AVI BioPharma said it will restate its financials for the three years ended December 2006 as well as the first two quarters of this year to correct errors in accounting for stock warrants.

The small drug developer, which acted after receiving comments from the Securities and Exchange Commission, explained that it is reclassifying certain warrants from 2003 to 2005 as liabilities. Previously, the company had classified these warrants in the shareholders’ equity section of its balance sheet.

Under accounting literature, if a financial instrument requires settlement in registered shares, the instrument cannot be classified within equity, as the company’s ability to maintain an effective registration statement is outside that company’s control. Since the warrants in question do require settlement in registered shares, they should have been recorded as a liability at fair value at the date of grant, and marked to market at each reporting period, the company acknowledged.

AVI warned that the changes will be material to its previously filed financial statements. They will be adjusted to reduce equity and increase liabilities for the issued warrants, and changes in fair value will be recorded on their own line item, the company said.

However, there will be no effect on cash flows as the mark-to-market adjustment would have been reflected as a non-cash charge within the company’s Statements of Operations.

Said K. Michael Forrest, interim chief executive of AVI, “The changes are technical in nature and do not affect the company’s overall cash flow, performance or prospects.”