**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

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**FORM 10-Q**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

**For the quarterly periodended September 30, 2006**

**OR**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

**Commission filenumber:  0-15006**

**AVANTIMMUNOTHERAPEUTICS, INC.**

(Exact name of registrant as specified in its charter)

| **Delaware**              |   | **No. 13-3191702**               |
|---------------------------|--------|---------------------------------------|
| (State of  Incorporation) |   | (I.R.S. Employer  Identification No.) |

 

**119 Fourth Avenue, Needham, Massachusetts 02494-2725**

(Address of principal executive offices) (Zip Code)

**(781) 433-0771**

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports) and (2) has been subject to such filing requirements for thepast 90 days.  Yes x  No o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act. (Check one):
| Large accelerated filer  o | Accelerated filer  x | Non-accelerated filer  o |
|--------------------------------------|--------------------------------|------------------------------------|

 

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

As of November 6, 2006, 74,182,548 shares ofcommon stock, $.001 par value per share, were outstanding.

 

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**AVANT IMMUNOTHERAPEUTICS, INC.**

**FORM 10-QQuarter Ended September 30, 2006Table of Contents**
| **Part I—Financial  Information**                                                                   |       |
|---------------------------------------------------------------------------------------------------------------|------------|
|                                                                                                          |       |
| Item  1. Financial Statments                                                                                  |       |
|                                                                                                          |       |
| Unaudited,  Consolidated Balance Sheets at September 30, 2006 and December 31,  2005                |       |
|                                                                                                          |       |
| Unaudited, Consolidated Statements of Operations for  the Three Months Ended September 30, 2006 and 2005 |       |
|                                                                                                          |       |
| Unaudited, Consolidated Statements of Operations for  the Nine Months Ended September 30, 2006 and 2005  |       |
|                                                                                                          |       |
| Unaudited, Consolidated Statements of Cash Flows for  the Nine Months Ended September 30, 2006 and 2005  |       |
|                                                                                                          |       |
| Notes to Unaudited, Consolidated Financial Statements                                                         |       |
|                                                                                                          |       |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations           |       |
|                                                                                                          |       |
| Item 3. Quantitative and Qualitative Disclosures About  Market Risk                                           |       |
|                                                                                                          |       |
| Item 4. Controls and Procedures                                                                               |       |
| ** **                                                                                                    | ** ** |
| **Part II  — Other Information**                                                                    | ** ** |
|                                                                                                          |       |
| Item 1A. Risk  Factors                                                                                        |       |
|                                                                                                          |       |
| Item 6. Exhibits                                                                                              |       |
|                                                                                                          |       |
| Signatures                                                                                                    |       |
|                                                                                                          |       |
| Certifications                                                                                                |       |

 

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**PART I—FINANCIALINFORMATION**

**Item 1.  Financial Statements**

**AVANT IMMUNOTHERAPEUTICS, INC.CONSOLIDATED BALANCE SHEETS(Unaudited)**
| ** **                                                                                                                                                                                                          | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                                                                          | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Current Assets:                                                                                                                                                                                                     |       |                         |       |                        |       |
| Cash and Cash  Equivalents                                                                                                                                                                                          |       | $                            | 46,681,330 |                        | $          | 23,419,434 |   |
| Accounts  Receivable                                                                                                                                                                                                |       | 554,358                      |       | 418,380                     |       |
| Prepaid Expenses  and Other Current Assets                                                                                                                                                                          |       | 927,199                      |       | 767,082                     |       |
|                                                                                                                                                                                                                |       |                         |       |                        |       |
| Total Current  Assets                                                                                                                                                                                               |       | 48,162,887                   |       | 24,604,896                  |       |
|                                                                                                                                                                                                                |       |                         |       |                        |       |
| Property and Equipment,  Net                                                                                                                                                                                        |       | 10,534,372                   |       | 5,743,663                   |       |
| Intangible and Other  Assets                                                                                                                                                                                        |       | 4,320,740                    |       | 5,067,073                   |       |
| Goodwill                                                                                                                                                                                                            |       | 1,036,285                    |       | 1,036,285                   |       |
| Total Assets                                                                                                                                                                                                        |       | $                            | 64,054,284 |                        | $          | 36,451,917 |   |
| ** **                                                                                                                                                                                                          | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                                                      | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Current Liabilities:                                                                                                                                                                                                |       |                         |       |                        |       |
| Accounts Payable                                                                                                                                                                                                    |       | $                            | 831,138    |                        | $          | 1,140,578 |   |
| Accrued Expenses                                                                                                                                                                                                    |       | 2,624,701                    |       | 2,334,708                   |       |
| Current Portion  of Deferred Revenue                                                                                                                                                                                |       | 4,553,082                    |       | —                      |       |
| Current Portion  of Other Long-Term Liabilities                                                                                                                                                                     |       | 222,542                      |       | 217,457                     |       |
| Total Current  Liabilities                                                                                                                                                                                          |       | 8,231,463                    |       | 3,692,743                   |       |
|                                                                                                                                                                                                                |       |                         |       |                        |       |
| Deferred Revenue                                                                                                                                                                                                    |       | 45,033,615                   |       | 10,000,000                  |       |
| Other Long-Term  Liabilities                                                                                                                                                                                        |       | 3,089,611                    |       | 1,870,051                   |       |
|                                                                                                                                                                                                                |       |                         |       |                        |       |
| Stockholders’ Equity:                                                                                                                                                                                          |       |                         |       |                        |       |
| Convertible  Preferred Stock, 4,513,102 Shares Authorized; None Issued and Outstanding                                                                                                                              |       | —                       |       | —                      |       |
|                                                                                                                                                                                                                |       |                         |       |                        |       |
| Common Stock,  $.001 Par Value; 100,000,000 Shares Authorized; 74,402,867 Issued and  74,182,548 Outstanding at September 30, 2006 and 74,387,087 Issued and 74,166,768 Outstanding at  December 31, 2005 |       | 74,403                       |       | 74,387                      |       |
| Additional  Paid-In Capital                                                                                                                                                                                         |       | 257,887,168                  |       | 258,139,855                 |       |
| Deferred  Compensation                                                                                                                                                                                              |       | —                       |       | (1,225,000                  | )          |
| Less: 220,319  Common Treasury Shares at Cost                                                                                                                                                                       |       | (227,646                     | )          | (227,646                    | )          |
| Accumulated  Deficit                                                                                                                                                                                                |       | (250,034,331                 | )          | (235,872,473                | )          |
|                                                                                                                                                                                                                |       |                         |       |                        |       |
| Total  Stockholders’ Equity                                                                                                                                                                                    |       | 7,699,595                    |       | 20,889,123                  |       |
|                                                                                                                                                                                                                |       |                         |       |                        |       |
| Total Liabilities and  Stockholders’ Equity                                                                                                                                                                    |       | $                            | 64,054,284 |                        | $          | 36,451,917 |   |

 

*Seeaccompanying notes to unaudited consolidated financial statements*

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**AVANTIMMUNOTHERAPEUTICS, INC.CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)**
| ** **                                    | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|
| ** **                                    | ** ** | **September 30,  2006**     | ** ** | **September 30,  2005** | ** ** |
| **REVENUE:**                                  | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Product  Development and Licensing Agreements |       | $                                | 35,475     |   | $ | 78,692 |   |
| Government  Contracts and Grants              |       | 280,419                          |       | 767,630 |   |
| Product  Royalties                            |       | 23,105                           |       | — |   |
|                                          |       |                             |       |   |   |
| Total Revenue                                 |       | 338,999                          |       | 846,322 |   |
| ** **                                    | ** ** | ** **                       | ** ** | ** ** | ** ** |
| **OPERATING  EXPENSE:**                       | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Research and  Development                     |       | 4,416,320                        |       | 3,591,334 |   |
| General and  Administrative                   |       | 1,818,799                        |       | 1,670,306 |   |
| Amortization of  Acquired Intangible Assets   |       | 248,778                          |       | 248,778 |   |
|                                          |       |                             |       |   |   |
| Total Operating  Expense                      |       | 6,483,897                        |       | 5,510,418 |   |
|                                          |       |                             |       |   |   |
| Operating Loss                                |       | (6,144,898                       | )          | (4,664,096 | ) |
|                                          |       |                             |       |   |   |
| Investment and  Other Income, Net             |       | 624,331                          |       | 149,662 |   |
|                                          |       |                             |       |   |   |
| Loss before  Provision for Income Taxes       |       | (5,520,567                       | )          | (4,514,434 | ) |
|                                          |       |                             |       |   |   |
| Provision for  Income Taxes                   |       | —                           |       | — |   |
|                                          |       |                             |       |   |   |
| Net Loss                                      |       | $                                | (5,520,567 | ) | $ | (4,514,434 | ) |
|                                          |       |                             |       |   |   |
| Basic and  Diluted Net Loss Per Common Share  |       | $                                | (0.07      | ) | $ | (0.06 | ) |
|                                          |       |                             |       |   |   |
| Weighted Average Common  Shares Outstanding   |       | 74,182,347                       |       | 74,145,814 |   |

 

*Seeaccompanying notes to unaudited consolidated financial statements*

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**AVANT IMMUNOTHERAPEUTICS, INC.CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)**
| ** **                                    | ** ** | **Nine Months Ended** | ** **  |
|-----------------------------------------------|------------|---------------------------------|-------------|
| ** **                                    | ** ** | **September 30,  2006**    | ** **  | **September 30,  2005** | ** ** |
| **REVENUE:**                                  | ** ** | ** **                      | ** **  | ** ** | ** ** |
| Product  Development and Licensing Agreements |       | $                               | 2,672,895   |   | $ | 209,209 |   |
| Government  Contracts and Grants              |       | 1,241,149                       |        | 2,156,680 |   |
| Product  Royalties                            |       | 636,921                         |        | 88,146 |   |
|                                          |       |                            |        |   |   |
| Total Revenue                                 |       | 4,550,965                       |        | 2,454,035 |   |
| ** **                                    | ** ** | ** **                      | ** **  | ** ** | ** ** |
| **OPERATING  EXPENSE:**                       | ** ** | ** **                      | ** **  | ** ** | ** ** |
| Research and  Development                     |       | 13,228,926                      |        | 11,052,944 |   |
| General and  Administrative                   |       | 5,924,505                       |        | 5,242,185 |   |
| Amortization of  Acquired Intangible Assets   |       | 746,334                         |        | 746,334 |   |
|                                          |       |                            |        |   |   |
| Total Operating  Expense                      |       | 19,899,765                      |        | 17,041,463 |   |
|                                          |       |                            |        |   |   |
| Operating Loss                                |       | (15,348,800                     | )           | (14,587,428 | ) |
|                                          |       |                            |        |   |   |
| Investment and  Other Income, Net             |       | 1,558,943                       |        | 470,556 |   |
|                                          |       |                            |        |   |   |
| Loss before  Provision for Income Taxes       |       | (13,789,857                     | )           | (14,116,872 | ) |
|                                          |       |                            |        |   |   |
| Provision for  Income Taxes                   |       | 372,000                         |        | — |   |
|                                          |       |                            |        |   |   |
| Net Loss                                      |       | $                               | (14,161,857 | ) | $ | (14,116,872 | ) |
|                                          |       |                            |        |   |   |
| Basic and  Diluted Net Loss Per Common Share  |       | $                               | (0.19       | ) | $ | (0.19 | ) |
|                                          |       |                            |        |   |   |
| Weighted Average Common  Shares Outstanding   |       | 74,176,593                      |        | 74,136,931 |   |

 

*Seeaccompanying notes to unaudited consolidated financial statements*

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**AVANT IMMUNOTHERAPEUTICS, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)**
| ** **                                                                   | ** ** | **Nine Months Ended** | ** **  |
|------------------------------------------------------------------------------|------------|---------------------------------|-------------|
| ** **                                                                   | ** ** | **September 30,  2006**    | ** **  | **September 30,  2005** | ** ** |
| **Cash  Flows from Operating Activities:**                                   | ** ** | ** **                      | ** **  | ** ** | ** ** |
| Net Loss                                                                     |       | $                               | (14,161,857 | ) | $ | (14,116,872 | ) |
| Adjustments to Reconcile Net Loss to Net Cash Used  in Operating Activities: |       |                            |        |   |   |
| Depreciation and Amortization                                                |       | 1,505,578                       |        | 1,142,620 |   |
| Stock-Based Compensation Expense                                             |       | 953,297                         |        | 363,000 |   |
| Changes in Operating Assets and Liabilities:                                 |       |                            |        |   |   |
| Accounts Receivable                                                          |       | (135,978                        | )           | 1,586,930 |   |
| Prepaid and Other Current Assets                                             |       | (160,117                        | )           | (182,798 | ) |
| Accounts Payable and Accrued Expenses                                        |       | (19,447                         | )           | (1,884,293 | ) |
| Deferred Revenue                                                             |       | 39,586,697                      |        | 5,000,793 |   |
| Other Long-Term Liabilities                                                  |       | 1,405,351                       |        | — |   |
|                                                                         |       |                            |        |   |   |
| Net Cash Provided by (Used in) Operating Activities                          |       | 28,973,524                      |        | (8,090,620 | ) |
| ** **                                                                   | ** ** | ** **                      | ** **  | ** ** | ** ** |
| **Cash  Flows from Investing Activities:**                                   | ** ** | ** **                      | ** **  | ** ** | ** ** |
| Acquisition of Property and Equipment                                        |       | (5,549,954                      | )           | (1,351,233 | ) |
| Other Non-Current Assets                                                     |       | —                          |        | 1,000 |   |
|                                                                         |       |                            |        |   |   |
| Net Cash Used in Investing Activities                                        |       | (5,549,954                      | )           | (1,350,233 | ) |
| ** **                                                                   | ** ** | ** **                      | ** **  | ** ** | ** ** |
| **Cash  Flows from Financing Activities:**                                   | ** ** | ** **                      | ** **  | ** ** | ** ** |
| Proceeds from Stock Issuance                                                 |       | 13,897                          |        | 5,438 |   |
| Proceeds from Exercise of Stock Options and Warrants                         |       | 5,135                           |        | 28,928 |   |
| Payment of Long-Term Liabilities                                             |       | (180,706                        | )           | (136,232 | ) |
|                                                                         |       |                            |        |   |   |
| Net Cash Used in Financing Activities                                        |       | (161,674                        | )           | (101,866 | ) |
|                                                                         |       |                            |        |   |   |
| Net Increase  (Decrease) in Cash and Cash Equivalents                        |       | 23,261,896                      |        | (9,542,719 | ) |
|                                                                         |       |                            |        |   |   |
| Cash and Cash  Equivalents at Beginning of Period                            |       | 23,419,434                      |        | 31,741,494 |   |
|                                                                         |       |                            |        |   |   |
| Cash and Cash  Equivalents at End of Period                                  |       | $                               | 46,681,330  |   | $ | 22,198,775 |   |
|                                                                         |       |                            |        |   |   |
| **Supplemental  Disclosure of Cash Flow Information**                        | ** ** | ** **                      | ** **  | ** ** | ** ** |
| Cash paid for  interest                                                      |       | $                               | 87,255      |   | $ | 89,894 |   |

 

*Seeaccompanying notes to unaudited consolidated financial statements*

 

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**AVANT IMMUNOTHERAPEUTICS, INC.Notes to Unaudited Consolidated Financial StatementsSeptember 30, 2006**

**(1)****           Natureof Business**

AVANT Immunotherapeutics, Inc. (the “Company” or“AVANT”) is engaged in the discovery, development and commercialization ofproducts that harness the human immune system to prevent and treat disease. TheCompany is developing a broad portfolio of vaccines and therapeutics againstinfectious diseases. The portfolio includes a pipeline of preventative,single-dose oral vaccines aimed at protecting travelers and people in regionswhere infectious diseases are endemic. The portfolio also includesimmunotherapeutics for cardiovascular diseases which are available forpartnering, including a treatment to reduce complement-mediated tissue damageassociated with cardiac by-pass surgery and a proprietary vaccine candidate forcholesterol management. In addition, the Company is developing the VitriLifeÒpreservation and lyophilization technologies for use in manufacturing AVANT’soral vaccines and certain other non-injectable applications. AVANT furtherleverages the value of its technology portfolio through corporate, governmentaland non-governmental partnerships. One successful collaboration resulted in thedevelopment and marketing of an oral human rotavirus vaccine. Currentcollaborations encompass the development of vaccines to combat threats ofbiological warfare and vaccines addressed to global health, human food safetyand animal health.

The unaudited consolidated financial statementsinclude the accounts of AVANT and its wholly owned subsidiary, MeganHealth, Inc. (“Megan”). All intercompany transactions have beeneliminated.

**(2)****           InterimFinancial Statements**

The accompanying unaudited consolidated financialstatements for the three months and nine months ended September 30, 2006and 2005 include the consolidated accounts of AVANT, and have been prepared inaccordance with instructions to Form 10-Q and Article 10 ofRegulation S-X. In the opinion of management, the information contained hereinreflects all adjustments, consisting solely of normal recurring adjustments,that are necessary to present fairly the Company’s financial position at September 30,2006, results of operations for the three months and nine months endedSeptember 30, 2006 and 2005, and cash flows for the nine-month periodsended September 30, 2006 and 2005. The results of operations for thenine-month period ended September 30, 2006 are not necessarily indicativeof results for any future interim period or for the full year.

Certain information and footnote disclosures normallyincluded in financial statements prepared in accordance with generally acceptedaccounting principles in the United States of America have been omitted,although the Company believes that the disclosures included, when read inconjunction with AVANT’s Annual Report on Form 10-K for the year endedDecember 31, 2005, are adequate to make the information presented notmisleading. The accompanying December 31, 2005 Consolidated Balance Sheetwas derived from audited financial statements, but does not include alldisclosures required by accounting principles generally accepted in the UnitedStates of America.

**(3)           RecentAccounting Pronouncements**

**SFAS 157:**  In September 2006, the FASB issued SFAS No.157, *Fair Value Measurements*(“SFAS 157”),which defines fair value, establishes a framework for measuring fair value ingenerally accepted accounting principles (GAAP), and expands disclosures aboutfair value measurements.  SFAS 157 applies under other accountingpronouncements that require or permit fair value measurements, the Board havingpreviously concluded in those accounting pronouncements that fair value is therelevant measurement attribute.  Accordingly, SFAS 157 does not requireany new fair value measurements.  However, for some entities, theapplication of SFAS 157 will change current practice.  SFAS 157 is effective for financialstatements issued for fiscal years beginning after November 15, 2007, andinterim periods within those fiscal years. We have not yet determined the effect if any that adopting SFAS 157will have on the Company’s financial statements.

**SAB 108:**  In September 2006, the Securities andExchange Commission (“SEC”) released Staff Accounting Bulletin No. 108, *Considering the Effects of Prior Year Misstatements when QuantifyingMisstatements in Current Year Financial Statements* (“SAB 108”). SAB108 requires that public companies utilize a “dual-approach” to assess thequantitative effects of financial misstatements. This dual approach includesboth an income statement focused assessment and a balance sheet assessment. Theguidance in SAB 108 must be applied to annual financial statements for fiscalyears beginning after November 15, 2006. The Company does not expect thatthe adoption of SAB 108 will have a material effect on the Company’sconsolidated financial position or results of operations.

**FIN 48:**  In July 2006, the FASB issued InterpretationNo. 48, *Accounting for Uncertainty in Income Taxes*(“FIN 48”).  FIN 48 addresses therecognition and measurement of uncertain income tax positions using a"more-likely-than-not" threshold and introduces a number of newdisclosure requirements. The new guidance is effective for fiscal yearsbeginning after December 15, 2006.  Because of the Company’s tax lossposition, the adoption of FIN 48 will not have a material impact on AVANT’snear-term financial position and results of operations.

**(4)****           PaulRoyalty Fund**

In May 2005, AVANT entered into an agreementwhereby an affiliate of Paul Royalty Fund II, L.P. (“PRF”) purchased aninterest in the******net******royalties AVANT willreceive on worldwide sales of RotarixÒ. RotarixÒis licensed to GlaxoSmithKline plc (“Glaxo”). The terms of the agreement withPRF include an upfront unconditional payment from PRF totaling $10 millionreceived in 2005 and the following milestone payments: (i) $40 million forproduct launch in the European Union received March 17, 2006, and(ii) between $9 million and $11 million on product launch in the UnitedStates, depending on date of the launch.

In addition, AVANT retains some participation in theworldwide net royalty stream from RotarixÒ. Ifworldwide net royalties on sales of RotarixÒ fromGlaxo exceed $27.5 million in any year, AVANT will receive 92.5% of royaltiesin excess of $27.5 million. Also, once PRF receives cumulative royalties equalto 2.45 times PRF’s aggregate cash payments to

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AVANT, then AVANT will receive 92.5% of all additionalroyalties. If RotarixÒ is not launched in the U.S.by the end of 2009, either PRF or AVANT can opt out of the U.S. portion of theagreement, and AVANT will retain all U.S.-derived royalties and PRF would notbe obligated to make payments to AVANT upon U.S. approval.

On March 14, 2006, AVANT amended its agreementwith PRF to accelerate the $40 million milestone payment, which was received onMarch 17, 2006. The payment had previously been due upon the first sale ofRotarixÒ in the European Union, which wasexpected to occur during the second quarter of 2006. Other financial terms ofthe PRF agreement were not changed.

In September 2006, AVANT received notice from Glaxothat Glaxo would begin paying royalties on sales of RotarixÒvaccine at the lower of two royalty rates under their 1997 license agreement.Glaxo’s decision to pay the lower royalty rate (which is 70% of the full rate)is based upon Glaxo’s assertion that RotarixÒ is notcovered by the patents Glaxo licensed from AVANT in Australia and certainEuropean countries. If Glaxo’s position stands, the royalties to which PRF isentitled will no longer be limited by a $27.5 million annual threshold, whichAVANT projected may have been reached in later years as sales of RotarixÒincrease. Irrespective of Glaxo’s position, AVANT will still retain theroyalties on worldwide sales of RotarixÒ once PRFreceives 2.45 times the aggregate cash payments it makes to AVANT, though thepotential amount of such residual royalties will be lower if Glaxo’s positionstands.

The PRF transaction qualifies as a sale in accordancewith guidance in EITF 88-18 “Sale of Future Revenues.”  The upfront unconditional payment of $10million and the $40 million milestone payment for launch in the European Unionwere recorded by AVANT as deferred revenue upon receipt. Any future milestonepayments received from PRF will also be recorded as deferred revenue. Revenueswill be recognized and calculated based on the ratio of total royaltiesreceived from Glaxo and remitted to PRF over expected total amounts to bereceived by PRF and then applying this percentage to the total cumulativeconsideration received from PRF to date. The expected total of payments to bepaid to PRF is an estimate which AVANT will update from time to time todetermine that the estimate continues to be reasonable in light of then currentevents and circumstances. In February 2006, the European Commission grantedapproval of RotarixÒ in the European Union,which triggered a $4 million milestone payment from Glaxo, 50% of which iscreditable against future royalties. AVANT remitted $1.4 million of the Glaxomilestone payment to PRF in accordance with the PRF agreement. As a result, inthe first quarter of 2006, AVANT recognized $550,803 in product royalty revenuerelated to PRF’s purchased interests in the net royalties that AVANT receivesfrom RotarixÒ worldwide net sales. Based on management’s bestestimates of the amount and timing of Glaxo royalties, the Company hasclassified $4,415,582 and $45,033,615 of the deferred revenue balance atSeptember 30, 2006 as short-term and long-term, respectively.

**(5)****           Stock-BasedCompensation**

On January 1, 2006, the Company adopted Statementof Financial Accounting Standards No. 123 (revised 2004), “Share-BasedPayment,” (“SFAS 123(R)”) which requires the measurement and recognition ofcompensation expense for all share-based payment awards made to employees anddirectors including employee stock options and employee stock purchases relatedto the Employee Stock Purchase Plan (“employee stock purchases”) based onestimated fair values. SFAS 123(R) supersedes the Company’s previousaccounting under Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees” (“APB 25”) for periods beginning in fiscal 2006.In March 2005, the Securities and Exchange Commission issued StaffAccounting Bulletin No. 107 (“SAB 107”) relating to SFAS 123(R). TheCompany has applied the provisions of SAB 107 in its adoption of SFAS 123(R).

The Company adopted SFAS 123(R) using themodified prospective transition method, which requires the application of theaccounting standard as of January 1, 2006, the first day of the Company’sfiscal year 2006. The Company’s Consolidated Financial Statements as of and forthe three and nine months ended September 30, 2006 reflect the impact ofSFAS 123(R). In accordance with the modified prospective transition method, theCompany’s Consolidated Financial Statements for prior periods have not beenrestated to reflect, and do not include, the impact of SFAS 123(R). Stock-basedcompensation expense recognized under SFAS 123(R) for the three monthsended September 30, 2006 was $413,401, which consisted of stock-based compensationexpense related to employee and non-employee director stock options andrestricted stock units of $106,667 and $306,250, respectively. Stock-basedcompensation expense recognized under SFAS 123(R) for the nine monthsended September 30, 2006 was $953,297, which consisted of stock-basedcompensation expense related to employee and non-employee director stockoptions and restricted

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stock units of $293,158 and $656,250, respectively.There was no stock-based compensation expense related to employee andnon-employee director stock options and employee stock purchases recognizedduring the three and nine months ended September 30, 2005. Stock-basedcompensation expense of $121,000 and $363,000 related to restricted stock unitawards was recognized during the three and nine months ended September 30,2005, respectively. No significant stock-based compensation expenses wererecorded for employee stock purchases.

SFAS 123(R) requires companies to estimate thefair value of share-based payment awards on the date of grant using anoption-pricing model. The value of the portion of the award that is ultimatelyexpected to vest is recognized as expense over the requisite service periods inthe Company’s Consolidated Statement of Operations. Prior to the adoption ofSFAS 123(R), the Company accounted for stock-based awards to employees anddirectors using the intrinsic value method in accordance with APB 25 as allowedunder Statement of Financial Accounting Standards No. 123, “Accounting forStock-Based Compensation” (“SFAS 123”). Under the intrinsic value method, nostock-based compensation expense had been recognized in the Company’sConsolidated Statement of Operations because the exercise price of theCompany’s stock options granted to employees and directors equaled the fairmarket value of the underlying stock at the date of grant.

Stock-based compensation expense recognized during theperiod is based on the value of the portion of share-based payment awards thatis ultimately expected to vest. Stock-based compensation expense recognized inthe Company’s Consolidated Statement of Operations for the three and ninemonths ended September 30, 2006 included compensation expense forshare-based payment awards granted prior to, but not yet vested as ofJanuary 1, 2006 based on the grant date fair value estimated in accordancewith the provisions of SFAS 123 and compensation expense for the share-basedpayment awards granted subsequent to January 1, 2006 based on the grantdate fair value estimated in accordance with the provisions of SFAS 123(R). Inconjunction with the adoption of SFAS 123(R), compensation expense for allshare-based payment awards granted prior to January 1, 2006 will continueto be recognized using the straight-line method and compensation expense forall share-based payment awards granted subsequent to January 1, 2006 willalso be recognized using the straight-line method. As stock-based compensationexpense recognized in the Consolidated Statement of Operations for the firstnine months of fiscal 2006 is based on awards ultimately expected to vest, ithas been reduced for estimated forfeitures. SFAS 123(R) requiresforfeitures to be estimated at the time of grant and revised, if necessary, insubsequent periods if actual forfeitures differ from those estimates. In theCompany’s pro forma information required under SFAS 123 for the periods priorto fiscal 2006, the Company accounted for forfeitures as they occurred.

Upon adoption of SFAS 123(R), the Company retained itsmethod of valuation for share-based awards granted beginning in fiscal 2006using the Black-Scholes option-pricing model (“Black-Scholes model”) which waspreviously used for the Company’s pro forma information required under SFAS123. The Company’s determination of fair value of share-based payment awards onthe date of grant using an option-pricing model is affected by the Company’sstock price as well as assumptions regarding a number of highly complex andsubjective variables. These variables include, but are not limited to, theCompany’s expected stock price volatility over the term of the awards, andactual and projected employee stock option exercise behaviors.

The Company has not recognized any tax benefits or deductionsrelated to the tax effects of employee stock-based compensation as the Companycarries a full deferred tax asset valuation allowance and has significant netoperating loss carryforwards available.

**Employee Stock Benefit Plans**

***Restricted StockUnit Awards***

On September 21, 2005, AVANT awarded Dr. Una Ryan, itsPresident and CEO, 200,000 Restricted Stock Units. The Restricted Stock Unitsvest over four years but will vest in their entirety upon the earlier of thesale of the Company or Dr. Ryan’s retirement at or after age 65. The Companydetermined the value of the Restricted Stock Units to be $270,000, based on avaluation of $1.35 per share, the closing price of AVANT’s common stock on theaward date. The value of the Restricted Stock Units is being amortized over theremaining months until Dr. Ryan attains age 65 in December 2006, and is beingrecorded as compensation expense. In connection with the award, the Company hasrecognized $54,000 and $162,000 as stock-based compensation expense in the statementsof operations during the three- and nine-month periods ended September 30,2006, respectively.

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In November 2004 and September 2003, theCompany also awarded Restricted Stock Units to Dr. Ryan and recordednon-cash deferred compensation amounting to $832,000 and $1,104,000,respectively. On September 21, 2006, the Company’s Board of Directors modifiedthese Restricted Stock Units to provide that they vest in their entirety uponthe earlier of the sale of the Company or Dr. Ryan’s retirement at or after age65. The value of the Restricted Stock Units is being amortized over theremaining months until Dr. Ryan attains age 65 in December 2006 and is beingrecorded as compensation expense. In connection with the awards, the Companyhas recognized $252,250 and $494,250 and $121,000 and $363,000 as stock-basedcompensation expense in the statements of operations during the three- andnine-month periods ended September 30, 2006 and 2005, respectively.

AVANT has applied an estimated forfeiture rate of zeroto the restricted stock unit awards.

***Employee Stock PurchasePlan***

The 2004 Employee Stock Purchase Plan (the “2004Plan”) was adopted on May 13, 2004. All full time employees of AVANT areeligible to participate in the 2004 Plan. A total of 150,000 shares of commonstock are reserved for issuance under the 2004 Plan. Under the 2004 Plan, eachparticipating employee may contribute up to 15% of his or her compensation topurchase up to 500 shares of common stock per year in any six-month offeringperiod and may withdraw from the offering at any time before stock ispurchased. Participation terminates automatically upon termination ofemployment. The purchase price per share of common stock in an offering is 85%of the lower of its fair market value at either the beginning of the offeringperiod or the applicable exercise date. During the nine months endedSeptember 30, 2006 and 2005, the Company issued 5,665 and 3,403 shares,respectively, under the 2004 Plan. At September 30, 2006, 126,757 shareswere available for issuance under the 2004 Plan.

The 2004 Plan is a compensatory plan under SFAS 123R.The requisite service period for compensation cost resulting from the 2004 Planis the period over which the employee participates in the plan and pays for theshares.  AVANT has historicallyestablished two purchase periods during each year—January 1 toJune 30 and July 1 to December 31. The requisite service periodbegins on the enrollment date (the start of the offering period) and ends onthe purchase date and is determined to be six months.

The current purchase period began on July 1, 2006. TheCompany has established the risk-free interest rate assumption to be 5.3% usingthe 6-month rate on a traded zero-coupon U.S. Treasury bond. The Company usedits historical volatility rate of 51% for the 6-month period preceding thegrant date for the current stock purchase period. The Company has concludedthat volatility during the current purchase period is expected to be consistentwith the calculated historical volatility rate. Finally, the Companyestablished the expected term for the current stock purchase period as sixmonths.  Based on these assumptions, theCompany has calculated and expensed the fair value for the 2,500 shares in thecurrent stock purchase period which amounted to $484 for the three months endedSeptember 30, 2006.

***Employee StockOption Plans***

*Stock Option Plan Description*

On May 6, 1999, AVANT’s 1999 Stock Option andIncentive Plan (the “1999 Plan”) was adopted. The 1999 Plan replaced theAmended and Restated 1991 Stock Compensation Plan, which was an amendment andrestatement of AVANT’s 1985 Incentive Option Plan. The 1999 Plan permits thegranting of incentive stock options (intended to qualify as such underSection 422A of the Internal Revenue Code of 1986, as amended),non-qualified stock options, stock appreciation rights, performance shareunits, restricted stock and other awards of restricted stock in lieu of cashbonuses to employees, consultants and outside directors.

The 1999 Plan, as amended in 2002, allows for amaximum of 3,500,000 shares of common stock to be issued prior to May 6,2009. The Board of Directors determines the term of each option, option price,and number of shares for which each option is granted and the rate at whicheach option vests. The Board of Directors has granted employee stock optionawards with four-year vesting periods. The term of each option cannot exceedten years (five years for options granted to holders of more than 10% of thevoting stock of AVANT) and the exercise price of stock options cannot be lessthan the fair

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market value of the common stock at the date of grant(110% of fair market value for incentive stock options granted to holders ofmore than 10% of the voting stock of AVANT). Vesting of all employee stockoption awards is accelerated upon a change in control as defined in the 1999Plan.

The 1999 Plan provides for the automatic grant ofnon-qualified stock options to non-employee directors. Each non-employeedirector who is serving as a director of the Company on the fifth business dayafter each annual meeting of stockholders will automatically be granted on suchday a non-qualified stock option to acquire 10,000 shares of common stock. Theexercise price of each such non-qualified stock option is the fair market valueof common stock on the date of grant. Each such non-qualified stock option isexercisable on the first anniversary of the grant date. Such non-qualifiedstock options will expire ten years from the date of grant. The 1999 Plan alsoprovides for discretionary grants of non-qualified stock options tonon-employee directors. Vesting of all non-employee director stock optionawards is accelerated upon a change in control as defined in the 1999 Plan.

On November 17, 2005, pursuant to and inaccordance with the recommendation of the Compensation Committee, the Board ofDirectors of AVANT approved full acceleration of the vesting of otherwiseunvested stock options that had an exercise price of $2.00 or greater grantedunder the 1999 Plan that were held by employees, officers and non-employee directors.As a result of the Board of Directors’ action, a total of 265,935 of such“out-of-the-money” unvested stock options, having a weighted average exerciseprice of $2.37 per share, became exercisable effective November 17, 2005,rather than the later dates when such options would have vested in the normalcourse. The Company determined the value of the “out-of-the-money” unvestedstock options to be $360,100. This action was taken in accordance with theapplicable provisions of the 1999 Plan. The Board’s decision to accelerate thevesting of these “out-of-the-money” stock options was made primarily to reducecompensation expense that otherwise would be recorded in future periodsfollowing AVANT’s adoption in the first quarter of 2006 of SFAS 123R.

*General Option Information*

A summary of stock option activity for the nine monthsended September 30, 2006 is as follows:
| ** **                                                               | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price  Per Share** | ** ** | **Weighted  Average  Remaining  Contractual  Term (In Years)** | ** ** |
|--------------------------------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| Outstanding at  January 1,                                          |       | 2,974,950  |       | $                                                      | 2.55       |                                                                     | 4.86       |   |
| Granted                                                                  |       | 667,950    |       | 1.96                                                   |       | 9.34                                                                     |       |
| Exercised                                                                |       | (4,188     | )          | 1.23                                                   |       | —                                                                   |       |
| Canceled/forfeited                                                       |       | (14,824    | )          | 1.89                                                   |       | —                                                                   |       |
| Expired                                                                  |       | (322,547   | )          | 2.93                                                   |       | —                                                                   |       |
|                                                                     |       |       |       |                                                   |       |                                                                     |       |
| Outstanding at  September 30,                                       |       | 3,301,341  |       | $                                                      | 2.40       |                                                                     | 5.53       |   |
|                                                                     |       |       |       |                                                   |       |                                                                     |       |
| At September 30,                                                    |       |       |       |                                                   |       |                                                                     |       |
| Options exercisable                                                      |       | 2,416,721  |       | $                                                      | 2.59       |                                                                     |       |   |
| Available for grant                                                      |       | 1,405,266  |       |                                                   |       |                                                                     |       |
| Weighted average fair value of options granted during nine-month  period |       |       |       | $                                                      | 1.46       |                                                                     |       |   |

 

The aggregate intrinsicvalue of options outstanding at September 30, 2006 was $34,467, of which$26,053 related to exercisable options.

*Valuation and Expense Informationunder SFAS 123(R)*

The following table summarizes stock-basedcompensation expense related to employee and non-employee director stockoptions, employee stock purchases and restricted stock unit awards under SFAS123(R) for the three and nine months ended September 30, 2006 whichwas allocated as follows:

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|                                        | ** ** | **Three  Months  Ended  September 30,  2006** | ** ** | **Nine Months  Ended  September 30,  2006** | ** ** |
|----------------------------------------|------------|----------------------------------------------------|------------|-------------------------------------------------------|------------|
| Research and development               |       | $                                                  | 39,970     |                                                  | $          | 113,098 |   |
| General and  administrative            |       | 373,431                                            |       | 840,199                                               |       |
| Total stock-based compensation expense |       | $                                                  | 413,401    |                                                  | $          | 953,297 |   |

 

Stock-based compensation expense recognized for thethree months ended September 30, 2006 and 2005 included $306,250 and$121,000, respectively, related to restricted stock unit awards, all of whichwere allocated to general and administrative expenses. Stock-based compensationexpense recognized for the nine months ended September 30, 2006 and 2005included $656,250 and $363,000, respectively, related to restricted stock unitawards, all of which were allocated to general and administrative expenses.

Based on basic and diluted weighted average commonshares outstanding of 74,182,347 and 74,176,593 for the three- and nine-monthperiods, respectively, the effect of stock-based compensation expense recordedunder SFAS 123R was approximately $0.01 per share.

The table below reflectsthe pro forma information for the three and nine months endedSeptember 30, 2005 as follows:
| ** **                                                                                                     | ** ** | **Three Months  Ended   September 30,  2005** | ** ** | **Nine Months  Ended   September 30,  2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| Net Loss:                                                                                                      |       |                                                         |       |                                                        |       |
| As reported for  prior years                                                                                   |       | $                                                            | 4,514,434  |                                                        | $          | 14,116,872 |   |
| Less:  Stock-based employee compensation expense as reported                                                   |       | (121,000                                                     | )          | (363,000                                                    | )          |
| Add: Total  stock-based employee compensation expense determined under fair value based  method for all awards |       | 221,412                                                      |       | 728,636                                                     |       |
| Net loss, including the  effect of stock-based compensation expense                                            |       | $                                                            | 4,614,846  |                                                        | $          | 14,482,508 |   |
|                                                                                                           |       |                                                         |       |                                                        |       |
| Basic and diluted net  loss per share — as reported for prior periods                                     |       | $                                                            | 0.06       |                                                        | $          | 0.19 |   |
|                                                                                                           |       |                                                         |       |                                                        |       |
| Basic and diluted net loss per share, including the effect of  stock-based compensation expense                |       | $                                                            | 0.06       |                                                        | $          | 0.20 |   |

 

As of September 30, 2006, total compensation costrelated to non-vested stock options not yet recognized was $775,090 which isexpected to be recognized as expense over a weighted average period of2.3 years. As of September 30, 2006, total compensation cost relatedto non-vested restricted stock unit awards not yet recognized was $962,000which is expected to be recognized over a weighted average period of0.3 years.

The fair values ofemployee stock options granted during the three and nine months endedSeptember 30, 2006 and 2005 were valued using the Black-Scholes model withthe following assumptions:
| ** **                                                | ** ** | **Three months ended   September 30,** | ** ** | **Nine months ended   September 30,** | ** ** |
|-----------------------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                | ** ** | **2006**                                                   | ** ** | **2005**                                                  | ** ** | **2006** | ** ** | **2005** | ** ** |
| Expected stock price  volatility (employees)              |       | 76                                                         | %          | 81                                                        | %          | 76 | % | 81 | % |
| Expected stock price  volatility (non-employee directors) |       | —                                                     |       | 81                                                        | %          | 76 | % | 81 | % |
| Expected option term  (employees)                         |       | 6.25 Years                                                 |       | 4.5 Years                                                 |       | 6.25 Years |   | 4.5 Years |   |
| Expected option term  (non-employee directors)            |       | —                                                     |       | 4.5 Years                                                 |       | 5.5 Years |   | 4.5 Years |   |
| Risk-free interest rate                                   |       | 4.5 -5.2                                                   | %          | 3.8 - 4.3                                                 | %          | 4.3 - 5.2 | % | 3.6 - 4.3 | % |
| Expected dividend yield                                   |       | None                                                       |       | None                                                      |       | None |   | None |   |

 

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The Company used its historical stock price volatilityas the basis for its expected volatility assumption consistent with SFAS123(R) and SAB 107 for its employee and non-employee director stockoptions and employee stock purchases. Prior to fiscal 2006, the Company hadalso used its historical stock price volatility in accordance with SFAS 123 forpurposes of its pro forma information. The Company has assessed that itshistorical volatility is representative of expected future stock price trends.

The risk-free interest rate assumption is based uponobserved interest rates appropriate for the expected term of the Company’s employeeand non-emplyee director stock options and employee stock purchases. Thedividend yield assumption is based on the Company’s history of zero dividendpayouts and expectation that no dividends will be paid in the foreseeablefuture.

The expected term of employee and non-employeedirector stock options represents the weighted-average period the stock optionsare expected to remain outstanding. SAB 107 provides for a simplified methodfor estimating expected term for “plain-vanilla” options. The simplified methodis based on the vesting period and the contractual term for each grant or foreach vesting tranche for awards with graded vesting. The mid-point between thevesting date and the expiration date is used as the expected term under thismethod. The Company has elected to follow the guidance of SAB 107 and adoptthis simplified method in determining expected term for its stock optionawards. There were 70,000 stock option grants to non-employee directors duringthe nine months ended September 30, 2006.

Forfeitures were estimated based on historicalexperience by applying a 10 and zero percent forfeiture rate to employee andnon-employee director stock option awards granted during the nine months endedSeptember 30, 2006, respectively.

**(6)****           AccountsReceivable**

Accounts receivable are recorded at the invoicedamount and do not bear interest. The Company has not historically experiencedcredit losses from its accounts receivable and therefore has not established anallowance for doubtful accounts. The Company does not have anyoff-balance-sheet credit exposure related to its customers.

Accounts receivableconsists of the following:
|        | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------|------------|------------------------------|------------|-----------------------------|------------|
| Trade  |       | $                            | 350,501    |                        | $          | 383,416 |   |
| Other  |       | 203,857                      |       | 34,964                      |       |
|   |       | $                            | 554,358    |                        | $          | 418,380 |   |

 

Other receivables at September 30, 2006 representinterest receivable from a bank and a receivable due from the Company’s Needhamlandlord. Other receivables at December 31, 2005 represent interestreceivable from a bank.

**(7)****           Propertyand Equipment**

Property and equipmentincludes the following:
|                                                 | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Laboratory Equipment                            |       | $                            | 3,172,317  |                        | $          | 2,966,354 |   |
| Manufacturing Equipment                         |       | 1,765,833                    |       | 1,054,512                   |       |
| Office Furniture and  Equipment                 |       | 1,048,973                    |       | 1,893,623                   |       |
| Leasehold Improvements                          |       | 4,710,849                    |       | 4,510,075                   |       |
| Construction in  Progress                       |       | 4,991,826                    |       | 960,624                     |       |
| Total Property  and Equipment                   |       | 15,689,798                   |       | 11,385,188                  |       |
| Less Accumulated  Depreciation and Amortization |       | (5,155,426                   | )          | (5,641,525                  | )          |
|                                            |       | $                            | 10,534,372 |                        | $          | 5,743,663 |   |

 

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The Company has recognized $25,521 and $67,493 ofcapitalized interest costs incurred in financing leasehold improvements andlaboratory and manufacturing equipment at its Fall River and Needham facilitiesduring the three- and nine-month periods ended September 30, 2006,respectively. The total amount of interest expense incurred by AVANT during thethree- and nine-month periods was $25,521 and $77,973, respectively.

Depreciation expense related to equipment andleasehold improvements was $293,478 and $206,591 for the three months endedSeptember 30, 2006 and 2005, respectively, and $780,493 and $396,286 forthe nine months ended September 30, 2006 and 2005, respectively.

**(8)****           Intangibleand Other Assets**

Intangible and other assets include the following:

|                              | ** ** | **September 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                   | ** ** | **Estimated  Lives**             | ** ** | **Gross  Intangible  Assets**   | ** ** | **Accumulated  Amortization** | ** ** | **Net  Intangible  Assets** | ** ** | **Gross  Intangible  Assets** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Intangible  Assets** | ** ** |
| Intangible Assets:           |       |                             |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Collaborative  Relationships |       | 5 years                          |       | $                               | 1,090,000  |   | $ | (1,090,000 | ) | $ | 3⁄4 |   | $ | 1,090,000 |   | $ | (1,090,000 | ) | $ | 3⁄4 |   |
| Core Technology              |       | 10 years                         |       | 3,786,900                       |       | (1,792,372 | ) | 1,994,528 |   | 3,786,900 |   | (1,508,352 | ) | 2,278,548 |   |
| Developed Technology         |       | 7 years                          |       | 3,263,100                       |       | (2,716,000 | ) | 547,100 |   | 3,263,100 |   | (2,366,800 | ) | 896,300 |   |
| Strategic  Partner Agreement |       | 17 years                         |       | 2,563,900                       |       | (879,769 | ) | 1,684,131 |   | 2,563,900 |   | (766,656 | ) | 1,797,244 |   |
|                         |       |                             |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Total Intangible Assets      |       |                             |       | 10,703,900                      |       | (6,478,141 | ) | 4,225,759 |   | 10,703,900 |   | (5,731,808 | ) | 4,972,092 |   |
|                         |       |                             |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Other Non Current  Assets    |       |                             |       | 94,981                          |       | 3⁄4 |   | 94,981 |   | 94,981 |   | 3⁄4 |   | 94,981 |   |
|                         |       |                             |       | $                               | 10,798,881 |   | $ | (6,478,141 | ) | $ | 4,320,740 |   | $ | 10,798,881 |   | $ | (5,731,808 | ) | $ | 5,067,073 |   |

 

All of the Company’s intangible assets are amortizedover their estimated useful lives. Total amortization expense for intangibleassets was $248,778 and $746,334 for the three- and nine-month periods endedSeptember 30, 2006 and 2005, respectively.

The estimated futureamortization expense of intangible assets as of September 30, 2006 for theremainder of fiscal year 2006 and the five succeeding years is as follows:
| Year ending December 31, | ** ** | **Estimated  Amortization  Expense** | ** ** |
|-----------------------------------------|------------|--------------------------------------|------------|
| 2006 (remaining three  months)          |       | $                                    | 248,778    |   |
| 2007                                    |       | 960,212                              |       |
| 2008                                    |       | 529,512                              |       |
| 2009                                    |       | 529,512                              |       |
| 2010                                    |       | 514,622                              |       |
| 2011 and thereafter                     |       | 1,443,123                            |       |
|                                         |            |                                      |            |  |

 

**(9)****           Loss Per Share**

The Companycomputes and reports earnings per share in accordance with the provisions ofSFAS No. 128, “Earnings Per Share.”  The computations of basic and diluted loss percommon share are based upon the weighted average number of common sharesoutstanding and potentially dilutive securities. Potentially dilutivesecurities include stock options, warrants and restricted stock units. Optionsand warrants to purchase 3,745,785 and 3,549,365 shares of common stock andrestricted stock units totaling 1,000,000 shares were not included in thecomputations of weighted average common shares for the periods endedSeptember 30, 2006 and 2005, respectively, because inclusion of suchshares would have an anti-dilutive effect on net loss per share.

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**(10)****         Income Taxes**

The $40 millionmilestone payment received from PRF during the first quarter of 2006 willresult in taxable income for the Company. The regular taxable income generatedby this transaction will be fully offset against available federal and statenet operating loss carryforwards. The Company recorded a provision of $372,000in the first quarter of 2006 for the alternative minimum tax that will resultfrom receipt of this milestone.

**(11)****         Product Development and LicensingAgreements**

AVANT’s revenuefrom product development and licensing agreements was received pursuant tocontracts with different organizations. A summary of these contracts follows:

*(A)**       GlaxoSmithKline plc (“Glaxo”)*

In 1997, AVANTentered into an agreement with Glaxo to collaborate on the development andcommercialization of the Company’s oral rotavirus vaccine and Glaxo assumedresponsibility for all subsequent clinical trials and all other developmentactivities. AVANT licensed-in the Rotarix® technology in 1995 and owes alicense fee of 30% to Cincinnati Children’s Hospital Medical Center (“CCH”) onnet royalties received from Glaxo. AVANT is obligated to maintain a licensewith CCH with respect to the Glaxo agreement. All licensing fees are includedin research and development expense. The term of the Glaxo agreement is throughthe expiration of the last of the relevant patents covered by the agreement,although Glaxo may terminate the agreement upon 90 days prior written notice.

In May 2005,AVANT entered into an agreement whereby an affiliate of Paul Royalty Fund II,L.P. (“PRF”) purchased an interest in the******net******royalties AVANT will receive on worldwidesales of RotarixÒ (see Note 4). Under the PRFagreement, AVANT will retain 50% of future Glaxo milestone payments beginningon the effective date of the agreement with PRF, with 70% of the remainingbalance payable to PRF and 30% of the remaining balance payable to CCH,respectively.

InFebruary 2006, the European Commission granted approval of RotarixÒin the European Union, which triggered a $4 million milestone payment fromGlaxo, 50% of which is creditable against future royalties. Revenue of $2.6million was recorded in the first quarter of 2006 as AVANT has no continuingobligations to incur any research and development costs in connection with theGlaxo agreement and the remaining $1.4 million was remitted to PRF inaccordance with the PRF agreement. In addition, the Company recorded $600,000of research and development expense in the first quarter of 2006 for amountswhich will be payable to CCH in connection with the aforementioned 2006milestone payment. Glaxo has agreed to make further payments, which could totalup to $1.5 million, upon achievement of a specific milestone.

In September 2006,AVANT received notice from Glaxo that Glaxo would begin paying royalties onsales of RotarixÒ vaccine at the lower of tworoyalty rates under their 1997 license agreement. Glaxo’s decision to pay thelower royalty rate (which is 70% of the full rate) is based upon Glaxo’sassertion that RotarixÒ is not covered by the patentsGlaxo licensed from AVANT in Australia and certain European countries.

*(B)**       Pfizer Inc (“Pfizer”)*

The Companyentered into a licensing agreement in December 2000 with Pfizer’s AnimalHealth Division whereby Pfizer has licensed Megan’s technology for thedevelopment of animal health and food safety vaccines. Under the agreement,AVANT may receive additional milestone payments of up to $3 million based uponattainment of specified milestones. AVANT may receive royalty payments oneventual product sales. The term of this agreement is through the expiration ofthe last of the patents covered by the agreement. AVANT has no obligation toincur any research and development costs in connection with thisagreement.  

As of June 1, 2006, AVANT entered into aCollaborative Research and Development Agreement with Pfizer aimed at thediscovery and development of vaccines to protect animals. The collaborationwill employ vaccine technologies owned by AVANT. Under the agreement, Pfizerand AVANT will conduct a joint research program funded by Pfizer to developprophylactic and therapeutic vaccines to protect livestock and companionanimals from respiratory and enteric diseases. AVANT considers its June 2006arrangement with Pfizer to be a revenue arrangement with multiple deliverables.The Company expects to recognize revenue as the research and developmentservice deliverables are completed and delivered to Pfizer.

 

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*(C)**       DynPort Vaccine Company LLC (“DVC”)*

InOctober 2001, the Company granted DVC a license for exclusive rights touse certain components of its anthrax vaccine technology. Under the agreement,AVANT is entitled to annual $50,000 license maintenance payments, with respectto which AVANT has received $200,000 in the aggregate, including $50,000received in the first quarter of 2005, and milestone payments of up to $700,000in the aggregate, $100,000 of which AVANT has recognized as revenue. The annuallicense fee is recognized as revenue on a straight line basis over the year. OnAugust 5, 2005, AVANT received notice from DVC of termination of thelicense agreement, effective November 5, 2005.

InJanuary 2003, AVANT was awarded a subcontract by DVC in the amount of $2.5million to develop for the U.S. Department of Defense an oral combinationvaccine against anthrax and plague using AVANT’s proprietary vaccinetechnologies. As of September 30, 2006, AVANT has received a number of additionalsubcontract modifications from DVC to support preclinical animal testing ofvaccine constructs and the start of human clinical testing of a plague vaccinecandidate being developed by AVANT for use in the oral combination vaccine.Total contract funding awarded by DVC now totals approximately $9.4 million.Payments under the subcontract agreement are made on a time and materials basisand receipt of the full amount is conditioned upon the project being fullyfunded through completion and AVANT performing and continuing to demonstratethat it has the capability to perform the funded work. For the nine monthsended September 30, 2006 and 2005, AVANT recognized $1,049,906 and$1,942,709, respectively, in government contract revenue from DVC. Through September 30,2006, AVANT had received approximately $9.2 million in payments under thevarious subcontract agreements. These agreements expire in 2007, although theymay be terminated by DVC at any time upon 30 days written notice.

**(12)****         Other Long-Term Liabilities**

InDecember 2003, AVANT entered into a Lease Agreement, a Secured PromissoryNote: Equipment Loan and a Security Agreement with the MassachusettsDevelopment Finance Agency (“MassDevelopment”), an economic development entityfor the Commonwealth of Massachusetts, for AVANT to occupy and build-out amanufacturing facility in Fall River, Massachusetts.

*(A)**       Loan Payable*

Under the LeaseAgreement, AVANT received a Specialized Tenant Improvement Loan of $1,227,800to finance the build-out of its Fall River facility. Principal and interestpayments on the loan are due monthly using an amortization period of 15 yearsand an interest rate of 5.5% per annum.

AtSeptember 30, 2006, AVANT has recorded leasehold improvements of$1,227,800 and currently has a loan payable of $1,084,557 to MassDevelopment,of which $75,032 is classified as current and $1,009,525 as long-term. AVANTbegan amortizing the leasehold improvements when the Fall River facility becameoperational. Based on current market interest rates available to AVANT forlong-term liabilities with similar terms and maturities, the fair value of theloan is approximately $781,600 at September 30, 2006.

*(B)**       Note Payable*

Under the SecuredPromissory Note: Equipment Loan, AVANT received $903,657 from MassDevelopmentto finance the purchases of manufacturing and laboratory equipment to be placedin its Fall River facility (the “Loan”). The Loan has a term of 84 months at aninterest rate of 5.5% per annum. The Loan is collateralized by all of theequipment purchased with the principal amount. The net book value of thesecollateralized assets at September 30, 2006 and December 31, 2005 was$795,830 and $880,690, respectively.

AtSeptember 30, 2006, AVANT currently has a note payable of $694,466 toMassDevelopment, of which $129,859 is classified as current and $564,607 aslong-term. AVANT began depreciating the manufacturing and laboratory equipmentassets over the estimated economic lives of the assets when the equipmentbecame ready for its intended use. Based on current market interest ratesavailable to AVANT for long-term liabilities with similar terms and maturities,the fair value of the note payable is approximately $610,600 atSeptember 30, 2006.

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**(13)****         Commitments and Contingencies**

*(A)**       Commitments for the Renovations of the NeedhamFacility and Improvements to the Fall River Facility*

In November 2005, AVANT entered into a Lease Amendment with thelandlord which specified terms for the complete renovation of the Company’sNeedham facility. The current projected costs for the tenantimprovements portion of the renovations project are approximately $9.1 million.As an incentive for AVANT to enter into the Lease Amendment, the landlord hasagreed to contribute up to $3.6 million towards tenant improvement costs. TheCompany will record the full cost of the Needham renovation project as an assetand the amounts of landlord incentive will be recorded as deferred rent(included under “Other Long Term Liabilities” account in the consolidatedbalance sheets) in accordance with FASB Technical Bulletin 88-1 “Issues Relatedto Accounting for Leases.”  Amortizationof the deferred rent will be recorded as a reduction of rent expense over theremaining lease term when the renovation project is complete and will beclassified as an operating activity in the Consolidated Statement of CashFlows.

InNovember 2005, AVANT amended the MassDevelopment lease to increase therentable space by approximately 2,500 square feet to approximately 14,300square feet at the Fall River facility. The landlord is providing a tenantincentive allowance of $49,740 against the cost of alterations and improvementsrequired by AVANT to be made to the expanded space. As of September 30,2006, none of the tenant incentive allowance has been received. InApril 2006, AVANT entered into aDesign/Build Contract with a design/builder for the build-out of the expandedspace. The contract amount totals $345,000 and the construction projectwas completed in the third quarter of 2006.

*(B)**       Purchase Commitments for Contract Manufacturing*

InApril 2000, AVANT entered into a Services Agreement (the “LonzaAgreement”) with Lonza Biologics plc (“Lonza”) for process development andmanufacture of its product candidate TP10. AVANT has entered into a number ofamendments to the Lonza Agreement for specific process development and scale-upwork and remaining aggregate commitments as of September 30, 2006 totalapproximately $1,011,656. The Company has incurred $1,348,356 and $8,129,077,respectively, of expense related to the Lonza Agreement in the nine-monthperiod ended September 30, 2006 and from inception throughSeptember 30, 2006, of which $190,768 remained accrued atSeptember 30, 2006.

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***Safe Harbor Statement under the Private SecuritiesLitigation Reform Act of 1995:****  This quarterly report onForm 10-Q includes forward-looking statements that are subject to avariety of risks and uncertainties and reflect AVANT’s current views withrespect to future events and financial performance. There are a number ofimportant factors that could cause the actual results to differ materially fromthose expressed in any forward-looking statements made by AVANT. These factorsinclude, but are not limited to: (1) the integration of multiple technologies and programs;(2) the ability to adapt AVANT’s vectoring systems to develop new, safeand effective orally administered vaccines against anthrax and plague or anyother microbes used as bioweapons and other disease causing agents;(3) the ability to successfully complete development and commercializationof TP10, CETi-1, CholeraGarde® (Peru-15), Ty800, ETEC E. coli and otherproducts; (4) the cost, timing, scope and results of ongoing safety andefficacy trials of TP10, CETi-1, CholeraGarde® (Peru-15), Ty800, ETEC E. coliand other preclinical and clinical testing; (5) the ability tosuccessfully complete product research and further development, includinganimal, pre-clinical and clinical studies of TP10, CETi-1, CholeraGarde®(Peru-15), Ty800, ETEC E. coli and other products; (6) the ability of theCompany to manage multiple late stage clinical trials for a variety of productcandidates; (7) the volume and profitability of product sales of Megan®Vac1, Megan®Egg and other future products; (8) the process of obtainingregulatory approval for the sale of Rotarix**Òin major commercial markets, as well as the timing and success of worldwidecommercialization of Rotarix**Ò by ourpartner, Glaxo; (9) Glaxo’s strategy and business plans to launch andsupply Rotarix® worldwide, including in the U.S. and other major markets andits payment of royalties to AVANT; (10)  changes in existing and potentialrelationships with corporate collaborators; (11) the availability, cost,delivery and quality of clinical and commercial grade materials supplied bycontract manufacturers; (12) the timing, cost and uncertainty of obtainingregulatory approvals to use TP10, CETi-1, CholeraGarde® (Peru-15) and Ty800,ETEC E. coli, among other purposes, for adults undergoing cardiac surgery, toraise serum HDL cholesterol levels and to protect travelers and people inendemic regions from diarrhea causing diseases, respectively; (13) the abilityto obtain substantial additional funding; (14) the ability to develop andcommercialize products before competitors and that are superior to thealternatives developed by competitors; (15) the ability to retain certainmembers of management; (16) AVANT’s expectations regarding research anddevelopment expenses and general and administrative expenses; (17) DVC’s abilityto complete clinical trials and perform under its agreement; (18) AVANT’sexpectations regarding CETP’s ability to improve cholesterol levels and AVANT’sability to develop and commercialize CETP; (19) AVANT’s expectations regardingcash balances, anticipated royalty payments (including those from Glaxo) andexpenses, including infrastructure expenses; and (20) other factors detailedfrom time to time in filings with the Securities and Exchange Commission. Youshould carefully review all of these factors, and you should be aware thatthere may be other factors that could cause these differences. Theseforward-looking statements were based on information, plans and estimates atthe date of this report, and we do not promise to update any forward-lookingstatements to reflect changes in underlying assumptions or factors, newinformation, future events or other changes.*

**Item 2. Management’sDiscussion and Analysis of Financial Condition And Results of Operations**

AVANT’s principalactivity since our inception has been research and product developmentconducted on its own behalf, as well as through joint development programs withseveral pharmaceutical companies and other collaborators. AVANT wasincorporated in the State of Delaware in December 1983.

## **CRITICAL ACCOUNTINGPOLICIES**

The Company’scritical accounting policies are set forth under the heading “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” inItem 7 to our 2005 Form 10-K. Other than the adoption of Statement ofFinancial Accounting Standards No. 123 (revised 2004), “Share-BasedPayment,” (“SFAS 123(R)”), there has been no changes to these policies sinceDecember 31, 2005. Readers are encouraged to review these criticalaccounting policies in conjunction with the review of this Form 10-Q.

*Stock-BasedCompensation Expense*

On January 1,2006, the Company adopted Statement of Financial Accounting StandardsNo. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”) whichrequires the measurement and recognition of compensation expense for allshare-based payment awards made to its employees and directors includingemployee stock options and employee stock purchases related to the 2004Employee Stock Purchase Plan (“employee stock purchases”) based on estimated fairvalues. The Company adopted SFAS 123(R) using the modified prospectivetransition method, which requires the application of the accounting standard asof January 1, 2006, the first day of the Company’s fiscal year 2006. TheCompany’s Consolidated

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Financial Statements asof and for the three and nine months ended September 30, 2006 reflect theimpact of SFAS 123(R). In accordance with the modified prospective transitionmethod, the Company’s Consolidated Financial Statements for prior periods havenot been restated to reflect, and do not include, the impact of SFAS 123(R).Stock-based compensation expense recognized under SFAS 123(R) for thethree months ended September 30, 2006 was $413,401, which consisted ofstock-based compensation expense related to employee and non-employee directorstock options and restricted stock units of $106,667 and $306,250,respectively. Stock-based compensation expense recognized under SFAS123(R) for the nine months ended September 30, 2006 was $953,297,which consisted of stock-based compensation expense related to employee andnon-employee director stock options and restricted stock units of $293,158 and$656,250, respectively. There was no stock-based compensation expense relatedto employee and non-employee director stock options and employee stockpurchases recognized during the three and nine months ended September 30,2005. Stock-based compensation expense of $121,000 and $363,000 related to restrictedstock unit awards was recognized during the three and six months endedSeptember 30, 2005, respectively. Stock-based compensation expense of$953,297 and $363,000 was reflected as operating cash flows in the ConsolidatedStatements of Cash Flows for the nine months ended September 30, 2006 and2005, respectively. See Note 4 to the Consolidated Financial Statements foradditional information. No significant stock-based compensation expenses wererecorded for employee stock purchases.

Thedetermination of fair value of share-based payment awards on the date of grantusing an option-pricing model is affected by our stock price as well asassumptions regarding a number of highly complex and subjective variables.These variables include, but are not limited to the expected stock pricevolatility over the term of the awards, and actual and projected employee stockoption exercise behaviors. The weighted average estimated fair value ofemployee stock options granted during the three and nine months ended September 30,2006 was $1.05 and $1.46, respectively, per share using the Black-Scholesoption pricing model with the following assumptions:
| ** **                                                | ** ** | **Three months ended  September 30, 2006** | ** ** | **Nine months ended  September 30, 2006** | ** ** |
|-----------------------------------------------------------|------------|----------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| Expected stock price  volatility (employees)              |       | 76                                                             | %          | 76                                                            | %          |
| Expected stock price  volatility (non-employee directors) |       | —                                                         |       | 76                                                            | %          |
| Expected option term  (employees)                         |       | 6.25 Years                                                     |       | 6.25 Years                                                    |       |
| Expected option term  (non-employee directors)            |       | —                                                         |       | 5.5 Years                                                     |       |
| Risk-free interest rate                                   |       | 4.5 — 5.2                                                 | %          | 4.3 — 5.2                                                | %          |
| Expected dividend yield                                   |       | None                                                           |       | None                                                          |       |

 

The Company usedits historical stock price volatility as the basis for its expected volatilityassumption consistent with SFAS 123(R) and SAB 107 for its employee andnon-employee director stock options and employee stock purchases. Prior tofiscal 2006, the Company had also used its historical stock price volatility inaccordance with SFAS 123 for purposes of its pro forma information. The Companyhas assessed that its historical volatility is representative of expected futurestock price trends.

The risk-freeinterest rate assumption is based upon observed interest rates appropriate forthe expected term of the Company’s employee and non-employee director stockoptions and employee stock purchases. The dividend yield assumption is based onthe Company’s history of zero dividend payouts and expectation that nodividends will be paid in the foreseeable future.

The expected termof employee and non-employee director stock options represents theweighted-average period the stock options are expected to remain outstanding.SAB 107 provides for a simplified method for estimating expected term for “plain-vanilla”options. The simplified method is based on the vesting period and thecontractual term for each grant or for each vesting tranche for awards withgraded vesting. The mid-point between the vesting date and the expiration dateis used as the expected term under this method. The Company has elected tofollow the guidance of SAB 107 and adopt this simplified method in determiningexpected term for its stock option awards. There were 70,000 stock optiongrants to non-employee directors during the nine months endedSeptember 30, 2006.

Forfeitures wereestimated based on historical experience by applying a 10 and zero percent forfeiturerate to employee and non-employee director stock option awards granted duringthe nine months ended September 30, 2006, respectively.

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If factors changeand we employ different assumptions in the application of SFAS 123(R) infuture periods, the compensation expense that we record under SFAS123(R) may differ significantly from what we have recorded in the currentperiod.

## **OVERVIEW**

AVANT’s focus isunlocking the power of the immune system to prevent and treat disease. TheCompany has assembled a broad portfolio of technologies and intellectualproperty that gives it a strong competitive position in vaccines andimmuno-therapeutics. These include an oral human rotavirus vaccine, whichgained its first marketing approval in Mexico in July 2004 and is beingmarketed by Glaxo worldwide. Five of AVANT’s products are in clinicaldevelopment. The Company’s goal is to become a leading developer of innovativevaccines and immunotherapeutics that address health care needs on a globalbasis.

The Company hasactively developed and acquired innovative technologies — especially novelapproaches to vaccine creation. The development of immunotherapeutic vaccineslike the CETP vaccine and the marriage of innovative bacterial vector deliverytechnologies with unique manufacturing processes offer the potential for a newgeneration of vaccines. In addition, AVANT’s vaccine technologies can providerapid protection against bacterial illnesses which may prove useful forimproving and expanding the U.S.’s vaccine arsenal against microbial agentsused in war or terrorist attacks.

AVANT is targetingits efforts where it can add the greatest value to the development of itsproducts and technologies. Its goal is to demonstrate clinical proof-of-conceptfor each product, and then seek excellent partners to help see those productsthrough to commercialization. This approach allows AVANT to maximize theoverall value of its technology and product portfolio while best ensuring theexpeditious development of each individual product.

## **RESEARCH AND DEVELOPMENTACTIVITIES**

AVANT is currentlyfocused on the development of a number of immunotherapeutic and vaccine productcandidates which are in various stages of clinical trials. AVANT expects that alarge percentage of its research and development expenses will be incurred insupport of its current and future clinical trial programs.

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Duringthe past five years through the end of 2005, AVANT incurred an aggregate of$74 million in research and development costs. During the nine monthsended September 30, 2006, AVANT incurred an aggregate of$13.4 million in research and development costs. The following tableindicates the amount incurred for each of AVANT’s material research programsand for other identified research and development activities during the twoyears ended December 31, 2005 and 2004 and the nine-month periods endedSeptember 30, 2006 and 2005. The amounts disclosed in the following tableand in “Program Developments” below reflect direct research and developmentcosts, license fees associated with the underlying technology and an allocationof indirect research and development costs to each program.
| ** **                                        | ** ** | **Nine Months Ended  Septembere 30,** | ** ** | **Years Ended  December 31,** | ** ** |
|---------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                        | ** ** | **2006**                                             | ** ** | **2005**                                | ** ** | **2005** | ** ** | **2004** | ** ** |
| *Bacterial  Vaccines:*                            | * *   | * *                                             | * *   | * *                                | * *   | * * | * * | * * | * * |
| CholeraGardeÒ                                |       | $                                                    | 3,240,200  |                                    | $          | 707,500 |   | $ | 1,257,200 |   | $ | 123,100 |   |
| Ty800                                             |       | 619,700                                              |       | 334,900                                 |       | 404,500 |   | 688,300 |   |
| Other                                             |       | 1,287,400                                            |       | 348,300                                 |       | 528,900 |   | 332,500 |   |
| *BioDefense  Vaccines:*                           |       | 1,413,700                                            |       | 1,839,200                               |       | 2,470,700 |   | 3,082,800 |   |
| *Cholesterol  Management Vaccine:*                | * *   | * *                                             | * *   | * *                                | * *   | * * | * * | * * | * * |
| CETi-1                                            |       | 834,000                                              |       | 458,500                                 |       | 650,800 |   | 816,900 |   |
| *Complement  Inhibitors:*                         | * *   | * *                                             | * *   | * *                                | * *   | * * | * * | * * | * * |
| TP10/TP20                                         |       | 3,722,800                                            |       | 6,973,000                               |       | 8,327,200 |   | 7,706,300 |   |
| *Food  Safety & Animal Health Vaccines:* |       | 6,200                                                |       | 7,000                                   |       | 9,900 |   | 12,600 |   |
| *Viral  Vaccines:*                                | * *   | * *                                             | * *   | * *                                | * *   | * * | * * | * * | * * |
| RotarixÒ  vaccine                            |       | 648,600                                              |       | —                                  |       | — |   | 500,000 |   |
| Avian Flu                                         |       | 585,400                                              |       | —                                  |       | — |   | — |   |
| TheraporeÒ/HIV                               |       | —                                               |       | 4,900                                   |       | 11,800 |   | 184,900 |   |
| *Other  Programs:*                                |       | 871,000                                              |       | 379,700                                 |       | 402,300 |   | 426,400 |   |
|                                              |       |                                                 |       |                                    |       |   |   |   |   |
| *Total R&D Expense*                           |       | $                                                    | 13,229,000 |                                    | $          | 11,053,000 |   | $ | 14,063,300 |   | $ | 13,873,800 |   |

 

**PROGRAMDEVELOPMENTS**

*RotavirusVaccine:*  Rotavirus isa major cause of diarrhea and vomiting in infants and children. In 1997, AVANTlicensed its oral rotavirus vaccine to Glaxo. All of the ongoing developmentfor this program is being conducted and funded by Glaxo. Glaxo gained approvalfor RotarixÒ in Mexico in July 2004, which represents the firstin an expected series of worldwide approvals and commercial launches for theproduct. Glaxo has launched in additional Latin American and Asian Pacificcountries during 2005 and 2006. Additionally, Glaxo filed for market approvalwith the European regulatory authorities in late 2004, which triggered a $2million milestone payment to AVANT. In February 2006, the EuropeanCommission granted approval of RotarixÒ in the European Union,which triggered a $4 million milestone payment from Glaxo. Glaxo has agreed tomake an additional payment of $1.5 million, upon achievement of market approvalin the United States. AVANT licensed-in the Rotarix® technology in 1995 andowes a license fee of 30% to Cincinnati Children’s Hospital Medical Center (“CCH”)on net royalties received from Glaxo. In May 2005, AVANT entered into anagreement whereby an affiliate of PRF purchased an interest in the netroyalties AVANT will receive on worldwide sales of RotarixÒ (seeNote 3 of our unaudited consolidated financial statements). Under the PRFagreement, AVANT will retain 50% of future Glaxo milestone payments, with thebalance payable to PRF and CCH.

On March 14,2006, AVANT amended its agreement with PRF to accelerate the $40 millionmilestone payment, which was received on March 17, 2006. The payment hadpreviously been due upon the first sale of RotarixÒin the European Union, which was expected to occur during the second quarter of2006. Other financial terms of the PRF agreement were not changed.

In September 2006,AVANT received notice from Glaxo that Glaxo would begin paying royalties onsales of RotarixÒ vaccine at the lower of tworoyalty rates under their 1997 license agreement. Glaxo’s decision to pay the lowerroyalty rate (which is 70% of the full rate) is based upon Glaxo’s assertionthat RotarixÒ is not covered by the patents Glaxo licensed from AVANTin Australia and certain European countries.

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*ComplementInhibitors:*  TP10, asoluble form of naturally occurring Complement Receptor 1, has effectivelyshown to inhibit the activation of the complement cascade in animal models.AVANT believes that regulating the complement system could have therapeutic andprophylactic applications in several acute and chronic conditions, includingreperfusion injury from surgery or ischemic disease, organ transplant, multiplesclerosis, rheumatoid arthritis, and myasthenia gravis. AVANT has elected todevelop TP10 for cardiac surgery. In February 2002, AVANT announced thatTP10 had not achieved a significant reduction in the primary endpoint of aPhase 2 adult cardiac surgery trial conducted in 564 patients. However, furtheranalysis of the study data demonstrated an important treatment benefit in malepatients participating in the trial directly related to mortality, which wasimpressive, but, with no treatment benefit observed in female patients. InFebruary 2004, AVANT started a Phase 2b double-blind, placebo-controlledtrial of TP10 in approximately 300 women undergoing cardiopulmonary by-passsurgery. In February 2006, AVANT reported that the females-only study didnot meet the primary endpoint, thus confirming the results for female subjectsin the previous TP10 trial. Therefore, given the strong efficacy data in males shownin this previous study, AVANT believes there is a clear clinical developmentpathway for a males-only indication for TP10 in cardiac bypass surgery. Malesrepresent 75% of the U.S. market opportunity in cardiac bypass surgery. AVANTbelieves that the TP10 program is now well positioned for a males-only cardiacbypass surgery indication. AVANT is currently seeking a corporate partner tocomplete development and to commercialize TP10.

During the periodJanuary 1, 2001 through December 31, 2005, AVANT incurredapproximately $32.3 million in research, development, contractmanufacturing and clinical costs associated with its complement inhibitorprogram. During the nine months ended September 30, 2006, the Companyincurred approximately $3.7 million in research, development, contractmanufacturing and clinical costs associated with its complement inhibitorprogram.

*BacterialVaccines:*  AVANT’s goalis to become a leading developer of innovative vaccines that address healthcare needs on a global basis. In this regard, AVANT acquired VitriLife®, atechnology with the potential to reduce manufacturing costs and improve productstability, and potentially eliminating the need for vaccine refrigerationduring shipping and storage. With this and other drying and preservationtechnologies and AVANT’s *Cholera*-and *Salmonella*-vectored deliverytechnologies, named VibrioVecÒ and SalmoVecTM, the Company can nowdevelop a new generation of vaccines that have an ideal product profile: safe,effective, oral, single-dose, rapidly protective and increased thermostability.

Development of asafe, effective cholera vaccine is the first step in establishing AVANT’ssingle-dose, oral bacterial vaccine franchise. During 2002, AVANT completed aPhase 2 dose-ranging study with CholeraGarde® which confirmed the safety andactivity of this vaccine and supported the start of Phase 2 trials inDecember 2002 with the International Vaccine Institute (“IVI”) inBangladesh where cholera is endemic. In July 2005, Bangladesh studyresults in children and infants showed CholeraGarde® to be well tolerated andhighly immunogenic, with 77% of children aged 9 months to 5 years generatingprotective immune responses. Previously published results showed the vaccine tobe well tolerated and immunogenic against the cholera organism in the adultportion of this trial. AVANT is preparing for a CholeraGarde®Phase 3 clinical study in theU.S. planned for mid-year 2007.

In July 2005,AVANT reported that it and Harvard Medical School would receive approximately$500,000 from the National Institutes of Health to apply AVANT’s VitriLife®formulation to CholeraGarde®. In the future, AVANT plans to utilize VitriLife®,a proprietary technology that confers thermostability to live bacterialvaccines, and other drying and preservation technologies at the Fall Riverfacility for its other bacterial vaccines.

During the periodJanuary 1, 2001 through December 31, 2005, AVANT incurredapproximately $10.4 million in research, development and clinical costs onits CholeraGarde® program. During the nine months ended September 30,2006, AVANT incurred approximately $3.2 million in research, development,manufacturing and clinical costs on its CholeraGarde® program.

AVANT is alsodeveloping an oral typhoid fever vaccine, Ty800, for global health needs. TheNational Institute of Allergy and Infectious Disease (“NIAID”) of the NationalInstitutes of Health (“NIH”) and AVANT agreed for the NIAID to conduct a Phase1/2 in-patient dose-ranging clinical trial aimed at demonstrating the safetyand immunogenicity of the Ty800 vaccine. NIAID funded the production of Ty800vaccine for clinical testing and initiated the Phase 1/2 trial at a NIH-fundedclinical site in February 2006. The NIAID trial seeks to confirm thesafety and immunogenicity of the Ty800 oral vaccine observed in an earlierphysician-sponsored Ty800 vaccine study. Enrollment in this study was completedduring the third quarter of 2006. During the period January 1, 2001through December 31, 2005, AVANT incurred approximately

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$5.3 million inresearch, development, contract manufacturing and clinical costs on its Ty800program. During the nine months ended September 30, 2006, AVANT incurredapproximately $619,700 in research, development and clinical costs on its Ty800program.

Finally, AVANT isdeveloping three additional bacterial vaccines against enterotoxigenic *E. coli*(“ETEC”), *Shigella* and *Campylobacter*—all important causes of serious diarrhealdiseases worldwide.

These three programs arein pre-clinical development. In April 2005, AVANT was awarded a Phase ISmall Business Innovation Research (“SBIR”) grant to support the development ofa live attenuated salmonella vaccine against campylobacter. The NIAID awardprovided approximately $107,000 in funding and work was completed by AVANTduring the second quarter of 2006. During the period January 1, 2001through December 31, 2005, AVANT incurred approximately $1.2 millionin research, development and clinical costs on these pre-clinical programs.During the nine months ended September 30, 2006, AVANT incurredapproximately $1.3 million in research, development and clinical costs on thesepre-clinical programs.

*BioDefenseVaccines:*  Theattenuated live bacteria used to create AVANT’s single-dose oral vaccines canalso serve as vectors for the development of vaccines against other bacterialand viral diseases. By engineering key disease antigens into the DNA of thevector organisms, AVANT expects to be able to extend the protective ability ofits single-dose oral vaccines to a wide variety of illnesses. AVANT believesthat its vector technologies may prove useful for improving and expandingAmerica’s vaccine arsenal against microbial agents used in war or terroristattacks.

InOctober 2001, AVANT granted DVC LLC, formerly DynPort Vaccine Company LLC,(“DVC”) a license for exclusive rights to use certain components of AVANT’santhrax vaccine technology. In October 2002, DVC announced the initiationof a Phase 1 clinical trial of a new injectable recombinant anthrax vaccine inapproximately 70 volunteers. The vaccine candidate consists of a highlypurified protein—Protective Antigen—derived from the anthrax bacterium usingrecombinant DNA technology and production processes licensed from AVANT. Thestudy will evaluate tolerability, safety and immunogenicity of DVC’s newvaccine. On August 5, 2005, AVANT received notice from DVC of terminationof the license agreement, effective November 5, 2005. DVC plans tocomplete the ongoing Phase 1 clinical trial.

Further,in January 2003, AVANT was awarded a subcontract by DVC in the amount of$2.5 million to develop for the U.S. Department of Defense an oral combinationvaccine against anthrax and plague using AVANT’s proprietary vaccinetechnologies. As of June 30, 2006, AVANT has received a number ofadditional subcontract modifications from DVC to support pre-clinical animaltesting of vaccine constructs and the start of human clinical testing of aplague vaccine candidate being developed by AVANT for use in the oralcombination vaccine. Total contract funding awarded by DVC now totalsapproximately $9.4 million. Payments under the subcontract agreement are madeon a time and materials basis and receipt of the full amount is conditionedupon the project being fully funded through completion and AVANT performing andcontinuing to demonstrate that it has the capability to perform the fundedwork. For the nine months ended September 30, 2006 and 2005, AVANTrecognized $1,049,906 and $1,942,709, respectively, in government contractrevenue from DVC. Through September 30, 2006, AVANT had receivedapproximately $9.2 million in payments under the subcontract agreements. Theseagreements expire in 2007, although they may be terminated by DVC at any timeupon 30 days notice.

During the periodJanuary 1, 2001 through December 31, 2005, AVANT incurredapproximately $9.3 million in research and development costs on itsbiodefense vaccine program. During the nine months ended September 30,2006, AVANT incurred approximately $1.4 million in research and developmentcosts on its biodefense vaccine program.

*FoodSafety and Animal Health Vaccines:*  AVANT has partnered with Pfizer Inc. (“Pfizer”),who will apply AVANT’s vaccine technologies to animal health and human foodsafety markets. The Pfizer research program achieved an important milestone inlate 2002, which resulted in a payment of $500,000 to AVANT. During the periodJanuary 1, 2001 through December 31, 2005, AVANT incurredapproximately $1.5 million in research and development costs on its foodsafety and animal health vaccines program. During the nine months endedSeptember 30, 2006, AVANT incurred approximately $6,200 in research anddevelopment costs on its food safety and animal health vaccines program.

*CholesterolManagement Vaccine:* AVANT is developing an immunotherapeutic vaccine against endogenouscholesteryl ester transfer protein (“CETP”), which may be useful in reducingrisks associated with atherosclerosis. CETP is a key intermediary in thebalance of HDL (high-density lipoprotein) and LDL (low-density lipoprotein).The Company is

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developing this vaccineto stimulate an immune response against CETP, which it believes may improve theratio of HDL to LDL cholesterol and reduce the progression of atherosclerosis,which often leads to heart attack.

InOctober 2003, AVANT completed a Phase 2 efficacy study of its CETi-1vaccine in approximately 200 patients with low levels of HDL cholesterol. Theresults of the study demonstrated proof-of-concept in humans confirming thatblocking cholesterol transfer could raise HDL levels. In addition, the CETi-1vaccine worked as designed to elicit anti-CETP antibodies in a high percentageof patients treated, approximately 90%. In recent pre-clinical testing, AVANThas identified a new adjuvanted formulation for the vaccine that, when combinedwith a more immunogenic peptide sequence, in an animal study elicits more thana 10-fold increase in anti-CETP antibody titers in animal studies when comparedto the previous vaccine formulation. AVANT has contracted for the production ofGMP peptide for the newly formulated vaccine and expects to complete releaseand stability studies in 2006. During the period January 1, 2001 throughDecember 31, 2005, AVANT incurred approximately $10.4 million inresearch, development, contract manufacturing and clinical costs associatedwith the CETP program. During the nine months ended September 30, 2006,AVANT incurred approximately $834,000 in research, development, contractmanufacturing and clinical costs associated with the CETP program. AVANT plansto seek a corporate partner to complete development and to commercialize theCETP vaccine.

## **TECHNOLOGY LICENSING**

AVANT has adopteda business strategy of out-licensing technology that does not match itsdevelopment focus or where it lacks sufficient resources for the technology’sefficient development or where certain uses of the technology are outside ofAVANT’s focus. For example, when AVANT acquired Megan, it also signed anagreement with Pfizer to leverage the value of Megan’s oral vaccine technologyin a significant market opportunity (animal health and human food safety)outside of AVANT’s own focus on human health care.

**RESULTSOF OPERATIONS**

**Three-MonthPeriod Ended September 30, 2006 as Comparedwith the Three-Month Period Ended September 30, 2005**

AVANT reportedconsolidated net loss of $5,520,567, or $.07 per share, for the third quarterended September 30, 2006, compared with a net loss of $4,514,434, or $.06per share, for the third quarter ended September 30, 2005. The weightedaverage common shares outstanding used to calculate net loss per common sharewas 74,182,347 in 2006 and 74,145,814 in 2005.

*Revenue:*  Total revenue decreased $507,323 to $338,999for the third quarter of 2006 compared to $846,322 for the third quarter of2005.

Productdevelopment and licensing revenue decreased $43,217 to $35,475 in 2006 from$78,692 in 2005 due to a decrease in reimbursed patent expense by AVANT’spartner, Pfizer.

AVANT has receiveda number of subcontracts from its partner, DVC, to develop anthrax and plaguevaccines for the U.S. Department of Defense. AVANT will be reimbursed by DVC ona time and materials basis for vaccine development research work performed byAVANT. Under these agreements and several SBIR grants, AVANT recognized $280,419and $767,630 in government contract and grant revenue during the third quartersof 2006 and 2005, respectively, for work performed. The decrease in revenue in2006 compared to 2005 primarily reflects reduced levels of vaccine developmentwork billable to DVC in 2006.

Marketing anddistribution of the Megan poultry product line is performed by AVANT’s partner,Lohmann Animal Health International (“LAHI”), and AVANT receives a royaltypercentage of all Megan®Vac 1 and Megan®Egg product sales. In March 2005, theUSDA placed a stop sale order on MeganÒVac 1 andMeganÒEgg for LAHI’s failure to update the Outline ofProduction as LAHI improved the fermentation process. LAHI updated the Outlineof Production and in July 2005 the USDA lifted the stop sale order on the Meganproducts. Royalty payments received during the third quarter of 2006 totaled$23,105 and no royalty payments were received during the third quarter of 2005.

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*OperatingExpense:*  Totaloperating expense increased $973,479, or 17.7%, to $6,483,897 for the thirdquarter of 2006 compared to $5,510,418 for the third quarter of 2005.

Research anddevelopment expense increased $824,986, or 23.0%, to $4,416,320 from $3,591,334in 2005. The increase in 2006 compared to 2005 is primarily due to increases inresearch and development personnel and related costs of $457,839, laboratorymaterials and supplies of $131,669, contract manufacturing costs incurred forTP10 process development and scale-up work of $191,709 and non-personneloperating and facility-related costs of $351,788 associated with operations ofthe Fall River facility in 2006 compared to 2005. These increases were offsetin part by declines in clinical trials costs of $605,892 associated with theTP10 program as a result of the completion of the TP10 Phase 2 female clinicaltrial.

General andadministrative expense increased $148,493, or 8.9%, to $1,818,799 in 2006compared to $1,670,306 in 2005 and is primarily attributed to increases instock-based compensation expense of $252,431 and consulting costs of $104,626,which were partly offset by a decrease in other personnel-related expenses of $87,820and legal and other professional fees of $110,567.

Amortizationexpense of acquired intangible assets was $248,778 in 2006 and 2005.

*Investmentand Other Income, Net:* Interest and other income increased $474,669 to $624,331 for the thirdquarter of 2006 compared to $149,662 for the third quarter of 2005. Theincrease is primarily due to higher interest rates and average cash balancesduring the third quarter of 2006 compared to the third quarter of 2005. Duringthe third quarters of 2006 and 2005, the average month-end cash balances were$49,378,137 and $24,007,956, respectively. The effective interest rates duringthe third quarters of 2006 and 2005 were 5.09% and 3.27%, respectively.

**Nine-MonthPeriod Ended September 30, 2006 as Compared with the Nine-Month Period EndedSeptember 30, 2005**

AVANT reportedconsolidated net loss of $14,161,857, or $.19 per share, for the nine monthsended September 30, 2006, compared with a net loss of $14,116,872, or $.19per share, for the nine months ended September 30, 2005. The weightedaverage common shares outstanding used to calculate net loss per common sharewas 74,176,593 in 2006 and 74,136,931 in 2005.

*Revenue:*  Total revenue increased $2,096,930 to$4,550,965 for the first nine months of 2006 compared to $2,454,035 for thefirst nine months of 2005.

Productdevelopment and licensing revenue increased $2,463,686 to $2,672,895 in 2006from $209,209 in 2005. In February 2006, the European Commission grantedapproval of RotarixÒ in the European Union,which triggered a one-time $4 million milestone payment from Glaxo, 50% ofwhich is creditable against future royalties. Product development and licensingrevenue of $2.6 million was recorded in the first quarter of 2006 and the remaining$1.4 million was remitted to PRF in accordance with the PRF agreement. In thefirst quarter of 2006, AVANT recognized $550,803 in product royalty revenuerelated to PRF’s purchased interests in the net royalties that AVANT receivesfrom RotarixÒ worldwide net sales.

AVANT has receiveda number of subcontracts from its partner, DVC, to develop anthrax and plaguevaccines for the U.S. Department of Defense. AVANT will be reimbursed by DVC ona time and materials basis for vaccine development research work performed byAVANT. Under these agreements and several SBIR grants, AVANT recognized$1,241,149 and $2,156,680 in government contract and grant revenue during thefirst nine months of 2006 and 2005, respectively, for work performed. Thedecrease in revenue in 2006 compared to 2005 primarily reflects reduced levelsof vaccine development work billable to DVC in 2006. AVANT expects the amountof research work to be performed for DVC during the remainder of 2006 todecrease from the amount of research work performed during the fourth quarterof 2005.

Marketing anddistribution of the Megan poultry product line is performed by AVANT’s partner,Lohmann Animal Health International (“LAHI”), and AVANT receives a royaltypercentage of all Megan®Vac 1 and Megan®Egg product sales. Royalty paymentsreceived during the first nine months of 2006 and 2005 totaled $86,117 and$88,146, respectively. AVANT expects royalty payments from LAHI to beapproximately the same in the fourth quarter of 2006 compared to 2005.

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*OperatingExpense:*  Totaloperating expense increased $2,858,302, or 16.8%, to $19,899,765 for the firstnine months of 2006 compared to $17,041,463 for the first nine months of 2005.

Research anddevelopment expense increased $2,175,982, or 19.7%, to $13,228,926 for thefirst nine months of 2006 from $11,052,944 for the first nine months of 2005.The increase in 2006 compared to 2005 is primarily due to $600,000 of licensefee expense recorded in the first quarter of 2006 for amounts which will bepayable to CCH in connection with the aforementioned 2006 Glaxo milestonepayment. The Company also experienced increases in research and developmentpersonnel and related costs of $1,339,418, consultant fees of $214,614,contract research costs of $326,137, other license fees of $148,566, andnon-personnel operating and facility-related costs of $756,004 associated withoperations of the Fall River facility in 2006 compared to 2005. These increaseswere offset in part by a decrease in clinical trials costs of $1,542,025associated with the TP10 program as a result of the completion of the TP10Phase 2 female clinical trial. AVANT expects research and development expenseto increase substantially in the fourth quarter of 2006 as AVANT prepares for aCholeraGardeÒ Phase 3 trial starting in mid-year2007 and as the Fall River facility runs at full operational status.

General andadministrative expense increased $682,320, or 13.0%, to $5,924,505 for thefirst nine months of 2006 compared to $5,242,185 in 2005 and is primarilyattributed to increases in stock-based compensation expense of $477,198,consultant fees of $145,603 and investor relations expenses of $89,388. Theseincreases are partly offset by a decrease in legal and other professional feesof $142,692. AVANT expects general and administrative expense to continue atthis level for the remainder of 2006.

Amortizationexpense of acquired intangible assets was $746,334 in the first nine months of2006 and 2005.

*Investmentand Other Income, Net:* Interest and other income increased by $1,088,387 to $1,558,943 for thefirst nine months of 2006 compared to $470,556 for the first nine months of2005. The increase is primarily due to higher interest rates and average cashbalances during the first nine months of 2006 compared to the first nine monthsof 2005. During the first nine months of 2006 and 2005, the average month-endcash balances were $46,441,661 and $26,948,666, respectively. The effectiveinterest rates during the first nine months of 2006 and 2005 were 4.68% and2.80%, respectively.

*Provisionfor Income Taxes:*  The$40 million milestone payment received from PRF during the first quarter of2006 will result in taxable income for the Company. The regular taxable incomegenerated by this transaction has been fully offset with available federal andstate net operating loss carryforwards. The Company recorded a provision of$372,000 in the first quarter of 2006 for the alternative minimum tax that willresult from receipt of this milestone.

**LIQUIDITYAND CAPITAL RESOURCES**

AtSeptember 30, 2006, AVANT’s principal sources of liquidity consisted ofcash and cash equivalents of $46,681,330. AVANT’s cash and cash equivalents arehighly liquid investments with a maturity of three months or less at the dateof purchase and consist of time deposits and investments in money market mutualfunds with commercial banks and financial institutions. Also, the Companymaintains cash balances with financial institutions in excess of insuredlimits. AVANT does not anticipate any losses with respect to such cashbalances.

The use of AVANT’scash flows for operations has primarily consisted of salaries and wages for itsemployees, facility and facility-related costs for its offices, laboratoriesand manufacturing facility, fees paid in connection with preclinical studies,clinical studies, contract manufacturing, laboratory supplies and services,consulting fees, and legal fees. To date, the primary sources of cash flowsfrom operations have been payments received from the Company’s collaborativepartners and from government entities. In general, AVANT’s sources of cashflows from operations for the foreseeable future will be upfront licensepayments, payments for the achievement of milestones, product royalty payments,payments under government contracts and grants and funded research anddevelopment under collaboration agreements that AVANT may receive. The timingof any new collaboration agreements, government contracts or grants and anypayments under these agreements, contracts or grants cannot be easily predictedand may vary significantly from quarter to quarter.

Net cash providedby operating activities increased to $28,973,524 for the first nine months of2006 compared to net cash used in operating activities of $8,090,620 for thefirst nine months of 2005. The increase is primarily attributed to the netincrease in deferred revenue of $39,586,697 related primarily to the$40 million PRF milestone payment received in the first

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quarter of 2006. Theseamounts were offset partly by the increase in accounts receivable and theincrease in net loss incurred in 2006 compared to 2005. Other than the effectof receiving the $40 million milestone payment from PRF, AVANT expectsthat cash used in operations will continue to increase in 2006 as the Companycontinues to develop its products in clinical trials, contracts for themanufacture of clinical materials, runs its Fall River facility at fulloperational status, makes license and royalty payments and advances newproducts into preclinical development. The expected increase in cash used wouldbe partially offset by receipt of anticipated payments under the Company’sgovernment contracts and grants and anticipated product royalty and milestonepayments.

Cash used ininvesting activities increased to $5,549,954 for the first nine months of 2006compared to $1,350,233 for the first nine months of 2005. The increase is dueto increased investment in property and equipment in 2006 primarily towards therenovations of the Needham facility and for the Fall River facility compared to2005. AVANT expects it will continue to use cash in its investing activities asthe Company expands its infrastructure at the Fall River facility and continuesfull-scale renovations of its Needham facility.

Net cash used infinancing activities was $161,674 for the first nine months of 2006 compared to$101,866 for the first nine months of 2005. The increase in net cash used infinancing activities is primarily due to increases in payments of long-termliabilities.

**AGGREGATE CONTRACTUAL OBLIGATIONS**

The following table summarizes AVANT’s contractualobligations at September 30, 2006 and the effect such obligations andcommercial commitments are expected to have on its liquidity and cash flow infuture years. These obligations, commitments and supporting arrangementsrepresent payments based on current operating forecasts, which are subject tochange:
| ** **                    | ** ** | **Total** | ** ** | **2006**  | ** ** | **2007-2009** | ** ** | **2010-2011** | ** ** | **Thereafter** | ** ** |
|-------------------------------|------------|-----------|------------|-----------|------------|---------------|------------|---------------|------------|----------------|------------|
| Contractual  obligations:     |       |      |       |      |       |          |       |          |       |           |       |
| Operating lease  obligations  |       | $         | 19,718,200 |      | $          | 701,500       |       | $             | 5,626,500  |           | $          | 3,604,500 |   | $ | 9,785,700 |   |
| Loan Payable*                 |       | 1,488,000 |       | 23,700    |       | 404,900       |       | 247,000       |       | 812,400        |       |
| Note Payable*                 |       | 785,500   |       | 29,500    |       | 531,500       |       | 224,500       |       | —         |       |
| Licensing  obligations        |       | 531,300   |       | 21,300    |       | 255,000       |       | 170,000       |       | 85,000         |       |
| Construction contracts        |       | 4,538,500 |       | 1,534,800 |       | 3,003,700     |       | —        |       | —         |       |
| Total contractual obligations |       | $         | 27,061,500 |      | $          | 2,310,800     |       | $             | 9,821,600  |           | $          | 4,246,000 |   | $ | 10,683,100 |   |
|                          |       |      |       |      |       |          |       |          |       |           |       |
| Commercial  commitments:      |       |      |       |      |       |          |       |          |       |           |       |
| Clinical  development         |       | $         | 425,900    |      | $          | 270,800       |       | $             | 155,100    |           | $          | — |   | $ | — |   |
| Manufacturing  development    |       | 1,435,000 |       | 1,045,500 |       | 389,500       |       | —        |       | —         |       |
| Total commercial  commitments |       | $         | 1,860,900  |      | $          | 1,316,300     |       | $             | 544,600    |           | $          | — |   | $ | — |   |

 

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*                    includesinterest obligations

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**Item 3. Quantitative and Qualitative Disclosuresabout Market Risk**

AVANT owns financial instruments that are sensitive to market risk aspart of its investment portfolio. The Company’s investment portfolio is used topreserve its capital until it is used to fund operations, including itsresearch and development activities. None of these market-risk sensitiveinstruments are held for trading purposes. AVANT invests its cash primarily inmoney market mutual funds. These investments are evaluated quarterly todetermine the fair value of the portfolio. The Company’s investment portfolioincludes only marketable securities with active secondary or resale markets tohelp insure liquidity. AVANT has implemented investment policies regarding theamount and credit ratings of investments. Because of the short-term nature ofthese investments, AVANT does not believe it has material exposure due tomarket risk. The impact to AVANT’s financial position and results of operationsfrom likely changes in interest rates is not material.

AVANT does not utilize derivative financial instruments. The carryingamounts reflected in the consolidated balance sheet of cash and cashequivalents, accounts receivables and accounts payable approximates fair valueat September 30, 2006 due to the short-term maturities of theseinstruments.

**Item 4. Controls and Procedures**

*Evaluationof disclosure controls and procedures*.

Asrequired by Rule 13a-15 under the Securities Exchange Act of 1934 (the “ExchangeAct”), as of September 30, 2006,AVANT carried out an evaluation under the supervision and with the participationof its management, including its Chief Executive Officer and Chief FinancialOfficer, of the effectiveness of the design and operation of its disclosurecontrols and procedures as of the period covered by this report. In designingand evaluating AVANT’s disclosure controls and procedures, AVANT and itsmanagement recognize that any controls and procedures, no matter how welldesigned and operated, can provide only reasonable assurance of achieving thedesired control objectives, and AVANT’s management necessarily was required toapply its judgment in evaluating and implementing possible controls andprocedures. Based upon that evaluation, AVANT’s Chief Executive Officer andChief Financial Officer have concluded that as of September 30, 2006, as a result of the material weaknessdiscussed below, its disclosure controls and procedures were not effective toensure that information required to be disclosed by AVANT in the reports itfiles or submits under the Exchange Act is recorded, processed, summarized, accumulated,communicated and reported, within the time periods specified in the Securitiesand Exchange Commission’s rules and forms. AVANT will continue to reviewand document its disclosure controls and procedures on an ongoing basis, andmay from time to time make changes aimed at enhancing their effectiveness andto ensure that its disclosure controls and procedures evolve with its business.

*Changesin Internal Control Over Financial Reporting.*

Management hasdetermined that the Company did not maintain effective controls over thecompleteness and accuracy of the recognition of revenue deferred pursuant to anagreement with Paul Royalty Fund (“PRF”) with respect to the sale of aninterest in future net royalties from GlaxoSmithKline (“GSK”), certain of whichshould have been recognized upon receipt of a milestone payment from GSK in thefirst quarter of 2006. Notwithstanding that management had correctly determinedthe accounting treatment for the PRF transaction, an operational failure ininternal control occurred in that revenue recognition was not triggered uponreceipt of the milestone payment. Therefore, recognition of previously deferredroyalty revenue was not completely and accurately recorded in the proper periodin accordance with accounting principles generally accepted in the UnitedStates. This was identified as a deficiency in internal control in the firstquarter of 2006 which constitutes a “material weakness.” A material weakness isa control deficiency, or combination of control deficiencies that results inmore than a remote likelihood that a material misstatement of the annual orinterim financial statements will not be prevented or detected. This controldeficiency resulted in an audit adjustment to the unaudited interim consolidatedfinancial statements for the quarter ended March 31, 2006 affecting deferredrevenue and product royalties.

Management is inthe process of reviewing and, as necessary, revising its policies andprocedures with respect to its controls over the accounting for deferredroyalty revenue to ensure that all reasonable steps will be taken to correctthis material weakness. As part of this process, management expects to furthertrain the Company’s accounting personnel, add additional revenue recognition reviewand approval controls, and possibly add staff to facilitate a more timelycompletion of

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such internal controls.The deficiency will not be considered remediated until the new internalcontrols are operational for a period of time and are tested, and managementhas concluded that the controls are operating effectively. Until it isremediated, the identified control deficiency could result in a misstatement inthe deferred revenue and product royalties balances that would not be preventedor detected.

In the secondquarter of 2006, the Company implemented changes in its internal control overfinancial reporting (as defined in Rules 13a-15(f) and 15d-15(f) underthe Exchange Act) to address the material weakness noted in the prior quarter.In the third quarter of 2006, other than the item disclosed above, there wereno significant changes in the Company’s controls and procedures.

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**PART II— OTHER INFORMATION**

## **Item1A.****     ****Risk Factors**

In addition to theother information set forth in this report, you should carefully consider thefactors discussed in Part I, “Item 1A. Risk Factors” in our Annual Reporton Form 10-K for the year ended December 31, 2005, which couldmaterially affect our business, financial condition or future results. Therisks described in our Annual Report on Form 10-K are not the only risksfacing the Company. Additional risks and uncertainties not currently known tothe Company or that the Company currently deems to be immaterial also maymaterially adversely affect the Company’s business, financial condition and/oroperating results.

## **Item 6.****        ****Exhibits**

| 31.1 |   | Certification of President and Chief Executive  Officer             |
|------|--------|---------------------------------------------------------------------|
| 31.2 |   | Certification of Senior Vice President and Chief  Financial Officer |
| 32.1 |   | Section 1350 Certifications                                    |

** **

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.
|                               | **AVANT IMMUNOTHERAPEUTICS, INC.** |
|-------------------------------|------------------------------------|
|                          | ** **                         |
|                          | BY:                                |
|                          |                               |
|                          |                               | /s/ UNA S. RYAN |
| Dated:  November 9, 2006 |                               | Una S. Ryan, Ph. D. |
|                          |                               | President and Chief Executive Officer |
|                          |                               | (Principal Executive Officer) |
|                          |                               |   |
|                          |                               | /s/ AVERY W. CATLIN |
| Dated:  November 9, 2006 |                               | Avery W. Catlin |
|                          |                               | Senior Vice President, Treasurer |
|                          |                               | and Chief Financial Officer |
|                          |                               | (Principal Financial and |
|                          |                               | Accounting Officer) |

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**EXHIBIT INDEX**
| Exhibit No. | ** ** | **Description**                                                     |
|------------------|------------|---------------------------------------------------------------------|
| 31.1             |       | Certification of President and Chief Executive  Officer             |
| 31.2             |       | Certification of Senior Vice President and Chief  Financial Officer |
| 32.1             |       | Section 1350 Certifications                                    |

 

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