##### Table of Contents





UNITED
    STATES SECURITIES AND EXCHANGE COMMISSIONWashington, 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, 2007ORo

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

92656(Zip Code)(Address of principal executive
    offices)    (949) 389-6700
 (Registrants telephone
    number, including area code)
   Securities registered pursuant to Section 12(b) of the
    Act:
 Class A Common Stock, no par value
   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
  Rule 12b-2
 o o 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


9Item 1B.


Unresolved Staff Comments


16Item 2.


Properties


16Item 3.


Legal Proceedings


16Item 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


21Item 7A.


Quantitative and Qualitative Disclosures About
    Market Risk


38Item 8.


Financial Statements and Supplementary Data


38Item 9.


Changes in and Disagreements With Accountants on
    Accounting and Financial Disclosure


38Item 9A.


Controls and Procedures


38Item 9B.


Other Information


40PART IIIItem 10.


Directors, Executive Officers and Corporate
    Governance


40Item 11.


Executive Compensation


41Item 12.


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


42Item 13.


Certain Relationships and Related Transactions
    and Director Independence


42Item 14.


Principal Accountant Fees and Services


42PART IVItem 15.


Exhibits and Financial Statement Schedules


42SIGNATURES


48EXHIBIT 3.1EXHIBIT 4.8EXHIBIT 10.36EXHIBIT 10.41EXHIBIT 10.42EXHIBIT 10.43EXHIBIT 10.44EXHIBIT 10.46EXHIBIT 10.49EXHIBIT 10.50EXHIBIT 10.51EXHIBIT 10.52EXHIBIT 10.53EXHIBIT 23.1EXHIBIT 23.2EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2




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##### Table of Contents



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. Except as otherwise indicted 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.
  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.
 2




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AvanirProduct Pipeline and Marketed Products
  Zenvia 
    Pseudobulbar Affect (PBA) Indication
  and/or
      and/or
  and/or
 3




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Zenvia 
    Diabetic Peripheral Neuropathic Pain (DPN pain)
    Indication
            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
    NIH/NIAID.
  Discontinued
    Programs
  Reverse
    Cholesterol Transport (RCT) Technology 
    Atherosclerosis
   5




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##### Table of Contents



AVP-13358 
    Selective Cytokine Inhibitor
    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 painful diabetic neuropathy.
  
    Cymbalta®;
    Lyrica®
    Narcotic products; and
    Off-label uses of non-narcotic products, such as the
    anticonvulsants phenytoin and carbamazepine, and the
    antidepressant amitriptyline.  Antibody generation technology.
  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 GlaxoSmithKline, respectively, and
    Famvir®
    famciclovir (oral) and
    Denavir®
    penciclovir (topical) prescription products marketed by Novartis. 6




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Manufacturing
      Patents
    and Proprietary Rights
    United States


ForeignDescription

Issued


Expiration


Pending


Issued


Expiration


PendingZenvia


7



2011 to 2019



3



13
(1)


Various



21Docosanol-related technologies


11



2008 to 2017



1



84



Various



37Xenerex antibody technologies


2



2008 to 2015



0



13



Various



0Selective cytokine inhibitor(2)


10



2019



6



22



Various



24MIF inhibitor technology


12







14



5







96Reverse cholesterol transport enhancer(2)


0







7



3







51Other


0







4



1







7Total


42







35



141







236     (1)
    
    Does not include November notification from European Patent
    office of intent to grant PBA and DPN pain patent.     7




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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.      
    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
       8




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Product
    Liability Insurance
    Executive
    Officers and Key Employees of the Registrant
    Human
    Resources
    Financial
    Information about Segments
    Research
    and Development
    General
    Information
  10-Q 8-K 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 or
    that an approval, if granted, will be on terms we may seek.
   9




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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.
    We have limited capital resources and will need to raise
    additional funds to support our operations.
    and/or
 10




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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
  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.
    
    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; or
    Challenges will not be instituted against the validity or
    enforceability of any patent that we own or, if instituted, that
    these challenges will not be successful.    We currently have only a limited term of patent coverage for
    Zenvia, which could result in the introduction of generic
    competition within in 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 have recently experienced significant turnover in senior
    management.
    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.
   12




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##### Table of Contents




    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.  and/or
      
    delays in our ability to submit a New Drug Application
    (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; or
    the rejection of an application.    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;
    shortage or lack of availability of supplies of drugs for
    clinical trials; 13




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##### Table of Contents




    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.    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.
        Developing and marketing pharmaceutical products for human
    use involves product liability risks, for which we currently
    have limited insurance coverage.
   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 stock price has historically been volatile and we expect
    that this volatility will continue for the foreseeable
    future.
    
    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 Class A 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.      Item 1B.
    Unresolved
    Staff Comments    Item 2.
    Properties    Item 3.
    Legal
    Proceedings   16




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##### Table of Contents



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 2007


Fiscal 2006High


Low


High


LowFirst Quarter

$
8.95


$
2.27


$
14.12


$
10.00Second Quarter

$
2.52


$
1.09


$
17.90


$
13.76Third Quarter

$
5.19


$
1.19


$
15.13


$
5.88Fourth Quarter

$
2.70


$
1.68


$
8.76


$
5.61       5-year 9/30/2002 9/30/2007.
  Information
    About Our Equity Compensation Plans
  Form 10-K.
 17




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##### Table of Contents



Stock
    Performance Graph
  
  *$100 Invested on 9/30/02 In stock or Index-Including
    reinvestment of dividends. Fiscal year ending
    September 30.
  9/02


9/03


9/04


9/05


9/06


9/07AVANIR Pharmaceuticals


100.00



135.65



246.96



268.70



150.43



46.52Russell 2000


100.00



136.50



162.12



191.23



210.20



236.14NASDAQ Pharmaceutical


100.00



156.88



164.14



194.67



195.01



211.03     Item 6.
    Selected
    Consolidated Financial Data  Form 10-Q
 18




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##### Table of Contents



Form 10-K
  Summary
    Financial Information
  Fiscal Years Ended September 30,Statement of operations data:

2007


2006(1)(2)


2005


2004


2003Net revenues

$
9,224,561


$
15,185,852


$
16,690,574


$
3,589,317


$
2,438,733Loss before discontinued operations and cumulative effect of
    change in accounting principle

$
(28,381,724
)

$
(50,234,040
)

$
(30,606,564
)

$
(28,154,853
)

$
(23,236,348
)Income/(loss) from discontinued operations

$
7,448,271


$
(8,702,716
)

$



$



$
Cumulative effect of change in accounting principle

$



$
(3,616,058
)

$



$



$
Net loss

$
(20,933,453
)

$
(62,552,814
)

$
(30,606,564
)

$
(28,154,853
)

$
(23,236,348
)Net loss attributable to common shareholders

$
(20,933,453
)

$
(62,552,814
)

$
(30,606,564
)

$
(28,154,853
)

$
(23,264,293
)Basic and diluted (loss)/income per share:Loss before cumulative effect of change in accounting principle
    and discontinued operations

$
(0.72
)

$
(1.64
)

$
(1.19
)

$
(1.44
)

$
(1.55
)Income/(loss) from discontinued operations

$
0.19


$
(0.28
)

$



$



$
Cumulative effect of change in accounting principle

$



$
(0.12
)

$



$



$
Net loss

$
(0.53
)

$
(2.04
)

$
(1.19
)

$
(1.44
)

$
(1.55
)Net loss attributable to common shareholders

$
(0.53
)

$
(2.04
)

$
(1.19
)

$
(1.44
)

$
(1.55
)Basic and diluted weighted average number of shares of common
    stock outstanding


39,643,876



30,634,872



25,617,432



19,486,603



14,974,034Cash dividends declared per share

$



$



$



$



$
Pro forma amounts assuming the method adopted in 2006 for
    patent-related costs was applied retroactively:Net loss

$



$
(58,936,756
)

$
(31,255,373
)

$
(29,056,101
)

$
(23,786,583
)Net loss attributable to common shareholders

$



$
(58,936,756
)

$
(31,255,373
)

$
(29,056,101
)

$
(23,814,528
)Basic and diluted loss per share

$



$
(1.92
)

$
(1.22
)

$
(1.49
)

$
(1.59
)   19




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##### Table of Contents



September 30,Balance sheet data:

2007


2006


2005


2004


2003Cash and cash equivalents

$
30,487,962


$
4,898,214


$
8,620,143


$
13,494,083


$
12,198,408Investments in marketable securities


3,153,436



19,851,859



18,917,443



12,412,446



5,258,881Total cash, cash equivalents and investments in marketable
    securities

$
33,641,398


$
24,750,073


$
27,537,586


$
25,906,529


$
17,457,289Working capital

$
29,336,776


$
(6,969,777
)

$
11,969,450


$
16,653,621


$
10,619,216Total assets

$
39,095,893


$
71,462,337


$
41,401,990


$
37,403,953


$
29,645,257Deferred revenues

$
15,320,430


$
19,354,175


$
19,158,210


$
21,009,115


$
22,742,641Notes payable and capital lease obligations

$
12,024,592


$
14,395,978


$
990,594


$
1,107,064


$
Total liabilities

$
32,065,659


$
77,136,872


$
32,267,111


$
27,206,694


$
28,608,026Shareholders equity (deficit)

$
7,030,234


$
(5,674,535
)

$
9,134,879


$
10,197,259


$
1,037,231   Fiscal Quarters EndedDecember 31,


March 31,


March 31,


June 30,


September 30,Quarterly statement of operations data for fiscal 2007
    (Unaudited):

2006


2007


2007


2007


2007(as reported)


(as restated)Net revenues

$
2,136,897


$
2,022,868


$
2,022,868


$
2,200,724


$
2,864,072Gross margin

$
677,095


$
585,791


$
585,791


$
620,070


$
2,694,089(Loss)/income before discontinued operations

$
(13,771,294
)

$
(4,577,583
)

$
(6,920,435
)

$
(8,010,403
)

$
320,408Income/(loss) from discontinued operations

$
153,767


$
(3,329,927
)

$
(3,329,927
)

$
(1,139,976
)

$
11,764,407Net (loss) income

$
(13,617,527
)

$
(7,907,510
)

$
(10,250,362
)

$
(9,150,379
)

$
12,084,815Basic net (loss) income per share

$
(0.39
)

$
(0.20
)

$
(0.26
)

$
(0.23
)

$
0.28Diluted net (loss) income per share

$
(0.39
)

$
(0.20
)

$
(0.26
)

$
(0.23
)

$
0.28Basic weighted average number of shares of common stock
    outstanding


34,626,117



39,047,597



39,047,597



40,580,326



43,059,672Diluted weighted average number of shares of common stock
    outstanding


34,626,117



39,047,597



39,047,597



40,580,326



43,820,517   20




---



##### Table of Contents



Fiscal Quarters EndedQuarterly statement of operations data for

December 31,


March 31,


June 30,


September 30,fiscal 2006 (Unaudited):

2005


2006


2006(1)


2006Net revenues

$
8,144,888


$
2,469,028


$
2,363,247


$
2,208,689Gross margin

$
6,054,966


$
576,428


$
671,304


$
389,544Loss before discontinued operations and cumulative effect of
    change in accounting principle

$
(5,599,912
)

$
(13,540,486
)

$
(15,358,383
)

$
(15,735,259
)Loss from discontinued operations

$



$



$
(2,260,835
)

$
(6,441,881
)Cumulative effect of change in accounting principle

$
(3,616,058
)

$



$



$
Net loss(2)

$
(9,215,970
)

$
(13,540,486
)

$
(17,619,218
)

$
(22,177,140
)Basic and diluted net loss per share(2):Loss before cumulative effect of change in accounting principle

$
(0.20
)

$
(0.44
)

$
(0.56
)

$
(0.70
)Cumulative effect of change in accounting principle

$
(0.13
)

$



$



$
Net loss

$
(0.32
)

$
(0.44
)

$
(0.56
)

$
(0.70
)Basic and diluted weighted average number of shares of common
    stock outstanding


28,579,357



31,086,874



31,419,394



31,472,217     (1)
    
    Includes a charge of $1.3 million in purchased IPR&D
    in connection with our acquisition of Alamo Pharmaceuticals, LLC
    in May 2006, based on purchase price allocation. See
    Note 3, Acquisition of Alamo Pharmaceuticals, Inc. /
    Sale of FazaClo, in Notes to the Consolidated Financial
    Statements.(2)
    
    In the fourth quarter of fiscal 2006, we changed our method of
    accounting, effective October 1, 2005 for legal costs, all
    of which are external, associated with the application for
    patents. The $3.6 million cumulative effect of the change
    on prior years as of October 1, 2005 is included as a
    charge to net loss in fiscal 2006, retrospectively applied to
    the first quarter. The effect of the change was to increase the
    net loss by $3.5 million, or $0.12 per basic and diluted
    share, for the first quarter of fiscal 2006; $135,000, or $0.01
    per basic and diluted share, for the second quarter of fiscal
    2006; and $127,000, or $0.00 per basic and diluted share, for
    the third quarter for fiscal 2006.  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, 2007 and 2006. The assets and liabilities of
    this business are reflected as assets and liabilities of
    discontinued operations in the consolidated balance sheet as of
    September 30, 2006. Unless otherwise noted, this
    Managements Discussion and Analysis of Financial Condition
    and Results of Operations relates only to financial results from
    continuing operations.
 21




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##### Table of Contents



Executive
    Overview
  Avanir tm ®
    
    In December 2007, we initiated the enrollment of patients in the
    confirmatory Phase III trial of Zenvia.
    On October 30, 2006, we received an approvable
    letter from the FDA for our NDA submission for Zenvia for
    the treatment of PBA/IEED. An approvable letter is an official
    notification from the FDA that certain additional conditions
    must be satisfied prior to obtaining U.S. marketing
    approval for a new drug. The approvable letter that we received
    from the FDA outlined concerns that the agency had regarding the
    efficacy and safety data contained in our NDA submission.
    In April 2007, our preliminary top-line data was completed from
    our first Phase III clinical trial of Zenvia for DPN pain.
    In the trial, two doses of Zenvia, 45/30 mg DMQ dosed twice
    daily (DMQ 45) and 30/30 mg DMQ dosed twice daily
    (DMQ 30), were compared to placebo based on daily
    patient diary entries for the Pain Rating Scale. Both Zenvia
    treatment groups had lower pain ratings than placebo patients (p
    <0.0001 in both cases). In the DMQ 45 patient group,
    average reductions were significantly greater than placebo
    patients at Days 30, 60, and 90 (p <0.0001 at each time
    point). In the DMQ 30 patient group, average reductions
    were also significantly greater than placebo patients at Days 30
    and 60 (p <0.0001) and Day 90 (p=0.007).
    In August 2007, we sold FazaClo to Azur Pharma for
    $43.9 million in upfront consideration. The Company has the
    right to receive up to an additional $10 million in
    contingent payments in 2009, subject to the satisfaction of
    certain regulatory conditions. In addition, the Company could
    receive up to $2 million in royalties, based on 3% of
    annualized net product revenues in excess of $17 million.
    The Companys earn-out obligations that would have been
    payable to the prior owner of Alamo Pharmaceuticals upon the
    achievement of certain milestones were assumed by Azur Pharma,
    however the Company is contingently liable in the event of
    default The Company transferred all FazaClo related business
    operations to Azur Pharma in August 2007. The gain resulting
    from the sale of FazaClo was $12.2 million.
    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. 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 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 second half of calendar 2009. We
    enrolled the first patient in this trial in December 2007.   22




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##### Table of Contents



Critical
    Accounting Policies and Estimates for Continuing
    Operations
      Purchase
    Price Allocation in Business Combinations
    Share-based
    compensation expense
  Share-Based
    Payment
   23




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##### Table of Contents



true-up true-up
   24




---



##### Table of Contents



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,
  License Arrangements. and/or
  and/or
 25




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##### Table of Contents



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).
  Cost
    of Revenues
    Recognition
    of Expenses in Outsourced Contracts
  and/or
 26




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##### Table of Contents



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 in-process research and
    development. Business
    Combinations
  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
 27




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##### Table of Contents




    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.    Change
    in Method of Accounting for Patent-related Costs
      Fiscal 2006

Fiscal 2005Net loss

$
(58,936,756
)

$
(31,255,373
)Basic and diluted loss per share

$
(1.92
)

$
(1.22
)   Restructuring
    Expense
  Accounting for Costs
    Associated with Exit or Disposal Activities
 28




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##### Table of Contents



Critical
    Accounting Policies and Estimates for Discontinued
    Operations
  Revenue
    Recognition
  Product Sales  FazaClo.
  18-month
      Nature of
    Operating Expenses
   29




---



##### Table of Contents



Effects
    of Inflation
    Results
    of Operations
      Comparison
    of Fiscal 2007 and 2006
  Revenues
      Cost
    of Revenues
      30




---



##### Table of Contents



Fiscal Year Ended2007


2006


$ Change


% ChangeOPERATING EXPENSESResearch and development

$
13,115,712


$
26,994,335


$
(13,878,623
)


−51
%Selling, general and administrative


20,830,188



32,375,366



(11,545,178
)


−36
%Total Operating Expenses

$
33,945,900


$
59,369,701


$
(25,423,801
)


−43
%   Research
    and Development Expenses
      Selling,
    General and Administrative Expenses
      Share-Based
    Compensation
    Interest
    Expense and Interest Income
     31




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##### Table of Contents



Net
    Loss
    Income/(Loss)
    from Discontinued Operations
    Comparison
    of Fiscal 2006 and 2005
  Revenues
    and/or
  Cost
    of Revenues
    32




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##### Table of Contents



Fiscal Year Ended2006


2005


$ Change


% ChangeOPERATING EXPENSESResearch and development

$
26,994,335


$
26,140,504


$
853,831



3
%Selling, general and administrative


32,375,366



18,796,188



13,579,178



72
%Total Operating Expenses

$
59,369,701


$
44,936,692


$
14,433,009



32
%   Research
    and Development Expenses
    Selling,
    General and Administrative Expenses
    Share-Based
    Compensation
    Matters Relating to Timing and Accounting for
    Options Grants.
 33




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##### Table of Contents



Form 10-K.
    Interest
    Expense and Interest Income
      Cumulative
    Effect of Change in Accounting Principle
    Net
    Loss
    Loss
    from Discontinued Operations
    Liquidity
    and Capital Resources
   34




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##### Table of Contents



IncreaseSeptember 30,


(Decrease)


September 30,2007


During Period


2006Cash, cash equivalents and investment in securities

$
33,641,398


$
8,891,325


$
24,750,073Cash and cash equivalents

$
30,487,962


$
25,589,748


$
4,898,214Net working capital (deficit)

$
29,336,776


$
36,306,553


$
(6,969,777
)   Twelve Months





Twelve MonthsEnded


Change


EndedSeptember 30,


Between


September 30,2007


Periods


2006Net cash used for operating activities

$
(46,644,434
)

$
(5,834,918
)

$
(40,809,516
)Net cash provided by (used for) investing activities


59,569,310



66,949,792



(7,380,482
)Net cash provided by financing activities


12,664,872



(31,803,197
)


44,468,069Net increase (decrease) in cash and cash equivalents

$
25,589,748


$
29,311,677


$
(3,721,929
)   Operating activities.
  Investing activities.
  Financing activities.
  Form S-3
 35




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##### Table of Contents



Payments Due by PeriodLess than








More thanTotal


1 Year


1-3 Years


3-5 Years


5 YearsLong-term debt (principal and interest)

$
13,339,769


$
1,048,710


$
12,291,059


$



$
Operating lease obligations


8,279,685



2,216,923



3,005,360



2,705,743



351,659Purchase obligations(1)


2,763,172



2,763,172











Total

$
24,382,626


$
6,028,805


$
15,296,419


$
2,705,743


$
351,659     (1)
    
    Purchase obligations consist of the total of trade accounts
    payable and trade related accrued expenses at September 30,
    2007, which approximates our contractual commitments for goods
    and services in the normal course of our business.  trading-day
    Alamo Earn-Out Payments.
 36




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##### Table of Contents



Eurand Milestone and Royalty Payments. once-a-day
  Zenvia License Milestone Payments.
    Management
    Outlook
   37




---



##### Table of Contents



Recent
    Accounting Pronouncements
    Item 7A.
    Quantitative
    and Qualitative Disclosures About Market Risk    Interest
    Rate Sensitivity
      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)
   38




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##### Table of Contents



true-up true-up
            Changes
    in Internal Control over Financial Reporting
    
    The Company intends to review share-based compensation expense
    on a quarterly basis with the assistance of consultants and
    their computational review to ensure that total share-based
    compensation expense is recognized for vested shares.
    The Company has hired a FAS 123R consultant who is also an
    experienced user of the software system utilized by the Company.
    This consultant will assist in the FAS 123R calculation and
    the Companys quarterly analysis of total share-based
    compensation.
    The Company has hired a consulting firm that offers
    FAS 123R calculation services for clients. This consulting
    firm will perform shadow calculations on certain awards to
    ensure that the software system is calculating share-based
    compensation expense accurately.   39




---



##### Table of Contents



Item 9B.Other
    Information
  No. 07-AVP-123,
    PART III
  Item 10.
    Directors,
    Executive Officers and Corporate Governance      Executive
    Officers and Key Employees of the Registrant
    Keith A. Katkin


35


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


45


Senior Vice President, Chief Medical OfficerMartin J. Sturgeon


49


Vice President, Finance, Interim Chief Financial OfficerEric S. Benevich


42


Vice President, CommunicationsGregory J. Flesher


37


Vice President, Business Development   Keith Katkin.
 40




---



##### Table of Contents



Randall E. Kaye, M.D.
  Martin J. Sturgeon.
  Eric S. Benevich.
  Gregory J. Flesher.
  Code of
    Ethics
  Form 8-K.
  Item 11.
    Executive
    Compensation   41




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##### Table of Contents



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

Filed herewith3.2

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, 19904.2

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, 1999 42




---



##### Table of Contents



Exhibit



Incorporated by Reference HereinNumber

Description

Form

Date4.6

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

Registration Statement on Form S-3 (File No. 333-107820),
    declared effective by the Commission on August 19, 2003

August 8, 20034.7

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

Filed herewith10.1

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, 200510.4

Research Collaboration and License Agreement, dated July 8,
    2005, by and between Avanir Pharmaceuticals and AstraZeneca UK
    Limited*

Annual Report on Form 10-K for the fiscal year ended September
    30, 2005, as Exhibit 10.4

December 14, 200510.5

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, 200010.6

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, 200210.7

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, 200610.8

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, 2000 43




---



##### Table of Contents



Exhibit



Incorporated by Reference HereinNumber

Description

Form

Date10.9

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, 200610.10

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, 200510.11

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, 200510.12

Clinical Development Agreement, dated March 22, 2005, by
    and between Avanir Pharmaceuticals and SCIREX Corporation

Quarterly Report on Form 10-Q for the quarter ended March 31,
    2005, as Exhibit 10.3

May 13, 200510.13

Unit Purchase Agreement, dated May 22, 2006, by and among
    Avanir Pharmaceuticals, the Sellers and Alamo Pharmaceuticals,
    LLC*

Quarterly Report on Form 10-Q for the quarter ended June 30,
    2006, as Exhibit 10.1

August 9, 200610.14

Senior Note for $14.4 million payable to Neal R. Cutler,
    dated May 24, 2006

Quarterly Report on Form 10-Q for the quarter ended June 30,
    2006, as Exhibit 10.2

August 9, 200610.15

Senior Note for $6,675,000 payable to Neal R. Cutler, dated
    May 24, 2006

Quarterly Report on Form 10-Q for the quarter ended June 30,
    2006, as Exhibit 10.3

August 9, 200610.16

Senior Note for $4.0 million payable to Neal R. Cutler,
    dated May 24, 2006

Quarterly Report on Form 10-Q for the quarter ended June 30,
    2006, as Exhibit 10.4

August 9, 200610.17

Registration Rights Agreement, dated May 24, 2006, by and
    between Avanir Pharmaceuticals and Neil Cutler

Quarterly Report on Form 10-Q for the quarter ended June 30,
    2006, as Exhibit 10.7

August 9, 200610.18

Amended and Restated Development, License and Supply Agreement,
    dated August 22, 2005, by and between CIMA Labs Inc. and
    Alamo Pharmaceuticals, LLC*

Quarterly Report on Form 10-Q for the quarter ended June 30,
    2006, as Exhibit 10.5

August 9, 200610.19

Amendment #1 to Amended and Restated Development, License and
    Supply Agreement, dated October 19, 2005, by and between
    CIMA Labs Inc. and Alamo Pharmaceuticals, LLC*

Quarterly Report on Form 10-Q for the quarter ended June 30,
    2006, as Exhibit 10.6

August 9, 200610.20

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, 2006 44




---



##### Table of Contents



Exhibit



Incorporated by Reference HereinNumber

Description

Form

Date10.21

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, 200610.22

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, 200610.23

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, 200610.24

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, 200610.25

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, 200110.26

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, 200110.27

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, 200310.28

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, 200310.29

2003 Equity Incentive Plan

Quarterly Report on Form 10-Q for the quarter ended March 31,
    2003, as Exhibit 10.3

May 14, 200310.30

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, 200310.31

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, 200310.32

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, 200310.33

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, 200310.34

2005 Equity Incentive Plan

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

December 14, 200510.35

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

Current Report on Form 8-K, as Exhibit 10.1

March 23, 2005 45




---



##### Table of Contents



Exhibit



Incorporated by Reference HereinNumber

Description

Form

Date10.36

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

Filed herewith10.37

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, 200610.38

Form of Change of Control Agreement

Current Report on Form 8-K, as Exhibit 10.2

December 10, 200710.39

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, 200510.40

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, 200610.41

Separation and Consulting Agreement, dated November 7,
    2006, by and between Avanir Pharmaceuticals and James E. Berg

Filed herewith10.42

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

Filed herewith10.43

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

Filed herewith10.44

Employment Agreement with Keith Katkin, dated March 13, 2007

Filed herewith10.45

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, 200710.46

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

Filed herewith10.47

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, 200710.48

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, 200710.49

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

Filed herewith 46




---



##### Table of Contents



Exhibit



Incorporated by Reference HereinNumber

Description

Form

Date10.50

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

Filed herewith10.51

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

Filed herewith10.52

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

Filed herewith10.53

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

Filed herewith21.1

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 herewith23.2

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. 47




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##### 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 20, 2007/s/  Martin
    J. SturgeonMartin
    J. Sturgeon

Vice President and Interim
    Chief Financial Officer 
    (Principal Financial Officer)

December 20, 2007/s/  Charles
    A. MathewsCharles
    A. Mathews

Director

December 20, 2007/s/  Stephen
    G. Austin, CPAStephen
    G. Austin, CPA

Director

December 20, 2007/s/  David
    J. Mazzo, Ph.D.David
    J. Mazzo, Ph.D.

Director

December 20, 2007/s/  Dennis
    G. PodlesakDennis
    G. Podlesak

Director

December 20, 2007/s/  Paul
    G. ThomasPaul
    G. Thomas

Director

December 20, 2007/s/  Craig
    A. WheelerCraig
    A. Wheeler

Director

December 20, 2007/s/  Scott
    M. Whitcup, M.D.Scott
    M. Whitcup, M.D.

Director

December 20, 2007  48




---



##### 



AvanirPharmaceuticals
  INDEX TO
    CONSOLIDATED FINANCIAL STATEMENTS
   
 PageReports of Independent Registered Public
    Accounting Firms


F-2Financial Statements:Consolidated Balance Sheets


F-4Consolidated Statements of Operations


F-5Consolidated Statements of Shareholders
    Equity (Deficit) and Comprehensive Loss


F-6Consolidated Statements of Cash Flows


F-7Notes to Consolidated Financial Statements


F-8Financial 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



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
   Avanir
  Avanir
    Avanir
  Share-based Payment
    Deloitte &
    Touche LLP
    F-3




---



##### Table of Contents



AvanirPharmaceuticals
  CONSOLIDATED BALANCE SHEETS
  September 30,2007


2006ASSETSCurrent assets:Cash and cash equivalents

$
30,487,962


$
4,898,214Short-term investments in marketable securities


1,747,761



16,778,267Receivables, net


988,450



1,123,699Inventories


17,000



3,098Prepaid expenses


1,479,992



1,651,118Current portion of restricted investments in marketable
    securities


688,122



Current assets of discontinued operations






4,878,674Total current assets


35,409,287



29,333,070Investments in marketable securities


249,078



2,216,995Restricted investments in marketable securities, net of current
    portion


468,475



856,597Property and equipment, net


1,215,666



4,521,713Intangible assets, net


41,048



43,305Long-term inventories


1,337,991



347,424Other assets


374,348



391,367Non-current assets of discontinued operations






33,751,866TOTAL ASSETS

$
39,095,893


$
71,462,337LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)Current liabilities:Accounts payable

$
307,700


$
10,845,057Accrued expenses and other liabilities


2,050,864



6,276,505Accrued compensation and payroll taxes


1,191,677



2,610,407Current portion of deferred revenues


2,267,594



3,637,413Current portion of notes payable


254,676



670,737Capital lease obligations






9,336Current liabilities of discontinued operations






12,253,392Total current liabilities


6,072,511



36,302,847Accrued expenses and other liabilities, net of current portion


1,170,396



230,450Deferred revenues, net of current portion


13,052,836



15,716,762Notes payable, net of current portion


11,769,916



13,715,905Non-current liabilities of discontinued operations






11,170,908Total liabilities


32,065,659



77,136,872Commitments and contingencies (Notes 3, 13, 16, and
    18)
    Shareholders equity (deficit):Preferred stock  no par value, 10,000,000 shares
    authorized, no shares issued or outstanding as of
    September 30, 2007 and 2006






Common stock  no par value, 200,000,000 shares
    authorized; 43,117,358 and 31,708,461 shares issued and
    outstanding as of September 30, 2007 and 2006, respectively


245,531,712



211,993,249Accumulated deficit


(238,498,733
)


(217,565,280
)Accumulated other comprehensive loss


(2,745
)


(102,504
)Total shareholders equity (deficit)


7,030,234



(5,674,535
)TOTAL LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)

$
39,095,893


$
71,462,337    F-4




---



##### Table of Contents



AvanirPharmaceuticals
  CONSOLIDATED STATEMENTS OF OPERATIONS
  Years Ended September 30,2007


2006


2005REVENUES FROM PRODUCT SALESNet revenues

$
72,000


$
18,270


$
17,400Cost of revenues


(328,184
)


(3,102
)


(3,102
)Product gross (deficit) margin


(256,184
)


15,168



14,298REVENUES AND COST OF RESEARCH SERVICES AND OTHERRevenues from research and development services


2,372,384



7,837,788



1,617,525Cost of research and development services


(2,994,905
)


(7,198,397
)


(2,346,044
)Revenues from government research grant services


914,834



236,882



503,328Cost of government research grant services


(1,324,427
)


(292,111
)


(497,210
)Revenues from license agreements


1,614,091



5,154,709



12,800,000Revenue from royalties and royalty rights


4,251,252



1,938,203



1,752,321Research services and other gross margin


4,833,229



7,677,074



13,829,920Total gross margin


4,577,045



7,692,242



13,844,218OPERATING EXPENSESResearch and development


13,115,712



26,994,335



26,140,504Selling, general and administrative


20,830,188



32,375,366



18,796,188Total operating expenses


33,945,900



59,369,701



44,936,692Loss from continuing operations


(29,368,855
)


(51,677,459
)


(31,092,474
)OTHER INCOME (EXPENSES)Interest income


622,687



1,794,049



619,857Interest expense


(1,247,875
)


(405,752
)


(92,533
)Other


1,615,519



57,552



(39,601
)Loss from continuing operations before provision for income
    taxes


(28,378,524
)


(50,231,610
)


(30,604,751
)Provision for income taxes


(3,200
)


(2,430
)


(1,813
)Loss before discontinued operations and cumulative effect of
    change in accounting principle


(28,381,724
)


(50,234,040
)


(30,606,564
)DISCONTINUED OPERATIONSLoss from discontinued operations


(4,760,056
)


(8,702,716
)


Gain on sale of discontinued operations


12,208,327







Income (loss) from discontinued operations


7,448,271



(8,702,716
)


Loss before cumulative effect of change in accounting
    principle


(20,933,453
)


(58,936,756
)


(30,606,564
)Cumulative effect of change in accounting principle






(3,616,058
)


Net Loss

$
(20,933,453
)

$
(62,552,814
)

$
(30,606,564
)BASIC AND DILUTED NET (LOSS) INCOME PER SHARE:Loss before discontinued operations and cumulative effect of
    change in accounting principle

$
(0.72
)

$
(1.64
)

$
(1.19
)Income (loss) from discontinued operations


0.19



(0.28
)


Cumulative effect of change in accounting principle






(0.12
)


Net Loss

$
(0.53
)

$
(2.04
)

$
(1.19
)Basic and diluted weighted average number of common shares
    outstanding


39,643,876



30,634,872



25,617,432    F-5




---



##### Table of Contents





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








Other


TotalClass A


Class B


Accumulated


Unearned


Comprehensive


Shareholders


ComprehensiveShares


Amount


Shares


Amount


Deficit


Compensation


Income (Loss)


Equity (Deficit)


LossBALANCE, OCTOBER 1, 2004


23,826,439


$
134,687,535






$



$
(124,405,902
)

$



$
(84,374
)

$
10,197,259Net loss


















(30,606,564
)










(30,606,564
)

$
(30,606,564
)Issuance of Class A common stock in connection with:Exercise of warrants


211,486



1,293,339























1,293,339Exercise of stock options


27,974



125,491























125,491Sale of stock and warrants


2,525,833



22,765,135























22,765,135Acquisition of certain contractual rights to Zenvia


500,000



5,300,000























5,300,000Issuance of restricted awards


250,000



3,556,000















(3,555,000
)






1,000Amortization of unearned compensation






















77,856







77,856Share-based compensation expense






10,803























10,803Unrealized losses on investments in marketable securities


























(29,440
)


(29,440
)


(29,440
)BALANCE, SEPTEMBER 30, 2005


27,341,732



167,738,303











(155,012,466
)


(3,477,144
)


(113,814
)


9,134,879


$
(30,636,004
)Net loss


















(62,552,814
)










(62,552,814
)

$
(62,552,814
)Issuance of Class A common stock in connection with:Exercise of warrants


827,575



5,908,997























5,908,997Exercise of stock options


524,807



3,264,953























3,264,953Sale of stock and warrants


3,016,122



35,637,905























35,637,905Issuance of restricted awards


28,000



























Common stock surrendered


(29,775
)


(200,386
)






















(200,386
)Elimination of unearned compensation






(3,477,144
)














3,477,144







Share-based compensation expense






3,120,621























3,120,621Unrealized gains on investments in marketable securities


























11,310



11,310



11,310BALANCE, SEPTEMBER 30, 2006


31,708,461



211,993,249











(217,565,280
)






(102,504
)


(5,674,535
)

$
(62,541,504
)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
)    F-6




---



##### Table of Contents



AvanirPharmaceuticals
  CONSOLIDATED STATEMENTS OF CASH FLOWS
  Years Ended September 30,2007


2006


2005OPERATING ACTIVITIES:Net loss

$
(20,933,453
)

$
(62,552,814
)

$
(30,606,564
)(Income) loss from discontinued operations


(7,448,271
)


8,702,716



Adjustments to reconcile loss before discontinued operations to
    net cash used in operating activities:Cumulative effect of change in accounting principle






3,616,058



Depreciation and amortization


2,843,814



2,964,741



1,852,427Share-based compensation expense


2,230,122



2,837,640



88,659Amortization of debt discount


413,822



85,400



Expense for issuance of common stock in connection with the
    acquisition of additional contractual rights to Zenvia










5,300,000Loss on sale and impairment of investment










84,252(Gain) loss on disposal of assets


(229,829
)


36,985



16,400Intangible assets impaired and abandoned






8,222



423,123Changes in operating assets and liabilities (net of effects of
    acquisition/disposition of FazaClo):Receivables


135,249



45,955



(929,775
)Inventories


(1,004,469
)


24,017



(365,237
)Prepaid and other assets


167,105



582,454



(848,219
)Accounts payable


(10,537,357
)


4,200,733



4,615,629Accrued expenses and other liabilities


(3,327,404
)


2,472,798



1,604,136Accrued compensation and payroll taxes


(1,418,730
)


1,338,176



561,863Deferred revenue


(4,033,745
)


195,965



(1,850,905
)Net cash used in operating activities of continuing operations


(43,143,146
)


(35,440,954
)


(20,054,211
)Net cash used in operating activities of discontinued operations


(3,501,288
)


(5,368,562
)


Net cash used in operating activities


(46,644,434
)


(40,809,516
)


(20,054,211
)INVESTING ACTIVITIES:Investments in securities


(101,818
)


(65,823,381
)


(23,448,802
)Proceeds from sales and maturities of investments in securities


16,900,000



64,900,275



16,830,113Patent costs










(1,278,935
)Purchase of property and equipment


(58,699
)


(1,663,347
)


(990,601
)Proceeds from disposal of assets


774,058







Net cash provided by (used in) investing activities of
    continuing operations


17,513,541



(2,586,453
)


(8,888,225
)Net cash provided by (used in) investing activities of
    discontinued operations


42,055,769



(4,794,029
)


Net cash provided by (used in) investing activities


59,569,310



(7,380,482
)


(8,888,225
)FINANCING ACTIVITIES:Proceeds from issuances of common stock and warrants, net of
    commissions and offering costs


30,870,014



44,811,855



24,184,966Proceeds from issuances of notes payable






359,875



395,244Tax withholding payments reimbursed by restricted stock payments
    on debt


(27,602
)


(200,386
)


Payments on notes and capital lease obligations


(6,785,208
)


(382,891
)


(511,714
)Net cash provided by financing activities of continuing
    operations


24,057,204



44,588,453



24,068,496Net cash used in financing activities of discontinued operations


(11,392,332
)


(120,384
)


Net cash provided by financing activities


12,664,872



44,468,069



24,068,496Net increase (decrease) in cash and cash equivalents


25,589,748



(3,721,929
)


(4,873,940
)Cash and cash equivalents at beginning of year


4,898,214



8,620,143



13,494,083Cash and cash equivalents at ending of year

$
30,487,962


$
4,898,214


$
8,620,143SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Interest paid

$
1,435,982


$
681,122


$
92,533Income taxes paid

$
22,368


$
2,430


$
1,912SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING
    ACTIVITIES:Purchase price adjustment of assumed liabilities

$
3,980,229


$



$
Issuance of notes payable as additional consideration for the
    Alamo acquisition

$
4,000,000


$



$
Issuance of promissory notes to sellers as consideration for the
    Alamo acquisition, net of discount (See Note 3 for other
    liabilities assumed and assets acquired in the acquisition)

$



$
24,343,000


$
Elimination of unearned compensation

$



$
3,477,144


$
Issuance of 250,000 shares of restricted Class A
    common stock for unearned compensation cost

$



$



$
3,555,000Accounts payable and accrued expenses for purchase of property
    plant and equipment

$



$
74,617


$
242,213Restricted stock surrendered

$
13,607


$
18,135


$
    F-7




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  1.
    Description
    of Business  Avanir tm ®
  tm tm
  2.
    Summary
    of Significant Accounting Policies  Basis
    of presentation
  Avanir
  Management
    estimates
    Purchase
    Price Allocation
   F-8




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Cash
    and cash equivalents
    Restricted
    investments in marketable securities
    Restricted


RestrictedAmount as of


Amount as ofSeptember 30,


September 30,


Lease TermLease Description

2007


2006


Expires onFacility lease 

$
388,122


$
388,122



08/31/0811388 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

$
1,156,597


$
856,597   Investments
    in Marketable Securities
  Accounting for Certain
    Investments in Debt and Equity Securities
  Concentrations
       F-9




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Allowance
    for doubtful accounts
    Inventories
  first-in,
  Property
    and equipment
    Capitalization
    and valuation of long-lived and intangible assets
  Business Combinations Goodwill and Other
    Intangible Assets
  Accounting for the Impairment or Disposal
    of Long-Lived Assets
   F-10




---



##### Table of Contents



AvanirPharmaceuticals
  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.    Change
    in Accounting for Patent-Related Costs
      Fiscal 2006

Fiscal 2005Net loss

$
(58,936,756
)

$
(31,255,373
)Basic and diluted loss per share

$
(1.92
)

$
(1.22
)   Deferred
    rent
    Fair
    value of financial instruments
   F-11




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    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,
  License Arrangements.
  and/or
 F-12




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      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).
  Product Sales  FazaClo (Sales from Discontinued
    Operations).
 F-13




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    18-month
      Cost
    of Revenues
   F-14




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Shipping
    and Handling Costs
    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 in-process research and
    development.
  Acquired contractual rights.
 F-15




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Share-Based
    Compensation
  Share-Based Payment, Accounting for Stock-Based Compensation
  No. FAS 123R-3, Transition Election Related to Accounting for Tax
    Effects of Share-Based Payment Awards (FAS 123R-3). FAS 123R-3.
     F-16




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Fiscal 2007


Fiscal 2006From Continuing Operations:Selling, general and administrative expense

$
1,864,689


$
2,372,356Research and development expense


365,433



465,284Share-based compensation expense related to continuing operations


2,230,122



2,837,640From Discontinued Operations:


507,638



282,981Share-based compensation expense

$
2,737,760


$
3,120,621   Fiscal 2007


Fiscal 2006Share-based compensation expense from:Stock options

$
1,304,944


$
1,795,610Restricted stock awards


707,448



1,179,621Restricted stock units


725,368



145,390Total

$
2,737,760


$
3,120,621     Accounting for Stock Issued to Employees
    Fiscal 2005Net loss, as reported

$
(30,606,564
)Add: Share-based employee compensation expense


77,856Deduct: Total share-based employee compensation expense
    determined under fair value based method for all awards


(1,777,838
)Pro forma net loss

$
(32,306,546
)Net loss per share:Basic and diluted  as reported

$
(1.19
)Basic and diluted  pro forma

$
(1.26
)    F-17




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  No. 96-18, Accounting for Equity Instruments That Are Issued to
    Other Than Employees for Acquiring, or in Conjunction with
    Selling, Goods or Services (EITF 96-18). EITF 96-18,
  Restructuring
    expense
  Accounting for Costs
    Associated with Exit or Disposal Activities
  Advertising
    expenses
    Income
    taxes
    Comprehensive
    loss
    Computation
    of net loss per common share
   F-18




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Fiscal 2007


Fiscal 2006


Fiscal 2005Stock options


1,040,581



1,587,070



1,600,034Stock warrants


1,322,305



269,305



1,122,047Restricted stock awards






29,250



Restricted stock units


1,914,988



51,480



   Recent
    accounting pronouncements
  FASB Interpretation No. 48
    (FIN 48 Accounting for Uncertainty in
    Income Taxes, an interpretation of FASB No. 109
  Financial Accounting Standards No. 157
    (FAS 157). Fair Value
    Measurements
  Financial Accounting Standards No. 159
    (FAS 159). The Fair Value Option for Financial
    Assets and Financial Liabilities Including an
    amendment of FASB Statement 115
  Staff Accounting Bulletin No. 108
    (SAB 108).
  3.
    Acquisition
    of Alamo Pharmaceuticals, Inc. / Sale of Fazaclo   F-19




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        Purchase
    Price Allocation
    Purchase price:Cash paid at closing

$
4,040,000Estimated fair value of notes payable issued


24,343,000Transaction costs


911,536$
29,294,536Allocation:Net tangible assets acquired

$
5,749,898Identifiable intangible assets acquired


11,960,000Goodwill


22,110,328Total assets acquired


39,820,226Accounts payable and accrued expenses


(3,611,653
)Liabilities assumed


(6,401,321
)Capital lease obligations


(512,716
)$
29,294,536    F-20




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    
    Issuance of additional notes payable totaling $4,000,000 issued
    in fiscal 2007 as the result of the contingency of certain
    revenue-based earn-out obligations being met.
    The reduction of $3,980,229 of the liabilities related to the
    product returns and discounts from the original amounts.
    A net increase of $19,771 to goodwill as a result of the two
    items described above.    Goodwill, as of the year ended September 30, 2006

$
22,110,328Contingent Consideration  Issuance of additional
    notes payable


4,000,000Reduction of assumed liabilities


(3,980,229
)Goodwill, balance prior to sale of FazaClo

$
22,130,099   EITF 01-3, Accounting in a Business Combination for Deferred
    Revenue of an Acquiree
    non-compete
  Identifiable
    Intangible Assets
   F-21




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      In-Process
    Research and Development
  in-process
    Sale
    of FazaClo and Presentation of Discontinued
    Operations
    Accounting for the
    Impairment or Disposal of Long-Lived Assets
 F-22




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    FIscal 2007


Fiscal 2006REVENUES FROM PRODUCT SALESNet revenues

$
17,132,171


$
Cost of revenues


4,599,105



411,943Product gross margin (loss)


12,533,066



(411,943
)OPERATING EXPENSESResearch and development


3,159,117



2,227,754Selling, general and administrative


13,486,361



5,678,853Loss from operations


(4,112,412
)


(8,318,550
)OTHER INCOME (EXPENSES)Interest expense


(647,644
)


(359,727
)Gain on sale of FazaClo


12,208,327



Other






(24,439
)Income (loss) before income taxes


7,448,271



(8,702,716
)Provision for income taxes






NET INCOME (LOSS )

$
7,448,271


$
(8,702,716
)     Fiscal 2006Accounts receivable, net

$
1,918,769Inventories, net


2,832,105Prepaid expenses and other current assets


127,800Current assets of discontinued operations


4,878,674Property, plant and equipment, net


1,526,016Other assets


45,498Intangible assets, net


10,070,024Goodwill


22,110,328Non-current assets of discontinued operations


33,751,866Assets of discontinued operations

$
38,630,540Current portion of capital leases and long-term debt

$
221,424Deferred revenue


3,955,150Assumed liabilities for returns and other discounts


3,980,229Other accrued expenses


4,096,589Current liabilities of discontinued operations


12,253,392Capital leases and long-term debt, net of current portion


11,170,908Liabilities of discontinued operations

$
23,424,300  F-23




---



##### Table of Contents



AvanirPharmaceuticals
  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   Pro
    Forma Results of Operations
    Fiscal 2006


Fiscal 2005Pro forma net revenues(1)

$
17,503,000


$
18,522,000Pro forma loss before cumulative effect of change in accounting
    principle(2)

$
(62,963,000
)

$
(56,307,000
)Pro forma net loss(2)

$
(66,579,000
)

$
(56,307,000
)Pro forma loss per basic and diluted share:Loss before cumulative effect of change in accounting principle

$
(2.06
)

$
(2.20
)Net loss

$
(2.17
)

$
(2.20
)Shares used for basic and diluted computation


30,634,872



25,617,432     (1)
    
    In accordance with the provisions of EITF
    01-3 we did
    not assume Alamos reported deferred revenue balance as of
    the acquisition date and accordingly did not record revenue
    associated with such deferred revenue, resulting in lower net
    revenues in the periods following the merger than Alamo would
    have achieved as a separate company.(2)
    
    Pro forma net loss for the periods presented included the
    following pro forma adjustments:  
    Amortization of identifiable intangible assets,
    Interest expense associated with the notes payable issued as
    part of purchase price,
    Elimination of interest expense associated with Alamos
    historical debt that was assumed by us in the acquisition,
    Reduction of interest income by an amount determined by applying
    the average rate of return for the respective periods to the
    decrease in our cash balance of $4.0 million used to fund
    the acquisition,
    Amortization of discount associated with the notes
    payable, and F-24




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   
    The charge of $1.3 million purchased IPR&D is not
    included in the pro forma results of operations. The purchased
    IPR&D is a one-time charge directly related to the
    acquisition and does not have a continuing impact on our future
    operations.  Assumed
    Liabilities for Returns and Other Discounts of Discontinued
    Operations
    2007


2006Balance, at beginning of year

$
3,980,229


$
Assumed liabilities for returns and other






6,401,321Payments for returns and other discounts






(2,421,092
)Adjustment to goodwill


(3,980,229
)


Balance, at end of year

$



$
3,980,229     4.
    Relocation
    of Commercial and General and Administrative
    Operations   F-25




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Balance at








Balance atSeptember 30,


Charges/


Net Payments/


September 30,2005


Additions


Reductions


2006Accrued Restructuring:Employee severance and relocation benefits

$



$
237,050


$



$
237,050Lease restructuring liability






277,627



(3,629
)


273,998Total






514,677



(3,629
)


511,048Less current portion














(280,598
)Total

$











$
230,450     Balance at








Balance atSeptember 30,


Charges/


Net Payments/


September 30,2006


Additions


Reductions


2007Accrued Restructuring:Employee 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    F-26




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  5.
    Investments
    in Marketable Securities    Gross


GrossAmortized


Unrealized


Unrealized


FairCost


Gains


Losses(1)


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(2)













$
688,122Classified as available for sale














1,747,761Total current investments in securities:














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














468,475Classified as available for sale














249,078Non-current investments in securities:














717,553Total investments in securites













$
3,153,436   Gross


GrossAmortized


Unrealized


Unrealized


FairCost


Gains


Losses(1)


ValueAs of September 30, 2006:Certificates of deposit

$
856,597










$
856,597Government debt securities


19,097,766







(102,504
)


18,995,262Total

$
19,954,363






$
(102,504
)

$
19,851,859Reported as:Current investments in securities:Classified as available for sale













$
16,778,267Total current investments in securities:














16,778,267Non-current investments in securities:Classified as available for sale














2,216,995Restricted investments(2)














856,597Non-current investments in securities:














3,073,592Total investments in securites













$
19,851,859     (1)
    
    Unrealized loss is reported as accumulated other
    comprehensive loss on the consolidated balance sheets. F-27




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   (2)
    
    Restricted investments represent amounts pledged to our bank as
    collateral for letters of credit issued in connection with our
    leases of office and laboratory space.    6.
    Receivables,
    Net    2007


2006Accounts receivable(1)

$
592,035


$
49,300Unbilled receivables






908,284Other receivables


396,415



176,714988,450



1,134,298Allowance for doubtful accounts






(10,599
)Receivables, net of allowances

$
988,450


$
1,123,699     (1)
    
    Fiscal 2007 amount includes non-trade related receivables from
    research partners of approximately $260,000.  7.
    Inventories      2007


2006Raw materials

$
1,354,991


$
350,522Less: current portion


(17,000
)


(3,098
)Long-term portion

$
1,337,991


$
347,424    F-28




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  8.
    Property
    and Equipment    2007


2006Gross








GrossCarrying


Accumulated





Carrying


AccumulatedValue


Depreciation


Net


Value


Depreciation


NetResearch and development equipment

$
761,815


$
(588,325
)

$
173,490


$
4,210,214


$
(3,134,970
)

$
1,075,244Computer equipment and related software


1,285,454



(941,628
)


343,826



1,345,321



(751,391
)


593,930Leasehold improvements


37,790



(3,787
)


34,003



5,671,209



(3,649,499
)


2,021,710Office equipment furniture and fixtures


767,313



(364,685
)


402,628



990,654



(421,544
)


569,110Manufacturing equipment


261,719







261,719



261,719







261,719Total property and equipment

$
3,114,091


$
(1,898,425
)

$
1,215,666


$
12,479,117


$
(7,957,404
)

$
4,521,713       9.
    Intangible
    Assets  Intangible Assets.
  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-29




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  2006Gross








Weighted AverageCarrying


Accumulated





AmortizationValue


Amortization


Net


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

$
42,461


$
(20,161
)

$
22,300



15.5Intangible assets with finite lives


42,461



(20,161
)


22,300Intangible assets with indefinite lives


21,005







21,005Total intangible assets

$
63,466


$
(20,161
)

$
43,305             AmortizationExpenseFiscal year ending September 30:2008

$
2,2572009


2,2572010


2,2572011


2,2572012


2,257Thereafter


8,758Total

$
20,043    F-30




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  10.
    Accrued
    Expenses and Other Liabilities    2007


2006Accrued research and development expenses

$
419,989


$
3,947,191Accrued sales and marketing expenses






1,146,222Accrued general and admistrative expenses


287,517



299,190Deferred rent


34,432



679,421Lease restructuring liability


2,223,802



273,998Other


255,520



160,933Total accrued expenses and other liabilities


3,221,260



6,506,955Less current


(2,050,864
)


(6,276,505
)Non-current total accrued expenses and other liabilities

$
1,170,396


$
230,450   11.
    Deferred
    Revenues  ®
  Drug RoyaltyUSA Agreement


Other Agreements


TotalNet deferred revenues as of October 1, 2005

$
19,049,877


$
108,333


$
19,158,210Changes during the period:License fees






2,288,638



2,288,638Recognized as revenues during period


(1,937,964
)


(154,709
)


(2,092,673
)Net deferred revenues as of September 30, 2006

$
17,111,913


$
2,242,262


$
19,354,175Classified and reported as:Current portion of deferred revenues

$
1,981,799


$
1,655,614


$
3,637,413Deferred revenues, net of current portion


15,130,114



586,648



15,716,762Total deferred revenues

$
17,111,913


$
2,242,262


$
19,354,175   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:Shipments, net






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  F-31




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Drug Royalty Agreement
  EITF 88-18
  Kobayashi Docosanol License Agreement
    HBI Docosanol License Agreement
 F-32




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      12.
    Commitments
    and Contingencies  Operating lease commitments. non-cancelable
    three-year
   F-33




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Less Payments toMinimum


be Received fromYear Ending September 30,

Payments


Subleases


Net Payments2008

$
2,217,000


$
888,000


$
1,329,0002009


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



487,000Thereafter


352,000



216,000



136,000Total

$
8,280,000


$
4,132,000


$
4,148,000   Legal contingencies.
    Guarantees and Indemnities.
   F-34




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  13.
    Notes Payable    September 30,2007


2006Senior notes with an interest rate of LIBOR + 1.33%; interest
    payable monthly; principal due May 2009, net of unamortized
    discount of $232,778 and $646,600, respectively

$
11,737,087


$
13,428,4009.5% equipment loan due April 2008


174,224



451,4057.9% business insurance financing repaid in June 2007






320,95710.43% equipment loan due February 2009


65,442



106,17010.17% equipment loan due January 2009


47,839



79,710Total


12,024,592



14,386,642Less: current portion


(254,676
)


(670,737
)Total long-term notes payable

$
11,769,916


$
13,715,905   Senior Notes. trading-day
         F-35




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Equipment Loans.
    MinimumYear Ending September 30,

Payments2008

$
1,040,2502009


12,582,533Total


13,622,783Less amount representing interest


(1,365,413
)Present value of payments


12,257,370Less unamortized discount


(232,778
)Less current portion


(254,676
)Long-term portion of obligation

$
11,769,916   14.
    Shareholders
    Equity (Deficit)    Preferred
    Stock
   F-36




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Common
    stock
  Fiscal 2007.
  Form S-3
      Fiscal 2006. Form S-3,
      Fiscal 2005.
 F-37




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  5-day
  Form S-3,
  5-day
  Form S-3,
   F-38




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Common Stock


Gross Amount


Average PriceCommon Stock Issued and Warrants and Stock Options
    Exercised

Date

Shares


Received(1)


per Share(2)Fiscal 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


$
32,121,705Fiscal year ended September 30, 2006:Private placement of common stock

October  2005


1,523,585


$
16,150,001


$
10.60Private placement of common stock

December 2005


1,492,538



19,400,002


$
13.00Restricted stock award

Various


28,000



112


$
Stock options

Various


524,807



3,264,953


$
6.22Warrants(3)

Various


827,575



5,908,997


$
7.14Total




4,396,505


$
44,724,065Fiscal year ended September 30, 2005:Private placement of common stock

December 2004


583,333


$
6,999,999


$
12.00Private placement of common stock

April 2005


1,942,500



17,094,000


$
8.80Acquisition of certain contractual rights to Zenvia

March 2005


500,000



5,300,000


$
10.60Restricted stock award

September 2005


250,000



1,000


$
Stock options

Various


27,974



125,491


$
4.49Warrants(3)

Various


211,486



1,293,339


$
6.12Total




3,515,293


$
30,813,829     (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.(3)
    
    Includes 4,780 shares issued on a cashless
    exercise basis at an average exercise price of $4.20 per share.  Warrants
     F-39




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        Shares of


WeightedCommon Stock


AveragePurchasable Upon


Exercise Price


Range ofExercise of Warrants


per Share


Exercise PricesOutstanding at September 30, 2004


1,333,539


$
7.32


$
5.52-$10.88Exercised


(211,492
)

$
6.12


$
5.80-$8.76Outstanding at September 30, 2005


1,122,047


$
7.56


$
7.00-$8.92Exercised


(827,575
)

$
7.14


$
7.00-$8.92Expired


(25,167
)

$
7.00


$
7.00Outstanding 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


$
8.92   Employee
    Equity Incentive Plans
    share-based
  2005 Equity Incentive Plan.
 F-40




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    2003 Equity Incentive Plan.
  2000 Stock Option Plan.
  1998 Stock Option Plan.
  Stock Options. 10-year
            F-41




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Weighted AverageWeighted Average


Remaining


AggregateExercise Price per


Contractual Term


IntrinsicNumber of Shares


Share


(in Years)


ValueOutstanding, September 30, 2004


1,313,398


$
7.80Granted


379,875


$
12.60Exercised


(27,974
)

$
4.48Forfeited


(56,641
)

$
14.18Expired


(8,624
)

$
13.75Outstanding, September 30, 2005


1,600,034


$
8.76Granted


658,312


$
10.83Exercised


(524,807
)

$
6.22Forfeited


(146,094
)

$
12.68Expired


(375
)

$
10.00Outstanding, September 30, 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


$
7.69



6.9


$
130,000Vested and expected to vest in the future, September 30,
    2007


714,230


$
8.68



5.8


$
47,000Exercisable, September 30, 2007


458,240


$
9.85



4.0


$
Exercisable, September 30, 2006


765,411


$
8.98Exercisable, September 30, 2005


1,257,896


$
7.92      F-42




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      2007

2006

2005Expected volatility

75.0%  113.4%

77.4%  80.4%

76.6%  130.2%Weighted-average volatility

93.7%

78.4%

95.5%Average expected term in years

6.0

4.5

3.4Risk-free interest rate (zero coupon U.S. Treasury Note)

4.3%  4.7%

4.5%

3.8%Expected dividend yield

0%

0%

0%   :
  Options OutstandingWeighted





Options ExercisableAverage


Weighted





WeightedRemaining


Average





AverageNumber


Contractual


Exercise


Number


ExerciseRange of Exercise Prices

Outstanding


Life in Years


Price


Exercisable


Price$ 1.20-$ 1.29


150,960



9.5


$
1.28






$
$ 2.30-$ 2.88


154,685



9.1


$
2.44



13,904


$
2.88$ 2.92-$ 6.80


154,429



5.3


$
5.64



98,492


$
5.63$ 6.92-$ 9.92


175,169



5.4


$
8.12



96,272


$
8.37$10.24-$11.76


243,354



5.7


$
11.40



163,752


$
11.26$12.12-$16.60


148,709



7.7


$
14.14



72,545


$
13.92$19.38


13,275



3.8


$
19.38



13,275


$
19.381,040,581



6.9


$
7.69



458,240


$
9.85   Restricted stock units.
  Weighted AverageGrant DateNumber of Shares


Fair ValueUnvested, October 1, 2006


51,480


$
15.54Granted


2,321,043


$
1.74Vested


(83,900
)

$
2.76Forfeited


(373,635
)

$
1.19Unvested, September 30, 2007


1,914,988


$
2.17    F-43




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##### Table of Contents



AvanirPharmaceuticals
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Restricted stock awards.
  Weighted AverageGrant DateNumber of Shares


Fair ValueUnvested, October 1, 2006


223,915


$
13.48Granted


15,000


$
7.34Vested


(58,749
)

$
12.68Forfeited


(157,666
)

$
13.42Unvested, September 30, 2007


22,500


$
11.87       Review of Stock Options Practices and Related
    Accounting. Matters Relating to
    Timing and Accounting for Options Grants.
  Form 10-K.
   F-44




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##### Table of Contents



AvanirPharmaceuticals
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  15.
    Research
    and Licensing Agreements  Center for Neurologic Study (CNS) 
  Eurand, Inc. once-a-day
  CIMA Labs Inc. Royalty Agreement. 
      2006

$
250,0002007

$
300,0002008 and each year thereafter

$
400,000    F-45




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##### Table of Contents



AvanirPharmaceuticals
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  16.
    License
    and Research Collaboration Agreements  AstraZeneca UK Limited
    (AstraZeneca).
        EITF 00-21, agreed-upon
 F-46




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##### Table of Contents



AvanirPharmaceuticals
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Novartis International Pharmaceutical Ltd.
    (Novartis).
      EITF 00-21, agreed-upon
    HBI Docosanol License Agreement
 F-47




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##### Table of Contents



AvanirPharmaceuticals
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  country-by-country
  Kobayashi Docosanol License Agreement
  Boryung Pharmaceuticals Company Ltd
    (Boryung). 12-year
  GlaxoSmithKline Subsidiary, SB Pharmco Puerto Rico, Inc.
    (GlaxoSmithKline).
  Bruno Farmaceutici (Bruno).
  P.N. Gerolymatos SA.
    (Gerolymatos).
 F-48




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    ACO HUD.
  Government research grants.
  17.
    Income
    Taxes    2007


2006


2005Current:State and foreign

$
(3,200
)

$
(2,430
)

$
(1,813
)Deferred:Federal


7,011,828



20,625,828



10,143,270State and foreign


714,424



(540,800
)


5,017,2697,726,252



20,085,028



15,160,539Increase in deferred income tax asset valuation allowance


(7,726,252
)


(20,085,028
)


(15,160,539
)Total income tax provision

$
(3,200
)

$
(2,430
)

$
(1,813
)  F-49




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    September 30,2007


2006Net operating loss carryforwards

$
75,965,310


$
64,594,100Deferred revenue


6,118,100



9,274,407Research credit carryforwards


10,295,636



9,682,998Capitalized research and development costs


1,379,468



1,800,079Capitalized license fees and patents


3,724,831



4,037,033Share-based compensation and options


1,946,490



1,136,117Purchased intangible assets






450,751Foreign tax credits


595,912



595,912Other


1,387,534



2,036,885Deferred income tax assets


101,413,281



93,608,282Deferred tax liabilities:Other


(78,748
)


Deferred tax liabilities


(78,748
)


Less valuation allowance for net deferred income tax assets


(101,334,533
)


(93,608,282
)Net deferred tax assets / (liabilities)

$



$
       2007


2006


2005Federal statutory rate


(34
)%


(34
)%


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


36



32



50State income taxes, net of federal effect


(6
)


(5
)


(6
)Research and development credits


(4
)


(2
)


(5
)Expired net operating loss and other credits


6



2



Other


2



7



(5
)Effective income tax rate


0
%


0
%


0
%   18.
    Employee
    Savings Plan   F-50




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##### Table of Contents



AvanirPharmaceuticals
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    19.
    Segment
    Information          20.
    Related
    Party Transactions  IriSys
    Research and Development, LLC
  License Agreement.
   F-51




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##### Table of Contents



AvanirPharmaceuticals
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  5-day
    agreed-upon
  21.
    Subsequent
    Events  Clinical
    Master Service Agreement
  A Double-Blind, Randomized, Placebo Controlled, Multicenter
    Study to Assess the Safety and Efficacy and to Determine the
    Pharmakinetics of Two Doses of AVP-923
    (Dextromethorphan/Quinidine) in the Treatment of Pseudobulbar
    Affect (PBA) in Patients with Amyotrophic Lateral Sclerosis and
    Multiple Sclerosis
    Stock
    Issuance
     F-52