##### Table of Contents





UNITED
    STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C.
    20549
   Form 10-K
  þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended
    September 30, 2008ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the transition period
    from          to   Commission File
    No. 1-15803
  AvanirPharmaceuticals
 (Exact name of registrant as
    specified in its charter)
  California

33-0314804(State or other jurisdiction
    of
    incorporation or organization)

(I.R.S. Employer Identification
    No.)101 Enterprise Suite 300,
    Aliso Viejo, California(Address of principal
    executive offices)

92656(Zip
    Code)    (949) 389-6700
 (Registrants telephone
    number, including area code)
  Securities registered pursuant to Section 12(b) of the
    Act:
   Title of Each Class

Name of Each Exchange on Which RegisteredClass A Common Stock, no par value

The NASDAQ Stock Market LLC   Securities registered pursuant to Section 12(g) of the
    Act:
 None
  o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. þ
  12b-2
 Large
    accelerated
    filer o
    Accelerated
    filer o
    Non-accelerated
    filer o
    Smaller
    reporting
    company þ   Rule 12b-2 o þ
      DOCUMENTS
    INCORPORATED BY REFERENCE




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##### 





Table of
    Contents
   
 PagePART IItem 1.

Business


1Item 1A.

Risk factors


8Item 1B.

Unresolved Staff Comments


17Item 2.

Properties


17Item 3.

Legal Proceedings


17Item 4.

Submission of Matters to a Vote of Security
    Holders


17PART IIItem 5.

Market For Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities


17Item 6.

Selected Consolidated Financial Data


18Item 7.

Managements Discussion and Analysis of
    Financial Condition and Results of Operations


18Item 7A.

Quantitative and Qualitative Disclosures About
    Market Risk


30Item 8.

Financial Statements and Supplementary Data


31Item 9.

Changes in and Disagreements With Accountants on
    Accounting and Financial Disclosure


31Item 9A.

Controls and Procedures


31Item 9B.

Other Information


32PART IIIItem 10.

Directors, Executive Officers and Corporate
    Governance


32Item 11.

Executive Compensation


34Item 12.

Security Ownership of Certain Beneficial Owners
    and Management and Related Stockholder Matters


34Item 13.

Certain Relationships and Related Transactions
    and Director Independence


34Item 14.

Principal Accountant Fees and Services


34PART IVItem 15.

Exhibits and Financial Statement Schedules


34SIGNATURES


40EX-23.1EX-31.1EX-31.2EX-32.1EX-32.2




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PART I  Item 1.
    Business  This Annual Report on
    Form 10-K
    contains forward-looking statements concerning future events and
    performance of our Company. When used in this report, the words
    intend, estimate,
    anticipate, believe, plan,
    goal and expect and similar expressions
    as they relate to
    Avanir are
    included to identify forward-looking statements. These
    forward-looking statements are based on our current expectations
    and assumptions and many factors could cause our actual results
    to differ materially from those indicated in these
    forward-looking statements. You should review carefully the
    factors identified in this report under the caption Risk
    Factors. We disclaim any intent to update or announce
    revisions to any forward-looking statements to reflect actual
    events or developments.
  Executive
    Overview
  Avanir tm ®
  Zenvia
    Status
         1




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Restructuring
    Activities
  ®
    (949) 389-6700 e-mail info@avanir.com www.avanir.com. Form 10-K. 1-800-SEC-0330.
  Drug
    Candidates and Marketed Products
  Zenvia 
    Pseudobulbar Affect (PBA) Indication
  and/or
 2




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and/or
  and/or
  Zenvia 
    Diabetic Peripheral Neuropathic Pain (DPN pain)
    Indication
     3




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Other
    Programs
  Docosanol
    10% Cream  Cold Sores
  ®
   4




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##### Table of Contents



Macrophage
    Migration Inhibitory Factor (MIF) 
    Inflammation
    Xenerex
    Human Antibody Technology  Anthrax/Other Infectious
    Diseases
      Competition
    Zenvia for Pseudobulbar Affect.
  
    Antidepressants, including
    Prozac®,

    Celexa®,

    Zoloft®,

    Paxil®,

    Elavil®

    and
    Pamelor®

    and others;
    Atypical antipsychotic agents, including
    Zyprexa®,

    Resperdal®,

    Abilify®,

    Geodon®

    and others; and
    Miscellaneous agents, including
    Symmetrel®,

    Lithium and others.  Zenvia for DPN pain.
  
    Cymbalta®;
    Lyrica®
    Narcotic products; and 5




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
    Off-label uses of non-narcotic products, such as the
    anticonvulsants phenytoin and carbamazepine, and the
    antidepressant amitriptyline.  Docosanol 10% cream.
  
    Over-the-counter preparations, including
    Carmex®,

    Zilactin®,

    Campho®,

    Orajel®,

    Herpecin®

    and others;
    Zovirax®

    acyclovir (oral and topical) and
    Valtrex®

    valacyclovir (oral) prescription products marketed by Biovail
    Corporation and GSK, respectively, and
    Famvir®

    famciclovir (oral) and
    Denavir®

    penciclovir (topical) prescription products marketed by Novartis.  Manufacturing
    Patents
    and Proprietary Rights
    United States


ForeignDescription

Issued


Expiration


Pending


Issued


Expiration


PendingZenvia


7



Up to 2019



2



43



Up to 2023



17Other


52







23



105







171Total


59







25



148







188       Government
    Regulations
    
    Animal pharmacology studies to obtain preliminary information on
    the safety and efficacy of a drug; and
    Nonclinical evaluation in vitroand in vivoincluding extensive toxicology studies. 6




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
    Phase I investigations are generally conducted in healthy
    subjects. In certain instances, subjects with a life-threatening
    disease, such as cancer, may participate in Phase I studies that
    determine the maximum tolerated dose and initial safety of the
    product;
    Phase II studies are conducted in limited numbers of
    subjects with the disease or condition to be treated and are
    aimed at determining the most effective dose and schedule of
    administration, evaluating both safety and whether the product
    demonstrates therapeutic effectiveness against the
    disease; and
    Phase III studies involve large, well-controlled
    investigations in diseased subjects and are aimed at verifying
    the safety and effectiveness of the drug.  and/or
        Product
    Liability Insurance
    Executive
    Officers and Key Employees of the Registrant
   7




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Human
    Resources
    Financial
    Information about Segments
    General
    Information
  Form 10-K Form 10-Q Form 8-K Forms 10-K, 10-Q 8-K
  Item 1A.
    Risk
    Factors  Risks
    Relating to Our Business
  We must conduct additional clinical trials for Zenvia and
    there can be no assurance that the FDA will approve Zenvia.
      and/or
 8




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The FDAs safety concerns regarding Zenvia for the
    treatment of PBA may extend to other clinical indications that
    we are pursuing, including DPN pain. Due to these concerns, we
    expect to develop Zenvia for other indications using alternative
    doses, which may negatively affect efficacy.
    Even if Zenvia receives marketing approval from the FDA, the
    approval may not be on the terms that we seek and could limit
    the marketability of the drug.
      
    regulatory authorities may require the addition of labeling
    statements, such as a black box warning, which is
    the strongest type of warning that the FDA can require for a
    drug and is generally reserved for warning prescribers about
    adverse drug reactions that can cause serious injury or death;
    regulatory authorities may withdraw approval of the product
    after its initial approval;
    we may be required to change the way the product is
    administered, monitor patients taking Zenvia, conduct additional
    clinical trials or change the labeling of the product; and
    Zenvia may not be approved for commercialization.    We have limited capital resources and will need to raise
    additional funds to support our operations.
     9




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Any transactions that we may engage in to raise capital could
    dilute our shareholders and diminish certain commercial
    prospects.
  and/or
  We have licensed out or sold most of our non-core drug
    development programs and related assets and these and other
    possible future dispositions carry certain risks.
  and/or
  
    Diversion of managements attention from normal daily
    operations of the business;
    Disputes over earn-outs, working capital adjustments or
    contingent payment obligations;
    Insufficient proceeds to offset expenses associated with the
    transactions; and
    The potential loss of key employees following such a transaction.      Our patents may be challenged and our patent applications may
    be denied. Either result would seriously jeopardize our ability
    to compete in the intended markets for our proposed products.
   10




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
    The claims in any pending patent applications will be allowed or
    that patents will be granted;
    Competitors will not develop similar or superior technologies
    independently, duplicate our technologies, or design around the
    patented aspects of our technologies;
    Our technologies will not infringe on other patents or rights
    owned by others, including licenses that may not be available to
    us;
    Any of our issued patents will provide us with significant
    competitive advantages;
    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; or  
    We will be able to secure additional worldwide intellectual
    property protection for our Zenvia patent portfolio.    We currently have only a limited term of patent coverage and
    exclusivity protection for Zenvia in the U.S., which could
    result in the introduction of generic competition within a few
    years of product launch.
       11




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If we fail to obtain regulatory approval in foreign
    jurisdictions, we would not be able to market our products
    abroad and our revenue prospects would be limited.
    We face challenges retaining members of management and other
    key personnel.
    Risks
    Relating to Our Industry
  There are a number of difficulties and risks associated with
    clinical trials and our trials may not yield the expected
    results.
      
    the results from earlier clinical trials may not be
    statistically significant or predictive of results that will be
    obtained from subsequent clinical trials, particularly larger
    trials;
    institutional review boards or regulators, including the FDA,
    may hold, suspend or terminate our clinical research or the
    clinical trials of our product candidates for various reasons,
    including noncompliance with regulatory requirements or if, in
    their opinion, the participating subjects are being exposed to
    unacceptable health risks;
    subjects may drop out of our clinical trials;
    our preclinical studies or clinical trials may produce negative,
    inconsistent or inconclusive results, and we may decide, or
    regulators may require us, to conduct additional preclinical
    studies or clinical trials; and
    the cost of our clinical trials may be greater than we currently
    anticipate. 12




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and/or
      
    delays in our ability to submit an NDA;
    the refusal by the FDA to accept for file any NDA we may submit;
    requests for additional studies or data;
    delays of an approval;
    the rejection of an application; or
    the approval of the drug, but with adverse labeling claims that
    could adversely affect the commercial market.    Clinical trials can be delayed for a variety of reasons. If
    we experience any such delays, we would be unable to
    commercialize our product candidates on a timely basis, which
    would materially harm our business.
    
    identifying and engaging a sufficient number of clinical trial
    sites;
    negotiating acceptable clinical trial agreement terms with
    prospective trial sites;
    obtaining institutional review board approval to conduct a
    clinical trial at a prospective site;
    recruiting eligible subjects to participate in clinical trials;
    competition in recruiting clinical investigators or patients,
    particularly if others are pursuing trials at the same time in
    the same patient population (whether or not for the same
    indication);
    shortage or lack of availability of supplies of drugs for
    clinical trials;
    the need to repeat clinical trials as a result of inconclusive
    results or poorly executed testing;
    the placement of a clinical hold on a study;
    the failure of third parties conducting and overseeing the
    operations of our clinical trials to perform their contractual
    or regulatory obligations in a timely fashion; and
    exposure of clinical trial subjects to unexpected and
    unacceptable health risks or noncompliance with regulatory
    requirements, which may result in suspension of the trial.   13




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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.
      If we fail to comply with regulatory requirements, regulatory
    agencies may take action against us, which could significantly
    harm our business.
        We rely on insurance companies to mitigate our exposure for
    business activities, including developing and marketing
    pharmaceutical products for human use.
   14




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Risks
    Related to Reliance on Third Parties
  Because we depend on clinical research centers and other
    contractors for clinical testing and for certain research and
    development activities, the results of our clinical trials and
    such research activities are, to a certain extent, beyond our
    control.
    We depend on third parties to manufacture, package and
    distribute compounds for our drugs and drug candidates. The
    failure of these third parties to perform successfully could
    harm our business.
  and/or
  We generally do not control the development of compounds
    licensed to third parties and, as a result, we may not realize a
    significant portion of the potential value of any such license
    arrangements.
    We expect to rely entirely on third parties for international
    sales and marketing efforts.
   15




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Risks
    Relating to Our Stock
  Our common stock could be delisted from The NASDAQ Global
    Market, which could negatively impact the price of our common
    stock and our ability to access the capital markets.
      Our stock price has historically been volatile and we expect
    that this volatility will continue for the foreseeable
    future.
    
    Announcements by us regarding our non-compliance with continued
    listing standards on the NASDAQ stock market;
    Comments made by securities analysts, including changes in their
    recommendations;
    Short selling activity by certain investors, including any
    failures to timely settle short sale transactions;
    Announcements by us of financing transactions
    and/or
    future sales of equity or debt securities;
    Sales of our common stock by our directors, officers, or
    significant shareholders;
    Announcements by our competitors of clinical trial results or
    product approvals; and
    Market and economic conditions.     16




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Item 1B.
    Unresolved
    Staff Comments    Item 2.
    Properties    Item 3.
    Legal
    Proceedings    Item 4.
    Submission
    of Matters to a Vote of Security Holders   PART II  Item 5.
    Market
    for Registrants Common Equity, Related Stockholder Matters
    and Issuer Purchases of Equity Securities    Class A Common Stock PriceFiscal 2008


Fiscal 2007High


Low


High


LowFirst Quarter

$
2.84


$
1.25


$
8.95


$
2.27Second Quarter

$
1.43


$
0.94


$
2.52


$
1.09Third Quarter

$
1.35


$
1.00


$
5.19


$
1.19Fourth Quarter

$
1.04


$
0.40


$
2.70


$
1.68    17




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Information
    About Our Equity Compensation Plans
  Form 10-K.
  Item 6.
    Selected
    Consolidated Financial Data  Rule 12b-2
  Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  This Annual Report on
    Form 10-K
    contains forward-looking statements concerning future events and
    performance of the Company. When used in this report, the words
    intend, estimate,
    anticipate, believe, plan or
    expect and similar expressions are included to
    identify forward-looking statements. These forward-looking
    statements are based on our current expectations and assumptions
    and many factors could cause our actual results to differ
    materially from those indicated in these forward-looking
    statements. You should review carefully the factors identified
    in this report under the caption, Risk Factors. We
    disclaim any intent to update or announce revisions to any
    forward-looking statements to reflect actual events or
    developments. Except as otherwise indicated herein, all dates
    referred to in this report represent periods or dates fixed with
    reference to the calendar year, rather than our fiscal year
    ending September 30.
  In August 2007, we sold our FazaClo business and related
    support operations to Azur Pharma, Inc. We have reflected the
    financial results of this business as discontinued operations in
    the consolidated statements of operations for the years ended
    September 30, 2008 and 2007. Unless otherwise noted, this
    Managements Discussion and Analysis of Financial Condition
    and Results of Operations relates only to financial results from
    continuing operations.
  Executive
    Overview
  tm ®
    
    In October 2007, we reached a definitive agreement with the FDA,
    under the SPA process, on the design of a single confirmatory
    Phase III clinical trial of Zenvia for PBA. Based on
    discussions with the FDA, we were able to successfully resolve
    the outstanding efficacy concern of the original dose
    formulation. However, in order to address safety concerns, we
    agreed to re-formulate Zenvia and conduct one additional
    confirmatory Phase III clinical trial using lower quinidine
    dose formulations. The goal of the study is to demonstrate
    improved safety while maintaining significant efficacy. This
    study is expected to be completed (as defined as top-line safety
    and efficacy data becomes available) during the third calendar
    quarter of calendar 2009. 18




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
    In December 2007, we enrolled the first PBA patient into our
    confirmatory Phase III clinical trial of Zenvia for PBA,
    only 8 weeks after receiving notification of the SPA
    approval from the FDA.
    In April 2008, we closed a registered securities offering
    raising approximately $40 million in gross proceeds from a
    select group of institutional investors led by ProQuest
    Investments and joined by Clarus Ventures, Vivo Ventures, and
    OrbiMed Advisors. The proceeds from this offering are expected
    to allow us to fund our operations through the date by which we
    expect to receive an approval decision from the FDA for Zenvia
    for the PBA indication.
    In May 2008, we reported that we were exceeding our early STAR
    Trial patient enrollment goals and that we would expand the
    trial size to increase the statistical power and size of the
    safety database without jeopardizing our initial timelines.  
    In May 2008, we reported a positive outcome of our large, formal
    pharmacokinetic study that identified two new doses of Zenvia
    that we expect will provide enhanced safety with similar
    efficacy in the next Phase III DPN pain study compared to
    the previously tested doses.  
    In June 2008, we obtained a new patent for Zenvia that
    significantly extends its period of commercial exclusivity in
    Europe into 2023.  
    In June 2008, we reported that we successfully negotiated a
    9.25% discount in exchange for prepaying our $12 million in
    notes payable 11 months early. This represented a savings
    of approximately $1.2 million to the two year operating
    plan and resulted in a third quarter gain on extinguishment of
    debt in the amount of $968,000.  
    In August 2008, we achieved 50% enrollment of the targeted
    number of PBA patients in the STAR Trial.
    In September 2008, we submitted our Phase III protocol and
    related questions for Zenvia for DPN pain to the FDA under an
    SPA. We received the FDAs initial response to the SPA and
    we are currently engaged in discussions with the FDA regarding
    the design of the next Phase III study and overall program
    requirements.
    During 2008, we successfully negotiated two separate license
    agreements for assets derived from the Xenerex program resulting
    in incremental revenue to the Company.
    In December 2008, we achieved over 75% enrollment of the
    targeted number of PBA patients in the STAR Trial.        Critical
    Accounting Policies and Estimates for Continuing
    Operations
   19




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Share-Based
    Compensation expense
  Share-Based Payment
       20




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Revenue
    Recognition
  General. Revenue Recognition
  Revenue Recognition When Right of Return
    Exists
  No. 00-21 (EITF 00-21), Accounting for Revenue Arrangements with Multiple
    Deliverables
  Revenue Arrangements with Multiple
    Deliverables. and/or EITF 00-21,
  EITF 00-21,
 21




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License Arrangements. and/or
  and/or
    Research and Development Services. agreed-upon No. 99-19, Reporting Revenue Gross as a Principal versus Net as an
    Agent,
  Royalty Revenues.
    Revenues from Sale of Royalty Rights.
  Government Research Grant Revenue.
  Product Sales  Active Pharmaceutical Ingredient
    Docosanol (API Docosanol).
 22




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Cost
    of Revenues
    Recognition
    of Expenses in Outsourced Contracts
  and/or
  Research
    and Development Expenses
      
    The technology is in the early stage of development and has no
    alternative uses;
    There is substantial uncertainty regarding the future success of
    the technology or product;
    There will be difficulty in completing the remaining
    development; and
    There is substantial cost to complete the work.  Acquired contractual rights.
  Capitalization
    and Valuation of Long-Lived and Intangible Assets
  Goodwill and
    Other Intangible Assets
  Accounting for the Impairment or Disposal
    of Long-Lived Assets
 23




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
    A significant underperformance relative to expected historical
    or projected future operating 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.  Restructuring
    Expense
  Accounting for Costs Associated with Exit or Disposal
    Activities
  Critical
    Accounting Policies and Estimates for Discontinued
    Operations
  Revenue
    Recognition
  Product Sales  FazaClo.
  18-month
   24




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Nature of
    Operating Expenses
      Effects
    of Inflation
    Results
    of Operations
     25




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Comparision
    of Fiscal 2008 and 2007
  Revenues
    and Cost of Revenues
  Year Ended September 30,2008


2007


$ Change


% ChangePRODUCT SALESNet revenues

$
129,820


$
72,000


$
57,820



80
%Cost of revenues


21,714



328,184



(306,470
)


−93
%Product gross margin (deficit)


108,106



(256,184
)


364,290



−142
%REVENUES AND COST OF RESEARCH SERVICES AND OTHERRevenues:Revenue from royalties and royalty rights

$
3,616,102


$
4,251,252


$
(635,150
)


−15
%Revenues from license agreements


2,205,724



1,614,091



591,633



37
%Revenues from government research grant services


1,006,922



914,834



92,088



10
%Revenues from research and development services






2,372,384



(2,372,384
)


−100
%Revenues from research services and other


6,828,748



9,152,561



(2,323,813
)


−25
%Costs:Cost of research and development services


249,281



2,994,905



(2,745,624
)


−92
%Cost of government research grant


940,130



1,324,427



(384,297
)


−29
%Costs from research services and grants


1,189,411



4,319,332



(3,129,921
)


−72
%Research services and other gross margin


5,639,337



4,833,229



806,108



17
%Total gross margin

$
5,747,443


$
4,577,045


$
1,170,398



26
%   Revenues
      Cost
    of Revenues
     26




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Year Ended September 30,2008


2007


$ Change


% ChangeOPERATING EXPENSESResearch and development

$
14,110,743


$
13,115,712


$
995,031



8
%General and administrative


10,599,158



20,830,188



(10,231,030
)


−49
%Total Operating Expenses

$
24,709,901


$
33,945,900


$
(9,235,999
)


−27
%   Research
    and Development Expenses
    General
    and Administrative Expenses
    Share-Based
    Compensation
    Interest
    Expense and Interest Income
     27




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Income/(Loss)
    from Discontinued Operations
      Net
    Loss
    Liquidity
    and Capital Resources
      IncreaseSeptember 30,


(Decrease)


September 30,2008


During Period


2007Cash, cash equivalents and investments in securities

$
42,240,527


$
8,599,129


$
33,641,398Cash and cash equivalents

$
41,383,930


$
10,895,968


$
30,487,962Net working capital

$
37,171,636


$
7,834,860


$
29,336,776   Year Ended


Change


Year EndedSeptember 30,


Between


September 30,2008


Periods


2007Net cash used in operating activities

$
(16,678,209
)

$
29,966,225


$
(46,644,434
)Net cash provided by investing activities


1,028,991



(58,540,319
)


59,569,310Net cash provided by financing activities


26,545,186



13,880,314



12,664,872Net increase in cash and cash equivalents

$
10,895,968


$
(14,693,780
)

$
25,589,748   Operating activities.
  Investing activities.
 28




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Financing activities.
      Payments Due by PeriodLess than








More thanTotal


1 Year


1-3 Years


3-5 Years


5 YearsLong-term debt

$
25,744


$
25,744


$



$



$
Operating lease obligations(1)


6,062,762



1,475,111



3,013,444



1,574,207



Purchase obligations(2)


1,280,216



1,280,216











Total

$
7,368,722


$
2,781,071


$
3,013,444


$
1,574,207


$
     (1)
    
    Operating lease obligations are exclusive of payments we expect
    to receive under subleases totaling $3.3 million,
    $1.0 million in less than 1 year, $1.4 million in
    1-3 years and $0.9 million in 3-5 years.(2)
    
    Purchase obligations consist of the total of trade accounts
    payable and trade related accrued expenses at September 30,
    2008 which approximates our contractual commitments for goods
    and services in the normal course of our business.       29




---



##### Table of Contents



$
  Zenvia License Milestone Payments.
    Management
    Outlook
      Recent
    Accounting Pronouncements
    Item 7A.
    Quantitative
    and Qualitative Disclosures About Market Risk    Interest
    Rate Sensitivity
   30




---



##### Table of Contents



Rule 2A-7
      Item 8.
    Financial
    Statements and Supplementary Data  page F-1.
  Item 9.
    Changes
    in and Disagreements with Accountants on Accounting and
    Financial Disclosure    Item 9A.
    Controls
    and Procedures  Evaluation
    of Disclosure Controls and Procedures
  Rules 13a-15(e) 15d-15(e)
   31




---



##### Table of Contents



Changes
    in Internal Control over Financial Reporting
  Rule 13a-15(f)
  Item 9B.
    Other
    Information   PART III  Item 10.
    Directors,
    Executive Officers and Corporate Governance      Executive
    Officers and Key Employees of the Registrant
    Executive OfficersKeith A. Katkin


37


President and Chief Executive OfficerRandall E. Kaye, M.D.


46


Senior Vice President, Chief Medical OfficerChristine G. Ocampo


36


Vice President, Finance, SecretaryKey EmployeesEric S. Benevich


43


Vice President, CommunicationsGregory J. Flesher


38


Vice President, Business Development   Executive
    Officers
  Keith Katkin.
 32




---



##### Table of Contents



Randall E. Kaye, M.D.
  Christine G. Ocampo.
  Key
    Employees
  Eric S. Benevich. ® ® ® ®
  Gregory J. Flesher.
 33




---



##### Table of Contents



Code of
    Ethics
  Form 8-K.
  Item 11.
    Executive
    Compensation    Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Stockholder Matters    Item 13.  Certain
    Relationships and Related Transactions and Director
    Independence    Item 14.
    Principal
    Accountant Fees and Services   PART IV  Item 15.
    Exhibits
    and Financial Statement Schedules    page F-1.
      Exhibit



Incorporated by Reference HereinNumber

Description

Form

Date3.1

Amended and Restated Articles of Incorporation of the
    Registrant, as amended January 5, 2006

Annual Report on Form 10-K for the fiscal year ended September
    30, 2007, as Exhibit 3.1

December 21, 20073.2

Amended and Restated Bylaws of the Registrant, dated
    September 25, 2005

Current Report on Form 8-K, as Exhibit  3.2

September 29, 20054.1

Form of Class A Common Stock Certificate

Registration Statement on Form S-1 (File No. 33-32742), declared
    effective by the Commission on May 8, 1990

May 8, 1990 34




---



##### Table of Contents



Exhibit



Incorporated by Reference HereinNumber

Description

Form

Date4.2

Certificate of Determination with respect to Series C
    Junior Participating Preferred Stock of the Registrant

Current Report on Form 8-K, as Exhibit 4.1

March 11, 19994.3

Rights Agreement, dated as of March 5, 1999, with American
    Stock Transfer & Trust Company

Current Report on Form 8-K, as Exhibit 4.1

March 11, 19994.4

Form of Rights Certificate with respect to the Rights Agreement,
    dated as of March 5, 1999

Current Report on Form 8-K, as Exhibit 4.1

March 11, 19994.5

Amendment No. 1 to Rights Agreement, dated
    November 30, 1999, with American Stock Transfer &
    Trust Company

Current Report on Form 8-K, as Exhibit 4.5

December 3, 19994.6

Form of Class A Common Stock Warrant, issued in connection
    with the Securities Purchase Agreement dated July 21, 2003

Current Report on Form 8-K, as Exhibit 4.2

July 25, 20034.7

Form of Class A Common Stock Warrant, issued in connection
    with the Securities Purchase Agreement dated November 25,
    2003

Current Report on Form 8-K, as Exhibit 4.2

December 11, 20034.8

Form of Class A Common Stock Warrant, issued in connection
    with the Securities Purchase Agreement dated November 2,
    2006

Annual Report on Form 10-K for the fiscal year ended September
    30, 2007, as Exhibit 4.8

December 21, 20074.9

Form of Class A Common Stock Warrant, issued in connection
    with the Subscription Agreement dated March 26, 2008

Current Report on Form 8-K, as Exhibit 10.2

March 27, 20084.10

Amendment No. 2 to Rights Agreement, dated April 4,
    2008, with American Stock Transfer &
    Trust Company.

Registration Statement on Form 8-A/A (File No. 001-15803),
    as Exhibit 4.2

April 10, 20084.11

Amendment No. 3 to Rights Agreement, dated
    November 11, 2008 with American Stock Transfer &
    Trust Company

Current Report on Form 8-K, as Exhibit 4.4

November 12, 200810.1

License Agreement, dated March 31, 2000, by and between
    Avanir Pharmaceuticals and SB Pharmco Puerto Rico, a Puerto Rico
    Corporation

Current Report on Form 8-K, as Exhibit 10.1

May 4, 200010.2

License Purchase Agreement, dated November 22, 2002, by and
    between Avanir Pharmaceuticals and Drug Royalty USA, Inc.

Current Report on Form 8-K, as Exhibit 99.1

January 7, 200310.3

Research, Development and Commercialization Agreement, dated
    April 27, 2005, by and between Avanir Pharmaceuticals and
    Novartis International Pharmaceutical Ltd.*

Quarterly Report on Form 10-Q for the quarter ended June 30,
    2005, as Exhibit 10.1

August 15, 2005 35




---



##### Table of Contents



Exhibit



Incorporated by Reference HereinNumber

Description

Form

Date10.4

Standard Industrial Net Lease by and between Avanir
    Pharmaceuticals and BC Sorrento, LLC, effective
    September 1, 2000

Quarterly Report on Form 10-Q for the quarter ended June 30,
    2000, as Exhibit 10.1

August 14, 200010.5

Standard Industrial Net Lease by and between Avanir
    Pharmaceuticals (Tenant) and Sorrento Plaza, a
    California limited partnership (Landlord), effective
    May 20, 2002

Quarterly Report on Form 10-Q for the quarter ended June 30,
    2002, as Exhibit 10.1

August 13, 200210.6

Office lease agreement, dated April 28, 2006, by and
    between RREEF America REIT II Corp. FFF and Avanir
    Pharmaceuticals

Annual Report on Form 10-K for the fiscal year ended September
    30, 2006, as Exhibit 10.7

December 18, 200610.7

License Agreement, dated August 1, 2000, by and between
    Avanir Pharmaceuticals (Licensee) and IriSys
    Research & Development, LLC, a California limited
    liability company

Quarterly Report on Form 10-Q for the quarter ended June 30,
    2000, as Exhibit 10.2

August 14, 200010.8

Sublease agreement, dated September 5, 2006, by and between
    Avanir Pharmaceuticals and Sirion Therapeutics, Inc.

Annual Report on Form 10-K for the fiscal year ended September
    30, 2006, as Exhibit 10.9

December 18, 200610.9

Exclusive Patent License Agreement, dated April 2, 1997, by
    and between IriSys Research & Development, LLC and the
    Center for Neurologic Study

Quarterly Report on Form 10-Q for the quarter ended March 31,
    2005, as Exhibit 10.1

May 13, 200510.10

Amendment to Exclusive Patent License Agreement, dated
    April 11, 2000, by and between IriSys Research &
    Development, LLC and the Center for Neurologic Study

Quarterly Report on Form 10-Q for the quarter ended March 31,
    2005, as Exhibit 10.2

May 13, 200510.11

Manufacturing Services Agreement, dated January 4, 2006, by
    and between Patheon Inc. and Avanir Pharmaceuticals*

Quarterly Report on Form 10-Q for the quarter ended March 31,
    2006, as Exhibit 10.1

May 10, 200610.12

Quality Agreement, dated January 4, 2006, by and between
    Avanir Pharmaceuticals and Patheon Inc.*

Quarterly Report on Form 10-Q for the quarter ended March 31,
    2006, as Exhibit 10.2

May 10, 200610.13

Docosanol License Agreement, dated January 5, 2006, by and
    between Kobayashi Pharmaceutical Co., Ltd. And Avanir
    Pharmaceuticals*

Quarterly Report on Form 10-Q for the quarter ended March 31,
    2006, as Exhibit 10.3

May 10, 200610.14

Docosanol Data Transfer and Patent License Agreement, dated
    July 6, 2006, by and between Avanir Pharmaceuticals and
    Healthcare Brands International Limited*

Annual Report on Form 10-K for the fiscal year ended September
    30, 2006, as Exhibit 10.21

December 18, 200610.15

Development and License Agreement, dated August 7, 2006, by
    and between Eurand, Inc. and Avanir Pharmaceuticals*

Annual Report on Form 10-K for the fiscal year ended September
    30, 2006, as Exhibit 10.22

December 18, 2006 36




---



##### Table of Contents



Exhibit



Incorporated by Reference HereinNumber

Description

Form

Date10.16

Amended and Restated 1998 Stock Option Plan

Annual Report on Form 10-K for the fiscal year ended September
    30, 2001, as Exhibit 10.2

December 21, 200110.17

Amended and Restated 1994 Stock Option Plan

Annual Report on Form 10-K for the fiscal year ended September
    30, 2001, as Exhibit 10.4

December 21, 200110.18

Amended and Restated 2000 Stock Option Plan

Quarterly Report on Form 10-Q for the quarter ended March 31,
    2003, as Exhibit 10.1

May 14, 200310.19

Form of Restricted Stock Grant Notice for use with Amended and
    Restated 2000 Stock Option Plan

Quarterly Report on Form 10-Q for the quarter ended March 31,
    2003, as Exhibit 10.2

May 14, 200310.20

2003 Equity Incentive Plan

Quarterly Report on Form

May 14, 200310-Q for the quarter ended March 31, 2003, as Exhibit 10.310.21

Form of Non-Qualified Stock Option Award Notice for use with
    2003 Equity Incentive Plan

Quarterly Report on Form 10-Q for the quarter ended March 31,
    2003, as Exhibit 10.4

May 14, 200310.22

Form of Restricted Stock Grant for use with 2003 Equity
    Incentive Plan

Quarterly Report on Form 10-Q for the quarter ended March 31,
    2003, as Exhibit 10.5

May 14, 200310.23

Form of Restricted Stock Grant Notice (cash consideration) for
    use with 2003 Equity Incentive Plan

Quarterly Report on Form 10-Q for the quarter ended March 31,
    2003, as Exhibit 10.6

May 14, 200310.24

Form of Indemnification Agreement with certain Directors and
    Executive Officers of the Registrant

Annual Report on Form 10-K for the fiscal year ended September
    20, 2003, as Exhibit 10.4

December 23, 200310.25

2005 Equity Incentive Plan

Annual Report on Form 10-K for the fiscal year ended September
    30, 2005, as Exhibit 10.21

December 14, 200510.26

Form of Stock Option Agreement for use with 2005 Equity
    Incentive Plan

Current Report on Form 8-K, as Exhibit 10.1

March 23, 200510.27

Form of Restricted Stock Unit Grant Agreement for use with 2005
    Equity Incentive Plan and 2003 Equity Incentive Plan

Annual Report on Form 10-K for the fiscal year ended
    September 30, 2007, as Exhibit 10.36

December 21, 200710.28

Form of Restricted Stock Purchase Agreement for use with 2005
    Equity Incentive Plan

Annual Report on Form 10-K for the fiscal year ended September
    30, 2006, as Exhibit 10.35

December 18, 200610.29

Form of Change of Control Agreement

Current Report on Form 8-K, as Exhibit 10.2

December 10, 200710.30

Employment Agreement with Keith Katkin, dated June 13,
    2005

Annual Report on Form 10-K for the fiscal year ended September
    30, 2005, as Exhibit 10.25

December 14, 200510.31

Employment Agreement with Randall Kaye, dated December 23,
    2005

Quarterly Report on Form 10-Q for the quarter ended December 31,
    2005, as Exhibit 10.1

February 9, 200610.32

Employment Agreement with Martin J. Sturgeon, dated
    February 12, 2007

Annual Report on Form 10-K for the fiscal year ended September
    30, 2007, as Exhibit 10.42

December 21, 2007 37




---



##### Table of Contents



Exhibit



Incorporated by Reference HereinNumber

Description

Form

Date10.33

Amended and Restated Change of Control Agreement, dated
    February 27, 2007, by and between Avanir Pharmaceuticals
    and Randall Kaye

Annual Report on Form 10-K for the fiscal year ended September
    30, 2007, as Exhibit 10.43

December 21, 200710.34

Employment Agreement with Keith Katkin, dated
    March 13, 2007

Annual Report on Form 10-K for the fiscal year ended September
    30, 2007, as Exhibit 10.44

December 21, 200710.35

Bonus Agreement, dated September 10, 2007, by and between
    Avanir Pharmaceuticals and Keith Katkin

Current Report on Form 8-K, as Exhibit 10.1

December 10, 200710.36

Separation and Consulting Agreement, dated June 25, 2007,
    by and between Avanir Pharmaceuticals and Jagadish Sircar

Annual Report on Form 10-K for the fiscal year ended September
    30, 2007, as Exhibit 10.46

December 21, 200710.37

Sales Agreement, dated December 15, 2006, by and between
    Avanir Pharmaceuticals and Brinson Patrick Securities Corporation

Current Report on Form 8-K, as Exhibit 10.1

June 4, 200710.38

Amendment No. 1 to Sales Agreement, dated June 4,
    2007, by and between Avanir Pharmaceuticals and Brinson Patrick
    Securities Corporation

Current Report on Form 8-K, as Exhibit 10.2

June 4, 200710.39

Asset Purchase Agreement, dated July 2, 2007, by and among
    Avanir Pharmaceuticals, Alamo Pharmaceuticals, LLC and Azur
    Pharma Inc.*

Annual Report on Form 10-K for the fiscal year ended September
    30, 2007, as Exhibit 10.49

December 21, 200710.40

Agreement, dated July 2, 2007, by and between Avanir
    Pharmaceuticals and Neal R. Cutler

Annual Report on Form 10-K for the fiscal year ended September
    30, 2007, as Exhibit 10.50

December 21, 200710.41

Sublease Agreement, dated July 2, 2007, by and between
    Avanir Pharmaceuticals and Halozyme, Inc. (11388 Sorrento Valley
    Rd., San Diego, CA)

Annual Report on Form 10-K for the fiscal year ended September
    30, 2007, as Exhibit 10.51

December 21, 200710.42

Sublease Agreement, dated July 2, 2007, by and between
    Avanir Pharmaceuticals and Halozyme, Inc. (11404 Sorrento Valley
    Rd., San Diego, CA)

Annual Report on Form 10-K for the fiscal year ended September
    30, 2007, as Exhibit 10.52

December 21, 200710.43

Third Amendment to Lease, dated July 19, 2007, by and
    between Avanir Pharmaceuticals and RREEF America REIT II Corp.
    FFF

Annual Report on Form 10-K for the fiscal year ended September
    30, 2007, as Exhibit 10.53

December 21, 200710.44

Asset Purchase and License Agreement, dated March 6, 2008,
    by and among Avanir Pharmaceuticals, Xenerex Biosciences and
    Emergent Biosolutions, Inc.*

Quarterly Report on Form 10-Q for the quarter ended March 31,
    2008, as Exhibit 10.1

May 14, 2008 38




---



##### Table of Contents



Exhibit



Incorporated by Reference HereinNumber

Description

Form

Date10.45

Payoff Letter, dated June 2, 2008, by and between Neal R.
    Cutler and Avanir Pharmaceuticals

Quarterly Report on Form 10-Q for the quarter ended June 30,
    2008, as Exhibit 10.1

August 8, 200821.1

List of Subsidiaries

Annual Report on Form 10-K for the fiscal year ended September
    30, 2006

December 18, 200623.1

Consent of Independent Registered Public Accounting Firm

Filed herewith31.1

Certification of Chief Executive Officer pursuant to
    Section 302 of Sarbanes-Oxley Act of 2002

Filed herewith31.2

Certification of Chief Financial Officer pursuant to
    Section 302 of Sarbanes-Oxley Act of 2002

Filed herewith32.1

Certification of Chief Executive Officer pursuant to
    Section 906 of Sarbanes-Oxley Act of 2002

Filed herewith32.2

Certification of Chief Financial Officer pursuant to
    Section 906 of Sarbanes-Oxley Act of 2002

Filed herewith     *
    
    Confidential treatment has been granted with respect to portions
    of this exhibit pursuant to an application requesting
    confidential treatment under
    Rule 24b-2
    of the Securities Exchange Act of 1934. A complete copy of this
    exhibit, including the redacted terms, has been separately filed
    with the Securities and Exchange Commission. 39




---



##### Table of Contents



SIGNATURES    Avanir Pharmaceuticals
  By:
    /s/  Keith
    A. Katkin   President and Chief Executive Officer
      Signature

Title

Date/s/  Keith
    A. KatkinKeith
    A. Katkin

President and Chief Executive Officer
    (Principal Executive Officer)

December 17, 2008/s/  Christine
    G. OcampoChristine
    G. Ocampo

Vice President, Finance
    (Principal Financial Officer)

December 17, 2008/s/  Craig
    A. WheelerCraig
    A. Wheeler

Director, Chairman of the Board

December 17, 2008/s/  Stephen
    G. Austin, CPAStephen
    G. Austin, CPA

Director

December 17, 2008/s/  Charles
    A. MathewsCharles
    A. Mathews

Director

December 17, 2008/s/  David
    J. Mazzo, Ph.D.David
    J. Mazzo, Ph.D.

Director

December 17, 2008/s/  Dennis
    G. PodlesakDennis
    G. Podlesak

Director

December 17, 2008/s/  Nicholas
    SimonNicholas
    Simon

Director

December 17, 2008/s/  Scott
    M. Whitcup, M.D.Scott
    M. Whitcup, M.D.

Director

December 17, 2008  40




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##### Table of Contents



AvanirPharmaceuticals
  INDEX TO
    CONSOLIDATED FINANCIAL STATEMENTS
  PageReport of Independent Registered Public
    Accounting Firm


F-2Financial Statements:Consolidated Balance Sheets


F-3Consolidated Statements of Operations


F-4Consolidated Statements of Shareholders
    Equity and Comprehensive Loss


F-5Consolidated Statements of Cash Flows


F-6Notes to Consolidated Financial Statements


F-7Financial Statement Schedules:Financial statement schedules have been omitted for the reason
    that the required information is presented in financial
    statements or notes thereto, the amounts involved are not
    significant or the schedules are not applicable.  F-1




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM   Avanir
        Corbin &
    Company LLP
    F-2




---



##### Table of Contents



AvanirPharmaceuticals
  CONSOLIDATED
    BALANCE SHEETS
  September 30,2008


2007ASSETSCurrent assets:Cash and cash equivalents

$
41,383,930


$
30,487,962Short-term investments in marketable securities






1,747,761Receivables






72,000Inventories


17,000



17,000Prepaid expenses


1,030,630



1,479,992Other current assets


237,334



916,450Current portion of restricted investments in marketable
    securities


388,122



688,122Total current assets


43,057,016



35,409,287Investments in marketable securities






249,078Restricted investments in marketable securities, net of current
    portion


468,475



468,475Property and equipment, net


806,909



1,215,666Intangible assets, net






41,048Non-current inventories


1,316,277



1,337,991Other assets


257,484



374,348TOTAL ASSETS

$
45,906,161


$
39,095,893LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable

$
451,846


$
307,700Accrued expenses and other liabilities


1,881,401



2,050,864Accrued compensation and payroll taxes


1,192,457



1,191,677Current portion of deferred revenues


2,333,932



2,267,594Current portion of notes payable


25,744



254,676Total current liabilities


5,885,380



6,072,511Accrued expenses and other liabilities, net of current portion


868,517



1,170,396Deferred revenues, net of current portion


10,152,100



13,052,836Notes payable, net of current portion






11,769,916Total liabilities


16,905,997



32,065,659Commitments and contingencies
    Shareholders equity:Preferred stock  no par value, 10,000,000 shares
    authorized, no shares issued or outstanding as of
    September 30, 2008 and 2007






Class A Common stock  no par value,
    200,000,000 shares authorized; 78,213,986 and
    43,117,358 shares issued and outstanding as of
    September 30, 2008 and 2007, respectively


284,994,636



245,531,712Accumulated deficit


(255,994,472
)


(238,498,733
)Accumulated other comprehensive loss






(2,745
)Total shareholders equity


29,000,164



7,030,234TOTAL LIABILITIES AND SHAREHOLDERS EQUITY

$
45,906,161


$
39,095,893    F-3




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##### Table of Contents



AvanirPharmaceuticals
  CONSOLIDATED STATEMENTS OF OPERATIONS
  Years Ended September 30,2008


2007REVENUES FROM PRODUCT SALESNet revenues

$
129,820


$
72,000Cost of revenues


(21,714
)


(328,184
)Product gross margin (loss)


108,106



(256,184
)REVENUES AND COST OF RESEARCH SERVICES AND OTHERRevenue from royalties and royalty rights


3,616,102



4,251,252Revenues from license agreements


2,205,724



1,614,091Revenues from government research grant services


1,006,922



914,834Revenues from research and development services






2,372,384Revenues from research services and other


6,828,748



9,152,561Cost of research and development services


(249,281
)


(2,994,905
)Cost of government research grant


(940,130
)


(1,324,427
)Research services and other gross margin


5,639,337



4,833,229Total gross margin


5,747,443



4,577,045OPERATING EXPENSESResearch and development


14,110,743



13,115,712General and administrative


10,599,158



20,830,188Total operating expenses


24,709,901



33,945,900Loss from continuing operations


(18,962,458
)


(29,368,855
)OTHER INCOME (EXPENSES)Interest income


1,283,302



622,687Interest expense


(540,618
)


(1,247,875
)Gain on early extinguishment of debt


967,547



Gain on sale of Xenerex antibodies


120,274



Other, net


1,222,481



1,615,519Loss from continuing operations before provision for income
    taxes


(15,909,472
)


(28,378,524
)Provision for income taxes


3,200



3,200Loss before discontinued operations


(15,912,672
)


(28,381,724
)DISCONTINUED OPERATIONSLoss from discontinued operations


(231,848
)


(4,760,056
)(Loss) gain on sale of discontinued operations


(1,351,219
)


12,208,327(Loss) income from discontinued operations


(1,583,067
)


7,448,271Net loss

$
(17,495,739
)

$
(20,933,453
)BASIC AND DILUTED NET (LOSS) INCOME PER SHARE:Loss before discontinued operations

$
(0.27
)

$
(0.72
)(Loss) income from discontinued operations


(0.03
)


0.19Net loss

$
(0.30
)

$
(0.53
)Basic and diluted weighted average number of common shares
    outstanding


58,901,030



39,643,876    F-4




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##### Table of Contents



AvanirPharmaceuticals
  CONSOLIDATED STATEMENTS OF SHAREHOLDERS
    EQUITY AND COMPREHENSIVE LOSS
  AccumulatedCommon Stock





Other


TotalClass A


Accumulated


Comprehensive


Shareholders


ComprehensiveShares


Amount


Deficit


Income (Loss)


Equity (Deficit)


LossBALANCE, SEPTEMBER 30, 2006


31,708,461


$
211,993,249


$
(217,565,280
)

$
(102,504
)

$
(5,674,535
)Net loss










(20,933,453
)






(20,933,453
)

$
(20,933,453
)Issuance of Class A common stock in connection with:Exercise of stock options


67,758



294,699











294,699Sale of stock and warrants, net of offering costs


11,388,790



30,547,713











30,547,713Issuance of restricted awards


44,250















Vesting of restricted stock units


83,900















Common stock surrendered


(18,135
)


(41,209
)










(41,209
)Forfeiture of restricted awards


(157,666
)


(500
)










(500
)Share-based compensation expense






2,737,760











2,737,760Unrealized gains on investments in marketable securities














99,759



99,759



99,759BALANCE, SEPTEMBER 30, 2007


43,117,358



245,531,712



(238,498,733
)


(2,745
)


7,030,234


$
(20,833,694
)Net loss










(17,495,739
)






(17,495,739
)

$
(17,495,739
)Issuance of Class A common stock in connection with:Sale of stock, net of offering costs


35,007,246



37,838,842











37,838,842Vesting of restricted stock units and awards


113,361



271











271Common stock surrendered


(21,979
)


(29,850
)










(29,850
)Forfeiture of restricted awards


(2,000
)














Share-based compensation expense






1,653,661











1,653,661Reclassification adjustment for unrealized gains on investments
    in marketable securities














2,745



2,745



2,745BALANCE, SEPTEMBER 30, 2008


78,213,986


$
284,994,636


$
(255,994,472
)

$



$
29,000,164


$
(17,492,994
)    F-5




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##### Table of Contents



Avanir Pharmaceuticals
  CONSOLIDATED
    STATEMENTS OF CASH FLOWS
  Years Ended September 30,2008


2007OPERATING ACTIVITIES:Net loss

$
(17,495,739
)

$
(20,933,453
)Loss (income) from discontinued operations


1,583,067



(7,448,271
)Adjustments to reconcile loss before discontinued operations to
    net cash used in operating activities of continuing operations:Depreciation and amortization


445,980



2,843,814Share-based compensation expense


1,639,756



2,230,122Amortization of debt discount


232,776



413,822Gain on extinguishment of debt


(967,547
)


Gain on sale of Xenerex antibodies


(120,274
)


Loss on impairment of assets


41,048



Loss (gain) on disposal of assets


26,852



(229,829
)Changes in operating assets and liabilities (net of effects of
    acquisition/disposition of business):Receivables


72,000



1,051,699Inventories


21,714



(1,004,469
)Prepaid and other assets


1,220,915



(749,345
)Accounts payable


144,146



(10,537,357
)Accrued expenses and other liabilities


(471,342
)


(3,327,404
)Accrued compensation and payroll taxes


780



(1,418,730
)Deferred revenue


(2,834,398
)


(4,033,745
)Net cash used in operating activities of continuing operations


(16,460,266
)


(43,143,146
)Net cash used in operating activities of discontinued operations


(217,943
)


(3,501,288
)Net cash used in operating activities


(16,678,209
)


(46,644,434
)INVESTING ACTIVITIES:Investments in securities


(527
)


(101,818
)Proceeds from sales and maturities of investments in securities


2,300,111



16,900,000Purchase of property and equipment


(134,374
)


(58,699
)Proceeds from sale of Xenerex antibodies


210,000



Proceeds from disposal of assets


5,000



774,058Net cash provided by investing activities of continuing
    operations


2,380,210



17,513,541Net cash (used in) provided by investing activities of
    discontinued operations


(1,351,219
)


42,055,769Net cash provided by investing activities


1,028,991



59,569,310FINANCING ACTIVITIES:Proceeds from issuances of common stock and warrants, net of
    commissions and offering costs


37,838,842



30,870,014Tax withholding payments reimbursed by restricted stock payments
    on debt


(29,579
)


(27,602
)Payments on notes and capital lease obligations


(11,264,077
)


(6,785,208
)Net cash provided by financing activities of continuing
    operations


26,545,186



24,057,204Net cash used in financing activities of discontinued operations






(11,392,332
)Net cash provided by financing activities


26,545,186



12,664,872Net increase in cash and cash equivalents


10,895,968



25,589,748Cash and cash equivalents at beginning of year


30,487,962



4,898,214Cash and cash equivalents at ending of year

$
41,383,930


$
30,487,962SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Interest paid

$
447,508


$
1,435,982Income taxes paid

$
51,108


$
22,368SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING
    ACTIVITIES:Purchase price adjustment of assumed liabilities

$



$
3,980,229Issuance of notes payable as additional consideration for the
    Alamo acquisition

$



$
4,000,000Common stock surrendered

$
29,850


$
13,607    F-6




---



##### Table of Contents



Avanir Pharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
  1.
    Description
    of Business  Avanir tm ®
  tm tm
  2.
    Summary
    of Significant Accounting Policies  Basis
    of presentation
  Avanir
  ® Avanir
  Management
    estimates
   F-7




---



##### Table of Contents



Avanir Pharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Purchase
    Price Allocation
    Cash
    and cash equivalents
    Restricted
    investments in marketable securities
    Restricted


RestrictedAmount as of


Amount as ofSeptember 30,


September 30,


Lease TermLease Description

2008


2007


Expires onFacility lease 

$
388,122


$
388,122



08/31/08
(1)11388 Sorrento Valley Road, San DiegoFacility lease 


468,475



468,475



01/14/1311404 and 11408 Sorrento Valley Road, San DiegoEquipment lease  GE Capital Fleet






300,000



10/23/07Total

$
856,597


$
1,156,597     (1)
    
    As of September 30, 2008, this letter of credit was pending
    release from landlord.  Investments
    in marketable securities
  Accounting
    for Certain Investments in Debt and Equity Securities
  Concentrations
   F-8




---



##### Table of Contents



Avanir Pharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Rule 2A-7
        Allowance
    for doubtful accounts
    Inventories
  first-in,
  Property
    and equipment
    Capitalization
    and Valuation of Long-Lived Assets
   F-9




---



##### Table of Contents



Avanir Pharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    
    A significant underperformance relative to expected historical
    or projected future operating 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.    Deferred
    rent
    Fair
    value of financial instruments
    Revenue
    recognition
    Revenue Recognition Revenue Recognition When Right of
    Return Exists
 F-10




---



##### Table of Contents



Avanir Pharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    No. 00-21 (EITF 00-21), Accounting for Revenue Arrangements with Multiple
    Deliverables
  Product Sales  Active Pharmaceutical Ingredient
    Docosanol (API Docosanol).
  FazaClo. (Sales from Discontinued
    Operations).
    18-month
 F-11




---



##### Table of Contents



Avanir Pharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Multiple
    Element Arrangements.
  and/or EITF 00-21,
  EITF 00-21,
  License Arrangements.
  and/or
 F-12




---



##### Table of Contents



Avanir Pharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Research Services Arrangements. agreed-upon No. 99-19, Reporting Revenue Gross as a Principal versus Net as an
    Agent
  Royalty Arrangements.
    ®
  Government Research Grant Revenues.
  Cost
    of revenues
    Recognition
    of expenses in outsourced contracts
  and/or
 F-13




---



##### Table of Contents



Avanir Pharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Research
    and development expenses
      
    The technology is in the early stage of development and has no
    alternative uses;
    There is substantial uncertainty regarding the future success of
    the technology or product;
    There will be difficulty in completing the remaining
    development; and
    There is substantial cost to complete the work.  Acquired contractual rights.
  Share-Based
    Compensation
  Share-Based Payment
     F-14




---



##### Table of Contents



Avanir Pharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Fiscal 2008


Fiscal 2007From Continuing Operations:General and administrative expense

$
1,149,018


$
1,864,689Research and development expense


490,738



365,433Share-based compensation expense related to continuing operations


1,639,756



2,230,122From Discontinued Operations:


13,905



507,638Share-based compensation expense

$
1,653,661


$
2,737,760   Fiscal 2008


Fiscal 2007Share-based compensation expense from:Stock options

$
666,129


$
1,304,944Restricted stock units


848,535



725,368Restricted stock awards


138,997



707,448Total

$
1,653,661


$
2,737,760     Restructuring
    expense
  Accounting for Costs Associated with Exit or Disposal
    Activities
  Advertising
    expenses
    Income
    taxes
   F-15




---



##### Table of Contents



Avanir Pharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Accounting for Uncertainty in
    Income Taxes  An Interpretation of FASB Statement
    No. 109. Accounting for Income Taxes,
      and/or
      Comprehensive
    income (loss)
    Computation
    of net loss per common share
   F-16




---



##### Table of Contents



Avanir Pharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Fiscal 2008


Fiscal 2007Stock options


624,027



1,040,581Performance stock options


2,048,000



Stock warrants


12,509,742



1,322,305Restricted stock units


2,259,042



1,914,988   Reclassifications
    Recent
    accounting pronouncements
  Financial Accounting Standards No. 162
    (FAS 162). The Hierarchy of Generally
    Accepted Accounting Principles The Meaning of
    Present Fairly in Conformity with Generally Accepted Accounting
    Principles.
  Financial Accounting Standards No. 163
    (FAS 163). Accounting for Financial
    Guarantee Insurance Contracts  an interpretation of
    FASB Statement No. 60.
  FASB Staff Position
    No. 142-3
    (FSP 142-3). No. 142-3, Determination of the Useful Life of Intangible
    Assets FSP 142-3 Goodwill and Other Intangible
    Assets FSP 142-3 FSP 142-3 No. 142-3
  Financial Accounting Standards No. 161
    (FAS 161). Disclosures about Derivative Instruments and Hedging
    Activities, an Amendment of FAS 133
 F-17




---



##### Table of Contents



Avanir Pharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Financial Accounting Standards No. 160
    (FAS 160). Noncontrolling Interests in
    Consolidated Financials, an Amendment of ARB
    No. 51
  Financial Accounting Standards No. 141(R)
    (FAS 141R). Business Combinations:
    Applying the Acquisition Method
  EITF Issue
    No. 07-1. Issue No. 07-1, Accounting for Collaborative Arrangements, (EITF 07-1) EITF 07-1 EITF 07-1 EITF 07-1; EITF 07-1
  EITF Issue
    No. 07-3. No. 07-3, Accounting for Nonrefundable Advance Payments for Goods
    or Services to Be Used in Future Research and Development
    Activities, (EITF 07-3) EITF 07-3 EITF 07-3
  Financial Accounting Standards No. 159
    (FAS 159). The Fair Value Option for
    Financial Assets and Financial Liabilities Including
    an amendment of FASB Statement 115
  Financial Accounting Standards No. 157
    (FAS 157). Fair Value
    Measurements
 F-18




---



##### Table of Contents



Avanir Pharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  FSPFAS No. 157-2, Effective Date of FASB Statement No. 157
  Financial Accounting Standards No. 157
    (FSP FAS 157-3). No. 157-3, Determining the Fair Value of a Financial Asset When
    the Market for That Asset is Not Active (FSP FAS 157-3). No. 157-3 No. 157-3 FSP FAS No. 157-3
  3.
    Acquisition
    of Alamo Pharmaceuticals, Inc. / Sale of
    Fazaclo        Sale
    of FazaClo and Presentation of Discontinued
    Operations
   F-19




---



##### Table of Contents



Avanir Pharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Accounting for the
    Impairment or Disposal of Long-Lived Assets
    Fiscal 2008


Fiscal 2007REVENUES FROM PRODUCT SALESNet revenues

$



$
17,132,171Cost of revenues






4,599,105Product gross margin






12,533,066OPERATING EXPENSESResearch and development






3,159,117General and administrative


231,848



13,486,361Loss from operations


(231,848
)


(4,112,412
)OTHER INCOME (EXPENSES)Interest expense






(647,644
)(Loss) gain on sale of FazaClo


(1,351,219
)


12,208,327Other






(Loss) income before income taxes


(1,351,219
)


7,448,271Provision for income taxes






NET (LOSS) INCOME

$
(1,583,067
)

$
7,448,271   Accounting for Changes and Error Corrections
   F-20




---



##### Table of Contents



Avanir Pharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Consideration, net of transaction costs of $1,829,000

$
42,055,000Assets and liabilities related to FazaClo:Current assets


3,835,000Property and equipment


612,000Net intangible assets


8,653,000Goodwill


22,130,000Less: Current liabilities


(5,383,000
)Net assets


29,847,000Gain on sale

$
12,208,000   4.
    Relocation
    of Commercial and General and Administrative
    Operations      Balance at





Balance atSeptember 30,


Payments/


September 30,2007


Reductions


2008Accrued RestructuringEmployee severance and relocation benefits

$
75,790


$
(75,790
)

$
Lease restructuring liability


2,223,802



(1,087,837
)


1,135,965Total


2,299,592


$
(1,163,627
)


1,135,965Less current portion


(1,163,627
)






(316,086
)Total

$
1,135,965






$
819,879  F-21




---



##### Table of Contents



Avanir Pharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Balance at








Balance atSeptember 30,


Charges/


Payments/


September 30,2006


Additions


Reductions


2007Accrued RestructuringEmployee severance and relocation benefits

$
237,050


$
847,642


$
(1,008,902
)

$
75,790Lease restructuring liability


273,998



2,101,771



(151,967
)


2,223,802Total


511,048


$
2,949,413


$
(1,160,869
)


2,299,592Less current portion


(280,598
)










(1,163,627
)Total

$
230,450










$
1,135,965     5.
    Investments
    in Marketable Securities      Gross


GrossAmortized


Unrealized


Unrealized


FairCost


Gains


Losses(1)


ValueAs of September 30, 2008:Certificates of deposit

$
856,597










$
856,597Government debt securities














Total

$
856,597






$



$
856,597Reported as:Current investments in securities:Restricted investments













$
388,122Classified as available for saleTotal current investments in securities














388,122Non-current investments in securities:Restricted investments














468,475Classified as available for saleNon-current investments in securities














468,475Total investments in securities













$
856,597   F-22




---



##### Table of Contents



Avanir Pharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  GrossAmortized


Unrealized


FairCost


Losses


ValueAs of September 30, 2007:Certificates of deposit

$
1,156,597


$



$
1,156,597Government debt securities


1,999,584



(2,745
)


1,996,839Total

$
3,156,181


$
(2,745
)

$
3,153,436Reported as:Current investments in securities:Restricted investments









$
688,122Classified as available for sale










1,747,761Total current investments in securities:










2,435,883Non-current investments in securities:Restricted investments










468,475Classified as available for sale










249,078Non-current investments in securities:










717,553Total investments in securities









$
3,153,436   6.
    Inventories      September 30,


September 30,2008


2007Raw materials

$
1,333,277


$
1,354,991Less: current portion


(17,000
)


(17,000
)Non-current portion

$
1,316,277


$
1,337,991    F-23




---



##### Table of Contents



Avanir Pharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  7.
    Property
    and Equipment    As of September 30, 2008


As of September 30, 2007Gross








GrossCarrying


Accumulated





Carrying


AccumulatedValue


Depreciation


Net


Value


Depreciation


NetResearch and development equipment

$
9,421


$
(9,421
)

$



$
761,815


$
(588,325
)

$
173,490Computer equipment and related software


1,319,891



(1,080,132
)


239,759



1,285,454



(941,628
)


343,826Leasehold improvements


37,790



(11,362
)


26,428



37,790



(3,787
)


34,003Office equipment furniture and fixtures


763,260



(484,257
)


279,003



767,313



(364,685
)


402,628Manufacturing equipment


261,719







261,719



261,719







261,719Total property and equipment

$
2,392,081


$
(1,585,172
)

$
806,909


$
3,114,091


$
(1,898,425
)

$
1,215,666       8.
    Intangible
    Assets      September 30, 2007Gross








Weighted AverageCarrying


Accumulated





AmortizationValue


Amortization


Net


Period (in years)Intangible assets with finite lives:Licenses

$
42,461


$
(22,418
)

$
20,043



15.5Total intangible assets with finite lives


42,461



(22,418
)


20,043Intangible assets with indefinite lives


21,005







21,005Total intangible assets

$
63,466


$
(22,418
)

$
41,048      F-24




---



##### Table of Contents



Avanir Pharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  9.
    Accrued
    Expenses and Other Liabilities    September 30,


September 30,2008


2007Accrued research and development expenses

$
1,404,556


$
419,989Accrued general and administrative expenses


160,759



287,517Deferred rent


48,638



34,432Lease restructuring liability


1,135,965



2,223,802Other






255,520Total accrued expenses and other liabilities


2,749,918



3,221,260Less: current


(1,881,401
)


(2,050,864
)Non-current total accrued expenses and other liabilities

$
868,517


$
1,170,396   10.
    Deferred
    Revenues/Sale of Licenses  ®
  Drug RoyaltyUSA Agreement


Other Agreements


TotalNet deferred revenues as of October 1, 2007

$
14,738,509


$
581,921


$
15,320,430Changes during the period:Additions






250,000



250,000Recognized as revenues during period


(2,536,311
)


(548,087
)


(3,084,398
)Net deferred revenues as of September 30, 2008

$
12,202,198


$
283,834


$
12,486,032Classified and reported as:Current portion of deferred revenues

$
2,106,740


$
227,192


$
2,333,932Deferred revenues, net of current portion


10,095,458



56,642



10,152,100Total deferred revenues

$
12,202,198


$
283,834


$
12,486,032   Drug RoyaltyUSA Agreement


Other Agreements


TotalNet deferred revenues as of October 1, 2006

$
17,111,913


$
2,242,262


$
19,354,175Changes during the period:Additions






278,910



278,910Recognized as revenues during period


(2,373,404
)


(1,939,251
)


(4,312,655
)Net deferred revenues as of September 30, 2007

$
14,738,509


$
581,921


$
15,320,430Classified and reported as:Current portion of deferred revenues

$
1,969,507


$
298,087


$
2,267,594Deferred revenues, net of current portion


12,769,002



283,834



13,052,836Total deferred revenues

$
14,738,509


$
581,921


$
15,320,430   Drug Royalty Agreement
 F-25




---



##### Table of Contents



Avanir Pharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    EITF 88-18
  Kobayashi Docosanol License Agreement
      HBI Docosanol License Agreement
   F-26




---



##### Table of Contents



Avanir Pharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Emergent Biosolutions License Agreement
  11.
    Commitments
    and Contingencies  Operating lease commitments.
      Less Payments to beMinimum


Received fromYear Ending September 30,

Payments


Subleases


Net Payments2009

$
1,475,000


$
904,000


$
571,0002010


1,530,000



680,000



850,0002011


1,483,000



708,000



775,0002012


1,223,000



736,000



487,0002013


352,000



216,000



136,000Total

$
6,063,000


$
3,244,000


$
2,819,000   Legal contingencies.
 F-27




---



##### Table of Contents



Avanir Pharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        Guarantees and Indemnities.
    Center for Neurologic Study (CNS) 
 F-28




---



##### Table of Contents



Avanir Pharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  12.
    Notes
    Payable    September 30,2008


2007Senior notes with an interest rate of LIBOR + 1.33%; interest
    payable monthly; repaid June 2008; unamortized discount of
    $232,776 at September 30, 2007

$



$
11,737,0879.5% equipment loan repaid April 2008






174,22410.43% equipment loan due February 2009


16,275



65,44210.17% equipment loan due January 2009


9,469



47,839Total


25,744



12,024,592Less: current portion


(25,744
)


(254,676
)Total long-term notes payable

$



$
11,769,916   Senior Notes.
      Equipment Loans.
  13.
    Shareholders
    Equity  Preferred
    Stock
   F-29




---



##### Table of Contents



Avanir Pharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Common
    stock
  Fiscal 2008. 5-year
        Fiscal 2007.
  Form S-3
   F-30




---



##### Table of Contents



Avanir Pharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Common Stock Issued and Warrants and



Common Stock


Gross Amount


Average PriceStock Options Exercised

Date

Shares


Received(1)


per Share(2)Fiscal year ended September 30, 2008:Registered offering of common stock

April 2008


34,972,678


$
40,000,000


$
1.14Private placement of common stock

January 2008


34,568



44,200


$
1.28Restricted stock awards and restricted stock units

Various


113,361






$
Total




35,120,607


$
40,044,200Fiscal year ended September 30, 2007:Private placement of common stock

November 2006


5,263,158


$
14,999,999


$
2.85Private placement of common stock

Various


6,125,632



16,827,007


$
2.75Restricted stock awards and restricted stock units

Various


128,150






$
Stock options

Various


67,758



294,699


$
4.33Total




11,584,698


$
32,121,705     (1)
    
    Amount received represents the amount before the cost of
    financing and after underwriters discount, if any.(2)
    
    Average price per share has been rounded to two decimal places.  Warrants
  5-year
      Shares of


WeightedCommon Stock


AveragePurchasable Upon


Exercise Price


Range ofExercise of Warrants


per Share


Exercise PricesOutstanding at September 30, 2006


269,305


$
8.92


$
8.92Issued


1,053,000


$
3.30


$
3.30Outstanding at September 30, 2007


1,322,305


$
4.45


$
3.30-$8.92Issued


12,240,437


$
1.43


$
1.43Expired


(1,053,000
)

$
3.30


$
3.30Outstanding at September 30, 2008


12,509,742


$
1.59


$
1.43-$8.92  F-31




---



##### Table of Contents



Avanir Pharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Employee
    Equity Incentive Plans
      2005 Equity Incentive Plan.
  2003 Equity Incentive Plan.
  2000 Stock Option Plan.
  1998 Stock Option Plan.
 F-32




---



##### Table of Contents



Avanir Pharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Stock Options. 10-year
            Shares of





Weighted AverageCommon Stock


Weighted Average


Remaining


AggregatePurchasable Upon


Exercise Price per


Contractual Term


IntrinsicNumber of Shares


Share


(in Years)


ValueOutstanding October 1, 2006


1,587,070


$
10.07Granted


490,161


$
4.47Exercised


(67,758
)

$
4.33Forfeited


(960,767
)

$
10.22Expired


(8,125
)

$
7.89Outstanding September 30, 2007


1,040,581


$
7.69Granted


12,000


$
0.79Forfeited


(419,720
)

$
9.13Expired


(8,834
)

$
5.20Outstanding September 30, 2008


624,027


$
6.61



7.3


$
Vested and expected to vest in the future, September 30,
    2008


484,545


$
7.76



7.0


$
Exercisable, September 30, 2008


275,410


$
10.50



5.9


$
Exercisable, September 30, 2007


458,240


$
9.85      F-33




---



##### Table of Contents



Avanir Pharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      2008


2007Expected volatility


95.8
%

75.0%  113.4%Weighted-average volatility


95.8
%

93.7%Average expected term in years


5.0


6.0Risk-free interest rate (zero coupon U.S. Treasury Note)


2.9
%

4.3%  4.7%Expected dividend yield


0
%

0%   :
  Options OutstandingWeighted





Options ExercisableAverage


Weighted





WeightedRemaining


Average





AverageNumber


Contractual


Exercise


Number


ExerciseRange of Exercise Prices

Outstanding


Life in Years


Price


Exercisable


Price$ 0.79-$ 1.20


32,000



9.0


$
1.05



7,500


$
1.20$ 1.29


130,960



8.5


$
1.29






$
$ 2.41


120,781



9.0


$
2.41






$
$ 2.88-$ 6.92


91,849



5.8


$
5.87



61,850


$
5.59$ 7.12-$11.68


63,187



6.0


$
10.70



60,392


$
10.65$11.76


100,000



6.8


$
11.76



75,000


$
11.76$12.12-$19.38


85,250



6.0


$
14.57



70,668


$
14.34624,027



7.3


$
6.61



275,410


$
10.50   Performance Stock Options.
   F-34




---



##### Table of Contents



Avanir Pharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    2008Expected volatility

96.4%  99.3%Weighted-average volatility

98.9%Average expected term in years

5.3-6.3Risk-free interest rate (zero coupon U.S. Treasury Note)

3.3%  3.5%Expected dividend yield

0%     Restricted stock units.
  Weighted AverageGrant DateNumber of Shares


Fair ValueUnvested, October 1, 2007


1,914,988


$
2.17Granted


868,251


$
1.48Vested


(289,947
)

$
2.63Forfeited


(234,250
)

$
1.75Unvested, September 30, 2008


2,259,042


$
1.85       Restricted stock awards.
  F-35




---



##### Table of Contents



Avanir Pharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Weighted AverageGrant DateNumber of Shares


Fair ValueUnvested, October 1, 2007


22,500


$
11.87Vested


(20,500
)

$
12.35Forfeited


(2,000
)

$
6.91Unvested, September 30, 2008





$
       14.
    Research,
    License, Supply and other Agreements  Center for Neurologic Study (CNS) 
  AstraZeneca UK Limited
    (AstraZeneca).
  Novartis International Pharmaceutical Ltd.
    (Novartis).
 F-36




---



##### Table of Contents



Avanir Pharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    HBI Docosanol License Agreement country-by-country
  Kobayashi Docosanol License Agreement
    Boryung Pharmaceuticals Company Ltd
    (Boryung). 12-year
  GlaxoSmithKline Subsidiary, SB Pharmco Puerto Rico, Inc.
    (GlaxoSmithKline).
 F-37




---



##### Table of Contents



Avanir Pharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Bruno Farmaceutici (Bruno).
  P.N. Gerolymatos SA.
    (Gerolymatos).
  ACO HUD.
    Emergent Biosolutions.
  Non-anthrax related antibodies.
  Government research grants.
 F-38




---



##### Table of Contents



Avanir Pharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    15.
    Income
    Taxes    2008


2007Current:State and foreign

$
3,200


$
3,200Deferred:Federal


(5,147,297
)


(7,011,828
)State and foreign


(1,115,570
)


(714,424
)(6,262,867
)


(7,726,252
)Increase in deferred income tax asset valuation allowance


6,262,867



7,726,252Total income tax provision

$
3,200


$
3,200     September 30,2008


2007Net operating loss carryforwards

$
83,265,183


$
75,965,310Deferred revenue


4,943,699



6,118,100Research credit carryforwards


10,964,507



10,295,636Capitalized research and development costs


1,263,921



1,379,468Capitalized license fees and patents


3,411,306



3,724,831Share-based compensation and options


2,584,645



1,946,490Foreign tax credits


595,912



595,912Other


622,961



1,387,534Deferred income tax assets


107,652,134



101,413,281Deferred tax liabilities:Other


(54,734
)


(78,748
)Deferred tax liabilities


(54,734
)


(78,748
)Less valuation allowance for net deferred income tax assets


(107,597,400
)


(101,334,533
)Net deferred tax assets / (liabilities)

$



$
  F-39




---



##### Table of Contents



Avanir Pharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      2008


2007Federal statutory rate


(34
)%


(34
)%Increase in deferred income tax asset valuation allowance


36



36State income taxes, net of federal effect


(6
)


(6
)Research and development credits


(4
)


(4
)Expired net operating loss and other credits


7



6Other


1



2Effective income tax rate


0
%


0
%   16.
    Employee
    Savings Plan    17.
    Segment
    Information         F-40




---



##### Table of Contents



Avanir Pharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  18.
    Subsequent
    Events         F-41