AVIGEN INC \DE, 424B4, 1996-05-22

AVIGEN INC \DE
424B4, 1996-05-22
IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES

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<PAGE> 1
Filed Pursuant to Rule 424(b)(4)
Registration Statement No. 333-3220

2,500,000 SHARES

LOGO

COMMON STOCK

All of the 2,500,000 shares of Common Stock are being sold by Avigen, Inc.
("Avigen" or the "Company"). Prior to this offering, there has been no public
market for the Common Stock of the Company. See "Underwriting" for a discussion
of the factors considered in determining the initial public offering price. The
Common Stock has been approved for listing on the Nasdaq National Market under
the symbol "AVGN".

------------------------

THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" ON PAGE 6.

------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1)(2) COMPANY(3)
- -----------------------------------------------------------------------------------------------------
Per Share.......................... $8.00 $0.60 $7.40
- -----------------------------------------------------------------------------------------------------
Total(4)........................... $20,000,000 $1,500,000 $18,500,000
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
</TABLE>

(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.

(2) Excludes additional compensation to the representatives (the
"Representatives") of the several Underwriters in the form of a
nonaccountable expense allowance of $150,000. Also excludes the value of
warrants to purchase 250,000 shares of Common Stock to be issued to the
Representatives.

(3) Before deducting expenses payable by the Company estimated at $800,000.

(4) The Company has granted to the Underwriters a 45-day option to purchase up
to 375,000 additional shares of Common Stock solely to cover
over-allotments, if any. If all such shares are purchased, the total Price
to Public, Underwriting Discount and Proceeds to Company will be
$23,000,000, $1,725,000 and $21,275,000, respectively. See "Underwriting."

-----------------------------

The shares of Common Stock are offered by the several Underwriters subject
to prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about May 28, 1996, at the office of the agent of Wedbush
Morgan Securities in Los Angeles, California.

WEDBUSH MORGAN SECURITIES SANDS BROTHERS & CO., LTD.

May 22, 1996
<PAGE> 2

(Artwork depicting the Company's potential product and delivery mechanism.)

AVIGEN'S PRODUCT DEVELOPMENT PROGRAMS ARE AT AN EARLY STAGE. PRODUCTS, IF
ANY, RESULTING FROM SUCH PROGRAMS CANNOT BE MADE AVAILABLE FOR COMMERCIAL SALE
UNLESS AND UNTIL REGULATORY APPROVAL IS OBTAINED. THE COMPANY WILL BE REQUIRED
TO COMPLETE CLINICAL TRIALS TO DEMONSTRATE THE SAFETY AND EFFICACY OF ANY
POTENTIAL PRODUCTS PRIOR TO FILING FOR REGULATORY APPROVAL.

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

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<PAGE> 3

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and the Financial Statements and Notes thereto appearing elsewhere
in this Prospectus.

THE COMPANY

Avigen is a leader in the development of gene therapy products derived from
adeno-associated virus ("AAV") for the treatment of inherited and acquired
diseases. The Company's proposed gene therapy products are designed for in vivo
administration to achieve the production of therapeutic proteins within the
body. The Company is developing two broad-based proprietary gene delivery
technologies: AAV vectors and the Targeted Vector Integration ("TVI") system.
The Company believes AAV vectors can be used to deliver genes for the treatment
of brain, liver and prostate cancer, anemia, hemophilia, hyperlipidemia and
metabolic storage diseases. The Company also believes its TVI system will allow
it to pursue more effective treatments for blood cell-related diseases,
including sickle cell anemia, beta-thalassemia and human immunodeficiency virus
("HIV") infection.

AAV Vectors. The Company's gene therapy products are based on gene delivery
systems called vectors. AAV vectors are derived from AAV, a common
non-pathogenic human virus, and take advantage of the natural efficiency with
which viruses deliver genes to cells. To produce an AAV vector, the virus is
modified by removing the viral genes and replacing them with genes for
therapeutic proteins. The Company believes that AAV vectors combine desirable
properties of viral and non-viral vectors and may offer several potential
advantages over other gene therapy vectors. These advantages include efficient
delivery of genes to both dividing and non-dividing target cells, absence of
viral genes that may be responsible for causing an undesirable immune response,
in vivo administration to patients, higher levels of gene expression and
improved stability allowing AAV vectors to be manufactured, stored and handled
like more traditional pharmaceutical products. Avigen believes that its
proprietary manufacturing process will simplify manufacturing and purification
and achieve increased yield of high purity AAV vectors.

TVI System. The Company's proprietary TVI system utilizes components of AAV
to integrate large segments of DNA at a specific location on human chromosome
19. Integration is essential for certain gene therapy applications where the
genes must be passed on to the progeny of the cell. The Company believes gene
therapy vectors that integrate at a specific site, such as the site on
chromosome 19 where the non-pathogenic AAV normally integrates, will have an
increased safety profile relative to vectors that integrate randomly. The
Company also believes that the ability to integrate large segments of DNA could
lead to gene therapy applications involving the delivery of multiple genes or
requiring precise or controllable gene regulation.

Product Development. Based on encouraging results in animal models, the
Company has initiated two preclinical development programs using AAV vectors for
the treatment of brain tumors and anemia. Additionally, the Company has a number
of research programs and collaborations intended to generate product development
candidates for liver and prostate cancer, hemophilia, hyperlipidemia, metabolic
storage diseases, hemoglobin disorders and HIV infection. Avigen believes that
the number of potential applications for gene therapy will increase
significantly as advances are made in the area of genomics. These advances are
enabling scientists to link diseases to specific gene defects. As more genes are
discovered, the need for improved gene delivery technologies is expected to
increase. With the identification of new disease-related genes, the Company
believes that its AAV vectors and its TVI system will provide it with
significant opportunities for new gene therapy products.

Corporate Partnering Opportunities. The Company is actively seeking to
develop long-term strategic collaborations with pharmaceutical companies that
can provide funding for research and development activities and clinical trials
as well as access to complementary technologies, including gene sequences. The
Company believes that its broad-based proprietary gene delivery technologies can
be used to deliver a number of different genes, giving rise to multiple product
and corporate partnering opportunities.

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<PAGE> 4

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the Company................... 2,500,000 shares
Common Stock to be outstanding after the offering..... 7,029,015 shares(1)
Use of proceeds....................................... For repayment of certain
indebtedness, research and
development, leasehold improvements
and capital equipment, working
capital, and general corporate
purposes
Proposed Nasdaq National Market symbol................ AVGN
</TABLE>

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(1) Based on shares outstanding as of March 31, 1996. Excludes 823,275 shares of
Common Stock issuable upon exercise of outstanding stock options as of March
31, 1996 at a weighted average exercise price of $0.51 per share; 257,880
shares of Common Stock issuable upon exercise of warrants outstanding at
March 31, 1996 at exercise prices ranging from $4.87 to $7.80 per share;
warrants to purchase 193,750 shares of Common Stock issued in connection
with a bridge financing completed in March 1996 (the "1996 Bridge
Financing") at an exercise price per share equal to the greater of $0.25 and
80% of the offering price; warrants to purchase 19,375 shares of Common
Stock issued to the placement agent in the 1996 Bridge Financing at an
exercise price per share equal to 110% of the greater of $0.25 and 80% of
the offering price, and warrants to purchase 250,000 shares of Common Stock
to be issued to the Representatives at the closing of this offering at an
exercise price equal to 120% of the offering price. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources," "Description of Capital
Stock," "Underwriting" and Notes 5 and 9 of Notes to Financial Statements.

4
<PAGE> 5

SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
NINE MONTHS PERIOD FROM
PERIOD FROM YEARS ENDED JUNE ENDED OCTOBER 22, 1992
OCTOBER 22, 1992 30, MARCH 31, (INCEPTION)
(INCEPTION) THROUGH ----------------- ----------------- THROUGH
JUNE 30, 1993 1994 1995 1995 1996 MARCH 31, 1996
------------------- ------- ------- ------- ------- -----------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Grant revenue................. $ -- $ -- $ 178 $ 90 $ 87 $ 265
Expenses:
Research and development.... 932 2,558 2,290 1,526 1,875 7,655
General and
administrative............ 538 1,283 1,334 983 708 3,863
------- ------- ------- ------- ------- --------
Total expenses.............. 1,470 3,841 3,624 2,509 2,583 11,518
------- ------- ------- ------- ------- --------
Loss from operations.......... (1,470) (3,841) (3,446) (2,419) (2,496) (11,253)
Other income (expense), net... (24) (8) 181 (2) (35) 114
------- ------- ------- ------- ------- --------
Net loss...................... $(1,494) $(3,849) $(3,265) $(2,421) $(2,531) $ (11,139)
======= ======= ======= ======= ======= ========
Pro forma net loss per
share(1).................... $ (0.62) $ (0.47)
======= =======
Shares used in computing pro
forma net loss per
share(1).................... 5,295 5,432
======= =======
</TABLE>

<TABLE>
<CAPTION>
MARCH 31, 1996
-------------------------
JUNE 30, 1995 ACTUAL AS ADJUSTED(2)
------------- -------- --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................................... $ 203 $ 1,938 $ 17,701
Working capital (deficit).................................... (916) (829) 16,391
Total assets................................................. 1,841 3,636 19,210
Capital lease obligations, noncurrent portion................ 214 193 193
Deficit accumulated during the development stage............. (8,608) (11,139) (11,619)
Stockholders' equity (deficit)............................... 184 (120) 17,100
</TABLE>

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(1) See Note 1 of Notes to Financial Statements describing the shares used in
calculating pro forma net loss per share.

(2) Adjusted to give effect to (i) the receipt of the estimated net proceeds
from the sale of 2,500,000 shares of Common Stock offered by the Company
hereby at an initial public offering price of $8.00 per share and (ii) the
repayment of the $1,937,500 principal amount of promissory notes relating to
a bridge financing completed in March 1996 and the corresponding charges to
operations of the unamortized debt discount of $291,781 and deferred
financing cost of $188,442. Such promissory notes will be repaid out of the
proceeds of this offering. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

Except as otherwise noted, all information contained in this Prospectus:
(i) assumes the automatic conversion of all outstanding shares of Preferred
Stock into Common Stock upon the closing of this offering; (ii) reflects a
4.43-for-1 reverse stock split of the Company's outstanding Common Stock and
Preferred Stock effected in May 1996; (iii) reflects the amendment and
restatement of the Company's Certificate of Incorporation completed in May 1996;
and (iv) assumes no exercise of the Underwriters' over-allotment option. See
"Capitalization" and "Description of Capital Stock."

Except for the historical information contained herein, the discussion in
this Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in "Risk Factors" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" as well as those discussed elsewhere in this Prospectus.

Avigen(SM) is a service mark of the Company.

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<PAGE> 6

RISK FACTORS

The following risk factors should be considered carefully in addition to
the other information contained in this Prospectus before purchasing the Common
Stock offered hereby:

EARLY STAGE OF DEVELOPMENT; TECHNOLOGICAL UNCERTAINTY

Gene therapy is a new and rapidly evolving technology. To date, there has
been only limited research and development in gene therapy using AAV vectors.
The Company is not aware of any gene therapy products which have obtained
marketing approval from the United States Food and Drug Administration ("FDA").
Because there is only limited research regarding the safety and efficacy of AAV
vectors, the Company believes that clinical trials will proceed more slowly than
clinical trials involving traditional drugs and biologics.

Avigen is at an early stage of development. All of the Company's potential
products are in research or early preclinical development. There can be no
assurance that the Company's research and development activities will be
completed successfully or will support the initiation of clinical trials or that
any proposed products will prove to be efficacious or safe. Before obtaining
regulatory approval for the commercial sale of any of its products under
development, the Company must demonstrate through preclinical studies and
clinical trials that the proposed product is safe and efficacious for its
intended use. None of the Company's proposed products has been tested in humans.
There can be no assurance that the Company will not encounter problems with the
clinical trials which will require the Company to delay, suspend or terminate
such trials. All of the Company's products in research and development may prove
to have undesirable and unintended side effects or other characteristics that
may prevent or limit their commercial use. Even if successfully developed, there
can be no assurance that any potential products will be cleared for marketing by
United States or foreign regulatory authorities or that such products can be
manufactured at acceptable cost or that any approved products can be
successfully marketed. Products resulting from the Company's research and
development efforts, if any, are not expected to be commercially available and
revenues from the sale of any such products are not expected for at least the
next several years.

HISTORY OF LOSSES; WORKING CAPITAL DEFICIT; ACCUMULATED DEFICIT

To date, the Company has been engaged in research and development
activities and has not generated any revenues from product sales. As of March
31, 1996, the Company had a working capital deficit of $829,000 and an
accumulated deficit of $11.1 million. The process of developing the Company's
products will require significant research and development, preclinical testing
and clinical trials, as well as regulatory approval. These activities, together
with the Company's general and administrative expenses, are expected to result
in operating losses for the foreseeable future. The Company's ability to achieve
profitability is dependent, in part, on its ability to successfully complete
development of its proposed products, obtain required regulatory approvals and
manufacture and market its products directly or through partners. There can be
no assurance that the Company will achieve revenues or profitability in the
future.

GOING CONCERN QUALIFICATION IN INDEPENDENT AUDITORS' REPORT

The report by the Company's independent auditors included in this
Prospectus contains an explanatory paragraph regarding the Company's ability to
continue as a going concern. Such report states that the Company has incurred
cumulative net losses since inception and had a working capital deficit of
$916,000 as of June 30, 1995 that raise substantial doubt as of the date of such
report about the Company's ability to continue as a going concern. In the
opinion of management, existing funding together with the proceeds from this
offering will be sufficient to fund the Company's operating expenses and capital
requirements for at least the next twelve months.

FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING

The Company will require substantial additional funding after this offering
in order to complete the research and development activities currently
contemplated and to commercialize its proposed products. The Company anticipates
that its existing capital resources, including the net proceeds of this
offering, will be adequate to fund its capital needs for at least the next 12
months. The Company's future capital requirements will depend on many factors,
including continued scientific progress in research and development programs,
the scope and results of preclinical studies and clinical trials, the time and
costs involved in obtaining

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<PAGE> 7

regulatory approvals, the costs involved in filing, prosecuting and enforcing
patent claims, competing technological developments, the cost of manufacturing
scale-up, the cost of commercialization activities and other factors which may
not be within the Company's control.

The Company intends to seek additional funding through public or private
equity or debt financing, when market conditions allow. If additional funds are
raised by issuing equity securities, further dilution to the existing
stockholders may result. There can be no assurance that the Company will be able
to enter into such collaborative or financing arrangements on acceptable terms
or at all. Without such additional funding, the Company may be required to
delay, reduce the scope of or eliminate one or more of its research or
development programs. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."

NEED FOR ESTABLISHMENT OF CORPORATE PARTNER RELATIONSHIPS

The Company does not currently have a corporate partner relationship with
respect to any of its technologies or potential products. Given the very high
cost of funding clinical trials and bringing a proposed product through the
governmental approval process to the commercial market, the Company believes
that successful development and commercialization of its technologies and
products will depend in large part on the establishment of one or more such
relationships. There can be no assurance that the Company will be able to
establish such relationships on favorable terms, if at all. In addition, the
failure to raise needed future capital could put the Company at a disadvantage
with respect to negotiating favorable terms with such potential corporate
partners.

NEED TO OBTAIN RIGHTS TO PROPRIETARY GENES AND TECHNOLOGY

A number of the gene sequences or proteins encoded by certain of those
sequences that the Company is investigating or may use in its products are or
may become patented by others. As a result, the Company may be required to
obtain licenses to such gene sequences or proteins or other technology in order
to test, use or market such products. For example, in connection with its anemia
program, the Company anticipates that it may need to obtain a license to a gene
for erythropoietin. There can be no assurance that the Company will be able to
obtain such a license on terms favorable to the Company, if at all. In
connection with the Company's efforts to obtain rights to such gene sequences or
proteins, the Company may find it necessary to convey rights to its technology
to others. See "Business -- Patents and Intellectual Property."

The Company has entered into agreements for the license from third parties
of certain technologies related to its gene therapy product development
programs. Certain of these license agreements provide for the achievement of
development milestones at various times beginning in February 1997. In the event
the Company fails to achieve such milestones or to obtain extensions, certain of
the license agreements may be terminated by the licensor with relatively short
notice to the Company. Termination of any of the Company's license agreements
could have a material adverse effect on the Company's business.

Some of the Company's gene therapy products may require the use of multiple
proprietary technologies. Consequently, the Company may be required to make
cumulative royalty payments to several third parties. Such cumulative royalties
could be commercially prohibitive. While the Company believes the third parties
will be motivated to adjust the royalty structure under such circumstances,
there can be no assurance that the Company will be able to successfully
negotiate such royalty adjustments. See "Business -- Licensing and Research
Agreements."

UNCERTAINTY OF MARKET ACCEPTANCE

The Company's success is dependent on acceptance of its gene therapy
products. The Company believes that recommendations by physicians and health
care payors will be essential for market acceptance of its gene therapy
products. In the past, concerns have arisen regarding the potential safety and
efficacy of gene therapy products derived from pathogenic viruses such as
retroviruses and adenoviruses. While the Company's proposed gene therapy
products are derived from AAV which is a non-pathogenic virus, there can be no
assurance that physicians and health care payors will conclude that the
technology is safe. In addition, health care payors can indirectly affect the
attractiveness of the Company's proposed products by regulating the maximum
amount of reimbursement they will provide for such proposed products. There can
be no assurance that the Company's products will achieve significant market
acceptance among patients, physicians or third

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<PAGE> 8

party payors, even if necessary regulatory and reimbursement approvals are
obtained. Failure to achieve significant market acceptance will have a material
adverse effect on the Company's business, financial condition and results of
operations.

GOVERNMENT REGULATION

The production and marketing of the Company's proposed products and its
ongoing research and development activities are subject to extensive regulation
by governmental authorities in the United States and foreign countries. At the
present time, the Company believes that its products will be regulated as
biologics by the FDA and comparable foreign regulatory bodies. Gene therapy is,
however, a relatively new technology and has not been extensively tested in
humans. The regulatory requirements governing gene therapy products are
uncertain and are subject to change. No gene therapy products have been approved
to date in the United States or any foreign country. Failure to comply with
applicable FDA or other applicable regulatory requirements may result in
criminal prosecution, civil penalties, recall or seizure of products, total or
partial suspension of production or injunction, as well as other regulatory
action against the Company.

The Company is currently conducting preclinical studies and is planning
clinical trials of its AAV vectors. Prior to marketing in the United States, any
drug developed by the Company must undergo rigorous preclinical and clinical
testing and an extensive regulatory approval process implemented by the FDA
under the federal Food, Drug and Cosmetic Act. Satisfaction of such regulatory
requirements, which includes satisfying the FDA that the product is both safe
and efficacious, typically takes several years or more depending on the type,
complexity and novelty of the product, and requires a substantial commitment of
resources. The Company may encounter significant delays or excessive costs in
its efforts to secure regulatory approvals, particularly because gene therapy is
a novel method of treatment and regulatory requirements are evolving and
uncertain. Preclinical studies must be conducted in conformance with the FDA's
Good Laboratory Practices regulations. Before commencing clinical trials, the
Company must submit to and receive FDA authorization of an investigational new
drug application ("IND"). There can be no assurance that submission of an IND
would result in FDA authorization to commence clinical trials.

Clinical trials must meet FDA regulatory requirements for Institutional
Review Board ("IRB") oversight and informed consent and good clinical practice
regulations. The Company has limited experience in conducting preclinical
studies and no experience in conducting clinical trials necessary to obtain
regulatory approval. There can be no assurance that those clinical trials can be
conducted at preferred sites, sufficient test subjects can be recruited or
clinical trials will be started or completed successfully in a timely fashion,
if at all. Furthermore, the FDA may suspend clinical trials at any time if it
believes the subjects participating in such trials are being exposed to
unacceptable health risks or if it finds deficiencies in the IND or conduct of
the investigation. There can be no assurance that the Company will not encounter
problems in clinical trials which cause the Company or the FDA to delay, suspend
or terminate such trials.

In addition to the FDA requirements, the National Institutes of Health
("NIH") has established guidelines for research involving recombinant DNA
molecules, which are utilized by the Company in its research. These guidelines
apply to recombinant DNA research which is conducted at or supported by the NIH.
Under current guidelines, proposals to conduct clinical research involving gene
therapy at institutions supported by the NIH must be approved by the NIH's
Recombinant DNA Advisory Committee.

There can be no assurance that any product developed by the Company will
prove to be safe and efficacious in clinical trials or will meet all of the
applicable regulatory requirements necessary to receive marketing approval. Data
obtained from preclinical and clinical activities are susceptible to varying
interpretations which could delay, limit or prevent regulatory approvals. If
regulatory approval is granted for a product, such approval will be limited to
those disease states and conditions for which the product is useful, as
demonstrated through clinical trials. Furthermore, approval may require ongoing
requirements for postmarketing studies. Even if a product is approved for
marketing, the product, its manufacturer and its manufacturing facilities are
continuously subject to review and periodic inspections. Discovery of previously
unknown problems with a product, manufacturer or facility may result in
restrictions on such product or manufacturer, including withdrawal of the
product from the market.

In order to market its products outside of the United States, the Company
also must comply with numerous and varying foreign regulatory requirements,
implemented by foreign health authorities, governing

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<PAGE> 9

the design and conduct of human clinical trials and marketing approval. The
approval procedure varies among countries and can involve additional testing,
and the time required to obtain approval may differ from that required to obtain
FDA approval. The foreign regulatory approval process includes all of the risks
associated with obtaining FDA approval set forth above, and approval by the FDA
does not ensure approval by the health authorities of any other country. See
"Business -- Government Regulation."

UNCERTAINTY OF PRODUCT PRICING AND THIRD PARTY REIMBURSEMENT

The business and financial condition of biotechnology companies such as the
Company are affected by the efforts of government and third party payors to
contain or reduce the cost of health care through various means. In the United
States, there have been and will continue to be a number of federal and state
proposals to implement government control on pricing. In addition, the emphasis
on managed care in the United States has increased and will continue to increase
the pressure on the pricing of pharmaceutical products. While the Company cannot
predict whether any legislative or regulatory proposals will be adopted or the
effect such proposals or managed care efforts may have on its business, the
announcement of such proposals or efforts could have a material adverse effect
on the Company's ability to raise capital, and the adoption of such proposals
could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, in both the United States and
elsewhere, sales of medical products and treatments are dependent, in part, on
the availability of reimbursement to the consumer from third-party payors, such
as government and private insurance plans. Third-party payors are increasingly
challenging the prices charged for medical products and services. If the Company
succeeds in bringing its proposed products to the market, there can be no
assurance that these products will be considered cost-effective and that
reimbursement to the consumer will be available or will be sufficient to allow
the Company to sell its products on a competitive basis.

COMPETITION

The field of gene therapy is new and rapidly evolving and is expected to
undergo significant technological change in the future. Competition from fully
integrated pharmaceutical companies and more established biotechnology companies
is expected to increase. Most of these companies have significantly greater
financial resources and expertise than the Company in research and development,
preclinical studies and clinical trials, obtaining regulatory approvals,
manufacturing, marketing and distribution. Smaller companies may also prove to
be significant competitors, particularly through collaborative arrangements with
large pharmaceutical companies. Academic institutions, government agencies and
other public and private research organizations also conduct research, seek
patent protection and establish collaborative arrangements for product
development and marketing. In addition, these companies and institutions compete
with the Company in recruiting and retaining highly qualified scientific and
management personnel. There can be no assurance that the Company's competitors
will not develop more effective or more affordable products, or achieve earlier
product commercialization than the Company.

The Company is aware that other companies are conducting preclinical
studies and clinical trials for viral and non-viral gene therapy products. One
of these companies is supporting clinical studies for use of AAV vectors in the
treatment of cystic fibrosis.

Avigen believes the primary competitive factors for success in the gene
therapy field will be product efficacy, safety, manufacturing capability, the
timing and scope of regulatory approvals, the timing of market introduction,
marketing and sales capability, reimbursement coverage, price and patent
position. There can be no assurance that the Company's competitors will not
develop more effective or more affordable products, or achieve earlier product
commercialization than the Company. See "Business -- Competition."

UNCERTAIN PROTECTION OF INTELLECTUAL PROPERTY; POSSIBLE CLAIMS OF OTHERS

To date, the Company has filed a number of patent applications in the
United States relating to the Company's technologies. In addition, the Company
has acquired exclusive and non-exclusive licenses to certain issued patents and
pending patent applications. There is no assurance that patents will issue from
these applications or that any patent will issue on technology arising from
additional research or, if patents do issue, that claims allowed will be
sufficient to protect the Company's technologies.

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<PAGE> 10

The patent application process takes several years and entails considerable
expense. The failure to obtain patent protection on the technologies underlying
the Company's proposed products may have a material adverse effect on the
Company's competitive position and business prospects. Important legal issues
remain to be resolved as to the scope of patent protection for biotechnology
products, and the Company expects that administrative proceedings, litigation or
both will be necessary to determine the validity and scope of its and others'
biotechnology products. Such proceedings or litigation may require a significant
commitment of the Company's resources in the future. If patents can be obtained,
there can be no assurance that any such patents will provide the Company with
any competitive advantage. For example, there can be no assurance that others
will not independently develop similar technologies, others will not duplicate
any technology developed by the Company, or any such patent will not be
invalidated in litigation. In addition, two of the Company's patent applications
are co-owned with co-inventors. Under the terms of agreements with such
co-inventors, the Company has an option to obtain an exclusive, worldwide,
transferable, royalty-bearing license for such technology, and is currently in
discussions with one of the co-inventors to obtain such a license. In the event
the Company is unable to negotiate exclusive rights to such co-owned technology,
each co-inventor may have rights to independently make, use, offer to sell or
sell the patented technology. Commercialization, assignment or licensing of such
technology by a co-inventor could have a material adverse effect on the
Company's business, financial condition and results of operations.

There can be no assurance that third parties will not assert patent or
other intellectual property infringement claims against the Company with respect
to its products or technology or other matters. There may be third-party patents
and other intellectual property relevant to the Company's products and
technology which are not known to the Company. Although no third party has
asserted that the Company is infringing such third party's patent rights or
other intellectual property, there can be no assurance that litigation asserting
such claims will not be initiated, that the Company would prevail in any such
litigation, or that the Company would be able to obtain any necessary licenses
on reasonable terms, if at all. Any such claims against the Company, with or
without merit, as well as claims initiated by the Company against third parties,
can be time-consuming and expensive to defend or prosecute and to resolve. If
competitors of the Company prepare and file patent applications in the United
States that claim technology also claimed by the Company, the Company may have
to participate in interference proceedings declared by the Patent and Trademark
Office to determine priority of invention, which could result in substantial
cost to the Company, even if the outcome is favorable to the Company. In
addition, to the extent outside collaborators apply technological information
developed independently by them or by others to the Company's product
development programs or apply Avigen's technologies to other projects, disputes
may arise as to the ownership of proprietary rights to such technologies.

The Company also relies on a combination of trade secret and copyright law,
employee and third-party nondisclosure agreements, and other protective measures
to protect intellectual property rights pertaining to its products and
technologies. There can be no assurance that these measures will provide
meaningful protection of the Company's trade secrets, know-how or other
proprietary information in the event of any unauthorized use, misappropriation
or disclosure of such trade secrets, know-how or other proprietary information.
In addition, the laws of certain foreign countries do not protect the Company's
intellectual property rights to the same extent as do the laws of the United
States. There can be no assurance that the Company will be able to protect its
intellectual property successfully. See "Business -- Patents and Intellectual
Property."

LACK OF MANUFACTURING AND SALES AND MARKETING EXPERIENCE

The Company has no experience in, and currently lacks the resources and
capability to, manufacture or market any of its proposed products on a
commercial basis. In addition, the Company's proprietary process for
manufacturing AAV vectors has not yet implemented the FDA's regulations
concerning Current Good Manufacturing Practices ("cGMP"). Initially, the Company
anticipates that it will be dependent to a significant extent on collaborative
partners or other entities for commercial scale manufacturing of its products.
In the event the Company decides to establish a commercial scale manufacturing
facility, the Company will require substantial additional funds and personnel
and will be required to comply with extensive regulations applicable to such
facility. There can be no assurance that the Company will be able to develop
adequate commercial manufacturing capabilities either on its own or through
third parties. In addition, the

10
<PAGE> 11

Company does not anticipate establishing its own sales and marketing
capabilities in the foreseeable future. There can be no assurance that the
Company will be able to develop adequate marketing capabilities either on its
own or through third parties. See "Business -- Corporate Partnering Strategy"
and "-- Manufacturing."

DEPENDENCE ON KEY PERSONNEL

The Company is highly dependent on certain members of its management and
research and development staff. The loss of any of these persons could have a
material adverse effect on the Company's business. In addition, the Company
relies on consultants and advisors to assist the Company in formulating its
research and development strategy. Recruiting and retaining qualified technical
and managerial personnel will also be critical to the Company's success. There
can be no assurance that the Company will be successful in attracting and
retaining skilled personnel who generally are in high demand in the
pharmaceutical and biotechnology industries. The loss of certain key employees
or the Company's inability to attract and retain other qualified employees could
have a material adverse effect on the Company's business. A majority of the
Company's scientific advisors are engaged by the Company on a consulting basis
and are employed on a full-time basis by employers other than the Company and
some have consulting or other advisory arrangements with other entities that may
conflict or compete with their obligations to the Company.

SIGNIFICANT PRODUCT LIABILITY RISK; LIMITED INSURANCE COVERAGE

The manufacture and sale of medical products entail significant risk of
product liability claims. The Company currently does not carry product liability
insurance although it intends to obtain such coverage prior to commencing
clinical trials. There can be no assurance that such coverage will be adequate
to protect the Company from any liabilities it might incur in connection with
the use or sale of the Company's products. In addition, the Company may require
increased product liability coverage as additional products are commercialized.
Such insurance is expensive and in the future may not be available on acceptable
terms, if at all. A successful product liability claim or series of claims
brought against the Company in excess of its insurance coverage could have a
material adverse effect on the Company's business and results of operations. The
Company must indemnify certain of its licensors against any product liability
claims brought against them arising out of products developed by the Company
under these licenses. See "Business -- Product Liability and Insurance."

HAZARDOUS MATERIALS

The Company's research and development efforts involve the use of hazardous
materials, chemicals and various radioactive compounds. The Company is subject
to federal, state and local laws and regulations governing the storage, use, and
disposal of such materials and certain waste products. Although the Company
believes that its safety procedures for handling and disposing of such materials
comply with the standards prescribed by federal, state and local regulations,
the risk of accidental contamination or injury from these materials cannot be
completely eliminated. In the event of an accident, the Company could be held
liable for any damages that result and any such liability could exceed the
resources of the Company. The Company may incur substantial costs to comply with
environmental regulations if the Company develops its own commercial
manufacturing facility.

CONTROL BY EXISTING STOCKHOLDERS; ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER
PROVISIONS AND DELAWARE LAW

After this offering, the Company's officers, directors and principal
stockholders will beneficially own approximately 17.28% of the Company's Common
Stock. As a result, such persons may have the ability to effectively control the
Company and direct its affairs and business. Such concentration of ownership may
also have the effect of delaying, deferring or preventing a change in control of
the Company. In addition, the Company's Board of Directors will have the
authority to issue up to 5,000,000 shares of Preferred Stock and to determine
the price, rights, preferences and privileges of those shares without any
further vote or action by the stockholders. The rights of the holders of Common
Stock will be subject to, and may be materially adversely affected by, the
rights of the holders of any Preferred Stock that may be issued in the future.
The issuance of Preferred Stock could have the effect of making it more
difficult for a third party to acquire a majority of the outstanding voting
stock of the Company. The Company has no present plans to issue shares of
Preferred Stock. Furthermore, certain provisions of the Company's Restated
Certificate of Incorporation may have the effect of delaying or preventing
changes in control or management of the Company, which could adversely

11
<PAGE> 12

affect the market price of the Company's Common Stock. In addition, the Company
is subject to the provisions of Section 203 of the Delaware General Corporation
Law (the "Delaware Law"), an anti-takeover law. See "Principal Stockholders" and
"Description of Capital Stock."

NO PRIOR TRADING MARKET; POTENTIAL VOLATILITY OF STOCK PRICE

Prior to this offering there has been no public market for the Company's
Common Stock, and there can be no assurance that an active market will develop
or be maintained. The initial public offering price will be negotiated between
the Company and the Representatives of the Underwriters and may not be
indicative of future market prices. See "Underwriting" for information related
to the method of determining the initial public offering price. The Company
believes that various factors, including announcements of technological
innovations or regulatory approvals, results of clinical trials, announcements
of new products by the Company or by its competitors, healthcare or
reimbursement policy changes by governments or insurance companies, developments
in relationships with corporate partners or a change in securities analysts'
recommendations, may cause the market price of the Common Stock to fluctuate,
perhaps substantially. In addition, in recent years the stock market in general,
and the shares of biotechnology and healthcare companies in particular, have
experienced extreme price fluctuations. These broad market and industry
fluctuations may materially adversely affect the market price of the Company's
Common Stock.

IMMEDIATE AND SUBSTANTIAL DILUTION TO NEW INVESTORS

The initial public offering price is substantially higher than the book
value per share of the Common Stock. Investors purchasing shares of Common Stock
in this offering will therefore incur immediate and substantial dilution of
$5.57 per share. To the extent that outstanding options or warrants to purchase
the Company's Common Stock are exercised, there will be further dilution. See
"Dilution."

SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS

Sales of substantial amounts of Common Stock in the public market following
the offering made hereby could have a material adverse effect on the price of
the Common Stock. In addition to the 2,500,000 shares offered hereby,
immediately upon completion of this offering, approximately 160,721 shares will
be freely tradeable without restriction pursuant to Rule 144(k) promulgated
under the Securities Act of 1933, as amended. Beginning 90 days following the
date of the offering, 36,144 shares of Common Stock will be eligible for sale in
the public market, subject to compliance with Rule 144 or Rule 701. Beginning
180 days after the date of the offering, an additional 3,646,559 shares of
Common Stock will become eligible for sale subject to compliance with Rule 144
or Rule 701 upon the expiration of agreements not to sell such shares. In
addition, beginning 90 days after the date of the offering, 44,016 shares
subject to vested options will be available for sale subject to compliance with
Rule 701 and, beginning 180 days after the date of the offering, 323,967 shares,
subject to vested options, will be available for sale subject to compliance with
Rule 701 upon the expiration of agreements not to sell such shares.

After the offering, the holders of 3,424,535 shares and warrants to
purchase 655,731 shares are entitled to certain demand and piggyback
registration rights with respect to such shares. If such holders, by exercising
their demand registration rights, cause a large number of shares to be
registered and sold in the public market, such sales may have a material adverse
effect on the market price of the Common Stock. If the Company is required to
include in a Company-initiated registration shares held by such holders pursuant
to the exercise of their piggyback registration rights, such sales may have a
material adverse effect on the Company's ability to raise needed capital. See
"Description of Capital Stock -- Registration Rights" and "Shares Eligible for
Future Sale."

ABSENCE OF DIVIDENDS

The Company has never declared or paid any cash dividends on its capital
stock and does not anticipate paying any cash dividends in the foreseeable
future. See "Dividend Policy."

12
<PAGE> 13

THE COMPANY

The Company's predecessor was incorporated in New York in July 1991 under
the name "Vestmark, Inc." Avigen, Inc. was incorporated in Delaware in October
1992. In December 1992 Vestmark, Inc., which had no operations, merged with and
into Avigen, Inc. pursuant to an Agreement and Plan of Merger, with Avigen, Inc.
as the surviving corporation. Unless the context otherwise requires, "Avigen"
and the "Company" refer to Avigen, Inc., a Delaware corporation and its
predecessor "Vestmark, Inc." The Company's executive offices are located at 1201
Harbor Bay Parkway, #1000, Alameda, California 94502 and its telephone number is
(510) 748-7150.

USE OF PROCEEDS

The net proceeds to the Company from the sale of 2,500,000 shares of Common
Stock offered hereby are estimated to be $17.7 million ($20.5 million if the
over-allotment option is exercised in full) after deducting the underwriting
discount and commissions and estimated offering expenses payable by the Company.

The Company expects to use approximately $2.0 million of the net proceeds
from this offering to repay the entire principal amount and accrued interest of
the Company's outstanding notes issued in a bridge financing in March 1996. The
notes bear interest at the rate of 12% per year until March 1997. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." The Company intends to use
approximately $10.0 million of the net proceeds of the offering to fund research
and development activities and clinical trials in support of regulatory
approvals, approximately $1.0 million for leasehold improvements and capital
equipment, and the remainder for working capital and general corporate purposes.
In addition, a portion of the proceeds may be used for the acquisition of
complementary businesses, products or technologies. The Company has no present
understandings, commitments or agreements, nor is it currently engaged in any
negotiations with respect to any acquisition. Pending such uses, the Company
intends to invest the net proceeds from this offering in short-term,
investment-grade, interest-bearing securities. The Company believes that the net
proceeds from the sale of the Common Stock offered hereby, together with its
current cash balances and cash flow from future operations, will be sufficient
to meet its working capital and capital expenditure requirements for at least
the next 12 months.

DIVIDEND POLICY

The Company has never declared or paid any cash dividends on its capital
stock and does not anticipate paying any cash dividends in the foreseeable
future.

13
<PAGE> 14

CAPITALIZATION

The following table sets forth as of March 31, 1996, (i) the pro forma
capitalization of the Company giving effect to the conversion of all outstanding
shares of Preferred Stock to Common Stock and (ii) the pro forma capitalization
as adjusted to give effect to the receipt by the Company of the estimated net
proceeds from the sale of 2,500,000 shares of Common Stock offered hereby at an
initial public offering price of $8.00 per share, after deducting the
underwriting discount and commissions and estimated offering expenses payable by
the Company, and the application of a portion of the net proceeds therefrom to
repay the 1996 Bridge Financing:

<TABLE>
<CAPTION>
MARCH 31, 1996
----------------------------
PRO FORMA(1) AS ADJUSTED
------------ -----------
(IN THOUSANDS)
<S> <C> <C>
Notes payable...................................................... $ 1,646 $ --
Capital lease obligations, noncurrent portion...................... 193 193
-------- --------
Stockholders' equity (deficit):.................................... 1,839 193
Preferred stock, $.001 par value; 5,000,000 shares authorized; no
shares issued and outstanding, pro forma and as adjusted...... -- --
Common stock, $.001 par value; 30,000,000 shares authorized;
4,529,015 shares issued and outstanding, pro forma; 7,029,015
shares issued and outstanding, as adjusted(2)................. 5 7
Additional paid-in capital......................................... 11,152 28,850
Deferred compensation.............................................. (138) (138)
Deficit accumulated during development stage(3).................... (11,139) (11,619)
-------- --------
Total stockholders' equity (deficit).......................... (120) 17,100
-------- --------
Total capitalization..................................... $ 1,719 $ 17,293
======== ========
</TABLE>

- ---------------

(1) See Note 10 of Notes to Financial Statements.

(2) Excludes 823,275 shares of Common Stock issuable upon exercise of
outstanding stock options as of March 31, 1996 at a weighted average
exercise price of $0.51 per share; 257,880 shares of Common Stock issuable
upon exercise of warrants outstanding at March 31, 1996 at exercise prices
ranging from $4.87 to $7.80 per share; warrants to purchase 193,750 shares
of Common Stock issued in connection with a bridge financing completed in
March 1996 (the "1996 Bridge Financing") at an exercise price per share
equal to the greater of $0.25 and 80% of the offering price; warrants to
purchase 19,375 shares of Common Stock issued to the placement agent in the
1996 Bridge Financing at an exercise price per share equal to 110% of the
greater of $0.25 and 80% of the offering price, and warrants to purchase
250,000 shares of Common Stock to be issued to the Representatives at the
closing of this offering at an exercise price equal to 120% of the offering
price. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources," "Description of
Capital Stock," "Underwriting" and Notes 5 and 9 of Notes to Financial
Statements.

(3) Gives effect to the recognition, upon closing of the offering, of charges to
operations of (i) the unamortized debt discount of $291,781 and (ii)
unamortized deferred financing costs of $188,442 relating to the 1996 Bridge
Financing. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources," "Use of
Proceeds," and Note 9 of Notes to Financial Statement.

14
<PAGE> 15

DILUTION

As of March 31, 1996, the Company had a pro forma net tangible book value
of $(120,000) or $(0.03) per share of Common Stock. Pro forma net tangible book
value per share is determined by dividing pro forma tangible book value (total
tangible assets less total liabilities) by the number of shares of Common Stock
outstanding. Without taking into account any other changes in the net tangible
book value after March 31, 1996, other than to give effect to the receipt by the
Company of the estimated net proceeds from the sale of the 2,500,000 shares of
Common Stock offered by the Company hereby at an initial public offering price
of $8.00 per share and the application of a portion of the net proceeds
therefrom to repay the 1996 Bridge Financing, the pro forma net tangible book
value of the Company as of March 31, 1996 would have been $17,100,000 or $2.43
per share. This represents an immediate increase in such pro forma net tangible
book value of $2.46 per share to existing stockholders and an immediate dilution
of $5.57 per share to new investors. The following table illustrates this per
share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $8.00
Pro forma net tangible book value per share before the
offering............................................... $(0.03)
Increase per share attributable to new investors.......... 2.46
------
Pro forma net tangible book value per share after the
offering.................................................. 2.43
-----
Dilution per share to new investors......................... $5.57
=====
</TABLE>

The following table summarizes, on a pro forma basis, as of March 31, 1996,
the difference between existing stockholders and purchasers of shares in the
offering (at an initial public offering price of $8.00 per share) with respect
to the number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid:

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders................... 4,529,015 64.4 $10,993,800 35.5 $2.43
New investors........................... 2,500,000 35.6 $20,000,000 64.5 $8.00
--------- ----- ---------- -----
Total................................... 7,029,015 100.0% $30,993,800 100.0%
========= ===== ========== =====
</TABLE>

The foregoing computations excludes 823,275 shares of Common Stock issuable
upon exercise of stock options outstanding as of March 31, 1996, at a weighted
average exercise price of $0.51 per share; 257,880 shares of Common Stock
issuable upon exercise of warrants outstanding at March 31, 1996 at exercise
prices ranging from $4.87 to $7.80 per share; warrants to purchase 193,750
shares of Common Stock issued in connection with the 1996 Bridge Financing at an
exercise price per share equal to the greater of $0.25 and 80% of the offering
price; warrants to purchase 19,375 shares of Common Stock issued to the
placement agent in the 1996 Bridge Financing at an exercise price per share
equal to 110% of the greater of $0.25 and 80% of the offering price; and
warrants to purchase 250,000 shares of Common Stock to be issued to the
Representatives at the closing of the offering at an exercise price equal to
120% of the offering price. To the extent that options or warrants are exercised
and shares of Common Stock are issued, there will be further dilution to new
investors. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources," "Description of
Capital Stock" and Notes 5 and 9 of Notes to Financial Statements.

15
<PAGE> 16

SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and the Notes thereto included
elsewhere in this Prospectus. The statement of operations data for the period
from October 22, 1992 (inception) to June 30, 1993 and for the years ended June
30, 1994 and 1995 and the balance sheet data at June 30, 1994 and 1995 are
derived from, and should be read in conjunction with, the Company's Financial
Statements and Notes thereto audited by Ernst & Young LLP, independent auditors,
included elsewhere in this Prospectus.(1) The balance sheet data at June 30,
1993 is derived from audited financial statements not included in this
Prospectus. The statement of operations data for the nine month periods ended
March 31, 1995 and 1996 and for the period from October 22, 1992 (inception)
through March 31, 1996 and the balance sheet data at March 31, 1996 have been
derived from unaudited interim financial statements included elsewhere in this
Prospectus and include, in the opinion of management, all adjustments
(consisting of normal recurring adjustments) necessary to present fairly the
financial position at, and results of operations for, such periods. The
operating results for the nine months ended March 31, 1996 are not necessarily
indicative of the results to be expected for the full year or any future period.

<TABLE>
<CAPTION>
NINE MONTHS PERIOD FROM
PERIOD FROM YEARS ENDED JUNE ENDED OCTOBER 22, 1992
OCTOBER 22, 1992 30, MARCH 31, (INCEPTION)
(INCEPTION) THROUGH ----------------- ----------------- THROUGH
JUNE 30, 1993 1994 1995 1995 1996 MARCH 31, 1996
------------------- ------- ------- ------- ------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Grant revenue..................... $ -- $ -- $ 178 $ 90 $ 87 $ 265
Expenses:
Research and development....... 932 2,558 2,290 1,526 1,875 7,655
General and administrative..... 538 1,283 1,334 983 708 3,863
------- ------- ------- ------- ------- --------
Total expenses................. 1,470 3,841 3,624 2,509 2,583 11,518
------- ------- ------- ------- ------- --------
Loss from operations.............. (1,470) (3,841) (3,446) (2,419) (2,496) (11,253)
Other income (expense), net....... (24) (8) 181 (2) (35) 114
------- ------- ------- ------- ------- --------
Net loss.......................... $(1,494) $(3,849) $(3,265) $(2,421) $(2,531) $ (11,139)
======= ======= ======= ======= ======= ========
Pro forma net loss per share(2)... $ (0.62) $ (0.47)
======= =======
Shares used in computing pro forma
net loss per share(2).......... 5,295 5,432
======= =======
</TABLE>

<TABLE>
<CAPTION>
JUNE 30,
-------------------------------
1993 1994 1995 MARCH 31, 1996
------- ------- ------- -----------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................. $ 666 $ 244 $ 203 $ 1,938
Working capital (deficit)............................. 199 (1,615) (916) (829)
Total assets.......................................... 1,920 2,133 1,841 3,636
Capital lease obligations, noncurrent portion......... -- 27 214 193
Deficit accumulated during the development stage...... (1,494) (5,343) (8,608) (11,139)
Stockholders' equity (deficit)........................ 1,441 (69) 184 (120)
</TABLE>

- ---------------

(1) The report of Ernst & Young LLP, which also appears herein, contains a
paragraph that explains the uncertainty as to the ability of the Company to
continue as a going concern. See Note 1 of Notes to the Financial
Statements. The Company anticipates that its existing capital resources,
including the net proceeds of this offering, will be adequate to fund its
capital needs for at least the next 12 months.

(2) See Note 1 of Notes to Financial Statements for a description of the shares
used in calculating pro forma net loss per share.

16
<PAGE> 17

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Since its inception, the Company has devoted substantially all of its
resources to research and development activities. The Company is a development
stage company and has not received any revenue from the sale of products. The
Company does not anticipate generating revenue from the sale of products in the
foreseeable future. The Company expects its source of revenue, if any, for the
next several years to consist of government grants and payments under
collaborative arrangements. The Company has incurred losses since its inception
and expects to incur substantial losses over the next several years due to
ongoing and planned research and development efforts, including preclinical
studies and clinical trials. At March 31, 1996, the Company had an accumulated
deficit of $11.1 million.

This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other parts of this Prospectus contain forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed in "Risk Factors."

RESULTS OF OPERATIONS

PERIOD FROM OCTOBER 22, 1992 (INCEPTION) THROUGH JUNE 30, 1993, AND YEARS
ENDED JUNE 30, 1994, AND 1995

Grant revenue increased from zero for the period ended June 30, 1993 and
the year ended June 30, 1994 to $178,000 for the year ended June 30, 1995. Grant
revenue for 1995 consisted of reimbursements under a NIH grant. Revenues earned
under research grants are determined by the timing of the award from the issuing
agency. As a result, research grant revenue earned in one period is not
predictive of research grant revenue to be earned in future periods.

The Company's research and development expenses increased from $932,000 for
the period ended June 30, 1993, to $2.6 million for the year ended June 30,
1994, and decreased to $2.3 million for the year ended June 30, 1995. The
increase from fiscal 1993 to fiscal 1994 is attributable to the commencement of
research studies and activities to expanded research and development, including
the initial purchase of supplies and payments under licensing arrangements. The
decrease from fiscal 1994 to fiscal 1995 was due primarily to the concentration
of costs associated with startup in 1994. The Company expects research and
development spending to increase significantly over the next several years as
the Company expands research and product development efforts.

General and administrative expenses increased from $538,000 for the period
ended June 30, 1993, to $1.3 million for the year ended June 30, 1994, and
remained constant at $1.3 million for the year ended June 30, 1995. The increase
from fiscal 1993 to fiscal 1994 was primarily due to increases in personnel and
support costs, legal expenses, and business development activities. General and
administrative expenses are expected to continue to increase as the level of the
Company's activities increases but to decrease as a percentage of total
expenses.

NINE MONTHS ENDED MARCH 31, 1995, AND MARCH 31, 1996

Grant revenue was $90,000 for the nine months ended March 31, 1995 and
$87,000 for the nine months ended March 31, 1996. For both periods grant revenue
consisted of reimbursements under a NIH grant.

Research and development expenses increased from $1.5 million for the nine
months ended March 31, 1995 to $1.9 million for the nine months ended March 31,
1996 primarily due to expansion of research and development activities.

General and administrative expenses decreased from $983,000 for the nine
months ended March 31, 1995, to $708,000 for the nine months ended March 31,
1996. The decrease was primarily due to lower personnel and support costs and
the write-off in 1994 of unamortized organization costs.

17
<PAGE> 18

LIQUIDITY AND CAPITAL RESOURCES

The Company has financed its operations primarily through private
placements of Common Stock and Preferred Stock and the 1996 Bridge Financing
which was completed on March 29, 1996. Through March 31, 1996, the Company had
raised approximately $11.0 million, net of financing costs, from the sale of
Common Stock and Preferred Stock and $1.9 million from the 1996 Bridge
Financing.

At March 31, 1996, the Company had cash and cash equivalents of
approximately $1.9 million. In March 1996, the Company completed the 1996 Bridge
Financing in which the Company issued $1,937,500 principal amount of promissory
notes (the "Notes") and warrants to purchase 193,750 shares of Common Stock at
an exercise price per share equal to the greater of $0.25 per share and 80% of
the offering price. The Notes accrue interest at the rate of 12% per year until
March 1997 and are due and payable upon the earlier of ten days following the
closing of this offering or other equity financing with gross proceeds to the
Company exceeding $2,500,000 or March 1997. If the amounts due under the Notes
are not paid by the maturity date, 10% of the original principal amount of the
Notes become convertible into shares of Common Stock at a price of $0.04 per
share. In addition, in the event of any default under the Notes the remaining
balance continues to accrue interest at the rate of 18% per year. In connection
with the 1996 Bridge Financing, the Company agreed to pay the placement agent a
commission equal to 10% of the gross proceeds and warrants to purchase 19,375
shares of Common Stock at an exercise price per share equal to 110% of the
greater of $0.25 and 80% of the offering price. The Company intends to use a
portion of the net proceeds of this offering to repay the entire principal
amount of the Notes, plus accrued interest. The warrants expire in March 2001.
The warrants were assigned a value of $300,000. This amount is reflected as a
discount on the Notes and will be accreted as additional financing (interest)
expense over the term of the Notes. The Company will incur, during the quarter
in which the anticipated offering is completed and the Notes are repaid, a
non-recurring charge representing the unamortized portion of the $300,000 Notes
discount and the $193,750 of deferred financing costs relating to these Notes.
(See Note 9 of notes to financial statements.)

The Company expects its cash requirements to increase significantly in
future periods. The Company will require substantial funds to conduct the
research and development activities and preclinical studies and clinical testing
of its potential products and to market any products that are developed. To the
extent the Company decides to expand its existing facilities, the Company would
require substantial additional capital. The Company's cash requirements may vary
materially from those now planned because of the results of research,
development and clinical trials, the time and costs involved in obtaining
regulatory approvals, the cost of filing, prosecuting, defending and enforcing
patent claims and other intellectual property rights, competing technological
and market developments, changes in the Company's existing research
relationships, the ability of the Company to establish collaborative
arrangements, the development of commercialization activities and arrangements
and the purchase of additional capital equipment.

The Company believes that the net proceeds from this offering, together
with available cash and cash equivalents and short-term investments, will be
sufficient to meet the Company's operating expenses and capital requirements for
at least the next 12 months. See "Use of Proceeds." The Company will be required
to seek additional funds through public or private financings or collaborative
arrangements with corporate partners. Issuances of additional equity securities
could result in substantial dilution to stockholders. There can be no assurance
that additional funding will be available on terms acceptable to the Company, if
at all. The failure to fund its capital requirements would have a material
adverse effect on the Company's business. See "Risk Factors -- Future Capital
Needs; Uncertainty of Additional Funding."

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BUSINESS

AAV Vectors. The Company's gene therapy products are based on gene delivery
systems called vectors. AAV vectors are derived from AAV, a common
non-pathogenic human virus, and take advantage of the natural efficiency with
which viruses deliver genes to cells. To produce an AAV vector, the virus is
modified by removing the viral genes and replacing them with genes for
therapeutic proteins. The Company believes that AAV vectors combine desirable
properties of viral and non-viral vectors and may offer several potential
advantages over other gene therapy vectors. These advantages include efficient
delivery of genes to both dividing and non-dividing target cells, absence of
viral genes that may be responsible for causing an undesirable immune response,
in vivo administration to patients, higher levels of gene expression and
improved stability allowing AAV vectors to be stored and handled like more
traditional pharmaceutical products. Due to the complex replication cycle of the
natural virus, AAV vectors have been difficult to produce. Avigen believes that
its proprietary manufacturing process will simplify manufacturing and
purification and achieve increased yield of high purity AAV vectors.

In spite of the potential advantages, the use of AAV vectors for gene
therapy also presents potential disadvantages. Since the genome of the natural
AAV virus is relatively small, the amount of the genetic material that can be
included in an AAV vector is limited. Therefore, large genes cannot be delivered
by AAV vectors. In addition, in vivo administration of AAV vectors may result in
the production of antibodies which may limit the effectiveness of repeat dosing
of these vectors. Furthermore, direct administration of AAV vectors may result
in their distribution to inappropriate tissues.

TVI System. The Company's proprietary TVI system utilizes components of AAV
to integrate large segments of DNA at a specific location on human chromosome
19. There are 23 pairs of chromosomes in human cells. Integration is essential
for certain gene therapy applications where the genes must be passed on to the
progeny of the cell. The Company believes gene therapy vectors that integrate at
a specific site, such as the site on chromosome 19 where the non-pathogenic AAV
normally integrates, will have an increased safety profile relative to vectors
that integrate randomly. The Company also believes that the ability to integrate
large segments of DNA could lead to gene therapy applications involving the
delivery of multiple genes or requiring precise or controllable gene regulation.

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Company believes that its broad-based proprietary gene delivery technologies can
be used to deliver a number of different genes, giving rise to multiple product
and corporate partnering opportunities.

GENE THERAPY BACKGROUND

Gene therapy is an approach to the treatment of inherited and acquired
diseases whereby genes are delivered into patients' cells in order to direct the
cells to produce therapeutic proteins. Genes are regions of DNA that contain the
instructions that direct cells to produce proteins, one of the basic building
blocks of all cells. Each cell in the body has the ability to produce proteins
necessary for cellular structure, growth and function. The process that results
in protein production by the cell is known as gene expression. By directing the
cells to produce proteins, gene therapy offers the opportunity to correct
defects or diseases at the molecular level.

All gene therapy approaches contain three key components: (i) the vector,
(ii) the gene cassette, and (iii) the target cell. See Figure 1. The vector is
the vehicle used to deliver the gene cassette to target cells. The gene cassette
is the segment of DNA containing the gene for the therapeutic protein and the
necessary control elements. The vector containing the gene cassette is delivered
to the target cell capable of producing the therapeutic protein.

Figure 1. [A graphic representation of vectors, gene cassettes, and target
cells appear here.]

Vectors. One of the most critical factors for the success of gene therapy
products is the development of vectors that can practically, efficiently and
safely deliver genes into cells. The process of gene transfer may be
accomplished in vivo (by administering the vector directly to patients) or ex
vivo (by removing patients' cells and combining them with vector). Viral vectors
are derived from naturally occurring viruses. Non-viral vectors are produced by
standard recombinant DNA techniques.

Viral vectors take advantage of the natural efficiency with which viruses
transport their own genetic information into cells. Viral vectors are
constructed by removing some or all of the viral genes and replacing them with a
gene cassette. Viral vectors have been the most extensively studied method of
gene delivery, and most gene therapy applications currently undergoing clinical
evaluation involve the use of viral vectors. However, viral vectors currently
under clinical investigation have limitations which may affect their safety or
efficacy. Viral vectors based on retroviruses ("retroviral vectors"), for
example, require that target cells be dividing or multiplying to achieve gene
delivery. Because most target cells in the body are not dividing or divide very
slowly and because retroviruses become rapidly inactivated in the blood, most
clinical applications currently under evaluation employing retroviral vectors
involve a complex and expensive procedure whereby patient cells are removed and
the gene is delivered to these cells ex vivo.

Another type of viral vector is derived from adenovirus. Adenoviral vectors
are capable of efficiently delivering genes to several dividing and non-dividing
cell types. However, adenoviral vectors contain and express genes from the
naturally occurring virus, and as a result, the body's immune system is
triggered

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following their administration. This immune response is believed to limit the
length of time that gene expression can be maintained in the target cell.

Additional safety issues have been raised by the use of retroviral and
adenoviral vectors since both vectors are derived from pathogenic viruses.
During the manufacture of these vectors, there is a possibility of generating a
small amount of the natural virus. Although considered a low risk, such a
possibility necessitates additional costly product testing. In addition,
retroviral vectors randomly integrate the gene cassette into the target cell.
Any gene therapy approach that involves the random integration of genetic
material into the target cell's DNA could, theoretically, cause the activation
of another gene involved in the development of cancer or the inactivation of a
beneficial gene. It is generally believed that such events would be rare.

Non-viral vectors are produced by standard recombinant DNA techniques and
are delivered to target cells either unmodified ("naked DNA") or combined with
lipids (e.g., liposomes) or proteins designed to facilitate the entry of DNA
into the cells. Because they have no components derived from viruses, they are
perceived to be safer. In addition, non-viral vectors are capable of delivering
large segments of DNA to target cells. However, non-viral vectors are relatively
inefficient at delivering genes to cells, and in general, have resulted in
temporary or low levels of gene expression in target cells.

In contrast to retroviral and adenoviral vectors, AAV vectors are derived
from a non-pathogenic human virus to which the majority of the population has
been exposed. In spite of its name, AAV is genetically unrelated to adenovirus.
AAV, as it exists in nature, can only reproduce in the presence of another
virus. AAV vectors are derived from AAV by removing all of the viral genes and
replacing them with an appropriate gene cassette. The Company believes that AAV
vectors offer several potential advantages over other viral and non-viral
vectors. These advantages include efficient delivery of genes to both dividing
and non-dividing target cells, absence of viral genes that may be responsible
for causing an undesirable immune response, in vivo administration to patients,
higher levels of gene expression and improved stability allowing AAV vectors to
be manufactured, stored and handled like more traditional pharmaceutical
products. The Company believes that AAV vectors combine the desired properties
of viral and non-viral vectors and may offer a safer and more practical
alternative to the other gene therapy vectors. Two clinical trials evaluating
AAV vectors manufactured by another company for the treatment of cystic fibrosis
are currently being conducted.

Gene Cassette. Packaged inside a gene therapy vector is the gene cassette,
containing the gene for a desired therapeutic protein and the control elements
which direct protein production by the cell. The design of the gene cassette
depends on the therapeutic application. The gene may be a naturally occurring
gene for a therapeutic protein (e.g., erythropoietin or factor VIII), one that
sensitizes cancer cells to chemotherapy (a "suicide gene") or a man-made gene
with novel anti-viral properties. The control elements that regulate expression
of the delivered genes are equally important in the success of gene therapy
products. Certain control elements permit gene expression in many cell types
while other cell-specific control elements direct expression only in a
particular type of cell. The Company believes that inclusion of the
cell-specific control elements in a gene therapy vector may increase safety in
certain gene therapy applications by limiting gene expression to a desired organ
or tissue.

Target Cells. The three major types of cell targets for gene therapy are
differentiated cells, cancer cells and stem cells. Differentiated cells
constitute the majority of cells in the body, including cells in muscle, heart,
skin, brain and liver. The Company's research has demonstrated that AAV vectors
are well-suited for gene delivery to specific differentiated cell types. These
cell types have limited, if any, capacity to divide or multiply. To be effective
in clinical applications involving differentiated cells, a gene therapy vector
must be capable of efficiently delivering genes to a sufficiently large number
of non-dividing cells to produce appropriate levels of the therapeutic protein.
Similarly, for cancer cells, an effective gene therapy vector must be able to
efficiently deliver genes to a significant number of cells within a tumor. The
Company believes that AAV vectors may be useful for the treatment of several
cancer types. Stem cells are cells that give rise to differentiated cells. Bone
marrow stem cells, which give rise to the mature red and white cells in the
blood, are the most extensively studied stem cell target for gene therapy. To be
effective for gene therapy applications involving stem cells, a gene therapy
vector must be capable of integrating or inserting its gene cassette into the
genome of the stem cell. Therefore, as the stem cells multiply and divide, the
gene cassette will be passed on

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to subsequent generations of cells. The Company believes the shortcomings of
current gene therapy approaches limit their applications to stem cells, and is
developing its TVI system to address these needs.

AVIGEN TECHNOLOGY

AAV VECTORS

AAV vectors are emerging as a promising gene delivery system because they
combine the efficiency with which viral vectors deliver their DNA to cells with
a potential safety profile closer to that of non-viral vectors. A major
limitation in the development of clinical applications for AAV vectors has been
the lack of an efficient production method. Current methods, in general, result
in low yields of AAV vectors and require the input of an infectious virus, most
commonly adenovirus, to initiate vector replication. The Company has developed a
proprietary manufacturing process which allows for the more efficient production
of larger quantities of AAV vectors and does not require the use of an
infectious virus, thereby eliminating some potentially harmful contaminants. The
Company believes that its process will simplify manufacturing and purification
of AAV vectors for clinical trials. In addition, the Company believes that its
proprietary process will result in a product that will be safer and, as a
result, more commercially viable than AAV vectors produced by commonly employed
methods.

Figure 2. [A graphic representation of the elements of AAV vectors appears
here.]

AAV, as it occurs in nature, has a single-stranded DNA genome which is
encased in a protein coat. The AAV genome consists of three elements. See Figure
2a. The first is the "rep" gene which directs production of the proteins that
enable the virus to replicate its genome and integrate into a specific site on
human chromosome 19. The second is the "cap" gene which directs production of
the protein coat. These two viral genes are bound by two short identical
stretches of DNA called inverted terminal repeats ("ITRs") that are also
required for integration and genome replication. In addition, the ITRs contain
the instructions for insertion of the viral genome into the protein coat. AAV
vectors are derived from the naturally occurring virus by recombinant DNA
techniques. The viral genome extracted from the virus is "cloned" into a plasmid
to facilitate its modification. The viral rep and cap genes are then removed,
and a gene cassette is inserted in their place between the viral ITRs. See
Figure 2b. In order to produce AAV vectors, the resulting "vector plasmid" is
introduced into "packaging cells" in tissue culture along with a "helper
plasmid" containing the rep and cap genes. Previous methods for AAV vector
production also required infection of the packaging cells with a "helper virus,"
most typically adenovirus, in order to trigger AAV vector production by these
cells. The Company's proprietary manufacturing process eliminates the need for a
helper virus. This eliminates the risk

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of adenovirus contamination of the final product, rather than depending on the
inactivation of the virus during the manufacturing process. The Company's
manufacturing process also results in substantially increased yield of AAV
vector. The result of this effort is a versatile method suitable for the
production of high grade and high titer AAV vector preparations that the Company
is currently using to support its preclinical studies and research. The Company
is in the process of scaling up this process in anticipation of clinical trials
and believes that it can be readily adapted to the FDA's current Good
Manufacturing Practice regulations ("cGMP").

TARGET VECTOR INTEGRATION (TVI) SYSTEM

The Company's proprietary TVI system utilizes components of AAV to
integrate large segments of DNA at a specific location on human chromosome 19.
See Figure 3. Integration is essential for gene therapy applications where the
gene cassette is delivered to a cell which is capable of multiplying and
dividing and where the gene cassette must be passed on to the progeny of the
cell. In addition, the ability to target integration of a gene cassette to a
specific site on a chromosome may increase the predictability of therapeutic
protein production and the product safety profile. Delivering large segments of
DNA is important for gene therapy applications that require the delivery of
several genes or regulatory elements too large to be accommodated in the current
generation of gene therapy vectors.

The Company's TVI system utilizes the AAV ITR and Rep proteins to achieve
site-specific integration of DNA segments. The Company believes that no current
gene therapy vectors are capable of achieving site-specific integration. Avigen
scientists have demonstrated that large segments of DNA attached to an AAV ITR
can be targeted for integration into human chromosome 19 in the presence of Rep
proteins; however, these results have not been independently verified.

Development of TVI technology is at an early stage and several issues
remain to be addressed. The Company is currently developing methods to
incorporate TVI into novel gene therapy vectors for the delivery of genes into
target cells. Because several genes and control elements could be incorporated
into a single gene therapy vector, the Company believes gene therapy
applications could be developed involving precise gene regulation or complex
control systems, such as gene activation with orally active drugs (so-called
"gene switches"). Initially, the Company is focusing on developing TVI vectors
to deliver genes to bone marrow stem cells for the treatment of
hemoglobinopathies (sickle cell anemia and beta-thalassemia) and Acquired Immune
Deficiency Syndrome ("AIDS").

Figure 3. [A graphic representation of the Company's TVI system
appears here.]

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PRODUCT DEVELOPMENT PROGRAMS

The Company has selected its product development programs based on
experimental data that demonstrate the feasibility of gene delivery to specific
target cells. The Company believes that its technologies may be used with
several different genes, giving rise to multiple product and corporate
partnering opportunities. Avigen believes that further advances in genomics,
including the sequencing, mapping and identification of genes linked to
diseases, may offer other product opportunities. The following table summarizes
the Company's current product development programs:
- --------------------------------------------------------------------------------

AAV VECTOR-BASED GENE THERAPY PROGRAMS

<TABLE>
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------
PROGRAM INDICATION TARGET CELL STATUS(1)
Cancer Brain Tumors Tumor Preclinical
Hepatocellular Tumor Research
Carcinoma
Prostate Cancer Tumor Research
Blood Diseases Anemia(2) Muscle Preclinical
Hemophilia Muscle/Liver Research
Metabolic Diseases Hyperlipidemia Muscle Research
Storage Diseases Muscle Research
- --------------------------------------------------------------------------------------------
TVI-BASED GENE THERAPY PROGRAMS
- --------------------------------------------------------------------------------------------
PROGRAM INDICATION TARGET CELL STATUS(1)
Blood Diseases Anemia(3) Bone Marrow Stem Research
Cells
Infectious Diseases HIV Bone Marrow Stem Research
Cells
- --------------------------------------------------------------------------------------------
</TABLE>

(1) "Research" indicates activities related to designing, constructing and
testing vectors in specific target cell types in order to evaluate gene
expression. "Preclinical" indicates in vitro and animal studies to evaluate
efficacy, pharmacology and toxicology.

(2) Includes programs utilizing delivery of an erythropoietin gene for the
treatment of renal failure, sickle cell anemia and beta-thalassemia.

(3) Includes programs utilizing delivery of a hemoglobin gene for the treatment
of sickle cell anemia and beta-thalassemia.

CANCER

Avigen has focused on the treatment of cancer as one of its earliest
applications of AAV gene therapy. Cancer is currently the second-leading cause
of death in the United States with 1.2 million cases diagnosed each year and
more than 500,000 deaths annually. Greater than 2.3 million cases are diagnosed
each year worldwide. Conventional strategies for treatment of cancer include
surgery, radiation therapy and chemotherapy. Potential gene therapy strategies
for cancer include the delivery of genes to tumor cells which increase the
susceptibility of these cells to the cytotoxic effect of drugs ("suicide gene
therapy"), the delivery of genes to tumor cells to enhance their destruction by
the body's immune system ("immunotherapy") and the delivery of genes to tumor
cells that directly promote cell death. The Company is in the process of
developing AAV vectors to treat solid tumors in the brain, liver and prostate.

Brain Tumors. Primary brain tumors represent a significant health problem
with an incidence estimated to be approximately 18,000 new cases in 1996 in the
United States. Glioblastoma multiforme ("GBM"), a type of brain tumor,
represents 20-30% of all such tumors. Patients with GBM have a particularly grim
prognosis, with a median survival rate of approximately ten months after surgery
and high-dose radiation.

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Systemically administered chemotherapy has not significantly increased either
survival or quality of life. After recurrence of GBM, the median survival rate
is approximately nine months even with treatment.

In collaboration with investigators in the Department of Neurosurgery at
Nagoya University, Japan, the Company has demonstrated the efficacy of AAV
vector-based gene therapy for GBM in an experimental animal model. For this
initial study, the Company designed and produced an AAV vector containing the
gene for the enzyme, thymidine kinase ("TK"). When expressed in dividing cells
such as tumor cells, the TK gene renders these cells sensitive to the toxic
effect of the FDA-approved antiviral drug, ganciclovir ("GCV"). TK converts the
relatively non-toxic GCV into by-product which is toxic to the dividing tumor
cells. Following a single injection of an AAV-TK vector into brain tumors
arising from human glioma cells implanted in the brains of mice, a significant
reduction in tumor size was observed in all animals that also received GCV. In
addition, there was evidence of a "bystander effect" whereby tumor cells that
did not receive the TK gene but that were in contact with cells that did were
also killed. The Company believes that the bystander effect significantly
contributes to the efficacy of this therapeutic strategy.

The Company believes that this approach offers the potential for increased
efficacy and decreased toxicity as compared to the systemic administration of
chemotherapeutic agents. The AAV vector can be injected directly into the tumor
or applied to the surgical field following removal of the tumor. In addition,
the toxic by-product of GCV only kills dividing cells, sparing the surrounding
non-dividing brain cells, and is produced only in response to the systemic
administration of GCV. Therefore, the Company believes that potential side
effects can be reduced or eliminated by controlling the administration of GCV.

Clinical trials are currently being performed by investigators at several
academic institutions in collaboration with another gene therapy company to
evaluate suicide gene therapy using retroviral vectors to deliver the TK gene.
However, since retroviral vectors generally are ineffective when administered
directly into the body, these protocols involve the delivery of mouse cells that
produce the retroviral vectors into the brains of patients. The Company believes
that its AAV vector approach offers a safer and potentially more effective
alternative with greater potential for commercialization.

The Company is also investigating the utility of combining the suicide gene
strategy with immunotherapy. The Company through its collaborators at Nagoya
University has demonstrated that AAV vectors can be used to deliver and achieve
the simultaneous expression of both the TK gene and an immunostimulatory
lymphokine gene in tumor cells in vitro. The Company's collaborators are
currently evaluating the effects of using AAV vectors to deliver the genes for
immunostimulatory factors to mice with experimentally-induced brain tumors. The
Company believes that this combined approach may increase the efficacy and the
potential utility of AAV vectors for the treatment of brain tumors.

Hepatocellular Carcinoma. Hepatocellular carcinoma, or liver cancer, is
among the most common form of cancer worldwide. Based on industry sources, the
Company believes that there are over 10,000 new cases of liver cancer in the
United States each year. Current therapeutic modalities include surgical
resection, regional chemotherapy or tumor embolization. Long-term survival rates
are poor.

An Avigen collaborator and scientific advisor at the University of
California, San Francisco ("UCSF") has demonstrated that AAV vectors can deliver
the TK gene to human hepatoma cells in tissue culture and sensitize them to the
toxic effects of GCV. In addition, those studies employed a hepatoma-specific
promoter which restricted expression of the TK gene to hepatoma cells. This
collaborator is currently evaluating the efficacy of the Company's AAV-TK
vectors in animal models of hepatoma. As part of this collaboration, the Company
has also constructed and produced an AAV vector containing both the TK gene and
the gene for the immunostimulatory lymphokine, interleukin-2 ("IL-2"), under
control of the hepatoma-specific promoter. It is believed that the inclusion of
IL-2 may increase the effectiveness of this approach by initiating a systemic
immune response to the tumor. Residual tumor can then be eliminated by the
administration of GCV.

Prostate Cancer. Prostate cancer is the most common cancer among American
men and is second only to lung cancer as a cause of male cancer deaths. The
American Cancer Society has estimated that there will be 300,000 cases diagnosed
in the United States in 1996 and 40,000 deaths. Currently, prostate cancer is
responsible for about 3% of all deaths in men over 55 years of age. Because the
incidence of prostate cancer

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increases more rapidly with age than any other form of cancer and the average
age of American men is rising, the number of United States patients with
prostate cancer is expected to rise steadily over the next decade.

Present therapy for prostate cancer depends on the stage or extent of
disease at the time of diagnosis. Until recently, the diagnosis of prostate
cancer was generally made by the detection of a nodule or mass on routine rectal
examination or during evaluation for difficulty with urination. The development
of sensitive blood tests to detect prostate cancer and the utilization of
sonogram detection systems have increased the diagnosis of prostate cancer,
particularly in individuals with early stage disease. Approximately 50% of
patients are diagnosed when the disease is still localized to the prostate. Such
patients generally have the option of surgical removal of the prostate or
externally applied radiation therapy. Although either of these treatment options
results in long-term survival rates equal to or approaching age-matched
individuals without prostate cancer, these costly procedures may result in
significant treatment-related side effects, including impotence, urinary
incontinence and even death. Some clinicians recommend no treatment in older
patients because of the morbidity and cost.

The Company is pursuing gene therapy as a treatment for early stage
prostate cancer. The Company's AAV vectors are well suited for treatment of
prostate cancer because prostate tumor cells divide extremely slowly and tumors
are frequently localized to a particular site. In addition, prostate tumors can
be easily accessed by direct injection.

In collaboration with investigators at Baylor College of Medicine, the
Company is evaluating the use of AAV vectors for the treatment of prostate
cancer. These investigators have demonstrated that following injection of an AAV
vector containing a "marker" gene directly into the prostate in mice, expression
of the marker protein is observed within the prostate epithelium. Recently, they
have also developed a model of prostate cancer in mice. Currently, these
investigators are evaluating the antitumor effects of direct injection of an AAV
vector containing the TK and IL-2 genes into these tumors. They are also
developing other strategies using AAV vectors containing tumor suppressor genes.
These vectors will incorporate a prostate-specific promoter designed to limit
gene expression to the prostate cells.

Blood Diseases

Anemia. Anemia results from a variety of inherited and acquired conditions
resulting in a reduction of the number of red blood cells and hemoglobin, the
red blood cell protein that carries oxygen. In the case of sickle cell anemia
and beta-thalassemia, two inherited diseases, anemia results from the production
of inadequate or abnormal hemoglobin molecules. In acquired cases such as renal
failure, AIDS or as the result of the administration of chemotherapy for cancer,
anemia is generally due to the inadequate production of red blood cells.

Erythropoietin ("EPO") is the protein produced by the kidney that
stimulates cells in the bone marrow to produce red blood cells and is involved
in the production of hemoglobin. Recombinant human EPO, a drug first developed
by Amgen, Inc., is administered several times a week by injection for the
treatment of anemia secondary to renal failure, AIDS or chemotherapy. Currently,
there are approximately 140,000 renal failure patients receiving dialysis in the
United States and an equivalent number in Europe. It is estimated that about
85,000 renal failure patients receiving dialysis are presently receiving EPO
worldwide. In addition, it is estimated that approximately 50,000 AIDS patients
are also currently being treated with EPO. The incidence of anemia in the
approximately 1 million cancer patients in the United States is estimated at
14%, providing a potential additional 140,000 patients who also may be
candidates for EPO therapy.

There are an estimated 60,000 patients with sickle cell anemia in the
United States. The Company believes that there are approximately 8,000 to 10,000
cases of beta-thalassemia in the United States. Currently, there is no effective
and widely available therapy for beta-thalassemia and sickle cell anemia.
Studies in animals and clinical trials in a small number of patients suggest
that administration of large doses of EPO, either alone or in combination with
other agents, in certain individuals with beta-thalassemia and sickle cell
anemia can increase the production of functional hemoglobin molecules and
perhaps ameliorate the symptoms of disease.

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Avigen scientists have demonstrated that biologically active levels of EPO
can be achieved in mice following a single intramuscular administration of an
AAV vector containing a gene for human EPO. Mice treated in this study showed a
dose-dependent increase in the amount of EPO in their serum and a proportional
increase in red blood cells. In this ongoing study, increased EPO levels and red
blood cell production have persisted undiminished for greater than five months.
The results of this study have not been independently verified. Preclinical
studies are currently planned to evaluate the efficacy of intramuscularly
administered AAV vectors containing the EPO gene in animal models of renal
failure and beta-thalassemia.

The Company is also developing a separate approach for the treatment of
sickle cell anemia and beta-thalassemia by delivering normal hemoglobin genes to
patients' defective bone marrow stem cells using TVI technology. Company
scientists are developing vectors to deliver large regions of the hemoglobin
gene "locus," containing the hemoglobin gene and the surrounding control
regions, for integration into human chromosome 19. All current applications for
treating bone marrow cells involve removing cells from the body. The Company
believes that potential treatments arising from this work will involve exposure
of patients' bone marrow stem cells ex vivo employing currently available
clinical procedures. The Company has entered into a collaboration with
Children's Hospital Los Angeles and Children's Hospital Oakland Research
Institute to develop an animal model for sickle cell anemia which will be useful
for testing vectors which incorporate the TVI system for the treatment of this
disease.

Hemophilia. Hemophilia is a hereditary disorder characterized by the
decrease or absence of clotting factor activity in the plasma. The most common
forms are caused by a defect or deficiency in protein coagulation factor VIII
("hemophilia A") or factor IX ("hemophilia B"). Approximately 10,000
individuals, mostly male, were treated for hemophilia A and about 2,800
individuals were treated for hemophilia B in the United States in 1994.
Worldwide, there are about 80,000 hemophiliacs. Patients with either disease
experience acute and often life-threatening bleeding episodes and can also
suffer joint deformities from repeated bleeding into joints. Depending on the
severity of disease, treatment consists of either intermittent or chronic
administration of clotting factor which has either been purified from plasma or,
more recently, is in the form of a recombinant DNA-derived protein.
Transmissions of viral agents have been significantly reduced with the increased
use of highly purified or recombinant clotting factors.

The Company believes that AAV vectors may be useful to deliver the genes
for factor VIII or factor IX and achieve long-term expression in vivo. The
Company intends to initiate collaborations to evaluate the use of AAV vectors to
deliver the gene for factor VIII to muscle or liver in animals. In addition, the
Company intends to initiate parallel animal studies to evaluate the use of AAV
vectors to deliver the gene for factor IX.

Metabolic Diseases

Hyperlipidemia. Disorders of lipid metabolism contribute to a number of
common human diseases. Hyperlipidemia, characterized by elevation of cholesterol
or triglycerides in the blood, is a risk factor for atherosclerosis which leads
to heart attacks, strokes and peripheral vascular disease. Elevation of
triglycerides ("hypertriglyceridemia") often accompanies diabetes and may
contribute to the acceleration of atherosclerosis observed in that patient
population. In addition, high triglyceride levels, resulting from an underlying
genetic disease, can also lead to life-threatening pancreatitis, which is
frequently unresponsive to current therapies.

Treatment of elevated lipids has been shown to decrease the risk of
atherosclerosis. There is evidence that elevated triglycerides, particularly in
combination with low HDL cholesterol ("good cholesterol") in the blood is a
substantial risk factor associated with coronary artery disease. While dietary
control and exercise are important methods to treat high cholesterol, many
individuals do not achieve adequate results with these conservative measures.
Drug therapy for high cholesterol has been successful at reducing the
complications of atherosclerosis. Although drugs to lower blood triglycerides
are widely available, medical management of this condition is often problematic
and treatment regimens are often poorly tolerated by patients. The lack of a
uniformly effective therapy for hypertriglyceridemia provides a rationale for
development of novel, alternative treatments, including gene therapy.

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Deficiency of the enzyme lipoprotein lipase ("LPL") is believed to be
common in patients with hypertriglyceridemia, and there may be a correlation
between decreased expression of LPL, which is normally produced in the muscle
and fat, and hypertriglyceridemia. Based on the Company's research demonstrating
that AAV vectors efficiently deliver genes to muscle resulting in sustained
protein production, the Company is working with a collaborator who intends to
conduct studies in animals to evaluate the effectiveness of delivering an AAV
vector containing the LPL gene to muscle to lower triglyceride levels.

Storage diseases. Storage diseases are a diverse set of inherited disorders
characterized by a deficiency of one of several proteins that are necessary for
the function of cellular lysosomes. Lysosomes are the compartments in all cells
that process macromolecules as a part of normal turnover and tissue remodeling.
Storage diseases are characterized by abnormal cell function and cell death
resulting in a variety of clinical manifestations such as progressive neurologic
dysfunction, including mental retardation, enlarged organs or skeletal
abnormalities. Gaucher's disease and Tay-Sachs disease are two of the more
well-known examples of this class of disease.

Based on the finding that long-term production of therapeutic proteins can
be obtained following the intramuscular injection of an AAV vector containing
the relevant gene, the Company has entered into two collaborations to evaluate
this approach for the treatment of storage diseases. In collaboration with
investigators at The Johns Hopkins School of Medicine, the Company is initiating
studies to evaluate gene therapy for the treatment of Pompe's disease. This
disease, caused by deficient production of the enzyme, acid maltase, leads to
lethal skeletal and cardiac abnormalities in affected individuals. These
investigators intend to determine whether, following the intramuscular
administration of an AAV vector containing the acid maltase gene, the muscle
will produce a sufficient amount of this enzyme to reverse or prevent the
manifestations of this disease. In collaboration with an investigator at
Childrens Hospital Los Angeles, the Company is currently evaluating a similar
approach for the treatment of deficiency of the enzyme alpha-iduronidase
(Hurler's disease). Although these conditions are rare, there is currently no
available treatment for these devastating diseases. In addition, the Company
believes that research on such conditions will benefit the Company's product
development efforts because the clinical endpoints are relatively clear and
measurable and the results are expected to be sufficiently generalizable to
allow for the design of AAV vector gene therapy for several other diseases.

Infectious Diseases

HIV. The Center for Disease Control estimates that as of the middle of
1995 there were 460,000 cases of AIDS in the United States and 4.5 million cases
worldwide. HIV, the cause of AIDS, is spread by a transfer of bodily fluids
primarily through sexual contact, blood transfusions, sharing intravenous
needles, accidental needle sticks or transmission from infected mothers to
newborns.

The Company is developing vectors incorporating TVI to deliver genes to
bone marrow stem cells. These cells can also be used as target cells for the
delivery of genes designed to protect blood cells from infection with HIV. As in
the case of thalassemia and sickle cell anemia, the Company believes that
potential treatments arising from this work will involve exposure of patients'
bone marrow stem cells to vector ex vivo. The Company is also participating in a
National Cooperative Drug Discovery Grant program with Johns Hopkins and The
University of Alabama at Birmingham to utilize capsid targeted viral
inactivation technology for the treatment of AIDS. An anti-viral effect has been
demonstrated in tissue culture for a virus (Moloney murine leukemia virus)
related to HIV. The Company holds an exclusive, worldwide, royalty-bearing
license to a patent application relating to certain synthetic genes which direct
the production of proteins with specific antiviral properties. The Company
believes such research may lead to the development of proprietary hybrid genes
that can be delivered to bone marrow stem cells using its gene therapy vectors.

CORPORATE PARTNERING STRATEGY

The Company is actively seeking to develop long-term strategic
collaborations with pharmaceutical companies that can provide funding for
research and development activities and clinical trials. The Company

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believes that its technologies are proprietary and broad-based and can be used
with several different genes, giving rise to multiple product and corporate
partnering opportunities.

The Company has initiated discussions with a number of pharmaceutical
companies in the United States, Europe and Asia. The Company has not entered
into any definitive agreements with respect to any corporate partnering
arrangements. Avigen's strategy is to contribute both technology and expertise
in the gene therapy field while seeking corporate partners who can provide
access to complementary technologies, including gene sequences. In addition, the
Company intends to rely on corporate partners, licensees or other entities for
marketing of its products, when and if such products achieve regulatory
approval. There can be no assurance, however, that the Company will be able to
reach satisfactory arrangements with such parties or that such arrangements will
be successful.

LICENSING AND RESEARCH AGREEMENTS

Research Corporation Technologies. In May 1992, the Company entered into a
license agreement with Research Corporation Technologies, Inc. ("RCT") for
rights to a patent and patent application relating to a cell-specific promoter
in AAV vectors. The license is exclusive and worldwide. In consideration for the
license, the Company paid an initial license fee and issued 247,949 shares of
its Common Stock. In addition, the Company is required under the agreement to
pay RCT royalties based on net sales of products which utilize the licensed
technology, with certain minimum annual royalty payments due beginning in 1999.
Avigen must exercise its best efforts to commercially develop, promote and sell
products covered by the licensed patent rights, and is obligated to file an IND
by the end of 1997 and a product license application or a new drug application
by the end of 2000. In the event the Company fails to achieve any of these
milestones by their applicable deadlines, the Company has the right to pay RCT
additional fees of up to $250,000 to extend certain of the deadlines for
specified periods. RCT may terminate the agreement if the Company becomes
insolvent or bankrupt or fails to perform any of its obligations under the
agreement.

The University of Manitoba. In February 1994, the Company entered into an
agreement with the University of Manitoba for an exclusive, worldwide license to
patent applications relating to a prostate-specific promoter for use in gene
therapy. Under this agreement, the Company paid an initial license fee and has
agreed to make additional cash payments on achievement of certain development
milestones and to make royalty payments based on net sales of products which
utilize the licensed technology. The Company is required to diligently pursue
clinical studies by February 1997 and to diligently pursue commercialization of
licensed products as soon as practicable. The Company currently is negotiating a
one year extension of the development milestone dates, and there can be no
assurance that an extension can be obtained on acceptable terms, if at all. The
University of Manitoba may terminate the agreement if the Company becomes
insolvent or bankrupt or fails to perform any of its obligations under the
agreement.

The Johns Hopkins University. In November 1992, the Company entered into
an agreement with The Johns Hopkins University under which it issued an
aggregate of 152,702 shares of its Common Stock and agreed to make certain cash
payments in exchange for an exclusive, worldwide, royalty bearing license to a
patent application relating to certain synthetic genes which direct the
production of proteins with specific antiviral properties and which the Company
believes may be useful in its infectious disease programs. Under the agreement,
Johns Hopkins has control over the prosecution and maintenance of the licensed
patent application. The Company is obligated to exercise its best efforts to
develop and commercialize products which utilize the subject technology. Under
the terms of the agreement, as amended, the Company is required to meet the
following development milestones: initiation of large animal studies for a
licensed potential product by the end of 1997, submission to the FDA of at least
one clinical protocol utilizing a licensed potential product by the end of 1998,
initiation of at least one clinical study utilizing a licensed potential product
by the end of 1999 and receipt of FDA approval to market a licensed product by
the end of 2002. If the Company fails to perform any of its obligations under
the agreement, Johns Hopkins may terminate the agreement upon 60 days' written
notice.

The Company has entered into other exclusive and nonexclusive license
agreements with certain research institutions and their representatives.
Although specific terms of the licenses vary, all of such licenses require the
Company to achieve certain development milestones. In addition, the agreements
require Avigen to pay

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<PAGE> 30

certain license fees and royalties to the licensors. All of the licenses provide
for a term which extends for the life of the underlying patent.

The failure to achieve any required development milestones or to negotiate
appropriate extensions of any of the Company's license agreements or to make all
required milestone and royalty payments when due and the subsequent decision of
any such institution to terminate such license could have a material adverse
effect on the Company.

The Company has also entered into agreements with certain research
institutions and corporate entities with respect to its research and development
efforts. Under such agreements the Company has provided specific vectors and
other materials for research purposes conducted at the direction of a principal
investigator. Generally, the agreements also provide that: (i) the Company
remains the sole and exclusive owner of the transferred materials; (ii)
ownership of improvements will be determined under patent law principles, based
upon the parties' relative contributions to the improvements; and (iii) the
Company has the right to prosecute patents on jointly-owned improvements.
Although specific terms of each agreement vary, the Company is generally
granted, with respect to jointly owned improvements, an irrevocable,
nonexclusive, royalty-free license and an option to negotiate in good faith an
exclusive license at royalty rates to be mutually agreed upon. There can be no
assurance that exclusive rights to any such improvements can be obtained on
terms acceptable to the Company, if at all. In addition, the Company engages
from time to time in discussions with other prospective academic partners
regarding potential research and development projects and may, in the future,
enter into arrangements in addition to those described above.

MANUFACTURING

The Company has developed a proprietary manufacturing process for AAV
vectors. The Company believes it currently has the capacity to manufacture AAV
vectors in amounts sufficient to conduct clinical trials, but it will be
required to implement cGMP policies and procedures prior to manufacturing
material for preclinical studies and clinical trials. The Company believes that
its manufacturing process will simplify manufacturing and purification and will
allow the Company to produce amounts of AAV vector required for clinical trials.
The processes used by the Company are new, however, and there can be no
assurance that such processes will be feasible or cost-effective.

Avigen currently does not operate manufacturing facilities for commercial
production of its gene therapy products. Avigen's strategy for the manufacture
of its gene therapy products may be to enter into alliances with pharmaceutical
and other biotechnology companies. In addition, the Company does not have, and
has no intention of developing, the facilities necessary to perform cell
processing which may be required for TVI. The Company intends to rely on
corporate partners or others for such cell processing. There can be no assurance
that the Company will be able to negotiate satisfactory arrangements with such
parties, that such arrangements will be successful or that its corporate
partners will be able to develop adequate manufacturing capabilities for
commercial scale production. In the event the Company decides to establish a
commercial scale manufacturing facility, the Company will require substantial
additional funds and personnel and will be required to comply with extensive
regulations applicable to such facility.

GOVERNMENT REGULATION

The production and marketing of the Company's proposed products and its
research and development activities are subject to regulation for safety,
efficacy and quality by numerous governmental authorities in the United States
and other countries. In the United States, pharmaceutical products are subject
to rigorous regulation by the FDA under the federal Food, Drug, and Cosmetic
Act. Biological products, in addition to being subject to certain provisions of
this act, are also regulated under the Public Health Service Act. These laws and
the regulations promulgated thereunder govern, among other things, testing,
manufacturing, safety, efficacy, labeling, storage, record keeping, advertising
and promotional practices and import and export of drugs and biological
products. In general, the Center for Biologics Evaluation and Research holds
primary responsibility for the regulation of biological products and has handled
the IND submissions of most gene therapy products to date. At the present time,
the Company believes that its products will be regulated as

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<PAGE> 31

biologics by the FDA and comparable foreign regulatory bodies. Gene therapy is,
however, a relatively new technology and has not been extensively tested in
humans. The regulatory requirements governing gene therapy products are
uncertain and are subject to change. No gene therapy products have been approved
to date in the United States or any foreign country.

Under the NIH Guidelines for Research Involving Recombinant DNA Molecules,
clinical protocols involving recombinant DNA are conducted at institutions
receiving NIH funds must be reviewed by the Recombinant DNA Advisory Committee
("RAC") and approved by the NIH Director. The NIH has established the RAC to
advise the NIH Director concerning approval of research involving the use of
recombinant DNA. A proposal will be considered by the RAC only after the
protocol has been approved by the Institutional Review Board ("IRB") at the
institution where the study will be conducted. This process can be conducted in
parallel with the IND review process but may add considerable time and expense.
The Company intends to submit its gene therapy clinical protocols to the RAC for
review and approval even when it may not be subject to the NIH review process.

The steps required before a new drug, including a biologic, may be marketed
in the United States generally include (i) preclinical laboratory tests and
preclinical animal studies, (ii) the submission to the FDA of an IND for human
clinical testing, which must become effective before human clinical trials
commence, (iii) adequate and well-controlled human clinical trials to establish
the safety and efficacy of the product, (iv) the submission to the FDA of a
Product License Application and Establishment License Application ("PLA/ELA")
for a biologic and (v) FDA approval of the PLA/ELA prior to any commercial sale
or shipment of the biologic. The FDA has proposed regulations that would
eliminate the separate requirement for an ELA for certain biotechnology
products, including certain recombinant DNA products, that satisfy the
regulatory definition of a "well-characterized product." The FDA, however, has
indicated that gene therapy products are not considered "well-characterized" at
this time.

Domestic manufacturing establishments are subject to inspections at any
time by the FDA and must comply with cGMP regulations enforced by the FDA
through its facilities inspection program. Manufacturers of biological products
also must comply with FDA general biological product standards. In addition, the
Company must obtain a drug manufacturing license from the State of California
for any of its products administered to humans, including products intended for
clinical trials.

Preclinical safety studies include laboratory evaluation of the product, as
well as animal studies to assess the potential safety and, if possible, efficacy
of the product. Preclinical studies must be conducted by laboratories that
comply with FDA regulations regarding Good Laboratory Practices. The results of
the preclinical tests, together with manufacturing information and analytical
data, are submitted to the FDA as part of an IND, which must become effective
before human clinical trials may be commenced. The IND will become automatically
effective 30 days after its receipt by the FDA unless the FDA indicates prior to
the end of the 30-day period that it does not wish the trials to proceed as
outlined in the IND. In such case, the IND sponsor and the FDA must resolve any
outstanding concerns before clinical trials can proceed. There can be no
assurance that submission of an IND will result in FDA authorization to commence
clinical trials.

Clinical trials must be conducted in accordance with FDA's Good Clinical
Practice regulations and must be approved by the IRB at the institution where
the study will be conducted. The IRB will consider, among other things, safety
and ethical issues, proper informed consent of the human subjects, possible
issues relating to health care costs and potential liability of the institution.
The IRB may require changes in a protocol, and there can be no assurance that an
IRB will permit any given study to be initiated or completed.

Clinical trials typically are conducted in three sequential phases, but the
phases may overlap. Phase I typically involves the initial introduction of the
drug into patients primarily to determine the drug's metabolism,
pharmacokinetics and pharmacological actions in humans and the side effects
associated with increasing doses. Phase II typically involves studies in a
limited patient population to (i) determine the efficacy of the drug for
specific indications, (ii) determine dosage tolerance and optimal dosage and
(iii) further identify possible adverse effects and safety risks. If the drug is
found to be effective and to have an acceptable safety profile in Phase II
evaluations, Phase III trials are undertaken to evaluate efficacy and safety
within an expanded patient population typically at geographically dispersed
clinical study sites. There can be

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<PAGE> 32

no assurance that Phase I, Phase II or Phase III testing will be completed
successfully within any specific time period, if at all, with respect to any of
the Company's products subject to such testing. Furthermore, the FDA may suspend
clinical trials at any time on various grounds, including a finding that
patients are being exposed to an unacceptable health risk. FDA regulations also
subject sponsors of clinical investigations to numerous regulatory requirements
related to, among other things, selection of qualified investigators, proper
monitoring of investigations, record keeping and record retention and notice to
investigators and FDA of any death or adverse serious reaction. In addition, the
FDA may require post marketing clinical studies (Phase IV) which will require
extensive patient monitoring and recordkeeping and may result in restricted
marketing of the product for an extended period of time.

The results of the pharmaceutical development, preclinical studies and
clinical trials are submitted to the FDA in the form of a PLA/ELA for approval
of the manufacture, marketing and commercial shipment of the biologic. The
testing and approval process is likely to require substantial time and effort
and there can be no assurance that any approval will be granted on a timely
basis, if at all. The FDA may deny a PLA/ELA if applicable regulatory criteria
are not satisfied, require additional testing or information, or require
postmarketing testing and surveillance to monitor the safety or efficacy of a
product. Moreover, if regulatory approval of a biologic is granted, such
approval may entail limitations on the indicated uses for which it may be
marketed. Finally, product approvals may be withdrawn if compliance with
regulatory standards is not maintained or if problems occur following initial
marketing. Among the conditions for PLA/ELA approval is the requirement that the
prospective manufacturer's quality control and manufacturing procedures conform
to cGMP, which must be followed at all times. In complying with standards set
forth in these regulations, manufacturers must continue to expend time,
financial resources and effort in the area of production and quality control.

In accordance with the Orphan Drug Act, the FDA may grant Orphan Drug
status to certain drugs intended to treat a "rare disease or condition" defined
as a disease or condition which affects fewer than 200,000 people in the United
States, or which affects more than 200,000 people for which the cost of
developing and marketing the drug will not be recovered from sales of the drug
in the United States. An approved Orphan Drug may provide certain benefits
including exclusive marketing rights in the United States to the drug for the
approved indication for seven years following marketing approval and federal
income tax credits for certain clinical trial expenses. The Company believes
that some of its future products may qualify for Orphan Drug status but there
can be no assurance that such products will receive FDA approval. In addition,
there is no assurance that potential benefits provided by the Orphan Drug Act
will not be significantly limited by amendment by the United States Congress
and/or reinterpretation by the FDA.

For clinical investigation and marketing outside the United States, the
Company is also subject to foreign regulatory requirements governing clinical
trials and marketing approval for pharmaceutical products. In Europe, the
approval process for the commencement of clinical trials varies from country to
country. The foreign regulatory approval process includes all of the risks
associated with FDA approval set forth above.

In addition to regulations enforced by the FDA, the Company also is subject
to regulation under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act, the Resource Conservation and
Recovery Act and other federal, state and local regulations. The Company's
research and development activities involve the controlled use of hazardous
materials, chemicals, biological materials and various radioactive compounds.
Although the Company believes that its safety procedures for handling and
disposing of such materials comply with the standards prescribed by state and
federal regulations, it could be held liable for any damages that result from
accidental contamination or injury and any such liability could exceed the
resources of the Company.

COMPETITION

The field of gene therapy is new and rapidly evolving, and is expected to
undergo significant technological change in the future. The Company believes its
primary competitors in the AAV gene therapy market are Genetic Therapy, Inc.
(recently acquired by Sandoz, Ltd.), Genzyme Corporation, Somatix Therapy
Corporation and Targeted Genetics Corporation. In addition, competition from
fully integrated pharmaceutical companies and other biotechnology companies is
expected to increase, particularly as large pharmaceutical

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companies acquire smaller gene therapy companies. Most of these companies have
significantly greater financial resources and expertise than the Company in
research and development, preclinical studies and clinical trials, obtaining
regulatory approvals, manufacturing, marketing and distribution. One of these
companies is supporting clinical studies for use of AAV vectors in the treatment
of cystic fibrosis. Smaller companies may also prove to be significant
competitors, particularly through collaborative arrangements with large
pharmaceutical companies. Academic institutions, governmental agencies and other
public and private research organizations also conduct research, seek patent
protection and establish collaborative arrangements for product development and
marketing. In addition, these companies and institutions compete with the
Company in recruiting and retaining highly qualified scientific and management
personnel.

The Company is aware that other companies are conducting clinical trials
and preclinical studies for viral and non-viral gene therapy products. These
companies include Cell Genesys, Inc., GeneMedicine, Inc., Systemix, Inc.,
Viagene, Inc. (recently acquired by Chiron Corporation) and Vical Incorporated.
Avigen believes the primary competitive factors for success in the gene therapy
field will be product efficacy, safety, manufacturing capability, the timing and
scope of regulatory approvals, the timing of market introduction, marketing and
sales capability, reimbursement coverage, price and patent position. There can
be no assurance that the Company's competitors will not develop more effective
or more affordable products, or achieve earlier product commercialization than
the Company.

PATENTS AND INTELLECTUAL PROPERTY

Patents and other proprietary rights are important to the Company's
business. The Company's policy is to file patent applications and protect
technology, inventions and improvements to inventions that are commercially
important to the development of its business. The Company also relies on trade
secrets, know-how, continuing technology innovations and licensing opportunities
to develop and maintain its competitive position.

The Company has filed six United States patent applications, two of which
are co-owned with co-inventors, and has one exclusive worldwide license to an
issued patent and two nonexclusive licenses to two issued patents for use in the
United States. In addition, the Company has acquired exclusive worldwide
licenses to four patent applications. There is no assurance that patents will
issue from these applications or that any patent will issue on technology
arising from additional research or, if patents do issue, that claims allowed
will be sufficient to protect the Company's technology. The patent application
process takes several years and entails considerable expense. In addition, with
respect to each of the Company's co-owned patent applications, the Company has
an option to obtain an exclusive, worldwide, transferable, royalty-bearing
license for such technology, and is currently in discussions with one of the
co-inventors to obtain such a license. In the event the Company is unable to
negotiate exclusive rights to such co-owned technology, each co-inventor may
have rights to independently make, use, offer to sell or sell the patented
technology. Commercialization, assignment or licensing of such technology by a
co-inventor could have a material adverse effect on the Company's business,
financial condition and results of operations. The failure to obtain patent
protection on the Company's technologies or proposed products may have a
material adverse effect on the Company's competitive position and business
prospects.

The patent positions of pharmaceutical and biotechnology firms are
generally uncertain and involve complex legal and factual questions. To date,
there has emerged no consistent policy regarding the breadth of claim allowed in
biotechnology patents. Patent applications in the United States are maintained
in secrecy until a patent issues, and the Company cannot be certain that others
have not filed applications for technology covered by the Company's patent
applications or that the Company was first to file patent applications for such
technology. Competitors may have filed applications for, or may have received
patents and may obtain additional patents and proprietary rights relating to
compounds or processes that block or compete with those of the Company.

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<PAGE> 34

which are not known to the Company. A number of the gene sequences or proteins
encoded by certain of those sequences that the Company is investigating or may
use in its products are or may become patented by others. As a result, the
Company may be required to obtain licenses to such gene sequences or other
technology in order to test, use or market products that contain proprietary
gene sequences or encode proprietary proteins. For example, in connection with
its anemia program, the Company anticipates that it may need to obtain a license
to a gene for human erythropoietin. There can be no assurance that the Company
will be able to obtain this or any other license on terms favorable to the
Company, if at all.

Patent litigation is becoming more widespread in the biotechnology
industry. Litigation may be necessary to defend against or assert claims of
infringement, to enforce patents issued to the Company, to protect trade secrets
owned by the Company, or to determine the scope and validity of proprietary
rights of third parties. Although no third party has asserted that the Company
is infringing such third party's patent rights or other intellectual property,
there can be no assurance that litigation asserting such claims will not be
initiated, that the Company would prevail in any such litigation, or that the
Company would be able to obtain any necessary licenses on reasonable terms, if
at all. Any such claims against the Company, with or without merit, as well as
claims initiated by the Company against third parties, can be time-consuming and
expensive to defend or prosecute and to resolve. If competitors of the Company
prepare and file patent applications in the United States that claim technology
also claimed by the Company, the Company may have to participate in interference
proceedings declared by the Patent and Trademark Office to determine priority of
invention, which could result in substantial cost to the Company, even if the
outcome is favorable to the Company. In addition, to the extent outside
collaborators apply technological information developed independently by them or
by others to the Company's product development programs or apply Avigen's
technologies to other projects, disputes may arise as to the ownership of
proprietary rights to such technologies.

The Company also relies on a combination of trade secret and copyright law,
employee and third-party nondisclosure agreements, and other protective measures
to protect intellectual property rights pertaining to its products and
technology. There can be no assurance, however, that these agreements will
provide meaningful protection of the Company's trade secrets, know-how or other
proprietary information in the event of any unauthorized use, misappropriation
or disclosure of such trade secrets, know-how or other proprietary information.
In addition, the laws of certain foreign countries do not protect the Company's
intellectual property rights to the same extent as do the laws of the United
States. There can be no assurance that the Company will be able to protect its
intellectual property successfully.

PRODUCT LIABILITY INSURANCE

The manufacture and sale of medical products entail significant risk of
product liability claims. The Company currently does not carry product liability
insurance, although it intends to obtain such coverage prior to beginning
clinical trials. There can be no assurance that such coverage will be adequate
to protect the Company from any liabilities it might incur in connection with
the sale of the Company's products. In addition, the Company may require
increased product liability coverage as products are commercialized. Such
insurance is expensive and in the future may not be available on acceptable
terms, if at all. A successful product liability claim or series of claims
brought against the Company in excess of its insurance coverage could have a
material adverse effect on the Company's business and results of operations.

EMPLOYEES

As of March 31, 1996, the Company had 15 full-time employees, 7 of whom
have Ph.D. or M.D. degrees, including 11 employees in research and development,
and 4 in general administration and finance. The Company also relies on several
part-time employees and consultants. None of the Company's employees is
represented by a collective bargaining agreement nor has the Company ever
experienced a work stoppage. The Company believes that its relationship with its
employees is good.

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FACILITIES

The Company's facility, located in Alameda, California, is an approximately
23,000 square foot facility leased through May 2003. The Company believes that
it will be able to renew the lease of this facility or find suitable alternate
facilities in the same general area without a material disruption of its
operations.

SCIENTIFIC ADVISORY BOARD

The Company has established a Scientific Advisory Board, consisting of
experts in the field of medicine, genetics and molecular biology, which reviews
and evaluates the Company's research programs and advises the Company with
respect to technical matters in fields in which the Company is involved. The
members of the Scientific Advisory Board are prominent scholars in their field
and, as a result, may serve as consultants to a wide variety of companies. The
Company's Scientific Advisory Board includes:

Gary J. Kurtzman, M.D., is Chairman of the Scientific Advisory Board. Dr.
Kurtzman serves as Vice President, Research and Development for the Company.
"See Management -- Directors and Executive Officers."

Jef D. Boeke, Ph.D., co-invented capsid targeted viral inactivation
technology that provides a basis for Avigen's infectious disease product
development program. Dr. Boeke is a professor of Molecular Biology and Genetics
at The Johns Hopkins University School of Medicine, and has authored more than
100 publications.

Jerome E. Groopman, M.D. serves as chief of Hematology/Oncology at Harvard
University's New England Deaconess Hospital in Boston and holds the Dina and
Raphael Recantati Chair at Harvard Medical School. In addition, Dr. Groopman
serves on the Board of Directors of the American Foundation for AIDS Research
and is a member of the FDA Biological Response Modifiers Advisory Committee.

Yuichi Iwaki, M.D., Ph.D. serves as a director of the Company. "See
Management -- Directors and Executive Officers."

Y.W. Kan, M.D., D.Sc. is the Louis K. Diamond Professor of Hematology at
the University of California at San Francisco. He also is an Investigator of the
Howard Hughes Medical Institute. Dr. Kan was the 1991 recipient of the Albert
Lasker Clinical Medical Research Award and is noted as a leader in the fields of
sickle cell anemia and thalassemia.

Keiya Ozawa, M.D., Ph.D. is a professor of Molecular Biology, Institute of
Hematology, at Jichi Medical School in Japan, where he has established a
research and preclinical program in gene therapy. Dr. Ozawa is regarded as one
of the leading authorities on gene therapy in Japan and is responsible for
drafting the Japanese government's gene therapy guidelines. Dr. Ozawa holds both
a M.D. and a Ph.D. from the University of Tokyo and is the author of more than
90 publications regarding virology, hematology and gene therapy.

Jeffrey M. Rosen, Ph.D. is a professor of Cell Biology at Baylor College of
Medicine. Dr. Rosen is an internationally recognized expert in the field of gene
expression. His research has focused primarily on the mechanisms of
tissue-specific gene expression in the mammary and prostate glands. Dr. Rosen
has served on the editorial board of the Journal of Biological Chemistry,
Molecular and Cellular Endocrinology, Molecular Endocrinology and as executive
editor of Nucleic Acids Research.

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MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The directors and executive officers of the Company and their ages as of
March 31, 1996 are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------------- --- --------------------------------
<S> <C> <C>
Philip J. Whitcome, Ph.D.......... 47 Chairman of the Board and acting
Chief Financial Officer
John Monahan, Ph.D................ 49 President, Chief Executive
Officer and Director
Wanda deVlaminck.................. 54 Vice President, Clinical and
Regulatory Affairs and Secretary
Gary J. Kurtzman, M.D............. 41 Vice President, Research and
Development
Zola Horovitz, Ph.D.(1)(2)........ 61 Director
Yuichi Iwaki, M.D., Ph.D.......... 46 Director
Richard T. Pratt(1)(2)............ 59 Director
John K.A. Prendergast, Ph.D.(1)... 42 Director
Lindsay A. Rosenwald, M.D.(1)..... 40 Director
Leonard P. Shaykin(2)............. 52 Director
</TABLE>

- ---------------

(1) Member of Audit Committee
(2) Member of Compensation Committee

Philip J. Whitcome, Ph.D. has served as a director of the Company since
December 1992. In April 1995, Dr. Whitcome was elected Chairman of the Board and
in March 1996 he was appointed acting Chief Financial Officer. From 1988 to
1994, Dr. Whitcome was President and Chief Executive Officer of Neurogen
Corporation, a biopharmaceutical company. From 1981 to 1988, Dr. Whitcome was
employed at Amgen Inc. ("Amgen"), a biopharmaceutical company, serving most
recently as Director of Strategic Planning. Prior to joining Amgen, he served as
Manager of Corporate Development for Medical Products at Bristol-Myers Squibb
Co. ("Bristol-Myers"), a pharmaceutical and health care products company, and
held research and marketing management positions with the Diagnostics Division
of Abbott Laboratories, a pharmaceutical and medical products company. Dr.
Whitcome received a Ph.D. in Molecular Biology from the University of California
at Los Angeles, an M.B.A. from the Wharton School at the University of
Pennsylvania and a B.S. in Physics from Providence College.

John Monahan, Ph.D. has served as President, Chief Executive Officer and a
director of the Company since its inception in 1992. Prior to joining Avigen,
Dr. Monahan was Vice President of Research and Development at Somatix Therapy
Corporation ("Somatix"), a gene therapy company, from 1989 to 1992, where he was
responsible for the initiation and development of all research programs. From
1983 to 1988, he was Director of Molecular and Cell Biology at Berlex
Laboratories, a pharmaceutical company. From 1981 to 1983, he was Group Research
Chief at Hoffmann La Roche, a pharmaceutical company. Dr. Monahan received his
Ph.D. in biochemistry from McMaster University, Hamilton, Canada and his B.S.
degree in science from University College, Dublin, Ireland.

Wanda deVlaminck has served as Vice President, Clinical and Regulatory
Affairs of the Company since its inception in 1992 and in March 1996 she was
appointed as Secretary. From 1989 to 1992, Ms. deVlaminck was Vice President,
Regulatory Affairs at Somatix. In this position, she was responsible for
Somatix's compliance with all local, state and federal regulations pertaining to
environmental issues, personnel safety and products that come under the
jurisdiction of the FDA. In addition, Ms. deVlaminck managed intellectual
property and license agreements at Somatix. From 1988 to 1989, Ms. deVlaminck
worked on assignments in Israel, Japan, and the United States as a regulatory
affairs consultant. From 1983 to 1988, she was Senior Director Regulatory
Affairs at Cetus Corporation, a biotechnology company. Ms. deVlaminck received a
B.S.

36
<PAGE> 37

degree in microbiology from the University of California at Berkeley and is a
licensed Public Health Microbiologist in California.

Gary J. Kurtzman, M.D. has served as Vice President, Research and
Development since October 1994. From December 1993 to October 1994, Dr. Kurtzman
served as Senior Director of Research and Development of the Company. From 1991
to 1993, Dr. Kurtzman was the Virology Group Leader at Gilead Sciences, Inc, a
biotechnology company, where he was responsible for research related to drug
discovery and preclinical development of antiviral compounds. From 1989 to 1993,
he served as Associate at the Howard Hughes Medical Institute at Stanford
University. From 1984 to 1988, Dr. Kurtzman was employed by the National
Institutes of Health, initially as a medical staff fellow and later as a senior
staff fellow in the Hematology Branch of the National Heart, Lung and Blood
Institute. Dr. Kurtzman received his M.D. degree from Washington University, St.
Louis, Missouri and completed his internship and residency in internal medicine
at Barnes Hospital in St. Louis, Missouri. Dr. Kurtzman is board-certified in
internal medicine, with a hematology subspecialty, and is a licensed medical
practitioner in California.

Zola Horovitz, Ph.D. has served as a director of the Company since November
1994. From 1991 through May 1994, Dr. Horovitz served as Vice President,
Business Development and Planning and from 1990 to 1991 as Vice President,
Licensing at Bristol-Myers. Prior to this, Dr. Horovitz served from 1959 through
1989 in various positions at the Squibb Institute for Medical Research,
including Vice President, Research, Planning & Scientific Liaison, Vice
President, Drug Development, and Vice President, Biological and Pharmaceutical
R&D. Dr. Horovitz currently serves on the Board of Directors of Biocryst
Pharmaceuticals, Diacrin, Inc., InfoMed Corp., Magainin Pharmaceuticals, Procept
Corp. and Synaptic Pharmaceuticals and formerly served as a Commissioner of the
New Jersey Cancer Research Commission. From 1975 through 1993 Dr. Horovitz
served on the Scientific Advisory Council at Princeton University and from 1976
through 1989 on the Advisory Board of Rutgers University College of Pharmacy.
Dr. Horovitz received a Ph.D. in Pharmacology, and both an M.S. in Pharmacology
and B.S. in Pharmacy from the University of Pittsburgh.

Yuichi Iwaki, M.D., Ph.D. has served as a director of the Company since
November 1994. Since 1992, Dr. Iwaki has held two professorships at the
University of Southern California School of Medicine in the Departments of
Urology, and Pathology and is Director of the Transplantation Immunology and
Immunogenetic Laboratory. In addition, he holds visiting professorships at Tokai
University School of Medicine and Nihon University School of Medicine in Japan
and at the University of Pittsburgh School of Medicine and is the author of more
than 170 publications. Prior to joining the University of Southern California
Medical School faculty, Dr. Iwaki held professorships at the University of
Pittsburgh in the Departments of Urology and Pathology from 1989 through 1991.
Dr. Iwaki received an M.D. and a Ph.D. from Sapporo Medicine School in Sapporo,
Japan.

Richard T. Pratt has served as a director of the Company since January 1994
and served as Chairman of the Board of Directors from January 1994 to April
1995. Since 1993, Mr. Pratt has held a faculty position at the University of
Utah, where he teaches graduate and undergraduate courses in corporate finance,
banking and real estate. From 1983 through 1993, Mr. Pratt was employed at
Merrill Lynch & Co., a financial services company, first as Chairman of Merrill
Lynch Mortgage Capital Inc. and later as Managing Director, Financial
Institutions Group. Mr. Pratt is also Chairman of Richard T. Pratt Associates, a
financial consulting company. From 1981 to 1983, Mr. Pratt served as Chairman of
the Federal Home Loan Bank Board in Washington D.C. as chief federal regulator
of all federally insured savings and loan associations. Mr. Pratt has a D.B.A.
degree in Finance from Indiana University and M.B.A. and B.S. degrees from the
University of Utah.

John K.A. Prendergast, Ph.D. is a co-founder of the Company and has served
as a director of the Company since December 1992. From December 1992 to March
1996, Dr. Prendergast also served as a Vice President and the Treasurer of the
Company. Dr. Prendergast has also served as a Managing Director of The Castle
Group, Ltd. ("Castle"), a medical technology venture capital firm, since 1991.
Dr. Prendergast is a director of Xenometrix, a medical technology company, and
Atlantic Pharmaceuticals, Inc., a medical technology company. Dr. Prendergast
received M.Sc. and Ph.D. degrees from the University of New South Wales, Sydney,
Australia and a C.S.S. in Administration and Management from Harvard University.

37
<PAGE> 38

Lindsay A. Rosenwald, M.D. is a co-founder of the Company and has served as
a director since its inception in 1992. Dr. Rosenwald has served as the
President and Chairman of the Board of Directors of both Castle and Paramount
Capital Incorporated, an investment banking firm specializing in biomedical
technology companies since their respective inceptions in 1990 and 1992. Dr.
Rosenwald also serves as the Chairman of the Board of Directors and founder of
Interneuron Pharmaceuticals, Inc., a biotechnology company. In addition, Dr.
Rosenwald serves on the Board of Directors of Ansan, Inc., Atlantic
Pharmaceuticals, Inc., Biocryst Pharmaceuticals, Inc., Boston Life Sciences,
Inc., Neose Technologies, Inc., Sparta Pharmaceuticals, Inc., and Xenometrix,
Inc., all of which are medical technology companies. Dr. Rosenwald received an
M.D. from Temple University School of Medicine and a B.A. in finance from
Pennsylvania State University.

Leonard P. Shaykin has served as a director of the Company since June 1995.
Mr. Shaykin is a principal of Shaykin & Co., LLC, a private investment and
management holding company. From 1983 to 1994, Mr. Shaykin was a managing
partner of Adler & Shaykin, an investment partnership organized to sponsor
leveraged buyouts. Prior to forming Adler & Shaykin in 1983, Mr. Shaykin was
Vice President, director and a member of the Investment Committee of Citicorp
Venture Capital Ltd. and Citicorp Capital Investors, Inc., where he was
responsible for establishing and subsequently managing a $100 million equity
fund dedicated to management leveraged buyouts. Mr. Shaykin is Chairman of the
Board of Directors of NaPro BioTherapeutics, Inc. He also serves as Chairman of
The Neuroblastoma Foundation, is a governing trustee of The Jackson Laboratory
and a trustee of the University of Chicago's Graduate School of Business. Mr.
Shaykin received an M.B.A., M.A., and B.A. from the University of Chicago.

The Company intends to recruit a Chief Financial Officer after the closing
of the offering. Each officer serves at the discretion of the Board of
Directors. Each of the Company's officers and directors, other than non-employee
directors, devotes substantially full time to the affairs of the Company. The
Company's Chairman of the Board and the other non-employee directors devote such
time to the affairs of the Company as is necessary to discharge their duties.
There are no family relationships among any of the directors, officers or key
employees of the Company.

BOARD COMPOSITION

The Company currently has authorized 8 directors. In accordance with the
terms of the Company's Amended and Restated Certificate of Incorporation,
effective upon the closing of this offering, the terms of office of the Board of
Directors will be divided into three classes: Class I, whose term will expire at
the annual meeting of stockholders to be held in 1996; Class II, whose term will
expire at the annual meeting of stockholders to be held in 1997; and Class III,
whose term will expire at the annual meeting of stockholders to be held in 1998.
The Class I directors are Drs. Monahan, Horovitz and Iwaki, the Class II
directors are Drs. Whitcome and Prendergast and Mr. Pratt, and the Class III
directors are Dr. Rosenwald and Mr. Shaykin. At each annual meeting of
stockholders after the initial classification, the successors to directors whose
term will then expire will be elected to serve from the time of election and
qualification until the third annual meeting following election. In addition,
the Company's Amended and Restated Certificate of Incorporation provides that
the authorized number of directors may be changed only by resolution of the
Board of Directors. Any additional directorships resulting from an increase in
the number of directors will be distributed among the three classes so that, as
nearly as possible, each class will consist of one-third of the directors. This
classification of the Board of Directors may have the effect of delaying or
preventing changes in control or management of the Company. Although directors
of the Company may be removed for cause by the affirmative vote of the holders
of a majority of the Common Stock, the Company's Amended and Restated
Certificate of Incorporation provides that holders of two-thirds of the Common
Stock must vote to approve the removal of a director without cause.

BOARD COMMITTEES

The Audit Committee of the Board of Directors reviews the internal
accounting procedures of the Company and consults with and reviews the services
provided by the Company's independent auditors. The Compensation Committee of
the Board of Directors reviews and recommends to the Board the compensation and
benefits of all officers of the Company and reviews general policy relating to
compensation and benefits of

38
<PAGE> 39

employees of the Company. The Compensation Committee also administers the
issuance of stock options and other awards under the Company's stock plans.

DIRECTOR COMPENSATION

After completion of this offering, directors will receive no cash
compensation but will be reimbursed for certain expenses in connection with
attendance at Board and Committee meetings. In February 1996, the Board granted
options to Drs. Iwaki and Horovitz and Messrs. Shaykin and Pratt to purchase
1,975, 1,693, 846 and 9,969 shares, respectively, of Common Stock at an exercise
price of $0.71 per share. In September 1995, the Board granted an option to Dr.
Monahan to purchase 11,286 shares of Common Stock at an exercise price of $0.49
per share. In July 1995, the Board granted an option to Dr. Whitcome to purchase
515,248 shares of Common Stock at an exercise price of $0.49 per share in
connection with his services as Chairman of the Board. In June 1995, the Board
granted an option to purchase 6,772 shares of Common Stock to Mr. Shaykin at an
exercise price of $0.49 per share. In November 1994, the Board granted options
to purchase 6,772 shares of Common Stock to Dr. Horovitz and 6,772 shares of
Common Stock to Dr. Iwaki at an exercise price of $0.44 per share. In January
1994, the Board granted an option to purchase 33,860 shares of Common Stock to
Mr. Pratt at an exercise price of $0.66 per share. In April 1995 this option
expired without being exercised.

In March 1996, the Board of Directors adopted and in April 1996 the
stockholders approved the 1996 Non-Employee Directors' Stock Option Plan (the
"Directors' Plan") and reserved 200,000 shares of Common Stock for issuance
under the Directors' Plan. The Directors Plan provides for automatic grants of
options to purchase shares of Common Stock to non-employee directors of the
Company ("Non-Employee Directors"). Pursuant to the terms of the Directors'
Plan, each Non-Employee Director elected after completion of this offering will
automatically be granted an option to purchase 15,000 shares of Common Stock on
the date of his election to the Board. In addition, at each annual meeting of
the Company's stockholders, each Non-Employee Director who has continuously
served as a director since the last annual meeting of the Company's stockholders
shall be granted an option to purchase 5,000 shares of Common Stock. A
Non-Employee Director who has not served for a full year shall be granted an
option to purchase a pro-rated number of shares. As of March 31, 1996, no
options have been granted under the Directors' Plan.

Outstanding options under the Directors' Plan will vest at the rate of 33%
of the shares subject to the option on the first anniversary of the date of
grant, 34% of the shares subject to the option on the second anniversary of the
date of grant and 33% of the shares subject to the option on the third
anniversary of the date of grant. The exercise price of options granted under
the Directors' Plan must equal the fair market value of the Common Stock on the
date of grant. No option granted under the Directors' Plan may be exercised
after the expiration of ten years from the date it was granted. Options granted
under the Directors' Plan are generally non-transferable. The Directors' Plan
will terminate in March 2006, unless earlier terminated by the Board.

In the event of a merger or consolidation, or a reverse merger or
reorganization in which the Company is not the surviving corporation, options
outstanding under the Directors' Plan will automatically become fully vested and
will terminate if not exercised prior to such event.

39
<PAGE> 40

EXECUTIVE COMPENSATION

The following table sets forth certain compensation awarded or paid by the
Company during the fiscal year ended June 30, 1995 to its President and Chief
Executive Officer and the Company's other executive officers who earned more
than $100,000 during the year ended June 30, 1995 (collectively, the "Named
Executive Officers"):

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES ALL OTHER
-------------------- UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS(#) ($)(1)
------------------------------------------- --------- -------- ------------ ------------
<S> <C> <C> <C> <C>
John Monahan, Ph.D......................... 159,935 -- -- 576
President and Chief Executive Officer
Wanda deVlaminck........................... 127,200 -- 7,900 491
Vice President, Clinical and Regulatory
Affairs
Gary J. Kurtzman, M.D...................... 120,000 -- 22,573 461
Vice President, Research and Development
</TABLE>

- ---------------

(1) Represents insurance premiums paid by the Company with respect to term life
insurance for the benefit of the named executive.

EMPLOYMENT AGREEMENTS

In August and October 1992, the Company entered into employment agreements
with John Monahan, the Company's President, and with Wanda deVlaminck, the
Company's Vice President, Clinical and Regulatory Affairs. The employment
agreements provide for, among other items, (i) a minimum base salary of at least
$150,000 and $120,000 per year for Dr. Monahan and Ms. deVlaminck, respectively,
and (ii) severance payments and benefits at the standard compensation rate for
12 months or until new employment in the gene therapy field is commenced, unless
termination is for just cause. The employment agreements automatically renew for
successive one year periods unless 30 days prior written notice is provided by
either party or unless terminated by either party for just cause.

1993 STOCK OPTION PLAN

The Company's 1993 Stock Option Plan (the "1993 Stock Plan") was adopted by
the Board of Directors in October 1993 and approved by its stockholders in
November 1993. The 1993 Stock Plan provides for grants of incentive stock
options to key employees (including officers and employee directors) and
nonstatutory stock options to key employees (including officers and employee
directors) and consultants of the Company. A total of 338,600 shares of Common
Stock have been reserved for issuance under the 1993 Stock Plan. As of March 31,
1996, the Company has granted or agreed to grant options to purchase an
aggregate of 308,027 shares of Common Stock at exercise prices ranging from
$0.44 to $0.71 per share. A total of 30,573 shares of Common Stock are available
for future issuance under the 1993 Stock Plan, and shares subject to options
which expire, are cancelled or terminate without having been exercised may again
be subject to options under the 1993 Stock Plan. However, the Board of Directors
has determined that no further options will be granted under the 1993 Stock Plan
after the completion of this offering. The 1993 Stock Plan is administered by
the Compensation Committee of the Board of Directors, which determines
recipients and types of awards to be granted, including the exercise price,
number of shares subject to the award and the exercisability thereof.

The term of a stock option granted under the 1993 Stock Plan generally may
not exceed 10 years. Options granted pursuant to the 1993 Stock Plan become
exercisable at a rate of at least twenty percent (20%) per year of the total
number of shares granted over a period of no more than five years from the date
of grant. The exercise price of options granted under the 1993 Stock Plan is
determined by the Board of Directors; provided that, in the case of an incentive
stock option, the exercise price cannot be less than 100% of the fair market

40
<PAGE> 41

value of the Common Stock on the date of grant or, in the case of 10%
stockholders, not less than 110% of the fair market value of the Common Stock on
the date of grant. No option may be transferred by the optionee other than by
will or the laws of descent or distribution. An optionee whose employment with
the Company ceases for any reason (other than by death or permanent and total
disability) may exercise options in the 90 day period following such termination
(unless such options terminate or expire sooner by their terms).

The 1993 Stock Plan will terminate in September 2003, unless terminated
sooner by the Board of Directors.

1996 EQUITY INCENTIVE PLAN

In March 1996, the Board of Directors adopted and in April 1996 the
stockholders approved the 1996 Equity Incentive Plan (the "Incentive Plan") and
reserved 600,000 shares of Common Stock for issuance under the Incentive Plan.
The Incentive Plan provides for grants of incentive stock options to employees
(including officers and employee directors) and nonstatutory stock options,
restricted stock purchase awards, stock bonuses and stock appreciation rights to
employees (including officers and employee directors) and consultants of the
Company. As of March 31, 1996, no options, restricted stock awards, stock
bonuses or stock appreciation rights had been granted under the Incentive Plan.
The Incentive Plan is administered by the Compensation Committee, which
determines recipients and types of awards to be granted, including the exercise
price, number of shares subject to the award and the exercisability thereof.

The term of a stock option granted under the Incentive Plan generally may
not exceed 10 years. The exercise price of options granted under the Incentive
Plan is determined by the Board of Directors; provided that, in the case of a
nonstatutory stock option the exercise price cannot be less than 85% of the fair
market value on the date of grant, and in the case of an incentive stock option,
cannot be less than 100% of the fair market value of the Common Stock on the
date of grant or, in the case of 10% stockholders, not less than 110% of the
fair market value of the Common Stock on the date of grant. No option may be
transferred by the optionee other than by will or the laws of descent or
distribution or, in certain limited instances, pursuant to a qualified domestic
relations order. An optionee whose relationship with the Company or any related
corporation ceases for any reason (other than by death or permanent and total
disability) may exercise options in the three-month period following such
cessation (unless such options terminate or expire sooner by their terms) or in
such longer period as may be determined by the Board of Directors.

Shares subject to options which have expired or terminated may again be
subject to options granted under the Incentive Plan. Furthermore, the Board of
Directors may offer to exchange new options for existing options, with the
shares subject to the existing options again becoming available for grant under
the Incentive Plan. In the event of a decline in the value of the Company's
Common Stock, the Board of Directors has the authority to offer optionees the
opportunity to replace outstanding higher priced options with new lower priced
options.

Restricted stock purchase awards granted under the Incentive Plan may be
granted pursuant to a repurchase option in favor of the Company in accordance
with a vesting schedule determined by the Board. The purchase price of such
awards will be at least 85% of the fair market value of the Common Stock on the
date of grant. Stock bonuses may be awarded in consideration for past services
without a purchase payment. Stock appreciation rights authorized for issuance
under the Incentive Plan may be tandem stock appreciation rights, concurrent
stock appreciation rights or independent stock appreciation rights.

Upon any merger, consolidation or similar transaction in which the Company
is not the surviving corporation, all outstanding awards under the Incentive
Plan shall either be assumed or substituted by the surviving entity. If the
surviving entity determines not to assume or substitute such awards, the time
during which such awards may be exercised shall be accelerated and the awards
terminated if not exercised prior to the transaction. The Incentive Plan will
terminate in March 2006, unless terminated sooner by the Board of Directors.

41
<PAGE> 42

OPTION GRANTS IN LAST FISCAL YEAR

The following table sets forth each grant of stock options made during the
fiscal year ended June 30, 1995, to each of the Named Executive Officers:

<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT ASSUMED
INDIVIDUAL GRANTS ANNUAL RATES OF
------------------------------------------------------- STOCK
NUMBER OF PERCENTAGE OF PRICE APPRECIATION
SECURITIES TOTAL OPTIONS FOR
UNDERLYING GRANTED IN EXERCISE OPTION TERM(4)
OPTIONS FISCAL YEAR PRICE EXPIRATION -------------------
NAME GRANTED(#)(1) (%)(2) ($/SH)(3) DATE 5%($) 10%($)
- ------------------------------ ------------- ------------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Wanda deVlaminck.............. 7,900 6.9 $ 0.44 9/15/04 $ 99,516 $160,188
Gary J. Kurtzman, M.D......... 22,573 19.6 $ 0.44 9/15/04 $284,352 $457,713
</TABLE>

- ---------------

(1) Options granted become exercisable at the rate of 6.25% of the shares
subject to the option each quarter for four years. The options expire 10
years from the date of grant, or earlier upon termination of employment.

(2) Based on an aggregate of 115,237 options granted to employees and directors
of, and consultants to, the Company during fiscal year ended June 30, 1995,
including the Named Executive Officers.

(3) The exercise price per share of each option was equal to the fair market
value of the Common Stock on the date of grant as determined by the Board of
Directors.

(4) The potential realizable value is calculated based on the term of the option
at its time of grant (ten years). It is calculated assuming that the public
offering price of $8.00 per share appreciates from the date of grant at the
indicated annual rate compounded annually for the entire term of the option
and the option is exercised and sold on the last day of its term for the
appreciated stock price. No gain to the optionee is possible unless the
stock price increases over the option term.

AGGREGATE OPTION EXERCISES IN FISCAL 1995 AND JUNE 30, 1995 OPTION VALUES

The following table sets forth for each of the Named Executive Officers the
shares acquired and the value realized on each exercise of stock options during
the fiscal year ended June 30, 1995 and the number and value of securities
underlying unexercised options held by the Named Executive Officers at June 30,
1995:

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES JUNE 30, 1995(#) JUNE 30, 1995($)(1)
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) REALIZED($)(1) UNEXERCISABLE UNEXERCISABLE
- ----------------------------- ----------- -------------- ---------------------- -----------------------
<S> <C> <C> <C> <C>
Wanda deVlaminck............. -- -- 1,482/6,418 $ 11,204/$48,520
Gary J. Kurtzman, M.D........ -- -- 11,004/29,627 $ 83,190/$223,980
</TABLE>

- ---------------

(1) Value realized and value of unexercised in-the-money options is based on a
value of $8.00 per share of the Company's Common Stock, the estimated public
offering price, even though at the time of grant the fair market value of
the Common Stock was determined by the Board of Directors to be $0.44 per
share. Amounts reflected are based on the assumed value minus the exercise
price multiplied by the number of shares acquired on exercise and do not
indicate that the optionee sold such stock.

LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS

As permitted by the Delaware Law, the Company's Amended and Restated
Certificate of Incorporation provides that no director of the Company will be
personally liable to the Company or its stockholders for monetary damages for
breach of fiduciary duty as a director, except for liability (i) for any breach
of the director's duty of loyalty to the Company or to its stockholders, (ii)
for acts or omissions not made in good faith or which involved intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the
Delaware Law, relating to prohibited dividends or distributions or the
repurchase or redemption of stock, or (iv) for any transaction from which the
director derives an improper personal benefit. In addition, the

42
<PAGE> 43

Company's Certificate of Incorporation provides that any director or officer who
was or is a party or is threatened to be made a party to any action or
proceeding by reason of his or her services to the Company will be indemnified
to the fullest extent permitted by the Delaware Law.

The Company has entered into indemnification agreements with each of its
directors and officers under which the Company has indemnified each of them
against expenses and losses incurred for claims brought against them by reason
of their being a director or officer of the Company, and the Company is in the
process of obtaining directors' and officers' liability insurance.

There is no pending litigation or proceeding involving a director or
officer of the Company as to which indemnification is being sought, nor is the
Company aware of any pending or threatened litigation that may result in claims
for indemnification by any director or officer.

CERTAIN TRANSACTIONS

In March 1996, in connection with the 1996 Bridge Financing, the Company
entered into a Placement Agency Agreement with Paramount Capital Incorporated
("Paramount"), pursuant to which the Company agreed to pay Paramount a selling
commission of 7% of the gross proceeds from the financing, and a non-accountable
expense allowance of 3% of the gross proceeds and warrants to purchase a number
of newly issued shares of Common Stock equal to 10% of the warrants issued in
the offering to Paramount and its designees at an exercise price of 110% of the
exercise price of the warrants in connection with its services as placement
agent. Dr. Rosenwald, a director of the Company, is the Chairman of the Board,
President and sole stockholder of Paramount. In addition, Mr. Shaykin, a
director of the Company, purchased $25,000 aggregate principal amount of notes
in the 1996 Bridge Financing and received a warrant to purchase 2,500 shares of
Common Stock at an exercise price equal to the greater of $.25 per share and 80%
of the offering price. The warrant is exercisable until March 2001.

In March 1996, the Company completed a private placement of its Series D
Preferred Stock ("Series D Private Placement"). Pursuant to a March 1995
Engagement Agreement between the Company and Dr. Yuichi Iwaki, a director of the
Company, Dr. Iwaki will receive a fee for identifying investors in the amount of
$25,279. In addition, the Company issued warrants to purchase up to 45,272
shares of Series D Preferred Stock at an exercise price of $7.80 per share,
which equaled 110% of the purchase price of the Series D Preferred Stock. The
warrants are exercisable until March 2001.

In October 1995, the Company entered into an agreement with The Aries Trust
pursuant to which The Aries Trust extended a bridge loan in the principal amount
of $80,000. The loan bore interest at the rate of 12% per year and was due and
payable on the earlier of April 1996 or the receipt by the Company of an equity
investment in excess of $500,000. In December 1995, the Company paid the
principal amount of $80,000 plus accrued interest in the amount of $1,707 and
issued warrants to purchase 1,805 shares of Common Stock at an exercise price of
$7.09 per share. The warrants are exercisable until November 2005. Dr. Rosenwald
is the President of Aries Financial Services, which serves as the investment
manager for The Aries Trust.

In September 1995, the Company entered into an agreement with the Aries
Domestic Fund pursuant to which the Aries Domestic Fund extended a bridge loan
in the principal amount of $120,000. Dr. Rosenwald is President of the sole
general partner to the Aries Domestic Fund. Dr. Iwaki is a director of the Aries
Domestic Fund. The loan bore interest at the rate of 12% and was due and payable
on the earlier of March 1996 or the receipt by the Company of an equity
investment in excess of $500,000. In December 1995, the Company paid the
principal amount of $120,000, accrued interest in the amount of $2,880 and
issued warrants to purchase 2,708 shares of Common Stock at an exercise price of
$7.09. The warrants are exercisable until October 2005.

In July 1995, the Company granted to Dr. Whitcome an option to purchase
515,248 shares of Common Stock at $0.49 per share, exercisable for ten years
from the date of grant. The shares vest in equal monthly installments over
thirty-six months. The shares issuable upon exercise of such option are subject
to repurchase at the original price per share upon cessation of service prior to
vesting in such shares. Such grant was made outside of the 1993 Stock Plan.

In July 1995, the Company completed a private placement of shares of its
Series C Preferred Stock in which Paramount acted as placement agent. Under the
agreement, Paramount received (i) a commission of 9% of gross proceeds received
by the Company from investors, (ii) a nonaccountable expense allowance equal

43
<PAGE> 44

to 4% of the gross proceeds and (iii) warrants to purchase 10% of the Series C
Preferred Shares sold by Paramount. For a period of eighteen months from the
final closing date, Paramount was entitled to receive a commission of 9% and a
non accountable expense allowance equal to 4% of any securities sold by the
Company, other than in a public offering, to individuals or entities who
purchased the Series C Preferred Stock through Paramount prior to the final
closing date. As of March 31, 1996, Paramount had received cash payments in the
amount of $156,024 and warrants to purchase 24,471 shares of Series C Preferred
Stock, at an exercise price of $5.36 per share. The warrants are exercisable
until June 2005. In addition, Mr. Shaykin, a director of the Company, and an
immediate family member purchased a total of 47,198 shares of Series C Preferred
Stock at a price of $4.87 per share in the private placement.

In May 1995, Dr. Rosenwald extended a bridge loan to the Company in the
principal amount of $38,000. The loan accrued interest at the prime rate of
National Westminster Bank USA plus 1% per year. In June 1995, the Company issued
7,797 shares of Series C Preferred Stock as payment in full of the outstanding
principal under the loan.

In May 1995, Dr. Rosenwald extended a bridge loan to the Company in the
principal amount of $135,000. The loan accrued interest at the prime rate of
National Westminster Bank USA plus 1% per year and was due and payable on
demand. In June 1995, the Company issued 27,703 shares of Series C Preferred
Stock as payment in full of the outstanding principal under the loan.

In January 1995, the Company entered into an Introduction Agreement with
Paramount for the purpose of introducing the Company to potential strategic
alliance partners in Korea. Under the terms of the agreement, the Company agreed
to pay Paramount 4% of the aggregate investment received by Avigen upon the
closing of each investment. In addition, the Company agreed to issue: (i) a
warrant to purchase a number of securities equal to 4% of the securities sold
pursuant to the Introduction Agreement at an exercise price equal to 110% of the
price paid by the introduced parties, and (ii) an option to purchase a number of
shares of Common Stock approximately equal to 4% of the number of shares issued
pursuant to the Introduction Agreement at an exercise price of 110% of the fair
market value of Common Stock at the time the option is granted. Both the
warrants and the options will be exercisable for 10 years from the date of
grant. The Introduction Agreement expired in January 1996. However, if the
Company receives an investment during the 12 months following the date of the
termination, Paramount will be entitled to receive the compensation described
above. As of March 31, 1996, the Company had made no payments and issued no
options or warrants to Paramount under the agreement.

In July 1994, the Company entered into a non-exclusive Engagement Agreement
("the 1994 Engagement Agreement") with Maxzen Medical Technologies ("Maxzen")
for the purpose of identifying potential investors in Japan. Dr. Iwaki has been
affiliated with Maxzen from its inception in 1992. The 1994 Engagement Agreement
replaced an expired agreement between Maxzen and the Company, dated May 1993
(the "1993 Engagement Agreement") and provided for Maxzen to assist the Company
in identifying potential investors in Japan during an initial one year term. The
1994 Engagement Agreement provided for (a) the payment of a fee by Avigen equal
to 5% of the gross proceeds of investments in the Company initiated by Maxzen
and (b) the grant of warrants to purchase the same kind of securities as were
purchased by such investors equal to 10% of the number of securities so
purchased. Such warrants are to be exercisable at a price equal to 110% of the
price at which such shares were sold for a period of five years from the
respective closings of such investments. As of March 31, 1996, the Company paid
to Maxzen and its designees under the 1993 Engagement Agreement and the 1994
Engagement Agreement cash payments totaling $271,561 and warrants for the
purchase of: (i) 61,014 shares of Series A Preferred Stock at an exercise price
of $4.87 per share, 30,507 of which are currently held by Dr. Iwaki, (ii) 12,802
shares of Series B Preferred Stock at an exercise price of $6.11 per share and
(iii) 53,594 shares of Series C Preferred Stock at an exercise price of $5.36
per share. The warrants are exercisable until December 1998, March 1999 and June
2000, respectively.

In June 1994, the Company entered into a Business Development Agreement
with Maxzen pursuant to which Maxzen agreed to assist the Company in specified
corporate partnering efforts in certain countries in Asia. The Company was
obligated under the Business Development Agreement to pay certain out-of-pocket
expenses of Maxzen and to compensate Maxzen for any investment in the Company by
one of the specified corporate partners by payment of a fee equal to 7% of the
total amount of such investment and the grant of warrants to purchase a number
of shares of Common Stock equal to 10% of the total amount of such

44
<PAGE> 45

investment. Such warrants were to be exercisable at a price of $4.87 per share
for a period of five years from the date of issuance. The agreement expired in
June 1995, and the Company had made no payments under the agreement.

In April 1994, the Company entered into a credit facility agreement with
Dr. Rosenwald. The credit facility provided that Dr. Rosenwald would assist in
obtaining or providing, for the benefit of the Company, a credit facility in an
amount up to $1,000,000, either in the form of a direct loan or a personal
guaranty, to finance ordinary working capital requirements of the Company. In
October 1994, the Company repaid the principal amount of $880,000 received under
the credit facility, plus interest at the rate of 7.25% per year.

In February 1994, the Company received a $100,000 loan from National
Westminster Bank USA guaranteed by Dr. Rosenwald. The loan accrued interest at
the rate of 10% and was repaid in March 1994.

In January 1994, Paramount introduced a certain party to the Company with a
view to a potential investment in the Company. In connection with this
introduction, the Company entered into an Agreement of Introduction with
Paramount pursuant to which the Company agreed to pay a commission ranging from
5% to 10% of any investment in the Company by the introduced party. In addition,
the agreement provided that Paramount was entitled to receive warrants to
purchase securities of the Company equal to 7% of the amount of securities
purchased by the introduced party at an exercise price equal to 110% of the
price paid by the introduced party. The agreement expired in January 1996 and
the Company had made no payments and issued no warrants to Paramount under the
agreement.

In November 1993, the Company completed a private placement of its Series A
Preferred Stock in which Paramount acted as placement agent. Under the
agreement, Paramount received (i) a commission of $442,110; (ii) an advance
accountable expense allowance of $50,000; and (iii) warrants to purchase 47,569
shares of Series A Preferred Stock at an exercise price of $4.87 per share,
13,337 of which are currently held by Dr. Rosenwald. The warrants are
exercisable until May 1998 and December 1998, respectively.

In February 1993, National Westminster Bank USA extended to the Company two
loans in the amounts of $90,000 and $100,000 that were guaranteed by Dr.
Rosenwald. The loans accrued interest at the rate of 7% per year and were repaid
in June 1993.

In March 1993, Dr. Rosenwald personally extended to the Company a loan in
the amount of $130,000. The loan accrued interest at the rate of 10% per year
and was repaid in April 1993.

In November 1992, The Castle Group, Ltd. ("Castle") extended the Company a
$300,000 line of credit to finance the Company's license issue fees and ordinary
working capital needs. In April 1993, the Company repaid the loan with interest
at the rate of 7% per year. Dr. Rosenwald is President and Chairman of the Board
of Castle. Dr. Prendergast, a director of the Company, is also a Managing
Director of Castle.

In October 1992, the mother of Dr. Rosenwald's spouse loaned $250,000 to
the Company pursuant to a promissory note issued by the Company. The loan was
converted with accrued interest of $15,902, into 68,991 shares of Series A
Preferred Stock in September 1995. The lender also received warrants to purchase
6,899 shares of Series A Preferred Stock at an exercise price of $4.87 per
share. The warrants are exercisable until November 1998.

Dr. Rosenwald has personally guaranteed the Company's five-year lease with
1201 Harbor Bay Partnership, the landlord of the Company's office and laboratory
facilities at 1201 Harbor Bay Parkway, Alameda, California. The Company has
agreed to indemnify Dr. Rosenwald for any losses or expenses that he may incur
as a result of this guarantee.

The Company has entered into indemnification agreements with its directors
and executive officers for the indemnification of and advancement of expenses to
such persons to the full extent permitted by law. The Company intends to execute
such agreements with its future directors and executive officers. See
"Management -- Limitation of Liability and Indemnification Matters."

45
<PAGE> 46

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of March 31, 1996 and as adjusted to
reflect the sale of the Common Stock being offered hereby by: (i) each
stockholder who is known by the Company to own beneficially more than 5% of the
Common Stock; (ii) each Named Executive Officer of the Company; (iii) each
director of the Company; and (iv) all directors and executive officers of the
Company as a group:

<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED
OFFERING(1) AFTER OFFERING(1)
-------------------- --------------------
DIRECTORS, EXECUTIVE OFFICERS AND 5% STOCKHOLDERS NUMBER PERCENT NUMBER PERCENT
- --------------------------------------------------- -------- ------- -------- -------
<S> <C> <C> <C> <C>
Lindsay A. Rosenwald, M.D.(2)...................... 569,241 12.49% 569,241 8.10%
c/o The Castle Group Ltd.
375 Park Ave.
New York, NY 10152
John Monahan, Ph.D.(3)............................. 232,714 5.14% 232,714 3.31%
c/o Avigen, Inc.
1201 Harbor Bay Parkway, #1000
Alameda, CA 94502
Philip J. Whitcome, Ph.D.(4)....................... 162,311 3.47% 162,311 2.31%
Yuichi Iwaki, M.D., Ph.D.(5)....................... 107,752 2.33% 107,752 1.53%
Wanda deVlaminck(6)................................ 65,050 1.43% 65,050 *
John K. A. Prendergast, Ph.D. ..................... 58,608 1.29% 58,608 *
Leonard P. Shaykin(7).............................. 46,683 1.03% 46,683 *
Gary J. Kurtzman, M.D.(8).......................... 20,737 * 20,737 *
Richard T. Pratt(9)................................ 9,969 * 9,969 *
Zola Horovitz, Ph.D.(10)........................... 4,232 * 4,232 *
All directors and executive officers as a group
(10 persons)(11)................................. 1,268,946 26.21% 1,268,946 17.28%
</TABLE>

- ---------------

* Represents beneficial ownership of less than 1%.

(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission (the "Commission") and generally
includes voting or investment power with respect to securities. Except as
indicated by footnote, and subject to community property laws where
applicable, the persons named in the table above have sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by them. Percentage of beneficial ownership is based on
4,529,015 shares of Common Stock outstanding as of March 31, 1996 and
7,029,015 shares of Common Stock outstanding after completion of this
offering.

(2) Includes warrants to purchase 23,877 shares of Common Stock held by Dr.
Rosenwald. Also includes 160,573 shares held by Dr. Rosenwald's immediate
family members and 66,914 shares held in trust for the benefit of Dr.
Rosenwald's immediate family members, which he disclaims beneficial
ownership of except to the extent of his pecuniary interest therein. Also
includes 5,130 shares of Common Stock and warrants to purchase 3,221 shares
of Common Stock held by the Aries Domestic Fund. Dr. Rosenwald is President
of the sole general partner to the Aries Domestic Fund and disclaims
beneficial ownership of such shares except to the extent of his pecuniary
interest therein. Also includes 5,130 shares of Common Stock and warrants
to purchase 2,318 shares of Common Stock held by the Aries Trust. Dr.
Rosenwald is President of the sole investment advisor to the Aries Trust
and disclaims beneficial ownership of such shares except to the extent of
his pecuniary interest therein. Includes 89,606 shares of Common Stock held
by Huntington Street Co. and June Street Co. Dr. Rosenwald is the sole
proprietor of both entities.

(3) Includes 1,410 shares granted in September 1995 and issuable upon the
exercise of options held by Dr. Monahan that are exercisable within 60
days.

(4) Includes 143,124 shares granted in July 1995 and issuable upon the exercise
of options held by Dr. Whitcome that are exercisable within 60 days.

46
<PAGE> 47

(5) Includes 4,514 shares issuable upon the exercise of options and warrants to
purchase 89,244 shares of Common Stock held by Dr. Iwaki that are
exercisable within 60 days. Also includes 5,130 shares of Common Stock and
warrants to purchase 3,221 shares of Common Stock exercisable within 60
days held by the Aries Domestic Fund. Dr. Iwaki is a director of the Aries
Domestic Fund and disclaims beneficial ownership of such shares except to
the extent of his pecuniary interest therein.

(6) Includes 5,079 shares issuable upon the exercise of options held by Ms.
deVlaminck that are exercisable within 60 days.

(7) Includes 2,115 shares issuable upon the exercise of options held by Mr.
Shaykin that are exercisable within 60 days. Also includes warrants to
purchase 2,500 shares of Common Stock held by Mr. Shaykin.

(8) Includes 20,737 shares issuable upon the exercise of options held by Dr.
Kurtzman that are exercisable within 60 days.

(9) Includes 9,969 shares issuable upon the exercise of options held by Mr.
Pratt that are exercisable within 60 days.

(10) Includes 4,232 shares issuable upon the exercise of options held by Dr.
Horovitz that are exercisable within 60 days.

(11) Includes 312,340 shares issuable upon the exercise of options and warrants
held by all directors and executive officers that are exercisable within 60
days.

47
<PAGE> 48

DESCRIPTION OF CAPITAL STOCK

Upon the closing of this offering, the authorized capital stock of the
Company will consist of 30,000,000 shares of Common Stock, $.001 par value, and
5,000,000 shares of Preferred Stock, $.001 par value ("Preferred Stock").

COMMON STOCK

As of March 31, 1996, there were 4,529,015 shares of Common Stock
outstanding held of record by approximately 210 stockholders.

The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. The holders of
Common Stock are entitled to receive ratably such dividends as may be declared
by the Board of Directors out of funds legally available therefor. See "Dividend
Policy." In the event of a liquidation, dissolution or winding up of the
Company, holders of the Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities. Holders of Common Stock have no
preemptive rights and no right to convert their Common Stock into any other
securities. There are no redemption or sinking fund provisions applicable to the
Common Stock. All outstanding shares of Common Stock are, and all shares of
Common Stock to be outstanding upon completion of this offering will be, fully
paid and nonassessable.

PREFERRED STOCK

The Board of Directors has the authority, without further action by the
stockholders, to issue up to 5,000,000 shares of Preferred Stock in one or more
series and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences, sinking fund terms and the number of shares
constituting any series or the designation of such series, without any further
vote or action by stockholders. The issuance of Preferred Stock could adversely
affect the voting power of holders of Common Stock and the likelihood that such
holders will receive dividend payments and payments upon liquidation and could
have the effect of delaying, deferring or preventing a change in control of the
Company. The Company has no present plan to issue any shares of Preferred Stock.

WARRANTS

As of March 31, 1996, the Company had outstanding warrants to purchase
257,880 shares of Common Stock (excluding warrants issued pursuant to the 1996
Bridge Financing) at exercise prices ranging from $4.87 per share to $7.80 per
share. The warrants expire at various times from May 1998 to November 2005. Each
warrant contains provisions for the adjustment of the exercise price and the
aggregate number of shares issuable upon the exercise of the warrant under
certain circumstances, including stock dividends, stock splits, reorganizations,
reclassification, consolidations and certain dilutive sales of the securities
for which the warrant is exercisable below the then existing exercise price.
Each warrant may be exercised, without the payment of cash, for the number of
shares of Common Stock purchasable, at the current market value of the Common
Stock, by the difference between the aggregate exercise price of the warrant and
the value, at the current market price per share of Common Stock of the
aggregate number of shares purchasable under the warrant.

In connection with the 1996 Bridge Financing, the Company issued warrants
to purchase 193,750 shares of Common Stock in March 1996 at an exercise price
equal to the greater of $0.25 per share and 80% of the offering price and
warrants to purchase 19,375 shares of Common Stock at an exercise price equal to
110% of the greater of $0.25 per share and 80% of the offering price. The
warrants expire in March 2001. Each warrant contains provisions for the
adjustment of the exercise price and the aggregate number of shares issuable
upon the exercise of the warrant under certain circumstances, including stock
dividends, stock splits, reorganizations, reclassification, and consolidations.
In addition, the warrant to purchase 19,375 shares granted to the Placement
Agent provides that such warrant may be exercised, without the payment of cash,
for the number of shares of Common Stock purchasable, at the current market
value of the Common Stock, by the differences between the aggregate exercise
price of the warrant and the value, at the current market price per share of
Common Stock of the aggregate number of shares purchasable under the warrant.

48
<PAGE> 49

Holders of warrants have certain rights to require the Company to register
the shares of Common Stock issued or issuable upon exercise of the warrants.

REGISTRATION RIGHTS

Following this offering, holders of 3,424,535 shares of Common Stock and
warrants to purchase 442,606 shares of Common Stock (excluding warrants issued
pursuant to the 1996 Bridge Financing) will be entitled to certain rights with
respect to the registration of their shares under the Securities Act. Under the
terms of their respective subscription agreements or warrants, if the Company
proposes to register any of its securities under the Securities Act at any time
commencing 12 months after the closing of this offering, either for its own
account or the account of others, the holders are entitled to notice of such
registration and are entitled to include their shares of Common Stock; provided,
among other conditions, that the underwriters of any offering have the right to
limit the number of such shares included in such registration. The holders may
also require the Company to file a registration statement under the Securities
Act at the Company's expense with respect to their shares of Common Stock, and
the Company is required to use its best efforts to effect such registration.

No later than 180 days following the closing of this offering, the Company
will also be required to register under the Securities Act 213,125 shares of
Common Stock issuable upon exercise of warrants issued in the 1996 Bridge
Financing. The Company is required to keep such registration effective until all
holders have completed the distribution which will be described in such
registration statement.

DELAWARE LAW AND CERTAIN CHARTER PROVISIONS

The Company is subject to the provisions of Section 203 of the Delaware
Law, an anti-takeover law. In general, the statute prohibits a publicly held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. For purposes of Section
203, a "business combination" includes a merger, asset sale or other transaction
resulting in a financial benefit to the interested stockholder, and an
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior, did own) 15% or more of the
corporation's voting stock.

The Company's Certificate of Incorporation and Bylaws also require that,
effective upon the closing of this offering any action required or permitted to
be taken by stockholders of the Company must be effected at a duly called annual
or special meeting of the stockholders and may not be effected by a consent in
writing. In addition, special meetings of the stockholders of the Company may be
called only by the Board of Directors, the Chairman of the Board, the Chief
Executive Officer of the Company or by any person or persons holding shares
representing at least 10% of the outstanding capital stock. The Company's
Certificate of Incorporation also provides for a classified Board and specifies
that the authorized number of directors may be changed only by resolution of the
Board of Directors. See "Management -- Board Composition." These provisions may
have the effect of deterring hostile takeovers or delaying changes in control or
management of the Company.

TRANSFER AGENT AND REGISTRAR

American Stock Transfer & Trust Company has been appointed as the transfer
agent and registrar for the Company's Common Stock.

49
<PAGE> 50

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering and assuming no exercise of outstanding
options or warrants and no exercise of the Underwriters over-allotment option,
the Company will have outstanding 7,029,015 shares of Common Stock. Of these
shares, the 2,500,000 shares sold in this offering will be freely tradeable
without restriction or further registration under the Securities Act, except for
any shares held by "affiliates" of the Company as that term is defined in Rule
144 under the Securities Act ("Affiliates"), which shares will be subject to the
resale limitations of Rule 144. The remaining 4,529,015 shares of Common Stock
held by existing stockholders (the "Restricted Shares") were issued and sold by
the Company in reliance on exemptions from the registration requirements of the
Securities Act. These shares may be sold in the public market only if registered
or pursuant to an exemption from registration such as Rules 144, 144(k), or 701
under the Securities Act, which are summarized below.

In the absence of the restrictions contained in the agreements not to sell
described below, approximately 160,721 of these Restricted Shares will be
eligible for sale in the public market upon the date of this offering pursuant
to Rule 144(k). In the absence of the restrictions contained in the agreements
not to sell described below, approximately 36,144 additional Restricted Shares
will be eligible for sale beginning 90 days after the date of this offering
pursuant to Rule 144 and Rule 701. Holders of approximately 4,267,991 of the
Restricted Shares are subject to agreements not to sell or otherwise transfer
their shares for a certain period of time following the date of this offering
(the "Lock-up Shares"). Of such Lock-up Shares, 3,646,559 will become available
for sale in the public market 180 days after the date of this offering, although
1,801,454 of the Lock-up Shares will still be subject to certain volume and
other restrictions on resale under Rule 144 at the expiration of such lock-up
period. Wedbush Morgan Securities may, in its sole discretion and at any time
without notice, release any or all of the holders of the Lock-up Shares from any
or all of their obligations under their respective agreements not to sell.

As of March 31, 1996, there were 823,275 shares of Common Stock issuable
upon exercise of outstanding options. The Company intends to file registration
statements under the Securities Act to register shares of Common Stock reserved
for issuance under the 1993 Stock Plan, the 1996 Equity Incentive Plan, the
Directors' Plan and pursuant to an option granted to a director of the Company
outside of the Plan, thus permitting the sale of such shares by non-affiliates
in the public market without restriction under the Securities Act. Such
registration statements will become effective immediately upon filing. Upon
effectiveness of such registration statements, holders of vested options to
purchase approximately 124,299 shares will be entitled to exercise such options
and immediately sell such shares. Holders of options to purchase 323,967 shares
of Common Stock have entered into agreements not to sell any shares of Common
Stock received upon exercise of such options for 180 days following the date of
this offering. Wedbush Morgan Securities, in its sole discretion and at any time
without notice, may release any or all of such option holders from any or all of
their obligations under their respective agreements not to sell.

In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, an Affiliate of the Company, or person (or persons
whose shares are aggregated) who has beneficially owned Restricted Shares for at
least two years, will be entitled to sell in any three-month period a number of
shares that does not exceed the greater of (i) 1% of the then outstanding shares
of the Company's Common Stock (approximately 70,290 shares immediately after
this offering) or (ii) the average weekly trading volume of the Company's Common
Stock in the Nasdaq National Market during the four calendar weeks immediately
preceding the date on which notice of the sale is filed with the Securities and
Exchange Commission. Sales pursuant to Rule 144 are subject to certain
requirements relating to manner of sale, notice and availability of current
public information about the Company. A person (or person whose shares are
aggregated) who is not deemed to have been an Affiliate of the Company at any
time during the 90 days immediately preceding the sale and who has beneficially
owned Restricted Shares for at least three years is entitled to sell such shares
pursuant to Rule 144(k) without regard to the limitations described above.

An employee, officer or director of or consultant to the Company who
purchased or was awarded shares or options to purchase shares pursuant to a
written compensatory plan or contract is entitled to rely on the resale
provisions of Rule 701 under the Securities Act, which permits Affiliates and
non-Affiliates to sell their Rule 701 shares without having to comply with the
Rule 144 holding period restrictions, in each case

50
<PAGE> 51

commencing 90 days after the date of this Prospectus. In addition,
non-Affiliates may sell Rule 701 shares without complying with the public
information, volume and notice provisions of Rule 144.

Prior to this offering, there has been no public market for the Common
Stock of the Company. Future sales of substantial amounts of Common Stock in the
public market could adversely affect market prices prevailing from time to time.
Sales of substantial amounts of Common Stock of the Company in the public market
could adversely affect the prevailing market price and the ability of the
Company to raise equity capital in the future.

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<PAGE> 52

UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, through their Representatives, Wedbush Morgan
Securities, and Sands Brothers & Co., Ltd. (the "Representatives"), have
severally agreed to purchase from the Company the following respective number of
shares of Common Stock:

<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
------------------------------------------------------------------ ---------
<S> <C>
Wedbush Morgan Securities......................................... 912,500
Sands Brothers & Co., Ltd. ....................................... 912,500
Robertson, Stephens & Company LLC................................. 60,000
Allen & Co. Inc. ................................................. 60,000
Cowen & Company................................................... 30,000
Crowell, Weedon & Co. ............................................ 30,000
Cruttenden Roth Incorporated...................................... 30,000
Dain Bosworth Inc. ............................................... 30,000
EVEREN Securities Inc. ........................................... 30,000
Gerard Klauer Mattison & Co. LLC.................................. 30,000
Hanifen Imhoff Inc. .............................................. 30,000
J.J.B. Hilliard, W.L. Lyons Inc. ................................. 30,000
Janney Montgomery Scott Inc. ..................................... 30,000
Morgan Keegan & Company, Inc. .................................... 30,000
Pacific Crest Securities.......................................... 30,000
Parker/Hunter Incorporated........................................ 30,000
Scott & Stringfellow Inc. ........................................ 30,000
The Seidler Companies Incorporated................................ 30,000
Stifel, Nicholaus & Company Incorporated.......................... 30,000
Sutro & Co. Incorporated.......................................... 30,000
Van Kasper & Co. ................................................. 30,000
GBS Financial Corp. .............................................. 15,000
Hoefer & Arnett Inc. ............................................. 15,000
Triquest Financial Inc. .......................................... 15,000
---------
Total................................................... 2,500,000
=========
</TABLE>

The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in the Company's business and the receipt of
certain certificates, opinions and letters from the Company, its counsel and its
independent accountants. The nature of the Underwriters' obligation is such that
they are committed to purchase all shares of Common Stock offered hereby if any
of such shares are purchased.

The Underwriters propose to offer the shares of Common Stock directly to
the public at the initial public offering price set forth on the cover page of
this Prospectus and to certain dealers at such price less a concession not in
excess of $0.30 per share. The Underwriters may allow and such dealers may
reallow a concession not in excess of $0.10 per share to certain other dealers.
After the initial public offering of the shares, the offering price and other
selling terms may be changed by the Representatives of the Underwriters.

The Company has agreed to issue to the Representatives of the Underwriters,
warrants to purchase 250,000 shares of Common Stock at an exercise price equal
to 120% of the initial public offering price (the "Underwriters' Warrants"). The
Underwriters' Warrants are exercisable at any time from May 28, 1997 to May 27,
2001. The transferability of the Underwriters' Warrants is subject to compliance
with applicable securities laws and is restricted for one year after the date of
issuance. The Underwriters' Warrants will contain provisions for appropriate
adjustments in the event of stock splits, stock dividends, combination,

52
<PAGE> 53

reorganizations or recapitalizations. In addition, the Company has granted
certain rights to the holder of the Underwriters' Warrants to register the
Common Stock underlying under the Securities Act.

The Company has granted to the Underwriters an option, exercisable no later
than 45 days after the date of this Prospectus, to purchase up to 375,000
additional shares of Common Stock at the initial public offering price, less the
underwriting discount, set forth on the cover page of this Prospectus. To the
extent that the Underwriters exercise this option, each of the Underwriters will
have a firm commitment to purchase approximately the same percentage thereof
which the number of shares of Common Stock to be purchased by it shown in the
above table bears to the total number of shares of Common Stock offered hereby.
The Company will be obligated, pursuant to the option, to sell shares to the
Underwriters to the extent the option is exercised. The Underwriters may
exercise such option only to cover over-allotments made in connection with the
sale of shares of Common Stock offered hereby.

The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The Underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.

The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments the Underwriters may be required to make in respect thereof. The
Company has also agreed to pay to the Representatives an expense allowance on a
nonaccountable basis of $150,000.

The Company's directors, officers and certain other stockholders of the
Company, who will own in the aggregate 4,267,991 shares of Common Stock after
the offering, have agreed that they will not, without the prior written consent
of the Representatives of the Underwriters, offer, sell or otherwise dispose of
any shares of Common Stock, options or warrants to acquire shares of Common
Stock or securities exchangeable for or convertible into shares of Common Stock
owned by them during the 180-day period following the date of this Prospectus.
The Company has agreed that it will not, without the prior written consent of
Wedbush Morgan Securities, offer, sell or otherwise dispose of any shares of
Common Stock, options or warrants to acquire shares of Common Stock or
securities exchangeable for or convertible into shares of Common Stock during
the 180-day period following the date of this Prospectus, except that the
Company may issue shares upon the exercise of options and warrants granted prior
to the date hereof, and may grant additional options under its 1993 Stock Plan,
Incentive Plan, and Directors' Plan.

The Underwriters have informed the Company that they do not intend to
confirm sales to any accounts over which they exercise discretionary authority.

Prior to the offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock was determined by
negotiation among the Company and the Representatives. Among the factors
considered in determining the initial public offering price were prevailing
market and economic conditions, market valuations of other companies engaged in
activities similar to the Company, estimates of the business potential and
prospects of the Company, the present state of the Company's business
operations, the Company's management and other factors deemed relevant.

LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for the
Company by Cooley Godward Castro Huddleson & Tatum, Palo Alto, California.
Certain legal matters in connection with this offering will be passed upon for
the Underwriters by Gibson, Dunn & Crutcher LLP, Irvine, California.

EXPERTS

The financial statements of Avigen as of June 30, 1994 and 1995 and for the
period from October 22, 1992 (inception) through June 30, 1993, the years ended
June 30, 1994 and 1995 and for the period from October 22, 1992 (inception)
through June 30, 1995 appearing in this Prospectus and Registration Statement
have been audited by Ernst & Young, LLP, independent auditors, as set forth in
their report thereon (which

53
<PAGE> 54

contains an explanatory paragraph with respect to the uncertainty surrounding
the Company's ability to continue as a going concern, as discussed in Note 1 of
Notes to Financial Statements) appearing elsewhere herein and in the
Registration Statement, and are included in reliance upon such report given on
the authority of such firm as experts in accounting and auditing.

ADDITIONAL INFORMATION

A Registration Statement on Form S-1, including amendments thereto,
relating to the Common Stock offered hereby has been filed by the Company with
the Commission, Washington, D.C. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. Statements contained in this Prospectus as to the contents of
any contract or other document referred to are not necessarily complete, and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. For further information with
respect to the Company and the Common Stock offered hereby, reference is made to
the Registration Statement and the exhibits and schedules thereto. A copy of the
Registration Statement may be inspected by anyone without charge at the
Commission's principal office in Washington, D.C. and copies of all or any part
thereof may be obtained from the Public Reference Section of the Commission, 450
Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, upon payment of
certain fees prescribed by the Commission.

54
<PAGE> 55

AVIGEN, INC.
(A DEVELOPMENT STAGE COMPANY)

FINANCIAL STATEMENTS

CONTENTS

<TABLE>
<S> <C>
Report of Independent Auditors......................................................... F-2
Audited Financial Statements
Balance Sheets......................................................................... F-3
Statements of Operations............................................................... F-4
Statements of Stockholders' Equity (Deficit)........................................... F-5
Statements of Cash Flows............................................................... F-7
Notes to Financial Statements.......................................................... F-8
</TABLE>

F-1
<PAGE> 56

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Avigen, Inc.

We have audited the accompanying balance sheets of Avigen, Inc. (a
development stage company) as of June 30, 1994 and 1995 and the related
statements of operations, stockholders' equity (deficit) and cash flows for the
period from October 22, 1992 (inception) through June 30, 1993, the years ended
June 30, 1994 and 1995 and for the period from October 22, 1992 (inception)
through June 30, 1995. 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 generally accepted auditing
standards. 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 June 30,
1994 and 1995, and the results of its operations and its cash flows for the
period from October 22, 1992 (inception) through June 30, 1993, the years ended
June 30, 1994 and 1995 and for the period from October 22, 1992 (inception)
through June 30, 1995, in conformity with generally accepted accounting
principles.

The accompanying financial statements have been prepared assuming that
Avigen, Inc. will continue as a going concern. As more fully discussed in Note 1
to the financial statements, the Company is in the development stage, has
incurred losses since inception through June 30, 1995 of $8.6 million and
expects to incur substantial and increasing losses over the next several years.
At June 30, 1995, the Company had a working capital deficit of $916,000. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans as to these matters are also described in Note
1. The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the possible
inability of Avigen, Inc. to continue as a going concern.

Ernst & Young LLP

Walnut Creek, California
September 8, 1995, except Note 10
as to which the date is
May 7, 1996

F-2
<PAGE> 57

AVIGEN, INC.
(A DEVELOPMENT STAGE COMPANY)

BALANCE SHEETS

ASSETS

<TABLE>
<CAPTION>
UNAUDITED
PRO FORMA
STOCKHOLDERS'
JUNE 30, EQUITY AT
------------------------- MARCH 31, MARCH 31,
1994 1995 1996 1996
----------- ----------- ------------ ------------
(UNAUDITED) (NOTE 10)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.............................. $ 243,537 $ 203,400 $ 1,938,189
Stock subscription receivable.......................... 50,000 135,081 --
Prepaid offering costs................................. 151,403 -- 355,528
Deferred debt financing costs, net..................... -- -- 188,442
Other current assets................................... 22,523 12,603 --
----------- ----------- ------------
Total current assets............................ 467,463 351,084 2,482,159
Property and equipment, net.............................. 1,485,348 1,455,337 1,118,642
Organization costs, net.................................. 145,741 -- --
Deposits and other assets................................ 34,077 34,128 35,172
----------- ----------- ------------
Total assets.................................... $ 2,132,629 $ 1,840,549 $ 3,635,973
=========== =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable....................................... $ 655,023 $ 615,199 $ 662,852
Accrued compensation and related expenses.............. 95,389 70,583 104,125
Accrued liabilities.................................... 437,333 577,944 880,995
Current portion of capital lease obligations........... 4,564 3,761 17,241
Notes payable.......................................... 889,800 -- 1,645,719
----------- ----------- ------------
Total current liabilities....................... 2,082,109 1,267,487 3,310,932
Accrued rent............................................. 92,412 174,556 252,222
Capital lease obligations, less current portion.......... 26,687 214,250 192,803
Commitments
Stockholders' equity (deficit):
Preferred stock, $.001 par value, 30,000,000 shares
authorized (5,000,000 pro forma), issuable in series:
1,294,171, 2,069,326 and 2,338,293 shares issued and
outstanding at June 30, 1994, June 30, 1995 and
March 31, 1996 (none pro forma); aggregate
liquidation preference of $10,313,121 and
$12,497,531 at June 30, 1995 and March 31, 1996,
respectively....................................... 1,294 2,069 2,338 $ --
Common stock:
Class A, $.001 par value, 100,000,000 shares
authorized (30,000,000 pro forma), 1,942,653 shares
issued and outstanding at June 30, 1994 and 1995,
2,173,262 shares issued and outstanding at March
31, 1996 (4,529,015 shares issued and outstanding
pro forma)......................................... 1,942 1,942 2,173 4,529
Class B convertible, $.001 par value, 500,000 shares
authorized (none pro forma), 90,293 shares issued
and outstanding at June 30, 1994 and 1995, none
issued and outstanding at March 31, 1996 (none pro
forma)............................................. 90 90 -- --
Additional paid-in capital............................. 5,270,995 8,788,046 11,151,893 11,151,875
Deferred compensation.................................. -- -- (137,604) (137,604)
Deficit accumulated during the development stage....... (5,342,900) (8,607,891) (11,138,784) (11,138,784)
----------- ----------- ------------ ------------
Total stockholders' equity (deficit)............ (68,579) 184,256 (119,984) $ (119,984)
============
----------- ----------- ------------
Total liabilities and stockholders' equity
(deficit)..................................... $ 2,132,629 $ 1,840,549 $ 3,635,973
=========== =========== ============
</TABLE>

See accompanying notes.

F-3
<PAGE> 58

AVIGEN, INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM PERIOD FROM
OCTOBER 22, 1992 OCTOBER 22, 1992 OCTOBER 22, 1992
(INCEPTION) (INCEPTION) NINE MONTHS ENDED (INCEPTION)
THROUGH YEARS ENDED JUNE 30, THROUGH MARCH 31, THROUGH
JUNE 30, ------------------------- JUNE 30, ------------------------- MARCH 31,
1993 1994 1995 1995 1995 1996 1996
---------------- ----------- ----------- ---------------- ----------- ----------- ----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Grant revenue......... $ -- $ -- $ 177,804 $ 177,804 $ 90,402 $ 87,402 $ 265,206
Expenses:
Research and
development....... 932,143 2,557,698 2,289,881 5,779,722 1,526,506 1,875,348 7,655,070
General and
administrative.... 537,889 1,283,727 1,333,756 3,155,372 982,746 707,955 3,863,327
----------- ----------- ----------- ----------- ----------- ------------
1,470,032 3,841,425 3,623,637 8,935,094 2,509,252 2,583,303 11,518,397
----------- ----------- ----------- ----------- ----------- ------------
Loss from
operations.......... (1,470,032) (3,841,425) (3,445,833) (8,757,290) (2,418,850) (2,495,901) (11,253,191)
Interest expense,
net................. (23,742) (7,701) (8,579) (40,022) (10,483) (38,907) (78,929)
Other income.......... -- -- 189,421 189,421 8,822 3,915 193,336
----------- ----------- ----------- ----------- ----------- ------------
Net loss.............. $ (1,493,774) $(3,849,126) $(3,264,991) $ (8,607,891) $(2,420,511) $(2,530,893) $(11,138,784)
=========== =========== =========== =========== =========== ============
Pro forma net loss per
share............... $ (0.62) $ (0.47)
=========== ============
Shares used in
computing pro forma
net loss per
share............... 5,295,064 5,432,384
=========== ============
</TABLE>

See accompanying notes.

F-4
<PAGE> 59

AVIGEN, INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
PERIOD FROM OCTOBER 22, 1992 (INCEPTION) THROUGH MARCH 31, 1996

<TABLE>
<CAPTION>
COMMON STOCK
-------------------------------------- DEFICIT
ACCUMULATED TOTAL
PREFERRED STOCK CLASS A CLASS B ADDITIONAL DURING THE STOCKHOLDERS
------------------ ------------------ ------------------ PAID-IN DEFERRED DEVELOPMENT EQUITY
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION STAGE (DEFICIT)
--------- ------ --------- ------ --------- ------ ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
October 22,
1992
(inception)... -- $ -- -- $ -- -- $ -- $ -- $ -- $ -- $ --
Issuance of
Class A
common
stock at
$.004 per
share in
November
and
December
1992 in
connection
with
merger
with
Vestmark,
Inc...... -- -- 896,062 896 -- -- 4,074 -- -- 4,970
Issuance of
Class A
common
stock at
$.554 per
share
from
January
to June
1993 for
services
rendered... -- -- 20,316 20 -- -- 11,230 -- -- 11,250
Issuance of
Class A
common
stock at
$.004 to
$.222 per
share
from
November
1992 to
March
1993 for
cash and
certain
license
rights... -- -- 1,003,406 1,003 -- -- 54,267 -- -- 55,270
Issuance of
Class B
common
stock at
$.004 per
share in
December
1992 for
cash..... -- -- -- -- 90,293 90 310 -- -- 400
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)... 678,865 679 -- -- -- -- 2,595,922 -- -- 2,596,601
Issuance of
Series A
preferred
stock at
$3.85 per
share in
March
1993 for
cancellation
of note
payable
and
accrued
interest... 68,991 69 -- -- -- -- 265,833 -- -- 265,902
Net loss... -- -- -- -- -- -- -- -- (1,493,774) (1,493,774)
--------- ------ --------- ------ ------ ---- ---------- -------- ------------- -----------
Balance at
June 30,
1993....... 747,856 748 1,919,784 1,919 90,293 90 2,931,636 -- (1,493,774) 1,440,619
Issuance of
Class A
common
stock at
$.004 per
share in
November
1993
pursuant
to
antidilution
rights... -- -- 22,869 23 -- -- 78 -- -- 101
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)... 418,284 418 -- -- -- -- 1,665,377 -- -- 1,665,795
Issuance of
Series B
preferred
stock at
$5.54 per
share in
March
1994 for
cash (net
of
issuance
costs of
$34,968)... 128,031 128 -- -- -- -- 673,904 -- -- 674,032
Net loss... -- -- -- -- -- -- -- -- (3,849,126) (3,849,126)
--------- ------ --------- ------ ------ ---- ---------- -------- ------------- -----------
Balance at
June 30,
1994....... 1,294,171 1,294 1,942,653 1,942 90,293 90 5,270,995 -- (5,342,900) (68,579)
Issuance of
Series C
preferred
stock at
$4.87 per
share
from
August
1994 to
June 1995
for cash
and
receivables
(net of
issuance
costs of
$259,620)... 739,655 740 -- -- -- -- 3,344,086 -- -- 3,344,826
Issuance of
Series C
preferred
stock at
$4.87 per
share in
June 1995
for
cancellation
of notes
payable... 35,500 35 -- -- -- -- 172,965 -- -- 173,000
Net loss... -- -- -- -- -- -- -- -- (3,264,991) (3,264,991)
--------- ------ --------- ------ ------ ---- ---------- -------- ------------- -----------
Balance at
June 30,
1995....... 2,069,326 2,069 1,942,653 1,942 90,293 90 8,788,046 -- (8,607,891) 184,256
</TABLE>

F-5
<PAGE> 60

AVIGEN, INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) -- (CONTINUED)
PERIOD FROM OCTOBER 22, 1992 (INCEPTION) THROUGH MARCH 31, 1996

<TABLE>
<CAPTION>
COMMON STOCK
-------------------------------------- DEFICIT
ACCUMULATED TOTAL
PREFERRED STOCK CLASS A CLASS B ADDITIONAL DURING THE STOCKHOLDERS'
------------------ ------------------ ------------------ PAID-IN DEFERRED DEVELOPMENT EQUITY
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION STAGE (DEFICIT)
--------- ------ --------- ------ --------- ------ ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance
of
Series C
preferred
stock at
$4.87
per
share in
July
1995 for
cash
(net of
issuance
costs of
$26,000)
(unaudited)... 41,042 41 -- -- -- -- 173,959 -- -- 174,000
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)
(unaudited)... 205,351 205 -- -- -- -- 1,430,005 -- -- 1,430,210
Issuance
of
Series D
preferred
stock at
$7.09
per
share in
March
1996 in
settlement
of
accounts
payable
(unaudited)... 22,574 23 -- -- -- -- 160,027 -- -- 160,050
Issuance
of Class
A common
stock at
$.004
per
share in
March
1996
pursuant
to
antidilution
rights
(unaudited)... -- -- 17,630 18 -- -- 60 -- -- 78
Conversion
of Class
B common
stock to
Class A
common
stock
(unaudited).. -- -- 231,304 231 (90,293) (90) (141) -- -- --
Repurchase
of
common
stock
(unaudited)... -- -- (18,325) (18 ) -- -- (63) -- -- (81)
Issuance
of stock
options
in
settlement
of
certain
accrued
liabilities
(unaudited)... -- -- -- -- -- -- 137,396 -- -- 137,396
Issuance
of
warrants
to
purchase
Class A
common
stock in
connection
with
1996
Bridge
Financing
(unaudited)... -- -- -- -- -- -- 300,000 -- -- 300,000
Deferred
compensation
(unaudited)... -- -- -- -- -- -- 162,604 (137,604) -- 25,000
Net loss
(unaudited)... -- -- -- -- -- -- -- -- (2,530,893) (2,530,893)
--------- ------ --------- ------ ------ ---- ---------- -------- ------------- -----------
Balance at
March 31,
1996 (unaudited)
2,338,293 $2,338 2,173,262 $2,173 -- $ -- $11,151,893 $ (137,604) $(11,138,784) $ (119,984)
========= ====== ========= ====== ====== ==== ========== ======== ============= ===========
</TABLE>

See accompanying notes.

F-6
<PAGE> 61

AVIGEN, INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM PERIOD FROM
OCTOBER 22, 1992 OCTOBER 22, 1992 OCTOBER 22, 1992
(INCEPTION) (INCEPTION) NINE MONTHS (INCEPTION)
THROUGH YEAR ENDED JUNE 30, THROUGH ENDED MARCH 31, THROUGH
JUNE 30, ------------------------- JUNE 30, ------------------------- MARCH 31,
1993 1994 1995 1995 1995 1996 1996
---------------- ----------- ----------- ---------------- ----------- ----------- ----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING
ACTIVITIES
Net loss.......... $ (1,493,774) $(3,849,126) $(3,264,991) $ (8,607,891) $(2,420,511) $(2,530,893) $(11,138,784)
Adjustments to
reconcile net
loss to net cash
used in
operating
activities:
Depreciation
and
amortization... 26,951 309,783 367,710 704,444 275,783 323,063 1,027,507
Amortization
of deferred
compensation.. -- -- -- -- -- 25,000 25,000
Write-off of
organizational
costs....... -- -- 145,741 145,741 145,741 -- 145,741
Class A common
stock issued
for
services.... 11,250 -- -- 11,250 -- -- 11,250
Noncash
interest
expense..... 15,902 -- -- 15,902 -- -- 15,902
Changes in
operating
assets and
liabilities:
Prepaids,
deposits
and
other
assets.. (444,697) 388,097 9,869 (46,731) 5,482 11,559 (35,172)
Prepaid
offering
costs... -- -- -- -- -- (355,528) (355,528)
Accounts
payable,
accrued
liabilities
and
accrued
compensation
and
related
expenses... 469,094 718,651 75,981 1,263,726 (90,532) 521,642 1,785,368
Accrued
rent.... 10,268 82,144 82,144 174,556 61,608 77,666 252,222
----------- ----------- ----------- ----------- ----------- ----------- ------------
Net cash used in
operating
activities...... (1,405,006) (2,350,451) (2,583,546) (6,339,003) (2,022,429) (1,927,491) (8,266,494)
INVESTING
ACTIVITIES
Purchases of
property and
equipment....... (618,078) (1,098,263) (144,299) (1,860,640) (93,182) (19,874) (1,880,514)
Disposal of
property and
equipment....... -- -- -- -- -- 47,033 47,033
Organization
costs........... (218,601) -- -- (218,601) -- -- (218,601)
----------- ----------- ----------- ----------- ----------- ----------- ------------
Net cash (used in)
provided by
investing
activities...... (836,679) (1,098,263) (144,299) (2,079,241) (93,182) 27,159 (2,052,082)
FINANCING
ACTIVITIES
Proceeds from
notes payable... 870,000 889,800 173,000 1,932,800 -- 200,000 2,132,800
1996 bridge
financing....... -- -- -- -- -- 1,937,500 1,937,500
Deferred offering
costs........... -- -- -- -- -- (193,750) (193,750)
Repayment of notes
payable......... (620,000) -- (889,800) (1,509,800) (889,800) (200,000) (1,709,800)
Payments on
capital lease
obligations..... -- (1,630) (6,640) (8,270) (3,560) (7,967) (16,237)
Net proceeds from
issuance of
preferred
stock........... 2,596,601 2,138,424 3,411,148 8,146,173 2,944,526 1,899,341 10,045,514
Issuance of common
stock, net of
repurchases..... 60,640 101 -- 60,741 -- (3) 60,738
----------- ----------- ----------- ----------- ----------- ----------- ------------
Net cash provided
by financing
activities...... 2,907,241 3,026,695 2,687,708 8,621,644 2,051,166 3,635,121 12,256,765
----------- ----------- ----------- ----------- ----------- ----------- ------------
Net (decrease)
increase in cash
and cash
equivalents..... 665,556 (422,019) (40,137) 203,400 (64,445) 1,734,789 1,938,189
Cash and cash
equivalents,
beginning of
period.......... -- 665,556 243,537 -- 243,537 203,400 --
----------- ----------- ----------- ----------- ----------- ----------- ------------
Cash and cash
equivalents, end
of period....... $ 665,556 $ 243,537 $ 203,400 $ 203,400 $ 179,092 $ 1,938,189 $ 1,938,189
=========== =========== =========== =========== =========== =========== ============
Supplemental
disclosure:
Issuance of
preferred
stock for
cancellation
of notes
payable and
accrued
interest...... $ 265,902 $ -- $ 173,000 $ 438,902 $ -- $ -- $ 438,902
Issuance of
stock options
for repayment
of certain
accrued
liabilities... -- -- -- -- -- 137,396 137,396
Deferred
compensation
related to
stock option
grants........ $ -- $ -- $ -- $ -- $ -- $ 162,604 $ 162,604
Purchases of
property and
equipment
under capital
lease
arrangements... $ -- $ 32,881 $ 193,400 $ 226,281 $ -- $ -- $ 226,281
Cash paid for
interest...... $ -- $ 12,085 $ 33,892 $ 79,462 $ 22,172 $ 25,652 $ 105,114
</TABLE>

See accompanying notes.

F-7
<PAGE> 62

AVIGEN, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS

(INFORMATION AT MARCH 31, 1996 AND FOR THE NINE-MONTH PERIODS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Description of Business

Avigen, Inc. (the "Company") was incorporated on October 22, 1992 in
Delaware for the purpose of development and commercialization of gene-based
therapeutic products. In November 1992, the Company's stockholders approved a
definitive Agreement and Plan of Merger (the "Merger") with Vestmark Inc., a New
York corporation incorporated on July 25, 1991. The merger became effective
under Delaware law on December 2, 1992. Vestmark Inc. had no operations through
the date of merger with the Company. Pursuant to the Merger, the Company became
the succeeding corporation. The stockholders of Vestmark Inc. were issued
896,062 shares of Class A common stock of the Company, in exchange for $4,970
and all the outstanding stock of Vestmark, Inc.

Basis of Presentation

The Company is in the development stage devoting substantially all of its
efforts to research and development. During its development stage, the Company
has incurred cumulative net losses of approximately $8.6 million through June
30, 1995, and expects to incur substantial and increasing losses over the next
several years. At June 30, 1995, the Company had a working capital deficit of
$916,000. The Company plans to finance its operations primarily through proceeds
from equity or debt offerings, including the Company's proposed initial public
offering (the "Offering"). The Company will require substantial additional funds
in order to complete the research and development activities currently
contemplated and to commercialize its proposed products. The Company's future
capital requirements will depend on many factors, including continued scientific
progress in research and development programs, the scope and results of
preclinical studies and clinical trials, the time and costs involved in
obtaining regulatory approvals, the costs involved in filing, prosecuting and
enforcing patent claims, competing technological developments, the cost of
manufacturing scale-up, the cost of commercialization activities and other
factors which may not be within the Company's control. The Company anticipates
that its existing capital resources, including the net proceeds of the proposed
Offering if completed on the terms presently anticipated, will be adequate to
fund its capital needs for at least 12 months.

Without additional funding, the Company may be required to delay, reduce
the scope of or eliminate one or more of its research or development programs,
or obtain funds through arrangements with collaborative partners or others which
may require the Company to relinquish rights to certain of its technologies,
product candidates or products that the Company would otherwise seek to develop
or commercialize itself on its own. As there can be no assurance that the
Company will be able to raise additional funds on acceptable terms, if at all,
these conditions raise substantial doubt about the Company's ability to continue
as a going concern. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that might result from
the possible inability of the Company to continue as a going concern.

Interim Financial Information

The financial information at March 31, 1996 and for the nine-month periods
ended March 31, 1995 and 1996 is unaudited but includes all adjustments
(consisting only of normal recurring adjustments) which the Company considers
necessary for a fair presentation of the financial position at such date and of
the operating results and cash flows for such periods. The results for the
interim periods are not necessarily indicative of results expected for the
entire year ended June 30, 1996.

F-8
<PAGE> 63

AVIGEN, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(INFORMATION AT MARCH 31, 1996 AND FOR THE NINE-MONTH PERIODS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash and cash equivalents.
Substantially all of the Company's cash and cash equivalents are maintained by
one major financial institution.

Organization Costs

Organization costs are stated at cost, less accumulated amortization.
During 1995, the remaining unamortized balance of organization costs was written
off as a result of management's assessment of recoverability.

Grant Revenue

Revenue consists of revenue from grants which are recognized in accordance
with the terms of the related agreements.

Property and Equipment

Property and equipment is stated at cost, less accumulated depreciation.
Depreciation is provided over the estimated useful lives of the respective
assets, which range from five to seven years, using the straight-line method.

Leasehold improvements and assets under capital leases are amortized over
the lives of the related leases or their estimated useful lives, whichever is
shorter, using the straight-line method. Accumulated amortization of assets
under capital lease was $19,834 and $1,174 at June 30, 1995 and 1994,
respectively.

Accounting for the Impairment of Long-Lived Assets

In March 1995, Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed Of" ("SFAS 121") was issued. The Company will adopt SFAS 121 beginning
in fiscal year 1997, and based on current circumstances, management does not
believe adoption will have a material effect on the Company's results of
operations or financial position.

Stock-Based Compensation

In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," ("SFAS 123") was issued and is
effective for the Company's fiscal year 1997. As permitted under SFAS 123, the
Company intends to continue to account for employee stock options in accordance
with APB Opinion No. 25 and will make the necessary pro forma disclosures
mandated by SFAS 123 beginning in fiscal year 1997.

F-9
<PAGE> 64

AVIGEN, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(INFORMATION AT MARCH 31, 1996 AND FOR THE NINE-MONTH PERIODS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Net Loss Per Share

Except as noted below, net loss per share is computed using the weighted
average number of common shares outstanding. Common equivalent shares are
excluded from the computation as their effect is antidilutive, except that,
pursuant to the Securities and Exchange Commission ("SEC") Staff Accounting
Bulletins, common and common equivalent shares (stock options, warrants and
preferred stock) issued during the period commencing 12 months prior to the
initial filing of a proposed public offering at prices below the assumed public
offering price have been included in the calculation as if they were outstanding
for all periods presented (using the treasury stock method for stock options and
warrants and the if-converted method for preferred stock at the estimated
initial public offering price). Per share information calculated on the above
noted basis is as follows:

<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 22, 1992 YEAR ENDED NINE MONTHS ENDED
(INCEPTION) JUNE 30, MARCH 31,
THROUGH ------------------------ ------------------------
JUNE 30, 1993 1994 1995 1995 1996
---------------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net loss per share.......... $ (0.45) $ (1.08) $ (0.91) $ (0.70) $ (0.71)
========= ========= ========= ========= =========
Shares used in calculating
net loss per share........ 3,284,889 3,559,345 3,568,767 3,568,767 3,556,550
========= ========= ========= ========= =========
</TABLE>

Pro forma net loss per share has been computed as described above and also
gives effect, pursuant to SEC policy, to common equivalent shares from
convertible preferred stock issued more than twelve months from the proposed
initial public offering that will automatically convert upon completion of the
Company's initial public offering (using the if-converted method) from the
original date of issuance.

Reclassifications

Certain 1993 and 1994 balances have been reclassified to conform to the
1995 presentation.

2. LICENSING AGREEMENTS

The Company has entered into various license agreements with universities
and medical research centers for the use of certain technologies. Generally,
such agreements require the Company to pay the licensor a royalty on sales of
products incorporating the licensed technology. Certain of these agreements
require the payment of minimum royalties for specified periods and payments upon
the achievement of specified milestones. These agreements are generally
cancelable by the Company upon written notice without significant financial
penalty, or by the licensors if the Company does not meet development milestones
specified in the agreements.

The Company entered into an exclusive license agreement for the use of
patented technology with Research Corporation Technologies ("RCT"). This
agreement requires the Company to achieve certain development milestones in
order to continue to use the technology. In the event the Company fails to
achieve any of these milestones by their applicable deadlines, the Company has
the right to pay RCT additional fees of up to $250,000 to extend certain of the
deadlines for specified periods. If the Company has not made good faith and
diligent efforts in connection with the initial extension, RCT can terminate the
agreement.

F-10
<PAGE> 65

AVIGEN, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(INFORMATION AT MARCH 31, 1996 AND FOR THE NINE-MONTH PERIODS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)

3. NOTES PAYABLE

At June 30, 1994, the Company had a term note payable to a bank in the
amount of $880,000 which bore interest at 7.25%. The note and related interest
were paid during fiscal year 1995.

4. LEASE ARRANGEMENTS

The Company leases its facility under a noncancelable operating lease
agreement with an initial lease term of one year or more. The lease agreement
has variable payment terms; however, the Company is recognizing rent expense on
a straight-line basis over the life of the lease. The lease expires in May 2003.
The Company also has entered into various capital leases for office furniture
and laboratory equipment with an initial lease term of one year or more. Future
minimum lease payments are as follows:

<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING JUNE 30 LEASES LEASE
------------------------------------------------------------- -------- ----------
<S> <C> <C>
1996................................................... $ 37,646 $ 305,370
1997................................................... 57,078 397,670
1998................................................... 84,282 419,520
1999................................................... 84,282 419,520
2000................................................... 49,929 419,520
Thereafter............................................. -- 1,206,120
-------- ----------
Total minimum lease payments........................... 313,217 $3,167,720
==========
Less amount representing interest............................ (95,206)
--------
Present value of minimum lease payments...................... 218,011
Less current portion of capital lease obligations............ (3,761)
--------
Long-term capital lease obligations.......................... $214,250
========
Rent expense for fiscal year 1995 was $342,361 ($369,610 in 1994 and $68,845 for the
period from October 22, 1992 through June 30, 1993).
</TABLE>

5. STOCKHOLDERS' EQUITY

Preferred Stock

Preferred stock consists of the following:

<TABLE>
<CAPTION>
SHARES DESIGNATED SHARES ISSUED AND OUTSTANDING
------------------------------------ ---------------------------------
JUNE 30, JUNE 30,
------------------------ MARCH 31, ---------------------- MARCH 31,
1994 1995 1996 1994 1995 1996
----------- ----------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Series A................... 6,000,000 6,000,000 6,000,000 1,166,140 1,166,140 1,166,140
Series B................... 4,000,000 4,000,000 673,920 128,031 128,031 128,031
Series C................... -- 15,500,000 4,000,000 -- 775,155 816,197
Series D................... -- -- 2,500,000 -- -- 227,925
---------- ---------- ---------- --------- --------- ---------
Total...................... 10,000,000 25,500,000 13,173,920 1,294,171 2,069,326 2,338,293
========== ========== ========== ========= ========= =========
</TABLE>

The holders of Series A, B and C convertible preferred stock are entitled
to cumulative annual dividends of $.2215, $.2769 and $.2215 per share,
respectively, whether or not declared by the Board of Directors. The

F-11
<PAGE> 66

AVIGEN, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(INFORMATION AT MARCH 31, 1996 AND FOR THE NINE-MONTH PERIODS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)

5. STOCKHOLDERS' EQUITY -- (CONTINUED)
holders of Series D convertible preferred stock are entitled to receive
dividends when and if declared by the Board of Directors. In the event of
liquidation or winding up of the Company, holders of Series A, B, C and D
convertible preferred stock are entitled to receive liquidation preferences
equal to $4.43, $5.54, $4.87 and $7.09 per share, respectively, plus any accrued
but unpaid dividends. As of June 30, 1995, the cumulative dividends payable in
the event of a liquidation for Series A, B, and C convertible preferred stock
were $510,143, $45,357 and $105,039, respectively, ($703,872, $71,944 and
$253,488 at March 31, 1996). Each share of Series A, C and D convertible
preferred stock is automatically converted into one share of Class A common
stock and each share of Series B convertible preferred stock is automatically
converted into 1.1364 shares of Class A common stock upon the closing of an
underwritten initial public offering of the Class A common stock pursuant to an
effective registration statement under the Securities Act with aggregate gross
proceeds to the Company in excess of $10,000,000 or upon the written notice to
the Company from the holders of a majority of the outstanding shares of Series
A, B, C and D preferred stock consenting thereto. Upon conversion of the Series
A, B and C convertible preferred stock into Class A common stock, all accrued
but unpaid cumulative dividends will be canceled.

Holders of preferred stock are entitled to one vote for each share of
common stock into which such preferred stock could be converted. The voting
rights of preferred stockholders are equal to the voting rights of holders of
common stock.

Common Stock

Class A and Class B common stock have been issued to founders and certain
employees, investors and consultants of the Company. Certain of these shares
(79,816 shares at June 30, 1995, 22,513 shares at March 31, 1996) are subject to
repurchase by the Company at $.004 per share in the event of termination of
employment, death or disability. Such rights lapse over specified periods.

Certain Class A stockholders have antidilution provisions specified in
their stock purchase agreements. The Company has reserved 17,630 shares which
are issuable at $.004 per share to these stockholders as of June 30, 1995. Such
shares were issued in March 1996.

The Class B common stock automatically converts into the number of shares
of Class A common stock equal to 5% of the fully diluted capitalization of the
Company upon the receipt by the Company of cumulative capital contributions of
$10,000,000 from the date of incorporation, excluding any consideration not
actually received but deemed to be received as a result of the sale of rights or
options to purchase additional shares of Class A common stock or convertible
securities.

In December 1995, cumulative capital contributions since incorporation
reached the $10,000,000 level, and the board of directors subsequently approved
the conversion of the Class B common shares into 231,304 shares of Class A
common stock.

Warrants

In March 1993, in connection with a financing arrangement, the Company
issued warrants to purchase 6,899 shares of Series A preferred stock at an
exercise price of $4.87 to a relative of a member of the board of directors. The
warrants are exercisable at any time for a period of five years from the date of
issuance.

F-12
<PAGE> 67

AVIGEN, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(INFORMATION AT MARCH 31, 1996 AND FOR THE NINE-MONTH PERIODS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)

5. STOCKHOLDERS' EQUITY -- (CONTINUED)
In connection with offerings of preferred stock, the Company has issued or
has agreed to issue to related parties (see Note 7) warrants to purchase 108,583
shares of Series A preferred stock, 12,802 shares of Series B preferred stock,
78,065 shares of Series C preferred stock and 45,272 shares of Series D
preferred stock at exercise prices of $4.87, $6.11, $5.36 and $7.80 per share,
respectively. The warrants are exercisable at any time for a period of five
years from the closing of the respective offering.

In connection with a financing arrangement in the nine-month period ended
March 31, 1996, the Company issued warrants to purchase 4,513 shares of Class A
common stock at an exercise price of $7.09 to entities managed by related
parties (see Note 7). The warrants are exercisable at any time for a period of
ten years from the date of issuance.

See Notes 7 and 9 for a description of warrants issued in connection with
the Company's March 1996 Bridge Financing.

Stock Options

In 1993, the Company established a stock option plan (the "1993 Plan")
under which incentive and nonqualified stock options may be granted to key
employees, directors and consultants of the Company to purchase up to 338,600
shares of Class A common stock. Under the 1993 Plan, options may be granted at a
price per share not less than the fair market value at the date of grant as
determined by the Board of Directors. Options granted generally have a maximum
term of 10 years from the grant date and become exercisable over four years.
Option activity under the 1993 Plan from June 30, 1993 to March 31, 1996 was as
follows:

<TABLE>
<CAPTION>
OPTIONS
---------------------
OPTIONS PRICE
------- ---------
<S> <C> <C>
Outstanding at June 30, 1993............................ 4,514 $.44
Granted............................................... 58,690 .44
Canceled.............................................. --
-------
Outstanding at June 30, 1994............................ 63,204 $.44
Granted............................................... 115,237 .44-.66
Canceled.............................................. (16,930) .44
-------
Outstanding at June 30, 1995............................ 161,511 $.44-.66
Granted............................................... 193,476 .44-.71
Canceled.............................................. (46,960) .44-.66
-------
Outstanding at March 31, 1996........................... 308,027 $.44-.71
=======
</TABLE>

At June 30, 1994 and 1995, options to purchase 6,703 shares and 35,561
shares, respectively, of common stock were exercisable at prices from $.44 to
$.49 per share (113,958 at March 31, 1996). At June 30, 1995, 177,089 options
were available for future grant under the 1993 Plan (30,573 at March 31, 1996).

In July 1995, the Company granted a board member an option to purchase
515,248 shares of common stock at $0.49 per share, exercisable for five years
from the date of grant. The shares vest in equal monthly installments over
thirty-six months (128,812 shares were vested at March 31, 1996). The shares
issuable upon exercise of such option are subject to repurchase at the original
price per share upon cessation of service prior to vesting in such shares. Such
grant was made outside of the 1993 Plan.

F-13
<PAGE> 68

AVIGEN, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(INFORMATION AT MARCH 31, 1996 AND FOR THE NINE-MONTH PERIODS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)

5. STOCKHOLDERS' EQUITY -- (CONTINUED)
For certain options granted, the Company recognized as deferred
compensation the excess of the deemed value for financial reporting purposes of
the common stock issuable upon the exercise of such options over the aggregate
exercise price of such options. Total deferred compensation of $162,604 recorded
during the nine-month period ended March 31, 1996 is being amortized over the
vesting period for such options.

Reserved Shares

Class A common shares are reserved for future issuance as follows:

<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1995 1996
--------- ---------
<S> <C> <C>
Pursuant to antidilution provisions........................... 17,630 --
Conversion of Class B common stock............................ 227,532 --
Conversion of Series A preferred stock (including warrants)... 1,281,622 1,281,622
Conversion of Series B preferred stock (including warrants)... 160,039 160,039
Conversion of Series C preferred stock (including warrants)... 853,250 894,262
Conversion of Series D preferred stock (including warrants)... -- 273,197
Stock option plan............................................. 338,600 338,600
Stock options outside of plan................................. -- 515,248
Class A common stock warrants................................. -- 4,513
Common stock warrants......................................... -- 213,125
--------- ---------
2,878,673 3,680,606
========= =========
</TABLE>

F-14
<PAGE> 69

AVIGEN, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(INFORMATION AT MARCH 31, 1996 AND FOR THE NINE-MONTH PERIODS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)

6. BALANCE SHEET DETAIL

Accrued liabilities consists of the following:

<TABLE>
<CAPTION>
JUNE 30,
------------------------- MARCH 31,
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Accrued consulting fees........................ $ 205,833 $ 393,125 $ 123,500
Accrued license fees........................... 227,500 109,776 122,815
Accrued offering costs......................... -- -- 355,528
Accrued financing costs........................ -- -- 193,750
Other.......................................... 4,000 75,043 85,402
---------- ---------- ----------
$ 437,333 $ 577,944 $ 880,995
========== ========== ==========
Property and equipment consists of the
following:
Leasehold improvements......................... $1,116,549 $1,116,109 $1,116,109
Office equipment............................... 40,031 44,386 45,222
Furniture and fixtures......................... 26,485 32,700 32,700
Laboratory equipment........................... 533,276 667,445 635,175
Furniture under capital lease.................. 32,881 32,881 32,881
Laboratory equipment under capital lease....... -- 193,400 193,400
---------- ---------- ----------
Property and equipment......................... 1,749,222 2,086,921 2,055,487
Accumulated depreciation and amortization...... (263,874) (631,584) (936,845)
---------- ---------- ----------
$1,485,348 $1,455,337 $1,118,642
========== ========== ==========
</TABLE>

7. RELATED PARTY TRANSACTIONS

As part of its continuous program of research and development, the Company
retains consultants to consult with and advise the Company. Certain of the
consultants are holders of the Company's common stock or options to purchase
common stock. Consulting expenses relating to these stockholders and option
holders were $193,000 and $275,000 for the years ended June 30, 1994 and 1995,
respectively ($90,999 in 1993). The amounts payable to these consultants at June
30, 1994 and 1995 were $205,833 and $393,125, respectively.

A stockholder and Director of the Company (the "Director") is an officer
and sole shareholder of Paramount Capital (the "Placement Agent"). In connection
with the Series A convertible preferred stock offerings, the Placement Agent
received a commission of $442,110, an expense allowance of $50,000, and warrants
to purchase up to 47,569 shares of Series A convertible preferred stock (see
Note 5). In connection with the Series C convertible preferred stock offering,
the Placement Agent received a commission of $129,025 and warrants to purchase
24,471 shares of Series C convertible preferred stock (see Note 5). In
connection with the March 1996 Bridge Financing (See Note 9), the Company agreed
to pay the Placement Agent a commission equal to $193,750 and to issue warrants
to purchase 19,375 shares of Class A common stock at an exercise price per share
equal to 110% of the greater of $0.25 and 80% of the offering price.

In May 1995, two promissory notes totaling $173,000 from the Director were
converted into 35,500 shares of Series C convertible preferred stock at $4.87
per share. In the six-month period ended December 31, 1995, entities managed by
the Director and another member of the Board of Directors loaned the Company
$200,000 which was repaid in December 1995. In connection with these agreements,
the Company issued warrants to purchase 4,513 shares of Class A common stock
(see Note 5).

F-15
<PAGE> 70

AVIGEN, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(INFORMATION AT MARCH 31, 1996 AND FOR THE NINE-MONTH PERIODS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)

7. RELATED PARTY TRANSACTIONS -- (CONTINUED)
The Director has personally guaranteed the Company's five-year lease on the
office and laboratory facilities (see Note 4).

The Company has entered into non-exclusive agreements with Maxzen Medical
Technologies ("Maxzen") for the purpose of identifying potential investors in
Japan. A director of the Company is affiliated with Maxzen. Under the terms of
the agreements, Maxzen receives commissions, payable in cash and warrants,
determined based on investments in the Company initiated by Maxzen. Through June
30, 1995, Maxzen had earned commissions under the agreements amounting to
$271,561 and warrants for the purchase of 61,014 shares of Series A preferred
stock, 12,802 shares of Series B preferred stock and 53,594 shares of Series C
preferred stock (see Note 5). In connection with the 1996 Series D preferred
stock offering, the Company agreed to pay the director a finder's fee of $25,279
and issued warrants to purchase 45,272 shares of Series D preferred stock (see
Note 5).

8. INCOME TAXES

The Company uses the liability method to account for income taxes as
required by Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes". Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using enacted tax rules and laws that
will be in effect when the differences are expected to reverse.

Significant components of the Company's deferred tax assets are as follows:

<TABLE>
<CAPTION>
JUNE 30, 1994 JUNE 30, 1995
------------------------- ------------------------
FEDERAL STATE FEDERAL STATE
----------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Net operating loss carryforward........... $ 1,614,000 $ 68,000 $2,543,000 $ 111,000
Research and development credit
carryforward............................ 215,000 86,000 335,000 88,000
Accelerated depreciation.................. 63,000 11,000 135,000 24,000
Deferred rent expense..................... 31,000 6,000 59,000 10,000
Capitalized research and development...... -- 156,000 -- 284,000
Other..................................... 33,000 6,000 69,000 12,000
----------- --------- ----------- ---------
Gross deferred tax assets................. 1,956,000 333,000 3,141,000 529,000
Valuation allowance....................... (1,956,000) (333,000) (3,141,000) (529,000)
----------- --------- ----------- ---------
Net deferred tax assets................... $ -- $ -- $ -- $ --
=========== ========= =========== =========
</TABLE>

The valuation allowance increased by $1,751,000 and $1,381,000 for the
fiscal years ended in 1994 and 1995, respectively.

At June 30, 1995, the Company has net operating loss carryforwards for
federal and state income tax purposes of approximately $7,481,000 and
$1,843,000, respectively, which expire in 1998 through 2010. At June 30, 1995,
the Company has research and development credit carryforwards for federal tax
purposes of approximately $335,000, which expire in 2008 through 2010.

Because of the "change in ownership" provisions of the Tax Reform Act of
1986, utilization of the Company's tax net operating loss carryforward and tax
credit carryforwards may be subject to an annual

F-16
<PAGE> 71

AVIGEN, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(INFORMATION AT MARCH 31, 1996 AND FOR THE NINE-MONTH PERIODS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)

8. INCOME TAXES -- (CONTINUED)
limitation in future periods. As a result of the annual limitation, a portion of
these carryforwards may expire before ultimately becoming available to reduce
future income tax liabilities.

9. 1996 BRIDGE FINANCING

In March 1996, the Company completed a bridge financing pursuant to which
the Company issued $1,937,500 principal amount of bridge notes payable and
193,750 warrants to purchase Class A common stock at an exercise price per share
equal to the greater of $0.25 per share and 80% of the Offering price ("the
bridge warrants"). The bridge notes payable are due, together with interest at
the rate of 12% per annum, on the earlier of March 1997 or ten days following
the consummation of the Offering. Should the bridge notes not be repaid when
due, then 10% of such notes become convertible into shares of common stock at
$0.04 per share and the remaining balance accrues interest at 18% until paid.
The warrants expire in March 2001. The bridge warrants were assigned a value of
$300,000. This amount is reflected as a discount on the bridge notes and will be
accreted as additional financing (interest) expense over the term of the notes.

10. INITIAL PUBLIC OFFERING

In March 1996, the Board of Directors authorized the Company to proceed
with an initial public offering of the Company's common stock. If the Offering
is consummated under the terms presently anticipated all of the outstanding
preferred stock at March 31, 1995 will automatically convert into 2,333,179
shares of common stock. Unaudited pro forma stockholders' equity, as adjusted
for the assumed conversion of all outstanding shares of convertible preferred
stock as of March 31, 1996, is set forth on the accompanying balance sheet.

In May 1996, in contemplation of the Offering, the Company filed an Amended
and Restated Certificate of Incorporation to effect a one for 4.43 reverse stock
split of all outstanding shares of common stock, preferred stock, stock options
and warrants. All shares and per share data in the accompanying financial
statements have been adjusted retroactively to give effect to the reverse stock
split. The Amended and Restated Certificate of Incorporation also reduced the
authorized stock of the Company such that the Company is authorized to issue
5,000,000 shares of $.001 par value "blank check" preferred stock, and
30,000,000 shares of $.001 par value common stock and the Class A designation
was eliminated.

In March 1996, the Board of Directors adopted and in April 1996 the
stockholders approved the 1996 Equity Incentive Plan ("the Incentive Plan") and
reserved 600,000 shares of common stock for issuance thereunder. The Incentive
Plan provides for grants of incentive stock options to employees and non
statutory stock options, restricted stock purchase awards, stock bonuses and
stock appreciation rights to employees and consultants of the Company. No
options, restricted stock awards, stock bonuses or stock appreciation rights
have been granted under the Incentive Plan.

F-17
<PAGE> 72

- ------------------------------------------------------
- ------------------------------------------------------

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER
OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY TO ANY PERSON IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.

------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................... 3
Risk Factors........................... 6
The Company............................ 13
Use of Proceeds........................ 13
Dividend Policy........................ 13
Capitalization......................... 14
Dilution............................... 15
Selected Financial Data................ 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 17
Business............................... 19
Management............................. 36
Certain Transactions................... 43
Principal Stockholders................. 46
Description of Capital Stock........... 48
Shares Eligible for Future Sale........ 50
Underwriting........................... 52
Legal Matters.......................... 53
Experts................................ 53
Additional Information................. 54
Index to Financial Statements.......... F-1
</TABLE>

UNTIL JUNE 15, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------

2,500,000 SHARES

LOGO

COMMON STOCK
------------------------

PROSPECTUS
------------------------
WEDBUSH MORGAN SECURITIES

SANDS BROTHERS & CO., LTD.
MAY 22, 1996

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