<PAGE>   1
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                    FORM 10-Q
================================================================================

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



For the quarter ended MARCH 31, 2001                 Commission File No. 0-18734




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

             CALIFORNIA                                   33-0314804
   (State or other jurisdiction of             (IRS Employer Identification No).
   incorporation or organization)


11388 SORRENTO VALLEY ROAD, SUITE 200
        SAN DIEGO, CALIFORNIA                                92121
(Address of principal executive office)                   (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 May 8, 2001:

<TABLE>
<S>                                                     <C>
         Class A Common stock, no par value             57,501,512
         Class B Common stock, no par value                 49,000
</TABLE>


================================================================================

<PAGE>   2
                             AVANIR PHARMACEUTICALS

                                    FORM 10-Q

                      FOR THE QUARTER ENDED MARCH 31, 2001

                                      INDEX


<TABLE>
<CAPTION>
  PART I.    FINANCIAL INFORMATION                                                                  PAGE
<S>                                                                                                 <C>
  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

  Item 2.    Management's Discussion and Analysis of Financial Condition and Results
             of Operations......................................................................... 11

  Item 3.    Quantitative and Qualitative Disclosures about Market Risk............................ 20

  PART II.   OTHER INFORMATION

  Item 4.    Submission of Matters to a Vote of Security Holders................................... 21

  Item 6.    Exhibits and Reports on Form 8-K...................................................... 21
</TABLE>




                                       2
<PAGE>   3
                             AVANIR PHARMACEUTICALS

                     CONSOLIDATED BALANCE SHEETS (UNAUDITED)
================================================================================


<TABLE>
<CAPTION>
                                                                             MARCH 31,           SEPTEMBER 30,
ASSETS                                                                         2001                  2000
                                                                           ------------          ------------
<S>                                                                        <C>                   <C>
Current assets:
   Cash and cash equivalents                                               $ 19,715,352          $ 19,699,768
   Short-term investments                                                       779,372               868,474
   Receivables, net                                                           1,405,915                95,429
   Inventory                                                                    222,585                 9,804
   Prepaid and other                                                            279,159               411,999
                                                                           ------------          ------------
         Total current assets                                                22,402,383            21,085,474

   Property and equipment, net                                                1,682,888             1,050,703
   Intangible costs, net                                                      1,063,923               614,816
   Deferred costs, net                                                          141,532                  --
   Investments                                                                  400,000               700,000
   Other assets                                                                  65,139                68,244
                                                                           ------------          ------------

         TOTAL ASSETS                                                      $ 25,755,865          $ 23,519,237
                                                                           ============          ============

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                                        $    860,100          $    965,636
   Accrued expenses and other liabilities                                     1,237,984               537,027
   Accrued compensation and payroll taxes                                       327,270               248,599
   Notes payable                                                                 50,257               171,667
                                                                           ------------          ------------
     Total current liabilities                                                2,475,611             1,922,929

COMMITMENTS

REDEEMABLE CONVERTIBLE PREFERRED STOCK
   Series D -- no par value, 500 shares authorized;
       50 shares issued and outstanding                                         487,503               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; 57,424,994 and
       56,974,828 issued and outstanding                                     85,320,328            84,695,590
    Class B -- 712,000 shares authorized; 49,000 and 65,000 shares
        issued and outstanding (convertible into Class A
        Common Stock)                                                            26,144                34,145
   Receivable for Class A common stock                                             --                (649,431)
   Accumulated deficit                                                      (62,553,721)          (62,949,916)
                                                                           ------------          ------------

    Total shareholders' equity                                               22,792,751            21,130,388
                                                                           ------------          ------------
    TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                             $ 25,755,865          $ 23,519,237
                                                                           ============          ============
</TABLE>



See notes to consolidated financial statements.



                                       3
<PAGE>   4
                             AVANIR PHARMACEUTICALS

                CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
================================================================================


<TABLE>
<CAPTION>
                                                         THREE MONTHS ENDED                          SIX MONTHS ENDED
                                                             MARCH 31,                                   MARCH 31,
                                                 ----------------------------------          ----------------------------------
                                                      2001                  2000                  2001                  2000
                                                 ------------          ------------          ------------          ------------
<S>                                              <C>                   <C>                   <C>                   <C>
REVENUES:
 Contract and license revenues                   $      2,350          $  1,000,000          $  5,012,350          $  1,000,000
 Royalty revenues                                   1,253,051                  --               1,253,051                  --
 Grant revenue                                         16,803                  --                  72,535                  --
 Interest and other                                   340,129                42,978               675,499                51,015
                                                 ------------          ------------          ------------          ------------

    Total revenues                                  1,612,333             1,042,978             7,013,435             1,051,015
                                                 ------------          ------------          ------------          ------------

EXPENSES:
 Product launch expenses                              492,229                  --                 492,229                  --
 Research and development                           2,462,965               489,733             3,771,090               942,735
 Sales and marketing                                  291,975               168,807               506,294               251,498
 General and administrative                         1,048,916               921,440             1,821,611             1,925,805
 Litigation settlement                                   --               3,900,000                  --               4,097,504
 Interest                                               1,579               237,744                 4,438               345,345
                                                 ------------          ------------          ------------          ------------

    Total expenses                                  4,297,664             5,717,724             6,595,662             7,562,887
                                                 ------------          ------------          ------------          ------------


NET INCOME (LOSS)                                $ (2,685,331)         $ (4,674,746)         $    417,773          $ (6,511,872)
                                                 ============          ============          ============          ============

NET INCOME (LOSS) ATTRIBUTABLE TO COMMON
SHAREHOLDERS:
Net income (loss)                                $ (2,685,331)         $ (4,674,746)         $    417,773          $ (6,511,872)
Dividends on redeemable convertible
preferred stock                                        (6,164)               (4,586)              (12,465)               (4,586)
Accretion of discount related to
redeemable convertible preferred stock                 (4,459)                 --                  (9,118)                 --
                                                 ------------          ------------          ------------          ------------

NET INCOME (LOSS) ATTRIBUTABLE TO COMMON
SHAREHOLDERS
                                                 $ (2,695,954)         $ (4,679,332)         $    396,190          $ (6,516,458)
                                                 ============          ============          ============          ============

NET INCOME (LOSS) PER SHARE:
     BASIC                                       $      (0.05)         $      (0.09)         $       0.01          $      (0.14)
                                                 ============          ============          ============          ============
     DILUTED                                     $      (0.05)         $      (0.09)         $       0.01          $      (0.14)
                                                 ============          ============          ============          ============

WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING:
     BASIC                                         57,346,992            50,438,776            57,281,146            48,047,954
                                                 ============          ============          ============          ============
     DILUTED                                       57,346,992            50,438,776            65,221,833            48,047,954
                                                 ============          ============          ============          ============
</TABLE>



See notes to the financial statements.



                                       4
<PAGE>   5
                             AVANIR PHARMACEUTICALS

                   CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
================================================================================


<TABLE>
<CAPTION>
                                                                            SIX MONTHS ENDED
                                                                                MARCH 31,
                                                                     ----------------------------------
                                                                         2001                  2000
                                                                     ------------          ------------
<S>                                                                  <C>                   <C>
OPERATING ACTIVITIES:
Net income (loss)                                                    $    417,773          $ (6,511,872)
Adjustments to reconcile net income to net cash used for
   operating activities:
Depreciation and amortization                                             276,409                71,086
Non-cash interest expense                                                    --                 402,990
Compensation paid with common stock and stock options                      31,828               388,855
Litigation settlements paid with common stock                                --               4,097,504
Loss on sale of assets                                                     16,482                 5,224
Changes in assets and liabilities:
   Accounts receivable                                                 (1,310,486)             (423,501)
   Inventory                                                             (212,781)                 --
   Prepaid and other                                                      135,945               187,339
   Deferred costs                                                        (256,175)               59,154
   Accounts payable                                                      (105,536)             (467,789)
   Accrued expenses and other liabilities                                 700,959              (107,073)
   Accrued compensation and payroll taxes                                  78,671               169,450
                                                                     ------------          ------------
     Net cash used for operating activities:                             (226,911)           (2,128,633)
INVESTING ACTIVITIES:
   Patent and licensing costs                                            (355,214)              (32,904)
   Capital expenditures, net of proceeds                                 (793,167)                1,556
   Proceeds from investments                                              389,102                  --
                                                                     ------------          ------------
     Net cash used for investing activities                              (759,279)              (31,348)
FINANCING ACTIVITIES:
   Proceeds from issuance of common and preferred stock                 1,123,184            14,029,773
   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                      --                  16,277
   Repayment of subordinated notes payable                               (121,410)             (130,456)
                                                                     ------------          ------------
     Net cash provided by financing activities                          1,001,774            13,760,579
                                                                     ------------          ------------

NET INCREASE IN CASH AND CASH EQUIVALENTS                                  15,584            11,600,598

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
                                                                       19,699,768               122,674
                                                                     ------------          ------------

CASH AND CASH EQUIVALENTS AT END OF PERIOD                           $ 19,715,352          $ 11,723,272
                                                                     ============          ============

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid                                                        $      4,438          $    345,345
                                                                     ============          ============

SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING
   ACTIVITIES:
Patent purchased with common stock                                   $    111,158                  --
</TABLE>



See notes to the financial statements.



                                       5
<PAGE>   6
AVANIR PHARMACEUTICALS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

1. 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 March 31, 2001, and the results of operations for the three and six-month
periods ended March 31, 2001. The results of operations for the three and six
months ended March 31, 2001 may not be indicative of the results that may be
expected for the year ending September 30, 2001.

2. BALANCE SHEET DETAIL

The following tables provide details of selected balance sheet items.


<TABLE>
<CAPTION>
                                                            MARCH 31,          SEPTEMBER 30,
                                                              2001                 2000
                                                           -----------          -----------
<S>                                                        <C>                  <C>
Receivables, net:
   Total receivables                                       $ 1,420,456          $   109,970
   Allowance for doubtful accounts                             (14,541)             (14,541)
                                                           -----------          -----------
       Receivables, net                                    $ 1,405,915          $    95,429
                                                           ===========          ===========

Property and Equipment, Net:
   Leasehold improvements                                  $   470,460          $   416,523
   Computer equipment and related software                     262,272              233,200
   Research and development equipment                        1,454,391              781,677
   Office equipment, furniture, and fixtures                   200,042              193,808
                                                           -----------          -----------
                                                             2,387,165            1,625,208
   Less, accumulated depreciation and amortization            (704,277)            (574,505)
                                                           -----------          -----------
       Property and equipment, net                         $ 1,682,888          $ 1,050,703
                                                           ===========          ===========

Intangible costs, net:
   Intangible costs                                        $ 1,181,594          $   715,222
   Less, accumulated amortization                             (117,671)            (100,406)
                                                           -----------          -----------
       Intangible costs, net                               $ 1,063,923          $   614,816
                                                           ===========          ===========
</TABLE>

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. ROYALTY REVENUES

         For the three months ended March 31, 2001, the Company earned $1.3
million in royalties on initial sales of Abreva(TM) in the United States by the
Company's licensee, GlaxoSmithKline, which included the period from the product
launch date in November 2000 to March 31, 2001. Our policy is to recognize
royalty revenues from our licensed products when earned. We did not have
sufficient



                                       6
<PAGE>   7
information on which to determine whether royalties had been earned for the
prior fiscal quarter ended December 31, 2000. Therefore, we reported no royalty
revenue. Having been provided sufficient information from our licensee to
determine royalties on cumulative sales of Abreva(TM) from product launch
through March 31, 2001, we have included such royalties as being earned in the
most recent fiscal quarter ended March 31, 2001.

         Net sales for calculating the royalty due the Company exclude such
costs as unsaleable returns, managed care chargebacks, cash discounts, freight
and warehousing, and miscellaneous write-offs, and may vary over the course of
the license agreement. Therefore, sales of Abreva(TM), if publicly reported by
GlaxoSmithKline, may differ from net sales used for royalty calculations and in
determining the royalties earned according the license agreement. Net sales of
Abreva(TM) for purposes of calculating the royalty, solely for the period of
January 1, 2001 to March 31, 2001, and exclusive of any sales of product from
product launch to December 31, 2000, would have amounted to slightly over $10
million, and our royalty solely for the period of January 1, 2001 to March 31,
2001 would have been $822,000.

5.       INVESTMENTS

         The following tables summarize the Company's investments in securities:

<TABLE>
<CAPTION>
                                                        Gross           Gross
                                     Amortized        Unrealized      Unrealized         Fair
                                        Cost             Gain            Loss            Value
                                     ----------       ----------      ----------       ----------
<S>                                  <C>              <C>             <C>              <C>
As of March 31, 2001:

     Certificates of deposit         $  488,122            --             --           $  488,122
     Government securities              491,250         $ 5,226           --              496,476
     Commercial paper                   200,000           5,616           --              205,616
                                     ----------         -------         ------         ----------
          Total                      $1,179,372         $10,842           --           $1,190,214
                                     ==========         =======         ======         ==========

Reported as:
     Short-term investments          $  779,372
     Investments                        400,000
                                     ----------
          Total                      $1,179,372
                                     ==========

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
                                     ==========
</TABLE>

6. PRODUCT LAUNCH COSTS

         We incurred $492,229 in expenses related to the product launch phase of
Abreva(TM), which we had agreed to share with GlaxoSmithKline. We expect to
continue to share in these costs, which will continue in approximately the same
proportion to royalty revenues until no later than September 30, 2001.



                                       7
<PAGE>   8

7. MINORITY INTEREST IN SUBSIDIARY

         IDEC Pharmaceuticals currently holds a 5% ownership interest in our
subsidiary, Xenerex Biosciences. We consider the cost basis of the minority
interest held by IDEC to be immaterial at this time.

8. 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.

9. RECLASSIFICATIONS

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

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 March 31, 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:

         -        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.



                                       8
<PAGE>   9
Class A Common Stock

          Between January 1, 2001 and March 31, 2001, we issued an aggregate of
72,135 shares of Class A common stock in connection with the exercise of stock
purchase warrants and 97,901 shares of Class A common stock in connection with
the exercise of employee stock options. Details of the transactions are shown in
the table below.

<TABLE>
<CAPTION>
         WARRANTS                                                              AMOUNT              AVERAGE PRICE
        EXERCISED                   DATES                 SHARES              RECEIVED               PER SHARE
        ---------             -----------------           ------              --------             -------------
<S>                           <C>                         <C>                 <C>                  <C>
Class I warrants              01/01/01-03/31/01            2,135                  --                      --
Class K warrants              01/01/01-03/31/01           70,000              $ 78,750                 $1.1250
                                                          ------              --------                 -------
    Total                                                  72,135             $ 78,750                 $1.1250
</TABLE>


<TABLE>
<CAPTION>
      STOCK OPTIONS                                                             AMOUNT              AVERAGE PRICE
        EXERCISED                   DATES                 SHARES               RECEIVED               PER SHARE
      -------------           -----------------           ------               --------             -------------
<S>                           <C>                         <C>                   <C>                     <C>
Employees                     01/01/01-03/31/01           97,901                $102,181                $1.044
</TABLE>


         Class I Warrants. As of March 31, 2001, the Class I Warrant to purchase
Class A common stock had been fully exercised, leaving no additional shares to
be purchased under this warrant. On January 2, 2001, the Class I warrant holder
exercised its right to purchase 2,135 shares of Class A common stock at $0.78125
per share using a "cashless" exercise option. The market price on the date of
exercise of the Class I warrant was $6.125 per share. The gain in value per
share purchasable under the warrant was $5.34375 per share. Therefore, the
holder surrendered to us the remainder of the warrant to purchase 312 shares
that had an aggregate value of $1,667 based on the difference in the market
price on the tender date and the exercise price of $0.78125 per share, times the
portion of the warrant tendered.

         Class K Warrants. On March 27, 2001, the Class K warrant holder
exercised its right to purchase 70,000 shares of Class A common stock at an
exercise price of $1.125 per share, for cash in the aggregate amount of $78,750.

         Stock Options to Officers. On March 15, 2001, we issued nonqualified
stock options under our 2000 Stock Option Plan to the officers of the Company
for the purchase of 200,000 shares of Class A common stock at an exercise price
of $3.57 per share, 85% of the fair market value at the date of grant. We will
record as compensation expense over the three-year vesting period of the stock
options the amount of $126,000, representing the aggregate difference between
the exercise price and the fair market value on the date granted.

         Stock Options to Non-employee Directors. On March 16, 2001, we issued
to our non-employee directors stock options to purchase 50,000 shares of Class A
common stock at an exercise price of $4.15 per share as part of a provision for
an annual formula grant under our 1994 Stock Option Plan.

Stock Options In Company's Subsidiary

         Xenerex Biosciences. On March 13, 2001, the board of directors of the
Company's subsidiary, Xenerex Biosciences ("Xenerex"), granted stock options to
certain of its employees, scientific advisors, and directors to purchase an
aggregate of 361,000 shares of Xenerex common stock at an exercise price



                                       9
<PAGE>   10
of $0.22 per share pursuant to the Xenerex 2000 Stock Option Plan. Under the
terms of this plan, the board of directors of Xenerex may grant options to
purchase up to 2,000,000 shares of Xenerex common stock to its officers,
directors, employees and consultants.


11. NET INCOME (LOSS) PER SHARE

         Computation of Net Income and Net Loss per Common Share. The Company
follows provisions of Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("SFAS 128"), which expands upon the current standard,
Accounting Principles Board Opinion No. 15, "Earnings per Share" ("APB 15").
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, we have presented our net income and net
loss per share for the three and six months ended March 31, 2001, using both the
basic EPS and the diluted EPS methods.


12. 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 September 1999, the FASB issued Emerging Issues Task Force Topic No.
D-83, "Accounting for Payroll Taxes Associated with Stock Option Exercises"
("EITF D-83"). EITF D-83 requires that payroll tax paid on the difference
between the exercise price and the fair value of acquired stock in association
with an employee's exercise of stock options be reported as operating expenses.
For the six months ended March 31, 2001, payroll tax of $89,364 was expensed as
a result of stock option exercises.

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. We will be required to adopt SAB 101 in the
fourth quarter of the fiscal year ending September 30, 2001. At March 31, 2001,
we did not have any research collaborations that had revenue-generating
milestones that would be impacted by the adoption of SAB 101. However, SAB 101
could have a material effect on the reporting of our financial position and
results of operations in the future if we were to sign research collaborations
that have cash payments tied to the achievement of milestones.




                                       10
<PAGE>   11

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS

         This report contains forward-looking statements concerning our future
events or performance. You should not rely excessively on these forward-looking
statements, because they are only predictions based on our current expectations
and assumptions. Forward-looking statements often contain words like "estimate,"
"anticipate," "believe" or "expect". Many known and unknown risks and
uncertainties could cause our actual results to differ materially from those
indicated in these forward-looking statements. You should review carefully the
risks and uncertainties identified in this report, including those explained
below and in our annual report on Form 10-K filed with the Securities and
Exchange Commission. We have no obligation to update or announce revisions to
any forward-looking statements to reflect actual events or developments.

OVERVIEW

         AVANIR Pharmaceuticals, based in San Diego, is an emerging diversified
biopharmaceutical company engaged in research, development, commercialization,
licensing and sales of innovative drug products and antibody generation
services.

LICENSED PRODUCTS

         GlaxoSmithKline successfully launched our first therapeutic product,
Abreva(TM), as an over-the-counter (OTC) topical cold sore medication in the
United States, with major print and television advertising being conducted
throughout the period from product introduction in November 2000 to March 2001.
Sales of Abreva(TM) for the quarter ended March 31, 2001 were over $10 million,
achieving a 28% market share according to GlaxoSmithKline. Abreva(TM) (docosanol
10% cream) is the first medicine to be approved for cold sores by the U.S. Food
and Drug Administration (FDA) for marketing as an OTC product. We licensed the
rights to manufacture and sell Abreva(TM) in the United States to
GlaxoSmithKline under an exclusive license agreement for the North American
market.

         We are now pursuing opportunities to outlicense docosanol 10% cream to
companies in the rest of the world. We have made initial visits to current and
prospective licensees in Japan, Korea, Israel and Western Europe. We have
continued to hold further discussions with those companies that have expressed
an initial interest in learning more about the drug, with the intent of entering
into negotiations for licensing in the territories of their respective interest.

CLINICAL AND PRE-CLINICAL DEVELOPMENT PROGRAMS

         We have begun to enroll patients in our Phase II/III clinical study to
examine the effect of our drug candidate, AVP-923, in the treatment of emotional
lability in neurodegenerative diseases. Additional indications for AVP-923 under
consideration for clinical development include neuropathic pain, chronic cough,
and weaning from narcotics. Our drug discovery programs that are in preclinical
development are focused in the areas of developing novel treatments for allergy
and asthma, inflammation, and lipid lowering.

INTELLECTUAL PROPERTY

         We improved our owned and inlicensed intellectual property portfolios
in two important areas of research. The United States Patent and Trademark
Office issued a Notice of Allowance for a patent for a method of treatment of
allergy and asthma, a program currently in preclinical development, and the
Office issued a patent to the inventor of AVP-923 for weaning patients from
narcotics and anti-depressants. AVANIR has the exclusive worldwide rights to
develop and market AVP-923.



                                       11
<PAGE>   12
ANTIBODY GENERATION SERVICES AND XENEREX BIOSCIENCES

         Within our subsidiary, Xenerex Biosciences, we were able to acquire
ownership of a key patent from IDEC Pharmaceuticals for the generation of fully
human antibodies. And in early May 2001, Xenerex entered into its first research
collaboration agreement with a third party, Eos Biotechnology, a privately
funded biotechnology company in South San Francisco. The research collaboration
provides for Xenerex to generate fully human monoclonal antibodies to three
cancer-target antigens provided by Eos. Eos will evaluate the antibodies
generated by Xenerex for potential development of therapeutic treatments for the
selected cancers. We believe that this collaboration represents an important
third-party validation of the potential of our proprietary technology in human
antibodies and an important step in broadening the commercialization of the
company's platform for application in multiple diseases.

RESULTS OF OPERATIONS--THREE MONTHS ENDED MARCH 31, 2001

NET LOSSES

         Net losses for the second fiscal quarter ended March 31, 2001 were $2.7
million or $0.05 per share compared to $4.7 million or $0.09 per share for the
same period in 2000.

REVENUES

         Revenues for the second fiscal quarter ended March 31, 2001 were $1.6
million, including $1.3 million in royalties earned on the initial sales of
Abreva(TM) in the United States by the Company's licensee, GlaxoSmithKline, from
the launch date in November 2000 to March 31, 2001. This represents the first
royalties to be earned by the Company for Abreva(TM). The balance of the
revenues for the period came from government grants and interest income. For the
same period a year ago, the Company earned $1 million in revenues, representing
license fees from GlaxoSmithKline for Abreva(TM).

EXPENSES

         Operating Expenses - Total operating expenses decreased to $4.3 million
for the second fiscal quarter ended March 31, 2001, compared to $5.7 million as
reported for the same period in fiscal year 2000. Excluding product launch costs
in the current year and litigation settlement costs in the prior year, second
quarter operating expenses increased by $2 million as a result of a significant
expansion of the Company's research and development programs. A comparison of
operating expenses for the second fiscal quarter ended March 31, 2001, with that
of the same period in the prior year is described below in the discussions of
research and development, general and administrative, sales and marketing and
interest expenses.

         Research and Development Expenses -- During the second fiscal quarter
ended March 31, 2001, research and development expenses increased to $2.5
million compared to $490,000 in the same period in fiscal year 2000. The
increased expenses in the second fiscal quarter ended March 31, 2001 related to
increased staff size and outside contract research to support the additional
clinical development program underway with AVP-923 and preclinical research
related primarily to the Company's allergy and asthma research program. In
November 2000, the Company initiated Phase II/III clinical trials of its drug
candidate, AVP-923, in the first of a series of studies intended to examine the
effect of AVP-923 in the treatment of emotional lability in neurodegenerative
diseases. Patient enrollment has been initiated and is still underway. The
Company has also recently increased its preclinical research in an effort to
select



                                       12
<PAGE>   13

for clinical development a lead compound capable of regulating production of
IgE, a protein known to contribute to the symptoms of allergy and asthma.

         General and Administrative Expenses -- For the second fiscal quarter
ended March 31, 2001, general and administrative expenses increased to $1.0
million compared to $921,000 as reported for the same period in fiscal year
2000. The increase in general and administrative expenses is related primarily
to the higher cost of operating and maintaining the Company's new facility and
an increase in staff size to support the Company's growing research and
development programs and expanded marketing efforts for outlicensing docosanol
10% cream.

         Sales and Marketing Expenses -- For the second fiscal quarter ended
March 31, 2001, sales, marketing and business development expenses were $292,000
compared with $169,000 in the comparable period a year earlier. Higher expenses
were incurred in the current fiscal year primarily due to added costs associated
with outlicensing docosanol 10% in the international market place and evaluation
of opportunities to inlicense late-stage drug candidates owned by third parties
that are available for development.

         Litigation Settlement Expense -- We did not incur any litigation
settlement expense for the second fiscal quarter ended March 31, 2001.
Litigation settlement expense reported for the same period in fiscal year 2000
was $3.9 million, representing the fair value of the issuance of 975,000 shares
of Class A common stock in settlement of an employment-related matter.

         Interest Expense - Interest expense decreased to $1,600 in the second
fiscal quarter ended March 31, 2001, compared to $238,000 for the same period in
fiscal year 2000. The higher level of in interest expense in fiscal year 2000
was primarily due to the issuance of $1.5 million in 11% convertible debentures,
which remained outstanding from approximately November 1999 to February 2000.


RESULTS OF OPERATIONS--SIX MONTHS ENDED MARCH 31, 2001

NET INCOME (LOSS)

         Net income for the six months ended March 31, 2001 was $418,000 or
$0.01 per share, compared to a loss of $6.5 million or $0.14 per share, for the
same period in fiscal year 2000.

REVENUES

         Revenues for the six months ended March 31, 2001 increased to $7
million from $1.1 million in the same period in fiscal year 2000. A $5 million
milestone payment from GlaxoSmithKline in October 2000, $1.3 million in
royalties on product sales of Abreva(TM) and interest income accounted for most
of the revenues in the current period, compared to the $1 million milestone
payment from GlaxoSmithKline for the same period in fiscal year 2000.

EXPENSES

         Operating Expenses -- For the six months ended March 31, 2001, total
operating expenses decreased to $6.6 million compared to $7.6 million in the
same period in fiscal year 2000. Excluding product launch costs in the current
year and litigation settlement costs in the prior year, operating expenses were
higher by $2.6 million. A comparison of operating expenses for the first six
months of fiscal year 2001 with the same period in fiscal year 2000 is described
below in the discussions of



                                       13
<PAGE>   14
research and development, general and administrative, sales and marketing,
litigation settlement and interest expenses.

         Research and Development -- During the first six months of fiscal year
2001, research and development expenses increased to $3.8 million compared to
$943,000 in the same period in fiscal year 2000. The increase in expenses for
the first six months of fiscal year 2001 compared with the prior year represents
primarily $1.3 million for clinical trials for AVP-923, an increase of $665,000
for preclinical research in our allergy and asthma program, and initial research
and development of monoclonal antibodies.

         General and Administrative Expenses -- For the six months ended March
31, 2001, general and administrative expenses decreased to $1.8 million compared
to $1.9 million in the same period of 2000. The decreased expenses for the six
months ended March 31, 2001 reflect primarily lower legal expenses compared to
levels in the same period in fiscal year 2000.

         Sales and Marketing Expenses -- During the first six months of fiscal
year 2001, sales and marketing expenses were $506,000 compared to $251,000 in
the comparable period a year earlier. Sales, marketing and business development
expenses for fiscal year 2001 have increased because of the expansion of
commercial development activity in both AVANIR and Xenerex. Sales and marketing
activity for the same period in fiscal year 2000 was relatively low because of
the decision to outlicense the marketing and sales rights to Abreva(TM) to
GlaxoSmithKline and the Company was still awaiting approval by the FDA for
Abreva(TM).

         Litigation Settlement Expense -- The Company did not incur any
litigation settlement expense for the first six months of fiscal year 2001.
Litigation settlement expense for the first six months of fiscal year 2000 was
$4.1 million and was paid for by the issuance of 160,000 shares of Class A
common stock in the first quarter of fiscal year 2000 and 975,000 shares of
Class A common stock during the second quarter of fiscal year 2000 in settlement
of employment-related matters.

         Interest Expense - Interest expense decreased to $4,400 in the first
six months of fiscal year 2001 compared to $345,000 for the same period in
fiscal year 2000. Interest expense in fiscal year 2000 was due primarily to the
issuance of $1.5 million in 11% convertible debentures, which were repaid in the
second quarter of fiscal year 2000.

LIQUIDITY AND CAPITAL RESOURCES

         At March 31, 2001, we had cash, cash equivalents and short-term
investments of $20.5 million and a working capital balance of $19.9 million. At
September 30, 2000, we had cash, cash equivalents and short-term investments of
$20.6 million and a working capital balance of $19.2 million. The increase in
working capital during the first six months of fiscal year 2001 resulted
primarily from a $1.3 million increase in receivables, partially offset by a
$701,000 increase in accrued expenses related to product launch. The Company
believes that its cash resources are adequate to fund operations for at least
the next twelve months.

         Operating Activities. Net cash used for operating activities amounted
to $227,000 in the first six months of fiscal 2001, compared to net cash used in
operating activities of $2.1 million during the comparable period in fiscal year
2000. The improvement in net cash used for operating activities is primarily the
result of profits earned and the receipt of a $5 million milestone payment from
our licensee for Abreva(TM) during the first quarter of fiscal year 2001.



                                       14
<PAGE>   15
         Investing Activities. Net cash used for investing activities totaled
$760,000 during the first six months of fiscal year 2001, including capital
expenditures of $793,000 and patent costs of $355,000. Net cash used for
investing activities during the first six months of fiscal year 2000 amounted to
$31,000.

         Financing Activities. During the first six months of fiscal year 2001,
we received $1 million from financing activities. The amount received from
financing activities included sales of common stock related to exercises of
stock options and stock purchase warrants. During the first six months of fiscal
2000, we received $13.8 million, primarily from the issuance of common stock
related to a $6 million financing transaction and exercises of stock options and
warrants to purchase common stock. The balance of financing related to
commercial finance transactions in the ordinary course of business.

         Our sources of cash flows from operations for the next several quarters
will depend substantially on the performance of GlaxoSmithKline under our
license agreement for Abreva(TM). We expect to receive approximately one-half
the remaining $10 million in license fees under our agreement with
GlaxoSmithKline before the end of our fiscal year, with the balance of the
license fees coming before the end of December. Because Abreva(TM) is new to the
market, we do not have sufficient sales experience to be able to predict the
amount of royalties on product sales at this time.


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 activities, therefore, there is no material impact on our
financial statements.

         In September 1999, the FASB issued Emerging Issues Task Force Topic No.
D-83, "Accounting for Payroll Taxes Associated with Stock Option Exercises"
("EITF D-83"). EITF D-83 requires that payroll tax paid on the difference
between the exercise price and the fair value of acquired stock in association
with an employee's exercise of stock options be reported as operating expenses.
For the six months ended March 31, 2001, payroll tax of $89,364 was expensed
as a result of stock option exercises.

         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. We will be required to adopt SAB 101 in the
fourth quarter of the fiscal year ending September 30, 2001. At March 31, 2001,
we did not have any research collaborations that had revenue-generating
milestones that would be impacted by the adoption of SAB 101. However, SAB 101
could have a material effect on the reporting of our financial position and
results of operations in the future if we were to sign research collaborations
that have cash payments tied to the achievement of milestones.



                                       15
<PAGE>   16

RISK FACTORS THAT MIGHT AFFECT FUTURE OPERATIONS

If GlaxoSmithKline experiences any delays in the manufacture, distribution or
promotion of docosanol 10% cream, then our business will be materially and
adversely affected.

         We have signed an exclusive license agreement with GlaxoSmithKline for
manufacturing and sales of docosanol 10% cream in North America. Docosanol 10%
cream, which is being marketed under the trade name of Abreva(TM) in the United
States, is approved for sale only in the United States at this time. Therefore,
our license fees and royalty revenues from sales of the product for at least the
next year depend entirely upon GlaxoSmithKline's marketing efforts. Any problem
or delays in manufacturing, promotion and distribution of Abreva(TM) could
affect materially and adversely our business operations and financial condition.

AVANIR and its licensees may not be successful in selling docosanol 10% cream in
the United States or the rest of the world as an OTC product.

         AVANIR and its licensees could face the following risks in our efforts
to market and sell docosanol 10% cream:

         -        difficulty in building product awareness of a new OTC product
                  among customers or retail store decision makers;

         -        lack of consumer perception that docosanol 10% cream is
                  superior to existing and potentially new OTC products for oral
                  herpes;

         -        lack of widespread acceptance of docosanol 10% cream in the
                  OTC consumer market; and

         -        potential price erosion due to competitive reactions to our
                  product's introduction.

Docosanol 10% cream will face intense competition from a number of existing and
well-established products and the companies that market their products.

         Docosanol 10% cream competes with several other products for
oral-facial herpes currently on the market in the U.S., as well as other
products or potential products that are or may be under development or
undergoing FDA review. Most of our competitors, including Blistex, Inc., Bayer
Corp. and Schering Plough, have substantial financial resources, research and
development facilities and manufacturing and marketing experience. Even with
docosanol 10% cream being marketed by one of the world's largest consumer
healthcare companies, our licensee may not achieve commercial success in this
intensely competitive environment, which would severely impact our revenues.

Foreign sales of docosanol 10% cream and other potential products are subject to
various foreign trade risks.

         Our license agreement with GlaxoSmithKline is for the United States and
Canada only. We also have exclusive license agreements for docosanol 10% cream
for Israel and Korea. We are in the early stages of discussions with other
potential licensees for marketing and selling docosanol 10% cream in other
countries not already licensed. However, we may not finalize any license or
distributorship arrangements for territories on a timely basis or on favorable
terms, if at all. Further, we are exposed to various foreign trade risks
relating to the continued development and marketing of docosanol 10% cream by
our foreign licensees. Further, we may arrange for contracts in the future for
the manufacture, marketing and distribution of docosanol 10% cream overseas by
foreign licensees, which will be substantially outside our control. Even if we
are able to obtain experienced licensees in foreign markets, specific risks that
could impact significantly our ability to deliver products abroad include:



                                       16
<PAGE>   17

         -        difficulties in obtaining regulatory approval of docosanol 10%
                  cream in Canada, Israel, Korea and other foreign countries;

         -        changes in the regulatory and competitive environments in
                  foreign countries;

         -        changes in a specific country's or region's political or
                  economic conditions;

         -        difficulty in finding foreign partners with sufficient capital
                  to effectively launch, market and promote the product;

         -        shipping delays;

         -        difficulties in managing operations across disparate
                  geographic areas;

         -        fluctuations in foreign currency exchange rates;

         -        prices of competitive products;

         -        difficulties associated with enforcing agreements through
                  foreign legal systems; and

         -        trade protection measures, including customs duties and export
                  quotas.

Our failure or inability to comply with government regulations regarding the
development, production, testing, manufacturing and marketing of our other
products may adversely affect our operations.

         Governmental authorities in the U.S., including the FDA, and other
countries regulate significantly the development, production, testing,
manufacturing and marketing of pharmaceutical products. The clinical testing and
regulatory approval process can take a number of years and require the
expenditure of substantial resources. Failure to obtain, or delays in obtaining,
these approvals will adversely affect our business operations, including our
ability to commence marketing of any proposed products. We may find it necessary
to use a significant portion of our financial resources for research and
development and the clinical trials necessary to obtain these approvals for our
proposed products. We will continue to incur costs of development without any
assurance that we will ever obtain regulatory approvals for any of our products
under development. In addition, we cannot predict the extent to which adverse
governmental regulation might arise from future U.S. or foreign legislative or
administrative action. Moreover, we cannot predict with accuracy the effect of
unspecified, but possible, future changes in the regulatory approval process and
in the domestic health care system for which we develop our products. Future
changes could affect adversely the time frame required for regulatory review,
our financial resources, and the sale prices of our proposed products, if
approved for sale.

Unsuccessful or lengthy research and development programs for proposed new
products could negatively affect our business.

         We face substantial risks of failing to complete the development of our
research programs for the treatment of central nervous system disorders, allergy
and asthma, and other areas. Our Phase II/III clinical trials of AVP-923 for the
treatment of emotional lability in ALS and MS patients may experience setbacks
or failures for reasons we have not anticipated. The effectiveness of our
preclinical allergy and asthma research performed in vitro or in animal models
may not be relevant to the development of, indicate the efficacy of, or have the
safety profile necessary for a proposed product for human use. Unsuccessful
clinical trial results for our proposed products could affect materially and
adversely our future business operations and financial condition. The
development process for medical products is lengthy and capital intensive. Our
drug development programs are exposed to all of the risks inherent in product
development based on innovative technologies, including unanticipated
development problems and the possible lack of funding or collaborative partners,
which could result in the abandonment or substantial change in the development
of a specific product.

We expect to incur increased energy costs and frequent power outages as a result
of the energy crisis currently being experienced in California.

         The State of California has experienced and continues to experience a
deterioration in the ability of major utilities to provide energy for the
State's needs. Throughout California, the crisis has resulted



                                       17
<PAGE>   18

in "rolling blackouts" where certain areas are not provided with any electricity
for periods of up to two hours. The immediate impact has been a significant
increase in power rates for most users, including us. Additionally, the loss of
electrical power or "blackouts" for any significant periods of time could harm
our ability to conduct our experiments or to provide antibody research services
for others. Further, we could lose valuable progress made to date in experiments
currently underway. While we have attempted to mitigate the severity of such
losses by renting portable emergency power equipment, this only partially covers
our electrical needs. We expect to incur capital costs in the near future to
purchase additional power generation capability that we hope will be sufficient
to cover our emergency power needs.

Difficulties in acquiring inlicensed technologies that we believe are necessary
to fill our product development pipeline may negatively affect our stock price
and restrict our growth.

         Our business strategy for growth is not only through internal
development, but also through inlicensing of products, potential products and/or
technologies at various stages in the drug development pipeline. We will face
intense competition in attempting to inlicense other products and technologies.
In addition, we may not be able to locate suitable products and technologies to
fit our strengths, be able to obtain them on acceptable terms, or have the
financial resources to develop products from the inlicensed technology. If we
are unable to add to our product development pipeline, our growth may be limited
and it may affect our business and stock price negatively. Also, we must have
the financial resources to acquire and/or inlicense new products and
technologies and develop and market the products, if approved. We can provide no
assurance that we will be successful in our inlicensing strategy or that it will
have the desired effect on our future growth or stock price.

Our failure to retain key management and scientific personnel could negatively
affect our business.

         Our success depends on the performance of a small core staff of key
management and scientific employees with biotech experience. Given our small
staff size and programs currently under development, we depend substantially on
our ability to hire, train, retain and motivate high quality personnel,
especially our scientists and management team in this field. If we were to lose
one or more of our key scientists, then we would lose the history and knowledge
that they have which could substantially delay one or more of our development
programs until adequate replacement personnel could be hired and trained.

         Our future success also depends on our continuing ability to identify,
hire, train and retain highly qualified, technical, sales, marketing and
customer service personnel. We presently employ approximately 35 people in
AVANIR and our subsidiary, Xenerex Biosciences, and we expect to hire additional
people throughout the year. While we have employment and employee retention
agreements with certain key executives, they are limited in scope and provide no
real assurance that any of these people will continue their employment with us.
We do not have "key person" life insurance policies. The industry in which we
compete has a high level of employee mobility and aggressive recruiting of
skilled personnel, which creates intense competition for qualified personnel,
particularly in product research, development, sales and marketing.

Our patents may be challenged and our pending patents may be denied. Either
result would seriously jeopardize our ability to compete in the intended markets
for our proposed products.

         We rely substantially on the protection of our intellectual property
for docosanol, with 17 U.S. and foreign docosanol patents and 24 additional
docosanol-related patent applications pending. We also have seven U.S. and
foreign patents issued, one Notice of Allowance of a patent and 62 applications
pending on other products and technologies, and have inlicensed the rights to
market a potential product



                                       18
<PAGE>   19
that treats multiple central nervous system disorders that has six issued
patents. Because of the competitive nature of the bio-pharmaceutical industry,
we cannot assure you that:

         -        the claims in the pending patent applications will be allowed
                  or that we will even be issued additional patents;

         -        present and future competitors will not develop similar or
                  superior technologies independently, duplicate our
                  technologies or design around the patented aspects of our
                  technologies;

         -        our proposed technologies will not infringe other patents or
                  rights owned by others, including licenses which may not be
                  available to us;

         -        any issued patents will provide us with significant
                  competitive advantages; or

         -        challenges will not be instituted against the validity or
                  enforceability of any patent that we own or, if instituted,
                  that these challenges will not be successful.

Our inability to obtain or maintain patent protections for our products in
foreign markets may negatively affect our financial condition.

         The process for the approval of patent applications in foreign
countries may differ significantly from the process in the U.S. These
differences may delay our plans to market and sell docosanol 10% cream and other
products in the international marketplace. Approval in one country does not
necessarily indicate that approval can be obtained in other countries. The
patent authorities in each country administer that country's laws and
regulations relating to patents independently of the laws and regulations of any
other country and we must seek and obtain the patents separately. Our inability
to obtain or maintain patent protections for docosanol 10% cream and other
products in foreign markets would severely hamper our ability to generate
international sales from our first product and other products still under
development.

If we do not protect our technical innovations, then our business may be
negatively affected.

         We rely substantially on confidentiality agreements to protect our
innovations. We cannot assure you that secrecy obligations will be honored, or
that others will not develop independently similar or superior technology. In
addition, if our consultants, key employees or other third parties apply
technological information independently developed by them or by others to our
projects, then disputes may arise as to the proprietary rights to this
information in which we may not receive a favorable resolution.

Developing new pharmaceutical products for human use involves product liability
risks, for which we currently have limited insurance coverage.

         The testing, marketing, and sale of pharmaceutical products involves
the risk of product liability claims by consumers and other third parties. We
maintain product liability insurance coverage for our clinical trials in the
amount of $2 million per incident and $2 million in the aggregate. However,
product liability claims can be high in the pharmaceutical industry and our
insurance may not cover sufficiently all of the possible liabilities. If a suit
against our business or proposed products is successful, then the lack or
insufficiency of insurance coverage could affect materially and adversely our
business and financial condition. Furthermore, various distributors of
pharmaceutical products require minimum product liability insurance coverage
before their purchase or acceptance of products for distribution. Failure to
satisfy these insurance requirements could impede our ability to achieve broad
distribution of our proposed products.



                                       19
<PAGE>   20
We may issue additional shares of our Class A common stock. These issuances may
dilute the value of our Class A common stock to current shareholders and may
adversely affect the market price of our Class A common stock.

         If we raise additional capital by issuing additional shares of Class A
common stock at a price or a value per share less than the then-current price
per share of Class A common stock, then the value of the shares of Class A
common stock outstanding will be diluted or reduced. Further, even if we were to
sell shares of common stock at prices higher than today's price, sales of such
shares, over which we have no control, may depress our market price and dilute
earnings per share.

The conversion or exercise of currently outstanding stock purchase warrants and
stock options, or conversion of redeemable convertible preferred stock currently
outstanding will have a dilutive effect on our Class A common stock.

          As of May 8, 2001, the Company had outstanding stock options to
purchase an aggregate of 5,196,419 shares of Class A common stock at exercise
prices ranging from $0.30 to $6.44 per share and warrants to acquire up to
1,372,131 shares of Class A common stock at exercise prices ranging from $0.9144
to $2.715 per share. The Company has or may have other securities that have a
dilutive effect, including 50 shares of Series D redeemable convertible
preferred stock, which at today's market prices may be converted into
approximately 180,000 shares of Class A common stock at a fixed conversion price
of $2.715 per share.

         Sales in the public market of shares of Class A common stock acquired
upon exercise of stock options and warrants may affect adversely the prevailing
market prices for Class A common stock. Negative price movements in the shares
of Class A common stock likely would affect adversely our ability to obtain
additional equity capital on favorable terms, if at all.

We do not intend to declare or pay cash dividends in the foreseeable future.

         We do not intend to declare or pay cash dividends in the foreseeable
future. We expect to retain any earnings, if and when achieved, to finance our
business.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         The Company's market risk exposures are related to its cash and cash
equivalents. We invest our excess cash in highly liquid short-term investments
with maturities of less than one-year, which we do not believe is a significant
market risk. We do not enter into derivative or other financial instruments for
trading or speculative purposes. We expect that our sales transactions for the
foreseeable future will be denominated in U.S. dollars and thus will not be
subject to risk due to currency exchange fluctuations.


                            PART II OTHER INFORMATION

ITEMS 1-3. NOT APPLICABLE



                                       20
<PAGE>   21

Item 4.       SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        The Annual Meeting of Shareholders of AVANIR Pharmaceuticals was
convened on March 15, 2001, at 9:00 a.m. local time.  There were issued and
outstanding on January 17, 2001, the record date, 57,257,092 shares of Class A
common stock, each share being entitled to one vote, and 49,000 shares of the
Company's Class B common stock, each share being entitled to five votes,
constituting all of the outstanding voting securities of the Company.  There
were present at the meeting in person or by proxy, shareholders of the Company
who were the holders of 55,264,575 votes of the Company's common stock entitled
to vote thereat, constituting a quorum.  The proposal to elect three Class III
directors to hold office until the 2004 Annual Meeting of Shareholders received
the following votes:

<TABLE>
<CAPTION>
                                      For         Against
<S>                                   <C>           <C>
  Kenneth E. Olson                 53,428,835    1,835,740
  Gerald J. Yakatan, Ph.D.         53,358,273    1,906,302
  Dennis J. Carlo, Ph.D.           53,670,375    1,594,200
</TABLE>

        The proposal to ratify the selection of Deloitte & Touche LLP as the
Company's independent auditors received the following vote:

<TABLE>
<CAPTION>
                                  For       Against    Abstain
<S>                               <C>         <C>        <C>
                               54,805,598   327,479    356,498
</TABLE>

        The foregoing proposal was approved and accordingly ratified.

        Management withdrew a proposal to amend our bylaws to reduce the number
of classes of directors from three classes to two.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K


        None.



                                       21
<PAGE>   22
                                   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.



<TABLE>
<CAPTION>
Signature                                        Title                                Date
---------                                        -----                                ----
<S>                                     <C>                                           <C>
/s/GERALD J. YAKATAN                    President and Chief                           May 15, 2001
------------------------------------    Executive Officer
Gerald J. Yakatan                       (Principal Executive Officer)



/s/GREGORY P. HANSON                    Vice President, Finance and Chief            May 15, 2001
------------------------------------    Financial Officer
Gregory P. Hanson                       (Principal Financial and Accounting Officer)
</TABLE>



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