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                                                                    EXHIBIT 10.4

                             AVANIR PHARMACEUTICALS
                              AMENDED AND RESTATED
                             1994 STOCK OPTION PLAN
                         (as amended September 11, 2001)

SECTION 1. ESTABLISHMENT AND PURPOSE.

        The Plan was established in 1994 to offer selected employees, directors,
advisors and consultants an opportunity to acquire a proprietary interest in the
success of AVANIR Pharmaceuticals, a California corporation (the "Company"), or
to increase such interest, by purchasing Shares of the Company's Common Stock.
The Plan provides for the grant of Options to purchase Shares. Options granted
under the Plan may include Nonstatutory Options as well as ISO's intended to
qualify under section 422 of the Code. The Plan is intended to comply in all
respects with Rule 16b-3 (or its successor) under the Exchange Act.

SECTION 2. DEFINITIONS.

        (a)    "Board of Directors" shall mean the Board of Directors of the
Company, as constituted from time to time.

        (b)    "Code" shall mean the Internal Revenue Code of 1986, as amended.

        (c)    "Committee" shall mean a committee of the Board of Directors
consisting of Nonemployee Directors as appointed by the Board of Directors from
time to time; or, if no such committee is appointed, all members of the Board of
Directors who are not employees of the Company, in either case, as described in
Section 3(a).

        (d)    "Company" shall mean AVANIR Pharmaceuticals, a corporation
organized under the laws of the State of California.

        (e)    "Consultant" shall mean any individual who is (i) a member of the
Board of Directors but who is not an Employee, (ii) in affiliate of a member of
the Board of Directors, (iii) a member of the board of directors of a Subsidiary
or (iv) an independent contractor who performs services for the Company or a
Subsidiary.

        (f)    "Employee" shall include every individual performing Service to
the Company or its Subsidiaries if the relationship between such individual and
the Company or its Subsidiaries is the legal relationship of employer and
employee. This definition of "Employee" is qualified in its entirety and is
subject to the definition set forth in Section 3401(c) of the Code and the
applicable regulations thereunder.

        (g)    "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.

        (h)    "Exercise Price" shall mean the amount for which one Share may be
purchased upon exercise of an Option, as specified by the Committee in the
applicable Stock Option Agreement.

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        (i)    "Fair Market Value" shall mean the market price of Stock,
determined by the Committee as follows:

               (i)    If Stock was traded over-the-counter on the date in
question but was not classified as a national market issue, then the Fair Market
Value shall be equal to the mean between the last reported representative bid
and asked prices quoted by the NASDAQ system for such date;

               (ii)   If Stock was traded over-the-counter on the date in
question and was classified as a national market issue, then the Fair Market
Value shall be equal to the last-transaction price quoted by the NASDAQ system
for such date;

               (iii)  If Stock was traded on a stock exchange on the date in
question, then the Fair Market Value shall be equal to the closing price
reported by the applicable composite-transaction report for such date; and

               (iv)   If none of the foregoing provisions is applicable, then
the Fair Market Value shall be determined by the Committee in good faith on such
basis as it deems appropriate, or with respect to the determination of Fair
Market Value in connection with the exercise of any Options granted to
Nonemployee Directors under Section 4(b) of this Plan, by an independent
appraiser, selected by the Committee in its sole discretion.

In all cases, the determination of Fair Market Value by the Committee shall be
conclusive and binding on all persons.

        (j)    "ISO" shall mean an incentive stock option described in section
422(b) of the Code.

        (k)    "Nonemployee Director" shall mean a member of the Board of
Directors who (i) is not currently an officer or employee of the Company or a
parent or subsidiary of the Company, (ii) has not received compensation for
serving as a consultant or in any other non-director capacity or had an interest
in any transaction with the Company or a parent or subsidiary of the Company
that would exceed the $60,000 threshold for which disclosure would be required
under Item 404(a) of Regulations S-K, or (iii) has not been engaged through
another party in a business relationship with the Company which would be
disclosable under Item 404(b) of Regulation S-K. If the Board of Directors
determines that compliance with Section 162(m) of the Code is desirable, then
the term "Nonemployee Director" shall also be interpreted to satisfy the
definition of "outside director" under Section 162(m) and applicable regulations
issued pursuant thereto.

        (l)    "Nonstatutory Option" shall mean a stock option not described in
sections 422(b) or 423(b) of the Code.

        (m)    "Option" shall mean an ISO or Nonstatutory Option granted under
the Plan and entitling the holder to purchase Shares.

        (n)    "Optionee" shall mean an individual who holds an Option.

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        (o)    "Plan" shall mean this Amendment Number Three to the AVANIR
Pharmaceuticals 1994 Stock Option Plan (and subsequent amendments thereto).

        (p)    "Service" shall mean service as an Employee or Consultant.

        (q)    "Share" shall mean one share of Stock, as adjusted in accordance
with Section 8 (if applicable).

        (r)    "Stock" shall mean the Class A Common Stock of the Company.

        (s)    "Stock Option Agreement" shall mean the agreement between the
Company and an Optionee which contains the terms, conditions and restrictions
pertaining to his or her Option.

        (t)    "Stock Purchase Agreement" shall mean the Notice of Exercise and
Stock Purchase Agreement to be delivered by an Optionee to the Company upon
exercise of an Option.

        (u)    "Subsidiary" shall mean any corporation, if the Company and/or
one ore more other Subsidiaries own not less than 50 percent of the total
combined voting power of all classes of outstanding stock of such corporation. A
corporation that attains the status of a Subsidiary on a date after the adoption
of the Plan shall be considered a Subsidiary commencing as of such date.

        (v)    "Total and Permanent Disability" shall mean that the Optionee is
unable to engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which can be expected to result in
death or which has lasted, or can be expected to last, for a continuous period
of not less than one year.

SECTION 3. ADMINISTRATION.

        (a)    Committee Membership. The Plan shall be administered by the
Committee. The Committee shall consist only of Nonemployee Directors of the
Company and shall have at least two members. The Committee shall meet such other
requirements as may be established from time to time by the Securities and
Exchange Commission for plans intended to qualify for exemption under Rule 16b-3
(or its successor) under the Exchange Act. The Board of Directors may appoint a
separate committee of the Board of Directors, composed of one ore more directors
of the Company who need not be Nonemployee Directors, who may administer the
Plan with respect to Employees or Consultants who are not officers or directors
of the Company or incoming new directors of the Company, may grant Options under
the Plan to such persons and may determining the timing, number of Shares
subject to such Options and other terms of such grants.

        (b)    Committee Procedures. The Committee shall designate one of its
members as chairman. The Committee may hold meetings at such times and places as
it shall determine. The acts of a majority of the Committee members present at
meetings at which a quorum exists, or acts reduced to or approved in writing by
all Committee members, shall be valid acts of the Committee.

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        (c)    Committee Responsibilities. Subject to the provisions of the
Plan, and without further approval of the Board of Directors, the Committee
shall have full authority and discretion to take the following actions:

               (i)    To interpret the Plan and to apply its provisions;

               (ii)   To adopt, amend or rescind rules, procedures and forms
relating to the Plan;

               (iii)  To authorize any person to execute, on behalf of the
Company, any instrument required to carry out the purposes of the Plan;

               (iv)   To determine when Options are to be granted under the
Plan;

               (v)    To select the Optionees;

               (vi)   To determine the number of Shares to be made subject to
each Option;

               (vii)  To prescribe the terms and conditions of each Option,
including without limitation, the Exercise Price, to determine whether such
Option is to be classified as an ISO or as a Nonstatutory Option, and to specify
the provisions of the Stock Option Agreement relating to such Option;

               (viii) To amend any outstanding Stock Option Agreement, subject
to applicable legal restrictions and to the consent of the Optionee who entered
into such agreement;

               (ix)   To accelerate or defer, with the consent of the Optionee,
the exercise date of any Option;

               (x)    With the consent of the Optionee, to reprice, cancel and
regrant, or otherwise adjust the Exercise Price of an option previously granted
by the Committee;

               (xi)   To prescribe the consideration for the grant of each
Option or other right under the Plan and to determine the sufficiency of such
consideration; and

               (xii)  To take any other actions deemed necessary or adviseable
for the administration of the Plan.

All decisions, interpretations and other actions of the Committee shall be final
and binding on all Optionees, and all persons deriving their rights from an
Optionee. No member of the Committee shall be liable for any action that he or
she has taken or has failed to take in good faith with respect to the Plan, any
Option, or any other right to acquire Shares under the Plan.

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SECTION 4. ELIGIBILITY.

        (a)    General Rule. Only Employees, Nonemployee Directors and
Consultants shall be eligible to receive Options. In addition, only Employees
shall be eligible for the grant of ISO's.

        (b)    Nonemployee Directors. Any other provisions of the Plan
notwithstanding (including, without limitation, Section 3(d)), options to be
granted to the participation of Nonemployee Directors shall be granted in
accordance with the following conditions and be subject to the following
restrictions:

               (i)    Such individuals shall receive no Options other than
Nonstatutory Options described in this Section 4(b);

               (ii)   Each of such individuals shall receive annually one Option
covering 10,000 Shares subject to adjustment under Section 8, which Option shall
be granted as of the day next following the conclusion of the regular annual
meeting of the Company's stockholders each year provided that such individual
then serves on the Board of Directors;

               (iii)  The Exercise Price of the Options described in this
Section 4(b) shall be equal to the Fair Market Value on the date of the grant
payable in cash;

               (iv)   The term of the Options described in this Section 4(b)
shall not exceed 10 years; and

               (v)    The Options described in Section 4(b) shall become
exercisable immediately upon the date of grant.

        (c)    Ten-Percent Stockholders. An Employee who owns more than 10
percent of the total combined voting power of all classes of outstanding stock
of the Company or any of its Subsidiaries shall not be eligible for the grant of
an ISO unless (i) the Exercise Price is at least 110 percent of the Fair Market
Value of Share on the date of grant and (ii) such ISO by its terms is not
exerciseable after the expiration of five years from the date of grant.

        (d)    Attribution Rules. For purposes of Subsection (c) above, in
determining stock ownership, an Employee shall be deemed to own the stock owned,
directory or indirectly, by or for such Employee's brothers, sisters, spouse,
ancestors and lineal descendants. Stock owned, directly or indirectly, by or for
a corporation, partnership, estate or trust shall be deemed to be owned
proportionately by or for its stockholders, partners or beneficiaries. Stock
with respect to which such Employee holds an option shall be counted.

        (e)    Outstanding Stock. For purposes of Subsection (c) above,
"outstanding stock" shall include all stock actually issued and outstanding
immediately after the grant. "Outstanding Stock" shall not include shares
authorized for issuance under outstanding options held by the Employee or by any
other person.

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SECTION 5. STOCK SUBJECT TO PLAN.

        (a)    Basic Limitation. Shares subject to Options granted under the
Plan shall be authorized but unissued Shares. The aggregate number of shares
which may be issued under the Plan (upon exercise of Options or other rights to
acquire Shares) shall not exceed 2,000,000 Shares, subject to adjustment
pursuant to Section 8. The number of Shares which are subject to Options or
other rights outstanding at any time under the Plan shall not exceed the number
of Shares which then remain available for issuance under the Plan. The Company,
during the term of the Plan, shall at all times reserve and keep available
sufficient Shares to satisfy the requirements of the Plan.

        (b)    Additional Shares. In the event that any outstanding Option or
other right for any reason expires or is canceled or otherwise terminated, the
Shares allocated to the unexercised portion of such Option or other right shall
again be available for the purpose of the Plan.

SECTION 6. TERMS AND CONDITIONS OF OPTIONS.

        (a)    Stock Option Agreement. Each grant of an Option under the Plan
shall be evidenced by a Stock Option Agreement between the Optionee and the
Company. Such Option shall be subject to all applicable terms and conditions of
the Plan and may be subject to any other terms and conditions which are not
inconsistent with the Plan and which the Committee deems appropriate for
inclusion in a Stock Option Agreement. The provisions of the various Stock
Option Agreements entered into under the Plan need not be identical.

        (b)    Number of Shares. Each Stock Option Agreement shall specify the
number of Shares that are subject to the Option and shall provide for the
adjustment of such number in accordance with Section 8. The Stock Option
Agreement shall also specify whether the Option is an ISO or a Nonstatutory
Option.

        (c)    Exercise Price. Each Stock Option Agreement shall specify the
Exercise Price. The Exercise Price of an ISO shall not be less than 100 percent
of the Fair Market Value of a Share on the date of grant, subject to the
additional conditions of Section 4(d). The Exercise Price of a Nonstatutory
Option shall not be less than 85 percent of the Fair Market Value of a Share on
the date of grant. Subject to the preceding two sentences, the Exercise Price
under any Option shall be determined by the Committee at its sole discretion.
The Exercise Price shall be payable in a form described in Section 7.

        (d)    Withholding Taxes. The Company's obligation to deliver shares or
cash upon the exercise of Options shall be subject to the satisfaction of all
applicable Federal, State and local income tax and employment tax withholding
requirements. The Committee may, in its discretion and in accordance with the
provision of this Section 6(d) and such supplemental rules as the Committee may
from time to time adopt, provide any or all Optionees holding Non-statutory
Options with the right to use Shares in satisfaction of all or part of the
Federal, State and local income tax and employment tax liabilities incurred by
such Optionees in connection with the exercise of their Options (the "Taxes").
The Optionee holding a Non-statutory Option may be provided with the election to
have the Company withhold, from the Shares otherwise

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issuable upon the exercise of such Non-statutory Option, a portion of such
Shares with an aggregate Fair Market Value equal to the designated percentage
(up to 100% as specified by the Optionee) of the applicable Taxes. Any such
withholding election shall be subject to the following terms and conditions:

               (i)    The election must be made on or before the date the amount
of the Taxes incurred by the Optionee in connection with the exercise of the
Option is determined (the "Tax Determination Date").

               (ii)   The election shall be irrevocable.

               (iii)  The election shall be subject to the approval of the
Committee and none of the Shares for which the Option is exercised shall be
withheld in satisfaction of the Taxes incurred by the Optionee in connection
with such exercise, except to the extent the election is approved by the
Committee.

               (iv)   The Shares withheld pursuant to the election shall be
valued at Fair Market Value on the Tax Determination Date.

               (v)    In no event may the number of Shares requested to be
withheld exceed in value the dollar amount of Taxes incurred by the Optionee in
connection with the exercise of the Non-statutory Option.

               (vi)   If the withholding election is to be made by an Optionee
who is at the time an officer or director of the Company subject to the
short-swing profit restrictions of Section 16(b) of the Exchange Act, then the
following limitations, in addition to the preceding provisions of this Section
6(d), shall also be applicable:

                      (A)    The election shall not become effective at any time
prior to the expiration of the six month period measured from the later of the
grant date of the Non-statutory Option to which such election pertains or the
actual grant date of the withholding election, and no Shares shall accordingly
be withheld in connection with any Tax Determination Date which occurs before
the expiration of such six month period.

                      (B)    The election must be effected in accordance with
either of the following guidelines: (1) the election must be made six months or
more prior to the Tax Determination Date, and (2) the exercise of such election
and the exercise of the Non-statutory Option to which such election relates must
occur concurrently within a quarterly "window" period. Quarterly window periods
shall begin on the third business day following the date of public release of
each quarterly or annual summary statement on the Company's sales and earnings
and end on the earlier of the 12th business day following such release date or
the Tax Determination Date.

                      (C)    The six month period specified in clauses (A) and
(B) shall not be applicable in the event of the Optionee's death or disability.

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        (e)    Exercisability and Term. Each Stock Option Agreement shall
specify the date when all or any installment of the Option is to become
exerciseable. Except with respect to any Options granted to Nonemployee
Directors under Section 4(b) of this Plan, the vesting of any Option shall be
determined by the Committee in its sole discretion. A Stock Option Agreement may
provide for accelerated exercisability in the event of the Optionee's death,
Total and Permanent Disability or retirement or other events determined from
time-to-time by the Committee. The Stock Option Agreement shall also specify the
term of the Option. The term shall not exceed 10 years from the date of grant,
except as otherwise provided in Section 4(d). Subject to the preceding sentence
and except with respect to any Options granted under Section 4(b), the Committee
at its sole discretion shall determine when an Option is to expire. An Option
shall be deemed exercised when the Company receives from the Optionee an
executed Stock Purchase Agreement in accordance with the terms of the Option by
the person entitled to exercise the Option and full payment for the Shares with
respect to which the Option is exercised has been received by the Company. Full
payment may, as authorized by the Committee, consist of any consideration and
method of payment allowable under Section 7 of this Plan. Until the issuance (as
evidenced by the appropriate entry on the books of the Company or of a dully
authorized transfer agent of the Company) of the stock certificate evidencing
such Shares, no right to vote or receive dividends or any other rights as a
shareholder shall exist with respect to the Shares, notwithstanding the exercise
of the Option. No adjustment will be made for a dividend or other right for
which the record date is prior to the date of the stock certificate is issued,
except as provided in Section 8 of this Plan. With respect to any ISO's granted
under this Plan, the aggregate Fair Market Value (determined as of the
respective date or dates of grant) of the Shares for which one or more options
granted to any Employee under this Plan (or any other option plan of the Company
or its parent or subsidiary corporations) may for the first time become
exerciseable as ISO's during any one calendar year shall not exceed the sum of
One Hundred Thousand Dollars ($100,000). To the extend the Employee holds two or
more such options which becomes exerciseable for the first time in the same
calendar year, the foregoing limitation on the exercisability thereof as ISO's
shall be applied on the basis of the order in which such options are granted. To
the extent such dollar limitation is exceeded in any one calendar year the
Option shall nevertheless be exerciseable for the excess number of Shares as a
Non-statutory Option.

        (f)    Nontransferability. During an Optionee's lifetime, such
Optionee's Option(s) shall be exerciseable only by him or her and shall not be
transferable. In the event of an Optionee's death, such Optionee's Option(s)
shall not be transferable other than by will or by the laws or descent and
distribution.

        (g)    Termination of Service (Except by Death). If an Optionee's
Services terminates for any reason other than the Optionee's death, then such
Optionee's Option(s) shall expire on the earliest of the following occasions:

               (i)    The expiration date determined pursuant to Subsection (e)
above;

               (ii)   The date three months after the termination of the
Optionee's Service for any reason other than Total and Permanent Disability; or

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               (iii)  The date twelve months after the termination of the
Optionee's Service by reason of Total and Permanent Disability.

        The Optionee may exercise all or part of his or her Option(s) at any
time before the expiration of such Option(s) under the preceding sentence, but
only to the extend that such Option(s) had become exercisable before the
Optionee's Service terminated or became exercisable as a result of the
termination. The balance of such Option(s) shall lapse when the Optionee's
Service terminates. In the event that the Optionee dies after the termination of
the Optionee's Service but before the expiration of the Optionee's Option(s),
all or part of such Option(s) may be exercised (prior to expiration) by the
executors or administrators of the Optionee's estate or by any person who has
acquired such Option(s) directly from the Optionee by bequest or inheritance,
but only to the extent that such Option(s) had become exercisable before the
Optionee's Service terminated or became exercisable as a result of the
termination. For purposes of the foregoing provisions of this Section 6(g), the
Optionee shall be deemed to be providing Service to the Company for so long as
the Optionee renders Services on a periodic basis to the Company or a
Subsidiary in the capacity of an Employee or Consultant. The Optionee shall be
considered to be an Employee for so long as the Optionee remains in the employ
of the Company or Subsidiary.

        (h)    Leaves of Absence. For purposes of Subsection (g) above, Service
shall be deemed to continue which the Optionee is on military leave, sick leave
or other bona fide leave of absences (as determined by the Committee.) The
foregoing notwithstanding, in the case of an ISO granted under the Plan, Service
shall not be deemed to continue beyond the first 90 days of such leave, unless
the Optionee's reemployment rights are guaranteed by statute or by contract.

        (i)    Death of Optionee. If an Optionee dies while he or she is
providing Service to the Company, then such Optionee's Option(s) shall expire on
the earlier of the following dates:

               (i)    The expiration date determined pursuant to Subsection (e)
above; or

               (ii)   The date twelve months after the Optionee's death.

All or part of the Optionee's Option(s) may be exercised at any time before the
expiration of such Option(s) under the preceding sentence by the executors or
administrators of the Optionee's estate or by any person who has acquired such
Option(s) directly from the Optionee by bequest or inheritance, but only to the
extent such Option(s) had become exercisable before the Optionee's death or
became exerciseable as a result of the Optionee's death. The balance of such
Option(s) shall lapse when the Optionee dies.

        (j)    No Rights as a Stockholder. An Optionee, or a transferee of an
Optionee, shall have no rights as a stockholder with respect to any Shares
covered by his or her Option until the date of the issuance of a stock
certificate for such Shares. No adjustments shall be made, except as provided in
Section 8.

        (k)    Modification, Extension and Renewal of Options. Within the
limitations of the Plan (and except with respect to the Options granted to
Nonemployee Directors under Section

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4(b)), the Committee may modify, extend or renew outstanding Options or may
accept the cancellation of outstanding Options (to the extent not previously
exercised) in return for the grant of new Options at the same or different
price. The foregoing notwithstanding, no modification of an Option shall,
without the consent of the Optionee, impair such Optionee's rights or increase
his or her obligations under such Option.

        (l)    Restrictions on Transfer of Shares. Any Shares issued upon
exercise of an Option shall be subject to such special forfeiture conditions,
rights of repurchase, rights of first offer and other transfer restrictions as
the Committee may determine. Such restrictions shall be set forth in the
applicable Stock Option Agreement and shall apply in addition to any general
restrictions that may apply to all holders of Shares.

        (m)    Rule 16b-3. Options granted to persons who are subject to Section
16 of the Exchange Act must company with the applicable provisions of Rule 16b-3
promulgated therein and shall contain such additional conditions or restrictions
as may be required thereunder to qualify for the maximum exemption from Section
16 of the Exchange Act with respect to Plan transactions, provided, however,
that this provision shall not apply if at the time of such option grant the
Plan, as it relates to such grant, is not administered by a Committee consisting
solely of Nonemployee Directors.

SECTION 7. PAYMENT FOR SHARES.

        (a)    General Rule. The entire Exercise Price of Shares issued under
the Plan shall be payable in lawful money of the United States of America at the
time when such Shares are purchased, except as follows:

               (i)    In the case of an ISO granted under the Plan, payment
shall be made only pursuant to the express provisions of the applicable Stock
Option Agreement. However, the Committee (at its sole discretion) may specify in
the Stock Option Agreement that payment may be made pursuant to Subsections (b),
(c) or (d) below.

               (ii)   In the case of a Nonstatutory Option granted under the
Plan, the Committee (at its sole discretion) may accept payment pursuant to
Subsections (b), (c) or (d) below.

        (b)    Surrender of Stock. To the extent that this Subsection (b) is
applicable, payment may be made all or in part with Shares which have already
been owned by the Optionee or his or her representative for more than 12 months
and which are surrendered to the Company in good form for transfer. Such Shares
shall be valued at their Fair Market Value on the date when the new Shares are
purchased under the Plan.

        (c)    Exercise/Sale. To the extent that this Subsection (c) is
applicable, payment may be made by the delivery (on a form prescribed by the
Company) of an irrevocable direction to a securities broker approved by the
Company to sell Shares and to deliver all or part of the sales proceeds to the
Company in payment of all or part of the Exercise Price and any withholding
taxes.

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        (d)    Exercise/Pledge. To the extent that this Subsection (d) is
applicable, payment may be made by the delivery (on a form prescribed by the
Company) of an irrevocable direction to pledge Shares to a securities broker or
lender approved by the Company, as security for a loan, and to deliver all or
part of the loan proceeds to the Company in payment of all or part of the
Exercise Price and any withholding taxes.

SECTION 8. ADJUSTMENT OF SHARES.

        (a)    General. In the event of a subdivision of the outstanding Stock,
a declaration of a dividend payable in Shares, a declaration of a dividend
payable in a form other than Stock in an amount that has a material effect on
the value of Stock, a combination or consolidation of the outstanding Stock (by
reclassification or otherwise) into a lesser number of Shares, a
recapitalization, a spinoff or a similar occurrence, the Committee shall make
appropriate adjustments in or more of (i) the number of Shares available for
future grants under Section 5, (ii) the number of Options to be awarded to
Nonemployee Directors under Section 4(b), (iii) the number of Shares covered by
each outstanding Option or (iv) the Exercise Price under each outstanding
Option.

        (b)    Reorganizations. In the event of any of the following
transactions (a "Corporate Transaction"):

               (i)    a merger or acquisition involving the Company in which the
Company is not the surviving entity, except for a transaction the principal
purpose of which is to change the State of the Company's incorporation,

               (ii)   sale, transfer or other disposition of all or
substantially all of the assets of the Company or

               (iii)  any other corporate reorganization or business combination
in which fifty percent (50%) or more of the Company's outstanding voting stock
is transferred to different holders in a single transaction or a series of
related transactions, then the exercisability of each Option outstanding under
the Plan shall be automatically accelerated so that each such Option shall
immediately prior to the specified effective date for the Corporate Transaction,
become fully exerciseable with respect to the total number of Shares purchasable
under such Option and may be exercised for all or any portion of such Shares.
However, an outstanding Option under the Plan shall not be so accelerated if (i)
such Option is, in connection with this Corporate Transaction, either to be
assumed by the successor corporation or parent thereof or be replaced with a
comparable option to purchase shares of the capital stock of the successor
corporation or parent thereof, or (ii) such Option is to be replaced by a
comparable cash incentive program of the successor corporation based on the
value of the option at the time of the Corporate Transaction, or (iii) the
acceleration of such Option is subject to other applicable limitations imposed
by the Committee at the time of the grant. The determination of comparability
under clauses (i) or (ii) above shall be made by the Committee and its
determination shall be final, binding and conclusive. In connection with any
such Corporate Transaction, the exercisability as an incentive stock option
under the federal tax laws of any accelerated Options under the Plan shall
remain subject to any applicable dollar limitation of Section 6(e). Except as
provided

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below in this Subsection (b), upon the consummation of the Corporate
Transaction, all outstanding Options under the Plan shall, to the extent not
previously exercised or assumed by the successor corporation or its parent
company, terminate and cease to be outstanding. If the Company is the surviving
entity in any Corporate Transaction or the outstanding Options are to be assumed
in connection with such Corporate Transaction, then each Option shall,
immediately after such Corporate Transaction, be appropriately adjusted to apply
and pertain to the number and class of securities which would be issuable to the
Optionee, upon consummation of such Corporate Transaction if the Option were
exercised immediately prior to such Corporate Transaction. Appropriate
adjustments shall also be made to the Exercise Price payable per share, provided
the aggregate Exercise Price payable for such Option shall remain the same. In
addition, the class and number of securities available for issuance under the
Plan following the consummation of such Corporate Transaction shall be
appropriately adjusted. The grant of Options under this Plan shall in no way
affect the right of the Company to adjust, reclassify, reorganize or otherwise
change its capital or business structure or to merge, consolidate, dissolve,
liquidate or sell or transfer all or any part of its business or assets.

        (c)    Reservation of Rights. Except as provided in this Section 8, an
Optionee shall have no rights by reason of any subdivision or consolidation of
shares of stock of any class, the payment of any dividend or any other increase
or decrease in the number of shares of stock of any class. Any issue by the
Company of shares of stock of any class, or securities convertible into shares
of stock of any class, shall not affect, and no adjustment by reason thereof
shall be made with respect to, the number or Exercise Price of Shares subject to
an Option. The grant of an Option pursuant to the Plan shall not affect in any
way the right or power of the Company to make adjustments, reclassification,
reorganizations or changes of its capital or business structure, to merge or
consolidate or to dissolve, liquidate, sell or transfer all or any part of its
business or assets.

SECTION 9. SECURITIES LAWS.

        Shares shall not be issued under the Plan unless the issuance and
delivery of such Shares complies with (or is exempt from) all applicable
requirements of law, including without limitation) the Securities Act of 1933,
as amended, the rules and regulations promulgated thereunder, state securities
laws and regulations, and the regulations of any stock exchange on which the
Company's securities may then be listed.

SECTION 10. NO EMPLOYMENT RIGHTS.

        No provision of the Plan, nor any right or Option granted under the
Plan, shall be construed to give any person any right to become, to be treated
as, or to remain an Employee or Consultant or in any way to amend, modify, waive
or terminate the Company's (or its Subsidiary's) right to terminate any person's
Service at any time and for any reason.

SECTION 11. DURATION AND AMENDMENTS.

        (a)    Term of the Plan. The Plan, as set forth herein, shall become
effective January 14, 1994, the date the Board of Directors adopted the Plan.
Notwithstanding the foregoing, no Option granted under the Plan shall become
exerciseable unless and until the Plan shall have

                                       12
<PAGE>

been approved by the shareholders of the Company. The Plan shall terminate
automatically 10 years after its initial adoption by the Board of Directors on
January 14, 2004, and may be terminated on any earlier date pursuant to
Subsection (b) below.

        (b)    Right to Amend or Terminate the Plan. The Board of Directors may
amend, suspend or terminate the Plan at any time and for any reason; provided,
however, that any amendment of the Plan which (i) materially increases the
number of Shares available for issuance under the Plan (except as provided in
Section 8); (ii) materially changes the class of persons who are eligible for
the grant of ISO's; or (iii) if required by Rule 16b-3 (or any successor) under
the Exchange Act, would materially increase the benefits accruing to
participants under the Plan or would materially modify the requirements as to
eligibility for participation in the Plan, shall be subject to the approval of
the Company's stockholders by the affirmative vote of the holders of a majority
of the securities of the Company present, or represented and entitled to vote at
a duly held stockholders' meeting. Stockholder approval shall not be required
for any other amendment of the Plan. Notwithstanding the foregoing, Section 4(b)
of this Plan may not be amended more than once in any six-month period other
than to conform with changes in the Code or the Employee Retirement Income
Security Act, as amended.

        (c)    Effect of Amendment or Termination. No Shares shall be issued or
sold under the Plan after the termination thereof, except upon exercise of an
Option granted prior to such termination. The termination of the Plan, or any
amendment thereof, shall not affect any Share previously issued or any Option
previously granted under the Plan.

                                       13
<PAGE>

SECTION 12. EXECUTION.

        To record the adoption of this Plan by the Board of Directors, as
amended on September 11, 2001, the Company has caused its authorized officer to
execute the same.

                                        AVANIR PHARMACEUTICALS,
                                        a California corporation

                                        By: /s/ Gregory P. Hanson
                                            ------------------------------------
                                            Gregory P. Hanson, Secretary

                                       14<PAGE>
                                                                    EXHIBIT 10.5

                              EMPLOYMENT AGREEMENT

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

I.     AGREEMENT

       1.     Effective Date.

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

       2.     At-will Employment.

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

       3.     Employment Duties.

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

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

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

<PAGE>

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

       4.     Compensation.

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

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

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

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

       5.     Non-disclosure Covenant.

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

                                       2
<PAGE>

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

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

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

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

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

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

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

                                       3
<PAGE>

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

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

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

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

       9. Voluntary Resignation or Termination for "Cause."

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

                                       4
<PAGE>

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

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

       10. Termination Without "Cause."

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

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

                                       5
<PAGE>

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

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

       12. Change of Control Termination.

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

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

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

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

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

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

                                       6
<PAGE>

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

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

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

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

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

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

                                       7
<PAGE>

                                   other corporation resulting from such
                                   Transaction; or

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

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

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

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

       If to AVANIR:

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

       If to Employee:

                 Gerald J. Yakatan, Ph.D.

                                       8
<PAGE>

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

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

       16. General Provisions.

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

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

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

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

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

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

                                       9
<PAGE>

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

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

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

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

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

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

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

                                            AVANIR PHARMACEUTICALS

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

                                            EMPLOYEE

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

                                       10
<PAGE>

                                    EXHIBIT 2

                                 GENERAL RELEASE

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

                                    RECITALS

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

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

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

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

                                       11
<PAGE>

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

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

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

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

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

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

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

                                       12
<PAGE>

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

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

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

                                       13
<PAGE>

                                    EXHIBIT 3

                          MUTUAL ARBITRATION AGREEMENT

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

AGREEMENT TO ARBITRATE CERTAIN DISPUTES AND CLAIMS

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

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

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

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

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

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

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

                                       14
<PAGE>

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

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

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

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

       FINAL AND BINDING ARBITRATION

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

       ARBITRATION PROCEDURES

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

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

                                       15
<PAGE>

       PLACE OF ARBITRATION

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

       GOVERNING LAW

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

       COSTS OF ARBITRATION

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

       SEVERABILITY

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

       COMPLETE AGREEMENT

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

       KNOWING AND VOLUNTARY AGREEMENT

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

                                       16
<PAGE>

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

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

                                       AVANIR PHARMACEUTICALS

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

                                       EMPLOYEE

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

                                       17

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