##### 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, 2006ORo

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
  Avanir Pharmaceuticals
 (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. o
  Rule 12b-2
 o þ o
  Rule 12b-2 o þ
      DOCUMENTS
    INCORPORATED BY REFERENCE




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##### 



Table of
    Contents
  
  PagePART IItem 1.


Business


1Item 1A.


Risk
    factors


10Item 1B.


Unresolved Staff
    Comments


18Item 2.


Properties


18Item 3.


Legal
    Proceedings


18Item 4.


Submission of
    Matters to a Vote of Security Holders


18PART IIItem 5.


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


18Item 6.


Selected Financial
    Data


19Item 7.


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


21Item 7A.


Quantitative and
    Qualitative Disclosures About Market Risk


41Item 8.


Financial
    Statements and Supplementary Data


42Item 9.


Changes in and
    Disagreements With Accountants on Accounting and Financial
    Disclosure


42Item 9A.


Controls and
    Procedures


42Item 9B.


Other
    Information


45PART IIIItem 10.


Directors and
    Executive Officers of the Registrant


45Item 11.


Executive
    Compensation


47Item 12.


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


47Item 13.


Certain
    Relationships and Related Transactions


47Item 14.


Principal
    Accountant Fees and Services


47PART IVItem 15.


Exhibits and
    Financial Statement Schedules


47SIGNATURES


51EXHIBIT 10.7EXHIBIT 10.9EXHIBIT 10.21EXHIBIT 10.22EXHIBIT 10.34EXHIBIT 10.35EXHIBIT 10.39EXHIBIT 18.1EXHIBIT 21.1EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 31.3EXHIBIT 32.1EXHIBIT 32.2EXHIBIT 32.3




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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. You should not
    rely on these forward-looking statements, because they are only
    predictions based on our current expectations and assumptions.
    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 as
    set forth below and under the caption Risk Factors.
    We disclaim any intent to update any forward-looking statements
    to reflect subsequent 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.
  The
    Company
  Avanir
  ®
  tm tm and/or
  and/or
   1




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##### Table of Contents



AVP-13358, AVP-13358. tm
  ® over-the-counter
  (949) 389-6700 e-mail info@avanir.com. www.avanir.com. Form 10-K.
  Avanir Marketed Products and Product Pipeline
    
 2




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##### Table of Contents



FazaClo 
    Resistant Schizophrenia/Reduction of Suicide
    Docosanol
    10% Cream  Cold Sores
  over-the-counter ®
    Zenvia 
    Involuntary Emotional Expression Disorder (IEED)/Pseudobulbar
    Affect (PBA)
  and/or
 3




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##### Table of Contents



and/or
        Neurology,
  once-a-day
  Zenvia 
    Painful Diabetic Neuropathy Indication
     4




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##### Table of Contents



Reverse
    Cholesterol Transport Technology 
    Atherosclerosis
    Macrophage
    Migration Inhibitory Factor (MIF) 
    Inflammation
    Xenerex
    Antibody Technology  Anthrax/Other Infectious
    Diseases
  AVP-21D9,
   5




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##### Table of Contents



AVP-13358 
    Selective Cytokine Inhibitor
  AVP-13358 AVP-13358
  Competition
    FazaClo.
  
    Clozaril (Novartis)
    Generic Clozapine (several manufacturers)    
    Abilify (aripiprazole, BMS)
    Geodon (ziprasidone, Pfizer)
    Risperdal (risperidone, Janssen)
    Seroquel (quetiapine, AstraZeneca)
    Zyprexa (olanszapine, Lilly)  Docosanol 10% cream.
  
    Over-the-counter
    monograph 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.  Zenvia for Involuntary Emotional Expression
    Disorder/Pseudobulbar Affect.
 6




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##### Table of Contents




    Antidepressants, including
    Prozac®,
    Celexa®,
    Zoloft®,
    Paxil®,
    Elavil®
    and
    Pamelor®
    and others;
    Atypical antipsychotics agents, including
    Zyprexa®,
    Resperdal®,
    Abilify®,
    Geodon®
    and others; and
    Miscellaneous agents, including
    Symmetrel®,
    Lithium and others.  Zenvia for painful diabetic neuropathy.
  
    Cymbalta®;
    Narcotic products; and
    Off-label uses of non-narcotic products, such as the
    anticonvulsants phenytoin and carbamazepine, and the
    antidepressant amitriptyline.  Reverse Cholesterol Transport.
  MIF Inhibitor Technology.
  Antibody generation technology.
  AVP-13358
    (selective cytokine inhibitor). AVP-13358 ®
  Marketing
    and Customers
    Manufacturing
     7




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##### Table of Contents



Patents
    and Proprietary Rights
  Patents.
  Patents and Patent ApplicationsUnited States


ForeignDescription:

Issued


Expiration Dates


Pending


Issued


Expiration Dates


PendingDocosanol-related technologies


10



2008 to 2017



3



73



Various



48FazaClo


0







2



1



April 2007



Xenerex antibody technologies


6



2008 to 2015



12



0



Various



1Selective cytokine inhibitor


8



2019



6



27



Various



130Zenvia


7



2011 to 2019



1



5







24MIF inhibitor technology


2







8



2







71Reverse cholesterol transport
    enhancer


0







5



3







47



















Total


33







37



111







321         Government
    Regulations
   8




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##### Table of Contents




    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
      Product
    Liability Insurance
   9




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Executive
    Officers of the Registrant
    Human
    Resources
    Item 1A.
    Risk
    Factors  Risks
    Relating to Our Business
  The FDA will likely require additional data for the approval
    of Zenvia. The additional data requirements may necessitate new
    clinical trials, which are likely to be costly and cause a
    significant delay in any approval decision for Zenvia.
    Additionally, there can be no assurance that the FDA will
    approve Zenvia.
  and/or
      We have limited capital resources and will need to raise
    additional funds to support our operations.
  and/or
 10




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##### Table of Contents



and/or
      The FDAs safety concerns regarding Zenvia for the
    treatment of PBA/IEED may extend to other clinical indications
    that we are pursuing, including diabetic neuropathic pain.
  and/or
  There are a number of difficulties and risks associated with
    clinical trials and our trials may not yield the expected
    results.
        
    the results from early clinical trials may not be statistically
    significant or predictive of results that will be obtained from
    expanded, advanced clinical 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. 11




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##### Table of Contents



and/or
      
    delays in our ability to submit an NDA;
    the refusal by the FDA to file any NDA we may submit;
    requests for additional studies or data;
    delays of an approval; or
    the rejection of an application.    If our clinical trials for our product candidates are
    delayed, we would be unable to commercialize our product
    candidates on a timely basis, which would materially harm our
    business.
    
    obtaining an effective investigational new drug application, or
    IND, or regulatory approval to commence a clinical trial;
    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 qualified subjects to participate in clinical trials;
    competition in recruiting clinical investigators;
    shortage or lack of availability of supplies of drugs for
    clinical trials;
    the need to repeat clinical trials as a result of inconclusive
    results or poorly executed testing;
    the placement of a clinical hold on a study;
    the failure of third parties conducting and overseeing the
    operations of our clinical trials to perform their contractual
    or regulatory obligations in a timely fashion; and
    exposure of clinical trial subjects to unexpected and
    unacceptable health risks or noncompliance with regulatory
    requirements, which may result in suspension of the trial. 12




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If we fail to comply with regulatory requirements, regulatory
    agencies may take action against us, which could significantly
    harm our business.
    over-the-counter over-the-counter
    
    restrictions on our products or manufacturing processes;
    warning letters;
    withdrawal of the products from the market;
    voluntary or mandatory recall;
    fines;
    suspension or withdrawal of regulatory approvals;
    suspension or termination of any of our ongoing clinical trials;
    refusal to permit the import or export of our products;
    refusal to approve pending applications or supplements to
    approved applications that we submit;
    product seizure; and
    injunctions or the imposition of civil or criminal penalties.  We have only limited sales and marketing experience and
    capabilities.
    We are dependent on a small number of physicians for a
    substantial percentage of FazaClo sales.
 13




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It is difficult to integrate acquired companies, products,
    technologies and personnel into our operations and our inability
    to do so could greatly lessen the value of any such
    acquisitions.
  day-to-day
  Changes in board and management composition that are intended
    to strengthen the board and management team could adversely
    disrupt our operations.
      We may face challenges attracting and retaining members of
    management and other key personnel, particularly following our
    receipt of the Zenvia approvable letter.
    If we fail to obtain regulatory approval in foreign
    jurisdictions, we would not be able to market our products
    abroad, and the growth of our revenues, if any, would be
    limited.
   14




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We expect to rely entirely on third parties for international
    sales and marketing efforts.
    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.
    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.   15




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##### Table of Contents



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
  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.
    Developing and marketing pharmaceutical products for human
    use involves product liability risks, for which we currently
    have limited insurance coverage.
  class-action
 16




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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.  quarter-to-quarter,
      Risks
    Relating to Our Industry
  The pharmaceutical industry is highly competitive and most of
    our competitors are larger and have greater resources. As a
    result, we face significant competitive hurdles.
     17




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##### Table of Contents



Item 1B.
    Unresolved
    Staff Comments    Item 2.
    Properties    Item 3.
    Legal
    Proceedings    Item 4.
    Submission
    of Matters to a Vote of Security Holders   PART II  Item 5.
    Market
    for Registrants Common Equity and Related Stockholder
    Matters  one-for-four
  Class A Common Stock PriceFiscal 2006


Fiscal 2005High


Low


High


LowFirst Quarter

$
14.12


$
10.00


$
14.08


$
11.20Second Quarter

$
17.90


$
13.76


$
14.92


$
8.80Third Quarter

$
15.13


$
5.88


$
12.16


$
8.92Fourth Quarter

$
8.76


$
5.61


$
14.76


$
11.36  18




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##### Table of Contents



Item 6.
    Selected
    Consolidated Financial Data  Form 10-Q. one-for-four
  Summary
    Financial Information
  Fiscal Years Ended September 30,Statement of operations data:

2006(1)(4)


2005


2004


2003


2002Total revenues

$
15,185,852


$
16,690,574


$
3,589,317


$
2,438,733


$
8,853,742Loss before cumulative effect of
    change in accounting principle

$
(58,936,756
)

$
(30,606,564
)

$
(28,154,853
)

$
(23,236,348
)

$
(10,249,512
)Cumulative effect of change in
    accounting principle

$
(3,616,058
)

$



$



$



$
Net loss

$
(62,552,814
)

$
(30,606,564
)

$
(28,154,853
)

$
(23,236,348
)

$
(10,249,512
)Net loss attributable to common
    shareholders

$
(62,552,814
)

$
(30,606,564
)

$
(28,154,853
)

$
(23,264,293
)

$
(10,292,798
)Basic and diluted loss per share:Loss before cumulative effect of
    change in accounting principle

$
(1.92
)

$
(1.19
)

$
(1.44
)

$
(1.55
)

$
(0.70
)Cumulative effect of change in
    accounting principle

$
(0.12
)

$



$



$



$
Net loss

$
(2.04
)

$
(1.19
)

$
(1.44
)

$
(1.55
)

$
(0.70
)Net loss attributable to common
    shareholders

$
(2.04
)

$
(1.19
)

$
(1.44
)

$
(1.55
)

$
(0.71
)Basic and diluted weighted average
    number of shares of common stock outstanding


30,634,872



25,617,432



19,486,603



14,974,034



14,551,742Cash dividends declared per share

$



$



$



$



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

$
(58,936,756
)

$
(31,255,373
)

$
(29,056,101
)

$
(23,786,583
)

$
(10,724,214
)Net loss attributable to common
    shareholders

$
(58,936,756
)

$
(31,255,373
)

$
(29,056,101
)

$
(23,814,528
)

$
(10,767,500
)Basic and diluted loss per share

$
(1.92
)

$
(1.22
)

$
(1.49
)

$
(1.59
)

$
(0.74
)  19




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##### Table of Contents



September 30,Balance sheet data:

2006


2005


2004


2003


2002Cash and cash equivalents

$
4,898,214


$
8,620,143


$
13,494,083


$
12,198,408


$
8,630,547Investments in securities


19,851,859



18,917,443



12,412,446



5,258,881



4,538,460Total cash, cash equivalents and
    investments in securities

$
24,750,073


$
27,537,586


$
25,906,529


$
17,457,289


$
13,169,007Working capital

$
(6,969,777
)

$
11,969,450


$
16,653,621


$
10,619,216


$
5,918,083Total assets

$
71,462,337


$
41,401,990


$
37,403,953


$
29,645,257


$
20,332,929Deferred revenues

$
23,309,325


$
19,158,210


$
21,009,115


$
22,742,641


$
233,333Notes payable and capital lease
    obligations

$
25,788,310


$
990,594


$
1,107,064


$



$
Total liabilities

$
77,136,872


$
32,267,111


$
27,206,694


$
28,608,026


$
5,752,259Convertible preferred stock

$



$



$



$



$
521,189Shareholders (deficit) equity

$
(5,674,535
)

$
9,134,879


$
10,197,259


$
1,037,231


$
14,059,481   Fiscal Quarters EndedQuarterly statement of operations data for

December 31,


March 31,


June 30,


September 30,fiscal 2006 (Unaudited):

2005


2006


2006(1)


2006Total revenues

$
8,144,888


$
2,469,028


$
2,363,247


$
2,208,689Gross margin(2)

$
472,921


$
139,827


$
(1,003
)

$
(424,358
)Loss before cumulative effect of
    change in accounting principle

$
(5,599,912
)

$
(13,540,486
)

$
(17,619,218
)

$
(22,177,140
)Cumulative effect of change in
    accounting principle

$
(3,616,058
)

$



$



$
Net loss(4)

$
(9,215,970
)

$
(13,540,486
)

$
(17,619,218
)

$
(22,177,140
)Basic and diluted net loss per
    share(4):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   Fiscal Quarters EndedQuarterly statement of operations data for

December 31,


March 31,


June 30,


September 30,fiscal 2005 (Unaudited):

2004


2005(3)


2005


2005Total revenues

$
888,365


$
644,733


$
3,333,838


$
11,823,638Gross margin(2)

$
13,771


$
(4,744
)

$
(103,319
)

$
(613,811
)Net loss

$
(7,088,589
)

$
(14,050,947
)

$
(8,207,544
)

$
(1,259,484
)Basic and diluted net loss per
    share

$
(0.30
)

$
(0.57
)

$
(0.31
)

$
(0.05
)Basic and diluted weighted average
    number of shares of common stock outstanding


23,962,989



24,565,682



26,841,950



27,089,552Pro forma amounts assuming the new
    method for patent-related costs was applied retroactively:Net loss

$
(7,069,980
)

$
(14,346,117
)

$
(8,296,555
)

$
(1,542,721
)Basic and diluted loss per share

$
(0.30
)

$
(0.58
)

$
(0.31
)

$
(0.06
)  20




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##### Table of Contents



(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 4,
    Alamo Acquisition, in Notes to the Consolidated
    Financial Statements.(2)
    
    Represents product sales, research and development services
    revenue and government research grant services, net of related
    costs and amortization of acquired FazaClo product rights.(3)
    
    Includes a research and development expense of $7,225,000
    related to the acquisition of contractual rights to Zenvia.(4)
    
    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 our company. When used in this report, the words
    intend, estimate,
    anticipate, believe, plan,
    goal, expect and similar expressions as
    they relate to
    Avanir are
    included to identify forward-looking statements. You should not
    rely on these forward-looking statements, because they are only
    predictions based on our current expectations and assumptions.
    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 as
    set forth below and under the caption Risk Factors.
    We disclaim any intent to update any forward-looking statements
    to reflect subsequent 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.
  Overview
  Avanir
    
    On October 30, 2006, we received an approvable
    letter from the FDA for our NDA submission for Zenvia for
    the treatment of IEED/PBA. 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 has regarding the
    efficacy and safety data contained in our NDA submission, which
    may require additional clinical trials and data in order to
    obtain marketing approval. The principal questions
    and/or
    concerns raised in the approvable letter related to the
    following: (i) the choice of statistical methods used to
    analyze a secondary endpoint in the ALS trial and whether the
    requirements of the combination drug policy have been met and
    (ii) safety concerns relating to Zenvias active
    ingredients, dextromethorphan and quinidine sulfate,
    particularly for the patient population that would be prescribed
    Zenvia.  and/or
 21




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##### Table of Contents



AVP-13358,
  
    In May 2006, we acquired Alamo Pharmaceuticals, LLC
    (Alamo) as a wholly-owned subsidiary. As part of the
    acquisition, we acquired FazaClo, the only orally-disintegrating
    formulation of clozapine for the management of treatment
    resistant schizophrenia and reduction in the risk of recurrent
    suicidal behavior in schizophrenia or schizoaffective disorders.
    Because the acquisition occurred in the third quarter of fiscal
    2006, the full year impact on operating expenses and interest
    expense associated with the acquisition will not be reflected
    until fiscal 2007. See Note 4, Alamo
    Acquisition, in the Notes to Consolidated Financial
    Statements for further discussion.
    In July 2006, we entered into an exclusive agreement with
    Healthcare Brands International (HBI) to develop and
    market our docosanol 10% cream as a treatment for cold sores in
    the European Union, (with the exception of Denmark, Finland,
    Greece, Italy, and Sweden, all of which are covered by previous
    license grants from us) Russia and Ukraine. In connection with
    the agreement we received an upfront fee of £750,000
    (U.S. $1.4 million) in July 2006, plus we will be
    eligible to receive aggregate payments of up to £1,500,000
    (approximately $2.8 million, based on the exchange rate on
    September 30, 2006) if 10% docosanol cream receives
    certain regulatory approvals in the licensed territory.
    Additionally, if there is any subsequent divestiture or
    sublicense of 10% docosanol cream by HBI (including through a
    sale of HBI), or any initial public offering of HBIs
    securities, we will receive a payment calculated based on a
    percentage of the assigned value of 10% docosanol cream to the
    overall value of the transaction. HBI will be responsible for
    all expenses related to the regulatory approval and
    commercialization of 10% docosanol cream in the territory.
    In June 2006, we were notified that we had been awarded a
    $2.0 million research grant from the National Institutes of
    Health/National Institute of Allergy and Infectious Disease
    (NIH) for ongoing research and development related
    to our fully human monoclonal antibody for the treatment of
    post-exposure anthrax infection (the Anthrax
    Antibody). Under the terms of the grant, the NIH will
    reimburse us for up to $2.0 million in certain expenses
    (including expenses incurred in the 90 days preceding the
    grant award date) related to the establishment of a cGMP
    manufacturing process and the testing of efficacy of the Anthrax
    Antibody in non-human primate animal models.
    In May 2006, our Board of Directors authorized a space
    restructuring plan and the relocation of our commercial and
    general and administrative operations. We currently occupy three
    laboratory buildings in San Diego, California. We are in
    the process of relocating all operations other than research and
    development to Orange County, California. We have subleased one
    of the San Diego buildings in September 2006 under a
    three-year sublease and plan to sublease the other
    San Diego building after our relocation is complete. Also
    in May 2006, we entered into a five-year lease for the new
    Orange County offices, and currently occupy approximately
    11,319 square feet of office space, which we expect will
    increase to 17,000 square feet in the second quarter of
    2007. The aggregate minimum payments over the initial term of
    the lease are expected to be approximately $2.8 million.
    On April 3, 2006, The NASDAQ Stock Market approved our
    application for listing our common stock for trading on the
    NASDAQ Global Market (formerly the NASDAQ National Market
    System). On April 11, 2006, our stock began trading on the
    NASDAQ under the stock symbol AVNR simultaneously
    with the discontinuation of trading on the American Stock
    Exchange. On January 17, 2006, we implemented a
    one-for-four
    reverse stock split of our common stock. Authorization to
    implement the reverse stock split had been previously approved
    on March 17, 2005 by our shareholders at our annual meeting
    of shareholders. Our common stock began trading on the American
    Stock Exchange on a split-adjusted basis on January 18,
    2006. 22




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##### Table of Contents



All share and per share information herein (including shares
    outstanding, earnings per share and warrant and stock option
    exercise prices) reflect the retrospective adjustment for the
    reverse stock split.  
    In January 2006, we signed an exclusive license agreement with
    Kobayashi Pharmaceutical Co., Ltd. (Kobayashi)
    giving Kobayashi the rights to manufacture and sell docosanol
    10% cream as a treatment for cold sores in Japan.        Critical
    Accounting Policies and Estimates
      Purchase
    Price Allocation in Business Combinations
   23




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##### Table of Contents



Share-based
    compensation expense
  Share-Based
    Payment
         24




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##### Table of Contents



Revenue
    Recognition
  General. Revenue Recognition.
  Revenue Recognition When Right of Return
    Exists
  No. 00-21 00-21), Accounting for Revenue Arrangements with Multiple
    Deliverables.
  Revenue Arrangements with Multiple
    Deliverables. and/or 00-21,
 25




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##### Table of Contents



00-21,
  License Arrangements. and/or
  and/or
    Research and Development Services. agreed-upon No. 99-19, Reporting Revenue Gross as a Principal versus Net as an
    Agent,
  Royalty Revenues.
  Revenues from Sale of Royalty Rights. units-of-revenue
  Government Research Grant Revenue.
 26




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##### Table of Contents



Product Sales  Active Pharmaceutical Ingredient
    Docosanol (API Docosanol).
  Product Sales  FazaClo. 48-pill units.
  18-month
    No. 01-09, Accounting for Consideration Given by a Vendor to a
    Customer (Including a Reseller of the Vendors
    Products).
  Cost
    of Revenues
   27




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##### Table of Contents



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. Business
    Combinations
  Acquired contractual rights.
  Capitalization
    and Valuation of Long-Lived and Intangible Assets
  Goodwill and Other
    Intangible Assets
 28




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##### Table of Contents



Accounting for the Impairment or Disposal
    of Long-Lived Assets
    
    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 2005


Fiscal 2004Net loss

$
(58,936,756
)

$
(31,255,373
)

$
(29,056,101
)Basic and diluted loss per share

$
(1.92
)

$
(1.22
)

$
(1.49
)  29




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##### Table of Contents



Restructuring
    Expense
  Accounting for Costs
    Associated with Exit or Disposal Activities
  Nature of
    Operating Expenses
      Effects
    of Inflation
    Results
    of Operations
      Comparison
    of Fiscal 2006 and 2005
  Revenues
    and/or
 30




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##### Table of Contents



Operating
    Expenses
    Operating ExpensesFiscal Years Ended September 30,2006


2005


2004Operating expenses:Research and development


39
%


55
%


67
%Selling, general and administrative


50
%


39
%


29
%Costs of revenues


11
%


6
%


4
%Total operating expenses


100
%


100
%


100
%   Research and development (R&D)
    expenses.
 31




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##### Table of Contents



Research
    and Development Projects and Expenses
  Inception


EstimatedThrough


Costs toFiscal Years Ended September 30,


September 30,


Complete2006(1)


2005(1)


2004(1)


2006(1)(2)


Projects(1)(3)Company-funded
    Projects:Development programs for Zenvia
    (two), Atherosclerosis, MIF inhibitor, selective cytokine
    inhibitor and other programs projected through fiscal 2007

$
27,922,089


$
26,140,505


$
21,502,499


$
116,556,869


Unknown at
    this timePartner-funded
    Projects:Atherosclerosis and MIF inhibitor
    research programs


7,198,397



2,346,043







16,742,837


Funded by
    PartnersGovernment-funded
    Projects:Preclinical research on various
    projects. Estimated timing to complete the current anthrax
    research project is less than 12 months


292,111



497,210



979,182



2,830,655


$2.0MPurchased in-process research
    and development(4)


1,300,000











1,300,000


$0.5MTotal

$
36,712,597


$
28,983,758


$
22,481,681


$
137,430,361     (1)
    
    Each project includes an allocation of laboratory occupancy
    costs. M refers to millions. Estimated costs and
    timing to complete the projects are subject to the availability
    of funds and FDA requirements. For each of the projects set
    forth in the table, other than Zenvia for IEED/PBA (which we
    intend to market ourselves if fully developed), the reverse
    cholesterol transport and the MIF inhibitor programs (both of
    which we have partnered), we may seek development partners or
    licensees to defray part or all of the ongoing development costs.(2)
    
    Inception dates are on or after October 1, 1998, at which
    time we began identifying and tracking program costs.(3)
    
    We currently cannot estimate the extent of additional spending
    on Zenvia. We plan to meet with the FDA to discuss the
    approvable letter and may, at that time, be able to reasonably
    estimate additional development costs. Further development of
    the selective cytokine inhibitor is on hold.(4)
    
    See Note 4, Alamo Acquisition in the Notes to
    Consolidated Financial Statements.    Status of
    R&D Programs and Plans  Company-funded
    Projects
  Zenvia for the treatment of Involuntary Emotional Expression
    Disorder/Pseudobulbar Affect.
  and/or
 32




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##### Table of Contents



Zenvia for the treatment of painful diabetic
    neuropathy.
  Development program for selective cytokine
    inhibitor. AVP-13358 AVP-13358 AVP-13358 AVP-13358
  Status of
    R&D Programs and Plans  Partner-funded
    Projects
  AstraZeneca UK Limited
    (AstraZeneca).
  Novartis International Pharmaceutical Ltd.
    (Novartis).
  Status of
    R&D Programs and Plans  Government-Funded
    Projects
   33




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##### Table of Contents



Selling, general and administrative
    expenses.
  Cost of revenues.
  Share-Based
    Compensation
    Matters Relating to Timing and Accounting for
    Options Grants.
   34




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##### Table of Contents



Form 10-K.
    Interest
    Income
    Cumulative
    Effect of Change in Accounting Principle
    Net
    Loss
      Comparison
    of Fiscal 2005 and 2004
  Revenues
    Operating
    Expenses
    Research and development (R&D)
    expenses.
 35




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##### Table of Contents



Selling, general and administrative
    expenses.
  Cost of Revenues.
  Interest
    Income
    Net
    Loss
    Liquidity
    and Capital Resources
    September 30,


Increase (Decrease)


September 30,2006


During Period


2005Cash, cash equivalents and
    investment in securities

$
24,750,073


$
(2,787,513
)

$
27,537,586Cash and cash equivalents

$
4,898,214


$
(3,721,929
)

$
8,620,143Net working capital

$
(6,969,777
)

$
(18,939,227
)

$
11,969,450   36




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##### Table of Contents



Year Ended


Change


Year EndedSeptember 30,


Between


September 30,2006


Periods


2005Net cash used for operating
    activities

$
(41,009,903
)

$
(20,955,692
)

$
(20,054,211
)Net cash used for investing
    activities


(7,380,482
)


1,507,743



(8,888,225
)Net cash provided by financing
    activities


44,668,456



20,599,960



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

$
(3,721,929
)

$
1,152,011


$
(4,873,940
)   Operating activities. tm
      Investing activities.
    Financing activities.
 37




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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 obligations(1)

$
30,689,599


$
2,394,674


$
28,294,925


$



$
Capital (finance) lease obligations


424,571



252,479



172,092







Operating lease obligations


11,597,443



2,380,226



4,319,167



3,323,843



1,574,207Purchase obligations


19,759,591



17,991,010



1,768,581







Total

$
62,471,204


$
23,018,389


$
34,554,765


$
3,323,843


$
1,574,207     (1)
    
    Includes interest.  not-for-cause
 38




---



##### Table of Contents



trading-day
        Alamo Earn-Out Payments.
  
    A promissory note that would have been issuable in the principal
    amount of $4,000,000 if FazaClo sales, as reported by IMS Health
    Incorporated, for each of the months of April and May 2006
    exceeded $1,266,539. Since the closing of the acquisition, we
    have determined that FazaClo sales for the months April and May
    2006 did not satisfy this condition and thus this promissory
    note was not issued pursuant to this contingency.
    If the preceding condition is not satisfied, then (A) a
    promissory note, in the principal amount of $2,000,000, payable
    one time if monthly FazaClo net product sales, as reported by
    us, exceed $1,000,000 for each of the three months in a given
    fiscal quarter during the Contingent Payment Period, and
    (B) an additional promissory note in the principal amount
    of $2,000,000, payable one time if monthly FazaClo net product
    sales, as reported by us, exceed $1,500,000 for each of the
    three months in a given fiscal quarter during the Contingent
    Payment Period. None of these conditions were satisfied as of
    September 30, 2006.
    A one-time cash payment of $10,450,000 if FazaClo net product
    sales, as reported by us, exceed $40.0 million over four
    consecutive fiscal quarters during the Contingent Payment Period.
    A one-time cash payment of $25,000,000 if FazaClo net product
    sales, as reported by us, exceed $50.0 million over four
    consecutive fiscal quarters during the Contingent Payment Period.    CIMA Royalty payments.
 39




---



##### Table of Contents



Twelve-month period ending
    December 31:2006

$
250,0002007

$
300,0002008 and each year thereafter

$
400,000   Eurand Milestone and Royalty Payments. once-a-day
  Zenvia License Milestone Payments.
  5-day
  Management
    Outlook
   40




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##### Table of Contents



Recent
    Accounting Pronouncements
    Item 7A.
    Quantitative
    and Qualitative Disclosures About Market Risk    Interest
    Rate Sensitivity
  available-for-sale held-to-maturity. available-for-sale
    Item 8.
    Financial
    Statements and Supplementary Data  page F-1.
 41




---



##### Table of Contents



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),
  Changes
    in Internal Controls over Financial Reporting
  Rule 13a-15(f)
  Managements
    Report on Internal Control Over Financial Reporting
  Rules 13a-15(f) 15d-15(f).
  Internal Control 
    Integrated Framework Internal
    Control  Integrated Framework
   42




---



##### Table of Contents



43




---



##### Table of Contents



Report of
    Independent Registered Public Accounting Firm
  Avanir
  Internal Control  Integrated Framework
        Internal
    Control  Integrated Framework Internal Control  Integrated
    Framework
  Share-based
    Payment,
  Deloitte &
    Touche LLP
    44




---



##### Table of Contents



Item 9B.
    Other
    Information   PART III  Item 10.
    Directors
    and Executive Officers    Executive
    Officers of the Registrant
    Name

Age

PositionEric K. Brandt


44


President and Chief Executive
    OfficerKeith A. Katkin


35


Senior Vice President, Sales and
    MarketingMichael J. Puntoriero


53


Senior Vice President of Finance
    and Chief Financial OfficerGregory P. Hanson, CMA


60


Vice President, Chief Accounting
    Officer and SecretaryTheresa Hope-Reese


49


Vice President, Human ResourcesRandall E. Kaye, M.D.


44


Vice President, Clinical and
    Medical AffairsJagadish C.
    Sircar, Ph.D.


71


Vice President, Drug Discovery   Eric K. Brandt.
  Keith Katkin.
  Michael J. Puntoriero.
 45




---



##### Table of Contents



Gregory P. Hanson, CMA. 14-year
  Theresa Hope-Reese.
  Randall E. Kaye, M.D.
  Jagadish Sircar, Ph.D.
 46




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##### Table of Contents



Code of
    Ethics
  www.avanir.com Form 8-K.
  Item 11.
    Executive
    Compensation    Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Shareholder Matters    Item 13.
    Certain
    Relationships and Related Transactions    Item 14.
    Principal
    Accountant Fees and Services   PART IV  Item 15.
    Exhibits,
    Financial Statements and Schedules    page F-1.
    3
.1

Restated Articles of Incorporation
    of the Registrant, dated April 1, 2004(13)3
.2

Amended and Restated Bylaws of the
    Registrant, dated September 25, 2005(14)4
.1

Form of Class A Common Stock
    Certificate(1)4
.2

Certificate of Determination with
    respect to Series C Junior Participating Preferred Stock of
    the Registrant(2)4
.3

Rights Agreement, dated as of
    March 5, 1999, with American Stock Transfer &
    Trust Company(2)4
.4

Form of Rights Certificate with
    respect to the Rights Agreement, dated as of March 5,
    1999(2)4
.5

Amendment No. 1 to Rights
    Agreement, dated November 30, 1999, with American Stock
    Transfer & Trust Company(4)4
.6

Form of Class A Stock
    Purchase Warrant, issued in connection with the Securities
    Purchase Agreement dated July 21, 2003(10)4
.7

Form of Class A Stock
    Purchase Warrant, issued in connection with the Securities
    Purchase Agreement dated November 25, 2003(11)10
.1

License Agreement, dated
    March 31, 2000, by and between
    AvanirPharmaceuticals and SB Pharmco Puerto Rico, a Puerto Rico
    Corporation(5) 47




---



##### Table of Contents



10
.2

License Agreement, dated
    November 22, 2002, by and between
    AvanirPharmaceuticals and Drug Royalty USA, Inc.(17)10
.3

Research, Development and
    Commercialization Agreement, dated April 27, 2005, by and
    between
    AvanirPharmaceuticals and Novartis International Pharmaceutical
    Ltd.*(18)10
.4

Research Collaboration and License
    Agreement, dated July 8, 2005, by and
    betweenAvanirPharmaceuticals and AstraZeneca UK Limited* (23)10
.5

Standard Industrial Net Lease by
    and between
    AvanirPharmaceuticals and BC Sorrento, LLC, effective
    September 1, 2000(6)10
.6

Standard Industrial Net Lease by
    and between
    AvanirPharmaceuticals (Tenant) and Sorrento Plaza, a
    California limited partnership (Landlord),
    effective May 20, 2002(8)10
.7

Office lease agreement by and
    between RREEF AMERICA REIT II CORP. FFF and
    AvanirPharmaceuticals, dated April 28, 200610
.8

License Agreement, dated
    August 1, 2000, by and between
    AvanirPharmaceuticals (Licensee) and Irisys Research
    and Development, LLC, a California limited liability company(6)10
.9

Sublease agreement between
    AvanirPharmaceuticals and Sirion Therapeutics, Inc., dated
    September 5, 200610
.10

License Agreement, dated
    April 2, 1997, by and between Irisys Research &
    Development, LLC and the Center for Neurologic Study(16)10
.11

Amendment to License Agreement,
    dated April 11, 2000, by and between IriSys
    Research & Development, LLC and the Center for
    Neurologic Study(16)10
.12

Clinical Development Agreement,
    dated March 22, 2005, by and between
    AvanirPharmaceuticals and SCIREX Corporation(16)10
.13

Unit Purchase Agreement by and
    among AVANIR Pharmaceuticals, the Sellers and Alamo
    Pharmaceuticals, LLC, dated May 22, 2006 *(24)10
.14

Senior Note for $14.4 million
    payable to Neal R. Cutler, dated May 24, 2006 (24)10
.15

Senior Note for $6,675,000 payable
    to Neal R. Cutler, dated May 24, 2006 (24)10
.16

Senior Note for $4.0 million
    payable to Neal R. Cutler, dated May 24. 2006 (24)10
.17

Registration Rights Agreement
    between Avanir Pharmaceuticals and Neil Cutler, dated
    May 24, 2006 (24)10
.18

Amended and Restated Development,
    License and Supply Agreement by and between CIMA Labs Inc. and
    Alamo Pharmaceuticals, LLC, dated August 22, 2005* (24)10
.19

Amendment #1 to Amended and
    Restated Development, License and Supply Agreement by and
    between CIMA Labs Inc. and Alamo Pharmaceuticals, LLC, dated
    October 19, 2005* (24)10
.20

Docosanol License Agreement
    between Kobayashi Pharmaceutical Co., Ltd. and AVANIR
    Pharmaceuticals, dated January 5, 2006* (28)10
.21

Docosanol Data Transfer and Patent
    License Agreement between AVANIR Pharmaceuticals and Healthcare
    Brands International Limited, dated July 6, 2006*10
.22

Development and License Agreement
    between Eurand, Inc. and AVANIR Pharmaceuticals, dated
    August 7, 2006*10
.23

Amended and Restated 1998 Stock
    Option Plan(7)10
.24

Amended and Restated 1994 Stock
    Option Plan(7)10
.25

Amended and Restated 2000 Stock
    Option Plan(9)10
.26

Form of Restricted Stock Grant
    Notice for use with Amended and Restated 2000 Stock Option
    Plan(9)10
.27

2003 Equity Incentive Plan(9)10
.28

Form of Non-qualified Stock Option
    Award Notice for use with 2003 Equity Incentive Plan(9)10
.29

Form of Restricted Stock Grant for
    use with 2003 Equity Incentive Plan(9)10
.30

Form of Restricted Stock Grant
    Notice (cash consideration) for use with 2003 Equity Incentive
    Plan(9) 48




---



##### Table of Contents



10
.31

Form of Indemnification Agreement
    with certain Directors and Executive Officers of the
    Registrant(12)10
.32

2005 Equity Incentive Plan (23)10
.33

Form of Stock Option Agreement for
    use with 2005 Equity Incentive Plan (20)10
.34

Form of Restricted Stock Unit
    Agreement for use with 2005 Equity Incentive Plan and 2003
    Equity Incentive Plan10
.35

Form of Restricted Stock Agreement
    for use with 2005 Equity Incentive Plan10
.36

Form of Change of Control
    Agreement (26)10
.37

Employment Agreement with Eric
    Brandt, dated August 15, 2005* (23)10
.38

Employment Agreement with Keith
    Katkin, dated June 13, 2005 (23)10
.39

Employment Agreement with Michael
    J. Puntoriero, dated May 4, 200610
.40

Employment Agreement with Randall
    Kaye, dated December 23, 2005 (25)10
.41

Employment Agreement with Theresa
    Hope-Reese, dated August 7, 2006 (27)18
.1

Letter regarding change in
    accounting principle21
.1

List of Subsidiaries23
.1

Consent of Independent Registered
    Public Accounting Firm31
.1

Certification of Chief Executive
    Officer pursuant to Section 302 of Sarbanes-Oxley Act of
    200231
.2

Certification of Chief Financial
    Officer pursuant to Section 302 of Sarbanes-Oxley Act of
    200231
.3

Certification of Chief Accounting
    Officer pursuant to Section 302 of Sarbanes-Oxley Act of
    200232
.1

Certification of Chief Executive
    Officer pursuant to Section 906 of the Sarbanes-Oxley Act
    of 200232
.2

Certification of Chief Financial
    Officer pursuant to Section 906 of the Sarbanes-Oxley Act
    of 200232
.3

Certification of Chief Accounting
    Officer pursuant to Section 906 of the Sarbanes-Oxley Act
    of 2002     *
    
    Certain confidential portions of this exhibit have been
    retracted. A complete copy of this exhibit has been filed with
    the Secretary of the Securities and Exchange Commission pursuant
    to an application requesting confidential treatment under
    Rule 246-2
    of the Securities Exchange Act of 1934.(1)
    
    Incorporated by reference to the similarly described exhibit
    included with the Registrants Registration Statement on
    Form S-1,
    File No.
    33-32742,
    declared effective by the Commission on May 8, 1990.(2)
    
    Incorporated by reference to the similarly described exhibit
    included with the Registrants Current Report on
    Form 8-K,
    filed March 11, 1999.(3)
    
    Incorporated by reference to the similarly described exhibit
    included with the Registrants Current Report on
    Form 8-K,
    filed April 1, 1999.(4)
    
    Incorporated by reference to the similarly described exhibit
    included with the Registrants Current Report on
    Form 8-K,
    filed December 3, 1999.(5)
    
    Incorporated by reference to the similarly described exhibit
    included with the Registrants Current Report on
    Form 8-K,
    filed May 4, 2000.(6)
    
    Incorporated by reference to the similarly described exhibit
    included with the Registrants Quarterly Report on
    Form 10-Q,
    filed August 14, 2000.(7)
    
    Incorporated by reference to the similarly described exhibit
    included with the Registrants Annual Report on
    Form 10-K,
    filed December 21, 2001.(8)
    
    Incorporated by reference to the similarly described exhibit
    included with the Registrants Quarterly Report on
    Form 10-Q,
    filed August 13, 2002.(9)
    
    Incorporated by reference to the similarly described exhibit
    included with the Registrants Quarterly Report on
    Form 10-Q,
    filed May 13, 2003. 49




---



##### Table of Contents



(10)
    
    Incorporated by reference to the similarly described exhibit
    included with the Registrants Registration on From
    S-3, File
    No. 333-107820,
    declared effective by the Commission on August 19, 2003.(11)
    
    Incorporated by reference to the similarly described exhibit
    included with the Registrants Current Report on
    Form 8-K,
    filed December 11, 2003.(12)
    
    Incorporated by reference to the similarly described exhibit
    included with the Registrants Annual Report on
    Form 10-K,
    filed December 23, 2003.(13)
    
    Incorporated by reference to the similarly described exhibit
    included with the Registrants Current Report on
    Form 8-K,
    filed on April 6, 2004.(14)
    
    Incorporated by reference to the similarly described exhibit
    included with the Registrants Current Report on
    Form 8-K,
    filed September 28, 2005.(15)
    
    Incorporated by reference to the similarly described exhibit
    included with the Registrants Current Report on
    Form 8-K,
    filed September 21, 2004.(16)
    
    Incorporated by reference to the similarly described exhibit
    included with the Registrants Current Report on
    Form 10-Q,
    filed May 13, 2005.(17)
    
    Incorporated by reference to the similarly described exhibit
    included with the Registrants Current Report on
    Form 8-K,
    filed January 7, 2003.(18)
    
    Incorporated by reference to the similarly described exhibit
    included with the Registrants Current Report on
    Form 10-Q,
    filed August 12, 2005.(19)
    
    Incorporated by reference to the similarly described exhibit
    included with the Registrants Current Report on
    Form 8-K,
    filed March 23, 2005.(20)
    
    Incorporated by reference to the similarly described exhibit
    included with the Registrants Current Report on
    Form 8-K,
    filed October 24, 2005.(21)
    
    Incorporated by reference to the similarly described exhibit
    included with the Registrants Annual Report on
    Form 10-K,
    filed December 14, 2005.(22)
    
    Incorporated by reference to the similarly described exhibit
    included with the Registrants Current Report on
    Form 10-Q,
    filed August 9, 2006.(23)
    
    Incorporated by reference to the similarly described exhibit
    included with the Registrants Current Report on
    Form 10-Q,
    filed February 9, 2006.(24)
    
    Incorporated by reference to the similarly described exhibit
    included with the Registrants Current Report on
    Form 8-K,
    filed June 26, 2006.(25)
    
    Incorporated by reference to the similarly described exhibit
    included with the Registrants Current Report on
    Form 8-K,
    filed August 10, 2006.(26)
    
    Incorporated by reference to the similarly described exhibit
    included with the Registrants Current Report on
    Form 10-Q,
    filed May 10, 2006. 50




---



##### Table of Contents



SIGNATURES    Avanir  Pharmaceuticals
  By:
    /s/  Eric
    K. Brandt   President and Chief Executive Officer
      Signature

Title

Date/s/  Eric
    K. BrandtEric
    K. Brandt

President and Chief Executive
    Officer (Principal Executive Officer)

December 15, 2006/s/  Michael
    J. Puntoriero,
    CPAMichael
    J. Puntoriero, CPA

Senior Vice President of Finance
    and Chief Financial Officer (Principal Financial Officer)

December 15, 2006/s/  Gregory
    P. Hanson,
    CMAGregory
    P. Hanson, CMA

Vice President and Chief
    Accounting Officer (Principal Accounting Officer)

December 15, 2006/s/  Charles
    A. MathewsCharles
    A. Mathews

Director

December 15, 2006/s/  Stephen
    G. Austin,
    CPAStephen
    G. Austin, CPA

Director

December 15, 2006/s/  David
    J.
    Mazzo, Ph.D.David
    J. Mazzo, Ph.D.

Director

December 15, 2006/s/  Dennis
    G. PodlesakDennis
    G. Podlesak

Director

December 15, 2006/s/  Jonathan
    T.
    Silverstein, J.D.Jonathan
    T. Silverstein, J.D.

Director

December 15, 2006/s/  Paul
    G. ThomasPaul
    G. Thomas

Director

December 15, 2006/s/  Craig
    A. WheelerCraig
    A. Wheeler

Director

December 15, 2006/s/  Scott
    M.
    Whitcup, M.D.Scott
    M. Whitcup, M.D.

Director

December 15, 2006  51




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##### Table of Contents



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


F-2Financial Statements:Consolidated
    Balance Sheets


F-3Consolidated
    Statements of Operations


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


F-5Consolidated
    Statements of Cash Flows


F-6Notes to
    Consolidated Financial Statements


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




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##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  Avanir
  Avanir
    Avanir
  Internal Control 
    Integrated Framework
  Share-based Payment
  /s/ Deloitte &
    Touche LLP
    F-2




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##### Table of Contents



AvanirPharmaceuticalsCONSOLIDATED BALANCE SHEETS
   September 30,2006


2005ASSETSCurrent assets:Cash and cash equivalents

$
4,898,214


$
8,620,143Short-term investments in
    securities


16,778,267



14,215,005Receivables, net


3,042,468



1,169,654Inventories


2,835,203



27,115Prepaid expenses


1,778,918



2,370,801Total current assets


29,333,070



26,402,718Investments in securities


2,216,995



3,845,566Restricted investments in
    securities


856,597



856,872Property and equipment, net


6,047,729



6,004,527Intangible assets, net


10,113,329



3,665,086Goodwill


22,110,328



Long-term inventories


347,424



347,424Other assets


436,865



279,797TOTAL ASSETS

$
71,462,337


$
41,401,990LIABILITIES AND
    SHAREHOLDERS (DEFICIT) EQUITYCurrent liabilities:Accounts payable

$
10,845,057


$
6,751,781Accrued expenses and other
    liabilities


9,857,639



4,094,295Assumed liabilities for returns
    and other discounts


3,980,229



Accrued compensation and payroll
    taxes


3,125,862



1,272,231Deferred revenues, net


7,592,563



1,970,989Notes payable


670,737



317,667Capital lease obligations


230,760



26,305Total current liabilities


36,302,847



14,433,268Other liabilities


230,450



Deferred revenues, net of current
    portion


15,716,762



17,187,221Notes payable, net of current
    portion


24,715,905



637,285Capital lease obligations, net of
    current portion


170,908



9,337Total liabilities


77,136,872



32,267,111Commitments and contingencies
    (Notes 4, 14, 17 and 19)Shareholders (deficit)
    equity:Preferred stock  no par
    value, 10,000,000 shares authorized, no shares issued or
    outstanding as of September 30, 2006 and 2005, respectively:






Common stock  no par
    value, 200,000,000 shares authorized; 31,708,461 and
    27,341,732 shares issued and outstanding as of
    September 30, 2006 and 2005, respectively


211,993,249



167,738,303Unearned compensation






(3,477,144
)Accumulated deficit


(217,565,280
)


(155,012,466
)Accumulated other comprehensive
    loss


(102,504
)


(113,814
)Total shareholders (deficit)
    equity


(5,674,535
)


9,134,879TOTAL LIABILITIES AND
    SHAREHOLDERS (DEFICIT) EQUITY

$
71,462,337


$
41,401,990    F-3




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##### Table of Contents



AvanirPharmaceuticals CONSOLIDATED STATEMENTS OF OPERATIONS
  Years Ended September 30,2006


2005


2004REVENUES:Research and development services

$
7,837,788


$
1,617,525


$
Licenses


5,154,709



12,800,000



328,000Royalties and sale of royalty
    rights


1,938,203



1,752,321



1,715,152Government research grants


236,882



503,328



758,827Product sales


18,270



17,400



787,338Total revenues


15,185,852



16,690,574



3,589,317OPERATING EXPENSES:Cost of research and development
    services


7,198,397



2,346,044



979,182Cost of government research grant
    services


292,111



497,210



Research and development


29,222,089



26,140,504



21,502,499Selling, general and administrative


38,054,219



18,796,188



9,340,260Cost of product sales


415,045



3,102



213,192Total operating expenses


75,181,861



47,783,048



32,035,133Loss from operations


(59,996,009
)


(31,092,474
)


(28,445,816
)Interest income


1,794,049



619,857



290,067Interest expense


(765,871
)


(92,533
)


(34,508
)Other income (expense)


33,505



(39,601
)


38,068Loss before income
    taxes


(58,934,326
)


(30,604,751
)


(28,152,189
)Provision for income taxes


(2,430
)


(1,813
)


(2,664
)Loss before cumulative effect of
    change in accounting principle


(58,936,756
)


(30,606,564
)


(28,154,853
)Cumulative effect of change in
    accounting principle (Note 3)


(3,616,058
)






Net loss

$
(62,552,814
)

$
(30,606,564
)

$
(28,154,853
)Basic and diluted net loss per
    share (Note 2):Loss before cumulative effect of
    change in accounting principle

$
(1.92
)

$
(1.19
)

$
(1.44
)Cumulative effect of change in
    accounting principle


(0.12
)






Net loss

$
(2.04
)

$
(1.19
)

$
(1.44
)Basic and diluted weighted average
    number of common shares outstanding (Note 2)


30,634,872



25,617,432



19,486,603    F-4




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##### Table of Contents



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








Other


TotalClass A


Class B


Accumulated


Unearned


Comprehensive


Shareholders


ComprehensiveShares (Note 2)


Amount


Shares


Amount


Deficit


Compensation


Income (Loss)


(Deficit) Equity


LossBALANCE, OCTOBER 1, 2003


16,454,109


$
97,286,433



3,375


$
8,395


$
(96,251,049
)

$



$
(6,548
)

$
1,037,231Net loss


















(28,154,853
)










(28,154,853
)

$
(28,154,853
)Issuance of Class A common
    stock in connection with:Exercise of warrants


73,724



448,671























448,671Exercise of stock options


31,002



160,823























160,823Sale of stock and warrants


7,005,027



34,015,320























34,015,320Research milestone obligation of
    MIF technology


259,202



2,733,023























2,733,023Conversion of Class B common
    stock


3,375



8,395



(3,375
)


(8,395
)














Compensation expense related to
    valuation of stock options granted to employees and
    non-employees for services rendered






34,870























34,870Unrealized losses on investments in
    securities


























(77,826
)


(77,826
)


(77,826
)BALANCE, SEPTEMBER 30, 2004


23,826,439



134,687,535











(124,405,902
)






(84,374
)


10,197,259


$
(28,232,679
)Net 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







77,856Compensation expense related to
    valuation of stock options granted to employees and
    non-employees for services rendered






10,803























10,803Unrealized losses on investments in
    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 gain on investments in
    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
)    F-5




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##### Table of Contents



AvanirPharmaceuticals
  CONSOLIDATED
    STATEMENTS OF CASH FLOWS
  Years Ended September 30,2006


2005


2004OPERATING ACTIVITIES:Net loss

$
(62,552,814
)

$
(30,606,564
)

$
(28,154,853
)Adjustments to reconcile net loss
    to net cash provided by (used for) operating activities:Cumulative effect of change in
    accounting principle


3,616,058







Depreciation and amortization


3,871,278



1,852,427



1,826,372Share-based compensation expense


2,920,234



88,659



34,870Amortization of debt discount


85,400







Purchased in-process research and
    development


1,300,000







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






5,300,000



Research milestone obligation paid
    with common stock










2,733,023Loss on sale and impairment of
    investment






84,252



Loss on disposal of assets


36,985



16,400



162Intangible assets impaired and
    abandoned


8,222



423,123



Changes in operating assets and
    liabilities:Receivables


(846,075
)


(929,775
)


31,802Inventory


(510,971
)


(365,237
)


201,552Prepaid expenses and other assets


835,112



(848,219
)


(9,912
)Accounts payable


3,188,980



4,615,629



(300,210
)Accrued expenses and other
    liabilities


3,973,998



1,604,136



612,151Assumed liabilities for returns and
    other discounts


(2,421,092
)






Accrued compensation and payroll
    taxes


1,333,667



561,863



84,214Deferred revenue


4,151,115



(1,850,905
)


(1,733,526
)Net cash used for operating
    activities


(41,009,903
)


(20,054,211
)


(24,674,355
)INVESTING
    ACTIVITIES:Investments in securities


(65,823,381
)


(23,448,802
)


(9,381,391
)Proceeds from sales and maturities
    of investments in securities


64,900,275



16,830,113



2,150,000Acquisition of businesses, net of
    cash acquired


(4,794,029
)Patent costs






(1,278,935
)


(1,156,975
)Purchases of property and equipment


(1,663,347
)


(990,601
)


(793,913
)Net cash used for investing
    activities


(7,380,482
)


(8,888,225
)


(9,182,279
)FINANCING ACTIVITIES:Proceeds from issuances of common
    stock and warrants, net of commissions and offering costs


44,811,855



24,184,966



34,624,814Proceeds from issuances of notes
    payable


359,875



395,244



1,074,570Payments on notes and capital lease
    obligations


(503,274
)


(511,714
)


(547,075
)Net cash provided by financing
    activities


44,668,456



24,068,496



35,152,309Net increase (decrease) in cash and
    cash equivalents


(3,721,929
)


(4,873,940
)


1,295,675Cash and cash equivalents at
    beginning of year


8,620,143



13,494,083



12,198,408Cash and cash equivalents at end of
    year

$
4,898,214


$
8,620,143


$
13,494,083SUPPLEMENTAL DISCLOSURES OF CASH
    FLOW INFORMATION:Interest paid

$
681,122


$
92,533


$
34,508Income taxes paid

$
2,430


$
1,912


$
2,664SUPPLEMENTAL DISCLOSURES OF
    NON-CASH INVESTING AND FINANCING ACTIVITIES:Issuance of promissory notes to
    sellers as consideration for the Alamo acquisition, net of
    discount (See Note 4 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

$



$
3,555,000


$
Accounts payable and accrued
    expenses for purchases of property and equipment

$
74,617


$
242,213


$
3,951    F-6




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##### Table of Contents



AvanirPharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
  1.
    Description
    of Business  Avanir Avanir
    ® tm tm
    2.
    Reverse
    Stock Split  one-for-four
 F-7




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##### Table of Contents



AvanirPharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  3.
    Summary
    of Significant Accounting Policies  Basis
    of presentation
  Avanir
  Management
    estimates
    Purchase
    Price Allocation
    Cash
    and cash equivalents
    Restricted
    investments in securities
  held-to-maturity
  Restricted Amount as ofSeptember 30,


Lease TermProperty Location

2006


Expires on11388 Sorrento Valley Road,
    San Diego

$
388,122



08/31/0811404 and 11408 Sorrento Valley
    Road, San Diego


468,475



08/31/12Total

$
856,597   Investments
  Accounting for Certain Investments in Debt and Equity
    Securities available-for-sale
 F-8




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Concentrations
        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
 F-9




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Accounting for the Impairment or Disposal
    of Long-Lived Assets
    
    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 2005

Fiscal 2004Net loss

$
(58,936,756
)

$
(31,255,373
)

$
(29,056,101
)Basic and diluted loss per share

$
(1.92
)

$
(1.22
)

$
(1.49
)  F-10




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Deferred
    rent
    Fair
    value of financial instruments
    Revenue
    recognition
  General. Revenue
    Recognition.
  Revenue Recognition When Right of Return
    Exists
  No. 00-21 00-21), Accounting for Revenue Arrangements with Multiple
    Deliverables.
  Revenue Arrangements with Multiple
    Deliverables. and/or 00-21,
  00-21,
 F-11




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##### Table of Contents



AvanirPharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    License Arrangements.
  and/or
    Research and Development Services. agreed-upon No. 99-19, Reporting Revenue Gross as a Principal versus Net as an
    Agent,
  Royalty Revenues.
  Revenues from Sale of Royalty Rights. units-of-revenue
  Government Research Grant Revenue.
  Product Sales  Active Pharmaceutical Ingredient
    Docosanol (API Docosanol).
 F-12




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##### Table of Contents



AvanirPharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Product Sales  FazaClo.
  18-month
    No. 01-09, Accounting for Consideration Given by a Vendor to a
    Customer (Including a Reseller of the Vendors
    Products).
  Cost
    of Revenues
   F-13




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##### 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-14




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##### Table of Contents



AvanirPharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Change
    in Accounting Method for 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.
      Fiscal 2006Selling, general and
    administrative expense

$
2,514,427Research and development expense


606,194Share-based compensation expense
    before taxes


3,120,621Related income tax benefits


Share-based compensation expense

$
3,120,621Net share-based compensation
    expense per common share  basic and diluted

$
(0.10
)  F-15




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Fiscal 2006Share-based compensation expense
    from:Stock options

$
1,795,610Restricted stock awards


1,179,621Restricted stock units


145,390Total

$
3,120,621     Accounting for Stock Issued to Employees
    Fiscal 2005


Fiscal 2004Net loss, as reported

$
(30,606,564
)

$
(28,154,853
)Add: Share-based employee
    compensation expense


77,856



24,069Deduct: Total share-based employee
    compensation expense determined under fair value based method
    for all awards


(1,777,838
)


(1,026,844
)Pro forma net loss

$
(32,306,546
)

$
(29,157,628
)Net loss per share:Basic and diluted  as
    reported

$
(1.19
)

$
(1.44
)Basic and diluted  pro
    forma

$
(1.26
)

$
(1.50
)     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
 F-16




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Advertising
    expenses
    Income
    taxes
    Comprehensive
    loss
    Computation
    of net loss per common share
      Fiscal 2006


Fiscal 2005


Fiscal 2004Stock options


1,587,070



1,600,034



1,313,398Stock warrants


269,305



1,122,047



1,333,539Restricted stock awards


29,250







Restricted stock units


51,480







   Recent
    accounting pronouncements
  Financial Accounting Standards No. 154
    (FAS 154). Accounting Changes and Error
    Corrections.
 F-17




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Financial Accounting Standards No. 155
    (FAS 155). Accounting for Certain Hybrid
    Financial Instruments, Accounting for
    Derivative Instruments and Hedging Activities Accounting for Transfers and
    Servicing of Financial Assets and Extinguishments of
    Liabilities Application of
    Statement 133 to Beneficial Interests in Securitized
    Financial Assets,
  FASB Interpretation No. 48
    (FIN 48 Accounting for Uncertainty in
    Income Taxes
  Financial Accounting Standards No. 157
    (FAS 157). Fair Value
    Measurements.
  Financial Accounting Standards No. 158
    (FAS 158). Employers
    Accounting for Defined Benefit Pension and Other Postretirement
    Plans-an Amendment of FASB Statements No. 87, 88, 106 and
    132(R). not-for-profit
  Staff Accounting Bulleting No. 108
    (SAB 108).
  FASB Staff Position
    No. FAS 123R-5
    (FAS 123R-5). FAS 123R-5, Amendment of FASB Staff Position
    FAS 123R-1,
 F-18




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  FAS 123R-1, Classification and Measurement of Freestanding
    Financial Instruments Originally Issued in Exchange for Employee
    Services under FASB Statement
    No. FAS 123(R). FAS 123R-5 FAS 123R-5
  4.
    Alamo
    Acquisition      
    A promissory note that would have been issuable in the principal
    amount of $4,000,000 if FazaClo sales, as reported by IMS Health
    Incorporated, for each of the months of April and May 2006
    exceeded $1,266,539. Since the closing of the acquisition, we
    have determined that FazaClo sales for the months April and May
    2006 did not satisfy this condition and thus this promissory
    note will not be issued pursuant to this contingency.
    If the preceding condition is not satisfied, then (A) a
    promissory note, in the principal amount of $2,000,000, payable
    one time if monthly FazaClo net product sales, as reported by
    us, exceed $1,000,000 for each of the three months in a given
    fiscal quarter during the Contingent Payment Period, and
    (B) an additional promissory note in the principal amount
    of $2,000,000, payable one time if monthly FazaClo net product
    sales, as reported by us, exceed $1,500,000 for each of the
    three months in a given fiscal quarter during the Contingent
    Payment Period. As discussed in Note 3, Summary of
    Significant Accounting Policies  Revenue
    Recognition  Product Sales 
    FazaClo, all revenue from FazaClo shipments since
    acquisition date are deferred; therefore, monthly FazaClo net
    product sales in the quarter ended September 30, 2006 did
    not meet these conditions at September 30, 2006.
    A one-time cash payment of $10,450,000 if FazaClo net product
    sales, as reported by us, exceed $40.0 million over four
    consecutive fiscal quarters during the Contingent Payment Period.
    A one-time cash payment of $25,000,000 if FazaClo net product
    sales, as reported by us, exceed $50.0 million over four
    consecutive fiscal quarters during the Contingent Payment Period.     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:Cash

$
157,507Accounts receivable


1,026,740Inventories


2,297,117Property and equipment


1,845,077Other assets


423,457Identifiable intangible assets
    acquired:Product rights


7,200,000In-process research and development


1,300,000Customer relationships


2,900,000Trade name


400,000Non-compete agreement


160,000Goodwill


22,110,328Total assets acquired


39,820,226Liabilities assumed:Accounts payable and accrued
    expenses


(3,611,653
)Assumed liabilities for returns
    and other discounts


(6,401,321
)Capital lease obligations


(512,716
)Total liabilities assumed


(10,525,690
)$
29,294,536  F-20




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Customer





Non-CompeteYear:

Product Rights


Relationships


Trade Name


Agreements1


14
%


15
%


8%



100
%2


15
%


22
%


9%



3


15
%


18
%


8%



4


14
%


13
%


9%



5


14
%


9
%


8%



6


14
%


8
%


9%



7


14
%


8
%


8%



8






7
%


9%



9










8%



10










9%



11










8%



12










8%



     01-3, Accounting in a Business Combination for Deferred
    Revenue of an Acquiree,
      Identifiable
    Intangible Assets
   F-21




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      In-Process
    Research and Development
     F-22




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  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 will 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 not assumed by us in the acquisition,
    Reduction of interest income by an amount determined by applying
    the average rate of return for the respective periods to the
    decrease in our cash balance of $4.0 million used to fund
    the acquisition,
    Amortization of discount associated with the notes
    payable, and
    The charge of $1.3 million purchased IPR&D is not
    included in the pro forma results of operations. The purchase
    IPR&D is a one-time charge directly related to the
    acquisition and does not have a continuing impact on our future
    operations.  5.
    Relocation
    of Commercial and General and Administrative
    Operations     F-23




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Charge forTwelve Months Ended


Payments in Fiscal


Accruals As ofSeptember 30, 2006


2006


September 30, 2006Employee severance and relocation
    benefits

$
237,050


$



$
237,050Lease restructuring liability


277,627



(3,629
)


273,998Balance, September 30, 2006

$
514,677


$
(3,629
)

$
511,048   6.
    Investments
    in Securities  available-for-sale held-to-maturity.
  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:Short-term investments:Classified as
    available-for-sale













$
16,778,267Long-term investments:Classified as
    available-for-sale














2,216,995Restricted investments(2)














856,597Long-term investments














3,073,592Total













$
19,851,859   F-24




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Gross


GrossAmortized


Unrealized


Unrealized


FairCost


Gains


Losses(1)


ValueAs of September 30, 2005:Certificates of deposit

$
956,872


$
48


$



$
956,920Government debt securities


18,074,385







(113,862
)


17,960,523Total

$
19,031,257


$
48


$
(113,862
)

$
18,917,443Reported as:Short-term investments:Classified as
    available-for-sale













$
14,215,005Long-term investments:Classified as
    available-for-sale














3,845,566Restricted investments(2)














856,872Long-term investments














4,702,438Total













$
18,917,443     (1)
    
    Unrealized loss is reported as accumulated other
    comprehensive loss on the consolidated balance sheets.(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.    7.
    Receivables,
    Net    2006


2005Accounts receivable

$
1,966,164


$
60,391Unbilled receivables


908,284



1,010,902Other receivables


178,619



126,4603,053,067



1,197,753Allowance for doubtful accounts


(10,599
)


(28,099
)Receivables, net of allowances

$
3,042,468


$
1,169,654  F-25




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  8.
    Inventories    2006


2005Finished goods

$
1,642,208


$
Raw materials


923,822



374,539Work in progress


80,580



Inventories subject to return


536,017



Total inventories


3,182,627



374,539Less: current portion


(2,835,203
)


(27,115
)Long-term portion

$
347,424


$
347,424     9.
    Property
    and Equipment    2006


2005Gross








GrossCarrying


Accumulated





Carrying


AccumulatedValue


Depreciation


Net


Value


Depreciation


NetResearch and development equipment

$
4,210,214


$
(3,134,970
)

$
1,075,244


$
3,903,735


$
(2,567,843
)

$
1,335,892Computer equipment and related
    software


2,207,370



(872,592
)


1,334,778



1,038,390



(565,137
)


473,253Leasehold improvements


5,826,441



(3,665,799
)


2,160,642



5,583,177



(1,641,485
)


3,941,692Office equipment, furniture and
    fixtures


1,293,775



(453,547
)


840,228



558,911



(305,221
)


253,690Automobiles


499,275



(124,157
)


375,118











Manufacturing equipment


261,719







261,719











Total property and equipment

$
14,298,794


$
(8,251,065
)

$
6,047,729


$
11,084,213


$
(5,079,686
)

$
6,004,527      F-26




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    10.
    Intangible
    Assets and Goodwill  Intangible Assets.
  2006Gross








Weighted AverageCarrying


Accumulated





Amortization PeriodValue


Amortization


Net


(in Years)Intangible assets with finite
    lives:FazaClo product rights

$
7,200,000


$
(365,144
)

$
6,834,856



7Customer relationships


2,900,000



(156,200
)


2,743,800



8Trade name


400,000



(11,833
)


388,167



12Non-compete agreement


160,000



(56,800
)


103,200



1Licenses


42,461



(20,160
)


22,301



15.5Total intangible assets with
    finite lives


10,702,461



(610,137
)


10,092,324



7.4Intangible assets with indefinite
    useful lives


21,005







21,005Total intangible assets

$
10,723,466


$
(610,137
)

$
10,113,329   2005Gross








Weighted AverageCarrying


Accumulated





Amortization PeriodValue


Amortization


Net


(in Years)Intangible assets with finite
    lives:Patent applications pending

$
3,029,127


$
(336,457
)

$
2,692,670



20.0Patents


1,429,532



(506,144
)


923,388



15.4Licenses


42,461



(17,904
)


24,557



15.5Total intangible assets with
    finite lives


4,501,120



(860,505
)


3,640,615



18.5Intangible assets with indefinite
    useful lives


24,471







24,471Total intangible assets

$
4,525,591


$
(860,505
)

$
3,665,086    F-27




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
          Amortization ExpenseFiscal year ending
    September 30:2007

$
1,681,0002008


1,665,0002009


1,525,0002010


1,386,0002011


1,304,000Thereafter


2,531,000Total

$
10,092,000   Goodwill.
  11.
    Accrued
    Expenses and Other Liabilities    2006


2005Accrued returns, rebates and other
    discounts

$
2,371,703


$
Accrued research and development
    expenses


3,947,191



1,909,229Accrued sales and marketing
    expenses


2,354,344



1,065,229Deferred rent


680,730



597,551Other


503,671



522,286Total

$
9,857,639


$
4,094,295   12.
    Assumed
    Liabilities for Returns and Other Discounts   F-28




---



##### Table of Contents



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

$
6,401,321Payments for returns and other
    discounts


(2,421,092
)Balance, at September 30, 2006

$
3,980,229   13.
    Net
    Deferred Revenues  ®
  FazaCloDrug Royalty


Product


OtherUSA Agreement


Shipments, Net


Agreements


TotalNet deferred revenues as of
    October 1, 2005

$
19,049,877


$



$
108,333


$
19,158,210Changes during the period:Shipments, net






3,955,150







3,955,150License 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


$
3,955,150


$
2,242,262


$
23,309,325Classified and reported as:Current portion of deferred
    revenues,

$
1,981,799


$
3,955,150


$
1,655,614


$
7,592,563Deferred revenues, net of current
    portion


15,130,114







586,648



15,716,762Total deferred revenues

$
17,111,913


$
3,955,150


$
2,242,262


$
23,309,325   FazaClo Product
  Drug Royalty Agreement
   F-29




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  88-18
  Kobayashi Docosanol License Agreement
    HBI Docosanol License Agreement
     F-30




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  14.
    Commitments
    and Contingencies  Operating lease commitments.
          MinimumYear Ending September 30,

Payments(1)2007

$
2,380,0002008


2,537,0002009


1,782,0002010


1,721,0002011


1,603,000Thereafter


1,574,000Total

$
11,597,000     (1)
    
    Minimum payments have not been reduced by minimum sublease
    rentals of $766,000. Due in the future under noncancelable
    subleases.  Capital lease commitments.
 F-31




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  36-month
    MinimumYear Ending September 30,

Payments2007

$
252,4792008


172,092Total


424,571Less amount representing interest


(22,903
)Present value of net lease payments


401,668Less current portion


(230,760
)Long-term portion of obligation

$
170,908   Legal contingencies.
  Employment and Severance Agreements.
 F-32




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  15.
    Notes Payable    September 30,2006


2005Senior notes with an interest rate
    of LIBOR + 1.33%; interest payable monthly; principal due May
    2009, net of $646,600 unamortized discount

$
24,428,400


$
9.5% equipment loan due April 2008


451,405



703,5607.9% business insurance financing
    due June 2007


320,957



10.43% equipment loan due February
    2009


106,170



142,88110.17% equipment loan due January
    2009


79,710



108,511Total


25,386,642



954,952Less: current portion


(670,737
)


(317,667
)Total long-term notes payable

$
24,715,905


$
637,285   Senior Notes. trading-day
       F-33




---



##### Table of Contents



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

Payments2007

$
2,394,6742008


1,935,6822009


26,359,243Total


30,689,599Less amount representing interest


(5,302,957
)Present value of payments


25,386,642Less current portion


(670,737
)Long-term portion of obligation

$
24,715,905   16.
    Shareholders
    (Deficit) Equity  one-for-four
   F-34




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Preferred
    Stock
        Common
    stock
  Class A
    common stock.
  Fiscal 2006. Form S-3,
      Fiscal 2005. 5-day
 F-35




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Form S-3,
  5-day
  Form S-3,
    Fiscal 2004.
       F-36




---



##### Table of Contents



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




Class A


Gross Amount


Average Priceand Stock Options Exercised

Date


Common Stock


Received(1)


Per Share(2)Fiscal 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


$
0.00Stock options


Various



524,807



3,264,953


$
6.22Warrants(4)


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


$
0.00Stock options


Various



27,974



125,491


$
4.49Warrants(4)


Various



211,486



1,293,339


$
6.12Total






3,515,293


$
30,813,829Fiscal year ended
    September 30, 2004:Underwritten public offering(3)


June 2005



5,659,449


$
26,737,500


$
4.72Private placement of common stock
    and warrants


December 2004



1,345,579



8,019,652


$
5.96Issuance of common stock to Ciblex


August 2005



259,202



2,733,023


$
10.54Conversions of Class B common
    stock


Various



3,375



8,395


$
2.49Stock options


Various



31,002



160,823


$
5.19Warrants(4)


Various



73,724



448,671


$
6.09Total






7,372,331


$
38,108,064     (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)
    
    Price per share of $4.72 in the underwritten public offering is
    after underwriters discount of $2.0 million,
    representing approximately $0.36 per share.(4)
    
    Includes 4,780 shares issued on a cashless
    exercise basis at an average exercise price of $4.20 per
    share.  Class B common stock conversions.
  Warrants
   F-37




---



##### Table of Contents



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


WeightedCommon Stock


AveragePurchasable Upon


Exercise Price


Range ofExercise of Warrants


per Share


Exercise PricesOutstanding at October 1, 2003


572,475


$
7.64


$
3.64 - $10.88Issued


850,727


$
7.00


$
7.00Tendered(1)


(7,720
)

$
4.20


$
4.20Exercised


(73,724
)

$
6.36


$
4.20 - $ 7.00Expired


(8,219
)

$
9.76


$
9.76Outstanding 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


$
8.92     (1)
    
    Warrant shares tendered represent 7,720 in the amount of warrant
    shares given up, in lieu of cash, for warrants exercised
    (cashless exercise).  Employee
    Equity Incentive Plans
     F-38




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    2005 Equity Incentive Plan.
  2003 Equity Incentive Plan.
  2000 Stock Option Plan.
  1998 Stock Option Plan.
  Stock Options. 10-year
       F-39




---



##### 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, October 1, 2003


1,327,151


$
7.84Granted


60,750


$
7.24Exercised


(31,002
)

$
5.20Forfeited


(18,616
)

$
11.06Expired


(24,885
)

$
10.16Outstanding, 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


$
10.07



7.2


$
817,000Vested and expected to vest in the
    future, September 30, 2006


1,472,726


$
10.05



7.2


$
799,000Exercisable, September 30,
    2006


765,411


$
8.98



5.0


$
732,000Exercisable, September 30,
    2005


1,257,896


$
7.92Exercisable, September 30,
    2004


1,164,103


$
7.96      F-40




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      2006

2005

2004Expected volatility

77.4% - 80.4%

76.6% - 130.2%

132.9 - 133.3%Weighted-average volatility

78.4%

95.5%

133.1%Average expected term in years

4.5

3.4

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

4.5%

3.8%

2.4%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  $ 4.64


214,271



4.2


$
3.98



214,271


$
3.98$ 5.12  $ 6.92


234,725



6.3


$
6.13



124,225


$
6.10$ 7.12  $ 9.92


196,921



6.6


$
8.66



132,128


$
8.99$10.10  $10.70


181,750



9.6


$
10.64



3,126


$
10.24$11.08  $11.76


327,892



8.7


$
11.69



45,914


$
11.70$12.12  $13.84


262,061



7.2


$
13.26



183,797


$
13.33$14.28  $19.38


169,450



7.6


$
16.19



61,950


$
17.101,587,070



7.2


$
10.07



765,411


$
8.98   Restricted stock units.
  Weighted AverageGrant DateNumber of Shares


Fair ValueUnvested, October 1, 2005





$
Granted


51,480


$
15.54Vested





$
Forfeited





$
Unvested, September 30, 2006


51,480


$
15.54    F-41




---



##### Table of Contents



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


Fair ValueUnvested, October 1, 2005


250,000


$
14.22Granted


57,250


$
11.34Vested


(83,335
)

$
14.22Forfeited





$
Unvested, September 30, 2006


223,915


$
13.48       Review of Stock Options Practices and Related
    Accounting. Matters Relating to
    Timing and Accounting for Options Grants.
  Form 10-K.
    17.
    Research
    and Licensing Agreements  Eurand, Inc.
 F-42




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  once-a-day
  CIMA Labs Inc. Royalty Agreement
  Twelve-month period ending
    December 31:2006

$
250,0002007

$
300,0002008 and each year thereafter

$
400,000     18.
    License
    and Research Collaboration Agreements  AstraZeneca UK Limited
    (AstraZeneca).
     F-43




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    00-21, agreed-upon
    Novartis International Pharmaceutical
    Ltd.  (Novartis).
     F-44




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    00-21,
    HBI Docosanol License Agreement country-by-country
  Kobayashi Docosanol License Agreement
  CTS Chemical Industries, Ltd.
    (CTS).
  Boryung Pharmaceuticals Company Ltd
    (Boryung). 12-year
 F-45




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  GlaxoSmithKline Subsidiary, SB Pharmco Puerto Rico, Inc.
    (GlaxoSmithKline). over-the-counter
  Bruno Farmaceutici (Bruno).
  P.N. Gerolymatos SA.
    (Gerolymatos).
  ACO HUD.
  Government research grants.
 F-46




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  19.
    Related
    Party Transactions  IriSys
    Research and Development, LLC
  License Agreement.
    5-day
    agreed-upon in-the-money
  Fair Value Analysis.
 F-47




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Avanir
  Research and development.
  20.
    Income
    Taxes    2006


2005


2004Current:State and foreign

$
(2,430
)

$
(1,813
)

$
(2,664
)Deferred:Federal


20,625,828



10,143,270



10,900,106State


(540,800
)


5,017,269



246,52820,085,028



15,160,539



11,146,634Increase in deferred income tax
    asset valuation allowance


(20,085,028
)


(15,160,539
)


(11,146,634
)Total income tax provision

$
(2,430
)

$
(1,813
)

$
(2,664
)     2006


2005


2004Federal statutory rate


(34
)%


(34
)%


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


32



50



40State income taxes, net of federal
    effect


(5
)


(6
)


(6
)Research and development credits


(2
)


(5
)


(4
)Expired net operating loss and
    other tax credits


2







1Other


7



(5
)


3Effective income tax rate


0
%


0
%


0
%  F-48




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    September 30,2006


2005Net operating loss carryforwards

$
64,594,100


$
46,522,001Deferred revenue


9,274,407



7,631,558Research credit carryforwards


9,682,998



8,799,375Capitalized research and
    development costs


1,800,079



2,216,029Capitalized license fees and
    patents


4,037,033



2,959,707Share-based compensation and
    options


1,136,117



Purchased intangible assets


450,751



Foreign tax credits


595,912



595,912Other


2,036,885



779,763Deferred income tax assets


93,608,282



69,504,345Less valuation allowance for net
    deferred income tax assets


(93,608,282
)


(69,504,345
)$



$
     21.
    Employee
    Savings Plan    22.
    Segment
    Information       F-49




---



##### Table of Contents



AvanirPharmaceuticals
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      23.
    Subsequent
    Events  Approvable Letter and/or
  and/or
    Sale of Common Stock and Warrants Form S-3
   F-50




---



##### Table of Contents



Exhibit Index
  3
.1

Restated Articles of Incorporation
    of the Registrant, dated April 1, 2004(13)3
.2

Amended and Restated Bylaws of the
    Registrant, dated September 25, 2005(14)4
.1

Form of Class A Common Stock
    Certificate(1)4
.2

Certificate of Determination with
    respect to Series C Junior Participating Preferred Stock of
    the Registrant(2)4
.3

Rights Agreement, dated as of
    March 5, 1999, with American Stock Transfer &
    Trust Company(2)4
.4

Form of Rights Certificate with
    respect to the Rights Agreement, dated as of March 5,
    1999(2)4
.5

Amendment No. 1 to Rights
    Agreement, dated November 30, 1999, with American Stock
    Transfer & Trust Company(4)4
.6

Form of Class A Stock
    Purchase Warrant, issued in connection with the Securities
    Purchase Agreement dated July 21, 2003(10)4
.7

Form of Class A Stock
    Purchase Warrant, issued in connection with the Securities
    Purchase Agreement dated November 25, 2003(11)10
.1

License Agreement, dated
    March 31, 2000, by and between
    AvanirPharmaceuticals and SB Pharmco Puerto Rico, a Puerto Rico
    Corporation(5)10
.2

License Agreement, dated
    November 22, 2002, by and between
    AvanirPharmaceuticals and Drug Royalty USA, Inc.(17)10
.3

Research, Development and
    Commercialization Agreement, dated April 27, 2005, by and
    between
    AvanirPharmaceuticals and Novartis International Pharmaceutical
    Ltd.*(18)10
.4

Research Collaboration and License
    Agreement, dated July 8, 2005, by and
    betweenAvanirPharmaceuticals and AstraZeneca UK Limited*(23)10
.5

Standard Industrial Net Lease by
    and between
    AvanirPharmaceuticals and BC Sorrento, LLC, effective
    September 1, 2000(6)10
.6

Standard Industrial Net Lease by
    and between
    AvanirPharmaceuticals (Tenant) and Sorrento Plaza, a
    California limited partnership (Landlord), effective
    May 20, 2002(8)10
.7

Office lease agreement by and
    between RREEF AMERICA REIT II CORP. FFF and
    AvanirPharmaceuticals, dated April 28, 200610
.8

License Agreement, dated
    August 1, 2000, by and between
    AvanirPharmaceuticals (Licensee) and Irisys Research and
    Development, LLC, a California limited liability company(6)10
.9

Sublease agreement between
    AvanirPharmaceuticals and Sirion Therapeutics, Inc., dated
    September 5, 200610
.10

License Agreement, dated
    April 2, 1997, by and between Irisys Research &
    Development, LLC and the Center for Neurologic Study(16)10
.11

Amendment to License Agreement,
    dated April 11, 2000, by and between IriSys
    Research & Development, LLC and the Center for
    Neurologic Study(16)10
.12

Clinical Development Agreement,
    dated March 22, 2005, by and between
    AvanirPharmaceuticals and SCIREX Corporation(16)10
.13

Unit Purchase Agreement by and
    among AVANIR Pharmaceuticals, the Sellers and Alamo
    Pharmaceuticals, LLC, dated May 22, 2006*(24)10
.14

Senior Note for $14.4 million
    payable to Neal R. Cutler, dated May 24, 2006(24)10
.15

Senior Note for $6,675,000 payable
    to Neal R. Cutler, dated May 24, 2006(24)10
.16

Senior Note for $4.0 million
    payable to Neal R. Cutler, dated May 24. 2006(24)10
.17

Registration Rights Agreement
    between Avanir Pharmaceuticals and Neil Cutler, dated
    May 24, 2006(24)10
.18

Amended and Restated Development,
    License and Supply Agreement by and between CIMA Labs Inc. and
    Alamo Pharmaceuticals, LLC, dated August 22, 2005*(24)10
.19

Amendment #1 to Amended and
    Restated Development, License and Supply Agreement by and
    between CIMA Labs Inc. and Alamo Pharmaceuticals, LLC, dated
    October 19, 2005*(24)10
.20

Docosanol License Agreement
    between Kobayashi Pharmaceutical Co., Ltd. and AVANIR
    Pharmaceuticals, dated January 5, 2006*(28)




---



##### Table of Contents



10
.21

Docosanol Data Transfer and Patent
    License Agreement between AVANIR Pharmaceuticals and Healthcare
    Brands International Limited, dated July 6, 2006*10
.22

Development and License Agreement
    between Eurand, Inc. and AVANIR Pharmaceuticals, dated
    August 7, 2006*10
.23

Amended and Restated 1998 Stock
    Option Plan(7)10
.24

Amended and Restated 1994 Stock
    Option Plan(7)10
.25

Amended and Restated 2000 Stock
    Option Plan(9)10
.26

Form of Restricted Stock Grant
    Notice for use with Amended and Restated 2000 Stock Option
    Plan(9)10
.27

2003 Equity Incentive Plan(9)10
.28

Form of Non-qualified Stock Option
    Award Notice for use with 2003 Equity Incentive Plan(9)10
.29

Form of Restricted Stock Grant for
    use with 2003 Equity Incentive Plan(9)10
.30

Form of Restricted Stock Grant
    Notice (cash consideration) for use with 2003 Equity Incentive
    Plan(9)10
.31

Form of Indemnification Agreement
    with certain Directors and Executive Officers of the
    Registrant(12)10
.32

2005 Equity Incentive Plan(23)10
.33

Form of Stock Option Agreement for
    use with 2005 Equity Incentive Plan(20)10
.34

Form of Restricted Stock Unit
    Agreement for use with 2005 Equity Incentive Plan and 2003
    Equity Incentive Plan10
.35

Form of Restricted Stock Agreement
    for use with 2005 Equity Incentive Plan10
.36

Form of Change of Control
    Agreement(26)10
.37

Employment Agreement with Eric
    Brandt, dated August 15, 2005*(23)10
.38

Employment Agreement with Keith
    Katkin, dated June 13, 2005(23)10
.39

Employment Agreement with Michael
    J. Puntoriero, dated May 4, 200610
.40

Employment Agreement with Randall
    Kaye, dated December 23, 2005(25)10
.41

Employment Agreement with Theresa
    Hope-Reese, dated August 7, 2006(27)18
.1

Letter regarding change in
    accounting principle21
.1

List of Subsidiaries23
.1

Consent of Independent Registered
    Public Accounting Firm31
.1

Certification of Chief Executive
    Officer pursuant to Section 302 of Sarbanes-Oxley Act of
    200231
.2

Certification of Chief Financial
    Officer pursuant to Section 302 of Sarbanes-Oxley Act of
    200231
.3

Certification of Chief Accounting
    Officer pursuant to Section 302 of Sarbanes-Oxley Act of
    200232
.1

Certification of Chief Executive
    Officer pursuant to Section 906 of the Sarbanes-Oxley Act
    of 200232
.2

Certification of Chief Financial
    Officer pursuant to Section 906 of the Sarbanes-Oxley Act
    of 200232
.3

Certification of Chief Accounting
    Officer pursuant to Section 906 of the Sarbanes-Oxley Act
    of 2002     *
    
    Certain confidential portions of this exhibit have been
    retracted. A complete copy of this exhibit has been filed with
    the Secretary of the Securities and Exchange Commission pursuant
    to an application requesting confidential treatment under
    Rule 246-2
    of the Securities Exchange Act of 1934.(1)
    
    Incorporated by reference to the similarly described exhibit
    included with the Registrants Registration Statement on
    Form S-1,
    File No.
    33-32742,
    declared effective by the Commission on May 8, 1990.(2)
    
    Incorporated by reference to the similarly described exhibit
    included with the Registrants Current Report on
    Form 8-K,
    filed March 11, 1999.(3)
    
    Incorporated by reference to the similarly described exhibit
    included with the Registrants Current Report on
    Form 8-K,
    filed April 1, 1999.(4)
    
    Incorporated by reference to the similarly described exhibit
    included with the Registrants Current Report on
    Form 8-K,
    filed December 3, 1999.(5)
    
    Incorporated by reference to the similarly described exhibit
    included with the Registrants Current Report on
    Form 8-K,
    filed May 4, 2000.




---



##### Table of Contents



(6)
    
    Incorporated by reference to the similarly described exhibit
    included with the Registrants Quarterly Report on
    Form 10-Q,
    filed August 14, 2000.(7)
    
    Incorporated by reference to the similarly described exhibit
    included with the Registrants Annual Report on
    Form 10-K,
    filed December 21, 2001.(8)
    
    Incorporated by reference to the similarly described exhibit
    included with the Registrants Quarterly Report on
    Form 10-Q,
    filed August 13, 2002.(9)
    
    Incorporated by reference to the similarly described exhibit
    included with the Registrants Quarterly Report on
    Form 10-Q,
    filed May 13, 2003.(10)
    
    Incorporated by reference to the similarly described exhibit
    included with the Registrants Registration on From
    S-3, File
    No. 333-107820,
    declared effective by the Commission on August 19, 2003.(11)
    
    Incorporated by reference to the similarly described exhibit
    included with the Registrants Current Report on
    Form 8-K,
    filed December 11, 2003.(12)
    
    Incorporated by reference to the similarly described exhibit
    included with the Registrants Annual Report on
    Form 10-K,
    filed December 23, 2003.(13)
    
    Incorporated by reference to the similarly described exhibit
    included with the Registrants Current Report on
    Form 8-K,
    filed on April 6, 2004.(14)
    
    Incorporated by reference to the similarly described exhibit
    included with the Registrants Current Report on
    Form 8-K,
    filed September 28, 2005.(15)
    
    Incorporated by reference to the similarly described exhibit
    included with the Registrants Current Report on
    Form 8-K,
    filed September 21, 2004.(16)
    
    Incorporated by reference to the similarly described exhibit
    included with the Registrants Current Report on
    Form 10-Q,
    filed May 13, 2005.(17)
    
    Incorporated by reference to the similarly described exhibit
    included with the Registrants Current Report on
    Form 8-K,
    filed January 7, 2003.(18)
    
    Incorporated by reference to the similarly described exhibit
    included with the Registrants Current Report on
    Form 10-Q,
    filed August 12, 2005.(19)
    
    Incorporated by reference to the similarly described exhibit
    included with the Registrants Current Report on
    Form 8-K,
    filed March 23, 2005.(20)
    
    Incorporated by reference to the similarly described exhibit
    included with the Registrants Current Report on
    Form 8-K,
    filed October 24, 2005.(21)
    
    Incorporated by reference to the similarly described exhibit
    included with the Registrants Annual Report on
    Form 10-K,
    filed December 14, 2005.(22)
    
    Incorporated by reference to the similarly described exhibit
    included with the Registrants Current Report on
    Form 10-Q,
    filed August 9, 2006.(23)
    
    Incorporated by reference to the similarly described exhibit
    included with the Registrants Current Report on
    Form 10-Q,
    filed February 9, 2006.(24)
    
    Incorporated by reference to the similarly described exhibit
    included with the Registrants Current Report on
    Form 8-K,
    filed June 26, 2006.(25)
    
    Incorporated by reference to the similarly described exhibit
    included with the Registrants Current Report on
    Form 8-K,
    filed August 10, 2006.(26)
    
    Incorporated by reference to the similarly described exhibit
    included with the Registrants Current Report on
    Form 10-Q,
    filed May 10, 2006.