** **

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, DC 20549**

** **

----

** **

**FORM 10-Q**

** **

| **x**                                                       | ** ** | **QUARTERLY REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934**  |
|-------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|
| ** **                                                  | ** ** | ** **                                                                                               |
| **For the quarterly period ended September 30,  2007** |
| ** **                                                  | ** ** | ** **                                                                                               |
| **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 ofregistrant 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 ofprincipal executive offices) (Zip Code)

 

**(781) 433-0771**

(Registrant’stelephone number, including area code)

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to file suchreports) and (2) has been subject to such filing requirements for the past90 days.   Yes* *x   No o

 

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

 
| Large accelerated filer   o | Accelerated filer   x | Non-accelerated filer   o |
|---------------------------------------|---------------------------------|-------------------------------------|

 

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

 

As of November 5, 2007,74,188,066 shares of common stock, $.001 par value per share, were outstanding.

 

 

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**AVANTIMMUNOTHERAPEUTICS, INC.**

 

**FORM 10-QQuarter Ended September 30, 2007Table of Contents**
| ** **                                                                                            | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|
| **Part I—Financial Information**                                                            |       |
|                                                                                                  |       |
| Item 1. Unaudited Financial  Statements.                                                              |       |
|                                                                                                  |       |
| Consolidated Balance Sheets at  September 30, 2007 and December 31, 2006                    |       |
|                                                                                                  |       |
| Consolidated Statements of  Operations for the Three Months Ended September 30, 2007 and 2006    |       |
|                                                                                                  |       |
| Consolidated Statements of  Operations for the Nine Months Ended September 30, 2007 and 2006     |       |
|                                                                                                  |       |
| Consolidated Statements of  Cash Flows for the Nine Months Ended September 30, 2007 and 2006     |       |
|                                                                                                  |       |
| Notes to Unaudited  Consolidated Financial Statements                                                 |       |
|                                                                                                  |       |
| Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations. |       |
|                                                                                                  |       |
| Item 3.  Quantitative and Qualitative Disclosures About Market Risk.                                  |       |
|                                                                                                  |       |
| Item 4. Controls and  Procedures.                                                                     |       |
| ** **                                                                                            | ** ** |
| **Part II — Other  Information**                                                            | ** ** |
|                                                                                                  |       |
| Item 1. Legal Proceedings.                                                                            |       |
|                                                                                                  |       |
| Item 1A. Risk Factors.                                                                                |       |
|                                                                                                  |       |
| Item 6. Exhibits.                                                                                     |       |
|                                                                                                  |       |
| Signatures                                                                                            |       |
|                                                                                                  |       |
| Exhibit Index                                                                                         |       |
|                                                                                                  |       |
| Certifications                                                                                        |       |

 

2

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**PART I—FINANCIALINFORMATION**

 

**Item 1.   UnauditedFinancial Statements**

 

**AVANTIMMUNOTHERAPEUTICS, INC.**

**CONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

** **
| ** **                                                                                                                                                                                                          | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                                                                          | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Current Assets:                                                                                                                                                                                                     |       |                         |       |                        |       |
| Cash and Cash  Equivalents                                                                                                                                                                                          |       | $                            | 20,339,659 |                        | $          | 40,911,539 |   |
| Accounts and  Other Receivables                                                                                                                                                                                     |       | 525,600                      |       | 320,941                     |       |
| Prepaid Expenses  and Other Current Assets                                                                                                                                                                          |       | 515,118                      |       | 1,171,014                   |       |
|                                                                                                                                                                                                                |       |                         |       |                        |       |
| Total Current  Assets                                                                                                                                                                                               |       | 21,380,377                   |       | 42,403,494                  |       |
|                                                                                                                                                                                                                |       |                         |       |                        |       |
| Property and  Equipment, Net                                                                                                                                                                                        |       | 17,072,700                   |       | 13,967,800                  |       |
| Investment in  Select Vaccines Ltd                                                                                                                                                                                  |       | 576,905                      |       | —                      |       |
| Intangible and  Other Assets, Net                                                                                                                                                                                   |       | 3,338,362                    |       | 4,071,963                   |       |
| Goodwill                                                                                                                                                                                                            |       | 1,036,285                    |       | 1,036,285                   |       |
| Total Assets                                                                                                                                                                                                        |       | $                            | 43,404,629 |                        | $          | 61,479,542 |   |
| ** **                                                                                                                                                                                                          | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                      | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Current  Liabilities:                                                                                                                                                                                               |       |                         |       |                        |       |
| Accounts Payable                                                                                                                                                                                                    |       | $                            | 1,022,861  |                        | $          | 2,552,089 |   |
| Accrued Expenses                                                                                                                                                                                                    |       | 3,038,941                    |       | 2,674,544                   |       |
| Current Portion  of Deferred Revenue                                                                                                                                                                                |       | 4,122,672                    |       | 4,380,074                   |       |
| Current Portion  of Long-Term Liabilities                                                                                                                                                                           |       | 577,630                      |       | 477,606                     |       |
| Total Current  Liabilities                                                                                                                                                                                          |       | 8,762,104                    |       | 10,084,313                  |       |
|                                                                                                                                                                                                                |       |                         |       |                        |       |
| Deferred Revenue                                                                                                                                                                                                    |       | 43,886,636                   |       | 45,069,123                  |       |
| Other Long-Term  Liabilities                                                                                                                                                                                        |       | 4,702,491                    |       | 4,165,126                   |       |
|                                                                                                                                                                                                                |       |                         |       |                        |       |
| Commitments and  Contingent Liabilities (Note 12)                                                                                                                                                                   |       |                         |       |                        |       |
|                                                                                                                                                                                                                |       |                         |       |                        |       |
| Stockholders’  Equity (Deficit):                                                                                                                                                                               |       |                         |       |                        |       |
| Convertible  Preferred Stock, 4,513,102 Shares Authorized; None Issued and Outstanding                                                                                                                              |       | —                       |       | —                      |       |
| Common Stock,  $.001 Par Value; 100,000,000 Shares Authorized; 74,408,385 Issued and  74,188,066 Outstanding at September 30, 2007 and 74,402,867 Issued and  74,182,548 Outstanding at December 31, 2006 |       | 74,408                       |       | 74,403                      |       |
| Additional  Paid-In Capital                                                                                                                                                                                         |       | 258,838,046                  |       | 258,560,628                 |       |
| Less: 220,319  Common Treasury Shares at Cost                                                                                                                                                                       |       | (227,646                     | )          | (227,646                    | )          |
| Accumulated  Deficit                                                                                                                                                                                                |       | (272,631,410                 | )          | (256,246,405                | )          |
|                                                                                                                                                                                                                |       |                         |       |                        |       |
| Total  Stockholders’ Equity (Deficit)                                                                                                                                                                          |       | (13,946,602                  | )          | 2,160,980                   |       |
|                                                                                                                                                                                                                |       |                         |       |                        |       |
| Total  Liabilities and Stockholders’ Equity                                                                                                                                                                    |       | $                            | 43,404,629 |                        | $          | 61,479,542 |   |

 

*Seeaccompanying notes to unaudited consolidated financial statements*

 

3

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**AVANTIMMUNOTHERAPEUTICS, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

** **
| ** **                                                       | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                       | ** ** | **September 30,  2007**     | ** ** | **September 30,  2006** | ** ** |
| **REVENUE:**                                                     | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Product  Development and Licensing Agreements                    |       | $                                | 100,508    |   | $ | 35,475 |   |
| Government  Contracts and Grants                                 |       | 90,149                           |       | 280,419 |   |
| Product  Royalties                                               |       | 1,000,878                        |       | 23,105 |   |
|                                                             |       |                             |       |   |   |
| Total Revenue                                                    |       | 1,191,535                        |       | 338,999 |   |
| ** **                                                       | ** ** | ** **                       | ** ** | ** ** | ** ** |
| **OPERATING  EXPENSE:**                                          | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Research and  Development                                        |       | 4,457,475                        |       | 4,416,320 |   |
| General and  Administrative                                      |       | 2,000,271                        |       | 1,818,799 |   |
| Amortization of  Acquired Intangible Assets                      |       | 240,048                          |       | 248,778 |   |
|                                                             |       |                             |       |   |   |
| Total Operating  Expense                                         |       | 6,697,794                        |       | 6,483,897 |   |
|                                                             |       |                             |       |   |   |
| Operating Loss                                                   |       | (5,506,259                       | )          | (6,144,898 | ) |
|                                                             |       |                             |       |   |   |
| Investment and  Other Income, Net                                |       | 132,778                          |       | 624,331 |   |
|                                                             |       |                             |       |   |   |
| Loss Before  Provision for Income Taxes                          |       | $                                | (5,373,481 | ) | $ | (5,520,567 | ) |
|                                                             |       |                             |       |   |   |
| Benefit from Income  Taxes                                       |       | (120,000                         | )          | — |   |
|                                                             |       |                             |       |   |   |
| Net Loss                                                         |       | (5,253,481                       | )          | (5,520,567 | ) |
|                                                             |       |                             |       |   |   |
| Basic and  Diluted Net Loss Per Common Share                     |       | $                                | (0.07      | ) | $ | (0.07 | ) |
|                                                             |       |                             |       |   |   |
| Shares Used in  Calculating Basic and Diluted Net Loss per Share |       | 75,188,022                       |       | 74,182,347 |   |

 

*Seeaccompanying notes to unaudited consolidated financial statements*

 

4

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**AVANTIMMUNOTHERAPEUTICS, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 
| ** **                                                       | ** ** | **Nine Months Ended** | ** **  |
|------------------------------------------------------------------|------------|---------------------------------|-------------|
| ** **                                                       | ** ** | **September 30,  2007**    | ** **  | **September 30,  2006** | ** ** |
| **REVENUE:**                                                     | ** ** | ** **                      | ** **  | ** ** | ** ** |
| Product  Development and Licensing Agreements                    |       | $                               | 118,612     |   | $ | 2,672,895 |   |
| Government  Contracts and Grants                                 |       | 441,407                         |        | 1,241,149 |   |
| Product  Royalties                                               |       | 2,823,109                       |        | 636,921 |   |
|                                                             |       |                            |        |   |   |
| Total Revenue                                                    |       | 3,383,128                       |        | 4,550,965 |   |
| ** **                                                       | ** ** | ** **                      | ** **  | ** ** | ** ** |
| **OPERATING  EXPENSE:**                                          | ** ** | ** **                      | ** **  | ** ** | ** ** |
| Research and  Development                                        |       | 14,383,806                      |        | 13,228,926 |   |
| General and  Administrative                                      |       | 5,723,386                       |        | 5,924,505 |   |
| Amortization of  Acquired Intangible Assets                      |       | 720,144                         |        | 746,334 |   |
|                                                             |       |                            |        |   |   |
| Total Operating  Expense                                         |       | 20,827,336                      |        | 19,899,765 |   |
|                                                             |       |                            |        |   |   |
| Operating Loss                                                   |       | (17,444,208                     | )           | (15,348,800 | ) |
|                                                             |       |                            |        |   |   |
| Investment and  Other Income, Net                                |       | 939,202                         |        | 1,558,943 |   |
|                                                             |       |                            |        |   |   |
| Loss before  Provision for Income Taxes                          |       | (16,505,006                     | )           | (13,789,857 | ) |
|                                                             |       |                            |        |   |   |
| Provision for (Benefit  from) Income Taxes                       |       | (120,000                        | )           | 372,000 |   |
|                                                             |       |                            |        |   |   |
| Net Loss                                                         |       | $                               | (16,385,006 | ) | $ | (14,161,857 | ) |
|                                                             |       |                            |        |   |   |
| Basic and  Diluted Net Loss Per Common Share                     |       | $                               | (0.22       | ) | $ | (0.19 | ) |
|                                                             |       |                            |        |   |   |
| Shares Used in  Calculating Basic and Diluted Net Loss per Share |       | 75,185,365                      |        | 74,176,593 |   |

 

*Seeaccompanying notes to unaudited consolidated financial statements*

 

5

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**AVANTIMMUNOTHERAPEUTICS, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

** **
| ** **                                                                                 | ** ** | **Nine Months Ended** | ** **  |
|--------------------------------------------------------------------------------------------|------------|---------------------------------|-------------|
| ** **                                                                                 | ** ** | **September 30,  2007**    | ** **  | **September 30,  2006** | ** ** |
| **Cash  Flows from Operating Activities:**                                                 | ** ** | ** **                      | ** **  | ** ** | ** ** |
| Net Loss                                                                                   |       | $                               | (16,385,006 | ) | $ | (14,161,857 | ) |
| Adjustments to  Reconcile Net Loss to Net Cash Provided by (Used in) Operating Activities: |       |                            |        |   |   |
| Depreciation and  Amortization                                                             |       | 1,937,228                       |        | 1,505,578 |   |
| Impairment of  Investment in Select Vaccines Ltd                                           |       | 158,095                         |        | — |   |
| Loss on Disposal  of Assets                                                                |       | 76,014                          |        | — |   |
| Stock-Based  Compensation Expense                                                          |       | 272,879                         |        | 953,297 |   |
| Changes in  Operating Assets and Liabilities:                                              |       |                            |        |   |   |
| Accounts and  Other Receivables                                                            |       | (204,659                        | )           | (135,978 | ) |
| Prepaid and  Other Current Assets                                                          |       | 655,896                         |        | (160,117 | ) |
| Accounts Payable  and Accrued Expenses                                                     |       | (1,160,661                      | )           | (19,447 | ) |
| Deferred Revenue                                                                           |       | (1,444,058                      | )           | 39,586,697 |   |
| Other Long-Term  Liabilities                                                               |       | 824,527                         |        | 1,405,351 |   |
|                                                                                       |       |                            |        |   |   |
| Net Cash  Provided by (Used in) Operating Activities                                       |       | (15,269,745                     | )           | 28,973,524 |   |
| ** **                                                                                 | ** ** | ** **                      | ** **  | ** ** | ** ** |
| **Cash  Flows from Investing Activities:**                                                 | ** ** | ** **                      | ** **  | ** ** | ** ** |
| Other  Non-Current Assets                                                                  |       | 13,456                          |        | — |   |
| Acquisition of  Property and Equipment                                                     |       | (4,397,997                      | )           | (5,549,954 | ) |
| Investment in  Select Vaccines Limited                                                     |       | (735,000                        | )           | — |   |
|                                                                                       |       |                            |        |   |   |
| Cash Used in  Investing Activities                                                         |       | (5,119,541                      | )           | (5,549,954 | ) |
| ** **                                                                                 | ** ** | ** **                      | ** **  | ** ** | ** ** |
| **Cash  Flows from Financing Activities:**                                                 | ** ** | ** **                      | ** **  | ** ** | ** ** |
| Proceeds from  Stock Issuance                                                              |       | 4,544                           |        | 13,897 |   |
| Proceeds from  Exercise of Stock Options and Warrants                                      |       | —                          |        | 5,135 |   |
| Payments of  Long-Term Liabilities                                                         |       | (187,138                        | )           | (180,706 | ) |
|                                                                                       |       |                            |        |   |   |
| Net Cash Used in  Financing Activities                                                     |       | (182,594                        | )           | (161,674 | ) |
|                                                                                       |       |                            |        |   |   |
| Net Increase  (Decrease) in Cash and Cash Equivalents                                      |       | (20,571,880                     | )           | 23,261,896 |   |
|                                                                                       |       |                            |        |   |   |
| Cash and Cash  Equivalents at Beginning of Period                                          |       | 40,911,539                      |        | 23,419,434 |   |
|                                                                                       |       |                            |        |   |   |
| Cash and Cash  Equivalents at End of Period                                                |       | $                               | 20,339,659  |   | $ | 46,681,330 |   |
|                                                                                       |       |                            |        |   |   |
| **Supplemental  Disclosure of Cash Flow Information**                                      | ** ** | ** **                      | ** **  | ** ** | ** ** |
| Cash paid for  interest                                                                    |       | $                               | 77,022      |   | $ | 87,255 |   |

 

*Seeaccompanying notes to unaudited consolidated financial statements*

 

6

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**AVANT IMMUNOTHERAPEUTICS, INC.**

**Notes to Unaudited Consolidated Financial Statements**

**September 30, 2007**

** **

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

 

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

 

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

 

On October 22, 2007,AVANT announced the signing of a definitive merger agreement with CelldexTherapeutics, Inc., a privately-held biopharmaceutical company. The all-stocktransaction, approved by both companies’ Boards of Directors, will combine thetwo companies under the same name AVANT. Celldex and AVANT shareholders willown 58% and 42% of the combined company on a fully diluted basis,respectively.  Closing of the merger iscontingent upon a vote of approval by AVANT’s current shareholders at a specialmeeting of shareholders expected to take place in the first quarter of 2008.

 

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

 

The accompanyingunaudited consolidated financial statements for the three months and ninemonths ended September 30, 2007 and 2006 include the consolidated accountsof AVANT, and have been prepared in accordance with instructions toForm 10-Q and Article 10 of Regulation S-X. In the opinion ofmanagement, the information contained herein reflects all adjustments,consisting solely of normal recurring adjustments, that are necessary topresent fairly the Company’s financial position at September 30, 2007,results of operations for the three months and nine months endedSeptember 30, 2007 and 2006, and cash flows for the nine-month periodsended September 30, 2007 and 2006. The results of operations for thenine-month period ended September 30, 2007 are not necessarily indicativeof results for any future interim period or for the full year.

 

Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with generally accepted accounting principles in the United Statesof America have been omitted, although the Company believes that thedisclosures included, when read in conjunction with AVANT’s Annual Report onForm 10-K for the year ended December 31, 2006, are adequate to makethe information presented not misleading. The accompanying December 31,2006 Consolidated Balance Sheet was derived from audited financial statements,but does not include all disclosures required by accounting principlesgenerally accepted in the United States of America.

 

**(3)****                                 RecentAccounting Pronouncements**

** **

**SFAS 159:**  In February 2007, the FASB issued SFAS No.159, *The**Fair Value Option forFinancial Assets and Financial Liabilities – including an Amendment of FASBStatement No. 155*(“SFAS 159”), which permits entities to choose tomeasure many financial instruments and certain other items on aninstrument-by-instrument basis under a fair value option.  SFAS 159 is effective for financialstatements issued for fiscal years beginning after November 15, 2007, andinterim periods within those fiscal years. AVANT has not yet determined theeffect if any that adopting SFAS 159 will have on the Company’s financialstatements.

 

**EITF07-3:**  In June 2007,the EITF reached consensus on EITF Issue No. 07-3, *Accountingfor Advance Payments for Goods and Services to Be Used in Future Research andDevelopment Activities* (“EITF 07-3”).  EITF 07-3 states that non-refundable advancepayments for future research and development activities should be capitalizeduntil the goods have been delivered or the related services have beenperformed.  EITF is effective for fiscalyears beginning after December 15, 2007.

 

7

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Entities are to recognizethe effects of EITF 07-3 prospectively for new contracts entered into after theeffective date.  The adoption of EITF07-3 is not expected to have a material impact on AVANT’s financial position orresults of operations.

 

**(4)****                                 Stock-BasedCompensation**

 

The Company adopted SFAS123(R) beginning January 1, 2006, using the modified prospectivetransition method. In conjunction with the adoption of SFAS 123(R),compensation expense for all stock-based payment awards granted prior toJanuary 1, 2006 will continue to be recognized using the straight-linemethod and compensation expense for all share-based payment awards grantedsubsequent to January 1, 2006 will also be recognized using thestraight-line method. As stock-based compensation expense recognized in theConsolidated Statement of Operations for the first nine months of fiscal 2007and 2006 is based on awards ultimately expected to vest, it has been reducedfor estimated forfeitures. SFAS 123(R) requires forfeitures to beestimated at the time of grant and revised, if necessary, in subsequent periodsif actual forfeitures differ from those estimates.

 

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

 

As of September 30,2007, the Company had two shareholder approved, share-based compensation plans:the 2004 Employee Stock Purchase Plan (the “2004 ESPP Plan”) and the 1999 StockOption and Incentive Plan (the “1999 Plan”). For a complete discussion of the Company’s share-based plans see Note 5of the consolidated financial statements included in its annual report on Form10-K, as previously filed with the Securities and Exchange Commission on March16, 2007.

 

**Employee Stock Benefit Plans**

 

***Restricted StockUnit Awards***

 

In September 2005,November 2004 and September 2003, the Company awarded restricted stock units toDr. Una Ryan, its President and CEO, and determined the value of the restrictedstock unit awards to be $270,000, $832,000 and $1,104,000, respectively, basedon the closing price of AVANT’s common stock on the award date. The value ofthe restricted stock units was amortized over the remaining months until Dr.Ryan attained age 65 in December 2006, and was recorded as compensationexpense. In connection with the awards, the Company has recognized $175,000 and$350,000 as stock-based compensation expense in the statements of operationsduring the three- and nine-month periods ended September 30, 2006, respectively.

 

AVANT has applied anestimated forfeiture rate of zero to the restricted stock unit awards.

 

***Employee StockPurchase Plan***

 

During the nine monthsended September 30, 2007 and 2006, the Company issued 5,518 and 5,665shares, respectively, under the 2004 ESPP Plan. At September 30, 2007,121,239 shares were available for issuance under the 2004 ESPP Plan.

 

The current purchaseperiod began on July 1, 2007. The Company has established the risk-freeinterest rate assumption to be 4.1% using the 6-month rate on a tradedzero-coupon U.S. Treasury bond. The Company used its historical volatility rateof 46% for the 6-month period preceding the grant date for the current stockpurchase period. The Company has concluded that volatility during the currentpurchase period is expected to be consistent with the calculated historicalvolatility rate. Finally, the Company established the expected term for thecurrent stock purchase period as six months. Based on these assumptions, thestock-based compensation expense recorded for the employee stock purchases wasnot significant.

 

8

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***Employee StockOption Plan***

 

*GeneralOption Information*

* *

A summary of stock optionactivity under the 1999 Plan for the nine months ended September 30, 2007is as follows:

 
| ** **                        | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price  Per Share** | ** ** | **Weighted  Average  Remaining  Contractual  Term (In Years)** | ** ** |
|-----------------------------------|------------|------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| Outstanding at  January 1    |       | 3,281,154  |       | $                                                      | 2.40       |                                                                     | 5.26       |   |
| Granted                           |       | 463,450    |       | 1.26                                                   |       |                                                                     |       |
| Canceled/forfeited                |       | (342,398   | )          | 1.75                                                   |       |                                                                     |       |
| Expired                           |       | (388,154   | )          | 2.41                                                   |       |                                                                     |       |
|                              |       |       |       |                                                   |       |                                                                     |       |
| Outstanding at  September 30 |       | 3,014,052  |       | $                                                      | 2.30       |                                                                     | 4.79       |   |
|                              |       |       |       |                                                   |       |                                                                     |       |
| At  September 30             |       |       |       |                                                   |       |                                                                     |       |
| Options  exercisable              |       | 2,374,710  |       | $                                                      | 2.50       |                                                                     |       |   |

 

The weighted average fairvalue of options granted during the nine-month period ended September 30,2007 was $0.90.

 

The aggregate intrinsicvalue of options outstanding at September 30, 2007 was insignificant.

*** ***

*Valuation and Expense Informationunder SFAS 123(R)*

 

The following tablesummarizes stock-based compensation expense related to employee andnon-employee director stock options and employee stock purchases under SFAS123(R) for the three and nine months ended September 30, 2007 and2006 which was allocated as follows:

 
| ** **                              | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|-----------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                              | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| Research and  development               |       | $                                                    | 45,674     |                                                | $          | 39,970 |   | $ | 119,093 |   | $ | 113,098 |   |
| General and  administrative             |       | 51,818                                               |       | 373,431                                             |       | 153,786 |   | 840,199 |   |
| Total  stock-based compensation expense |       | $                                                    | 97,492     |                                                | $          | 413,401 |   | $ | 272,879 |   | $ | 953,297 |   |

 

Stock-based compensationexpense related to restricted stock unit awards recognized for the three andnine months ended September 30, 2006 was $306,250 and $656,250,respectively, all of which was allocated to general and administrativeexpenses.

 

Based on basic anddiluted weighted average common shares outstanding of 75,188,022 and75,185,365, the effect of stock-based compensation expense recorded underSFAS 123R for the three-and nine-month periods has no significant impacton net loss per share.

 

As of September 30,2007, total compensation cost related to non-vested stock options not yetrecognized was $731,070, net of estimated forfeitures, which is expected to berecognized as expense over a weighted average period of 1.9 years.

 

9

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The fair values ofemployee and non-employee director stock options granted during the three andnine months ended September 30, 2007 and 2006 were valued using theBlack-Scholes model with the following assumptions:

 
| ** **                                                | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|-----------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| Expected stock  price volatility (employees)              |       | 73                                                   | %          | 76                                                  | %          | 73 | % | 76 | % |
| Expected stock  price volatility (non-employee directors) |       | 61                                                   | %          | 76                                                  | %          | 61 | % | 76 | % |
| Expected option  term (employees)                         |       | 6.25 Years                                           |       | 6.25 Years                                          |       | 6.25 Years |   | 6.25 Years |   |
| Expected option  term (non-employee directors)            |       | 5.5 Years                                            |       | 5.5 Years                                           |       | 5.5 Years |   | 5.5 Years |   |
| Risk-free  interest rate                                  |       | 4.0 -5.1                                             | %          | 4.5 -5.2                                            | %          | 4.0 - 5.2 | % | 4.3 - 5.2 | % |
| Expected  dividend yield                                  |       | None                                                 |       | None                                                |       | None |   | None |   |

 

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

 

The risk-free interestrate assumption is based upon observed interest rates appropriate for theexpected term of the Company’s employee and non-employee director stock optionsand employee stock purchases. The dividend yield assumption is based on theCompany’s history of zero dividend payouts and expectation that no dividendswill be paid in the foreseeable future.

 

The expected term ofemployee and non-employee director stock options represents theweighted-average period the stock options are expected to remain outstanding.SAB 107 provides for a simplified method for estimating expected term for “plain-vanilla”options. The simplified method is based on the vesting period and thecontractual term for each grant or for each vesting tranche for awards withgraded vesting. The mid-point between the vesting date and the expiration dateis used as the expected term under this method. The Company has elected tofollow the guidance of SAB 107 and adopt this simplified method in determiningexpected term for its stock option awards. There were 5,000 stock options granted to non-employee directors duringthe three months ended September 30, 2007.

 

Forfeitures wereestimated based on historical experience by applying an eleven and zero percentforfeiture rate to employee and non-employee director stock option awardsgranted during the nine months ended September 30, 2007, respectively.

 

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

 

**(5)****                                 Accountsand Other Receivables**

 

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

 

Accountsand other receivables consist of the following:

 
| ** ** | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|------------|------------|------------------------------|------------|-----------------------------|------------|
| Trade      |       | $                            | 54,483     |                        | $          | 183,830 |   |
| Other      |       | 471,117                      |       | 137,111                     |       |
|       |       | $                            | 525,600    |                        | $          | 320,941 |   |

 

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Other receivables atSeptember 30, 2007 represent interest receivable from a bank and an incometax refund of $401,752. Other receivables at December 31, 2006 representinterest receivable from a bank.

 

**(6)****                                 Propertyand Equipment**

 

Propertyand equipment includes the following:

 
| ** **                                      | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Laboratory  Equipment                           |       | $                            | 4,313,666  |                        | $          | 3,631,247 |   |
| Manufacturing  Equipment                        |       | 1,978,346                    |       | 1,842,017                   |       |
| Office Furniture  and Equipment                 |       | 1,300,674                    |       | 992,076                     |       |
| Leasehold  Improvements                         |       | 9,794,502                    |       | 5,202,366                   |       |
| Construction in  Progress                       |       | 5,945,624                    |       | 7,668,904                   |       |
| Total Property  and Equipment                   |       | 23,332,812                   |       | 19,336,610                  |       |
| Less Accumulated  Depreciation and Amortization |       | (6,260,112                   | )          | (5,368,810                  | )          |
|                                            |       | $                            | 17,072,700 |                        | $          | 13,967,800 |   |

 

AVANT recorded a loss of$74,148 on disposal of fixed assets during the nine months endedSeptember 30, 2007.

 

The Company has recorded$22,393 and $25,521 of capitalized interest costs incurred in financingleasehold improvements and laboratory and manufacturing equipment at its FallRiver and Needham facilities during the three-month periods endedSeptember 30, 2007 and 2006, respectively, and $54,396 and $67,493 ofcapitalized interest costs during the nine-month periods endedSeptember 30, 2007 and 2006, respectively. The total amount of interestexpense incurred by AVANT during the three-month periods endedSeptember 30, 2007 and 2006 was $22,393 and $25,521, respectively, and$68,771 and $77,973 during the nine-month periods ended September 30, 2007and 2006, respectively.

 

Depreciation expense related to equipment andleasehold improvements was $462,010 and $293,478 for the three months endedSeptember 30, 2007 and 2006, respectively, and $1,217,083 and $780,493 forthe nine months ended September 30, 2007 and 2006, respectively.

 

**(7)****                                 Intangibleand Other Assets**

 

Intangibleand other assets include the following:

 
| ** **                   | ** ** | **September 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                   | ** ** | **Estimated  Lives**             | ** ** | **Gross  Intangible  Assets**   | ** ** | **Accumulated  Amortization** | ** ** | **Net  Intangible  Assets** | ** ** | **Gross  Intangible  Assets** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Intangible  Assets** | ** ** |
| Intangible  Assets:          |       |                             |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Collaborative  Relationships |       | 5 years                          |       | $                               | 1,090,000  |   | $ | (1,090,000 | ) | $ | — |   | $ | 1,090,000 |   | $ | (1,090,000 | ) | $ | — |   |
| Core Technology              |       | 10 years                         |       | 3,786,900                       |       | (2,171,067 | ) | 1,615,833 |   | 3,786,900 |   | (1,887,046 | ) | 1,899,854 |   |
| Developed  Technology        |       | 7 years                          |       | 3,263,100                       |       | (3,155,410 | ) | 107,690 |   | 3,263,100 |   | (2,832,400 | ) | 430,700 |   |
| Strategic  Partner Agreement |       | 17 years                         |       | 2,563,900                       |       | (1,030,586 | ) | 1,533,314 |   | 2,563,900 |   | (917,472 | ) | 1,646,428 |   |
|                         |       |                             |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Total Intangible  Assets     |       |                             |       | 10,703,900                      |       | (7,447,063 | ) | 3,256,837 |   | 10,703,900 |   | (6,726,918 | ) | 3,976,982 |   |
|                         |       |                             |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Other Non  Current Assets    |       |                             |       | 81,525                          |       | 3⁄4 |   | 81,525 |   | 94,981 |   | 3⁄4 |   | 94,981 |   |
|                         |       |                             |       | $                               | 10,785,425 |   | $ | (7,447,063 | ) | $ | 3,338,362 |   | $ | 10,798,881 |   | $ | (6,726,918 | ) | $ | 4,071,963 |   |

 

All of AVANT’s intangibleassets are amortized over their estimated useful lives. Total amortizationexpense for intangible assets was $240,048 and $248,778 for the three-monthperiods ended September 30, 2007 and 2006, respectively, and $720,144 and$746,334 for the nine-month periods ended September 30, 2007 and 2006,respectively.

 

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The estimated futureamortization expense of intangible assets as of September 30, 2007 for theremainder of fiscal year 2007 and the five succeeding years is as follows:

 
| **Year ending December 31,** | ** ** | **Estimated  Amortization  Expense** | ** ** |
|---------------------------------------------|------------|--------------------------------------|------------|
| 2007 (remaining  three months)              |       | $                                    | 240,068    |   |
| 2008                                        |       | 529,512                              |       |
| 2009                                        |       | 529,512                              |       |
| 2010                                        |       | 514,622                              |       |
| 2011                                        |       | 350,822                              |       |
| 2012 and  thereafter                        |       | 1,092,303                            |       |
|                                             |            |                                      |            |  |

 

**(8)****                                 LossPer Share**

 

The Company computes andreports earnings per share in accordance with the provisions of SFASNo. 128, *Earnings Per Share*. Thecomputations of basic and diluted loss per common share are based upon theweighted average number of common shares outstanding and potentially dilutivesecurities. Potentially dilutive securities include stock options, warrants andrestricted stock units. Options and warrants to purchase 4,452,871 and3,745,785 shares of common stock and restricted stock units totaling 0 and1,000,000 shares were not included in the computations of weighted averagecommon shares for the periods ended September 30, 2007 and 2006,respectively, because inclusion of such shares would have an anti-dilutiveeffect on net loss per share. In 2007, restricted stock units totaling1,000,000 shares were included in the computation of basic and diluted net lossper share as all necessary conditions for their issuance had been satisfied andan insignificant amount of cash consideration will be received upon issuance.

 

**(9)****                                 IncomeTaxes**

 

The $40 million milestonepayment received from Paul Royalty Fund II, L.P. (“PRF”) during the firstquarter of 2006 resulted in taxable income for the Company. The regular taxableincome generated by this transaction will be fully offset against availablefederal and state net operating loss carryforwards. The Company recorded aprovision of $372,000 in the first quarter of 2006 for the alternative minimumtax that was estimated to result from receipt of this milestone. In the fourthquarter of 2006, the estimated provision was adjusted to $120,000. In the thirdquarter of 2007, AVANT made an adjustment to its tax provision estimates of$120,000 after determining that no alternative minimum tax will be due on thetransaction.

 

On January 1, 2007, theCompany adopted FASB Interpretation No. 48, *Accounting for Uncertaintyin Income Taxes –an interpretation of FASB Statement 109* (“FIN 48”).FIN 48 prescribes a comprehensive model for recognizing, measuring, presentingand disclosing in the financial statements tax positions taken or expected tobe taken on a tax return, including a decision whether to file or not to filein a particular jurisdiction. As a result of the implementation of FIN 48,AVANT recognized no material adjustment in the liability for unrecognizedincome tax benefits. At adoption date and at September 30, 2007, AVANT had nomaterial unrecognized income tax benefits.

 

As of December 31,2006, the Company had federal and state net operating loss (“NOL”)carryforwards and federal and state research and development (“R&D”) creditcarryforwards, which may be available to offset future federal and state incometax liabilities which expire at various dates starting in 2007 and goingthrough 2026. Utilization of the NOL and R&D credit carryforwards may besubject to a substantial annual limitation due to ownership change limitationsthat have occurred previously or that could occur in the future provided bySection 382 of the Internal Revenue Code of 1986, as well as similar stateprovisions. These ownership changes may limit the amount of NOL and R&Dcredit carryforwards that can be utilized annually to offset future taxableincome and tax, respectively. In general, an ownership change, as defined bySection 382, results from transactions increasing the ownership of certainshareholders or public groups in the stock of a corporation by more than 50percentage points over a three-year period. Since the Company’s formation, theCompany has raised capital through the issuance of capital stock on severaloccasions (both pre and post initial public offering) which, combined with thepurchasing shareholders’ subsequent disposition of those shares, may haveresulted in a change of control, as defined by Section 382, or couldresult in a change of control in the future upon subsequent disposition. TheCompany has completed a study to assess whether changes of control haveoccurred which would limit the Company’s utilization of its

 

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NOL or R&D creditcarryforwards. Based on this study, management has concluded that there are no significantlimitations. The Company does not expect to have taxable income for theforeseeable future.

 

Massachusetts andMissouri are the two states in which the Company operates and has income taxnexus. Open federal and state return years subject to examination by major taxjurisdictions include the tax years ended December 31, 2004, 2005 and 2006.Carryforward attributes that were generated prior to 2004 may still be adjustedupon examination by the IRS if they either have been or will be used in afuture period.

 

The Company’s policy isto recognize interest and penalties related to uncertain tax positions inincome tax expense. There have been no interest or penalties recognized in theconsolidated statement of operations and on the consolidated balance sheet as aresult of FIN 48 calculations. The Company has no amounts accrued for interestand penalties at September 30, 2007.

 

As required by Statementof Financial Accounting Standards No. 109, management of the Company hasevaluated the positive and negative evidence bearing upon the realizability ofits deferred tax assets, which are comprised principally of NOLs, capitalizedresearch and development expenditures and R&D credits. Management hasdetermined that it is more likely than not that the Company will not realizethe benefits of federal and state deferred tax assets and, as a result, a fullvaluation allowance was maintained at September 30, 2007 andDecember 31, 2006.

 

During the third quarterof 2007, the Company completed the closing the its Missouri location andtherefore expects that it will not benefit from the Missouri state losscarryforwards. This state net operating loss carryforward totaled approximately$13,256,300 at September 30, 2007.

 

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

 

AVANT’s revenue fromproduct development and licensing agreements was received pursuant to contractswith different organizations. A summary of these contracts follows:

 

*(A)**                 GlaxoSmithKlineplc (“Glaxo”) and Paul Royalty Fund (“PRF”)*

 

In 1997, AVANT enteredinto an agreement with Glaxo to collaborate on the development and commercializationof the Company’s oral rotavirus vaccine and Glaxo assumed responsibility forall subsequent clinical trials and all other development activities. AVANTlicensed-in the Rotarix® technology in 1995 and owes a license fee of 30% toCincinnati Children’s Hospital Medical Center (“CCH”) on net royalties receivedfrom Glaxo. AVANT is obligated to maintain a license with CCH with respect tothe Glaxo agreement. All licensing fees are included in research anddevelopment expense. The term of the Glaxo agreement is through the expirationof the last of the relevant patents covered by the agreement, although Glaxomay terminate the agreement upon 90 days prior written notice.

 

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.Under the PRF agreement, AVANT will retain 50% of future Glaxo milestonepayments beginning on the effective date of the agreement with PRF, with 70% ofthe remaining balance payable to PRF and 30% of the remaining balance payableto CCH, respectively.

 

The PRF transactionqualifies as a sale in accordance with guidance in EITF 88-18, “Sale of FutureRevenues.”  The upfront unconditional paymentof $10 million and the $40 million milestone payment for launch in the EuropeanUnion were recorded by AVANT as deferred revenue upon receipt. Any futuremilestone payments received from PRF will also be recorded as deferred revenue.Revenues are being recognized and calculated based on the ratio of totalroyalties received from Glaxo and remitted to PRF over expected total amountsto be received by PRF and then applying this percentage to the total cumulativeconsideration received from PRF to date. The expected total of payments to PRFis an estimate which will be updated for any changes in expectations of suchpayments. The impact of any such changes will be applied prospectively.

 

In February 2006,the European Commission granted approval of RotarixÒin the European Union, which triggered a $4 million milestone payment fromGlaxo, 50% of which is creditable against future royalties. Revenue of $2.6million was recorded in the first quarter of 2006 as AVANT has no continuingobligations to incur any research and development costs in

 

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connection with the Glaxoagreement. Glaxo has agreed to make further payments, which could total up to$1.5 million, upon achievement of a specific milestone.

 

AVANT also recorded$600,000 in royalty expense payable to Cincinnati Children’s Hospital MedicalCenter (“CCH”) as a result of this milestone payment. AVANT remitted theremaining $1.4 million of the Glaxo milestone payment to PRF in accordance withthe PRF agreement. As a result, in the first nine months of 2006, AVANT alsorecognized $550,803 in product royalty revenue related to PRF’s purchasedinterests in the net royalties that AVANT receives from RotarixÒworldwide net sales. In the first nine months of 2007, AVANT recognized$2,742,689 in RotarixÒ-related productroyalty revenue consisting of $1,444,058 related to PRF’s purchased interest inRotarix® net royalties and $1,298,631 related to AVANT’s retained interest inRotarix® net royalties which were not sold to PRF, which also corresponds tothe amount payable by AVANT to CCH. As such, a corresponding amount is recordedas royalty expense and included in research and development expense. Based onmanagement’s best estimates of the amount and timing of Glaxo royalties, theCompany has classified $4,118,503 and $43,886,636 of the deferred revenuebalance at September 30, 2007 as short-term and long-term, respectively.

 

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

 

*(B)**                 Pfizer Inc (“Pfizer”)*

 

The Company entered intoa licensing agreement in December 2000 with Pfizer’s Animal Health Divisionwhereby Pfizer has licensed Megan’s technology for the development of animalhealth and food safety vaccines. Under the agreement, AVANT may receiveadditional milestone payments of up to $3 million based upon attainment ofspecified milestones. AVANT may receive royalty payments on eventual productsales. The term of this agreement is through the expiration of the last of thepatents covered by the agreement. AVANT has no obligation to incur any researchand development costs in connection with this agreement.

 

As of June 1, 2006, AVANTentered into a Collaborative Research and Development Agreement with Pfizeraimed at the discovery and development of vaccines to protect animals. Thecollaboration will employ vaccine technologies owned by AVANT. Under theagreement, Pfizer and AVANT will conduct a joint research program funded byPfizer to develop prophylactic and therapeutic vaccines. AVANT had recognized revenueas the research and development service deliverables were completed anddelivered to Pfizer. AVANT recognized $62,500 and zero in product developmentrevenue from Pfizer, Inc in the nine-month periods ended September 30,2007 and 2006, respectively.

 

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

 

In January 2003,AVANT was awarded a subcontract by DVC in the amount of $2.5 million to developfor the U.S. Department of Defense an oral combination vaccine against anthraxand plague using AVANT’s proprietary vaccine technologies. As ofSeptember 30, 2007, AVANT had received a number of additional subcontractmodifications from DVC to support further development and pre-clinical animaltesting of vaccine constructs of anthrax and plague vaccine candidates beingdeveloped by AVANT for use in the oral combination vaccine. Total contract fundingawarded by DVC now totals approximately $12 million. Payments under thesubcontract agreement are made on a time and materials basis and receipt of thefull amount is conditioned upon the project being fully funded throughcompletion and AVANT performing and continuing to demonstrate that it has thecapability to perform the funded work. As a result of AVANT’s recentrestructuring, the Company will no longer invest its resources in biodefenseresearch and development activities and as a result limited contract revenue isexpected during the remainder of 2007. For the nine months endedSeptember 30, 2007 and 2006, AVANT recognized $250,491 and $1,049,906,respectively, in government contract revenue from DVC. ThroughSeptember 30, 2007, AVANT had received approximately $9.7 million inpayments under the various subcontract

 

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agreements. Theseagreements expire in 2007, although they may be terminated by DVC at any timeupon 30 days written notice.

 

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

 

In February 2007, AVANTentered into a research and developmentpartnership with Select Vaccines, a public Australian biotechnology company,focused on the use of Select Vaccines’ virus-like particles (“VLPs”) as aplatform technology for the development of viral vaccines. Research anddevelopment efforts will initially target the development of vaccines againstinfluenza including both epidemic and pandemic forms of vaccine, with theopportunity to expand the collaboration to other disease targets. Under theterms of the agreement, AVANT made an upfront equity investment of $735,000 inSelect Vaccines and will fund influenza vaccine research and development fortwo years, as well as provide payments to Select Vaccines for the achievementof specific preclinical and clinical development milestones. In addition, AVANThas the exclusive right to apply Select Vaccines’ technology to a second targetwithin the first two years of the agreement, and a third target within thefirst three years of the agreement. Select Vaccines would also be eligible toreceive royalties based on net sales of any approved products arising out ofthis collaboration that are successfully marketed.

 

On November 1, 2007,AVANT notified Select Vaccines that, effective December 31, 2007, AVANT forstrategic reasons was exercising its rights to terminate its Collaboration andLicense Agreement with Select Vaccines.

 

 AVANThas classified its equity investment in Select Vaccines shares as available forsale securities under FAS 115, *Accounting for CertainInvestments in Debt and Equity Securities*, (“FAS 115”). Inaccordance with FAS115, all available-for-sale securities are recorded at fairmarket value and, to the extent deemed temporary, unrealized gains and lossesare included in accumulated other comprehensive income (loss) in shareholders’equity.  Realized gains and losses and declines in value, if any, judgedto be other than temporary on available-for-sale securities are reported inother income (expense).

 

During the quarter endedSeptember 30, 2007, AVANT recognized $158,095 for the impairment of itsinvestment in Select Vaccines that was determined to be other-than-temporary. In assessing whether the decline in fair value of the investment isother-than-temporary, AVANT has determined that it does not have significantpositive evidence to conclude that the decline was temporary.

 

**(11)****                          OtherLong-Term Liabilities**

 

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)**                 Loan Payable*

 

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

 

At September 30,2007, AVANT has recorded leasehold improvements of $1,227,800 and currently hasa loan payable of  $1,002,703 toMassDevelopment, of which $75,032 is classified as current and $927,671 aslong-term. AVANT began amortizing the leasehold improvements when the FallRiver facility became operational. Based on current market interest ratesavailable to AVANT for long-term liabilities with similar terms and maturities,the fair value of the loan is approximately $738,600 at September 30,2007.

 

*(B)**                 Note Payable*

 

Under the SecuredPromissory Note: Equipment Loan, AVANT received $903,657 from MassDevelopmentto finance the purchases of manufacturing and laboratory equipment to be placedin its Fall River facility (the “Loan”). The

 

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Loan has a term of 84months at an interest rate of 5.5% per annum. The Loan is collateralized by allof the equipment purchased with the principal amount. The net book values ofthese collateralized assets at September 30, 2007 and December 31,2006 was $692,410 and $769,855, respectively.

 

At September 30,2007, AVANT currently has a note payable of $552,432 to MassDevelopment, ofwhich $137,221 is classified as current and $415,210 as long-term. AVANT begandepreciating the manufacturing and laboratory equipment assets over theestimated economic lives of the assets when the equipment became ready for itsintended use. Based on current market interest rates available to AVANT forlong-term liabilities with similar terms and maturities, the fair value of thenote payable is approximately $505,200 at September 30, 2007.

 

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

 

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

 

In November 2005,AVANT entered into a Lease Amendment with the landlord which specified termsfor the complete renovation of the Company’s Needham facility. The currentprojected costs for the tenant improvements portion of the renovations projectare approximately $9.5 million. As an incentive for AVANT to enter into theLease Amendment, the landlord has agreed to contribute up to $3.6 milliontowards tenant improvement costs. TheCompany will record the full cost of the Needham renovation project as an assetand the amounts of landlord incentive will be recorded as deferred rent(included under “Other Long Term Liabilities” account in the consolidatedbalance sheets) in accordance with FASB Technical Bulletin 88-1 “Issues Relatedto Accounting for Leases.” Amortization of the deferred rent will be recordedas a reduction of rent expense over the remaining lease term when therenovation project is complete and will be classified as an operating activityin the Consolidated Statement of Cash Flows. AVANT has recorded a totalof $3,600,000 in deferred rent related to the Needham landlord’s tenantincentive allowance. In May 2007, AVANT began amortizing on a straight-linebasis the tenant incentive allowance over the ten-year lease term and recordeda reduction in rent expense of $90,000 in the quarter ended September 30, 2007.At September 30, 2007, deferred rent of $3,450,000 related to the Needhamlandlord’s tenant incentive allowance was recorded on the Consolidated BalanceSheet of which $360,000 is classified as current and $3,090,000 as long-term.

 

*(B)**                 Purchase Commitments for ContractManufacturing*

 

In April 2000, AVANTentered into a Services Agreement (the “Lonza Agreement”) with Lonza Biologicsplc (“Lonza”) for process development and manufacture of its product candidateTP10. AVANT has entered into a number of amendments to the Lonza Agreement forspecific process development and scale-up work and remaining aggregatecommitments as of September 30, 2007 total approximately $106,000. TheCompany has incurred $608,692 and $9,120,000 of expense related to the LonzaAgreement in the nine-month period ended September 30, 2007 and frominception through September 30, 2007, respectively, of which approximately$106,000 remained accrued at September 30, 2007.

 

**(13)****                          Restructuring**

 

On April 16, 2007, AVANTinitiated planned restructuring activities to reduce ongoing operational costs,following an extensive review of its operations and cost structure. The restructuringaimed to increase the focus of AVANT’s resources upon key programs and coreoperational capabilities and to lower the Company’s overall cost structure. TheCompany will concentrate its focus on building an enhanced portfolio of viraland bacterial vaccines for global health and travelers around the Company’score technologies, as well as its unique development and manufacturingcapabilities. AVANT will no longer invest in biodefense research anddevelopment activities or further invest in clinical trials for its CETi and TP10programs.

 

The restructuringresulted in a workforce reduction of approximately 30%. AVANT also exited fromits St. Louis-based research facility at September 30, 2007 when the lease termexpired and has moved all essential research activities to its Needham, MAheadquarters. The restructuring charges consisted of severance, payroll tax andextended benefits costs for terminated employees, as well as, salarycontinuation and retention bonus costs for certain St. Louis employees retainedduring the transition and closing process for the St. Louis facility. Duringthe nine-month period ended September 30, 2007, restructuring charges of$765,204 were recorded, of which $754,877 were recorded as research anddevelopment and $10,327 were recorded as general and administrative expense. Ofthe restructuring charge, $384,116 related to St. Louis benefit arrangementsand $381,088 related to Needham and Fall River benefit arrangements. During thethree months and nine

 

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months ended September30, 2007, $147,625 and $365,423, respectively, of restructuring costs were paidout and a balance of $399,781 of accrued restructuring costs remained atSeptember 30, 2007.

 

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***Safe Harbor Statement under the Private SecuritiesLitigation Reform Act of 1995:****  This quarterly report onForm 10-Q includes forward-looking statements**that are subject to a variety ofrisks and uncertainties andreflect AVANT’s current views with respect to future events and financialperformance. There are a numberof important factors that could cause the actual results to differ materiallyfrom those expressed in any forward-looking statements made by AVANT. Thesefactors include, but are not limited to: (1) the integration ofmultiple technologies and programs; (2) the ability to adapt AVANT’s vectoringsystems to develop new, safe and effective orally administered vaccines againstpandemic diseases or other disease causing agents; (3) the ability tosuccessfully complete product research and further development, includinganimal, pre-clinical and clinical studies and commercialization ofCholeraGarde® (Peru-15), Ty800, ETEC E. coli, VLPs and other products and AVANT’sexpectations regarding market growth; (4) the cost, timing, scope and resultsof ongoing safety and efficacy trials of CholeraGarde® (Peru-15), Ty800, ETECE. coli and other preclinical and clinical testing; (5) the ability tonegotiate strategic partnerships or other disposition transactions for AVANT’scardiovascular programs, including TP10 and CETi; (6) the ability of AVANT tomanage multiple clinical trials for a variety of product candidates; (7) thevolume and profitability of product sales of Megan®Vac 1, Megan®Egg and otherfuture products; (8) the process of obtaining regulatory approval for the saleof Rotarix**Òin major commercial markets, as well as the timing and success of worldwidecommercialization of Rotarix**Òby our partner, Glaxo; (9) Glaxo’s strategy and business plans to launch andsupply Rotarix**Òworldwide, including in the U.S. and other major markets and its payment ofroyalties to AVANT; (10) changes in existing and potential relationships withcorporate collaborators and partners; (11) the availability, cost, delivery andquality of clinical and commercial grade materials produced at AVANT’s ownmanufacturing facility or supplied by contract manufacturers; (12) the timing,cost and uncertainty of obtaining regulatory approvals to use CholeraGarde®(Peru-15) and Ty800, ETEC E. coli, among other purposes, to protect travelersand people in endemic regions from diarrhea causing diseases, respectively;(13) the ability to obtain substantial additional funding; (14) the ability todevelop and commercialize products before competitors that are superior to thealternatives developed by competitors; (15) the ability to retain certainmembers of management;(16) AVANT’s expectations regarding research anddevelopment expenses and general and administrative expenses and restructuringcosts; (17) AVANT’s expectations regarding CETP’s ability to improvecholesterol levels and AVANT’s ability to find a partner todevelop and  commercialize CETP; (18) AVANT’s expectationsregarding cash balances, capital requirements, anticipated royalty payments(including those from Paul Royalty Fund), revenues and expenses, includinginfrastructure expenses;(19) our belief regarding the validity of our patentsand potential litigation; and (20) other factors detailed from time to time infilings with the Securities and Exchange Commission.*

 

*Inaddition, on October 19, 2007, the Company entered into an Agreement and Planof Merger (the “Merger Agreement”) with Celldex Therapeutics, Inc. (“Celldex”),a Delaware corporation, and Callisto Merger Corporation, a Delaware corporationand wholly owned subsidiary of the Company. See Note 14 of the notes to theunaudited consolidated financial statements for more information.**Forward-looking statements regarding the Merger Agreement are subjectto risks and uncertainties that may cause actual future experience and resultsto differ materially from those discussed in these forward-looking statements.Important factors that might cause such a difference include, but are notlimited to, costs related to the merger, failure of AVANT’s stockholders toapprove the Merger; AVANT’s or Celldex’s inability to satisfy the conditions ofthe Merger; AVANT’s inability to maintain its NASDAQ listing; the risk thatAVANT’s and Celldex’s businesses will not be integrated successfully; thecombined company’s inability to further identify, develop and achievecommercial success for new products and technologies; the possibility ofMerger-related delays in the research and development necessary to select drugdevelopment candidates and delays in clinical trials; the risk that clinicaltrials may not result in marketable products; the risk that the combinedcompany may be unable to successfully secure regulatory approval of and marketits drug candidates; the risks associated with reliance on outside financing tomeet capital requirements; risks associated with Celldex’s new and uncertaintechnology; risks of the development of competing technologies; risks relatedto the combined company’s ability to protect its proprietary technologies;risks related to patent-infringement claims; and risks of new, changing andcompetitive technologies and regulations in the U.S. and internationally.*

 

*You should carefully review all of these factors, and youshould be aware**that there may be other factorsthat 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.*

 

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**Item 2. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

AVANT’sprincipal activity since our inception has been research and productdevelopment conducted on our own behalf, as well as through joint developmentprograms with several pharmaceutical companies and other collaborators. AVANTwas incorporated in the State of Delaware in December 1983.

 

## **CRITICAL ACCOUNTING POLICIES**

##  

The Company’s criticalaccounting policies are set forth under the heading “Management’s Discussionand Analysis of Financial Condition and Results of Operations” in Item 7 to our2006 Form 10-K. Other than the adoption of the FASB issued InterpretationNo. 48, *Accounting for Uncertainty in Income Taxes*,(“FIN 48”), there have been no changes to these policies sinceDecember 31, 2006. Readers are encouraged to review these criticalaccounting policies in conjunction with the review of this Form 10-Q.

 

## **OVERVIEW**

##  

AVANT’s is engaged in thediscovery, development and commercialization of products that harness the humanimmune system to prevent and treat disease. The Company has assembled a broadportfolio of technologies and intellectual property that gives it a competitiveposition in vaccines and immunotherapeutics. These include an oral humanrotavirus vaccine, which has gained marketing approval in over 90 countriesworldwide and is being commercialized by Glaxo. Three of AVANT’s products arein clinical development. The Company has actively developed and acquiredinnovative technologies — especially novel approaches to vaccine creation. Themarriage of innovative bacterial vector delivery technologies with uniquemanufacturing processes offer the potential for a new generation of vaccines.The Company’s goal is to become a leading developer of innovative vaccines andimmunotherapeutics that address health care needs on a global basis.

 

AVANT is targeting itsefforts where it can add the greatest value to the development of its productsand technologies. Its goal is to demonstrate clinical proof-of-concept for eachproduct, and then seek excellent partners to help see those products through tocommercialization. This approach allows AVANT to maximize the overall value ofits technology and product portfolio while best ensuring the expeditiousdevelopment of each individual product.

 

On October 22, 2007,AVANT and Celldex Therapeutics, Inc., a privately-held company, announced thesigning of a definitive merger agreement. The merger creates a NASDAQ-listed,fully-integrated and diversified biopharmaceutical company with a deep pipelineof product candidates addressing high- value indications including oncology,infectious and inflammatory diseases. The all-stock transaction, approved byboth companies’ Boards of Directors, will combine the two companies under thename AVANT, and is currently expected to close in the first quarter of 2008.Celldex and AVANT shareholders will own 58% and 42% of the combined company ona fully diluted basis, respectively. Closing of the merger is contingent upon avote of approval by AVANT’s current shareholders at a special meeting ofshareholders expected to take place in the first quarter of 2008.

 

## **RESEARCH AND DEVELOPMENT ACTIVITIES**

##  

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

 

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During the past fiveyears through the end of 2006, AVANT incurred an aggregate of $71 millionin research and development costs. During the nine months endedSeptember 30, 2007, AVANT incurred an aggregate of $14.4 million inresearch and development costs. The following table indicates the amountincurred for each of AVANT’s material research programs and for otheridentified research and development activities during the two years endedDecember 31, 2006 and 2005 and the nine-month periods endedSeptember 30, 2007 and 2006. The amounts disclosed in the following tableand in “Program Developments” below reflect direct research and developmentcosts, license fees associated with the underlying technology and an allocationof indirect research and development costs to each program.

 
| ** **                                        | ** ** | **Nine Months Ended  September 30,** | ** ** | **Year Ended  December 31,** | ** ** |
|---------------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                        | ** ** | **2007**                                            | ** ** | **2006**                               | ** ** | **2006** | ** ** | **2005** | ** ** |
| *Bacterial  Vaccines:*                            | * *   | * *                                            | * *   | * *                               | * *   | * * | * * | * * | * * |
| CholeraGardeÒ                                |       | $                                                   | 1,825,400  |                                   | $          | 3,240,200 |   | $ | 5,427,800 |   | $ | 1,257,200 |   |
| Ty800                                             |       | 4,980,500                                           |       | 619,700                                |       | 1,402,300 |   | 404,500 |   |
| Other                                             |       | 3,446,200                                           |       | 1,287,400                              |       | 1,873,600 |   | 528,900 |   |
| *Viral  Vaccines:*                                | * *   | * *                                            | * *   | * *                               | * *   | * * | * * | * * | * * |
| RotarixÒ  Vaccine                            |       | 1,323,600                                           |       | 648,600                                |       | 648,600 |   | — |   |
| Avian and Human  Influenza                        |       | 630,600                                             |       | 585,400                                |       | 711,600 |   | 3⁄4 |   |
| *BioDefense  Vaccines:*                           |       | 194,400                                             |       | 1,413,700                              |       | 1,558,600 |   | 2,470,700 |   |
| *Cholesterol  Management Vaccine:*                | * *   | * *                                            | * *   | * *                               | * *   | * * | * * | * * | * * |
| CETi-1                                            |       | 269,500                                             |       | 834,000                                |       | 922,700 |   | 650,800 |   |
| *Complement  Inhibitors:*                         | * *   | * *                                            | * *   | * *                               | * *   | * * | * * | * * | * * |
| TP10/TP20                                         |       | 1,452,900                                           |       | 3,722,800                              |       | 4,466,400 |   | 8,327,200 |   |
| *Food  Safety & Animal Health Vaccines:* |       | 3⁄4                                              |       | 6,200                                  |       | 6,700 |   | 9,900 |   |
| *Other  Programs:*                                |       | 260,700                                             |       | 871,000                                |       | 1,048,200 |   | 414,100 |   |
|                                              |       |                                                |       |                                   |       |   |   |   |   |
| *Total  R&D Expense*                          |       | $                                                   | 14,383,800 |                                   | $          | 13,229,000 |   | $ | 18,066,500 |   | $ | 14,063,300 |   |

 

**PROGRAMDEVELOPMENTS**

 

*Rotavirus Vaccine:*  Rotavirus is a major cause of diarrhea andvomiting in infants and children. In 1997, AVANT licensed its oral rotavirusvaccine to Glaxo. All of the ongoing development for this program is beingconducted and funded by Glaxo. Glaxo gained approval for RotarixÒin Mexico in July 2004, which represented the first in an expected seriesof worldwide approvals and commercial launches for the product. Glaxo haslaunched in additional Latin American and Asian Pacific countries during 2005 –2007. Additionally, Glaxo filed for market approval with the Europeanregulatory authorities in late 2004, which triggered a $2 million milestonepayment to AVANT. In February 2006, the European Commission grantedapproval of RotarixÒ in the EuropeanUnion, which triggered a $4 million milestone payment from Glaxo. Glaxo hasagreed to make an additional payment of $1.5 million upon achievement of marketapproval in the United States. AVANT licensed-in the Rotarix® technology in1995 and owes a license fee of 30% to Cincinnati Children’s Hospital MedicalCenter (“CCH”) on net royalties received from Glaxo. In May 2005, AVANTentered into an agreement whereby an affiliate of Paul Royalty Fund (“PRF”)purchased an interest in the net royalties AVANT will receive on worldwidesales of RotarixÒ (see Note 10 of our unaudited consolidatedfinancial statements). Under the PRF agreement, AVANT will retain 50% of futureGlaxo milestone payments, with the balance payable to PRF and CCH.

 

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

 

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

 

*BacterialVaccines:*  AVANT’s goalis to become a leading developer of innovative vaccines that address healthcare needs on a global basis. Utilizing its *Cholera*-and *Salmonella*-vectored deliverytechnologies together with its drying and preservation technologies, theCompany can now develop a new generation of vaccines that have an ideal productprofile: safe, effective, oral, single-dose, rapidly protective and increasedthermostability.

 

Development of a safe,effective cholera vaccine is the first step in establishing AVANT’s single-dose,oral bacterial vaccine franchise. In December 2002 the InternationalVaccine Institute (“IVI”) initiated a Phase 2 study of CholeraGarde® inBangladesh where cholera is endemic. In July 2005, Bangladesh studyresults in children and infants showed CholeraGarde® to be well tolerated andhighly immunogenic, with 77% of children aged 9 months to 5 years generatingprotective immune responses. Previously published results showed the vaccine tobe well tolerated and immunogenic against the cholera organism in the adultportion of this trial.

 

In August 2006, IVIreceived $21 million in funding from the Bill & Melinda Gates Foundationfor a Cholera Vaccine Initiative (“CHOVI”), which will include conductingfurther clinical trials of CholeraGarde®. IVI plans to conduct Phase 2 clinicaltrials of CholeraGarde® in Bangladesh and India beginning around year-end 2007followed by Phase 3 field studies. IVI will be purchasing clinical materialsproduced at AVANT’s Fall River, MA manufacturing facility for the trials.

 

AVANThas decided to focus only on the fully-funded opportunity for CholeraGarde®in the developing world. AVANT has determined that the high clinical costs ofour own Phase 3 clinical trials in the United States and the investment in acommercial manufacturing facility are not justified by the limited marketopportunities for a cholera vaccine in developed countries at this time. Thisdecision frees up both financial and manufacturing resources for our Ty800 andETEC programs.

 

During the periodJanuary 1, 2002 through December 31, 2006, AVANT incurredapproximately $13.5 million in research, development and clinical costs onits CholeraGarde® program. During the nine months ended September 30,2007, AVANT incurred approximately $1.8 million in research, development,manufacturing and clinical costs on its CholeraGarde® program.

 

AVANT is also developingan oral typhoid fever vaccine, Ty800, for the travelers’ market and globalhealth needs. The National Institute of Allergy and Infectious Disease (“NIAID”)of the National Institutes of Health (“NIH”) and AVANT agreed for the NIAID toconduct a Phase 1/2 in-patient dose-ranging clinical trial aimed atdemonstrating the safety and immunogenicity of the Ty800 vaccine. NIAID hasfunded the production of Ty800 vaccine for clinical testing and completed thePhase 1/2 trial at a NIH-funded clinical site. Results showed the single-dose,oral vaccine to be well tolerated and immunogenic, with over 90% of vaccinatedsubjects generating immune responses. AVANT initiated its own sponsored Phase 2trial of Ty800 in July 2007. Enrollment was completed in late September 2007and results are expected in the first half of 2008. During the periodJanuary 1, 2002 through December 31, 2006, AVANT incurred approximately$4.9 million in research, development, contract manufacturing and clinicalcosts on its Ty800 program. During the nine months ended September 30,2007, AVANT incurred approximately $5.0 million in research, development andclinical costs on its Ty800 program.

 

Finally, AVANT isdeveloping additional bacterial vaccines against enterotoxigenic *E. coli*(“ETEC”), *Salmonellaparatyphi* and *Shigella*,—all important causes of seriousdiarrheal diseases and enteric fevers worldwide. These programs are inpre-clinical development. In early 2008,AVANT expects to initiate a Phase 1 trial of its ETEC vaccine candidate. AVANT’slong-term goal is to develop a combination vaccine containing Cholera, Ty800,ETEC and *S. paratyphi* as a “super enteric vaccine”to address the travelers’ market. During the period January 1, 2002through December 31, 2006, AVANT incurred approximately $3.1 millionin research, development, contract manufacturing and clinical costs on thesepre-clinical programs. During the nine months ended September 30, 2007,AVANT incurred approximately $3.4 million in research and development costs onthese pre-clinical programs.

 

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*BioDefenseVaccines:*  Theattenuated live bacteria used to create AVANT’s single-dose oral vaccines canalso serve as vectors for the development of vaccines against other bacterialand viral diseases. In January 2003, AVANT was awarded a subcontract by DVC inthe amount of $2.5 million to develop for the U.S. Department of Defense an oralcombination vaccine against anthrax and plague using AVANT’s proprietaryvaccine technologies. AVANT has received a number of additional subcontractmodifications from DVC to support further development and pre-clinical animaltesting of vaccine constructs of anthrax and plague vaccine candidates.Payments under the subcontract agreement are made on a time and materials basisand receipt of the full amount is conditioned upon the project being fullyfunded through completion and AVANT performing and continuing to demonstratethat it has the capability to perform the funded work. As a result of AVANT’srecent restructuring, the Company will no longer invest its resources inbiodefense research and development activities. For the nine months endedSeptember 30, 2007 and 2006, AVANT recognized $250,491 and $1,049,906,respectively, in government contract revenue from DVC. ThroughSeptember 30, 2007, AVANT had received approximately $9.7 million inpayments under the subcontract agreements. These agreements expire in 2007,although they may be terminated by DVC at any time upon 30 days notice.

 

During the periodJanuary 1, 2002 through December 31, 2006, AVANT incurredapproximately $10.9 million in research and development costs on itsbiodefense vaccine program. During the six months ended September 30,2007, AVANT incurred approximately $194,400 in research and development costson its biodefense vaccine program.

 

*FoodSafety and Animal Health Vaccines:*  AVANT has partnered with Pfizer Inc. (“Pfizer”),who will apply AVANT’s vaccine technologies to animal health and human foodsafety markets. As of June 1, 2006, AVANT entered into a Collaborative Researchand Development Agreement with Pfizer aimed at the discovery and development ofvaccines to protect animals. Under the agreement, Pfizer and AVANT will conducta joint research program funded by Pfizer. AVANT expects to recognize revenueas the research and development service deliverables are completed anddelivered to Pfizer. During the period January 1, 2002 through December 31,2006, AVANT incurred approximately $0.5 million in research anddevelopment costs on its food safety and animal health vaccines program. Duringthe nine months ended September 30, 2007, AVANT incurred no research anddevelopment costs on its food safety and animal health vaccines program.

 

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

 

During the periodJanuary 1, 2002 through December 31, 2006, AVANT incurred approximately$23.9 million in research, development, contract manufacturing andclinical costs associated with its complement inhibitor program. During thenine months ended September 30, 2007, the Company incurred approximately$1.5 million in research, development, contract manufacturing and clinicalcosts associated with its complement inhibitor program.

 

*CholesterolManagement Vaccine:* AVANT has been developing an immunotherapeutic vaccine againstendogenous cholesteryl ester transfer protein (“CETP”), which may be useful inreducing risks associated with atherosclerosis. CETP is a key intermediary inthe balance of HDL (high-density lipoprotein) and LDL (low-densitylipoprotein). The vaccine stimulates an immune response against CETP, which mayimprove the ratio of HDL to LDL cholesterol and reduce the progression ofatherosclerosis, which often leads to heart attack.

 

During the periodJanuary 1, 2002 through December 31, 2006, AVANT incurredapproximately $9.0 million in research, development and clinical costsassociated with the CETP program. During the nine months endedSeptember 30, 2007, AVANT incurred approximately $269,500 in research anddevelopment costs associated with the CETP program. AVANT is no longerexpending its own resources on this program and is seeking a corporate partnerto complete development and to commercialize the CETP vaccine.

 

## **TECHNOLOGY LICENSING**

##  

AVANT has adopted abusiness strategy of out-licensing technology that does not match itsdevelopment focus or where it lacks sufficient resources for the technology’sefficient development or where certain uses of the technology are outside ofAVANT’s focus. For example, when AVANT acquired Megan, it also signed anagreement with Pfizer to leverage

 

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the value of Megan’s oralvaccine technology in a significant market opportunity (animal health and humanfood safety) outside of AVANT’s own focus on human health care.

 

**RESULTS OF OPERATIONS**

 

**Three-Month Period Ended****September 30****, 2007 as Compared****with the Three-Month Period Ended September**** 30, 2006**

 

AVANT reported aconsolidated net loss of $5,253,481, or $.07 per share, for the third quarterended September 30, 2007, compared with a net loss of $5,520,567, or $.07per share, for the third quarter ended September 30, 2006. The weighted average common sharesoutstanding used to calculate net loss per common share was 75,188,022 in 2007and 74,182,347 in 2006.

 

*Revenue:*  Total revenue increased $852,536 to$1,191,535 for the third quarter of 2007 compared to $338,999 for the thirdquarter of 2006.

 

Productdevelopment and licensing revenue increased to $100,508 in 2007 from $35,475 in2006 due to revenue earned from Pfizer for $62,500 and license fees fromInflazyme for $25,833, offset in part by a decrease in reimbursed patentexpense by AVANT’s partner, Pfizer.

 

In the third quarter of2007, AVANT recognized $988,462 in product royalty revenue consisting of$540,374 related to PRF’s purchased interest in Rotarix® net royalties and$448,088 related to AVANT’s retained interests in Rotarix® net royalties whichwere not sold to PRF and which amount is also payable to CCH. As such, acorresponding amount is recorded as royalty expense and included in researchand development expense. In the third quarter of 2006, no product royaltyrevenue related to net royalties from RotarixÒworldwide net sales was recognized. AVANT expects the amount of product royaltyrevenue to increase during the remainder of 2007 as Glaxo continues the globalcommercialization of Rotarix®.

 

AVANT has received anumber of subcontracts from its partner, DVC, to develop anthrax and plaguevaccines for the U.S. Department of Defense. AVANT has been reimbursed by DVCon a time and materials basis for vaccine development research work performedby AVANT. Under these agreements and several SBIR grants, AVANT recognized$90,149 and $280,419 in government contract and grant revenue during the thirdquarters of 2007 and 2006, respectively, for work performed. The decrease inrevenue in 2007 compared to 2006 primarily reflects reduced levels of vaccinedevelopment work billable to DVC in 2007 as the Company closed down itsbiodefense development activities to focus on its travelers vaccines. As aresult, limited contract revenue is expected during the remainder of 2007.

 

Marketingand distribution of the Megan poultry product line is performed by AVANT’spartner, Lohmann Animal Health International (“LAHI”), and AVANT receives aroyalty percentage of all Megan®Vac 1 and Megan®Egg product sales. Royaltypayments received during the third quarters of 2007 and 2006 totaled $12,416and $23,105, respectively.

 

*OperatingExpense:*  Total operating expense increased $213,897 to$6,697,794 for the third quarter of 2007 compared to $6,483,897 for the thirdquarter of 2006.

 

Researchand development expense increased $41,155, or 0.9%, to $4,457,475 from $4,416,320 in 2006. The increase in 2007 compared to2006 is primarily due to increases in clinical trial costs of $685,120associated with the TY800 program and royalty expense of $448,088, offset inpart by declines in personnnel and related expenses of $445,128, primarilyrelated to restructuring activity, lower contract manufacturing costs of$314,883, lab materials and supplies of $242,190 and consulting costs of$114,677. Research and development expense includes $448,088 and $0 of royaltyexpense payable to CCH in the three months ended September 30, 2007 and 2006,respectively. AVANT expects research and development expense to continue todecrease during the remainder of 2007 as a result of AVANT’s restructuringactivities initiated in April 2007.

 

Generaland administrative expense increased $181,472, or 10.0%, to $2,000,271 in 2007compared to $1,818,799 in 2006 and is primarily attributed to increases inprofessional services costs of $561,146 primarily related to the anticipatedmerger transaction, offset in part by decreases in consulting expenses of$181,623 and lower personnel and related costs of $224,748. AVANT expectsgeneral and administrative expense to continue at current levels during theremainder of 2007.

 

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Amortizationexpense of acquired intangible assets was $240,048 and $248,778 in 2007 and2006, respectively.

 

*Investmentand Other Income, Net:* Interest and other income decreased $491,553 to $132,778 for the thirdquarter of 2007 compared to $624,331 for the third quarter of 2006. During thequarter ended September 30, 2007, AVANT recognized a loss of $158,095 for theimpairment of its investment in Select Vaccines that was determined to beother-than-temporary. The decrease is also due to lower average cash balances,offset in part by slightly higher interest rates during the third quarter of2007 compared to the third quarter of 2006. During the third quarters of 2007and 2006, the average month-end cash balances were $21,972,582 and $49,378,137,respectively. The effective interest rates during the third quarters of 2007and 2006 were 5.22% and 5.09%, respectively.

 

*Provisionfor Income Taxes:*  The$40 million milestone payment received from PRF during the first quarter of2006 resulted in taxable income for the Company. The regular taxable incomegenerated by this transaction has been fully offset with available federal andstate net operating loss carryforwards. The Company recorded a provision of$372,000 in the first quarter of 2006 for the alternative minimum tax that wasestimated to result from receipt of this milestone. In the fourth quarter of2006, the estimated provision was adjusted to $120,000. In the third quarter of2007, AVANT made an adjustment to its tax provision estimates of $120,000.

 

**Nine-Month Period Ended****September**** 30, 2007 asCompared**** withthe Nine-Month Period Ended September 30, 2006**

 

AVANT reportedconsolidated net loss of $16,385,006, or $.22 per share, for the nine monthsended September 30, 2007, compared with a net loss of $14,161,857, or $.19per share, for the nine months ended September 30, 2006. The weighted average common sharesoutstanding used to calculate net loss per common share was 75,185,365 in 2007and 74,176,593 in 2006.

 

*Revenue:*  Total revenue decreased $1,167,837 to$3,383,128 for the first nine months of 2007 compared to $4,550,965 for thefirst nine months of 2006.

 

Product development andlicensing revenue decreased $2,554,283 to $118,612 in 2007 from $2,672,895 in2006. In February 2006, the European Commission granted approval ofRotarixÒ in the EuropeanUnion, which triggered a one-time $4 million milestone payment from Glaxo, 50%of which was creditable against future royalties. Product development and licensing revenue of $2.6 million wasrecorded in the first quarter of 2006 and the remaining $1.4 million wasremitted to PRF in accordance with the PRF agreement. AVANT recorded $600,000in royalty expense payable to CCH as a result of this milestone payment.

 

In the first nine monthsof 2007, AVANT recognized $2,742,689 in product royalty revenue consisting of$1,444,058 related to PRF’s purchased interest in Rotarix® net royalties and$1,298,631 related to AVANT’s retained interests in Rotarix® net royaltieswhich were not sold to PRF and which amount is also payable to CCH. As such, acorresponding amount is recorded as royalty expense and included in researchand development expense. In the first nine months of 2006, AVANT recognized$550,803 in product royalty revenue related to PRF’s purchased interests in thenet royalties from RotarixÒworldwide net sales. AVANT expects the amount of product royalty revenue toincrease during the remainder of 2007 as Glaxo continues the globalcommercialization of Rotarix®.

 

AVANT has received anumber of subcontracts from its partner, DVC, to develop anthrax and plaguevaccines for the U.S. Department of Defense. AVANT has been reimbursed by DVCon a time and materials basis for vaccine development research work performedby AVANT. Under these agreements and several SBIR grants, AVANT recognized$441,407 and $1,241,149 in government contract and grant revenue during thefirst nine months of 2007 and 2006, respectively, for work performed. Thedecrease in revenue in 2007 compared to 2006 primarily reflects reduced levelsof vaccine development work billable to DVC in 2007 as the Company closes downits biodefense development activities, and as a result, limited contractrevenue is expected during the remainder of 2007.

 

Marketingand distribution of the Megan poultry product line is performed by AVANT’spartner, Lohmann Animal Health International (“LAHI”), and AVANT receives aroyalty percentage of all Megan®Vac 1 and Megan®Egg product

 

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sales.Royalty payments received during the first nine months of 2007 and 2006 totaled$80,419 and $86,117, respectively. AVANT expects royalty payments from LAHI tobe approximately consistent in the remainder of 2007 compared to 2006.

 

*OperatingExpense:*  Total operating expense increased $927,571,or 4.7%, to $20,827,336 for the first nine months of 2007 compared to$19,899,765 for the first nine months of 2006.

 

Researchand development expense increased $1,154,880, or 8.7%, to $14,383,806 from $13,228,926for the first nine months of 2006. Theincrease in 2007 compared to 2006 is primarily due to increases inclinical trial costs of $635,728 associated with the TY800 program andincreases in research and development personnel and related costs of $347,371,primarily related to restructuring activity. These increases were coupled by a increase in royalty expense of $698,631 in 2007 due primarily to highersales of Rotarix® and were offset by lower contract manufacturing costs of$730,656. Research and development expense includes $1,298,631 and $600,000 ofroyalty expense payable to CCH at September 30, 2007 and 2006, respectively.AVANT expects research and development expense to continue to decrease duringthe remainder of 2007 as a result of AVANT’s restructuring activities initiatedin April 2007.

 

Generaland administrative expense decreased $201,119, or 3.4%, to $5,723,386 in 2007 compared to $5,924,505 for thefirst nine months of 2006 and is primarily attributed to lower personnel andrelated costs of $624,132 and consulting costs of $158,645, offset in part byhigher professional services costs of $498,091 primarily related to theanticipated merger transaction. AVANT expects general and administrativeexpense to continue at current levels during the remainder of 2007.

 

Amortizationexpense of acquired intangible assets was $720,144 and $746,334 in the firstnine months of 2007 and 2006, respectively.

 

*Investment and Other Income, Net:*  Interest and other income decreased $619,741to $939,202 for the first nine months of 2007 compared to $1,558,943 for thefirst nine months of 2006. During the quarter ended September 30, 2007, AVANTrecognized a loss of $158,095 for the impairment of its investment in SelectVaccines that was determined to be other-than-temporary. The decrease is alsodue to lower average cash balances, offset in part by slightly higher interestrates during the first nine months of 2007 compared to the first nine months of2006. During the first nine months of 2007 and 2006, the average month-end cashbalances were $28,179,604 and $46,441,661, respectively. The effective interestrates during the first nine months of 2007 and 2006 were 5.19% and 4.68%,respectively.

 

*Provisionfor Income Taxes:*  The$40 million milestone payment received from PRF during the first quarter of2006 resulted in taxable income for the Company. The regular taxable incomegenerated by this transaction has been fully offset with available federal andstate net operating loss carryforwards. The Company recorded a provision of$372,000 in the first quarter of 2006 for the alternative minimum tax that wasestimated to result from receipt of this milestone. In the fourth quarter of2006, the estimated provision was adjusted to $120,000. In the third quarter of2007, AVANT made an adjustment to its tax provision estimates of $120,000.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

At September 30,2007, AVANT’s principal sources of liquidity consisted of cash and cashequivalents of $20,339,659. AVANT’s cash and cash equivalents are highly liquidinvestments with a maturity of three months or less at the date of purchase andconsist of time deposits and investments in money market mutual funds withcommercial banks and financial institutions. Also, the Company maintains cashbalances with financial institutions in excess of insured limits. AVANT doesnot anticipate any losses with respect to such cash balances.

 

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

 

25

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Net cash used inoperating activities was $15,269,745 for the first nine months of 2007 comparedto net cash provided by operating activities of $28,973,524 for the first ninemonths of 2006. The decrease in net cash provided by operating activities isprimarily attributed to the increase in net loss incurred in 2007 compared to2006, the decrease in accounts payable and accrued expenses in 2007 and the$40 million PRF milestone payment received in the first quarter of 2006.AVANT expects that cash used in operations will decline in the remainder of 2007as a result of the Company’s restructuring activities initiated in April 2007.

 

Cash used in investingactivities was $5,119,541 for the first nine months of 2007 compared to$5,549,954 for the first nine months of 2006. The change in amounts between years reflects a decreased investment inproperty and equipment in 2007 as the Company completes the full-scalerenovations of its Needham facility.

 

Net cash used infinancing activities was $182,594 for the first nine months of 2007 compared to$161,674 for the first nine months of 2006. The increase in net cash used infinancing activities is primarily due to increases in payments of long-termliabilities.

 

In February 2007, AVANTentered into a research and developmentpartnership with Select Vaccines, a public Australian biotechnology company,focused on the use of Select Vaccines’ virus-like particles (“VLPs”) as aplatform technology for the development of viral vaccines. Research anddevelopment efforts will initially target the development of vaccines againstinfluenza including both epidemic and pandemic forms of vaccine, with theopportunity to expand the collaboration to other disease targets. Under theterms of the agreement, AVANT made an upfront equity investment of $735,000 inSelect Vaccines and will fund influenza vaccine research and development fortwo years, as well as provide payments to Select Vaccines for the achievementof specific preclinical and clinical development milestones. In addition, AVANThas the exclusive right to apply Select Vaccines’ technology to a second targetwithin the first two years of the agreement, and a third target within thefirst three years of the agreement. Select Vaccines would also be eligible toreceive royalties based on net sales of any approved products arising out ofthis collaboration that are successfully marketed.

 

On November 1, 2007,AVANT notified Select Vaccines that, effective December 31, 2007, AVANT forstrategic reasons was exercising its rights to terminate its Collaboration andLicense Agreement with Select Vaccines. During the quarter ended September 30,2007, AVANT recognized $158,095 for the impairment of its investment in SelectVaccines that was determined to be other-than-temporary.  In assessingwhether the decline in fair value of the investment is other-than-temporary,AVANT has determined that it does not have significant positive evidence toconclude that the decline was temporary.

 

On April 16, 2007, AVANTinitiated planned restructuring activities to reduce ongoing operational costs,following an extensive review of its operations and cost structure. Therestructuring aimed to increase the focus of AVANT’s resources upon keyprograms and core operational capabilities and to lower the Company’s overallcost structure. The Company will concentrate its focus on building an enhancedportfolio of viral and bacterial vaccines for global health and travelersaround the Company’s core technologies, as well as its unique development andmanufacturing capabilities. AVANT will no longer invest in biodefense researchand development activities or further invest in clinical trials for its CETiand TP10 programs.

 

The restructuringresulted in a workforce reduction of approximately 30%. AVANT also exited fromits St. Louis-based research facility by September 30, 2007 when the lease termexpired and moved all essential research activities to its Needham, MA headquarters.The restructuring charges consisted of severance, payroll tax and extendedbenefits costs for terminated employees, as well as, salary continuation andretention bonus costs for certain St. Louis employees retained during thetransition and closing process for the St. Louis facility. As of the quarterended September 30, 2007, restructuring charges of $765,204 were recorded, ofwhich $754,877 were recorded as research and development and $10,327 wererecorded as general and administrative expense. Of the restructuring charge,$384,116 related to St. Louis benefit arrangements and $381,088 related toNeedham and Fall River benefit arrangements. During the three and nine monthsended September 30, 2007, $217,798 and $147,624, respectively, of restructuringcosts were paid out and a balance of $399,781 of accrued restructuring costsremained at September 30, 2007. The cash impact of the remaining restructuringcosts will be incurred during the fourth quarter of 2007 and the first quarterof 2008.

 

On June 27, 2007, AVANTreported that its partner, Glaxo, had filed a marketing application for theRotarix® vaccine with the United States Food and Drug Administration(FDA) during the second quarter of 2007. The terms of

 

26

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AVANT’s agreement withPRF include a $10 million milestone payment on product launch in the UnitedStates, which AVANT now expects to receive in 2008 based on Glaxo’s recentfiling.

 

During 2007 and 2008,AVANT may take steps to raise additional capital including, but not limited to,the licensing of technology programs with existing or new collaborativepartners, possible business combinations, or the issuance of common stock viaprivate placement and public offering. There can be no assurance that suchefforts will be successful.

 

On October 22, 2007,AVANT announced the signing of a definitive merger agreement with CelldexTherapeutics, Inc., a privately-held biopharmaceutical company. The all-stocktransaction, approved by both companies’ Boards of Directors, will combine thetwo companies under the same name AVANT. Celldex and AVANT shareholders willown 58% and 42% of the combined company on a fully diluted basis,respectively.  Closing of the merger iscontingent upon a vote of approval by AVANT’s current shareholders at a specialmeeting of shareholders expected to take place in the first quarter of 2008.

 

On July 6, 2007, AVANTreceived a letter from the Listing Qualifications Department of The NASDAQStock Market indicating that the Company is not in compliance with NASDAQMarketplace Rule 4450(a)(5) because the closing bid price per share for theCompany’s common stock had been below $1.00 per share for 30 consecutivebusiness days. On August 15, 2007, AVANT received a second letter from theListing Qualifications Department indicating that the Company was not incompliance with NASDAQ Marketplace Rules 4450(b)(1)(A) and (B) because theCompany’s market value and total assets and revenue have been below the minimum$50,000,000 requirement for 10 consecutive trading days.

 

To regain compliance withrespect ot the second notification letter, on August 20, 2007, AVANT applied tolist its common stock on the NASDAQ Capital Market and on August 29, 2007,received notice from the Listing Qualifications Department indicating that theCompany had been approved to list its common stock on The NASDAQ CapitalMarket. AVANT’s common stock began trading on The NASDAQ Capital Market, andceased trading on The NASDAQ Global Market, at the opening of business onAugust 31, 2007. The trading symbol for the Company’s common stock remained “AVAN.”AVANT still needs to regain compliance with respect to the first notificationletter by having the Company’s stock maintain a minimum bid price of $1.00 for10 consecutive business days. See Part II, “Item 1A: Risk Factors” in this Form10-Q for additional details.

 

**AGGREGATECONTRACTUAL OBLIGATIONS**

 

Thefollowing table summarizes AVANT’s contractual obligations at September 30, 2007 and the effect such obligations andcommercial commitments are expected to have on its liquidity and cash flow infuture years. These obligations, commitments and supporting arrangementsrepresent payments based on current operating forecasts, which are subject tochange:

 
| ** **                         | ** ** | **Total** | ** ** | **2007** | ** ** | **2008-2010** | ** ** | **2011-2012** | ** ** | **Thereafter** | ** ** |
|------------------------------------|------------|-----------|------------|----------|------------|---------------|------------|---------------|------------|----------------|------------|
| Contractual  obligations:          |       |      |       |     |       |          |       |          |       |           |       |
| Operating lease  obligations       |       | $         | 20,178,100 |     | $          | 483,500       |       | $             | 5,927,400  |           | $          | 4,280,400 |   | $ | 9,486,800 |   |
| Loan Payable*                      |       | 1,347,800 |       | 23,000   |       | 391,200       |       | 238,000       |       | 695,600        |       |
| Note Payable*                      |       | 608,400   |       | 29,500   |       | 531,500       |       | 47,400        |       | 3⁄4         |       |
| Licensing and  R&D obligations |       | 995,000   |       | 150,000  |       | 255,000       |       | 170,000       |       | 420,000        |       |
| Construction contracts             |       | 775,400   |       | 775,400  |       | 3⁄4        |       | 3⁄4        |       | 3⁄4         |       |
| Restructuring  Costs               |       | 399,800   |       | 255,500  |       | 144,300       |       | 3⁄4        |       | 3⁄4         |       |
| Total  contractual obligations     |       | $         | 24,304,500 |     | $          | 1,716,900     |       | $             | 7,249,400  |           | $          | 4,735,800 |   | $ | 10,602,400 |   |
|                               |       |      |       |     |       |          |       |          |       |           |       |
| Commercial  commitments:           |       |      |       |     |       |          |       |          |       |           |       |
| Clinical  development              |       | $         | 1,260,600  |     | $          | 946,700       |       | $             | 313,900    |           | $          | — |   | $ | — |   |
| Manufacturing  development         |       | 106,000   |       | 106,000  |       | —        |       | —        |       | —         |       |
| Total commercial  commitments      |       | $         | 1,366,600  |     | $          | 1,052,700     |       | $             | 313,900    |           | $          | — |   | $ | — |   |

 

----

*                    includesinterest obligations

 

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

 

AVANT owns financialinstruments that are sensitive to market risk as part of its investmentportfolio. AVANT’s investment portfolio is used to preserve its capital untilit is used to fund operations, including its research and developmentactivities. None of these market-risk sensitive instruments are held fortrading purposes. AVANT invests its cash primarily in money market mutualfunds. These investments are evaluated quarterly to determine the fair value ofthe portfolio. AVANT’s investment portfolio includes only marketable securitieswith active secondary or resale markets to help insure liquidity. AVANT hasimplemented investment policies regarding the amount and credit ratings ofinvestments. Because of the short-term nature of these investments, AVANT doesnot believe it has material exposure due to market risk. The impact to AVANT’sfinancial position and results of operations from likely changes in interestrates is not material.

 

AVANT does not utilizederivative financial instruments. The carrying amounts reflected in theconsolidated balance sheet of cash and cash equivalents, accounts receivablesand accounts payable approximates fair value at September 30, 2007 due tothe short-term maturities of these instruments.

 

**Item 4. Controls and Procedures**

 

*Evaluation of disclosure controls and procedures*.

 

As required by Rule 13a-15 under the SecuritiesExchange Act of 1934 (the “Exchange Act”), as of September 30, 2007, AVANT carried out an evaluation underthe supervision and with the participation of its management, including itsChief Executive Officer and Chief Financial Officer, of the effectiveness ofthe design and operation of its disclosure controls and procedures as of theperiod covered by this report. In designing and evaluating AVANT’s disclosurecontrols and procedures, AVANT and its management recognize that any controlsand procedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives, and AVANT’smanagement necessarily was required to apply its judgment in evaluating andimplementing possible controls and procedures. Based upon that evaluation,AVANT’s Chief Executive Officer and Chief Financial Officer have concluded thatas of September 30, 2007,AVANT’s disclosure controls and procedures were reasonably effective to ensurethat information required to be disclosed by AVANT in the reports it files orsubmits under the Exchange Act is recorded, processed, summarized, accumulated,communicated and reported, within the time periods specified in the Securitiesand Exchange Commission’s rules and forms. AVANT will continue to review anddocument its disclosure controls and procedures on an ongoing basis, and mayfrom time to time make changes aimed at enhancing their effectiveness and toensure that its disclosure controls and procedures evolve with its business.

 

*Changes inInternal Control Over Financial Reporting.*

* *

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

 

**PART II— OTHER INFORMATION**

 

## **Item 1.            Legal Proceedings**

##  

None.

 

## **Item 1A.         Risk Factors**

##  

In addition to the otherinformation set forth in this report, you should carefully consider the factorsdiscussed in Part I, “Item 1A. Risk Factors” in our Annual Report onForm 10-K for the year ended December 31, 2006, which couldmaterially affect our business, financial condition or future results. Therisks described in our Annual Report on Form 10-K are not the only risksfacing the Company. Additional risks and uncertainties not currently known tothe Company or that the

 

28

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

 

Therisk factor below has been added to provide additional information related toour stock price:

 

***We could lose our listing on the Nasdaq Global Market if ourstock price falls below $1.00 for 30 consecutive business days, and the loss ofthe listing would make our stock significantly less liquid and would affect itsvalue.***

 

OnJuly 6, 2007, AVANT received a letter from the Listing Qualifications Departmentof The NASDAQ Stock Market indicating that the we are not in compliance withNASDAQ Marketplace Rule 4450(a)(5) because the closing bid price per share forour common stock had been below $1.00 per share for 30 consecutive businessdays. On August 15, 2007, AVANT received a second letter from the ListingQualifications Department indicating that the Company was not in compliancewith NASDAQ Marketplace Rules 4450(b)(1)(A) and (B) because the Company’smarket value and total assets and revenue have been below the minimum$50,000,000 requirement for 10 consecutive trading days.

 

Toregain compliance with respect to the second notification letter, on August 20,2007, AVANT applied to list its common stock on the NASDAQ Capital Market andon August 29, 2007, received notice from the Listing Qualifications Departmentindicating that the Company had been approved to list its common stock on TheNASDAQ Capital Market. AVANT’s common stock began trading on The NASDAQ CapitalMarket, and ceased trading on The NASDAQ Global Market, at the opening ofbusiness on August 31, 2007. AVANT’s common stock is listed on the NASDAQCapital Market and had a closing price of $0.52 at the close of the market onNovember 5, 2007.  AVANT has been afforded a 180-day compliance period, oruntil January 2, 2008, to regain compliance in accordance with Marketplace Rule4450(e)(2). The Company will seek to regain compliance within the 180-day cureperiod and is considering alternatives to address compliance with the continuedlisting standards of The NASDAQ Stock Market. If the Company’s stock fails tomaintain a minimum bid price of $1.00 for 10 consecutive business days duringthe 180-day compliance period on the NASDAQ Capital Market, AVANT could receivea delisting notice from the NASDAQ Capital Market, and, under certaincircumstances, even if its stock maintains a minimum bid price of $1.00 for 10consecutive business days, AVANT may receive a delisting notice from the NASDAQCapital Market.  Upon delisting from the NASDAQ Capital Market, AVANT’sstock would be traded over-the-counter, more commonly known as OTC. OTCtransactions involve risks in addition to those associated with transactions insecurities traded on the NASDAQ Capital Market. Many OTC stocks trade lessfrequently and in smaller volumes than securities traded on the NASDAQ CapitalMarket. Accordingly, AVANT’s stock would be less liquid than it would otherwisebe, and the value of its stock could decrease. There is no guarantee that anactive trading market for AVANT’s common stock will be maintained on the NASDAQCapital Market. You may not be able to sell your shares of the Company’s stockquickly, at the market price or at all, if trading in AVANT’s stock is notactive.

 

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

 
| 2.1 |   | Agreement and Plan of  Merger, dated as of November 20, 2000, by and among AVANT, AVANT Acquisition  Corp., and Megan Health, Inc., incorporated by reference to Exhibit 2.1 of  AVANT’s Current Report on Form 8-K, filed December 12, 2000 with the Securities  and Exchange Commission.                    |
|-----|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.2 |   | First Amendment to  Agreement and Plan of Merger, dated as of November 20, 2000, by and among  AVANT, AVANT Acquisition Corp., and Megan Health, Inc., incorporated by  reference to Exhibit 2.2 of AVANT’s Current Report on Form 8-K, filed  December 12, 2000 with the Securities and Exchange Commission. |
| 3.1 |   | Third Restated  Certificate of Incorporation of AVANT, incorporated by reference to Exhibit  3.1 of AVANT’s Registration Statement on Form S-4 (Reg. No. 333-59215), filed  July 16, 1998 with the Securities and Exchange Commission.                                                                        |
| 3.2 |   | Certificate of  Amendment of Third Restated Certificate of Incorporation of AVANT,  incorporated by reference to Exhibit 3.1 of AVANT’s Registration Statement on  Form S-4 (Reg. No. 333-59215), filed July 16, 1998 with the Securities and  Exchange Commission.                                           |
| 3.3 |   | Second Certificate of  Amendment of Third Restated Certificate of Incorporation of AVANT,  incorporated by reference to Exhibit 3.2 of AVANT’s Registration Statement on  Form S-4 (Reg. No. 333-59215), filed July 16, 1998 with the Securities and  Exchange Commission.                                    |

 

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| 3.4           |   | Amended and Restated  By-Laws of AVANT as of November 10, 1994, incorporated by reference to Exhibit  3.3 of AVANT’s Registration Statement on Form S-4 (Reg. No. 333-59215), filed  July 16, 1998 with the Securities and Exchange Commission.                                                                                                                                   |
|---------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.5           |   | Third Certificate of  Amendment of Third Restated Certificate of Incorporation of AVANT,  incorporated by reference to Exhibit 3.1 of AVANT’s Quarterly Report on Form  10-Q, filed May 10, 2002 with the Securities and Exchange Commission.                                                                                                                                     |
| 3.6           |   | Certificate of  Elimination of Series C-1 Junior Participating Cumulative Preferred Stock,  incorporated by reference to Exhibit 3.6 of AVANT’s Annual Report on Form  10-K, filed March 16, 2005 with the Securities and Exchange Commission.                                                                                                                                    |
| 3.7           |   | Certificate of  Designations, Preferences and Rights of a Series of Preferred Stock of AVANT  Immunotherapeutics, Inc. classifying and designating the Series C-1 Junior  Participating Cumulative Preferred Stock, incorporated by reference to  Exhibit 3.1 of AVANT’s Registration Statement on Form 8-A, filed November 8,  2004 with the Securities and Exchange Commission. |
| 4.1           |   | Shareholder Rights Agreement  dated November 5, 2004 between AVANT and EquiServe Trust Company, N.A. as  Rights Agent, incorporated by reference to Exhibit 3.1 of AVANT’s  Registration Statement on Form 8-A, filed November 8, 2004 with the  Securities and Exchange Commission.                                                                                              |
| *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                                                                                                                                                                                                                                                                                                                                                      |
|          |   |                                                                                                                                                                                                                                                                                                                                                                                   |
|               |
| *   |   | Filed herewith.                                                                                                                                                                                                                                                                                                                                                                        |
|          |   |                                                                                                                                                                                                                                                                                                                                                                                   |
| **            |   | Furnished herewith.                                                                                                                                                                                                                                                                                                                                                                    |
|               |        |                                                                                                                                                                                                                                                                                                                                                                                        |  |

 

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** **

**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|                               | ** ** | **AVANT IMMUNOTHERAPEUTICS, INC.** |
|-------------------------------|------------|------------------------------------|
|                          | ** ** | ** **                         | ** ** | ** ** |
|                          |       | BY:                                |   |   |
|                          |       |                               |   |   |
|                          |       |                               |   | /s/ UNA S. RYAN |
| Dated: November 7,  2007 |       |                               |   | Una S. Ryan, Ph. D. |
|                          |       |                               |   | President and Chief  Executive Officer |
|                          |       |                               |   | (Principal Executive  Officer) |
|                          |       |                               |   |   |
|                          |       |                               |   | /s/ AVERY W. CATLIN |
| Dated: November 7,  2007 |       |                               |   | Avery W. Catlin |
|                          |       |                               |   | Senior Vice President,  Treasurer |
|                          |       |                               |   | and Chief Financial  Officer |
|                          |       |                               |   | (Principal Financial  and |
|                          |       |                               |   | Accounting Officer) |

 

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**EXHIBITINDEX**

 
| Exhibit No. | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                        |
|------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1              |       | Agreement and Plan of  Merger, dated as of November 20, 2000, by and among AVANT, AVANT Acquisition  Corp., and Megan Health, Inc., incorporated by reference to Exhibit 2.1 of  AVANT’s Current Report on Form 8-K, filed December 12, 2000 with the Securities  and Exchange Commission.                                                                                        |
| 2.2              |       | First Amendment to  Agreement and Plan of Merger, dated as of November 20, 2000, by and among  AVANT, AVANT Acquisition Corp., and Megan Health, Inc., incorporated by  reference to Exhibit 2.2 of AVANT’s Current Report on Form 8-K, filed  December 12, 2000 with the Securities and Exchange Commission.                                                                     |
| 3.1              |       | Third Restated  Certificate of Incorporation of AVANT, incorporated by reference to Exhibit  3.1 of AVANT’s Registration Statement on Form S-4 (Reg. No. 333-59215), filed  July 16, 1998 with the Securities and Exchange Commission.                                                                                                                                            |
| 3.2              |       | Certificate of  Amendment of Third Restated Certificate of Incorporation of AVANT,  incorporated by reference to Exhibit 3.1 of AVANT’s Registration Statement on  Form S-4 (Reg. No. 333-59215), filed July 16, 1998 with the Securities and  Exchange Commission.                                                                                                               |
| 3.3              |       | Second Certificate of  Amendment of Third Restated Certificate of Incorporation of AVANT,  incorporated by reference to Exhibit 3.2 of AVANT’s Registration Statement on  Form S-4 (Reg. No. 333-59215), filed July 16, 1998 with the Securities and  Exchange Commission.                                                                                                        |
| 3.4              |       | Amended and Restated  By-Laws of AVANT as of November 10, 1994, incorporated by reference to  Exhibit 3.3 of AVANT’s Registration Statement on Form S-4 (Reg. No.  333-59215), filed July 16, 1998 with the Securities and Exchange Commission.                                                                                                                                   |
| 3.5              |       | Third Certificate of  Amendment of Third Restated Certificate of Incorporation of AVANT,  incorporated by reference to Exhibit 3.1 of AVANT’s Quarterly Report on Form  10-Q, filed May 10, 2002 with the Securities and Exchange Commission.                                                                                                                                     |
| 3.6              |       | Certificate of  Elimination of Series C-1 Junior Participating Cumulative Preferred Stock,  incorporated by reference to Exhibit 3.6 of AVANT’s Annual Report on Form  10-K, filed March 16, 2005 with the Securities and Exchange Commission.                                                                                                                                    |
| 3.7              |       | Certificate of  Designations, Preferences and Rights of a Series of Preferred Stock of AVANT  Immunotherapeutics, Inc. classifying and designating the Series C-1 Junior  Participating Cumulative Preferred Stock, incorporated by reference to  Exhibit 3.1 of AVANT’s Registration Statement on Form 8-A, filed November 8,  2004 with the Securities and Exchange Commission. |
| 4.1              |       | Shareholder Rights  Agreement dated November 5, 2004 between AVANT and EquiServe Trust Company,  N.A. as Rights Agent, incorporated by reference to Exhibit 3.1 of AVANT’s  Registration Statement on Form 8-A, filed November 8, 2004 with the  Securities and Exchange Commission.                                                                                              |
| *31.1            |       | Certification of  President and Chief Executive Officer                                                                                                                                                                                                                                                                                                                                |
| *31.2            |       | Certification of Senior  Vice President and Chief Financial Officer                                                                                                                                                                                                                                                                                                                    |
| **32.1           |       | Section 1350  Certifications                                                                                                                                                                                                                                                                                                                                                      |

 

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| *  |   | Filed herewith.     |
|----|--------|---------------------|
| ** |   | Furnished herewith. |

 

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