We've cancelled an event due to low response.   What do you do in Raiser's Edge for the refund?   Take it to a 0 amount but leave it there?   Remove the gift all together?    Any thoughts would be appreciated!

I would adjust amount to $0, especially if it has already been recorded elsewhere/receipted etc.   I genarallly don't delete gift records.  Adjusting it to $0 will leave a clear trail for audits/reports/questions as to how much was refunded.  We use a gift sub-type referencing 'cancelled - refunded.'   Leaving it also gives you ability to query on the list of people if you find you want to at some point in the future. 

Just an idea - we had a special event concert back in 2006 that was cancelled.  We called the people who purchased tickets and asked if they'd like to make their ticket purchase a donation to the annual fund or have a refund.  We found that many people made their ticket purchase a donation to the annual fund and made an additional annual fund gift when it came time for our fall appeal.