**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 June 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” inRule 12b-2 of 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 August 2, 2006, 74,182,360 shares of commonstock, $.001 par value per share, were outstanding.

 

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** **

**AVANT IMMUNOTHERAPEUTICS, INC.**

**FORM 10-QQuarter Ended June 30, 2006Table of Contents**
|                                                                                                          | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|------------|------------|
| **Part I—Financial  Information**                                                              |       |       |       |
|                                                                                                     |       |       |       |
| Item  1. Financial Statments                                                                             |       |       |       |
|                                                                                                     |       |       |       |
| Unaudited,  Consolidated Balance Sheets at June 30, 2006 and December 31, 2005                 |       |       |       |
|                                                                                                     |       |       |       |
| Unaudited, Consolidated Statements of Operations for  the Three Months Ended June 30, 2006 and 2005 |       |       |       |
|                                                                                                     |       |       |       |
| Unaudited, Consolidated Statements of Operations for  the Six Months Ended June 30, 2006 and 2005   |       |       |       |
|                                                                                                     |       |       |       |
| Unaudited, Consolidated Statements of Cash Flows for  the Six Months Ended June 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                                                                                   |       |       |       |
|                                                                                                     |       |       |       |
| Item4. Submission of Matters to a Vote of Security  Holders                                              |       |       |       |
|                                                                                                     |       |       |       |
| Item 6.  Exhibits                                                                                        |       |       |       |
|                                                                                                     |       |       |       |
| Signatures                                                                                               |       |       |       |
|                                                                                                     |       |       |       |
| Certifications                                                                                           |       |       |       |

 

2

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**PART I—FINANCIALINFORMATION**

**Item 1.   FinancialStatements**

**AVANT IMMUNOTHERAPEUTICS, INC.CONSOLIDATED BALANCE SHEETS(Unaudited)**
| ** **                                                                                                                                                                                                     | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                                                                     | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Current Assets:                                                                                                                                                                                                |       |                    |       |                        |       |
| Cash and Cash Equivalents                                                                                                                                                                                      |       | $                       | 53,468,716 |                        | $          | 23,419,434 |   |
| Accounts Receivable                                                                                                                                                                                            |       | 735,671                 |       | 418,380                     |       |
| Prepaid Expenses and Other Current Assets                                                                                                                                                                      |       | 787,928                 |       | 767,082                     |       |
|                                                                                                                                                                                                           |       |                    |       |                        |       |
| Total Current Assets                                                                                                                                                                                           |       | 54,992,315              |       | 24,604,896                  |       |
|                                                                                                                                                                                                           |       |                    |       |                        |       |
| Property and  Equipment, Net                                                                                                                                                                                   |       | 7,950,494               |       | 5,743,663                   |       |
| Intangible and  Other Assets                                                                                                                                                                                   |       | 4,569,518               |       | 5,067,073                   |       |
| Goodwill                                                                                                                                                                                                       |       | 1,036,285               |       | 1,036,285                   |       |
| Total Assets                                                                                                                                                                                                   |       | $                       | 68,548,612 |                        | $          | 36,451,917 |   |
| ** **                                                                                                                                                                                                     | ** ** | ** **              | ** ** | ** **                  | ** ** |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                                                 | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Current Liabilities:                                                                                                                                                                                           |       |                    |       |                        |       |
| Accounts Payable                                                                                                                                                                                               |       | $                       | 661,277    |                        | $          | 1,140,578 |   |
| Accrued Expenses                                                                                                                                                                                               |       | 3,084,537               |       | 2,334,708                   |       |
| Current Portion of Deferred Revenue                                                                                                                                                                            |       | 2,618,508               |       | —                      |       |
| Current Portion of Other Long-Term Liabilities                                                                                                                                                                 |       | 231,022                 |       | 217,457                     |       |
| Total Current Liabilities                                                                                                                                                                                      |       | 6,595,344               |       | 3,692,743                   |       |
|                                                                                                                                                                                                           |       |                    |       |                        |       |
| Deferred Revenue                                                                                                                                                                                               |       | 46,830,689              |       | 10,000,000                  |       |
| Other Long-Term  Liabilities                                                                                                                                                                                   |       | 2,323,785               |       | 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; 74,397,014 Issued and 74,176,695 Outstanding at June 30,  2006 and 74,387,087 Issued and 74,166,768  Outstanding at December 31, 2005 |       | 74,397                  |       | 74,387                      |       |
| Additional Paid-In Capital                                                                                                                                                                                     |       | 257,465,806             |       | 258,139,855                 |       |
| Deferred Compensation                                                                                                                                                                                          |       | —                  |       | (1,225,000                  | )          |
| Less: 220,319 Common Treasury Shares at Cost                                                                                                                                                                   |       | (227,646                | )          | (227,646                    | )          |
| Accumulated Deficit                                                                                                                                                                                            |       | (244,513,763            | )          | (235,872,473                | )          |
|                                                                                                                                                                                                           |       |                    |       |                        |       |
| Total Stockholders’ Equity                                                                                                                                                                                |       | 12,798,794              |       | 20,889,123                  |       |
|                                                                                                                                                                                                           |       |                    |       |                        |       |
| Total  Liabilities and Stockholders’ Equity                                                                                                                                                               |       | $                       | 68,548,612 |                        | $          | 36,451,917 |   |

 

*Seeaccompanying notes to unaudited consolidated financial statements*

3

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** **

**AVANT IMMUNOTHERAPEUTICS, INC.CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)**
| ** **                                    | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|
| ** **                                    | ** ** | **June 30,  2006**          | ** ** | **June 30,  2005** | ** ** |
| **REVENUE:**                                  | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Product  Development and Licensing Agreements |       | $                                | 17,446     |   | $ | 59,060 |   |
| Government  Contracts and Grants              |       | 460,523                          |       | 522,963 |   |
| Product  Royalties                            |       | 27,510                           |       | 55,138 |   |
|                                          |       |                             |       |   |   |
| Total Revenue                                 |       | 505,479                          |       | 637,161 |   |
| ** **                                    | ** ** | ** **                       | ** ** | ** ** | ** ** |
| **OPERATING EXPENSE:**                        | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Research and  Development                     |       | 4,463,899                        |       | 3,430,992 |   |
| General and  Administrative                   |       | 2,117,192                        |       | 1,861,095 |   |
| Amortization of  Acquired Intangible Assets   |       | 248,778                          |       | 248,778 |   |
|                                          |       |                             |       |   |   |
| Total Operating  Expense                      |       | 6,829,869                        |       | 5,540,865 |   |
|                                          |       |                             |       |   |   |
| Operating Loss                                |       | (6,324,390                       | )          | (4,903,704 | ) |
|                                          |       |                             |       |   |   |
| Investment and  Other Income, Net             |       | 654,091                          |       | 169,764 |   |
|                                          |       |                             |       |   |   |
| Loss before  Provision for Income Taxes       |       | (5,670,299                       | )          | (4,733,940 | ) |
|                                          |       |                             |       |   |   |
| Provision for  Income Taxes                   |       | —                           |       | — |   |
|                                          |       |                             |       |   |   |
| Net Loss                                      |       | $                                | (5,670,299 | ) | $ | (4,733,940 | ) |
|                                          |       |                             |       |   |   |
| Basic and  Diluted Net Loss Per Common Share  |       | $                                | (0.08      | ) | $ | (0.06 | ) |
|                                          |       |                             |       |   |   |
| Weighted Average Common  Shares Outstanding   |       | 74,174,761                       |       | 74,132,829 |   |

 

*Seeaccompanying notes to unaudited consolidated financial statements*

4

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**AVANT IMMUNOTHERAPEUTICS, INC.CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)**
| ** **                                    | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------|------------|--------------------------------|------------|
| ** **                                    | ** ** | **June 30,  2006**        | ** ** | **June 30,  2005** | ** ** |
| **REVENUE:**                                  | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Product  Development and Licensing Agreements |       | $                              | 2,637,420  |   | $ | 130,517 |   |
| Government  Contracts and Grants              |       | 960,730                        |       | 1,389,050 |   |
| Product  Royalties                            |       | 613,816                        |       | 88,146 |   |
|                                          |       |                           |       |   |   |
| Total Revenue                                 |       | 4,211,966                      |       | 1,607,713 |   |
| ** **                                    | ** ** | ** **                     | ** ** | ** ** | ** ** |
| **OPERATING EXPENSE:**                        | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Research and  Development                     |       | 8,812,606                      |       | 7,461,610 |   |
| General and  Administrative                   |       | 4,105,706                      |       | 3,571,879 |   |
| Amortization of Acquired  Intangible Assets   |       | 497,556                        |       | 497,556 |   |
|                                          |       |                           |       |   |   |
| Total Operating  Expense                      |       | 13,415,868                     |       | 11,531,045 |   |
|                                          |       |                           |       |   |   |
| Operating Loss                                |       | (9,203,902                     | )          | (9,923,332 | ) |
|                                          |       |                           |       |   |   |
| Investment and  Other Income, Net             |       | 934,612                        |       | 320,894 |   |
|                                          |       |                           |       |   |   |
| Loss before  Provision for Income Taxes       |       | (8,269,290                     | )          | (9,602,438 | ) |
|                                          |       |                           |       |   |   |
| Provision for  Income Taxes                   |       | 372,000                        |       | — |   |
|                                          |       |                           |       |   |   |
| Net Loss                                      |       | $                              | (8,641,290 | ) | $ | (9,602,438 | ) |
|                                          |       |                           |       |   |   |
| Basic and  Diluted Net Loss Per Common Share  |       | $                              | (0.12      | ) | $ | (0.13 | ) |
|                                          |       |                           |       |   |   |
| Weighted Average Common  Shares Outstanding   |       | 74,173,668                     |       | 74,132,416 |   |

 

*Seeaccompanying notes to unaudited consolidated financial statements*

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** **

**AVANT IMMUNOTHERAPEUTICS, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)**
| ** **                                                                   | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                   | ** ** | **June 30,  2006**        | ** ** | **June 30,  2005** | ** ** |
| **Cash Flows from Operating  Activities:**                                   | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Net Loss                                                                     |       | $                              | (8,641,290 | ) | $ | (9,602,439 | ) |
| Adjustments to  Reconcile Net Loss to Net Cash Used in Operating Activities: |       |                           |       |   |   |
| Depreciation and Amortization                                                |       | 963,322                        |       | 687,251 |   |
| Stock-Based Compensation Expense                                             |       | 539,895                        |       | 242,000 |   |
| Changes in  Operating Assets and Liabilities:                                |       |                           |       |   |   |
| Accounts Receivable                                                          |       | (317,291                       | )          | 1,753,279 |   |
| Prepaid and Other Current Assets                                             |       | (20,846                        | )          | (15,225 | ) |
| Accounts Payable and Accrued Expenses                                        |       | 270,528                        |       | (1,914,731 | ) |
| Deferred Revenue                                                             |       | 39,449,197                     |       | 5,013,294 |   |
| Other Long-Term Liabilities                                                  |       | 593,334                        |       | — |   |
|                                                                         |       |                           |       |   |   |
| Net Cash Provided by (Used in) Operating Activities                          |       | 32,836,849                     |       | (3,836,571 | ) |
| ** **                                                                   | ** ** | ** **                     | ** ** | ** ** | ** ** |
| **Cash Flows from Investing  Activities:**                                   | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Acquisition of Property and Equipment                                        |       | (2,672,598                     | )          | (813,963 | ) |
| Other Non-Current Assets                                                     |       | —                         |       | 1,000 |   |
|                                                                         |       |                           |       |   |   |
| Net Cash Used in Investing Activities                                        |       | (2,672,598                     | )          | (812,963 | ) |
| ** **                                                                   | ** ** | ** **                     | ** ** | ** ** | ** ** |
| **Cash Flows from Financing  Activities:**                                   | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Proceeds from Stock Issuance                                                 |       | 6,145                          |       | 2,055 |   |
| Proceeds from Exercise of Stock Options and Warrants                         |       | 4,921                          |       | 427 |   |
| Payment of Long-Term Liabilities                                             |       | (126,035                       | )          | (65,844 | ) |
|                                                                         |       |                           |       |   |   |
| Net Cash Used in Financing Activities                                        |       | (114,969                       | )          | (63,362 | ) |
|                                                                         |       |                           |       |   |   |
| Net Increase  (Decrease) in Cash and Cash Equivalents                        |       | 30,049,282                     |       | (4,712,896 | ) |
|                                                                         |       |                           |       |   |   |
| Cash and Cash  Equivalents at Beginning of Period                            |       | 23,419,434                     |       | 31,741,494 |   |
|                                                                         |       |                           |       |   |   |
| Cash and Cash  Equivalents at End of Period                                  |       | $                              | 53,468,716 |   | $ | 27,028,598 |   |
|                                                                         |       |                           |       |   |   |
| **Supplemental Disclosure of Cash  Flow Information**                        | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Cash paid for interest                                                       |       | $                              | 61,734     |   | $ | 51,885 |   |
|                                                                         |       |                           |       |   |   |

 

*Seeaccompanying notes to unaudited consolidated financial statements*

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** **

**AVANTIMMUNOTHERAPEUTICS, INC.Notes to Unaudited Consolidated Financial StatementsJune 30, 2006**

**(1)           Nature of Business**

AVANTImmunotherapeutics, Inc. (the “Company” or “AVANT”) is engaged in thediscovery, development and commercialization of products that harness the humanimmune system to prevent and treat disease. The Company is developing a broadportfolio of vaccines and therapeutics against infectious diseases. Theportfolio also includes immunotherapeutics for cardiovascular diseases whichare available for partnering. These include a treatment to reducecomplement-mediated tissue damage associated with cardiac by-pass surgery,single-dose oral vaccines aimed at protecting travelers and people in regionswhere infectious diseases are endemic 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. AVANTfurther leverages the value of its technology portfolio through corporate,governmental and non-governmental partnerships. One successful collaborationresulted in the development and marketing of an oral human rotavirus vaccine.Current collaborations encompass the development of vaccines to combat threatsof biological warfare and vaccines addressed to global health, human foodsafety and animal health.

The unauditedconsolidated financial statements include the accounts of AVANT and its whollyowned subsidiary, Megan Health, Inc. (“Megan”). All intercompanytransactions have been eliminated.

**(2)           Interim Financial Statements**

The accompanyingunaudited consolidated financial statements for the three months and six monthsended June 30, 2006 and 2005 include the consolidated accounts of AVANT,and have been prepared in accordance with instructions to Form 10-Qand Article 10 of Regulation S-X. In the opinion of management, theinformation contained herein reflects all adjustments, consisting solely ofnormal recurring adjustments, that are necessary to present fairly the Company’sfinancial position at June 30, 2006, results of operations for the threemonths and six months ended June 30, 2006 and 2005, and cash flows for thesix-month periods ended June 30, 2006 and 2005. The results of operationsfor the six-month period ended June 30, 2006 are not necessarilyindicative of results for any future interim period or for the full year.

Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with generally accepted accounting principles in theUnited States of America have been omitted, although the Company believes thatthe disclosures included, when read in conjunction with AVANT’s Annual Reporton Form 10-K for the year ended December 31, 2005, are adequateto make the information presented not misleading. The accompanyingDecember 31, 2005 Consolidated Balance Sheet was derived from auditedfinancial statements, but does not include all disclosures required byaccounting principles generally accepted in the United States of America.

**(3)           Paul Royalty Fund**

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 onworldwide sales of RotarixÒ.RotarixÒ is licensed to GlaxoSmithKline plc (“Glaxo”).The terms of the agreement with PRF include an upfront unconditional paymentfrom PRF totaling $10 million received in 2005 and the following milestonepayments: (i) $40 million for product launch in the European Unionreceived March 17, 2006, and (ii) between $9 million and $11 millionon product launch in the United States, depending on date of the launch.

In addition, AVANTretains some participation in the worldwide net royalty stream from RotarixÒ.If worldwide net royalties on sales of RotarixÒfrom Glaxo exceed $27.5 million in any year, AVANT will receive 92.5% ofroyalties in excess of $27.5 million. Also, once PRF receives cumulativeroyalties equal to 2.45 times PRF’s aggregate cash payments to AVANT, thenAVANT will receive 92.5% of all additional royalties. If RotarixÒis not launched in the U.S. by the end of 2009, either PRF or AVANT can opt outof the U.S. portion of the agreement, and AVANT will retain all U.S.-derivedroyalties and PRF would not be obligated to make payments to AVANT upon U.S.approval.

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.

7

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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 EuropeanUnion, which triggered a $4 million milestone payment from Glaxo, 50% of whichis creditable against future royalties. AVANT remitted $1.4 million of theGlaxo milestone payment to PRF in accordance with the PRF agreement. As aresult, in the first quarter of 2006, AVANT recognized $550,803 in productroyalty revenue related to PRF’s purchased interests in the net royalties thatAVANT receives from RotarixÒ worldwide netsales. Based on management’s best estimates of the amount and timing of Glaxoroyalties, the Company has classified $2,618,508 and $46,830,689 of thedeferred revenue balance at June 30, 2006 as short-term and long-term,respectively.

**(4)           Stock-Based Compensation**

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 employees and directors including employeestock options and employee stock purchases related to the Employee StockPurchase Plan (“employee stock purchases”) based on estimated fair values. SFAS123(R) supersedes the Company’s previous accounting under AccountingPrinciples Board Opinion No. 25, “Accounting for Stock Issued to Employees”(“APB 25”) for periods beginning in fiscal 2006. In March 2005, theSecurities and Exchange Commission issued Staff Accounting BulletinNo. 107 (“SAB 107”) relating to SFAS 123(R). The Company has applied theprovisions of SAB 107 in its adoption of SFAS 123(R).

The Companyadopted SFAS 123(R) using the modified prospective transition method, whichrequires the application of the accounting standard as of January 1, 2006,the first day of the Company’s fiscal year 2006. The Company’s ConsolidatedFinancial Statements as of and for the three and six months ended June 30,2006 reflect the impact of SFAS 123(R). In accordance with the modifiedprospective transition method, the Company’s Consolidated Financial Statementsfor prior periods have not been restated to reflect, and do not include, theimpact of SFAS 123(R). Stock-based compensation expense recognized under SFAS123(R) for the three months ended June 30, 2006 was $275,641, whichconsisted of stock-based compensation expense related to employee andnon-employee director stock options, employee stock purchases and restrictedstock units of $98,938, $1,703 and $175,000, respectively. Stock-basedcompensation expense recognized under SFAS 123(R) for the six months endedJune 30, 2006 was $539,895, which consisted of stock-based compensationexpense related to employee and non-employee director stock options, employeestock purchases and restricted stock units of $186,490, $3,405 and $350,000,respectively. There was no stock-based compensation expense related to employeeand non-employee director stock options and employee stock purchases recognizedduring the three and six months ended June 30, 2005. Stock-basedcompensation expense of $121,000 and $242,000 related to restricted stock unitawards was recognized during the three and six months ended June 30, 2005,respectively.

SFAS123(R) requires companies to estimate the fair value of share-basedpayment awards on the date of grant using an option-pricing model. The value ofthe portion of the award that is ultimately expected to vest is recognized asexpense over the requisite service periods in the Company’s ConsolidatedStatement of Operations. Prior to the adoption of SFAS 123(R), the Companyaccounted for stock-based awards to employees and directors using the intrinsicvalue method in accordance with APB 25 as allowed under Statement of FinancialAccounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS123”). Under the intrinsic value method, no stock-based compensation expensehad been recognized in the Company’s Consolidated Statement of Operationsbecause the exercise price of the Company’s stock options granted to employeesand directors equaled the fair market value of the underlying stock at the dateof grant.

Stock-basedcompensation expense recognized during the period is based on the value of theportion of share-based payment awards that is ultimately expected to vest.Stock-based compensation expense recognized in the Company’s ConsolidatedStatement of Operations for the three and six months ended June 30, 2006included compensation expense for share-based payment awards granted prior to,but not yet vested as of January 1, 2006 based on the grant date fairvalue estimated in accordance with the provisions of SFAS 123 and compensationexpense for the share-based payment awards granted subsequent to January 1,2006 based on the grant date fair value estimated in accordance with theprovisions of SFAS 123(R). In conjunction with the adoption of SFAS 123(R),compensation expense for all share-based payment awards granted prior toJanuary 1, 2006 will continue to be recognized using the straight-linemethod and compensation expense for all share-based payment awards grantedsubsequent to January 1, 2006 will also be recognized using thestraight-line method. As stock-based compensation expense recognized in theConsolidated Statement of Operations for the first six months of fiscal 2006 isbased on awards ultimately expected to vest, it has been reduced for estimatedforfeitures. SFAS 123(R) requires forfeitures to be estimated at the timeof grant and revised, if necessary, in subsequent periods if actual forfeituresdiffer from those estimates. In the Company’s pro forma information requiredunder SFAS 123 for the periods prior to fiscal 2006, the Company accounted forforfeitures as they occurred.

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Upon adoption of SFAS123(R), the Company retained its method of valuation for share-based awardsgranted beginning in fiscal 2006 using the Black-Scholes option-pricing model (“Black-Scholesmodel”) which was previously used for the Company’s pro forma informationrequired under SFAS 123. The Company’s determination of fair value ofshare-based payment awards on the date of grant using an option-pricing modelis affected by the Company’s stock price as well as assumptions regarding anumber of highly complex and subjective variables. These variables include, butare not limited to, the Company’s expected stock price volatility over the termof the awards, and actual and projected employee stock option exercisebehaviors.

The Company hasnot recognized any tax benefits or deductions related to the tax effects ofemployee stock-based compensation as the Company carries a full deferred taxasset valuation allowance and has significant net operating loss carryforwardsavailable.

**EmployeeStock Benefit Plans**

***Restricted Stock Unit Awards***

On September 21,2005, AVANT awarded Dr. Una Ryan, its President and CEO, 200,000 RestrictedStock Units. The Restricted Stock Units vest over four years but will vest intheir entirety upon the earlier of the sale of the Company or Dr. Ryan’s retirementat or after age 65. The Company determined the value of the Restricted StockUnits to be $270,000, based on a valuation of $1.35 per share, the closingprice of AVANT’s common stock on the award date. The value of the RestrictedStock Units is being amortized over approximately 15 months until Dr. Ryanattains age 65, and is being recorded as compensation expense. In connectionwith the award, the Company has recognized $54,000 and $108,000 as stock-basedcompensation expense in the statements of operations during the three- andsix-month periods ended June 30, 2006, respectively.

InNovember 2004 and September 2003, the Company also awarded RestrictedStock Units to Dr. Ryan and recorded non-cash deferred compensationamounting to $832,000 and $1,104,000, respectively. The value of the Restricted Stock Units is being amortized over theirvesting period, or four years, and is being recorded as compensation expense.In connection with the awards, the Company has recognized $121,000 and$242,000 as stock-based compensation expense in the statements of operationsduring the three- and six-month periods ended June 30, 2006 and 2005,respectively.

AVANT has appliedan estimated forfeiture rate of zero to the restricted stock unit awards.

***Employee Stock Purchase Plan***

The 2004 EmployeeStock Purchase Plan (the “2004 Plan”) was adopted on May 13, 2004. Allfull time employees of AVANT are eligible to participate in the 2004 Plan. Atotal of 150,000 shares of common stock are reserved for issuance under the2004 Plan. Under the 2004 Plan, each participating employee may contribute upto 15% of his or her compensation to purchase up to 500 shares of common stockper year in any six-month offering period and may withdraw from the offering atany time before stock is purchased. Participation terminates automatically upontermination of employment. The purchase price per share of common stock in anoffering is 85% of the lower of its fair market value at either the beginningof the offering period or the applicable exercise date. During the six monthsended June 30, 2006 and 2005, the Company issued 5,665 and 3,403 shares,respectively, under the 2004 Plan. At June 30, 2006, 126,757 shares wereavailable for issuance under the 2004 Plan.

The 2004 Plan is acompensatory plan under SFAS 123R. The requisite service period forcompensation cost resulting from the 2004 Plan is the period over which theemployee participates in the plan and pays for the shares.  AVANT has historically established twopurchase periods during each year—January 1 to June 30 andJuly 1 to December 31. The requisite service period begins on theenrollment date (the start of the offering period) and ends on the purchasedate and is determined to be six months.

The currentpurchase period began January 1, 2006. The Company has established therisk-free interest rate assumption to be 4.4% using the 6-month rate on atraded zero-coupon U.S. Treasury bond. The Company used its historicalvolatility rate of 56% for the 6-month period preceding the grant date for thecurrent stock purchase period. The Company has concluded that volatility duringthe current purchase period is expected to be consistent with the calculatedhistorical volatility rate. Finally, the Company established the expected termfor the current stock purchase period as six months.  Based on these assumptions, the Company hascalculated and expensed the fair value for the 5,665 shares in the currentstock purchase period which amounted to $3,405 for the six months endedJune 30, 2006.

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***Employee Stock Option Plans***

*StockOption Plan Description*

On May 6,1999, AVANT’s 1999 Stock Option and Incentive Plan (the “1999 Plan”) wasadopted. The 1999 Plan replaced the Amended and Restated 1991 StockCompensation Plan, which was an amendment and restatement of AVANT’s 1985Incentive Option Plan. The 1999 Plan permits the granting of incentive stockoptions (intended to qualify as such under Section 422A of the InternalRevenue Code of 1986, as amended), non-qualified stock options, stock appreciationrights, performance share units, restricted stock and other awards ofrestricted stock in lieu of cash bonuses to employees, consultants and outsidedirectors.

The 1999 Plan, asamended in 2002, allows for a maximum of 3,500,000 shares of common stock to beissued prior to May 6, 2009. The Board of Directors determines the term ofeach option, option price, and number of shares for which each option isgranted and the rate at which each option vests. The Board of Directors hasgranted employee stock option awards with four-year vesting periods. The termof each option cannot exceed ten years (five years for options granted toholders of more than 10% of the voting stock of AVANT) and the exercise priceof stock options cannot be less than the fair market value of the common stockat the date of grant (110% of fair market value for incentive stock optionsgranted to holders of more than 10% of the voting stock of AVANT). Vesting ofall employee stock option awards is accelerated upon a change in control asdefined in the 1999 Plan.

The 1999 Plan providesfor the automatic grant of non-qualified stock options to non-employeedirectors. Each non-employee director who is serving as a director of theCompany on the fifth business day after each annual meeting of stockholderswill automatically be granted on such day a non-qualified stock option toacquire 10,000 shares of common stock. The exercise price of each suchnon-qualified stock option is the fair market value of common stock on the dateof grant. Each such non-qualified stock option is exercisable on the firstanniversary of the grant date. Such non-qualified stock options will expire tenyears from the date of grant. The 1999 Plan also provides for discretionarygrants of non-qualified stock options to non-employee directors. Vesting of allnon-employee director stock option awards is accelerated upon a change incontrol as defined in the 1999 Plan.

OnNovember 17, 2005, pursuant to and in accordance with the recommendationof the Compensation Committee, the Board of Directors of AVANT approved fullacceleration of the vesting of otherwise unvested stock options that had anexercise price of $2.00 or greater granted under the 1999 Plan that were heldby employees, officers and non-employee directors. As a result of the Board ofDirectors’ action, a total of 265,935 of such “out-of-the-money” unvested stockoptions, having a weighted average exercise price of $2.37 per share, becameexercisable effective November 17, 2005, rather than the later dates when suchoptions would have vested in the normal course. The Company determined thevalue of the “out-of-the-money” unvested stock options to be $360,100. Thisaction was taken in accordance with the applicable provisions of the 1999 Plan.The Board’s decision to accelerate the vesting of these “out-of-the-money”stock options was made primarily to reduce compensation expense that otherwisewould be recorded in future periods following AVANT’s adoption in the firstquarter of 2006 of SFAS 123R.

*GeneralOption Information*

Asummary of stock option activity for the six months ended June 30, 2006 isas 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                                                                 |       | 653,100    |       | 1.98                                                   |       | 3.98                                                                     |       |
| Exercised                                                               |       | (4,000     | )          | 1.23                                                   |       | —                                                                   |       |
| Canceled/forfeited                                                      |       | (4,562     | )          | 1.82                                                   |       | —                                                                   |       |
| Expired                                                                 |       | (30,262    | )          | 2.85                                                   |       | —                                                                   |       |
|                                                                    |       |       |       |                                                   |       |                                                                     |       |
| Outstanding at  June 30,                                           |       | 3,589,226  |       | $                                                      | 2.45       |                                                                     | 5.32       |   |
|                                                                    |       |       |       |                                                   |       |                                                                     |       |
| At June 30,                                                        |       |       |       |                                                   |       |                                                                     |       |
| Options  exercisable                                                    |       | 2,655,069  |       | $                                                      | 2.64       |                                                                     |       |   |
| Available for  grant                                                    |       | 1,230,854  |       |                                                   |       |                                                                     |       |
| Weighted average fair  value of options granted during six-month period |       |       |       | $                                                      | 1.47       |                                                                     |       |   |

 

Theaggregate intrinsic value of options outstanding at June 30, 2006 was$224,412, of which $193,394 related to exercisable options.

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*Valuationand Expense Information under SFAS 123(R)*

The followingtable summarizes stock-based compensation expense related to employee andnon-employee director stock options, employee stock purchases and restrictedstock unit awards under SFAS 123(R) for the three and six months endedJune 30, 2006 which was allocated as follows:

|                                         | ** ** | **Three  Months  Ended  June 30,  2006** | ** ** | **Six Months  Ended June 30,  2006** | ** ** |
|-----------------------------------------|------------|-----------------------------------------------|------------|-----------------------------------------------------|------------|
| Research and  development               |       | $                                             | 39,733     |                                                | $          | 73,128 |   |
| General and  administrative             |       | 235,908                                       |       | 466,767                                             |       |
| Total stock-based  compensation expense |       | $                                             | 275,641    |                                                | $          | 539,895 |   |

 

Stock-basedcompensation expense recognized for the three months ended June 30, 2006and 2005 included $175,000 and $121,000, respectively, related to restrictedstock unit awards, all of which were allocated to general and administrativeexpenses. Stock-based compensation expense recognized for the six months endedJune 30, 2006 and 2005 included $350,000 and $242,000, respectively,related to restricted stock unit awards, all of which were allocated to generaland administrative expenses.

Based on basic anddiluted weighted average common shares outstanding of 74,174,761 and74,173,668, the effect of stock-based compensation expense recorded underSFAS 123R for the three- and six-month periods was approximately $0.00 pershare.

Thetable below reflects the pro forma information for the three and six monthsended June 30, 2005 as follows:

 
| ** **                                                                                                    | ** ** | **Three Months  Ended June 30,  2005** | ** ** | **Six Months  Ended June 30,  2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| Net Loss:                                                                                                     |       |                                                  |       |                                                |       |
| As reported for prior years                                                                                   |       | $                                                     | 4,733,940  |                                                | $          | 9,602,438 |   |
| Less: Stock-based employee compensation expense as  reported                                                  |       | (121,000                                              | )          | (242,000                                            | )          |
| Add: Total stock-based employee compensation expense  determined under fair value based method for all awards |       | 248,835                                               |       | 507,224                                             |       |
| Net loss,  including the effect of stock-based compensation expense                                           |       | $                                                     | 4,861,775  |                                                | $          | 9,867,662 |   |
|                                                                                                          |       |                                                  |       |                                                |       |
| Basic and  diluted net loss per share — as reported for prior periods                                    |       | $                                                     | 0.06       |                                                | $          | 0.13 |   |
|                                                                                                          |       |                                                  |       |                                                |       |
| Basic and diluted net  loss per share, including the effect of stock-based compensation expense               |       | $                                                     | 0.07       |                                                | $          | 0.13 |   |

 

As ofJune 30, 2006, total compensation cost related to non-vested stock optionsnot yet recognized was $863,926 which is expected to be recognized as expenseover a weighted average period of 2.4 years. As of June 30, 2006,total compensation cost related to non-vested restricted stock unit awards notyet recognized was $1,446,000 which is expected to be recognized over aweighted average period of 0.9 years.

Thefair values of employee stock options granted during the three and six monthsended June 30, 2006 and 2005 were valued using the Black-Scholes modelwith the following assumptions:
| ** **                                                | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Expected stock  price volatility (employees)              |       | 80                                                  | %          | 82                                                | %          | 80 | % | 82 | % |
| Expected stock  price volatility (non-employee directors) |       | 78                                                  | %          | 82                                                | %          | 78 | % | 82 | % |
| Expected option  term (employees)                         |       | 6.25 Years                                          |       | 5 Years                                           |       | 6.25 Years |   | 5 Years |   |
| Expected option term  (non-employee directors)            |       | 5.5 Years                                           |       | 5 Years                                           |       | 5.5 Years |   | 5 Years |   |
| Risk-free  interest rate                                  |       | 4.8 -5.2                                            | %          | 3.6 - 4.2                                         | %          | 4.3 - 5.2 | % | 3.6 - 4.3 | % |
| Expected dividend yield                                   |       | None                                                |       | None                                              |       | None |   | None |   |

 

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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 expectedfuture stock price trends.

The risk-freeinterest rate assumption is based upon observed interest rates appropriate forthe expected term of the Company’s employee and non-emplyee 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 three months ended June 30,2006.

Forfeitures wereestimated based on historical experience by applying a 10 and zero percentforfeiture rate to employee and non-employee director stock option awardsgranted during the six months ended June 30, 2006, respectively.

**(5)           Accounts Receivable**

Accounts receivable are recorded at the invoiced amount and do not bearinterest. The Company has not historically experienced credit losses from itsaccounts receivable and therefore has not established an allowance for doubtfulaccounts. The Company does not have any off-balance-sheet credit exposurerelated to its customers.

Accounts receivable consists of the following:

|        | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------|------------|-------------------------|------------|-----------------------------|------------|
| Trade  |       | $                       | 468,179    |                        | $          | 383,416 |   |
| Other  |       | 267,492                 |       | 34,964                      |       |
|   |       | $                       | 735,671    |                        | $          | 418,380 |   |

 

Other receivablesat June 30, 2006 represent interest receivable from a bank and areceivable due from the Company’s Needham landlord. Other receivables atDecember 31, 2005 represent interest receivable from a bank.

**(6)           Property and Equipment**

Property and equipment includes the following:

|                                                 | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Laboratory  Equipment                           |       | $                       | 3,100,980  |                        | $          | 2,966,354 |   |
| Manufacturing  Equipment                        |       | 1,286,398               |       | 1,054,512                   |       |
| Office Furniture  and Equipment                 |       | 2,032,802               |       | 1,893,623                   |       |
| Leasehold  Improvements                         |       | 4,741,820               |       | 4,510,075                   |       |
| Construction in  Progress                       |       | 2,895,786               |       | 960,624                     |       |
| Total Property and Equipment                    |       | 14,057,786              |       | 11,385,188                  |       |
| Less Accumulated  Depreciation and Amortization |       | (6,107,292              | )          | (5,641,525                  | )          |
|                                            |       | $                       | 7,950,494  |                        | $          | 5,743,663 |   |

 

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The Company hasrecognized $25,997 and $41,972 of capitalized interest costs incurred infinancing leasehold improvements and laboratory and manufacturing equipment atits Fall River and Needham facilities during the three- and six-month periodsended June 30, 2006, respectively. The total amount of interest expenseincurred by AVANT during the three- and six-month periods was $25,997 and$52,452, respectively.

Depreciation expense related to equipment andleasehold improvements was $241,463 and $96,123 for the three months endedJune 30, 2006 and 2005, respectively, and $487,465 and $189,696 for thesix months ended June 30, 2006 and 2005, respectively.

**(7)           Intangible and Other Assets**

Intangible and other assets include the following:
| ** **                  | ** ** | **June 30, 2006** | ** ** | **December 31, 22005** | ** ** |
|-----------------------------|------------|-----------------------------|------------|----------------------------------|------------|
| ** **                  | ** ** | **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                        |       | (1,697,699 | ) | 2,089,201 |   | 3,786,900 |   | (1,508,352 | ) | 2,278,548 |   |
| Developed Technology        |       | 7 years                     |       | 3,263,100                        |       | (2,599,600 | ) | 663,500 |   | 3,263,100 |   | (2,366,800 | ) | 896,300 |   |
| Strategic Partner Agreement |       | 17 years                    |       | 2,563,900                        |       | (842,064 | ) | 1,721,836 |   | 2,563,900 |   | (766,656 | ) | 1,797,244 |   |
|                        |       |                        |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Total Intangible Assets     |       |                        |       | 10,703,900                       |       | (6,229,363 | ) | 4,474,537 |   | 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 |   | $ | (6,229,363 | ) | $ | 4,569,518 |   | $ | 10,798,881 |   | $ | (5,731,808 | ) | $ | 5,067,073 |   |

 

All of the Company’sintangible assets are amortized over their estimated useful lives. Totalamortization expense for intangible assets was $248,778 and $ 497,556 for thethree- and six-month periods ended June 30, 2006 and 2005, respectively.

Theestimated future amortization expense of intangible assets as of June 30,2006 for the remainder of fiscal year 2006 and the five succeeding years is asfollows:

| Year ending December 31, | ** ** | **Estimated  Amortization  Expense** | ** ** |
|-----------------------------------------|------------|--------------------------------------|------------|
| 2006 (remaining  six months)            |       | $                                    | 497,556    |   |
| 2007                                    |       | 960,212                              |       |
| 2008                                    |       | 529,512                              |       |
| 2009                                    |       | 529,512                              |       |
| 2010                                    |       | 514,622                              |       |
| 2011                                    |       | 350,822                              |       |
|                                         |            |                                      |            |  |

 

**(8)           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 per common share are basedupon the weighted average number of common shares outstanding and potentiallydilutive securities. Potentially dilutive securities include stock options,warrants and restricted stock units. Options and warrants to purchase 4,033,670and 3,632,326 shares of common stock and restricted stock units totaling1,000,000 and 800,000 shares were not included in the computations of weightedaverage common shares for the periods ended June 30, 2006 and 2005, respectively,because inclusion of such shares would have an anti-dilutive effect on net lossper share.

**(9)           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.

**(10)         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:

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*(A)         GlaxoSmithKlineplc (“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 onworldwide sales of RotarixÒ(see Note 3). Under the PRF agreement, AVANT will retain 50% of future Glaxomilestone payments beginning on the effective date of the agreement with PRF,with 70% of the remaining balance payable to PRF and 30% of the remainingbalance 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.

*(B)         PfizerInc (“Pfizer”)*

The Companyentered into a licensing agreement with Pfizer’s Animal Health Division wherebyPfizer has licensed Megan’s technology for the development of animal health andfood safety vaccines. Under the agreement, AVANT may receive additionalmilestone payments of up to $3 million based upon attainment of specifiedmilestones. AVANT may receive royalty payments on eventual product sales. Theterm of this agreement is through the expiration of the last of the patentscovered by the agreement. AVANT has no obligation to incur any research anddevelopment costs in connection with this agreement.

*(C)         DynPortVaccine 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 $50,000 receivedin the first quarter of 2005, and milestone payments of up to $700,000 in theaggregate, $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 combination vaccineagainst anthrax and plague using AVANT’s proprietary vaccine technologies. Asof June 30, 2006, AVANT has received a number of additional subcontractmodifications from DVC to support preclinical animal testing of vaccineconstructs 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 six months endedJune 30, 2006 and 2005, AVANT recognized $870,653 and $1,358,520,respectively, in government contract revenue from DVC. Through June 30,2006, AVANT had received approximately $8.7 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.

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**(11)         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)         LoanPayable*

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.

At June 30,2006, AVANT has recorded leasehold improvements of $1,227,800 and currently hasa loan payable of $1,104,930 to MassDevelopment, of which $75,032 is classifiedas current and $1,029,988 as long-term. AVANT began amortizing the leaseholdimprovements when the Fall River facility became operational. Based on currentmarket interest rates available to AVANT for long-term liabilities with similarterms and maturities, the fair value of the loan is approximately $792,200 atJune 30, 2006.

*(B)         NotePayable*

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 June 30, 2006 and December 31, 2005 was $850,928and $880,690, respectively.

At June 30,2006, AVANT currently has a note payable of $728,673 to MassDevelopment, ofwhich $128,046 is classified as current and $600,627 as long-term. AVANT begandepreciating the manufacturing and laboratory equipment assets over theestimated economic lives of the assets when the equipment became ready for itsintended use. Based on current market interest rates available to AVANT forlong-term liabilities with similar terms and maturities, the fair value of thenote payable is approximately $646,800 at June 30, 2006.

**(12)         Commitments and Contingencies**

*(A)         Commitmentsfor the Renovations of the Needham Facility and Improvements to the Fall RiverFacility*

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 $8.4 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. The Company will record the full cost of theNeedham renovation project as an asset and the amounts of landlord incentivewill be recorded as deferred rent (included under “Other Long Term Liabilities”account in the consolidated balance sheets) in accordance with FASB TechnicalBulletin 88-1 “Issues Related to Accounting for Leases.”  Amortization of the deferred rent will berecorded as a reduction of rent expense over the remaining lease term when therenovation project is complete and will be classified as an operating activityin the Consolidated Statement of Cash Flows.

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 June 30, 2006,none of the tenant incentive allowance has been received. In April 2006,AVANT entered into a Design/Build Contractwith a design/builder for the build-out of the expanded space. Thecontract amount totals $345,000.

*(B)         PurchaseCommitments for Contract Manufacturing*

InApril 2000, AVANT entered into a Services Agreement (the “Lonza Agreement”)with Lonza Biologics plc (“Lonza”) for process development and manufacture ofits product candidate TP10. AVANT has entered into a number of amendments tothe Lonza Agreement for specific process development and scale-up work andremaining aggregate commitments as of June 30, 2006 total approximately$957,180. The Company has incurred $906,838 and $7,687,559, respectively, ofexpense related to the Lonza Agreement in the six-month period endedJune 30, 2006 and from inception through June 30, 2006, of which$364,845 remained accrued at June 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 a variety ofrisks and uncertainties andreflect AVANT’s current views with respect to future events and financialperformance. There are a numberof important factors that could cause the actual results to differ materiallyfrom those expressed in any forward-looking statements made by AVANT. Thesefactors include, but are not limited to: (1) the integration of multiple technologies andprograms; (2) the ability to adaptAVANT’s vectoring**systems to develop new, safe andeffective orally administered vaccines against anthrax and plague or any other microbes used as bioweapons and other diseasecausing agents; (3) the ability to successfully completedevelopment and commercialization of TP10, CETi-1, CholeraGarde® (Peru-15),Ty800 and other products; (4) the cost, timing, scope and results ofongoing safety and efficacy trials of TP10, CETi-1, CholeraGarde® (Peru-15),Ty800 and 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 and other products; (6) the ability of the Companyto 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**Ò in major commercial markets, as well as thetiming and success of worldwide commercialization of Rotarix**Ò by our partner, Glaxo; (9) Glaxo’s strategyand business plans to launch and supply Rotarix® worldwide, including in theU.S. and other major markets;  (10) changes in existing and potential relationships with corporate collaborators;(11) the availability, cost, delivery and quality of clinical and commercialgrade materials supplied by contract manufacturers; (12) the timing, cost anduncertainty of obtaining regulatory approvals to use TP10, CETi-1,CholeraGarde® (Peru-15) and Ty800, among other purposes, for adultsundergoing cardiac surgery,**to raise serum HDLcholesterol levels and toprotect travelers and people in endemic regions from diarrhea causing diseases,respectively; (13) the ability to obtain substantial additional funding; (14)the ability to develop and commercialize products before competitors and thatare superior to the alternatives developed by competitors; (15) the ability toretain certain members of management; (16) AVANT’s expectations regardingresearch and development expenses and general and administrative expenses; (17)DVC’s ability to complete clinical trials and perform under its agreement; (18)AVANT’s expectations regarding CETP’s ability to improve cholesterol levels andAVANT’s ability to develop and commercialize CETP; (19) AVANT’s expectationsregarding cash balances, anticipated royalty payments and expenses, includinginfrastructure expenses; and (20) other factors detailed from time to time infilings with the Securities and Exchange Commission. You should carefully review all of these factors, and you should be aware**that there 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 principal activity since our inception has been research andproduct development conducted on its own behalf, as well as through jointdevelopment programs with several pharmaceutical companies and othercollaborators. AVANT was incorporated in the State of Delaware inDecember 1983.

## **CRITICALACCOUNTING POLICIES**

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 Statementof Financial 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 estimatedfair values. 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 Financial Statements as of and for the three and sixmonths ended June 30, 2006 reflect the impact of SFAS 123(R). Inaccordance with the modified prospective transition method, the Company’sConsolidated Financial Statements for prior periods have not been restated toreflect, and do not include, the impact of SFAS 123(R). Stock-basedcompensation expense recognized under SFAS 123(R) for the three monthsended June 30, 2006 was $275,641, which consisted of stock-basedcompensation expense related to employee and non-employee director stockoptions, employee stock purchases and restricted stock units of $98,938, $1,703and $175,000, respectively. Stock-based compensation expense recognized underSFAS 123(R) for the six months ended June 30, 2006 was $539,895,which consisted of stock-based compensation expense related to employee andnon-employee director stock options, employee stock purchases and restrictedstock units of $186,490, $3,405 and $350,000, respectively. There was nostock-based compensation expense related to employee and non-employee directorstock options and employee stock purchases recognized during the three and sixmonths ended June 30, 2005. Stock-based compensation expense of $121,000and $242,000 related to restricted stock unit awards was recognized during the 

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three and six months ended June 30, 2005,respectively. Stock-based compensation expense of $539,895 and $242,000 wasreflected as operating cash flows in the Consolidated Statements of Cash Flowsfor the six months ended June 30, 2006 and 2005, respectively. See Note 4to the Consolidated Financial Statements for additional information.

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 six months endedJune 30, 2006 was $1.28 and $1.47, respectively, per share using theBlack-Scholes option pricing model with the following assumptions:
| ** **                                                | ** ** | **Three months ended  June 30, 2006** | ** ** | **Six months ended  June 30, 2006** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| Expected stock  price volatility (employees)              |       | 80                                                        | %          | 80                                                      | %          |
| Expected stock  price volatility (non-employee directors) |       | 78                                                        | %          | 78                                                      | %          |
| Expected option  term (employees)                         |       | 6.25 Years                                                |       | 6.25 Years                                              |       |
| Expected option  term (non-employee directors)            |       | 5.5 Years                                                 |       | 5.5 Years                                               |       |
| Risk-free  interest rate                                  |       | 4.8 — 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 expectedfuture stock 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 three months endedJune 30, 2006.

Forfeitures wereestimated based on historical experience by applying a 10 and zero percentforfeiture rate to employee and non-employee director stock option awardsgranted during the six months ended June 30, 2006, respectively.

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. Six 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 has actively developed and acquired innovative technologies— especially novel approaches to vaccine creation. The development ofimmunotherapeutic vaccines like the CETP vaccine and the marriage of innovativebacterial vector delivery technologies with unique manufacturing processesoffer the potential for a new generation of vaccines. In addition, AVANT’svaccine technologies can provide rapid protection against bacterial illnesseswhich may prove useful for improving and expanding America’s vaccine arsenalagainst microbial agents used in war or terrorist attacks.

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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.

## **RESEARCHAND DEVELOPMENT ACTIVITIES**

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.

Duringthe past five years through the end of 2005, AVANT incurred an aggregate of$74 million in research and development costs. During the six months endedJune 30, 2006, AVANT incurred an aggregate of $8.8 million inresearch and development costs. The following table indicates the amountincurred for each of AVANT’s material research programs and for other identifiedresearch and development activities during the two years endedDecember 31, 2005 and 2004 and the six-month periods ended June 30,2006 and 2005. The amounts disclosed in the following table and in “ProgramDevelopments” below reflect direct research and development costs, license feesassociated with the underlying technology and an allocation of indirectresearch and development costs to each program.
| ** **                                        | ** ** | **Six Months Ended  June 30,** | ** ** | **Years Ended  December 31,** | ** ** |
|---------------------------------------------------|------------|-----------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                        | ** ** | **2006**                                      | ** ** | **2005**                                | ** ** | **2005** | ** ** | **2004** | ** ** |
| *Bacterial Vaccines:*                             | * *   | * *                                      | * *   | * *                                | * *   | * * | * * | * * | * * |
| CholeraGardeÒ                                |       | $                                             | 1,626,100  |                                    | $          | 256,600 |   | $ | 1,257,200 |   | $ | 123,100 |   |
| Ty800                                             |       | 325,500                                       |       | 258,000                                 |       | 404,500 |   | 688,300 |   |
| Other                                             |       | 770,400                                       |       | 216,200                                 |       | 528,900 |   | 332,500 |   |
| *BioDefense Vaccines:*                            |       | 1,112,200                                     |       | 1,111,900                               |       | 2,470,700 |   | 3,082,800 |   |
| *Cholesterol Management Vaccine:*                 | * *   | * *                                      | * *   | * *                                | * *   | * * | * * | * * | * * |
| CETi-1                                            |       | 666,100                                       |       | 291,000                                 |       | 650,800 |   | 816,900 |   |
| *Complement Inhibitors:*                          | * *   | * *                                      | * *   | * *                                | * *   | * * | * * | * * | * * |
| TP10/TP20                                         |       | 2,669,200                                     |       | 4,735,100                               |       | 8,327,200 |   | 7,706,300 |   |
| *Food Safety & Animal  Health Vaccines:* |       | 5,700                                         |       | 3,300                                   |       | 9,900 |   | 12,600 |   |
| *Viral Vaccines:*                                 | * *   | * *                                      | * *   | * *                                | * *   | * * | * * | * * | * * |
| RotarixÒ  vaccine                            |       | 648,600                                       |       | 3⁄4                                  |       | — |   | 500,000 |   |
| Avian Flu                                         |       | 339,400                                       |       | 3⁄4                                  |       | 3⁄4 |   | 3⁄4 |   |
| TheraporeÒ/HIV                               |       | 3⁄4                                        |       | 3,100                                   |       | 11,800 |   | 184,900 |   |
| *Other Programs:*                                 |       | 649,400                                       |       | 586,400                                 |       | 402,300 |   | 426,400 |   |
|                                              |       |                                          |       |                                    |       |   |   |   |   |
| *Total R&D Expense*                           |       | $                                             | 8,812,600  |                                    | $          | 7,461,600 |   | $ | 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 representsthe first in an expected series of worldwide approvals and commercial launchesfor the product. Glaxo has launched in additional Latin American and AsianPacific countries during 2005 and 2006. Additionally, Glaxo filed for marketapproval with the European regulatory authorities in late 2004, which triggereda $2 million milestone payment to AVANT. In February 2006, the EuropeanCommission granted approval of RotarixÒ in the EuropeanUnion, which triggered a $4 million milestone payment from Glaxo. Glaxo hasagreed to make an additional payment of $1.5 million, upon achievement ofmarket approval in the United States. AVANT licensed-in the Rotarix® technologyin 1995 and owes a license fee of 30% to Cincinnati Children’s Hospital MedicalCenter (“CCH”) on net royalties received from Glaxo. In May 2005, AVANTentered into an agreement whereby an affiliate of PRF purchased an interest inthe net royalties AVANT will receive on worldwide sales of RotarixÒ(see Note 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.

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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.

*ComplementInhibitors:*  TP10, asoluble form of naturally occurring Complement Receptor 1, has effectivelyshown to inhibit the activation of the complement cascade in animal models. AVANTbelieves 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 to develop TP10 for cardiac surgery. InFebruary 2002, AVANT announced that TP10 had not achieved a significantreduction in the primary endpoint of a Phase 2 adult cardiac surgery trialconducted in 564 patients. However, further analysis of the study datademonstrated an important treatment benefit in male patients participating inthe trial directly related to mortality, which was impressive, but, with notreatment benefit observed in female patients. In February 2004, AVANTstarted a Phase 2b double-blind, placebo-controlled trial of TP10 inapproximately 300 women undergoing cardiopulmonary by-pass surgery. InFebruary 2006, AVANT reported that the females-only study did not meet theprimary endpoint, thus confirming the results for female subjects in theprevious 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 iscurrently seeking a corporate partner to complete development and tocommercialize 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 six months ended June 30, 2006, the Company incurredapproximately $2.7 million in research, development, contract manufacturing andclinical costs associated with its complement inhibitor program.

*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*-vectoreddelivery technologies, named VibrioVecÒ and SalmoVecTM, theCompany can now develop a new generation of vaccines that have an ideal productprofile: safe, effective, oral, single-dose, rapidly protective and increasedthermostability.

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 early 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 six months ended June 30, 2006,AVANT incurred approximately $1,626,100 in research, development, manufacturingand 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. During the periodJanuary 1, 2001 through December 31, 2005, AVANT incurredapproximately $5.3 million in research, development, contractmanufacturing and clinical costs on its Ty800 program. During the six monthsended June 30, 2006, AVANT incurred approximately $325,500 in research,development and clinical costs on its Ty800 program.

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

These three programs arein pre-clinical development. In 2006,AVANT expects to allocate resources to further the development of a two-vaccinecombination product containing ETEC and Shigella or Campylobacter addressed tothe travelers’ market. 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 six months ended June 30, 2006, AVANT incurred approximately$770,400 in research, development and clinical costs on these pre-clinicalprograms.

*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 six months ended June 30, 2006 and 2005, AVANT recognized$870,653 and $1,358,520, respectively, in government contract revenue from DVC.Through June 30, 2006, AVANT had received approximately $8.7 million inpayments under the subcontract agreements. These agreements expire in 2007,although they may be terminated by DVC at any time upon 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 six months ended June 30, 2006,AVANT incurred approximately $1,112,200 in research and development costs onits 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 six months endedJune 30, 2006, AVANT incurred approximately $5,700 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 developing this vaccine to stimulate an immune response againstCETP, which it believes may improve the ratio of HDL to LDL cholesterol andreduce the progression of atherosclerosis, which often leads to heart attack.

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In October 2003,AVANT completed a Phase 2 efficacy study of its CETi-1 vaccine in approximately200 patients with low levels of HDL cholesterol. The results of the studydemonstrated proof-of-concept in humans confirming that blocking cholesteroltransfer could raise HDL levels. In addition, the CETi-1 vaccine workedas designed to elicit anti-CETP antibodies in a high percentage of patientstreated, approximately 90%. In recent pre-clinical testing, AVANT hasidentified 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 whencompared to the previous vaccine formulation. AVANT has contracted for theproduction of GMP peptide for the newly formulated vaccine and expects tocomplete release and stability studies in 2006. During the periodJanuary 1, 2001 through December 31, 2005, AVANT incurredapproximately $10.4 million in research, development, contractmanufacturing and clinical costs associated with the CETP program. During thesix months ended June 30, 2006, AVANT incurred approximately $666,100 inresearch, development, contract manufacturing and clinical costs associatedwith the CETP program. AVANT plans to seek a corporate partner to completedevelopment and to commercialize the CETP vaccine.

## **TECHNOLOGYLICENSING**

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.

**RESULTS OF OPERATIONS**

**Three-Month Period Ended June 30, 2006 as Compared****with the Three-Month Period EndedJune 30, 2005**

AVANT reportedconsolidated net loss of $5,670,299, or $.08 per share, for the second quarterended June 30, 2006, compared with a net loss of $4,733,940, or $.06 pershare, for the second quarter ended June 30, 2005. The weighted average common shares outstanding used to calculate net lossper common share was 74,174,761 in 2006 and 74,132,829 in 2005.

*Revenue:*  Total revenue decreased $131,682 to $505,479for the second quarter of 2006 compared to $637,161 for the second quarter of2005.

Product development and licensing revenue decreased $41,614 to $17,446 in2006 from $59,060 in 2005 due to a decrease in reimbursed patent expense byAVANT’s partner, 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$460,523 and $522,963 in government contract and grant revenue during thesecond quarters 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.

Marketing and distribution of the Megan poultry product line is performedby AVANT’s partner, Lohmann Animal Health International (“LAHI”), and AVANTreceives a royalty percentage of all Megan®Vac 1 and Megan®Egg product sales.Royalty payments received during the second quarter of 2006 and 2005 totaled$27,510 and $55,138, respectively.

*OperatingExpense:*  Total operating expense increased $1,289,004,or 23.3%, to $6,829,869 for the second quarter of 2006 compared to $5,540,865for the second quarter of 2005.

Research and developmentexpense increased $1,032,907, or 30.1%, to $4,463,899 from $3,430,992 in 2005.The increase in 2006 compared to 2005 is primarily due to increases in researchand development personnel and related costs of $424,828, contract researchcosts of $204,877, license fees of $98,750, contract manufacturing costsincurred for TP10 process development and scale-up work of $282,113 andnon-personnel operating and facility-related costs of $288,981 associated withoperations of the Fall River facility in 2006 compared to 2005. These increaseswere offset in part by declines in clinical trials costs of $565,606 associatedwith the TP10 program as a result of the completion of the TP10 Phase 2 femaleclinical trial.

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General and administrative expense increased $256,097, or 13.8%, to$2,117,192 in 2006 compared to $1,861,095 in 2005 and is primarily attributedto increases in stock-based compensation expense of $114,908, consulting costsof $56,797 and other professional fees of $167,621. These increases were partlyoffset by a decrease in legal expenses of $180,465.

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

*Investment and Other Income, Net:*  Interest and other income increased $484,327to $654,091 for the second quarter of 2006 compared to $169,764 for the secondquarter of 2005. The increase is primarily due to higher interest rates andaverage cash balances during the second quarter of 2006 compared to the secondquarter of 2005. During the second quarters of 2006 and 2005, the averagemonth-end cash balances were $56,270,211 and $27,372,971, respectively. Theeffective interest rates during the second quarters of 2006 and 2005 were 4.68%and 2.81%, respectively.

**Six-Month Period Ended June 30, 2006 as Compared**** withthe Six-Month Period Ended June 30, 2005**

AVANT reportedconsolidated net loss of $8,641,290, or $.12 per share, for the six monthsended June 30, 2006, compared with a net loss of $9,602,438, or $.13 pershare, for the six months ended June 30, 2005. The weighted average common shares outstanding used to calculate net lossper common share was 74,173,668 in 2006 and 74,132,416 in 2005.

*Revenue:*  Total revenue increased $2,604,253 to$4,211,966 for the first six months of 2006 compared to $1,607,713 for thefirst six months of 2005.

Product development andlicensing revenue increased $2,506,903 to $2,637,420 in 2006 from $130,517 in2005. In February 2006, the European Commission granted approval ofRotarixÒ in the EuropeanUnion, which triggered a one-time $4 million milestone payment from Glaxo, 50%of which is creditable against future royalties. Product development andlicensing revenue of $2.6 million was recorded in the first quarter of 2006 andthe remaining $1.4 million was remitted to PRF in accordance with the PRFagreement. In the first quarter of 2006, AVANT recognized $550,803 in productroyalty revenue related to PRF’s purchased interests in the net royalties thatAVANT receives from RotarixÒ worldwide netsales.

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$960,730 and $1,389,050 in government contract and grant revenue during thefirst six 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 toapproximate the amount of research work performed during the first six monthsof 2006.

Marketing and distribution of the Megan poultry product line is performedby AVANT’s partner, Lohmann Animal Health International (“LAHI”), and AVANTreceives a royalty percentage of all Megan®Vac 1 and Megan®Egg product sales.Royalty payments received during the first six months of 2006 and 2005 totaled$63,013 and $88,146, respectively. AVANT expects royalty payments from LAHI toincrease in the second half of 2006 compared to 2005.

*OperatingExpense:*  Total operating expense increased $1,884,823,or 16.3%, to $13,415,868 for the first six months of 2006 compared to$11,531,045 for the first six months of 2005.

Research and developmentexpense increased $1,350,996, or 18.1%, to $8,812,606 for the first six monthsof 2006 from $7,461,610 for the first six months of 2005. The increase in 2006compared to 2005 is primarily due to $600,000 of license fee expense recordedin the first quarter of 2006 for amounts which will be payable to CCH inconnection with the aforementioned 2006 Glaxo milestone payment. The Companyalso experienced increases in research and development personnel and relatedcosts of $881,578, consultant fees of $153,095, contract research costs of$256,847, license fees of $746,066, and non-personnel operating andfacility-related costs of $462,848 associated with operations of the Fall Riverfacility in 2006 compared to 2005. These increases were offset in part bydeclines in contract manufacturing costs incurred for process development andscale-up work of $131,004 and clinical trials costs of $936,134, bothassociated with the TP10 program, as a result of reduced development activitiesand the completion of the TP10 Phase 2 female clinical trial. AVANT expectsresearch and development expense to increase substantially in the second halfof 2006 as AVANT prepares for a CholeraGardeÒPhase 3 trial starting in early 2007 and as the Fall River facility runs atfull operational status.

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General and administrative expense increased $533,827, or 14.9%, to$4,105,706 for the first six months of 2006 compared to $3,571,879 in 2005 andis primarily attributed to increases in stock-based compensation expense of$224,767, consultant fees of $40,977 and other professional fees of $319,603.These increases are partly offset by a decrease in legal expenses of $255,333.AVANT expects general and administrative expense to continue at this level forthe remainder of 2006.

Amortization expense of acquired intangible assets was $497,556 in thefirst six months of 2006 and 2005.

*Investment and Other Income, Net:*  Interest and other income increased $613,718to $934,612 for the first six months of 2006 compared to $320,894 for the firstsix months of 2005. The increase is primarily due to higher interest rates andaverage cash balances during the first six months of 2006 compared to the firstsix months of 2005. During the first six months of 2006 and 2005, the averagemonth-end cash balances were $44,973,422 and $28,419,021, respectively. Theeffective interest rates during the first six months of 2006 and 2005 were4.48% and 2.57%, respectively.

*Provision for Income Taxes:*  The $40 million milestone payment receivedfrom PRF during the first quarter of 2006 will result in taxable income for theCompany. The regular taxable income generated by this transaction has beenfully offset with available federal and state net operating loss carryforwards.The Company recorded a provision of $372,000 in the first quarter of 2006 forthe alternative minimum tax that will result from receipt of this milestone.

**LIQUIDITY AND CAPITAL RESOURCES**

At June 30,2006, AVANT’s principal sources of liquidity consisted of cash and cashequivalents of $53,468,716. AVANT’s cash and cash equivalents are highly liquidinvestments with a maturity of three months or less at the date of purchase andconsist of time deposits and investments in money market mutual funds withcommercial banks and financial institutions. Also, the Company maintains cashbalances with financial institutions in excess of insured limits. AVANT doesnot anticipate any losses with respect to such cash balances.

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 and developmentunder collaboration agreements that AVANT may receive. The timing of any newcollaboration agreements, government contracts or grants and any payments underthese agreements, contracts or grants cannot be easily predicted and may varysignificantly from quarter to quarter.

Net cash providedby operating activities increased to $32,836,849 for the first six months of2006 compared to net cash used in operating activities of $3,836,571 for thefirst six months of 2005. The increase is primarily attributed to the netincrease in deferred revenue of $39,449,197 related to the $40 million PRFmilestone payment received in the first quarter of 2006, and the decrease innet loss incurred in 2006 compared to 2005 because of the Glaxo milestonepayment. These amounts were offset partly by the increase in accountsreceivable. Other than the effect of receiving the $40 million milestonepayment from PRF, AVANT expects that cash used in operations will continue toincrease in 2006 as the Company continues to develop its products in clinicaltrials, contracts for the manufacture of clinical materials, runs its FallRiver facility at full operational status and advances new products intopreclinical development. The expected increase in cash used would be partiallyoffset by anticipated payments made under the Company’s government contractsand grants and anticipated product royalty payments.

Cash used ininvesting activities increased to $2,672,598 for the first six months of 2006compared to $812,963 for the first six months of 2005. The increase is due to increased investment in property and equipment in2006 primarily towards the renovations of the Needham facility and for the FallRiver facility compared to 2005. AVANT expects it will continue to usecash in its investing activities as the Company expands its infrastructure atthe Fall River facility and continues full-scale renovations of its Needhamfacility.

Net cash used infinancing activities was $114,969 for the first six months of 2006 compared to$63,362 for the first six months of 2005. The increase in net cash used infinancing activities is primarily due to increases in payments of long-termliabilities.

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**AGGREGATE CONTRACTUAL OBLIGATIONS**

The following table summarizesAVANT’s contractual obligations at June 30, 2006 and the effect suchobligations and commercial commitments are expected to have on its liquidityand cash flow in future years. These obligations, commitments and supportingarrangements represent payments based on current operating forecasts, which aresubject to change:
| ** **                    | ** ** | **Total** | ** ** | **2006**  | ** ** | **2007-2009** | ** ** | **2010-2011** | ** ** | **Thereafter** | ** ** |
|-------------------------------|------------|-----------|------------|-----------|------------|---------------|------------|---------------|------------|----------------|------------|
| Contractual  obligations:     |       |      |       |      |       |          |       |          |       |           |       |
| Operating lease  obligations  |       | $         | 20,101,300 |      | $          | 1,394,700     |       | $             | 5,530,600  |           | $          | 3,533,100 |   | $ | 9,642,900 |   |
| **Loan Payable*******         |       | 1,523,900 |       | 59,600    |       | 404,900       |       | 247,000       |       | 812,400        |       |
| **Note Payable*******         |       | 829,800   |       | 73,800    |       | 531,500       |       | 224,500       |       | 3⁄4         |       |
| Licensing  obligations        |       | 552,500   |       | 42,500    |       | 255,000       |       | 170,000       |       | 85,000         |       |
| Construction  contracts       |       | 4,823,000 |       | 3,326,300 |       | 1,496,700     |       | 3⁄4        |       | 3⁄4         |       |
| Total contractual obligations |       | $         | 27,830,500 |      | $          | 4,896,900     |       | $             | 8,218,700  |           | $          | 4,174,600 |   | $ | 10,540,300 |   |
|                          |       |      |       |      |       |          |       |          |       |           |       |
| Commercial commitments:       |       |      |       |      |       |          |       |          |       |           |       |
| Clinical  development         |       | $         | 288,300    |      | $          | 288,300       |       | $             | —     |           | $          | — |   | $ | — |   |
| Manufacturing  development    |       | 957,200   |       | 957,200   |       | 3⁄4        |       | —        |       | —         |       |
| Total commercial  commitments |       | $         | 1,245,500  |      | $          | 1,245,500     |       | $             | 3⁄4     |           | $          | — |   | $ | — |   |

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*                    includesinterest obligations

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** **

**Item 3.  Quantitativeand Qualitative Disclosures about Market Risk**

AVANT owns financial instruments that are sensitive to market risk aspart of its investment portfolio. The Company 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 June 30, 2006 due to the short-term maturities of these instruments.

**Item 4.  Controls andProcedures**

*Evaluation of disclosure controls and procedures*.

As required by Rule 13a-15 under the Securities Exchange Actof 1934 (the “Exchange Act”), as of June 30, 2006, we carried out anevaluation under the supervision and with the participation of our management,including our Chief Executive Officer and Chief Financial Officer, of theeffectiveness of the design and operation of our disclosure controls andprocedures as of the period covered by this report. In designing and evaluatingour disclosure controls and procedures, we and our management recognize thatany controls and procedures, no matter how well designed and operated, canprovide only reasonable assurance of achieving the desired control objectives,and our management necessarily was required to apply its judgment in evaluatingand implementing possible controls and procedures. Based upon that evaluation,our Chief Executive Officer and Chief Financial Officer have concluded that asof June 30, 2006, as a result of the material weakness discussed below,our disclosure controls and procedures were not effective to ensure thatinformation required to be disclosed by us in the reports we file or submitunder 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. We will continue to review anddocument our disclosure controls and procedures on an ongoing basis, and mayfrom time to time make changes aimed at enhancing their effectiveness and toensure that our disclosure controls and procedures evolve with our business.

*Changes inInternal Control Over Financial Reporting.*

Management has determinedthat the Company did not maintain effective controls over the completeness andaccuracy of the recognition of revenue deferred pursuant to an agreement withPaul Royalty Fund (“PRF”) with respect to the sale of an interest in future netroyalties from GlaxoSmithKline (“GSK”), certain of which should have beenrecognized upon receipt of a milestone payment from GSK in the first quarter of2006. Notwithstanding that management had correctly determined the accountingtreatment for the PRF transaction, an operational failure in internal controloccurred in that revenue recognition was not triggered upon receipt of themilestone payment. Therefore, recognition of previously deferred royaltyrevenue was not completely and accurately recorded in the proper period inaccordance with accounting principles generally accepted in the United States.This was identified as a deficiency in internal control in the first quarter of2006 which constitutes a “material weakness.” A material weakness is a controldeficiency, or combination of control deficiencies that results in more than aremote likelihood that a material misstatement of the annual or interimfinancial statements will not be prevented or detected. This control deficiencyresulted in an audit adjustment to the unaudited interim consolidated financialstatements for the quarter ended March 31, 2006 affecting deferred revenue andproduct royalties.

Management is in theprocess of reviewing and, as necessary, revising its policies and procedureswith respect to its controls over the accounting for deferred royalty revenueto ensure that all reasonable steps will be taken to correct this materialweakness. As part of this process, management expects to further train theCompany’s accounting personnel, add additional revenue recognition review andapproval controls, and possibly add staff to facilitate a more timelycompletion of such internal controls. The deficiency will not be consideredremediated until the new internal controls are operational for a period of timeand are tested, and management has concluded that the controls are operatingeffectively. Until it is remediated, the identified control deficiency couldresult in a misstatement in the deferred revenue and product royalties balancesthat would not be prevented or detected.

During the quarter, theCompany implemented changes in its internal control over financial 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.

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**PART II— OTHER INFORMATION**

## **Item 1A.      RiskFactors**

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 onlyrisks facing the Company. Additional risks and uncertainties not currentlyknown to the Company or that the Company currently deems to be immaterial alsomay materially adversely affect the Company’s business, financial conditionand/or operating results.

## **Item 4.         Submissionof Matters to a Vote of Security Holders**

On May 18, 2006, AVANTheld its Annual Meeting of Stockholders at which the stockholders elected eightdirectors to our Board of Directors.

At the AnnualMeeting of Stockholders, the following votes were tabulated for the proposalbefore AVANT’s Stockholders:

PROPOSALI

Election of Directors:

|                               | ** ** | **Number of Shares/Votes** | ** ** |
|-------------------------------|------------|--------------------------------------|------------|
| ** **                    | ** ** | **For**                              | ** ** | **Authority Withheld** | ** ** |
| J. Barrie Ward,  Ph.D.        |       | 60,851,386                           |       | 3,388,726 |   |
| Una S. Ryan,  Ph.D.           |       | 62,526,966                           |       | 1,713,146 |   |
| Harry H. Penner,  Jr.         |       | 62,097,675                           |       | 2,142,437 |   |
| Peter A. Sears                |       | 61,890,499                           |       | 2,349,613 |   |
| Karen Shoos  Lipton           |       | 61,874,879                           |       | 2,365,233 |   |
| Larry Ellberger               |       | 62,101,169                           |       | 2,138,943 |   |
| Alf A. Lindberg,  M.D., Ph.D. |       | 62,095,652                           |       | 2,144,460 |   |
| Francis R. Cano, Ph.D.        |       | 62,097,577                           |       | 2,142,535 |   |

 

**The number of shares issued,outstanding and eligible to vote as of the record date of April 5, 2006 was74,172,695.  A quorum was present with64,240,1123 shares represented by proxies or 83.98% of the eligible votingshares.**

## **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:  August 9, 2006 |       |                               |   | Una S. Ryan, Ph. D. |
|                        |       |                               |   | President and Chief Executive Officer |
|                        |       |                               |   | (Principal Executive Officer) |
|                        |       |                               |   |   |
|                        |       |                               |   | /s/ AVERY W. CATLIN |
| Dated:  August 9, 2006 |       |                               |   | Avery W. Catlin |
|                        |       |                               |   | Senior Vice President, Treasurer |
|                        |       |                               |   | and Chief Financial Officer |
|                        |       |                               |   | (Principal Financial and |
|                        |       |                               |   | Accounting Officer) |

 

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** **

**EXHIBITINDEX**
| 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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