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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

x ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2008

o TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from                  to                  

Commission File Number: 001-14895

AVI BioPharma, Inc.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code:  (541) 753-3635

Securities registered under Section 12(b) of the Act: None

Securities registered under Section 12(g) of the Act:

Common Stock with $.0001 par value

(Title of Class)

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

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

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

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

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

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

The aggregate market value of the voting stock held by non-affiliates of the Registrant as of June 30, 2008 was approximately $66,694,075. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of outstanding shares of the Registrant’s Common Stock as of the close of business on March 6, 2009 was 85,644,698.

Documents Incorporated by Reference

The issuer has incorporated into Part III of this annual report on Form 10-K, by reference, portions of its definitive Proxy Statement for its 2009 annual meeting.

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AVI BioPharma, Inc.
FORM 10-K INDEX

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PART I

Item 1.  Business.

General Overview

AVI BioPharma is a biopharmaceutical Company specializing in the discovery and development of novel, RNA-based drugs targeting a range of diseases (in this report, “we,” “our,” “us,” “AVI,” and “Company” refers to AVI BioPharma, Inc.).

As one of the emerging leaders in the fast growing field of RNA therapeutics, AVI has developed and optimized derivatives of its proprietary antisense chemistry (phosphorodiamidate morpholino oligomers or PMOs) that can be designed to target disease mechanisms through distinct mechanisms of action. Unlike other RNA therapeutic approaches, AVI’s antisense technology has been used to directly target both messenger RNA (mRNA) and precursor messenger RNA (pre-mRNA) allowing for both down- and up-regulation of targeted genes or proteins. We believe that these broad capabilities give the Company a unique RNA-based technology platform and strong intellectual property position, both of which are the result of advances across several areas of science, including over 20 years of research and development work in chemistry and the Human Genome Project. Our patent estate includes 222 patents (foreign and domestic) issued to or licensed by us and 196 pending patent applications (domestic and foreign).

AVI is leveraging its discovery and development capabilities to build a pipeline of RNA-based therapeutic candidates to develop in collaboration with larger pharmaceutical and biotechnology partners. Current applications of AVI’s RNA technology platform include genetic diseases (Duchenne muscular dystrophy), infectious diseases (Ebola and Marburg viruses), cardiovascular disease (restenosis) and other early discovery targets.  Several of our antiviral programs, including Ebola, Marburg, Junín and Dengue, have been or are currently funded by the U.S. government (see U.S. Department of Defense Agreements below), and other governmental and non-governmental funding has supported our other programs.

Business Strategy

We believe that our antisense technology is applicable for the potential development of pharmaceutical products in many therapeutic areas and we intend to exploit our core technology appropriately.

Our strategy is to:

·     focus on near-term opportunities in the genetic disease, cardiovascular disease, and infectious diseases areas;

·     manage drug discovery, pre-clinical and early to mid-stage clinical development in-house;

·     utilize biodefense funding to advance antiviral programs; and

·     enter into collaborative development agreements with strategic partners or larger pharmaceutical companies for specific molecular targets or selected disease indications.

AVI Chemistries

AVI’s core chemistry is based on PMOs. PMOs are synthetic molecules based on a fundamental redesign of the natural nucleic acid structure. PMOs bind to complementary sequences of RNA by standard nucleic acid base—pairing. Structurally, the difference between PMOs and DNA and RNA is that while PMOs have standard nucleic acid bases, those bases are bound to morpholine rings instead of deoxyribose (in DNA) or ribose (in RNA) rings,

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and they are linked through phosphorodiamidate groups instead of phosphates. Replacement of anionic phosphates with the uncharged phosphorodiamidate groups eliminates ionization in the usual physiological pH range, so PMOs in organisms or cells are uncharged molecules. The entire backbone of a PMO is made from these modified subunits; they act in a drug-like manner as steric blockers and do not activate biologic mechanisms — such as RNAse H — for their mode of action.

These differences in fundamental design and mechanism of action differentiate AVI’s PMO-based drug candidates from earlier-generation RNA antisense compounds and many current antisense drug candidates. We believe that these key differences provide the pharmaceutical properties that are best suited for advanced antisense technology to achieve broader drug characteristics and greater potential clinical utility than the earlier antisense compounds.

AVI has advanced its original PMO chemistry through the addition of two new series of PMO analogues. The first is a peptide conjugated phosphorodiamidate morpholino oligomer, or PPMO, where cellular uptake of the active PMOs, as well as their potency and specificity of tissue targeting, can be significantly enhanced by the conjugation of chemical moieties to a PMO, which broadly can be considered as arginine-rich cell-penetrating peptides (CPPs).

The second analogue series includes the addition of positive charges to certain monomers in the PMO backbone. This new series, the PMOplus, is effective in overcoming the viral mutations that make certain RNA viruses drug-resistant. AVI continues to advance additional discoveries to further optimize its core proprietary chemistry as well as to develop further novel analogues that we believe will provide benefit in the key characteristics for drug action, such as potency, bioavailability, therapeutic index and tissue selectivity.

Applications (TSOs & SSOs)

Translation Suppressing Oligomers (TSOs)

Translation Suppressing Oligomers (TSOs) are PMO-based antisense compounds that interfere with gene expression — and other RNA-dependent cellular processes — by binding to their specific target sequence in RNA. The primary application of TSOs is to stop or suppress the translation of a specific protein through this binding process, thus inducing a desired therapeutic effect.

TSOs demonstrate tight and selective RNA binding and act by a direct steric-blocking mechanism instead of by RNAse H-mediated or RISC-mediated RNA degradation. In some cases, AVI is developing drugs that use combinations of PMO analogues to confer special characteristics — such as resistance to viral mutations — to TSOs (as with their novel PMOplus chemistry) to achieve gene down regulation of targeted RNA sequences, thus preventing protein expression.

Splice Switching Oligomers (SSOs)

Splice Switching Oligomers (SSOs) are PMO-based compounds that can direct alternative splicing by forcing the cellular splicing machinery towards desired splicing outcomes. Sometimes these desired splicing pathways are entirely novel, i.e. they are not normally seen in the human body, and could produce important therapeutic outcomes. SSOs exploit pre-mRNA splicing to control gene function and produce a therapeutic benefit in which a protein is inhibited, increased in its expression level changed in the overall profile of protein isoforms or in the expression of a unique novel protein. This powerful mechanism provides great discrimination when used for intervention in disease-causing processes.

The field of directed alternative splicing represents an especially exciting opportunity for AVI. This new era of RNA-based drug discovery and development is positioned at the crucial interface of genomes, regulatory networks and evolution, a rapidly emerging mechanism of gene regulation. The genetic information stored in human DNA is dispersed in short DNA stretches, called exons, that code for fragments of the protein and are separated by long non-coding pieces of DNA called introns. During processing of precursor or pre-mRNA, which is copied from the DNA template, introns are removed and exons spliced together to create the mature mRNA. In mRNA, the exons are brought together, the genetic information is made contiguous and the full, functional protein can be translated.

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During alternative splicing, this process can occur through more than one pathway, creating multiple messenger RNAs and, hence, multiple proteins, all from the same gene. AVI’s SSOs can be used to manipulate splicing in a way that is distinct from conventional antisense or siRNA-based approaches.

By targeting elements in precursor RNA that are essential for splicing, SSO compounds force the cellular machinery to skip over targeted exons, creating an altered mRNA template. In a disease situation, SSOs are designed to prevent formation of harmful proteins and/or help to restore beneficial proteins. When the exon contains a disease-causing mutation, for example, the resulting altered protein may have its function restored, partially restored or neutralized, by forced skipping of the harmful exon. This approach may be used to overcome the devastating consequences of certain disease-causing mutations which are known as genetic diseases.

The Human Genome Project revealed that humans have far fewer genes than would have been predicted from the range of unique proteins that are expressed in the human proteome. Latest estimates indicate that approximately 90% of human genes are alternatively spliced.  Thus, for the majority of genes, alternative splicing produces multiple proteins that can have slightly or profoundly different functions. Some pairs of splice variants have exactly opposite effects. Alternative splicing pathways are affected in many different diseases such that pathological protein isoforms are overproduced and the physiological isoforms are decreased. AVI’s PMO-based SSO technology enables manipulation of splicing to restore production of desired proteins, and, therefore, represents a novel therapeutic platform, with significant therapeutic potential in some previously untreatable diseases.

Therapeutic applications of SSOs include:

·                  Inhibition of mRNA production through a kinetically favored process

·                  Functional repair of RNA mutations

·                  Expression of novel proteins

·                  Alteration of protein compartmentalization

·                  The ability to flip a control switch on specific gene targets

·                  Alteration of the profile of protein isoforms

The Company believes that the field of directed alternative splicing represents an exciting opportunity and has emerged as a ubiquitous and dynamic mechanism for gene regulation. Supported by a growing stream of new insights and discoveries derived from the fields of genomics, bioinformatics and molecular biology, this area promises to be a rich source of therapeutic applications.

This annual report includes our trademarks and registered trademarks, including NeuGene®, Avicine®, Resten-NG®, Resten-CP™, and Oncomyc-NG™. Each other trademark, trade name or service mark appearing in this annual report belongs to its holder.

Development Programs

AVI’s RNA-based drug programs are being evaluated for the treatment of Duchenne muscular dystrophy and for the treatment of cardiovascular restenosis through our partner, Global Therapeutics, a Cook Medical Company. Our antiviral programs have demonstrated promising effects in Ebola and Marburg virus diseases and may prove applicable to other viral targets such as HCV, Junín and Dengue viruses.  We currently have products at various stages of development as summarized below.

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Duchenne Muscular Dystrophy (DMD) programs.  We are developing a series of drugs for the potential treatment of DMD.  We believe that a series of drugs skipping different exons will best be able to treat the various genotypically distinct forms of DMD.  Boys with DMD have a mutation in the genetic information that codes for the production of a critical muscle protein — dystrophin — that is localized to the sarcolemmal membrane of muscle cells. The absence of dystrophin in muscle cells leads to cell damage, an abnormally permeable cell membrane and ultimately causes cell death and fibrotic replacement. We currently have two programs underway with drugs that skip exon 51 (AVI-4658) and exon 50 (AVI-5038).

AVI-4658. A phase 1 human clinical trial in boys with Duchenne Muscular Dystrophy (DMD) was recently completed by the MDEX consortium in the United Kingdom. We announced the successful outcome of that trial in January 2009.  Our SSO drug, AVI-4658, targets the most frequent mutations resulting in DMD, forces the genetic machinery to skip over an adjacent piece (one or more codons) of RNA, thus restoring the ability of the cell to process genetic instructions, thereby, allowing for production of a new, albeit truncated, dystrophin protein. We believe that this might restore, prevent or slow deterioration of muscle function. This was the first clinical application of our SSO technology and entailed administration of the drug directly into an affected muscle in DMD boys.   We have recently opened a second, phase 1b systemic clinical trial with this product at the Institute of Child Health in London, UK. AVI-4658 has been granted Orphan Status in the U.S. and the EU which allow for seven and ten years of post-approval market exclusivity, respectively.  In addition, we have been granted fast track approval in the U.S.

AVI-5038. We are conducting preclinical evaluations with our SSO drug, AVI-5038, which is designed to skip exon 50 and potentially restore a range of associated mutations.  This drug utilizes our PPMO chemistry with the aim to enhance potency, tissue selectivity and bioavailability when compared to first generation PMO drug candidates.

AVI-5126 Prevention of Restenosis. AVI has partnered with Global Therapeutics, a Cook Medical Company, to evaluate AVI’s cardiovascular restenosis drug for use on a chromium cobalt drug-eluting stent (DES) for the treatment of cardiovascular restenosis. The application of AVI—5126 to the Global Therapeutics SilencerTM System is designed to offer rapid drug release and reversion to a bare metal stent within hours of implantation. The current worldwide market for DES is estimated at $5 billion.

Infectious Disease Programs. Our infectious disease program is currently focusing on single-stranded RNA viruses using our proprietary TSO technology with our PMOplus chemistry backbone to target the often fatal diseases caused by Dengue, Ebola, Marburg and Junín viruses, as well as many of the items included on the Department of Homeland Security’s list of bioterrorism agents, including anthrax and ricin. Our future efforts toward development and commercialization in viral diseases will focus on government programs in bioterrorism, such as Ebola and Marburg virus infections.

AVI-6002 Ebola virus program, Ebola virus is a highly lethal virus with no effective current therapy.  We have demonstrated significant survival in mice, guinea pigs and monkeys when they are treated with AVI-6002 post infection with Ebola virus. In November 2008, we filed an Investigational New Drug application (IND) with the United States Food and Drug Administration (FDA).  In December 2008, we received approval to move into the initial clinical study.  We expect to pursue development and approval of AVI-

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6002 under the “Animal Rule”.  The Animal Rule states that in selected circumstances, when it is unethical or infeasible to conduct human efficacy studies, the FDA may grant marketing approval based on adequate and well-controlled animal studies when the results of those studies establish that the drug or biological product is reasonably likely to produce clinical benefit in humans. Demonstration of the product’s safety in humans is still necessary.  Our development of AVI-6002 is currently funded by the U.S. government.

AVI-6003 Marburg virus program, Marburg virus is a highly lethal virus with no effective current therapy.  We have demonstrated significant survival in mice, guinea pigs and monkeys when they are treated with AVI-6003 post-infection with Marburg virus.  In November 2008, we filed an Investigational New Drug application (IND) with the FDA.  In December 2008, we received approval to move into the initial clinical study.  We expect to pursue development and approval of AVI-6003 under the Animal Rule.  Our development of AVI-6003 is currently funded by the U.S. government.

Strategic Alliances

We believe that our antisense technology is broadly applicable for the potential development of pharmaceutical products in many therapeutic areas. To exploit our core technology as fully as possible, our strategy is to enter into strategic research and development alliances with larger pharmaceutical and biotechnology companies for specific molecular targets or selected disease indications. We also plan to pursue opportunities to access intellectual property rights through license agreements or other arrangements that complement our portfolio of patents and patent applications.

We currently have strategic alliances with the following companies and institutions

Cook Group - for vascular diseases using PPMO-based RNA therapeutic agents

U.S. Department of Defense - for Ebola, Marburg and Dengue viruses; Ricin and Anthrax toxins

USAMRIID - for BSL—4 threats, including Marburg and Ebola viruses

Eleos, Inc. - to treat cancer with p53-related drugs

Institute of Child Health at the University College, London - for clinical trials in muscular dystrophy

Chiron Agreement

In January 2006, we entered into an agreement with Chiron Corporation that granted us a nonexclusive license to Chiron’s patents and patent applications for research, development, and commercialization of antisense therapeutics against hepatitis C virus (HCV).  Chiron scientists were the first to clone HCV and Chiron has been granted more than 100 HCV-related patents.

The license agreement with Chiron further strengthened our patent position on our HCV antisense product candidates, which are already covered by issued U.S. patent claims.  In conjunction with the license agreement, AVI issued Chiron shares of AVI common stock as an initial license fee payment.

Cook Group Agreement

In March 2006, we entered into agreements with Cook Group Incorporated (“Cook”) for the development and commercialization of products for vascular diseases. Cook is the world’s largest privately-held manufacturer of medical devices and is a leading designer, manufacturer and global distributor of minimally invasive medical device technologies for diagnostic and therapeutic procedures. Pursuant to our agreements, Cook licensed AVI-5126 for down-regulating c-Myc expression in the field of cardiovascular disease. Cook has taken over the clinical development of device-related programs for cardiovascular restenosis, including our AVI-5126 drug-eluting stent (DES) program, Resten-MP™ microparticle delivery program, and a program for catheter delivery of Resten-NG®.

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Based on the agreements, we expect Cook to fully fund the development, clinical and regulatory costs of licensed programs in the U.S. and Europe leading to commercialization. The license and development agreement provides for payment to AVI of a double-digit percentage royalty on worldwide product sales by Cook and a commercialization milestone. Cook also purchased 692,003 shares of AVI common stock for $5 million under a stock purchase agreement. Cook has taken over AVI’s facilities and personnel in Colorado that were dedicated to the programs now licensed by Cook. Finally, we also entered into a supply agreement with Cook for the supply of the active pharmaceutical ingredient AVI-5126 required to support development, clinical studies, and commercialization of the licensed products.

Ercole Agreement

From December 2006 to May 2007, AVI entered into a series of cross-license and collaboration agreements with Ercole Biotech, Inc. (“Ercole”) to identify and develop drugs that direct the splicing of precursor messenger RNA (pre-mRNA) to treat a variety of genetic and acquired diseases.  In March 2008, we completed the acquisition of Ercole.

Eleos Agreement

In January 2007, we announced that we had entered into a cross-license agreement with Eleos Inc. (“Eleos”) for the development of antisense drugs targeting p53, a well-studied human protein that controls cellular response to genetic damage. Under the terms of the agreement, AVI granted Eleos an exclusive license to AVI’s NeuGene® third-generation antisense chemistry to treat cancer with p53-related drugs. In return, Eleos granted an exclusive license to its patents to AVI for treatment of most viral diseases with drugs that target p53. The companies are sharing rights in other medical fields where targeting p53 may be therapeutically useful. Each company will make milestone payments and royalty payments to the other on development and sales of products that utilize technology licensed under the agreement. In addition, Eleos Inc. made an upfront payment of $500 thousand to AVI. Through December 31, 2008, the Company had recognized revenue of $250 thousand from this agreement.

Charley’s Fund Agreement

In October 2007, AVI and Charley’s Fund, Inc., a nonprofit organization that funds drug development and discovery initiatives specific to Duchenne muscular dystrophy (DMD), announced that AVI had been awarded a $2.45 million research grant from Charley’s Fund. This award will support a new product development program using proprietary exon skipping technologies developed by AVI to overcome the effects of certain genetic errors in the dystrophin gene. The program has identified AVI-5038 as a lead preclinical development candidate for the treatment of certain types of DMD in which skipping of exon 50 might have therapeutic benefit. Through December 31, 2008, the Company had received $2.0 million from Charley’s Fund, and recorded the advances as Deferred Revenue, to be recognized upon the attainment of certain milestones as specified in the agreement. The Company recognized $22,500 and $37,500, respectively, in revenues from Charley’s Fund for the years ended December 31, 2008 and 2007.

U.S. Department of Defense Agreements

The Company currently has several contracts from the U.S. Department of Defense funding its programs, including its clinical stage programs for the Ebola virus and Marburg virus therapeutics.  The funding of these programs from the U.S. government is critical to the ongoing development of these programs.  Future funding of these programs is subject to availability of budgeted funds from the U.S. Department of Defense.  Through December 31, 2008, the Company had received approximately $45 million in contract awards from the U.S. Government.

Manufacturing

We believe we have developed proprietary manufacturing techniques that will allow synthesis and purification of our products to support up to Phase 2 clinical development. We have established a Good Manufacturing Practices (“GMP”) manufacturing facility at our Corvallis, Oregon site that permits us to synthesize and purify our products. We believe that our GMP facility should provide sufficient manufacturing capacity to continue to meet our early stage clinical trial requirements for the foreseeable future and allow us to produce products incorporating our technology. Our GMP facility is subject to FDA inspection and regulation.

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Marketing Strategy

We plan to market initial products, when developed, and for which we obtain regulatory approval, through marketing arrangements or other licensing arrangements with larger pharmaceutical or biotechnology companies. Implementation of this strategy will depend on many factors, including the market potential of any products we develop, and our financial resources.  We do not expect to establish a direct sales capability for therapeutic compounds for at least the next several years, if at all. To market products that will serve a large, geographically diverse patient population, we expect to enter into licensing, distribution, or partnering agreements with pharmaceutical companies that have large, established sales organizations. The timing of our entry into marketing arrangements or other licensing arrangements with large pharmaceutical companies will depend on successful product development and regulatory approval within the regulatory framework established by the Federal Food, Drug and Cosmetics Act, as amended, and regulations promulgated thereunder and, to the extent our products are distributed outside of the United States, within the regulatory framework established in other countries. Although the implementation of initial aspects of our marketing strategy may be undertaken before this process is completed, the development and approval process typically is not completed in less than three to five years after the filing of an IND application and our marketing strategy therefore may not be implemented for several years. See “Drug Approval Process and Other Governmental Regulation.”

Patents and Proprietary Rights

We have developed or acquired a comprehensive body of intellectual property rights. The proprietary nature of, and protection for, our product candidates, processes and know-how are important to our business. We plan to prosecute and aggressively defend our patents and proprietary technology. Our policy is to patent the technology, inventions, and improvements that we believe are important to the development of our business. We also depend upon trade secrets, know-how, and continuing technological innovation to develop and maintain our competitive position.

A patent estate including 222 patents (domestic and foreign) issued or licensed to us, and 196 pending patent applications (domestic and foreign) has been developed for purposes of protecting our technologies.  We intend to protect our proprietary technology with additional filings as appropriate. Some of our patents on core technologies expired in 2008, including that for our basic PMO chemistry. Based on patented improvements and additional support to such core patents, however, we believe our patent protection for those products and other products will extend beyond 2020.

We have licensed certain technology to supplement and support certain of our core technology. We have certain obligations and minimum royalties under those agreements, which costs are not deemed material to our business.

Drug Approval Process and Other Government Regulation

The system of reviewing and approving drugs in the United States is considered to be among the most rigorous in the world. Costs to bring a single product from research through market approval and commercialization range from $800 million (Pharmaceutical Research and Manufacturers Association) to $1.7 billion in 2000 through 2002 (FDA), with the timing to do so typically ranging between 10 and 15 years. The Pharmaceutical Research and Manufacturers Association estimates that of every 5,000 medicines tested, on average, only five are tested in clinical trials, and only one of those is approved for human use.

Drug Discovery

The drug discovery process can take several years. The refinement of the lead compounds can result in numerous chemical modifications to the screening lead in an attempt to improve its drug properties. After a compound emerges from the above process, the next steps are to conduct further preliminary studies on the mechanism of action, further in vitro (test tube) screening against particular disease targets and, finally, limited in vivo (animal) screening. If the compound overcomes these hurdles, the toxic effects of the compound are analyzed by performing preliminary exploratory animal toxicology. If the results are acceptable, the compound emerges from the basic research mode and moves into development.

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Preclinical Development

During the pre-clinical development stage, laboratory and animal studies are conducted to show biological activity of the compound, and the compound is evaluated for safety. These tests typically take approximately three and one-half years to complete.

Investigational New Drug Application

During the pre-clinical testing, an IND is filed with the FDA to begin human testing of the drug. The IND becomes effective if not rejected by the FDA within 30 days. The IND must indicate the results of previous experiments, both preclinical and any clinical studies conducted outside the US, and present a plan for next clinical work showing how, where and by whom the new studies will be conducted, the chemical structure of the compound, the method by which it is believed to work in the human body, any toxic effects of the compound found in the animal studies and how the compound is manufactured. In addition, an Institutional Review Board (IRB), comprised of physicians, scientists and lay people, will review the study protocols for the proposed studies. The IRB must review and approve each study protocol and any amendments before patients can be dosed. Progress reports detailing the results of the clinical trials must be submitted at least annually to the FDA.

Phase I Clinical Trials

After an IND becomes effective, Phase I human clinical trials in the U.S. may begin. These tests, involving patients or healthy volunteers, typically take approximately one year to complete and cost between $300,000 and $1,500,000 per trial. The Phase I clinical studies also determine how a drug is absorbed, distributed, metabolized and excreted by the body, and the duration of its action.  A Phase 1b study may involve patients with the targeted disease and is focused on safety.

Phase II Clinical Trials

In Phase II clinical trials, controlled studies are generally conducted on volunteer patients with the targeted disease. The preliminary purpose of these tests is to evaluate the effectiveness of the drug on the volunteer patients, to determine an optimal dose at which the test drug is deemed safe and effective and to determine if there are any side effects. These studies generally take approximately two years, involve tens to a hundred patients, at several clinical testing centers and cost between $600,000 and $4 million per trial.

Phase III Clinical Trials

This phase typically lasts about three years, involves tests in patients with the targeted disease and cost between $5 million and $50 million per trial. During the Phase III clinical trials, physicians monitor the patients to determine efficacy and to observe and report any reactions that may result from long-term use of the drug. These studies generally involve hundreds of patients at many clinical centers, sometimes in many different countries. It is customary to have agreed with the FDA on the data that needs to be generated from these studies before they are started.

New Drug Application

After the completion of the requisite three phases of clinical trials, if the data indicate that the drug has an acceptable benefit to risk assessment and it is found to be safe and effective, a New Drug Application (NDA) is filed with the FDA and/or a Marketing Authorization Application (MAA) with the European Medicines Evaluation Agency (EMEA), and/or other regulatory authorities. The requirements for submitting an NDA are defined by and in conjunction with the FDA and other regulatory authorities. These applications are comprehensive, including all information obtained from each clinical trial as well as all data pertaining to the manufacturing and testing of the product, as well as the results from all preclinical toxicology testing. With the implementation of the Prescription Drug Users Fee Act (PDUFA), review fees are provided at the time of NDA filing. For 2008, each NDA with clinical data was required to be accompanied by a $1.2 million review fee. If the NDA is assessed as unacceptable in the initial 30 day review, it is returned to the submitter, with 50% of the fee. The FDA reported the estimated median review time for a New Molecular Entity (NME) was estimated to be 13.8 months, however, a priority review of a NME can be and has been approved in as little as six months.

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Marketing Approval

If the FDA approves the NDA, the drug becomes available for physicians to prescribe. Periodic reports must be submitted to the FDA, including descriptions of any adverse reactions reported. The FDA may request additional studies (Phase IV) to evaluate long-term effects.

Phase IV Clinical Trials and Post Marketing Studies

In addition to studies requested by the FDA after approval, these trials and studies are conducted to explore new indications. The purpose of these trials and studies and related publications is to broaden the application and use of the drug and its acceptance in the medical community.  Sometimes an NDA is approved with the sponsoring company being required as a condition of approval to perform specific additional work, which should be provided to the FDA in due course to maintain the product’s approval.

Competition

Several companies are pursuing the development of gene silencing technology, including Prosensa, Santaris, Merck, and ISIS Pharmaceuticals. All of these companies have products in development stages, and, in some cases, are in human trials with antisense compounds similar to our compounds.

While we believe that none of these companies is likely to introduce an additional antisense compound into the broad commercial market in the immediate future, many pharmaceutical and biotechnology companies, including those listed above, have financial and technical resources greater than those currently available to us and have more established collaborative relationships with industry partners than do we.

Prosensa is currently developing a potential treatment for DMD skipping exon 51 using a competing chemistry.  Prosensa initiated in Europe a systemic administration clinical trial several months prior to the initiation of our similar clinical trial.  There can be no assurance that Prosensa’s product candidate will prove to be more or less efficacious than our product candidate or that it will gain marketing approval sooner than our product or at all.

We can also expect to compete with other companies exploiting alternative technologies that address the same therapeutic needs as do our technologies. The biopharmaceutical market is subject to rapid technological change, and it can be expected that competing technologies will emerge and will present a competitive challenge to us.

Research and Development

We expensed $29,002,504, $34,760,402 and $25,345,588 on research and development activities during the years ended December 31, 2008, 2007 and 2006, respectively. Research and development (R&D) expenses include related salaries, contractor fees, materials, utilities and allocations of corporate costs. R&D expenses consist of independent R&D costs and costs associated with collaborative development arrangements. In addition, the Company funded R&D at other companies and research institutions under agreements. Research and development costs are expensed as incurred.

Employees

As of December 31, 2008, we had 83 employees, 18 of whom hold advanced degrees. Sixty-five employees are engaged directly in research and development activities, and eighteen are in administration. None of our employees are covered by collective bargaining agreements and we consider relations with our employees to be good.

Where You Can Find Additional Information

We are a reporting company and file annual, quarterly and current reports, proxy statements and other information with the SEC. For further information with respect to us, you may read and copy our reports, proxy statements and other information, at the SEC’s public reference room at Room 1580, 100 F Street, NE, Washington, D.C. 20549. You can request copies of these documents by writing to the SEC and paying a fee for the copying cost. Please call

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the SEC at 1-800-SEC-0330 for more information about the operation of the public reference rooms. Our SEC filings are also available at the SEC’s web site at “http://www.sec.gov.”

Copies of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, our proxy statement and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) as well as our corporate governance guideline, outline of directorship qualifications, code of business conduct and the charter of our audit committee, compensation committee, and nominations committee are all available on our website (www.avibio.com) or by sending a request for a paper copy to: AVI BioPharma, Inc., 4575 SW Research Way, Suite 200, Corvallis, Oregon 97333, attn. Investor Relations.

Item 1A. Risk Factors.

Risks Affecting Future Operating Results

The following factors should be considered in evaluating our business and prospects for the future. If risks described below actually occur, our operating results and financial condition would likely suffer and the trading price of our common stock may fall, causing a loss of some or all of an investment in our common stock. In addition, there may be additional risks not known to us or understood by us which may adversely affect our financial condition, results of operations, and the price of our stock.

If we fail to attract significant additional capital, we may be unable to continue to successfully develop our products.

Since we began operations, we have obtained operating funds primarily by selling shares of our common stock. Based on our current plans, we believe that current cash balances will be sufficient to meet our operating needs for the current fiscal year. Furthermore, the actual amount of funds that we will need will be determined by many factors, some of which are beyond our control. These factors include the success of our research and development efforts, the status of our pre-clinical and clinical testing, costs relating to securing regulatory approvals and the costs and timing of obtaining new patent rights, regulatory changes, competition and technological developments in the market. We may need funds sooner than currently anticipated.

If necessary, potential sources of additional funding could include strategic relationships, public or private sales of shares of our stock, or debt, or other arrangements. We may not be able to obtain additional funding when we need it on terms that will be acceptable to us or at all. If we raise funds by selling additional shares of our common stock or securities convertible into our common stock, the ownership interest of our existing shareholders will be diluted. If we are unable to obtain financing when needed, our business and future prospects would be materially adversely affected.

Our products are in an early stage of research and development and may not be determined to be safe or effective.

We are in the early stages of clinical development with respect to our RNA therapeutics pharmaceutical products. We have devoted almost all of our resources to research and development of our product candidate, protecting our proprietary rights and establishing strategic alliances. Our potential products are in the pre-clinical or clinical stages of research and development and will require significant further research, development, clinical testing and regulatory clearances. We have no products available for sale and we do not expect to have any products available for sale for several years. Our products could be found to be ineffective or toxic, or could fail to receive necessary regulatory clearances. We have not received any significant revenues from the sale of products and we may not successfully develop marketable products that will increase sales and, given adequate margins, make us profitable. Third parties may develop superior or equivalent, but less expensive, products.

We rely on U.S. government contracts to support several important R&D programs.

We rely on U.S. government contracts and awards to fund several of our development programs, including those for the Ebola and Marburg viruses.  The termination of one or more of these contracts, whether due to lack of funding, for convenience, or otherwise, or the occurrence of delays or product failures in connection with one or more of

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these contracts, could negatively impact our financial condition. Furthermore, we can give no assurance that we would be able to procure new U.S. government contracts to offset the revenues lost as a result of any termination of our contracts.

The funding of U.S. government programs is subject to Congressional appropriations. Congress generally appropriates funds on a fiscal year basis even though a program may extend over several fiscal years. Consequently, programs are often only partially funded initially and additional funds are committed only as Congress makes further appropriations. In the event that appropriations for one of our programs become unavailable, or are reduced or delayed, our contracts may be terminated or adjusted by the government, which could have a negative impact on our future sales under such a contract or subcontract. From time to time, when a formal appropriation bill has not been signed into law before the end of the U.S. government’s fiscal year, Congress may pass a continuing resolution that authorizes agencies of the U.S. government to continue to operate, generally at the same funding levels from the prior year, but does not authorize new spending initiatives, during a certain period. During such a period (or until the regular appropriation bills are passed), delays can occur in government procurement due to lack of funding, and such delays can affect our operations during the period of delay.

In addition, U.S. government contracts generally also permit the government to terminate the contract, in whole or in part, without prior notice, at the government’s convenience or for default based on performance. If one of our contracts is terminated for convenience, we would generally be entitled to payments for our allowable costs and would receive some allowance for profit on the work performed. If one of our contracts is terminated for default, we would generally be entitled to payments for our work that has been accepted by the government. A termination arising out of our default could expose us to liability and have a negative impact on our ability to obtain future contracts.

If we fail to receive necessary regulatory approvals, we will be unable to develop and commercialize our products.

All of our products are subject to extensive regulation by the United States Food and Drug Administration, or FDA, and by comparable agencies in other countries. The FDA and these agencies require new pharmaceutical products to undergo lengthy and detailed preclinical and clinical testing procedures and other costly and time-consuming compliance procedures. We do not know when, or if, we will be able to submit our products for regulatory review. Even if we submit a new drug application, there may be delays in obtaining regulatory approvals, if we obtain them at all. Sales of our products outside the United States will also be subject to regulatory requirements governing clinical trials and product approval. These requirements vary from country to country and could delay introduction of our products in those countries. We cannot assure you that any of our products will receive marketing approval from the FDA or comparable foreign agencies.

If we lose key personnel or are unable to attract and retain additional, highly skilled personnel required for our activities, our business will suffer.

The loss of key employees could significantly delay the achievement of our goals. Competition for qualified personnel in our industry is intense, and our success will depend on our ability to attract and retain highly skilled personnel. To date, we have been successful in attracting and retaining key personnel.

Asserting, defending and maintaining our intellectual property rights could be challenging and costly, and our failure to do so could harm our ability to compete and impair the outcome of our operations.

Our success will depend on our existing patents and licenses (222 patents (domestic and foreign) issued or licensed to us, and 196 (domestic and foreign) pending patent applications) and our ability to obtain additional patents in the future. We license patents from other parties for certain complementary technologies.

Some of our patents on core technologies expired in 2008, including for our basic PMO chemistry. Based on patented improvements and additions to such core patents, however, we believe our patent protection for those products and other products extend beyond 2020.

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We cannot be certain that pending patent applications will result in patents being issued in the United States or foreign countries. In addition, the patents that have been or will be issued may not afford meaningful protection for our technology and products. Competitors may develop products similar to ours that do not conflict with our patents. Others may challenge our patents and, as a result, our patents could be narrowed or invalidated. The patent position of biotechnology firms generally is highly uncertain, involves complex legal and factual questions, and has recently been the subject of much litigation. No consistent policy has emerged from the United States Patent and Trademark Office (USPTO) or the courts regarding the breadth of claims allowed or the degree of protection afforded under biotechnology patents. In addition, there is a substantial backlog of biotechnology patent applications at the USPTO and the approval or rejection of patents may take several years.

Our success will also depend partly on our ability to operate without infringing upon the proprietary rights of others as well as our ability to prevent others from infringing on our proprietary rights. We may be required at times to take legal action to protect our proprietary rights and, despite our best efforts, we may be sued for infringing on the patent rights of others. We have not received any communications or other indications from owners of related patents or others that such persons believe our products or technology may infringe their patents. Patent litigation is costly and, even if we prevail, the cost of such litigation could adversely affect our financial condition. If we do not prevail, in addition to any damages we might have to pay, we could be required to stop the infringing activity or obtain a license. Any required license may not be available to us on acceptable terms, or at all. If we fail to obtain a license, our business might be materially adversely affected.

To help protect our proprietary rights in unpatented trade secrets, we require our employees, consultants and advisors to execute confidentiality agreements. However, such agreements may not provide us with adequate protection if confidential information is used or disclosed improperly. In addition, in some situations, these agreements may conflict with, or be subject to, the rights of third parties with whom our employees, consultants or advisors have prior employment or consulting relationships. Further, others may independently develop substantially equivalent proprietary information and techniques, or otherwise gain access to our trade secrets.

We depend on our partners for critical functions.  Therefore, if our collaborations or strategic relationships are unsuccessful, our business could be harmed.

Our strategic relationships are important to our success. The discovery, development and marketing of many of our key therapeutic products are or will be dependent in large part on the efforts of our strategic partners. The transactions contemplated by our agreements with strategic partners, including the equity purchases and cash payments, are subject to numerous risks and conditions. The occurrence of any of these events could severely harm our business.

We anticipate entering into relationships with larger pharmaceutical companies to conduct late stage clinical trials and to market our products. We also plan to use contract manufacturing for late stage clinical and commercial quantities of our products. We may be unable to enter into partnerships or other relationships, which could impede our ability to bring our products to market. Any such partnerships, if entered into at all, may be on less than favorable terms and may not result in the successful development or marketing of our products. If we are unsuccessful in establishing advantageous clinical testing, manufacturing and marketing relationships, we are not likely to generate significant revenues and become profitable.

To fully realize the potential of our products, including development, production and marketing, we may need to establish other strategic relationships.

We may get unexpected results from, or have trouble conducting, our clinical studies.

Not only do any clinical studies need to be agreed with regulatory authorities beforehand, especially in the case of phase III or pivotal studies, but they have to be successfully executed.  Preclinical as well as clinical studies are experiments designed to test a theory or hypothesis, and by their very nature, the result is unknown at the time the study is started. Sometimes unexpected results occur and the product does not demonstrate effectiveness (even though it may be effective), or an unexpected safety issue is encountered. In addition in rare diseases, other companies may be testing their products which will prevent AVI from testing its candidate products.

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We have incurred net losses since our inception and we may not achieve or sustain profitability.

We incurred a net loss of $24.0 million in 2008 and $27.2 million in 2007. As of December 31, 2008, our accumulated deficit was $250.3 million. Our losses have resulted principally from expenses incurred in research and development of our technology and products and from selling, general and administrative expenses that we have incurred while building our business infrastructure. We expect to continue to incur significant operating losses in the future as we continue our research and development efforts and seek to obtain regulatory approval of our products. Our ability to achieve profitability depends on our ability to raise additional capital, complete development of our products, obtain regulatory approvals and market our products. It is uncertain when, if ever, we will become profitable.

Our ability to be successful against our competitors cannot be assured.

The biopharmaceutical industry is highly competitive, with a number of well established firms performing leading-edge research for the development of new products to treat a wide range of diseases. These companies have obtained patents for their  intellectual property rights that could preclude other companies from using similar technologies in their product development. Moreover, companies which are focused on the treatment of similar diseases are in effect competing for the same limited number of potential patients.  Even if we are able to develop new products for market, there can be no assurance that we will be able to compete effectively or profitably against our competitors.

We may be subject to clinical trial claims and our insurance may not be adequate to cover damages.

We believe we carry adequate insurance for our current product development research. In the future, commercial sale and use of our products will expose us to the risk of clinical trial claims. Although we intend to obtain product liability insurance coverage, product liability insurance may not continue to be available to us on acceptable terms and our coverage may not be sufficient to cover all claims against us. A product liability claim, even one without merit or for which we have substantial coverage, could result in significant legal defense costs, thereby increasing our expenses, lowering our earnings and, depending on revenues, potentially resulting in additional losses.

We use hazardous substances in our research activities.

We use organic and inorganic solvents and reagents in our clinical development that are customarily used in pharmaceutical development and synthesis. Some of these chemicals, such as methylene chloride, isopropyl alcohol, ethyl acetate and acetone, may be classified as hazardous substances, are flammable and, if exposed to human skin, can cause anything from irritation to severe burns. We receive, store, use and dispose of such chemicals in compliance with all applicable laws with containment storage facilities and contained handling and disposal safeguards and procedures. We are routinely inspected by federal, state and local governmental and public safety agencies regarding our storage, use and disposal of such chemicals, including the federal Occupational, Safety and Health Agency (“OSHA”), the Oregon Department of Environmental Quality (“DEQ”) and local fire departments, without any material noncompliance issues in such inspections to date. Further, our usage of such chemicals is limited and falls below the reporting thresholds under federal law. Based on our limited use of such chemicals, the nature of such chemicals and the safeguards undertaken by the Company for storage, use and disposal, we believe we do not have any material exposure for toxic tort liability. Further, the cost of such compliance is not a material cost in our operating budget. While we do not have toxic tort liability insurance at this time, we believe our current insurance coverage is adequate to cover most liabilities that may arise from our use of such substances. If we are wrong in any of our beliefs, we could incur a liability in certain circumstances that would be material to our finances and the value of an investment in our securities.

Risks Related to Share Ownership

Our right to issue preferred stock, our classified Board of Directors and Oregon Anti-Takeover laws may delay a takeover attempt and prevent or frustrate any attempt to replace or remove the then current management of the Company by shareholders.

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Our authorized capital consists of 200 million shares of common stock and 20 million shares of preferred stock. Our Board of Directors, without any further vote by the shareholders, has the authority to issue preferred shares and to determine the price, preferences, rights and restrictions, including voting and dividend rights, of these shares. The rights of the holders of shares of common stock may be affected by the rights of holders of any preferred shares that our Board of Directors may issue in the future. For example, our Board of Directors may allow the issuance of preferred shares with more voting rights, preferential dividend payments or more favorable rights upon dissolution than the shares of common stock or special rights to elect directors.

In addition, we have a “classified” Board of Directors, which means that only one-half of our directors are eligible for election each year. Therefore, if shareholders wish to change the composition of our Board of Directors, it could take at least two years to remove a majority of the existing directors or to change all directors. Having a classified Board of Directors may, in some cases, delay mergers, tender offers or other possible transactions that may be favored by some or a majority of our shareholders and may delay or frustrate action by shareholders to change the then current Board of Directors and management.

The Oregon Control Share Act and Business Combination Act may limit parties that acquire a significant amount of voting shares from exercising control over us for specific periods of time. These acts may lengthen the period for a proxy contest or for a person to vote their shares to elect the majority of our Board and change management.

Our stock price is volatile and may fluctuate due to factors beyond our control.

Historically, the market price of our stock has been highly volatile. The following types of announcements could have a significant impact on the price of our common stock: positive or negative results of testing and clinical trials by ourselves, strategic partners, or competitors; delays in entering into corporate partnerships; technological innovations or commercial product introductions by ourselves or competitors; changes in government regulations; developments concerning proprietary rights, including patents and litigation matters; public concern relating to the commercial value or safety of any of our products; financing or other corporate transactions; or general stock market conditions.

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The significant number of our shares of Common Stock eligible for future sale may cause the price of our common stock to fall.

We have outstanding 85,644,698 shares of common stock as of March 6, 2009 and all are eligible for sale under Rule 144 or are otherwise freely tradeable. In addition:

Sales of substantial amounts of shares into the public market could lower the market price of our common stock.

Our common stock is listed on The NASDAQ Global Market and we may not be able to maintain that listing, which may make it more difficult for investors to sell shares of our common stock.

Our common stock is listed on The NASDAQ Global Market. The NASDAQ Global Market has several quantitative and qualitative requirements with which companies must comply in order to maintain this listing, including a $1.00 minimum bid price per share and $50 million minimum value of listed securities. If a listed company fails to meet the $1.00 minimum bid price per share requirement for 30 consecutive days, it will receive a notice from NASDAQ mandating that the company achieve compliance with the minimum bid price per share listing requirement within 90 calendar days.  Our stock price is currently below $1.00, and there can be no assurance that we will be able to maintain compliance with the minimum bid price per share requirement. Likewise, based on a closing price of $0.56 per share on such date, the aggregate market value for our listed securities has gone below the $50 million minimum value of listed securities as recently as March 3, 2009, and there can be no assurance that we will be able to maintain compliance with this listing requirement.

On October 16, 2008, NASDAQ suspended the minimum bid price per share requirement and market value for publicly held shares requirements for all listed companies through January 16, 2009.  Recently, NASDAQ extended the suspension of the minimum bid price per share requirement and market value for publicly held shares requirements for all listed companies through April 19, 2009, with enforcement of these rules presently scheduled to resume on April 20, 2009.

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In order to maintain our listing on NASDAQ, we may seek to transfer our securities listing to The NASDAQ Capital Market, but any such proposed transfer would be subject to our ability to satisfy the listing standards for The NASDAQ Capital Market, which includes, among other things, a $35 million minimum value of listed securities. The level of trading activity of our common stock may decline if it is no longer listed on The NASDAQ Global Market or The NASDAQ Capital Market. As such, if our common stock ceases to be listed for trading on The NASDAQ Stock Market for any reason, it may harm our stock price, increase the volatility of our stock price and make it more difficult for investors to buy or sell shares of our common stock.

In addition to the foregoing, if we are not listed on The NASDAQ Stock Market and/or if our public float remains below $75 million, we may be limited in our ability to file new shelf registration statements on SEC Form S-3 and/or to fully use one or more registration statements on SEC Form S-3. We have relied significantly on shelf registration statements on SEC Form S-3 for most of our financings in recent years, so any such limitations might have a material adverse effect on our ability to raise the capital we need.

We do not expect to pay dividends in the foreseeable future.

We have never paid dividends on our shares of common stock and do not intend to pay dividends in the foreseeable future. Therefore, you should only invest in our common stock with the expectation of realizing a return through capital appreciation on your investment. You should not invest in our common stock if you are seeking dividend income.

Item 1B. Unresolved Staff Comments.

None.

Item 2.  Properties.

We occupy 53,000 square feet of leased laboratory and office space at 4575 SW Research Way, Suite 200, Corvallis, Oregon 97333. This lease expires in December 2020.  In March 2007, we purchased an additional facility, totaling 34,000 square feet, in Corvallis, Oregon which was acquired with the intention of providing the Company with future expansion space for the manufacture of potential products and components. We believe that our facilities are suitable and adequate for our present operational requirements for the foreseeable future.

Item 3. Legal Proceedings.

As of March 6, 2009, there were no material, pending legal proceedings to which we are a party. From time to time, we become involved in ordinary, routine or regulatory legal proceedings incidental to our business.

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

No matters were submitted to a vote of our shareholders during the quarter ended December 31, 2008.

PART II

Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information

Our Common Stock is quoted on the Nasdaq Global Market (“Nasdaq”) under the symbol “AVII.”  The following table sets forth the high and low closing sales prices as reported by Nasdaq for each quarterly period in the two most recent fiscal years and quarter-to-date for the next fiscal year:

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Holders

As of March 6, 2009, we had 613 shareholders of record and approximately 17,000 beneficial holders.

Dividends

There were no cash dividends declared or paid in fiscal years 2008 or 2007. We do not anticipate declaring such dividends in the foreseeable future.

Securities Authorized for Issuance under Equity Compensation Plans

Equity Compensation Plan Information

(1) The number of securities remaining available for future issuance under equity compensation plans includes shares from the Company’s 2002 Equity Incentive Plan (the “2002 Plan”). The number of shares reserved for issuance is increased by an automatic annual share increase pursuant to which the number of shares available for issuance under the 2002 Plan automatically increases on the first trading day of each fiscal year (the “First Trading Day”), beginning with the 2003 fiscal year and continuing through the fiscal year 2011, by an amount equal to two percent (2%) of the total number of shares outstanding on the last trading day of the immediately preceding fiscal year; such increases being subject to the limitation in the next sentence. The 2002 Plan provides that, following any such adjustment, the number of then outstanding options under the Company’s stock option plans and stock purchase plans, together with options in the reserve then available for future grants under the Company’s stock option plans, will not exceed twenty percent (20%) of the then outstanding voting shares of capital stock of the Company, and all the actually outstanding stock options under the Company’s stock option plans, together with all shares in the reserve then available for future grants under the Company’s stock option and stock purchase plans. This automatic share increase feature is designed to assure that a sufficient reserve of Common Stock remains available for the duration of the 2002 Plan to attract and retain the services of key individuals essential to the Company’s long-term growth and success. This feature is also designed to eliminate the uncertainty inherent in seeking an individual increase to the reserve each year as to what number of shares will be available in the reserve

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for option grants. Creating a certain rate of growth under the 2002 Plan assists the Company as it makes strategic personnel decisions in an effort to expand its growth, as the Company will know the approximate number of shares that will become available for issuance under the 2002 Plan. At the same time, the Company has attempted to minimize the dilutive effect that the issuance of Common Stock upon the exercise of options can have on stockholders’ percentage of ownership in the Company by adopting only a 2% growth rate for the 2002 Plan. This rate, while it provides room for growth in the 2002 Plan, is a rate which the Company believes it can reasonably sustain, minimizing the risk to stockholders that the option reserve grows faster than the Company itself. The twenty percent (20%) limitation discussed above further protects shareholders by capping the size of the 2002 Plan in relation to the Company’s other securities.

Performance Graph

The following graph compares the performance of the Company’s Common Stock for the periods indicated with the performance of the NASDAQ Composite Index and the Amex Biotech Index. This graph assumes an investment of $100 on December 31, 2003 in each of the Company’s common stock, the NASDAQ Composite Index and the Amex Biotech Index, and assumes reinvestment of dividends, if any. The stock price performance shown on the graph below is not necessarily indicative of future stock price performance.

Recent Sales of Unregistered Securities.

None.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers.

None.

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Item 6. Selected Financial Data.

The following selected financial data is derived from our audited financial statements and should be read in conjunction with, and is qualified in its entirety by, Item 7. “Management’s Discussion and Analysis or Plan of Operation” and Item 8. “Financial Statements.”

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operation

Forward-Looking Information

This report contains forward-looking statements regarding our plans, expectations, estimates and beliefs. Our actual results could differ materially from those discussed in, or implied by, these forward-looking statements. Forward-looking statements are identified by words such as “believe,” “anticipate,” “expect,” “intend,” “plan,” “will,” “may,” and other similar expressions. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. We have based these forward-looking statements largely on our expectations. Forward-looking statements in this report include, but are not necessarily limited to, those relating to:

·                  our intention to introduce new products,

·                  receipt of any required FDA or other regulatory approval for our products,

·                  our expectations about the markets for our products,

·                  acceptance of our products, when introduced, in the marketplace,

·                  our expectations about availability of government funding for certain projects,

·                  our future capital needs,

·                  results of our research and development efforts, and

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·                  success of our patent applications.

Forward-looking statements are subject to risks and uncertainties, certain of which are beyond our control. Actual results could differ materially from those anticipated as a result of the factors described in the “Risk Factors” and detailed herein and in our other Securities and Exchange Commission filings, including among others:

·                  the effect of regulation by the FDA and other governmental agencies,

·                  delays in obtaining, or our inability to obtain, approval by the FDA or other regulatory authorities for our products,

·                  research and development efforts, including delays in developing, or the failure to develop, our products,

·                  uncertainty of government funding for certain projects,

·                  the development of competing or more effective products by other parties,

·                  the results of pre-clinical and clinical testing and our ability to conduct these tests,

·                  uncertainty of market acceptance of our products,

·                  problems that we may face in manufacturing, marketing, and distributing our products,

·                  our inability to raise additional capital when needed,

·                  delays in the issuance of, or the failure to obtain, patents for certain of our products and technologies, and

·                  problems with important suppliers and business partners.

Because of these risks and uncertainties, the forward-looking events and circumstances discussed in this report or incorporated by reference might not occur. Factors that cause actual results or conditions to differ from those anticipated by these and other forward-looking statements include those more fully described in the “Risk Factors” section and elsewhere in this report.

Overview

From our inception in 1980, we have devoted our resources primarily to fund our research and development efforts. We have been unprofitable since inception and, other than limited interest, license fees, grants and research contracts, we have had no material revenues from the sale of products or from other sources other than from government grants and research contracts, and we do not expect material revenues for the foreseeable future. We expect to continue to incur losses for the foreseeable future as we continue to expand our research and development efforts and enter additional collaborative efforts. As of December 31, 2008, our accumulated deficit was $250,310,180.

Results of Operations

Year Ended December 31, 2008 Compared with Year Ended December 31, 2007.

Revenues from license fees, grants and research contracts increased from $10,985,191 in 2007 to $21,258,155 in 2008.  This increase was due to increases in research contract revenues of $10,260,009 and grant and other revenues of $12,956.  Revenues for 2008 were due primarily to the recognition of $21,073,169 in research contract revenue from government funding for work performed on viral disease research projects. Future revenues will depend on the

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ability of the Company to obtain additional U.S. government awards to fund advanced development of its antiviral therapeutic candidates.

Operating expenses increased from $44,092,767 in 2007 to $48,715,722 in 2008.  This increase was due to $9,916,271 of acquired in-process research and development associated with the Company’s acquisition of Ercole Biotechnology, Inc. (“Ercole”) and an increase in general and administrative costs for fiscal year 2008 of $464,582, partially offset by a decrease in research and development expenses of $5,757,898.

The decline in research and development expenses for 2008 was due primarily to a decrease of approximately $6,320,000 in contracting costs for the production of GMP subunits, which are used by the Company to manufacture compounds for future clinical trials. The Company incurred approximately $8,266,000 in such costs in 2007, compared with approximately $1,946,000 in 2008 as the related project was completed. The decrease in research and development also reflects a decrease in government research contract expenses of approximately $1,772,000, a decrease in chemical costs of approximately $767,000, a decrease in amortization of leasehold improvements of approximately $493,000, and a decrease in purchases of equipment for government research contracts of approximately $316,000.  These decreases were partially offset by: an increase in net clinical expenses of approximately $1,791,000, an increase in professional consultant expenses of approximately $1,202,000 (primarily related to the Ercole acquisition), and an increase in compensation costs of approximately $189,000. In addition, pursuant to an annual evaluation of the status of its patents, the Company in 2008 recorded a write-off of $580,000 in previously capitalized costs related to expired or abandoned patents.

The increase in general and administrative expenses for 2008 was due primarily to an impairment charge of $800,000 recorded on a parcel of real estate to reflect a decline in its estimated fair value.  In addition, accounting and auditing expenses increased by approximately $377,000 and corporate travel increased by approximately $141,000 from 2007 to 2008.  These increases were partially offset by a decrease in compensation costs of approximately $483,000, in addition to decreases in legal expenses of approximately $222,000 and in public and investor-relations costs of approximately $175,000.

Net interest income decreased from $983,976 in 2007 to $343,865 in 2008.  This decrease was due to declines in both the average balances of cash, cash equivalents and short-term securities, and in average interest rates of the Company’s interest earning investments. The gain on warrant liability was $3,161,077 for the year ended December 31, 2008, compared with $4,955,875 for the year ended December 31, 2007.  The Company’s gains or losses on its warrant liability is a function of the Company’s stock price and fluctuates with movements in the market price of the Company’s stock.

Year Ended December 31, 2007 Compared with Year Ended December 31, 2006.

Revenues, from license fees, grants and research contracts, increased from $115,291 in 2006 to $10,985,191 in 2007, due to increases in research contracts revenues of $10,795,943 and license fees of $125,000, partially offset by decreases in grants revenues of $51,043. Revenues for 2007 were primarily due to the recognition of $10,710,330 in research contract revenue from government funding for work performed on viral disease research projects.

Operating expenses increased from $33,098,340 in 2006 to $44,092,767 in 2007 due to increases in research and development, which increased from $25,345,588 in 2006 to $34,760,402 in 2007, and increases in general and administrative costs, which increased from $7,752,752 in 2006 to $9,332,365 in 2007. This research and development increase for 2007 was due primarily to approximately $4,500,000 expensed for government research contracts and approximately $3,900,000 for contracting costs for the production of GMP subunits, which are used by the Company to manufacture compounds for future clinical trials. In addition, professional consultant costs increased approximately $730,000, government contract related equipment expenses increased approximately $735,000, chemical and lab supply costs increased approximately $655,000, and patent amortization expenses increased approximately $100,000. These research and development increases were partially offset by decreases in employee costs of approximately $1,200,000, of which approximately $430,000 was related to the acceleration of the vesting of certain stock options in the first quarter of 2006 and decreases in stock-based compensation expenses of

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approximately $530,000 and salary and bonuses of approximately $180,000. The increase in general and administrative expense in fiscal year 2007 was due primarily to increases in compensation costs of approximately $850,000, of which approximately $1,620,000 (including $562,500 in cash compensation and $1,057,372 in stock-based compensation expenses) was related to the Separation and Release Agreement with the Company’s former Chief Executive Officer and $100,000 in non-employee compensation, partially offset by decreases in stock-based compensation of approximately $320,000 and salary and bonuses of approximately $550,000. General and administrative expense for fiscal year 2007 also includes increases in legal expenses of approximately $650,000 and accounting expenses of approximately $185,000, partially offset by decreases in advertising costs of approximately $80,000.

Net interest income decreased from $1,910,037 in 2006 to $983,976 in 2007 due to decreases in average cash, cash equivalents and short-term securities, partially offset by increases in average interest rates of the Company’s interest earning investments. Gain on warrant liability increased from $2,385,502 in 2006 to $4,955,875 in 2007. The gain (loss) on warrant liability is a function of the Company’s stock price and fluctuates as the market price of the Company’s stock fluctuates.

Research and Development Expenses

Historically, the Company has maintained a focus internally upon the development of its core platform antisense technology known as Phosphorodiamidate Morpholino Oligomers (PMOs), also known under the registered trademark of NEUGENE. All internal research and development projects have been performed with the goal of defining the uses, breadth of applicability, limitations, and possible modifications surrounding PMOs. Thus, even specific projects had overarching or common impact upon expanding the Company’s knowledge base surrounding this technology. Accordingly, essentially all of the Company’s research and development resources have been dedicated to this goal.  External research projects may tend to be more focused on given disease areas, but also generate results that have a breadth of applicability across the platform.  These external research projects are generally performed at low or no net cost to the Company. Thus, the total shown for research and development in the Statement of Operations for 2008 reflects the amount of the Company’s resources being used toward the above stated goal.

Our research and development costs allocated by focus area for the year ended December 31, 2008 were as follows:

Direct research and development costs associated with our programs include clinical trial site costs, clinical manufacturing costs, costs incurred for consultants and other outside services, such as data management and statistical analysis support, and materials and supplies used in support of the clinical programs, as well as other direct research. Indirect costs of our clinical program include wages, payroll taxes and other employee-related expenses including rent, restructuring, stock based compensation, utilities and other facilities-related maintenance. The costs in each category may change in the future and new categories may be added. Costs attributable to our discovery research programs represent our efforts to develop and expand our product pipeline. Due to the number of projects and our ability to utilize resources across several programs, our discovery research costs are not assigned to specific programs. The amount and timing of future research and development expense will depend on the Company’s ability to obtain U.S. government awards to fund the advanced development of its antiviral therapeutic candidates.  Without future government awards, the Company will likely drastically reduce its spending in these areas.

While we believe our programs are promising, we do not know whether any commercially viable products will result from our research and development efforts. Thus, we believe that the nature, timing, and estimated costs of the efforts necessary to complete the projects and the anticipated completion dates, are not estimable due to many factors, including the following:

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·                  Delivery strategies and potency enhancements of the Company’s compounds are still being developed and explored;

·                  Variability among different disease categories result in successful delivery strategies or potency enhancements not necessarily being applicable across different disease categories;

·                  Costs of clinical trials, like costs of all forms of medical care, are rapidly changing;

·                  Variability among different disease categories in terms of dosages, duration of treatment, method of administration, etc. exist;

·                  Rules surrounding filings and conduct of clinical trials are changing;

·                  Confidentiality surrounding commercialization is heightening; and

·                  Clinical endpoints are in a constant state of flux.

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Liquidity and Capital Resources

We have financed our operations since inception primarily through sales of common stock and other forms of equity totaling $215,096,479, and from grants and contract research funding of $42,224,165 from various sources. In January 2009, we raised an additional $16.5 million in financing through the sale of 14,224,202 shares of common stock pursuant to a registered direct offering to a select group of institutional investors. The investors also received warrants to purchase 14,224,202 shares of the Company’s common stock.  As of January 30, 2009, immediately following the closing of the registered direct offering, our cash on hand was approximately $27.5 million.

We expect to continue to incur losses as we continue to expand our research and development activities and related regulatory work and increase our collaborative efforts. For 2009, we expect our expenditures for operations, net of government funding, including our collaborative efforts, and our GMP facilities to be approximately $10 to $12 million. This cost could increase if we undertake additional collaborative efforts. However, if need be in 2009, we believe we can reduce our expenditures because a significant amount of our costs are variable. Those estimated expenditures include amounts necessary to fulfill our obligations under our various collaborative, research and licensing agreements during 2009. The Company believes it will be awarded additional government funds to pursue the advanced development of its antiviral compounds and has assumed certain revenues from these awards in providing this guidance.  Should the Company not receive the additional awards, or should the timing be delayed, it may have a significant negative impact on these projections.

Because of the cost (up to $1.7 billion) and timeframe (up to 15 years) generally associated with developing a potential drug or pharmaceutical product to the point of approval by the FDA or other regulatory agencies for human use, our business strategy is to develop our products up to Phase II human clinical trials and then look for third parties to fund further development of the product and to market the product through strategic partnerships, license agreements or other relationships. We also look for collaborative and other efforts, such as our relationship with Cook, to utilize other technology to increase the potential variety and reduce the cost of identifying products. We believe that this strategy will reduce the potential costs we would otherwise incur in developing a product and bringing it to market. Our expected costs under our various contracts and for various drug development products can be estimated for the next year or two, but not much beyond that due to the uncertainty of clinical trial results, research results and the timing of securing one or more partners to develop and market a potential drug.

Because of the various factors noted above and the expectation that, until we establish revenue sources, we will license or jointly develop our prospective products to or with strategic partners, we review, at least annually, each research program and clinical trial, based on results and progress during the prior year and estimate our needs for that program or trial for the coming year, making adjustments based on the progress of the program during the year.

In December 2006, the Company announced the execution of a two-year $28 million research contract with the Defense Threat Reduction Agency (DTRA), an agency of the United States Department of Defense (DoD). In February 2008, the contract was extended into the first five months of 2009. The contract is directed toward funding the Company’s development of antisense therapeutics to treat the effects of Ebola, Marburg and Junin hemorrhagic viruses, which are seen by DoD as potential biological warfare and bioterrorism agents. During the years ended December 31, 2008 and 2007, the Company recognized $16,759,748 and $8,018,389, respectively, in research contract revenue from this contract. Funding of the remainder of the contract is anticipated in 2009.

In January 2006, the Company announced that the final version of the 2006 Defense Appropriations Act had been approved, which included an allocation of $11.0 million to fund the Company’s ongoing defense-related programs. Net of government administrative costs, we anticipate that we will receive up to $9.8 million under this allocation. The Company’s NEUGENE® technology is expected to be used to continue developing therapeutic agents against Ebola, Marburg and Dengue viruses, as well as to continue developing countermeasures for anthrax exposure and antidotes for ricin toxin. The Company has received signed contracts for all four of these projects. The Company expects that funding under these signed contracts will be received over the next 12 months. The Company recognized $4,251,252 and $2,691,941, respectively, in research contract revenue from these contracts during the years ended December 31, 2008 and 2007, with the remainder expected to be received in 2009.

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Our cash, cash equivalents and short-term securities were $11,474,300 at December 31, 2008, compared with $25,074,413 at December 31, 2007. The decrease of $13,600,113 was due primarily to cash of $12,339,313 used in operations and $1,217,531 used for purchases of property and equipment and patent related costs, partially offset by $80,805 from the exercise of options and sales under the Company’s employee stock purchase plan during the year ended December 31, 2008.  As of January 30, 2009, immediately following the closing of the Company’s recent registered direct offering, our cash on hand was approximately $27.5 million.

We do not expect any material revenues in 2009 from our business activities except for revenues from U.S. government contracts. We expect that our cash requirements for the balance of calendar 2009 will be satisfied by existing cash resources and these revenues. To fund our operations beyond 2009, we may need to raise additional capital. We will continue to look for opportunities to finance our ongoing activities and operations through accessing corporate partners or the public equity markets, as we currently have no credit facility, nor do we intend to seek one.

Off-Balance Sheet Arrangements

The Company’s off-balance sheet arrangements are limited to operating leases and rents on certain facilities and equipment and license agreements for which it is obligated to pay the licensors a minimum annual royalty. These off-balance sheet arrangements are expensed as incurred. In 2008, these expenses totaled $1,439,000 for operating leases and $75,000 for royalty payments.

Contractual Payment Obligations

A summary of our contractual commitments and obligations as of December 31, 2008 is as follows:

Our future expenditures and capital requirements depend on numerous factors, most of which are difficult to project beyond the short term. These requirements include the progress of our research and development programs and our pre-clinical and clinical trials, the time and costs involved in obtaining regulatory approvals, the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights, competing technological and market developments, our ability to establish collaborative arrangements and the terms of any such arrangements, and the costs associated with commercialization of our products. Our cash requirements are expected to continue to increase each year as we expand our activities and operations. There can be no assurance, however, that we will ever be able to generate product revenues or achieve or sustain profitability.

New Accounting Pronouncements

See Note 2 of Notes to Financial Statements with this report on Form 10-K included under Part III, Item 15.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to stock-based compensation, valuation of investments, long-lived assets, and revenue recognition. We base our estimates on historical experience and on various other assumptions. Actual results may differ from these estimates under different assumptions or

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conditions. We believe the following critical accounting policies and the related judgments and estimates affect the preparation of our financial statements.

Revenue Recognition

Revenue is recorded from research contracts and grants as the services are performed and payment is reasonably assured. In 2008, the Company recognized $21,073,169 in research contracts revenues from government funding for work performed on viral disease projects. Upfront, nonrefundable fees and other fees associated with license and development arrangements are recognized as revenue ratably over the performance period. Revenue associated with performance milestones under license and development arrangements is recognized based upon the achievement of the milestones, as defined in the respective agreements. Revenue from license and development arrangements has been insignificant to date.

Long-Lived Asset Impairment

Long-lived assets held and used by us and intangible assets with determinable lives are reviewed for impairment whenever events or circumstances indicate that the carrying amount of assets may not be recoverable in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” We evaluate recoverability of assets to be held and used by comparing the carrying amount of an asset to future net undiscounted cash flows to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets. Such reviews assess the fair value of the assets based upon estimates of future cash flows that the assets are expected to generate.

Stock-based Compensation Expense

Effective January 1, 2006, the Company adopted SFAS No. 123R, “Share-Based Payment” (SFAS 123R), using the modified-prospective application. Under the modified prospective application, stock compensation cost recognized beginning January 1, 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, and (b) compensation cost for all share-based payments granted on or subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. Results for prior periods have not been restated.

Stock-based compensation costs are generally based on the fair value calculated from the Black-Scholes option-pricing model on the date of grant for stock options and on the date of enrollment for the Plan. The fair value of stock grants are amortized as compensation expense on a straight-line basis over the vesting period of the grants. Compensation expense recognized is shown in the operating activities section of the statements of cash flows. Stock options granted to employees are service-based and typically vest over four years.

The fair market values of stock options granted were measured on the date of grant using the Black-Scholes option-pricing model, with weighted average assumptions for the risk-free interest rate, expected dividend yield, expected lives, and expected volatility. As part of the requirements of SFAS 123R, the Company is required to estimate potential forfeiture of stock grants and adjust compensation cost recorded accordingly. The estimate of forfeitures will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up in the period of change and will also impact the amount of stock compensation expense to be recognized in future periods.

The assumptions used in calculating the fair value of stock-based compensation expense represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and the Company uses different assumptions, its stock-based compensation expense could be materially different in the future. See Note 3 to Notes to Financial Statements for a further discussion of stock-based compensation.

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Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

The primary objective of our cash investment activities is to preserve principal while at the same time maximizing the income we receive from our investments while avoiding incurring significant market risk.  As of December 31, 2008, we held more than 93% of our cash in a sweep money market account, with the remainder held in non-interest bearing checking accounts or short-term certificates of deposit. We have no holdings of derivative financial or commodity instruments. We do not anticipate significant making significant changes in how we hold our cash. Accordingly, we believe our credit risk is immaterial.

Item 8.  Financial Statements and Supplementary Data.

The information required by this Item 8 begins on page F-1 in Item 15 of Part III of this report on Form 10-K and is incorporated into this item by reference.

Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A.  Controls and Procedures.

Disclosure Controls and Procedures

We carried out an evaluation as of the end of period covered by this report, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of our disclosure controls and procedures pursuant to paragraph (b) of Rule 13a-15 and 15d-15 under the Exchange Act. Based on that review, the Chief Executive Officer and the Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

The Company does not expect that its disclosure controls and procedures will prevent all error and all fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The Company considered these limitations during the development of it disclosure controls and procedures, and will continually reevaluate them to ensure they provide reasonable assurance that such controls and procedures are effective.

Internal Control over Financial Reporting

Changes in Internal Control over Financial Reporting

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the Company’s fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Management’s Annual Report on Internal Control over Financial Reporting

The management of AVI BioPharma, Inc. (the Company or AVI) is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process

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designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:

·                  Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

·                  Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

·                  Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2008. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in “Internal Control-Integrated Framework.” Based on management’s assessment and those criteria, we believe that, as of December 31, 2008, the Company’s internal control over financial reporting is effective.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

AVI BioPharma, Inc:

We have audited AVI BioPharma, Inc.’s (a development stage enterprise) internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). AVI BioPharma, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable

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assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, AVI BioPharma, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance sheets of AVI BioPharma, Inc. as of December 31, 2008 and 2007, and the related statements of operations, shareholders’ equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 2008, and for the period July 22, 1980 (inception) to December 31, 2008.  The financial statements of AVI BioPharma, Inc. for the period July 22, 1980 (inception) to December 31, 2001 were audited by other auditors who have ceased operations.  Those auditors expressed an unqualified opinion on those financial statements in their report dated February 21, 2002. Our opinion on the statements of operations, shareholders’ equity and comprehensive income (loss), and cash flows, insofar as it relates to the amounts included for the period July 22, 1980 through December 31, 2001 is based solely on the report of other auditors.  Our report dated March 10, 2009 expressed an unqualified opinion on those financial statements.

/s/ KPMG LLP

Portland, Oregon
March 10, 2009

Item 9B.  Other Information.

None.

PART III

Item 10.  Directors, Executive Officers and Corporate Governance.

Information regarding our directors and executive officers required by this item is included in our definitive proxy statement for our 2009 annual meeting of shareholders to be filed with the Commission not later than 120 days after the end of the fiscal year covered by this Annual Report and is incorporated herein by reference.

Item 11.  Executive Compensation.

The information required by this item is included in our definitive proxy statement for our 2009 annual meeting of shareholders to be filed with the Commission not later than 120 days after the end of the fiscal year covered by this Annual Report and is incorporated herein by reference.

Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information required by this item is included in our definitive proxy statement for our 2009 annual meeting of shareholders to be filed with the Commission not later than 120 days after the end of the fiscal year covered by this Annual Report and is incorporated herein by reference.

Item 13.  Certain Relationships and Related Transactions, and Director Independence.

The information required by this item is included in our definitive proxy statement for our 2009 annual meeting of shareholders to be filed with the Commission not later than 120 days after the end of the fiscal year covered by this Annual Report and is incorporated herein by reference.

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Item 14.  Principal Accountant Fees and Services.

The information required by this item is included in our definitive proxy statement for our 2009 annual meeting of shareholders to be filed with the Commission not later than 120 days after the end of the fiscal year covered by this Annual Report and is incorporated herein by reference.

Item 15.  Exhibits, Financial Statement Schedules.

(a)   The following documents are filed as part of this Report:

(1) Financial Statements

The following financial statements of the Company and the Report of KPMG LLP, Independent Auditors, are included in Part IV of this Report on the pages indicated:

(2) Financial Statement Schedules

All schedules are omitted because they are not applicable or the required information is shown in the financial statements or the notes thereto.

(3) Exhibits

The following exhibits are filed herewith and this list is intended to constitute the exhibit index:

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* A Confidential Treatment Request for certain information in this document has been filed with the Securities and Exchange Commission. The information for which treatment has been sought has been deleted from such exhibit and the deleted text replaced by an asterisk (*).

† Indicates management contract or compensatory plan, contract or arrangement.

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SIGNATURES

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

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in their capacities indicated on March 10, 2009:

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

AVI BioPharma, Inc:

We have audited the accompanying balance sheets of AVI BioPharma, Inc. (a development stage enterprise) as of December 31, 2008 and 2007, and the related statements of operations, shareholders’ equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 2008 and for the period from July 22, 1980 (inception) to December 31, 2008. 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. The financial statements of AVI BioPharma, Inc. for the period July 22, 1980 (inception) to December 31, 2001 were audited by other auditors who have ceased operations.  Those auditors expressed an unqualified opinion on those financial statements in their report dated February 21, 2002.  Our opinion on the statements of operations, shareholders’ equity and comprehensive income (loss), and cash flows, insofar as it relates to the amounts included for the period July 22, 1980 (inception) through December 31, 2001 is based solely on the report of other auditors.

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

In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of AVI BioPharma, Inc. (a development stage enterprise) as of December 31, 2008 and 2007, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2008 and for the period July 22, 1980 (inception) to December 31, 2008, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of AVI BioPharma, Inc.’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 10, 2009 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ KPMG LLP

Portland, Oregon
March 10, 2009

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THIS REPORT IS A CONFORMED COPY OF THE REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP AND HAS NOT BEEN REISSUED BY THAT FIRM.

Report of Independent Public Accountants

To the Board of Directors and Shareholders of

AVI BioPharma, Inc.

We have audited the accompanying balance sheet of AVI BioPharma, Inc. (an Oregon corporation in the development stage) as of December 31, 2001, and the related statements of operations, shareholders’ equity and cash flows for each of the two years in the period ended December 31, 2001 and for the period from inception (July 22, 1980) to December 31, 2001. 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 auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of AVI BioPharma, Inc. as of December 31, 2001, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2001 and for the period from inception (July 22, 1980) to December 31, 2001, in conformity with accounting principles generally accepted in the United States.

/s/ Arthur Andersen LLP

Portland, Oregon

February 21, 2002

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AVI BIOPHARMA, INC.

(A Development Stage Company)

BALANCE SHEETS

See accompanying notes to financial statements.

F-3

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AVI BIOPHARMA, INC.

(A Development Stage Company)

STATEMENTS OF OPERATIONS