**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

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**FORM10-Q**

 

**ý****                                ****QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended September 30, 2005**

 

**OR**

 

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

 

**Commission file number:  0-15006**

 

**AVANTIMMUNOTHERAPEUTICS, INC.**

(Exact name of registrantas 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) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports) and (2) has been subjectto such filing requirements for the past 90 days.       Yesý      Noo.

 

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

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 126-2 of the Exchange Act).       Yeso   No  ý.

 

As of November 3, 2005, 74,161,232 shares of common stock, $.001 parvalue per share, were outstanding.

 

 

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**AVANT IMMUNOTHERAPEUTICS, INC.**

**FORM 10-Q**

**Quarter Ended September 30, 2005**

**Table of Contents**

 
| **Part I — Financial Information**                                                                   |   |
|-----------------------------------------------------------------------------------------------------------|--------|
|                                                                                                      |   |
| Unaudited,  Consolidated Balance Sheets at September 30, 2005 and December 31, 2004                       |   |
|                                                                                                      |   |
| Unaudited, Consolidated  Statements of Operations for the Three Months Ended  September 30, 2005 and 2004 |   |
|                                                                                                      |   |
| Unaudited, Consolidated Statement of  Operations for the Nine Months Ended  September 30, 2005 and 2004   |   |
|                                                                                                      |   |
| Unaudited, Consolidated  Statements of Cash Flows for the Nine Months Ended  September 30, 2005 and 2004  |   |
|                                                                                                      |   |
| Notes  to Unaudited, Consolidated Financial Statements                                                    |   |
|                                                                                                      |   |
| Management’s  Discussion and Analysis of Financial Condition and Results of Operations               |   |
|                                                                                                      |   |
| Quantitative  and Qualitative Disclosures about Market Risk                                               |   |
|                                                                                                      |   |
| Controls  and Procedures                                                                                  |   |
|                                                                                                      |   |
| **Part II — Other Information**                                                                      |   |
|                                                                                                      |   |
| Item  6. Exhibits and Reports on Form 8-K                                                                 |   |
|                                                                                                      |   |
| Signatures                                                                                                |   |
|                                                                                                      |   |
| Certifications                                                                                            |   |

 

2

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**PART I — FINANCIAL INFORMATION**

 

**Item 1.   FinancialStatements**

 

**AVANT IMMUNOTHERAPEUTICS, INC.**

**CONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

 
| ** **                                                                                                                                                                                                | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| **ASSETS**                                                                                                                                                                                                |       |                    |       |                   |       |
| Current Assets:                                                                                                                                                                                           |       |                    |       |                   |       |
| Cash and Cash  Equivalents                                                                                                                                                                                |       | $                       | 22,198,775 |                   | $          | 31,741,494 |   |
| Accounts  Receivable                                                                                                                                                                                      |       | 5,643,420               |       | 2,230,350              |       |
| Prepaid Expenses  and Other Current Assets                                                                                                                                                                |       | 750,714                 |       | 567,916                |       |
|                                                                                                                                                                                                      |       |                    |       |                   |       |
| Total Current  Assets                                                                                                                                                                                     |       | 28,592,909              |       | 34,539,760             |       |
|                                                                                                                                                                                                      |       |                    |       |                   |       |
| Property and Equipment, Net                                                                                                                                                                               |       | 5,119,239               |       | 4,164,292              |       |
| Intangible and Other Assets                                                                                                                                                                               |       | 5,315,851               |       | 6,063,185              |       |
| Goodwill                                                                                                                                                                                                  |       | 1,036,285               |       | 1,036,285              |       |
|                                                                                                                                                                                                      |       |                    |       |                   |       |
| Total Assets                                                                                                                                                                                              |       | $                       | 40,064,284 |                   | $          | 45,803,522 |   |
|                                                                                                                                                                                                      |       |                    |       |                   |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                             |       |                    |       |                   |       |
| Current Liabilities:                                                                                                                                                                                      |       |                    |       |                   |       |
| Accounts Payable                                                                                                                                                                                          |       | $                       | 476,868    |                   | $          | 1,752,313 |   |
| Accrued Expenses                                                                                                                                                                                          |       | 2,891,573               |       | 3,500,422              |       |
| Current Portion of  Deferred Revenue                                                                                                                                                                      |       | 12,497                  |       | 11,704                 |       |
| Current Portion  of Long-Term Liabilities                                                                                                                                                                 |       | 204,674                 |       | 186,509                |       |
|                                                                                                                                                                                                      |       |                    |       |                   |       |
| Total Current  Liabilities                                                                                                                                                                                |       | 3,585,612               |       | 5,450,948              |       |
|                                                                                                                                                                                                      |       |                    |       |                   |       |
| Deferred Revenue                                                                                                                                                                                          |       | 10,000,000              |       | —                 |       |
| Long-Term Liabilities                                                                                                                                                                                     |       | 1,790,552               |       | 1,944,948              |       |
|                                                                                                                                                                                                      |       |                    |       |                   |       |
| Stockholders’ Equity:                                                                                                                                                                                |       |                    |       |                   |       |
| Convertible  Preferred Stock, 4,513,102 Shares Authorized; None Issued and Outstanding                                                                                                                    |       | —                  |       | —                 |       |
|                                                                                                                                                                                                      |       |                    |       |                   |       |
| Common Stock,  $.001 Par Value; 100,000,000 Shares Authorized; 74,381,551 Issued and  74,161,232 Outstanding at September 30, 2005 and 74,351,571 Issued and 74,131,252 Outstanding at December 31,  2004 |       | 74,381                  |       | 74,351                 |       |
| Additional  Paid-In Capital                                                                                                                                                                               |       | 258,134,160             |       | 257,829,824            |       |
| Deferred  Compensation                                                                                                                                                                                    |       | (1,400,000              | )          | (1,493,000             | )          |
| Less: 220,319  Common Treasury Shares at Cost                                                                                                                                                             |       | (227,646                | )          | (227,646               | )          |
| Accumulated  Deficit                                                                                                                                                                                      |       | (231,892,775            | )          | (217,775,903           | )          |
|                                                                                                                                                                                                      |       |                    |       |                   |       |
| Total  Stockholders’ Equity                                                                                                                                                                          |       | 24,688,120              |       | 38,407,626             |       |
|                                                                                                                                                                                                      |       |                    |       |                   |       |
| Total  Liabilities and Stockholders’ Equity                                                                                                                                                          |       | $                       | 40,064,284 |                   | $          | 45,803,522 |   |

 

*Seeaccompanying notes to unaudited consolidated financial statements*

 

3

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**AVANT IMMUNOTHERAPEUTICS, INC.**

**CONSOLIDATED STATEMENTS OFOPERATIONS**

**(Unaudited)**

 
| ** **                                   | ** ** | **Three Months Ended**  | ** ** |
|----------------------------------------------|------------|-------------------------|------------|
| ** **                                   | ** ** | **September 30,  2005** | ** ** | **September 30,  2004** | ** ** |
| **REVENUE:**                                 | ** ** | ** **              | ** ** | ** ** | ** ** |
| Product Development and Licensing Agreements |       | $                       | 78,692     |   | $ | 144,280 |   |
| Government Contracts and Grants              |       | 767,630                 |       | 334,166 |   |
| Product Royalties                            |       | —                  |       | 49,064 |   |
|                                         |       |                    |       |   |   |
| Total Revenue                                |       | 846,322                 |       | 527,510 |   |
|                                         |       |                    |       |   |   |
| **OPERATING EXPENSE:**                       |       |                    |       |   |   |
| Research and Development                     |       | 3,591,334               |       | 2,805,813 |   |
| General and Administrative                   |       | 1,670,306               |       | 1,290,567 |   |
| Amortization of Acquired Intangible Assets   |       | 248,778                 |       | 248,778 |   |
|                                         |       |                    |       |   |   |
| Total Operating Expense                      |       | 5,510,418               |       | 4,345,158 |   |
|                                         |       |                    |       |   |   |
| Operating Loss                               |       | (4,664,096              | )          | (3,817,648 | ) |
|                                         |       |                    |       |   |   |
| Investment and Other Income, Net             |       | 149,662                 |       | 120,417 |   |
|                                         |       |                    |       |   |   |
| Net Loss                                     |       | $                       | (4,514,434 | ) | $ | (3,697,231 | ) |
|                                         |       |                    |       |   |   |
| Basic and Diluted Net Loss Per Common Share  |       | $                       | (0.06      | ) | $ | (0.05 | ) |
|                                         |       |                    |       |   |   |
| Weighted Average Common Shares Outstanding   |       | 74,145,814              |       | 74,118,314 |   |

 

*See accompanying notes tounaudited consolidated financial statements*

 

4

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| ** **                                   | ** ** | **Nine Months Ended**   | ** **  |
|----------------------------------------------|------------|-------------------------|-------------|
| ** **                                   | ** ** | **September 30,  2005** | ** **  | **September 30,  2004** | ** ** |
| **REVENUE:**                                 | ** ** | ** **              | ** **  | ** ** | ** ** |
| Product Development and Licensing Agreements |       | $                       | 209,209     |   | $ | 2,393,118 |   |
| Government Contracts and Grants              |       | 2,156,680               |        | 1,928,712 |   |
| Product Royalties                            |       | 88,146                  |        | 129,388 |   |
|                                         |       |                    |        |   |   |
| Total Revenue                                |       | 2,454,035               |        | 4,451,218 |   |
|                                         |       |                    |        |   |   |
| **OPERATING EXPENSE:**                       |       |                    |        |   |   |
| Research and Development                     |       | 11,052,944              |        | 9,626,816 |   |
| General and Administrative                   |       | 5,242,185               |        | 3,852,413 |   |
| Amortization of Acquired Intangible Assets   |       | 746,334                 |        | 746,334 |   |
|                                         |       |                    |        |   |   |
| Total Operating Expense                      |       | 17,041,463              |        | 14,225,563 |   |
|                                         |       |                    |        |   |   |
| Operating Loss                               |       | (14,587,428             | )           | (9,774,345 | ) |
|                                         |       |                    |        |   |   |
| Investment and Other Income, Net             |       | 470,556                 |        | 268,967 |   |
|                                         |       |                    |        |   |   |
| Net Loss                                     |       | $                       | (14,116,872 | ) | $ | (9,505,378 | ) |
|                                         |       |                    |        |   |   |
| Basic and Diluted Net Loss Per Common Share  |       | $                       | (0.19       | ) | $ | (0.13 | ) |
|                                         |       |                    |        |   |   |
| Weighted Average Common Shares Outstanding   |       | 74,136,931              |        | 72,510,640 |   |

 

*See accompanying notes tounaudited consolidated financial statements*

 

5

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**AVANT IMMUNOTHERAPEUTICS, INC.**

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(Unaudited)**

 
| ** **                                                                   | ** ** | **Nine Months Ended**   | ** **  |
|------------------------------------------------------------------------------|------------|-------------------------|-------------|
| ** **                                                                   | ** ** | **September 30,  2005** | ** **  | **September 30,  2004** | ** ** |
| **Cash Flows from Operating Activities:**                                    | ** ** | ** **              | ** **  | ** ** | ** ** |
| Net Loss                                                                     |       | $                       | (14,116,872 | ) | $ | (9,505,378 | ) |
| Adjustments to  Reconcile Net Loss to Net Cash Used in Operating Activities: |       |                    |        |   |   |
| Depreciation and  Amortization                                               |       | 1,142,620               |        | 1,045,078 |   |
| Amortization of  Deferred Compensation                                       |       | 363,000                 |        | 207,000 |   |
| Changes in  Operating Assets and Liabilities:                                |       |                    |        |   |   |
| Accounts  Receivable                                                         |       | 1,586,930               |        | 1,199,685 |   |
| Prepaid and  Other Current Assets                                            |       | (182,798                | )           | (185,532 | ) |
| Accounts Payable  and Accrued Expenses                                       |       | (1,884,293              | )           | 1,750,104 |   |
| Deferred Revenue                                                             |       | 5,000,793               |        | (1,323,257 | ) |
|                                                                         |       |                    |        |   |   |
| Net Cash Used in  Operating Activities                                       |       | (8,090,620              | )           | (6,812,300 | ) |
|                                                                         |       |                    |        |   |   |
| **Cash Flows from Investing Activities:**                                    |       |                    |        |   |   |
| Acquisition of  Property and Equipment                                       |       | (1,351,233              | )           | (1,557,782 | ) |
| Proceeds from  the Maturity of Marketable Securities                         |       | 3⁄4                  |        | 2,000,000 |   |
| Purchases of  Marketable Securities                                          |       | 3⁄4                  |        | (2,000,000 | ) |
| Other  Non-Current Assets                                                    |       | 1,000                   |        | (10,231 | ) |
|                                                                         |       |                    |        |   |   |
| Net Cash Used in  Investing Activities                                       |       | (1,350,233              | )           | (1,568,013 | ) |
|                                                                         |       |                    |        |   |   |
| **Cash Flows from Financing Activities:**                                    |       |                    |        |   |   |
| Proceeds from  Stock Issuance                                                |       | 5,438                   |        | 23,050,977 |   |
| Proceeds from  Exercise of Stock Options and Warrants                        |       | 28,928                  |        | 306,629 |   |
| Payment of  Long-Term Liabilities                                            |       | (136,232                | )           | 3⁄4 |   |
|                                                                         |       |                    |        |   |   |
| Net Cash  Provided by (Used in) Financing Activities                         |       | (101,866                | )           | 23,357,606 |   |
|                                                                         |       |                    |        |   |   |
| Net Increase (Decrease) in Cash and Cash Equivalents                         |       | (9,542,719              | )           | 14,977,293 |   |
|                                                                         |       |                    |        |   |   |
| Cash and Cash Equivalents at Beginning of Period                             |       | 31,741,494              |        | 18,251,044 |   |
|                                                                         |       |                    |        |   |   |
| Cash and Cash Equivalents at End of Period                                   |       | $                       | 22,198,775  |   | $ | 33,228,337 |   |
|                                                                         |       |                    |        |   |   |
| **Supplemental Disclosure of Noncash Financing  Activities**                 |       |                    |        |   |   |
| Note payable  from MassDevelopment                                           |       | 3⁄4                  |        | $ | 342,700 |   |
|                                                                         |       |                    |        |   |   |
| **Supplemental Disclosure of Cash Flow Information**                         |       |                    |        |   |   |
| Cash paid for  interest                                                      |       | $                       | 89,894      |   | 3⁄4 |   |

 

See Note 5.

 

*Seeaccompanying notes to unaudited consolidated financial statements*

 

6

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**AVANT IMMUNOTHERAPEUTICS, INC.**

**Notes to Unaudited ConsolidatedFinancial Statements**

**September 30, 2005**

 

**(1)           Natureof Business**

 

AVANT Immunotherapeutics, Inc. (the “Company” or “AVANT”)is engaged in the discovery, development and commercialization of products thatharness the human immune system to prevent and treat disease.  The Company is developing a broad portfolioof vaccines and therapeutics against cardiovascular, viral and bacterialdiseases.  These include a treatment toreduce complement-mediated tissue damage associated with cardiac by-passsurgery, single-dose oral vaccines aimed at protecting travelers and people inregions where infectious diseases are endemic and a proprietary vaccinecandidate for cholesterol management.  Inaddition, the Company is developing the VitriLifeÒpreservation technology for use in manufacturing AVANT’s oral vaccines andcertain other non-injectable applications. AVANT further leverages the value of its technology portfoliothrough corporate partnerships.  Currentcollaborations encompass the development of an oral human rotavirus vaccine,vaccines to combat threats of biological warfare and vaccines addressed tohuman food safety and animal health.

 

The unaudited consolidated financial statementsinclude the accounts of AVANT Immunotherapeutics, Inc. and its wholly ownedsubsidiary, Megan Health, Inc. (“Megan”). All intercompany transactions have been eliminated.

 

**(2)           InterimFinancial Statements**

 

The accompanying unaudited consolidated financialstatements for the three months and nine months ended September 30, 2005 and2004 include the consolidated accounts of AVANT, and have been prepared inaccordance with instructions to Form 10-Q and Article 10 of RegulationS-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 September 30, 2005, results of operations for the threemonths and nine months ended September 30, 2005 and 2004, and cash flows forthe nine-month periods ended September 30, 2005 and 2004.  The results of operations for the nine-monthperiod ended September 30, 2005 are not necessarily indicative of results forany future interim period or for the full year.

 

Certain information and footnote disclosures normallyincluded in financial statements prepared in accordance with generally acceptedaccounting principles have been omitted, although the Company believes that thedisclosures included, when read in conjunction with AVANT’s Annual Report onForm 10-K for the year ended December 31, 2004, are adequate to make the informationpresented not misleading.

 

**(3)           RecentAccounting Pronouncement**

 

On June 2, 2005, the Financial Accounting StandardsBoard (FASB) issued FASB Statement No. 154, *Accounting Changes and Error Corrections*(FAS 154), which will require entities that voluntarily make a change inaccounting principle to apply that change retrospectively to prior periods’financial statements, unless this would be impracticable.  FAS 154 supersedes Accounting PrinciplesBoard Opinion No. 20, *Accounting Changes*(APB20), which previously required that most voluntary changes in accountingprinciple be recognized by including in the current period’s net income thecumulative effect of changing to the new accounting principle.  FAS 154 also makes a distinction between “retrospectiveapplication” of an accounting principle and the “restatement” of financialstatements to reflect the correction of an error.  Another significant change in practice underthe FAS 154 will be that if an entity changes its method of depreciation, amortization,or depletion for long-lived, non-financial assets, the change must be accountedfor as a change in accounting estimate. Under APB 20, such a change would

 

7

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have been reported as a change in accounting principle.  FAS 154 applies to accounting changes anderror corrections that are made in fiscal years beginning after December 15,2005.

 

**(4)           PaulRoyalty Fund**

 

In May 2005, AVANT entered into an agreement wherebyan affiliate of Paul Royalty Fund II, L.P. (“PRF”) purchased an interest in the******net******royaltiesAVANT will receive on worldwide sales of RotarixÒ.  RotarixÒis licensed to GlaxoSmithKline plc (“Glaxo”). The terms of the agreement with PRF include an upfront unconditionalpayment from PRF totaling $10 million ($5 million paid at closing and $5million due on December 1, 2005) and the following milestone payments: (i) $40million on product launch in the European Union, and (ii) between $9 millionand $11 million on product launch in the United States, depending on date ofthe launch.

 

In addition, AVANT retains some participation in theworldwide net royalty stream from RotarixÒ.  If worldwide net royalties on sales ofRotarixÒ from Glaxo exceed $27.5 million in any year,AVANT will receive 92.5% of royalties in excess of $27.5 million.  Also, once PRF receives cumulative royaltiesequal to 2.45 times PRF’s aggregate cash payments to AVANT, then AVANT willreceive 92.5% of all additional royalties. If RotarixÒ is not launched in the U.S. by the end of 2009,either PRF or AVANT can opt out of the U.S. portion of the agreement, and AVANTwill retain all U.S.-derived royalties and PRF would not be obligated to makepayments to AVANT upon U.S. approval.

 

The PRF transaction qualifies as a sale in accordancewith guidance in EITF 88-18 “Sale of Future Revenues”.  The upfront unconditional payment of $10million was recorded by AVANT as deferred revenue at September 30, 2005.  Any future milestone payments received fromPRF will also be recorded as deferred revenue. Revenues will be recognized and calculated based on the ratio of totalroyalties received from Glaxo and remitted to PRF over expected total amountsto be received by PRF and then applying this percentage to the total cumulativeconsideration received from PRF to date. The expected total of payments to be paid to PRF is an estimate whichAVANT will update from time to time to determine that the estimate continues tobe reasonable in the light of then current events and circumstances.

 

**(5)           Stock-BasedCompensation**

 

As permitted by Statement of Financial AccountingStandards (“SFAS”) No. 148, “Accounting for Stock-Based Compensation -Transition and Disclosure - an amendment of SFAS 123”, AVANT has accounted forits stock-based compensation awards using the intrinsic method and disclosedthe effect on the net loss per share as if the fair value method had beenused.  AVANT periodically grants stock options for a fixed number of shares toemployees and directors with an exercise price equal to the fair market valueof the shares at the date of grant.  TheCompany accounts for employee and director stock options under therecognition and measurement principles of Accounting Principles Board (“APB”)Opinion No. 25, “Accounting for Stock Issued to Employees”, and relatedinterpretations.

 

On September 21, 2005, AVANT awarded Dr. Una Ryan,its President and CEO, 200,000 Restricted Stock Units.  The Restricted Stock Units vest over fouryearsbut will vest in their entirety upon the earlier of the sale of the Company orDr. Ryan’s retirement at or after age 65.  The Company determined the value of theRestricted Stock Units to be $270,000, based on a valuation of $1.35 per share,the closing price of AVANT’s common stock on the award date.  The value of the Restricted Stock Units isbeing amortized over approximately two years until Dr. Ryan attains age 65, andis being recorded as compensation expense.

 

In November 2004 and September 2003, the Company alsoawarded Restricted Stock Units to Dr. Ryan and recorded non-cash deferredcompensation amounting to $832,000 and $1,104,000, respectively.  Thevalue of the Restricted Stock Units is being amortized over their vestingperiod, or four years, and being recorded as compensation expense.  The Company has recognized $121,000and $69,000 as stock-based compensation expense in the statement of operationsduring the three-month periods ended September 30, 2005

 

8

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and 2004, respectively and $363,000 and $207,000 as stock-basedcompensation expense in the statement of operations during the nine-monthperiods ended September 30, 2005 and 2004, respectively.

 

The following are pro formanet loss and loss per share, as if compensation expense for the option planshad been determined based on the fair value at the date of grant:

 
| ** **                                                                                                     | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                                     | ** ** | **2005**                             | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net Loss:                                                                                                      |       |                                 |       |                                |       |   |   |   |   |
| As reported                                                                                                    |       | $                                    | 4,514,434  |                                | $          | 3,697,231 |   | $ | 14,116,872 |   | $ | 9,505,378 |   |
| Less:  Stock-based employee compensation expense as reported                                                   |       | (121,000                             | )          | (69,000                             | )          | (363,000 | ) | (207,000 | ) |
| Add: Total  stock-based employee compensation expense determined under fair value based  method for all awards |       | 221,412                              |       | 251,800                             |       | 728,636 |   | 729,100 |   |
| Pro forma                                                                                                      |       | $                                    | 4,614,846  |                                | $          | 3880,031 |   | $ | 14,482,508 |   | $ | 10,027,478 |   |
|                                                                                                           |       |                                 |       |                                |       |   |   |   |   |
| Basic and  Diluted Net Loss Per Share:                                                                         |       |                                 |       |                                |       |   |   |   |   |
| As reported                                                                                                    |       | $                                    | 0.06       |                                | $          | 0.05 |   | $ | 0.19 |   | $ | 0.13 |   |
| Pro forma                                                                                                      |       | $                                    | 0.06       |                                | $          | 0.05 |   | $ | 0.20 |   | $ | 0.14 |   |

 

The fair value of theoption grant is estimated on the date of grant using the Black-Scholes optionpricing model with the following assumptions:

 
| ** **                      | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|---------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **                      | ** ** | **2005**                             | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Expected stock price volatility |       | 81                                   | %          | 81                                  | %          | 81 | % | 64 | % |
| Expected option term            |       | 4.5 Years                            |       | 5 Years                             |       | 4.5 Years |   | 5 Years |   |
| Risk-free interest rate         |       | 3.8 - 4.3                            | %          | 3.3 – 3.9                      | %          | 3.6 – 4.3 | % | 2.7 – 4.2 | % |
| Expected dividend yield         |       | None                                 |       | None                                |       | None |   | None |   |

 

Because additionalstock-based compensation grants are expected to be made each year, the abovepro forma disclosures are not representative of pro forma effects of reportednet income for future years.

 

**(6)           Tradeand Other Accounts Receivable**

 

Trade accounts receivable are recorded at the invoiced amount and donot bear interest. The Company has not historically experienced credit lossesfrom its trade accounts receivable and therefore has not established anallowance for doubtful accounts.

 

Accounts receivable consists of the following:

 
| ** **        | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------|------------|-------------------------|------------|------------------------|------------|
|              |       |                    |       |                   |       |
| Trade Receivables |       | $                       | 5,614,458  |                   | $          | 2,205,176 |   |
| Other Receivables |       | 28,962                  |       | 25,174                 |       |
|              |       | $                       | 5,643,420  |                   | $          | 2,230,350 |   |

 

Other receivablesat September 30, 2005 and December 31, 2004 primarily represent interest receivablefrom a bank.

 

9

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**(7)           Propertyand Equipment**

 

Property and equipment includes the following:

 
| ** **                                     | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
|                                           |       |                    |       |                   |       |
| Laboratory Equipment                           |       | $                       | 2,824,559  |                   | $          | 2,390,458 |   |
| Manufacturing Equipment                        |       |                    | 534,760    |                   |       | — |   |
| Office Furniture and Equipment                 |       | 1,864,023               |       | 1,665,401              |       |
| Leasehold Improvements                         |       | 4,613,988               |       | 1,704,590              |       |
| Construction in Progress                       |       | 747,932                 |       | 3,473,580              |       |
| Property and  Equipment, Total                 |       | 10,585,262              |       | 9,234,029              |       |
| Less Accumulated Depreciation and Amortization |       | (5,466,023              | )          | (5,069,737             | )          |
|                                           |       | $                       | 5,119,239  |                   | $          | 4,164,292 |   |

 

**8)            Intangibleand Other Assets**

 

Intangible and other assets include the following:

 
| ** **                   | ** ** | ** **           | ** ** | **September  30, 2005**       | ** ** | **December  31, 2004**        | ** ** |
|------------------------------|------------|----------------------|------------|-------------------------------|------------|-------------------------------|------------|
| ** **                   | ** ** | **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 | ) | $ | — |   | $ | 1,090,000 |   | $ | (1,090,000 | ) | $ | — |   |
| Core Technology              |       | 10 years             |       | 3,786,900                     |       | (1,413,680                    | )          | 2,373,220 |   | 3,786,900 |   | (1,129,658 | ) | 2,657,242 |   |
| Developed  Technology        |       | 7 years              |       | 3,263,100                     |       | (2,250,400                    | )          | 1,012,700 |   | 3,263,100 |   | (1,901,200 | ) | 1,361,900 |   |
| Strategic Partner  Agreement |       | 17 years             |       | 2,563,900                     |       | (728,950                      | )          | 1,834,950 |   | 2,563,900 |   | (615,838 | ) | 1,948,062 |   |
| Total Intangible Assets      |       |                 |       | 10,703,900                    |       | (5,483,030                    | )          | 5,220,870 |   | 10,703,900 |   | (4,736,696 | ) | 5,967,204 |   |
|                         |       |                 |       |                          |       |                          |       |   |   |   |   |   |   |   |   |
| Other Non Current Assets     |       |                 |       | 94,981                        |       | 3⁄4                        |       | 94,981 |   | 95,981 |   | 3⁄4 |   | 95,981 |   |
|                         |       |                 |       | $                             | 10,798,881 |                          | $          | (5,483,030 | ) | $ | 5,315,851 |   | $ | 10,799,881 |   | $ | (4,736,696 | ) | $ | 6,063,185 |   |

 

Allof the Company’s intangible assets are amortized over their estimated usefullives.  Total amortization expense forintangible assets was $248,778 and $746,334 for the three- and nine-monthperiods ended September 30, 2005 and 2004, respectively.

 

Theestimated future amortization expense of intangible assets as of September 30,2005 for the remainder of fiscal year 2005 and the five succeeding years is asfollows:

 
| **Year ending December 31,**  | ** ** | **Estimated  Amortization  Expense** | ** ** |
|-------------------------------|------------|--------------------------------------|------------|
| 2005 (remaining three months) |       | $                                    | 248,778    |   |
| 2006                          |       | 995,112                              |       |
| 2007                          |       | 960,212                              |       |
| 2008                          |       | 529,512                              |       |
| 2009                          |       | 529,512                              |       |
| 2010                          |       | 514,622                              |       |
|                               |            |                                      |            |  |

 

**(9)           LossPer Share**

 

The Company computes andreports earnings per share in accordance with the provisions of SFAS No. 128, “EarningsPer Share”.  The computations of basicand diluted loss per common share are based upon the weighted average number ofcommon shares outstanding and potentially dilutive securities.

 

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Potentially dilutive securities include stock options, warrants andrestricted stock units.  Options andwarrants to purchase 3,549,365 and 3,536,242 shares of common stock andrestricted stock units totaling 1,000,000 and 400,000 shares were not includedin the computations of weighted average common shares for the periods endedSeptember 30, 2005 and 2004, respectively, because inclusion of such shareswould have an anti-dilutive effect on net loss per share.

 

**(10)         ProductDevelopment and Licensing Agreements**

 

AVANT’srevenue from product development and licensing agreements was received pursuantto contracts with different organizations. Total revenue recognized by the Company in connection with thesecontracts for the nine-month periods ended September 30, 2005 and 2004 were$209,209 and $2,393,118, respectively.  Asummary of these contracts follows:

 

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

 

During 1997, AVANT entered into an agreement withGlaxo to collaborate on the development and commercialization of the Company’soral rotavirus vaccine and Glaxo assumed responsibility for all subsequentclinical trials and all other development activities.  Glaxo filed for market approval with theEuropean regulatory authorities in late 2004, triggering a $2 million milestonefee payable to AVANT, 50% of which is creditable against future royalties.  The amount was recorded as revenue in 2004 asAVANT has no obligation to incur any research and development costs inconnection with this agreement.  AVANT isobligated to maintain a license with **Cincinnati Children’s Hospital Medical Center(“CCH”)**with respect to this agreement and incurredlicensing fees of $200,000 in 2004.  Inaddition, the Company recorded $300,000 of expense in the fourth quarter of2004 for amounts which will be payable to this institution in connection withthe aforementioned 2004 milestone payment. The recording of this 2004 expense accrual satisfies AVANT’s minimum licensefee obligations for 2005.  All licensingfees are included in research and development expense.  **The term of this agreement is through theexpiration of the last of the relevant patents covered by the agreement,although Glaxo may terminate the agreement upon 90 days prior writtennotice.  Glaxo has agreed to make furtherpayments, which could total up to $5.5 million, upon achievement of specificmilestones.  AVANT licensed-in theRotarix ® technology in 1995 and owes a license fee of 30% to CCH on netroyalties received from Glaxo. **InMay 2005, AVANT entered into an agreement whereby an affiliate of Paul RoyaltyFund II, L.P. (“PRF”) purchased an interest in the******net******royalties AVANT will receive onworldwide sales of RotarixÒ(see Note 4).  Under the PRF agreement,AVANT will retain 50% of future Glaxo milestone payments, with the balancepayable to PRF and CCH.

 

*(B)     Pfizer Inc (“Pfizer”)*

 

In connection with the Company’s acquisition of Meganin 2000, it entered into a licensing agreement with Pfizer’s Animal HealthDivision whereby Pfizer has licensed Megan’s technology for the development ofanimal health and food safety vaccines. Under the agreement, AVANT may receive additional milestone payments ofup to $3 million based upon attainment of specified milestones.  AVANT may receive royalty payments oneventual product sales.  The term of thisagreement is through the expiration of the last of the patents covered by theagreement.  AVANT has no obligation toincur any research and development costs in connection with this agreement.

 

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

 

In October 2001, the Company granted DVC a license forexclusive rights to use certain components of its anthrax vaccinetechnology.  Under the agreement, AVANTis entitled to annual $50,000 license maintenance payments, with respect towhich 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 recognized as revenue in 2002.  The annual license fee is recognized asrevenue on a straight line basis over the year. On August 5, 2005, AVANT received notice from DVC of termination of thelicense agreement, effective November 5, 2005.

 

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InJanuary 2003, AVANT was awarded a subcontract by DVC in the amount of $2.5million to develop for the U.S. Department of Defense an oral combinationvaccine against anthrax and plague using AVANT’s proprietary vaccine technologies.  As of September 30, 2005, AVANT has receiveda number of additional subcontract modifications from DVC to supportpreclinical animal testing of vaccine constructs and the start of humanclinical testing of a plague vaccine candidate being developed by AVANT for usein the oral combination vaccine.  Totalcontract funding awarded by DVC now totals approximately $7 million.  The Defense Appropriations Bill for FiscalYear 2005 passed by Congress in July 2004 committed an additional $2.8 millionin funding to this vaccine program bringing the aggregate funding commitmentsfor this vaccine development program to approximately $10 million.  Payments under the subcontract agreement aremade on a time and materials basis and receipt of the full amount isconditioned upon the project being fully funded through completion and AVANTperforming and continuing to demonstrate that it has the capability to performthe funded work.  For the nine monthsended September 30, 2005 and 2004, AVANT recognized $1,942,709 and $1,837,628,respectively, in government contract revenue from DVC. Through September 30,2005, AVANT had received approximately $7.4 million in payments under thevarious subcontract agreements.  Theseagreements expire in 2006, although they may be terminated by DVC at any timeupon 30 days notice.

 

*(D)     AdProTech, Ltd (“AdProTech”)*

 

In March 2004,AVANT granted a license to AdProTech for non-exclusive rights to use certaincomponents of its intellectual property surrounding complement inhibition.  In April 2004, AVANT received an initiallicense payment of $1 million from AdProTech and AdProTech was acquired byInflazyme Pharmaceuticals Ltd. which assumed the license.  AVANT has no continuing involvement or obligationunder this license agreement, thus it recognized the $1 million as revenueduring the first quarter of 2004.  Underthe agreement, AVANT is entitled to milestone payments of up to $13.5 millionin the aggregate and royalties on eventual product sales.  AVANT has no obligations to incur anyresearch and development costs in connection with this agreement.

 

**(11)         Long-TermLiabilities and Deferred Revenue**

 

In December 2003, AVANT entered into a LeaseAgreement, a Secured Promissory Note: Equipment Loan and a Security Agreementwith the Massachusetts Development Finance Agency (“MassDevelopment”), aneconomic development entity for the Commonwealth of Massachusetts, for AVANT tooccupy and build-out a manufacturing facility in Fall River, Massachusetts.

 

*(A)     Loan Payable*

 

Under the Lease Agreement, AVANT received aSpecialized Tenant Improvement Allowance of $1,227,800 to finance the build-outof the Fall River facility.  Principaland interest payments of the aggregate disbursement increments are due monthlyusing an amortization period of 15 years and an interest rate of 5.5% perannum.

 

At September 30, 2005, AVANT has recorded leaseholdimprovement assets of $1,227,800 and currently has a loan payable of $1,166,410to MassDevelopment, of which $81,853 is classified as current and $1,084,557 aslong-term.  AVANT began amortizing theleasehold improvement assets this quarter when the Fall River facility becameoperational.  Based on current marketinterest rates available to AVANT for long-term liabilities with similar termsand maturities, the fair value of the loan payable is approximately $868,600 atSeptember 30, 2005.

 

*(B)     Note Payable*

 

Under the Secured Promissory Note: Equipment Loan,AVANT received $903,657 from MassDevelopment to finance the purchases ofequipment to be placed in the Fall River facility (the “Loan”).  The Loan has a term of 84 months at aninterest rate of 5.5% per annum.  TheLoan is collateralized by all of the equipment purchased with the principalamount.

 

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At September 30, 2005, AVANT has recordedmanufacturing and laboratory equipment assets of $903,657 and currently has anote payable of $828,815 to MassDevelopment, of which $122,820 is classified ascurrent and $705,995 as long-term.  AVANTbegan depreciating the manufacturing and laboratory equipment assets over theestimated economic lives of the assets this quarter when the Fall Riverfacility became operational.  Based oncurrent market interest rates available to AVANT for long-term liabilities withsimilar terms and maturities, the fair value of the note payable isapproximately $738,600 at September 30, 2005.

 

*(C)     Deferred Revenue*

 

At June 30, 2005, AVANT recorded the upfrontunconditional payments totaling $10 million from an affiliate of Paul RoyaltyFund II, L.P. (“PRF”) as deferred revenue. Any future milestone payments received from PRF will also initially berecorded as deferred revenue.  Deferredrevenue will be amortized to revenue as described in Note 4.

 

**(12)         Commitmentsand Contingencies**

 

*PurchaseCommitments for Contract Manufacturing*

 

In April 2000, AVANT entered into a Services Agreement(the “Lonza Agreement”) with Lonza Biologics plc (“Lonza”) for processdevelopment and manufacture of its product candidate TP10.  AVANT has entered into a number of amendmentsto the Lonza Agreement for specific process development and scale-up work andremaining aggregate commitments as of September 30, 2005 total approximately$657,524.  The Company has incurred$1,287,651 and $6,563,263, respectively, of expense related to the LonzaAgreement in the nine-month period ended September 30, 2005 and from inceptionthrough September 30, 2005, of which $68,749 remained accrued at September 30,2005.

 

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***Safe Harbor Statement under the Private SecuritiesLitigation Reform Act of 1995:****  This quarterly report on Form10-Q includes forward-looking statements**that are subject to a variety of risks and uncertainties and reflect AVANT’s current views withrespect to future events and financial performance.  There are a number of important factors that could cause the actualresults to differ materially from those expressed in any forward-lookingstatements made by AVANT.  These factorsinclude, but are not limited to:  (1) the integration of multiple technologies and programs; (2) the ability to adapt AVANT’s vectoring**systems to develop new, safe and effective orally administered vaccines againstanthrax and plague or any other microbesused as bioweapons and other disease causing agents; (3) the ability tosuccessfully complete development and commercialization of TP10, CETi-1,CholeraGarde® (Peru-15), Ty800 and other products; (4) the cost, timing, scopeand results of ongoing 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 Company to managemultiple late stage clinical trials for a variety of product candidates; (7)the volume and profitability of product sales of Megan®Vac 1, Megan®Egg andother future products; (8) the process of obtaining regulatory approval for thesale of Rotarix**Òin major commercial markets, as well as the timing and success of worldwidecommercialization of Rotarix**Òby our partner, GlaxoSmithKline; (9) Glaxo’s strategy and business plans tolaunch and supply Rotarix ® worldwide, including in the US and other majormarkets;  (10)  changes in existing and potentialrelationships with corporate collaborators; (11) the availability, cost, deliveryand quality of clinical and commercial grade materials supplied by contractmanufacturers; (12) the timing, cost and uncertainty of obtaining regulatoryapprovals to use TP10, CETi-1, CholeraGarde® (Peru-15) and Ty800, among otherpurposes, for adults undergoing cardiac surgery,**to raiseserum HDL cholesterol levels andto protect travelers and people in endemic regions from diarrhea causingdiseases, respectively; (13) the ability to obtain substantial additionalfunding; (14) the ability to develop and commercialize products beforecompetitors and that are superior to the alternatives developed by competitors;(15) the ability to retain certain members of management; and (16) otherfactors detailed from time to time in filings with the Securities and ExchangeCommission.  You should carefully review all of thesefactors, and you should be aware**that there may be otherfactors that could cause these differences. These forward-looking statements were based on information, plans andestimates at the 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’s Discussion and Analysis ofFinancial Condition And Results of Operations**

 

AVANT’s principal activitysince our inception has been research and product development conducted on itsown behalf, as well as through joint development programs with severalpharmaceutical companies and other collaborators.  AVANT was incorporated in the State ofDelaware in December 1983.

 

**CRITICAL ACCOUNTING POLICIES**

 

The Company’s critical accounting policies are setforth under the heading “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” in Item 7 to our 2004 Form 10-K.  There have been no changes to these policiessince December 31, 2004.  Readers areencouraged to review these critical accounting policies in conjunction with thereview of this Form 10-Q.

 

*Long-Lived Assets: *In the ordinary course of our business, we incur substantialcosts to construct property and equipment. The treatment of costs to construct these assets depends on the natureof the costs and the stage of construction. Costs incurred in the project planning and design phase, and in theconstruction and installation phase, are capitalized as part of the cost of theasset.  We stop capitalizing costs whenthe asset is substantially complete and ready for its intended use.  Determining the appropriate period during whichto capitalize costs, and assessing whether particular costs qualify for capitalization,requires us to make significant judgments. These judgments can have a material impact on our reported results.

 

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Formanufacturing property and equipment, we also capitalize the cost of validatingthese assets for the underlying manufacturing process.  We complete the capitalization of validationcosts when the asset is substantially complete and ready for its intended use.  Costs capitalized include incremental laborand fringe benefits, and direct consultancy services.  Determining whether to capitalize validationcosts require judgment and can have a material impact on our reported results.

 

Propertyand equipment is stated at cost and depreciated over the estimated useful livesof the related assets using the straight-line method.  Laboratory equipment and office furniture andequipment are depreciated over a five year period and computer equipment isdepreciated over a three year period. Manufacturing equipment is amortized over a seven to ten yearperiod.  Leasehold improvements areamortized over the shorter of the estimated useful life or the noncancelableterm of the related lease.  Property andequipment under construction is classified as construction in progress and isdepreciated or amortized only after the asset is placed in service.  Determining the economic lives of propertyand equipment requires us to make significant judgments that can materiallyimpact our operating results.

 

**OVERVIEW**

 

AVANT’s focus isunlocking the power of the immune system to prevent and treat disease.  The Company has assembled a broad portfolioof technologies and intellectual property that gives it a strong competitiveposition in vaccines and immunotherapeutics. These include an oral human rotavirus vaccine, which gained its firstmarketing approval in Mexico in July 2004 and is being targeted for marketingby Glaxo worldwide.  Six of AVANT’sproducts are in clinical development. The Company’s goal is to become a leading developer of innovative vaccinesand immunotherapeutics that address health care needs on a global basis.

 

The Company hasactively developed and acquired innovative technologies – especially novelapproaches to vaccine creation.  Thedevelopment of immunotherapeutic vaccines like CETi and the marriage ofinnovative bacterial vector delivery technologies with the unique VitriLife®manufacturing process represent the potential for a new generation ofvaccines.  In addition, AVANT’s vaccinetechnologies can provide rapid protection against bacterial illnesses which mayprove useful for improving and expanding America’s vaccine arsenal againstmicrobial agents used in war or terrorist attacks.

 

AVANTis targeting its efforts where it can add the greatest value to the developmentof its products and technologies.  Itsgoal is to demonstrate clinical proof-of-concept for each product, and thenseek excellent partners to help see those products through tocommercialization.  This approach allowsAVANT to maximize the overall value of its technology and product portfoliowhile best ensuring the expeditious development of each individual product.

 

**RESEARCH AND DEVELOPMENT ACTIVITIES**

 

AVANT is currently focused on the development of anumber of immunotherapeutic and vaccine product candidates which are in variousstages of clinical trials. AVANT expects that a large percentage of itsresearch and development expenses will be incurred in support of its currentand future clinical trial programs.

 

During the past five years through the end of 2004, AVANTincurred an aggregate of $71 million in research and developmentcosts.  During the nine months endedSeptember 30, 2005, AVANT incurred an aggregate of $11.1 million inresearch and development costs. The following table indicates the amountincurred for each of AVANT’s material research programs and for otheridentified research and development activities during the two years endedDecember 31, 2004 and 2003 and the nine-month periods ended September 30,2005 and 2004. 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.

 

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| ** **                                  | ** ** | **Nine Months Ended  September 30,** | ** ** | **Years Ended  December 31,** | ** ** |
|---------------------------------------------|------------|--------------------------------------|------------|-------------------------------|------------|
| ** **                                  | ** ** | **2005**                             | ** ** | **2004**                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| *Bacterial Vaccines:*                       |       |                                 |       |                          |       |   |   |   |   |
| CholeraGardeÒ                          |       | $                                    | 707,500    |                          | $          | 80,700 |   | $ | 123,100 |   | $ | 695,800 |   |
| Ty800                                       |       | 334,900                              |       | 545,900                       |       | 688,300 |   | 186,300 |   |
| Other                                       |       | 348,300                              |       | 233,300                       |       | 332,500 |   | 137,500 |   |
| *BioDefense Vaccines:*                      |       | 1,839,200                            |       | 2,634,700                     |       | 3,082,800 |   | 3,524,500 |   |
| *Cholesterol Management Vaccine:*           |       |                                 |       |                          |       |   |   |   |   |
| CETi-1                                      |       | 458,500                              |       | 621,900                       |       | 816,900 |   | 3,404,000 |   |
| *Complement Inhibitors:*                    |       |                                 |       |                          |       |   |   |   |   |
| TP10/TP20                                   |       | 6,973,000                            |       | 4,906,000                     |       | 7,706,300 |   | 1,648,700 |   |
| *Food Safety & Animal Health Vaccines:* |       | 7,000                                |       | 11,600                        |       | 12,600 |   | 49,400 |   |
| *Viral Vaccines:*                           |       |                                 |       |                          |       |   |   |   |   |
| RotarixÒ  vaccine                      |       | 3⁄4                               |       | 150,000                       |       | 500,000 |   | 200,000 |   |
| TheraporeÒ/HIV                         |       | 4,900                                |       | 196,800                       |       | 184,900 |   | 72,400 |   |
| *Other Programs:*                           |       | 379,700                              |       | 263,800                       |       | 426,400 |   | 102,700 |   |
|                                        |       |                                 |       |                          |       |   |   |   |   |
| *Total R&D Expense*                     |       | $                                    | 11,053,000 |                          | $          | 9,644,700 |   | $ | 13,873,800 |   | $ | 10,021,300 |   |

 

**PROGRAM DEVELOPMENTS**

 

*RotavirusVaccine:*  Rotavirus isa major cause of diarrhea and vomiting in infants and children. In 1997, AVANTlicensed its oral rotavirus vaccine to Glaxo. All of the ongoing developmentfor this program is being conducted and funded by Glaxo. Glaxo gained approvalfor RotarixÒ in Mexico in July 2004, which represents thefirst in an expected series of worldwide approvals and commercial launches forthe product.  Glaxo has already filed formarket approval in more than 30 countries worldwide and has launched inadditional Latin American and Asia Pacific countries during the course of 2005.Additionally, Glaxo filed for market approval with the European regulatoryauthorities in late 2004, which triggered a $2 million milestone payment toAVANT.  Glaxo has agreed to make further payments,which could total up to $5.5 million, upon achievement of specificmilestones.  AVANT licensed-in theRotarix ® technology in 1995 and owes a license fee of 30% to CCH on netroyalties received from Glaxo.  In May2005, AVANT entered into an agreement whereby an affiliate of PRF purchased aninterest in the******net******royaltiesAVANT will receive on worldwide sales of RotarixÒ(see Note 4 of our unaudited consolidated financial statements).  Under the PRF agreement, AVANT will retain50% of future Glaxo milestone payments, with the balance payable to PRF andCCH.

 

*ComplementInhibitors:*  InFebruary 2002, AVANT announced that TP10 had not achieved a significantreduction in the primary endpoint of a Phase II adult cardiac surgery trialconducted in 564 patients.  However,further analysis of the study data demonstrated an important treatment benefitin male patients participating in the trial directly related to mortality,which was impressive, but, with no treatment benefit observed in femalepatients.  In February 2004, AVANTstarted a Phase IIb double-blind, placebo-controlled trial of TP10 inapproximately 300 women undergoing cardiopulmonary by-pass surgery.  The trial will examine the effect of TP10versus placebo at approximately 30 sites throughout the United States.  The goals of the trial are to clarify thetreatment effect that TP10 has for women undergoing high risk cardiac surgery,as well as augment the safety data for that patient population to allow for thedesign of a subsequent registration-directed trial.  In October 2005, AVANT completed enrollmentin this trial and expects to report results of this study in the first quarterof 2006.  AVANT plans to seek a corporate partner to complete development and tocommercialize TP10 prior to starting a Phase III clinical trial.

 

During the period January 1, 2000 throughDecember 31, 2004, AVANT incurred approximately $30.5 million inresearch, development, contract manufacturing and clinical costs.  During the nine months

 

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ended September 30, 2005, the Company incurred approximately $7 millionin research, development, contract manufacturing and clinical costs associatedwith its complement program.

 

*BacterialVaccines:*  AVANT’s goalis to become a leading developer of innovative vaccines that address healthcare needs on a global basis.  In thisregard, AVANT acquired VitriLife®, a technology with the potential to reducemanufacturing costs and improve product stability, eliminating the need for vaccinerefrigeration during shipping and storage. With this technology 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 requiringno refrigeration.

 

Development of a safe, effective cholera vaccine isthe first step in establishing AVANT’s single-dose, oral bacterial vaccinefranchise.  During 2002, AVANT completeda Phase II dose-ranging study with CholeraGarde® which confirmed the safety andactivity of this vaccine and supported the start of Phase II trials inDecember 2002 with the International Vaccine Institute (“IVI”) inBangladesh where cholera is endemic. In July 2005, Bangladesh study results inchildren and infants showed CholeraGarde ® to be well tolerated and highlyimmunogenic, with 77% of children aged 9 months to 5 years generatingprotective immune responses.  Previouslypublished results showed the vaccine to be well tolerated and immunogenicagainst the cholera organism in the adult portion of this trial.

 

In July 2005, AVANT reported that it and HarvardMedical School would receive approximately $500,000 from the NationalInstitutes of Health to apply AVANT’s VitriLife® formulation toCholeraGarde®.  In the future,AVANT plans to utilize VitriLife®, a proprietary technology thatconfers thermostability to live bacterial vaccines, at the Fall River facilityfor its other bacterial vaccines.

 

During the period January 1, 2000 through December 31,2004, AVANT incurred approximately $9.3 million in research, developmentand clinical costs on its CholeraGarde® program.  During the nine months ended September 30,2005, AVANT incurred approximately $707,500 in research, development and clinicalcosts on its CholeraGarde® program.

 

AVANT is also developing an oral typhoid fevervaccine, Ty800, for global health needs. The National Institute of Allergy and Infectious Disease (NIAID) of theNational Institutes of Health (NIH) and AVANT have agreed for the NIAID toconduct a Phase I/II in-patient dose-ranging clinical trial aimed atdemonstrating the safety and immunogenicity of the Ty800 vaccine.  NIAID has funded the production of Ty800vaccine for clinical testing and expects to initiate the Phase I/II trial at aNIH-funded clinical site in the first quarter of 2006.  The NIAID trial seeks toconfirm the safety and immunogenicity of the Ty800 oral vaccine observed in anearlier physician-sponsored Ty800 vaccine study.  During the period January 1, 2000through December 31, 2004, AVANT incurred approximately $5 million inresearch, development, contract manufacturing and clinical costs on its Ty800program.  During the nine months endedSeptember 30, 2005, AVANT incurred approximately $334,900 in research,development and clinical costs on its Ty800 program.

 

Finally, AVANT is developing three additionalbacterial vaccines against enterotoxigenic *E.coli*(“ETEC”), *Shigella* and *Campylobacter*—all important causes of serious diarrhealdiseases worldwide. These three programs are in pre-clinical development.  In2005, AVANT expects to allocate resources to further the development of atwo-vaccine combination product containing ETEC and Shigella or Campylobacteraddressed to the travelers’ market.  InApril 2005, AVANT was awarded a Phase I Small Business Innovation Research(SBIR) grant to support the development of a live attenuated salmonella vaccineagainst campylobacter.  The NIAID awardprovides approximately $131,000 in funding and work was started by AVANT duringthe third quarter of 2005.  During thenine months ended September 30, 2005, AVANT incurred approximately $348,300 inresearch, development and clinical costs on these pre-clinical programs.

 

*BioDefenseVaccines:*  Theattenuated live bacteria used to create AVANT’s single-dose oral vaccines canalso serve as vectors for the development of vaccines against other bacterialand viral diseases.

 

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By engineering key disease antigens into the DNA of the vectororganisms, AVANT expects to be able to extend the protective ability of itssingle-dose oral vaccines to a wide variety of illnesses.  AVANT believes its vector technologies mayprove useful for improving and expanding America’s vaccine arsenal againstmicrobial agents used in war or terrorist attacks.

 

In October 2001, AVANT granted DynPort VaccineCompany LLC (“DVC”) a license for exclusive rights to use certain components ofAVANT’s anthrax vaccine technology.  InOctober 2002, DVC announced the initiation of a Phase I clinical trial ofa new injectable recombinant anthrax vaccine in approximately 70volunteers.  The vaccine candidateconsists of a highly purified protein—Protective Antigen—derived from theanthrax bacterium using recombinant DNA technology and production processeslicensed from AVANT.  The study willevaluate tolerability, safety and immunogenicity of DVC’s new vaccine. OnAugust 5, 2005, AVANT received notice from DVC of termination of the licenseagreement, effective November 5, 2005. DVC plans to complete the ongoing Phase I clinical trial.

 

Further,in January 2003, AVANT was awarded a subcontract by DVC in the amount of $2.5million to develop for the U.S. Department of Defense an oral combinationvaccine against anthrax and plague using AVANT’s proprietary vaccinetechnologies.  As of September 30, 2005,AVANT has received a number of additional subcontract modifications from DVC tosupport preclinical animal testing of vaccine constructs and the start of humanclinical testing of a plague vaccine candidate being developed by AVANT for usein the oral combination vaccine.  Totalcontract funding awarded by DVC now totals approximately $7 million.  The Defense Appropriations Bill for FiscalYear 2005 passed by Congress in July 2004 committed an additional $2.8 millionin funding to this vaccine program bringing aggregate funding commitments forthis vaccine development program to approximately $10 million.  Payments under the subcontract agreement aremade on a time and materials basis and receipt of the full amount isconditioned upon the project being fully funded through completion and AVANTperforming and continuing to demonstrate that it has the capability to performthe funded work.  For the nine monthsended September 30, 2005 and 2004, AVANT recognized $1,942,709 and $1,837,628,respectively, in government contract revenue from DVC.  Through September 30, 2005, AVANT hadreceived approximately $7.4 million in payments under the subcontractagreements.  These agreements expire in2006, although they may be terminated by DVC at any time upon 30 days notice.

 

During the period January 1, 2000 throughDecember 31, 2004, AVANT incurred approximately $6.8 million inresearch and development costs on its biodefense vaccine program.  During the nine months ended September 30,2005, AVANT incurred approximately $1,839,200 in research and development costson its biodefense vaccine program.

 

*FoodSafety and Animal Health Vaccines:*  AVANT has partnered with Pfizer Inc. (“Pfizer”),who will apply AVANT’s vaccine technologies to animal health and human foodsafety markets.  The Pfizer researchprogram achieved an important milestone in late 2002, which resulted in apayment of $500,000 to AVANT.  During theperiod January 1, 2000 through December 31, 2004, AVANT incurred approximately$1.6 million in research and development costs on its food safety andanimal health vaccines program.  Duringthe nine months ended September 30, 2005, AVANT incurred approximately $7,000in research and development costs on its food safety and animal health vaccinesprogram.

 

*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 the balance of HDL (high-densitylipoprotein) and LDL (low-density lipoprotein). The Company is developing this vaccine, CETi-1, to stimulate an immuneresponse against CETP, which it believes may improve the ratio of HDL to LDLcholesterol and reduce the progression of atherosclerosis which leads to heartattack.

 

In October 2003, AVANTcompleted the CETi-1 vaccine Phase II efficacy study 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.  Inaddition, the CETi-1 vaccine worked as designed to elicit anti-CETP antibodiesin a high percentage of patients treated,

 

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approximately 90%.  In recentpre-clinical testing, AVANT has identified a new adjuvanted formulation for thevaccine that elicits more than a 10-fold increase in anti-CETP antibody titerswhen compared to the current CETi vaccine. The Company has contracted for the production of GMP peptide for thenewly formulated vaccine.  During theperiod January 1, 2000 through December 31, 2004, AVANT incurredapproximately $11.7 million in research, development and clinical costsassociated with the CETi program.  Duringthe nine months ended September 30, 2005, AVANT incurred approximately $458,500in research, development and clinical costs associated with the CETiprogram.  AVANT plans to seek a corporatepartner to complete development and to commercialize the CETi vaccine.

 

**TECHNOLOGY LICENSING**

 

AVANT has adopted a business strategy of out-licensingtechnology that does not match its development focus or where it lackssufficient resources for the technology’s efficient development or wherecertain uses of the technology are outside of AVANT’s focus.  For example, when AVANT acquired Megan, italso signed an agreement with Pfizer to leverage the value of Megan’s oralvaccine technology in a significant market opportunity (animal health and humanfood safety) outside of AVANT’s own focus on human health care.

 

*AdProTech: *In March 2004, AVANTgranted a license to AdProTech for non-exclusive rights to use certaincomponents of its intellectual property surrounding complement inhibition.  Financial terms of the agreement withAdProTech include an initial license fee, milestone payments androyalties.  In April 2004, AdProTech wasacquired by Inflazyme Pharmaceuticals Ltd. which assumed the license.

 

**RESULTS OF OPERATIONS**

 

Three-Month Period EndedSeptember 30, 2005 as Comparedwith the Three-Month Period Ended September 30, 2004

 

AVANT reported consolidated net loss of $4,514,434, or$.06 per share, for the third quarter ended September 30, 2005, compared with anet loss of $3,697,231, or $.05 per share, for the third quarter endedSeptember 30, 2004.  The weighted average common sharesoutstanding used to calculate net loss per common share was 74,145,814 in 2005and 74,118,314 in 2004.

 

*Revenue:* Total revenue increased $318,812 to $846,322 for the third quarter of2005 compared to $527,510 for the third quarter of 2004.

 

Product development and licensing revenue decreased $65,588, or 45.5%, to$78,692 in 2005 from $144,280 in 2004. Product development and licensing revenue in 2004 consisted primarily ofthe amortization of nonrefundable license fees from Pfizer which was fullyamortized by November 2004.

 

AVANT has received anumber of subcontracts from its partner, DVC, to develop anthrax and plaguevaccines for the U.S. Department of Defense. AVANT will be reimbursed by DVC on a time and materials basis forvaccine development research work performed by AVANT.  Under these agreements and several SBIR andNIH grants, AVANT recognized $767,630 and $334,166 in government contract andgrant revenue during the third quarters of 2005 and 2004, respectively, forwork performed.  AVANT expects the amountof research work to be performed for DVC during the remainder of 2005 to remainlevel when compared to the amount of research work performed during thecomparable period in 2004.

 

Marketing and distributionof the Megan poultry product line is performed by AVANT’s partner, LohmannAnimal Health International (“LAHI”), and AVANT receives a royalty percentageof all Megan®Vac 1 and Megan®Egg product sales. In early March 2005, the USDA placed a stop sale order on MeganÒVac1 and MeganÒEgg for LAHI’s failure to update the Outline ofProduction as LAHI improved the fermentation process.  LAHI updated the Outline of Production and inJuly 2005 the USDA lifted the stop sale order on the Megan products.  AVANT receivedno royalty payments during the third quarter of 2005 and received $49,064 inthe third quarter of 2004.

 

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*Operating Expense:* Total operating expense increased $1,165,260, or 26.8%, to $5,510,418for the third quarter of 2005 compared to $4,345,158 for the third quarter of2004.

 

Research and developmentexpense increased $785,521, or 28%, to $3,591,334 in 2005 from $2,805,813 in2004.  The increase in 2005 compared to2004 is primarily due to increases in TP10 clinical trials costs of$481,663, increases in contractmanufacturing costs of $75,464associated with the TP10 program and increased personnel, operating andfacility-related costs of $277,118 associated with operations at the Fall Rivermanufacturing facility.  These increases were offset in part bydeclines in, license fees of$56,250.  AVANT expects research anddevelopment expense to remain at current levels in the fourth quarter of 2005as the TP10 Phase II female clinical trial finalizes, as AVANT’s contractmanufacturer continues process development and scale-up work for the TP10program and as the Fall River facility runs at full operational status.

 

General and administrativeexpense increased $379,739, or 29.4%, to $1,670,306 in 2005 compared to$1,290,567 in 2004 and is primarily attributed to increases in: personnel andrelated costs of $75,743, legal fees of $111,165 primarily related to patentmatters, and other professional fees and consultancy costs of $78,850 relatedto project management and Sarbanes-Oxley compliance.  AVANT expects general and administrativeexpense to continue at this level for the balance of 2005.

 

Amortization expense ofacquired intangible assets was $248,778 in 2005 and 2004.

 

*Investment and Other Income, Net:*  Interest and other income increased $29,245to $149,662 for the third quarter of 2005 compared to $120,417 for the thirdquarter of 2004.  The increase isprimarily due to higher interest rates, offset in part by lower average cashbalances during the third quarter of 2005 compared to the third quarter of2004.  During the third quarters of 2005and 2004, the average month-end cash balances were $24,007,956 and $36,502,328,respectively.  The effective interestrates during the third quarters of 2005 and 2004 were 3.27% and 1.32%,respectively.

 

Nine-Month Period EndedSeptember 30, 2005 as Comparedwith the Nine-Month Period Ended September 30, 2004

 

AVANT reported a consolidated net loss of $14,116,872,or $.19 per share, for the nine months ended September 30, 2005, compared witha net loss of $9,505,378, or $.13 per share, for the nine months endedSeptember 30, 2004.  The increase in netloss between periods was due to reduced revenues and increased operatingexpenses, offset partially by increased investment and other income.  Theweighted average common shares outstanding used to calculate net loss percommon share was 74,136,931 in 2005 and 72,510,640 in 2004.

 

*Revenue:* Total revenue decreased $1,997,183 to $2,454,035 for the first ninemonths of 2005 compared to $4,451,218 for the first nine months of 2004.

 

Product development and licensing revenue decreased $2,183,909 to$209,209 for the first nine months of 2005 from $2,393,118 for the first nine months of 2004. The decrease is primarily due to the one-time recognition of $1 millionin revenue from DVC for rPA clinical materials and a license fee of $1million from AdProTech, Ltd in the first quarter of 2004.

 

AVANT has received anumber of subcontracts from its partner, DVC, to develop anthrax and plaguevaccines for the U.S. Department of Defense. AVANT will be reimbursed by DVC on a time and materials basis forvaccine development research work performed by AVANT.  Under these agreements and several SBIR andNIH grants, AVANT recognized $2,156,680 and $1,928,712 in government contractand grant revenue during the first nine months of 2005 and 2004,respectively.  AVANT expects the level ofresearch work to be performed for DVC during the remainder of 2005 toapproximate the level of research work performed during the first nine monthsof 2005.

 

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In 2002, AVANT transferredthe marketing and distribution of the Megan poultry product line to ourpartner, LAHI.  Product royalty paymentsreceived by AVANT for Megan®Vac 1 and Megan®Egg product sales for the firstnine months of 2005 and 2004 totaled $88,146 and $129,388, respectively.

 

*Operating Expense:* Total operating expense increased $2,815,900, or 19.8%, to $17,041,463for the first nine months of 2005 compared to $14,225,563 for the first ninemonths of 2004.

 

Research and development expense increased $1,426,128,or 14.8%, to $11,052,944 for the first nine months of 2005 compared to$9,626,816 for the first nine months of 2004. The increase in 2005 compared to2004 is primarily due to increases in contract manufacturing costs and labsupplies of $819,907 associated with the TP10 program, to increases in clinicaltrial costs of $367,138 and increased personnel, operating andfacility-related costs of $751,570 associated with operations of the Fall Riverfacility.  These increases were offset in part bydecreases in consultancy costsof $36,892, license fees of $168,749, and insurance costs of $56,742.  AVANT expects research and developmentexpense to continue at current levels for the remainder of 2005 as the TP10Phase II female clinical trial finalizes, as AVANT’s contract manufacturercontinues process development and scale-up work and as the Fall River facilityruns at full operational status.

 

General and administrative expense increased$1,389,772, or 36.1%, to $5,242,185 for the first nine months of 2005 comparedto $3,852,413 for the first nine months of 2004.  The increase in 2005 is primarily attributedto increased: personnel and related expenses of $431,546, legal fees of $502,787 primarily associated withthe PRF transaction and patent matters, and other professional services andconsulting costs of $305,572 related toproject management and Sarbanes-Oxley compliance.  AVANT expects the level of general andadministrative expense during the remainder of 2005 to approximate the level ofexpense incurred during the first nine months of 2005 and 2004.

 

Amortization expense ofacquired intangible assets was $746,334 in the first nine months of 2005 and2004.

 

*InvestmentIncome, Net: *Net investment income increased $201,589 to $470,556for the first nine months of 2005 compared to $268,967 for the first ninemonths of 2004.  The increase isprimarily due to higher average interest rates, offset in part by lower averagecash balances during the first nine months of 2005 compared to the first ninemonths of 2004.  During the first ninemonths of 2005 and 2004, the average month-end cash balances were $26,948,666and $36,938,225, respectively.  Theeffective interest rates during the first nine months of 2005 and 2004 were2.80% and 1.08%, respectively.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

At September 30, 2005, AVANT’s principal sources ofliquidity consisted of cash and cash equivalents of $22,198,775.  AVANT’s cash and cash equivalents are highlyliquid investments with a maturity of three months or less at the date ofpurchase and consist of time deposits and investments in money market mutualfunds with commercial banks and financial institutions, short-term commercialpaper, and U.S. Government and other investment grade debt securities.  The Company maintains cash balances withfinancial institutions in excess of insured limits, however, AVANT does notanticipate any losses with respect to such cash balances.

 

The use of AVANT’s cash flows for operations hasprimarily consisted of salaries and wages for its employees, facility and facility-relatedcosts for its offices, laboratories and manufacturing facility, fees paid inconnection 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 cash flows from operations for theforeseeable future will be upfront license payments, payments for theachievement of milestones, product royalty payments, payments under governmentcontracts and grants and funded research and development under collaborationagreements that AVANT may receive.  The timingof any new collaboration agreements, government contracts or grants and

 

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any payments under these agreements, contracts or grants cannot beeasily predicted and may vary significantly from quarter to quarter.

 

Net cash used in operating activities increased to$8,090,620 for the first nine months of 2005 compared to $6,812,300 for thefirst nine months of 2004.  The increaseis primarily attributed to an increase in net loss incurred in 2005 compared to2004, a decrease in accounts payable and accrued expenses due to timing ofpayments, offset partly by the receipt of $5 million from PRF which is includedin deferred revenue related to the PRF royalty transaction.  AVANT expects that cash used in operationswill continue to increase in 2005 as the Company continues to develop itsproducts in clinical trials, contracts for the manufacture of clinicalmaterials, brings its Fall River facility to full operational status andadvances new products into preclinical development.  The expected increase in cash used would bepartially offset by anticipated payments made under the Company’s governmentcontracts and grants and anticipated product royalty payments.

 

Cash used in investing activities decreased to$1,350,233 for the first nine months of 2005 compared to $1,568,013 for thefirst nine months of 2004.  The decrease is due to lower investment inproperty and equipment in 2005 compared to 2004 primarily at the Fall Rivermanufacturing facility.  AVANTexpects it will continue to use cash in its investing activities as the Companyexpands its infrastructure and brings the Fall River facility to fulloperational status.

 

Net cash used in financing activities was $101,866 forthe first nine months of 2005 compared to net cash provided by financing activitiesof $23,357,606 for the first nine months of 2004.  Thedecrease in cash provided by financing activities between years is dueprimarily to the sale of common stock in the first quarter of 2004.

 

**AGGREGATECONTRACTUAL OBLIGATIONS**

 

Thefollowing table summarizes AVANT’s contractual obligations at September 30,2005 and the effect such obligations and commercial commitments are expected tohave on its liquidity and cash flow in future years.  These obligations, commitments and supportingarrangements represent payments based on current operating forecasts, which aresubject to change:

 
| ** **                     | ** ** | **Total** | ** ** | **2005** | ** ** | **2006-2008** | ** ** | **2009-2010** | ** ** | **Thereafter** | ** ** |
|--------------------------------|------------|-----------|------------|----------|------------|---------------|------------|---------------|------------|----------------|------------|
| Contractual obligations:       |       |      |       |     |       |          |       |          |       |           |       |
| Operating lease obligations    |       | $         | 5,196,600  |     | $          | 617,300       |       | $             | 4,041,100  |           | $          | 538,200 |   | $ | — |   |
| **Loan Payable*******          |       | 1,632,800 |       | 24,400   |       | 418,600       |       | 256,200       |       | 933,600        |       |
| **Note Payable*******          |       | 962,700   |       | 29,500   |       | 531,500       |       | 354,300       |       | 47,400         |       |
| Licensing obligations          |       | 531,300   |       | 21,300   |       | 255,000       |       | 170,000       |       | 85,000         |       |
| Total  contractual obligations |       | $         | 8,323,400  |     | $          | 692,500       |       | $             | 5,246,200  |           | $          | 1,318,700 |   | $ | 1,066,000 |   |
|                           |       |      |       |     |       |          |       |          |       |           |       |
| Commercial commitments:        |       |      |       |     |       |          |       |          |       |           |       |
| Clinical development           |       | $         | 1,786,800  |     | $          | 1,786,800     |       | $             | —     |           | $          | — |   | $ | — |   |
| Manufacturing development      |       | 657,500   |       | 287,300  |       | 370,200       |       | —        |       | —         |       |
| Total commercial  commitments  |       | $         | 2,444,300  |     | $          | 2,074,100     |       | $             | 370,200    |           | $          | — |   | $ | — |   |

 

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*includes interest obligations

 

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## **Item3.  Quantitative and QualitativeDisclosures about Market Risk**

 

AVANT owns financial instruments that are sensitive tomarket risk as part 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 sensitive instruments are held for tradingpurposes.  AVANT invests its cashprimarily in money market mutual funds and U.S. Government and other investmentgrade debt securities.  These investmentsare evaluated quarterly to determine the fair value of the portfolio.  The Company’s investment portfolio includesonly marketable securities with active secondary or resale markets to helpinsure liquidity.  AVANT has implementedinvestment policies regarding the amount and credit ratings of investments.  Because of the short-term nature of theseinvestments, AVANT does not believe it has material exposure due to marketrisk.  The impact to AVANT’s financialposition and results of operations from likely changes in interest rates is notmaterial.

 

AVANT does not utilize derivative financialinstruments.  The carrying amountsreflected in the consolidated balance sheet of cash and cash equivalents,accounts receivables and accounts payable approximates fair value at September30, 2005 due to the short-term maturities of these instruments.

 

**Item 4.  Controls and Procedures**

 

*Evaluationof disclosure controls and procedures*.

 

As required by Rule 13a-15 under the SecuritiesExchange Act of 1934, as of September 30, 2005, we carried out an evaluationunder the supervision and with the participation of our management, includingour Chief Executive Officer and Chief Financial Officer, of the effectivenessof the design and operation of our disclosure controls and procedures.  In designing and evaluating our disclosurecontrols and procedures, we and our management recognize that any controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives, and ourmanagement necessarily was required to apply its judgment in evaluating andimplementing possible controls and procedures. Based upon that evaluation, our Chief Executive Officer and ChiefFinancial Officer have concluded that they believe that, as of September 30,2005, our disclosure controls and procedures were reasonably effective toensure that information required to be disclosed by us in the reports we fileor submit under the Exchange Act is recorded, processed, summarized andreported, within the time periods specified in the Securities and ExchangeCommission’s rules and forms.  We willcontinue to review and document our disclosure controls and procedures on anongoing basis, and may from time to time make changes aimed at enhancing theireffectiveness and to ensure that our systems evolve with our business.

 

*Changesin Internal Control Over Financial Reporting.*

 

There was no significant change in our internalcontrol over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)under the Exchange Act) that occurred during the period covered by thisQuarterly Report on Form 10-Q that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.

 

**PART II — OTHER INFORMATION**

 

**Item 6.    Exhibits and Reports on Form 8-K**

 

**(a)****   Exhibits**

** **

31.1         Certification ofPresident and Chief Executive Officer

 

31.2         Certification ofSenior Vice President and Chief Financial Officer

 

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32.1         Section 1350Certifications

 

**(b)****   Reportson Form 8-K**

 

A Form 8-K (Item 12) was filed on August 3, 2005regarding a press release announcing that AVANT had reported its financialresults for the second quarter ended June 30, 2005.

 

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**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

 
| ** **              | **AVANT IMMUNOTHERAPEUTICS, INC.** |
|-------------------------|------------------------------------|
|                    |                               |   |
|                    |                               |   |
|                    | BY:                                |   |
|                    |                               |   |
|                    |                               |   |
| Dated: November 3, 2005 |                               | /s/ Una S. Ryan |   |
|                    |                               | Una S. Ryan, Ph. D. |
|                    |                               | President and Chief Executive Officer |
|                    |                               | (Principal Executive Officer) |
|                    |                               |   |
|                    |                               |   |
| Dated: November 3, 2005 |                               | /s/ Avery W. Catlin |   |
|                    |                               | Avery W. Catlin |
|                    |                               | Senior Vice President, Treasurer |
|                    |                               | and Chief Financial Officer |
|                    |                               | (Principal Financial and |
|                    |                               | Accounting Officer) |

 

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**EXHIBIT INDEX**

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

 

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