**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

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**FORM 10-Q**

 
| **ý**                                             | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**  |
|--------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|
| ** **                                             |
| **For the quarterly period ended June 30,  2005** |
| ** **                                             |
| **OR**                                                 |
| ** **                                             |
| **o**                                                  | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |

 

**Commission file number:  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 markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports) and (2) has been subject to such filing requirements for thepast 90 days.       Yes  ý      No  o.

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12 b-2of theExchange Act.)               Yes  ý      No  o.

 

As of July 31, 2005, 74,136,232 shares of common stock, $.001 parvalue per share, were outstanding.

 

 

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**AVANT IMMUNOTHERAPEUTICS, INC.**

 

**FORM 10-Q**

### **Quarter Ended June 30,2005**

**Table of Contents**

 
| **Part I — Financial Information**                                                              | **Page** |
|-----------------------------------------------------------------------------------------------------------|----------|
|                                                                                                      |     |
| Unaudited,  Consolidated Balance Sheets at June 30, 2005 and December 31, 2004                  | 3        |
|                                                                                                      |     |
| Unaudited,  Consolidated Statements of Operations for the Three Months Ended June 30,  2005 and 2004 | 4        |
|                                                                                                      |     |
| Unaudited  Consolidated Statement of Operations for the Six Months Ended June 30,  2005 and 2004     | 5        |
|                                                                                                      |     |
| Unaudited,  Consolidated Statements of Cash Flows for the Six Months Ended June 30,  2005 and 2004   | 6        |
|                                                                                                      |     |
| Notes  to Unaudited Consolidated Financial Statements                                                     | 7        |
|                                                                                                      |     |
| Management’s  Discussion and Analysis of Financial Condition and Results of Operations               | 15       |
|                                                                                                      |     |
| Quantitative  and Qualitative Disclosures about Market Risk                                               | 24       |
|                                                                                                      |     |
| Controls and  Procedures                                                                                  | 24       |
|                                                                                                      |     |
| **Part II — Other Information**                                                                 |     |
|                                                                                                      |     |
| Item  4. Submission of Matters to a Vote of Security Holders                                              | 24       |
|                                                                                                      |     |
| Item 6.  Exhibits                                                                                         | 25       |
|                                                                                                      |     |
| Signatures                                                                                                | 26       |
|                                                                                                      |     |
| Certifications                                                                                            |     |

 

2

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**PART I — FINANCIAL INFORMATION**

 

**Item 1.   FinancialStatements**

 

**AVANT IMMUNOTHERAPEUTICS, INC.**

### **CONSOLIDATEDBALANCE SHEETS**

**(Unaudited)**

 
| ** **                                                                                                                                                                                                     | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                                                                     |       |                    |       |                        |       |
| Current Assets:                                                                                                                                                                                                |       |                    |       |                        |       |
| Cash and Cash Equivalents                                                                                                                                                                                      |       | $                       | 27,028,598 |                        | $          | 31,741,494 |   |
| Accounts Receivable                                                                                                                                                                                            |       | 5,477,071               |       | 2,230,350                   |       |
| Prepaid Expenses and Other Current Assets                                                                                                                                                                      |       | 583,141                 |       | 567,916                     |       |
|                                                                                                                                                                                                           |       |                    |       |                        |       |
| Total Current Assets                                                                                                                                                                                           |       | 33,088,810              |       | 34,539,760                  |       |
|                                                                                                                                                                                                           |       |                    |       |                        |       |
| Property and Equipment, Net                                                                                                                                                                                    |       | 4,788,560               |       | 4,164,292                   |       |
| Intangible and Other Assets                                                                                                                                                                                    |       | 5,564,629               |       | 6,063,185                   |       |
| Goodwill                                                                                                                                                                                                       |       | 1,036,285               |       | 1,036,285                   |       |
|                                                                                                                                                                                                           |       |                    |       |                        |       |
| Total Assets                                                                                                                                                                                                   |       | $                       | 44,478,284 |                        | $          | 45,803,522 |   |
|                                                                                                                                                                                                           |       |                    |       |                        |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                  |       |                    |       |                        |       |
| Current Liabilities:                                                                                                                                                                                           |       |                    |       |                        |       |
| Accounts Payable                                                                                                                                                                                               |       | $                       | 617,205    |                        | $          | 1,752,313 |   |
| Accrued Expenses                                                                                                                                                                                               |       | 2,720,799               |       | 3,500,422                   |       |
| Current Portion of Deferred Revenue                                                                                                                                                                            |       | 24,998                  |       | 11,704                      |       |
| Current Portion of Long-Term Liabilities                                                                                                                                                                       |       | 213,727                 |       | 186,509                     |       |
|                                                                                                                                                                                                           |       |                    |       |                        |       |
| Total Current Liabilities                                                                                                                                                                                      |       | 3,576,729               |       | 5,450,948                   |       |
|                                                                                                                                                                                                           |       |                    |       |                        |       |
| Deferred Revenue                                                                                                                                                                                               |       | 10,000,000              |       | —                      |       |
| Long-Term Liabilities                                                                                                                                                                                          |       | 1,851,886               |       | 1,944,948                   |       |
|                                                                                                                                                                                                           |       |                    |       |                        |       |
| Stockholders’ Equity:                                                                                                                                                                                     |       |                    |       |                        |       |
| Convertible Preferred Stock, 4,513,102 Shares  Authorized; None Issued and Outstanding                                                                                                                         |       | —                  |       | —                      |       |
|                                                                                                                                                                                                           |       |                    |       |                        |       |
| Common Stock, $.001 Par Value; 100,000,000 Shares  Authorized; 74,353,148 Issued and 74,132,829 Outstanding at June 30,  2005 and 74,351,571 Issued and 74,131,252 Outstanding at December 31,  2004 |       | 74,353                  |       | 74,351                      |       |
| Additional Paid-In Capital                                                                                                                                                                                     |       | 257,832,304             |       | 257,829,824                 |       |
| Deferred Compensation                                                                                                                                                                                          |       | (1,251,000              | )          | (1,493,000                  | )          |
| Less: 220,319 Common Treasury Shares at Cost                                                                                                                                                                   |       | (227,646                | )          | (227,646                    | )          |
| Accumulated Deficit                                                                                                                                                                                            |       | (227,378,342            | )          | (217,775,903                | )          |
|                                                                                                                                                                                                           |       |                    |       |                        |       |
| Total Stockholders’ Equity                                                                                                                                                                                |       | 29,049,669              |       | 38,407,626                  |       |
|                                                                                                                                                                                                           |       |                    |       |                        |       |
| Total Liabilities and Stockholders’ Equity                                                                                                                                                                |       | $                       | 44,478,284 |                        | $          | 45,803,522 |   |

 

*See accompanying notes to unaudited consolidatedfinancial statements*

 

3

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**AVANT IMMUNOTHERAPEUTICS, INC.**

### **CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(Unaudited)**

 
| ** **                                   | ** ** | **Three Months Ended**  | ** ** |
|----------------------------------------------|------------|-------------------------|------------|
| ** **                                   | ** ** | **June 30,  2005** | ** ** | **June 30,  2004** | ** ** |
| ** **                                   | ** ** | ** **              | ** ** | ** ** | ** ** |
| **REVENUE:**                                 | ** ** | ** **              | ** ** | ** ** | ** ** |
| ** **                                   | ** ** | ** **              | ** ** | ** ** | ** ** |
| Product Development and Licensing Agreements |       | $                       | 59,060     |   | $ | 124,419 |   |
| Government Contracts and Grants              |       | 522,963                 |       | 714,638 |   |
| Product Royalties                            |       | 55,138                  |       | 53,953 |   |
|                                         |       |                    |       |   |   |
| Total Revenue                                |       | 637,161                 |       | 893,010 |   |
|                                         |       |                    |       |   |   |
| **OPERATING EXPENSE:**                       |       |                    |       |   |   |
| ** **                                   |       |                    |       |   |   |
| Research and Development                     |       | 3,430,992               |       | 3,367,804 |   |
| General and Administrative                   |       | 1,861,095               |       | 1,269,711 |   |
| Amortization of Acquired Intangible Assets   |       | 248,778                 |       | 248,778 |   |
|                                         |       |                    |       |   |   |
| Total Operating Expense                      |       | 5,540,865               |       | 4,886,293 |   |
|                                         |       |                    |       |   |   |
| Operating Loss                               |       | (4,903,704              | )          | (3,993,283 | ) |
|                                         |       |                    |       |   |   |
| Investment and Other Income, Net             |       | 169,764                 |       | 94,546 |   |
|                                         |       |                    |       |   |   |
| Net Loss                                     |       | $                       | (4,733,940 | ) | $ | (3,898,737 | ) |
|                                         |       |                    |       |   |   |
| Basic and Diluted Net Loss Per Common Share  |       | $                       | (0.06      | ) | $ | (0.05 | ) |
|                                         |       |                    |       |   |   |
| Weighted Average Common Shares Outstanding   |       | 74,132,829              |       | 74,091,599 |   |

 

###### *See accompanyingnotes to unaudited consolidated financial statements*

 

4

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**AVANT IMMUNOTHERAPEUTICS, INC.**

### **CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(Unaudited)**

 
| ** **                                   | ** ** | **Six Months Ended**    | ** ** |
|----------------------------------------------|------------|-------------------------|------------|
| ** **                                   | ** ** | **June 30,  2005** | ** ** | **June 30,  2004** | ** ** |
| ** **                                   | ** ** | ** **              | ** ** | ** ** | ** ** |
| **REVENUE:**                                 | ** ** | ** **              | ** ** | ** ** | ** ** |
| ** **                                   | ** ** | ** **              | ** ** | ** ** | ** ** |
| Product Development and Licensing Agreements |       | $                       | 130,517    |   | $ | 2,248,838 |   |
| Government Contracts and Grants              |       | 1,389,050               |       | 1,594,546 |   |
| Product Royalties                            |       | 88,146                  |       | 80,323 |   |
|                                         |       |                    |       |   |   |
| Total Revenue                                |       | 1,607,713               |       | 3,923,707 |   |
|                                         |       |                    |       |   |   |
| **OPERATING EXPENSE:**                       |       |                    |       |   |   |
| ** **                                   |       |                    |       |   |   |
| Research and Development                     |       | 7,461,610               |       | 6,821,003 |   |
| General and Administrative                   |       | 3,571,879               |       | 2,561,846 |   |
| Amortization of Acquired Intangible Assets   |       | 497,556                 |       | 497,556 |   |
|                                         |       |                    |       |   |   |
| Total Operating Expense                      |       | 11,531,045              |       | 9,880,405 |   |
|                                         |       |                    |       |   |   |
| Operating Loss                               |       | (9,923,332              | )          | (5,956,698 | ) |
|                                         |       |                    |       |   |   |
| Investment Income, Net                       |       | 320,894                 |       | 148,549 |   |
|                                         |       |                    |       |   |   |
| Net Loss                                     |       | $                       | (9,602,438 | ) | $ | (5,808,149 | ) |
|                                         |       |                    |       |   |   |
| Basic and Diluted Net Loss Per Common Share  |       | $                       | (0.13      | ) | $ | (0.08 | ) |
|                                         |       |                    |       |   |   |
| Weighted Average Common Shares Outstanding   |       | 74,132,416              |       | 71,655,099 |   |

 

###### *See accompanyingnotes to unaudited consolidated financial statements*

 

5

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**AVANT IMMUNOTHERAPEUTICS, INC.**

##### **CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                   | ** ** | **Six Months Ended**    | ** ** |
|------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                   | ** ** | **June 30,  2005** | ** ** | **June 30,  2004** | ** ** |
| ** **                                                                   | ** ** | ** **              | ** ** | ** ** | ** ** |
| **Cash Flows from Operating Activities:**                                    | ** ** | ** **              | ** ** | ** ** | ** ** |
| Net Loss                                                                     |       | $                       | (9,602,439 | ) | $ | (5,808,149 | ) |
| Adjustments to Reconcile Net Loss to Net Cash Used  in Operating Activities: |       |                    |       |   |   |
| Depreciation and Amortization                                                |       | 687,251                 |       | 697,983 |   |
| Amortization of Deferred Compensation                                        |       | 242,000                 |       | 138,000 |   |
| Changes in Operating Assets and Liabilities:                                 |       |                    |       |   |   |
| Accounts Receivable                                                          |       | 1,753,279               |       | 932,692 |   |
| Prepaid and Other Current Assets                                             |       | (15,225                 | )          | 294,909 |   |
| Accounts Payable and Accrued Expenses                                        |       | (1,914,731              | )          | 1,142,823 |   |
| Deferred Revenue                                                             |       | 5,013,294               |       | (1,198,838 | ) |
|                                                                         |       |                    |       |   |   |
| Net Cash Used in Operating Activities                                        |       | (3,836,571              | )          | (3,800,580 | ) |
|                                                                         |       |                    |       |   |   |
| **Cash Flows from Investing Activities:**                                    |       |                    |       |   |   |
| Acquisition of Property and Equipment                                        |       | (812,963                | )          | (400,965 | ) |
| Proceeds from the Maturity of Marketable Securities                          |       | 3⁄4                  |       | 2,000,000 |   |
| Purchases of Marketable Securities                                           |       | 3⁄4                  |       | (2,000,000 | ) |
|                                                                         |       |                    |       |   |   |
| Net Cash Used in Investing Activities                                        |       | (812,963                | )          | (400,965 | ) |
|                                                                         |       |                    |       |   |   |
| **Cash Flows from Financing Activities:**                                    |       |                    |       |   |   |
| Proceeds from Stock Issuance                                                 |       | 2,055                   |       | 23,050,977 |   |
| Proceeds from Exercise of Stock Options and Warrants                         |       | 427                     |       | 270,260 |   |
| Payment of Long-Term Liabilities                                             |       | (65,844                 | )          | 3⁄4 |   |
|                                                                         |       |                    |       |   |   |
| Net Cash Provided by (Used in) Financing Activities                          |       | (63,362                 | )          | 23,321,237 |   |
|                                                                         |       |                    |       |   |   |
| Net Increase (Decrease) in Cash and Cash Equivalents                         |       | (4,712,896              | )          | 19,119,692 |   |
|                                                                         |       |                    |       |   |   |
| Cash and Cash Equivalents at Beginning of Period                             |       | 31,741,494              |       | 18,251,044 |   |
|                                                                         |       |                    |       |   |   |
| Cash and Cash Equivalents at End of Period                                   |       | $                       | 27,028,598 |   | $ | 37,370,736 |   |
|                                                                         |       |                    |       |   |   |
| **Supplemental Disclosure of Cash Flow Information**                         |       |                    |       |   |   |
| Cash paid for interest                                                       |       | $                       | 51,885     |   | 3⁄4 |   |

 

*See accompanying notes to unaudited consolidatedfinancial statements*

 

6

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**AVANTIMMUNOTHERAPEUTICS, INC.**

**Notes to Unaudited ConsolidatedFinancial Statements**

**June 30, 2005**

 

**(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 broad portfolio of vaccines and therapeuticsagainst cardiovascular, viral and bacterial diseases.  These include a treatment to reducecomplement-mediated tissue damage associated with cardiac by-pass surgery, single-doseoral vaccines aimed at protecting travelers and people in regions whereinfectious diseases are endemic, as well as, a proprietary vaccine candidatefor cholesterol management.  In addition,the Company is developing the VitriLifeÒpreservation technology for use in AVANT’s oral vaccines and certain othernon-injectable applications.  AVANTfurther leverages the value of its technology portfolio through corporatepartnerships.  Current collaborationsencompass the development of an oral human rotavirus vaccine, vaccines tocombat threats of biological warfare, and vaccines addressed to human foodsafety and animal health.

 

Theunaudited consolidated financial statements include the accounts of AVANTImmunotherapeutics, Inc. and its wholly owned subsidiary, Megan Health, Inc.(“Megan”).  All intercompany transactionshave been eliminated.

 

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

 

Theaccompanying unaudited consolidated financial statements for the three monthsand six months ended June 30, 2005 and 2004 include the consolidatedaccounts of AVANT, and have been prepared in accordance with instructions to Form 10-Qand Article 10 of Regulation S-X. In the opinion of management, the information contained herein reflectsall adjustments, consisting solely of normal recurring adjustments, that arenecessary to present fairly the Company’s financial position at June 30,2005, results of operations for the three months and six months ended June 30,2005 and 2004, and cash flows for the six-month periods ended June 30, 2005and 2004.  The results of operations forthe six-month period ended June 30, 2005 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 have beenomitted, although the Company believes that the disclosures included, when readin conjunction with AVANT’s Annual Report on Form 10-K for the yearended December 31, 2004, are adequate to make the information presentednot misleading.

 

**(3)****                                 RecentAccounting Pronouncement**

 

In December 2004,the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS123R”), which replaces SFAS No. 123, “Accounting for Stock-BasedCompensation” (“SFAS 123”) and supercedes APB Opinion No. 25, “Accountingfor Stock Issued to Employees”. SFAS 123R requires all share-based payments to employees, includinggrants of employee stock options, to be recognized in the financial statementsbased on their fair values, beginning with the first annual period after June 15,2005, with early adoption encouraged. The pro forma disclosures previously permitted under SFAS 123 nolonger will be an alternative to financial statement recognition.  AVANT is required to adopt SFAS 123R inour first quarter of 2006, beginning January 1, 2006.  Under SFAS 123R, the Company mustdetermine the appropriate fair value model to be used for valuing share-basedpayments, the amortization method for compensation cost and the transitionmethod to be used at date of adoption. The transition methods include prospective and retroactive adoptionoptions. Under the retroactive options, prior periods may be restated either asof the beginning of the year of adoption or for all periods presented.  The prospective method requires thatcompensation expense be recorded for all unvested stock options and restrictedstock at the beginning of the first quarter of adoption of SFAS 123R,while the retroactive

 

7

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methods would recordcompensation expense for all unvested stock options and restricted stockbeginning with the first period restated. AVANT is evaluating the requirements of SFAS 123R and the adoptionof SFAS 123R which may have a material impact on its consolidated resultsof operations and earnings per share.  TheCompany has not yet determined the method of adoption or the effect of adoptingSFAS 123R, and has not determined whether the adoption will result inamounts that are similar to the current pro forma disclosures underSFAS 123.

 

OnJune 1, the Financial Accounting Standards Board (FASB) issued FASB StatementNo. 154, *Accounting Changes and Error Corrections*(FAS 154), which will require entities that voluntary make a change inaccounting principle to apply that change retrospectively to prior periods'financial statements, unless this would be impracticable. FAS 154 supersedesAccounting Principles Board Opinion No. 20, *Accounting Changes*(APB 20), which previously required that most voluntary changes in accountingprinciple be recognized by including in the current period's net income thecumulative effect of changing to the new accounting principle. FAS 154 alsomakes a distinction between "retrospective application" of anaccounting principle and the "restatement" of financial statements toreflect the correction of an error.

 

Anothersignificant change in practice under FAS 154 will be that if an entity changesits method of depreciation, amortization, or depletion for long-lived,non-financial assets, the change must be accounted for as a change inaccounting estimate. Under APB 20, such a change would have been reported as achange in accounting principle. FAS 154 applies to accounting changes and errorcorrections that are made in fiscal years beginning after December 15, 2005.

 

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

 

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

 

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

 

The PRF transactionqualifies as a sale in accordance with guidance in EITF 88-18 “Sale ofFuture Revenues”.  The upfrontunconditional payment of $10 million was recorded by AVANT as deferred revenueat June 30, 2005.  Any futuremilestone payments received from PRF will also be recorded as deferredrevenue.  Revenues will be recognized andcalculated based on the ratio of total royalties received from Glaxo andremitted to PRF over expected total amounts to be paid to PRF and then applyingthis percentage to the total cumulative consideration received from PRF todate.  The expected total of payments tobe paid to PRF is an estimate which AVANT will update from time to time todetermine that the estimate continues to be reasonable in the light of thencurrent events and circumstances.

 

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

 

Aspermitted by Statement of Financial Accounting Standards (“SFAS”) No. 148,“Accounting for Stock-Based Compensation - Transition and Disclosure - anamendment of SFAS 123”, AVANT has accounted for its stock-based compensationawards using the intrinsic method and disclosed the effect on the net loss per shareas if the fair value method had been used. AVANT periodically grants stockoptions for a fixed number of shares to employees and directors with anexercise price equal to the fair market value of the shares at the date ofgrant.  The Company accounts foremployee and director stock options under the recognition and measurementprinciples of Accounting Principles Board (“APB”) Opinion No. 25, “Accountingfor Stock Issued to Employees”, and related interpretations.

 

In November 2004and September 2003, the Company awarded Restricted Stock Units to Dr. UnaS. Ryan, Ph. D., the Company’s President and CEO, and recorded non-cashdeferred compensation amounting to $832,000 and $1,104,000, respectively.  Thevalue of the Restricted Stock Units is being amortized over their vestingperiod, or four years, and being recorded as compensation expense.  The Company has recognized $121,000and $69,000 as stock-based compensation expense in the statement of operationsduring the three-month periods ended June 30, 2005 and 2004, respectivelyand $242,000 and $138,000 as stock based compensation expense in the statementof operations during the six-month periods ended June 30, 2005 and 2004,respectively.

 

The following are pro forma net loss and loss pershare, as if compensation expense for the option plans had been determinedbased on the fair value at the date of grant:

 
| ** **                                                                                                    | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                                    | ** ** | **2005**                             | ** ** | **2004**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net Loss:                                                                                                     |       |                                 |       |                               |       |   |   |   |   |
| As reported                                                                                                   |       | $                                    | 4,733,940  |                               | $          | 3,898,737 |   | $ | 9,602,438 |   | $ | 5,808,149 |   |
| Less: Stock-based employee compensation expense as  reported                                                  |       | (121,000                             | )          | (69,000                            | )          | (242,000 | ) | (138,000 | ) |
| Add: Total stock-based employee compensation expense  determined under fair value based method for all awards |       | 248,835                              |       | 168,000                            |       | 507,224 |   | 339,400 |   |
| Pro forma                                                                                                     |       | $                                    | 4,861,775  |                               | $          | 3,997,737 |   | $ | 9,867,662 |   | $ | 6,009,549 |   |
|                                                                                                          |       |                                 |       |                               |       |   |   |   |   |
| Basic and Diluted Net Loss Per Share:                                                                         |       |                                 |       |                               |       |   |   |   |   |
| As reported                                                                                                   |       | $                                    | 0.06       |                               | $          | 0.05 |   | $ | 0.13 |   | $ | 0.08 |   |
| Pro forma                                                                                                     |       | $                                    | 0.07       |                               | $          | 0.05 |   | $ | 0.13 |   | $ | 0.08 |   |

 

8

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The fair value of the option grant is estimated onthe date of grant using the Black-Scholes option pricing model with thefollowing assumptions:

 
| ** **                      | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|---------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                      | ** ** | **2005**                             | ** ** | **2004**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
| Expected stock price volatility |       | 82                                   | %          | 109                                | %          | 82 | % | 109 | % |
| Expected option term            |       | 5 Years                              |       | 5 Years                            |       | 5 Years |   | 5 Years |   |
| Risk-free interest rate         |       | 3.6 - 4.2                            | %          | 3.1 - 4.2                          | %          | 3.6 – 4.3 | % | 2.7 – 4.2 | % |
| Expected dividend yield         |       | None                                 |       | None                               |       | None |   | None |   |

 

Because additional stock-based compensation grantsare expected to be made each year, the above pro forma disclosures are notrepresentative of pro forma effects of reported net income for future years.

 

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

 

Trade accounts receivableare recorded at the invoiced amount and do not bear interest. The Company hasnot historically experienced credit losses from its trade accounts receivableand therefore has not established an allowance for doubtful accounts.

 

Accounts receivableconsists of the following:

 

| ** **        | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------|------------|-------------------------|------------|-----------------------------|------------|
|              |       |                    |       |                        |       |
| Trade Receivables |       | $                       | 5,447,650  |                        | $          | 2,205,176 |   |
| Other Receivables |       | 29,421                  |       | 25,174                      |       |
|              |       | $                       | 5,477,071  |                        | $          | 2,230,350 |   |

 

Other receivables at June 30, 2005 and December 31,2004 primarily represent interest receivable from a bank.

 

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

 

Property and equipment includes the following:

 

| ** **                                     | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
|                                           |       |                    |       |                        |       |
| Laboratory Equipment                           |       | $                       | 2,459,850  |                        | $          | 2,390,458 |   |
| Office Furniture and Equipment                 |       | 1,794,707               |       | 1,665,401                   |       |
| Leasehold Improvements                         |       | 1,705,438               |       | 1,704,590                   |       |
| Construction in Progress                       |       | 4,087,997               |       | 3,473,580                   |       |
| Property and Equipment, Total                  |       | 10,047,992              |       | 9,234,029                   |       |
| Less Accumulated Depreciation and Amortization |       | (5,259,432              | )          | (5,069,737                  | )          |
|                                           |       | $                       | 4,788,560  |                        | $          | 4,164,292 |   |

 

9

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

 

Intangible and other assets include the following:

 
| ** **                  | ** ** | **Estimated  Lives** | ** **                    | **June 30, 2005** | ** **                    | **December 31, 2004** | ** **                  |
|-----------------------------|------------|----------------------|-------------------------------|------------------------|-------------------------------|----------------------------|-----------------------------|
| ** **                  | ** ** | ** **           | **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 | ) | $ | — |   |
| Core Technology             |       | 10 years             |                          | 3,786,900              |                          | (1,319,006                 | )                           | 2,467,894 |   | 3,786,900 |   | (1,129,658 | ) | 2,657,242 |   |
| Developed Technology        |       | 7 years              |                          | 3,263,100              |                          | (2,134,000                 | )                           | 1,129,100 |   | 3,263,100 |   | (1,901,200 | ) | 1,361,900 |   |
| Strategic Partner Agreement |       | 17 years             |                          | 2,563,900              |                          | (691,246                   | )                           | 1,872,654 |   | 2,563,900 |   | (615,838 | ) | 1,948,062 |   |
|                        |       |                 |                          |                   |                          |                       |                        |   |   |   |   |   |   |   |   |
| Total Intangible Assets     |       |                 |                          | 10,703,900             |                          | (5,234,252                 | )                           | 5,469,648 |   | 10,703,900 |   | (4,736,696 | ) | 5,967,204 |   |
|                        |       |                 |                          |                   |                          |                       |                        |   |   |   |   |   |   |   |   |
| Other Non Current Assets    |       |                 |                          | 94,981                 |                          | 3⁄4                     |                        | 94,981 |   | 95,981 |   | 3⁄4 |   | 95,981 |   |
|                        |       |                 |                          | $                      | 10,798,881                    |                       | $                           | (5,234,252 | ) | $ | 5,564,629 |   | $ | 10,799,881 |   | $ | (4,736,696 | ) | $ | 6,063,185 |   |

 

Allof the Company’s intangible assets are amortized over their estimated usefullives.  Total amortization expense forintangible assets was $248,778 and $497,556 for the three- and six-month periodsended June 30, 2005 and 2004, respectively.

 

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

 
| **Year ending December 31,** | ** ** | **Estimated  Amortization  Expense** | ** ** |
|-----------------------------------|------------|--------------------------------------|------------|
| 2005 (remaining six months)       |       | $                                    | 497,556    |   |
| 2006                              |       | 995,112                              |       |
| 2007                              |       | 960,212                              |       |
| 2008                              |       | 529,512                              |       |
| 2009                              |       | 529,512                              |       |
| 2010                              |       | 514,622                              |       |
|                                   |            |                                      |            |  |

 

**(9)****                                 LossPer Share**

 

TheCompany computes and reports earnings per share in accordance with theprovisions of SFAS No. 128, “Earnings Per Share”.  The computations of basic and diluted lossper common share are based upon the weighted average number of common sharesoutstanding and potentially dilutive securities.  Potentially dilutive securities include stockoptions, warrants and restricted stock units. Options and warrants to purchase 3,632,326 and 3,472,018 shares ofcommon stock and restricted stock units totaling 800,000 and 400,000 shareswere not included in the computations of weighted average common shares for theperiods ended June 30, 2005 and 2004, respectively, because inclusion ofsuch shares would have an anti-dilutive effect on net loss per share.

 

**(10)****                          ProductDevelopment and Licensing Agreements**

 

AVANT’srevenue from product development and licensing agreements was received pursuantto contracts with different organizations. Total revenue recognized by the Company in connection with thesecontracts for the six-month periods ended June 30, 2005 and 2004 were $130,517and $2,248,838, respectively.  A summaryof these contracts follows:

 

10

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*(A)**                              GlaxoSmithKlineplc (“Glaxo”)*

 

During1997, AVANT entered into an agreement with Glaxo to collaborate on thedevelopment and commercialization of the Company’s oral rotavirus vaccine andGlaxo assumed responsibility for all subsequent clinical trials and all otherdevelopment activities.  Glaxo filed formarket approval with the European regulatory authorities in late 2004,triggering a $2 million milestone fee payable to AVANT, 50% of which iscreditable against future royalties.  Theamount was recorded as revenue in 2004 as AVANT has no obligation to incur anyresearch and development costs in connection with this agreement.  AVANT is obligated to maintain a license withan academic institution with respect to this agreement and incurred licensingfees of $200,000 in 2004.  In addition,the Company recorded $300,000 of expense in the fourth quarter of 2004 foramounts which will be payable to this institution in connection with theaforementioned 2004 milestone payment. The recording of this 2004 expense accrual satisfies AVANT’s minimumlicense fee obligations for 2005.  Alllicensing fees are included in research and development expense.  The term of this agreement is through theexpiration of the last of the relevant patents covered by the agreement,although Glaxo may terminate the agreement upon 90 days prior written notice.  Glaxo has agreed to make further payments,which could total up to $5.5 million, upon achievement of specificmilestones.  AVANT licensed-in theRotarix® technology in 1995 and owes a license fee of 30% to CincinnatiChildren’s Hospital Medical Center (“CCH”) on net royalties received fromGlaxo.  In May 2005, AVANT entered intoan agreement whereby an affiliate of Paul Royalty Fund II, L.P. (“PRF”)purchased an interest in the net royalties AVANT will receive on worldwidesales of Rotarix® (see Note 4 of unaudited Consolidated Financial Statements.)  Under the PRF agreement, AVANT will retain50% of future Glaxo milestone payments, with the balance payable to PRF and CCH.

 

*(B)**                              PfizerInc (“Pfizer”)*

 

Inconnection with the Company’s acquisition of Megan, it entered into a licensingagreement with Pfizer’s Animal Health Division whereby Pfizer has licensedMegan’s technology for the development of animal health and food safetyvaccines.  Under the agreement, AVANT mayreceive additional milestone payments of up to $3 million based upon attainmentof specified milestones.  AVANT mayreceive royalty payments on eventual product sales.  The term of this agreement is through the expirationof the last of the patents covered by the agreement.  AVANT has no obligation to incur any researchand development costs in connection with this agreement.

 

*(C)**                             DynPortVaccine Company LLC (“DVC”)*

 

In October 2001,the Company granted DVC a license for exclusive rights to use certaincomponents of its anthrax vaccine technology. Under the agreement, AVANT is entitled to annual $50,000 licensemaintenance payments, with respect to which AVANT has received $200,000 in theaggregate, including $50,000 received in the first quarter of 2005, andmilestone payments of up to $700,000 in the aggregate, $100,000 of which AVANT recognizedas revenue in 2002.  The annual licensefee is recognized as revenue on a straight line basis over the year.  On August 5, 2005, AVANT received notice fromDVC of termination of the license agreement, effective November 5, 2005.

 

InJanuary 2003, AVANT was awarded a subcontract by DVC in the amount of $2.5million to develop for the U.S. Department of Defense an oral combinationvaccine against anthrax and plague using AVANT’s proprietary vaccine technologies.As of June 30, 2005, AVANT has received a number of additional subcontractmodifications from DVC to support preclinical animal testing of vaccineconstructs and the start of human clinical testing of a plague vaccinecandidate being developed by AVANT for use in the oral combination vaccine. Totalcontract funding awarded by DVC now totals approximately $7 million. TheDefense Appropriations Bill for Fiscal Year 2005 passed by Congress in July 2004committed an additional $2.8 million in funding to this vaccine programbringing the aggregate funding commitments for this vaccine development programto approximately $10 million. Payments under the subcontract agreement aremade on a time and materials basis and receipt of the full amount is conditionedupon the project being fully funded through completion and AVANT performing andcontinuing to demonstrate that it has the capability to perform the fundedwork. For the six months ended June 30, 2005 and 2004, AVANT recognized $1,358,520and $1,550,023, respectively, in government contract revenue from DVC.

 

11

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ThroughJune 30, 2005, AVANT had received approximately $6.8 million in payments underthe subcontract agreements. These agreements expire in 2006, although they maybe terminated by DVC at any time upon 30 days notice.

 

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

 

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

 

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

 

In December 2003,AVANT entered into a Lease Agreement, a Secured Promissory Note: Equipment Loanand a Security Agreement with the Massachusetts Development Finance Agency (“MassDevelopment”),an economic development entity for the Commonwealth of Massachusetts, for AVANTto occupy and build-out a manufacturing facility in Fall River, Massachusetts.

 

*(A)**                              LoanPayable*

 

Underthe Lease Agreement, AVANT received a Specialized Tenant Improvement Allowanceof $1,227,800 to finance the build-out of the Fall River facility.  Principal and interest payments of theaggregate disbursement increments are due monthly using an amortization periodof 15 years and an interest rate of 5.5% per annum.

 

At June 30,2005, AVANT has recorded leasehold improvement assets of $1,227,800 asconstruction in progress and currently has a loan payable of $1,193,694 toMassDevelopment, of which $81,853 is classified as current and $1,111,841 aslong-term.  AVANT will begin amortizingthe leasehold improvement assets when validation of the Fall River facility iscompleted and it is operational.  Basedon current market interest rates available to AVANT for long-term liabilitieswith similar terms and maturities, the fair value of the loan payable is approximately$891,000 at June 30, 2005.

 

*(B)**                              NotePayable*

 

Under theSecured Promissory Note: Equipment Loan, AVANT received $903,657 fromMassDevelopment to finance the purchases of equipment to be placed in the FallRiver facility (the “Loan”).  The Loanhas a term of 84 months at an interest rate of 5.5% per annum.  The Loan is collateralized by all of theequipment purchased with the principal amount.

 

At June 30,2005, AVANT has recorded manufacturing and laboratory equipment assets of $903,657as construction in progress and currently has a note payable of $871,919 toMassDevelopment, of which $131,873 is classified as current and $740,046 aslong-term.  AVANT will depreciate themanufacturing and laboratory equipment assets over the estimated economic livesof the assets beginning when validation of the Fall River facility is completedand ready for its intended use which is expected to be by third quarter 2005.  Based on current market interest ratesavailable to AVANT for long-term liabilities with similar terms and maturities,the fair value of the note payable is approximately $772,000 at June 30,2005.

 

12

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*(C)**                             DeferredRevenue*

 

At June 30,2005, AVANT recorded the upfront unconditional payments totaling $10 millionfrom an affiliate of Paul Royalty Fund II, L.P. (“PRF”) as deferredrevenue.  Any future milestone paymentsreceived from PRF will also initially be recorded as deferred revenue.  Deferred revenue will be amortized to revenueas described in Note 4.

 

**(12)****                          Commitmentsand Contingencies**

 

*(A)**                              Commitmentsfor the Build-out of the Fall River Facility*

 

In August 2004,AVANT entered into a Design/Build Contract (the “Contract”) with adesign/builder for the build-out of the Fall River facility. The final contractamount including work change orders made during the construction period totaled$2,317,036.  As of June 30, 2005,AVANT had made payments and accrued costs totaling $2,193,371 under theContract.

 

*(B)**                              PurchaseCommitments for Contract Manufacturing*

 

In April 2000,AVANT entered into a Services Agreement (the “Lonza Agreement”) with LonzaBiologics plc (“Lonza”) for process development and manufacture of its productcandidate TP10.  AVANT has entered into anumber of amendments to the Lonza Agreement for specific process developmentand scale-up work and remaining aggregate commitments as of June 30, 2005 totalapproximately $1,996,700.  The Companyhas incurred $1,037,841 and $6,313,454, respectively, of expense related to theLonza Agreement in the six-month period ended June 30, 2005 and frominception through June 30, 2005, of which $90,240 remained accrued at June 30,2005.

 

In May 2004,AVANT signed an Amendment to the Lonza Agreement for the cGMP production ofTP10 at commercial scale scheduled for the first quarter of 2005.  Due to development delays, AVANT and Lonza hadmutually agreed to reschedule the production run to the first quarter of2006.  Under the terms of the LonzaAgreement, if AVANT voluntarily terminates the Amendment within four months ofthe expected start date of the cGMP production run, AVANT is obligated to pay atermination fee of approximately $720,000. In July 2005, AVANT cancelled this production run and instead hasrequested a 130 litre development run. Cancelling the cGMP production run prior to four months of the expectedstart date voids AVANT's obligation to pay Lonza for the termination fee.

 

13

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***Safe Harbor Statement under the Private SecuritiesLitigation Reform Act of 1995:****  This quarterly report on Form 10-Qincludes forward-looking statements**that are subject to a variety of risks and uncertainties and reflect AVANT’s current views withrespect to future events and financial performance.  There are a number of important factors that could cause the actualresults to differ materially from those expressed in any forward-lookingstatements made by AVANT.  These factorsinclude, but are not limited to:  (1) the integration of multiple technologies andprograms; (2) the ability to adaptAVANT’s vectoring**systems to develop new, safe andeffective orally administered vaccines against anthrax and plague or any other microbes used as bioweapons and other diseasecausing agents; (3) the ability to successfully completedevelopment and commercialization of TP10, CETi-1, CholeraGarde® (Peru-15),Ty800 and other products; (4) the cost, timing, scope and results of ongoingsafety and efficacy trials of TP10, CETi-1, CholeraGarde® (Peru-15),Ty800 and other preclinical and clinical testing; (5) the ability tosuccessfully complete product research and further development, includinganimal, pre-clinical and clinical studies of TP10, CETi-1, CholeraGarde®(Peru-15), Ty800 and other products; (6) the ability of the Companyto manage multiple late stage clinical trials for a variety of productcandidates; (7) the volume and profitability of product sales of Megan®Vac1, Megan®Egg and other future products; (8) the process of obtainingregulatory approval for the sale of Rotarix**Ò in major commercial markets, as well as thetiming and success of worldwide commercialization of Rotarix**Ò by our partner, GlaxoSmithKline; (9) GSK’sstrategy and business plans to launch and supplyRotarix ® worldwide, including in the US and other major markets; (10) changesin existing and potential relationships with corporate collaborators; (11) theavailability, cost, delivery and quality of clinical and commercial gradematerials supplied by contract manufacturers; (12) the timing, cost anduncertainty of obtaining regulatory approvals to use TP10, CETi-1,CholeraGarde® (Peru-15) and Ty800, among other purposes, for adultsundergoing cardiac surgery,**to raise serum HDLcholesterol levels and toprotect travelers and people in endemic regions from diarrhea causing diseases,respectively; (13) the ability to obtain substantial additional funding; (14)the ability to develop and commercialize products before competitors and thatare superior to the alternatives developed by competitors; (15) the ability toretain certain members of management; and (16) other factors detailed from timeto time in filings with the Securities and Exchange Commission.  Youshould carefully review all of these factors, and you should be aware**that there may be other factors that could cause these differences.  These forward-looking statements were basedon information, plans and estimates at the date of this report, and we do notpromise to update any forward-looking statements to reflect changes inunderlying assumptions or factors, new information, future events or otherchanges.*

 

**Item 2.   Management’s Discussionand Analysis of Financial Condition And Results of Operations**

 

AVANT’s principal activity since our inception hasbeen research and product development conducted on its own behalf, as well asthrough joint development programs with several pharmaceutical companies andother collaborators.  AVANT wasincorporated in the State of Delaware in December 1983.

 

## **CRITICAL ACCOUNTING POLICIES**

## ** **

TheCompany’s critical accounting policies are set forth under the heading “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” inItem 7 to our 2004 Form 10-K. There have been no changes to these policies since December 31, 2004.  Readers are encouraged to review thesecritical accounting policies in conjunction with the review of this Form 10-Q.

 

## **OVERVIEW**

## ** **

AVANT’s focus is unlocking the power of the immunesystem to prevent and treat disease.  TheCompany has assembled a broad portfolio of technologies and intellectualproperty that give it a strong competitive position in vaccines andimmunotherapeutics.  These include anoral human rotavirus vaccine, which gained its first marketing approval inMexico in July 2004 and is being marketed by Glaxo.  Six of AVANT’s products are in clinicaldevelopment.  The Company’s goal is tobecome a leading developer of innovative vaccines and immunotherapeutics thataddress health care needs on a global basis.

 

14

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The Company has actively developed and acquiredinnovative technologies – especially novel approaches to vaccine creation.  The development of immunotherapeutic vaccineslike CETi and the marriage of innovative vector delivery technologies with theunique VitriLife® manufacturing process represent the potential for a newgeneration of vaccines.  In addition, AVANT’svaccine technology can provide rapid protection against bacterial illnesses whichmay prove useful for improving and expanding America’s vaccine arsenal againstmicrobial agents used in war or terrorist attacks.

 

AVANTis targeting its efforts where it can add the greatest value to the developmentof its products and technologies.  Its goalis to demonstrate clinical proof-of-concept for each product, and then seekexcellent partners to help see those products through tocommercialization.  This approach allows AVANTto maximize the overall value of its technology and product portfolio whilebest ensuring the expeditious development of each individual product.

 

## **RESEARCH AND DEVELOPMENT ACTIVITIES**

## ** **

AVANTis currently focused on the development of a number of immunotherapeutic and vaccineproduct candidates which are in various stages of clinical trials. AVANT expectsthat a large percentage of its research and development expenses will beincurred in support of its current and future clinical trial programs.

 

Duringthe past five years through the end of 2004, AVANT incurred an aggregate of$71 million in research and development costs.  During the six months ended June 30,2005, AVANT incurred an aggregate of $7.5 million in research anddevelopment costs. The following table indicates the amount incurred for eachof AVANT’s material research programs and for other identified research anddevelopment activities during the two years ended December 31, 2004 and 2003and the six-month periods ended June 30, 2005 and 2004. The amountsdisclosed in the following table and in “Program Developments” below reflectdirect research and development costs, license fees associated with theunderlying technology and an allocation of indirect research and developmentcosts to each program.

 

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| ** **                                       | ** ** | **Six Months Ended  June 30,** | ** ** | **Years Ended  December 31,** | ** ** |
|--------------------------------------------------|------------|-------------------------------------|------------|------------------------------------|------------|
| ** **                                       | ** ** | **2005**                            | ** ** | **2004**                           | ** ** | **2004** | ** ** | **2003** | ** ** |
| *Bacterial Vaccines:*                            |       |                                |       |                               |       |   |   |   |   |
| CholeraGardeÒ                               |       | $                                   | 256,600    |                               | $          | 53,200 |   | $ | 123,100 |   | $ | 695,800 |   |
| Ty800                                            |       | 258,000                             |       | 457,600                            |       | 688,300 |   | 186,300 |   |
| Other                                            |       | 216,200                             |       | 82,500                             |       | 332,500 |   | 137,500 |   |
| *BioDefense Vaccines:*                           |       | 1,111,900                           |       | 1,921,200                          |       | 3,082,800 |   | 3,524,500 |   |
| *Cholesterol Management Vaccine:*                |       |                                |       |                               |       |   |   |   |   |
| CETi-1                                           |       | 291,000                             |       | 408,200                            |       | 816,900 |   | 3,404,000 |   |
| *Complement Inhibitors:*                         |       |                                |       |                               |       |   |   |   |   |
| TP10/TP20                                        |       | 4,735,100                           |       | 3,464,500                          |       | 7,706,300 |   | 1,648,700 |   |
| *Food Safety & Animal Health Vaccines:* |       |                                |       |                               |       |   |   |   |   |
| * *                                         |       | 3,300                               |       | 8,300                              |       | 12,600 |   | 49,400 |   |
| *Viral Vaccines:*                                |       |                                |       |                               |       |   |   |   |   |
| RotarixÒ  vaccine                           |       | 3⁄4                              |       | 100,000                            |       | 500,000 |   | 200,000 |   |
| TheraporeÒ/HIV                              |       | 3,100                               |       | 180,300                            |       | 184,900 |   | 72,400 |   |
| *Other Programs:*                                |       | 586,400                             |       | 145,200                            |       | 426,400 |   | 102,700 |   |
|                                             |       |                                |       |                               |       |   |   |   |   |
| *Total R&D Expense*                          |       | $                                   | 7,461,600  |                               | $          | 6,821,000 |   | $ | 13,873,800 |   | $ | 10,021,300 |   |

 

**PROGRAMDEVELOPMENTS**

 

*Rotavirus Vaccine:*  Rotavirus is a major cause of diarrhea and vomitingin infants and children. In 1997, AVANT licensed its oral rotavirus vaccine toGlaxo. All of the ongoing development for this program is being conducted andfunded by Glaxo. Glaxo gained approval for RotarixÒin Mexico in July 2004, which represents the first in an expected seriesof worldwide approvals and commercial launches for the product.  Glaxo has already filed for market approvalin more than 30 countries worldwide and plans to launch in additional LatinAmerican and Asia Pacific countries during the course of 2005. Additionally,Glaxo filed for market approval with the European regulatory authorities inlate 2004, which triggered a $2 million milestone payment to AVANT.  Glaxo has agreed to make further payments,which could total up to $5.5 million, upon achievement of specificmilestones.  AVANT licensed-in the RotarixÒtechnology in 1995 and owes a license fee of 30% to CCH on net royaltiesreceived from Glaxo.  In May 2005,AVANT entered into an agreement whereby an affiliate of PRF will purchase, forup to $61 million, an interest in the******net******royalties AVANT will receive onworldwide sales of RotarixÒ (see Note 4 ofunaudited consolidated financial statements.) Under the PRF agreement, AVANT will retain 50% of future Glaxo milestonepayments, with the balance payable to PRF and CCH.

 

*Complement Inhibitors:*  In February 2002, AVANT announced thatTP10 had not achieved a significant reduction in the primary endpoint of aPhase II adult cardiac surgery trial conducted in 564 patients. However,further analysis of the study data demonstrated an important treatment benefitin male patients participating in the trial directly related to mortality,which was impressive, however, with no significant treatment benefit observedin female patients. In February 2004, AVANT started a Phase IIbdouble-blind, placebo-controlled trial of TP10 in approximately 300 womenundergoing cardiopulmonary by-pass surgery. The trial will examine the effectof TP10 versus placebo at approximately 30 sites throughout the United States.The goals of the trial are to clarify the effect that TP10 has for womenundergoing cardiac surgery, as well as augment the safety data for that patientpopulation to allow for the design of a subsequent registration-directed trial. AVANT expects to complete enrollment inthis trial by year-end.  AVANT plans to seek a corporate partner tocomplete development and to commercialize TP10 prior to starting a Phase IIIclinical trial.

 

Duringthe period January 1, 2000 through December 31, 2004, AVANT incurredapproximately $30.5 million in research, development, contractmanufacturing and clinical costs. During the six months ended June 30,2005, the Company incurred approximately $4.7 million in research, development,contract manufacturing and clinical costs associated with its complementprogram.

 

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*Bacterial Vaccines:*  AVANT’s goal is to become a leading developerof innovative vaccines that address health care needs on a global basis. In thisregard, AVANT acquired VitriLife®, a technology with the potential to reducemanufacturing costs and improve product stability, eliminating the need forvaccine refrigeration during shipping and storage. With this technology andAVANT’s *Cholera*- and *Salmonella*-vectored delivery technologies,named VibrioVecÒ and SalmoVecTM, the Company can now develop a newgeneration of vaccines that have an ideal product profile: safe, effective,oral, single-dose, rapidly protective and requiring no refrigeration.

 

Developmentof a safe, effective cholera vaccine is the first step in establishing AVANT’ssingle-dose, oral bacterial vaccine franchise. During 2002, AVANT completed aPhase II dose-ranging study with CholeraGarde® which confirmed the safety andactivity of this vaccine and supported the start of Phase II trials in December 2002with the International Vaccine Institute (“IVI”) in Bangladesh wherecholera is endemic. IVI is assessing the safety and immunogenicity of thevaccine in adults, children and infants as young as nine months of age. In July 2005,study results in children and infants showed CholeraGarde ® to be welltolerated and highly immunogenic, with 77% of children aged 9 months to 5 yearsgenerating protective immune responses. Previously published results have shown the vaccine to be well toleratedand immunogenic against the cholera organism in the adult portion of thistrial.

 

Duringthe period January 1, 2000 through December 31, 2004, AVANT incurredapproximately $9.3 million in research, development and clinical costs onits CholeraGarde® program. During the six months ended June 30, 2005,AVANT incurred approximately $256,600 in research, development and clinicalcosts on its CholeraGarde® program.

 

AVANTis also developing an oral typhoid fever vaccine, Ty800, for global healthneeds. The National Institute of Allergy and Infectious Disease (NIAID) of theNational Institutes of Health (NIH) and AVANT have agreed for the NIAID toconduct a Phase I/II in-patient dose-ranging clinical trial aimed atdemonstrating the safety and immunogenicity of the Ty800 vaccine. NIAID has fundedthe production of Ty800 vaccine for clinical testing and expects to initiatethe Phase I/II trial at a NIH-funded clinical site in the second half of 2005. The NIAID trial seeks to confirm thesafety and immunogenicity of the Ty800 oral vaccine observed in an earlierphysician-sponsored Ty800 vaccine study. During the period January 1, 2000through December 31, 2004, AVANT incurred approximately $5 million inresearch, development, contract manufacturing and clinical costs on its Ty800program. During the six months ended June 30, 2005, AVANT incurredapproximately $258,000 in research, development and clinical costs on its Ty800program.

 

Finally,AVANT is developing three additional bacterial vaccines against enterotoxigenic*E. coli*(“ETEC”), *Shigella*and *Campylobacter*—all importantcauses of serious diarrheal diseases worldwide. These three programs are inpre-clinical development.  In 2005, AVANT expects to allocate resourcesto further the development of a two-vaccine combination product containing ETECand Shigella or Campylobacter addressed to the travelers’ market.

 

*BioDefense Vaccines:*  The attenuated live bacteria used to createAVANT’s single-dose oral vaccines can also serve as vectors for the developmentof vaccines against other bacterial and viral diseases. By engineering keydisease antigens into the DNA of the vector organisms, AVANT expects to be ableto extend the protective ability of its single-dose oral vaccines to a widevariety of illnesses. AVANT believes its vector technologies may prove usefulfor improving and expanding America’s vaccine arsenal against microbial agentsused in war or terrorist attacks.

 

In October 2001,AVANT granted DynPort Vaccine Company LLC (“DVC”) a license for exclusiverights to use certain components of AVANT’s anthrax vaccine technology. In October 2002,DVC announced the initiation of a Phase I clinical trial of a new injectablerecombinant anthrax vaccine in approximately 70 volunteers. The vaccinecandidate consists of a highly purified protein—Protective Antigen—derived fromthe anthrax bacterium using recombinant DNA technology and production

 

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processes licensed fromAVANT. The study will evaluate tolerability, safety and immunogenicity of DVC’snew vaccine.  On August 5, 2005, AVANTreceived notice from DVC of termination of the license agreement, effectiveNovember 5, 2005.  DVC plans to completethe ongoing Phase I clinical trial and report out results in mid-2006.

 

Further,in January 2003, AVANT was awarded a subcontract by DVC in the amount of$2.5 million to develop for the U.S. Department of Defense an oral combinationvaccine against anthrax and plague using AVANT’s proprietary vaccinetechnologies. As of June 30, 2005, AVANT has received a number ofadditional subcontract modifications from DVC to support preclinical animaltesting of vaccine constructs and the start of human clinical testing of aplague vaccine candidate being developed by AVANT for use in the oralcombination vaccine.  Total contractfunding awarded by DVC now totals approximately $7 million. The DefenseAppropriations Bill for Fiscal Year 2005 passed by Congress in July 2004 committedan additional $2.8 million in funding to this vaccine program bringing aggregatefunding commitments for this vaccine development program to approximately$10 million. Payments under the subcontract agreement are made on a timeand materials basis and receipt of the full amount is conditioned upon theproject being fully funded through completion and AVANT performing andcontinuing to demonstrate that it has the capability to perform the fundedwork. For the six months ended June 30, 2005 and 2004, AVANT recognized $1,358,520and $1,550,023, respectively, in government contract revenue from DVC. Through June 30,2005, AVANT had received approximately $6.8 million in payments under thesubcontract agreements. These agreements expire in 2006, although they may beterminated by DVC at any time upon 30 days notice.

 

Duringthe period January 1, 2000 through December 31, 2004, AVANT incurredapproximately $6.8 million in research and development costs on itsbiodefense vaccine program. During the six months ended June 30, 2005,AVANT incurred approximately $1,111,900 in research and development costs onits biodefense vaccine program.

 

*Food Safety and Animal Health Vaccines:*  AVANT has partnered with Pfizer Inc. (“Pfizer”),who will apply AVANT’s vaccine technologies to animal health and human foodsafety markets. The Pfizer research program achieved an important milestone inlate 2002, which resulted in a payment of $500,000 to AVANT. During the period January 1,2000 through December 31, 2004, AVANT incurred approximately $1.6 millionin research and development costs on its food safety and animal health vaccinesprogram. During the six months ended June 30, 2005, AVANT incurredapproximately $3,300 in research and development costs on its food safety andanimal health vaccines program.

 

*Cholesterol Management Vaccine:*  AVANT is developing an immunotherapeuticvaccine against endogenous cholesteryl ester transfer protein (“CETP”), whichmay be useful in reducing risks associated with atherosclerosis. CETP is a keyintermediary in the balance of HDL (high-density lipoprotein) and LDL(low-density lipoprotein). The Company is developing this vaccine, CETi-1,to stimulate an immune response against CETP, which it believes may improve theratio of HDL to LDL cholesterol and reduce the progression of atherosclerosiswhich leads to heart attack.

 

In October 2003,AVANT completed the CETi-1 vaccine Phase II efficacy study inapproximately 200 patients with low levels of HDL cholesterol. The results ofthe study demonstrated proof-of-concept in humans confirming that blockingcholesterol transfer could raise HDL levels. In addition, the CETi-1vaccine worked as designed to elicit anti-CETP antibodies in a high percentageof patients treated, approximately 90%. In recent pre-clinical testing, AVANThas identified a new adjuvanted formulation for the vaccine that elicits morethan a 10-fold increase in anti-CETP antibody titers when compared to thecurrent CETi vaccine. The Company has contracted for the production of GMPpeptide for the newly formulated vaccine. During the period January 1,2000 through December 31, 2004, AVANT incurred approximately$11.7 million in research, development and clinical costs associated withthe CETi program. During the six months ended June 30, 2005, AVANTincurred approximately $291,000 in research, development and clinical costsassociated with the CETi program. AVANT plans to seek a corporate partner tocomplete development and to commercialize the CETi vaccine.

 

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## **TECHNOLOGY LICENSING**

## ** **

AVANThas adopted a business strategy of out-licensing technology that does not matchits development focus or where it lacks sufficient resources for the technology’sefficient development.  For example, whenAVANT acquired Megan, it also signed an agreement with Pfizer to leverage thevalue of Megan’s oral vaccine technology in a significant market opportunity(animal health and human food safety) outside of AVANT’s own focus on humanhealth care.

 

*AdProTech: *InMarch 2004, AVANT granted a license to AdProTech for non-exclusive rightsto use certain components of its intellectual property surrounding complementinhibition.  Financial terms of theagreement with AdProTech include an initial license fee, milestone payments androyalties.  AdProTech was acquired byInflazyme Pharmaceuticals Ltd. in April 2004 which assumed the license.

 

**RESULTSOF OPERATIONS**

 

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

 

AVANTreported consolidated net loss of $4,733,940, or $.06 per share, for the secondquarter ended June 30, 2005, compared with a net loss of $3,898,737, or$.05 per share, for the second quarter ended June 30, 2004.  Theweighted average common shares outstanding used to calculate net loss percommon share was 74,132,829 in 2005 and 74,091,599 in 2004.

 

*Revenue:* Total revenue decreased $255,849 to $637,161 for the second quarter of2005 compared to $893,010 for the second quarter of 2004.

 

Product development and licensing revenue decreased$65,359, or 53%, to $59,060 in 2005 from $124,419 in 2004.  Product development and licensing revenue in2004 consisted primarily of the amortization of nonrefundable license fees fromPfizer which was fully amortized by November 2004.

 

AVANThas received a number of subcontracts from its partner, DVC, to develop anthraxand plague vaccines for the U.S. Department of Defense.  AVANT will be reimbursed by DVC on a time andmaterials basis for vaccine development research work performed by AVANT.  Under these agreements and several SBIRgrants, AVANT recognized $522,963 and $714,638 in government contract and grantrevenue during the second quarters of 2005 and 2004, respectively, for workperformed.  AVANT expects the amount ofresearch work to be performed for DVC during the remainder of 2005 to increasewhen compared to the amount of research work performed during the comparableperiod in 2004.

 

Marketing and distribution of the Megan poultryproduct line is performed by AVANT’s partner, Lohmann Animal HealthInternational (“LAHI”), and AVANT receives a royalty percentage of allMegan®Vac 1 and Megan®Egg product sales. Royalty payments received during the secondquarter of 2005 and 2004 totaled $55,138 and $53,953, respectively. In early March 2005,the USDA placed a stop sale order on MeganÒVac1 and MeganÒEgg, for LAHI’s failure to update the Outline ofProduction as LAHI improved the fermentation process. LAHI updated the Outlineof Production and in July 2005 the USDA lifted the stop sale order on theMegan products.

 

*OperatingExpense:*  Total operating expense increased $654,572,or 13.4%, to $5,540,865 for the second quarter of 2005 compared to $4,886,293for the second quarter of 2004.

 

Research and developmentexpense increased $63,188, or 1.9%, to $3,430,992 in 2005 from $3,367,804 in2004. The increase in 2005 compared to 2004 is primarily due to increases in TP10clinical trials costs of $141,207 and increased personnel, operating andfacility-related costs of $346,220 associated with the start-up operations ofthe Fall River manufacturing facility. These increases were offset in part by

 

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declines in contract manufacturing costs of $192,772 associated with the TP10 program,license fees of $56,250 and insurance expense of $43,901.  AVANT expects research and developmentexpense to increase in the second half of 2005 as the TP10 Phase II femaleclinical trial reaches full enrollment, as AVANT’s contract manufacturer continuesprocess development and scale-up work and as the Fall River facility runs atfull operational status.

 

General and administrative expense increased $591,384,or 46.6%, to $1,861,095 in 2005 compared to $1,269,711 in 2004 and is primarilyattributed to increases in personnel and related costs of $207,222, legal and otherprofessional fees of $275,778, and consultancy costs of $65,201 related toproject management and Sarbanes-Oxley compliance.  AVANT expects general and administrativeexpense to continue at this level for the balance of 2005.

 

Amortization expense of acquired intangible assetswas $248,778 in 2005 and 2004.

 

*Investmentand Other Income, Net:* Interest and other income increased $75,218 to $169,764 for the secondquarter of 2005 compared to $94,546 for the second quarter of 2004.  The increase is primarily due to higher interestrates during the second quarter of 2005 compared to the second quarter of 2004. During the second quarters of 2005 and2004, the average month-end cash balances were $27,372,971 and $40,183,500,respectively.  The effective interestrates during the second quarters of 2005 and 2004 were 2.81% and 0.95%,respectively.

 

Six-Month Period Ended June 30, 2005 as Comparedwith the Six-Month Period Ended June 30, 2004

 

AVANTreported a consolidated net loss of $9,602,438, or $.13 per share, for the sixmonths ended June 30, 2005, compared with a net loss of $5,808,149, or$.08 per share, for the six months ended June 30, 2004.  Theweighted average common shares outstanding used to calculate net loss percommon share was 74,132,416 in 2005 and 71,655,099 in 2004.

 

*Revenue:* Total revenue decreased $2,315,994 to $1,607,713 for the first sixmonths of 2005 compared to $3,923,707 for the first six months of 2004.

 

Product development and licensing revenue decreased$2,118,321 to $130,517 for the first six months of 2005 from $2,248,838 for the firstsix months of 2004.  The decrease is primarily due to the one-timerecognition of $1 million in revenue from DVC for rPA clinical materials and alicense fee of $1 million from AdProTech, Ltd.

 

AVANThas received a number of subcontracts from its partner, DVC, to develop anthraxand plague vaccines for the U.S. Department of Defense.  AVANT will be reimbursed by DVC on a time andmaterials basis for vaccine development research work performed by AVANT.  Under these agreements and several SBIRgrants, AVANT recognized $1,389,050 and $1,594,546 in government contract andgrant revenue during the first six months of 2005 and 2004, respectively.  AVANT expects the amount of research work tobe performed for DVC during the second half of 2005 to approximate the amountof research work performed during the first six months of 2005.

 

In 2002, AVANT transferred the marketing anddistribution of the Megan poultry product line to our partner, LAHI.  Product royalty payments received by AVANTfor Megan®Vac 1 and Megan®Egg product sales for the first six months of 2005and 2004 totaled $88,145 and $80,323, respectively.

 

*OperatingExpense:*  Total operating expense increased $1,650,640,or 16.7%, to $11,531,045 for the first six months of 2005 compared to $9,880,405for the first six months of 2004.

 

Research anddevelopment expense increased $640,607, or 9.4%, to $7,461,610 for the firstsix months of 2005 compared to $6,821,003 for the first six months of 2004.  Theincrease in 2005 compared to 2004 is primarily due to increases in contractmanufacturing costs and lab supplies of $500,913 associated

 

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with the TP10 program, and increased personnel, operating andfacility-related costs of $375,766 associated with the operations of the FallRiver facility.  These increases were offset in part bydecreases in clinical trial costs of$114,525, consultancy costs of $82,146, license fees of $112,500, and insurancecosts of $41,613.  AVANT expects researchand development expense to increase in the second half of 2005 as the TP10Phase II female clinical trial reaches full enrollment, as AVANT’s contractmanufacturer continues process development and scale-up work and as the FallRiver facility runs at full operational status.

 

General andadministrative expense increased $1,010,033, or 39.4%, to $3,571,879 for thefirst six months of 2005 compared to $2,561,846 for the first six months of 2004.  The increase in 2005 is primarily attributedto increased personnel and related expenses, legal, professional services and consultingexpenses.  AVANT expects general andadministrative expense during the second half of 2005 to approximate theexpense incurred during the first six months of 2005 and 2004.

 

Amortization expense of acquired intangible assets was $497,556 in thefirst six months of 2005 and 2004.

 

*Investment Income,Net: *Net investment income increased $172,345 to $320,894for the first six months of 2005 compared to $148,549 for the first six monthsof 2004.  The increase is primarily dueto higher average interest rates during the first six months of 2005 comparedto the first six months of 2004.  During the first sixmonths of 2005 and 2004, the average month-end cash balances were $28,419,021and $37,156,200, respectively.  Theeffective interest rates during the first six months of 2005 and 2004 were 2.57%and 0.95%, respectively.

* *

**LIQUIDITYAND CAPITAL RESOURCES**

 

At June 30,2005, AVANT’s principal sources of liquidity consisted of cash and cashequivalents of $27,028,598. 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, short-term commercial paper, andU.S. Government and other investment grade debt securities.  Also, the Company maintains cash balanceswith financial institutions in excess of insured limits.  AVANT does not anticipate any losses withrespect to such cash balances.

 

Theuse of AVANT’s cash flows for operations has primarily consisted of salariesand wages for its employees, facility and facility-related costs for its officesand laboratories, fees paid in connection with preclinical studies, clinicalstudies, contract manufacturing, laboratory supplies and services, consultingfees, and legal fees. To date, the primary sources of cash flows from operationshave been payments received from the Company’s collaborative partners and fromgovernment entities. In general, AVANT’s sources of cash flows from operationsfor the foreseeable future will be upfront license payments, payments for theachievement of milestones, product royalty payments, payments under governmentcontracts and grants and funded research and development under collaborationagreements that AVANT may receive. The timing of any new collaborationagreements, government contracts or grants and any payments under theseagreements, contracts or grants cannot be easily predicted and may varysignificantly from quarter to quarter.

 

Netcash used in operating activities increased to $3,836,571 for the first sixmonths of 2005 compared to $3,800,580 for the first six months of 2004.  The increase is primarily attributed to anincrease in net loss incurred in 2005 compared to 2004, an increase in accountsreceivable which related primarily to the $5,000,000 payable by PRF in December 2005and a decrease in accounts payable and accrued expenses due to timing ofpayments, offset partly by the increase in deferred revenue related to the PRFroyalty transaction. AVANT expects that cash used in operations will continueto increase in 2005 as the Company continues to develop its products inclinical trials, contacts for the manufacture of clinical materials, brings itsFall River facility to full operational status and advances new products intopreclinical development. The expected increase in cash used would be partiallyoffset by anticipated payments made under the Company’s government contractsand grants and anticipated product royalty payments.

 

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Cashused in investing activities increased to $812,963 for the first six months of2005 compared to $400,965 for the first six months of 2004.  The increaseis due to increased investment in property and equipment in 2005 primarily forthe Fall River facility compared to 2004.  AVANT expects it will continue to use cash in itsinvesting activities as the Company expands its infrastructure and completesthe validation of the Fall River facility and brings it to operational status.

 

Netcash used in financing activities was $63,362 for the first six months of 2005compared to net cash provided by financing activities of $23,321,237 for thefirst six months of 2004.  The decrease in cash provided by financingactivities between years is due primarily to the completion of a direct equityplacement in the first quarter of 2004.

 

**AGGREGATECONTRACTUAL OBLIGATIONS**

 

The following table summarizes AVANT’s contractualobligations at June 30, 2005 and the effect such obligations andcommercial commitments are expected to have on its liquidity and cash flow infuture years.  These obligations,commitments and supporting arrangements represent payments based on currentoperating forecasts, which are subject to change:

 
| ** **                    | ** ** | **Total** | ** ** | **2005** | ** ** | **2006-2008** | ** ** | **2009-2010** | ** ** | **Thereafter** | ** ** |
|-------------------------------|------------|-----------|------------|----------|------------|---------------|------------|---------------|------------|----------------|------------|
| Contractual obligations:      |       |      |       |     |       |          |       |          |       |           |       |
| Operating lease obligations   |       | $         | 5,813,900  |     | $          | 1,234,600     |       | $             | 4,041,100  |           | $          | 538,200 |   | $ | — |   |
| **Loan  payable*******        |       | 1,682,200 |       | 73,800   |       | 418,600       |       | 256,200       |       | 933,600        |       |
| **Note  payable***            |       | 1,021,700 |       | 88,600   |       | 531,500       |       | 354,300       |       | 47,300         |       |
| Licensing obligations         |       | 552,500   |       | 42,500   |       | 255,000       |       | 170,000       |       | 85,000         |       |
| Construction contract         |       | 123,700   |       | 123,700  |       | —        |       | —        |       | —         |       |
| Total contractual obligations |       | $         | 9,194,000  |     | $          | 1,563,200     |       | $             | 5,246,200  |           | $          | 1,318,700 |   | $ | 1,065,900 |   |
|                          |       |      |       |     |       |          |       |          |       |           |       |
| Commercial commitments:       |       |      |       |     |       |          |       |          |       |           |       |
| Clinical development          |       | $         | 2,387,800  |     | $          | 2,387,800     |       | $             | —     |           | $          | — |   | $ | — |   |
| Manufacturing development**   |       | 1,996,700 |       | 196,700  |       | 1,800,000     |       | —        |       | —         |       |
| Total commercial commitments  |       | $         | 4,384,500  |     | $          | 2,584,500     |       | $             | 1,800,000  |           | $          | — |   | $ | — |   |

 

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*includes interest obligations

**$1.8 million obligation was cancelled in July 2005, see Note 12(B) in ourunaudited consolidated financial statements

 

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## **Item 3.  Quantitative andQualitative Disclosures about Market Risk**

## ** **

AVANTowns financial instruments that are sensitive to market risk as part of itsinvestment portfolio.  The Companyinvestment portfolio is used to preserve its capital until it is used to fundoperations, including its research and development activities.  None of these market-risk sensitiveinstruments are held for trading purposes. AVANT invests its cash primarily in money market mutual funds and U.S.Government and other investment grade debt securities.  These investments are evaluated quarterly todetermine the fair value of the portfolio. The Company’s investment portfolio includes only marketable securitieswith active secondary or resale markets to help insure liquidity.  AVANT has implemented investment policiesregarding the amount and credit ratings of investments.  Because of the short-term nature of theseinvestments, AVANT does not believe it has material exposure due to marketrisk.  The impact to AVANT’s financialposition and results of operations from likely changes in interest rates is notmaterial.

 

AVANT does not utilizederivative financial instruments.  Thecarrying amounts reflected in the consolidated balance sheet of cash and cashequivalents, accounts receivables and accounts payable approximates fair valueat June 30, 2005 due to the short-term maturities of these instruments.

 

## **Item 4.  Controls and Procedures**

 

*Evaluation of disclosure controls and procedures*.

 

As required by Rule 13a-15 under theSecurities Exchange Act of 1934, as of June 30, 2005, we carried out anevaluation under the supervision and with the participation of our management,including our Chief Executive Officer and Chief Financial Officer, of theeffectiveness of the design and operation of our disclosure controls andprocedures.  In designing and evaluatingour disclosure controls and procedures, we and our management recognize thatany controls and procedures, no matter how well designed and operated, canprovide only reasonable assurance of achieving the desired control objectives,and our management necessarily was required to apply its judgment in evaluatingand implementing possible controls and procedures.  Based upon that evaluation, our ChiefExecutive Officer and Chief Financial Officer have concluded that they believethat, as of June 30, 2005, our disclosure controls and procedures werereasonably effective to ensure that information required to be disclosed by usin the reports we file or submit under the Exchange Act is recorded, processed,summarized and reported, within the time periods specified in the Securitiesand Exchange Commission’s rules and forms. We will continue to review and document our disclosure controls andprocedures on an ongoing basis, and may from time to time make changes aimed atenhancing their effectiveness and to ensure that our systems evolve with ourbusiness.

 

*Changes in Internal Control OverFinancial Reporting.*

 

There was no significantchange in our internal control over financial reporting (as defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act) that occurred during the period coveredby this Quarterly Report on Form 10-Q that has materially affected,or is reasonably likely to materially affect, our internal control overfinancial reporting.

 

**PART II — OTHER INFORMATION**

 

## **Item 4.**           Submission of Matters to aVote of Security Holders

 

On May 19, 2005,AVANT held its Annual Meeting of Stockholders at which the stockholders electedsix directors to our Board of Directors.

 

At the Annual Meeting ofStockholders, the following votes were tabulated for the proposal before AVANT’sStockholders:

 

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*PROPOSAL I*

Election of Directors:

 
| ** **                | *** *** | **Number of Shares/Votes** | *** *** |
|---------------------------|--------------|----------------------------|--------------|
| ** **                | ** **   | **For**                    | ** **   | **Authority Withheld** | ** ** |
|                      |         |                       |         |   |   |
| J. Barrie Ward, Ph.D.     |         | 59,447,750                 |         | 2,811,023 |   |
| Una S. Ryan, Ph.D.        |         | 60,750,251                 |         | 1,508,522 |   |
| Harry H. Penner, Jr. |         | 60,600,696                 |         | 1,658,077 |   |
| Peter A. Sears            |         | 60,625,366                 |         | 1,633,407 |   |
| Karen Shoos Lipton        |         | 60,745,665                 |         | 1,513,108 |   |
| Larry Ellberger           |         | 60,749,466                 |         | 1,509,307 |   |

** **

**The number of shares issued, outstanding andeligible to vote as of the record date of April 7, 2005 was 74,132,829.  A quorum was present with 62,258,773 sharesrepresented by proxies or 83.98% of the eligible voting shares.**

** **

## **Item 6.**           Exhibitsand Reports on Form 8-K

## ** **

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

 

31.1                           Certification of President and ChiefExecutive Officer

 

31.2                           Certification of Senior Vice President andChief Financial Officer

 

32.1                           Section 1350 Certifications

 

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

 

A Form 8-K (Item 12) was filed on May 5,2005 regarding a press release announcing that AVANT had reported its financialresults for the first quarter ended March 31, 2005.

 

A Form 8-K (Item 12) was filed on May 18,2005 regarding a press release announcing that AVANT hadentered into a Purchase Agreement whereby an affiliate of Paul Royalty Fund II,L.P. will purchase for up to $61 million an interest in the net royalties AVANTwill receive from GlaxoSmithKline on worldwide sales of RotarixÒ.

 

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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:                                    |
|                        |                                   |
|                        |                                   |
| Dated: August 9,  2005 | /s/ Una S. Ryan                        |   |
|                        | Una S. Ryan, Ph.  D.                   |
|                        | President and  Chief Executive Officer |
|                        | (Principal  Executive Officer)         |
|                        |                                   |
|                        |                                   |
| Dated: August 9,  2005 | /s/ Avery W.  Catlin                   |   |
|                        | Avery W. Catlin                        |
|                        | Senior Vice  President, Treasurer      |
|                        | and Chief  Financial Officer           |
|                        | (Principal  Financial and              |
|                        | Accounting  Officer)                   |
|                             |                                        |  |  |  |

 

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**EXHIBITINDEX**

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

 

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