10-Q 1 avigen_10q1.htm QUARTERLY REPORT

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

___________________

FORM 10-Q
___________________

(Mark One)
S		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2007

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 S No £

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 £

Accelerated filer S

Non-accelerated filer £

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

The number of outstanding shares of the registrant’s Common Stock as of August 2, 2007, was 29,622,191 shares.

AVIGEN, INC.
FORM 10-Q
Quarter Ended June 30, 2007

INDEX

PART I. FINANCIAL INFORMATION

		PAGE
Item 1.	Financial Statements (unaudited)	3

	Condensed Balance Sheets at June 30, 2007 and December 31, 2006	3
	Condensed Statements of Operations -
	For the three and six months ended June 30, 2007 and 2006 and the period
	from October 22, 1992 (inception) through June 30, 2007	4
	Condensed Statements of Cash Flows -
	For the six months ended June 30, 2007 and 2006 and the period from
	October 22, 1992 (inception) through June 30, 2007	5
	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	32
Item 4.	Controls and Procedures	32

	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	34
Item 5.	Other Information	35
Item 6.	Exhibits	36

SIGNATURES		37

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,
	2007			2006
	(Unaudited)			Note 1
ASSETS
Current assets:
Cash and cash equivalents	$	12,016		$	1,815
Available-for-sale securities		67,093			58,525
Restricted investments – current		428			8,000
Accrued interest		690			652
Prepaid expenses and other current assets		964			445
Total current assets		81,191			69,437
Restricted investments		10,000			2,428
Property and equipment, net		1,947			2,709
Deposits and other assets		412			443
Total assets	$	93,550		$	75,017

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued liabilities	$	1,825		$	1,137
Accrued compensation and related expenses		574			833
Loan payable – current		-			8,000
Total current liabilities		2,399			9,970
Long-term loan payable		8,000			-
Deferred rent and other liabilities		1,480			1,570
Total liabilities		11,879			11,540
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $0.001 par value, 5,000,000 shares authorized, none issued and outstanding		-			-
Common Stock, $0.001 par value, 100,000,000 and 50,000,000
shares authorized, 26,612,984 and 25,116,131 shares issued
and outstanding, at June 30, 2007 and December 31, 2006, respectively		30			25
Additional paid-in capital		288,909			259,115
Accumulated other comprehensive loss		(144	)		(132	)
Deficit accumulated during development stage		(207,124	)		(195,531	)
Total stockholders' equity		81,671			63,477
Total liabilities and stockholders' equity	$	93,550		$	75,017

See accompanying notes.

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

													June 30,
	2007			2006			2007			2006			2007
Revenue	$	-		$	-		$	-		$	103		$	15,574

Operating expenses:
Research and development		4,845			3,551			9,198			6,552			165,697
General and administrative		2,073			1,971			4,336			4,786			73,650
Impairment loss related to long-lived assets		-						-			-			6,580
In-license fees		-			-			-			3,000			8,034
Total operating expenses		6,918			5,522			13,534			14,338			253,961
Loss from operations		(6,918	)		(5,522	)		(13,534	)		(14,235	)		(238,387	)
Interest expense		(119	)		(112	)		(238	)		(214	)		(3,408	)
Interest income		1,029			724			1,836			1,291			33,830
Sublease income		182			141			331			282			963
Other income (expense), net		(3	)		(64	)		12			21			(122	)

Net loss	$	(5,829	)	$	(4,833	)	$	(11,593	)	$	(12,855	)	$	(207,124	)

Basic and diluted net loss per common share	$	(0.21	)	$	(0.21	)	$	(0.44	)	$	(0.59	)

Shares used in basic and diluted net
loss per common share calculation		27,427,033			23,014,205			26,267,944			21,959,027

See accompanying notes.

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
							June 30,
	2007			2006			2007
Operating Activities
Net cash used in operating activities	$	(10,063	)	$	(10,395	)	$	(169,127	)

Investing Activities
Purchases of property and equipment		(48	)		(56	)		(28,679	)
Proceeds from disposal of property and equipment		50			142			423
Increase in restricted investments		-			-			(10,428	)
Purchases of available-for-sale securities		(72,457	)		(76,479	)		(953,278	)

Maturities of available-for-sale securities		63,877			63,057			886,042
Net cash used by investing activities		(8,578	)		(13,336	)		(105,920	)
Financing Activities
Proceeds from long-term obligations		-			-			10,133
Proceeds from warrants and options exercised		318			451			15,679
Proceeds from issuance of common stock, net of issuance costs and repurchases		28,524			19,353			253,497
Other financing activities		-			-			7,754
Net cash provided by financing activities		28,842			19,804			287,063
Net increase (decrease) in cash and cash equivalents		10,201			(3,927	)		12,016
Cash and cash equivalents, beginning of period		1,815			11,510			-
Cash and cash equivalents, end of period	$	12,016		$	7,583		$	12,016

See accompanying notes.

AVIGEN, INC.
(a development stage company)

NOTES TO CONDENSED FINANCIAL STATEMENTS

1. Unaudited Interim Financial Statements

The 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, 2007 are not necessarily indicative of the results that may be expected for any other interim period or for the entire year ending December 31, 2007. 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, 2006, filed with the Securities and Exchange Commission on March 16, 2007.

The balance sheet at December 31, 2006 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.

Recent Accounting Pronouncements

In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109 (“FIN 48”), which provides clarification related to the process associated with accounting for uncertain tax positions recognized in financial statements. FIN 48 prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. FIN 48 also provides guidance related to, among other things, classification, accounting for interest and penalties associated with tax positions, and disclosure requirements. We adopted FIN 48 on January 1, 2007 and the impact on our financial statements was not material.

In September 2006, the FASB issued FAS 157, “Fair Value Measurements.” FAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP) and expands disclosures about fair value measurements. This Statement is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. We are currently evaluating the potential impact of adopting this Statement.

In February 2007, the FASB issued FAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FAS 115.” FAS 159 permits companies to choose to measure many financial instruments and certain other items at fair value. This statement provides companies the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This Statement is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. We are currently evaluating the potential impact of adopting this Statement.

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

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), is being recognized over the remaining service period using the compensation cost calculated based on the same estimate of grant-date fair value previously reported for pro forma disclosure purposes under FAS 123.

During the three and six months ended June 30, 2007 and 2006, respectively, share-based compensation expense has been recognized for all our share-based compensation plans as follows (in thousands, except per share data):

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2007			2006			2007			2006
Research and development	$	(185	)	$	(151	)	$	(368	)	$	(291	)
General and administrative		(296	)		(209	)		(587	)		(516	)
Share-based compensation expense before taxes		(481	)		(360	)		(955	)		(807	)
Related income tax benefits		-			-			-			-
Share-based compensation expense, net	$	(481	)	$	(360	)	$	(955	)	$	(807	)

Since we have cumulative operating losses as of June 30, 2007 for which a valuation allowance has been established, we recorded no income tax benefits for share-based compensation arrangements during the three- and six-month periods ended June 30, 2007 and 2006, respectively.

As of June 30, 2007, Avigen had stock options outstanding to employees, nonemployee directors, and consultants under three share-based compensation plans; however, only the 2006 Incentive Stock Option Plan (“2006 Plan”) was available for future grants. The 1996 Equity Incentive Plan (“1996 Plan”) and the 1996 Non-Employee Directors’ Stock Option Plan (“Directors’ Plan”) were both approved by our stockholders, had a ten-year duration and were terminated on March 29, 2006. The 2006 Plan was approved by stockholders in May 2006 and represented an amendment and restatement of the 2000 Equity Incentive Plan (“2000 Plan”) which was adopted by Avigen’s Board of Directors in June 2000. The adoption of the 2006 Plan did not increase the number of shares available for grant under the 2000 Plan.

In general, the outstanding options under these plans were granted at a price equal to the fair market value of our stock on the date of grant with a term of 10 years. Grants under the 2006 Plan and 1996 Plan generally become exercisable on a quarterly basis over a vesting period of either three or four years. Grants under the Directors’ Plan become exercisable in three annual installments. As of June 30, 2007, we had an aggregate of 4,460,064 shares of our common stock reserved for issuance under these plans subject to outstanding awards and 2,368,668 shares available for future grants of share-based awards under the 2006 Plan.

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

	Outstanding Options
			Weighted-
	Number of		Average Exercise
	Shares		Price per Share
Outstanding at December 31, 2006	4,090,674		$	9.36
Granted	427,000		$	5.60
Exercised	(21,000	)	$	4.10
Canceled	(10,250	)	$	5.41
Outstanding at March 31, 2007	4,486,424		$	9.03
Granted	130,834		$	6.72
Exercised	(62,662	)	$	3.71
Canceled	(94,532	)	$	4.86
Outstanding at June 30, 2007	4,460,064		$	9.13

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

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2007		2006		2007		2006
Expected volatility	0.5428		0.5779		0.5811		0.6130
Risk free interest rate	4.76	%	4.99	%	4.64	%	4.59	%
Expected life of options in years	4.5		3.6		4.5		3.7
Expected dividend yield	0	%	0	%	0	%	0	%

The following table summarizes information with regard to total stock options outstanding under all stock option plans at June 30, 2007:

				Options Outstanding	Options Exercisable
				Weighted-
				Average	Weighted-
				Remaining	Average				Weighted-
Range of Exercise			Number	Contractual	Exercise			Number	Average Exercise
Prices			Of Shares	Life	Price			Of Shares	Price
	$	2.00 - $3.31	448,863	6.72		$	3.00	276,238		$	3.01
		3.38 - 3.53	576,520	5.82		$	3.44	430,837		$	3.45
		3.63 - 5.06	177,100	6.78		$	4.07	115,543		$	4.03
		5.06 - 5.06	687,918	8.65		$	5.06	281,316		$	5.06
		5.26 - 5.41	481,851	7.66		$	5.34	191,769		$	5.36
		5.44 - 5.55	477,000	9.32		$	5.51	67,105		$	5.53
		5.57 - 8.53	596,359	6.00		$	7.02	336,337		$	7.49
		8.88 - 14.63	534,703	2.24		$	13.83	534,703		$	13.83
		15.44 - 40.75	459,750	1.46		$	33.58	459,750		$	33.58
		47.63 - 47.63	20,000	2.61		$	47.63	20,000		$	47.63
	$	2.00 - $47.63	4,460,064	6.09		$	9.13	2,713,598		$	11.76

Our employee stock options are granted at a price equal to the fair market value of our stock on the date of the grant. The weighted average grant-date fair value of options granted during the six months ended June 30, 2007 and 2006 was $3.03 per share and $2.48 per share, respectively. The total intrinsic value of options exercised during the six months ended June 30, 2007 and 2006 was approximately $259,000 and $276,000, respectively. The total intrinsic value of options outstanding and options exercisable at June 30, 2007 was $4.8 million and $2.7 million, respectively. The weighted average remaining contractual life of options exercisable at June 30, 2007 was 4.3 years.

As of June 30, 2007, there was approximately $3.7 million of total unrecognized compensation expense related to non-vested share-based compensation arrangements, which is expected to be recognized over a weighted average period of 2.1 years.

As of June 30, 2007, we had 4.1 million outstanding stock options that had vested or are expected to vest with a weighted average exercise price of $9.48, a weighted average remaining contractual term of 5.8 years and an aggregate intrinsic value of $4.4 million.

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

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.

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. All marketable securities are held in our name under the custodianship of Wells Capital Management. 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, 2007, $428,000 and $10.0 million were classified as restricted investments in current and non-current assets, respectively. At December 31, 2006, $8.0 million and $2.4 million were classified as restricted investments in current and non-current assets, respectively. The total of our current and non-current restricted investments at the end of each period represents the combined aggregate portion of our portfolio of available-for-sale securities that were pledged in connection with certain liabilities at the end of each period. The change in classification of $7.6 million of current restricted investments to non-current assets at June 30, 2007 represents the net impact of extending the repayment period on our outstanding borrowings of $8.0 million through November 2009, and therefore the restricted investments pledged in connection with these borrowings were reclassified to non-current assets, offset by the reclassification of restricted investments of $428,000 to current assets associated with our letter of credits in connection with the scheduled expiration of our underlying 1201 building lease in May 2008.

The following is a summary of cash, restricted investments, and available-for-sale securities as of June 30, 2007 (in thousands):

			Gross		Gross
			Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Cash and money market funds	$	12,016	$	-	$	-		$	12,016
Corporate debt securities		29,744		2		(75	)		29,671
Federal agency obligations		12,927		-		(33	)		12,894
Asset-backed and other securities		34,994		12		(50	)		34,956
Total	$	89,681	$	14	$	(158	)	$	89,537
Amounts reported as:
Cash and cash equivalents	$	12,016	$	-	$	-		$	12,016
Restricted investments		10,428		-		-			10,428
Available for sale securities		67,237		14		(158	)		67,093
Total	$	89,681	$	14	$	(158	)	$	89,537

The weighted average maturity of our investment portfolio at June 30, 2007 was 334 days, with $49.4 million carrying an effective maturity of less than twelve months, and $40.1 million carrying an effective maturity between one and three years.

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

			Gross		Gross
			Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Cash and money market funds	$	1,815	$	-	$	-		$	1,815
Corporate debt securities		28,465		6		(73	)		28,398
Federal agency obligations		23,438		8		(58	)		23,388
Asset-backed and other securities		16,432		9		(19	)		16,422
Treasury obligations		750		-		(5	)		745
Total	$	70,900	$	23	$	(155	)	$	70,768
Amounts reported as:
Cash and cash equivalents	$	1,815	$	-	$	-		$	1,815
Restricted investments		10,428		-		-			10,428
Available for sale securities		58,657		23		(155	)		58,525
Total	$	70,900	$	23	$	(155	)	$	70,768

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

Net realized gain was approximately $1,000 for the six months ended June 30, 2007 and net realized loss was approximately $2,000 for the six months ended June 30, 2006.

At June 30, 2007 and December 31, 2006, 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):

	Matures in Less Than					Matures in 12 Months
	12 Months					or Greater
	Gross					Gross
	Unrealized			Fair		Unrealized			Fair
June 30, 2007	Losses			Value		Losses			Value
Corporate debt securities	$	(13	)	$	10,893	$	(63	)	$	15,144
Federal agency obligations		(6	)		5,130		(27	)		7,764
Asset-backed and other securities		(19	)		13,215		(30	)		12,069
Total	$	(38	)	$	29,238	$	(120	)	$	34,977

	Matures in Less Than					Matures in 12 Months
	12 Months					or Greater
	Gross			Estimated		Gross			Estimated
	Unrealized			Fair		Unrealized			Fair
December 31, 2006	Losses			Value		Losses			Value
Corporate debt securities	$	(38	)	$	9,024	$	(36	)	$	11,925
Federal agency obligations		(42	)		12,097		(15	)		3,782
Asset-backed and other securities		(14	)		7,684		(5	)		2,495
Treasury obligations		(5	)		745		-			-
Total	$	(99	)	$	29,550	$	(56	)	$	18,202

The gross unrealized losses reported above for June 30, 2007 and December 31, 2006 were caused by general rises in market interest rates from the respective purchase date of these securities through the end of those periods. No significant facts or circumstances have occurred to indicate that these unrealized losses are related to any deterioration in the creditworthiness of the issuers of the marketable securities we own. Based on our review of these securities, including our assessment of the duration and severity of the related unrealized losses, we have not recorded any other-than-temporary impairments on these investments.

4. Long Term Loan Payable

Effective June 1, 2007, we renewed our credit facility with Wells Fargo Bank, National Association (the “Bank”) to extend the expiration date until November 30, 2009. Under the terms of the credit facility, as renewed, the Bank agrees to provide a Loan Commitment through November 30, 2009, not to exceed the aggregate principal amount of $8.0 million, the proceeds of which shall be used to refinance Avigen’s outstanding borrowings under its expiring line of credit and, accordingly, is classified as long-term loans payable. Also under the terms of the credit facility, as renewed, Avigen may from time to time during the term of the Loan Commitment partially or wholly repay any outstanding borrowings, provided that amounts repaid may not be reborrowed, and that the outstanding principal balance of the Loan Commitment shall be due and payable in full on November 30, 2009. In addition, the Bank will separately maintain Avigen’s currently outstanding standby letters of credit in the amounts of $2.0 million and $427,670 pursuant to the terms required under Avigen’s building operating leases that expire in November 2010 and May 2008, respectively, and are issued in favor of the respective property owners.

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 market certain formulations of the compound tolperisone in North America. This compound is the active pharmaceutical ingredient in our product candidate, AV650, for the treatment of spasticity and neuromuscular spasm. Under the terms of the agreement, Avigen paid Sanochemia $3.0 million in initial license costs and is required to make additional future payments upon the achievement of successful clinical and regulatory product development milestones and following regulatory approval to make royalty payments on sales. 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 in-license fee expense during the three-month period ended March 31, 2006 and expect that any future payments we make under the terms of the agreement will also be recorded as in-license fee expense.

6. Severance Expense

In January 2006, 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 three-month period ended 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
	June 30,						June 30,
	2007			2006			2007			2006
Net loss	$	(5,829	)	$	(4,833	)	$	(11,593	)	$	(12,855	)
Net unrealized loss on available-for-sale securities		(133	)		(17	)		(12	)		(11	)
Comprehensive loss	$	(5,962	)	$	(4,850	)	$	(11,605	)	$	(12,866	)

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.

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,
	2007	2006	2007	2006
Potential dilutive stock options outstanding	548,546	367,926	504,803	249,497
Outstanding securities excluded from the potential
dilutive common shares calculation (1)	2,326,224	2,669,864	3,054,811	2,607,571

(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. Stockholders’ Equity

On April 26, 2007, we sold 3,974,000 shares of our common stock in an underwritten offering to selected institutional investors pursuant to our effective shelf registration statement on Form S-3 (Registration No. 333-47680) and pursuant to a registration statement on Form S-3 (Registration No. 333-142373) under Rule 462(b). We sold the shares of common stock at a negotiated purchase price of $6.94 per share. Under the terms of the underwriting agreement, we granted the underwriters an option to purchase additional shares to cover over-allotments, if any, until May 31, 2007. On May 24, 2007, the underwriters purchased an additional 439,191 shares of our common stock. Total cash proceeds for the stock offering, including over-allotments, was $28.5 million, net of underwriter discounts and other issuance costs.

During the six-month period ended June 30, 2007, we received $318,000 in cash proceeds related to the exercise of stock options for 83,662 shares of common stock.

As of June 30, 2007, 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 some intellectual property rights used in our research and development activities and has a ten-year term.

10. Income Taxes

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

We file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. We are subject to U.S. federal or state income tax examinations by tax authorities for all years in which we reported net operating losses that are currently being carried forward. We do not believe there will be any material changes in our unrecognized tax positions over the next 12 months.

We recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of the date of adoption of FIN 48, we did not have any accrued interest or penalties associated with unrecognized tax benefits, nor was any interest expense recognized for the period ended June 30, 2007.

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, 2006, filed with the Securities and Exchange Commission on March 16, 2007, as amended by our Annual Report on Form 10-K/A, filed with the Securities and Exchange Commission on April 25, 2007.

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. We undertake 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.

Our goal is to retain rights to commercialize our products in North America and therefore we expect, when appropriate, to build a sales and marketing infrastructure. We intend to seek to out-license rights to develop and market our products outside the United States. We also intend to continue to look for opportunities to expand our pipeline of compounds through a combination of internal research, acquisitions, and in-licensing as appropriate.

In building our pipeline, we have focused 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 are unique in the solutions they may offer patients in the indications being pursued and have the potential to minimize side-effects, such as sedation, that might otherwise interfere with the resumption of a patient’s normal living activities. 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. may 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, which we have named AV650, for the North American market. These rights include relevant patent filings, as well as clinical data held by SDI Diagnostics International LTD, a division of Sanochemia Pharmazeutika AG, or Sanochemia, relating to AV650. Sanochemia has also agreed to supply AV650 to us exclusively for the North American market. Under the terms of the agreement, we made an upfront payment of $3.0 million and will make additional payments to Sanochemia based on the parties’ achievement of clinical and regulatory product development milestones and sales of AV650.

In February 2007, we announced that we had completed a safety and tolerability study of AV411 with the Royal Adelaide Hospital in Australia. The trial was conducted with dose levels of AV411 above the prescribed dosage levels used in Asia for other indications and will be used by us to guide the development of AV411 for neuropathic pain. The study enrolled 18 healthy adult volunteers under a double blind, placebo-controlled format. In the study, two subjects ceased study medications as a result of nausea and vomiting; however, no dose-limiting or dose-related increases in adverse events were reported. We continue to enroll subjects in a Phase IIa exploratory therapeutic clinical trial of AV411 in Australia and expect to complete the trial by the end of 2007.

In March 2007, we announced that we had received approval from the U.S. Food and Drug Administration, the FDA, to initiate a Phase II clinical trial in the U.S. to assess the safety, tolerability, and initial efficacy of AV650 in spinal cord injury patients suffering from spasticity. This study will also assess the lack of sedation experienced by subjects in the trial.

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

In July 2007, we announced that we had modified the clinical trial protocol to increase the number of subjects enrolled in our Phase II clinical trial of AV650 to provide a more robust assessment of the efficacy of the drug at a total daily dose of 450 mg, the level currently approved in Europe.

Also in July 2007, we announced that we had completed a drug-drug-interaction study of AV650 with healthy adult volunteers. The trial was conducted under a double-blind, placebo-controlled format. The study found the drug to be favorably tolerated, with no significant clinical adverse events.

We are a development stage company and have primarily supported the financial needs of our research and development activities since our inception through public offerings and private placements of our equity securities. We have not received any revenue from the sale of our products in development, and we do not anticipate generating revenue from the sale of products in the foreseeable future. As a result, we expect that we will need to obtain additional funding to support the anticipated future needs of our research and development activities, including the costs to complete clinical trials. We expect our source of revenue, if any, for the next several years to consist of payments under the Genzyme agreement, under which we assigned to Genzyme our rights to certain gene-therapy related intellectual property, our gene therapy clinical trial programs for Parkinson’s disease and hemophilia, some gene therapy-related contracts, and the use of previously manufactured clinical-grade vector materials, and collaborative arrangements with third parties, government grants, and non-gene therapy-related license fees. We have incurred losses since our inception and expect to incur substantial losses over the next several years due to lack of any substantial revenue and the continuation of our ongoing and planned research and development efforts, including preclinical studies and clinical trials. There can be no assurance that we will successfully develop, commercialize, manufacture, or market our product candidates or ever achieve or sustain product revenue for profitability. At June 30, 2007 we had an accumulated deficit of $207.1 million and cash, cash equivalents, available-for-sale securities, and restricted investments of approximately $89.5 million. We believe that our capital resources at June 30, 2007, 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, recognition of research and development expenses and stock-based compensation. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following accounting policies are critical to the process of making significant judgments and estimates in the preparation of our financial statements. These policies are consistent with those presented in our Annual Report on Form 10-K for the period ended December 31, 2006.

Revenue recognition

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

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

We recognize revenue associated with up-front license, technology access and research and development funding payments under collaborative agreements ratably over the relevant periods specified in the agreements, generally the development phase. This development phase can be defined as a specified period of time, however, in some cases, the collaborative agreement specifies a development phase that culminates with milestone objectives but does not have a fixed date and requires us to estimate the time period over which to recognize this revenue. Our estimated time periods are based on management's estimate of the time required to achieve a particular development milestone considering the projected level of effort and current stage of development. If our estimate of the development-phase time period changes, the amount of revenue we recognize related to up-front payments for a given period will accelerate or decrease accordingly. For example, in March 2003, we received a $2.5 million payment from Bayer under the terms of a collaboration agreement for a gene therapy product candidate for hemophilia. The revenue associated with the payment was being recognized ratably over the development phase, which was initially estimated to be five years. In May 2004, we suspended subject enrollment in the phase I clinical trial for this product candidate and, as a result, ended the development phase for this product candidate and recognized as revenue $2.0 million, constituting the portion of the $2.5 million payment not previously recognized as revenue.

Valuation of investments in financial instruments

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

the length of time and the extent to which the market value of the security has been less than cost;
the financial condition and near-term prospects of the issuer; and
our 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, management would evaluate such securities to determine whether the security, based on the remaining duration until its scheduled maturity, should be identified as a current or long-term asset. As of June 30, 2007, management had not designated any individual securities as held-to-maturity for the purposes of avoiding an other-than-temporary impairment.

Impairment of property and equipment

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

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

The determination of whether the value of our property and equipment is impaired requires significant judgment, and could have a material impact on our balance sheet and results of operations. In 2005, we determined that the scope of our research and development activities had changed such that we would not effectively utilize 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 market conditions for rental property at the time of the reduction in the scope of our research and development activities, and our subsequent completion of sublease agreements for approximately 26,000 square feet, we did not expect to fully recover the value invested in leasehold improvements and equipment, and reduced our net carrying value for these assets to their then current fair value, resulting in an impairment loss for the year ended December 31, 2005 of approximately $6.1 million. This impairment loss does not impact our cash flows and primarily represents an acceleration of depreciation charges that would have been recognized over the subsequent three and five year lease periods.

Under the terms of our building lease that expires in May 2008, we may be required, at our landlord’s sole discretion, to remove, reconfigure or otherwise alter some improvements we have made to the facility. We determine the fair value of asset retirement obligations based on our assessment of a range of possible settlement dates and amounts. Considerable management judgment is required in estimating these obligations. Important assumptions include estimates of retirement costs, the timing of the future retirement activities, and the likelihood of retirement provisions being enforced. Changes in these assumptions based on future information could result in adjustments to estimated liabilities. As a result of a change in estimate in December 2006, we remeasured the fair value of this contingent asset retirement obligation and recognized a liability for $450,000. In order to evaluate the sensitivity of the fair value calculations in measuring the obligation, we applied a hypothetical 10% increase to the expected future costs underlying the fair value calculation. This hypothetical increase would have caused a comparable increase in the retirement charge. The recognition of this liability would have resulted in an adjustment to the carrying value of the underlying long-lived assets. However, in June 2005, these leasehold improvements were determined to be impaired and written-off with a charge to our net loss. Since there was no carrying value of the underlying assets at December 31, 2006, the recognition of our asset retirement obligation resulted in an additional charge in 2006 to impairment loss related to long-lived assets. As of June 30, 2007, there were no material changes in our expectations with regard to this obligation. Upon settlement of the obligation, we will recognize any difference between the cost to retire the asset and the liability recorded as an increase or decrease to operating expenses in our statement of operations in the year of settlement.

Recognition of research and development expenses

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

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

Share-based compensation expense

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

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

Results of Operations

Revenue

	Three Months Ended				Six Months Ended
(In thousands, except percentages)	June 30,				June 30,
	2007		2006		2007		2006
Revenue	$	-	$	-	$	-	$	103
Percentage decrease over prior period	n/a				n/a

No revenues were reported for the three and six months ended June 30, 2007 or the three months ended June 30, 2006. We recognized revenues of $103,000 for the six months ended June 30, 2006 in connection with our participation with the University of Colorado on a grant that was funded by the National Institutes of Health.

Research and Development Expenses

We maintain a small staff level of approximately 35 employees and sublease portions of our leased operating facilities to reduce our overhead costs. In addition, we use external resources to optimize the pace and cost of development of our product candidates. As a result, our current business model reduces our exposure to fixed costs for manufacturing staff and facilities and gives us more control over the strategic timing and application of our resources.

Our research and development expenses can be divided into two primary functions, 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, and in-house and independent third-party validation testing of potential acquisition or in-license drug candidates. Clinical development costs include activities associated with preparing for regulatory approvals, maintaining regulated and controlled processes, purchasing manufactured drug substances for use in human clinical trials, and supporting subject enrollment and subject administration within clinical trials.

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

					Percentage						Percentage
					increase						increase
	Three Months Ended				(decrease)		Six Months Ended				(decrease)
	June 30,				over prior		June 30,				over prior
	2007		2006		year		2007		2006		year
Research and preclinical
development	$	2,380	$	2,673	(11	%)	$	4,822	$	4,982	(3	%)
Clinical development		2,465		878	181	%		4,376		1,570	179	%
Total research and
development expenses	$	4,845	$	3,551	36	%	$	9,198	$	6,552	40	%

Because a significant percentage of our research and development resources contribute to multiple development programs, the majority of our costs are not directly attributed to individual development programs. 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 activities are primarily based on staffing roles within our research and development departments. As such, costs allocated to specific projects may not necessarily reflect the actual costs of those efforts and, therefore, we do not generally evaluate actual costs-incurred information on a project-by-project basis. In addition, we are unable to estimate the future costs to completion for any specific projects.

As of December 31, 2006, we revised the estimated depreciable life on some leasehold improvements with a remaining carrying value of $1.2 million. As a result of this change, we expect to depreciate the remaining carrying value of these assets over the estimated remaining term on our underlying building operating lease, which expires in May 2008. We expect this change in estimate to increase our research and preclinical development depreciation expense for these items by $0.5 million and $0.2 million in 2007 and 2008, respectively.

Reclassifications

We have reclassified certain prior period amounts within Research and preclinical development expenses, Clinical development expenses, and General and administrative expenses to conform to our current period’s presentation. The reclassifications had no impact on our financial condition, results of operations, or the net cash flow from operating activities reported on our statement of cash flow.

Research and preclinical development

Percentage Percentage

increase increase

Three Months Ended (decrease) Six Months Ended (decrease)

June 30, over prior June 30, over prior

2007 2006 year 2007 2006 year

(In thousands, except percentages)

Personnel-related $ 474 $ 469 1 % $ 958 $ 949 1 %

Share-based compensation 130 97 34 % 266 177 50 %

External research and

development 750 1,032 (27 %) 1,453 1,660 (12 %)

Depreciation 367 271 36 % 734 546 34 %

Other expenses including facilities

overhead 659 804 (18 %) 1,411 1,650 (15 %)

Total research and preclinical

development expenses $ 2,380 $ 2,673 (11 %) $ 4,822 $ 4,982 (3 %)

The decrease in our total research and preclinical development expenses for the three- and six-month periods ended June 30, 2007, compared to the same periods in 2006, of $293,000 and $160,000, respectively, were primarily due to changes in costs for the following:

lower expenditures for external research and development services from third-party providers of $282,000 and $207,000, respectively, primarily related to the completion of external preclinical animal studies associated with our lead drug candidates, AV411 and AV650, as both programs transitioned into the clinical development phase in late 2006, and
lower facilities and other allocated expenses of $145,000 and $239,000, respectively, primarily due to lower travel-related expenses and facilities overhead,

partially offset by,

higher depreciation expenses of $96,000 and $188,000, respectively, as a result of the December 31, 2006 decrease in estimated depreciable life of certain leasehold improvements, and
higher non-cash expenses of $33,000 and $89,000, respectively, for the recognition of share-based compensation in compliance with FAS 123(R).

Clinical development

											Percentage
					Percentage						increase
	Three Months Ended				increase		Six Months Ended				(decrease)
	June 30,				over prior		June 30,				over prior
	2007		2006		year		2007		2006		year
(In thousands, except percentages)

Personnel-related	$	348	$	319	9	%	$	729	$	700	4	%
Share-based compensation		55		54	2	%		102		114	(10	%)
External clinical development		1,926		393	389	%		3,271		557	487	%
Other expenses including facilities
overhead		136		112	20	%		274		199	37	%
Total clinical development
expenses	$	2,465	$	878	181	%	$	4,376	$	1,570	179	%

The increase in our total clinical development expenses for the three- and six-month periods ended June 30, 2007 of $1.6 million and $2.8 million, respectively, compared to the same periods in 2006, were primarily due to higher expenditures for external clinical development services from third-party suppliers associated with the preparation, initiation and ongoing support of our clinical trials for AV650 and AV411.

Total research and development expenses for the three and six months ended June 30, 2007 were within management’s expectations. If we are successful in our efforts to develop our product candidates, including the operation of multiple clinical trials in the second half of 2007 and thereafter, we expect our total research and development spending in future periods to rise.

General and Administrative Expenses

					Percentage						Percentage
					(decrease)						(decrease)
	Three Months Ended				increase		Six Months Ended				increase
	June 30,				over prior		June 30,				over prior
	2007		2006		year		2007		2006		year
(In thousands, except percentages)

Personnel-related	$	658	$	733	(10	%)	$	1,473	$	1,675	(12	%)
Share-based compensation		296		209	41	%		587		516	14	%
Severance		-		-	na			-		288	(100	%)
Legal and professional fees		328		240	37	%		638		598	7	%
Facilities, depreciation and
other allocated expenses		791		789	-			1,638		1,709	(4	%)
Total general and
administrative expenses	$	2,073	$	1,971	5	%	$	4,336	$	4,786	(9	%)

The increase in our total general and administrative expenses for the three months ended June 30, 2007, compared to the same period in 2006, of $102,000, was primarily due to changes in costs for the following:

increase in legal and professional fees of $88,000, primarily due to higher audit fees and additional legal and auditor services rendered in connection with our filing of a shelf S-3 registration statement during the quarter, and
higher non-cash expenses of $87,000 for share-based compensation in compliance with FAS 123(R),

partially offset by,

lower personnel-related expenses of $75,000, reflecting a slightly lower average staff level partially offset by higher average salaries in 2007.

The decrease in our total general and administrative expenses for the six months ended June 30, 2007, compared to the same period in 2006, of $450,000, was primarily due to changes in costs for the following:

$288,000 lower severance expenses largely due to the resignation of our former CFO in January 2006,
$202,000 lower personnel-related expenses, reflecting lower recruitment costs and a slightly lower average staff level, partially offset by higher average salaries in 2007, and
$71,000 lower facilities, depreciation and other allocated expenses, including costs associated with recruiting additional members to our board of directors,

partially offset by,

higher non-cash expenses of $71,000 for share-based compensation in compliance with FAS 123(R), and
$40,000 higher legal and professional fees, primarily due to higher audit fees and additional legal and auditor services rendered in connection with our filing of a shelf S-3 registration statement during the quarter.

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 in connection with the changing needs of the company.

In-license Fees

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2007		2006		2007		2006
(In thousands, except percentages)

In-license fees	$	-	$	-	$	-	$	3,000

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

Interest Income

Three Months Ended Six Months Ended

June 30, June 30,

2007 2006 2007 2006

(In thousands, except percentages)

Interest income $ 1,029 $ 724 $ 1,836 $ 1,291

Percentage change over prior period 42% 42%

Almost all of our interest income is generated from our investments in high-grade marketable securities of government and corporate debt. The increases in interest income for the three- and six-month periods ended June 30, 2007, as compared to the same periods in 2006, were primarily due to the higher average outstanding balance of our total portfolio, reflecting the impact of the $28.5 million net cash proceeds from the sale of our common stock in connection with the underwritten offering during the quarter ended June 30, 2007, as well as the impact of the increase in average yields earned on the portfolio.

Recently Issued Accounting Standards

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

Deferred Income Tax Assets

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

We adopted the provisions of FIN 48, Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109 on January 1, 2007. Upon adoption of FIN 48, we commenced a review of our tax position taken in our tax returns that remain subject to examination. Based upon our review we do not believe we have any unrecognized tax benefits or that there is a material impact on our financial condition or results of operations as a result of implementing FIN 48.

Liquidity and Capital Resources

Since our inception in 1992, cash expenditures have significantly exceeded our revenue. We have funded our operations primarily through public offerings and private placements of our equity securities. Between May 1996, the date of our initial public offering, and March 31, 2007, we raised $207 million from private placements and public offerings of our common stock and warrants to purchase our common stock.

During the three months ended June 30, 2007, we sold 4.4 million shares of our common stock, including over-allotments, in an underwritten offering to selected institutional investors for total net cash proceeds of $28.5 million after deducting underwriter discounts and other issuance costs of $2.1 million, as reported in the Notes to Condensed Financial Statements under “Stockholders’ Equity.”

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, 2007, we had cash, cash equivalents, available-for-sale securities, and restricted investments, of approximately $89.5 million, compared to approximately $70.8 million at December 31, 2006. At June 30, 2007 and December 31, 2006, $10.4 million of restricted assets were pledged to secure some current and long-term liabilities. At June 30, 2007 and December 31, 2006, the portion of our investment portfolio pledged as collateral, which we refer to as restricted investments, includes $8.0 million for outstanding borrowings against our credit facility and approximately $2.4 million for letters of credit which serve as security deposits on our building leases. The classification of $428,000 of these restricted investments as current assets at June 30, 2007 results from the classification of the underlying 1201 building lease liability that expires in May 2008, as a current liability. The classification of $10.0 million of these restricted investments as long-term assets at June 30, 2007 results from the classifications of the related loan payable that is due in November 2009, and the underlying 1301 building lease liability that expires in November 2010, as long-term liabilities. Our restricted investments would not be considered a current source of additional liquidity.

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

As of June 30, 2007, 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, 2006. As of December 31, 2006, we had net commitments under leases and other obligations totaling approximately $18.0 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, 2006 filed with the SEC on March 16, 2007.

Operating Activities. Net cash used in operating activities was $10.1 million during the six months ended June 30, 2007, and was primarily used to support our clinical research and development activities, including non-clinical studies and clinical trials performed by third parties, our internal research and development activities, and our general and administrative expenses. The level of cash used in operating activities during this six-month period was in line with management’s expectations.

Investing and Financing Activities. Net cash used by investing activities and provided by financing activities during the six months ended June 30, 2007 was $8.6 million and $28.8 million, respectively. The cash used by investing activities consisted primarily of purchased of available-for-sale securities, net of sales and maturities. The cash provided by financing activities consisted primarily of proceeds from the issuance of common stock in connection with the underwritten offering and the exercise of stock options during the period.

We believe we will continue to require substantial additional funding in order to complete the research and development activities currently contemplated and to commercialize our product candidates. We believe that by keeping our staff level low and continuing to consolidate our operations and sublease additional portions of our current facilities, our financial resources as of June 30, 2007 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:

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

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

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, 2007, we had an accumulated deficit of $207.1 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.

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 Form 10-K for the year-ended December 31, 2006, as amended by our Amendment No. 1 to our Annual Report on Form 10-K/A filed with the Securities and Exchange Commission on April 25, 2007, 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.

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 products

At June 30, 2007 we had cash, cash equivalents, available-for-sale securities, and restricted investments of approximately $89.5 million. We anticipate that our existing capital resources as of June 30, 2007, 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 and enforcing patent claims and other intellectual property rights;
the costs involved in obtaining licenses to patented technologies from third-parties that may be needed to commercialize our products;
how successful, if at all, we are at expanding our drug development portfolio through a combination of internal research, acquisitions, and in-licensing compounds, and the nature of the consideration we pay for acquiring or in-licensing compounds;
competing technological developments;
the cost of manufacturing for clinical trials and commercialization;
the costs of sales, marketing and commercialization activities; 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.

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

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

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

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

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

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

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

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

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

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

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

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 partly dependent upon our ability to effectively protect our proprietary rights, which we may not be able to do

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

To date, we have filed a number of patent applications in the U.S. relating to technologies we have developed or co-developed. In addition, we have acquired licenses to one patent and certain 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. Others may independently develop similar technologies or duplicate any technology developed by us, and patents may be invalidated or held unenforceable in litigation.

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

We also rely on a combination of trade secret and copyright laws, employee and third-party nondisclosure agreements and other protective measures to protect intellectual property rights pertaining to our products and technologies. We cannot be certain that these measures will provide meaningful protection of our trade secrets, know-how or other proprietary information. In addition, the laws of 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.

We may not be able to patent certain formulations of our products in development and may not be able to obtain adequate protection under the Hatch-Waxman Act to prevent generics from copying our product candidates

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

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

Third parties may assert patent or other intellectual property infringement claims against us with respect to our products, technologies, or other matters. Any claims against us, with or without merit, as well as claims initiated by us against third parties, can be time-consuming and expensive to defend or prosecute and resolve. There may be third-party patents and other intellectual property relevant to our products and technology which are not known to us. We have not been accused of infringing any third party's patent rights or other intellectual property, but we cannot assure you that litigation asserting claims will not be initiated, that we would prevail in any litigation, or that we would be able to obtain any necessary licenses on reasonable terms, if at all. If our competitors prepare and file patent applications in the 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. Termination of any of our license agreements could harm our business and force us to cease our activities with the affected product candidate or technology.

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

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, 2006, 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, 2007 levels, we estimate that the fair value of our securities portfolio would decline by approximately $768,000 compared to our estimated exposure of $613,000 at December 31, 2006, 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, 2007. Based on that evaluation, the principal executive officer and principal financial officer have concluded that these disclosure controls and procedures were effective to ensure, at a reasonable assurance level, that the information required to be disclosed by us in reports we file with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and instructions for such reports.

Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting during the quarter ended June 30, 2007, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

As of August 1, 2007, 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, 2006, as filed with the SEC on March 16, 2007, as amended by our Amendment No. 1 to Annual Report on Form 10-K/A, filed with the SEC on April 25, 2007, have not substantively changed. We have updated these risk factors to include financial information as of June 30, 2007.

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

None.

Item 3. Defaults Upon Senior Securities

None.

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

Our 2007 Annual Meeting of Stockholders was held on May 30, 2007.
The matters voted upon at the Annual Meeting and the voting of stockholders with respect thereto are as follows:

1.		Each of Kenneth G. Chahine, Ph.D., J.D., Stephen Dilly, M.B.B.S., Ph.D., and Jan K. Öhrström, M.D., were elected as a Class III director to hold office until our 2010 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:

Kenneth G. Chahine, J.D., Ph.D.
For	19,057,282
Withhold	308,276
Abstain	-0-
Broker non-votes	-0-

Stephen Dilly, M.B.B.S., Ph.D.
For	19,057,282
Withhold	308,276
Abstain	-0-
Broker non-votes	-0-

Jan K. Öhrström, M.D.
For	19,057,282
Withhold	308,276
Abstain	-0-
Broker non-votes	-0-

		Our Class I directors, Zola Horovitz, Ph.D. and Yuichi Iwaki, M.D., 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 II directors, John K.A. Prendergast, Ph.D. and Richard J. Wallace, will each continue to serve on our Board of Directors until our 2009 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 an amendment to Avigen’s existing Amended and Restated Certificate of Incorporation (the “*Certificate of Incorporation*”) to increase Avigen’s authorized number of shares of common stock from 50,000,000 shares to 100,000,000 shares was approved. The voting results were as follows:

For	16,386,076
Against	2,984,948
Abstain	5,465
Broker non-votes	-0-

3.		The selection of Odenberg, Ullakko, Muranishi & Co. LLP as our independent registered public accounting firm for our fiscal year ending December 31, 2007 was ratified. The voting results were as follows:

For	19,352,468
Against	2,675
Abstain	10,416
Broker non-votes	-0-

Item 5. Other Information

None.

Item 6. Exhibits

The following exhibits are included herein:

Exhibit Number		Exhibits
2.1	(6)	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	(2)	Certificate of Amendment to Certificate of Incorporation
3.1.2	(3)	Certificate of Amendment to Certificate of Incorporation
3.2	(1)	Restated Bylaws of the Registrant
4.1	(1)	Specimen Common Stock Certificate
10.65	(4)	Letter Agreement dated June 1, 2007 between Avigen, Inc. and Wells Fargo Bank, National Association
10.66	(4)	Promisory Note dated June 1, 2007, issued by Avigen, Inc. in favor of Wells Fargo Bank, National Association
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	(5)	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 Quarterly Report on Form 10-Q for the quarter ended December 31, 2000, as filed with the SEC (Commission File No. 000- 28272).

(3)		Incorporated by reference from such document filed as an exhibit to Avigen’s Current Report on Form 8-K filed with the SEC on June 26, 2007 (Commission File No. 000-28272).

(4)		Incorporated by reference from such document filed as an exhibit to Avigen’s Current Report on Form 8-K filed with the SEC on June 6, 2007 (Commission File No. 000-28272).

(5)		This certification accompanies the Form 10-Q 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-Q), irrespective of any general incorporation language contained in such filing.

(6)		Incorporated by reference from such document filed with the SEC as an exhibit to Avigen’s Annual Report on Form 10-K for the year ended December 31, 2005, as filed with the SEC on March 16, 2006 (Commission File No. 000-28272). Portions of this exhibit have been omitted pursuant to a grant of confidential treatment.

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	AVIGEN, INC.



Date: August 8, 2007	By:	/s/ KENNETH G. CHAHINE
		Kenneth G. Chahine
		Chief Executive Officer and President



Date: August 8, 2007	By:	/s/ ANDREW A. SAUTER
		Andrew A. Sauter
		Vice President, Finance

		EXHIBIT INDEX
Exhibit Number		Exhibits
2.1	(6)	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	(2)	Certificate of Amendment to Certificate of Incorporation
3.1.2	(3)	Certificate of Amendment to Certificate of Incorporation
3.2	(1)	Restated Bylaws of the Registrant
4.1	(1)	Specimen Common Stock Certificate
10.65	(4)	Letter Agreement dated June 1, 2007 between Avigen, Inc. and Wells Fargo Bank, National Association
10.66	(4)	Promisory Note dated June 1, 2007, issued by Avigen, Inc. in favor of Wells Fargo Bank, National Association
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	(5)	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 Quarterly Report on Form 10-Q for the quarter ended December 31, 2000, as filed with the SEC (Commission File No. 000- 28272).

(3)		Incorporated by reference from such document filed as an exhibit to Avigen’s Current Report on Form 8-K filed with the SEC on June 26, 2007 (Commission File No. 000-28272).

(4)		Incorporated by reference from such document filed as an exhibit to Avigen’s Current Report on Form 8-K filed with the SEC on June 6, 2007 (Commission File No. 000-28272).

(5)		This certification accompanies the Form 10-Q 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-Q), irrespective of any general incorporation language contained in such filing.

(6)		Incorporated by reference from such document filed with the SEC as an exhibit to Avigen’s Annual Report on Form 10-K for the year ended December 31, 2005, as filed with the SEC on March 16, 2006 (Commission File No. 000-28272). Portions of this exhibit have been omitted pursuant to a grant of confidential treatment.