Letter to Shareholders from 2007 Annual Report

Dear Shareholders and Friends,

I am pleased to have this opportunity to write to you in my new role as CEO of AVI BioPharma. I am excited by the challenges and opportunities that my new position brings and believe that I am qualified both by experience and track record to add a new dimension to the Company’s Corporate Executive Team.

In more ways than this, the previous year and the beginning of 2008 have seen significant transitions for the Company. There was a change of CEO followed by a 12 month period under the leadership of the Interim CEO Michael Forrest. Linked with this change, Jack Bowman stepped up from the Board of Directors to take on the role of Chairman. As you know, Jack has now retired from the Board of Directors, and his role as Chairman has been assumed by Michael Casey. Mike has been a director of AVI for the past two years and possesses substantial executive and corporate governance experience in our industry and I look forward to working with him.

On behalf of the shareholders and employees of AVI, I wish to thank Jack Bowman and Mike Forrest for their dedication of time and effort during the transition.

We have just completed the important acquisition of our former research partner Ercole Biotechnology which is located in Research Triangle Park, North Carolina. This brings us not only new intellectual property but also creates a closer and more productive working relationship between our scientists, which we believe can best be maximized when they are members of the same company, sharing the same motivations and building towards a single pipeline of future products based on current technology. We believe that this acquisition augments our ability to become one of the major companies able to find drug candidates that will direct alternative RNA splicing and so leverage important insights provided by the Human Genome Project and RNAi technologies for discovery, development and commercialization of drugs that lead to therapeutic effect through direct modulation of RNA splicing.

Let me remind you that the output from alternative splicing of RNA explains how the 26,000 genes in the human body result in 150,000 different proteins. As a process alternative RNA splicing is fundamental to how the body works; but when it goes wrong it produces serious — often very serious — diseases. In Duchene muscular dystrophy (DMD) — a disease in which AVI BioPharma is already conducting clinical trials with its drug candidate AVI–4658 — gene mutations impair the cell’s ability to correctly splice RNA that codes for the critical protein, dystrophin, from which muscles are built. We believe that the ability to direct the creation of an alternatively–spliced protein may be able to restore near normal muscle protein function.

We believe that the ability to direct mRNA splicing is a powerful platform for creating new drugs with the potential for treating a wide range of genetic and acquired diseases. We work with synthetic chemical oligomers that have drug–like character and believe they provide us with an important competitive edge compared to those companies seeking to use macromolecules or biological products against the same types of targets.

In addition to our work in DMD, we have clinical trials in cardiovascular disease — AVI–5126 is being tested by our partners, Cook Group Inc. and Global Therapeutics (a Cook Medical company), for its ability to block restenosis when used in a catheter delivery kit or as a coated stent. On our own behalf, we are examining the ability of AVI–5126 to prevent occlusion of saphenous veins used in coronary artery bypass grafts (CABG). At earlier stages in the development pipeline, we have two anti–viral compounds moving towards the clinic — AVI–6003 and AVI–6002 — against Marburg and Ebola infections, respectively. We have just filed the pre–INDs for these drug candidates.

The Ercole acquisition brought us a new early compound — AVI–3378 — that has been shown in pre–clinical models to induce the formation of a soluble form of the TNFα receptor. We are excited by the commercial prospects for this molecule, for the family of TNF Blockers — including Enbrel, Remicade and Humira — has been a major commercial success in the treatment of rheumatoid arthritis.

My agenda for the merged company is to focus our R&D efforts on developing a product flow process, firmly drive for success in the clinic; and, ultimately, to commercialization by partnership with companies that will enable AVI to achieve the full clinical and commercial impact of its drug candidates in development.

I greatly look forward to our upcoming annual meeting of shareholders, to meet some of you face to face, to present a more detailed update on our Company’s R&D pipeline, and, above all else, to have the chance to answer your questions in person.

Yours sincerely,

Leslie Hudson, PhD
CEO
AVI BioPharma