<PAGE>
                                                                    EXHIBIT 10.5


                              EMPLOYMENT AGREEMENT

       This EMPLOYMENT AGREEMENT ("Agreement"), dated as of November 29, 2001,
is made by and between AVANIR PHARMACEUTICALS, a California corporation having
its principal offices at 11388 Sorrento Valley Road, San Diego, California,
92121 (the "Company"), and Gerald J. Yakatan, Ph.D. ("Employee").

I.     AGREEMENT

       1.     Effective Date.

              Employee's employment under this Agreement shall commence on
November 29, 2001 ("Commencement Date").

       2.     At-will Employment.

              Employee's employment relationship with the Company ("Employment")
is at-will, terminable at any time and for any reason by either the Company or
Employee. While certain sections of this Agreement describe events that could
occur at a particular time in the future, nothing in this Agreement shall be
construed as a guarantee of employment of any length.

       3.     Employment Duties.

              a. Title/Responsibilities. Employee shall be the Chief Executive
Officer and President of the Company. Employee shall perform all of the duties
and responsibilities of such offices set forth in the Bylaws of the Company and
those commonly associated with such offices and such further duties and
responsibilities as may from time to time be assigned to him by the Board of
Directors of the Company (the "Board").

              b. Full-Time Attention. Employee shall devote his full time,
attention, energy and skills to the Company during the period he is employed
under this Agreement. Notwithstanding anything in this Agreement to the
contrary, Employee may, with the consent of the Board, serve as a director of
one or more other corporations.

              c. Policy Compliance. Employee shall comply with all of the
Company's policies, practices and procedures. Employee shall concurrently

<PAGE>


herewith execute and deliver to the Company the Employee Confidentiality and
Inventions Agreement ("Confidentiality Agreement") in the form attached hereto
as Exhibit 1.

       4.     Compensation.

              a.     Base Salary. The Company shall pay Employee a base salary
of $33,340.00 per month, or such higher amount as the Board may determine from
time to time, less applicable Federal and state withholding taxes, in accordance
with the Company's regular payroll practices.

              b.     Bonus Compensation. In addition to the Base Salary,
Employee may, at the sole discretion of the Board, be eligible for an incentive
bonus. Employee must be employed by the Company when bonuses are distributed in
order to be eligible to receive any portion of such bonus.

              c.     Employee Benefits. Employee shall be entitled to
participate in all employee benefit plans, programs and arrangements maintained
by the Company and made available to employees generally, including, without
limitation, stock option, stock purchase and stock incentive plans, bonus,
retirement, profit sharing and savings plans and medical, disability, dental,
life and accidental death and dismemberment insurance plans. The Employee's
participation in such plans, programs and arrangements shall be on the same
basis and terms as are applicable to other employees of the Company generally.

              d.     Reimbursement of Expenses. During his Employment with the
Company, Employee shall be entitled to reimbursement for all reasonable and
necessary business expenses incurred on behalf of the Company, including without
limitation, travel and entertainment expenses, business supplies and cellular
phone expenses, in accordance with the Company's policies and procedures.

       5.     Non-disclosure Covenant.

              a.     Employee acknowledges that during his Employment and as a
part of that Employment, Employee shall be afforded access to trade secrets
concerning the Company's business, including but not limited to (1) product
specifications, processes, inventions and ideas, past, current and planned
research and development, customer lists and information, current and
anticipated customer requirements, price lists and vendor information, market
studies, business plans, computer software and programs (including object code
and source code), database technologies, and any other information, however
documented, of the


                                       2
<PAGE>


Company that is a trade secret within the meaning of the Uniform Trade Secrets
Act (California Civil Code Section 3426 and 3426.11); and (2) information
concerning the business and affairs of the Company (which includes historical
financial statements, financial projections and budgets, historical and
projected sales, capital spending budgets and plans, the names and backgrounds
of key personnel, personnel training and techniques and materials), however
documented. The foregoing is referred to as "Confidential Information."

              b.     Employee acknowledges that public disclosure of
Confidential Information could have an adverse effect on the Company and it
business;

              c.     In consideration of the compensation and benefits to be
paid or provided to Employee by the Company under this Agreement, Employee
covenants as follows:

                     i. During and following his Employment, Employee shall hold
in confidence the Confidential Information and shall not disclose it to any
person or entity except with the specific prior written consent of the Company
or except as otherwise expressly permitted by the terms of this Agreement.

                     ii. Any trade secrets of the Company shall be entitled to
all of the protections and benefits under the Uniform Trade Secrets Act
(California Civil Code Sections 3426 and 3426.11) and any other applicable law.
Information that the Company deems to be a trade secret but is found by an
arbitrator not to be a trade secret for purposes of this Agreement may still
constitute Confidential Information for purposes of this Agreement if the facts
and circumstances justify. Employee hereby waives any requirement that the
Company submit proof of the economic value of any trade secret or post a bond or
other security.

                     iii. None of the foregoing obligations and restrictions
applies to any part of the Confidential Information that Employee demonstrates
was or became generally available to the public other than as a result of a
disclosure by Employee or a breach of a confidentiality or other agreement with
a person in possession of such Confidential Information.

                     iv. Employee shall not remove from the Company's premises
(except to the extent such removal is for purposes of the performance of
Employee's duties at home, while traveling or as otherwise specifically
authorized by the Company) any document, record, notebook, plan, model,
component,




                                       3
<PAGE>



device or computer software or code, whether embodied in a disk or in any other
form (collectively, the "Proprietary Items"). Employee recognizes that, between
the Company and Employee, all of the Proprietary Items, whether or not developed
by Employee, are the exclusive property of the Company. Upon termination of
Employee's Employment by either party, or upon the request of the Company during
Employment, Employee shall return to the Company all of the Proprietary Items in
Employee's possession or subject to Employee's control, and Employee shall not
retain any copies, abstracts, sketches or other physical embodiment of any of
the Proprietary Items.

       6. Non-Competition. During his Employment, Employee shall not, directly
or indirectly, either as an employee, employer, consultant, corporate officer or
director, investor, or in any other capacity, engage or participate in any
business that is in competition with the business of the Company, unless such
participation or interest is fully disclosed to the Company and approved by the
Board.

       7. Non-Solicitation/Non-Interference. During his Employment, and for a
period of 12 months thereafter, whether for Employee's own account or the
account of any other person, Employee shall not solicit, directly or indirectly,
any employee to leave his or her employment with the Company. For purposes of
this Agreement, the phrase, "shall not solicit, directly or indirectly,"
includes, without limitation, that Employee shall not: (a) identify any Company
employees to any third party as potential candidates for employment, such as by
disclosing the names, backgrounds or qualifications of any Company employees;
(b) personally or through any other person approach, recruit or otherwise
solicit employees of Company to work for any other employer; or (c) participate
in any pre-employment interview with any person who was employed by the Company
while Employee was employed by the Company whether under this Agreement or
otherwise.

       8. Agreement with Previous Employers. Employee represents and warrants to
the Company that he does not have any agreement with any previous employer that
prevents him from performing his duties and responsibilities under this
Agreement or that in any way limits his performance hereunder.

       9. Voluntary Resignation or Termination for "Cause."

              a. Payment upon Voluntary Resignation or Termination for Cause. If
Employee voluntarily resigns his Employment or if Employee is terminated for
Cause, the Company shall pay Employee all accrued and unpaid Base Salary through
the date of termination and any vacation which is accrued but



                                       4
<PAGE>


unused as of such date. Employee shall not be eligible for Severance Payments,
as defined below, or any continuation of benefits (other than those provided for
under the Federal Consolidated Omnibus Budget Reconciliation Act ("COBRA")), or
any other compensation pursuant to this Agreement or otherwise.

              b. Definition of "Cause." As set forth above, the Employment
relationship between the parties is at-will, terminable at any time by either
party for any reason or no reason. The termination may nonetheless be for
"Cause." For purposes of this Agreement, "Cause" is defined as (i) Employee's
material breach of this Agreement or the Confidentiality Agreement; (ii)
Employee's substantial and material failure or refusal to perform according to,
or to comply with, the policies, procedures or practices established by the
Company; (iii) the appropriation (or attempted appropriation) of a material
business opportunity of the Company, including attempting to secure or securing
any personal profit in connection with any transaction entered into on behalf of
the Company; (iv) the misappropriation (or attempted appropriation) of any of
the Company's funds or property of any kind; (v) the conviction of, or the
entering of a guilty plea or plea of "no contest" with respect to a felony or
the equivalent thereof, or any other crime with respect to which imprisonment is
a possible punishment; or (vi) willful misconduct or incompetence.

       10. Termination Without "Cause."

              a. Payment upon Termination Without Cause. In the event Employee
is terminated without Cause, as Cause is defined in Section 9(b) above, Employee
shall be eligible for payment of all accrued and unpaid Base Salary and any
accrued but unused vacation through the date of termination. In addition,
Employee shall be eligible to receive severance payments under this Agreement in
an amount equal to 12 months Base Salary (the "Severance Payments"), payable on
the same dates as Employee would have received salary payments had Employee
continued to be employed by the Company, in exchange for Employee's execution of
a release of all claims against the Company and its subsidiaries and affiliates
effective as of the date of termination in the form attached hereto as Exhibit
2.

              b. Stock Option Vesting. In the event of a termination without
Cause that entitles Employee to the Severance Payments, the vesting period of
all options to purchase shares of the Company's Class A Common Stock granted to
Employee after the date hereof (the "Stock Options") shall be accelerated and
become immediately exercisable, provided, however, that the Stock Options shall
be exercisable for the period or periods set forth in, and in accordance with
the



                                       5
<PAGE>



other terms and conditions of, the stock option plans under which such options
were granted.

       11. Employee's Disability or Death. Employee's Employment shall terminate
automatically in the event of Employee's death or "Disability." In the event of
Employee's death or Disability, the Company shall pay Employee all accrued and
unpaid Base Salary through the date of death or Disability and any vacation
which is accrued but unused as of the date of death or Disability. For purposes
of this Agreement, "Disability" shall mean the Employee's failure to perform his
duties hereunder, for a period of not less than 90 consecutive days because of
Employee's incapacitation due to physical or mental injury, disability, or
illness.

       12. Change of Control Termination.

              a. Payment Upon Change of Control Termination. In the event of a
"Change of Control Termination," as defined below, Employee shall be eligible
for payment of Base Salary and accrued but unused vacation through the date of
termination. In addition, Employee shall be eligible to receive severance under
this Agreement in the amount of the Severance Payments for the Severance Paid,
each as set forth in Section 10(a) above, in exchange for Employee's execution
of a release of all claims against the Company and its subsidiaries and
affiliates effective as of the date of termination, in the form attached hereto
as Exhibit 2.

              b. Definition of "Change of Control Termination". A "Change of
Control Termination" occurs where Employee is (i) terminated without Cause, or
(ii) "Resigns for Good Reason," as defined below, within 12 months following a
"Change of Control," as defined below. For purposes of this Section 12(b):

                     i.     Cause is defined in Section 9(b) above.

                     ii.    "Resignation for Good Reason" is defined as a
resignation based on:

                            (1)    a material reduction in Employee's duties and
                                   responsibilities as set forth in this
                                   Agreement;

                            (2)    the assignment to Employee of any duties
                                   inconsistent with his status as an executive
                                   officer of the Company;


                                       6
<PAGE>


                            (3)    a reduction by the Company in Employee's Base
                                   Salary by greater than 5%, except to the
                                   extent the base salaries of other executive
                                   officers of the Company are also reduced; or

                            (4)    a relocation of Employee's or the Company's
                                   principal executive offices to a location
                                   outside of San Diego County, if Employee's
                                   principal office is at such offices, without
                                   reimbursement of relocation costs.

                     Notwithstanding the foregoing, an event described in
Section 12(b)(ii)(1)-(4) shall not constitute Good Reason unless it is
communicated in writing within 60 days of the event giving rise to the claim by
Employee to the Company or its successor and unless it is not corrected by the
Company or its successor in a manner which is reasonably satisfactory to
Employee within 30 days of the Company's receipt of such written notice.

                     iii.   A "Change of Control" shall have occurred if, and
only if,

                            (1)    any individual, partnership, firm,
                                   corporation, association, trust,
                                   unincorporated organization or other entity
                                   or person, or any syndicate or group deemed
                                   to be a person under Section 14(d)(2) of the
                                   Securities Exchange Act of 1934 (the
                                   "Exchange Act") is or becomes the "Beneficial
                                   Owner" (as defined in Rule 13d-3 of the
                                   General Rules and Regulations under the
                                   Exchange Act), directly or indirectly, of
                                   securities of the Company representing 50% or
                                   more of the combined voting power of the
                                   Company's then outstanding securities
                                   entitled to vote in the election of directors
                                   of the Company;

                            (2)    there occurs a reorganization, merger,
                                   consolidation or other corporate transaction
                                   involving the Company ("Transaction"), in
                                   each case, with respect to which the
                                   stockholders of the Company immediately prior
                                   to such Transaction do not, immediately after
                                   the Transaction own more than 50% of the
                                   combined voting power of the Company or




                                       7
<PAGE>


                                   other corporation resulting from such
                                   Transaction; or

                            (3)    all or substantially all of the assets of the
                                   Company are sold, liquidated or distributed.

              c. Stock Option Vesting Upon Change of Control. In the event of a
Change of Control, all Stock Options, as defined in Section 10(b) above, shall
be accelerated and become immediately exercisable, provided, however, that the
Stock Options shall be exercisable for the period or periods set forth in, and
in accordance with the other terms and conditions of, the stock option plans
under which such options were granted.

       13. Dispute Resolution Procedures. Except as expressly provided in this
Agreement, Employee agrees that any dispute or controversy arising out of,
relating to, or in connection with this Agreement, or the interpretation,
validity, construction, performance, breach, or termination thereof shall be
settled by arbitration, to the extent permitted by law, to be held in San Diego
County, California in accordance with the National Rules for the Resolution of
Employment Disputes then in effect of the American Arbitration Association (the
"Rules") and in accordance with the accompanying Mutual Arbitration Agreement
attached hereto as Exhibit 3. The arbitrator's decision shall be final,
conclusive and binding on the parties to the arbitration. Judgment may be
entered on the decision of the arbitrator in any court having competent
jurisdiction.

       14. Notices. Any reports, notices or other communications required or
permitted to be given by either party hereto, shall be given in writing by
personal delivery, overnight courier service, or by registered or certified
mail, postage prepaid, return receipt requested, addressed to each respective
party at the address shown below:

       If to AVANIR:

                 AVANIR Pharmaceuticals
                 11388 Sorrento Valley Road
                 San Diego, California  92121
                 Fax: (858) 658-7455
                 Attn: Chairman of the Board

       If to Employee:

                 Gerald J. Yakatan, Ph.D.



                                       8
<PAGE>


                 13813 Boquita Drive
                 Del Mar, California 92014
                 Fax: (858) 455-8047


       15. Notice of Termination. Any purported termination of Employment by the
Company or the Employee shall be communicated by written Notice of Termination
to the other party. For purposes of this Agreement, a "Notice of Termination"
shall mean a notice which indicates the specific termination provision in this
Agreement relied upon and shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Employee's
employment under the provision so indicated. For purposes of this Agreement, no
such purported termination of employment shall be effective without delivery of
such a Notice of Termination.

       16. General Provisions.

              a. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of California.

              b. Assignment. Employee may not assign, pledge or encumber his
interest in this Agreement or any part thereof.

              c. No Waiver of Breach. The failure to enforce any provision of
this Agreement shall not be construed as a waiver of any such provision, nor
prevent a party thereafter from enforcing the provision or any other provision
of this Agreement. The rights granted the parties are cumulative, and the
election of one shall not constitute a waiver of such party's right to assert
all other legal and equitable remedies available under the circumstances.

              d. Severability. The provisions of this Agreement are severable,
and if any provision shall be held to be invalid or otherwise unenforceable, in
whole or in part, the remainder of the provisions, or enforceable parts of this
Agreement, shall not be affected.

              e. Entire Agreement. This Agreement and the exhibits hereto
constitute the entire agreement of the parties with respect to the subject
matter of this Agreement and supersedes all prior and contemporaneous
negotiations, agreements and understandings between the parties, whether oral or
written.

              f. Fees and Expenses. If any proceedings is brought for the
enforcement or interpretation of this Agreement, or because of any alleged




                                       9
<PAGE>


dispute, breach, default or misrepresentation in connection with any provisions
of this Agreement, the prevailing party shall be entitled to recover from the
other party reasonable attorneys' fees and other costs incurred in that
proceeding (including, in the case of an arbitration, arbitration fees and
expenses), in addition to any other relief to which such party may be entitled.

              g. Modifications and Waivers. No modification or waiver of this
Agreement shall be valid unless in writing, signed by the party against whom
such modification or waiver is sought to be enforced.

              h. Amendment. This Agreement may be amended or supplemented only
by a writing signed by both of the parties hereto.

              i. Duplicate Counterparts. This Agreement may be executed in
duplicate counterparts, each of which shall be deemed an original; provided,
however, such counterparts shall together constitute only one agreement.

              j. Interpretation. The headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.

              k. Drafting Ambiguities. Each party to this Agreement and its
counsel have reviewed and revised this Agreement. The rule of construction that
any ambiguities are to be resolved against the drafting party shall not be
employed in the interpretation of this Agreement or any of the amendments to
this Agreement.

       EXECUTED at San Diego, California, this 29th day of November, 2001.



                                            AVANIR PHARMACEUTICALS


Dated: 11/29/01                             By:  /s/ James B. Glavin
                                                ---------------------------
                                                     James B. Glavin


                                            EMPLOYEE


Dated: 11/29/01                             /s/ Gerald J. Yakatan, Ph.D.
                                            -------------------------------
                                                Gerald J. Yakatan, Ph.D.



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<PAGE>


                                    EXHIBIT 2

                                 GENERAL RELEASE

       This GENERAL RELEASE ("Release"), is made this ___ day of ____________,
20__ (the "Effective Date") by Gerald J. Yakatan, Ph.D. ("Employee") in favor of
AVANIR PHARMACEUTICALS, a California Corporation ("the Company").

                                    RECITALS

       A. On November __, 2001, the parties hereto entered into an Employment
Agreement ("Agreement") pursuant to which the parties agreed that, among other
things, upon (i) a termination without "Cause" or (ii) a termination resulting
from "Change in Control," Employee would become eligible for severance payments
for a period of 12 months from the date of termination of his Employment
("Termination Date") in exchange for Employee's release of the Company and its
subsidiaries and affiliates from all claims which Employee may have against the
Company and its subsidiaries and affiliates as of the Termination Date.

       B. The parties desire to dispose of, fully and completely, all claims
which Employee may have against the Company and its subsidiaries and affiliates
in the manner set forth in this Release.

       NOW, THEREFORE, in consideration of the severance payments referenced
above and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, Employee hereby agrees as follows:

       1. Release. Employee, for himself and his heirs, successors and assigns,
fully and forever releases, relinquishes, acquits and discharges the Company,
its officers, directors, employees, shareholders, attorneys, accountants, other
professionals, insurers and agents of the other (collectively "Agents"), and all
entities related to each party, including, but not limited to, heirs, executors,
administrators, personal representatives, assigns, parent, subsidiary and sister
corporations, affiliates, partners and co-venturers (collectively "Related
Entities"), from all rights, claims, demands, actions, causes of action,
liabilities and obligations of every kind, nature and description whatsoever,
Employee now has, owns or holds or has at anytime had, owned or held or may have
against the Company, Agents or Related Entities from any source whatsoever,
whether or not arising from or related to the facts recited in this Release.
Employee specifically releases and waives any and all claims arising under any
express or implied contract, rule, regulation or ordinance, including, without
limitation, Title VII of the Civil Rights Act of 1964, the Civil Rights Act of
1991, the Americans with Disabilities Act, the California




                                       11
<PAGE>



Fair Employment and Housing Act, and the Age Discrimination in Employment Act,
as amended ("ADEA").

       2. Section 1542 Waiver. This Release is intended as a full and complete
release and discharge of any and all claims that Employee may have against the
Company, Agents or Related Entities. In making this Release, Employee intends to
release the Company, Agents and Related Entities from liability of any nature
whatsoever for any claim of damages or injury or for equitable or declaratory
relief of any kind, whether the claim, or any facts on which such claim might be
based, is know or unknown to him. Employee expressly waives all rights under
Section 1542 of the Civil Code of the State of California, which Employee
understands provides as follows:

              A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS THAT THE CREDITOR DOES
       NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
       RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
       SETTLEMENT WITH THE DEBTOR.

       Employee acknowledges that he may discover facts different form or in
addition to those which he now believes to be true with respect to this Release.
Employee agrees that this Release shall remain effective notwithstanding the
discovery of any different or additional facts.

       3. Waiver of Certain Claims. Employee acknowledges that he has been
advised in writing of his right to consult with an attorney prior to executing
the waivers set out in this Release, and that he has been given a twenty-one day
period in which to consider entering into the release of ADEA claims, if any. In
addition, Employee acknowledges that he has been informed that he may revoke a
signed waiver of the ADEA claims for up to 7 days after executing this Release.

       4. No Undue Influence. This Release is executed voluntarily and without
any duress or undue influence. Employee acknowledges he has read this Release
and executed it with his full and free consent. No provision of this Release
shall be construed against any party by virtue of the fact that such party or
its counsel drafted such provision or the entirety of this Release.

       5. Governing Law. This Release is made and entered into in the State of
California and accordingly the rights and obligations of the parties hereunder
shall in all respects be construed, interpreted, enforced and governed in
accordance with the laws of the State of California as applied to contracts
entered into by and between residents of California to be wholly performed
within California.




                                       12
<PAGE>


       6. Severability. If any provision of this Release is held to be invalid,
void or unenforceable, the balance of the provisions of this Release shall,
nevertheless, remain in full force and effect and shall in no way be affected,
impaired or invalidated.

       IN WITNESS WHEREOF, the undersigned has executed this Release at San
Diego, California as of the date first above written.



                                        -----------------------------
                                        Gerald J. Yakatan, Ph.D.




                                       13
<PAGE>



                                    EXHIBIT 3

                          MUTUAL ARBITRATION AGREEMENT

       This MUTUAL ARBITRATION AGREEMENT ("Agreement"), dated as of November 29,
2001, is made by and between AVANIR Pharmaceuticals, a California corporation
("the Company") and Gerald J. Yakatan, Ph.D. ("Employee") (collectively, the
"Parties" or "we").

AGREEMENT TO ARBITRATE CERTAIN DISPUTES AND CLAIMS

       We agree to arbitrate before a neutral arbitrator any and all disputes or
claims arising from or relating to Employee's recruitment to or employment with
the Company, or the termination of that employment, including claims against any
current or former agent or employee of the Company, whether the disputes or
claims arise in tort, contract, or pursuant to a statute, regulation, or
ordinance now in existence or which may in the future be enacted or recognized,
including, but not limited to, the following claims:

       o      claims for fraud, promissory estoppel, fraudulent inducement of
              contract or breach of contract or contractual obligation, whether
              such alleged contract or obligation be oral, written, or express
              or implied by fact or law;

       o      claims for wrongful termination of employment, violation of public
              policy and constructive discharge, infliction of emotional
              distress, misrepresentation, interference with contract or
              prospective economic advantage, defamation, unfair business
              practices, and any other tort or tort-like causes of action
              relating to or arising from the employment relationship or the
              formation or termination thereof;

       o      claims for discrimination, harassment, or retaliation under any
              and all Federal, state, or municipal statutes, regulations, or
              ordinances that prohibit discrimination, harassment, or
              retaliation in employment, as well as claims for violation of any
              other Federal, state, or municipal statute, regulation, or
              ordinance, except as set forth herein;

       o      claims for non-payment or incorrect payment of wages, commissions,
              bonuses, severance, employee fringe benefits, stock options and
              the like, whether such claims be pursuant to alleged express or
              implied contract or obligation, equity, the California Labor Code,
              the Fair Labor Standards Act, the Employee Retirement Income
              Securities Act, and any other Federal, state, or municipal laws
              concerning wages, compensation or employee benefits; and

       o      claims arising out of or relating to the grant, exercise, vesting
              and/or issuance of equity in the Company or options to purchase
              equity in the Company.

       We understand and agree that arbitration of the disputes and claims
covered by this Agreement shall be the sole and exclusive method of resolving
any and all existing and future




                                       14
<PAGE>


disputes or claims arising out of Employee's recruitment to or employment with
the Company or the termination thereof. We further understand and agree that the
following disputes and claims are not covered by this Agreement and shall
therefore be resolved in any appropriate forum, including courts of law, as
required by the laws then in effect:

       o      claims for workers' compensation benefits, unemployment insurance,
              or state or Federal disability insurance; and

       o      claims concerning the validity, infringement, enforceability, or
              misappropriation of any trade secret, patent right, copyright,
              trademark, or any other intellectual or confidential property held
              or sought by Employee or the Company, including claims alleged by
              Employee or the Company that arise under the Company's Employee
              Confidentiality and Inventions Agreement.

       Nothing in this Agreement should be interpreted as restricting or
prohibiting the Employee from filing a charge or complaint with a Federal,
state, or local administrative agency charged with investigating and/or
prosecuting complaints under any applicable Federal, state or municipal law or
regulation. Any dispute or claim that is not resolved through the Federal,
state, or local agency must be submitted to arbitration in accordance with this
Agreement.

       FINAL AND BINDING ARBITRATION

       We understand and agree that the arbitration of disputes and claims under
this Agreement shall be instead of a trial before a court or jury. We further
understand and agree that, by signing this Agreement, we are expressly waiving
any and all rights to a trial before a court regarding any disputes and claims
which we now have or which we may in the future have that are subject to
arbitration under this Agreement.

       ARBITRATION PROCEDURES

       We understand and agree that the arbitration shall be conducted in
accordance with the National Rules for the Resolution of Employment Disputes of
the American Arbitration Association; provided, however, that the Arbitrator
shall allow the discovery authorized by California Code of Civil Procedure
section 1283.05 or any other discovery required by law in arbitration
proceedings. Also, to the extent that any of the National Rules for the
Resolution of Employment Disputes or anything in this Agreement conflicts with
any arbitration procedures required by applicable law, the arbitration
procedures required by applicable law shall govern. Employee and the Company
also agree that nothing in this Agreement relieves either of them from any
obligation they may have to exhaust certain administrative remedies before
arbitrating any claims or disputes under this Agreement.

       We understand and agree that the Arbitrator shall issue a written award
that sets forth the essential findings and conclusions on which the award is
based. The Arbitrator shall have the authority to award any relief authorized by
law in connection with the asserted claims or disputes. The Arbitrator's award
shall be subject to correction, confirmation, or vacation, as provided by any
applicable law setting forth the standard of judicial review of arbitration
awards.




                                       15
<PAGE>


       PLACE OF ARBITRATION

       We understand and agree that the arbitration shall take place in San
Diego County, California.

       GOVERNING LAW

       We understand and agree that this Agreement and its validity,
construction and performance, as well as disputes and/or claims arising under
this Agreement, shall be governed by the laws of California, or Federal law. If
both Federal and state law apply to any given dispute or claim, Employee shall
have the right to elect the applicable law.

       COSTS OF ARBITRATION

       We understand and agree that the Company shall bear the arbitrator's fee
and any other type of expense or cost that Employee would not be required to
bear if he or she were free to bring the dispute or claim in court as well as
any other expense or cost that is unique to arbitration. We shall each pay our
own attorneys' fees incurred in connection with the arbitration, and the
arbitrator shall not have authority to award attorneys' fees unless a statute or
contract at issue in the dispute authorizes the award of attorneys' fees to the
prevailing party, in which case the arbitrator shall have the authority to make
an award of attorneys' fees as required or permitted by applicable law. If there
is a dispute as to whether the Company or Employee is the prevailing party in
the arbitration, the Arbitrator shall decide this issue.

       SEVERABILITY

       We understand and agree that if any term or portion of this Agreement
shall, for any reason, be held to be invalid or unenforceable or to be contrary
to public policy or any law, then the remainder of this Agreement shall not be
affected by such invalidity or unenforceability but shall remain in full force
and effect, as if the invalid or unenforceable term or portion thereof had not
existed within this Agreement.

       COMPLETE AGREEMENT

       We understand and agree that this Agreement contains the complete
agreement between the Company and Employee regarding the subject matter of this
Agreement, superseding any and all prior representations and agreements between
the Company and Employee, if any, and that it may be modified only in a writing,
expressly referencing this Agreement, and signed by Employee and the Chairman of
the Board of the Company.

       KNOWING AND VOLUNTARY AGREEMENT

       We understand and agree that we have been advised to consult with an
attorney of our own choosing before signing this Agreement, and we have had an
opportunity to do so. We agree that we have read this Agreement carefully and
understand that by signing it, we are




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<PAGE>


waiving all rights to a trial or hearing before a court or jury of any and all
disputes and claims subject to arbitration under this Agreement.

       IN WITNESS WHEREOF, the parties have executed this Agreement at San
Diego, California on the 29th day of November, 2001.




                                       AVANIR PHARMACEUTICALS

                                       By: /s/ James B. Glavin
                                           --------------------------------
                                           James B. Glavin
                                           Chairman of the Board



                                       EMPLOYEE

                                       /s/ Gerald J. Yakatan, Ph.D.
                                       ------------------------------------
                                       Gerald J. Yakatan, Ph.D.


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