##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

FORM 10-Q/A

---

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

|                                    |                            
|----------------------------------- | ---------------------------
|For the quarter ended June 30, 2001 | Commission File No. 0-18734

AVANIR Pharmaceuticals
(Exact name of registrant as specified in its charter)

|                                                                                                                                                                                                                                                                                                             |  |                                                                                                                             
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------------------------------------------------------------------------------------------------------------------
|California
                                (State or other jurisdiction of
                                incorporation or organization)11388 Sorrento Valley Road, Suite 200
                                San Diego, California
                                (Address of principal executive office) |  | 33-0314804
                                (IRS Employer Identification No).92121
                                (Zip Code)

(858) 622-5200
(Registrants telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [   ]

The number of shares of Common Stock of the Registrant issued and outstanding
as of August 7, 2001:

|                                   |  |  |            | 
|---------------------------------- |  |  | ---------- | 
|Class A Common stock, no par value |  |  | 57,642,593 | 
|                                  
|                                  
|                                  
|                                  
|Class B Common stock, no par value |  |  | 36,500     | 



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TABLE OF CONTENTS



|           |  |                                            |  |  |  |  |  | 
|---------- |  | ------------------------------------------ |  |  |  |  |  | 
|           |  | CONSOLIDATED BALANCE SHEETS               
|           |  | CONSOLIDATED STATEMENTS OF OPERATIONS     
|           |  | CONSOLIDATED STATEMENTS OF CASH FLOWS     
|           |  | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|SIGNATURES

AVANIR Pharmaceuticals

FORM 10-QFor the Quarter Ended June 30, 2001

INDEX

|        |  |                                            |  |  |   |      |  | 
|------- |  | ------------------------------------------ |  |  | - | ---- |  | 
|        |  |                                            |  |  |   | Page
|        |  |                                            |  |  |   |     
|PART I. |  | FINANCIAL INFORMATION                      |  |  |   |     
|       
|       
|       
|       
|Item 1. |  | Financial Statements                       |  |  |   |     
|       
|       
|       
|       
|        |  | Consolidated Balance Sheets                |  |  | 3 |     
|       
|       
|       
|       
|        |  | Consolidated Statements of Operations      |  |  | 4 |     
|       
|       
|       
|       
|        |  | Consolidated Statements of Cash Flows      |  |  | 5 |     
|       
|       
|       
|       
|        |  | Notes to Consolidated Financial Statements |  |  | 6 |     

2



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##### Table of Contents






AVANIR Pharmaceuticals

CONSOLIDATED BALANCE SHEETS (Unaudited)

---



|                                       |                                                              |                                                                                                                              |                           |                                  |            |            |         |               |            |            |         | 
|-------------------------------------- | ------------------------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------- | ------------------------- | -------------------------------- | ---------- | ---------- | ------- | ------------- | ---------- | ---------- | ------- | 
|                                       |                                                              |                                                                                                                              |                           |                                  |            | June 30,   |         | September 30,
|                                       |                                                              |                                                                                                                              |                           |                                  |            | 2001       |         | 2000         
|                                       |                                                              |                                                                                                                              |                           |                                  |            |            |         |              
|ASSETS                                 |                                                              |                                                                                                                              |                           |                                  |            |            |         |              
|                                      
|                                      
|                                      
|                                      
|Current assets:                        |                                                              |                                                                                                                              |                           |                                  |            |            |         |              
|                                      
|                                      
|                                      
|                                      
|                                       | Cash and cash equivalents                                    |                                                                                                                              | $                         | 13,476,478                       |            |            | $       | 19,699,768    |           
|                                      
|                                      
|                                      
|                                      
|                                       | Short-term investments                                       |                                                                                                                              |                           | 5,220,129                        |            |            |         | 868,474       |           
|                                      
|                                      
|                                      
|                                      
|                                       | Receivables, net                                             |                                                                                                                              |                           | 560,560                          |            |            |         | 95,429        |           
|                                      
|                                      
|                                      
|                                      
|                                       | Inventory                                                    |                                                                                                                              |                           | 222,585                          |            |            |         | 9,804         |           
|                                      
|                                      
|                                      
|                                      
|                                       | Prepaid and other                                            |                                                                                                                              |                           | 488,746                          |            |            |         | 411,999       |           
|                                       |                                                              |                                                                                                                              |                           |                                  |            |            |         |              
|                                       |                                                              |                                                                                                                              | Total current assets      |                                  |            | 19,968,498 |         |               |            | 21,085,474 |        
|                                      
|                                      
|                                      
|                                      
|                                       | Property and equipment, net                                  |                                                                                                                              |                           | 1,681,716                        |            |            |         | 1,050,703     |           
|                                      
|                                      
|                                      
|                                      
|                                       | Intangible costs, net                                        |                                                                                                                              |                           | 1,086,219                        |            |            |         | 614,816       |           
|                                      
|                                      
|                                      
|                                      
|                                       | Investments                                                  |                                                                                                                              |                           | 400,000                          |            |            |         | 700,000       |           
|                                      
|                                      
|                                      
|                                      
|                                       | Other assets                                                 |                                                                                                                              |                           | 63,587                           |            |            |         | 68,244        |           
|                                       |                                                              |                                                                                                                              |                           |                                  |            |            |         |              
|                                       |                                                              |                                                                                                                              | TOTAL ASSETS              |                                  | $          | 23,200,020 |         |               | $          | 23,519,237 |        
|                                       |                                                              |                                                                                                                              |                           |                                  |            |            |         |              
|LIABILITIES AND SHAREHOLDERS EQUITY   |                                                              |                                                                                                                              |                           |                                  |            |            |         |              
|                                      
|                                      
|                                      
|                                      
|Current liabilities:                   |                                                              |                                                                                                                              |                           |                                  |            |            |         |              
|                                      
|                                      
|                                      
|                                      
|                                       | Accounts payable                                             |                                                                                                                              | $                         | 591,283                          |            |            | $       | 965,636       |           
|                                      
|                                      
|                                      
|                                      
|                                       | Accrued expenses and other liabilities                       |                                                                                                                              |                           | 1,018,813                        |            |            |         | 537,027       |           
|                                      
|                                      
|                                      
|                                      
|                                       | Accrued compensation and payroll taxes                       |                                                                                                                              |                           | 279,020                          |            |            |         | 248,599       |           
|                                      
|                                      
|                                      
|                                      
|                                       | Notes payable                                                |                                                                                                                              |                           | 31,210                           |            |            |         | 171,667       |           
|                                       |                                                              |                                                                                                                              |                           |                                  |            |            |         |              
|                                       |                                                              |                                                                                                                              | Total current liabilities |                                  |            | 1,920,326  |         |               |            | 1,922,929  |        
|                                      
|                                      
|                                      
|                                      
|COMMITMENTS                            |                                                              |                                                                                                                              |                           |                                  |            |            |         |              
|                                      
|                                      
|                                      
|                                      
|REDEEMABLE CONVERTIBLE PREFERRED STOCK |                                                              |                                                                                                                              |                           |                                  |            |            |         |              
|                                      
|                                      
|                                      
|                                      
|                                       | Series D  no par value, 500 shares authorized;              |                                                                                                                              |                           |                                  |            |            |         |               |           
|                                      
|                                      
|                                      
|                                      
|                                       |                                                              |                                                                                                                              |                           | 50 shares issued and outstanding |            |            | 498,295 |               |            |            | 465,920 | 
|                                       |                                                              |                                                                                                                              |                           |                                  |            |            |         |              
|SHAREHOLDERS EQUITY                   |                                                              |                                                                                                                              |                           |                                  |            |            |         |              
|                                      
|                                      
|                                      
|                                      
|                                       | Preferred stock  no par value, 9,999,500 shares authorized: |                                                                                                                              |                           |                                  |            |            |         |               |           
|                                      
|                                      
|                                      
|                                      
|                                       |                                                              | Series C Junior Participating  1,000,000 shares
authorized, no shares issued or outstanding                                 |                           |                                  |           |            |         |               |           |           
|                                      
|                                      
|                                      
|                                      
|                                       | Common stock  no par value:                                 |                                                                                                                              |                           |                                  |            |            |         |               |           
|                                      
|                                      
|                                      
|                                      
|                                       |                                                              | Class A  99,288,000 shares authorized; 57,535,012 and
56,974,828 issued and outstanding                                     |                           |                                  | 85,349,626 |            |         |               | 84,695,590 |           
|                                      
|                                      
|                                      
|                                      
|                                       |                                                              | Class B  712,000 shares authorized; 36,500 and 65,000
shares issued and outstanding (convertible into Class A
Common Stock) |                           |                                  | 19,894     |            |         |               | 34,145     |           
|                                      
|                                      
|                                      
|                                      
|                                       | Receivable for Class A common stock                          |                                                                                                                              |                           |                                 |            |            |         | (649,431      | )         
|                                      
|                                      
|                                      
|                                      
|                                       | Accumulated deficit                                          |                                                                                                                              |                           | (64,556,877                      | )          |            |         | (62,949,916   | )         
|                                      
|                                      
|                                      
|                                      
|                                       | Accumulated other comprehensive loss                         |                                                                                                                              |                           | (31,244                          | )          |            |         |              |           
|                                       |                                                              |                                                                                                                              |                           |                                  |            |            |         |              
|                                       |                                                              | Total shareholders equity                                                                                                   |                           |                                  | 20,781,399 |            |         |               | 21,130,388 |           
|                                       |                                                              |                                                                                                                              |                           |                                  |            |            |         |              
|                                       |                                                              | TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                   |                           | $                                | 23,200,020 |            |         | $             | 23,519,237 |           
|                                       |                                                              |                                                                                                                              |                           |                                  |            |            |         |              

See notes to consolidated financial statements.

3



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##### Table of Contents






AVANIR Pharmaceuticals

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

---



|                                                                        |                |         |            |                    |            |                   |            |           |            |      |            |           |            |   |            |           |            |  
|----------------------------------------------------------------------- | -------------- | ------- | ---------- | ------------------ | ---------- | ----------------- | ---------- | --------- | ---------- | ---- | ---------- | --------- | ---------- | - | ---------- | --------- | ---------- | -
|                                                                        |                |         |            | Three months ended |            | Nine months ended
|                                                                        |                |         |            | June 30,           |            | June 30,         
|                                                                        |                |         |            |                    |            |                  
|                                                                        |                |         |            | 2001               |            | 2000              |            | 2001      |            | 2000
|                                                                        |                |         |            |                    |            |                   |            |           |            |     
|REVENUES:                                                               |                |         |            |                    |            |                   |            |           |            |      |            |           |            |   |            |          
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|Contract and license revenues                                           |                | $       | 5,000      |                    |            |                   |           |           |            | $    | 5,017,350  |           |            | $ | 1,000,000  |          
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|Royalty revenues                                                        |                |         | 508,739    |                    |            |                   |           |           |            |      | 1,761,790  |           |            |   |           |          
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|Grant revenue                                                           |                |         |           |                    |            |                   |           |           |            |      | 72,535     |           |            |   |           |          
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|Interest and other                                                      |                |         | 284,975    |                    |            | $                 | 162,631    |           |            |      | 960,474    |           |            |   | 213,646    |          
|                                                                        |                |         |            |                    |            |                   |            |           |            |      |            |           |            |   |            |          
|                                                                        | Total revenues |         |            | 798,714            |            |                   |            | 162,631   |            |      |            | 7,812,149 |            |   |            | 1,213,646 |           
|                                                                        |                |         |            |                    |            |                   |            |           |            |      |            |           |            |   |            |          
|EXPENSES:                                                               |                |         |            |                    |            |                   |            |           |            |      |            |           |            |   |            |          
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|Product launch expenses                                                 |                |         | 235,919    |                    |            |                   |           |           |            |      | 728,148    |           |            |   |           |          
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|Research and development                                                |                |         | 1,394,732  |                    |            |                   | 638,616    |           |            |      | 5,165,822  |           |            |   | 1,581,351  |          
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|Sales and marketing                                                     |                |         | 360,550    |                    |            |                   | 214,336    |           |            |      | 866,844    |           |            |   | 465,834    |          
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|General and administrative                                              |                |         | 799,002    |                    |            |                   | 758,742    |           |            |      | 2,620,613  |           |            |   | 2,684,547  |          
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|Litigation settlement                                                   |                |         |           |                    |            |                   |           |           |            |      |           |           |            |   | 4,097,504  |          
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|Interest                                                                |                |         | 870        |                    |            |                   | 874        |           |            |      | 5,308      |           |            |   | 346,220    |          
|                                                                        |                |         |            |                    |            |                   |            |           |            |      |            |           |            |   |            |          
|                                                                        | Total expenses |         |            | 2,791,073          |            |                   |            | 1,612,568 |            |      |            | 9,386,735 |            |   |            | 9,175,456 |           
|                                                                        |                |         |            |                    |            |                   |            |           |            |      |            |           |            |   |            |          
|NET LOSS                                                                |                | $       | (1,992,359 | )                  |            | $                 | (1,449,937 | )         |            | $    | (1,574,586 | )         |            | $ | (7,961,810 | )        
|                                                                        |                |         |            |                    |            |                   |            |           |            |      |            |           |            |   |            |          
|NET LOSS ATTRIBUTABLE TO
COMMON SHAREHOLDERS:                           |                |         |            |                    |            |                   |            |           |            |      |            |           |            |   |            |          
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|Net loss                                                                |                | $       | (1,992,359 | )                  |            | $                 | (1,449,937 | )         |            | $    | (1,574,586 | )         |            | $ | (7,961,810 | )        
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|Dividends on redeemable
convertible preferred stock                     |                |         | (6,233     | )                  |            |                   | (155,613   | )         |            |      | (18,698    | )         |            |   | (155,613   | )        
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|Accretion of discount
related to redeemable
convertible preferred stock |                |         | (4,559     | )                  |            |                   |           |           |            |      | (13,677    | )         |            |   |           |          
|                                                                        |                |         |            |                    |            |                   |            |           |            |      |            |           |            |   |            |          
|NET LOSS ATTRIBUTABLE TO
COMMON SHAREHOLDERS                            |                | $       | (2,003,151 | )                  |            | $                 | (1,605,550 | )         |            | $    | (1,606,961 | )         |            | $ | (8,117,423 | )        
|                                                                        |                |         |            |                    |            |                   |            |           |            |      |            |           |            |   |            |          
|NET LOSS PER SHARE:                                                     |                |         |            |                    |            |                   |            |           |            |      |            |           |            |   |            |          
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        |                | BASIC   |            | $                  | (0.03      | )                 |            | $         | (0.03      | )    |            | $         | (0.03      | ) |            | $         | (0.16      | )
|                                                                        |                |         |            |                    |            |                   |            |           |            |      |            |           |            |   |            |          
|                                                                        |                | DILUTED |            | $                  | (0.03      | )                 |            | $         | (0.03      | )    |            | $         | (0.03      | ) |            | $         | (0.16      | )
|                                                                        |                |         |            |                    |            |                   |            |           |            |      |            |           |            |   |            |          
|WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING:                   |                |         |            |                    |            |                   |            |           |            |      |            |           |            |   |            |          
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        |                | BASIC   |            |                    | 57,542,291 |                   |            |           | 55,181,700 |      |            |           | 57,368,194 |   |            |           | 50,417,191 |  
|                                                                        |                |         |            |                    |            |                   |            |           |            |      |            |           |            |   |            |          
|                                                                        |                | DILUTED |            |                    | 57,542,291 |                   |            |           | 55,181,700 |      |            |           | 57,368,194 |   |            |           | 50,417,191 |  
|                                                                        |                |         |            |                    |            |                   |            |           |            |      |            |           |            |   |            |          

See notes to consolidated financial statements.

4



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##### Table of Contents






AVANIR Pharmaceuticals

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

---



|                                                                               |                                                      |                                           |            |                   |            |      |            |            |            |  
|------------------------------------------------------------------------------ | ---------------------------------------------------- | ----------------------------------------- | ---------- | ----------------- | ---------- | ---- | ---------- | ---------- | ---------- | -
|                                                                               |                                                      |                                           |            | Nine Months Ended
|                                                                               |                                                      |                                           |            | June 30,         
|                                                                               |                                                      |                                           |            |                  
|                                                                               |                                                      |                                           |            | 2001              |            | 2000
|                                                                               |                                                      |                                           |            |                   |            |     
|OPERATING ACTIVITIES:                                                          |                                                      |                                           |            |                   |            |      |            |           
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|Net loss                                                                       |                                                      | $                                         | (1,574,586 | )                 |            | $    | (7,961,810 | )         
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|Adjustments to reconcile net income to net cash used for
operating activities: |                                                      |                                           |            |                   |            |      |            |           
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|Depreciation and amortization                                                  |                                                      |                                           | 516,770    |                   |            |      | 103,486    |           
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|Non-cash interest expense                                                      |                                                      |                                           |           |                   |            |      | 402,990    |           
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|Compensation paid with common stock and stock options                          |                                                      |                                           | 95,271     |                   |            |      | 573,170    |           
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|Litigation settlements paid with common stock                                  |                                                      |                                           |           |                   |            |      | 4,097,504  |           
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|Loss on disposal of assets                                                     |                                                      |                                           | 16,482     |                   |            |      | 5,224      |           
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|Patents abandoned                                                              |                                                      |                                           |           |                   |            |      | 87,325     |           
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|Changes in assets and liabilities:                                             |                                                      |                                           |            |                   |            |      |            |           
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                               | Accounts receivable                                  |                                           |            | (465,131          | )          |      |            | 76,499     |           
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                               | Inventory                                            |                                           |            | (212,781          | )          |      |            | (1,551     | )         
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                               | Prepaid and other                                    |                                           |            | (72,090           | )          |      |            | 120,200    |           
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                               | Deferred costs                                       |                                           |            | (256,175          | )          |      |            | 100,000    |           
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                               | Accounts payable                                     |                                           |            | (374,353          | )          |      |            | (1,005,379 | )         
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                               | Accrued expenses and other liabilities               |                                           |            | 366,320           |            |      |            | (17,003    | )         
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                               | Accrued compensation and payroll taxes               |                                           |            | 30,421            |            |      |            | 50,766     |           
|                                                                               |                                                      |                                           |            |                   |            |      |            |           
|                                                                               |                                                      | Net cash used for operating activities:   |            |                   | (1,929,852 | )    |            |            | (3,368,579 | )
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|INVESTING ACTIVITIES:                                                          |                                                      |                                           |            |                   |            |      |            |           
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                               | Investments in securities                            |                                           |            | (4,450,000        | )          |      |            | (388,122   | )         
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                               | Proceeds from investments                            |                                           |            | 367,101           |            |      |            |           |           
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                               | Patent costs                                         |                                           |            | (386,059          | )          |      |            | (83,530    | )         
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                               | Capital expenditures                                 |                                           |            | (882,278          | )          |      |            | (105,072   | )         
|                                                                               |                                                      |                                           |            |                   |            |      |            |           
|                                                                               |                                                      | Net cash used for investing activities    |            |                   | (5,351,236 | )    |            |            | (576,724   | )
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|FINANCING ACTIVITIES:                                                          |                                                      |                                           |            |                   |            |      |            |           
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                               | Proceeds from issuance of common and preferred stock |                                           |            | 1,198,255         |            |      |            | 14,398,748 |           
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                               | Proceeds from issuance of convertible notes payable  |                                           |            |                  |            |      |            | 1,500,000  |           
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                               | Debt issue costs                                     |                                           |            |                  |            |      |            | (155,015   | )         
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                               | Repayment of convertible notes payable               |                                           |            |                  |            |      |            | (1,500,000 | )         
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                               | Proceeds from issuance of subordinated notes payable |                                           |            | 27,648            |            |      |            | 36,277     |           
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                               | Repayment of subordinated notes payable              |                                           |            | (168,105          | )          |      |            | (189,356   | )         
|                                                                               |                                                      |                                           |            |                   |            |      |            |           
|                                                                               |                                                      | Net cash provided by financing activities |            |                   | 1,057,798  |      |            |            | 14,090,654 |  
|                                                                               |                                                      |                                           |            |                   |            |      |            |           
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                           |                                                      |                                           | (6,223,290 | )                 |            |      | 10,145,351 |           
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                               |                                                      |                                           | 19,699,768 |                   |            |      | 122,674    |           
|                                                                               |                                                      |                                           |            |                   |            |      |            |           
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                                     |                                                      | $                                         | 13,476,478 |                   |            | $    | 10,268,025 |           
|                                                                               |                                                      |                                           |            |                   |            |      |            |           
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                             |                                                      |                                           |            |                   |            |      |            |           
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|Interest paid                                                                  |                                                      | $                                         | 5,308      |                   |            | $    | 343,340    |           
|                                                                               |                                                      |                                           |            |                   |            |      |            |           
|SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:       |                                                      |                                           |            |                   |            |      |            |           
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|Accrued leasehold improvements                                                 |                                                      |                                           |           |                   |            | $    | 245,700    |           
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|Value of conversion discount  convertible preferred stock                     |                                                      |                                           |           |                   |            | $    | 140,000    |           
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|Patent purchased with common stock                                             |                                                      | $                                         | 111,158    |                   |            |      |           |           

See notes to consolidated financial statements

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AVANIR Pharmaceuticals

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

---

1.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation.We have prepared the unaudited consolidated financial
statements in this quarterly report in accordance with the instructions to Form
10-Q adopted under the Securities Exchange Act of 1934. These statements
should be read with our audited consolidated financial statements and the
accompanying notes included in our Annual Report on Form 10-K for the fiscal
year ended September 30, 2000. These statements include all adjustments,
consisting only of normal recurring accruals, necessary to present fairly our
financial position as of June 30, 2001, and the results of operations for the
three and nine-month periods ended June 30, 2001. The results of operations
for the three and nine months ended June 30, 2001 may not be indicative of the
results that may be expected for the fiscal year ending September 30, 2001.

Estimates.The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires that we make estimates and assumptions that affect the reported
amounts of our assets and liabilities and disclosure of contingent assets and
liabilities as of the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.

Reclassifications.Certain amounts in the prior years consolidated financial
statements have been reclassified to conform to current period presentation.

2.      BALANCE SHEET DETAIL

The following tables provide details of selected balance sheet items.

|                             |                                                 |                             |           |           |           |               |           |          |           | 
|---------------------------- | ----------------------------------------------- | --------------------------- | --------- | --------- | --------- | ------------- | --------- | -------- | --------- | 
|                             |                                                 |                             |           | June 30,  |           | September 30,
|                             |                                                 |                             |           | 2001      |           | 2000         
|                             |                                                 |                             |           |           |           |              
|Receivables, net:            |                                                 |                             |           |           |           |               |           |         
|                            
|                            
|                            
|                            
|                             | Total receivables                               |                             | $         | 575,101   |           |               | $         | 109,970  |          
|                            
|                            
|                            
|                            
|                             | Allowance for doubtful accounts                 |                             |           | (14,541   | )         |               |           | (14,541  | )        
|                             |                                                 |                             |           |           |           |               |           |         
|                             |                                                 | Receivables, net            |           | $         | 560,560   |               |           | $        | 95,429    | 
|                             |                                                 |                             |           |           |           |               |           |         
|Property and Equipment, Net: |                                                 |                             |           |           |           |               |           |         
|                            
|                            
|                            
|                            
|                             | Leasehold improvements                          |                             | $         | 483,311   |           |               | $         | 416,523  |          
|                            
|                            
|                            
|                            
|                             | Computer equipment and related software         |                             |           | 290,105   |           |               |           | 233,200  |          
|                            
|                            
|                            
|                            
|                             | Research and development equipment              |                             |           | 1,494,712 |           |               |           | 781,677  |          
|                            
|                            
|                            
|                            
|                             | Office equipment, furniture, and fixtures       |                             |           | 208,147   |           |               |           | 193,808  |          
|                             |                                                 |                             |           |           |           |               |           |         
|                             |                                                 |                             | 2,476,275 |           |           |               | 1,625,208 |         
|                            
|                            
|                            
|                            
|                             | Less, accumulated depreciation and amortization |                             |           | (794,559  | )         |               |           | (574,505 | )        
|                             |                                                 |                             |           |           |           |               |           |         
|                             |                                                 | Property and equipment, net |           | $         | 1,681,716 |               |           | $        | 1,050,703 | 
|                             |                                                 |                             |           |           |           |               |           |         
|Intangible costs, net:       |                                                 |                             |           |           |           |               |           |         
|                            
|                            
|                            
|                            
|                             | Intangible costs                                |                             | $         | 1,212,438 |           |               | $         | 715,222  |          
|                            
|                            
|                            
|                            
|                             | Less, accumulated amortization                  |                             |           | (126,219  | )         |               |           | (100,406 | )        
|                             |                                                 |                             |           |           |           |               |           |         
|                             |                                                 | Intangible costs, net       |           | $         | 1,086,219 |               |           | $        | 614,816   | 
|                             |                                                 |                             |           |           |           |               |           |         

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##### Table of Contents



3.      INVENTORY

Inventories are stated at the lower of cost (first-in, first-out) or
market price. Inventories consist of the raw material, docosanol, which is the
active ingredient in docosanol 10% cream.

4.      INVESTMENTS

The following tables summarize the Companys investments in securities,
which are either held to maturity or available for sale. Available-for-sale
securities are those investments that the Company does not intend to sell in
the near term nor hold to maturity. The available-for-sale investments are
carried at fair value with unrealized gains or losses reported in shareholders
equity as a component of comprehensive income. Investments classified as held
to maturity are recorded at amortized cost.

|                          |                         |                                  |                        |         |           |           |           |            |        |            |        |       |        |   |        |   |           |   |           | 
|------------------------- | ----------------------- | -------------------------------- | ---------------------- | ------- | --------- | --------- | --------- | ---------- | ------ | ---------- | ------ | ----- | ------ | - | ------ | - | --------- | - | --------- | 
|                          |                         |                                  |                        |         |           |           |           |            |        | Gross      |        | Gross |        |   |        |  
|                          |                         |                                  |                        |         |           | Amortized |           | Unrealized |        | Unrealized |        | Fair 
|                          |                         |                                  |                        |         |           | Cost      |           | Gain       |        | Loss       |        | Value
|                          |                         |                                  |                        |         |           |           |           |            |        |            |        |      
|As of June 30, 2001:      |                         |                                  |                        |         |           |           |           |            |        |            |        |       |        |   |        |  
|                         
|                         
|                         
|                         
|                          |                         | Certificates of deposit          |                        | $       | 501,373   |           |           | $          | 10,787 |            |        |       |       |   |        | $ | 512,160   |  
|                         
|                         
|                         
|                         
|                          |                         | Government securities            |                        |         | 4,950,000 |           |           |            |       |            |        | $     | 31,152 |   |        |   | 4,918,848 |  
|                         
|                         
|                         
|                         
|                          |                         | Commercial paper                 |                        |         | 200,000   |           |           |            |       |            |        |       | 1,374  |   |        |   | 198,626   |  
|                          |                         |                                  |                        |         |           |           |           |            |        |            |        |       |        |   |        |  
|                          |                         |                                  |                        | Total   |           | $         | 5,651,373 |            |        | $          | 10,787 |       |        | $ | 32,526 |   |           | $ | 5,629,634 | 
|                          |                         |                                  |                        |         |           |           |           |            |        |            |        |       |        |   |        |  
|Reported as:              |                         |                                  |                        |         |           |           |           |            |        |            |        |       |        |   |        |  
|                         
|                         
|                         
|                         
|                          | Short-term investments: |                                  |                        |         |           |           |           |            |        |            |        |       |        |   |        |   |          
|                         
|                         
|                         
|                         
|                          |                         | Classified as available for sale |                        | $       | 4,418,756 |           |           |            |        |            |        |       |        |   |        |   |           |  
|                         
|                         
|                         
|                         
|                          |                         | Classified as held to maturity   |                        |         | 801,373   |           |           |            |        |            |        |       |        |   |        |   |           |  
|                          |                         |                                  |                        |         |           |           |           |            |        |            |        |       |        |   |        |  
|                          |                         |                                  | Short-term investments |         |           | 5,220,129 |           |            |        |            |        |       |        |   |        |   |           |   |          
|                         
|                         
|                         
|                         
|                          | Long-term investments   |                                  |                        | 400,000 |           |           |           |            |        |            |        |       |        |   |        |   |          
|                          |                         |                                  |                        |         |           |           |           |            |        |            |        |       |        |   |        |  
|                          |                         |                                  |                        | Total   |           | $         | 5,620,129 |            |        |            |        |       |        |   |        |   |           |   |           | 
|                          |                         |                                  |                        |         |           |           |           |            |        |            |        |       |        |   |        |  
|As of September 30, 2000: |                         |                                  |                        |         |           |           |           |            |        |            |        |       |        |   |        |  
|                         
|                         
|                         
|                         
|                          |                         | Certificates of deposit          |                        | $       | 588,122   |           |           |            |       |            |        |       |       |   |        | $ | 588,122   |  
|                         
|                         
|                         
|                         
|                          |                         | Government securities            |                        |         | 780,352   |           |           |            |       |            |        | $     | 1,517  |   |        |   | 778,835   |  
|                         
|                         
|                         
|                         
|                          |                         | Commercial paper                 |                        |         | 200,000   |           |           |            |       |            |        |       | 336    |   |        |   | 199,664   |  
|                          |                         |                                  |                        |         |           |           |           |            |        |            |        |       |        |   |        |  
|                          |                         |                                  |                        | Total   |           | $         | 1,568,474 |            |        |            |       |       |        | $ | 1,853  |   |           | $ | 1,566,621 | 
|                          |                         |                                  |                        |         |           |           |           |            |        |            |        |       |        |   |        |  
|Reported as:              |                         |                                  |                        |         |           |           |           |            |        |            |        |       |        |   |        |  
|                         
|                         
|                         
|                         
|                          |                         | Short-term investments           |                        | $       | 868,474   |           |           |            |        |            |        |       |        |   |        |   |           |  
|                         
|                         
|                         
|                         
|                          |                         | Investments                      |                        |         | 700,000   |           |           |            |        |            |        |       |        |   |        |   |           |  
|                          |                         |                                  |                        |         |           |           |           |            |        |            |        |       |        |   |        |  
|                          |                         |                                  |                        | Total   |           | $         | 1,568,474 |            |        |            |        |       |        |   |        |   |           |   |           | 
|                          |                         |                                  |                        |         |           |           |           |            |        |            |        |       |        |   |        |  

5.      ROYALTY REVENUES FROM LICENSE AGREEMENTS

Our policy is to recognize royalty revenues from our licensed products
when earned. Net sales figures used for calculating royalties due the Company
can often include deductions for costs of unsaleable returns, managed care
chargebacks, cash discounts, freight and warehousing, and miscellaneous
write-offs, which may vary over the course of the license agreement. Sales of
Abreva, if publicly reported by our licensee, GlaxoSmithKline, could differ
from net sales used for calculating royalties and in determining the royalties
earned according the license agreement.

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6.      PRODUCT LAUNCH COSTS

AVANIR has incurred certain costs related to the product launch phase for
Abreva through June 30, 2001. Our obligation to share product launch costs
with GlaxoSmithKline ceased after June 30, 2001.

7.      NET INCOME (LOSS) PER SHARE

Computation of Net
Income and Net Loss per Common Share. Basic income and
basic loss per share is computed by dividing the net income and net loss by the
weighted average number of common shares outstanding during the period (basic
EPS method). Diluted earnings (loss) per common share is computed using the
weighted-average number of common and dilutive common equivalent shares
outstanding during the period (diluted EPS method). Dilutive common
equivalent shares consist of shares issuable upon exercise of stock options and
warrants and conversion of preferred stock. In the accompanying consolidated
statements of operations, diluted net loss per share is the same as basic net loss per share
for both the three and nine months ended June 30,
2001, because the inclusion of 6,936,816 and 7,362,746 dilutive common
equivalent shares, respectively, would be anti-dilutive.

8.      COMPREHENSIVE LOSS

Comprehensive income for the Company includes unrealized gains and losses
on available-for-sale securities. The components of comprehensive income
(loss) are as follows:

|                         |                                                                 |   |                             |            |                            |   |            |            |      |   |            |            |   |   |            |            |  
|------------------------ | --------------------------------------------------------------- | - | --------------------------- | ---------- | -------------------------- | - | ---------- | ---------- | ---- | - | ---------- | ---------- | - | - | ---------- | ---------- | -
|                         |                                                                 |   | Three Months Ended June 30, |            | Nine Months Ended June 30,
|                         |                                                                 |   |                             |            |                           
|                         |                                                                 |   | 2001                        |            | 2000                       |   | 2001       |            | 2000
|                         |                                                                 |   |                             |            |                            |   |            |            |     
|Comprehensive loss:      |                                                                 |   |                             |            |                            |   |            |            |      |   |            |            |   |   |            |           
|                        
|                        
|                        
|                        
|                         | Net loss                                                        |   | $                           | (1,992,359 | )                          |   | $          | (1,449,937 | )    |   | $          | (1,574,586 | ) |   | $          | (7,961,810 | )
|                        
|                        
|                        
|                        
|                         | Net change in
unrealized loss on
available-for-sale
investments |   |                             | (31,244    | )                          |   |            |           |      |   |            | (31,244    | ) |   |            |           |  
|                         |                                                                 |   |                             |            |                            |   |            |            |      |   |            |            |   |   |            |           
|Total comprehensive loss |                                                                 | $ | (2,023,603                  | )          |                            | $ | (1,449,937 | )          |      | $ | (1,605,830 | )          |   | $ | (7,961,810 | )         
|                         |                                                                 |   |                             |            |                            |   |            |            |      |   |            |            |   |   |            |           

9.      MINORITY INTEREST IN SUBSIDIARY

At June 30, 2001, IDEC Pharmaceuticals held an ownership interest in our
subsidiary, Xenerex Biosciences, of approximately 5% on a fully diluted basis.
We consider the cost basis of the minority interest held by IDEC to be
immaterial for separate financial statement disclosure at this time.

10.      SHAREHOLDERS EQUITY

Preferred Stock

Preferred stock consists of Series C Junior Participating Preferred Stock
and Series D Redeemable Convertible Preferred Stock.

Series C Junior Participating Preferred Stock.None of the Series C Junior
Participating Preferred Stock is outstanding.

Series D Redeemable Convertible Preferred Stock.At June 30, 2001 and
September 30, 2000, 50 shares of Series D redeemable convertible preferred
stock (Series D Shares) remained outstanding in connection with a securities
purchase agreement made with certain investors on March 22, 1999. The Series
D holders may convert any or all of the remaining Series D Shares into shares
of Class A common stock at a conversion rate equal to $10,000 divided by a
conversion price equal to the lesser of:

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| |  |  | the Fixed Conversion Price an amount equal to $2.715 per share
of Class A common stock; or                                    
| | - |  | -------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the Variable Conversion Price an amount equal to 86% of the
market price of our Class A common stock, defined as the lower of:
|

| |  |  | the average of the five lowest trading prices per share of
Class A common stock on The American Stock Exchange during the 25
trading days immediately preceding a given date of determination,
where trading price is determined as the average of the high and
low trading prices of our Class A common stock on a particular
trading day; or
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the average of the high and low trading price per share of
Class A common stock on The American Stock Exchange on the date of
determination.                                                                                                                                                                                                  

Common Stock

Class A Common Stock.For the three months ended June 30, 2001, we issued an
aggregate of 97,518 shares of Class A common stock in exchange for $136,831
received in connection with the exercise of employee stock options. The
average exercise price per share for the three-month period was $1.403. For
the nine months ended June 30, 2001, we issued an aggregate of 384,549 shares
of Class A common stock in exchange for $382,262 received in connection with
the exercise of employee stock options. The average exercise price for the
common stock for the nine-month period was $0.99 per share.

Class B Common Stock Conversion.On June 27, 2001, 12,500 shares of Class B
common stock converted to 12,500 shares of Class A common stock.

11.      RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS 133). SFAS No. 133, as amended,
establishes accounting and reporting standards for derivative instruments and
for hedging activities. It requires an entity to recognize all derivatives as
either assets or liabilities on the balance sheet and measure those instruments
at fair value. We currently do not have any derivative instruments or any
embedded derivative instruments that require bifurcation and we are not
conducting any hedging activity; therefore, there is no material impact on our
financial statements.

In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial
Statements (SAB). SAB 101, as amended, summarizes certain of the SECs
views in applying accounting principles generally accepted in the United States
of America to revenue recognition in financial statements, including revenues
earned from collaborations between companies. On April 1, 2001, we adopted SAB
101, which did not change the accounting of the Company for revenue
recognition. At June 30, 2001, we were involved in two research collaborations
that contained payments that are tied to the achievement of future milestones.
We intend to recognize the revenues associated with those milestone payments as
the services contemplated by the agreements have been achieved.

In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations.SFAS No. 141 establishes new standards for accounting and
reporting requirements for business combinations, requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001 and eliminates the pooling-of-interests method. Management does not
believe that SFAS No. 141 will have a material impact on the Companys
consolidated financial statements.

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In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets, which supersedes APB Opinion No. 17, Intangible Assets. SFAS No. 142
establishes new standards for goodwill acquired in a business combination and
eliminates amortization of goodwill and other intangible assets with indefinite
lives and instead sets forth methods to periodically evaluate goodwill for
impairment. The Company expects to adopt this statement during the first
quarter of fiscal 2002. Management does not believe that SFAS No. 142 will
have a material impact on the Companys financial statements.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

|                                       |  |                                                                                                  |  |                
|-------------------------------------- |  | ------------------------------------------------------------------------------------------------ |  | ---------------
|Signature                              |  | Title                                                                                            |  | Date           
|                                       |  |                                                                                                  |  |                
|                                       |  |                                                                                                  |  |                
|/s/GERALD J. YAKATAN
Gerald J. Yakatan |  | President and Chief
Executive Officer
(Principal Executive Officer)                              |  | August 21, 2001
|                                       |  |                                                                                                  |  |                
|/s/GREGORY P. HANSON
Gregory P. Hanson |  | Vice President, Finance and Chief
Financial Officer
(Principal Financial and Accounting Officer) |  | August 21, 2001

11