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

________________

Form 10-K/A

Amendment No. 2

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended December 31, 2006
Or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from to

Commission File Number 0-28272
 
________________

Avigen, Inc.
(Exact name of registrant as specified in its charter)

Delaware	13-3647113
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

1301 Harbor Bay Parkway
Alameda, California 94502
(Address of principal executive offices, including zip code)

(510) 748-7150
(Registrant’s telephone number, including area code)
________________

Securities Registered Pursuant to Section 12(b) of the Act:

Title of Each Class
Common Stock, $0.001 par value Name of Each Exchange on Which Registered
The Nasdaq Stock Market, Inc.

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

     Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

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

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

     The aggregate market value of the Common Stock held by non-affiliates of the registrant as of June 30, 2006, was approximately $128,700,000 based upon the closing sale price of the registrant’s Common Stock as reported on the NASDAQ National Market on such date. Shares of common stock held by each officer and director have been excluded in that such persons may be deemed to be affiliates of the registrant. Shares held by all other stockholders have not been excluded, as no other stockholder holds a percentage of the registrant’s outstanding Common Stock that the registrant believes is necessary to exercise control over the registrant, nor has any other stockholder otherwise exhibited any ability to exercise control over the registrant.

The number of outstanding shares of the registrant’s Common Stock as of March 1, 2007, was 25,116,131 shares.

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the registrant’s definitive Proxy Statement for the 2007 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Form 10-K, are incorporated by reference in Part III, Items 10-14 of this Form 10-K.

AVIGEN, INC.

ANNUAL REPORT ON FORM 10-K/A
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006

Explanatory Note to Amendment No. 2 to Annual Report on Form 10-K/A

     This Amendment No. 2 to Annual Report on Form 10-K/A is being filed to amend Item 8 of the Annual Report on Form 10-K of Avigen, Inc. for the fiscal year ended December 31, 2006, filed with the Securities and Exchange Commission on March 16, 2007 (the “Form 10-K”). Item 8 of the Form 10-K is amended to revise the report of Ernst & Young LLP, which revised report includes the statement that the report also covers the period from inception (October 22, 1992) through December 31, 2005. No other changes have been made to Item 8 of the Form 10-K.

PART II

Item 8. Financial Statements and Supplementary Data

INDEX TO FINANCIAL STATEMENTS

     The following financial statements are filed as part of this Report on Form 10-K. Condensed supplementary data for each of the quarters in the years ended December 31, 2006 and 2005 are set forth under Note 16 of our financial statements.

	Page
Report of Independent Registered Public Accounting Firm	3
Balance Sheets	5
Statements of Operations	6
Statements of Stockholders’ Equity	7
Statements of Cash Flows	13
Notes to Financial Statements	15

2

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

The Board of Directors and Stockholders of Avigen, Inc.

     We have audited the accompanying balance sheet of Avigen, Inc. (a development stage company) as of December 31, 2006, and the related statements of operations, stockholders’ equity and cash flows for the year then ended and for the period from inception (October 22, 1992) through December 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. The cumulative statements of operations, stockholders' equity and cash flows for the period from inception (October 22, 1992) through December 31, 2005 were audited by other auditors. Our report, insofar as it relates to the amounts included for the period from October 22, 1992 to December 31, 2005, is based solely on the report of the other auditors.

     We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

     In our opinion, based on our audit and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of Avigen, Inc. (a development stage company) at December 31, 2006, and the results of its operations and its cash flows for the year then ended and for the period from inception (October 22, 1992) through December 31, 2006, in conformity with U.S. generally accepted accounting principles.

     As discussed in Note 1 to the financial statements, on January 1, 2006, Avigen adopted the provisions of Statement of Financial Accounting Standards No. 123 (revised), “Share-Based Payment.”

     We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Avigen, Inc.’s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 14, 2007 expressed an unqualified opinion thereon.

	/s/ ODENBERG, ULLAKKO, MURANISHI & CO. LLP
San Francisco, California
March 14, 2007

3

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

The Board of Directors and Stockholders of Avigen, Inc.

     We have audited the accompanying balance sheet of Avigen, Inc. (a development stage company) as of December 31, 2005, and the related statements of operations, stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2005. We also audited the statements of operations, stockholders’ equity and cash flows for the period from inception (October 22, 1992) through December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

     We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Avigen, Inc. at December 31, 2005 and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2005, and for the period from inception (October 22, 1992) through December 31, 2005, in conformity with U.S. generally accepted accounting principles.

	/s/ ERNST & YOUNG LLP
Palo Alto, California
March 14, 2006

4

AVIGEN, INC.
(a development stage company)

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

	December 31,
	2006			2005
ASSETS
Current Assets:
Cash and cash equivalents	$	1,815		$	11,510
Available-for-sale securities		58,525			48,450
Restricted investments – current		8,000			—
Accrued interest		652			470
Prepaid expenses and other current assets		445			737
Total current assets		69,437			61,167
Restricted investments		2,428			10,428
Property and equipment, net		2,709			3,929
Deposits and other assets		443			740
Total assets	$	75,017		$	76,264
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable and other accrued liabilities	$	1,137		$	984
Accrued compensation and related expenses		833			534
Loan payable – current		8,000			—
Total current liabilities		9,970			1,518
Long-term loan payable		—			8,000
Deferred rent and other liabilities		1,570			1,282
Total liabilities		11,540			10,800
Commitments and contingencies
Stockholders’ equity:
Preferred Stock, $0.001 par value, 5,000,000 shares authorized, none issued and
outstanding in 2006 and 2005		—			—
Common Stock, $0.001 par value, 50,000,000 shares authorized, 25,116,131 and
20,907,273 shares issued and outstanding at December 31, 2006 and 2005,
respectively		25			21
Additional paid-in capital		259,115			237,258
Accumulated other comprehensive loss		(132	)		(540	)
Deficit accumulated during development stage		(195,531	)		(171,275	)
Total stockholders’ equity		63,477			65,464
Total liabilities and stockholders’ equity	$	75,017		$	76,264

See accompanying notes.

5

AVIGEN, INC.
(a development stage company)

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

										Period from
										October 22, 1992
										(inception)
	Year Ended December 31,									through
	2006			2005			2004			December 31, 2006
Revenue	$	103		$	12,026		$	2,195		$	15,574
Operating expenses:
Research and development		15,219			13,775			19,344			156,499
General and administrative		8,860			8,264			8,367			69,314
Impairment loss related to
long-lived assets		450			6,130			—			6,580
In-license fees		3,000			—			—			8,034
Total operating expenses		27,529			28,169			27,711			240,427
Loss from operations		(27,426	)		(16,143	)		(25,516	)		(224,853	)
Interest expense		(467	)		(323	)		(209	)		(3,170	)
Interest income		3,002			1,682			1,905			31,994
Sublease income		565			67			—			632
Other income (expense), net		70			21			(103	)		(134	)
Net loss	$	(24,256	)	$	(14,696	)	$	(23,923	)	$	(195,531	)
Basic and diluted net loss per
common share	$	(1.03	)	$	(0.71	)	$	(1.17	)
Shares used in basic and diluted net loss per
common share calculation		23,509,378			20,624,229			20,362,155

See accompanying notes.

6

AVIGEN, INC.
(a development stage company)

STATEMENTS OF STOCKHOLDERS’ EQUITY

Period from October 22, 1992 (inception) through December 31, 2006
(in thousands, except for share information)

							Class B							Deficit
							Convertible					Accumulated		Accumulated
	Preferred Stock			Common Stock			Common Stock			Additional		Other		During the			Total
										Paid-in		Comprehensive		Development			Stockholders’
	Shares	Amount		Shares	Amount		Shares	Amount		Capital		Gain (Loss)		Stage			Equity
Balance at October 22, 1992
(inception)	—	$	—	—	$	—	—	$	—	$	—	$	—	$	—		$	—
Issuance of common stock at $.004
per share in November and
December 1992	—		—	896,062		1	—		—		4		—		—			5
Issuance of common stock at $.554
per share from January to June
1993 for services rendered	—		—	20,316		—	—		—		11		—		—			11
Issuance of common stock at
$.004 to $.222 per share from
November 1992 to March 1993
for cash	—		—	1,003,406		1	—		—		54		—		—			55
Issuance of Class B common stock
at $.004 per share in December
1992 for cash	—		—	—		—	90,293		—		1		—		—			1
Issuance of Series A preferred stock
at $4.43 per share from March
to June 1993 for cash (net of
issuance costs of $410,900)	678,865		1	—		—	—		—		2,595		—		—			2,596
Issuance of Series A preferred stock
at $3.85 per share in March
1993 for cancellation of note
payable and accrued interest	68,991		—	—		—	—		—		266		—		—			266
Issuance of common stock at $.004
per share in November 1993
pursuant to antidilution rights	—		—	22,869		—	—		—		1		—		—			1
Issuance of Series A preferred stock
at $4.43 per share from July
to November 1993 for cash
and receivable (net of issuance
costs of $187,205)	418,284		—	—		—	—		—		1,665		—		—			1,665
Issuance of Series B preferred stock
at $5.54 per share in March
1994 for cash (net of issuance
costs of $34,968)	128,031		—	—		—	—		—		674		—		—			674
Issuance of Series C preferred stock
at $4.87 per share from July
1994 to June 1995 for cash and
receivables (net of issuance
costs of $259,620)	739,655		1	—		—	—		—		3,344		—		—			3,345
Issuance of Series C preferred
stock at $4.87 per share in June
1995 for cancellation of notes
payable	35,500		—	—		—	—		—		173		—		—			173
Net loss and comprehensive loss
from inception to June 30,
1995	—		—	—		—	—		—		—		—		(8,608	)		(8,608	)
Balance at June 30, 1995 (carried
forward)	2,069,326	$	2	1,942,653	$	2	90,293	$	—	$	8,788	$	—	$	(8,608	)	$	184

7

AVIGEN, INC.
(a development stage company)

STATEMENTS OF STOCKHOLDERS’ EQUITY (Continued)

Period from October 22, 1992 (inception) through December 31, 2006
(in thousands, except for share information)

										Class B									Deficit
										Convertible							Accumulated		Accumulated
	Preferred Stock					Common Stock				CommonStock				Additional			Other		During the			Total
														Paid-in			Comprehensive		Development			Stockholders’
	Shares		Amount			Shares		Amount		Shares		Amount		Capital			Gain (Loss)		Stage			Equity
Balance at June 30, 1995 (brought
forward)	2,069,326		$	2		1,942,653		$	2	90,293		$	—	$	8,788		$	—	$	(8,608	)	$	184
Issuance of Series C preferred stock
at $4.87 per share in July 1995
for cash (net of issuance costs
of $26,000)	41,042			—		—			—	—			—		174			—		—			174
Issuance of Series D preferred
stock at $7.09 per share from
October 1995 to February 1996
for cash (net of issuance costs
of $25,279)	205,351			—		—			—	—			—		1,430			—		—			1,430
Issuance of Series D preferred stock
at $7.09 per share in March
1996 in settlement of accounts
payable	22,574			—		—			—	—			—		160			—		—			160
Issuance of common stock at
$.004 per share in March 1996
pursuant to antidilution rights	—			—		17,630			—	—			—		1			—		—			1
Issuance of stock options in
February 1996 in settlement of
certain accrued liabilities	—			—		—			—	—			—		137			—		—			137
Conversion of Class B common
stock to common stock	—			—		231,304			1	(90,293	)		—		(1	)		—		—			—
Issuance of warrants to purchase
common stock in connection
with 1996 bridge financing in
March 1996	—			—		—			—	—			—		300			—		—			300
Conversion of preferred stock to
common stock in May 1996	(2,338,293	)		(2	)	2,355,753			2	—			—		(1	)		—		—			(1	)
Issuance of common stock at $8.00
per share in connection with
the May 1996 initial public
offering (net of issuance costs
of $798,414 and underwriting
discount of $1,500,000)	—			—		2,500,000			2	—			—		17,699			—		—			17,701
Proceeds from exercise of options
at $0.44 per share in
June 1996	—			—		6,178			—	—			—		3			—		—			3
Repurchase of common stock	—			—		(18,325	)		—	—			—		(1	)		—		—			(1	)
Deferred compensation	—			—		—			—	—			—		164			—		—			164
Amortization of deferred
compensation	—			—		—			—	—			—		(128	)		—		—			(128	)
Net loss and comprehensive loss	—			—		—			—	—			—		—			—		(4,097	)		(4,097	)
Balance at June 30, 1996 (carried
forward)	—		$	—		7,035,193		$	7	—		$	—	$	28,725		$	—	$	(12,705	)	$	16,027

8

AVIGEN, INC.
(a development stage company)

STATEMENTS OF STOCKHOLDERS’ EQUITY (Continued)

Period from October 22, 1992 (inception) through December 31, 2006
(in thousands, except for share information)

							Class B							Deficit
							Convertible					Accumulated		Accumulated
	PreferredStock			Common Stock			Common Stock			Additional		Other		During the			Total
										Paid-in		Comprehensive		Development			Stockholders’
	Shares	Amount		Shares	Amount		Shares	Amount		Capital		Gain (Loss)		Stage			Equity
Balance at June 30, 1996 (brought
forward)	—	$	—	7,035,193	$	7	—	$	—	$	28,725	$	—	$	(12,705	)	$	16,027
Issuance of common stock at $8.00
per share in July 1996 in
connection with the exercise of
underwriters’ over-allotment
option (net of underwriting
discount of $150,000)	—		—	250,000		—	—		—		1,850		—		—			1,850
Proceeds from exercise of options
at $0.44 to $0.71 per share	—		—	3,387		—	—		—		1		—		—			1
Amortization of deferred
compensation	—		—	—		—	—		—		41		—		—			41
Net loss and comprehensive loss	—		—	—		—	—		—		—		—		(5,578	)		(5,578	)
Balance at June 30, 1997	—		—	7,288,580		7	—		—		30,617		—		(18,283	)		12,341
Proceeds from exercise of options
at $0.44 to $0.71 per share	—		—	17,278		—	—		—		10		—		—			10
Amortization of deferred
compensation	—		—	—		—	—		—		41		—		—			41
Compensation expense related to
options granted for services	—		—	—		—	—		—		68		—		—			68
Net loss and comprehensive loss	—		—	—		—	—		—		—		—		(8,877	)		(8,877	)
Balance at June 30, 1998	—		—	7,305,858		7	—		—		30,736		—		(27,160	)		3,583
Proceeds from exercise of options
at $0.44 to $4.31 per share	—		—	181,045		—	—		—		222		—		—			222
Amortization of deferred
compensation	—		—	—		—	—		—		41		—		—			41
Issuance of common stock at $2.25
- $2.94 per share and warrants
in August to September 1998
in connection with a Private
Placement (net of issuance
cost of $233,584)	—		—	1,306,505		1	—		—		2,734		—		—			2,735
Issuance of common stock at
$3.81 - $4.88 per share and
warrants in December 1998
in connection with a Private
Placement (net of issuance
cost of $438,183)	—		—	1,367,280		2	—		—		5,195		—		—			5,197
Issuance of common stock at $5.50
- $6.00 per share and warrants
in February to April 1999
in connection with a Private
Placement (net of issuance
cost of $1,033,225)	—		—	2,198,210		2	—		—		12,154		—		—			12,156
Net loss and comprehensive loss	—		—	—		—	—		—		—		—		(9,611	)		(9,611	)
Balance at June 30, 1999 (carried
forward)	—	$	—	12,358,898	$	12	—	$	—	$	51,082	$	—	$	(36,771	)	$	14,323

9

AVIGEN, INC.
(a development stage company)

STATEMENTS OF STOCKHOLDERS’ EQUITY (Continued)

Period from October 22, 1992 (inception) through December 31, 2006
(in thousands, except for share information)

							Class B								Deficit
							Convertible					Accumulated			Accumulated
	Preferred Stock			Common Stock			Common Stock			Additional		Other			During the			Total
										Paid-in		Comprehensive			Development			Stockholders’
	Shares	Amount		Shares	Amount		Shares	Amount		Capital		Gain (Loss)			Stage			Equity
Balance at June 30, 1999 (brought
forward)	—	$	—	12,358,898	$	12	—	$	—	$	51,082	$	—		$	(36,771	)	$	14,323
Proceeds from exercise of options
at $0.44 to $15.50	—		—	440,259		1	—		—		1,533		—			—			1,534
Proceeds from exercise of warrants
at $2.81 to $31.95	—		—	1,017,215		1	—		—		8,427		—			—			8,428
Amortization of deferred
compensation	—		—	—		—	—		—		5		—			—			5
Compensation expense related to
options granted for services	—		—	—		—	—		—		89		—			—			89
Warrants granted for patent
licenses	—		—	—		—	—		—		3,182		—			—			3,182
Warrants granted for building
lease	—		—	—		—	—		—		1,738		—			—			1,738
Issuance of common stock at
$16.19 to $25.56 per share
and warrants in October and
November 1999 in connection
with a Private Placement
(net of issuance cost of
$2,804,255)	—		—	2,033,895		2	—		—		37,220		—			—			37,222
Issuance of common stock at $26
per share in April and May
2000 in connection with
a Public Offering (net of
issuance cost of $2,288,966)	—		—	1,150,000		1	—		—		27,610		—			—			27,611
Comprehensive loss:
Net loss	—		—	—		—	—		—		—		—			(15,039	)		(15,039	)
Net unrealized loss on
available-for-sale securities	—		—	—		—	—		—		—		(80	)		—			(80	)
Comprehensive loss																			(15,119	)
Balance at June 30, 2000	—	$	—	17,000,267	$	17	—	$	—	$	130,886	$	(80	)	$	(51,810	)	$	79,013
Proceeds from exercise of options
at $0.44 to $34.00 per share	—		—	165,700		—	—		—		869		—			—			869
Proceeds from exercise of warrants
at $2.18 to $23.43	—		—	174,255		1	—		—		771		—			—			772
Compensation expense related to
options granted for services	—		—	—		—	—		—		336		—			—			336
Issuance of common stock at
$37.50 to $45.06 per share
in November 2000 Public
Offering (net of issuance cost
of $4,622,188)	—		—	2,291,239		2	—		—		86,084		—			—			86,086
Issuance of common stock
at $47.82 per share in
February 2001 pursuant to a
collaboration agreement	—		—	313,636		—	—		—		15,000		—			—			15,000
Comprehensive loss:																—
Net loss	—		—	—		—	—		—		—		—			(16,014	)		(16,014	)
Net unrealized gain on
available-for-sale securities	—		—	—		—	—		—		—		1,120			—			1,120
Comprehensive loss																			(14,894	)
Balance at June 30, 2001 (carried
forward)	—		—	19,945,097		20	—		—		233,946		1,040			(67,824	)		167,182

10

AVIGEN, INC.
(a development stage company)

STATEMENTS OF STOCKHOLDERS’ EQUITY (Continued)

Period from October 22, 1992 (inception) through December 31, 2006
(in thousands, except for share information)

							Class B								Deficit
							Convertible					Accumulated			Accumulated
	Preferred Stock			Common Stock			Common Stock			Additional		Other			During the			Total
										Paid-in		Comprehensive			Development			Stockholders’
	Shares	Amount		Shares	Amount		Shares	Amount		Capital		Gain (Loss)			Stage			Equity
Balance at June 30, 2001 (brought
forward)	—		—	19,945,097		20	—		—		233,946		1,040			(67,824	)		167,182
Proceeds from exercise of options
at $2.13 to $6.75 per share	—		—	11,282		—	—		—		60		—			—			60
Proceeds from exercise of warrants
$7.50 per share	—		—	9,955		—	—		—		75		—			—			75
Compensation expense related to
options granted for services	—		—	—		—	—		—		179		—			—			179
Comprehensive loss:
Net loss	—		—	—		—	—		—		—		—			(11,319	)		(11,319	)
Net unrealized gain on
available-for-sale securities	—		—	—		—	—		—		—		1,173			—			1,173
Comprehensive loss																			(10,146	)
Balance at December 31, 2001	—		—	19,966,334		20	—		—		234,260		2,213			(79,143	)		157,350
Proceeds from exercise of options
at $1.875 to $8.525 per share				34,627		—					113		—			—			113
Proceeds from exercise of warrants
at $7.50 per share	—		—	99,585		—	—		—		747		—			—			747
Compensation expense related to
options granted for services	—		—	—		—	—		—		217		—			—			217
Comprehensive loss:
Net loss	—		—	—		—	—		—		—		—			(27,739	)		(27,739	)
Net unrealized loss on
available-for-sale securities	—		—	—		—	—		—		—		(631	)		—			(631	)
Comprehensive loss																			(28,370	)
Balance at December 31, 2002	—		$—	20,100,546	$	20	—	$	—	$	235,337	$	1,582		$	(106,882	)	$	130,057
Proceeds from exercise of options
at $2.12 to $6.50 per share	—		—	63,746		—	—		—		242		—			—			242
Proceeds from exercise of warrants
at $2.47 to $6.09 per share	—		—	112,102		—	—		—		476		—			—			476
Compensation expense related to
options granted for services				—		—					65		—			—			65
Comprehensive loss:
Net loss	—		—	—		—	—		—		—		—			(25,774	)		(25,774	)
Net unrealized loss on
available-for-sale securities	—		—	—		—					—		(1,180	)		—			(1,180	)
Comprehensive loss																			(26,954	)
Balance at December 31, 2003 (carried
forward)	—		—	20,276,394		20	—		—		236,120		402			(132,656	)		103,886

11

AVIGEN, INC.
(a development stage company)

STATEMENTS OF STOCKHOLDERS’ EQUITY (Continued)

Period from October 22, 1992 (inception) through December 31, 2006
(in thousands, except for share information)

					Class B					Deficit
					Convertible			Accumulated		Accumulated
	Preferred Stock		Common Stock		Common Stock		Additional	Other		During the		Total
							Paid-in	Comprehensive		Development		Stockholders’
	Shares	Amount	Shares	Amount	Shares	Amount	Capital	Gain (Loss)		Stage		Equity
Balance at December 31, 2003 (brought
forward)	—	—	20,276,394	20	—	—	236,120	402		(132,656	)	103,886
Proceeds from exercise of options
at $0.443 to $6.313 per share	—	—	86,856	—	—	—	403	—		—		403
Proceeds from exercise of warrants
at $6.05 per share	—	—	18,000	—	—	—	109	—		—		109
Compensation expense related to
options granted for services	—	—	—	—	—	—	230	—		—		230
Warrants granted for
patent licenses	—	—	—	—	—	—	97	—		—		97
Comprehensive loss:
Net loss	—	—	—	—	—	—	—	—		(23,923	)	(23,923	)
Net unrealized loss on
available-for-sale
securities	—	—	—	—	—	—	—	(927	)	—		(927	)
Comprehensive loss												(24,850	)
Balance at December 31, 2004			20,381,250	20	—	—	236,959	(525	)	(156,579	)	79,875
Proceeds from exercise of options
at $0.487 to $3.53 per share	—	—	526,023	1	—	—	286	—		—		287
Compensation expense related to
options granted for services	—	—	—	—	—	—	13	—		—		13
Comprehensive loss:
Net loss	—	—	—	—	—	—	—	—		(14,696	)	(14,696	)
Net unrealized loss on
available-for-sale securities	—	—	—	—	—	—	—	(15	)	—		(15	)
Comprehensive loss												(14,711	)
Balance at December 31, 2005	—	—	20,907,273	21	—	—	237,258	(540	)	(171,275	)	65,464
Proceeds from exercise of options
at $2.00 to $5.93 per share	—	—	269,098	—	—	—	1,012	—		—		1,012
Issuance of common stock at
$5.37 per share in May 2006
in connection with a Private
Placement (net of issuance cost
of $1,802,149)	—	—	3,939,760	4	—	—	19,530	—		—		19,354
Stock-based compensation
expense			—	—	—	—	1,381	—		—		1,381
Compensation expense related to
options granted for services	—	—	—	—	—	—	114	—		—		114
Comprehensive loss:
Net loss			—	—	—	—	—	—		(24,256	)	(24,256	)
Net unrealized gain on
available-for-sale securities	—	—	—	—	—	—	—	408		—		408
Comprehensive loss												(23,848	)
Balance at December 31, 2006	—	$—	25,116,131	$25	—	$—	$ 259,115	$ (132	)	$ (195,531	)	$ 63,477

See accompanying notes.

12

AVIGEN, INC.
(a development stage company)

STATEMENTS OF CASH FLOWS
(in thousands)

										Period from
										October 22,
										1992
										(inception)
										through
	Year Ended December 31,									December 31,
	2006			2005			2004			2006
Operating Activities
Net loss	$	(24,256	)	$	(14,696	)	$	(23,923	)	$	(195,531	)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization		1,273			2,549			3,610			19,799
Gain on disposal of property and equipment		(18	)		(65	)		—			(83	)
Impairment loss related to long-lived assets		450			6,130			—			6,580
Amortization of deferred compensation		—			—			—			164
Non-cash rent expense for warrants issued in
connection with the extension of the building
lease		217			217			217			1,483
Amortization of deferred rent and other liabilities		(162	)		3			97			792
Non-cash compensation expense for common stock,
warrants, and stock options issued to employees
and consultants for services		1,495			13			230			3,213
Warrants issued for patent license		—			—			—			3,182
Changes in operating assets and liabilities:
Accrued interest		(182	)		238			66			(468	)
Prepaid expenses and other current assets		292			(294	)		1			(629	)
Deposits and other assets		79			(316	)		—			(263	)
Accounts payable, other accrued liabilities and
accrued compensation and related expenses		452			167			49			2,697
Deferred revenue		—			—			(2,125	)		—
Net cash used in operating activities		(20,360	)		(6,054	)		(21,778	)		(159,064	)
Investing Activities
Purchases of property and equipment		(176	)		(277	)		(467	)		(28,631	)
Proceeds from disposal of property and equipment		142			231			—			373
Decrease (increase) in restricted investments		—			1,500			—			(10,428	)
Purchases of available-for-sale securities		(109,261	)		(66,475	)		(79,670	)		(880,821	)
Maturities of available-for-sale securities		99,594			79,082			102,236			822,165
Net cash provided by (used in) investing activities		(9,701	)		14,061			22,099			(97,342	)
Financing Activities
Proceeds from long-term obligations		—			—			—			10,133
Repayment of long-term obligations		—			—			—			(1,710	)
Proceeds from bridge financing		—			—			—			1,937
Repayment of bridge financing		—			—			—			(2,131	)
Payments on capital lease obligations		—			—			—			(2,154	)
Proceeds from sale-leaseback of equipment		—			—			—			1,927

13

AVIGEN, INC.
(a development stage company)

STATEMENTS OF CASH FLOWS (Continued)
(in thousands)

								Period from
								October 22,
								1992
								(inception)
								through
	Year Ended December 31,							December 31,
	2006			2005		2004		2006
Proceeds from issuance of preferred stock, net of
issuance costs		—			—		—		9,885
Proceeds from warrants and options exercised		1,012			286		512		15,361
Proceeds from issuance of common stock, net of
issuance costs and repurchases		19,354			—		—		224,973
Net cash provided by financing activities		20,366			286		512		258,221
Net (decrease) increase in cash and cash equivalents		(9,695	)		8,293		833		1,815
Cash and cash equivalents, beginning of period		11,510			3,217		2,384		—
Cash and cash equivalents, end of period	$	1,815		$	11,510	$	3,217	$	1,815
Supplemental disclosure
Issuance of warrants in connection with the extension of
the building lease	$	—		$	—	$	—	$	1,738
Issuance of preferred stock for cancellation of accounts
payable, notes payable and accrued interest		—			—		—		499
Issuance of stock options for repayment of certain
accrued liabilities		—			—		—		137
Issuance of warrants in connection with bridge
financing		—			—		—		300
Deferred compensation related to stock option grants		—			—		—		164
Purchase of property and equipment under capital lease
financing		—			—		—		226
Cash paid for interest	$	467		$	323	$	209	$	2,677

See accompanying notes.

14

AVIGEN, INC.
(a development stage company)

NOTES TO FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

   Description of Business and Basis of Presentation

     Avigen, Inc. was incorporated on October 22, 1992 in Delaware and is focused on developing and commercializing small molecule therapeutics and biologics to treat serious neurological and neuromuscular disorders. Our current product candidates primarily address neuromuscular spasm and spasticity and neuropathic pain. Since our inception, our activities have consisted principally of acquiring product rights, raising capital, establishing facilities and performing research and development. Accordingly, we are considered to be in the development stage. We operate in a single segment.

     At December 31, 2006, we had an accumulated deficit of $195.5 million and expect to continue to incur substantial losses over the next several years while we continue in this development stage. Our operations are subject to certain risks and uncertainties frequently encountered by companies in the early stages of operations, particularly in the evolving market for small biotech and specialty pharmaceuticals companies. Such risks and uncertainties include, but are not limited to, timing and uncertainty of achieving milestones in clinical trials and in obtaining approvals by the FDA and regulatory agencies in other countries. Our ability to generate revenues in the future will depend substantially the timing and success of reaching development milestones and in obtaining regulatory approvals and market acceptance of our products, assuming the FDA approves our new drug applications. We plan to meet our future capital requirements primarily through issuances of equity securities, payments under collaborative agreements with third parties, government grants, and license fees. We intend to seek additional funding through public or private equity or debt financing, when market conditions allow. There can be no assurance that we will be able to enter into financing arrangements on acceptable terms in the future, if at all.

   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.

   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 all our investments in marketable securities as available-for-sale. Available-for-sale securities are reported at market value and unrealized holding gains and losses, net of the related tax effect, if any, are excluded from earnings and are reported in other comprehensive income 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.

15

AVIGEN, INC.
(a development stage company)

NOTES TO FINANCIAL STATEMENTS — (Continued)

   Fair value of financial instruments

     The fair value of our cash equivalents and available-for-sale securities is based on quoted market prices. The fair value of our loans payable is based on current interest rates available to us for debt instruments with similar terms, degrees of risk, and remaining maturities. The carrying amount of our cash equivalents, available-for-sale securities and loan payable are considered to be representative of their respective fair value at December 31, 2006 and 2005.

   Restricted Investments

     In June 2000, we initially entered into a financing arrangement to support construction related activities. Under this arrangement, we have pledged $10.0 million of our portfolio of available-for-sale securities to secure this long-term obligation.

     In May 2003, we secured two letters of credit to serve as security deposits in connection with a building lease that became effective July 1, 2003. This building lease was executed in February 2000 and replaced our previous building lease and sublease on the same premises that expired June 30, 2003 under the original terms of the agreements. Under the terms of these letters of credit, we have pledged $428,000 of our portfolio of available-for-sale securities to secure these letters of credit.

     At December 31, 2006, $8.0 million and $2.4 million were classified as restricted investments in current and non-current assets, respectively. At December 31, 2005, $10.4 million was classified as non-current restricted investments. 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 $8.0 million of long term restricted investments to current assets at December 31, 2006 results from the classification of the related loan payable, which is due in June 2007, as a current liability.

   Concentration of Credit Risk

     Cash, cash equivalents, available-for-sale securities and restricted investments consist of financial instruments that potentially subject us to concentrations of credit risk to the extent of the value of the assets recorded on the balance sheet. We believe that we have established guidelines for investment of our excess cash that maintain safety and liquidity through our policies on diversification among asset classes and issuers, as well as across investment maturities.

   Impairment of Long-Lived Assets

     All long-lived assets are reviewed for potential impairment whenever events or changes in business circumstances indicate that the carrying value of an asset may not be fully recoverable under Statement of Financial Account Standards No. 144 “Accounting for Impairment or Disposal of Long-Lived Assets.” Impairment is determined by comparing future projected undiscounted cash flows to be generated by the asset to its carrying value. If impairment is identified, a loss would be recognized and reflected in net loss to the extent that the carrying amount of the asset exceeds its estimated fair value determined by discounted cash flow analyses or comparable fair valued or similar assets.

   Property and Equipment

     Property and equipment are stated at cost, less accumulated depreciation. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the respective assets, or in the case of leasehold improvements, over the lesser of the estimated useful lives or the remaining lease terms. The estimated useful lives of our property and equipment range from three to seven years.

16

AVIGEN, INC.
(a development stage company)

NOTES TO FINANCIAL STATEMENTS — (Continued)

     Expenses for repairs and maintenance are charged to operations as incurred. Upon retirement, disposition, or sale, the cost of the property and equipment disposed of and the related accumulated depreciation are deducted from the accounts, and any resulting gain or loss is credited or charged to operations.

   Asset Retirement Obligation

     We account for obligations associated with the retirement costs of long-lived assets in accordance with Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations,” as interpreted by FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations.” FAS 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. Our asset retirement obligation is associated with a commitment to remove or otherwise alter certain leasehold improvements at the termination of our building lease that expires in May 2008, based on the sole discretion of our landlord, and is subject to a conditional future event that is not within our control. This obligation existed in prior years, but was not considered material to the fair presentation of our financial statements and was not recognized. 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 of December 31, 2006, as a result of a change in estimate, we remeasured the estimated fair value of our asset retirement obligation and recorded a non-current liability for $450,000. The recognition of this liability would have resulted in an adjustment to the carrying value of the underlying long-lived assets. However, in June 2005, these leasehold improvements were determined to be impaired and written-off with a charge to our net loss (see Note 4). Since there is no carrying value of the underlying assets at December 31, 2006, the recognition of our asset retirement obligation resulted in an additional charge during the period to impairment loss related to long-lived assets. Upon settlement of the obligation, any difference between the cost to retire the asset and the liability recorded will be recognized as an increase or decrease to operating expenses in our statement of operations in year of settlement.

   Revenue Recognition

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

Revenues from the License or Assignment of Intellectual Property Rights

     We recognize non-refundable license or assignment fees, including development milestone payments associated with license or assignment agreements, for which we have no further significant performance obligations and no continuing involvement requirements related to product development, on the earlier of the dates on when the payments are received or when collection is assured. In 2005, we received a $12.0 million payment under the terms of the Genzyme agreement (see Note 8) that we recognized as revenue, since we concluded that as of December 31, 2005, we did not have any significant future performance obligations under the agreement.

Revenues from Collaborative Research and Development Agreements

     We recognize revenue associated with up-front license, technology access and research and development funding payments under collaborative agreements ratably over the relevant periods specified in the agreements, generally the development phase. This development phase can be defined as a specified period of time, however, in certain cases, the collaborative agreement specifies a development phase that culminates with milestone objectives but does not have a fixed date and requires us to estimate the time period over which to recognize

17

AVIGEN, INC.
(a development stage company)

NOTES TO FINANCIAL STATEMENTS — (Continued)

this revenue. Our estimated time periods are based on management’s estimate of the time required to achieve a particular development milestone considering the projected level of effort and current stage of development. If our estimate of the development-phase time period changes, the amount of revenue we recognize related to up-front payments for a given period will accelerate or decrease accordingly.

Royalty Revenues

     We record royalty revenue from license agreements as earned in accordance with the contract terms when third-party results can be reliably determined and collectibility is reasonably assured.

Grant Revenues

     We record grant revenue in the period in which the revenue is earned as defined by the grant agreement. Since our inception, we have recognized approximately $794,000 of grant revenue, which includes amounts earned from reimbursements under government grants, of which all have come from the National Institutes of Health.

   Deferred Rent

     We record our obligations under facility operating lease agreements as rent expense. We recognize rent expense on a straight-line basis over the term of the operating lease. The difference in actual amounts paid and amounts recorded as rent expense during the fiscal year has been recorded as deferred rent. Amounts classified as deferred rent totaled $967,000 and $1.1 million at December 31, 2006 and 2005, respectively.

   Comprehensive Loss

     Components of other comprehensive loss, including unrealized gains and losses on available-for-sale investments, were included as part of total comprehensive loss. For all periods presented, we have disclosed comprehensive loss in the statement of stockholders’ equity.

   Research and Development Expenses

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

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

18

AVIGEN, INC.
(a development stage company)

NOTES TO FINANCIAL STATEMENTS — (Continued)

   Income Taxes

     Income taxes are accounted for in accordance with FAS 109, Accounting for Income Taxes, which requires the use of the liability method. Under this method, deferred tax assets and liabilities are determined based upon the differences between the financial reporting and the tax bases of assets and liabilities and are measured using enacted tax rules and laws that are anticipated to be in effect when the differences are expected to reverse. To date, we have no history of earnings. Therefore, our net deferred tax assets are reduced by a valuation allowance to the extent that realization of the related deferred tax asset is not assured. We have recorded a valuation allowance for the full amount of our calculated deferred tax asset as of December 31, 2006 and 2005.

   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 issueable upon exercise of stock options and warrants. Securities that potentially could have diluted basic earnings per common share, but were excluded from the diluted net loss per common share computation because their inclusion would have been anti-dilutive, were as follows:

	Year Ended December 31,
	2006	2005	2004
Potential dilutive stock options outstanding	287,853	273,667	530,731
Outstanding securities excluded from the potential dilutive
common shares calculation (1)	2,611,068	3,756,850	3,970,588

__________________

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

   Stock-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 associated with 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. Under the modified prospective transition method, compensation expense has been recognized in our financial statements beginning January 1, 2006 with no restatement of prior periods. As such, compensation expense is recognized for awards that are granted, modified, or cancelled on or after January 1, 2006 as well as for the portion of awards previously granted that had not vested as of January 1, 2006. Compensation expense for these previously granted awards 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.

19

AVIGEN, INC.
(a development stage company)

NOTES TO FINANCIAL STATEMENTS — (Continued)

     Until we adopted FAS 123 (R) on January 1, 2006, we accounted for stock options granted to our employees and directors in accordance with APB Opinion No. 25, (APB 25), “Accounting for Stock Issued to Employees” and related interpretations. Under APB 25, when the exercise price of our employee stock options was equal to or greater than the market price of the underlying stock on the date of grant, no compensation expense was recognized.

     Our adoption of FAS 123(R) using the modified prospective transition method requires us to determine the amount of eligible windfall tax benefits (the pool of windfall tax benefits) that are available on the adoption date to offset future shortfalls. We have elected to calculate the historical pool of windfall tax benefits (i.e., the amount that would have accumulated as of the adoption date of FAS 123(R)) using the “short-cut method,” as provided in FASB Staff Position No. FAS 123(R)-3, “Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards” which includes simplified methods to establish the beginning balance of the pool of windfall tax benefits related to the tax effects of employee share-based compensation, and to determine the subsequent impact on the pool of windfall tax benefits and consolidated statements of cash flows of the tax effects of employee share-based compensation awards that are outstanding upon adoption of SFAS 123(R). We also have elected to follow the “tax law ordering approach” to determine when the historic tax benefits are realized (tax benefits realized based on provisions in the tax law that identify the sequence in which stock option deductions are utilized for tax purposes). Subsequent to the adoption of FAS 123R, we will continue to track the balance of the pool of windfall tax benefits based on windfalls or shortfalls incurred after the adoption date.

      The following table illustrates the effect on our net loss and loss per common share if we had applied the fair value recognition provisions to share-based employee compensation in 2005 and 2004 (in thousands, except for per share data):

	Year Ended December31,
	2005			2004
Net loss - as reported	$	(14,696	)	$	(23,923	)
Add: Stock-based employee compensation included in reported net loss		—			220
Less: Total stock-based employee compensation expense determined under
the fair-value-based method for all awards		(2,219	)		(6,637	)
Net loss – pro forma	$	(16,915	)	$	(30,340	)
Net loss per common share basic and diluted – as reported	$	(0.71	)	$	(1.17	)
Net loss per common share basic and diluted - pro forma	$	(0.82	)	$	(1.49	)

     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.

   Reclassifications

     We have reclassified certain prior year amounts to conform to our current year’s presentation of sublease income and other income (expense), net reported in our statements of operations. 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 flows.

20

AVIGEN, INC.
(a development stage company)

NOTES TO FINANCIAL STATEMENTS — (Continued)

   New Accounting Pronouncements

     In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109, or FIN 48, which requires a company to recognize in its financial statements the impact of a tax position if that position is more likely than not of being sustained on examination by tax authorities based upon its technical merits. The provisions of FIN 48 are effective as of the beginning of the 2007 fiscal year, with the cumulative effect, if any, of the change in accounting principle recorded as an adjustment to opening retained earnings. We are currently evaluating the impact of adopting FIN 48, but believe that it will not have a material impact on our financial statements.

     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. FAS 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. We are currently evaluating the effect, if any, that the adoption of FAS 157 will have on our financial position and results of operations.

     In September 2006, the SEC issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”. SAB 108 provides interpretive guidance on how the effects of prior-year uncorrected misstatements should be considered when quantifying misstatements in the current year financial statements. SAB 108 requires companies to quantify misstatements using both an income statement (“rollover”) and balance sheet (“iron curtain”) approach and evaluate whether either approach results in a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. If prior year errors that had been previously considered immaterial now are considered material based on either approach, no restatement is required so long as management properly applied its previous approach and all relevant facts and circumstances were considered. If prior years are not restated, the cumulative effect adjustment is recorded in opening accumulated earnings as of the beginning of the fiscal year of adoption. SAB 108 is effective for fiscal years ending on or after November 15, 2006. The adoption of SAB 108 did not have a material effect on our financial condition or results of operations.

     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 as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Management is currently evaluating the impact of adopting this Statement.

21

AVIGEN, INC.
(a development stage company)

NOTES TO FINANCIAL STATEMENTS — (Continued)

2. Cash, Available-for-Sale Securities and Restricted Investments

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

			Gross		Gross
			Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Cash	$	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.

     The following is a summary of cash, restricted investments, and available-for-sale securities as of December 31, 2005 (in thousands):

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

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

     Net realized losses were approximately $24,000 and $32,000 for the years ended December 31, 2006 and 2005, respectively, and net realized gain was $119,000 for the year ended December 31, 2004.

22

AVIGEN, INC.
(a development stage company)

NOTES TO FINANCIAL STATEMENTS — (Continued)

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

	Less Than 12 Months					12 Months or Greater
	Gross			Estimated		Gross			Estimated
	Unrealized			Fair		Unrealized			Fair
	Losses			Value		Losses			Value
December 31, 2006
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

	Less Than 12 Months					12 Months or Greater
	Gross			Estimated		Gross			Estimated
	Unrealized			Fair		Unrealized			Fair
	Losses			Value		Losses			Value
December 31, 2005
Corporate debt securities	$	(108	)	$	11,246	$	(88	)	$	8,883
Federal agency obligations		(101	)		12,789		(205	)		12,918
Asset-backed and other securities		(4	)		996		(20	)		5,385
Treasury obligations		(8	)		1,201		(11	)		889
Total	$	(221	)	$	26,232	$	(324	)	$	28,075

     The gross unrealized losses reported above for 2006 and 2005 were caused by rises in market interest rates during those years. 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.

3. Property and Equipment

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

	December 31,
	2006			2005
Leasehold improvements	$	6,742		$	6,742
Laboratory equipment		1,168			1,551
Office furniture and equipment		1,542			1,702
		9,452			9,995
Less accumulated depreciation and amortization		(6,743	)		(6,066	)
Property and equipment, net	$	2,709		$	3,929

     Total depreciation and amortization expense for 2006, 2005 and 2004, was $1.3 million, $2.5 million and $3.6 million, respectively.

23

AVIGEN, INC.
(a development stage company)

NOTES TO FINANCIAL STATEMENTS — (Continued)

     As of December 31, 2006, we revised the estimated depreciable life on certain leasehold improvements with a remaining carrying value of $1.2 million to correspond with the remaining term on the corresponding building operating lease, which expires in May 2008. The leasehold improvements had previously been scheduled to be depreciated through December 2010. The change in depreciable life was accounted for as a change in accounting estimate on a prospective basis and did not have a material impact on depreciation expense for 2006.

4. Impairment Loss related to Long-Lived Assets

     During 2005, in connection with the preparation of our financial statements at June 30, 2005 and September 30, 2005, we evaluated the ongoing value of the leasehold improvements and equipment associated with approximately 40,000 square feet of manufacturing, laboratory, and office space we have under lease through May 2008 and approximately 11,000 square feet of manufacturing, laboratory, and office space we have under lease through November 2010, respectively. We determined to initiate these evaluations as a result of actions we had taken to discontinue funding of our AAV-based programs in order to focus our development efforts and financial resources on our small molecule product candidates.

     Based on these evaluations, we determined that our future operations would not require the full capacity of these leased facilities and that long-lived assets with a net carrying value of $6.1 million were no longer recoverable and were, in fact, impaired. In 2005, we recorded an impairment loss related to long-lived assets in the facility and wrote down the related carrying value of the leasehold improvements, laboratory and office equipment and furniture to approximate their estimated fair values.

     Fair value was based on the expected incremental sublease cash flows we estimated we could receive in excess of our prorated existing operating lease obligations based on current market lease rental rates at the time for similar mixed use properties. Based on market conditions during 2005, including vacancy rates and the expected time needed to sublease the facilities, we did not expect to receive significant incremental rents related to the long-lived assets.

     In December 2006, we recorded an asset retirement obligation associated with our commitment to remove or otherwise alter certain leasehold improvements at the termination of one of our building leases. Because the underlying assets had been determined to be impaired in 2005, and no longer had a carrying value, the recognition of the asset retirement obligation resulted in an additional impairment loss related to long-lived assets in 2006 (see Note 1).

5. License Agreement – Sanochemia Pharmazeutika AG

     In January 2006, we entered into a license agreement with SDI Diagnostics International LTD, a division of Sanochemia Pharmazeutika AG (Sanochemia). Under the terms of the agreement, Avigen received an exclusive license to develop and commercialize the compound tolperisone in North America. This compound is the active pharmaceutical ingredient in our product candidate, AV650, for the treatment of spasticity and neuromuscular spasm. Under the terms of the agreement, Avigen paid Sanochemia $3.0 million in initial license costs and is required to make additional future payments 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 in 2006 and expect that any future payments we make under the terms of the agreement will also be recorded as in-license fee expense.

24

AVIGEN, INC.
(a development stage company)

NOTES TO FINANCIAL STATEMENTS — (Continued)

6. Severance Expense

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

7. Termination Costs Associated with Exit Activities

     In August 2005, we took steps to reduce our research and development spending attributable to gene therapy activities. As a result, we reduced the level of our total staff by approximately 19 positions, primarily in research and development. This action qualified as an exit activity under FAS 146, “Costs Associated with Exit or Disposal Activities.” In connection with this reduction in staff, we incurred approximately $646,000 in severance and other termination-related benefits. Approximately $624,000 of the costs associated with the workforce reduction are included in research and development expenses and approximately $22,000 are included in general and administrative expenses for year ended December 31, 2005. At December 31, 2005, approximately $25,000 was unpaid and included on our balance sheet under accrued compensation and related expenses. These accrued amounts primarily represent deferred severance payments and extended health care benefits for certain impacted employees. We do not expect to incur any additional costs associated with the workforce reduction.

8. AAV Gene Therapy Assignment Agreement - Genzyme Corporation

     In December 2005, we entered into an agreement to assign to Genzyme Corporation rights to most of our AAV-based intellectual property, our gene therapy clinical trial programs for Parkinson’s disease and hemophilia, and certain clinical-grade vector materials. This assignment is subject to the potential reversion to us of specified rights under specified conditions. Under the terms of the agreement, we received a $12 million payment and could receive significant additional development-based milestone and royalty payments. The $12 million payment was non-refundable as of December 31, 2005, and Avigen did not have any significant performance obligations associated with the agreement. Because we could receive significant future cash flows in connection with this agreement, if Genzyme is successful in developing products using intellectual property included in the agreement, we have not accounted for this transaction as discontinued operations. As such, we recognized the entire payment received as revenue in 2005 and expect that any future payments we receive under the terms of the agreement will also be recorded as revenue. We did not receive any payments from Genzyme for the period ended December 31, 2006.

9. Collaboration Agreement – Bayer Corporation

     In March 2003, we received a $2.5 million payment from Bayer Corporation under the terms of a collaboration agreement for the development of an AAV-based gene therapy product for hemophilia. This amount was recorded as deferred revenue and was being recognized as revenue ratably at approximately $125,000 per quarter over the estimated development period for this product, which was determined to be five years. In May 2004, we suspended subject enrollment in the related phase I clinical trial, which resulted in the termination of the development of the product candidate associated with the Bayer payment. As a result, we accelerated the recognition of the remaining $2.0 million of deferred revenue in our statements of operations during the year ended December 31, 2004.

25

AVIGEN, INC.
(a development stage company)

NOTES TO FINANCIAL STATEMENTS — (Continued)

10. Loan Payable

     In June 2000, we entered into a financing arrangement to support construction related activities. Under this arrangement, we had the right to borrow up to $10.0 million through June 1, 2003. This revolving line of credit was amended in June 2002 to extend the expiration date to June 1, 2005, and amended again in June 2004 to extend the expiration date to June 1, 2007, or less than one year from the date of these financial statements. Accordingly, at December 31, 2006, the loan was classified as a current liability. Amounts borrowed under this arrangement bear interest at the London Inter-Bank Offered Rate plus a margin adjustment that varies between 0.50% and 0.75% on the date of each drawdown based on the market value of our investment portfolio held with a subsidiary of Wells Fargo. This interest rate is subsequently reset every three or six months. The weighted average interest rate for all outstanding drawdowns on this long-term obligation was 5.95% and 4.97% at December 31, 2006 and 2005, respectively. We have pledged a portion of our portfolio of available-for-sale securities equal to the amount of outstanding borrowings to secure this obligation, and have identified these pledged assets as restricted investments on our balance sheets. As of both December 31, 2006 and 2005, we had borrowed $8.0 million from the line of credit. Payments of interest only are due monthly through June 1, 2007, at which time a balloon payment of outstanding principal is due. In November 2000, we reserved $2.0 million in borrowing capacity from the line of credit to secure a letter of credit. The letter of credit was established pursuant to the terms required under a ten-year property lease entered into in November 2000, and was issued in favor of the property owner. As a result of the cash borrowings and the establishment of the letter of credit, we did not have any remaining borrowing capacity under the line of credit at December 31, 2006.

11. Stockholders’ Equity

   Common Stock

     In August and September 1998, we issued an aggregate of 1,306,505 shares of our common stock at $2.25 to $2.94 per share to selected institutional investors. The offering was completed through a private placement. As part of the transaction, we issued warrants to purchase 261,301 shares of our common stock with an exercise price of $2.18 to $3.67 per share. The exercise price was 125% of the fair market value per share of our underlying stock on the corresponding closing day and the warrants carry a five-year term. After deducting commissions and fees from the gross proceeds of $3.0 million, net proceeds from this transaction approximated $2.7 million.

In December 1998, we issued 1,367,280 shares of our common stock at $3.81 to $4.88 per share to selected institutional investors. The offering was completed through a private placement. As part of this transaction, we issued warrants to purchase 273,456 shares of our common stock with an exercise price ranging from $4.76 to $6.09 per share. The exercise price was 125% of the fair market value per share of our underlying stock on the corresponding closing day and the warrants carry a five-year term. After deducting commissions and fees from the gross proceeds of $5.6 million , net proceeds from this transaction approximated $5.2 million.

     In February and April 1999, we issued an aggregate of 2,198,210 shares of our common stock at $5.50 to $6.00 per share to selected institutional investors. The offering was completed through a private placement. As part of this transaction, we issued warrants to purchase 439,642 shares of our common stock with an exercise price of $6.87 to $7.50 per share. The exercise price was 125% of the fair market value per share of the underlying stock on the corresponding closing day and the warrants carry a five-year term. After deducting commissions and fees from the gross proceeds of $13.2 million, net proceeds from this transaction approximated $12.2 million.

     In October and November 1999, we issued an aggregate of 2,033,895 shares of our common stock at $16.19 to $25.56 per share to selected institutional investors. The offering was completed through a private placement. As part of this transaction, we issued warrants to purchase 406,779 shares of our common stock with an exercise price of $20.25 to $31.95 per share. The exercise price was 125% of the fair market value per share of our underlying stock on the corresponding closing day and the warrants carry a five-year term. After deducting commissions and fees from the gross proceeds of $40.0 million, net proceeds from this transaction approximated $37.2 million.

26

AVIGEN, INC.
(a development stage company)

NOTES TO FINANCIAL STATEMENTS — (Continued)

     In March 2000, we issued a warrant to purchase 40,000 shares of our common stock as partial consideration for the extension of our building lease. The fair value of this warrant at the date of issuance was approximately $1.7 million. This fair value is being amortized over the life of the lease extension, or May 2008. This warrant was issued with an exercise price equal to the fair market value per share of our underlying stock at the time of issuance, or $56.00, and carried a five-year term. In March 2005, this warrant expired unexercised.

     Also, in March 2000, we issued a warrant to purchase 50,000 shares of our common stock as partial consideration for the acquisition of certain patent licenses previously used in our gene therapy-related research and development activities. The fair value of this warrant at the date of issuance was approximately $3.2 million and was fully expensed in the year ended June 30, 2000. This warrant was issued with an exercise price equal to the fair market value per share of our underlying stock at the time of issuance, or $82.00, and carried a five-year term. In March 2005, this warrant expired unexercised.

     In April and May 2000, we issued an aggregate of 1,150,000 shares of our common stock at $26.00 per share through a public offering. After deducting commissions and fees from the gross proceeds of $29.9 million, net proceeds from this transaction totaled $27.6 million.

     In November 2000, we issued an aggregate of 2,291,239 shares of our common stock between $37.50 and $45.06 per share through a public offering. After deducting combined commissions and fees from the gross proceeds of $90.7 million, net proceeds from this transaction totaled $86.1 million.

     In February 2001, we issued 313,636 shares of common stock at $47.82 per share to Bayer AG, in connection with a collaboration agreement entered into with Bayer Corporation dated November 17, 2000. Net proceeds from this transaction totaled $15.0 million.

     In March 2004, we issued a warrant to purchase 15,000 shares of our common stock as partial consideration for the acquisition of certain intellectual property rights used in our research and development activities. The fair value of this warrant was approximately $97,000 when we entered into the corresponding license agreement in October 2003. The fair value of the warrant was fully expensed and recorded in accounts payable and other accrued liabilities as of December 31, 2003. Upon issuance, the fair value of the warrant was reclassified to additional paid in capital for the year ended December 31, 2004. This warrant was issued with an exercise price equal to the fair market value per share of our underlying stock at the time of issuance, or $6.50, and carries a ten-year term. At December 31, 2006, this was the only issued warrant Avigen had that was outstanding.

     In May 2006, we issued an aggregate of 3,939,760 shares of our common stock at $5.37 per share to selected institutional investors. The offering was completed through a private placement. After deducting combined commissions and fees from the gross proceeds of $21.2 million, net proceeds from this transaction totaled $19.4 million. The resales of these shares were registered pursuant to a registration statement that was declared effective on June 30, 2006.

     During the period ended December 31, 2006, we received $1.0 million in cash proceeds related to the exercise of stock options for 269,098 shares of common stock.

27

AVIGEN, INC.
(a development stage company)

NOTES TO FINANCIAL STATEMENTS — (Continued)

Shares Reserved for Future Issuance

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

	December 31,
	2006
Stock options outstanding	4,090,674
Stock options available for grant	2,856,792
Warrants to purchase common stock	15,000
Shares available for Employee Stock Purchase Plan	360,000
	7,322,466

12. Share-based Compensation

     During 2006, share-based compensation expense has been recognized for all our share-based compensation plans as follows (in thousands, except per share data):

	Year
	Ended
	December 31,
	2006
Research and development	$	(437	)
General and administrative		(944	)
Share-based compensation expense before taxes		(1,381	)
Related income tax benefits		—
Share-based compensation expense	$	(1,381	)
Net share-based compensation expenses per basic and diluted common share	$	(0.06	)

     Since we have cumulative operating losses as of December 31, 2006 for which a valuation allowance has been established, we recorded no income tax benefits for share-based compensation arrangements. Prior to our adoption of FAS 123(R) as of January 1, 2006, share-based employee compensation expense was not recognized in our statements of operations.

     As of January 1, 2006, Avigen had three share-based compensation plans available for employee, nonemployee director, and consultant grants. The 1996 Equity Incentive Plan (“1996 Plan”) and the 1996 Non-Employee Directors’ Stock Option Plan (“Directors’ Plan”) were both approved by our stockholders and had a ten-year duration which terminated on March 29, 2006. As of December 31, 2006, we had an aggregate of 2,043,484 shares of our common stock reserved for issuance under these plans subject to outstanding awards and there was no longer any shares reserved under these plans for future grants. In general, the outstanding options under these plans were granted at 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 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.

     The third plan was the 2000 Equity Incentive Plan (“2000 Plan”), which was adopted by Avigen’s Board of Directors in June 2000 and amended and restated as the 2006 Incentive Stock Option Plan (“2006 Plan”) in February 2006. The 2006 Plan was approved by stockholders on May 31, 2006, and currently represents the only outstanding stock option plan with shares available for future grant. The adoption of the 2006 Plan did not increase the number of shares available for grant under the 2000 Plan, but enables Avigen to grant incentive stock options to its employees, which enhance the after tax value of these options to the recipients, use a greater array of stock awards than was previously available under the 2000 Plan, and removed the forty percent limitation on the

28

AVIGEN, INC.
(a development stage company)

NOTES TO FINANCIAL STATEMENTS — (Continued)

number of shares that could be granted to directors and officers under the 2000 Plan. As of December 31, 2006, we had (1) an aggregate of 1,692,440 shares of our common stock reserved for issuance under the 2006 Plan that are subject to options outstanding prior to May 31, 2006, and are therefore subject to the terms of the 2000 Plan; and (2) an aggregate of 354,750 shares of our common stock reserved for issuance under the 2006 Plan subject to outstanding options granted since May 31, 2006, and are therefore subject to the terms of the 2006 Plan, and 2,856,792 shares available for future grants of share-based awards under the 2006 Plan.

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

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

	Outstanding Options
			Weighted- Average
	Number of		Exercise Price per
	Shares		Share
Outstanding at December 31, 2003	4,362,442		$	12.62
Granted	1,111,150			3.92
Canceled	(962,008	)		14.63
Exercised	(86,856	)		4.63
Outstanding at December 31, 2004	4,424,728		$	10.16
Granted	658,366			3.17
Canceled	(1,069,817	)		8.25
Exercised	(526,023	)		0.54
Outstanding at December 31, 2005	3,487,254		$	10.87
Granted	1,605,500			5.16
Canceled	(732,982	)		9.45
Exercised	(269,098	)		3.76
Outstanding at December 31, 2006	4,090,674		$	9.36

     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 on analyses of historical employee termination and option exercise behavior; separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The risk-free interest rates are based on the U.S. Treasury yield for a period consistent with the expected term of the option in effect at the time of the grant. Share-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. The estimated forfeiture rates are based on analyses of historical data, taking into account patterns of involuntary termination and other factors.

29

AVIGEN, INC.
(a development stage company)

NOTES TO FINANCIAL STATEMENTS — (Continued)

	Year Ended December 31,
	2006		2005		2004
Expected volatility	0.6006		0.6670		0.8110
Risk free interest rate	4.60	%	4.05	%	3.43	%
Expected life of options in years	3.68		4.50		5.00
Expected dividend yield	0	%	0	%	0	%

     The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options and warrants that have no vesting restrictions and are fully transferable. In addition, option valuation models, including Black-Scholes, require the input of highly subjective assumptions, including the expected stock price volatility. Because our stock options and warrants are not traded, they have characteristics significantly different from those of traded options and warrants, and because changes in the subjective input assumptions can materially affect the fair value estimate, in our opinion, the existing option valuation models, including Black-Scholes, do not necessarily provide a reliable single measure of the fair value of our stock options and warrants.

     The following table summarizes information with regard to total stock options outstanding under all stock option plans at December 31, 2006:

					Options Outstanding				Options Exercisable
						Weighted-	Weighted-			Weighted-
						Average	Average			Average
					Number	Remaining	Exercise		Number	Exercise
Range of Exercise Prices					Of Shares	Contractual Life	Price		Of Shares	Price
$	2.000	–	$	3.140	431,220	7.73	$	2.97	200,349	$	2.95
	3.250	–		3.450	448,051	7.36	$	3.38	243,293	$	3.37
	3.500	–		5.060	404,532	6.28	$	3.76	284,188	$	3.70
	5.062	–		5.062	722,168	9.14	$	5.06	173,152	$	5.06
	5.260	–		5.380	443,100	8.18	$	5.33	109,225	$	5.37
	5.410	–		6.310	413,750	7.89	$	5.73	134,436	$	5.95
	6.313	–		14.360	327,071	4.61	$	9.23	320,946	$	9.28
	14.625	–		14.625	421,032	3.05	$	14.63	421,032	$	14.63
	15.438	–		38.188	437,250	2.57	$	33.21	437,250	$	33.21
	40.750	–		47.625	42,500	3.51	$	43.99	42,500	$	43.99
$	2.000	–	$	47.625	4,090,674	6.53	$	9.36	2,366,371	$	12.79

     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 2006, 2005 and 2004 was $2.48, $1.79 and $2.60, respectively. The total intrinsic value of options exercised during 2006, 2005 and 2004 was approximately $514,000, $1.4 million and $200,000, respectively. The total intrinsic value of options outstanding and options exercisable at December 31, 2006 was $2.6 million and $1.4 million, respectively. The weighted average remaining contractual life of options exercisable at December 31, 2006 was 4.8 years.

     As of December 31, 2006, there was approximately $3.3 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 2.3 years.

     As of December 31, 2006, we had 3.8 million outstanding stock options that had vested or are expected to vest with a weighted average exercise price of $9.72, a weighted average remaining contractual term of 6.3 years and an aggregate intrinsic value of $2.4 million.

30

AVIGEN, INC.
(a development stage company)

NOTES TO FINANCIAL STATEMENTS — (Continued)

     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.

     In August 2005, in connection with the resignation of an executive, we modified the expiration terms for options representing 107,500 shares of common stock, but did not extend the maximum contractual term. At the time of this modification, there was no intrinsic value as the exercise price for these stock options exceeded the market price. As a result, we did not record any compensation expense in connection with the modification. At December 31, 2005, these options expired unexercised.

     In March 2004, in connection with the resignation of an executive, we modified the vesting and expiration terms for options representing 473,000 shares of common stock, but did not extend the maximum contractual term. These modifications resulted in the recognition of $220,000 in non-cash compensation expense during 2004.

   Employee Stock Purchase Plan

     In September 1997, we adopted the 1997 Employee Stock Purchase Plan (“Purchase Plan”). A total of 360,000 shares of our common stock have been reserved for issuance under the Purchase Plan. As of December 31, 2006, there have been no employee contributions to the Purchase Plan.

13. Employee Profit Sharing/401(k) Plan

     In January 1996, we adopted a Tax Deferred Savings Plan under Section 401(k) of the Internal Revenue Code (the “Plan”) for all full-time employees. Under the Plan, our eligible employees can contribute amounts to the Plan via payroll withholding, subject to certain limitations. Our matching contributions to the Plan are discretionary and can only be made in cash. Effective July 1, 2001, we began matching 25% of an employee’s contributions up to $2,500 per Plan year. These matching contributions vest ratably over a five-year period based on the employee’s initial hire date. Our matching contributions for all employees for the years ended December 31, 2006, 2005 and 2004 were approximately $51,000, $76,000 and $100,000, respectively.

14. Commitments and Contingencies

   Leases

     We lease an aggregate of 112,000 square feet of laboratory, manufacturing, and office facilities from two adjacent buildings in Alameda, California under two non-cancelable operating lease agreements which expire in May 2008 and November 2010. Our lease for 45,000 square feet from one building which expires in May 2008 contains an extension option for five years under the same terms and conditions as the original lease agreement. This lease also contains a conditional asset retirement obligation that may require us, at our landlord’s sole discretion, to remove, reconfigure or otherwise alter certain improvements we have made to the facility. We have recorded this obligation in accordance with FAS 143, “Accounting for Asset Retirement Obligations,” at its estimated fair value in our financial statements at December 31, 2006. As security for performance of future obligations under these leases, including the conditional asset retirement obligation, we have pledged $2.4 million of our available-for-sale securities to secure letters of credit that serve as deposits. These amounts are classified as restricted investments in our balance sheets.

     As of December 31, 2006, approximately 26,250 square feet of our aggregate facilities is subleased to two separate corporate tenants not affiliated with Avigen. The sublease agreements run concurrent with the respective duration of our underlying lease term on each building.

31

AVIGEN, INC.
(a development stage company)

NOTES TO FINANCIAL STATEMENTS — (Continued)

     At December 31, 2006, our future minimum commitments under non-cancelable facilities operating leases, net of sublease income, are a follows (in thousands):

	Minimum Lease		Sublease			Net Lease
	Commitments		Income			Commitments
Year ending December 31:
2007	$	2,543	$	(574	)	$	1,969
2008		2,007		(392	)		1,615
2009		1,624		(253	)		1,371
2010		1,543		(238	)		1,305
2011 and thereafter		—		—			—
Total	$	7,717	$	(1,457	)	$	6,260

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

	Year Ended December 31,
	2006			2005			2004
Rent Expense	$	2.6		$	2.6		$	2.6
Sublease income, net		(0.6	)		(0.1	)		—

     In 2005, we recorded an investment in deferred financing leases of approximately $220,000 and recorded unearned income of approximately $155,000. This deferred financing lease was related to equipment sold to one of our subtenants and carries a term equal to the related sublease agreement, or 30 months. Unearned income will be recognized ratably over the term of the lease, or approximately $5,200 per month.

   Subleases

     We have entered into sublease agreements for portions of our leased laboratory and office facilities. Based on the terms of the agreements, the fair value of our remaining lease liability is less than the scheduled sublease income. As a result, in the period ended December 31, 2005, we did not record any lease exit costs associated with the sublease of our operating facilities located at 1201 and 1301 Harbor Bay Parkway. In connection with the sublease agreements, we recorded initial direct costs of $114,000 in commission expenses. We amortize initial direct costs to operating expenses on a straight-line basis over the term of the sublease.

   Other Commitments

     In the ordinary course of business, we enter into commitments to fund collaborative research and clinical work performed by third parties. While these contracts are cancelable, we expect the research studies and clinical work to be completed as defined in the terms of the agreements, and all amounts paid when due. At December 31, 2006, the estimated costs related to these commitments totaled approximately $3.8 million, all of which is expected to be paid within the next twelve to twenty-four months.

     As permitted under Delaware law and in accordance with our bylaws, we indemnify our officers and directors for certain events or occurrences while the officer or director is or was serving at Avigen’s request in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum amount of the potential future indemnification is unlimited. However, we have a director or officer insurance policy that limits our exposure and may enable us to recover a portion of any future amounts paid. We believe the fair value of these indemnification agreements is minimal. Accordingly, we have not recorded any liabilities for these agreements as of December 31, 2006.

32

AVIGEN, INC.
(a development stage company)

NOTES TO FINANCIAL STATEMENTS — (Continued)

     In the normal course of business, we provide indemnifications of varying scope under our agreements with other companies, typically our clinical research organizations, investigators, clinical sites, and suppliers. Pursuant to these agreements, we generally indemnify, hold harmless, and agree to reimburse the indemnified parties for losses suffered or incurred by the indemnified parties in connection with use or testing of our products or product candidates or with any U.S. patent or any copyright or other intellectual property infringement claims by any third party with respect to our products. The term of these indemnification agreements is generally perpetual. The potential future payments we could be required to make under these indemnification agreements is unlimited. Historically, costs related to these indemnification provisions have been immaterial. We also maintain various liability insurance policies that limit our exposure. As a result, we believe the fair value of these indemnification agreements is minimal. Accordingly, we have not recorded any liabilities for these agreements as of December 31, 2006.

15. Income Taxes

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

	December 31,
	2006			2005
Net operating loss carryforwards	$	43,200		$	56,000
Research and development credits		3,300			7,600
Capitalized research and development		3,000			7,100
Depreciation		3,100			3,200
Capitalized patents		—			500
Other		3,500			3,300
Gross deferred tax assets		56,100			77,700
Valuation allowance		(56,100	)		(77,700	)
Net deferred tax assets	$	—		$	—

     No provision has been made for income taxes because we have incurred losses since our inception. Deferred income taxes reflect the net tax effects of temporary differences between the carrying value of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

     Realization of deferred tax assets is dependent on future taxable income, if any, the timing and the amount of which are uncertain. Accordingly, our deferred tax assets have been fully offset by a valuation allowance. Our valuation allowance decreased by $21.6 million for the year ended December 31, 2006 and increased by $6.8 million and $10.0 million, respectively, for the years ended December 31, 2005 and 2004.

     As of December 31, 2006, we had federal net operating loss carryforwards of $126.6 million and federal research and development tax credit carryforwards of $0.6 million, which will expire on various dates from 2008 through 2026. We also had state net operating loss carryforwards of $35.6 million which will expire on various dates from 2007 through 2016 and state research tax credits of $4.2 million, which carry forward indefinitely.

     Certain tax benefits resulting from employee stock option exercises are included in the deferred tax asset balance at December 31, 2005 as a component of our net operating loss carryforwards. The entire balance is offset by a valuation allowance. In accordance with FAS 123(R), we have excluded such tax benefits from our deferred tax assets at December 31, 2006. In the future, if and when such tax benefits are ultimately realized, the amount of excess tax benefit will be credited to additional paid-in capital in the statement of stockholders’ equity.

33

AVIGEN, INC.
(a development stage company)

NOTES TO FINANCIAL STATEMENTS — (Continued)

     Federal and state laws limit the use of net operating loss and tax credit carryforwards in certain situations where changes occur in the stock ownership of a company. We conducted a full Internal Revenue Code (IRC) Section 382 study from our inception and have reported our deferred tax assets related to net operating loss and research credit carryforwards after recognizing change of control limitations. The limitation of our federal and state carryforwards associated with previous net operating losses and research credits and the associated reduction in our deferred tax assets, was offset by a reduction in our valuation allowance.

16. Condensed Quarterly Financial Information (Unaudited)

	Year Ended December 31, 2006
	First			Second			Third			Fourth
(amounts in thousands except per share data)	Quarter			Quarter			Quarter			Quarter
Total revenue	$	103		$	—		$	—		$	—
Net loss		(8,022	)		(4,833	)		(5,662	)		(5,739	)
Net loss per share, basic and diluted		(0.38	)		(0.21	)		(0.23	)		(0.23	)
	Year Ended December 31, 2005
	First			Second			Third			Fourth
(amounts in thousands except per share data)	Quarter			Quarter			Quarter			Quarter
Total revenue	$	9		$	11		$	4			$12,002
Net loss		(5,190	)		(9,848	)		(6,764	)		7,106
Net loss per share, basic and diluted		(0.25	)		(0.48	)		(0.32	)		0.34

     In December 2005, we entered into an agreement to assign to Genzyme Corporation rights to most of our AAV-based intellectual property, our gene therapy clinical trial programs for Parkinson’s disease and hemophilia, and certain clinical-grade vector materials, and we no longer focus on the development of gene therapy-based therapeutics. Under the terms of the agreement, we received a non-refundable $12 million payment. We recognized the entire payment received as revenue in the fourth quarter of 2005. We did not receive any payments from Genzyme for any quarters in 2006.

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SIGNATURES

     Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	AVIGEN, INC.
	By:	/s/ ANDREW A. SAUTER
		Andrew A. Sauter
		Vice President, Finance
Dated: October 23, 2007

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EXHIBIT INDEX TO AMENDMENT NO. 2 TO ANNUAL REPORT ON FORM 10-K/A

Exhibit Number	Exhibits
23.1	Consent of Odenberg, Ullakko, Muranishi & Co. LLP, Independent Registered Public Accounting Firm
23.2	Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm
31.1	CEO Certification required by Rule 13a-14(a) or Rule 15d-14(a)
31.2	CFO Certification required by Rule 13a-14(a) or Rule 15d-14(a)
32.1*	Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350)

*      This certification accompanies the Amendment No. 2 to Annual Report on Form 10-K/A to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Avigen under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-K/A), irrespective of any general incorporation language contained in such filing.

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