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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
 For the quarterly period ended December 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 For the transition period from  to .
 Commission File No. 1-15803
 AVANIR PHARMACEUTICALS
  California
(State or other jurisdiction of 
incorporation or organization)
    
    
    
    33-0314804
(I.R.S. Employer Identification No.)
 101 Enterprise Suite 300, Aliso Viejo, California
(Address of principal executive offices)
    
    92656
(Zip Code)
 (949) 389-6700
 þ o
  o þ o
 o þ




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Table of Contents
  
 PagePART I. FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (Unaudited)Report of Independent Registered Public Accounting Firm
    
    
    3Condensed Consolidated Balance Sheets
    
    
    4Condensed Consolidated Statements of Operations
    
    
    5Condensed Consolidated Statements of Cash Flows
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    24Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    39Item 4.
    
    Controls and Procedures
    
    
    39PART II. OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    40Item 1A.
    
    Risk factors
    
    
    40Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    41Item 3.
    
    Defaults Upon Senior Securities
    
    
    42Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    42Item 5.
    
    Other Information
    
    
    42Item 6.
    
    Exhibits
    
    
    42Signatures
    
    
    43EXHIBIT 15.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. FINANCIAL STATEMENTS
 
 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 Avanir
 Avanir
   Avanir
  
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AVANIR Pharmaceuticals
 
 CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 December 31,
    
    
    September 30,2006
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    14,457,274
    
    
    $
    4,898,214Short-term investments in securities
    
    
    1,968,663
    
    
    
    16,778,267Receivables, net
    
    
    2,316,187
    
    
    
    3,042,468Inventories
    
    
    3,531,111
    
    
    
    2,835,203Prepaid expenses
    
    
    1,683,447
    
    
    
    1,778,918Total current assets
    
    
    23,956,682
    
    
    
    29,333,070Investments in securities
    
    
    245,040
    
    
    
    2,216,995Restricted investments in securities
    
    
    856,597
    
    
    
    856,597Property and equipment, net
    
    
    5,221,484
    
    
    
    6,047,729Intangible assets, net
    
    
    9,678,740
    
    
    
    10,113,329Goodwill
    
    
    19,042,439
    
    
    
    22,110,328Other assets
    
    
    438,614
    
    
    
    784,289TOTAL ASSETS
    
    $
    59,439,596
    
    
    $
    71,462,337LIABILITIES AND SHAREHOLDERS DEFICITCurrent liabilities:Accounts payable
    
    $
    4,813,554
    
    
    $
    10,845,057Accrued expenses
    
    
    15,047,773
    
    
    
    12,983,501Assumed liabilities for returns and other discounts
    
    
    
    
    
    
    3,980,229Deferred revenues, net
    
    
    4,705,633
    
    
    
    7,592,563Notes payable
    
    
    592,101
    
    
    
    670,737Capital lease obligations
    
    
    224,000
    
    
    
    230,760Total current liabilities
    
    
    25,383,061
    
    
    
    36,302,847Other liabilities
    
    
    219,563
    
    
    
    230,450Deferred revenues, net of current portion
    
    
    15,047,365
    
    
    
    15,716,762Notes payable, net of current portion
    
    
    21,820,992
    
    
    
    24,715,905Capital lease obligations, net of current portion
    
    
    116,815
    
    
    
    170,908Total liabilities
    
    
    62,587,796
    
    
    
    77,136,872COMMITMENTS AND CONTINGENCIES(Note 10)SHAREHOLDERS DEFICITPreferred stock  no par value, 10,000,000 shares
authorized, no shares issued and outstanding as of
December 31, 2006 and September 30, 2006
    
    
    
    
    
    
    Common stock  no par value, Class A, 200,000,000
shares authorized, 37,158,572 and 31,708,461 shares
issued and outstanding as of December 31, 2006 and
September 30, 2006, respectively
    
    
    228,069,110
    
    
    
    211,993,249Accumulated deficit
    
    
    (231,182,807
    )
    
    
    (217,565,280
    )Accumulated other comprehensive loss
    
    
    (34,503
    )
    
    
    (102,504
    )Total shareholders deficit
    
    
    (3,148,200
    )
    
    
    (5,674,535
    )TOTAL LIABILITIES AND SHAREHOLDERS DEFICIT
    
    $
    59,439,596
    
    
    $
    71,462,337
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AVANIR Pharmaceuticals
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 Three months endedDecember 31,2006
    
    
    2005PRODUCT SALESNet revenues
    
    $
    6,270,704
    
    
    $
    Cost of revenues
    
    
    1,347,184
    
    
    
    Product gross margin
    
    
    4,923,520
    
    
    
    LICENSES, RESEARCH SERVICES AND GRANTSRevenues from research services
    
    
    1,270,244
    
    
    
    2,478,018Cost of research services
    
    
    (1,164,075
    )
    
    
    (2,018,799
    )Revenues from government research grant services
    
    
    86,348
    
    
    
    84,825Cost of government research grant services
    
    
    (95,727
    )
    
    
    (71,123
    )Revenues from license agreements
    
    
    57,265
    
    
    
    5,000,000Revenue from royalties and royalty rights
    
    
    723,040
    
    
    
    582,045License, research services, and grants gross margin
    
    
    877,095
    
    
    
    6,054,966Total gross margin
    
    
    5,800,615
    
    
    
    6,054,966OPERATING EXPENSESResearch and development
    
    
    5,906,001
    
    
    
    7,198,958Selling, general and administrative
    
    
    13,245,934
    
    
    
    4,768,743Loss from operations
    
    
    (13,351,320
    )
    
    
    (5,912,735
    )OTHER INCOME (EXPENSE)Interest expense
    
    
    (603,028
    )
    
    
    (23,438
    )Interest income
    
    
    191,476
    
    
    
    328,166Other
    
    
    145,345
    
    
    
    10,512Loss before income taxes
    
    
    (13,617,527
    )
    
    
    (5,597,495
    )Provision for income taxes
    
    
    
    
    
    
    (2,417
    )NET LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
    
    
    (13,617,527
    )
    
    
    (5,599,912
    )Cumulative effect of change in accounting principle
    
    
    
    
    
    
    (3,616,058
    )NET LOSS
    
    $
    (13,617,527
    )
    
    $
    (9,215,970
    )Basic and diluted net loss per shareLoss before cumulative effect of change in accounting principle
    
    $
    (0.39
    )
    
    $
    (0.20
    )Cumulative effect of change in accounting principle
    
    
    
    
    
    
    (0.12
    )Net loss
per share
    
    $
    (0.39
    )
    
    $
    (0.32
    )Basic and diluted weighted average number of common shares
outstanding
    
    
    34,626,117
    
    
    
    28,579,357
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AVANIR Pharmaceuticals
 
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 Three Months EndedDecember 31,2006
    
    
    2005OPERATING ACTIVITIES:Net loss
    
    $
    (13,617,527
    )
    
    $
    (9,215,970
    )Adjustments to reconcile net loss to net cash used for operating activities:Cumulative effect of change in accounting principle
    
    
    
    
    
    
    3,616,058Depreciation and amortization
    
    
    1,415,040
    
    
    
    415,019Share-based compensation expense
    
    
    844,517
    
    
    
    462,013Loss on disposal of assets
    
    
    
    
    
    
    1,225Changes in operating assets and liabilities:Receivables
    
    
    964,646
    
    
    
    (5,428,921
    )Inventories
    
    
    (348,484
    )
    
    
    (364,567
    )Prepaid expenses and other assets
    
    
    86,709
    
    
    
    (679,390
    )Accounts payable
    
    
    (6,031,503
    )
    
    
    (3,581,490
    )Accrued expenses
    
    
    2,053,385
    
    
    
    2,803,655Assumed
liabilities for returns and other discounts, net of non-cash
adjustment
of purchase price
    
    
    (912,340
    )
    
    
    Deferred revenues
    
    
    (3,556,327
    )
    
    
    (553,597
    )Net cash used for operating activities
    
    
    (19,101,884
    )
    
    
    (12,525,965
    )INVESTING ACTIVITIES:Investments in securities
    
    
    (50,440
    )
    
    
    (13,532,124
    )Proceeds from sales and maturities of investments in securities
    
    
    16,900,000
    
    
    
    11,850,000Purchases of property and equipment
    
    
    (86,193
    )
    
    
    (543,300
    )Net cash (used for) provided by investing activities
    
    
    16,763,367
    
    
    
    (2,225,424
    )FINANCING ACTIVITIES:Proceeds from issuance of common stock, net
    
    
    14,992,979
    
    
    
    37,016,041Payments on notes and capital lease obligations
    
    
    (3,095,402
    )
    
    
    (82,901
    )Net cash provided by financing activities
    
    
    11,897,577
    
    
    
    36,933,140Net increase in cash and cash equivalents
    
    
    9,559,060
    
    
    
    22,181,751Cash and cash equivalents at beginning of period
    
    
    4,898,214
    
    
    
    8,620,143Cash and cash equivalents at end of period
    
    $
    14,457,274
    
    
    $
    30,801,894SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Interest paid
    
    $
    542,028
    
    
    $
    23,438Income taxes paid
    
    $
    
    
    
    $
    2,417NONCASH INVESTING AND FINANCING ACTIVITIES:Stock subscription receivable
    
    $
    238,365
    
    
    
    Purchase price adjustment of assumed liabilities
    
    
    3,067,889
    
    
    
    Purchases of property and equipment which are included in
accounts payable and accrued expenses
    
    $
    
    
    
    $
    253,538Elimination of unearned compensation against common stock
    
    $
    
    
    
    $
    3,477,144
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AVANIR Pharmaceuticals
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Nature of Business
 Avanir Avanir
   Revenue recognition
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Revenue Recognition. Revenue Recognition When Right of Return
Exists
 Accounting for Revenue Arrangements with
Multiple Deliverables. Revenue Recognition.
 Product Sales
 Active Pharmaceutical Ingredient Docosanol (API Docosanol).Revenues from the sale of our
API Docosanol are recognized when title and risk of loss have passed to the buyer and provided
the criteria in SAB Topic 13 are met. We sell the API Docosanol to various licensees upon
receipt of a written order for the materials. Shipments generally occur fewer than five times
a year. Our contracts for sales of the API Docosanol include buyer acceptance provisions that
give our buyers the right of replacement if the delivered product does not meet specified
criteria. That right requires that they give us notice within 30 days after receipt of the
product. We have the option to refund or replace any such defective materials; however, we
have historically demonstrated that the materials shipped from the same pre-inspected lot have consistently met the specified criteria and no buyer has rejected any of
our shipments from the same pre-inspected lot to date. Therefore, we recognize revenue at the
time of delivery without providing any returns reserve.FazaClo.We acquired Alamo Pharmaceuticals LLC (Alamo) on May 24, 2006, with one marketed
product, FazaClo (clozapine, USP), that began shipping to wholesale customers in July 2004 in
48-pill units. At that time, FazaClo had a two-year shelf life. In June 2005, Alamo received
FDA approval to extend the product expiration date to three years. In October 2005, Alamo began
shipping 96-pill units and accepted returns of unsold or undispensed 48-pill units.We sell FazaClo to pharmaceutical wholesalers, the three largest of which account for
approximately 84% of our net wholesale shipments for the quarter ended December 31, 2006. They
resell our product to outlets such as pharmacies, hospitals and other dispensing organizations.
We have agreements with our wholesale customers, various states, hospitals, certain other
medical institutions and third-party payers throughout the U.S. These agreements frequently
contain commercial incentives, which may include pricing allowances and discounts payable at
the time the product is sold to the dispensing outlet or upon dispensing the product to
patients. Consistent with pharmaceutical industry practice, wholesale customers can return
purchased product during an 18-month period that begins six months prior to the products
expiration date and ends 12 months after the expiration date. Additionally, several of our
dispensing outlets have the right to return expired product at any time. Once products have
been dispensed to patients the right of return expires.
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Prior to the quarter ended December 31, 2006, we did not have sufficient historical information
and analytical support to reasonably estimate future product returns, nor to reasonably
estimate the extent to which the right of return had expired on product we shipped.
Accordingly, prior to the first quarter of fiscal 2007, we were unable to recognize revenues
for product sales subject to return under FAS 48 and deferred the recognition of revenues on
all shipments of FazaClo. We would have recognized revenues when we obtained reliable evidence
that helped us reasonably determine that the right of return no longer exists, such as when the
products have been dispensed to patients or the return period had otherwise expired. We
previously disclosed in the notes to our fiscal 2006 financial statements included in our
Annual Report on Form 10-K, that for purposes of applying this sell-through method, we would
determine when products that we shipped are dispensed to patients based only on those instances
when rebate requests are submitted to us by various state agencies and others. Based on the
information we had available to us at the time, we had no other means to determine that product
had been dispensed until we received the rebate requests, however, rebate requests are only
expected to be received for a portion of the products dispensed to patients since not all
products dispensed are subject to rebates. Rebates are received in approximately 90-120 days
from when the products are dispensed. As of September 30, 2006, we had not received any rebate
requests that we believed related to product that we shipped after our acquisition of Alamo.
Further, as previously disclosed in the notes to our fiscal 2006 financial statements included
in our Annual Report on Form 10-K, in conjunction with our evaluation of our assumed liability
for returns, we had been working with our key wholesalers to obtain sufficient information
about the amount and type of FazaClo product in the distribution channel.During the second quarter of fiscal 2007, we obtained and substantially completed our analysis
of third-party information regarding certain wholesaler inventory levels, a sample of outlet
inventory levels and third-party market research data. The third-party data includes, (i) IMS
Health Audit  National Sales Perspective reports (NSP), which is a projection of
near-census data of wholesaler shipments of product to all outlet types, including retail and
non-retail and; (ii) IMS Health National Prescription Audit (NPA) Syndicated data which
captures end user consumption from retail dispensed prescriptions based upon
projected data from pharmacies estimated to represent approximately 60% to 70% of the U.S.
prescription universe . Finally, we completed our analysis of historical rebates and
chargebacks earned by State Medicaid, Medicare Part D and managed care customers for a trailing
twelve months. Based upon this additional information and analysis obtained in this quarter, we
now believe we can reasonably estimate the amount of product that we have shipped that is no
longer in the wholesale or outlet channels as of December 31, 2006, and hence no longer subject
to a right of return. Accordingly, since January 2007, we have received sufficient additional
information that allows us to reasonably estimate the amount of product no longer subject to
the right of return as of December 31, 2006. Therefore, we began recognizing revenues, net of
returns, chargebacks, rebates, and discounts, in the first quarter of fiscal 2007, for product
that we estimate have been sold to patients and that is no longer subject to a right of return.As a result, we have recognized revenues on FazaClo product sales of $6.3 million in the
quarter ended December 31, 2006, which includes the recognition of deferred revenues of FazaClo
that were deferred as of September 30, 2006. Had we continued to recognize revenue only upon
receipt of rebate requests as we did in the prior quarter, management
estimates that minimal revenue would have been recorded in the
quarter ended December 31, 2006. We received approximately
$1.2 million of rebate requests in the first quarter of 2007
that pertain to product that was shipped prior to our acquisition of
Alamo.Additionally, we continue to accumulate historical product return data. To date we have
accumulated return data for four lots which are within the 18-month return window, which have
varying historical return rates. We are continuing to accumulate historical product return
information, but at this time believe that we have insufficient information to reasonably
estimate future product returns for revenue recognition purposes. Accordingly, we continue to
defer recognizing revenues on all estimated in-channel inventories that are subject to the
right of return until such time as we can reasonably estimate product returns.Revenues are recorded net of provisions for estimated product pricing allowances including:
State Medicaid base and supplemental rebates, Medicare Part D discounts, managed care contract
discounts and prompt payment discounts at an aggregate rate of approximately 29.2% of gross
revenues as of December 31, 2006. Provisions for these allowances are estimated based upon
contractual terms and require management to make subjective judgments on customer mix to reach
this judgment. We considered our current contractual rates with States related to Medicaid base
and supplemental rebates, with private organizations for Medicare Part D discounts and
contracts with managed care organizations over a trailing twelve months. We review these rates
at least quarterly and make adjustments, if necessary.
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Multiple Element Arrangements.
   License Arrangements.License arrangements may consist of non-refundable upfront license
fees, data transfer fees, research reimbursement payments, exclusive licensed rights to
patented or patent pending compounds, technology access fees, various performance or sales
milestones and future product royalty payments. These arrangements are often multiple element
arrangements.Non-refundable, up-front fees that are not contingent on any future performance by us, and
require no consequential continuing involvement on our part, are recognized as revenue when the
license term commences and the licensed data, technology and/or compound is delivered. Such
deliverables may include physical quantities of compounds, design of the compounds and
structure-activity relationships, the conceptual framework and mechanism of action, and rights
to the patents or patents pending for such compounds. We defer recognition of non-refundable
upfront fees if we have continuing performance obligations without which the technology, right,
product or service conveyed in conjunction with the non-refundable fee has no utility to the
licensee that is separate and independent of our performance under the other elements of the
arrangement. In addition, if we have required continuing involvement through research and
development services that are related to our proprietary know-how and expertise of the
delivered technology, or can only be performed by us, then such up-front fees are deferred and
recognized over the period of continuing involvement.Payments related to substantive, performance-based milestones in a research and development
arrangement are recognized as revenues upon the achievement of the milestones as specified in
the underlying agreements when they represent the culmination of the earnings process.Research Services Arrangements.Revenues from research services are recognized during the
period in which the services are performed and are based upon the number of
full-time-equivalent personnel working on the specific project at the agreed-upon rate.
Reimbursements from collaborative partners for agreed upon direct costs including direct
materials and outsourced services, or subcontracted, pre-clinical studies are classified as
revenues in accordance with EITF Issue No. 99-19, Reporting Revenue Gross as a Principal
versus Net as an Agent,and recognized in the period the reimbursable expenses are incurred.
Payments received in advance are deferred until the research services are performed or costs
are incurred. These arrangements are often multiple element arrangements.
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Royalty Arrangements.We recognize royalty revenues from licensed products when earned in
accordance with the terms of the license agreements. Net sales amounts generally required to be
used for calculating royalties include deductions for returned product, pricing allowances,
cash discounts, freight and warehousing. These arrangements are often multiple element
arrangements.When we sell our rights to future royalties under license agreements and also maintain
continuing involvement in earning such royalties, we defer recognition of any upfront payments
and recognize them as revenues over the life of the license agreement. We recognize revenues
for the sale of an undivided interest of our Abreva® license agreement to Drug Royalty USA
under the units-of-revenue method. Under this method, the amount of deferred revenues to be
recognized in each period is calculated by multiplying the ratio of the royalty payments due to
Drug Royalty USA by GlaxoSmithKline for the period to the total remaining royalties that is
expect GlaxoSmithKline will pay Drug Royalty USA over the remaining term of the agreement by
the unamortized deferred revenues.
 Government Research Grant Revenues.
 Cost of Revenues
  Capitalization and Valuation of Long-Lived and Intangible Assets
 Business Combinations Goodwill and Other Intangible
Assets
 Accounting for the Impairment or Disposal of Long-Lived Assets
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Share-Based Compensation
 Share-Based Payment, Accounting for Stock-Based Compensation
 Transition Election
Related to Accounting for Tax Effects of Share-Based Payment Awards
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For the 3 months ended December 31,2006
    
    

2005Share-based compensation expense from:Stock options
    
    $
    414,847
    
    
    $
    246,698Restricted stock awards
    
    
    416,405
    
    
    
    215,315Restricted stock units
    
    
    13,265
    
    
    
    Total
    
    $
    844,517
    
    
    $
    462,013
  Change in Accounting for Patent-Related Costs
  2. ALAMO ACQUISITION
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
    
    A promissory note, in the principal amount of $2,000,000, generally
payable on the third anniversary date if monthly FazaClo net product
sales, as reported by us, exceed $1,000,000 for each of the three
months in a given fiscal quarter during the Contingent Payment Period,
and an additional promissory note in the principal amount of
$2,000,000, generally payable on the third anniversary date if monthly
FazaClo net product sales, as reported by us, exceed $1,500,000 for
each of the three months in a given fiscal quarter during the
Contingent Payment Period. As of December 31, 2007, we did not meet
these conditions.
    
    A one-time cash payment of $10,450,000 if FazaClo net product sales,
as reported by us, exceed $40.0 million over four consecutive fiscal
quarters during the Contingent Payment Period.
    
    An additional one-time cash payment of $25,000,000 if FazaClo net
product sales, as reported by us, exceed $50.0 million over four
consecutive fiscal quarters during the Contingent Payment Period.
   Purchase Price Allocation
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====================================================================================================================================

Purchase price:Cash paid at closing
    
    $
    4,040,000Estimated fair value of notes payable issued, net of
imputed discount
    
    
    24,343,000Transaction costs
    
    
    911,536$
    29,294,536Allocation:Net tangible assets acquired:Cash
    
    $
    157,507Accounts receivable
    
    
    1,026,740Inventories
    
    
    2,297,117Property and equipment
    
    
    1,845,077Other assets
    
    
    423,457Identifiable intangible assets acquired:Product rights
    
    
    7,200,000In-process research and development
    
    
    1,300,000Customer relationships
    
    
    2,900,000Trade name
    
    
    400,000Non-compete agreement
    
    
    160,000Goodwill
    
    
    19,042,439Total assets acquired
    
    
    36,752,337Liabilities assumed:Accounts payable and accrued expenses
    
    
    (3,611,653
    )Assumed liabilities for returns and other discounts
    
    
    (3,333,432
    )Capital lease obligations
    
    
    (512,716
    )Total liabilities assumed
    
    
    (7,457,801
    )$
    29,294,536
 Accounting in a Business Combination for Deferred Revenue of an Acquiree,
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Identifiable Intangible Assets
    Product
    
    Customer
    
    Trade
    
    Non-CompeteYear
    
    Rights
    
    Relationships
    
    Name
    
    Agreements1
    
    
    14
    %
    
    
    15
    %
    
    
    8
    %
    
    
    100
    %2
    
    
    15
    %
    
    
    22
    %
    
    
    9
    %
    
    
    3
    
    
    15
    %
    
    
    18
    %
    
    
    8
    %
    
    
    4
    
    
    14
    %
    
    
    13
    %
    
    
    9
    %
    
    
    5
    
    
    14
    %
    
    
    9
    %
    
    
    8
    %
    
    
    6
    
    
    14
    %
    
    
    8
    %
    
    
    9
    %
    
    
    7
    
    
    14
    %
    
    
    8
    %
    
    
    8
    %
    
    
    8
    
    
    
    
    
    
    7
    %
    
    
    9
    %
    
    
    9
    
    
    
    
    
    
    
    
    
    
    8
    %
    
    
    10
    
    
    
    
    
    
    
    
    
    
    9
    %
    
    
    11
    
    
    
    
    
    
    
    
    
    
    8
    %
    
    
    12
    
    
    
    
    
    
    
    
    
    
    8
    %
    
    
    
 In-Process Research and Development
  16




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##### Table of Contents



Pro Forma Results of Operations
  For the 3 monthsended December 31,2005Pro forma net revenues(1)
    
    $
    9,369,049Pro forma net loss(2)
    
    $
    (11,163,405
    )Pro forma loss per basic and diluted share
    
    $
    (0.39
    )Shares used for basic and diluted computation
    
    
    28,579,357
 
 (1)
    
    In accordance with the provisions of EITF 01-3, we will not
recognize deferred revenues recorded as of the acquisition date,
resulting in lower net revenues in the periods following the
merger than Alamo would likely have achieved as a separate
company.(2)
    
    Pro forma net loss for the periods presented includes the
amortization of identifiable intangible assets, interest expense
associated with the notes payable issued as part of the purchase
price, elimination of interest expense associated with Alamos
historical debt that was not assumed by us in the acquisition,
reduction of interest income by an amount determined by applying
the average rate of return for the respective periods to the
decrease in our cash balance of $4.0 million used to fund the
acquisition, amortization of discount associated with the notes
payable. The charge of $1.3 million for purchased IPR&D is not
included in the pro forma results of operations because it
reflects a one-time charge directly related to the acquisition
and does not have a continuing impact on our future operations. 17




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##### Table of Contents



3. RELOCATION OF COMMERCIAL AND GENERAL AND ADMINISTRATIVE OPERATIONS
   September 30,
    
    
    
    
    
    
    
    
    
    
    December 31,2006
    
    
    Additions
    
    
    Payments
    
    
    2006Accrued Restructuring:Employee severance and relocation benefits
    
    $
    237,050
    
    
    $
    771,852
    
    
    $
    (334,251
    )
    
    $
    674,651Lease restructuring liability
    
    
    273,998
    
    
    
    
    
    
    
    (10,887
    )
    
    
    263,111Total
    
    $
    511,048
    
    
    $
    771,852
    
    
    $
    (345,138
    )
    
    $
    937,762
 4. INVENTORIES
  December 31,
    
    
    September 30,2006
    
    
    2006Finished goods
    
    $
    1,381,355
    
    
    $
    1,642,208Raw materials
    
    
    1,994,180
    
    
    
    923,822Work in progress
    
    
    
    
    
    
    80,580Inventories subject to return
    
    
    155,576
    
    
    
    536,017Total inventories
    
    $
    3,531,111
    
    
    $
    3,182,627
   5. NET DEFERRED REVENUES
 ®
 18




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##### Table of Contents



Drug Royalty
    
    
    FazaCloUSA
    
    
    Net
    
    
    OtherAgreement
    
    
    Shipments
    
    
    Agreements
    
    
    TotalNet deferred revenues as of October 1,
2006
    
    $
    17,111,913
    
    
    $
    3,955,150
    
    
    $
    2,242,262
    
    
    $
    23,309,325Changes during the period:Shipments, net
    
    
    
    
    
    
    3,536,205
    
    
    
    
    
    
    
    3,536,205Recognized as revenues during period
    
    
    (723,040
    )
    
    
    (6,270,704
    )
    
    
    (98,788
    )
    
    
    (7,092,532
    )Net deferred revenues as of December
31, 2006
    
    $
    16,388,873
    
    
    $
    1,220,651
    
    
    $
    2,143,474
    
    
    $
    19,752,998Classified and reported as:Current portion of deferred revenues
    
    $
    1,870,891
    
    
    $
    1,220,651
    
    
    $
    1,614,091
    
    
    $
    4,705,633Deferred revenues, net of current
portion
    
    
    14,517,982
    
    
    
    
    
    
    
    529,383
    
    
    
    15,047,365Total deferred revenues
    
    $
    16,388,873
    
    
    $
    1,220,651
    
    
    $
    2,143,474
    
    
    $
    19,752,998
 6. COMPUTATION OF NET LOSS PER COMMON SHARE
  7. COMPREHENSIVE LOSS
  For
the 3 monthsended December 31,2006
    
    

2005Net loss
    
    $
    (13,617,527
    )
    
    $
    (9,215,970
    )Other comprehensive loss, net of tax:Unrealized (loss) gain on
available-for-sale securities
    
    
    68,001
    
    
    
    (59,337
    )Total comprehensive loss
    
    $
    (13,549,526
    )
    
    $
    (9,275,307
    )
 8. SHAREHOLDERS EQUITY
  19




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##### Table of Contents



9. EMPLOYEE EQUITY INCENTIVE PLANS
   Stock Options
 20




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##### Table of Contents



WeightedWeighted
    
    averageaverage
    
    remainingexercise
    
    contractual
    
    Aggregateprice per
    
    term
    
    intrinsicNumber of shares
    
    share
    
    (in years)
    
    valueOutstanding, October 1, 2006
    
    
    1,587,070
    
    
    $
    10.07
    
    
    
    7.2
    
    
    $
    817,000Granted
    
    
    198,420
    
    
    
    8.36Exercised
    
    
    (65,571
    )
    
    
    4.38Forfeited
    
    
    (420,757
    )
    
    
    9.98Expired
    
    
    (3,625
    )
    
    
    6.38Outstanding, December 31, 2006
    
    
    1,295,537
    
    
    
    9.35
    
    
    
    7.7
    
    
    
    537,105Vested and expected to vest
in the future, December 31,
2006
    
    
    1,234,324Exercisable, December 31, 2006
    
    
    537,105
    2007
    
    2006Expected volatility
    
    
    75
    %
    
    
    77.4% - 80.4
    %Weighted-average volatility
    
    
    75
    %
    
    
    78.4
    %Average expected term in years
    
    
    6.0
    
    
    
    4.5Risk-fee interest rate (zero coupon U.S.
Treasury Note)
    
    
    4.6
    %
    
    
    4.5
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %
  Options Outstanding
    
    Options ExercisableWeightedAverage
    
    Weighted
    
    
    
    
    
    WeightedRemaining
    
    Average
    
    
    
    
    
    AverageRange of
    
    Number
    
    Contractual
    
    Exercise
    
    Number
    
    ExerciseExercise Prices
    
    Outstanding
    
    Life in Years
    
    Price
    
    Exercisable
    
    Price$1.20  -   $4.64
    
    
    159,396
    
    
    
    4.8
    
    
    $
    3.92
    
    
    
    136,896
    
    
    $
    3.93$5.12  -   $6.92
    
    
    236,661
    
    
    
    7.8
    
    
    $
    6.26
    
    
    
    58,911
    
    
    $
    6.02$7.12  -   $9.92
    
    
    172,525
    
    
    
    7.7
    
    
    $
    8.67
    
    
    
    81,704
    
    
    $
    8.80$10.10 - $10.70
    
    
    146,250
    
    
    
    9.3
    
    
    $
    10.68
    
    
    
    3,646
    
    
    $
    10.24$11.08 - $11.76
    
    
    245,605
    
    
    
    8.4
    
    
    $
    11.70
    
    
    
    95,519
    
    
    $
    11.69$12.12 - $13.84
    
    
    183,650
    
    
    
    7.3
    
    
    $
    13.25
    
    
    
    127,104
    
    
    $
    13.26$14.28 - $19.38
    
    
    151,450
    
    
    
    8.2
    
    
    $
    15.86
    
    
    
    33,325
    
    
    $
    17.061,295,537
    
    
    
    7.7
    
    
    $
    9.94
    
    
    
    537,105
    
    
    $
    9.35
 21




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##### Table of Contents



Restricted stock units.
 WeightedNumber of
    
    average grantshares
    
    date fair valueUnvested, October 1, 2006
    
    
    51,480
    
    
    $
    15.54Granted
    
    
    613,930
    
    
    $
    2.79Vested
    
    
    
    
    
    $
    Forfeited
    
    
    (17,900
    )
    
    $
    Unvested, December 31, 2006
    
    
    647,510
    
    
    $
    3.78
  Restricted stock awards
 WeightedNumber of
    
    average grantshares
    
    date fair valueUnvested, October 1, 2006
    
    
    223,915
    
    
    $
    13.48Granted
    
    
    15,000
    
    
    $
    7.35Vested
    
    
    (20,833
    )
    
    $
    2.90Forfeited
    
    
    (     7,000
    )
    
    $
    Unvested, December 31, 2006
    
    
    211,082
    
    
    $
    14.54
   22




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##### Table of Contents



10. COMMITMENTS AND CONTINGENCIES
  11. SEGMENT INFORMATION
     12. SUBSEQUENT EVENTS
  23




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##### Table of Contents



Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  EXECUTIVE OVERVIEW
 Avanir
 ®
    24




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##### Table of Contents



®
 Avanir Marketed Products and Product Pipeline
  
 
 (a)
    
    Timelines in this pictorial representation are not to scale.(b)
    
    Granted to GlaxoSmithKline exclusive rights to market
docosanol 10% cream in North America.(c)
    
    Licensed to AstraZeneca, which assumed all ongoing product development expenses.(d)
    
    Licensed to Novartis, which assumed all ongoing product development expenses.(e)
    
    Effective November 9, 2006, we place on hold activities
associated with the selective cytokine.(f)
    
    Pending outcome of planned meeting with the FDA in
February 2007. 25




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##### Table of Contents



info@avanir.com www.avanir.com.
 CRITICAL ACCOUNTING POLICIES AND ESTIMATES
  26




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##### Table of Contents



Revenue Recognition. Revenue Recognition When Right of Return
Exists
 Accounting for Revenue Arrangements with
Multiple Deliverables. Revenue Recognition.
 Product Sales
 Active Pharmaceutical Ingredient Docosanol (API Docosanol).Revenues from the sale of our
API Docosanol are recognized when title and risk of loss have passed to the buyer and provided
the criteria in SAB Topic 13 are met. We sell the API Docosanol to various licensees upon
receipt of a written order for the materials. Shipments generally occur fewer than five times
a year. Our contracts for sales of the API Docosanol include buyer acceptance provisions that
give our buyers the right of replacement if the delivered product does not meet specified
criteria. That right requires that they give us notice within 30 days after receipt of the
product. We have the option to refund or replace any such defective materials; however, we
have historically demonstrated that the materials shipped from the same pre-inspected lot have consistently met the specified criteria and no buyer has rejected any of
our shipments from the same pre-inspected lot to date. Therefore, we recognize revenue at the
time of delivery without providing any returns reserve.FazaClo.We acquired Alamo Pharmaceuticals LLC (Alamo) on May 24, 2006, with one marketed
product, FazaClo (clozapine, USP), that began shipping to wholesale customers in July 2004 in
48-pill units. At that time, FazaClo had a two-year shelf life. In June 2005, Alamo received
FDA approval to extend the product expiration date to three years. In October 2005, Alamo began
shipping 96-pill units and accepted returns of unsold or undispensed 48-pill units.We sell FazaClo to pharmaceutical wholesalers, the three largest of which account for
approximately 84% of our net wholesale shipments for the quarter ended December 31, 2006. They
resell our product to outlets such as pharmacies, hospitals and other dispensing organizations.
We have agreements with our wholesale customers, various states, hospitals, certain other
medical institutions and third-party payers throughout the U.S. These agreements frequently
contain commercial incentives, which may include pricing allowances and discounts payable at
the time the product is sold to the dispensing outlet or upon dispensing the product to
patients. Consistent with pharmaceutical industry practice, wholesale customers can return
purchased product during an 18-month period that begins six months prior to the products
expiration date and ends 12 months after the expiration date. Additionally, several of our
dispensing outlets have the right to return expired product at any time. Once products have
been dispensed to patients the right of return expires.
 27




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##### Table of Contents



Prior to the quarter ended December 31, 2006, we did not have sufficient historical information
and analytical support to reasonably estimate future product returns, nor to reasonably
estimate the extent to which the right of return had expired on product we shipped.
Accordingly, prior to the first quarter of fiscal 2007, we were unable to recognize revenues
for product sales subject to return under FAS 48 and deferred the recognition of revenues on
all shipments of FazaClo. We would have recognized revenues when we obtained reliable evidence
that helped us reasonably determine that the right of return no longer exists, such as when the
products have been dispensed to patients or the return period had otherwise expired. We
previously disclosed in the notes to our fiscal 2006 financial statements included in our
Annual Report on Form 10-K, that for purposes of applying this sell-through method, we would
determine when products that we shipped are dispensed to patients based only on those instances
when rebate requests are submitted to us by various state agencies and others. Based on the
information we had available to us at the time, we had no other means to determine that product
had been dispensed until we received the rebate requests, however, rebate requests are only
expected to be received for a portion of the products dispensed to patients since not all
products dispensed are subject to rebates. Rebates are received in approximately 90-120 days
from when the products are dispensed. As of September 30, 2006, we had not received any rebate
requests that we believed related to product that we shipped after our acquisition of Alamo.
Further, as previously disclosed in the notes to our fiscal 2006 financial statements included
in our Annual Report on Form 10-K, in conjunction with our evaluation of our assumed liability
for returns, we had been working with our key wholesalers to obtain sufficient information
about the amount and type of FazaClo product in the distribution channel.During the second quarter of fiscal 2007, we obtained and substantially completed our analysis
of third-party information regarding certain wholesaler inventory levels, a sample of outlet
inventory levels and third-party market research data. The third-party data includes, (i) IMS
Health Audit  National Sales Perspective reports (NSP), which is a projection of
near-census data of wholesaler shipments of product to all outlet types, including retail and
non-retail and; (ii) IMS Health National Prescription Audit (NPA) Syndicated data which
captures end user consumption from retail dispensed prescriptions based upon
projected data from pharmacies estimated to represent approximately 60% to 70% of the U.S.
prescription universe . Finally, we completed our analysis of historical rebates and
chargebacks earned by State Medicaid, Medicare Part D and managed care customers for a trailing
twelve months. Based upon this additional information and analysis obtained in this quarter, we
now believe we can reasonably estimate the amount of product that we have shipped that is no
longer in the wholesale or outlet channels as of December 31, 2006, and hence no longer subject
to a right of return. Accordingly, since January 2007, we have received sufficient additional
information that allows us to reasonably estimate the amount of product no longer subject to
the right of return as of December 31, 2006. Therefore, we began recognizing revenues, net of
returns, chargebacks, rebates, and discounts, in the first quarter of fiscal 2007, for product
that we estimate have been sold to patients and that is no longer subject to a right of return.As a result, we have recognized revenues on FazaClo product sales of $6.3 million in the
quarter ended December 31, 2006, which includes the recognition of deferred revenues of FazaClo
that were deferred as of September 30, 2006. Had we continued to recognize revenue only upon
receipt of rebate requests as we did in the prior quarter, management
estimates that minimal revenue would have been recorded in the
quarter ended December 31, 2006. We received approximately
$1.2 million of rebate requests in the first quarter of 2007
that pertain to product that was shipped prior to our acquisition of
Alamo.Additionally, we continue to accumulate historical product return data. To date we have
accumulated return data for four lots which are within the 18-month return window, which have
varying historical return rates. We are continuing to accumulate historical product return
information, but at this time believe that we have insufficient information to reasonably
estimate future product returns for revenue recognition purposes. Accordingly, we continue to
defer recognizing revenues on all estimated in-channel inventories that are subject to the
right of return until such time as we can reasonably estimate product returns.Revenues are recorded net of provisions for estimated product pricing allowances including:
State Medicaid base and supplemental rebates, Medicare Part D discounts, managed care contract
discounts and prompt payment discounts at an aggregate rate of approximately 29.2% of gross
revenues as of December 31, 2006. Provisions for these allowances are estimated based upon
contractual terms and require management to make subjective judgments on customer mix to reach
this judgment. We considered our current contractual rates with States related to Medicaid base
and supplemental rebates, with private organizations for Medicare Part D discounts and
contracts with managed care organizations over a trailing twelve months. We review these rates
at least quarterly and make adjustments, if necessary.
 28




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##### Table of Contents



RESULTS OF OPERATIONS
 COMPARISON OF THREE MONTHS ENDED DECEMBER 31, 2006 AND 2005
 Three Months endedDecember 312006
    
    
    2005
    
    
    $ Change
    
    
    % ChangePRODUCT SALESNet revenues
    
    $
    6,270,704
    
    
    $
    
    
    
    $
    6,270,704
    
    
    
    100
    %Cost of revenues
    
    
    (1,347,184
    )
    
    
    
    
    
    
    (1,347,184
    )
    
    
    100
    %Gross margin
    
    $
    4,923,520
    
    
    $
    
    
    
    $
    4,923,520
    
    
    
    100
    %LICENSES, RESEARCH SERVICES AND GRANTSRevenues:License agreements
    
    $
    57,265
    
    
    $
    5,000,000
    
    
    $
    (4,942,735
    )
    
    
    -98.9
    %Research services
    
    
    1,270,244
    
    
    
    2,478,018
    
    
    
    (1,207,774
    )
    
    
    -48.7
    %Government research grant
    
    
    86,348
    
    
    
    84,825
    
    
    
    1,523
    
    
    
    1.8
    %Royalty and sale of royalty rights
    
    
    723,040
    
    
    
    582,045
    
    
    
    140,995
    
    
    
    24.2
    %Total Revenues
    
    
    2,136,897
    
    
    
    8,144,888
    
    
    
    (6,007,991
    )
    
    
    -73.8
    %Costs:Research services
    
    
    1,164,075
    
    
    
    2,018,799
    
    
    
    (854,724
    )
    
    
    -42.3
    %Government research grant
    
    
    95,727
    
    
    
    71,123
    
    
    
    24,604
    
    
    
    34.6
    %Total Costs
    
    
    1,259,802
    
    
    
    2,089,922
    
    
    
    (830,120
    )
    
    
    -39.7
    %Gross margin
    
    $
    877,095
    
    
    $
    6,054,966
    
    
    $
    (5,177,871
    )
    
    
    -85.5
    %
 Revenues
    29




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##### Table of Contents



Cost of revenues
   Three Months endedDecember 312006
    
    
    2005
    
    
    $ Change
    
    
    % ChangeOPERATING EXPENSESResearch and development
    
    $
    5,906,001
    
    
    $
    7,198,958
    
    
    $
    1,292,957
    
    
    
    18.0
    %Selling, general and administrative
    
    
    13,245,934
    
    
    
    4,768,743
    
    
    
    (8,477,191
    )
    
    
    -177.8
    %Total Operating Expenses
    
    $
    19,151,935
    
    
    $
    11,967,701
    
    
    $
    (7,184,234
    )
    
    
    -60.0
    %
 Selling, general and administrative expenses
  Research and Development Expenses
  30




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##### Table of Contents



Company-funded R&D Programs
 Zenvia
 Involuntary Emotional Expression Disorder (IEED)/Pseudobulbar Affect (PBA)
    Zenvia
 Painful Diabetic Neuropathy Indication
  31




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##### Table of Contents



AVP-13358
 Selective Cytokine Inhibitor
   Partner-funded R&D Programs
 Reverse Cholesterol Transport Technology  Atherosclerosis
  Macrophage Migration Inhibitory Factor (MIF)  Inflammation
  32




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##### Table of Contents



Government-funded R&D programs
 .
   Share-Based Compensation
  33




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##### Table of Contents



Interest Expense and Interest Income
   Net Loss
  LIQUIDITY AND CAPITAL RESOURCES
   IncreaseDecember 31,
    
    (Decrease)
    
    September 30,2006
    
    During Period
    
    2006Cash, cash equivalents and investment in securities
    
    $
    17,527,574
    
    
    $
    (7,222,499
    )
    
    $
    24,750,073Cash and cash equivalents
    
    $
    14,457,274
    
    
    $
    9,559,060
    
    
    $
    4,898,214Net working capital
    
    $
    (1,426,379
    )
    
    $
    (5,543,398
    )
    
    $
    (6,969,777
    )
 Three Months
    
    
    
    
    
    
    Three MonthsEnded
    
    
    Change
    
    
    EndedDecember 31,
    
    
    Between
    
    
    December 31,2006
    
    
    Periods
    
    
    2005Net cash used for operating activities
    
    $
    (19,101,884
    )
    
    $
    (6,575,919
    )
    
    $
    (12,525,965
    )Net cash (used for) provided by investing activities
    
    
    16,763,367
    
    
    
    18,988,791
    
    
    
    (2,225,424
    )Net cash provided by financing activities
    
    
    11,897,577
    
    
    
    (25,035,563
    )
    
    
    36,933,140Net increase in cash and cash equivalents
    
    $
    9,559,060
    
    
    $
    (12,622,691
    )
    
    $
    22,181,751
 Operating activities.
 34




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##### Table of Contents



Investing activities.
 Financing activities.
    35




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##### Table of Contents



Payments Due by PeriodLess than
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    1 Year
    
    1-3 Years
    
    3-5 Years
    
    5 YearsLong-term debt
(principal and
interest)
    
    $
    26,757,840
    
    
    $
    2,260,026
    
    
    $
    24,497,814
    
    
    $
    
    
    
    $
    Capital (finance)
lease obligations
    
    
    372,443
    
    
    
    255,186
    
    
    
    117,257
    
    
    
    
    
    
    
    Operating lease
obligations
    
    
    11,020,911
    
    
    
    2,452,443
    
    
    
    4,066,814
    
    
    
    3,233,084
    
    
    
    1,268,570Purchase
obligations (1)
    
    
    15,179,376
    
    
    
    13,661,438
    
    
    
    1,517,938
    
    
    
    
    
    
    
    Total
    
    $
    53,330,570
    
    
    $
    18,629,093
    
    
    $
    30,199,823
    
    
    $

3,233,084
    
    
    $
    1,268,570
 
 (1)
    
    Purchase obligations consist of the total of accounts payable and accrued expenses at
December 31, 2006 which approximates our contractual commitments for goods and services in the
normal course of our business.    36




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##### Table of Contents



Alamo Earn-Out Payments.
 
    
    A promissory note, in the principal amount of $2,000,000, generally
payable on the third anniversary date if monthly FazaClo net product
sales, as reported by us, exceed $1,000,000 for each of the three
months in a given fiscal quarter during the Contingent Payment Period,
and an additional promissory note in the principal amount of
$2,000,000, generally payable on the third anniversary date if monthly
FazaClo net product sales, as reported by us, exceed $1,500,000 for
each of the three months in a given fiscal quarter during the
Contingent Payment Period. None of these conditions were satisfied as
of December 31, 2006.
    
    A one-time cash payment of $10,450,000 if FazaClo net product sales,
as reported by us, exceed $40.0 million over four consecutive fiscal
quarters during the Contingent Payment Period.
    
    An additional one-time cash payment of $25,000,000 if FazaClo net
product sales, as reported by us, exceed $50.0 million over four
consecutive fiscal quarters during the Contingent Payment Period.
  CIMA Royalty payments.
 Twelve-month period ending December 31:2006
    
    $
    250,0002007
    
    $
    300,0002008 and each year thereafter
    
    $
    400,000
 Eurand Milestone and Royalty Payments.
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##### Table of Contents



Zenvia License Milestone Payments.
 Management Outlook
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##### Table of Contents



Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Interest rate sensitivity
  
 Item 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
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##### Table of Contents



Changes in Internal Controls over Financial Reporting
  
 PART II OTHER INFORMATION
 
 Item 1. LEGAL PROCEEDINGS
  
 Item 1A. RISK FACTORS
  We have limited capital resources and will need to raise additional funds to support our
operations.
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##### Table of Contents



We may face challenges attracting and retaining members of management and other key personnel,
particularly following our receipt of the Zenvia approvable letter.
    We generally do not control the development of compounds licensed to third parties and, as a
result, we may not realize a significant portion of the potential value of any such license
arrangements.
   
 Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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##### Table of Contents



Item 3. DEFAULTS UPON SENIOR SECURITIES
  
 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 Item 5. OTHER INFORMATION
 ,
  
 Item 6. EXHIBITS
 Exhibits
 15.1
    
    Letter on unaudited interim financial information.31.1
    
    Certification of Principal Executive Officer Required Under Rule
13a-14(a) of the Securities Exchange Act of 1934, as amended.31.2
    
    Certification of Principal Financial Officer Required Under Rule
13a-14(a) of the Securities Exchange Act of 1934, as amended.32.1
    
    Certification of Principal Executive Officer Required Under Rule
13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18
U.S.C. 1350.32.2
    
    Certification of Principal Financial Officer Required Under Rule
13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18
U.S.C. 1350.
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##### Table of Contents



SIGNATURES
  Signature
    
    Title
    
    Date/s/ Eric K. Brandt

Eric K. Brandt
    
    President and Chief Executive Officer (Principal
Executive Officer)
    
    February 14, 2007/s/ Michael J. Puntoriero

Michael J. Puntoriero
    
    Vice President, Finance and Chief Financial
Officer
(Principal Financial and Accounting Officer)
    
    February 14, 2007
 43