**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, DC 20549**

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**FORM10-Q**

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

**For the quarterly periodended March 31, 2007**

**OR**

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

**Commission filenumber:  0-15006**

**AVANT IMMUNOTHERAPEUTICS,INC.**

(Exact name of registrant as specified in its charter)
| **Delaware**              | ** ** | **No. 13-3191702**               |
|---------------------------|------------|---------------------------------------|
| (State of  Incorporation) |       | (I.R.S. Employer  Identification No.) |

 

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

(Address of principal executive offices) (Zip Code)

**(781) 433-0771**

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports) and(2) has been subject to such filing requirements for the past 90 days.   Yes * *x   No o

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

 

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

As of May 1, 2007, 74,184,048 shares of commonstock, $.001 par value per share, were outstanding.

 

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**AVANT IMMUNOTHERAPEUTICS, INC.**

**FORM 10-Q**

**Quarter Ended March 31, 2007**

**Table of Contents**
|                                                                                                      |
|------------------------------------------------------------------------------------------------------|
| **Part I—Financial  Information**                                                          |
|                                                                                                 |
| Item 1. Unaudited  Financial Statements.                                                             |
|                                                                                                 |
| Consolidated Balance  Sheets at March 31, 2007 and December 31, 2006                       |
|                                                                                                 |
| Consolidated  Statements of Operations for the Three Months Ended March  31, 2007 and  2006     |
|                                                                                                 |
| Consolidated  Statements of Cash Flows for the Three Months Ended March 31, 2007 and  2006      |
|                                                                                                 |
| Notes to  Consolidated Financial Statements                                                          |
|                                                                                                 |
| Item 2. Management’s  Discussion and Analysis of Financial Condition and Results of Operations. |
|                                                                                                 |
| Item 3.  Quantitative and Qualitative Disclosures About Market Risk.                                 |
|                                                                                                 |
| Item 4. Controls and  Procedures.                                                                    |
| ** **                                                                                           |
| **Part II — Other  Information**                                                           |
|                                                                                                 |
| Item 1. Legal  Proceedings.                                                                          |
|                                                                                                 |
| Item 1A. Risk Factors.                                                                               |
|                                                                                                 |
| Item 6. Exhibits.                                                                                    |
|                                                                                                 |
| Signatures                                                                                           |
|                                                                                                 |
| Certifications                                                                                       |

 

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**PART I—FINANCIALINFORMATION**

**Item 1.   FinancialStatements**

**AVANT IMMUNOTHERAPEUTICS, INC.**

**CONSOLIDATED BALANCE SHEETS**

**(Unaudited)**
| ** **                                                                                                                                                                                                      | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                                                                      | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Current Assets:                                                                                                                                                                                                 |       |                     |       |                        |       |
| Cash and Cash  Equivalents                                                                                                                                                                                      |       | $                        | 32,573,796 |                        | $          | 40,911,539 |   |
| Accounts  Receivable                                                                                                                                                                                            |       | 238,606                  |       | 320,941                     |       |
| Prepaid Expenses  and Other Current Assets                                                                                                                                                                      |       | 1,112,149                |       | 1,171,014                   |       |
|                                                                                                                                                                                                            |       |                     |       |                        |       |
| Total Current  Assets                                                                                                                                                                                           |       | 33,924,551               |       | 42,403,494                  |       |
|                                                                                                                                                                                                            |       |                     |       |                        |       |
| Property and Equipment,  Net                                                                                                                                                                                    |       | 15,551,013               |       | 13,967,800                  |       |
| Intangible and Other  Assets, Net                                                                                                                                                                               |       | 3,831,914                |       | 4,071,963                   |       |
| Goodwill                                                                                                                                                                                                        |       | 1,036,285                |       | 1,036,285                   |       |
| Total Assets                                                                                                                                                                                                    |       | $                        | 54,343,763 |                        | $          | 61,479,542 |   |
| ** **                                                                                                                                                                                                      | ** ** | ** **               | ** ** | ** **                  | ** ** |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                                                  | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Current Liabilities:                                                                                                                                                                                            |       |                     |       |                        |       |
| Accounts Payable                                                                                                                                                                                                |       | $                        | 1,017,921  |                        | $          | 2,552,089 |   |
| Accrued Expenses                                                                                                                                                                                                |       | 2,603,581                |       | 2,674,544                   |       |
| Current Portion  of Deferred Revenue                                                                                                                                                                            |       | 6,039,687                |       | 4,380,074                   |       |
| Current Portion  of Long-Term Liabilities                                                                                                                                                                       |       | 546,479                  |       | 477,606                     |       |
| Total Current  Liabilities                                                                                                                                                                                      |       | 10,207,668               |       | 10,084,313                  |       |
|                                                                                                                                                                                                            |       |                     |       |                        |       |
| Deferred Revenue                                                                                                                                                                                                |       | 42,984,354               |       | 45,069,123                  |       |
| Other Long-Term  Liabilities                                                                                                                                                                                    |       | 4,516,433                |       | 4,165,126                   |       |
|                                                                                                                                                                                                            |       |                     |       |                        |       |
| Commitments and  Contingent Liabilities (Note 12)                                                                                                                                                          |       |                     |       |                        |       |
| Stockholders’ Equity:                                                                                                                                                                                      |       |                     |       |                        |       |
| Convertible  Preferred Stock, 4,513,102 Shares Authorized; None Issued and Outstanding                                                                                                                          |       | —                   |       | —                      |       |
|                                                                                                                                                                                                            |       |                     |       |                        |       |
| Common Stock,  $.001 Par Value; 100,000,000 Shares Authorized; 74,404,367 Issued and  74,184,048 Outstanding at March 31, 2007 and 74,402,867 Issued and 74,182,548 Outstanding at  December 31, 2006 |       | 74,404                   |       | 74,403                      |       |
| Additional  Paid-In Capital                                                                                                                                                                                     |       | 258,661,233              |       | 258,560,628                 |       |
| Less: 220,319  Common Treasury Shares at Cost                                                                                                                                                                   |       | (227,646                 | )          | (227,646                    | )          |
| Accumulated  Deficit                                                                                                                                                                                            |       | (261,872,683             | )          | (256,246,405                | )          |
|                                                                                                                                                                                                            |       |                     |       |                        |       |
| Total  Stockholders’ Equity (Deficit)                                                                                                                                                                      |       | (3,364,692               | )          | 2,160,980                   |       |
|                                                                                                                                                                                                            |       |                     |       |                        |       |
| Total Liabilities and  Stockholders’ Equity                                                                                                                                                                |       | $                        | 54,343,763 |                        | $          | 61,479,542 |   |

 

*Seeaccompanying notes to unaudited consolidated financial statements*

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**AVANT IMMUNOTHERAPEUTICS, INC.CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**
| ** **                                                       | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                       | ** ** | **March 31,  2007**         | ** ** | **March 31,  2006** | ** ** |
| **REVENUE:**                                                     | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Product  Development and Licensing Agreements                    |       | $                                | 8,086      |   | $ | 2,619,974 |   |
| Government  Contracts and Grants                                 |       | 262,259                          |       | 500,207 |   |
| Product  Royalties                                               |       | 911,852                          |       | 586,306 |   |
|                                                             |       |                             |       |   |   |
| Total Revenue                                                    |       | 1,182,197                        |       | 3,706,487 |   |
| ** **                                                       | ** ** | ** **                       | ** ** | ** ** | ** ** |
| **OPERATING  EXPENSE:**                                          | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Research and  Development                                        |       | 4,958,702                        |       | 4,348,707 |   |
| General and Administrative                                       |       | 2,051,977                        |       | 1,988,514 |   |
| Amortization of  Acquired Intangible Assets                      |       | 240,048                          |       | 248,778 |   |
|                                                             |       |                             |       |   |   |
| Total Operating  Expense                                         |       | 7,250,727                        |       | 6,585,999 |   |
|                                                             |       |                             |       |   |   |
| Operating Loss                                                   |       | (6,068,530                       | )          | (2,879,512 | ) |
|                                                             |       |                             |       |   |   |
| Investment and  Other Income, Net                                |       | 442,251                          |       | 280,521 |   |
|                                                             |       |                             |       |   |   |
| Loss before  Provision for Income Taxes                          |       | (5,626,279                       | )          | (2,598,991 | ) |
|                                                             |       |                             |       |   |   |
| Provision for  Income Taxes                                      |       | —                           |       | 372,000 |   |
|                                                             |       |                             |       |   |   |
| Net Loss                                                         |       | $                                | (5,626,279 | ) | $ | (2,970,991 | ) |
|                                                             |       |                             |       |   |   |
| Basic and  Diluted Net Loss Per Common Share                     |       | $                                | (0.07      | ) | $ | (0.04 | ) |
|                                                             |       |                             |       |   |   |
| Shares Used in  Calculating Basic and Diluted Earnings per Share |       | 75,183,981                       |       | 74,172,563 |   |

 

*Seeaccompanying notes to unaudited consolidated financial statements*

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**AVANTIMMUNOTHERAPEUTICS, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**
| ** **                                                                   | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                   | ** ** | **March 31,  2007**         | ** ** | **March 31,  2006** | ** ** |
| **Cash  Flows from Operating Activities:**                                   | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Net Loss                                                                     |       | $                                | (5,626,279 | ) | $ | (2,970,991 | ) |
| Adjustments to Reconcile Net Loss to Net Cash Used  in Operating Activities: |       |                             |       |   |   |
| Depreciation and Amortization                                                |       | 578,523                          |       | 473,080 |   |
| Loss on Disposal of Assets                                                   |       | 74,148                           |       | — |   |
| Stock-Based Compensation Expense                                             |       | 98,897                           |       | 264,255 |   |
| Changes in Operating Assets and Liabilities:                                 |       |                             |       |   |   |
| Accounts Receivable                                                          |       | 82,335                           |       | (297,839 | ) |
| Prepaid and Other Current Assets                                             |       | 58,865                           |       | (10,678 | ) |
| Accounts Payable and Accrued Expenses                                        |       | (1,605,130                       | )          | (19,269 | ) |
| Deferred Revenue                                                             |       | (425,156                         | )          | 39,449,197 |   |
| Other Long-Term Liabilities                                                  |       | 494,430                          |       | 198,707 |   |
|                                                                         |       |                             |       |   |   |
| Net Cash Provided by (Used in) Operating Activities                          |       | (6,269,367                       | )          | 37,086,462 |   |
| ** **                                                                   | ** ** | ** **                       | ** ** | ** ** | ** ** |
| **Cash  Flows from Investing Activity:**                                     | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Acquisition of Property and Equipment                                        |       | (1,995,835                       | )          | (684,397 | ) |
|                                                                         |       |                             |       |   |   |
| Cash Used in Investing Activity                                              |       | (1,995,835                       | )          | (684,397 | ) |
| ** **                                                                   | ** ** | ** **                       | ** ** | ** ** | ** ** |
| **Cash  Flows from Financing Activities:**                                   | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Proceeds from Stock Issuance                                                 |       | 1,709                            |       | 6,145 |   |
| Payment of Long-Term Liabilities                                             |       | (74,250                          | )          | (71,725 | ) |
|                                                                         |       |                             |       |   |   |
| Net Cash Used in Financing Activities                                        |       | (72,541                          | )          | (65,580 | ) |
|                                                                         |       |                             |       |   |   |
| Net Increase  (Decrease) in Cash and Cash Equivalents                        |       | (8,337,743                       | )          | 36,336,485 |   |
|                                                                         |       |                             |       |   |   |
| Cash and Cash  Equivalents at Beginning of Period                            |       | 40,911,539                       |       | 23,419,434 |   |
|                                                                         |       |                             |       |   |   |
| Cash and Cash  Equivalents at End of Period                                  |       | $                                | 32,573,796 |   | $ | 59,755,919 |   |
|                                                                         |       |                             |       |   |   |
| **Supplemental  Disclosure of Cash Flow Information**                        | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Cash paid for interest                                                       |       | $                                | 31,699     |   | $ | 35,737 |   |

 

*Seeaccompanying notes to unaudited consolidated financial statements*

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**AVANT IMMUNOTHERAPEUTICS, INC.**

**Notes to Unaudited Consolidated Financial Statements**

**March 31,2007**

**(1)      Natureof Business**

AVANTImmunotherapeutics, Inc. (the “Company” or “AVANT”) is engaged in thediscovery, development and commercialization of products that harness the humanimmune system to prevent and treat disease. The Company is developing a broadportfolio of vaccines and therapeutics against infectious diseases. Theportfolio includes a pipeline of preventative, single-dose oral vaccines aimedat protecting travelers and people in regions where infectious diseases areendemic. The portfolio also includes immunotherapeutics for cardiovasculardiseases which are available for partnering, including a treatment to reducecomplement-mediated tissue damage associated with cardiac by-pass surgery andtransplantation and a proprietary vaccine candidate for cholesterol management.In addition, the Company is developing the VitriLifeÒ preservation and lyophilization technologiesfor use in manufacturing AVANT’s oral vaccines and certain other non-injectableapplications. AVANT further leverages the value of its technologyportfolio through corporate, governmental and non-governmental partnerships.One successful collaboration resulted in the development and marketing of anoral human rotavirus vaccine. Current collaborations encompass the developmentof vaccines addressed to global health, human food safety and animal health.

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

**(2)      InterimFinancial Statements**

The accompanyingunaudited consolidated financial statements for the three months endedMarch 31, 2007 and 2006 include the consolidated accounts of AVANT, andhave been prepared in accordance with instructions to Form 10-Q andArticle 10 of Regulation S-X. In the opinion of management, theinformation contained herein reflects all adjustments, consisting solely ofnormal recurring adjustments, that are necessary to present fairly the Company’sfinancial position at March 31, 2007, results of operations for the threemonths ended March 31, 2007 and 2006, and cash flows for the three-monthperiods ended March 31, 2007 and 2006. The results of operations for thethree-month period ended March 31, 2007 are not necessarily indicative ofresults for any future interim period or for the full year.

Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with generally accepted accounting principles in theUnited States of America have been omitted, although the Company believes thatthe disclosures included, when read in conjunction with AVANT’s Annual Reporton Form 10-K for the year ended December 31, 2006, are adequateto make the information presented not misleading. The accompanyingDecember 31, 2006 Consolidated Balance Sheet was derived from auditedfinancial statements, but does not include all disclosures required byaccounting principles generally accepted in the United States of America.

**(3)      RecentAccounting Pronouncements**

**SFAS 157:**  In September 2006, the FASB issued SFAS No.157, *Fair Value Measurements*(“SFAS 157”),which defines fair value, establishes a framework for measuring fair value ingenerally accepted accounting principles (GAAP), and expands disclosures aboutfair value measurements. SFAS 157 applies under other accounting pronouncementsthat require or permit fair value measurements, the Board having previouslyconcluded in those accounting pronouncements that fair value is the relevantmeasurement attribute. Accordingly, SFAS 157 does not require any new fairvalue measurements. However, for some entities, the application of SFAS 157will change current practice. SFAS 157 is effective for financial statementsissued for fiscal years beginning after November 15, 2007, and interim periodswithin those fiscal years.  AVANT has notyet determined the effect if any that adopting SFAS 157 will have on theCompany’s financial statements.

**SFAS 159:**  In February 2007, the FASB issued SFAS No.159, The *Fair Value Option for Financial Assets andFinancial Liabilities – including an Amendment of FASB Statement No. 155*(“SFAS159”), which permits entities to choose to measure many financial instrumentsand certain other items on an instrument-by-instrument basis under a fair valueoption.

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SFAS 159 iseffective for financial statements issued for fiscal years beginning afterNovember 15, 2007, and interim periods within those fiscal years.  AVANT has not yet determined the effect ifany that adopting SFAS 159 will have on the Company’s financialstatements.

**(4)      Stock-BasedCompensation**

The Company adoptedSFAS 123(R) beginning January 1, 2006, using the modified prospectivetransition method. In conjunction with the adoption of SFAS 123(R),compensation expense for all stock-based payment awards granted prior toJanuary 1, 2006 will continue to be recognized using the straight-linemethod and compensation expense for all share-based payment awards grantedsubsequent to January 1, 2006 will also be recognized using thestraight-line method. As stock-based compensation expense recognized in the ConsolidatedStatement of Operations for the first three months of fiscal 2007 and 2006 isbased on awards ultimately expected to vest, it has been reduced for estimatedforfeitures. SFAS 123(R) requires forfeitures to be estimated at the timeof grant and revised, if necessary, in subsequent periods if actual forfeituresdiffer from those estimates.

Also, uponadoption of SFAS 123(R), the Company retained its method of valuation forshare-based awards granted using the Black-Scholes option-pricing model (“Black-Scholesmodel”). The Company’s determination of fair value of share-based paymentawards on the date of grant using an option-pricing model is affected by theCompany’s stock price as well as assumptions regarding a number of highlycomplex and subjective variables. These variables include, but are not limitedto, the Company’s expected stock price volatility over the term of the awards,and actual and projected employee stock option exercise behaviors.

As of March 31,2007, the Company had two shareholder approved, share-based compensation plans;the 2004 Employee Stock Purchase Plan (the “2004 ESPP Plan”) and the 1999 StockOption and Incentive Plan (the “1999 Plan”). For a complete discussion of the Company’s share-based plans see Note 5of the consolidated financial statements included in its annual report on Form10-K, as previously filed with the Securities and Exchange Commission on March16, 2007.

**EmployeeStock Benefit Plans**

***Restricted Stock Unit Awards***

In September 2005,November 2004 and September 2003, the Company awarded restricted stock units toDr. Una Ryan, its President and CEO, and determined the value of the restrictedstock unit awards to be $270,000, $832,000 and $1,104,000, respectively, basedon the closing price of AVANT’s common stock on the award date.  The value of the

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restricted stock unitswas amortized over the remaining months until Dr. Ryan attained age 65 inDecember 2006, and was recorded as compensation expense. In connection with theawards, the Company recognized $175,000 as stock-based compensation expense inthe statement of operations during the three-month period ended March 31,2006.

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

***Employee Stock Purchase Plan***

During the threemonths ended March 31, 2007 and 2006, the Company issued 1,500 and 5,927shares, respectively, under the 2004 ESPP Plan. At March 31, 2007, 125,257shares were available for issuance under the 2004 ESPP Plan.

The currentpurchase period began on January 1, 2007. The Company has established therisk-free interest rate assumption to be 5.1% using the 6-month rate on atraded zero-coupon U.S. Treasury bond. The Company used its historicalvolatility rate of 39% for the 6-month period preceding the grant date for thecurrent stock purchase period. The Company has concluded that volatility duringthe current purchase period is expected to be consistent with the calculatedhistorical volatility rate. Finally, the Company established the expected termfor the current stock purchase period as six months.  Based on these assumptions, the stock-basedcompensation expense recorded for the employee stock purchases was notsignificant.

***Employee Stock Option Plan***

*GeneralOption Information*

Asummary of stock option activity under the 1999 Plan for the three months endedMarch 31, 2007 is as follows:
| ** **                      | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price  Per Share** | ** ** | **Weighted  Average  Remaining  Contractual  Term (In Years)** | ** ** |
|---------------------------------|------------|------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| Outstanding at  January 1, |       | 3,281,154  |       | $                                                      | 2.40       |                                                                     | 5.26       |   |
| Granted                         |       | 371,100    |       | 1.36                                                   |       |                                                                     |       |
| Canceled/forfeited              |       | (28,037    | )          | 1.77                                                   |       |                                                                     |       |
| Expired                         |       | (168,100   | )          | 1.70                                                   |       |                                                                     |       |
|                            |       |       |       |                                                   |       |                                                                     |       |
| Outstanding at  March 31   |       | 3,456,117  |       | $                                                      | 2.33       |                                                                     | 5.72       |   |
|                            |       |       |       |                                                   |       |                                                                     |       |
| At  March 31,              |       |       |       |                                                   |       |                                                                     |       |
| Options  exercisable            |       | 2,476,687  |       | $                                                      | 2.57       |                                                                     | 4.42       |   |

 

The weighted average fair value of options grantedduring the three-month period ended March 31, 2007 was $0.98.

The aggregate intrinsic value of options outstandingat March 31, 2007 was $133,151, of which $99,774 related to exercisableoptions.

*Valuationand Expense Information under SFAS 123(R)*

The followingtable summarizes stock-based compensation expense related to employee andnon-employee director stock options and employee stock purchases under SFAS123(R) for the three months ended March 31, 2007 and 2006 which wasallocated as follows:

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|                                         | ** ** | **Three  Months  Ended  March 31,  2007** | ** ** | **Three  Months  Ended  March 31,  2006** | ** ** |
|-----------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------|------------|
| Research and  development               |       | $                                              | 41,033     |                                           | $          | 33,395 |   |
| General and  administrative             |       | 57,865                                         |       | 230,860                                        |       |
| Total stock-based  compensation expense |       | $                                              | 98,898     |                                           | $          | 264,255 |   |

 

Stock-basedcompensation expense recognized for the three months ended March 31, 2006included $175,000 related to restricted stock unit awards, all of which wasallocated to general and administrative expenses.

Based on basic anddiluted weighted average common shares outstanding of 75,183,981, the effect ofstock-based compensation expense recorded under SFAS 123R for thethree-month periods has no impact on earning’s per share.

As ofMarch 31, 2007, total compensation cost related to non-vested stockoptions not yet recognized was $905,262, net of estimated forfeitures, which isexpected to be recognized as expense over a weighted average period of2.2 years.

Thefair values of employee and non-employee director stock options granted duringthe three months ended March 31, 2007 and 2006 were valued using theBlack-Scholes model with the following assumptions:
|                                                           | ** ** | **Three months ended   March 31,** | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                | ** ** | **2007**                                               | ** ** | **2006** | ** ** |
| Expected stock  price volatility (employees)              |       | 74                                                     | %          | 85 | % |
| Expected stock  price volatility (non-employee directors) |       | 73                                                     | %          | 80 | % |
| Expected option  term (employees)                         |       | 6.25 Years                                             |       | 6.25 Years |   |
| Expected option  term (non-employee directors)            |       | 5.5 Years                                              |       | 5.5 Years |   |
| Risk-free  interest rate                                  |       | 4.4 - 4.9                                              | %          | 4.3 - 4.8 | % |
| Expected dividend yield                                   |       | None                                                   |       | None |   |

 

The Company usedits daily historical stock price volatility consistent with the expected termof grant as the basis for its expected volatility assumption in accordance withSFAS 123(R) and SAB 107 for its employee and non-employee director stockoptions and employee stock purchases. The Company has assessed that itshistorical volatility is representative of expected future stock price trends.

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

The expected termof employee and non-employee director stock options represents theweighted-average period the stock options are expected to remain outstanding.SAB 107 provides for a simplified method for estimating expected term for “plain-vanilla”options. The simplified method is based on the vesting period and thecontractual term for each grant or for each vesting tranche for awards withgraded vesting. The mid-point between the vesting date and the expiration dateis used as the expected term under this method. The Company has elected tofollow the guidance of SAB 107 and adopt this simplified method in determiningexpected term for its stock option awards. There were no stock option grants tonon-employee directors during the three months ended March 31, 2007.

Forfeitures wereestimated based on historical experience by applying a nine percent forfeiturerate to employee stock option awards granted during the three months endedMarch 31, 2007.

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

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**(5)      AccountsReceivable**

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

Accounts receivable consists of the following:
|        | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|--------|------------|--------------------------|------------|-----------------------------|------------|
| Trade  |       | $                        | 138,671    |                        | $          | 183,830 |   |
| Other  |       | 99,935                   |       | 137,111                     |       |
|   |       | $                        | 238,606    |                        | $          | 320,941 |   |

 

Other receivablesat March 31, 2007 and December 31, 2006 represent interest receivablefrom a bank.

**(6)      Propertyand Equipment**

Property and equipment includes the following:
|                                                 | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|-------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Laboratory Equipment                            |       | $                        | 3,753,552  |                        | $          | 3,631,247 |   |
| Manufacturing  Equipment                        |       | 1,911,722                |       | 1,842,017                   |       |
| Office Furniture  and Equipment                 |       | 1,336,758                |       | 992,076                     |       |
| Leasehold  Improvements                         |       | 5,276,481                |       | 5,202,366                   |       |
| Construction in  Progress                       |       | 8,831,228                |       | 7,668,904                   |       |
| Total Property and Equipment                    |       | 21,109,741               |       | 19,336,610                  |       |
| Less Accumulated  Depreciation and Amortization |       | (5,558,728               | )          | (5,368,810                  | )          |
|                                            |       | $                        | 15,551,013 |                        | $          | 13,967,800 |   |

 

AVANT recorded aloss of $74,148 on disposal of fixed assets during the three months ended March31, 2007.

The Company hasrecognized $9,073 and $15,975 of capitalized interest costs incurred infinancing leasehold improvements and laboratory and manufacturing equipment atits Fall River and Needham facilities during the three-month periods endedMarch 31, 2007 and 2006, respectively. The total amount of interestexpense incurred by AVANT during the three-month periods ended March 31,2007 and 2006 was $23,448 and $26,455, respectively.

Depreciation expense related to equipment andleasehold improvements was $337,836 and $246,002 for the three months endedMarch 31, 2007 and 2006, respectively.

**(7)      Intangibleand Other Assets**

Intangible and other assets include the following:

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| ** **                  | ** ** | **March 31, 2007** | ** ** | **December 31, 2006** | ** ** |
|-----------------------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                  | ** ** | **Estimated  Lives**         | ** ** | **Gross  Intangible  Assets**   | ** ** | **Accumulated  Amortization** | ** ** | **Net  Intangible  Assets** | ** ** | **Gross  Intangible  Assets** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Intangible  Assets** | ** ** |
| Intangible  Assets:         |       |                         |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Collaborative Relationships |       | 5 years                      |       | $                               | 1,090,000  |   | $ | (1,090,000 | ) | $ | 3⁄4 |   | $ | 1,090,000 |   | $ | (1,090,000 | ) | $ | 3⁄4 |   |
| Core Technology             |       | 10 years                     |       | 3,786,900                       |       | (1,981,719 | ) | 1,805,181 |   | 3,786,900 |   | (1,887,046 | ) | 1,899,854 |   |
| Developed Technology        |       | 7 years                      |       | 3,263,100                       |       | (2,940,070 | ) | 323,030 |   | 3,263,100 |   | (2,832,400 | ) | 430,700 |   |
| Strategic Partner Agreement |       | 17 years                     |       | 2,563,900                       |       | (955,178 | ) | 1,608,722 |   | 2,563,900 |   | (917,472 | ) | 1,646,428 |   |
|                        |       |                         |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Total Intangible  Assets    |       |                         |       | 10,703,900                      |       | (6,966,967 | ) | 3,736,933 |   | 10,703,900 |   | (6,726,918 | ) | 3,976,982 |   |
|                        |       |                         |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Other Non  Current Assets   |       |                         |       | 94,981                          |       | 3⁄4 |   | 94,981 |   | 94,981 |   | 3⁄4 |   | 94,981 |   |
|                        |       |                         |       | $                               | 10,798,881 |   | $ | (6,966,967 | ) | $ | 3,831,914 |   | $ | 10,798,881 |   | $ | (6,726,918 | ) | $ | 4,071,963 |   |

 

All of AVANT’sintangible assets are amortized over their estimated useful lives. Totalamortization expense for intangible assets was $240,048 and $248,778 for thethree-month periods ended March 31, 2007 and 2006, respectively.

Theestimated future amortization expense of intangible assets as of March 31,2007 for the remainder of fiscal year 2007 and the five succeeding years is asfollows:
| Year ending December 31, | ** ** | **Estimated  Amortization  Expense** | ** ** |
|-----------------------------------------|------------|--------------------------------------|------------|
| 2007 (remaining  nine months)           |       | $                                    | 720,164    |   |
| 2008                                    |       | 529,512                              |       |
| 2008                                    |       | 529,512                              |       |
| 2010                                    |       | 514,622                              |       |
| 2011                                    |       | 350,822                              |       |
| 2012 and thereafter                     |       | 1,092,303                            |       |
|                                         |            |                                      |            |  |

 

**(8)      LossPer Share**

The Companycomputes and reports earnings per share in accordance with the provisions ofSFAS No. 128, “Earnings Per Share.” The computations of basic and diluted loss per common share are basedupon the weighted average number of common shares outstanding and potentiallydilutive securities. Potentially dilutive securities include stock options,warrants and restricted stock units. Options and warrants to purchase 3,900,561and 3,964,060 shares of common stock and restricted stock units totaling 0 and1,000,000 shares were not included in the computations of weighted averagecommon shares for the periods ended March 31, 2007 and 2006, respectively,because inclusion of such shares would have an anti-dilutive effect on net lossper share. In 2007, restricted stock units totaling 1,000,000 shares were includedin the computation of basic and diluted net loss per share as all necessaryconditions for their issuance had been satisfied and an insignificant amount ofcash consideration will be received upon issuance.

**(9)      IncomeTaxes**

The $40 millionmilestone payment received from PRF during the first quarter of 2006 resultedin taxable income for the Company. The regular taxable income generated by thistransaction will be fully offset against available federal and state netoperating loss carryforwards. The Company recorded a provision of $372,000 inthe first quarter of 2006 for the alternative minimum tax that was estimated toresult from receipt of this milestone. In the fourth quarter of 2006, theestimated provision was adjusted to $120,000.

On January 1,2007, the Company adopted FASB Interpretation No. 48, *Accountingfor Uncertainty in Income Taxes –an interpretation of FASB Statement 109*(“FIN 48”). FIN 48 prescribes a comprehensive model for recognizing, measuring,presenting and disclosing in the financial statements tax positions taken orexpected to be taken on a tax return, including a decision whether to file ornot to file in a particular jurisdiction. As a result of the implementation ofFIN 48, AVANT recognized no material adjustment in the liability forunrecognized income tax benefits. At adoption date and at March 31, 2007,AVANT had no material unrecognized income tax benefits.

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As of December 31,2006, the Company had federal and state NOL carryforwards and federal and stateR&D credit carryforwards, which may be available to offset future federaland state income tax liabilities which expire at various dates starting in 2007and going through 2026. Utilization of the NOL and R&D credit carryforwardsmay be subject to a substantial annual limitation due to ownership changelimitations that have occurred previously or that could occur in the future providedby Section 382 of the Internal Revenue Code of 1986, as well as similarstate provisions. These ownership changes may limit the amount of NOL andR&D credit carryforwards that can be utilized annually to offset futuretaxable income and tax, respectively. In general, an ownership change, asdefined by Section 382, results from transactions increasing the ownershipof certain shareholders or public groups in the stock of a corporation by morethan 50 percentage points over a three-year period. Since the Company’sformation, the Company has raised capital through the issuance of capital stockon several occasions (both pre and post initial public offering) which,combined with the purchasing shareholders’ subsequent disposition of thoseshares, may have resulted in a change of control, as defined bySection 382, or could result in a change of control in the future uponsubsequent disposition. The Company has completed a study to assess whetherchanges of control have occurred which would limit the Company’s utilization ofits NOL or R&D credit carryforwards. Based on this study, management hasconcluded that there are no such limitations. The Company does not expect tohave any taxable income for the foreseeable future.

Massachusetts andMissouri are the two states in which the Company operates and has income taxnexus.  Open federal and state returnyears subject to examination by major tax jurisdictions include the tax yearsended December 31, 2003, 2004, 2005 and 2006 (which has not yet been filed).Carryforward attributes that were generated prior to 2003 may still be adjustedupon examination by the IRS if they either have been or will be used in a futureperiod.

The Company’spractice is to recognize interest and penalties related to uncertain taxpositions in income tax expense. There have been no interest or penaltiesrecognized in the consolidated statement of operations and on the consolidatedbalance sheet as a result of FIN 48 calculations.

As required byStatement of Financial Accounting Standards No. 109, management of theCompany has evaluated the positive and negative evidence bearing upon therealizability of its deferred tax assets, which are comprised principally ofnet operating losses (“NOL”), capitalized research and development expendituresand research and development credits (“R&D credit”). Management hasdetermined that it is more likely than not that the Company will not realizethe benefits of federal and state deferred tax assets and, as a result, a fullvaluation allowance was established at March 31, 2007 andDecember 31, 2006.

The Company is inthe process of restructuring and closing the Company’s Missouri location andtherefore expects to lose the benefit of the Missouri state losscarryforwards.  This state net operatingloss carryforward totaled approximately $12,043,600 at March 31, 2007.

**(10)    ProductDevelopment and Licensing Agreements**

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

*(A)     GlaxoSmithKline plc (“Glaxo”) andPaul Royalty Fund (“PRF”)*

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

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In May 2005, AVANT entered into an agreementwhereby an affiliate of Paul Royalty Fund II, L.P. (“PRF”) purchased aninterest in the******net******royaltiesAVANT will receive on worldwide sales of RotarixÒ(see Note 4). Under the PRF agreement, AVANT will retain 50% of future Glaxomilestone payments beginning on the effective date of the agreement with PRF,with 70% of the remaining balance payable to PRF and 30% of the remainingbalance payable to CCH, respectively.

The PRF transaction qualifies as a sale in accordancewith guidance in EITF 88-18 “Sale of Future Revenues.”  The upfront unconditional payment of $10million and the $40 million milestone payment for launch in the European Unionwere recorded by AVANT as deferred revenue upon receipt. Any future milestonepayments received from PRF will also be recorded as deferred revenue. Revenues arebeing recognized and calculated based on the ratio of total royalties receivedfrom Glaxo and remitted to PRF over expected total amounts to be received byPRF and then applying this percentage to the total cumulative considerationreceived from PRF to date. The expected total of payments to PRF is an estimatewhich will be updated for any changes in expectations of such payments. Theimpact of any such changes will be applied prospectively.

In February 2006, the European Commission grantedapproval of RotarixÒ in the EuropeanUnion, which triggered a $4 million milestone payment from Glaxo, 50% of whichis creditable against future royalties. Revenue of $2.6 million was recorded inthe first quarter of 2006 as AVANT has no continuing obligations to incur anyresearch and development costs in connection with the Glaxo agreement. Glaxohas agreed to make further payments, which could total up to $1.5 million, uponachievement of a specific milestone.

AVANT also recorded $600,000 in royalty expensepayable to Cincinnati Children’s Hospital Medical Center (“CCH”) as a result ofthis milestone payment. AVANT remitted the remaining $1.4 million of the Glaxomilestone payment to PRF in accordance with the PRF agreement. As a result, inthe first quarter of 2006, AVANT also recognized $550,803 in product royaltyrevenue related to PRF’s purchased interests in the net royalties that AVANTreceives from RotarixÒ worldwide netsales. In the first quarter of 2007, AVANT recognized $879,209 in productroyalty revenue consisting of $425,156 related to PRF’s purchased interest inRotarix® net royalties and $454,053 related to AVANT’s retained interests in RotarixÒnet royalties which were not sold to PRF and which amount is also payable toCCH. As such, a corresponding amount is recorded as royalty expense andincluded in research and development expense. Based on management’s bestestimates of the amount and timing of Glaxo royalties, the Company hasclassified $6,039,687 and $42,984,354 of the deferred revenue balance atMarch 31, 2007 as short-term and long-term, respectively.

In September 2006,AVANT received notice from Glaxo that Glaxo would begin paying royalties onsales of RotarixÒ vaccine at thelower of two royalty rates under their 1997 license agreement. Glaxo’s decisionto pay the lower royalty rate (which is 70% of the full rate) is based uponGlaxo’s assertion that RotarixÒ is not covered bythe patents Glaxo licensed from AVANT in Australia and certain Europeancountries. AVANT is analyzing various options to counter Glaxo’s assertions andprotect AVANT’s rights. AVANT is determined to take all available steps toenforce its rights under its license agreement with Glaxo.

*(B)     Pfizer Inc (“Pfizer”)*

The Companyentered into a licensing agreement in December 2000 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 receiveadditional milestone payments of up to $3 million based upon attainment ofspecified milestones. AVANT may receive royalty payments on eventual productsales. The term of this agreement is through the expiration of the last of thepatents covered by the agreement. AVANT has no obligation to incur any researchand development costs in connection with this agreement.

As of June 1, 2006, AVANT entered into a Collaborative Research andDevelopment Agreement with Pfizer aimed at the discovery and development ofvaccines to protect animals. The collaboration will employ vaccine technologiesowned by AVANT.  Under the agreement,Pfizer and AVANT will conduct a joint research program funded by Pfizer todevelop prophylactic and therapeutic vaccines. AVANT considers its June 2006 arrangement with Pfizer to be a revenuearrangement with multiple deliverables. AVANT expects to recognize revenue as the research and developmentservice deliverables are completed and delivered to Pfizer. AVANT recognized $0in product development revenue from Pfizer, Inc for the three-month periodsended March 31, 2007 and 2006, respectively.

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

InJanuary 2003, AVANT was awarded a subcontract by DVC in the amount of $2.5million to develop for the U.S. Department of Defense an oral combinationvaccine against anthrax and plague using AVANT’s proprietary vaccinetechnologies. As of March 31, 2007, AVANT had received a number ofadditional subcontract modifications from DVC to support further developmentand pre-clinical animal testing of vaccine constructs of anthrax and plaguevaccine candidates being developed by AVANT for use in the oral combinationvaccine. Total contract funding awarded by DVC now totals approximately $12million. Payments under the subcontract agreement are made on a time andmaterials basis and receipt of the full amount is conditioned upon the projectbeing fully funded through completion and AVANT performing and continuing todemonstrate that it has the capability to perform the funded work. For thethree months ended March 31, 2007 and 2006, AVANT recognized $181,884 and$429,837, respectively, in government contract revenue from DVC. ThroughMarch 31, 2007, AVANT had received approximately $9.5 million in paymentsunder the various subcontract agreements. These agreements expire in 2007,although they may be terminated by DVC at any time upon 30 days written notice.

*(D)    Select Vaccines Limited (“SelectVaccines”)*

In February 2007,AVANT entered into a research anddevelopment partnership with Select Vaccines, a public Australian biotechnologycompany, focused on the use of Select Vaccines’ virus-like particles (“VLPs”)as a platform technology for the development of viral vaccines. Research anddevelopment efforts will initially target the development of

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vaccinesagainst influenza including both epidemic and pandemic forms of vaccine, withthe opportunity to expand the collaboration to other disease targets. Under theterms of the agreement, AVANT will make an upfront equity investment of$735,000 in Select Vaccines and fund influenza vaccine research and developmentfor two years, as well as provide payments to Select Vaccines for theachievement of specific preclinical and clinical development milestones.Completion of the partnership agreement is subject to the approval of Select’sshareholders. AVANT also gains the exclusive right to apply Select Vaccines’technology to a second target within the next two years, and a third targetwithin the next three years. Select Vaccines would also be eligible to receiveroyalties based on net sales of any approved products arising out of thiscollaboration that are successfully marketed.

 **(11)    OtherLong-Term Liabilities**

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

*(A)     Loan Payable*

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

At March 31,2007, AVANT has recorded leasehold improvements of $1,227,800 and currently hasa loan payable of $1,043,630 to MassDevelopment, of which $75,032 is classifiedas current and $968,598 as long-term. AVANT began amortizing the leaseholdimprovements when the Fall River facility became operational. Based on currentmarket interest rates available to AVANT for long-term liabilities with similarterms and maturities, the fair value of the loan is approximately $760,400 atMarch 31, 2007.

*(B)     Note Payable*

Under the SecuredPromissory Note: Equipment Loan, AVANT received $903,657 from MassDevelopmentto finance the purchases of manufacturing and laboratory equipment to be placedin its Fall River facility (the “Loan”). The Loan has a term of 84 monthsat an interest rate of 5.5% per annum. The Loan is collateralized by all of theequipment purchased with the principal amount. The net book values of thesecollateralized assets at March 31, 2007 and December 31, 2006 was$744,583 and $769,855, respectively.

At March 31, 2007,AVANT currently has a note payable of $624,393 to MassDevelopment, of which$133,514 is classified as current and $490,879 as long-term. AVANT begandepreciating the manufacturing and laboratory equipment assets over theestimated economic lives of the assets when the equipment became ready for itsintended use. Based on current market interest rates available to AVANT forlong-term liabilities with similar terms and maturities, the fair value of thenote payable is approximately $556,500 at March 31, 2007.

**(12)    Commitmentsand Contingencies**

*(A)     Commitments for the Renovations ofthe Needham Facility and Improvements to the Fall River Facility*

In November 2005, AVANT entered into a Lease Amendment with thelandlord which specified terms for the complete renovation of the Company’sNeedham facility. The current projected costs for the tenantimprovements portion of the renovations project are approximately $9.3 million.As an incentive for AVANT to enter into the Lease Amendment, the landlord hasagreed to contribute up to $3.6 million towards tenant improvement costs. The Company will record the full cost of theNeedham renovation project as an asset and the amounts of landlord incentivewill be recorded as deferred rent (included under “Other Long Term Liabilities”account in the consolidated balance sheets) in accordance with FASB TechnicalBulletin 88-1 “Issues Related to Accounting for Leases.” Amortization of thedeferred rent will be recorded as a reduction of rent expense over theremaining lease term when the renovation project is complete and will beclassified as an

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operatingactivity in the Consolidated Statement of Cash Flows. At March 31, 2007,AVANT had recorded $3,165,800 in deferred rent on the Consolidated BalanceSheet related to the Needham landlord’s tenant incentive allowance, of which$330,000 is classified as current and $2,835,800 as long-term.

*(B)     Purchase Commitments for ContractManufacturing*

InApril 2000, AVANT entered into a Services Agreement (the “Lonza Agreement”)with Lonza Biologics plc (“Lonza”) for process development and manufacture ofits product candidate TP10. AVANT has entered into a number of amendments tothe Lonza Agreement for specific process development and scale-up work andremaining aggregate commitments as of March 31, 2007 total approximately$474,930.  The Company has incurred$344,040 and $8,855,350 of expense related to the Lonza Agreement in thethree-month period ended March 31, 2007 and from inception throughMarch 31, 2007, respectively, of which $202,831 remained accrued atMarch 31, 2007.

**(13)    SubsequentEvent**

On April 16, 2007,AVANT announced that it has initiated planned restructuring activities toreduce ongoing operational costs, following an extensive review of itsoperations and cost structure.

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***Safe Harbor Statement under the Private SecuritiesLitigation Reform Act of 1995:****  This quarterly report onForm 10-Q includes forward-looking statements**that are subject to a variety ofrisks and uncertainties andreflect AVANT’s current views with respect to future events and financialperformance. There are a numberof important factors that could cause the actual results to differ materiallyfrom those expressed in any forward-looking statements made by AVANT. Thesefactors include, but are not limited to: (1) the integrationof multiple technologies and programs; (2) the ability to adapt AVANT’svectoring systems to develop new, safe and effective orally administeredvaccines against anthrax and plague or other any other microbes used asbioweapons and other disease causing agents; (3) the ability to successfullycomplete product research and further development, including animal,pre-clinical and clinical studies and commercialization of CholeraGarde®(Peru-15), Ty800, ETEC E. coli, VLPs and other products and AVANT’sexpectations regarding market growth; (4) the cost, timing, scope and resultsof ongoing safety and efficacy trials of CholeraGarde® (Peru-15), Ty800, ETECE. coli and other preclinical and clinical testing; (5) the ability tonegotiate strategic partnerships or other disposition transactions for AVANT’scardiovascular programs, including TP10 and CETi; (6) the ability of AVANT tomanage multiple clinical trials for a variety of product candidates; (7) thevolume and profitability of product sales of Megan®Vac 1, Megan®Egg and otherfuture products; (8) the process of obtaining regulatory approval for the saleof Rotarix**Òin major commercial markets, as well as the timing and success of worldwidecommercialization of Rotarix**Òby our partner, Glaxo; (9) Glaxo’s strategy and business plans to launchand supply Rotarix**Òworldwide, including in the U.S. and other major markets and its payment ofroyalties to AVANT; (10) changes in existing and potential relationships withcorporate collaborators and partners; (11) the availability, cost, delivery andquality of clinical and commercial grade materials produced at AVANT’s ownmanufacturing facility or supplied by contract manufacturers; (12) the timing,cost and uncertainty of obtaining regulatory approvals to use CholeraGarde®(Peru-15) and Ty800, ETEC E. coli, among other purposes, for adults undergoingcardiac surgery,**to raise serum HDLcholesterol levels and toprotect travelers and people in endemic regions from diarrhea causing diseases,respectively; (13) the ability to obtain substantial additional funding; (14)the ability to develop and commercialize products before competitors that aresuperior to the alternatives developed by competitors; (15) the ability toretain certain members of management;(16) AVANT’s expectations regardingresearch and development expenses and general and administrative expenses andrestructuring costs; (17) AVANT’s expectations regarding CETP’s ability toimprove cholesterol levels and AVANT’s ability to find a partner to commercializeCETP; (18) AVANT’s expectations regarding cash balances, capital requirements,anticipated royalty payments (including those from Paul Royalty Fund) revenuesand expenses, including infrastructure expenses;(19) our belief regarding thevalidity of our patents and potential litigation; and (20) other factorsdetailed from time to time in filings with the Securities and ExchangeCommission.  You should carefully review all of these factors, and you should be aware**that there may be other factors that could cause these differences. Theseforward-looking statements were based on information, plans and estimates atthe date of this report, and we do not promise to update any forward-lookingstatements to reflect changes in underlying assumptions or factors, newinformation, future events or other changes.*

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

AVANT’s principal activity since our inception has been research andproduct development conducted on its own behalf, as well as through jointdevelopment programs with several pharmaceutical companies and othercollaborators. AVANT was incorporated in the State of Delaware inDecember 1983.

## **CRITICALACCOUNTING POLICIES**

The Company’scritical accounting policies are set forth under the heading “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” inItem 7 to our 2006 Form 10-K. Other than the adoption of the FASBissued Interpretation No. 48, “*Accounting for Uncertaintyin Income Taxes*,” (“FIN 48”), there has been no changes to thesepolicies since December 31, 2006. Readers are encouraged to review thesecritical accounting policies in conjunction with the review of thisForm 10-Q.

## **OVERVIEW**

AVANT’s focus isunlocking the power of the immune system to prevent and treat disease. TheCompany has assembled a broad portfolio of technologies and intellectualproperty that gives it a strong competitive position in vaccines andimmunotherapeutics. These include an oral human rotavirus vaccine, which hasgained marketing approval in over 65 countries worldwide and is beingcommercialized by Glaxo. Four of AVANT’s products are in clinical development.The

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Company has activelydeveloped and acquired innovative technologies — especially novel approaches tovaccine creation. The marriage of innovative bacterial vector deliverytechnologies with unique manufacturing processes offer the potential for a newgeneration of vaccines. The Company’s goal is to become a leading developer ofinnovative vaccines and immunotherapeutics that address health care needs on aglobal basis.

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

## **RESEARCHAND DEVELOPMENT ACTIVITIES**

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

Duringthe past five years through the end of 2006, AVANT incurred an aggregate of$70 million in research and development costs. During the three monthsended March 31, 2007, AVANT incurred an aggregate of $4.9 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, 2006 and 2005 and the three-month periods endedMarch 31, 2007 and 2006. The amounts disclosed in the following table andin “Program Developments” below reflect direct research and development costs,license fees associated with the underlying technology and an allocation ofindirect research and development costs to each program.
| ** **                                        | ** ** | **Three Months Ended  March 31,** | ** ** | **Year Ended  December 31,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                        | ** ** | **2007**                                         | ** ** | **2006**                               | ** ** | **2006** | ** ** | **2005** | ** ** |
| *Bacterial  Vaccines:*                            | * *   | * *                                         | * *   | * *                               | * *   | * * | * * | * * | * * |
| CholeraGardeÒ                                |       | $                                                | 1,062,700  |                                   | $          | 678,500 |   | $ | 5,427,800 |   | $ | 1,257,200 |   |
| Ty800                                             |       | 938,300                                          |       | 102,700                                |       | 1,402,300 |   | 404,500 |   |
| Other                                             |       | 1,145,200                                        |       | 361,400                                |       | 1,873,600 |   | 528,900 |   |
| *Viral  Vaccines:*                                | * *   | * *                                         | * *   | * *                               | * *   | * * | * * | * * | * * |
| RotarixÒ  Vaccine                            |       | 454,100                                          |       | 648,600                                |       | 648,600 |   | — |   |
| Avian and Human Influenza                         |       | 177,200                                          |       | 141,400                                |       | 711,600 |   | 3⁄4 |   |
| *BioDefense  Vaccines:*                           |       | 112,300                                          |       | 572,900                                |       | 1,558,600 |   | 2,470,700 |   |
| *Cholesterol  Management Vaccine:*                | * *   | * *                                         | * *   | * *                               | * *   | * * | * * | * * | * * |
| CETi-1                                            |       | 174,500                                          |       | 360,100                                |       | 922,700 |   | 650,800 |   |
| *Complement  Inhibitors:*                         | * *   | * *                                         | * *   | * *                               | * *   | * * | * * | * * | * * |
| TP10/TP20                                         |       | 767,700                                          |       | 1,117,400                              |       | 4,466,400 |   | 8,327,200 |   |
| *Food  Safety & Animal Health Vaccines:* |       | 3⁄4                                           |       | 4,600                                  |       | 6,700 |   | 9,900 |   |
| *Other  Programs:*                                |       | 126,700                                          |       | 361,100                                |       | 1,048,200 |   | 414,100 |   |
|                                              |       |                                             |       |                                   |       |   |   |   |   |
| *Total R&D Expense*                           |       | $                                                | 4,958,700  |                                   | $          | 4,348,700 |   | $ | 18,066,500 |   | $ | 14,063,300 |   |

 

**PROGRAMDEVELOPMENTS**

*Rotavirus Vaccine:*  Rotavirus is a major cause of diarrhea andvomiting in infants and children. In 1997, AVANT licensed its oral rotavirusvaccine to Glaxo. All of the ongoing development for this program is beingconducted and funded by Glaxo. Glaxo gained approval for RotarixÒin Mexico in July 2004, which represented the first in an expected seriesof worldwide approvals and commercial launches for the product. Glaxo haslaunched in additional Latin American and Asian Pacific countries during 2005and 2006. Additionally, Glaxo filed for market approval with the Europeanregulatory authorities in late 2004, which triggered a $2 million milestonepayment to AVANT. In February 2006, the European Commission grantedapproval of RotarixÒ in the EuropeanUnion, which triggered a $4 million milestone payment from Glaxo. Glaxo hasagreed to make an additional payment of $1.5 million, upon achievement ofmarket approval in the United States. AVANT licensed-in the Rotarix® technologyin 1995 and owes a license fee of 30% to Cincinnati Children’s Hospital

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Medical Center (“CCH”) onnet royalties received from Glaxo. In May 2005, AVANT entered into anagreement whereby an affiliate of Paul Royalty Fund (“PRF”) purchased aninterest in the net royalties AVANT will receive on worldwide sales of RotarixÒ(see Note 3 of our unaudited consolidated financial statements). Under the PRFagreement, AVANT will retain 50% of future Glaxo milestone payments, with thebalance payable to PRF and CCH.

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

In September 2006,AVANT received notice from Glaxo that Glaxo would begin paying royalties onsales of RotarixÒ vaccine at thelower of two royalty rates under their 1997 license agreement. Glaxo’s decisionto pay the lower royalty rate (which is 70% of the full rate) is based uponGlaxo’s assertion that RotarixÒ is not covered bythe patents Glaxo licensed from AVANT in Australia and certain Europeancountries. AVANT is analyzing various options to counter Glaxo’s assertions andprotect AVANT’s rights. AVANT is determined to take all available steps toenforce its rights under its license agreement with Glaxo. 

If Glaxo’sposition stands, the royalties to which PRF is entitled will no longer belimited by a $27.5 million annual threshold, which AVANT projected may havebeen reached in later years as sales of RotarixÒincreased. Irrespective of Glaxo’s position, AVANT will still retain theroyalties on worldwide sales of RotarixÒonce PRF receives 2.45 times the aggregate cash payments it makes to AVANT,though the potential amount of such residual royalties will be lower if Glaxo’sposition stands.

*BacterialVaccines:*  AVANT’s goalis to become a leading developer of innovative vaccines that address healthcare needs on a global basis. Utilizing its *Cholera*-and *Salmonella*-vectoreddelivery technologies together with its drying and preservation technologies,the Company can now develop a new generation of vaccines that have an idealproduct profile: safe, effective, oral, single-dose, rapidly protective andincreased thermostability.

Development of asafe, effective cholera vaccine is the first step in establishing AVANT’ssingle-dose, oral bacterial vaccine franchise. In December 2002 theInternational Vaccine Institute (“IVI”) initiated a Phase 2 study ofCholeraGarde® in Bangladesh where cholera is endemic. In July 2005,Bangladesh study results in children and infants showed CholeraGarde® to bewell tolerated and highly immunogenic, with 77% of children aged 9 months to 5years generating protective immune responses. Previously published results showed the vaccine to be well tolerated andimmunogenic against the cholera organism in the adult portion of this trial.

In August 2006,IVI received $21 million in funding from the Bill & Melinda GatesFoundation for a Cholera Vaccine Initiative (“CHOVI”), which will includeconducting further clinical trials of CholeraGarde®.  IVI plans to conduct Phase 2 clinical trialsof CholeraGarde® in Bangladesh and India beginning in late 2007 followed byPhase 3 field studies. IVI will be purchasing clinical materials produced atAVANT’s Fall River, MA manufacturing facility for the trials.

AVANT has decided to focus only on the fully-funded opportunity forCholeraGarde® in the developing world. AVANT has determinedthat the high clinical costs of our own Phase 3 clinical trials in the UnitedStates and the investment in a commercial manufacturing facility are notjustified by the limited market opportunities for a cholera vaccine indeveloped countries at this time. This decision frees up both financial andmanufacturing resources for our Ty800 and ETEC programs, as well as our newinfluenza vaccine program.

During the periodJanuary 1, 2002 through December 31, 2006, AVANT incurredapproximately $13.5 million in research, development and clinical costs onits CholeraGarde® program. During the three months ended March 31, 2007,AVANT incurred approximately $1.1 million in research, development,manufacturing and clinical costs on its CholeraGarde® program.

AVANT is alsodeveloping an oral typhoid fever vaccine, Ty800, for global health needs.  The National Institute of Allergy andInfectious Disease (“NIAID”) of the National Institutes of Health (“NIH”) andAVANT agreed for the NIAID to conduct a Phase 1/2 in-patient dose-escalatingclinical trial aimed at demonstrating the safety and immunogenicity of the Ty800vaccine. NIAID has funded the production of Ty800 vaccine for clinical testingand completed the Phase 1/2 trial at a NIH-funded clinical site. The NIAIDtrial seeks to assess the safety and immunogenicity of the Ty800 oral vaccine.Enrollment in this study was completed during the third quarter of 2006 andresults are expected in mid-2007. AVANT plans to initiate its own sponsoredPhase 2 out-patient dose-ranging trial of Ty800 in mid-2007. During the periodJanuary 1, 2002 through December 31, 2006, AVANT

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incurred approximately$4.9 million in research, development, contract manufacturing and clinicalcosts on its Ty800 program. During the three months ended March 31, 2007,AVANT incurred approximately $938,300 in research, development and clinical costson its Ty800 program.

Finally, AVANT isdeveloping additional bacterial vaccines against enterotoxigenic *E. coli*(“ETEC”), *Salmonellaparatyphi* and *Shigella*,—all important causes of seriousdiarrheal diseases and enteric fevers worldwide. These programs are inpre-clinical development. In the secondhalf of 2007, AVANT expects to initiate a Phase 1 trial of its ETEC vaccinecandidate. AVANT’s long-term goal is to develop a combination vaccinecontaining CholeraGarde®, Ty800, *S. paratyphi*and ETEC as a “super enteric vaccine” to address the travelers’ market. Duringthe period January 1, 2002 through December 31, 2006, AVANT incurredapproximately $3.1 million in research, development, contractmanufacturing and clinical costs on these pre-clinical programs. During thethree months ended March 31, 2007, AVANT incurred approximately $1.1million in research, development and clinical costs on these pre-clinicalprograms.

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

InJanuary 2003, AVANT was awarded a subcontract by DVC in the amount of $2.5million to develop for the U.S. Department of Defense an oral combinationvaccine against anthrax and plague using AVANT’s proprietary vaccinetechnologies.  AVANT has received anumber of additional subcontract modifications from DVC to support furtherdevelopment and pre-clinical animal testing of vaccine constructs of anthraxand plague vaccine candidates being developed by AVANT for use in the oralcombination vaccine.  Total contractfunding awarded by DVC now totals approximately $12 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 three monthsended March 31, 2007 and 2006, AVANT recognized $181,884 and $429,837,respectively, in government contract revenue from DVC. Through March 31,2007, AVANT had received approximately $9.5 million in payments under thesubcontract agreements. These agreements expire in 2007, although they may beterminated by DVC at any time upon 30 days notice. As a result of AVANT’srecent restructuring, it will no longer invest its resources in biodefenseresearch and development activities.

During the periodJanuary 1, 2002 through December 31, 2006, AVANT incurredapproximately $10.9 million in research and development costs on itsbiodefense vaccine program. During the three months ended March 31, 2007,AVANT incurred approximately $112,300 million 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. As of June 1, 2006, AVANT entered into a Collaborative Researchand Development Agreement with Pfizer aimed at the discovery and development ofvaccines to protect animals. Under the agreement, Pfizer and AVANT will conducta joint research program funded by Pfizer. AVANT expects to recognize revenue as the research and developmentservice deliverables are completed and delivered to Pfizer.  During the period January 1, 2002 throughDecember 31, 2006, AVANT incurred approximately $0.5 million in researchand development costs on its food safety and animal health vaccines program.During the three months ended March 31, 2007, AVANT incurred no researchand development costs on its food safety and animal health vaccines program.

*ComplementInhibitors:*  InFebruary 2006, AVANT reported that the Phase 2b females-only study did not meetits primary endpoint, thus confirming the results for female subjects in theprevious TP10 Phase 2 trial. AVANT iscurrently spending limited resources on this program and is seeking a corporatepartner to complete the development and commercialization of TP10.

During the periodJanuary 1, 2002 through December 31, 2006, AVANT incurredapproximately $23.9 million in research, development, contractmanufacturing and clinical costs associated with its complement inhibitorprogram. During the three months ended March 31, 2007, the Companyincurred approximately $767,700 in research, development, contract manufacturingand clinical costs associated with its complement inhibitor program.

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*Cholesterol Management Vaccine:*  AVANT has been developing animmunotherapeutic vaccine against endogenous cholesteryl ester transfer protein(“CETP”), which may be useful in reducing risks associated withatherosclerosis. CETP is a key intermediary in the balance of HDL (high-densitylipoprotein) and LDL (low-density lipoprotein). The vaccine stimulates animmune response against CETP, which may improve the ratio of HDL to LDL cholesteroland reduce the progression of atherosclerosis, which often leads to heartattack.

During the period January 1, 2002 throughDecember 31, 2006, AVANT incurred approximately $9.0 million inresearch, development and clinical costs associated with the CETP program.During the three months ended March 31, 2007, AVANT incurred approximately$174,500 in research, development, contract manufacturing and clinical costsassociated with the CETP program. AVANT is no longer expending its own resourceson this program and is seeking a corporate partner to complete development andto commercialize the CETP vaccine.

## **TECHNOLOGYLICENSING**

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

**RESULTS OF OPERATIONS**

**Three-Month Period Ended****March**** 31, 2007 asCompared****with the Three-Month Period Ended March**** 31, 2006**

AVANT reportedconsolidated net loss of $5,626,279, or $.07 per share, for the first quarterended March 31, 2007, compared with a net loss of $2,970,991, or $.04 pershare, for the first quarter ended March 31, 2006. The weighted average common shares outstanding used to calculate net lossper common share was 75,183,981 in 2007 and 74,172,563 in 2006.

*Revenue:*  Total revenue decreased $2,524,290 to$1,182,197 for the first quarter of 2007 compared to $3,706,487 for the firstquarter of 2006.

Product development and licensing revenue decreased to $8,086 in 2007from $2,619,974 in 2006. In February 2006, the European Commissiongranted approval of RotarixÒ in the EuropeanUnion, which triggered a one-time $4 million milestone payment from Glaxo, 50% ofwhich is creditable against future royalties. Product development and licensing revenue of $2.6 million wasrecorded in the first quarter of 2006 and the remaining $1.4 million wasremitted to PRF in accordance with the PRF agreement. AVANT recorded $600,000in royalty expense payable to CCH as a result of this milestone payment.

In the first quarter of 2007, AVANT recognized$879,209 in product royalty revenue consisting of $425,156 related to PRF’spurchased interest in Rotarix® net royalties and $454,053 related to AVANT’sretained interests in Rotarix®  net royaltieswhich were not sold to PRF and which amount is also payable to CCH. As such, acorresponding amount is recorded as royalty expense and included in researchand development expense. In the first quarter of 2006, AVANT recognized$550,803 in product royalty revenue related to PRF’s purchased interests in thenet royalties from RotarixÒworldwide netsales. AVANT expects the amount of product royalty revenue to increase duringthe remainder of 2007 as Glaxo continues the global commercialization ofRotarix®.

AVANT has receiveda number of subcontracts from its partner, DVC, to develop anthrax and plaguevaccines for the U.S. Department of Defense. AVANT will be reimbursed by DVC ona time and materials basis for vaccine development research work performed byAVANT. Under these agreements and several SBIR grants, AVANT recognized$262,259 and $500,207 in government contract and grant revenue during the firstquarters of 2007 and 2006, respectively, for work performed. The decrease inrevenue in 2007 compared to 2006 primarily reflects reduced levels of vaccinedevelopment work billable to DVC in 2007. AVANT expects the amount of researchwork to be performed for DVC during the remainder of 2007 to be substantiallyless than the amount of research work performed during the comparable period in2006.

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Marketing and distribution of the Megan poultry product line is performedby AVANT’s partner, Lohmann Animal Health International (“LAHI”), and AVANTreceives a royalty percentage of all Megan®Vac 1 and Megan®Egg product sales.Royalty payments received during the first quarter of 2007 and 2006 totaled$32,643 and $35,503, respectively. We expect royalty payments from LAHI to beapproximately the same in 2007 compared to 2006.

*OperatingExpense:*  Total operating expense increased $664,728,or 10.1%, to $7,250,727 for the first quarter of 2007 compared to $6,585,999for the first quarter of 2006.

Research and development expense increased $609,995, or 14%, to$4,958,702 from $4,348,707 in 2006. The increase in 2007 compared to 2006 isprimarily due to increases in research and development personnel andrelated costs of $296,341, laboratory materials and services of $76,019 and non-personneloperating and facility-related costs of $368,003 associated with operations ofthe Needham and Fall River facilities in 2007 compared to 2006. These increases were offset in partby a decline in royalty expenseof $194,513 in 2007. Research and development expense includes $454,053 and$600,000 of royalty expense payable to CCH at March 31, 2007 and 2006,respectively. AVANT expects research and development expense to decrease duringthe remainder of 2007 as a result of AVANT’s restructuring activities initiatedin April 2007.

General and administrative expense increased $63,463, or 3.2%, to$2,051,977 in 2007 compared to $1,988,514 in 2006 and is primarily attributedto increases in consulting expenses of $139,077 and legal and other professionalfees of $86,562, partly offset by lower personnel and related costs of$168,884. AVANT expects general and administrative expense to decrease duringthe remainder of 2006 due to the Company’s restructuring activities.

Amortization expense of acquired intangible assets was $240,048 and$248,778 in 2007 and 2006, respectively.

*Investmentand Other Income, Net:* Interest and other income increased $161,730 to $442,251 for the firstquarter of 2007 compared to $280,521 for the first quarter of 2006. The increaseis primarily due to higher interest rates and average cash balances during thefirst quarter of 2007 compared to the first quarter of 2006. During the firstquarters of 2007 and 2006, the average month-end cash balances were $34,987,574and $33,676,633, respectively. The effective interest rates during the firstquarters of 2007 and 2006 were 5.19% and 4.28%, respectively.

*Provisionfor Income Taxes:*  The$40 million milestone payment received from PRF during the first quarter of2006 resulted in taxable income for the Company. The regular taxable incomegenerated by this transaction has been fully offset with available federal andstate net operating loss carryforwards. The Company recorded a provision of$372,000 in the first quarter of 2006 for the alternative minimum tax that wasestimated to result from receipt of this milestone. In the fourth quarter of2006, the estimated provision was adjusted to $120,000.

**LIQUIDITY AND CAPITAL RESOURCES**

At March 31,2007, AVANT’s principal sources of liquidity consisted of cash and cashequivalents of $32,573,796. AVANT’s cash and cash equivalents are highly liquidinvestments with a maturity of three months or less at the date of purchase andconsist of time deposits and investments in money market mutual funds withcommercial banks and financial institutions. Also, the Company maintains cashbalances with financial institutions in excess of insured limits. AVANT doesnot anticipate any losses with respect to such cash balances.

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

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Net cash used inoperating activities was $6,269,367 for the first three months of 2007 comparedto net cash provided by operating activities of $37,086,462 for the first threemonths of 2006. The decrease in net cash provided by operating activities isprimarily attributed to the increase in net loss incurred in 2007 compared to2006, the decrease in accounts payable and accrued expenses in the firstquarter of 2007 and the $40 million PRF milestone payment received in thefirst quarter of 2006. AVANT expects that cash used in operations will declinein the second half of 2007 as a result of the Company’s restructuringactivities initiated in April 2007.

Cash used ininvesting activities increased to $1,995,835 for the first three months of 2007compared to $684,397 for the first three months of 2006. The increase is due to increased investmentin property and equipment in 2007 primarily towards the renovations of theNeedham facility compared to 2006. AVANT expects it will continue to usecash in its investing activities as the Company completes the full-scalerenovations of its Needham facility.

Net cash used infinancing activities was $72,541 for the first three months of 2007 compared to$65,580 for the first three months of 2006. The increase in net cash used infinancing activities is primarily due to increases in payments of long-termliabilities.

In February 2007,AVANT entered into a research and development partnership with Select Vaccines,a public Australian biotechnology company, focused on the use of SelectVaccines’ virus-like particles (“VLPs”) as a platform technology for thedevelopment of viral vaccines. Research and development efforts will initiallytarget the development of vaccines against influenza including both epidemicand pandemic forms of vaccine, with the opportunity to expand the collaborationto other disease targets. Under the terms of the agreement, AVANT will make anupfront equity investment of $735,000 in Select Vaccines and fund influenzavaccine research and development for two years, as well as provide payments toSelect Vaccines for the achievement of specific preclinical and clinicaldevelopment milestones. Completion of the partnership agreement is subject tothe approval of Select’s shareholders. AVANT also gains the exclusive right toapply Select Vaccines’ technology to a second target within the next two years,and a third target within the next three years. Select Vaccines would also beeligible to receive royalties based on net sales of any approved productsarising out of this collaboration that are successfully marketed.

On April 16, 2007,AVANT announced that it has initiated planned restructuring activities toreduce ongoing operational costs, following an extensive review of itsoperations and cost structure. The restructuring aims to increase the focus ofAVANT’s resources upon key programs and core operational capabilities and lowerthe Company’s overall cost structure. The Company will concentrate its focus onbuilding an enhanced portfolio of viral and bacterial vaccines for globalhealth and travelers around the Company’s core technologies, as well as itsunique development and manufacturing capabilities. AVANT will continue tosupport its key partners in their development programs, but will no longerinvest in biodefense research and development activities or further invest inclinical trials for its CETi and TP-10 programs.

The restructuring,which will be implemented over the next few months, resulted in a workforcereduction of approximately 30%. AVANT anticipates that it will exit from itsSt. Louis-based research facility later this year and move all essentialresearch activities to its Needham, MA headquarters. AVANT estimates that itwill incur a restructuring charge of approximately $1 million in thesecond quarter, the cash impact of which will primarily be reflected during thesecond, third and fourth quarters of 2007. The Company has not determined if itwill incur any contract termination or non-cash impairment charges in connectionwith the restructuring.

**AGGREGATECONTRACTUAL OBLIGATIONS**

The following table summarizesAVANT’s contractual obligations at March 31, 2007 and the effect suchobligations and commercial commitments are expected to have on its liquidityand cash flow in future years. These obligations, commitments and supportingarrangements represent payments based on current operating forecasts, which aresubject to change:
| ** **                         | ** ** | **Total** | ** ** | **2007**  | ** ** | **2008-2010** | ** ** | **2011-2012** | ** ** | **Thereafter** | ** ** |
|------------------------------------|------------|-----------|------------|-----------|------------|---------------|------------|---------------|------------|----------------|------------|
| Contractual  obligations:          |       |      |       |      |       |          |       |          |       |           |       |
| Operating lease  obligations       |       | $         | 21,121,900 |      | $          | 1,324,000     |       | $             | 5,843,300  |           | $          | 4,240,700 |   | $ | 9,713,900 |   |
| Loan Payable*                      |       | 1,417,400 |       | 92,600    |       | 391,200       |       | 238,000       |       | 695,600        |       |
| Note Payable*                      |       | 696,900   |       | 118,100   |       | 531,500       |       | 47,300        |       | 3⁄4         |       |
| Licensing and  R&D obligations |       | 1,725,500 |       | 438,800   |       | 696,700       |       | 170,000       |       | 420,000        |       |
| Construction  contracts            |       | 2,722,600 |       | 2,722,600 |       | 3⁄4        |       | 3⁄4        |       | 3⁄4         |       |
| Total contractual obligations      |       | $         | 27,684,300 |      | $          | 4,696,100     |       | $             | 7,462,700  |           | $          | 4,696,000 |   | $ | 10,829,500 |   |
|                               |       |      |       |      |       |          |       |          |       |           |       |
| Commercial  commitments:           |       |      |       |      |       |          |       |          |       |           |       |
| Clinical  development              |       | $         | 23,500     |      | $          | 23,500        |       | $             | —     |           | $          | — |   | $ | — |   |
| Manufacturing  development         |       | 474,900   |       | 474,900   |       | —        |       | —        |       | —         |       |
| Total commercial  commitments      |       | $         | 498,400    |      | $          | 498,400       |       | $             | —     |           | $          | — |   | $ | — |   |

 

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*                    includesinterest obligations

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

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

AVANT does not utilize derivative financial instruments. The carryingamounts reflected in the consolidated balance sheet of cash and cashequivalents, accounts receivables and accounts payable approximates fair valueat March 31, 2007 due tothe short-term maturities of these instruments.

**Item 4.  Controls andProcedures**

*Evaluation of disclosure controls and procedures*.

As required by Rule 13a-15 under the Securities Exchange Actof 1934 (the “Exchange Act”), as of March 31,2007, AVANT carried out an evaluation under the supervision and with theparticipation of its management, including its Chief Executive Officer andChief Financial Officer, of the effectiveness of the design and operation ofits disclosure controls and procedures as of the period covered by this report.In designing and evaluating AVANT’s disclosure controls and procedures, AVANTand its management recognize that any controls and procedures, no matter howwell designed and operated, can provide only reasonable assurance of achievingthe desired control objectives, and AVANT’s management necessarily was requiredto apply its judgment in evaluating and implementing possible controls andprocedures. Based upon that evaluation, AVANT’s Chief Executive Officer andChief Financial Officer have concluded that as of March 31, 2007, AVANT’s disclosure controls and procedureswere reasonably effective to ensure that information required to be disclosedby AVANT in the reports it files or submits under the Exchange Act is recorded,processed, summarized, accumulated, communicated and reported, within the timeperiods specified in the Securities and Exchange Commission’s rules and forms.AVANT will continue to review and document its disclosure controls andprocedures on an ongoing basis, and may from time to time make changes aimed atenhancing their effectiveness and to ensure that its disclosure controls andprocedures evolve with its business.

*Changes inInternal Control Over Financial Reporting.*

There was no change in our internal control overfinancial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under theExchange Act) that occurred during the period covered by this Quarterly Reporton Form 10-Q that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

**PART II— OTHER INFORMATION**

## **Item 1.         LegalProceedings**

None.

## **Item 1A.      RiskFactors**

In addition to theother information set forth in this report, you should carefully consider thefactors discussed in Part I, “Item 1A. Risk Factors” in our Annual Reporton Form 10-K for the year ended December 31, 2006, which couldmaterially affect our business, financial condition or future results. Therisks described in our Annual Report on Form 10-K are not the onlyrisks facing the Company. Additional risks and uncertainties not currentlyknown to the Company or that the

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Company currently deemsto be immaterial also may materially adversely affect the Company’s business,financial condition and/or operating results.

The risk factorbelow has been added to provide additional information related to our stockprice: 

***We could lose ourlisting on the Nasdaq Global Market if our stock price falls below $1.00 for 30consecutive business days, and the loss of the listing would make our stocksignificantly less liquid and would affect its value.***

Our common stockis listed on the Nasdaq Global Market and had a closing price of $0.96 at theclose of the market on May 8, 2007. If the price of our common stock fallsbelow $1.00 and for 30 consecutive business days remains below $1.00, we willreceive a deficiency notice from NASDAQ advising us that we have been affordeda 180-day compliance period. If our stock fails to maintain a minimum bid priceof $1.00 for 10 consecutive business days during a 180-day compliance period onthe Nasdaq Global Market, we could receive a delisting notice from the NASDAQGlobal Market, and, under certain circumstances, even if our stock maintains aminimum bid price of $1.00 for 10 consecutive business days, we may receive adelisting notice from the Nasdaq Global Market. If we are unable to comply withthe bid price requirement prior to the expiration of the 180-day complianceperiod, we may be able to transfer to the NASDAQ Capital Market, so as to takeadvantage of an additional compliance period offered on that market, providedwe meet all requirements for initial listing on the NASDAQ Capital Market, exceptfor the bid price requirement. Upon delisting from the NASDAQ Global Market orthe NASDAQ Capital Market, our stock would be traded over-the-counter, morecommonly known as OTC. OTC transactions involve risks in addition to thoseassociated with transactions in securities traded on the Nasdaq Global Market.Many OTC stocks trade less frequently and in smaller volumes than securitiestraded on the Nasdaq Global Market. Accordingly, our stock would be less liquidthan it would otherwise be, and the value of our stock could decrease.

## **Item 6.         Exhibits**

| 2.1          |   | Agreement and Plan of Merger, dated as of November  20, 2000, by and among AVANT, AVANT Acquisition Corp., and Megan Health, Inc.,  incorporated by reference to Exhibit 2.1 of AVANT’s Current Report on Form  8-K, filed December 12, 2000 with the Securities and Exchange Commission.                                                                                         |
|--------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.2          |   | First Amendment to Agreement and Plan of Merger,  dated as of November 20, 2000, by and among AVANT, AVANT Acquisition Corp.,  and Megan Health, Inc., incorporated by reference to Exhibit 2.2 of AVANT’s  Current Report on Form 8-K, filed December 12, 2000 with the Securities and  Exchange Commission.                                                                     |
| 3.1          |   | Third Restated Certificate of Incorporation of AVANT,  incorporated by reference to Exhibit 3.1 of AVANT’s Registration Statement on  Form S-4 (Reg. No. 333-59215), filed July 16, 1998 with the Securities and  Exchange Commission.                                                                                                                                            |
| 3.2          |   | Certificate of Amendment of Third Restated  Certificate of Incorporation of AVANT, incorporated by reference to Exhibit  3.1 of AVANT’s Registration Statement on Form S-4 (Reg. No. 333-59215), filed  July 16, 1998 with the Securities and Exchange Commission.                                                                                                                |
| 3.3          |   | Second Certificate of Amendment of Third Restated  Certificate of Incorporation of AVANT, incorporated by reference to Exhibit  3.2 of AVANT’s Registration Statement on Form S-4 (Reg. No. 333-59215), filed  July 16, 1998 with the Securities and Exchange Commission.                                                                                                         |
| 3.4          |   | Amended and Restated By-Laws of AVANT as of November  10, 1994, incorporated by reference to Exhibit 3.3 of AVANT’s Registration  Statement on Form S-4 (Reg. No. 333-59215), filed July 16, 1998 with the  Securities and Exchange Commission.                                                                                                                                   |
| 3.5          |   | Third Certificate of Amendment of Third Restated  Certificate of Incorporation of AVANT, incorporated by reference to Exhibit  3.1 of AVANT’s Quarterly Report on Form 10-Q, filed May 10, 2002 with the  Securities and Exchange Commission.                                                                                                                                     |
| 3.6          |   | Certificate of Elimination of Series C-1 Junior  Participating Cumulative Preferred Stock, incorporated by reference to  Exhibit 3.6 of AVANT’s Annual Report on Form 10-K, filed March 16, 2005 with  the Securities and Exchange Commission.                                                                                                                                    |
| 3.7          |   | Certificate of Designations, Preferences and Rights  of a Series of Preferred Stock of AVANT Immunotherapeutics, Inc. classifying  and designating the Series C-1 Junior Participating Cumulative Preferred  Stock, incorporated by reference to Exhibit 3.1 of AVANT’s Registration  Statement on Form 8-A, filed November 8, 2004 with the Securities and  Exchange Commission. |
| 4.1          |   | Shareholder Rights Agreement dated November 5, 2004  between AVANT and EquiServe Trust Company, N.A. as Rights Agent, incorporated  by reference to Exhibit 3.1 of AVANT’s Registration Statement on Form 8-A,  filed November 8, 2004 with the Securities and Exchange Commission.                                                                                               |
| *+10.1       |   | Collaboration and License Agreement among AVANT,  Hepgenics Pty Ltd., and Select Vaccines Limited, dated as of February 9,  2007.                                                                                                                                                                                                                                                 |
|   *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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*      Filed herewith.

**    Furnished herewith.

+      Certain portions of this document have been omitted pursuant toa confidential treatment request filed with the Securities and Exchange Commission.The omitted portions have been filed separately with the Securities andExchange Commission.

 

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.
|                     | ** ** | **AVANT IMMUNOTHERAPEUTICS, INC.** |
|---------------------|------------|------------------------------------|
|                | ** ** | ** **                         | ** ** | ** ** |
|                |       | BY:                                |   |   |
|                |       |                               |   |   |
|                |       |                               |   | /s/ UNA S. RYAN |
| Dated: May 9,  2007 |       |                               |   | Una S. Ryan,  Ph. D. |
|                |       |                               |   | President and Chief Executive Officer |
|                |       |                               |   | (Principal Executive Officer) |
|                |       |                               |   |   |
|                |       |                               |   | /s/ AVERY W. CATLIN |
| Dated: May 9,  2007 |       |                               |   | Avery W. Catlin |
|                |       |                               |   | Senior Vice President, Treasurer |
|                |       |                               |   | and Chief Financial Officer |
|                |       |                               |   | (Principal Financial and |
|                |       |                               |   | Accounting Officer) |

 

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**EXHIBITINDEX**
| Exhibit  No. | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                        |
|--------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1          |       | Agreement and Plan of Merger, dated as of November  20, 2000, by and among AVANT, AVANT Acquisition Corp., and Megan Health,  Inc., incorporated by reference to Exhibit 2.1 of AVANT’s Current Report on  Form 8-K, filed December 12, 2000 with the Securities and Exchange  Commission.                                                                                        |
| 2.2          |       | First Amendment to Agreement and Plan of Merger,  dated as of November 20, 2000, by and among AVANT, AVANT Acquisition Corp.,  and Megan Health, Inc., incorporated by reference to Exhibit 2.2 of AVANT’s  Current Report on Form 8-K, filed December 12, 2000 with the Securities and  Exchange Commission.                                                                     |
| 3.1          |       | Third Restated Certificate of Incorporation of  AVANT, incorporated by reference to Exhibit 3.1 of AVANT’s Registration  Statement on Form S-4 (Reg. No. 333-59215), filed July 16, 1998 with the  Securities and Exchange Commission.                                                                                                                                            |
| 3.2          |       | Certificate of Amendment of Third Restated  Certificate of Incorporation of AVANT, incorporated by reference to Exhibit  3.1 of AVANT’s Registration Statement on Form S-4 (Reg. No. 333-59215), filed  July 16, 1998 with the Securities and Exchange Commission.                                                                                                                |
| 3.3          |       | Second Certificate of Amendment of Third Restated  Certificate of Incorporation of AVANT, incorporated by reference to Exhibit  3.2 of AVANT’s Registration Statement on Form S-4 (Reg. No. 333-59215), filed  July 16, 1998 with the Securities and Exchange Commission.                                                                                                         |
| 3.4          |       | Amended and Restated By-Laws of AVANT as of November  10, 1994, incorporated by reference to Exhibit 3.3 of AVANT’s Registration  Statement on Form S-4 (Reg. No. 333-59215), filed July 16, 1998 with the  Securities and Exchange Commission.                                                                                                                                   |
| 3.5          |       | Third Certificate of Amendment of Third Restated  Certificate of Incorporation of AVANT, incorporated by reference to Exhibit  3.1 of AVANT’s Quarterly Report on Form 10-Q, filed May 10, 2002 with the  Securities and Exchange Commission.                                                                                                                                     |
| 3.6          |       | Certificate of Elimination of Series C-1 Junior  Participating Cumulative Preferred Stock, incorporated by reference to  Exhibit 3.6 of AVANT’s Annual Report on Form 10-K, filed March 16, 2005 with  the Securities and Exchange Commission.                                                                                                                                    |
| 3.7          |       | Certificate of Designations, Preferences and Rights  of a Series of Preferred Stock of AVANT Immunotherapeutics, Inc. classifying  and designating the Series C-1 Junior Participating Cumulative Preferred  Stock, incorporated by reference to Exhibit 3.1 of AVANT’s Registration  Statement on Form 8-A, filed November 8, 2004 with the Securities and  Exchange Commission. |
| 4.1          |       | Shareholder Rights Agreement dated November 5, 2004  between AVANT and EquiServe Trust Company, N.A. as Rights Agent, incorporated  by reference to Exhibit 3.1 of AVANT’s Registration Statement on Form 8-A,  filed November 8, 2004 with the Securities and Exchange Commission.                                                                                               |
| *+10.1       |       | Collaboration and License Agreement among AVANT,  Hepgenics Pty Ltd., and Select Vaccines Limited, dated as of February 9,  2007.                                                                                                                                                                                                                                                 |
|  *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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|   | *      | Filed herewith.                                                                                                                                                                                                                                     |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | **     | Furnished herewith.                                                                                                                                                                                                                                 |
|   | +      | Certain portions of this document have been omitted  pursuant to a confidential treatment request filed with the Securities and  Exchange Commission. The omitted portions have been filed separately with the  Securities and Exchange Commission. |
|   |   |                                                                                                                                                                                                                                                |

 

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