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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  FORM 10-Q 
 (Mark One)[X]
    
    QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
 For the quarterly period ended June 30, 2004 OR [   ]
    
    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. 0-1734 AVANIR PHARMACEUTICALS  California
    
    33-0314804(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 11388 Sorrento Valley Road, San Diego, California
    
    92121(Address of principal executive offices)
    
    (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 [   ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES [X] NO [   ] As of August 9, 2004, the registrant had 94,141,411 shares of Class A common
stock issued and outstanding.




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Table of Contents PagePART I. FINANCIAL INFORMATIONItem 1. Financial StatementsReport 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
    
    
    13Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    33Item 4. Controls and Procedures
    
    
    34PART II. OTHER INFORMATIONItem 6. Exhibits and Reports on Form 8-K
    
    
    35EXHIBIT 15EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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PART I. FINANCIAL INFORMATION 
 Item 1. FINANCIAL STATEMENTS 
 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Shareholders
Avanir Pharmaceuticals We have reviewed the accompanying condensed consolidated balance sheet of
Avanir Pharmaceuticals and subsidiary (the Company) as of June 30, 2004, and
the related condensed consolidated statements of operations for the three-month
and nine-month periods ended June 30, 2004 and 2003, and of cash flows for the
nine-month periods ended June 30, 2004 and 2003. These interim financial
statements are the responsibility of the Companys management. We conducted our reviews in accordance with standards of the Public Company
Accounting Oversight Board (PCAOB) (United States). A review of interim
financial information consists principally of applying analytical procedures
and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with standards of the PCAOB (United States), the objective of which
is the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that
should be made to such condensed consolidated interim financial statements for
them to be in conformity with accounting principles generally accepted in the
United States of America. We have previously audited, in accordance with standards of the PCAOB (United
States), the consolidated balance sheet of the Company as of September 30,
2003, and the related consolidated statements of operations, shareholders
equity, and cash flows for the year then ended (not presented herein); and in
our report dated December 19, 2003, we expressed an unqualified opinion on
those consolidated financial statements. In our opinion, the information set
forth in the accompanying consolidated balance sheet as of September 30, 2003
is fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived. DELOITTE & TOUCHE LLP San Diego, California
August 13, 2004 3




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AVANIR Pharmaceuticals 
 CONDENSED
CONSOLIDATED BALANCE SHEETS (UNAUDITED) June 30,
    
    September 30,2004
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    19,708,480
    
    
    $
    12,198,408Short-term investments in securities
    
    
    7,523,633
    
    
    
    3,888,798Accounts receivable
    
    
    219,995
    
    
    
    271,681Inventory
    
    
    9,302
    
    
    
    210,854Prepaid expenses
    
    
    1,051,742
    
    
    
    1,564,315Total current assets
    
    
    28,513,152
    
    
    
    18,134,056Investments in securities
    
    
    4,189,498
    
    
    
    513,486Restricted investments in securities
    
    
    856,597
    
    
    
    856,597Property and equipment, net
    
    
    6,695,196
    
    
    
    7,742,005Intangible assets, net
    
    
    2,942,603
    
    
    
    2,131,209Other assets
    
    
    245,496
    
    
    
    267,904TOTAL ASSETS
    
    $
    43,442,542
    
    
    $
    29,645,257LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,237,091
    
    
    $
    2,853,604Accrued expenses and other liabilities
    
    
    3,075,215
    
    
    
    1,806,058Accrued compensation and payroll taxes
    
    
    621,709
    
    
    
    626,154Notes payable
    
    
    35,854
    
    
    
    244,805Current portion of deferred revenue
    
    
    1,855,808
    
    
    
    1,841,865Current portion of capital lease obligations
    
    
    153,734
    
    
    
    142,354Total current liabilities
    
    
    7,979,411
    
    
    
    7,514,840Deferred revenue, net of current portion
    
    
    19,605,688
    
    
    
    20,900,776Capital
lease obligation, net of current portion
    
    
    75,706
    
    
    
    192,410Total liabilities
    
    
    27,660,805
    
    
    
    28,608,026Contingencies (Note 13)Shareholders equity:Preferred stock  no par value, 10,000,000 and
9,999,500 shares authorized as of June 30, 2004
and September 30, 2003, respectively:Series C Junior Participating  1,000,000
share authorized; no shares issued
or outstanding
    
    
    
    
    
    
    Common stock  no par value:Class A  200,000,000 and 99,288,000 shares
authorized as of June 30, 2004 and September
30, 2003, respectively; 94,141,411 and
65,816,434 shares issued and outstanding as
of June 30, 2004 and September 30, 2003,
respectively
    
    
    131,733,137
    
    
    
    97,286,433Class B  None and 712,000 shares authorized
as of June 30, 2004 and September 30, 2003,
respectively; none and 13,500 shares issued
and outstanding as of June 30, 2004 and
September 30, 2003, respectively
(convertible into Class A common stock)
    
    
    
    
    
    
    8,395Accumulated deficit
    
    
    (115,839,310
    )
    
    
    (96,251,049
    )Accumulated other comprehensive loss
    
    
    (112,090
    )
    
    
    (6,548
    )Total shareholders equity
    
    
    15,781,737
    
    
    
    1,037,231TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    43,442,542
    
    
    $
    29,645,257
 See notes to consolidated financial statements. 4




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AVANIR Pharmaceuticals 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Three months ended
    
    Nine months endedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003REVENUES:Royalties and sale of royalty rights (Note 7)
    
    $
    351,517
    
    
    $
    302,741
    
    
    $
    1,237,029
    
    
    $
    1,377,486Government research grants
    
    
    222,437
    
    
    
    95,481
    
    
    
    661,968
    
    
    
    394,085Product sales
    
    
    17,400
    
    
    
    
    
    
    
    787,338
    
    
    
    17,400Research contract and licenses
    
    
    
    
    
    
    
    
    
    
    270,500
    
    
    
    50,000Total revenues
    
    
    591,354
    
    
    
    398,222
    
    
    
    2,956,835
    
    
    
    1,838,971OPERATING EXPENSES:Research and development
    
    
    5,092,916
    
    
    
    4,523,860
    
    
    
    15,829,240
    
    
    
    12,995,762General and administrative
    
    
    1,236,214
    
    
    
    1,185,881
    
    
    
    4,154,442
    
    
    
    3,477,765Sales and marketing
    
    
    936,802
    
    
    
    727,465
    
    
    
    2,517,399
    
    
    
    1,758,933Cost of product sales
    
    
    3,102
    
    
    
    
    
    
    
    213,192
    
    
    
    3,102Total operating expenses
    
    
    7,269,034
    
    
    
    6,437,206
    
    
    
    22,714,273
    
    
    
    18,235,562LOSS FROM OPERATIONS
    
    
    (6,677,680
    )
    
    
    (6,038,984
    )
    
    
    (19,757,438
    )
    
    
    (16,396,591
    )Interest income

    
    
    57,201
    
    
    
    49,375
    
    
    
    169,469
    
    
    
    202,525Other income
    
    
    11,116
    
    
    
    8,060
    
    
    
    30,485
    
    
    
    19,919Interest expense
    
    
    (7,706
    )
    
    
    (11,113
    )
    
    
    (28,233
    )
    
    
    (34,448
    )LOSS BEFORE INCOME TAXES
    
    
    (6,617,069
    )
    
    
    (5,992,662
    )
    
    
    (19,585,717
    )
    
    
    (16,208,595
    )Provision for income taxes
    
    
    (424
    )
    
    
    (36,766
    )
    
    
    (2,544
    )
    
    
    (36,766
    )NET LOSS
    
    $
    (6,617,493
    )
    
    $
    (6,029,428
    )
    
    $
    (19,588,261
    )
    
    $
    (16,245,361
    )NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS:Net loss
    
    $
    (6,617,493
    )
    
    $
    (6,029,428
    )
    
    $
    (19,588,261
    )
    
    $
    (16,245,361
    )Dividends on redeemable convertible
preferred stock
    
    
    
    
    
    
    (3,622
    )
    
    
    
    
    
    
    (16,122
    )Accretion of discount related to redeemable
convertible preferred stock
    
    
    
    
    
    
    (2,705
    )
    
    
    
    
    
    
    (11,823
    )NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
    
    $
    (6,617,493
    )
    
    $
    (6,035,755
    )
    
    $
    (19,588,261
    )
    
    $
    (16,273,306
    )NET LOSS PER SHARE:BASIC AND DILUTED
    
    $
    (0.08
    )
    
    $
    (0.10
    )
    
    $
    (0.27
    )
    
    $
    (0.28
    )WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING:BASIC AND DILUTED
    
    
    78,256,417
    
    
    
    58,741,635
    
    
    
    73,740,318
    
    
    
    58,463,328
 See notes to consolidated financial statements. 5




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AVANIR Pharmaceuticals 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Nine Months EndedJune 30,2004
    
    2003OPERATING ACTIVITIES:Net loss
    
    $
    (19,588,261
    )
    
    $
    (16,245,361
    )Adjustments to reconcile net loss to net cash provided by
(used for) operating activities:Depreciation and amortization
    
    
    1,198,306
    
    
    
    672,980Compensation paid with common stock and stock options
    
    
    32,170
    
    
    
    213,749Loss on disposal of assets
    
    
    
    
    
    
    1,896Intangible assets abandoned
    
    
    
    
    
    
    74,432Changes in assets and liabilities:Accounts receivable
    
    
    51,686
    
    
    
    972,035Inventory
    
    
    201,552
    
    
    
    27,272Prepaid expenses and other assets
    
    
    534,981
    
    
    
    (194,390
    )Accounts payable
    
    
    (616,513
    )
    
    
    (638,200
    )Accrued expenses and other liabilities
    
    
    1,269,157
    
    
    
    43,928Accrued compensation and payroll taxes
    
    
    (4,445
    )
    
    
    (22,972
    )Deferred revenue
    
    
    (1,281,145
    )
    
    
    22,911,644Net cash provided by (used for) operating activities
    
    
    (18,202,512
    )
    
    
    7,817,013INVESTING ACTIVITIES:Investments in securities
    
    
    (8,116,389
    )
    
    
    (710,861
    )Proceeds from sales and maturities of investments in securities
    
    
    700,000
    
    
    
    2,500,000Patent costs
    
    
    (873,111
    )
    
    
    (392,741
    )Purchases of property and equipment
    
    
    (89,780
    )
    
    
    (5,240,514
    )Net cash used for investing activities
    
    
    (8,379,280
    )
    
    
    (3,844,116
    )FINANCING ACTIVITIES:Proceeds from issuance of common stock and warrants, net of
issuance costs
    
    
    34,406,139
    
    
    
    85,350Dividends paid on preferred stock
    
    
    
    
    
    
    (12,500
    )Proceeds from issuance of notes payable
    
    
    159,918
    
    
    
    Payments on notes and capital lease obligations
    
    
    (474,193
    )
    
    
    (384,647
    )Net cash provided by (used for) financing activities
    
    
    34,091,864
    
    
    
    (311,797
    )Net increase in cash and cash equivalents
    
    
    7,510,072
    
    
    
    3,661,100Cash and cash equivalents at beginning of period
    
    
    12,198,408
    
    
    
    8,630,547Cash and cash equivalents at end of period
    
    $
    19,708,480
    
    
    $
    12,291,647SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Interest paid
    
    $
    28,233
    
    
    $
    34,448Income taxes paid
    
    $
    2,368
    
    
    $
    91,600
 See notes to consolidated financial statements. 6




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AVANIR Pharmaceuticals 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION Avanir Pharmaceuticals (Avanir, we or the Company) has prepared the
unaudited condensed consolidated financial statements in this quarterly report in
accordance with the instructions to Form 10-Q adopted under the Securities
Exchange Act of 1934. Certain information and note disclosures normally
included in consolidated financial statements prepared in accordance with
accounting principles generally accepted in the United States have been
condensed or omitted pursuant to such rules and regulations. These unaudited
condensed consolidated financial 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, 2003. In our opinion, all
adjustments (consisting only of normal recurring adjustments) necessary to
present a fair statement of our financial position as of June 30, 2004, and the
results of operations for the three-month and nine-month periods ended June 30,
2004 and 2003 have been made. The results of operations for the three-month
and nine-month periods ended June 30, 2004 are not necessarily indicative of
the results for the fiscal year ending September 30, 2004 or any future
periods. 2. STOCK-BASED COMPENSATION Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (SFAS No. 123), encourages, but does not require,
companies to record compensation costs for stock-based employee compensation at
fair value. The Company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations for all periods presented.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the fair value of the Companys stock at the date of the grant over the
amount an employee must pay to acquire the stock. If compensation cost had been determined based upon the fair value at the grant
date for awards under the stock option plans consistent with the methodology
prescribed under SFAS No. 123, the Companys net loss would have been higher by
approximately $258,000 and $809,000 for the three-month and nine-month periods
ended June 30, 2004, respectively, and approximately $357,000 and $1,239,000
for the three-month and nine-month periods ended 2003, respectively, as
summarized in the following table. Three Months Ended June 30,
    
    Nine Months Ended June 30,2004
    
    2003
    
    2004
    
    2003Net loss attributable to common
shareholders, as reported
    
    $
    (6,617,493
    )
    
    $
    (6,035,755
    )
    
    $

    (19,588,261
    )
    
    $
    (16,273,306
    )Add: Stock-based employee
compensation included in reported
net loss attributable to common
shareholders
    
    
    
    
    
    
    29,343
    
    
    
    24,069
    
    
    
    205,086Deduct: Total stock-based
employee compensation expense
determined under fair value based
method for all awards
    
    
    (258,127
    )
    
    
    (386,189
    )
    
    
    (832,626
    )
    
    
    (1,444,397
    )Pro forma net loss
attributable to common shareholders
    
    $
    (6,875,620
    )
    
    $
    (6,392,601
    )
    
    $
    (20,396,818
    )
    
    $
    (17,512,617
    )Net loss per share:Basic and diluted  as reported
    
    $
    (0.08
    )
    
    $
    (0.10
    )
    
    $
    (0.27
    )
    
    $
    (0.28
    )Basic and diluted  pro forma
    
    $
    (0.09
    )
    
    $
    (0.11
    )
    
    $
    (0.28
    )
    
    $
    (0.30
    )
 The Company accounts for stock options granted to non-employees using the fair
value method. Compensation expense for options granted to non-employees has
been determined in accordance with 7




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Emerging Issues Task Force (EITF) No. 96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services, as the fair value of the
consideration received or the fair value of the equity instruments issued,
whichever is more reliably measurable. For the purpose of determining
compensation expense for stock options granted to non-employees, all of the
Companys directors are considered to be employees. 3. RECLASSIFICATIONS Certain amounts from the prior period have been reclassified to conform to the
current period presentation. 4. BALANCE SHEET DETAILS The following tables provide details of selected balance sheet items. Property and equipment.Property and equipment consist of the following: June 30, 2004
    
    September 30, 2003Gross Carrying
    
    Accumulated
    
    
    
    
    
    Gross Carrying
    
    AccumulatedValue
    
    Depreciation
    
    Net
    
    Value
    
    Depreciation
    
    NetLeasehold improvements
    
    $
    5,030,874
    
    
    $
    (897,071
    )
    
    $
    4,133,803
    
    
    $
    5,000,147
    
    
    $
    (445,435
    )
    
    $
    4,554,712Research and
development equipment
    
    
    3,597,372
    
    
    
    (1,821,239
    )
    
    
    1,776,133
    
    
    
    3,544,343
    
    
    
    (1,331,544
    )
    
    
    2,212,799Computer equipment
and related software
    
    
    1,003,443
    
    
    
    (508,354
    )
    
    
    495,089
    
    
    
    1,000,206
    
    
    
    (383,512
    )
    
    
    616,694Office equipment,
furniture and
fixtures
    
    
    552,650
    
    
    
    (262,479
    )
    
    
    290,171
    
    
    
    549,864
    
    
    
    (192,064
    )
    
    
    357,800Total property and
equipment
    
    $
    10,184,339
    
    
    $
    (3,489,143
    )
    
    $
    6,695,196
    
    
    $
    10,094,560
    
    
    $
    (2,352,555
    )
    
    $
    7,742,005
 Depreciation expense related to property and equipment was approximately
$380,000 and $1,137,000 for the three-month and nine-month periods ended June
30, 2004, respectively, and $265,000 and $607,000 for the same periods,
respectively, in the prior year. Intangible assets.Intangible assets with indefinite useful lives consist of
costs of trademarks for Avanir and Xenerex and similar names intended for use
or potential use in the United States and the rest of the world. The Company
reviews intangible assets with indefinite useful lives at least annually for
impairment, following the guidelines established in Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets, (SFAS No.
142). There were no impairments to trademarks during the three-month and
nine-month periods ended June 30, 2004 and 2003. Intangible assets with finite
lives are amortized over their useful lives and are evaluated for impairment
whenever events or changes in circumstances indicate that their carrying value
may not be recoverable under SFAS No. 144, Accounting for Impairment or
Disposal of Long-lived Assets. Avanirs amortizable intangible assets consist
of the costs of patents, patent applications and licenses. 8




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Intangible assets, consisting of both intangible assets with finite and
indefinite useful lives, are as follows: June 30, 2004
    
    September 30, 2003Gross
    
    
    
    
    
    
    
    
    
    GrossCarrying
    
    Accumulated
    
    
    
    
    
    Carrying
    
    AccumulatedValue
    
    Amortization
    
    Net
    
    Value
    
    Amortization
    
    NetIntangible assets with
finite lives:Patent applications
pending
    
    $
    2,253,434
    
    
    $
    
    
    
    $
    2,253,434
    
    
    $
    1,464,859
    
    
    $
    
    
    
    $
    1,464,859Patents
    
    
    936,808
    
    
    
    (314,675
    )
    
    
    622,133
    
    
    
    855,799
    
    
    
    (254,657
    )
    
    
    601,142Licenses
    
    
    42,461
    
    
    
    (15,081
    )
    
    
    27,380
    
    
    
    42,461
    
    
    
    (13,383
    )
    
    
    29,078Total intangible
assets with finite
lives
    
    
    3,232,703
    
    
    
    (329,756
    )
    
    
    2,902,947
    
    
    
    2,363,119
    
    
    
    (268,040
    )
    
    
    2,095,079Intangible assets with
indefinite useful
lives
    
    
    39,656
    
    
    
    
    
    
    
    39,656
    
    
    
    36,130
    
    
    
    
    
    
    
    36,130Total intangible assets
    
    $
    3,272,359
    
    
    $
    (329,756
    )
    
    $
    2,942,603
    
    
    $
    2,399,249
    
    
    $
    (268,040
    )
    
    $
    2,131,209
 Amortization expense related to amortizable intangible assets was approximately
$24,000 and $62,000 for the three-month and nine-month periods ended June 30,
2004, respectively, and $17,000 and $52,000 for the same periods, respectively,
in the prior year. Based solely on the amortizable intangible assets as of
June 30, 2004, the estimated annual amortization expense of intangible assets
for the fiscal years ending September 30 is shown in the following table.
Actual amortization expense to be reported in future periods could differ from
these estimates as a result of acquisitions, divestitures, and other relevant
factors. Amortization ExpenseFiscal year ending September 30:2004 (Remaining three months)
    
    $
    24,6522005
    
    
    94,1752006
    
    
    92,8652007
    
    
    55,4862008
    
    
    55,327Thereafter
    
    
    327,008Subtotal
    
    
    649,513Patent applications pending
    
    
    2,253,434Total
    
    $
    2,902,947
 5. USE OF ESTIMATES The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of 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. 6. INVENTORY Inventory is stated at the lower of cost (first-in, first-out) or market.
Inventory consists of only the raw material docosanol, which is the active
ingredient in docosanol 10% cream. Docosanol in its present form as stored by
the Company has a substantial shelf life, a relatively stable value and
long-term use, and carries a low risk of becoming excess inventory or obsolete.
Avanir does not own or store any docosanol 10% cream in its finished product
form. The Company and one of its licensees receive raw materials from a single
supplier. Avanir also supplies several other licensees with raw materials from 9




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the same supplier. The inability of a sole supplier to fulfill supply
requirements of the Company or its licensees could materially impact future
operating results. 7. DEFERRED REVENUE On December 24, 2002, Avanir sold an undivided interest in its Abreva® license
agreement with SB Pharmco Puerto Rico, Inc. (SB or GlaxoSmithKline) to Drug
Royalty USA, Inc. (Drug Royalty USA) for $24.1 million. We recorded the net
proceeds of the transaction as deferred revenue, to be recognized as revenue
over the life of the license agreement, because of our ongoing involvement in
earning future revenues under our license agreement with SB. The following
table sets forth as of June 30, 2004 the deferred revenue balances for the Drug
Royalty USA agreement and other agreements. In May 2004, we entered into a
license agreement with the Gerolymatos Group of Companies to manufacture and
market docosanol 10% cream in Greece, Cyprus, Turkey and Romania. The portion
of deferred revenue classified as a current liability represents the amount
Avanir expects to realize as revenue within the next 12 months. Drug RoyaltyUSA Agreement
    
    Other Agreements
    
    TotalDeferred revenue as of September 30, 2003
    
    $
    22,509,308
    
    
    $
    233,333
    
    
    $
    22,742,641Changes during the period:Additions to deferred revenue
    
    
    
    
    
    
    200,000
    
    
    
    200,000Recognized as revenue during period
    
    
    (1,231,145
    )
    
    
    (250,000
    )
    
    
    (1,481,145
    )Deferred revenue as of June 30, 2004
    
    $
    21,278,163
    
    
    $
    183,333
    
    
    $
    21,461,496Classified as:Current portion of deferred revenue
    
    $
    1,747,475
    
    
    $
    108,333
    
    
    $
    1,855,808Deferred
revenue, net of current portion
    
    
    19,530,688
    
    
    
    75,000
    
    
    
    19,605,688Total deferred revenue
    
    $
    21,278,163
    
    
    $
    183,333
    
    
    $
    21,461,496
 8. REVENUE RECOGNITION Performance-based license fees.We recognize revenues from license fees when
the performance requirements have been met, the fee is fixed or determinable,
and collection of fees is probable. We defer revenues and recognize them
ratably over the life of the agreement when we have continuing obligations to
perform under the agreement. Royalty revenues.We recognize royalty revenues from licensed products when
earned. Net sales figures used for calculating royalties due to the Company
can often include deductions for costs of unsaleable returns, managed care
chargebacks, cash discounts, freight and warehousing, and miscellaneous
write-offs, which may vary over the course of the license agreement. Revenues from sale of royalty rights.In agreements where we have sold our
rights to future royalties under license agreements and we maintain continuing
involvement in earning such royalties, we defer revenues and recognize them
over the life of the license agreement. For example, in the sale of an
undivided interest of our Abreva license agreement to Drug Royalty USA, revenue
recognition is being determined under the units-of-revenue method. Under this
method, the amount of deferred revenue to be recognized as revenue in each
period is calculated by multiplying (i) the ratio of the royalty payments due
to Drug Royalty USA for the period to the total remaining royalties that we
expect SB will pay Drug Royalty USA over the term of the agreement, by (ii) the
unamortized deferred revenue amount. Revenue arrangements with multiple deliverable.In certain circumstances, we
may enter into revenue arrangements whereby we are obligated to deliver to the
customer multiple products and/or services (multiple deliverables). Such
arrangements could include antibody generation services agreements and 10




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other forms of research collaborations. In these transactions, we allocate the
total revenue to be earned under the arrangement among the various elements
based on their relative fair value. In the case of antibody generation
services, the allocation is based on objective, customer-specific evidence of
fair value. We recognize revenue related to the delivered products or services
only if: (i) the above performance or service criteria are met; (ii) any
undelivered products or services are not essential to the functionality of the
delivered products or services; (iii) payment for the delivered products or
services is not contingent upon delivery of the remaining products or services;
(iv) we have an enforceable claim to receive the amount due in the event we do
not deliver the undelivered products or services; and (v) as discussed above,
there is evidence of the fair value for each of the undelivered products or
services. Government research grant revenue.We recognize revenues from federal research
grants during the period in which the related expenditures are incurred. 9. INVESTMENTS The following tables summarize the Companys investments in securities: Gross
    
    GrossUnrealized
    
    Unrealized
    
    FairAmortized Cost
    
    Gains (1)
    
    Losses (1)
    
    ValueAs of June 30, 2004:Certificates of deposit
    
    $
    1,356,597
    
    
    $
    6,893
    
    
    $
    
    
    
    $
    1,363,490Adjustable rate mutual fund (2)
    
    
    3,014,365
    
    
    
    
    
    
    
    (65,530
    )
    
    
    2,948,835Government debt securities
    
    
    8,310,856
    
    
    
    1,180
    
    
    
    (54,633
    )
    
    
    8,257,403Total
    
    $
    12,681,818
    
    
    $
    8,073
    
    
    $
    (120,163
    )
    
    $
    12,569,728Reported as:Short term investments:Classified as available-for-sale
    
    $
    7,523,633Long term investments:Classified as available-for-sale
    
    
    4,189,498Restricted investments in
securities (3)
    
    
    856,597Long-term investments
    
    
    5,046,095Total
    
    $
    12,569,728
 Gross
    
    GrossUnrealized
    
    Unrealized
    
    FairAmortized Cost
    
    Gains (4)
    
    Losses (4)
    
    ValueAs of September 30, 2003:Certificates of deposit
    
    $
    2,056,597
    
    
    $
    15,575
    
    
    $
    
    
    
    $
    2,072,172Adjustable rate mutual fund (2)
    
    
    3,014,365
    
    
    
    
    
    
    
    (18,723
    )
    
    
    2,995,642Government debt securities
    
    
    194,467
    
    
    
    
    
    
    
    (3,400
    )
    
    
    191,067Total
    
    $
    5,265,429
    
    
    $
    15,575
    
    
    $
    (22,123
    )
    
    $
    5,258,881Reported as:Short term investments:Classified as available-for-sale
    
    $
    3,888,798Long term investments:Classified as available-for-sale
    
    
    513,486Restricted investments in
securities (3)
    
    
    856,597Long-term investments
    
    
    1,370,083Total
    
    $
    5,258,881
  (1)
    
    Gross unrealized gains of $8,073 and gross unrealized losses of $120,163
on government securities, the adjustable rate mutual fund, and
certificates of deposit represent an accumulated net unrealized loss of
$112,090, which is reported as accumulated other comprehensive loss on
the consolidated balance sheet as of June 30, 2004.  (2)
    
    Represents an investment in a mutual fund that invests primarily in
adjustable rate mortgage-backed securities. 11




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(3)
    
    Restricted investments amounting to $856,597 as of both June 30, 2004 and
September 30, 2003 represent amounts pledged to our bank as collateral for
letters of credit issued in connection with our leases of office and
laboratory space.  (4)
    
    Gross unrealized gains of $15,575 and gross unrealized losses of $22,123
on government securities, the adjustable rate mutual fund, and
certificates of deposit represent an accumulated net unrealized loss of
$6,548, which is reported as accumulated other comprehensive loss on the
consolidated balance sheet as of September 30, 2003. 10. COMPUTATION OF NET LOSS PER COMMON SHARE We compute basic net loss per common share by dividing the net loss
attributable to common shareholders by the weighted-average number of common
shares outstanding during the period (Basic EPS Method). We compute diluted
net loss per common share by dividing the net loss attributable to common
shareholders by 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. In the accompanying consolidated statements of
operations, we have presented our net loss per share for the three-month and
nine-month periods ended June 30, 2004 and 2003 using the Basic EPS Method and
the Diluted EPS Method. The shares of common stock issuable upon exercise of
stock options and warrants under the Diluted EPS Method were excluded from the
three-month and nine-month periods ended June 30, 2004 and 2003, as the
inclusion of such shares would have been anti-dilutive. For the three-month and nine-month periods ended June 30, 2004 and 2003,
options to purchase 5,264,246 and 6,388,238 shares of common stock,
respectively, were excluded from the computation of diluted net loss per share,
as the inclusion of such shares would be antidilutive. For the three-month and
nine-month periods ended June 30, 2004 and 2003, warrants to purchase 5,442,911
and 944,227 shares of common stock, respectively, were excluded from the
computation of diluted net loss per share, as the inclusion of such shares
would be antidilutive. 11. SHAREHOLDERS EQUITY Preferred stock.Preferred stock consists of Series C Junior Participating
Preferred Stock, of which none is outstanding. Class A common stock.On June 1, 2004, we completed an underwritten public
offering of 19,685,040 shares of Class A common stock at $1.27 per share. The
financing transaction was made pursuant to the terms of an underwriting
agreement with Lazard Freres & Co. On June 10, 2004, the underwriter
exercised its option to purchase from the Company an additional 2,952,756
shares of Class A common stock at the public offering price of $1.27 per share
to cover over-allotments. This offering generated gross proceeds of
approximately $28.8 million and net proceeds of approximately
$26.5 million, after taking into effect the
underwriters discount of $2.0 million and $263,000 in issuance costs. Subsequent to the financing transaction, we
invested approximately $7.1 million of the proceeds in government securities
(see Liquidity and Capital ResourcesInvesting Activities). Also during the three-month period ended June 30, 2004, we issued an aggregate
of 9,007 shares of Class A common stock in connection with the exercise of
employee stock options for cash in the aggregate amount of $3,107, representing
a weighted-average price per share of $0.34. Class B common stock conversions.As of June 30, 2004 and September 30, 2003,
there were none and 13,500 shares of Class B common stock outstanding,
respectively. Between December 11, 2003 and January 16, 2004, 13,500 shares of
Class B common stock were converted to 13,500 shares of Class A common stock. 12




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Comprehensive loss.Comprehensive loss consists of the following: Three Months Ended
    
    Nine Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net loss
    
    $
    (6,617,493
    )
    
    $
    (6,029,428
    )
    
    $
    (19,588,261
    )
    
    $
    (16,245,361
    )Other comprehensive
income (loss), net of
tax:Unrealized gain
(loss) on
available-for-sale
securities
    
    
    (74,781
    )
    
    
    7,837
    
    
    
    (105,542
    )
    
    
    15,925Total comprehensive loss
    
    $
    (6,692,274
    )
    
    $
    (6,021,591
    )
    
    $
    (19,693,803
    )
    
    $
    (16,229,436
    )
 12. RECENT ACCOUNTING PRONOUNCEMENTS In January 2003, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities,
an Interpretation of ARB No. 51. FIN 46 requires the consolidation of certain
variable interest entities by the primary beneficiary of an entity if the
equity investment at risk is not sufficient to permit the entity to finance its
activities without additional subordinated financial support from other parties
or if the equity investors lack the characteristics of a controlling financial
interest. FIN 46 was effective immediately for variable interest entities
created or acquired after January 31, 2003. For variable interest entities
created or acquired prior to February 1, 2003, the provisions of FIN 46, as
amended, were applicable to entities deemed special purpose entities on
December 31, 2003 and were applicable to entities not deemed special purpose
entities effective March 31, 2004. The application of the provisions of FIN 46
did not have a material impact on the Companys financial statements. The Emerging Issues Task Force (EITF) deliberated issue 03-01, The Meaning
of Other-Than-Temporary Impairment and Its Application to Certain Investments.
The issue was intended to address the meaning of other-than-temporary
impairment and its application to certain investments held at cost. A
consensus was reached regarding disclosure requirements concerning unrealized
losses on available-for-sale debt and equity securities accounted for under
SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities. The guidance for evaluating whether an investment is
other-than-temporarily impaired should be applied in reporting periods
beginning after June 15, 2004. The disclosures are effective in annual
financial statements for fiscal years ended after December 15, 2003, for
investments accounted for under SFAS No. 115. The Company is currently
evaluating the effect of this pronouncement on its financial statements. 13. CONTINGENCIES In the ordinary course of business, we may face various claims brought by third
parties, including claims relating to the safety or efficacy of our products.
Any of these claims could subject us to costly litigation and, while we
generally believe that we have adequate insurance to cover many different types
of liabilities, our insurance carriers may deny coverage or our policy limits
may be inadequate to fully satisfy any damage awards or settlements. If this
were to happen, the payment of any such awards could have a material adverse
effect on our operations and financial position. Additionally, any such
claims, whether or not successful, could damage our reputation and business.
Management believes the outcome of currently identified claims and lawsuits
will not have a material adverse effect on the Companys operations or
financial position. 
 Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS This Quarterly Report on Form 10-Q contains forward-looking statements
concerning future events and performance of our company. You should not rely
excessively on these forward-looking statements, because they are only
predictions based on our current expectations and assumptions. When used in
this report, the words intend, estimate, anticipate, believe, plan or
expect and similar expressions as they relate to Avanir are included to
identify forward-looking statements. Many factors could cause our actual
results to differ materially from those indicated in these forward-looking
statements. You 13




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should review carefully the factors identified in this report under the
caption, Risk Factors that Might Affect Future Results and in our most recent
Annual Report on Form 10-K filed with the Securities and Exchange Commission
(SEC). We disclaim any obligation to update or announce revisions to any
forward-looking statements to reflect actual events or developments. EXECUTIVE OVERVIEW We are a drug discovery and development company focused primarily on novel
treatments for chronic diseases. We have one product that has been approved by
the U.S. Food and Drug Administration (FDA) for the treatment of cold sores,
docosanol 10% cream (sold as Abreva® by our marketing partner, GlaxoSmithKline
Consumer Healthcare, in North America), and have several product candidates in
clinical development. We recently completed the treatment phase of a
second, pivotal Phase III
clinical trial of our most advanced product candidate, Neurodex, for the
treatment of pseudobulbar affect (PBA), also known as pathological laughing
or crying. We expect to obtain and report the results of the clinical trial in
the quarter ending September 30, 2004. If the results of the
clinical trial are favorable, then we intend to begin submission of a
new drug application (NDA) to the FDA by the end of the
2004 calendar year. Neurodex is also in Phase II clinical
development for the treatment of neuropathic pain. A potential product for
allergy and asthma, AVP-13358, is in Phase I clinical development. We also
have preclinical research programs targeting inflammatory diseases,
atherosclerosis and cancer. Our preclinical research and drug discovery
programs are focused primarily on small molecules that can be taken orally as
therapeutic treatments. Using our proprietary Xenerex technology, we are also
conducting research to develop injectable human monoclonal antibody products
for infectious diseases, such as anthrax and cytomegalovirus, and for other
therapeutic applications. The following graph illustrates the approximate development status of our
product candidates. (GRAPH) The continued development of our product candidates, and the potential launch
of a new drug, will require substantial additional capital. We intend to
partner with pharmaceutical companies that can help fund our research and
potential product launch in exchange for sharing in the rights to commercialize
new drugs. We have licensed certain rights to docosanol 10% cream and continue
to seek licensees for that product and potential products in our pipeline.
Research collaborations also represent an important way 14




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to achieve our development goals by sharing the risks and the opportunities
that come from such development efforts. Avanir has made further progress in commercializing docosanol 10% cream in
Europe. Our most recent license, signed in May 2004, is with the Gerolymatos
Group of Companies (Gerolymatos), to manufacture and market docosanol 10%
cream in Greece, Cyprus, Turkey, and Romania. Gerolymatos is responsible for
obtaining approvals from the appropriate regulatory agencies to market and sell
the product in those territories. The use of Sweden as the Reference Member State during the mutual recognition
process for obtaining further regulatory approvals of docosanol 10% cream in
the European Union has met with only partial success, based on responses from
the four countries where the applications were submitted. Recently, we
obtained approvals in Spain and Portugal using the evaluation conducted by
Sweden as the Reference Member State. We withdrew our applications in Italy
and England, given the nature of initial questions from the respective
regulatory agencies, limited procedural options, and short timelines provided
by the mutual recognition process. As an alternative, we intend to assist our
local partner in Italy, Bruno Farmaceutici, in its application for regulatory
approval in that territory. We are in the process of evaluating alternative
options for obtaining regulatory approval in England. Regarding other
territories in the European Union, we plan to assist our marketing partners in
making the necessary regulatory submissions, which may or may not attempt to
use the mutual recognition process. We expect that our development and operational costs will continue to exceed
revenues from existing sources through at least fiscal 2006. We will have to
raise significant amounts of additional capital to continue our research and
development activities, prepare for potential product launch of Neurodex for
PBA and fund other operating activities. Our future capital needs will
depend substantially on the economic terms and the timing of any new partnership or collaborative arrangements with pharmaceutical companies under which they
will share the costs of such activities. If we are unable to raise capital as
needed to fund our operations, or if we are unable to enter into any such collaborative
arrangements, then we may need to slow the rate of development of some of our
programs or sell the rights to one or more of our drug candidates. Our offices and research facilities are located at 11388 Sorrento Valley Road,
San Diego, California 92121. Our telephone number is (858) 622-5200 and our
e-mail address is info@avanir.com. Additional information about Avanir can be
found on our website, at www.avanir.com, and in our periodic and current
reports filed with the Securities and Exchange Commission (SEC). Copies of
our current and periodic reports filed with the SEC are available at the SEC
Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549, and
online at www.sec.govand our website at www.avanir.com. RESULTS OF OPERATIONS 
COMPARISON OF THREE MONTHS ENDED JUNE 30, 2004 AND 2003 Revenues Revenues in the third quarter of fiscal 2004 amounted to $591,000 including
$351,000 from the recognition of deferred revenue relating to the sale of an
undivided interest in our Abreva® license agreement to Drug Royalty USA (See
Note 7, Deferred Revenue, in the accompanying consolidated financial
statements), and $222,000 from government research grants. Revenues from
government research grants included preclinical development of docosanol as a
potential treatment for genital herpes ($156,000) and preclinical research on a
potential antibody to anthrax ($66,000). Revenues in the third quarter of
fiscal 2003 amounted to $398,000, including $298,000 from the recognition of
deferred revenue relating to the sale of an undivided interest in our Abreva
license agreement and $95,000 from government research grants. During the balance of fiscal 2004, we expect to recognize approximately
$400,000 in revenues from the recognition of deferred revenue relating to the
sale of an undivided interest in our Abreva license 15




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agreement to Drug Royalty USA and other research contracts, and approximately
$200,000 in revenues from government research grants. Projected fiscal 2004 revenues from new sources, such as license fees and
milestone payments, will depend substantially on our ability to enter into
additional license arrangements and achieve milestones under those
arrangements. Such arrangements could be in the form of licensing or
partnering agreements for docosanol 10% cream or for our other product
development programs for the treatment of PBA, neuropathic pain, allergy and
asthma, inflammation, and atherosclerosis. Many of our product development
programs could take years of additional development before they reach the stage
of licensing, if ever, by other pharmaceutical companies. Revenue-generating Contracts Commercial contracts that remained active at the end of the third quarter of
fiscal 2004 include six docosanol 10% cream license agreements, one antibody
license and one Neurodex sublicense. The GlaxoSmithKline license arrangement
has been our most significant revenue source during the past three years,
accounting for a majority of revenues. Expenses Operating expenses.Total operating expenses were $7.3 million in the third
fiscal quarter 2004, compared to $6.4 million in the same period in fiscal
2003. The $832,000 increase in operating expenses was primarily caused by an
$884,000 increase in spending for our Phase III clinical trial and open label
safety study of Neurodex for the treatment of PBA, reflecting a higher average
number of patients engaged in both studies, compared with the same period a
year ago. Research and development programs accounted for 70% of total
operating expenses for the three months ended June 30, 2004 and June 30, 2003.
Sales and marketing expenses for the three months ended June 30, 2004,
increased by 29% over the same period a year ago as a result of the development
of additional medical education and awareness programs for PBA. General and
administrative expenses of $1.2 million for the quarter were about the same as
a year ago, as headcount and related costs remained about the same as the prior
year. These and other costs are more fully described below. Three Months Ended
    
    Nine Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Operating expenses:Research and development
    
    
    70
    %
    
    
    70
    %
    
    
    70
    %
    
    
    71
    %General and administrative
    
    
    17
    %
    
    
    19
    %
    
    
    18
    %
    
    
    19
    %Sales and marketing
    
    
    13
    %
    
    
    11
    %
    
    
    11
    %
    
    
    10
    %Costs of sales
    
    
    0
    %
    
    
    0
    %
    
    
    1
    %
    
    
    0
    %Total operating expenses
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 Research and development (R&D) Expenses.R&D expenses were $5.1 million in
the third fiscal quarter of 2004, compared to $4.5 million in the same period a
year ago. The Phase III clinical trial of Neurodex for the treatment of PBA
in patients with multiple sclerosis (MS) accounted for approximately 42% of
all R&D spending in the third quarter of fiscal 2004. A Phase I single rising
dose study of Avanirs lead compound for the treatment of allergies and asthma
accounted for approximately 20% of total R&D spending in the third quarter of
fiscal 2004. The balance of R&D spending was for other programs, including
preclinical research related to the development of compounds for the treatment
of inflammation and atherosclerosis and antibody research programs. We expect
R&D spending will continue at about the current rate through the next quarter
as we proceed to analyze and report the results of the Neurodex Phase III
clinical trial, continue the open label safety study of Neurodex, continue
safety studies in the Phase I clinical trials of our allergy and asthma product
candidate, AVP-13358, and continue preclinical research related to inflammation
and atherosclerosis. 16




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In the third quarter of fiscal 2003, clinical development of Neurodex for the
treatment of PBA and neuropathic pain accounted for 28% and 14% of R&D
expenses, respectively. Approximately 21% of R&D expenses were related to
completion of toxicology and other preclinical research related to treatments
for allergies and asthma and 13% related to inflammation. The balance of R&D
spending was divided primarily among research related to the development of
compounds for the treatment of atherosclerosis and antibody research programs. Pharmaceutical R&D programs, by their very nature, require a substantial amount
of financial and human resources and there is no assurance that any drug
candidate will be approved for marketing by domestic and/or foreign regulatory
agencies. The later stages of clinical development typically require
substantially greater funds for development than the earlier stages. Thus, for
many of our larger development programs, we intend to license our technology or
partner with other pharmaceutical companies that have substantially greater
financial resources. We expect that our licensees will continue to develop and
fund those products and pay us up-front license fees, milestone payments, and
royalties on product sales if those products are successfully developed and
approved for marketing by the FDA and foreign regulatory agencies. We caution
that many of our development efforts could experience delays, setbacks and
failures, with no assurance that any of our clinical research or our potential
licensees or partners will ever reach the stage of submitting an NDA to the FDA
or that any NDA will be approved. The following table sets forth the status
of, and costs attributable to, our proprietary research and clinical
development programs. 17




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Research and Development Projects and Expenses Three Months Ended
    
    Nine Months EndedJune 30,
    
    June 30,
    
    Inception
Through
    
    Estimated
CostJune 30,
    
    To CompleteMajor Company-funded Projects:
    
    2004 (1)
    
    2003 (1)
    
    2004 (1)
    
    2003 (1)
    
    2004 (1) (2)
    
    Project(1)Develop Neurodex for FDA
marketing approval in
treating PBA. Estimated cost and
timing to complete
remainder of project
necessary to begin
submission of an NDA to
FDA: less than 0.5 year
    
    $
    2,144,049
    
    
    $
    1,260,026
    
    
    $
    6,339,722
    
    
    $
    3,355,826
    
    
    $
    16,804,859
    
    
    $
    4 M
    (3)Develop Neurodex for
neuropathic pain. Phase II
open-label study completed.
    
    
    464,168
    
    
    
    618,340
    
    
    
    1,570,870
    
    
    
    1,315,872
    
    
    
    6,327,001
    
    
    NA (4)Development program for
allergy and asthma (IgE
regulator). Estimated
timing to complete Phase
IIa and license the
product: up to 2 years
    
    
    999,615
    
    
    
    965,104
    
    
    
    2,948,193
    
    
    
    3,468,760
    
    
    
    17,452,484
    
    
    $
    14 MPreclinical
anti-inflammatory research
program (MIF inhibitor).
Estimated timing to
complete Phase IIa and to
license product: up to 4
years
    
    
    369,696
    
    
    
    591,435
    
    
    
    1,438,686
    
    
    
    1,606,606
    
    
    
    6,482,193
    
    
    $
    22 MPreclinical
atherosclerosis program.
Estimated timing to
complete proof of concept
and license product: up
to 3.5 years
    
    
    328,907
    
    
    
    223,924
    
    
    
    787,422
    
    
    
    632,600
    
    
    
    2,690,110
    
    
    $
    26 MGovernment-Funded Projects:Pre-clinical research,
primarily for potential
treatments for genital
herpes and anthrax.
Estimate timing to
complete the various
projects varies from one
to two years
    
    
    262,581
    
    
    
    222,161
    
    
    
    825,529
    
    
    
    577,414
    
    
    
    1,908,507
    
    
    $
    0.8 M
    (5)Other Research Projects:Other projects involving
monoclonal antibodies and
docosanol. The costs and
timing to complete these
projects are unpredictable
because of the uncertainty
of outcomes of our
research
    
    
    523,900
    
    
    
    642,870
    
    
    
    1,918,818
    
    
    
    2,038,684
    
    
    
    13,314,046Total
    
    $
    5,092,916
    
    
    $
    4,523,860
    
    
    $
    15,829,240
    
    
    $
    12,995,762
    
    
    $
    64,979,200
  (1)
    
    Each project includes allocation of laboratory occupancy costs.
M refers to millions. Estimated costs and timing to complete the
projects are subject to the availability of funds.(2)
    
    Inception dates are on or after October 1, 1998, at which time we
began identifying and tracking programs costs.(3)
    
    Includes the addition of approximately $2.0 million to conduct
special population studies in 2004.(4)
    
    Licensing and/or co-promotion alternatives are being explored
whereby the partner would fund Phase III clinical trials. See
Research and Development Program Status and Plans. Program
expenditures for Neurodex for the treatment of neuropathic pain during
each of the listed periods include allocated costs of certain research
programs that are shared with Neurodex for PBA.(5)
    
    Represents the remaining balance of State and Federal research
grant awards totaling $2.1 million for research related to genital
herpes, anthrax, cytomegalovirus (CMV) and a blood donor program. 18




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Research and Development Program Status and Plans Neurodex for the treatment of PBA.In June 2004, we completed the treatment
phase of a Phase III clinical trial of Neurodex for the treatment of PBA in 150
patients with MS  10 more patients than originally planned. A contract
research organization is collecting the data from the double-blind
placebo-controlled study from all study sites to evaluate the results. We
expect to obtain and report the results of the clinical trial in the
quarter ending September 30, 2004.
Assuming the results of the clinical trial in MS patients are favorable, we
intend to begin submission of an NDA to the FDA by the end of the 2004 calendar
year. Also, we are engaged in an open-label safety study for the treatment of
PBA in a broader pool of patients who could have any one of several
neurodegenerative diseases or conditions. Prior to engaging in these current
studies, we successfully completed the initial Phase III clinical trial of PBA in patients
with amyotrophic lateral sclerosis (ALS), in May 2002. Neurodex for the treatment of neuropathic pain.This program is in the Phase
II stage of clinical development. At present, we are evaluating alternatives
for continued development of Neurodex in the treatment of neuropathic pain,
including continuing development on our own or with the funding of a potential
co-promotion partner or potential licensee. In mid-2003, we successfully
completed a four-week open-label dose escalation study of Neurodex in patients
with painful diabetic neuropathy. There can be no assurances as to the timing
of a license or co-promotion arrangement, if any. Development program for allergy and asthma (IgE regulator).We recently
completed a Phase I clinical trial of our asthma/allergy drug, AVP-13358, in 54
healthy volunteers. The placebo-controlled study was intended to assess safety,
tolerability and pharmacokinetics following single rising oral doses. Results
of the study suggest AVP-13358 was well tolerated at all doses up through 16
milligrams. The study also demonstrated AVP-13358 was detectable in the
bloodstream at all doses administered and remains in circulation long enough to
allow potentially once or twice daily dosing. We intend to proceed to higher
levels of single rising doses in healthy volunteers, to further evaluate the
safety of the drug. These trials
will be followed by Phase Ib clinical trials using rising multi-doses in
healthy patients. Assuming the successful completion of Phase I clinical
trials and adequate funds to continue development without a partner, we intend
to continue development of the drug through Phase IIa. Assuming the results of
such additional studies are favorable, we expect to license the drug to a
larger pharmaceutical company for further development. Anti-inflammatory research program (MIF inhibitor).We are currently
conducting research on several potential drug candidates capable of inhibiting
or blocking the activity of macrophage migration inhibitory factor (MIF). Our
research indicates that MIF may serve as a potential drug target in a variety
of diseases, including rheumatoid arthritis, Crohns disease, colitis and
asthma. Assuming we are successful in finding a lead compound and submitting
an investigational new drug application (IND) to the FDA, and successfully
complete some of the initial studies, we intend to license the compound to
another pharmaceutical company for further development. Any delays to our
product development timeline or in submitting an IND could cause a similar
delay in the timing of when we expect that we could license our MIF technology. Development program for atherosclerosis.We are engaged in preclinical research
investigating the use of small, orally active molecules as a potential
treatment of atherosclerosis (the build-up of fatty plaques in blood vessel
walls). Our research is focused on developing molecules that can enhance the
naturally occurring process known as reverse cholesterol transport (RCT),
whereby cholesterol is effluxed from the fatty-plaques in blood vessel walls
and transported to the liver for elimination from the body. Preliminary
studies in animal models suggest our compounds may both reduce fatty plaques
and increase fecal cholesterol excretion. 19




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Government research contracts.Avanir has been engaged in research funded by
$2.1 million in government research grants. We recently completed two
government-funded research programs  the development of a blood donor program
intended to find high-affinity antibodies to infectious diseases and research
on potential antibodies to cytomegalovirus. Approximately $800,000 in funds
remains to be spent throughout 2004 and 2005 under existing government research
grants for research on docosanol-based formulations for the treatment of
genital herpes and the development of antibodies to anthrax toxins. Monoclonal antibodies research.Two of Avanirs most potent anthrax
antibodies, AVP 21D9 and AVP 22G12, appear unique both in mechanism of action
and in terms of the binding site on the anthrax toxin. AVP 21D9 is currently
in preclinical development for use as a prophylactic and therapeutic drug to
treat anthrax infections. Ultimately, Avanir intends to submit an IND
application seeking clearance from the FDA to begin clinical trials to evaluate
the safety, tolerability, and pharmacology of AVP 21D9 in healthy human
subjects. Much of our work targeting infectious diseases has been funded by
government research grants. Because all of our research is at a very early
preclinical stage of development and is unpredictable in terms of the outcome,
we are unable to predict the cost and timing for development of any antibody or
drug. Other Operating Expenses General and administrative expenses.General and administrative expenses
amounted to $1.2 million in the third quarter of fiscal 2004, about the same as
the same period a year ago. The Company expects that general and
administrative expenses will remain at about the same level over the next
quarter. Sales and marketing expenses.During the third quarter of fiscal 2004, sales
and marketing expenses were $937,000 compared to $727,000 in the same period a
year ago. Higher expenses in the third fiscal quarter of 2004 were related
primarily to additional expenditures of approximately $407,000 in medical
education and awareness programs for PBA and pre-launch planning activities for
Neurodex, which were partially offset by reduced marketing expenses for our
antibody generation services to other companies ($208,000). We expect that
sales and marketing expenses will increase by up to 20% in the next quarter if
Phase III clinical trial results for Neurodex are favorable and if we elect to
market the drug ourselves. Net Loss For the third quarter of fiscal 2004, the net loss attributable to common
shareholders was $6.6 million, compared to $6.0 million for the same period a
year ago. The basic and diluted net loss per share was $0.08 for the third
quarter of fiscal 2004, compared to $0.10 for the same period a year
ago. During the third quarter of fiscal 2004, the Company completed a
public offering of Class A common stock, which resulted in a higher average
number of shares outstanding during the three months ended June 30, 2004,
compared to the same period in the prior year. We expect to continue to pursue
our drug development strategy focused on the development of Neurodex, followed
by other programs in earlier stages of development that are in large
therapeutic areas and that have significant partnering and licensing potential.
To help fund and develop our products, we intend to seek licensees and
partners to share the costs of development. Some of these potential license
arrangements could materially change our outlook for future revenues and costs.
However, the timing of such potential arrangements is unpredictable. RESULTS OF OPERATIONS 
COMPARISON OF NINE MONTHS ENDED JUNE 30, 2004 AND 2003 Revenues Revenues for the first nine months of fiscal 2004 amounted to $3.0 million,
compared to $1.8 million for the same period last year. Revenues for the first
nine months of fiscal year 2004 included $1.2 million in revenues that the
Company recognized from the sale of an undivided interest in our Abreva license 20




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agreement, $787,000 in sales of the raw material docosanol, $662,000 from
government research grants, and $271,000 from research contracts and licenses.
Revenues for the first nine months of fiscal 2003 included $1.4 million from
the sale of an undivided interest in our Abreva license agreement and $394,000
in government research grants. Higher government research grant revenues in
fiscal 2004 were primarily the result of the award of a $750,000 grant from the
National Institute of Allergy and Infectious Diseases in early 2004 for
research related to further development of monoclonal antibodies to anthrax
toxins. Expenses Operating expenses.Total operating expenses were $22.7 million in the first
nine months of fiscal 2004 compared to $18.2 million in the same period in
fiscal 2003. The 25% increase in operating expenses was primarily caused by a
22% increase in spending on research and development programs. Research and
development programs accounted for 70% and 71% of total operating expenses for
the first nine months of fiscal 2004 and 2003, respectively. General and
administrative expenses accounted for 18% and 19% of total operating expenses
for the first nine months of fiscal 2004 and 2003, respectively. Sales and
marketing expenses accounted for 11% and 10% of total operating expenses for
the first nine months of fiscal 2004 and 2003, respectively. These and other
costs are more fully described below. Research and development expenses.Research and development (R&D) expenses
were $15.8 million in the first nine months of fiscal 2004, compared to $13.0
million in the same period a year ago. Higher R&D spending for the first nine
months of fiscal 2004 was primarily related to the clinical development of
Neurodex, and the costs associated with higher numbers of patients enrolled in
both the Phase III clinical trial and the open label safety study, than in the
same period a year ago. The Phase III clinical trial of Neurodex in the
treatment of PBA in patients with MS and the open label safety study accounted
for 40% of all R&D spending in the first nine months of fiscal 2004. Costs
associated primarily with Phase I clinical trials of Avanirs lead compound for
the treatment of allergies and asthma accounted for 19% of total R&D spending
in the first nine months of fiscal 2004. The balance of R&D spending was for
other programs, including pre-clinical research related to the development of
compounds for the treatment of inflammation and atherosclerosis and antibody
research programs. In the first nine months of fiscal 2003, costs associated with completion of
toxicology, submitting an IND, and initiating Phase I clinical trials of
Avanirs lead compound for the treatment of allergies and asthma accounted for
27% of total R&D spending. The clinical trials of Neurodex for the treatment
of PBA in patients with MS accounted for 26% of all R&D spending in the first
nine months of fiscal 2003. The balance of R&D spending was for other
programs, including clinical research of Neurodex for the treatment of
neuropathic pain, pre-clinical research related to the development of compounds
for the treatment of inflammation and atherosclerosis, and antibody research
programs. General and administrative expenses.General and administrative expenses
amounted to $4.2 million in the first nine months of fiscal 2004, representing
a 19% increase over expenses of $3.5 million in the same period in the prior
year. Higher expenses were attributable to a $360,000 increase related to
human resource programs, a $250,000 increase related to legal and other costs
associated with compliance with the Sarbanes-Oxley Act of 2002, and a $206,000
increase in building occupancy costs resulting from the utilization of
additional office space in the current period. These increases were partially
offset by a $103,000 reduction in outside services for investor relations. Sales and marketing expenses.During the first nine months of fiscal 2004,
sales and marketing expenses were $2.5 million, compared to $1.8 million in the
same period a year ago. Higher expenses in the first nine months of fiscal
2004 were primarily related to the addition of medical education and awareness
programs for PBA and pre-launch planning activities for Neurodex. Net Loss 21




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For the first nine months of fiscal 2004, the net loss attributable to common
shareholders was $19.6 million, compared to $16.3 million for the same period a
year ago. The basic and diluted net loss per share was $0.27 for the first
nine months of fiscal 2004, compared to $0.28 for the same period a year ago.
The lower loss per share for the first nine months of fiscal 2004 was primarily
attributable to a higher average number of shares outstanding in 2004 from the
sale of an aggregate of $34.1 million in common stock in December 2003 and June
2004. LIQUIDITY AND CAPITAL RESOURCES As of June 30, 2004, we had cash and investments in securities totaling $32.3
million, including cash and cash equivalents of $19.7 million, short and
long-term investments of $11.7 million and restricted investments in securities
of $857,000. Our net working capital balance as of June 30, 2004 was $20.5
million. As of September 30, 2003, we had cash, cash equivalents and
investments in securities of $17.5 million, cash and cash equivalents of $12.2
million, and a net working capital balance of $10.6 million. Explanations of
net cash provided by or used for operating, investing and financing activities
are provided below. June 30,
    
    Increase
    
    September 30,2004
    
    During Period
    
    2003Cash, cash equivalents and investment in securities
    
    $
    32,278,208
    
    
    $
    14,820,919
    
    
    $
    17,457,289Cash and cash equivalents
    
    $
    19,708,480
    
    
    $
    7,510,072
    
    
    $
    12,198,408Net working capital
    
    $
    20,533,741
    
    
    $
    9,914,525
    
    
    $
    10,619,216
 Nine months ended
    
    Change
    
    Nine months endedJune 30,
    
    Between
    
    June 30,2004
    
    Periods
    
    2003Net cash provided by (used for) operating activities
    
    $
    (18,202,512
    )
    
    $
    (26,019,525
    )
    
    $
    7,817,013Net cash used for investing activities
    
    
    (8,379,280
    )
    
    
    (4,535,164
    )
    
    
    (3,844,116
    )Net cash provided by (used for) financing activities
    
    
    34,091,864
    
    
    
    34,403,661
    
    
    
    (311,797
    )Net increase in cash and cash equivalents
    
    $
    7,510,072
    
    
    $
    3,848,972
    
    
    $
    3,661,100
 Operating activities.Net cash used for operating activities amounted to $18.2
million in the first nine months of fiscal 2004, compared to net cash provided
by operating activities of $7.8 million during the same period a year ago. For
the first nine months of fiscal 2004, the net loss of $19.6 million primarily
accounted for the cash used for operating activities. Depreciation
and amortization was higher by $525,000 in the first nine months of
fiscal 2004, reflecting primarily the additional depreciation on
$4.1 million in completed construction on approximately 30,400
square feet of additional office and laboratory space in fiscal 2003. Also during the period,
inventory declined by $202,000, representing the cost of docosanol sold to
various licensees, and accounts payable decreased by $617,000, representing
payments made on various contracts for services, including work performed by
others on our clinical trials. We intend to replenish our docosanol inventory
later in the fiscal year. The net cash provided by operating activities in the
first nine months of fiscal 2003 includes $24.1 million in cash, net of
transaction costs, received from Drug Royalty USA on December 24, 2002, from
the sale of an undivided interest in our Abreva® license agreement with
GlaxoSmithKline. The sale of rights to future Abreva royalties was recorded as
deferred revenue on the date of sale. (See Note 7, Deferred Revenue in the
accompanying notes to the consolidated financial statements.) Investing activities.Net cash used for investing activities during the first
nine months of 2004 amounted to $8.4 million, including investments in
securities totaling $8.1 million, purchases of property and equipment of
$90,000 and patent costs of $873,000, partially offset by sales and maturities
of investments totaling $700,000. Net cash used for investing activities
during the first nine months of fiscal 2003 amounted to $3.8 million, including
investments in securities totaling $711,000, capital expenditures related to
purchases of capital equipment and leasehold improvements totaling $5.2
million, and patent costs of $393,000, partially offset by sales and maturities
of investments totaling $2.5 million. Capital expenditures were substantially
lower in the first nine months of fiscal 2004, compared to the same period a
year ago when the Company was engaged in making leasehold improvements to
additional office and laboratory space. 22




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Financing activities.Net cash provided by financing activities amounted to
$34.1 million during the first nine months of 2004, consisting primarily of
$26.5 million received from the sale of Class A common stock in June
2004, and $7.6 million received from the sale of Class A common stock and
warrants in December 2003. Net cash used for financing activities amounted to
$312,000 in the first nine months of fiscal 2003, consisting primarily of
payments on notes and capital lease obligations. In April 2004, the Company filed a shelf registration statement on Form S-3
with the SEC that enables the Company to sell an aggregate of up to $50 million
in Class A common stock from time to time over a period of two years. The
Companys sale of Class A common stock in June 2004, representing $28.8 million
in gross proceeds ($26.5 million net of underwriting discount and costs of the
financing transaction) was the first transaction for the sale of Class A common
stock under the existing shelf registration. The balance of Class A common
stock available for sale under the existing shelf registration is approximately
$21.2 million. We believe that cash, cash equivalents, and investments in securities totaling
$32.3 million at June 30, 2004, plus anticipated future revenues, should be
sufficient to sustain our planned level of operations for at least the next 12
months. However, to continue to fund the development of our new drug
candidates and technology platforms and potential product launch of Neurodex
during the next two years (assuming that Neurodex is approved for marketing by
the FDA), we expect to continue to pursue various alternatives for raising
capital during this two-year period. Potential alternatives that we are
considering for raising capital include, but are not limited to, partnering
arrangements where partners share development costs, issuance of debt or equity
securities, and licensing or sales of one or more of our platform technologies
or new drug candidates. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of financial statements in accordance with accounting
principles generally accepted in the United States requires that management
make a number of assumptions and estimates that affect the reported amounts of
assets, liabilities, revenues and expenses in our consolidated financial
statements and accompanying notes. Management bases its estimates on
historical information and assumptions believed to be reasonable. Although
these estimates are based on managements best knowledge of current events and
circumstances that may impact the Company in the future, actual results may
differ from these estimates. Our critical accounting policies are those that affect our financial statements
materially and involve a significant level of judgment by management. Our
critical accounting policies regarding revenue recognition are in the following
areas: milestone payments in license agreements, royalties on licensed
products, sale of rights to future royalties, and recognition of revenues in
research contracts. Our critical accounting policies also include recognition
of expenses in research contracts and the valuation of long-lived and
intangible assets. Milestone Payments in License Agreements We recognize revenues from license fees when the performance requirements have
been met, the fee is fixed or determinable, and collection of fees is probable.
We defer revenues and recognize them ratably over the life of the agreement
when we have continuing obligations to perform under the agreement. Our largest and most significant license agreement is with SB Pharmco Puerto
Rico, Inc., a subsidiary of GlaxoSmithKline (GlaxoSmithKline). On March 31,
2000, we transferred the rights to manufacture, use, and sell Abreva in the
United States and Canada to GlaxoSmithKline and gave them full control,
authority and responsibility over research, development, regulatory compliance
activities (including actions required to obtain appropriate government
approvals), and commercialization of the product in those territories.
GlaxoSmithKline has achieved and paid all of the performance milestones under
the 23




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agreement. With regard to the milestones, we have no further performance
obligations. Future revenues, if any, to be earned under the GlaxoSmithKline
agreement will come solely from royalty revenues. We expect to enter into additional license agreements in the future. We expect
that each license agreement will have its own set of circumstances and terms of
performance. We will consider the specific facts and circumstances of each
license agreement to determine the appropriate revenue recognition for such
items, including nonrefundable up-front fees and milestone payments and taking
into consideration when the earnings process is complete and collection is
reasonably assured. Royalties on Licensed Products We recognize royalty revenues from our licensed products based on the reported
sales by our licensees and computed in accordance with the specific terms of
the license agreements. Since the launch of Abreva in October 2000 through
June 30, 2004, substantially all of our royalties have some from
GlaxoSmithKline. We have entered into additional license agreements that
contain royalties as a source of revenues, and we expect to enter into
additional similar license agreements with foreign-based companies. Sale of Rights to Future Abreva Royalties In fiscal 2003, we sold an undivided interest in our license agreement with
GlaxoSmithKline to Drug Royalty USA for $24.1 million. Because of our ongoing
involvement with GlaxoSmithKline in earning future royalty revenues, we have
recorded the amounts received from Drug Royalty USA, net of costs of the
transaction and forgiveness of certain advances, as deferred revenue. The
amount recorded as deferred revenue is being recognized as revenue under the
units-of-revenue method over the period from October 2002 through April 2014.
Under this method, the amount of deferred revenue being recognized as revenue
in each period is calculated by multiplying (i) the ratio of the royalty
payments due to Drug Royalty USA for the period to the total remaining
royalties that we expect SB will pay Drug Royalty USA over the term of the
agreement, by (ii) the unamortized deferred revenue amount. The portion of
deferred revenue classified as a current liability represents the amount we
expect to realize as revenue within the next 12 months. (See Note 7, Deferred
Revenue, in the accompanying consolidated financial statements.) Recognition of Revenues in Research Contracts In certain circumstances, we may enter into research contracts or
collaborations that have obligations to deliver to the customer multiple
products and/or services (multiple deliverables) in exchange for fees or
milestone payments. Such contracts could include antibody generation services
agreements and other forms of research collaborations, as discussed below. Antibody generation services.As of June 30, 2004, we were engaged in work on
one research collaboration agreement that had research initiation fees. In
this type of agreement, the customer provides us with the target antigens. We
then perform research services to develop potential antibodies for those
antigens. If we are able to estimate the period of service in the contract in
advance of beginning the work, then we recognize such research initiation fees
ratably as revenue over the estimated period of service. If we are unable to
identify the period of service in the contract in advance of beginning the
work, we defer research initiation fees and recognize such fees as revenue once
we have completed our efforts to create the antibodies. In the research phases
of the research collaboration agreement, we may receive payment either to start
a research phase or to complete a research phase (including receipt by the
customer of the deliverable). We recognize revenue once the product has been
delivered because the earning process would be complete and an exchange has
been made. Factors taken into consideration in recognizing revenues include
the following: 24




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
    
    The performance criteria have been met;
    
    Any deliverable products or services are not essential to the
functionality of the delivered products or services; and
    
    Payment for the delivered products or services is not contingent on
delivery of the remaining products or services. Other research contracts.As with all our research contracts, including the
up-front initiation fee, we defer revenue recognition until services have been
rendered or products (e.g. developed antibodies) are delivered. The milestones
established within the contract are typically set to approximate the effort
associated with the completion of each phase. Recognition of Expenses in Research Contracts Pursuant to managements assessment of the progress that has been made on
clinical trials and services provided in other research contracts, we recognize
expenses as the services are provided. Several of our contracts extend across
multiple reporting periods. For example, contracts with organizations that
conduct our Phase III clinical trial of Neurodex for the treatment of PBA in
patients with multiple sclerosis and our Neurodex open label safety study,
extend beyond one year. Such contracts require an assessment of the work that
has been completed during the period, including measurement of progress,
analysis of data that justifies the progress, and finally, managements
judgment. Valuation of Long-Lived and Intangible Assets We assess the impairment of identifiable intangible assets and long-lived
assets whenever events or changes in circumstances indicate that the carrying
value may not be recoverable. Factors we consider important that could trigger
an impairment review include the following:  
    
    a significant underperformance relative to expected historical or
projected future operation results;  
    
    a significant change in the manner of our use of the acquired asset
or the strategy for our overall business; and/or  
    
    a significant negative industry or economic trend. When we determine that the carrying value of intangible assets or long-lived
assets are not recoverable based upon the existence of one or more of the above
indicators of impairment, we may be required to record impairment charges for
these assets that have not been previously recorded. RECENT ACCOUNTING PRONOUNCEMENTS See Note 12, Recent Accounting Pronouncements in the accompanying
consolidated financial statements for a discussion of recent accounting
pronouncements and their effect, if any, on the Company. RISK FACTORS THAT MIGHT AFFECT FUTURE OPERATIONS Risks Relating to Our Business We have a history of losses and we may never achieve or maintain profitability. To date, we have experienced significant operating losses in funding the
research, development and clinical testing of our drug candidates and we expect
to continue to incur substantial operating losses through at least fiscal 2006.
As of June 30, 2004, our accumulated deficit was approximately $115.8 25




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million. To achieve profitability, we would need to generate significant
additional revenue with positive gross margins. Although we are seeking to
negotiate revenue-generating licenses and/or co-promotion arrangements for
docosanol 10% cream, Neurodex and other product candidates, we may not be
successful in doing so, and any such arrangements may not generate the
anticipated revenue. Additionally, our sales and marketing expenses are
expected to increase over the next several quarters if the results of our Phase
III clinical trial for Neurodex are favorable. These increases in expenses may
not be offset by new sources of increased revenues, and as a result, we may not
achieve or maintain profitability. We expect to receive the results of our Phase III clinical trial soon for
Neurodex and any negative results in this trial could hurt our stock price. In June 2004, we completed the treatment phase of our Phase III clinical trial
for Neurodex, our late-stage candidate for the treatment of PBA in MS patients.
We expect to obtain and announce preliminary data from this trial in late
August or in September 2004. Neurodex is our most developed drug candidate and
we believe it represents the most immediate opportunity to produce significant
revenue for the Company. If the clinical trial data are negative or
inconclusive, then we may be required to conduct one or more additional
clinical trials and may not be able to seek regulatory approval to market the
compound. If this were to happen, we expect our stock price would be
negatively affected. Assuming favorable results from our Phase III clinical trial for Neurodex in
multiple sclerosis patients with PBA, we must submit our results to the FDA for
review and approval prior to U.S. commercialization. Any delay in the
regulatory review or approval process may harm our prospects and could harm our
stock price. Assuming favorable results from our Phase III clinical trial of Neurodex in
patients suffering from PBA with MS, we will have to seek FDA approval prior to
commercialization in the United States. Any delays in our submission or in the
FDAs review or approval would delay market launch and increase our cash
requirements and could increase the volatility of our stock price and result in
additional operating losses. The process of obtaining FDA approval often takes many years and can vary
substantially based upon the type, complexity and novelty of the products
involved. FDAs review and approval of the actual NDA application is expensive
and uncertain. Though, in the event we have positive results from our Phase III
trial for Neurodex, we expect to begin submission of an NDA to the FDA before
the end of the 2004 calendar year, we may not be able to maintain our proposed
schedule. If we submit an NDA for Neurodex, the FDA must decide whether to
accept or reject the submission for filing. The FDAs official filing of an
NDA begins the applications substantive review. The FDA may refuse to file an
NDA for review for many reasons, including if the submission contains
insufficient data to demonstrate efficacy and safety. We cannot be certain
that our NDA submission would be accepted for filing and reviewed by the FDA or
that we would be able to respond to any requests during the review period in a
timely manner without delaying potential action on our request for approval. We also cannot be certain that Neurodex will receive a favorable recommendation
from any FDA advisory committees or be approved for marketing by the FDA. Even
if the FDA grants us marketing approval for Neurodex, we cannot be certain that
we will be able to obtain the labeling claims necessary or desirable for the
promotion of the product. In addition, delays in approvals or rejections of
marketing applications may be based upon many factors, including regulatory
requests for additional analyses, reports, data and/or studies, regulatory
questions regarding data and results, changes in regulatory policy during the
period of product development and/or the emergence of new information regarding
our products or other products. We expect that we will need to raise additional capital to fund ongoing
operations through at least 2006. If we are unable to raise additional
capital, we may be forced to curtail operations. If we 26




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succeed in raising additional capital through a licensing or financing
transaction, it may affect our stock price and future revenues. In order to maintain sufficient cash and investments to fund future operations,
we will need to raise additional capital. We expect to seek to raise
additional capital over the next 12 to 24 months through various alternatives,
including licensing or sales of our technologies and drug candidates and
through the sale of shares of our Class A common stock.  
    
    If we raise capital through licensing or sales of one or more of our
technologies and drug candidates, then we may lose an opportunity for
product sales if a product is successfully developed, approved by the
FDA and marketed. If we license any of our technologies or drug
candidates, then the development of that product or technology may no
longer be in our control. A licensee might not ever reach any of the
milestones in a license agreement and we would not earn any additional
payments in such an event. Further, if we sell any of our technologies
or drug candidates, the sales price may not cover our investment in such
technology or drug candidate.
    
    If we raise capital by issuing additional shares of Class A common
stock at a price per share less than the then-current market price per
share, then the value of shares of Class A common stock outstanding may
be diluted or reduced. Further, even if we were to sell shares of
common stock at prices equal to or higher than the current market price,
the issuance of additional shares may depress the market price of our
Class A common stock and dilute your voting rights in the Company.
    
    We may not be able to raise capital on terms that we find acceptable,
if at all. If we are unable to raise additional capital to fund future
operations, then we might have to reduce operations or defer or abandon
one or more of our clinical or preclinical research programs. Any of
these actions could be expected to have an adverse effect on our stock
price. We expect our quarterly operating results to fluctuate significantly from
period-to-period for a number of reasons. Historically, we have had only limited recurring revenue. As a result,
operating results have been, and will continue to be, subject to significant
quarterly fluctuations based on a variety of factors, including:  
    
    Co-promotion or License Arrangements We are currently seeking
co-promotion or licensing partners for docosanol 10% cream and Neurodex,
as well as for our compounds targeting IgE (allergy and asthma), MIF
(inflammation) and apolipoprotein A1 (atherosclerosis). It is difficult
to predict whether any of these discussions will result in a partnering
or license arrangement and what the financial terms of such an
arrangement might be. If we do enter into any such arrangements, the
recognition of the revenue under that arrangement may depend on the
efforts and performance of our licensees or partners in reaching
milestones that are outside our control. Such milestones may include
specific events, such as regulatory approval, product launch, the
passage of time, or reaching a sales threshold.
    
    Limited Rights to Future Abreva Royalties In December 2002 we sold
to Drug Royalty USA the rights to a substantial portion of our future
royalty revenues from sales of Abreva by GlaxoSmithKline. We will not
receive any future royalty payments unless and until annual Abreva
wholesale sales exceed $62 million, at which time we will receive
one-half of the stated royalty rate on any excess sales. We expect that
any royalty payments on these excess sales, if any, would occur only
once a year, after the end of each calendar year.
    
    Concentration of Significant Customers, Suppliers and Industries 
Milestone payments, royalties earned, and revenues recognized from the
sale of rights to royalties from a single licensee 27




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(GlaxoSmithKline) accounted for approximately 73% and 95% of our fiscal
2003 and 2002 revenues, respectively. We have now received all of the
milestone payments from GlaxoSmithKline for North America. With the sale
of our Abreva royalty rights to Drug Royalty USA, future royalty payments
from GlaxoSmithKline will come exclusively from our remaining 50% share
of Abreva royalties on contract sales in excess of $62 million a year.
Additionally, we purchase our raw materials from a sole foreign supplier
that has been approved for manufacture by the FDA. Any disturbances or
delays in the manufacture of the raw materials could seriously and
adversely affect our business.
    
    Acquisitions/Alliances If, in the future, we acquire technologies,
products, or businesses, or we form alliances with companies requiring
technology investments or commitments, we will face a number of risks to
our business. The risks that we may encounter include those associated
with integrating operations, personnel, and technologies acquired or
licensed, and the potential for unknown liabilities of the acquired
business. Our business and operating results on a quarterly basis could
be adversely affected if any or our acquisition or alliance activities,
to the extent they exist in the future, are not successful. The Board of Directors has the authority to effect a reverse stock split within
a stated range until March 18, 2005. If implemented, the reverse stock split
may negatively affect the price and liquidity of our Class A common stock. At our 2004 Annual Meeting of Shareholders, the Board of Directors received the
authority to implement, within its discretion and for a period of one year, a
reverse split of our Class A common stock within a range of 1:2 to 1:12.5. If
the Board of Directors were to effect a reverse stock split, the bid price of
the Class A common stock may not continue at a level in proportion to the
reduction in the number of outstanding shares resulting from the reverse stock
split. For example, if the Board of Directors decided to implement a reverse
stock split at a ratio of 1-for-5, the post-split market price of our Class A
common stock may not be at least five times greater than the pre-split price.
Accordingly, the total market capitalization of our Class A common stock after
a reverse stock split, if implemented, could be lower than the total market
capitalization before the proposed reverse stock split. Additionally, the
liquidity of our Class A common stock could be affected adversely by the
reduced number of shares outstanding after the reverse stock split. Developing and testing a drug candidate is a very expensive and time-consuming
process that may not ultimately lead to a marketable product. The drug development process is lengthy and capital-intensive. Since September
1998, we have spent approximately $65.0 million in preclinical and clinical
studies researching the safety and efficacy of our drug candidates and
potential drug candidates. If any of our drug candidates fail to demonstrate
the desired safety and efficacy, we may abandon the development of the
compound, in which event we would not recover our expenditures incurred to date
for that compound. If a compound appears to be safe and effective in
preclinical studies, we may decide to proceed with human clinical trials. The
full complement of clinical trials required to obtain regulatory approval for a
new drug may involve tens-of-millions of dollars. Because of our limited
financial resources, we may be required to license the compound to a
pharmaceutical company with greater financial resources in order to complete
the development of the drug. We may be unable to find a large pharmaceutical
company interested in licensing the drug or, if we do locate such a licensee,
that the proposed license terms will be acceptable to the Company. In the
event that we are unable to find a large pharmaceutical partner or licensee on
acceptable terms, we may be forced to abandon one or more of our drug
candidates. Avanir and its licensees may not be successful in obtaining regulatory approval
of docosanol 10% cream immediately as an over-the-counter (OTC) product in
the rest of the world, or in licensing, marketing and selling the product in
foreign countries. 28




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Currently, docosanol 10% cream is approved for sale in the United States,
Canada, Korea, Israel, Sweden, Spain and Portugal. We are currently seeking
approval in various other countries in the European Union and intend to seek
approval in Japan. Avanir and its licensees face a variety of risks in foreign
countries in obtaining regulatory approval and in marketing and selling
docosanol 10% cream, including:  
    
    Regulatory approval requirements differ by country, and obtaining
approvals to market the drug in foreign countries may be difficult to
obtain, may require additional costly and time consuming clinical
trials, or may require prescriptions status first before obtaining
sufficient experience to warrant approval as an OTC product;
    
    Building product awareness of a new drug, whether prescription or
OTC, among customers or retail store decision makers may require a
substantial amount of product promotion, which does not guarantee
success:
    
    Consumers may not perceive that docosanol 10% cream is superior to
existing and potentially new OTC products for oral herpes;
    
    Acceptance of docosanol 10% cream in the OTC consumer market may not
be widespread; and
    
    Potential price erosion could occur due to competitive products and
responses to our products introduction. 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.
We also have exclusive license agreements for docosanol 10% cream for South
Korea, Israel, Italy, Greece, Cyprus, Turkey, Romania and Egypt. We are
holding 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 distribution arrangements for other territories on
a timely basis or on favorable terms, if at all. Further, our foreign
licensees expose us to various foreign trade risks relating to development and
marketing of docosanol 10% cream. 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 potential revenues on foreign sale include:  
    
    difficulties in obtaining regulatory approval of docosanol 10% cream in 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, including related to terrorism;
    
    difficulty in finding foreign partners with sufficient capital to
effectively launch, market and promote the product;
    
    manufacturing and shipping delays
    
    difficulties in managing operations across disparate geographic areas;
    
    fluctuations in foreign exchange rates;
    
    prices of competitive products; 29




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
    
    difficulties associated with enforcing agreements through foreign legal systems;
    
    trade protection measures, including customs duties and export quotas; and
    
    foreign tax withholding laws. Our inability to attract and retain key management and scientific personnel
could negatively affect out business. Our success depends on the performance of a small core staff of key management
and scientific employees with biotechnology 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 likely lose some portion of our
institutional knowledge and technical know-how, potentially causing a
substantial delay in one or more of our development programs until adequate
replacement personnel could be hired and trained. Other than our chief
executive officer, our executives do not have employment agreements. We do not
have key person life insurance policies for any of our executives. The
industry in which we compete has a high level of employee mobility and
aggressive recruiting of skilled personnel. This type of environment creates
intense competition for qualified personnel, particularly in product research
and development, sales and marketing, and accounting and finance. 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 through
our ownership or control of 87 issued patents and 249 patent applications.
Patents and patent applications owned or controlled by the Company are for
docosanol-related products and technologies, Neurodex, compounds capable of
regulating the target IgE in controlling symptoms of allergy and asthma,
compounds capable of regulating the target MIF in treatment of inflammatory
diseases, compounds targeting apolipoprotein A1 for the treatment of
atherosclerosis, and Xenerex technologies for developing monoclonal antibodies.
Because of the competitive nature of the biopharmaceutical industry, we cannot
assure you that:  
    
    the claims in any pending patent applications will be allowed or that
patents will be granted;
    
    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 that may be not be available to us;
    
    any of our 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 indicate that
approval will 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 30




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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. We are dependent on third parties to manufacture our drug and drug-candidate
compounds. The failure of these third parties to perform successfully could
harm our business. We have utilized, and intend to continue utilizing, third parties to
manufacture docosanol 10% cream, Neurodex and our other drug candidates. We
have no experience in manufacturing and do not have any manufacturing
facilities. Currently, we have only a single supplier for the raw material
docosanol and we do not have any long-term supply agreements in place with this
manufacturer. Although we and GlaxoSmithKline maintain a strategic reserve of
docosanol to mitigate against a short-term supply disruption, any sustained
disruption of our supply could result in shipping and sales delays and
additional costs that could harm our operations. 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
$5 million per incident and $5 million in the aggregate. However, product
liability claims can be high in the pharmaceutical industry and our insurance
may not sufficiently cover our actual liabilities. If a suit against our
business or proposed products is successful, then the lack of 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. Abreva faces competition from a number of existing and well-established
products and the companies that market their products. We have the opportunity to earn royalties on Abreva product wholesale
sales if sales exceed $62 million a year. Abreva 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 the competing products are manufactured by
companies having substantial financial resources, research and development
facilities and manufacturing and marketing experience. Even with Abreva being
marketed by one of the worlds largest consumer healthcare companies,
GlaxoSmithKline, not all competitive responses and the impact of those
responses can be foreseen. Business interruptions could adversely affect our business. Our operations are vulnerable to interruption by fire, earthquake, power loss,
telecommunications failure, and other events beyond our control. For example,
during 2001 and again in 2003, we experienced electrical power outages lasting
several hours. The loss of electrical power for any significant periods of
time could adversely affect our ability to conduct experiments and could also
harm our vendors. Further, we could lose valuable data made to date in
experiments currently underway. We have mitigated the severity of power losses
by installing emergency power equipment, which we have used on several
occasions to supply electricity to the areas that we consider to be the most
critical to our operations. However, the emergency power units do not cover
all of our electrical needs and, further, they might not operate properly in
the event of a power loss. Our financial results could be affected by potential changes in the accounting
rules governing the recognition of stock-based compensation expense. 31




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We measure compensation expense for our employee stock compensation plans under
the intrinsic value method of accounting prescribed by Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees. In addition,
we provide pro forma disclosures of our operating results in our Notes to
Consolidated Financial Statements as if the fair value method of accounting had
been applied in accordance with SFAS No. 123, Accounting for Stock-Based
Compensation. Had we accounted for our compensation expense under the fair
value method accounting prescribed by SFAS No. 123, the charges would have been
significantly higher, by approximately $1,554,000, $2,176,000, and $1,540,000
during fiscal 2003, 2002, and 2001, respectively. Recently, the Financial
Accounting Standards Board proposed changes to accounting rules concerning the
recognition of stock option compensation expense. If these proposals are
implemented, we and other companies would be required to measure compensation
expense using the fair value method, which would adversely affect our results
of operations by reducing our income or increasing our losses by an amount
equal to the difference in the two measurement methods. Risks Relating to Our Industry The pharmaceutical industry is highly competitive and most of our competitors
are larger and have greater resources. As a result, we face significant
competitive hurdles. The pharmaceutical and biotechnology industries are highly competitive and
subject to significant and rapid technological change. We compete with hundreds
of companies that develop and market products and technologies in similar areas
as our research. Although we anticipate that Neurodex will be the first product
to market, assuming it is approved by the FDA for marketing for the treatment
of PBA, we are aware that physicians may utilize other products in an off-label
manner for the treatment of this disorder. For example, Neurodex may face
worldwide competition from the following products:  
    
    Antidepressants, including Prozac®, Celexa®, Zoloft®, Paxil®,
Elavil® and Pamelor® and others.
    
    Atypical antipsychotics agents, including Zyprexa®, Resperdal®,
Abilify®, Geodon® and others.
    
    Miscellaneous agents, including Symmetrel®, Lithium® and others Our competitors may have specific expertise and technologies that are better
than ours and many of these companies, either alone or together with their
research partners, have substantially greater financial resources, larger
research and development staffs and substantially greater experience than we
do. Accordingly, our competitors may someday develop a superior product that
can directly compete with Neurodex for the treatment of PBA. If we commence
commercial sales for Neurodex, we may potentially be competing with other
companies and their products with respect to manufacturing efficiencies and
marketing capabilities, areas where we have limited or no direct experience. Our industry is highly regulated and our failure or inability to comply with
government regulations regarding the development, production, testing,
manufacturing and marketing of our products may adversely affect our
operations. Government authorities in the U.S., including the FDA, and other countries
highly regulate the development, production, testing, manufacturing and
marketing of pharmaceutical products. The clinical testing and regulatory
approval process can take a number of years and requires 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 of the 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. Additionally, we cannot predict the extent to
which adverse 32




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government regulations might arise from future U.S. or foreign legislative or
administrative actions. Moreover, we cannot predict with accuracy the effects
of any future changes in the regulatory approval process and in the domestic
health care system for which we develop our products, or the costs of on-going
compliance regulations after marketing approval has been obtained. Future
changes could affect adversely the time frame required for regulatory review,
our financial resources, and the sales prices of our proposed products, if
approved for sale. Companies in our industry must protect their intellectual property rights and
operate without infringing on or misappropriating the proprietary rights of
others. Our inability to do so could be costly and could significantly affect
our business prospects. Biotechnology companies such as Avanir rely heavily on intellectual property
rights to protect their innovations. Although we attempt to protect these
rights by regularly filing patent applications and requiring all employees to
sign confidentiality agreements, we cannot assure you that patents will be
issued, that secrecy obligations will be honored, or that others will not
independently develop similar or superior technology. Additionally, if our
consultants, key employees or other third parties apply to our projects
technological information independently developed by them or by others, then
disputes may arise as to the ownership rights of these innovations. Even if we successfully preserve our intellectual property rights, other
biotechnology or pharmaceutical companies may allege that our technology
infringes on their rights. Intellectual property litigation is costly, and
even if we were to prevail in such a dispute, the cost of litigation would
adversely affect our business, financial condition and results of operations.
Litigation is also time consuming and would divert managements attention and
resources away from our operations and other activities. If we were not to
prevail in any litigation, in addition to any damages we would have to pay, we
could be required to stop the infringing activity or obtain a license. Any
required license might not be available to us on acceptable terms. Some
licenses might be non-exclusive, and our competitors could have access to the
same technology licensed to us. If we were to fail to obtain a required license
or were unable to design around a competitors patent, we would be unable to
sell or continue to develop some of our products, which would have a material
adverse effect on our business, financial condition and results of operations. Companies in our industry are frequently subjected to product liability claims,
which can be very costly to defend against. In the ordinary course of business, biotechnology and pharmaceutical companies
face various claims brought by third parties, including claims relating to the
safety or efficacy of products. Any of these claims could subject us to costly
litigation and, while we generally believe that we have adequate insurance to
cover many different types of liabilities, our insurance carriers may deny
coverage or our policy limits may be inadequate to fully satisfy any damage
awards or settlements. If this were to happen, the payment of any such awards
could have a material adverse effect on our operations and financial position.
Additionally, any such claims, whether or not successful, could damage our
reputation and business. 
 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest rate sensitivity We are exposed to market risks related to changes in interest rates. Our
investment portfolio consists primarily of fixed income instruments with an
average duration of 1.2 years as of June 30, 2004 (2.0 years as of September
30, 2003). The primary objective of our investments in debt securities is to
preserve principal while achieving attractive yields, without significantly
increasing risk. We carry some investments that we intend to hold to maturity
and others that we classify as available-for-sale. Those 33




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available-for-sale securities are subject to interest rate risk. In general,
we would expect that the volatility of this portfolio would increase as its
duration increases. Foreign currency exchange rate sensitivity Because substantially all of our revenue, expense, and capital purchasing
activities are transacted in U.S. dollars, our exposure to foreign currency
exchange rates is immaterial. However, in the future we could face increasing
exposure to foreign currency exchange rates as we expand international
distribution of docosanol 10% cream. Until such time as we are faced with
material amounts of foreign currency exchange rate risks, we do not plan to use
derivative financial instruments, which can be used to hedge such risks. We
will evaluate the use of derivative financial instruments to hedge our exposure
as the needs and risks should arise. 
 Item 4. CONTROLS AND PROCEDURES The President and Chief Executive Officer and the Chief Financial Officer of
the Company carried out an evaluation of the effectiveness of the Companys
disclosure controls and procedures (as defined in the Securities Exchange Act
of 1934 Rules 13a-15(e) and 15(d)-15(e)), as of the end of the period covered
by this report. Based on that evaluation, these officers have concluded that
the Companys disclosure controls and procedures were adequate and designed to
ensure that material information relating to the Company and the Companys
consolidated subsidiary would be made known to them by others within those
entities. 34




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PART II OTHER INFORMATION Items 1-5. NOT APPLICABLE 
 Item 6. EXHIBITS AND REPORTS ON FORM 8-K  (a)
    
    Exhibits 15.0
    
    Letter on unaudited interim financial information31.1
    
    Certification pursuant to Section 302 of Sarbanes-Oxley Act of 200231.2
    
    Certification pursuant to Section 302 of Sarbanes-Oxley Act of 200232.1
    
    Certification pursuant to Section 906 of Sarbanes-Oxley Act of 200232.2
    
    Certification pursuant to Section 906 of Sarbanes-Oxley Act of 2002
  (b)
    
    Reports on Form 8-K On April 6, 2004, the registrant filed a Current Report on Form 8-K reporting
under Item 5 that it had amended and restated its Articles of Incorporation
pursuant to the proposals approved at the registrants 2004 Annual Meeting of
Shareholders. On May 7, 2004, the registrant filed a Current Report on Form 8-K furnishing
under Item 12 a press release reporting the results of operations for the
quarter ended March 31, 2004. On May 26, 2004, the registrant filed a Current Report on Form 8-K reporting
under Item 5 that it had entered into an Underwriting Agreement with Lazard
Freres & Co. LLC relating to the sale of up to 22,637,796 shares of Class A
common stock. On June 17, 2004, the registrant filed a Current Report on Form 8-K reporting
under Item 5 that it had sold 2,952,756 shares of Class A common stock pursuant
to an over-allotment option granted in connection with the registrants May 25,
2004 public offering. 35




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. Signature
    
    Title
    
    Date/s/Gerald J. Yakatan, Ph.D.
    
    President and Chief
    
    August 13, 2004Executive OfficerGerald J. Yakatan, Ph.D.
    
    (Principal Executive Officer)/s/Gregory P. Hanson, CMA
    
    Vice President, Finance and Chief
    
    August 13, 2004Financial OfficerGregory P. Hanson, CMA
    
    (Principal Financial and Accounting Officer)
 36




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EXHIBIT INDEX Exhibit No.
    
    Description15.0
    
    Letter on unaudited financial information31.1
    
    Certification pursuant to Section 302 of Sarbanes-Oxley Act of 200231.2
    
    Certification pursuant to Section 302 of Sarbanes-Oxley Act of 200232.1
    
    Certification pursuant to Section 906 of Sarbanes-Oxley Act of 200232.2
    
    Certification pursuant to Section 906 of Sarbanes-Oxley Act of 2002
 37