of the Company. All disclosure furnished by or on behalf of the Company to the Purchasers regarding the Company, its business and the transactions contemplated hereby with respect to the representations and warranties made herein are true and correct with respect to such representations and warranties and do not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. The Company acknowledges and agrees that no Purchaser makes or has made any representations or warranties with respect to the transactions contemplated hereby other than those specifically set forth in Section 3.2 hereof.

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          (w) No Integrated Offering. Assuming the accuracy of the Purchasers’ representations and warranties set forth in Section 3.2, neither the Company, nor any of its affiliates, nor any Person acting on its or their behalf has, directly or indirectly, made any offers or sales of any security or solicited any offers to buy any security, under circumstances that would cause this offering of the Shares to be integrated with prior offerings by the Company for purposes of the Securities Act or any applicable shareholder approval provisions of any Trading Market on which any of the securities of the Company are listed or designated.

          (x)No General Solicitation. Neither the Company nor any person acting on behalf of the Company has offered or sold any of the Shares by any form of general solicitation or general advertising. The Company has offered the Shares for sale only to the Purchasers and certain other “accredited investors” within the meaning of Rule 501 under the Securities Act.

          (y)Foreign Corrupt Practices. Neither the Company, nor to the knowledge of the Company, any agent or other person acting on behalf of the Company, has (i) directly or indirectly, used any funds for unlawful contributions, gifts, entertainment or other unlawful expenses related to foreign or domestic political activity, (ii) made any unlawful payment to foreign or domestic government officials or employees or to any foreign or domestic political parties or campaigns from corporate funds, (iii) failed to disclose fully any contribution made by the Company (or made by any person acting on its behalf of which the Company is aware) which is in violation of law, or (iv) violated in any material respect any provision of the Foreign Corrupt Practices Act of 1977, as amended.

          (z)Acknowledgment Regarding Purchasers’ Purchase of Shares. The Company acknowledges and agrees that each of the Purchasers is acting solely in the capacity of an arm’s length purchaser with respect to this Agreement and the transactions contemplated hereby. The Company further acknowledges that no Purchaser is acting as a financial advisor or fiduciary of the Company (or in any similar capacity) with respect to this Agreement and the transactions contemplated hereby and any advice given by any Purchaser or any of their respective representatives or agents in connection with this Agreement and the transactions contemplated hereby is merely incidental to the Purchasers’ purchase of the Shares. The Company further represents to each Purchaser that the Company’s decision to enter into this Agreement has been based solely on the independent evaluation of the transactions contemplated hereby by the Company and its representatives.

          (aa)Acknowledgement Regarding Purchasers’ Trading Activity. Anything in this Agreement or elsewhere herein to the contrary notwithstanding (except for Sections 3.2(h) and 4.11 hereof), it is understood and acknowledged by the Company (i) that none of the Purchasers have been asked to agree, nor has any Purchaser agreed, to desist from purchasing or selling, long and/or short, securities of the Company, or “derivative” securities based on securities issued by the Company or to hold the Shares for any specified term; (ii) that past or future open market or other transactions by any Purchaser, including Short Sales, and

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specifically including, without limitation, Short Sales or “derivative” transactions, before or after the closing of this or future private placement transactions, may negatively impact the market price of the Company’s publicly-traded securities; (iii) that any Purchaser, and counter-parties in “derivative” transactions to which any such Purchaser is a party, directly or indirectly, presently may have a “short” position in the Common Stock, and (iv) that each Purchaser shall not be deemed to have any affiliation with or control over any arm’s length counter-party in any “derivative” transaction. The Company further understands and acknowledges that (a) one or more Purchasers may engage in hedging activities at various times during the period that the Shares are outstanding, and (b) such hedging activities (if any) could reduce the value of the existing stockholders' equity interests in the Company at and after the time that the hedging activities are being conducted. The Company acknowledges that such aforementioned hedging activities do not constitute a breach of this Agreement.

          (bb)Regulation M Compliance. The Company has not, and to its knowledge no one acting on its behalf has, (i) taken, directly or indirectly, any action designed to cause or to result in the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of any of the Shares in violation of Regulation M under the Exchange Act, (ii) sold (except pursuant to this Agreement), bid for, purchased, or, paid any compensation for soliciting purchases of, any of the Shares, or (iii) within 12 months prior to the date of this Agreement, paid or agreed to pay to any person any compensation for soliciting another to purchase any other securities of the Company, other than, in the case of clauses (ii) and (iii), compensation paid to the Company’s placement agent in connection with the placement of the Shares.

     3.2Representations and Warranties of the Purchasers. Each Purchaser hereby, for itself and for no other Purchaser, represents and warrants as of the date hereof and as of the Closing Date to the Company as follows:

          (a)Organization; Authority. Such Purchaser is an entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization with full right, power and authority to enter into and to consummate the transactions contemplated by this Agreement and otherwise to carry out its obligations hereunder. The execution, delivery and performance by such Purchaser of the transactions contemplated by this Agreement have been duly authorized by all necessary corporate or similar action on the part of such Purchaser. This Agreement has been duly executed by such Purchaser, and when delivered by such Purchaser in accordance with the terms hereof, will constitute the valid and legally binding obligation of such Purchaser, enforceable against it in accordance with its terms, except (i) as limited by general equitable principles and applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors’ rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies and (iii) insofar as indemnification and contribution provisions may be limited by applicable law. Such Purchaser does not have any agreement or understanding, directly or indirectly, with any Person to distribute any of the Shares.

          (b)Own Account. Such Purchaser understands that the Shares are “restricted securities” and have not been registered under the Securities Act or any applicable state securities law and is acquiring the Shares as principal for its own account and not with a view to

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or for distributing or reselling such Shares or any part thereof, has no present intention of distributing any of such Shares and has no direct or indirect arrangement or understandings with any other persons to distribute or regarding the distribution of such Shares (this representation and warranty not limiting such Purchaser’s right to sell the Shares pursuant to the Registration Statement or otherwise in compliance with applicable federal and state securities laws). Such Purchaser is acquiring the Shares hereunder in the ordinary course of its business.

          (c)Rule 144. Such Purchaser understands that the Shares must be held indefinitely unless such Shares are registered under the Securities Act or an exemption from registration is available. Such Purchaser acknowledges that it is familiar with Rule 144, and that Purchaser has been advised that Rule 144 permits resales only under certain circumstances. Such Purchaser understands that to the extent that Rule 144 is not available, such Purchaser will be unable to sell any Shares without either registration under the Securities Act or the existence of another exemption from such registration requirement.

          (d)Purchaser Status. At the time such Purchaser was offered the Shares, it was, and at the date hereof it is, either: (i) an “accredited investor” as defined in Rule 501(a)(1), (a)(2), (a)(3), (a)(7) or (a)(8) under the Securities Act or (ii) a “qualified institutional buyer” as defined in Rule 144A(a) under the Securities Act. Such Purchaser is not required to be registered as a broker-dealer under Section 15 of the Exchange Act.

          (e)Experience of Such Purchaser. Such Purchaser, either alone or together with its representatives, has such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the merits and risks of the prospective investment in the Shares, and has so evaluated the merits and risks of such investment. Such Purchaser is able to bear the economic risk of an investment in the Shares and, at the present time, is able to afford a complete loss of such investment.

          (f)General. Such Purchaser understands that the Shares are being offered and sold in reliance on a transactional exemption from the registration requirements of federal and state securities laws and the Company is relying upon the truth and accuracy of the representations, warranties, agreements, acknowledgments and understandings of such Purchaser set forth herein in order to determine the applicability of such exemptions and the suitability of such Purchaser to acquire the Shares. Such Purchaser understands that no United States federal or state agency or any government or governmental agency has passed upon or made any recommendation or endorsement of the Shares.

          (g)General Solicitation. Such Purchaser is not purchasing the Shares as a result of any advertisement, article, notice or other communication regarding the Shares published in any newspaper, magazine or similar media or broadcast over television or radio or presented at any seminar or any other general solicitation or general advertisement.

          (h)Short Sales and Confidentiality Prior To The Date Hereof. During the last thirty (30) days prior to the date hereof, neither such Purchaser nor any Affiliate of such Purchaser, foreign or domestic, has, directly or indirectly, effected or agreed to effect any Short Sale, whether or not against the box, established any "put equivalent position" (as defined in Rule 16a-1(h) under the 1934 Act) with respect to the Common Stock, borrowed or

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pre-borrowed any shares of Common Stock, or granted any other right (including, without limitation, any put or call option) with respect to the Common Stock or with respect to any security that includes, relates to or derived any significant part of its value from the Common Stock or otherwise sought to hedge its position in the Securities (each, a "Prohibited Transaction").Notwithstanding the foregoing, in the case of a Purchaser and/or its Affiliates that is, individually or collectively, a multi-managed investment vehicle whereby separate portfolio managers manage separate portions of such Purchaser's or Affiliates assets and the portfolio managers have no direct knowledge of the investment decisions made by the portfolio managers managing other portions of such Purchaser's or Affiliates assets, the representation set forth above shall only apply with respect to the portion of assets managed by the portfolio managers that have knowledge about the financing transaction contemplated by this Agreement. Other than to other Persons party (along with counsel) to this Agreement, such Purchaser has maintained the confidentiality of all disclosures made to it in connection with this transaction (including the existence and terms of this transaction).

          (i)Receipt of Information by Such Purchaser. Such Purchaser has had access to and has reviewed the SEC Reports.

          (j)Section 16 and Other Commission Filings. Such Purchaser acknowledges and agrees that it shall be solely responsible for timely making any required filings with the Commission, including without limitation any Section 16 filings or filings on Schedule 13D or 13G, on behalf of itself or its Affiliates and acknowledges and agrees that the Company shall have no responsibility or obligations to the Purchasers or their Affiliates in connection therewith.

          (k)Questionnaire. The information contained in the selling stockholder questionnaire in the form of Exhibit B attached hereto delivered by the Purchaser in connection with this Agreement is complete and accurate in all respects.

ARTICLE IV.
OTHER AGREEMENTS OF THE PARTIES

     4.1Transfer Restrictions.

          (a)The Shares may only be disposed of in compliance with state and federal securities laws. In connection with any transfer of Shares other than pursuant to an effective registration statement or Rule 144, to the Company or to an affiliate of a Purchaser or in connection with a pledge as contemplated in Section 4.1(b), the Company may require the transferor thereof to provide to the Company an opinion of counsel selected by the transferor and reasonably acceptable to the Company, the form and substance of which opinion shall be reasonably satisfactory to the Company, to the effect that such transfer does not require registration of such transferred Shares under the Securities Act. As a condition of transfer, any such transferee shall agree in writing to be bound by the terms of this Agreement and shall have the rights of a Purchaser under this Agreement.

          (b)The Purchasers agree to the imprinting, so long as is required by this Section 4.1, of a legend on any of the Shares in the following form:

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THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THESE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT WITH A REGISTERED BROKER-DEALER OR OTHER LOAN WITH A FINANCIAL INSTITUTION THAT IS AN “ACCREDITED INVESTOR” AS DEFINED IN RULE 501(a) UNDER THE SECURITIES ACT OR OTHER LOAN SECURED BY SUCH SECURITIES.

     The Company acknowledges and agrees that a Purchaser may from time to time pledge pursuant to a bona fide margin agreement with a registered broker-dealer or grant a security interest in some or all of the Shares to a financial institution that is an “accredited investor” as defined in Rule 501(a) under the Securities Act and who agrees to be bound by the provisions of this Agreement and, if required under the terms of such arrangement, such Purchaser may transfer pledged or secured Shares to the pledgees or secured parties. Such a pledge or transfer would not be subject to approval of the Company and no legal opinion of legal counsel of the pledgee, secured party or pledgor shall be required in connection therewith. Further, no notice shall be required of such pledge. At the appropriate Purchaser’s expense, the Company will execute and deliver such reasonable documentation as a pledgee or secured party of Shares may reasonably request in connection with a pledge or transfer of the Shares, including, if the Shares are subject to registration pursuant to Article V hereof, the preparation and filing of any required prospectus supplement under Rule 424(b)(3) under the Securities Act or other applicable provision of the Securities Act to appropriately amend the list of selling stockholders thereunder.

          (c)Certificates evidencing the Shares shall not contain the legend set forth in Section 4.1(b), (i) following a sale of such Shares pursuant to an effective registration statement (including the Registration Statement), or (ii) following any sale of such Shares pursuant to Rule 144, or (iii) if such Shares are eligible for sale under Rule 144(k); provided, however, that in each of instances (ii) through (iii) above, (A) each Purchaser shall have provided representations that such Purchaser is permitted to dispose of such Shares without limitation as to amount or manner of sale pursuant to Rule 144 under the Securities Act and (B) such certificates evidencing the Shares shall have been surrendered along with a notice requesting removal of any legend and requesting the issuance of new certificates free of the legend to replace those surrendered. The Company shall cause its counsel to issue a legal opinion to, or otherwise instruct, the Company’s transfer agent promptly after receipt of a request for legend removal in accordance with this Section 4.1(c) if required by the Company’s transfer agent to effect the removal of the legend hereunder.

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     4.2Furnishing of Information. Until the first date upon which each Purchaser may sell all of the Shares owned by it without reliance on Rule 144 (other than Rule 144(k)), the Company covenants to use its commercially reasonable efforts to timely file (or obtain extensions in respect thereof and file within the applicable grace period) all reports required to be filed by the Company after the date hereof pursuant to the Exchange Act. The Company further covenants that, until the second anniversary of the Closing, it will take such further action as any holder of Shares may reasonably request, to the extent required from time to time to enable such Person to sell such Shares without registration under the Securities Act within the requirements of the exemption provided by Rule 144.

     4.3Integration. The Company shall not sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in Section 2 of the Securities Act) that would be integrated with the offer or sale of the Shares in a manner that would require the registration under the Securities Act of the sale of the Shares to the Purchasers or that would be integrated with the offer or sale of the Shares for purposes of the rules and regulations of any Trading Market such that it would require shareholder approval prior to the closing of such other transaction unless shareholder approval is obtained before the closing of such subsequent transaction.

     4.4Securities Laws Disclosure; Publicity. The Company shall, by 8:30 a.m. Eastern time on the Trading Day immediately following the date hereof, issue a press release disclosing the material terms of the transactions contemplated hereby, and shall, by 8:30 a.m. Eastern time on the Trading Day immediately following the Closing Date, issue a Current Report on Form 8-K disclosing the closing of the transactions contemplated hereby and shall attach this Agreement thereto. From and after the filing of the Form 8-K with the SEC pursuant to the preceding sentence, no Purchaser shall be in possession of any material, nonpublic information received from the Company, any of its Subsidiaries or any of its respective officers, directors, employees or agents, that is not disclosed in the Form 8-K or SEC Reports. The Company shall not, and shall not cause any of its officers, directors, employees and agents to, provide any Purchaser with any material nonpublic information regarding the Company from and after the filing of the Form 8-K with the SEC without the express written consent of such Purchaser. The Company and each Purchaser shall consult with each other in issuing any other press releases with respect to the transactions contemplated hereby and which name such Purchaser, and neither the Company nor any Purchaser shall issue any such press release or otherwise make any such public statement without the prior consent of the Company, with respect to any press release of any Purchaser, or without the prior consent of each Purchaser, with respect to any press release of the Company naming such Purchaser, which consent shall not unreasonably be withheld or delayed, except if such disclosure is required by law, in which case the disclosing party shall promptly provide the other party with prior notice of such public statement or communication. Notwithstanding the foregoing, the Company shall not publicly disclose the name of any Purchaser, or include the name of any Purchaser in any filing with the Commission or any regulatory agency or Trading Market, without the prior written consent of such Purchaser, except (i) as required by federal securities law in connection with (A) the Registration Statement and (B) the filing of the final Agreement (including signature pages hereto) with the Commission and (ii) to the extent such disclosure is required by law or Trading Market regulations, in which case the Company shall provide the Purchasers with prior notice of such disclosure permitted under this subclause (ii).

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     4.5Non-Public Information. Except with respect to the material terms and conditions of the transactions contemplated by this Agreement, the Company covenants and agrees that neither it nor any other Person acting on its behalf will provide any Purchaser or its agents or counsel with any information that the Company believes constitutes material non-public information, unless prior thereto such Purchaser shall have executed a written agreement regarding the confidentiality and use of such information. The Company understands and confirms that each Purchaser shall be relying on the foregoing representations in effecting transactions in securities of the Company.

     4.6Use of Proceeds. The Company shall use the net proceeds from the sale of the Shares hereunder for working capital purposes and the conduct of the Company’s business, and not for the satisfaction of any portion of the Company’s debt (other than payment of trade payables in the ordinary course of the Company’s business and prior practices), to redeem any Common Stock or Common Stock Equivalents or to settle any outstanding litigation.

     4.7Reservation of Common Stock. As of the date hereof, the Company has reserved and the Company shall continue to reserve and keep available at all times, free of preemptive rights, a sufficient number of shares of Common Stock for the purpose of enabling the Company to issue Shares pursuant to this Agreement.

     4.8Listing of Common Stock.

  The Company hereby agrees to use commercially reasonable efforts, as soon as reasonably practicable following the Closing, to list all of the Shares on the Company’s principal Trading Market. The Company further agrees, if the Company applies to have the Common Stock traded on any other Trading Market, it will include in such application all of the Shares, and will take such other action as is necessary to cause all of the Shares to be listed on such other Trading Market as promptly as possible. The Company will comply in all respects with the Company’s reporting, filing and other obligations under the bylaws or rules of the Company’s principal Trading Market.

     4.9Equal Treatment of Purchasers. No consideration shall be offered or paid to any Person to amend or consent to a waiver or modification of any provision of this Agreement unless the same consideration is also offered to all of the parties to this Agreement. For clarification purposes, this provision constitutes a separate right granted to each Purchaser by the Company and negotiated separately by each Purchaser, and is intended to treat for the Company the Purchasers as a class and shall not in any way be construed as the Purchasers acting in concert or as a group with respect to the purchase, disposition or voting of Shares or otherwise.

     4.10Sales by Purchasers. Each Purchaser will sell any Shares held by it in compliance with applicable prospectus delivery requirements, if any, or otherwise in compliance with the requirements for an exemption from registration under the Securities Act and the rules and regulations promulgated thereunder. No Purchaser will make any sale, transfer or other disposition of the Shares in violation of federal or state securities laws.

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     4.11Short Sales and Confidentiality After The Date Hereof. Prior to the earliest to occur of (i) the termination of this Agreement, (ii) the Effective Date or (iii) the Required Effectiveness Date, each Purchaser, severally and not jointly with the other Purchasers, covenants that it shall not, and shall cause its Affiliates not to, engage, directly or indirectly, in (a) a Prohibited Transaction nor (b) any sale, assignment, pledge, hypothecation, put, call, or other transfer of any of the shares of Common Stock, warrants or other securities of the issuer acquired hereunder. Each Purchaser, severally and not jointly with the other Purchasers, covenants that until such time as the transactions contemplated by this Agreement are publicly disclosed by the Company as described in Section 4.4, such Purchaser will maintain the confidentiality of all disclosures made to it in connection with this transaction (including the existence and terms of this transaction). Each Purchaser understands and acknowledges, severally and not jointly with any other Purchaser, that the Commission currently takes the position that coverage of short sales of shares of the Common Stock “against the box” prior to the Effective Date of the Registration Statement with the Shares is a violation of Section 5 of the Securities Act, as set forth in Item 65, Section A, of the Manual of Publicly Available Telephone Interpretations, dated July 1997, compiled by the Office of Chief Counsel, Division of Corporation Finance. Notwithstanding the foregoing, in the case of a Purchaser that is a multi-managed investment vehicle whereby separate portfolio managers manage separate portions of such Purchaser's assets and the portfolio managers have no direct knowledge of the investment decisions made by the portfolio managers managing other portions of such Purchaser's assets, the covenant set forth above shall only apply with respect to the portion of assets managed by the portfolio managers that have knowledge about the financing transaction contemplated by this Agreement.

     4.12Delivery of Shares After Closing. The Company shall deliver, or cause to be delivered, the Shares purchased by each Purchaser to such Purchaser within three Trading Days of the Closing Date.

     4.13Form D. The Company agrees to timely file a Form D with respect to the Shares as required under Regulation D and to provide a copy thereof, promptly upon request of any Purchaser.

ARTICLE V.
REGISTRATION RIGHTS

     5.1Shelf Registration.

          (a)The Company shall use commercially reasonable efforts to cause to prepare and file with the Commission a “Shelf” Registration Statement covering the resale of all Registrable Securities for an offering to be made on a delayed or continuous basis pursuant to Rule 415 under the Securities Act on or prior to thirty (30) days from the date hereof (such date of actual filing, the “Filing Date”). The Registration Statement shall be on Form S-3 (or if such form is not available to the Company, on such other form as is then available to the Company)

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and shall contain (except if otherwise directed by the Purchasers) a “Plan of Distribution” substantially in the form attached hereto as Exhibit A. Each Purchaser has furnished or will promptly furnish to the Company a completed questionnaire in the form set forth as Exhibit B hereto. Each Purchaser agrees to promptly update such questionnaire in order to make the information previously furnished to the Company by such Purchaser not materially misleading. The Registration Statement shall register the Registrable Securities for resale by the holders thereof.

          (b)The Company shall use commercially reasonable efforts to cause the Registration Statement to be declared effective by the Commission on or prior to the 90th day following the Closing, and shall use commercially reasonable efforts to keep the Registration Statement continuously effective under the Securities Act until the earlier of (i) the second anniversary of the Closing, or (ii) the date when all Registrable Securities covered by such Registration Statement have been sold (the period ending on such earlier date, the “EffectivenessPeriod”).

          (c)The Company shall request effectiveness of the Registration Statement (and any post-effective amendments thereto) within five (5) business days following the Company’s receipt of notice from the Commission that the Registration Statement will not be reviewed by the Commission or that the Commission has completed its review of such Registration Statement and has no further comments. The Company shall request effectiveness of the Registration Statement (and any post-effective amendments thereto) at 5:00 p.m., Eastern time, on the effective date and use its commercially reasonable efforts to deliver the Prospectus (or any supplements thereto), which delivery may be made electronically, by 8:00 a.m. Eastern time on the second business day after such effective date.

          (d)Upon the occurrence of any Event (as defined below), as partial relief for the damages suffered therefrom by the Purchasers (which remedy shall not be exclusive of any other remedies which are available at law or in equity; and provided further that the Purchasers shall be entitled to pursue an action for specific performance of the Company’s obligations under Section 5.1(b) above and any such actions at law, in equity, for specific performance or otherwise shall not require the Purchaser to post a bond), the Company shall pay to each Purchaser, as liquidated damages and not as a penalty (it being agreed that it would not be feasible to ascertain the extent of such damages with precision), such amounts and at such times as shall be determined pursuant to this Section 5.1(d) . For such purposes, each of the following shall constitute an “Event”:

          (i)the Filing Date does not occur on the date contemplated by Section 5.1(a) above (such date is defined herein as the “Filing Default Date”), in which case the Company shall pay to each Purchaser an amount in cash equal to: (A) one percent (1.0%) of the aggregate purchase price paid by such Purchaser for the first 30-day period following such Filing Default, on a pro-rata basis for any portion of such 30-day period; and (B) for each successive 30-day period thereafter or any portion thereof until the Filing Date, one percent (1.0%) of the aggregate purchase price paid by such Purchaser, on a pro-rata basis for any portion of such 30-day period, to be paid at the end of each 30-day period; or

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               (ii)the Registration Statement is not declared effective on or prior to the date that is 90 days after the Closing Date (the “Required Effectiveness Date”), in which case the Company shall pay to each Purchaser an amount in cash equal to: (A) for the first 30 days after such 90th day, one percent (1.0%) of the aggregate purchase price paid by such Purchaser, on a pro-rata basis for any portion of such 30-day period; and (B) for each successive 30-day period thereafter until the Registration Statement is deemed effective, one percent (1.0%) of the aggregate purchase price paid by such Purchaser, on a pro rata basis for any portion of such 30-day period, at the end of each 30-day period.

The payment obligations of the Company under this Section 5.1(d) (i) shall be cumulative, and (ii) notwithstanding any of the above or any other provision set forth in this Agreement, shall not exceed, in the aggregate (including pursuant to the penultimate sentence of Section 5.2(f)), 10% of the aggregate purchase price paid by such Purchaser.

     5.2Registration Procedures. In connection with the Company’s registration obligations hereunder, the Company shall:

          (a)Use commercially reasonable efforts: (i) to prepare and file with the Commission such amendments, including post-effective amendments, to the Registration Statement as may be necessary to keep the Registration Statement continuously effective as to the Registrable Securities for the Effectiveness Period; (ii) to cause the related Prospectus to be amended or supplemented by any required Prospectus supplement, and as so supplemented or amended to be filed pursuant to Rule 424; and (iii) to respond as promptly as reasonably possible, and in any event within ten (10) trading days, to any comments received from the Commission with respect to the Registration Statement or any amendment thereto and as promptly as reasonably possible provide RBC true and complete copies of all correspondence from and to the Commission relating to the Registration Statement.

          (b)Notify RBC and the Purchasers as promptly as reasonably possible, and (if requested by RBC and the Purchasers) confirm such notice in writing no later than one (1) trading day thereafter, of any of the following events: (i) the Commission notifies the Company whether there will be a “review” of the Registration Statement; (ii) the Commission comments in writing on the Registration Statement (in which case the Company shall deliver to RBC a copy of such comments); (iii) the Commission or any other Federal or state governmental authority in writing requests any amendment or supplement to the Registration Statement or Prospectus or requests additional information related thereto; (iv) if the Commission issues any stop order suspending the effectiveness of the Registration Statement or initiates any Proceeding for that purpose; (v) the Company receives notice in writing of any suspension of the qualification or exemption from qualification of any Registrable Securities for sale in any jurisdiction, or the initiation or threat of any Proceeding for such purpose; (vi) a pending proceeding against the Company under Section 8A of the Securities Act in connection with the offering of the Registrable Securities; or (vii) the financial statements included in the Registration Statement become ineligible for inclusion therein or any statement made in the Registration Statement or Prospectus or any document incorporated or deemed to be incorporated therein by reference is untrue in any material respect or any revision to the Registration Statement, Prospectus or other document is required so that it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading.

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          (c)Use commercially reasonable efforts to avoid the issuance of or, if issued, obtain the withdrawal of (i) any order suspending the effectiveness of the Registration Statement or (ii) any suspension of the qualification (or exemption from qualification) of any of the Registrable Securities for sale in any jurisdiction, at the earliest practicable moment.

          (d)Deliver to each Purchaser, which delivery may be made electronically, by 8:00 a.m. Eastern time on the second business day after the date first available, without charge, such reasonable number of copies of the Prospectus or Prospectuses (including each form of prospectus) and each amendment or supplement thereto as such Purchasers may reasonably request. The Company hereby consents to the use of such Prospectus and each amendment or supplement thereto by each of the selling Purchasers in connection with the offering and sale of the Registrable Securities covered by such Prospectus and any amendment or supplement thereto.

          (e)To the extent required by law, prior to any public offering of Registrable Securities, use commercially reasonable efforts to register or qualify or cooperate with the selling Purchasers in connection with the registration or qualification (or exemption from such registration or qualification) of such Registrable Securities for offer and sale under the securities or “blue sky” laws of such jurisdictions within the United States as any Purchaser requests in writing, to keep each such registration or qualification (or exemption therefrom) effective during the Effectiveness Period and to do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of the Registrable Securities covered by a Registration Statement; provided, however, that the Company shall not be required for any such purpose (i) to consent to service of process or to qualify generally to do business as a foreign corporation in any jurisdiction wherein it would not be otherwise required to consent or qualify but for the requirements of this Section 5.2(e), or (ii) to subject itself to taxation.

          (f)Upon the occurrence of any event described in Section 5.2(b)(vi) above, as promptly as reasonably practicable, prepare a supplement or amendment, including a post-effective amendment, to the Registration Statement or a supplement to the related Prospectus or any document incorporated or deemed to be incorporated therein by reference, and file any other required document so that, as thereafter delivered, neither the Registration Statement nor such Prospectus will contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that the Company may suspend sales pursuant to the Registration Statement for a period or periods in the aggregate of up to thirty (30) days (unless the holders of at least two-thirds of the then-eligible Registrable Securities consisting of outstanding shares of Common Stock consent in writing to a longer delay of up to an additional thirty (30) days) in any twelve-month period if the Company furnishes to the holders of the Registrable Securities a certificate signed by the Company’s Chief Executive Officer stating that in the good faith judgment of the Company’s Board of Directors, (i) the offering could reasonably be expected to interfere in any material respect with any acquisition, corporate reorganization or other material transaction under consideration by the Company or (ii) there is some other material development relating to the operations or condition

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(financial or other) of the Company that has not been disclosed to the general public and as to which it is in the Company’s best interests not to disclose such development. Each violation of the Company’s obligation not to suspend sales pursuant to the Registration Statement longer than permitted pursuant to the proviso of this Section 5.2(f) shall be deemed an “Event” and for each such default, Purchaser shall be entitled to the payment provisions set forth in Section 5.1(d)(i), but treating the aggregate purchase price referred to in such Section 5.1(d)(i) as the aggregate purchase price of only the Affected Securities. For the purposes hereof, the “Affected Securities” shall mean only those Shares held by Purchaser at such time that may not be sold in any three month period in reliance on Rule 144.

          (g)Comply with all applicable rules and regulations of the Commission in all material respects.

          (h)File electronically on EDGAR the Registration Statement and any amendments or supplements thereto.

     5.3Registration Expenses. The Company shall pay (or reimburse the Purchasers for) all fees and expenses incident to the performance of or compliance with this Agreement by the Company, including without limitation (a) all registration and filing fees and expenses, including without limitation those related to filings with the Commission, Nasdaq and in connection with applicable state securities or “Blue Sky” laws (including, without limitation, reasonable fees and disbursements of counsel in connection with Blue Sky qualifications of the Registrable Securities under the laws of such jurisdictions as holders of a majority of the Registrable Securities being sold pursuant to the Registration Statement may designate), (b) printing expenses (including, without limitation, expenses of printing certificates for Registrable Securities and of printing copies of Prospectuses reasonably requested by the Purchasers), (c) messenger, telephone and delivery expenses, (d) fees and disbursements of counsel for the Company, and (e) fees and expenses of all other Persons retained by the Company in connection with the consummation of the transactions contemplated by this Agreement. Notwithstanding the foregoing, each Purchaser shall pay any and all costs, fees, discounts or commissions attributable to the sale of its respective Registrable Securities.

     5.4Indemnification.

          (a)Indemnification by the Company. The Company shall, notwithstanding any termination of this Agreement, indemnify and hold harmless each Purchaser, and each of their officers and directors, partners, members, agents, brokers and employees of each of them, each Person who controls any such Purchaser (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) and the officers, directors, partners, members, agents and employees of each such controlling Person, and each underwriter of Registrable Securities, to the fullest extent permitted by applicable law, from and against any and all losses, claims, damages, liabilities, settlement costs and expenses, including without limitation costs of preparation and reasonable attorneys’ fees (collectively, “Losses”), as incurred, arising out of or relating to any untrue or alleged untrue statement of a material fact contained in the Registration Statement, any Prospectus or form of prospectus or in any amendment or supplement thereto, or arising out of or relating to any omission or alleged omission of a material fact required to be stated therein or

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necessary to make the statements therein (in the case of any Prospectus or form of prospectus or supplement thereto, in light of the circumstances under which they were made) not misleading, except to the extent, but only to the extent, that (i) such untrue statements or omissions are based upon information regarding such Purchaser furnished in writing to the Company by such Purchaser expressly for use therein, or to the extent that such information related to such Purchaser or such Purchaser’s proposed method of distribution of Registrable Securities and was reviewed and expressly approved in writing by such Purchaser expressly for use in the Registration Statement, such Prospectus or such form of Prospectus or in any amendment or supplement thereto (which shall, however, be deemed to include disclosure substantially in accordance with the “Plan of Distribution” attached hereto), or (ii) in the case of an occurrence of an event of the type specified in Section 5.2(b) above, the use by such Purchaser of an outdated or defective Prospectus after the Company has notified such Purchaser in writing that the Prospectus is outdated or defective and prior to the receipt by such Purchaser of the Advice contemplated in Section 5.5 below. The Company shall notify RBC and the Purchasers promptly of the institution, threat or assertion of any Proceeding of which the Company is aware in connection with the transactions contemplated by this Agreement.

          (b)Indemnification by Purchasers. Each Purchaser shall, severally and not jointly, indemnify and hold harmless the Company, its directors, officers, agents and employees, and each Person who controls the Company (within the meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the directors, officers, agents or employees of such controlling Persons, to the fullest extent permitted by applicable law, from and against all Losses arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement, any Prospectus, or any form of prospectus or in any amendment or supplement thereto, or arising out of or based upon any omission of a material fact required to be stated therein or necessary to make the statements therein not misleading to the extent, but only to the extent, that such untrue statement or omission is contained in any information furnished in writing by such Purchaser to the Company specifically for inclusion in such Registration Statement or Prospectus or to the extent that (i) such untrue statements or omissions are based upon information regarding such Purchaser furnished in writing to the Company by such Purchaser expressly for use therein, or to the extent that such information related to such Purchaser or such Purchaser’s proposed method of distribution of Registrable Securities and was reviewed and expressly approved in writing by such Purchaser expressly for use in the Registration Statement, such Prospectus or such form of Prospectus or in any amendment or supplement thereto (which shall, however, be deemed to include disclosure substantially in accordance with the “Plan of Distribution” attached hereto), or (ii) in the case of an occurrence of an event of the type specified in 5.2(b) above, the use by such Purchaser of an outdated or defective Prospectus after the Company has notified such Purchaser in writing that the Prospectus is outdated or defective and prior to the receipt by such Purchaser of the Advice contemplated in Section 5.5 below. In no event shall the liability of any selling Purchaser hereunder be greater in amount than the dollar amount of the net proceeds received by such Purchaser upon the sale of the Registrable Securities giving rise to such indemnification obligation.

          (c)Conduct of Indemnification Proceedings. If any Proceeding shall be brought or asserted against any Person entitled to indemnity hereunder (an “Indemnified Party”), such Indemnified Party shall promptly notify the Person from whom indemnity is sought (the

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“Indemnifying Party”) in writing, and the Indemnifying Party shall assume the defense thereof, including the employment of counsel reasonably satisfactory to the Indemnified Party and the payment of all fees and expenses incurred in connection with defense thereof, provided, that the failure of any Indemnified Party to give such notice shall not relieve the Indemnifying Party of its obligations or liabilities pursuant to this Agreement, except (and only) to the extent that such failure shall have prejudiced the Indemnifying Party. An Indemnified Party shall have the right to employ separate counsel in any such Proceeding and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party or Parties unless: (i) the Indemnifying Party has agreed in writing to pay such fees and expenses; or (ii) the Indemnifying Party shall have failed promptly to assume the defense of such Proceeding and to employ counsel reasonably satisfactory to such Indemnified Party in any such Proceeding; or (iii) the named parties to any such Proceeding (including any impleaded parties) include both such Indemnified Party and the Indemnifying Party, and such Indemnified Party shall have been advised by counsel that a conflict of interest is likely to exist if the same counsel were to represent such Indemnified Party and the Indemnifying Party (in which case, if such Indemnified Party notifies the Indemnifying Party in writing that it elects to employ separate counsel at the expense of the Indemnifying Party, the Indemnifying Party shall not have the right to assume the defense thereof and such counsel shall be at the expense of the Indemnifying Party; provided, however, that in the event that the Indemnifying Party shall be required to pay the fees and expenses of separate counsel, the Indemnifying Party shall only be required to pay the fees and expenses of one separate counsel for such Indemnified Party or Parties. The Indemnifying Party shall not be liable for any settlement of any such Proceeding affected without its written consent, which consent shall not be unreasonably withheld. No Indemnifying Party shall, without the prior written consent of the Indemnified Party, effect any settlement of any pending Proceeding in respect of which any Indemnified Party is a party, unless such settlement includes an unconditional release of such Indemnified Party from all liability on claims that are the subject matter of such Proceeding. All fees and expenses of the Indemnified Party (including reasonable fees and expenses to the extent incurred in connection with investigating or preparing to defend such Proceeding in a manner not inconsistent with this Section) shall be paid to the Indemnified Party, but no more frequently than on a monthly basis, within ten trading days of written notice thereof to the Indemnifying Party (regardless of whether it is ultimately determined that an Indemnified Party is not entitled to indemnification hereunder; provided, that the Indemnifying Party may require such Indemnified Party to undertake to reimburse all such fees and expenses to the extent it is finally judicially determined that such Indemnified Party is not entitled to indemnification hereunder).

          (d)Contribution. If a claim for indemnification under Section 5.4(a) or (b) is unavailable to an Indemnified Party (by reason of public policy or otherwise), then each Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such Losses, in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party and Indemnified Party in connection with the actions, statements or omissions that resulted in such Losses as well as any other relevant equitable considerations. The relative fault of such Indemnifying Party and Indemnified Party shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission of a material fact, has been taken or made by, or related to information supplied by, such Indemnifying Party or Indemnified Party, and the parties’ relative intent, knowledge,

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access to information and opportunity to correct or prevent such action, statement or omission. The amount paid or payable by a party as a result of any Losses shall be deemed to include, subject to the limitations set forth in Section 5.4(c), any reasonable attorneys’ or other reasonable fees or expenses incurred by such party in connection with any Proceeding to the extent such party would have been indemnified for such fees or expenses if the indemnification provided for in this Section 5.4(d) was available to such party in accordance with its terms.

     The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 5.4(d) were determined by pro rata allocation or by any other method of allocation that does not take into account the equitable considerations referred to in the immediately preceding Section. Notwithstanding the provision of this Section 5.4(d), no Purchaser shall be required to contribute, in the aggregate, any amount in excess of the amount by which the net proceeds actually received by such Purchaser from the sale of the Registrable Securities subject to the Proceeding exceeds the amount of any damages that such Purchaser has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation.

     The indemnity and contribution agreements contained in this Section are in addition to any liability that the Indemnifying Parties may have to the Indemnified Parties.

     5.5Dispositions. Each Purchaser agrees that it will comply with the prospectus delivery requirements of the Securities Act as applicable to it in connection with sales of Registrable Securities pursuant to the Registration Statement. Each Purchaser further agrees that, upon receipt of a notice from the Company of the occurrence of any event of the kind described in Section 5.2(b), such Purchaser will discontinue disposition of such Registrable Securities under the Registration Statement until such Purchaser’s receipt of the copies of the supplemented Prospectus and/or amended Registration Statement contemplated by Section 5.2(f), or until it is advised in writing (the “Advice”) by the Company that the use of the applicable Prospectus may be resumed, and, in either case, has received copies of any additional or supplemental filings that are incorporated or deemed to be incorporated by reference in such Prospectus or Registration Statement. The Company may provide appropriate stop orders to enforce the provisions of this Section.

     5.6No Piggy-Back on Registrations. Neither the Company nor any of its security holders (other than the Purchasers) may include securities of the Company in the Registration Statement, and the Company shall not after the date hereof enter into any agreement providing any such right with respect to the Registration Statement to any of its security holders other than an aggregate of not more that an additional 15,000 shares of Common Stock.

     5.7Piggy-Back Registrations. If at any time during the Effectiveness Period, other than any suspension period referred to in Section 5.2(f), there is not an effective Registration Statement covering all of the Registrable Securities and the Company shall determine to prepare and file with the Commission a registration statement relating to an offering for its own account or the account of others under the Securities Act of any of its equity securities, other than on Form S-4 or Form S-8 (each as promulgated under the Securities Act) or their then equivalents

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relating to equity securities to be issued solely in connection with any acquisition of any entity or business or equity securities issuable in connection with stock option or other employee benefit plans, then the Company shall send to each Purchaser written notice of such determination and if, within fifteen (15) days after receipt of such notice, any such Purchaser shall so request in writing, the Company shall include in such registration statement all or any part of such Registrable Securities not already covered by an effective Registration Statement such Purchaser requests to be registered.

     5.8Rule 144. For a period of two years following the date hereof, the Company agrees with each holder of Registrable Securities to:

      (a) use commercially reasonable efforts to comply with the requirements of Rule 144(c) under the Securities Act with respect to current public information about the Company;

     (b) use commercially reasonable efforts to file with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act (at any time it is subject to such reporting requirements); and

     (c) furnish to any holder of Registrable Securities upon request (i) a written statement by the Company as to its compliance with the requirements of said Rule 144(c) and the reporting requirements of the Securities Act and the Exchange Act (at any time it is subject to such reporting requirements), (ii) a copy of the most recent annual or quarterly report of the Company, and (iii) such other reports and documents of the Company as such holder may reasonably request to avail itself of any similar rule or regulation of the Commission allowing it to sell any such securities without registration.

     5.9Early Termination. Subject to the compliance with Section 4.2 hereunder, the obligations of the Company pursuant to this Article V shall not apply at any time during which the Company’s Common Stock is not registered under the Exchange Act.

ARTICLE VI.
MISCELLANEOUS

     6.1Termination. This Agreement may be terminated by any Purchaser, as to such Purchaser’s obligations hereunder only and without any effect whatsoever on the obligations between the Company and the other Purchasers, by written notice to the other parties, if the Closing has not been consummated on or before May 17, 2006; provided, however, that the right to terminate this Agreement under this Section 6.1 shall not be available to any party whose breach of this Agreement has been the cause of, or resulted in, the failure of the Closing to occur on or before such date; provided, however, that no such termination will affect the right of any party to sue for any breach by the other party (or parties).

     6.2Fees and Expenses. Except as expressly set forth in this Agreement to the contrary, each party shall pay the fees and expenses of its advisers, counsel, accountants and other experts, if any, and all other expenses incurred by such party incident to the negotiation, preparation, execution, delivery and performance of this Agreement. Upon Closing, the Company shall promptly pay the reasonable fees and expenses of counsel to BVF in an amount not to exceed $10,000. The Company shall pay all transfer agent fees, stamp taxes and other taxes and duties levied in connection with the delivery of any Shares to the Purchasers.

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     6.3Entire Agreement. This Agreement, together with the exhibits hereto, contain the entire understanding of the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, oral or written, with respect to such matters, which the parties acknowledge have been merged into this Agreement and exhibits.

     6.4Notices. Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest of (a) the date of transmission, if such notice or communication is delivered via facsimile or email at the facsimile number or email address set forth on the signature pages attached hereto prior to 5:30 p.m. (New York City time) on a Trading Day, (b) the next Trading Day after the date of transmission, if such notice or communication is delivered via facsimile or email at the facsimile number or email address set forth on the signature pages attached hereto on a day that is not a Trading Day or later than 5:30 p.m. (New York City time) on any Trading Day, (c) the 2^nd Trading Day following the date of mailing, if sent by U.S. nationally recognized overnight courier service, or (d) upon actual receipt by the party to whom such notice is required to be given. The address for such notices and communications shall be as set forth on the signature pages attached hereto. Each Purchaser consents to the receipt of such notices in such manner, and agrees that any previous receipt of notices or other documents, including this Agreement, transmitted as set forth above, shall be deemed to have been received by such Purchaser within the time periods set forth above.

     6.5Amendments; Waivers. No provision of this Agreement may be waived or amended except in a written instrument signed, in the case of an amendment, by the Company and each Purchaser or, in the case of a waiver, by the party against whom enforcement of any such waived provision is sought. No waiver of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any subsequent default or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of any party to exercise any right hereunder in any manner impair the exercise of any such right.

     6.6Headings. The headings herein are for convenience only, do not constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof.

     6.7Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties and their successors and permitted assigns. The Company may not assign this Agreement or any rights or obligations hereunder without the prior written consent of each Purchaser (other than by merger or sale of all or substantially all of the assets of the Company). Any Purchaser may assign any or all of its rights under this Agreement to any Person to whom such Purchaser assigns or transfers all of the Shares held by such Purchaser, provided such transferee agrees in writing to be bound, with respect to the transferred Shares, by the provisions of this Agreement that apply to the “Purchasers”.

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     6.8No Third-Party Beneficiaries. This Agreement is intended for the benefit of the parties hereto and their respective successors and permitted assigns and is not for the benefit of, nor may any provision hereof be enforced by, any other Person.

     6.9Governing Law. All questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of California, without regard to the principles of conflicts of law thereof. Each party agrees that all legal proceedings concerning the interpretations, enforcement and defense of the transactions contemplated by this Agreement (whether brought against a party hereto or its respective affiliates, directors, officers, shareholders, employees or agents) shall be commenced exclusively in the state and federal courts sitting in the City of San Francisco. Each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in the City of San Francisco for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of this Agreement), and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is improper or is an inconvenient venue for such proceeding. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any other manner permitted by law. The parties hereby waive all rights to a trial by jury. If either party shall commence an action or proceeding to enforce any provisions of this Agreement, then the prevailing party in such action or proceeding shall be reimbursed by the other party for its reasonable attorneys’ fees and other costs and expenses incurred with the investigation, preparation and prosecution of such action or proceeding.

     6.10Survival. The representations and warranties contained herein shall survive the Closing and the delivery of the Shares.

     6.11Execution. This Agreement may be executed in two or more counterparts, all of which when taken together shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party, it being understood that both parties need not sign the same counterpart. In the event that any signature is delivered by facsimile transmission or by e-mail delivery of a “.pdf” format data file, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such facsimile or “.pdf” signature page were an original thereof.

     6.12Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their commercially reasonable efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable.

31

     6.13Rescission and Withdrawal Right. Notwithstanding anything to the contrary contained in (and without limiting any similar provisions of) this Agreement, whenever any Purchaser exercises a right, election, demand or option under this Agreement and the Company does not timely perform its related obligations within the periods therein provided, then such Purchaser may rescind or withdraw, in its sole discretion from time to time upon written notice to the Company, any relevant notice, demand or election in whole or in part without prejudice to its future actions and rights.

     6.14Replacement of Shares. If any certificate or instrument evidencing any Shares is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued in exchange and substitution for and upon cancellation thereof (in the case of mutilation), or in lieu of and substitution therefor, a new certificate or instrument, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction. The applicant for a new certificate or instrument under such circumstances shall also pay any reasonable third-party costs (including customary indemnity) associated with the issuance of such replacement Shares.

     6.15Remedies. In addition to being entitled to exercise all rights provided herein or granted by law, including recovery of damages, each of the Purchasers and the Company will be entitled to specific performance under this Agreement. The parties agree that monetary damages may not be adequate compensation for any loss incurred by reason of any breach of obligations contained in this Agreement and hereby agrees to waive and not to assert in any action for specific performance of any such obligation the defense that a remedy at law would be adequate.

     6.16Payment Set Aside. To the extent that the Company makes a payment or payments to any Purchaser pursuant to this Agreement or a Purchaser enforces or exercises its rights hereunder, and such payment or payments or the proceeds of such enforcement or exercise or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside, recovered from, disgorged by or are required to be refunded, repaid or otherwise restored to the Company, a trustee, receiver or any other person under any law (including, without limitation, any bankruptcy law, state or federal law, common law or equitable cause of action), then to the extent of any such restoration the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such enforcement or setoff had not occurred.

     6.17Independent Nature of Purchasers’ Obligations and Rights. The obligations of each Purchaser under this Agreement are several and not joint with the obligations of any other Purchaser, and no Purchaser shall be responsible in any way for the performance or non-performance of the obligations of any other Purchaser under this Agreement. Nothing contained herein, and no action taken by any Purchaser pursuant hereto, shall be deemed to constitute the Purchasers as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Purchasers are in any way acting in concert or as a group with respect to such obligations or the transactions contemplated by this Agreement. Each Purchaser shall be entitled to independently protect and enforce its rights, including without limitation, the rights

32

arising out of this Agreement, and it shall not be necessary for any other Purchaser to be joined as an additional party in any proceeding for such purpose. Each Purchaser has been represented by its own separate legal counsel in their review and negotiation of this Agreement. RBC has acted as placement agent for the Company in connection with the transaction. The Company has elected to provide all Purchasers with the same terms under this Agreement for the convenience of the Company and not because it was required or requested to do so by the Purchasers.

     6.18Construction. The parties agree that each of them and/or their respective counsel has reviewed and had an opportunity to revise this Agreement and, therefore, the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement or any amendments hereto.

(Signature Pages Follow)

33

      IN WITNESS WHEREOF, the parties hereto have caused this Common Stock Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

AVIGEN, INC.		Address for Notice:
By:	/s/ Kenneth Chahine	Avigen, Inc.
Name: Kenneth Chahine		Attn: Corporate Counsel
Title: President and Chief Executive Officer		1301 Harbor Bay Pkwy
		Alameda, CA 94502
		Fax: (510) 748-7285
With a copy to (which shall not constitute notice):
Cooley Godward LLP
Attn: Brett D. White
Five Palo Alto Square
3000 El Camino Real
Palo Alto, CA 94306
Fax: (650) 849-7400

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE FOR PURCHASER FOLLOWS]

34

[PURCHASER SIGNATURE PAGES TO AVIGEN COMMON STOCK PURCHASE AGREEMENT]

     IN WITNESS WHEREOF, the undersigned have caused this Common Stock Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

Name of Purchaser: 

Signature of Authorized Signatory of Purchaser: 

Name of Authorized Signatory: 

Title of Authorized Signatory: 

Email Address of Purchaser:

Fax Number of Purchaser: 

Address for Notice of Purchaser:

Address for Delivery of Shares for Purchaser (if not same as above):

Name to Appear on Certificate (if different from above):

Subscription Amount:
Shares:
EIN Number: [PROVIDE THIS UNDER SEPARATE COVER]

[SIGNATURE PAGES CONTINUE]

35

[PURCHASER SIGNATURE PAGES TO AVIGEN COMMON STOCK PURCHASE AGREEMENT]

     IN WITNESS WHEREOF, the undersigned have caused this Common Stock Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

Name of Purchaser:	Biotechnology Value Fund II, LP
Signature of Authorized Signatory of Purchaser:	/s/ MARK LAMPERT
Name of Authorized Signatory:	Mark Lampert
Title of Authorized Signatory:	President
Email Address of Purchaser:
Fax Number of Purchaser:
Address for Notice of Purchaser:

Address for Delivery of Shares for Purchaser (if not same as above):
     See Delivery Instructions

Name to Appear on Certificate (if different from above):

Subscription Amount: $1,464,613.80
Shares: 272,740
EIN Number: [PROVIDE THIS UNDER SEPARATE COVER]

[SIGNATURE PAGES CONTINUE]

[PURCHASER SIGNATURE PAGES TO AVIGEN COMMON STOCK PURCHASE AGREEMENT]

     IN WITNESS WHEREOF, the undersigned have caused this Common Stock Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

Name of Purchaser:	Biotechnology Value Fund II, LP
Signature of Authorized Signatory of Purchaser:	/s/ MARK LAMPERT
Name of Authorized Signatory:	Mark Lampert
Title of Authorized Signatory:	President
Email Address of Purchaser:
Fax Number of Purchaser:
Address for Notice of Purchaser:

Address for Delivery of Shares for Purchaser (if not same as above):
     See Delivery Instructions

Name to Appear on Certificate (if different from above):

Subscription Amount: $1,003,712.07
Shares: 186,911
EIN Number: [PROVIDE THIS UNDER SEPARATE COVER]

[SIGNATURE PAGES CONTINUE]

[PURCHASER SIGNATURE PAGES TO AVIGEN COMMON STOCK PURCHASE AGREEMENT]

     IN WITNESS WHEREOF, the undersigned have caused this Common Stock Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

Name of Purchaser:	BVF Investments, LLC
Signature of Authorized Signatory of Purchaser:	/s/ MARK LAMPERT
Name of Authorized Signatory:	Mark Lampert
Title of Authorized Signatory:	President
Email Address of Purchaser:
Fax Number of Purchaser:
Address for Notice of Purchaser:

Address for Delivery of Shares for Purchaser (if not same as above):
     See Delivery Instructions

Name to Appear on Certificate (if different from above):

Subscription Amount: $3,822,172.68
Shares: 711,764
EIN Number: [PROVIDE THIS UNDER SEPARATE COVER]

[SIGNATURE PAGES CONTINUE]

[PURCHASER SIGNATURE PAGES TO AVIGEN COMMON STOCK PURCHASE AGREEMENT]

     IN WITNESS WHEREOF, the undersigned have caused this Common Stock Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

Name of Purchaser:	Investment 10, LLC
Signature of Authorized Signatory of Purchaser:	/s/ MARK LAMPERT
Name of Authorized Signatory:	Mark Lampert
Title of Authorized Signatory:	President
Email Address of Purchaser:
Fax Number of Purchaser:
Address for Notice of Purchaser:

Address for Delivery of Shares for Purchaser (if not same as above):
     See Delivery Instructions

Name to Appear on Certificate (if different from above):

Subscription Amount: $422,001.45
Shares: 78,585
EIN Number: [PROVIDE THIS UNDER SEPARATE COVER]

[SIGNATURE PAGES CONTINUE]

[PURCHASER SIGNATURE PAGES TO AVIGEN COMMON STOCK PURCHASE AGREEMENT]

     IN WITNESS WHEREOF, the undersigned have caused this Common Stock Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

Name of Purchaser:	Federated Kaufman Fund and Portfolio of Federated Equity Funds
Signature of Authorized Signatory of Purchaser:		/s/ HANS P. UTSCH
Name of Authorized Signatory:		Hans P. Utsch
Title of Authorized Signatory:		VP, Portfolio Manager
Email Address of Purchaser:
Fax Number of Purchaser:
Address for Notice of Purchaser:

Address for Delivery of Shares for Purchaser (if not same as above):
     See Delivery Instructions

Name to Appear on Certificate (if different from above):

Subscription Amount: $3,000,004.20
Shares: 558,660
EIN Number: [PROVIDE THIS UNDER SEPARATE COVER]

[SIGNATURE PAGES CONTINUE]

[PURCHASER SIGNATURE PAGES TO AVIGEN COMMON STOCK PURCHASE AGREEMENT]

     IN WITNESS WHEREOF, the undersigned have caused this Common Stock Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

Name of Purchaser:		Permal U.S. Opportunities Limited
Signature of Authorized Signatory of Purchaser:		/s/ ADAM FIORE
Name of Authorized Signatory:		Adam Fiore
Title of Authorized Signatory:	General Counsel of Apex Capital, LLD, the Authorized Investment Advisor
Email Address of Purchaser:
Fax Number of Purchaser:
Address for Notice of Purchaser:

Address for Delivery of Shares for Purchaser (if not same as above):
     See Delivery Instructions

Name to Appear on Certificate (if different from above):

Subscription Amount: $1,258,728
Shares: 234,400
EIN Number: [PROVIDE THIS UNDER SEPARATE COVER]

[SIGNATURE PAGES CONTINUE]

[PURCHASER SIGNATURE PAGES TO AVIGEN COMMON STOCK PURCHASE AGREEMENT]

     IN WITNESS WHEREOF, the undersigned have caused this Common Stock Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

Name of Purchaser:		Zaxis Partners, L.P.
Signature of Authorized Signatory of Purchaser:		/s/ ADAM FIORE
Name of Authorized Signatory:		Adam Fiore
Title of Authorized Signatory:	General Counsel of Apex Capital, LLD, the Authorized Investment Advisor
Email Address of Purchaser:
Fax Number of Purchaser:
Address for Notice of Purchaser:

Address for Delivery of Shares for Purchaser (if not same as above):
     See Delivery Instructions

Name to Appear on Certificate (if different from above):

Subscription Amount: $279,240
Shares: 52,000
EIN Number: [PROVIDE THIS UNDER SEPARATE COVER]

[SIGNATURE PAGES CONTINUE]

[PURCHASER SIGNATURE PAGES TO AVIGEN COMMON STOCK PURCHASE AGREEMENT]

     IN WITNESS WHEREOF, the undersigned have caused this Common Stock Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

Name of Purchaser:		Zaxis Institutional Partners, L.P.
Signature of Authorized Signatory of Purchaser:		/s/ ADAM FIORE
Name of Authorized Signatory:		Adam Fiore
Title of Authorized Signatory:	General Counsel of Apex Capital, LLD, the Authorized Investment Advisor
Email Address of Purchaser:
Fax Number of Purchaser:
Address for Notice of Purchaser:

Address for Delivery of Shares for Purchaser (if not same as above):
     See Delivery Instructions

Name to Appear on Certificate (if different from above):

Subscription Amount: $452,691
Shares: 84,300
EIN Number: [PROVIDE THIS UNDER SEPARATE COVER]

[SIGNATURE PAGES CONTINUE]

[PURCHASER SIGNATURE PAGES TO AVIGEN COMMON STOCK PURCHASE AGREEMENT]

     IN WITNESS WHEREOF, the undersigned have caused this Common Stock Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

Name of Purchaser:		Zaxis Institutional Offshore Master Fund, L.P.
Signature of Authorized Signatory of Purchaser:		/s/ ADAM FIORE
Name of Authorized Signatory:		Adam Fiore
Title of Authorized Signatory:	General Counsel of Apex Capital, LLD, the Authorized Investment Advisor
Email Address of Purchaser:
Fax Number of Purchaser:
Address for Notice of Purchaser:

Address for Delivery of Shares for Purchaser (if not same as above):
     See Delivery Instructions

Name to Appear on Certificate (if different from above):

Subscription Amount: $487,059
Shares: 90,700
EIN Number: [PROVIDE THIS UNDER SEPARATE COVER]

[SIGNATURE PAGES CONTINUE]

[PURCHASER SIGNATURE PAGES TO AVIGEN COMMON STOCK PURCHASE AGREEMENT]

     IN WITNESS WHEREOF, the undersigned have caused this Common Stock Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

Name of Purchaser:		Pollat, Evans & Co.
Signature of Authorized Signatory of Purchaser:		/s/ ADAM FIORE
Name of Authorized Signatory:		Adam Fiore
Title of Authorized Signatory:	General Counsel of Apex Capital, LLD, the Authorized Investment Advisor
Email Address of Purchaser:
Fax Number of Purchaser:
Address for Notice of Purchaser:

Address for Delivery of Shares for Purchaser (if not same as above):
     See Delivery Instructions

Name to Appear on Certificate (if different from above):

Subscription Amount: $13,425
Shares: 2,500
EIN Number: [PROVIDE THIS UNDER SEPARATE COVER]

[SIGNATURE PAGES CONTINUE]

[PURCHASER SIGNATURE PAGES TO AVIGEN COMMON STOCK PURCHASE AGREEMENT]

     IN WITNESS WHEREOF, the undersigned have caused this Common Stock Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

Name of Purchaser:		Zaxis Offshore Limited Master Fund, L.P.
Signature of Authorized Signatory of Purchaser:		/s/ ADAM FIORE
Name of Authorized Signatory:		Adam Fiore
Title of Authorized Signatory:	General Counsel of Apex Capital, LLD, the Authorized Investment Advisor
Email Address of Purchaser:
Fax Number of Purchaser:
Address for Notice of Purchaser:

Address for Delivery of Shares for Purchaser (if not same as above):
     See Delivery Instructions

Name to Appear on Certificate (if different from above):

Subscription Amount: $547,203
Shares: 101,900
EIN Number: [PROVIDE THIS UNDER SEPARATE COVER]

[SIGNATURE PAGES CONTINUE]

[PURCHASER SIGNATURE PAGES TO AVIGEN COMMON STOCK PURCHASE AGREEMENT]

     IN WITNESS WHEREOF, the undersigned have caused this Common Stock Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

Name of Purchaser:		Zaxis Equity Neutral Fund, L.P.
Signature of Authorized Signatory of Purchaser:		/s/ ADAM FIORE
Name of Authorized Signatory:		Adam Fiore
Title of Authorized Signatory:	General Counsel of Apex Capital, LLD, the Authorized Investment Advisor
Email Address of Purchaser:
Fax Number of Purchaser:
Address for Notice of Purchaser:

Address for Delivery of Shares for Purchaser (if not same as above):
     See Delivery Instructions

Name to Appear on Certificate (if different from above):

Subscription Amount: $27,924
Shares: 5,200
EIN Number: [PROVIDE THIS UNDER SEPARATE COVER]

[SIGNATURE PAGES CONTINUE]

[PURCHASER SIGNATURE PAGES TO AVIGEN COMMON STOCK PURCHASE AGREEMENT]

     IN WITNESS WHEREOF, the undersigned have caused this Common Stock Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

Name of Purchaser:		Guggenheim Portfolio Company XIII, LLC
Signature of Authorized Signatory of Purchaser:		/s/ ADAM FIORE
Name of Authorized Signatory:		Adam Fiore
Title of Authorized Signatory:	General Counsel of Apex Capital, LLD, the Authorized Investment Advisor
Email Address of Purchaser:
Fax Number of Purchaser:
Address for Notice of Purchaser:

Address for Delivery of Shares for Purchaser (if not same as above):
     See Delivery Instructions

Name to Appear on Certificate (if different from above):

Subscription Amount: $155,730
Shares: 29,000
EIN Number: [PROVIDE THIS UNDER SEPARATE COVER]

[SIGNATURE PAGES CONTINUE]

[PURCHASER SIGNATURE PAGES TO AVIGEN COMMON STOCK PURCHASE AGREEMENT]

     IN WITNESS WHEREOF, the undersigned have caused this Common Stock Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

Name of Purchaser:	Pierce Diversified Strategy Master Fund LLC, Enab
Signature of Authorized Signatory of Purchaser:	/s/ BRENDAN O’NEIL
Name of Authorized Signatory:	Brendan O’Neil
Title of Authorized Signatory:	Principal and Portfolio Manager
Email Address of Purchaser:
Fax Number of Purchaser:
Address for Notice of Purchaser:

Address for Delivery of Shares for Purchaser (if not same as above):
     See Delivery Instructions

Name to Appear on Certificate (if different from above):

Subscription Amount: $500,000.7
Shares: 93,110
EIN Number: [PROVIDE THIS UNDER SEPARATE COVER]

[SIGNATURE PAGES CONTINUE]

[PURCHASER SIGNATURE PAGES TO AVIGEN COMMON STOCK PURCHASE AGREEMENT]

     IN WITNESS WHEREOF, the undersigned have caused this Common Stock Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

Name of Purchaser:	Enable Opportunity Partners, LP
Signature of Authorized Signatory of Purchaser:	/s/ BRENDAN O’NEIL
Name of Authorized Signatory:	Brendan O’Neil
Title of Authorized Signatory:	Principal and Portfolio Manager
Email Address of Purchaser:
Fax Number of Purchaser:
Address for Notice of Purchaser:

Address for Delivery of Shares for Purchaser (if not same as above):
     See Delivery Instructions

Name to Appear on Certificate (if different from above):

Subscription Amount: $200,000
Shares: 37,244
EIN Number: [PROVIDE THIS UNDER SEPARATE COVER]

[SIGNATURE PAGES CONTINUE]

[PURCHASER SIGNATURE PAGES TO AVIGEN COMMON STOCK PURCHASE AGREEMENT]

     IN WITNESS WHEREOF, the undersigned have caused this Common Stock Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

Name of Purchaser:	Enable Growth Partners, LP
Signature of Authorized Signatory of Purchaser:	/s/ BRENDAN O’NEIL
Name of Authorized Signatory:	Brendan O’Neil
Title of Authorized Signatory:	Principal and Portfolio Manager
Email Address of Purchaser:
Fax Number of Purchaser:
Address for Notice of Purchaser:

Address for Delivery of Shares for Purchaser (if not same as above):
     See Delivery Instructions

Name to Appear on Certificate (if different from above):

Subscription Amount: $1,300,001.82
Shares: 242,086
EIN Number: [PROVIDE THIS UNDER SEPARATE COVER]

[SIGNATURE PAGES CONTINUE]

[PURCHASER SIGNATURE PAGES TO AVIGEN COMMON STOCK PURCHASE AGREEMENT]

     IN WITNESS WHEREOF, the undersigned have caused this Common Stock Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

Name of Purchaser:	Fort Mason Partners, LP
Signature of Authorized Signatory of Purchaser:	/s/ DAN GERMAN
Name of Authorized Signatory:	Dan German
Title of Authorized Signatory:	Managing Member, Fort Mason Capital, LLC
Email Address of Purchaser:
Fax Number of Purchaser:
Address for Notice of Purchaser:

Address for Delivery of Shares for Purchaser (if not same as above):
     See Delivery Instructions

Name to Appear on Certificate (if different from above):

Subscription Amount: $182,700.26
Shares: 34,022
EIN Number: [PROVIDE THIS UNDER SEPARATE COVER]

[SIGNATURE PAGES CONTINUE]

[PURCHASER SIGNATURE PAGES TO AVIGEN COMMON STOCK PURCHASE AGREEMENT]

     IN WITNESS WHEREOF, the undersigned have caused this Common Stock Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

Name of Purchaser:	Fort Mason Master, LP
Signature of Authorized Signatory of Purchaser:	/s/ DAN GERMAN
Name of Authorized Signatory:	Dan German
Title of Authorized Signatory:	Managing Member, Fort Mason Capital, LLC
Email Address of Purchaser:
Fax Number of Purchaser:
Address for Notice of Purchaser:

Address for Delivery of Shares for Purchaser (if not same as above):
     See Delivery Instructions

Name to Appear on Certificate (if different from above):

Subscription Amount: $2,817,303.94
Shares: 524,638
EIN Number: [PROVIDE THIS UNDER SEPARATE COVER]

[SIGNATURE PAGES CONTINUE]

[PURCHASER SIGNATURE PAGES TO AVIGEN COMMON STOCK PURCHASE AGREEMENT]

     IN WITNESS WHEREOF, the undersigned have caused this Common Stock Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

Name of Purchaser:	Millennium Partners, LP
Signature of Authorized Signatory of Purchaser:	/s/ TERRY FEENEY
Name of Authorized Signatory:	Terry Feeney
Title of Authorized Signatory:	Chief Operating Officer
Email Address of Purchaser:
Fax Number of Purchaser:
Address for Notice of Purchaser:

Address for Delivery of Shares for Purchaser (if not same as above):
     See Delivery Instructions

Name to Appear on Certificate (if different from above):

Subscription Amount: $3,222,000
Shares: 600,000
EIN Number: [PROVIDE THIS UNDER SEPARATE COVER]

[SIGNATURE PAGES CONTINUE]

EXHIBIT A

PLAN OF DISTRIBUTION

     We are registering the shares offered by this prospectus on behalf of the selling stockholders. The selling stockholders, which as used herein includes donees, pledgees, transferees or other successors-in-interest selling shares of common stock or interests in shares of common stock received after the date of this prospectus from a selling stockholder as a gift, pledge, partnership distribution or other transfer, may, from time to time, sell, transfer or otherwise dispose of any or all of their shares of common stock or interests in shares of common stock on any stock exchange, market or trading facility on which the shares are traded or in private transactions. These dispositions may be at fixed prices, at prevailing market prices at the time of sale, at prices related to the prevailing market price, at varying prices determined at the time of sale, or at negotiated prices. To the extent any of the selling stockholders gift, pledge or otherwise transfer the shares offered hereby, such transferees may offer and sell the shares from time to time under this prospectus, provided that this prospectus has been amended under Rule 424(b)(3) or other applicable provision of the Securities Act to include the name of such transferee in the list of selling stockholders under this prospectus.

     The selling stockholders may use any one or more of the following methods when disposing of shares or interests therein:

• ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;

• block trades in which the broker-dealer will attempt to sell the shares as agent, but may position and resell a portion of the block as principal to facilitate the transaction;

• purchases by a broker-dealer as principal and resale by the broker-dealer for its account;

• an exchange distribution in accordance with the rules of the applicable exchange;

• privately negotiated transactions;

• “at the market” or through market makers or into an existing market for the shares;

• short sales entered into after the effective date of the registration statement of which this prospectus is a part;

• through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise;

• broker-dealers may agree with the selling stockholders to sell a specified number of such shares at a stipulated price per share;

• a combination of any such methods of sale; and

• any other method permitted pursuant to applicable law.

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     The selling stockholders may, from time to time, pledge or grant a security interest in some or all of the shares of common stock owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the shares of common stock, from time to time, under this prospectus, or under an amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act amending the list of selling stockholders to include the pledgee, transferee or other successors in interest as selling stockholders under this prospectus.

     In connection with the sale of our common stock or interests therein, the selling stockholders may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of the common stock in the course of hedging the positions they assume. The selling stockholders may also sell shares of our common stock short and deliver these securities to close out their short positions, or loan or pledge the common stock to broker-dealers that in turn may sell these securities. The selling stockholders may also enter into option or other transactions with broker-dealers or other financial institutions or the creation of one or more derivative securities which require the delivery to such broker-dealer or other financial institution of shares offered by this prospectus, which shares such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction).

     The aggregate proceeds to the selling stockholders from the sale of the common stock offered by them will be the purchase price of the common stock less discounts or commissions, if any. Each of the selling stockholders reserves the right to accept and, together with their agents from time to time, to reject, in whole or in part, any proposed purchase of common stock to be made directly or through agents. We will not receive any of the proceeds from this offering.

     The selling stockholders also may resell all or a portion of the shares in open market transactions in reliance upon Rule 144 under the Securities Act of 1933, provided that they meet the criteria and conform to the requirements of that rule.

     The selling shareholders and any broker-dealers that act in connection with the sale of securities may be deemed to be “underwriters” within the meaning of Section 2(11) of the Securities Act in connection with such sales, and any commissions received by such broker-dealers and any profit on the resale of the securities sold by them while acting as principals may be deemed to be underwriting discounts or commissions under the Securities Act.

     To the extent required, the shares of our common stock to be sold, the names of the selling stockholders, the respective purchase prices and public offering prices, the names of any agents, dealer or underwriter, any applicable commissions or discounts with respect to a particular offer will be set forth in an accompanying prospectus supplement or, if appropriate, a post-effective amendment to the registration statement that includes this prospectus.

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     In order to comply with the securities laws of some states, if applicable, the common stock may be sold in these jurisdictions only through registered or licensed brokers or dealers. In addition, in some states the common stock may not be sold unless it has been registered or qualified for sale or an exemption from registration or qualification requirements is available and is complied with.

     We have advised the selling stockholders that the anti-manipulation rules of Regulation M under the Exchange Act may apply to sales of shares in the market and to the activities of the selling stockholders and their affiliates. In addition, we will make copies of this prospectus (as it may be supplemented or amended from time to time) available to the selling stockholders for the purpose of satisfying the prospectus delivery requirements of the Securities Act. The selling stockholders may indemnify any broker-dealer that participates in transactions involving the sale of the shares against certain liabilities, including liabilities arising under the Securities Act.

     We have agreed to indemnify the selling stockholders against liabilities, including liabilities under the Securities Act and state securities laws, relating to the registration of the shares offered by this prospectus.

     We have agreed with the selling stockholders to keep the registration statement that includes this prospectus effective until the earlier of (1) such time as all of the shares covered by this prospectus have been disposed of pursuant to and in accordance with the registration statement, (2) the date on which the shares may be sold pursuant to Rule 144(k) of the Securities Act or (3) the date upon which all of the shares may be sold in any three month period in reliance on Rule 144.

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EXHIBIT B
SELLING STOCKHOLDER QUESTIONNAIRE
To:	Avigen, Inc.
	c/o Cooley Godward LLP
	5 Palo Alto Square
	3000 El Camino Real
	Palo Alto, CA 94306
	Fax No.: 650-849-7400
	Attention: Brett D. White, Esq.

     Reference is made to the Common Stock Purchase Agreement (the “Agreement”), made between Avigen, Inc., a Delaware corporation (the “Company”), and the Purchasers noted therein.

     Pursuant to Section 3.2(k) of the Agreement, the undersigned hereby furnishes to the Company the following information for use by the Company in connection with the preparation of the Registration Statement contemplated by Article V of the Agreement.

(1)		Name and Contact Information:
	Full legal name of record holder:
	Address of record holder:
	Social Security Number or Taxpayer identification number of record holder:
	Identity of beneficial owner (if different than record holder):
	Name of contact person:
	Telephone number of contact person:
	Fax number of contact person:
	E-mail address of contact person:

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(2)	Beneficial Ownership of Registrable Securities:
(a)	Number of Registrable Securities owned by Selling Stockholder:
(b)	Number of Registrable Securities requested to be registered:
(3)	Beneficial Ownership of Other Securities of the Company Owned by the Selling
	Stockholder:
Except as set forth below in this Item (3), the undersigned is not the beneficial or registered owner of any securities of the Company other than the Registrable Securities listed above in Item (2)(a).
Type and amount of other securities beneficially owned by the Selling Stockholder:
(4)	Relationships with the Company:
Except as set forth below, neither the undersigned nor any of its affiliates, officers, directors or principal equity holders (5% or more) has held any position or office or has had any other material relationship with the Company (or its predecessors or affiliates) during the past three years.
State any exceptions here:
(5)	Plan of Distribution:
Except as set forth below, the undersigned intends to distribute pursuant to the Registration Statement the Registrable Securities listed above in Item (2) in accordance with the “Plan of Distribution” section set forth therein:
State any exceptions here:

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(6)	Selling Stockholder Affiliations:
(a)	Is the Selling Stockholder a registered broker-dealer?
(b)   Is the Selling Stockholder an affiliate of a registered broker-dealer(s)? (For purposes of this response, an “affiliate” of, or person “affiliated” with, a specified person, is a person that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, the person specified.)
(c)   If the answer to Item (6)(b) is yes, identify the registered broker-dealer(s) and describe the nature of the affiliation(s):
(d)   If the answer to Item (6)(b) is yes, did the Selling Stockholder acquire the Registrable Securities in the ordinary course of business (if not, please explain)?
(e)   If the answer to Item (6)(b) is yes, did the Selling Stockholder, at the time of purchase of the Registrable Securities, have any agreements, plans or understandings, directly or indirectly, with any person to distribute the Registrable Securities (if yes, please explain)?
(7)  Voting or Investment Control over the Registrable Securities:
If the Selling Stockholder is not a natural person, please identify the natural person or persons who have voting or investment control over the Registrable Securities listed in Item (2) above:

     Pursuant to Section 5.2 of the Agreement, the undersigned acknowledges that the Company may, by notice to each Purchaser at its last known address, suspend or withdraw the Registration Statement and require that the undersigned immediately cease sales of Registrable Securities pursuant to the Registration Statement under certain circumstances described in the Agreement. At any time that such notice has been given, the undersigned may not sell Registrable Securities pursuant to the Registration Statement.

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     The undersigned hereby further acknowledges that pursuant to Section 5.4(b) of the Agreement, the undersigned shall indemnify the Company and each of its directors and officers against, and hold the Company and each of its directors and officers harmless from, any losses, claims, damages, expenses or liabilities (including reasonable attorneys fees) to which the Company or its directors and officers may become subject by reason of any statement or omission in the Registration Statement made in reliance upon, or in conformity with, a written statement by the undersigned, including the information furnished in this Questionnaire by the undersigned.

     By signing below, the undersigned consents to the disclosure of the information contained herein in its answers to Items (1) through (7) above and the inclusion of such information in the Registration Statement, any amendments thereto and the related prospectus. The undersigned understands that such information will be relied upon by the Company in connection with the preparation or amendment of the Registration Statement and the related prospectus.

     The undersigned has reviewed the answers to the above questions and affirms that the same are true, complete and accurate in all material respects. THE UNDERSIGNED AGREES TO NOTIFY THE COMPANY IMMEDIATELY OF ANY CHANGES IN THE FOREGOING INFORMATION.

Dated: _____________, 2006
	Signature of Record Holder
	(Please sign your name in exactly the same
	manner as the certificate(s) for the shares being
	registered)

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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 3, 2006

/s/ KENNETH G. CHAHINE 

Kenneth G. Chahine 

Chief Executive Officer and President 

(Principal Executive Officer) 

EX-31.2

EXHIBIT 31.2

CERTIFICATION

I, Andrew A. Sauter, 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 3, 2006 

/s/ ANDREW A. SAUTER 

Andrew A. Sauter 

Vice President, Finance 

(Principal Financial Officer) 

EX-32

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 Andrew A. Sauter, Vice President, Finance 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, 2006, 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 3rd day of August, 2006.

/s/ KENNETH G. CHAHINE 
 

 
Kenneth G. Chahine 

Chief Executive Officer 

/s/ ANDREW A. SAUTER 
 

 
Andrew A. Sauter 

Vice President, Finance 

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.