10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended September 30, 2007
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For 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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  YES o     NO þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act.  YES o     NO þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES þ     NO o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. (See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act). Check one:

Large Accelerated Filer o      Accelerated Filer o     Non-accelerated Filer  þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES o     NO þ

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of March 31, 2007 was approximately $46.9 million, based upon the closing price on the Nasdaq Stock Market reported for such date. Shares of common stock held by each officer and director and by each person who is known to own 10% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates of the Company. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

43,121,858 shares of the registrant’s Common Stock were issued and outstanding as of December 7, 2007.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information required to be disclosed in Part III of this report is incorporated by reference from the registrant’s definitive Proxy Statement for the 2008 Annual Meeting of Shareholders, which will be held on February 21, 2008 and which proxy statement will be filed not later than 120 days after the end of the fiscal year covered by this report.

Table of Contents

			Page
PART I
	Item 1.	Business		1
	Item 1A.	Risk factors		9
	Item 1B.	Unresolved Staff Comments		16
	Item 2.	Properties		16
	Item 3.	Legal Proceedings		16
	Item 4.	Submission of Matters to a Vote of Security Holders		17
PART II
	Item 5.	Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		17
	Item 6.	Selected Consolidated Financial Data		18
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		21
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		38
	Item 8.	Financial Statements and Supplementary Data		38
	Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure		38
	Item 9A.	Controls and Procedures		38
	Item 9B.	Other Information		40
PART III
	Item 10.	Directors, Executive Officers and Corporate Governance		40
	Item 11.	Executive Compensation		41
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		42
	Item 13.	Certain Relationships and Related Transactions and Director Independence		42
	Item 14.	Principal Accountant Fees and Services		42
PART IV
	Item 15.	Exhibits and Financial Statement Schedules		42
SIGNATURES				48
EXHIBIT 3.1
EXHIBIT 4.8
EXHIBIT 10.36
EXHIBIT 10.41
EXHIBIT 10.42
EXHIBIT 10.43
EXHIBIT 10.44
EXHIBIT 10.46
EXHIBIT 10.49
EXHIBIT 10.50
EXHIBIT 10.51
EXHIBIT 10.52
EXHIBIT 10.53
EXHIBIT 23.1
EXHIBIT 23.2
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

PART I

Item 1.   Business

This Annual Report on Form 10-K contains forward-looking statements concerning future events and performance of our Company. When used in this report, the words “intend,” “estimate,” “anticipate,” “believe,” “plan,” “goal” and “expect” and similar expressions as they relate to Avanir are included to identify forward-looking statements. These forward-looking statements are based on our current expectations and assumptions and many factors could cause our actual results to differ materially from those indicated in these forward-looking statements. You should review carefully the factors identified in this report under the caption “Risk Factors.” We disclaim any intent to update or announce revisions to any forward-looking statements to reflect actual events or developments. Except as otherwise indicted herein, all dates referred to in this Report represent periods or dates fixed with reference to the calendar year, rather than our fiscal year ending September 30.

Executive Overview

Avanir Pharmaceuticals, a California corporation incorporated in August 1988, is a pharmaceutical company focused on developing, acquiring and commercializing novel therapeutic products for the treatment of chronic diseases. Our product candidates address therapeutic markets that include the central nervous system, inflammatory diseases and infectious diseases. Our lead product candidate, Zenvia^tm (dextromethorphan hydrobromide/quinidine sulfate), is currently in Phase III clinical development for the treatment of pseudobulbar affect (“PBA”) and diabetic peripheral neuropathic pain (“DPN pain”). Our first commercialized product, docosanol 10% cream, (sold as Abreva^® by our marketing partner GlaxoSmithKline Consumer Healthcare in North America) is the only over-the-counter treatment for cold sores that has been approved by the FDA. Our inflammatory disease program, which targets macrophage migration inhibitory factor (“MIF”), is currently partnered with Novartis and our infectious disease program, which is focused primarily on anthrax antibodies, is currently being funded by grants from the National Institute of Health/National Institute of Allergy and Infectious Disease (“NIH/NIAID”).

Zenvia Status

Zenvia is currently in Phase III clinical development for the treatment of two conditions: (1) pseudobulbar affect (“PBA”), which is an involuntary emotional expression disorder (“IEED”) and (2) diabetic peripheral neuropathic pain (“DPN pain”).

In October 2006, we received an “approvable” letter from the FDA for Zenvia in the treatment of patients with PBA/IEED. The approvable letter raised certain safety and efficacy concerns and the safety concerns will require additional clinical development to resolve. Based on discussions with the FDA, we were able to successfully resolve the outstanding efficacy concern of the original dose formulation. However, in order to address safety concerns, we agreed to re-formulate Zenvia and conduct one additional confirmatory Phase III clinical trial using lower dose formulations. The goal of the study is to demonstrate improved safety while maintaining significant efficacy. In October 2007, we reached agreement with the FDA under the Special Protocol Assessment (“SPA”) process, on the design of a single confirmatory Phase III clinical trial of Zenvia for the treatment of patients with PBA. We enrolled our first patient in this trial in December 2007 and expect this study to be completed (as defined as top-line safety and efficacy data becomes available) during the second half of calendar 2009.

In April 2007, we announced top-line data results from our first Phase III clinical trial of Zenvia for DPN pain. After receipt of these positive results, we requested a meeting with the FDA to discuss the next steps for this program. The FDA informed Avanir it would not be necessary to meet and that Avanir should develop and then submit the protocol for the next study as well as any questions related to the development program for Zenvia. We are proceeding forward under this guidance and are currently conducting a formal pharmacokinetic (“PK”) study to identify a lower quinidine dose formulation that may have similar efficacy to the doses tested in the Phase III study before interacting with the FDA. While we have received no formal direction to lower quinidine dose formulation for DPN pain, we believe it is the most prudent course of action given the current regulatory environment and the concerns raised over Zenvia for PBA.

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Restructuring Activities

In May 2006, we acquired FazaClo^® (clozapine, USP), a product marketed for the management of treatment-resistant schizophrenia and the reduction in the risk of recurrent suicidal behavior in schizophrenia or schizoaffective disorders. We had intended to leverage the FazaClo sales force to assist with the commercial launch of Zenvia for PBA, which was planned for early 2007. However, due to the receipt of the approvable letter and the resulting delay in the planned launch of Zenvia, the strategic rationale for continued marketing of FazaClo by Avanir no longer existed. Therefore, we entered into an agreement in July 2007 to sell FazaClo to Azur Pharma, Inc. (“Azur”). The sale, which closed August 3, 2007, provided approximately $43.9 million in an up-front cash payment and may provide up to an additional $10 million in contingent payments to be paid in calendar year 2009, subject to certain regulatory conditions. In addition, the Company is eligible to receive up to $2 million in royalties, based on 3% of annualized net product revenues in excess of $17 million. Azur acquired the FazaClo sales force and support operations, representing approximately 80 employees in total. As a result, we became a substantially smaller organization following the sale of FazaClo and will be principally focused over the next two to three years on seeking regulatory approval of Zenvia for the treatment of patients with PBA and patients with DPN pain.

We also undertook other cost-cutting measures following receipt of the Zenvia approvable letter. We have ceased all pre-launch commercial readiness activities for Zenvia and have significantly reduced our administrative organization. We also cut back our drug discovery operations following (1) the non-renewal and termination of our Research Collaboration and License Agreement with AstraZeneca U.K. in March 2007 and (2) the completion of our two-year research collaboration with Novartis International Pharmaceutical Ltd. in March 2007. Our license agreement with Novartis currently remains in effect and Novartis is continuing clinical development of the licensed compounds. In late 2006 and early 2007, we consolidated operations to our headquarters in Orange County, California and, in July 2007, we subleased approximately 49,000 square feet of laboratory and office space, which represented all of our remaining excess facilities in San Diego, CA.

Based on our current capital resources and focus on obtaining approval for Zenvia, we have also structured the ongoing development of our anthrax human monoclonal antibody program so that direct development costs do not materially exceed funding levels from National Institutes of Health/National Institute of Allergy and Infectious Disease (“NIH/NIAID”) research grants or potential development partners. In May 2007, we received a one-year extension of our grant from the NIH/NIAID to fund further pre-clinical development of our anti-anthrax human monoclonal antibody and we are continuing development under this grant. We have suspended funding and development activity for our selective cytokine inhibitor program and will abandon the patents associated with this program if we are unable to find a licensing partner by the end of 2007.

As a result of these initiatives, we have undergone significant organizational changes in fiscal 2007. Our principal focus is currently on gaining regulatory approval for Zenvia, first for the treatment of patients with PBA and then for patients with DPN pain. We believe that the proceeds from the sale of FazaClo will be sufficient to fund our operations, including our planned confirmatory Phase III trial for Zenvia in patients with PBA, through the end of fiscal 2008. We are currently considering additional means of raising capital to fund ongoing Zenvia development and operations, including borrowing funds, selling common stock or other securities, and the monetization of remaining non-core assets. If we are unable to raise sufficient additional capital when needed in the future to fund our development programs, we may need to slow the development rate of some programs or sell additional rights to one or more drug candidates. For additional information about the risks and uncertainties that may affect our business and prospects, please see “Risk Factors.”

Our principal executive offices are located at 101 Enterprise, Suite 300, Aliso Viejo, California 92656. Our telephone number is (949) 389-6700 and our e-mail address is info@avanir.com. Our Internet website address is www.avanir.com. We make our periodic and current reports available on our Internet website, free of charge, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”). No portion of our website is incorporated by reference into this Annual Report on Form 10-K. The public may read and copy the materials we file with the SEC at the SEC’s Public Reference Room, located at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information regarding the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The public may also read and copy the materials we file with the SEC by visiting the SEC’s website, www.sec.gov.

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Avanir Product Pipeline and Marketed Products

Zenvia — Pseudobulbar Affect (PBA) Indication

PBA is a complex neurological syndrome that is characterized by a lack of control of emotional expression, typically involving episodes of involuntary or exaggerated motor expression of emotion such as laughing and/or crying. PBA occurs secondary to neurological diseases such as amyotrophic lateral sclerosis (“ALS”), dementias including Alzheimer’s disease (“AD”), multiple sclerosis (“MS”), and Parkinson’s disease, as well as neurological injuries such as stroke or traumatic brain injury. While the exact number of patients is unknown, based on our review of medical literature, independent surveys and our latest market research, we believe that there are likely over one million patients in the U.S. suffering from the symptoms of PBA. In addition, we believe that the availability of an FDA-approved treatment option for these patients may lead to the correct diagnosis of additional PBA patients. If the FDA approves Zenvia, it would be the first drug approved for the treatment of PBA. Zenvia is a patented, orally administered combination of two well-characterized compounds, the active ingredient dextromethorphan (“DM”) and the enzyme inhibitor quinidine (“Q”), which serves to increase the bioavailability of dextromethorphan in the human body.

We received an “approvable letter” from the FDA in October 2006 for our NDA submission for Zenvia for the treatment of patients with PBA/IEED. In October 2007, we reached agreement with the FDA under the SPA process, on the design of a single confirmatory Phase III clinical trial of Zenvia for the treatment of patients with PBA. For this trial, we have developed two alternative dosage formulations of Zenvia, the first contains 30 mg of DM and 10 mg of Q (Zenvia 30/10) and the second contains 20 mg of DM and 10 mg of Q (Zenvia 20/10). The new low dose formulation of Zenvia is expected to improve the safety and tolerability profile while maintaining comparable efficacy to the Zenvia 30/30 dose tested in prior Phase III trials. We enrolled our first patient in this trial in the first quarter of fiscal 2008.

The NDA for Zenvia contained data from two randomized, controlled, multi-center Phase III clinical trials testing the Zenvia 30/30 dose in patients with 1) PBA secondary to ALS and in patients with 2) PBA secondary to MS. The NDA also included data from an open-label clinical study evaluating the safety of long-term exposure to Zenvia 30/30 in patients with PBA associated with a variety of neurological disorders including ALS, MS, Alzheimer’s disease, traumatic brain injury and Parkinson’s disease. Zenvia demonstrated positive results in both the primary and secondary efficacy endpoints in the prior two pivotal Phase III clinical trials in patients with PBA, as described below.

The Phase III clinical study of Zenvia in the treatment of patients with PBA secondary to MS, was completed in June 2004, (Ann Neurol 2006;59:780-787) and treated 150 patients at 22 clinical sites who were given either placebo or Zenvia 30/30 twice a day for 85 days. A validated scale that measures the severity of these involuntary episodes of inappropriate laughing or crying called “The Center for Neurological Study Lability Scale,” or “CNS-LS”), was used to measure the effectiveness of Zenvia in this study. Results from the Phase III trial in MS patients with PBA demonstrated statistical significance for Zenvia 30/30 versus placebo in terms of the change in CNS-LS score, the primary endpoint of the study. Zenvia 30/30 also demonstrated a significant reduction in episodes of laughing and/or crying versus the comparators. The majority of reported adverse events were mild or moderate. Of the adverse events reported in 5% or more of the study participants, only dizziness was seen significantly more for Zenvia-treated patients than in the placebo-treated patients.

The Phase III clinical study of Zenvia in the treatment of 140 patients with PBA secondary to ALS was completed in June 2002 (Neurology, 2004; 63:1364-1370). This clinical trial had three treatment arms and compared Zenvia 30/30 to each of its two individual components; dextromethorphan 30 mg and quinidine 30 mg. Results from the Phase III trial in ALS patients with PBA demonstrated statistical significance for Zenvia 30/30 versus the comparators in terms of the change in CNS-LS score, the primary endpoint of the study. Zenvia 30/30 also demonstrated a significant reduction in episodes of laughing and/or crying versus the comparators. Nausea, dizziness and somnolence at a significantly higher incidence in the Zenvia 30/30 group compared with the DM and Q groups.

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Zenvia — Diabetic Peripheral Neuropathic Pain (“DPN pain”) Indication

Diabetic peripheral neuropathic pain (“DPN pain”), which arises from nerve injury, can result in a chronic and debilitating form of pain that has historically been poorly diagnosed and treated. One of the most debilitating forms of DPN pain is caused by nerve damage that can result from diabetes. It is often described as burning, tingling, stabbing, or pins and needles in the feet, legs, hands or arms. An estimated 3.5 million people in the United States experience diabetic peripheral neuropathic pain according to the American Diabetes Association. DPN pain currently is most commonly treated with antidepressants, anticonvulsants, opioid analgesics and local anesthetics. Most of these treatments have limited effectiveness or undesirable side effects. The neuropathic pain market is continuing to grow rapidly. In 2006, neuropathic pain therapies accounted for over $2.6 billion in sales among the seven largest markets (i.e. the United States., Japan, France, Germany, Italy, Spain and the United Kingdom.)

In April 2007, we announced positive top-line data from our first Phase III clinical trial of Zenvia for the treatment of patients with DPN pain. The primary endpoint of the trial was based on the daily diary entries for the Pain Rating Scale as defined in the SPA with the FDA. In the trial, two doses of Zenvia, 45/30 mg DMQ dosed twice daily (“DMQ 45”) and 30/30 mg DMQ dosed twice daily (“DMQ 30”), were compared to placebo based on daily patient diary entries for the Pain Rating Scale. Both Zenvia treatment groups had lower pain ratings than placebo patients (p <0.0001 in both cases). In the DMQ 45 patient group, average reductions were significantly greater than placebo patients at Days 30, 60, and 90 (p <0.0001 at each time point). In the DMQ 30 patient group, average reductions were also significantly greater than placebo patients at Days 30 and 60 (p <0.0001) and Day 90 (p=0.007).

Zenvia also demonstrated statistically significant improvements in a number of key secondary endpoints including the Pain Relief Ratings Scale and the Pain Intensity Ratings Scale. The secondary endpoints compared the baseline value to the average rating values at each study visit after randomization. The average pain relief reductions, as measured on the Pain Relief Rating Scale, were greater for the DMQ 45 patient group (p=0.0002) and for the DMQ 30 patient group (p=0.0083), compared with placebo. In addition, the DMQ 45, but not the DMQ 30, patient group demonstrated statistically significant improvements in the Pain Intensity Rating Scale compared with placebo (p=0.029). Although not powered to detect differences in the secondary endpoint of Peripheral Neuropathy Quality of Life Scale Composite score and thus not achieving statistical significance, the DMQ 45 patients showed a greater improvement than placebo patients (p=0.05) and the DMQ 30 patients showed a greater improvement than placebo patients (p=0.08).

The most commonly reported adverse events from this Phase III study were dizziness, nausea, diarrhea, fatigue and somnolence, which were mild to moderate in nature. A higher number of patients in the DMQ 45 and DMQ 30 treatment groups (25.2% and 21.0%, respectively) discontinued due to an adverse event than compared to placebo (11.4%). There were no statistically significant differences in serious adverse event with 7.6%, 4.8% and 4.1% reported in the DMQ 45, DMQ 30 and placebo groups, respectively, and no deaths occurred during the study.

After receipt of these positive results, we requested a meeting with the FDA to discuss the next steps for this program. The FDA informed Avanir it would not be necessary to meet and that Avanir should submit the protocol for the next study as well as any questions related to the development program for Zenvia. Before interacting further with the FDA we are proceeding forward under this guidance and are currently conducting a formal pharmacokinetic (“PK”) study to identify a lower quinidine dose formulation that may have similar efficacy to the doses tested in the Phase III study. While we have received no formal direction from the FDA to lower quinidine dose formulation for DPN pain, we believe it is the most prudent course of action given the current regulatory environment and the concerns raised in the approvable letter for Zenvia for PBA.

Docosanol 10% Cream — Cold Sores

Docosanol 10% cream is a topical treatment for cold sores. In 2000, we received FDA approval for marketing docosanol 10% cream as an over-the-counter product. Since that time, docosanol 10% cream has been approved by regulatory agencies in Canada, Denmark, Finland, Israel, Korea, Norway, Portugal, Spain, Poland, Greece and Sweden and is sold by our marketing partners in these territories. In 2000, we granted a subsidiary of GlaxoSmithKline, SB Pharmco Puerto Rico, Inc. (“GlaxoSmithKline”) the exclusive rights to market docosanol 10% cream in North America. GlaxoSmithKline markets the product under the name Abreva^® in the United States

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and Canada. In fiscal 2003, we sold an undivided interest in our GlaxoSmithKline license agreement for docosanol 10% cream to Drug Royalty USA, Inc. (“Drug Royalty USA”) for $24.1 million. We retained the right to receive 50% of all royalties under the GlaxoSmithKline license agreement for annual net sales of Abreva in North America in excess of $62 million. We also retained the rights to develop and license docosanol 10% cream outside North America for the treatment of cold sores and other potential indications. We have six other collaborations for docosanol around the world. Two of these collaborations currently generate revenue and the other four may generate future revenue for the Company depending on clinical and regulatory success outside of the United States.

Under the terms of our docosanol license agreements, our partners are generally responsible for all regulatory approvals, sales and marketing activities, and manufacturing and distribution of the product in the licensed territories. The terms of the license agreements typically provide for us to receive a data transfer fee, potential milestone payments and royalties on product sales. We purchase the active pharmaceutical ingredient (“API”), docosanol, from a large supplier in Western Europe and sell the material to our licensees for commercialization. We currently store our API in the United States. Any material disruption in manufacturing could cause a delay in shipments and possible loss of sales.

Macrophage Migration Inhibitory Factor (“MIF”) — Inflammation

In April 2005, we entered into an exclusive Research Collaboration and License Agreement with Novartis regarding the license of certain compounds that regulate macrophage migration inhibitory factor (“MIF”) in the treatment of various inflammatory diseases. In March 2007, Novartis made the decision to continue the MIF research program internally. As a result, the research collaboration portion of this agreement was not renewed. Under the terms of the license agreement, we are eligible to receive over $200 million in combined upfront and milestone payments upon achievement of development, regulatory, and sales objectives. We are also eligible to receive escalating royalties on any worldwide product sales generated from this program.

Xenerex Human Antibody Technology — Anthrax/Other Infectious Diseases

Our patented Xenerex antibody technology can be used to develop human monoclonal antibodies for use as prophylactic and therapeutic drugs, which may be used to prevent or treat anthrax and other infectious diseases. This proprietary technology provides a platform for accessing human monoclonal antibodies against disease antigens. The Xenerex technology is capable of generating fully human antibodies to target antigens and draws on the natural diversity of the human donor population. Using Xenerex technology, we have discovered a human monoclonal antibody, AVP-21D9, that provides immediate post-exposure neutralization and immediate immunity to animals exposed to a lethal dose of recombinant anthrax toxins.

Our anthrax antibody is in preclinical development and is currently being funded by grants from the NIH/NIAID. In May 2007, we were notified that we had been awarded a one-year extension of our $2.0 million research grant from the NIH/NIAID for ongoing research and development related to our anthrax antibody. Under the terms of the grant, the NIH/NIAID will reimburse us for up to $2.0 million in certain expenses related to the establishment of a current Good Manufacturing Practices (“cGMP”) manufacturing process and the preclinical testing of the anthrax antibody. Subject to certain conditions, we, as the awardee organization, retain the principal worldwide patent rights to any invention developed with the U.S. government support. Our progress on this program will substantially depend on future grants, as well as our business priorities. Currently, we expect that we will continue with the development of this program only to the extent that its development is funded by research grants. Because all of our monoclonal antibody research is at an early preclinical stage of development and is unpredictable in terms of the outcome, we are unable to predict the cost and timing for development of this antibody.

Discontinued Programs

Reverse Cholesterol Transport (“RCT”) Technology — Atherosclerosis

In July 2005, we entered into an exclusive Research Collaboration and License agreement with AstraZeneca regarding the license of certain compounds we discovered for the potential treatment of cardiovascular disease. In March 2007, the Research Collaboration and License agreement was mutually terminated. According to the terms of the agreement, AstraZeneca returned the lead molecule and will return or make available all related rights to

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Avanir. Following the mutual decision to terminate, we have elected to no longer prosecute any patents associated with this program and we do not expect to continue with any further development efforts for this program.

AVP-13358 — Selective Cytokine Inhibitor

In November 2006, in an effort to reduce operating expenses we decided to suspend clinical activities associated with the selective cytokine inhibitor program and seek potential partners for the program. AVP-13358 is an internally discovered novel, orally active drug molecule that has anti-inflammatory and other pharmacological properties that could be useful against certain disease targets. Given our limited resources and the lack of partnership interest, we have made the decision to no longer prosecute any patents associated with this program and we do not expect to continue with any further development efforts for this program.

Competition

The pharmaceutical industry is characterized by rapidly evolving technology and intense competition. A large number of companies of all sizes, including major pharmaceutical companies and specialized biotechnology companies, engage in activities similar to our activities. Many of our competitors have substantially greater financial and other resources available to them. In addition, colleges, universities, governmental agencies and other public and private research organizations continue to conduct research and are becoming more active in seeking patent protection and licensing arrangements to collect royalties for use of technologies that they have developed. Some of our competitors’ products and technologies are in direct competition with ours. We also must compete with these institutions in recruiting highly qualified scientific personnel.

Zenvia for Pseudobulbar Affect.  Although we anticipate that Zenvia, if approved, could be the first product to be marketed for the treatment of PBA, we are aware that physicians may prescribe other products in an off-label manner for the treatment of this disorder. For example, Zenvia may face competition from the following products:

•  Antidepressants, including Prozac^®, Celexa^®, Zoloft^®, Paxil^®, Elavil^® and Pamelor^® and others;

•  Atypical antipsychotic agents, including Zyprexa^®, Resperdal^®, Abilify^®, Geodon^® and others; and

•  Miscellaneous agents, including Symmetrel^®, Lithium and others.

Zenvia for painful diabetic neuropathy.  We anticipate that Zenvia for the treatment of painful diabetic neuropathy, if further developed by us and approved by the FDA for marketing, would compete with other drug products that are currently prescribed by physicians, including these identified below. Additionally, many other companies are developing drug candidates for this indication and we expect competition for Zenvia, if approved to treat DPN pain, to be intense. Current approved competitors include:

•  Cymbalta^®;

•  Lyrica^®

•  Narcotic products; and

•  Off-label uses of non-narcotic products, such as the anticonvulsants phenytoin and carbamazepine, and the antidepressant amitriptyline.

Antibody generation technology.  Several companies, including Emergent BioSolutions, Medarex Inc., Elusys Therapeutics, PharmAthene, VaxGen and MedImmune have research programs focused on developing anthrax antibodies. These companies are generally large and have greater resources to dedicate to development work.

Docosanol 10% cream.  Abreva faces intense competition in North America from the following established products:

•  Over-the-counter preparations, including Carmex^®, Zilactin^®, Campho^®, Orajel^®, Herpecin^® and others;

•  Zovirax^® acyclovir (oral and topical) and Valtrex^® valacyclovir (oral) prescription products marketed by Biovail Corporation and GlaxoSmithKline, respectively, and

•  Famvir^® famciclovir (oral) and Denavir^® penciclovir (topical) prescription products marketed by Novartis.

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Manufacturing

We currently have no manufacturing or production facilities and, accordingly, rely on third parties for clinical production of our products and product candidates. We obtain the API for Zenvia from one of several available commercial suppliers. Further, we licensed to various pharmaceutical companies the exclusive rights to manufacture and distribute docosanol 10% cream.

We, and the manufacturers of our products and product candidates, rely on suppliers of raw materials used in the commercial manufacturing of our products. Some of these materials, including the active ingredients in docosanol 10% cream and Zenvia, are custom and available from only a limited number of sources. We currently attempt to mitigate the risk associated with such sole source raw materials and production by actively managing our inventories and supply and production arrangements. We attempt to remain apprised of the financial condition of our suppliers and their ability to continue to supply our raw materials and finished products in an uninterrupted and timely manner. We have not experienced any significant shortages in supplies of such raw materials or finished products. Unavailability of certain materials or the loss of current sources of production could cause an interruption in production and a reduced supply of finished product pending establishment of new sources, or in some cases, implementation of alternative processes. See Item 1A, “Risk Factors,” for additional discussion of the risks associated with our outsourcing of manufacturing functions.

Patents and Proprietary Rights

As of September 30, 2007, we owned or had the rights to 183 issued patents (42 U.S. and 141 foreign) and 271 pending applications (35 U.S. and 236 foreign). Patents and patent applications owned by the Company include Zenvia; docosanol-related products and technologies; Xenerex antibody technologies; selective cytokine inhibitor; MIF inhibitor technology and reverse cholesterol transport enhancer.

	United States						Foreign
Description	Issued		Expiration		Pending		Issued			Expiration		Pending
Zenvia		7		2011 to 2019		3		13	(1)		Various		21
Docosanol-related technologies		11		2008 to 2017		1		84			Various		37
Xenerex antibody technologies		2		2008 to 2015		0		13			Various		0
Selective cytokine inhibitor(2)		10		2019		6		22			Various		24
MIF inhibitor technology		12		—		14		5			—		96
Reverse cholesterol transport enhancer(2)		0		—		7		3			—		51
Other		0		—		4		1			—		7
Total		42				35		141					236

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

We cannot assure you that the claims in our pending patent applications will be issued as patents, that any issued patents will provide us with significant competitive advantages, or that the validity or enforceability of any of our patents will not be challenged or, if instituted, that these challenges will not be successful. The cost of litigation to uphold the validity and prevent infringement of our patents could be substantial. Furthermore, we cannot assure you that others will not independently develop similar technologies or duplicate our technologies or design around the patented aspects of our technologies. We can provide no assurance that our proposed technologies will not infringe patents or rights owned by others, the licenses to which might not be available to us.

In addition, the approval process for patent applications in foreign countries may differ significantly from the process in the U.S. The patent authorities in each country administer that country’s laws and regulations relating to patents independently of the laws and regulations of any other country and the patents must be sought and obtained separately. Therefore, approval in one country does not necessarily indicate that approval can be obtained in other countries.

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Information regarding the status of our various research and development programs, and the amounts spent on major programs through the last two fiscal years, can be found under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Government Regulations

The FDA and comparable regulatory agencies in foreign countries regulate extensively the manufacture and sale of the pharmaceutical products that we have developed or are currently developing. The FDA has established guidelines and safety standards that are applicable to the nonclinical evaluation and clinical investigation of therapeutic products and stringent regulations that govern the manufacture and sale of these products. The process of obtaining regulatory approval for a new therapeutic product usually requires a significant amount of time and substantial resources. The steps typically required before a product can be tested in humans include:

•  Animal pharmacology studies to obtain preliminary information on the safety and efficacy of a drug; and

•  Nonclinical evaluation in vitro and in vivo including extensive toxicology studies.

The results of these nonclinical studies may be submitted to the FDA as part of an Investigational New Drug (“IND”) application. The sponsor of an IND application may commence human testing of the compound 30 days after submission of the IND, unless notified to the contrary by the FDA.

The clinical testing program for a new drug typically involves three phases:

•  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.

Data from all clinical studies, as well as all nonclinical studies and evidence of product quality, typically are submitted to the FDA in a New Drug Application (“NDA”). Although the FDA’s requirements for clinical trials are well established and we believe that we have planned and conducted our clinical trials in accordance with the FDA’s applicable regulations and guidelines, these requirements, including requirements relating to testing the safety of drug candidates, may be subject to change or new interpretation. Additionally, we could be required to conduct additional trials beyond what we had planned due to the FDA’s safety and/or efficacy concerns or due to differing interpretations of the meaning of our clinical data. (See Item 1A, “Risk Factors”)

The FDA’s Center for Drug Evaluation and Research must approve a new drug application for a drug before it may be marketed in the U.S. If we begin to market our proposed products for commercial sale in the U.S., any manufacturing operations that may be established in or outside the U.S. will also be subject to rigorous regulation, including compliance with current good manufacturing practices. We also may be subject to regulation under the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substance Control Act, the Export Control Act and other present and future laws of general application. In addition, the handling, care and use of laboratory mice, including the hu-PBL-SCID mice and rats, used for Xenerex technology are subject to the Guidelines for the Humane Use and Care of Laboratory Animals published by the National Institutes of Health.

Regulatory obligations continue post-approval, and include the reporting of adverse events when a drug is utilized in the broader commercial population. Promotion and marketing of drugs is also strictly regulated, with penalties imposed for violations of FDA regulations, the Lanham Act (trademark statute), and other federal and state laws, including the federal anti-kickback statute.

We currently intend to continue to seek, directly or through our partners, approval to market our products and product candidates in foreign countries, which may have regulatory processes that differ materially from those of the FDA. We anticipate that we will rely upon pharmaceutical or biotechnology companies to license our proposed

8

products or independent consultants to seek approvals to market our proposed products in foreign countries. We cannot assure you that approvals to market any of our proposed products can be obtained in any country. Approval to market a product in any one foreign country does not necessarily indicate that approval can be obtained in other countries.

Product Liability Insurance

We maintain product liability insurance on our products and clinical trials that provides coverage in the amount of $10 million per incident and $10 million in the aggregate.

Executive Officers and Key Employees of the Registrant

Information concerning our executive officers and key employees, including their names, ages and certain biographical information can be found in Part III, Item 10 under the caption, “Executive Officers and Key Employees of the Registrant.” This information is incorporated by reference into Part I of this report.

Human Resources

As of December 14, 2007, we employed 25 persons, including 9 engaged in research and development activities, including drug discovery, clinical development, and regulatory affairs, and 16 in general and administrative functions such as human resources, finance, accounting, business development and investor relations. Our staff includes 6 employees with Ph.D. or M.D. degrees. None of our employees are unionized and we believe that our relationship with our employees is good.

Financial Information about Segments

Refer to Note 19, “Segment Information” in the Notes to the Condensed Consolidated Financial Statements.

Research and Development

Our research and development expenses were $13.1 million in 2007, $27.0 million in 2006, and $26.1 million in 2005.

General Information

You are advised to read this Form 10-K in conjunction with other reports and documents that we file from time to time with the SEC. In particular, please read our Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K that we may file from time to time. You may obtain copies of these reports directly from us or from the SEC and the SEC’s Public Reference Room at 100 F Street, N.E. Washington, D.C. 20549. In addition, the SEC maintains information for electronic filers (including Avanir) at its website at www.sec.gov. We make available free of charge on or through our Internet website located at www.avanir.com our SEC filings on Forms 10-K, 10-Q and 8-K and any amendments to those filings as soon as reasonably practicable after electronic filing with the SEC.

Item 1A.  Risk Factors

Risks Relating to Our Business

We must conduct additional clinical trials for Zenvia and there can be no assurance that the FDA will approve Zenvia or that an approval, if granted, will be on terms we may seek.

In October 2006, we received an “approvable letter” from the FDA for our new drug application (“NDA”) submission for Zenvia in the treatment of patients with the PBA/IEED indication. The approvable letter raised certain safety and efficacy concerns and the safety concerns will require additional clinical development to resolve. Based on discussions with the FDA, we were able to successfully resolve the outstanding efficacy concern of the original dose formulation. However, in order to address the safety concerns, we agreed to re-formulate Zenvia and conduct one additional confirmatory Phase III clinical trial using lower dose formulations. The goal of the study is to demonstrate improved safety while maintaining significant efficacy. The study is expected to be completed (as

9

defined as top-line safety and efficacy data becomes available) during the second half of calendar 2009. It is possible that the efficacy will be so reduced that we will not be able to satisfy the FDA’s efficacy requirements and there can be no assurance that the FDA will approve Zenvia for commercialization.

Even if the confirmatory trial is successful, the additional development work will be costly and time consuming. Because our patents covering Zenvia expire at various times from 2011 through 2019 (without accounting for potential extensions that might be available or new patents that may be issued), any substantial delays in regulatory approval would negatively affect the commercial potential for Zenvia for this indication. Additionally, it is possible that Zenvia may not be approved with the labeling claims or for the patient population that we consider most desirable for the promotion of the product. Less desirable labeling claims could adversely affect the commercial potential for the product and could also affect our long-term prospects.

Additionally, although we have a Special Protocol Assessment (“SPA”) from the FDA for our recently completed Phase III trial for DPN pain and for our planned confirmatory Phase III trial for Zenvia for PBA, there can be no assurance that the terms of the SPA will ultimately be binding on the FDA. An SPA is intended to serve as a binding agreement from the FDA on the adequacy of the design of a planned clinical trial. However, even where an SPA has been granted, additional data may subsequently become available that causes the FDA to reconsider the previously agreed upon scope of review and the FDA may have subsequent safety or efficacy concerns that override the SPA. As a result, even with an SPA, we cannot be certain that the trial results will be found to be adequate to support an efficacy claim and product approval.

The FDA’s safety concerns regarding Zenvia for the treatment of PBA may extend to other clinical indications that we are pursuing, including DPN pain. Due to these concerns, we expect to develop Zenvia for other indications using alternative doses, which may negatively affect efficacy.

We are currently developing Zenvia for the treatment of DPN pain, for which we have completed a Phase III trial. Although the FDA has not expressly stated that the safety concerns and questions raised in the PBA approvable letter would apply to other indications such as DPN pain, we believe that it is possible that the FDA will raise similar concerns for this indication. Accordingly, we are investigating the potential use of alternative formulations with lower doses of quinidine and various DM levels in the next Phase III trial for Zenvia for this indication. Although we achieved positive results in our initial Phase III trial, an alternative lower dose may not yield the same levels of efficacy as seen in the earlier trials and any drop in efficacy may be so great that the drug does not demonstrate a statistically significant improvement over placebo. Additionally, any alternative dose that we develop may not sufficiently satisfy the FDA’s safety concerns. If this were to happen, we may not be able to pursue the development of Zenvia for other indications or may need to undertake significant additional clinical trials, which would be costly and cause potentially substantial delays. There is also a risk that due to the change in dosage levels, the FDA may require two additional Phase III trials for regulatory approval, which would be costly and delay the potential commercial launch of this drug.

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

We have experienced significant operating losses in funding the research, development and clinical testing of our drug candidates, accumulating operating losses totaling $238 million as of September 30, 2007, and we expect to continue to incur substantial operating losses for the foreseeable future. As of September 30, 2007, we had approximately $33.6 million in cash, cash equivalents, investments in marketable securities and restricted cash. Additionally, because we sold FazaClo in August 2007, we currently do not have any meaningful sources of recurring revenue or cash flow.

In light of our current capital resources, lack of near-term revenue opportunities and substantial long-term capital needs, we will need to raise significant amounts of additional capital in the future to complete the development of Zenvia and to finance our long-term operations. Based on our current loss rate and existing capital resources as of the date of this filing, we estimate that we have sufficient funds to sustain our operations at their current levels through the next twelve months. Although we expect to be able to raise additional capital and/or curtail current levels of operations to be able to continue to fund our operations beyond that time, there can be no assurance that we will be able to do so. If we are unable to raise additional capital to fund future operations, then we

10

may be unable to fully execute our development plans for Zenvia and DPN pain. This may result in significant delays in our planned clinical trial of Zenvia for PBA and may force us to further curtail our operations.

Any transactions that we may engage in to raise capital could dilute our shareholders and diminish certain commercial prospects.

We will seek to raise additional capital and may do so at any time through various financing alternatives, including licensing or sales of our technologies, drugs and/or drug candidates, selling shares of common or preferred stock, or through the issuance of debt. Each of these financing alternatives carries certain risks. Raising capital through the issuance of common stock may depress the market price of our stock and any such financing will dilute our existing shareholders. If we instead seek to raise capital through licensing transactions or sales of one or more of our technologies, drugs or drug candidates, as we have stated we are actively considering with certain investigational compounds, then we will likely need to share a significant portion of future revenues from these drug candidates with our licensees. Additionally, the development of any drug candidates licensed or sold to third parties will no longer be in our control and thus we may not realize the full value of any such relationships.

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.

We have invested in an extensive patent portfolio and we rely substantially on the protection of our intellectual property through our ownership or control of issued patents and patent applications. Such patents and patent applications cover Zenvia, docosanol 10% cream and other potential drug candidates that could come from our technologies such as anti-inflammatory compounds and antibodies. Because of the competitive nature of the biopharmaceutical industry, we cannot assure you that:

•  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.

Even if we successfully preserve our intellectual property rights, third parties, including other biotechnology or pharmaceutical companies, may allege that our technology infringes on their rights. Intellectual property litigation is costly, and even if we were to prevail in such a dispute, the cost of litigation could adversely affect our business, financial condition, and results of operations. Litigation is also time-consuming and would divert management’s attention and resources away from our operations and other activities. If we were to lose any litigation, in addition to any damages we would have to pay, we could be required to stop the infringing activity or obtain a license. Any required license might not be available to us on acceptable terms, or at all. Some licenses might be non-exclusive, and our competitors could have access to the same technology licensed to us. If we were to fail to obtain a required license or were unable to design around a competitor’s patent, we would be unable to sell or continue to develop some of our products, which would have a material adverse effect on our business, financial condition and results of operations.

We currently have only a limited term of patent coverage for Zenvia, which could result in the introduction of generic competition within in a few years of product launch.

Our PBA related patents for Zenvia expire at various times from 2011 through 2012 and our DPN pain patents for Zenvia expire in 2016. These expirations do not account for any potential patent term restoration nor does this account for the issuance of any patents pending. If Zenvia is approved, we can apply for a five year extension to one patent covering Zenvia; however, as Zenvia is not a new chemical entity, it is unknown whether or not Zenvia will qualify for patent term restoration under the U.S. Patent and Trademark Office (“USPTO”) guidelines. Once the patents covering Zenvia expire or the three-year Hatch Waxman exclusivity period has passed, generic drug

11

companies would be able to introduce competing versions of the drug. Although we have filed additional new patents for Zenvia, there can be no assurance that these patents will issue or that any patents will have claims that are broad enough to prevent generic competition. If we are unsuccessful in strengthening our patent portfolio, our long-term revenues from Zenvia sales may be less than expected.

If we fail to obtain regulatory approval in foreign jurisdictions, we would not be able to market our products abroad and our revenue prospects would be limited.

We may seek to have our products or product candidates marketed outside the United States. In order to market our products in the European Union and many other foreign jurisdictions, we must obtain separate regulatory approvals and comply with numerous and varying regulatory requirements. The approval procedure varies among countries and jurisdictions and can involve additional testing. The time required to obtain approval may differ from that required to obtain FDA approval. The foreign regulatory approval process may include all of the risks associated with obtaining FDA approval. We may not obtain foreign regulatory approvals on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or jurisdictions or by the FDA. We may not be able to file for regulatory approvals and may not receive necessary approvals to commercialize our products in any market. The failure to obtain these approvals could materially adversely affect our business, financial condition and results of operations.

We have recently experienced significant turnover in senior management.

Over the past 12 months, we have experienced significant turnover in our senior management team, including the departures of our President and Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer, Vice President of Human Resources, Vice President of Drug Discovery, Vice President of Business Development, and Vice President of Clinical Affairs. As a result of these changes, we essentially have a new management team. It is not yet possible to assess how effective this management team will be and whether they will be able to work together to accomplish the Company’s business objectives. Additionally, changes in management are disruptive to the organization and any further changes may slow the Company’s progress toward its goals. Further, the Board of Directors may seek to reduce its size to streamline operations and to reflect the fact that the Company is significantly smaller than it was previously. Changes in Board composition may also be disruptive and the loss of the experience and capabilities of any of our Board members may reduce the effectiveness of the Board.

We face challenges retaining members of management and other key personnel.

The industry in which we compete has a high level of employee mobility and aggressive recruiting of skilled employees. This type of environment creates intense competition for qualified personnel, particularly in clinical and regulatory affairs, sales and marketing and accounting and finance. Because we have a relatively small organization, the loss of any executive officers or other key employees could adversely affect our operations. For example, if we were to lose one or more of the senior members of our clinical and regulatory affairs team, the pace of clinical development for Zenvia could be slowed significantly. We have experienced extensive employee turnover recently, as discussed above, and the loss of any additional key employees could adversely affect our business and cause significant disruption in our operations.

Risks Relating to Our Industry

There are a number of difficulties and risks associated with clinical trials and our trials may not yield the expected results.

There are a number of difficulties and risks associated with conducting clinical trials. For instance, we may discover that a product candidate does not exhibit the expected therapeutic results, may cause harmful side effects or have other unexpected characteristics that may delay or preclude regulatory approval or limit commercial use if approved. It typically takes several years to complete a late-stage clinical trial, such as the planned Phase III confirmatory trial for Zenvia for PBA, and a clinical trial can fail at any stage of testing. If clinical trial difficulties or failures arise, our product candidates may never be approved for sale or become commercially viable.

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In addition, the possibility exists that:

•  the results from earlier clinical trials may not be statistically significant or predictive of results that will be obtained from subsequent clinical trials, particularly larger trials;

•  institutional review boards or regulators, including the FDA, may hold, suspend or terminate our clinical research or the clinical trials of our product candidates for various reasons, including noncompliance with regulatory requirements or if, in their opinion, the participating subjects are being exposed to unacceptable health risks;

•  subjects may drop out of our clinical trials;

•  our preclinical studies or clinical trials may produce negative, inconsistent or inconclusive results, and we may decide, or regulators may require us, to conduct additional preclinical studies or clinical trials; and

•  the cost of our clinical trials may be greater than we currently anticipate.

It is possible that earlier clinical and pre-clinical trial results may not be predictive of the results of subsequent clinical trials. If earlier clinical and/or pre-clinical trial results cannot be replicated or are inconsistent with subsequent results, our development programs may be cancelled or deferred. In addition, the results of these prior clinical trials may not be acceptable to the FDA or similar foreign regulatory authorities because the data may be incomplete, outdated or not otherwise acceptable for inclusion in our submissions for regulatory approval.

Additionally, the FDA has substantial discretion in the approval process and may reject our data or disagree with our interpretations of regulations or our clinical trial data or ask for additional information at any time during their review. For example, the use of different statistical methods to analyze the efficacy data from our recent Phase III trial of Zenvia in DPN pain results in significantly different conclusions about the efficacy of the drug. Although we believe we have legitimate reasons to use the methods that we have adopted as outlined in our SPA with the FDA, the FDA may not agree with these reasons and may disagree with our conclusions regarding the results of these trials.

Although we expect to be able to fully address these concerns, we may not be able to resolve these matters favorably, if at all. Disputes that are not resolved favorably could result in one or more of the following:

•  delays in our ability to submit a New Drug Application (“NDA”);

•  the refusal by the FDA to accept for file any NDA we may submit;

•  requests for additional studies or data;

•  delays of an approval; or

•  the rejection of an application.

If we do not receive regulatory approval to sell our product candidates or cannot successfully commercialize our product candidates, we would not be able to generate meaningful levels of sustainable revenues.

Clinical trials can be delayed for a variety of reasons. If we experience any such delays, we would be unable to commercialize our product candidates on a timely basis, which would materially harm our business.

Clinical trials may not begin on time or may need to be restructured after they have begun. Additionally, clinical trials can experience delays for a variety of other reasons, including delays related to:

•  identifying and engaging a sufficient number of clinical trial sites;

•  negotiating acceptable clinical trial agreement terms with prospective trial sites;

•  obtaining institutional review board approval to conduct a clinical trial at a prospective site;

•  recruiting eligible subjects to participate in clinical trials;

•  competition in recruiting clinical investigators;

•  shortage or lack of availability of supplies of drugs for clinical trials;

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•  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.

If we experience significant delays in or termination of clinical trials, our financial results and the commercial prospects for our product candidates or any other products that we may develop will be adversely impacted. In addition, our product development costs would increase and our ability to generate revenue could be impaired.

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.

The pharmaceutical and biotechnology industries are highly competitive and subject to significant and rapid technological change. We compete with hundreds of companies that develop and market products and technologies in similar areas as our research. For example, we expect that Zenvia will compete against antidepressants, atypical anti-psychotic agents and other agents.

Our competitors may have specific expertise and development technologies that are better than ours and many of these companies, either alone or together with their research partners, have substantially greater financial resources, larger research and development staffs and substantially greater experience than we do. Accordingly, our competitors may successfully develop competing products. We are also competing with other companies and their products with respect to manufacturing efficiencies and marketing capabilities, areas where we have limited or no direct experience.

If we fail to comply with regulatory requirements, regulatory agencies may take action against us, which could significantly harm our business.

Marketed products, along with the manufacturing processes, post-approval clinical data, labeling, advertising and promotional activities for these products, are subject to continual requirements and review by the FDA and other regulatory bodies. Even if we receive regulatory approval for one of our product candidates, the approval may be subject to limitations on the indicated uses for which the product may be marketed or to the conditions of approval or contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product.

In addition, regulatory authorities subject a marketed product, its manufacturer and the manufacturing facilities to ongoing review and periodic inspections. We will be subject to ongoing FDA requirements, including required submissions of safety and other post-market information and reports, registration requirements, cGMP regulations, requirements regarding the distribution of samples to physicians and recordkeeping requirements.

The cGMP regulations also include requirements relating to quality control and quality assurance, as well as the corresponding maintenance of records and documentation. We rely on the compliance by our contract manufacturers with cGMP regulations and other regulatory requirements relating to the manufacture of products. We are also subject to state laws and registration requirements covering the distribution of our products. Regulatory agencies may change existing requirements or adopt new requirements or policies. We may be slow to adapt or may not be able to adapt to these changes or new requirements.

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

The testing, marketing and sale of pharmaceutical products involves the risk of product liability claims by consumers and other third parties. Although we maintain product liability insurance coverage, product liability claims can be high in the pharmaceutical industry and our insurance may not sufficiently cover our actual liabilities. If product liability claims were made against us, it is possible that our insurance carriers may deny, or attempt to deny, coverage in certain instances. If a lawsuit against us is successful, then the lack or insufficiency of insurance

14

coverage could affect materially and adversely our business and financial condition. Furthermore, various distributors of pharmaceutical products require minimum product liability insurance coverage before their purchase or acceptance of products for distribution. Failure to satisfy these insurance requirements could impede our ability to achieve broad distribution of our proposed products and the imposition of higher insurance requirements could impose additional costs on us.

Risks Related to Reliance on Third Parties

Because we depend on clinical research centers and other contractors for clinical testing and for certain research and development activities, the results of our clinical trials and such research activities are, to a certain extent, beyond our control.

The nature of clinical trials and our business strategy of outsourcing a substantial portion of our research require that we rely on clinical research centers and other contractors to assist us with research and development, clinical testing activities, patient enrollment and regulatory submissions to the FDA. As a result, our success depends partially on the success of these third parties in performing their responsibilities. Although we pre-qualify our contractors and we believe that they are fully capable of performing their contractual obligations, we cannot directly control the adequacy and timeliness of the resources and expertise that they apply to these activities. If our contractors do not perform their obligations in an adequate and timely manner, the pace of clinical development, regulatory approval and commercialization of our drug candidates could be significantly delayed and our prospects could be adversely affected.

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.

We have utilized, and intend to continue utilizing, third parties to manufacture, package and distribute Zenvia and the API for docosanol 10% cream and supplies for our drug candidates. We have no experience in manufacturing and do not have any manufacturing facilities. Currently, we have sole suppliers for the API for docosanol and Zenvia, and a sole manufacturer for the finished form of Zenvia. Any material disruption in manufacturing could cause a delay in shipments and possible loss of sales. We do not have any long-term agreements in place with our current docosanol supplier or Zenvia supplier. Any delays or difficulties in obtaining APIs or in manufacturing, packaging or distributing our products and product candidates could delay Zenvia clinical trials for PBA and/or DPN pain. Additionally, the third parties we rely on for manufacturing and packaging are subject to regulatory review, and any regulatory compliance problems with these third parties could significantly delay or disrupt our commercialization activities.

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.

Under our license arrangement for our MIF compound, we have no direct control over the development of this drug candidate and have only limited, if any, input on the direction of development efforts. These development efforts are ongoing by our licensing partner and if the results of their development efforts are negative or inconclusive, it is possible that our licensing partner could elect to defer or abandon further development of these programs, as was the case in early 2007 when AstraZeneca terminated our license and collaboration agreement for our reverse cholesterol transport (“RCT”) mechanism technology. Because much of the potential value of these license arrangements is contingent upon the successful development and commercialization of the licensed technology, the ultimate value of these licenses will depend on the efforts of licensing partners. If our licensing partners do not succeed in developing the licensed technology for whatever reason, or elect to discontinue the development of these programs, we may be unable to realize the potential value of these arrangements.

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

In the event that we attempt to enter into international markets, we expect to rely on collaborative partners to obtain regulatory approvals and to market and sell our product(s) in those markets. We have not yet entered into any collaborative arrangement with respect to marketing or selling Zenvia, with the exception of one such agreement relating to Israel. We may be unable to enter into any other arrangements on terms favorable to us, or at all, and even if we are able to enter into sales and marketing arrangements with collaborative partners, we cannot assure you that

15

their sales and marketing efforts will be successful. If we are unable to enter into favorable collaborative arrangements with respect to marketing or selling Zenvia in international markets, or if our collaborators’ efforts are unsuccessful, our ability to generate revenue from international product sales will suffer.

Risks Relating to Our Stock

Our stock price has historically been volatile and we expect that this volatility will continue for the foreseeable future.

The market price of our Class A common stock has been, and is likely to continue to be, highly volatile. This volatility can be attributed to many factors independent of our operating results, including the following:

•  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.

Additionally, our stock price has been volatile as a result of announcements of regulatory actions and decisions relating to our product candidates, including Zenvia, and periodic variations in our operating results. We expect that our operating results will continue to vary from quarter-to-quarter. Our operating results and prospects may also vary depending on our partnering arrangements for our MIF technology, which has been licensed to a third party that controls the continued progress and pace of development, meaning that the achievement of development milestones is outside of our control.

As a result of these factors, we expect that our stock price may continue to be volatile and investors may be unable to sell their shares at a price equal to, or above, the price paid. Additionally, any significant drops in our stock price, such as the one we experienced following the announcement of the Zenvia approvable letter, could give rise to shareholder lawsuits, which are costly and time consuming to defend against and which may adversely affect our ability to raise capital while the suits are pending, even if the suits are ultimately resolved in favor of the Company.

Item 1B.   Unresolved Staff Comments

None.

Item 2.   Properties

As of September 30, 2007, we lease and occupy an aggregate of 13,099 square feet of space used for research and development and administrative operations in three buildings in California. Our headquarters and commercial and administrative offices are located in Aliso Viejo, California, where we currently occupy 11,319 square feet. The Aliso Viejo office lease expires in June 2011. We also currently occupy 1,780 square feet of laboratory and office facilities in one building located in San Diego, California, and we sublease approximately 57,945 square feet in three buildings in San Diego. The terms of the leases for the San Diego facilities vary from August 2008 (representing 27,575 square feet) to January 2013 (representing 30,370 square feet).

Item 3.   Legal Proceedings

In the ordinary course of business, we may face various claims brought by third parties and we may, from time to time, make claims or take legal actions to assert our rights, including intellectual property rights as well as claims relating to employment matters and the safety or efficacy of our products. Any of these claims could subject us to costly litigation and, while we generally believe that we have adequate insurance to cover many different types of liabilities, our insurance carriers may deny coverage or our policy limits may be inadequate to fully satisfy any damage awards or settlements. If this were to happen, the payment of any such awards could have a material adverse

16

effect on our operations, cash flows and financial position. Additionally, any such claims, whether or not successful, could damage our reputation and business. Management believes the outcome of currently pending claims and lawsuits will not likely have a material effect on our operations or financial position. We have no significant legal proceedings ongoing at this time.

Item 4.   Submission of Matters to a Vote of Security Holders

There were no matters submitted to a vote of our security holders during the fourth quarter of fiscal 2007.

PART II

Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

On April 11, 2006, our Class A common stock began trading on the NASDAQ Global Market under the stock symbol “AVNR” simultaneously with the discontinuation of trading of our stock on the American Stock Exchange. For approximately five years prior to April 11, 2006, our Class A common stock traded under the symbol “AVN” on The American Stock Exchange (the “AMEX”). The following table sets forth the high and low closing sales prices for our Class A common stock in each of the quarters over the past two fiscal years, as quoted on the NASDAQ and AMEX. This historical stock price information has been adjusted to reflect our one-for-four reverse stock split, which was effected on January 16, 2006.

	Class A Common Stock Price
	Fiscal 2007				Fiscal 2006
	High		Low		High		Low
First Quarter	$	8.95	$	2.27	$	14.12	$	10.00
Second Quarter	$	2.52	$	1.09	$	17.90	$	13.76
Third Quarter	$	5.19	$	1.19	$	15.13	$	5.88
Fourth Quarter	$	2.70	$	1.68	$	8.76	$	5.61

On December 7, 2007, the closing sales price of Class A Common Stock was $1.61 per share.

As of December 7, 2007, we had approximately 26,065 shareholders, including 927 holders of record and an estimated 25,138 beneficial owners. We have not paid any dividends on our Class A common stock since our inception and do not expect to pay dividends on our common stock in the foreseeable future.

The following graph compares the cumulative 5-year total return provided shareholders on AVANIR Pharmaceuticals’ common stock relative to the cumulative total returns of the Russell 2000 index and the NASDAQ Pharmaceutical index. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common stock and in each of the indexes on 9/30/2002 and its relative performance is tracked through 9/30/2007.

Information About Our Equity Compensation Plans

Information regarding our equity compensation plans is incorporated by reference in Item 12 of Part III of this annual report on Form 10-K.

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Stock Performance Graph

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

	9/02		9/03		9/04		9/05		9/06		9/07
AVANIR Pharmaceuticals		100.00		135.65		246.96		268.70		150.43		46.52
Russell 2000		100.00		136.50		162.12		191.23		210.20		236.14
NASDAQ Pharmaceutical		100.00		156.88		164.14		194.67		195.01		211.03

The stock price performance included in this graph is not necessarily indicative of future stock price performance.

Item 6.   Selected Consolidated Financial Data

The selected consolidated financial data set forth below at September 30, 2007 and 2006, and for the fiscal years ended September 30, 2007, 2006 and 2005, are derived from our audited consolidated financial statements included elsewhere in this report. This information should be read in conjunction with those consolidated financial statements, the notes thereto, and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The selected consolidated financial data set forth below at September 30, 2005, 2004 and 2003, and for the years ended September 30, 2004 and 2003, are derived from our audited consolidated financial statements that are contained in reports previously filed with the SEC, not included herein. The quarterly consolidated financial data are derived from unaudited financial statements included in our Quarterly Reports on Form 10-Q and have been modified to reflect the restatement of our quarterly results for the three months ended March 31, 2007. 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 a one-for-four reverse stock split implemented in January 2006.

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The following tables include selected consolidated financial data for each of our last five fiscal years and quarterly data for the last two fiscal years and include adjustments to reflect the classification of our FazaClo Business as discontinued operations. See Note 3 in the Notes to our Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K for information on discontinued operations.

Summary Financial Information

	Fiscal Years Ended September 30,
Statement of operations data:	2007			2006(1)(2)			2005			2004			2003
Net revenues	$	9,224,561		$	15,185,852		$	16,690,574		$	3,589,317		$	2,438,733
Loss before discontinued operations and cumulative effect of change in accounting principle	$	(28,381,724	)	$	(50,234,040	)	$	(30,606,564	)	$	(28,154,853	)	$	(23,236,348	)
Income/(loss) from discontinued operations	$	7,448,271		$	(8,702,716	)	$	—		$	—		$	—
Cumulative effect of change in accounting principle	$	—		$	(3,616,058	)	$	—		$	—		$	—
Net loss	$	(20,933,453	)	$	(62,552,814	)	$	(30,606,564	)	$	(28,154,853	)	$	(23,236,348	)
Net loss attributable to common shareholders	$	(20,933,453	)	$	(62,552,814	)	$	(30,606,564	)	$	(28,154,853	)	$	(23,264,293	)
Basic and diluted (loss)/income per share:
Loss before cumulative effect of change in accounting principle and discontinued operations	$	(0.72	)	$	(1.64	)	$	(1.19	)	$	(1.44	)	$	(1.55	)
Income/(loss) from discontinued operations	$	0.19		$	(0.28	)	$	—		$	—		$	—
Cumulative effect of change in accounting principle	$	—		$	(0.12	)	$	—		$	—		$	—
Net loss	$	(0.53	)	$	(2.04	)	$	(1.19	)	$	(1.44	)	$	(1.55	)
Net loss attributable to common shareholders	$	(0.53	)	$	(2.04	)	$	(1.19	)	$	(1.44	)	$	(1.55	)
Basic and diluted weighted average number of shares of common stock outstanding		39,643,876			30,634,872			25,617,432			19,486,603			14,974,034
Cash dividends declared per share	$	—		$	—		$	—		$	—		$	—
Pro forma amounts assuming the method adopted in 2006 for patent-related costs was applied retroactively:
Net loss	$	—		$	(58,936,756	)	$	(31,255,373	)	$	(29,056,101	)	$	(23,786,583	)
Net loss attributable to common shareholders	$	—		$	(58,936,756	)	$	(31,255,373	)	$	(29,056,101	)	$	(23,814,528	)
Basic and diluted loss per share	$	—		$	(1.92	)	$	(1.22	)	$	(1.49	)	$	(1.59	)

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	September 30,
Balance sheet data:	2007		2006			2005		2004		2003
Cash and cash equivalents	$	30,487,962	$	4,898,214		$	8,620,143	$	13,494,083	$	12,198,408
Investments in marketable securities		3,153,436		19,851,859			18,917,443		12,412,446		5,258,881
Total cash, cash equivalents and investments in marketable securities	$	33,641,398	$	24,750,073		$	27,537,586	$	25,906,529	$	17,457,289
Working capital	$	29,336,776	$	(6,969,777	)	$	11,969,450	$	16,653,621	$	10,619,216
Total assets	$	39,095,893	$	71,462,337		$	41,401,990	$	37,403,953	$	29,645,257
Deferred revenues	$	15,320,430	$	19,354,175		$	19,158,210	$	21,009,115	$	22,742,641
Notes payable and capital lease obligations	$	12,024,592	$	14,395,978		$	990,594	$	1,107,064	$	—
Total liabilities	$	32,065,659	$	77,136,872		$	32,267,111	$	27,206,694	$	28,608,026
Shareholders’ equity (deficit)	$	7,030,234	$	(5,674,535	)	$	9,134,879	$	10,197,259	$	1,037,231

	Fiscal Quarters Ended
	December 31,			March 31,			March 31,			June 30,			September 30,
Quarterly statement of operations data for fiscal 2007 (Unaudited):	2006			2007			2007			2007			2007
				(as reported)			(as restated)
Net revenues	$	2,136,897		$	2,022,868		$	2,022,868		$	2,200,724		$	2,864,072
Gross margin	$	677,095		$	585,791		$	585,791		$	620,070		$	2,694,089
(Loss)/income before discontinued operations	$	(13,771,294	)	$	(4,577,583	)	$	(6,920,435	)	$	(8,010,403	)	$	320,408
Income/(loss) from discontinued operations	$	153,767		$	(3,329,927	)	$	(3,329,927	)	$	(1,139,976	)	$	11,764,407
Net (loss) income	$	(13,617,527	)	$	(7,907,510	)	$	(10,250,362	)	$	(9,150,379	)	$	12,084,815
Basic net (loss) income per share	$	(0.39	)	$	(0.20	)	$	(0.26	)	$	(0.23	)	$	0.28
Diluted net (loss) income per share	$	(0.39	)	$	(0.20	)	$	(0.26	)	$	(0.23	)	$	0.28
Basic weighted average number of shares of common stock outstanding		34,626,117			39,047,597			39,047,597			40,580,326			43,059,672
Diluted weighted average number of shares of common stock outstanding		34,626,117			39,047,597			39,047,597			40,580,326			43,820,517

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	Fiscal Quarters Ended
Quarterly statement of operations data for	December 31,			March 31,			June 30,			September 30,
fiscal 2006 (Unaudited):	2005			2006			2006(1)			2006
Net revenues	$	8,144,888		$	2,469,028		$	2,363,247		$	2,208,689
Gross margin	$	6,054,966		$	576,428		$	671,304		$	389,544
Loss before discontinued operations and cumulative effect of change in accounting principle	$	(5,599,912	)	$	(13,540,486	)	$	(15,358,383	)	$	(15,735,259	)
Loss from discontinued operations	$	—		$	—		$	(2,260,835	)	$	(6,441,881	)
Cumulative effect of change in accounting principle	$	(3,616,058	)	$	—		$	—		$	—
Net loss(2)	$	(9,215,970	)	$	(13,540,486	)	$	(17,619,218	)	$	(22,177,140	)
Basic and diluted net loss per share(2):
Loss before cumulative effect of change in accounting principle	$	(0.20	)	$	(0.44	)	$	(0.56	)	$	(0.70	)
Cumulative effect of change in accounting principle	$	(0.13	)	$	—		$	—		$	—
Net loss	$	(0.32	)	$	(0.44	)	$	(0.56	)	$	(0.70	)
Basic and diluted weighted average number of shares of common stock outstanding		28,579,357			31,086,874			31,419,394			31,472,217

(1)

Includes a charge of $1.3 million in purchased IPR&D in connection with our acquisition of Alamo Pharmaceuticals, LLC in May 2006, based on purchase price allocation. See Note 3, “Acquisition of Alamo Pharmaceuticals, Inc. / Sale of FazaClo,” in Notes to the Consolidated Financial Statements.

(2)

In the fourth quarter of fiscal 2006, we changed our method of accounting, effective October 1, 2005 for legal costs, all of which are external, associated with the application for patents. The $3.6 million cumulative effect of the change on prior years as of October 1, 2005 is included as a charge to net loss in fiscal 2006, retrospectively applied to the first quarter. The effect of the change was to increase the net loss by $3.5 million, or $0.12 per basic and diluted share, for the first quarter of fiscal 2006; $135,000, or $0.01 per basic and diluted share, for the second quarter of fiscal 2006; and $127,000, or $0.00 per basic and diluted share, for the third quarter for fiscal 2006.

Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Annual Report on Form 10-K contains forward-looking statements concerning future events and performance of the Company. When used in this report, the words “intend,” “estimate,” “anticipate,” “believe,” “plan” or “expect” and similar expressions are included to identify forward-looking statements. These forward-looking statements are based on our current expectations and assumptions and many factors could cause our actual results to differ materially from those indicated in these forward-looking statements. You should review carefully the factors identified in this report under the caption, “Risk Factors”. We disclaim any intent to update or announce revisions to any forward-looking statements to reflect actual events or developments. Except as otherwise indicated herein, all dates referred to in this report represent periods or dates fixed with reference to the calendar year, rather than our fiscal year ending September 30.

In August 2007, we sold our FazaClo business and related support operations to Azur Pharma, Inc. We have reflected the financial results of this business as discontinued operations in the consolidated statements of operations for the years ended September 30, 2007 and 2006. The assets and liabilities of this business are reflected as assets and liabilities of discontinued operations in the consolidated balance sheet as of September 30, 2006. Unless otherwise noted, this Management’s Discussion and Analysis of Financial Condition and Results of Operations relates only to financial results from continuing operations.

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Executive Overview

Avanir Pharmaceuticals is a pharmaceutical company focused on developing, acquiring and commercializing novel therapeutic products for the treatment of chronic diseases. Our product candidates address therapeutic markets that include the central nervous system, inflammatory diseases and infectious diseases. Our lead product candidate, Zenvia^tm (dextromethorphan hydrobromide/quinidine sulfate), is currently in Phase III clinical development for the treatment of pseudobulbar affect (“PBA”) and diabetic peripheral neuropathic pain (“DPN pain”). Our first commercialized product, docosanol 10% cream, (sold as Abreva^® by our marketing partner GlaxoSmithKline Consumer Healthcare in North America) is the only over-the-counter treatment for cold sores that has been approved by the FDA. Our inflammatory disease program, which targets macrophage migration inhibitory factor (“MIF”), is currently partnered with Novartis and our infectious disease program, which is focused primarily on anthrax antibodies, is currently being funded by grants from the National Institute of Health/National Institute of Allergy and Infectious Disease (“NIH/NIAID”).

The following is a summary of significant developments in fiscal 2007 and subsequent to the end of fiscal 2007 through the date of this filing that have materially affected our operations, financial condition and prospects:

•  In December 2007, we initiated the enrollment of patients in the confirmatory Phase III trial of Zenvia.

•  On October 30, 2006, we received an “approvable letter” from the FDA for our NDA submission for Zenvia for the treatment of PBA/IEED. An approvable letter is an official notification from the FDA that certain additional conditions must be satisfied prior to obtaining U.S. marketing approval for a new drug. The approvable letter that we received from the FDA outlined concerns that the agency had regarding the efficacy and safety data contained in our NDA submission.

•  In April 2007, our preliminary top-line data was completed from our first Phase III clinical trial of Zenvia for DPN pain. In the trial, two doses of Zenvia, 45/30 mg DMQ dosed twice daily (“DMQ 45”) and 30/30 mg DMQ dosed twice daily (“DMQ 30”), were compared to placebo based on daily patient diary entries for the Pain Rating Scale. Both Zenvia treatment groups had lower pain ratings than placebo patients (p <0.0001 in both cases). In the DMQ 45 patient group, average reductions were significantly greater than placebo patients at Days 30, 60, and 90 (p <0.0001 at each time point). In the DMQ 30 patient group, average reductions were also significantly greater than placebo patients at Days 30 and 60 (p <0.0001) and Day 90 (p=0.007).

•  In August 2007, we sold FazaClo to Azur Pharma for $43.9 million in upfront consideration. The Company has the right to receive up to an additional $10 million in contingent payments in 2009, subject to the satisfaction of certain regulatory conditions. In addition, the Company could receive up to $2 million in royalties, based on 3% of annualized net product revenues in excess of $17 million. The Company’s earn-out obligations that would have been payable to the prior owner of Alamo Pharmaceuticals upon the achievement of certain milestones were assumed by Azur Pharma, however the Company is contingently liable in the event of default The Company transferred all FazaClo related business operations to Azur Pharma in August 2007. The gain resulting from the sale of FazaClo was $12.2 million.

•  In October 2007, we reached a definitive agreement with the FDA, under the SPA process, on the design of a single confirmatory Phase III clinical trial of Zenvia. Based on discussions with the FDA, we were able to successfully resolve the outstanding efficacy concern of the original dose formulation. However, in order to address safety concerns, we agreed to re-formulate Zenvia and conduct one additional confirmatory Phase III clinical trial using lower dose formulations. The goal of the study is to demonstrate improved safety while maintaining significant efficacy. This study is expected to be completed (as defined as top-line safety and efficacy data becomes available) during the second half of calendar 2009. We enrolled the first patient in this trial in December 2007.

We have historically sought to maintain flexibility in our cost structure by actively managing several outsourced functions, such as clinical trials, legal counsel, documentation and testing of internal controls, pre-clinical development work, and manufacturing, warehousing and distribution services, rather than maintaining all of these functions in house. We believe the benefits of outsourcing, including being flexible and being able to

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rapidly respond to program delays or successes far outweigh the higher costs often associated with outsourcing at this stage of our development.

We intend to continue to seek partnerships with pharmaceutical companies to help fund research and development programs in exchange for sharing in the rights to commercialize new drugs. Trends in revenues and various types of expenses are discussed further in the “Results of Operations.”

Our principal focus is currently on gaining regulatory approval for Zenvia for PBA and then for DPN pain. We expect that the proceeds from our sale of FazaClo will be sufficient to fund our operations, including our planned confirmatory Phase III trial for Zenvia for PBA, through the next twelve months. We are currently considering additional means of raising capital, including borrowing funds, selling common stock or other securities, and the monetization of additional assets. If we are unable to raise capital as needed to fund our operations, then we may need to slow the rate of development of some of our programs or sell additional rights to one or more of our drug candidates. For additional information about the risks and uncertainties that may affect our business and prospects, please see “Risk Factors.”

Critical Accounting Policies and Estimates for Continuing Operations

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make a number of assumptions and estimates that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported periods. These items are monitored and analyzed by management for changes in facts and circumstances, and material changes in these estimates could occur in the future. Changes in estimates are recorded in the period in which they become known. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from our estimates if past experience or other assumptions do not turn out to be substantially accurate.

We believe that the application of our accounting policies for purchase price allocations in business combinations, share-based compensation expense, revenue recognition, expenses in outsourced contracts, research and development expenses and valuation of long-lived and intangible assets, all of which are important to our financial position and results of operations, require significant judgments and estimates on the part of management.

Purchase Price Allocation in Business Combinations

The allocation of purchase price for business combinations requires extensive use of accounting estimates and judgments to allocate the purchase price to the identifiable tangible and intangible assets acquired, including in-process research and development, and liabilities assumed based on their respective fair values. In fiscal 2006, we completed the acquisition of Alamo Pharmaceuticals LLC. See Note 3 “Acquisition of Alamo Pharmaceuticals, Inc. / Sale of FazaClo” in the Notes to Consolidated Financial Statements for a detailed discussion.

Share-based compensation expense

We grant options to purchase our common stock to our employees, directors and consultants under our stock option plans. The benefits provided under these plans are share-based payments subject to the provisions of revised Statement of Financial Accounting Standards No. 123, “Share-Based Payment” (“FAS 123R”). Effective October 1, 2005, we adopted FAS 123R, including the provisions of the SEC’s Staff Accounting Bulletin No. 107 (“SAB 107”), and use the fair value method to account for share-based payments with a modified prospective application that provides for certain changes to the method for valuing share-based compensation. The valuation provisions of FAS 123R apply to new awards and to awards that are outstanding on the effective date and subsequently modified or cancelled. Under the modified prospective application, prior periods are not revised for comparative purposes.

The fair value of each option award is estimated on the date of grant using a Black-Scholes-Merton option pricing model (“Black-Scholes model”) that uses assumptions regarding a number of complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility, actual and projected

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employee stock option exercise behaviors, risk-free interest rate and expected dividends. Expected volatilities are based on historical volatility of our common stock and other factors. The expected terms of options granted are based on analyses of historical employee termination rates and option exercises. The risk-free interest rates are based on the U.S. Treasury yield in effect at the time of the grant. Since we do not expect to pay dividends on our common stock in the foreseeable future, we estimated the dividend yield to be 0%. FAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. We estimate pre-vesting forfeitures based on our historical experience.

If factors change and we employ different assumptions in the application of FAS 123R in future periods, the compensation expense that we record under FAS 123R may differ significantly from what we have recorded in the current period. There is a high degree of subjectivity involved when using option pricing models to estimate share-based compensation under FAS 123R. Because changes in the subjective input assumptions can materially affect our estimates of fair values of our share-based compensation, in our opinion, existing valuation models, including the Black-Scholes and lattice binomial models, may not provide reliable measures of the fair values of our share-based compensation. Consequently, there is a risk that our estimates of the fair values of our share-based compensation awards on the grant dates may bear little resemblance to the actual values realized upon the exercise, early termination or forfeiture of those share-based payments in the future. Certain share-based payments, such as employee stock options, may expire worthless or otherwise result in zero intrinsic value as compared to the fair values originally estimated on the grant date and reported in our financial statements. Alternatively, values may be realized from these instruments that are significantly in excess of the fair values originally estimated on the grant date and reported in our financial statements. There is no current market-based mechanism or other practical application to verify the reliability and accuracy of the estimates stemming from these valuation models, nor is there a means to compare and adjust the estimates to actual values. Although the fair value of employee share-based awards is determined in accordance with FAS 123R and SAB 107 using an option-pricing model, the value derived from that model may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.

The guidance in FAS 123R and SAB 107 is relatively new, and best practices are not well established. The application of these principles may be subject to further interpretation and refinement over time. There are significant differences among valuation models, and there is a possibility that we will adopt different valuation models in the future. This may result in a lack of consistency in future periods and materially affect the fair value estimate of share-based payments. It may also result in a lack of comparability with other companies that use different models, methods and assumptions.

Theoretical valuation models and market-based methods are evolving and may result in lower or higher fair value estimates for share-based compensation. The timing, readiness, adoption, general acceptance, reliability and testing of these methods is uncertain. Sophisticated mathematical models may require voluminous historical information, modeling expertise, financial analyses, correlation analyses, integrated software and databases, consulting fees, customization and testing for adequacy of internal controls. Market-based methods are emerging that, if employed by us, may dilute our earnings per share and involve significant transaction fees and ongoing administrative expenses. The uncertainties and costs of these extensive valuation efforts may outweigh the benefits to investors. Additionally, the application of FAS 123R is very complex. In November 2007, we announced a restatement of our financial results for the three and six months ended March 31, 2007 and the three and nine months ended June 30, 2007 primarily due to computation errors in our software used to calculate FAS 123R expense.

Previous versions of the software system we use to calculate share-based compensation expense applied a weighted average forfeiture rate in the calculation of share-based compensation. The old version consistently applied the forfeiture rate throughout the vesting period and allowed for a true-up of share-based compensation expense once the award had vested in full. The true-up was necessary because the old method did not properly attribute the cost over the vesting period. Because of the use of this method, the old version failed to properly account for the full expense of vested awards.

Under the new version of the software, forfeiture rates are applied in the calculation of share-based compensation expense up to the point each individual tranche is fully vested. As each tranche vests, the new version properly recognizes 100% of share-based compensation expense over the attribution period related to these vested tranches.

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In addition, our evaluation of share-based compensation expense uncovered a data input error when the forfeiture rate was adjusted to 30% in the second fiscal quarter of 2007. This data input error, combined with the software version issue discussed above, resulted in a material understatement of share-based compensation expense as of March 31, 2007.

Revenue Recognition

General.  We recognize revenue in accordance with the SEC’s Staff Accounting Bulletin Topic 13 (“Topic 13”), “Revenue Recognition.” Revenue is recognized when all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the seller’s price to the buyer is fixed and determinable; and (4) collectibility is reasonably assured.

Certain product sales are subject to rights of return. For these products, our revenue recognition policy is consistent with the requirements of Statement of Financial Accounting Standards No. 48, “Revenue Recognition When Right of Return Exists” (“FAS 48”). FAS 48 states that revenue from sales transactions where the buyer has the right to return the product shall be recognized at the time of sale only if several criteria are met, including that the seller be able to reasonably estimate future returns.

Certain revenue transactions include multiple deliverables. We allocate revenue to separate elements in multiple element arrangements based on the guidance in Emerging Issues Task Force No. 00-21 (“EITF 00-21”), “Accounting for Revenue Arrangements with Multiple Deliverables.” Revenue is allocated to a delivered product or service when all of the following criteria are met: (1) the delivered item has value to the customer on a standalone basis; (2) there is objective and reliable evidence of the fair value of the undelivered item; and (3) if the arrangement includes a general right of return relative to the delivered item, delivery, or performance of the undelivered item is considered probable and substantially in our control. We use the relative fair values of the separate deliverables to allocate revenue.

Revenue Arrangements with Multiple Deliverables.  We have revenue arrangements whereby we deliver to the customer multiple products and/or services. Such arrangements have generally included some combination of the following: antibody generation services; licensed rights to technology, patented products, compounds, data and other intellectual property; and research and development services. In accordance with EITF 00-21, we analyze our multiple element arrangements to determine whether the elements can be separated. We perform our analysis at the inception of the arrangement and as each product or service is delivered. If a product or service is not separable, the combined deliverables will be accounted for as a single unit of accounting.

When a delivered product or service (or group of delivered products or services) meets the criteria for separation in EITF 00-21, we allocate revenue based upon the relative fair values of each element. We determine the fair value of a separate deliverable using the price we charge other customers when we sell that product or service separately; however if we do not sell the product or service separately, we use third-party evidence of fair value. We consider licensed rights or technology to have standalone value to our customers if we or others have sold such rights or technology separately or our customers can sell such rights or technology separately without the need for our continuing involvement.

License Arrangements.  License arrangements may consist of non-refundable upfront license fees, data transfer fees, or research reimbursement payments and/or exclusive licensed rights to patented or patent pending compounds, technology access fees, various performance or sales milestones and future product royalty payments. Some of these arrangements are multiple element arrangements.

Non-refundable, up-front fees that are not contingent on any future performance by us, and require no consequential continuing involvement on our part, are recognized as revenue when the license term commences and the licensed data, technology and/or compound is delivered. Such deliverables may include physical quantities of compounds, design of the compounds and structure-activity relationships, the conceptual framework and mechanism of action, and rights to the patents or patents pending for such compounds. We defer recognition of non-refundable upfront fees if we have continuing performance obligations without which the technology, right, product or service conveyed in conjunction with the non-refundable fee has no utility to the licensee that is separate and independent of our performance under the other elements of the arrangement. In addition, if we have continuing

25

involvement through research and development services that are required because our know-how and expertise related to the technology is proprietary to us, or can only be performed by us, then such up-front fees are deferred and recognized over the period of continuing involvement.

Payments related to substantive, performance-based milestones in a research and development arrangement are recognized as revenue upon the achievement of the milestones as specified in the underlying agreements when they represent the culmination of the earnings process.

Research and Development Services.  Revenue from research and development services is recognized during the period in which the services are performed and is based upon the number of full-time-equivalent personnel working on the specific project at the agreed-upon rate. Reimbursements from collaborative partners for agreed upon direct costs including direct materials and outsourced, or subcontracted, pre-clinical studies are classified as revenue in accordance with EITF Issue No. 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent,” and recognized in the period the reimbursable expenses are incurred. Payments received in advance are recorded as deferred revenue until the research and development services are performed or costs are incurred.

Royalty Revenues.  We recognize royalty revenues from licensed products when earned in accordance with the terms of the license agreements. Net sales figures used for calculating royalties include deductions for costs of unsaleable returns, managed care chargebacks, cash discounts, freight and warehousing, and miscellaneous write-offs.

Revenues from Sale of Royalty Rights.  When we sell our rights to future royalties under license agreements and also maintain continuing involvement in earning such royalties, we defer recognition of any upfront payments and recognize them as revenue over the life of the license agreement. We recognize revenue for the sale of an undivided interest of our Abreva license agreement to Drug Royalty USA under the “units-of-revenue method.” Under this method, the amount of deferred revenue to be recognized as revenue in each period is calculated by multiplying the following: (1) the ratio of the royalty payments due to Drug Royalty USA for the period to the total remaining royalties that we expect GlaxoSmithKline will pay Drug Royalty USA over the term of the agreement by (2) the unamortized deferred revenue amount.

Government Research Grant Revenue.  We recognize revenues from federal research grants during the period in which the related expenditures are incurred.

Product Sales — Active Pharmaceutical Ingredient Docosanol (“API Docosanol”).  Revenue from sales of our API Docosanol is recorded when title and risk of loss have passed to the buyer and provided the criteria in SAB Topic 13 are met. We sell the API Docosanol to various licensees upon receipt of a written order for the materials. Shipments generally occur fewer than five times a year. Our contracts for sales of the API Docosanol include buyer acceptance provisions that give our buyers the right of replacement if the delivered product does not meet specified criteria. That right requires that they give us notice within 30 days after receipt of the product. We have the option to refund or replace any such defective materials; however, we have historically demonstrated that the materials shipped from the same pre-inspected lot have consistently met the specified criteria and no buyer has rejected any of our shipments from the same pre-inspected lot to date. Therefore, we recognize revenue at the time of delivery without providing any returns reserve.

Cost of Revenues

Cost of revenues includes direct and indirect costs to manufacture product sold, including the write-off of obsolete inventory, and to provide research and development services. Also, classified within cost of product sales is the amortization of the acquired FazaClo product rights.

Recognition of Expenses in Outsourced Contracts

Pursuant to management’s assessment of the services that have been performed on clinical trials and other contracts, we recognize expenses as the services are provided. Such management assessments include, but are not limited to: (1) an evaluation by the project manager of the work that has been completed during the period, (2) measurement of progress prepared internally and/or provided by the third-party service provider, (3) analyses of data that justify the progress, and (4) management’s judgment. Several of our contracts extend across multiple

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reporting periods, including our largest contract, representing a $7.1 million Phase III clinical trial contract that was entered into subsequent to September 30, 2007. A 3% variance in our estimate of the work completed in our largest contract could increase or decrease our quarterly operating expenses by approximately $213,000.

Research and Development Expenses

Research and development expenses consist of expenses incurred in performing research and development activities including salaries and benefits, facilities and other overhead expenses, clinical trials, contract services and other outside expenses. Research and development expenses are charged to operations as they are incurred. Up-front payments to collaborators made in exchange for the avoidance of potential future milestone and royalty payments on licensed technology are also charged to research and development expense when the drug is still in the development stage, has not been approved by the FDA for commercialization and concurrently has no alternative uses.

We assess our obligations to make milestone payments that may become due under licensed or acquired technology to determine whether the payments should be expensed or capitalized. We charge milestone payments to research and development expense when:

•  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.  In accordance with Statement of Financial Accounting Standards No. 141, “Business Combinations” (“FAS 141”), we immediately charge the costs associated with acquired in-process research and development (“IPR&D”) to research and development expense upon acquisition. These amounts represent an estimate of the fair value of acquired IPR&D for projects that, as of the acquisition date, had not yet reached technological feasibility, had no alternative future use, and had uncertainty in receiving future economic benefits from the acquired IPR&D. We determine the future economic benefits from the acquired IPR&D to be uncertain until such technology is approved by the FDA or when other significant risk factors are abated. We incurred significant IPR&D expense related to the Alamo acquisition. See also Note 3, “Acquisition of Alamo Pharmaceuticals, Inc. / Sale of FazaClo — In-Process Research and Development” in the Notes to Consolidated Financial Statements.

Acquired contractual rights.  Payments to acquire contractual rights to a licensed technology or drug candidate are expensed as incurred when there is uncertainty in receiving future economic benefits from the acquired contractual rights. We consider the future economic benefits from the acquired contractual rights to a drug candidate to be uncertain until such drug candidate is approved by the FDA or when other significant risk factors are abated.

Capitalization and Valuation of Long-Lived and Intangible Assets

In accordance with FAS 141 and Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“FAS 142”), goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead are tested for impairment on an annual basis or more frequently if certain indicators arise. Goodwill represents the excess of purchase price of an acquired business over the fair value of the underlying net tangible and intangible assets. The Company operates in one segment and goodwill is evaluated at the company level as there is only one reporting unit. Goodwill is evaluated in the fourth fiscal quarter of each year. There was no impairment to goodwill for the fiscal years ended September 30, 2007 and 2006.

Intangible assets with finite useful lives are amortized over their respective useful lives and reviewed for impairment in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“FAS 144”.) The method of amortization shall reflect the pattern in which the economic benefits of the intangible asset are consumed or otherwise used up. If that pattern cannot be

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reliably determined, a straight- line amortization method will be used. Intangible assets with finite useful lives include trade name and license agreements, which are being amortized over their estimated useful lives ranging from one to 15.5 years.

In accordance with FAS 144, intangible assets and other long-lived assets, except for goodwill, are evaluated for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. If the review indicates that intangible assets or long-lived assets are not recoverable (i.e. the carrying amount is less than the future projected undiscounted cash flows), their carrying amount would be reduced to fair value. Factors we consider important that could trigger an impairment review include the following:

•  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.

Prior to October 1, 2005, intangible assets with finite useful lives also include capitalized external legal costs incurred in connection with patents and patent applications pending. We amortized costs of approved patents and patent applications pending over their estimated useful lives. For patents pending, we amortized the costs over the shorter of a period of twenty years from the date of filing the application or, if licensed, the term of the license agreement. For patent and patent applications pending and trademarks that we abandon, we charge the remaining unamortized accumulated costs to expense.

Change in Method of Accounting for Patent-related Costs

In the fourth quarter of fiscal 2006, we changed our method of accounting, effective October 1, 2005 for legal costs, all of which were external, associated with the application for patents. Prior to the change, we expensed as incurred all internal costs associated with the application for patents and capitalized external legal costs associated with the application for patents. Costs of approved patents were amortized over their estimated useful lives or if licensed, the terms of the license agreement, whichever was shorter, while costs for patents pending were amortized over the shorter period of twenty years from the date of the filing application or if licensed, the term of the license agreement. Amortization expense for these capitalized costs was classified as research and development expenses in our consolidated statements of operations. Under the new method, external legal costs are expensed as incurred and classified as research and development expenses in our consolidated statements of operations. We believe that this change is preferable because it will result in a consistent treatment for all costs, that is, under our new method both internal and external costs associated with the application for patents are expensed as incurred. In addition, the change will provide a better comparison with our industry peers. 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 for the fiscal year ended September 30, 2006 was to increase the net loss by $3.7 million, $3.6 million of which represents the cumulative effect of the change on prior years, or $0.12 per basic and diluted share.

Pro forma amounts assuming the new method for patent-related costs was applied retroactively are as follows:

	Fiscal 2006			Fiscal 2005
Net loss	$	(58,936,756	)	$	(31,255,373	)
Basic and diluted loss per share	$	(1.92	)	$	(1.22	)

Restructuring Expense

We record costs and liabilities associated with exit and disposal activities, as defined in Statements of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“FAS 146”), at fair value in the period the liability is incurred. In periods subsequent to initial measurement, changes to a liability are measured using the credit-adjusted risk-free rate applied in the initial period. In fiscal years 2007 and 2006, we recorded costs and liabilities for exit and disposal activities related to a relocation plan, including a decision to discontinue occupying certain leased office and laboratory facilities, in accordance with FAS 146. The liability is

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evaluated and adjusted as appropriate on at least a quarterly basis for changes in circumstances. Please refer to Note 4, “Relocation of Commercial and General and Administrative Operations” in the Notes to Consolidated Financial Statements for further information.

Critical Accounting Policies and Estimates for Discontinued Operations

Revenue Recognition

Product Sales — FazaClo.  As discussed previously in this filing and also in Note 3, “Acquisition of Alamo Pharmaceuticals, Inc. / Sale of FazaClo” in the Notes to Consolidated Financial Statements, we acquired Alamo Pharmaceuticals LLC (“Alamo”) on May 24, 2006, with one marketed product, FazaClo (clozapine, USP), that began shipping to wholesale customers in July 2004 in 48-pill units. At that time, FazaClo had a two-year shelf life. In June 2005, Alamo received FDA approval to extend the product expiration date to three years. In October 2005, Alamo began shipping 96-pill units and accepted returns of unsold or undispensed 48-pill units. In August 2007, we sold our product rights to FazaClo to Azur Pharma, Inc. As a result of our sale of FazaClo near the end of fiscal 2007, we have reflected all FazaClo-related revenue and expenses as discontinued operations for all periods presented.

During fiscal 2007, we sold FazaClo to pharmaceutical wholesalers, the three largest of which accounted for approximately 84% of our net wholesale shipments for the fiscal year ended 2007. They resold our product to outlets such as pharmacies, hospitals and other dispensing organizations. We had agreements with our wholesale customers, various states, hospitals, certain other medical institutions and third-party payers throughout the U.S. These agreements frequently contain commercial incentives, which may have included pricing allowances and discounts payable at the time the product was sold to the dispensing outlet or upon dispensing the product to patients. Consistent with pharmaceutical industry practice, wholesale customers can return purchased product during an 18-month period that begins six months prior to the product’s expiration date and ends 12 months after the expiration date. Additionally, several of our dispensing outlets have the right to return expired product at any time. Once products have been dispensed to patients, the right of return expires.

Beginning in the first quarter of fiscal 2007, we obtained third-party information regarding certain wholesaler inventory levels, a sample of outlet inventory levels and third-party market research data regarding FazaClo sales. The third-party data includes, (i) IMS Health Audit — National Sales Perspective reports (“NSP”), which is a projection of near-census data of wholesaler shipments of product to all outlet types, including retail and non-retail and; (ii) IMS Health National Prescription Audit (“NPA”) Syndicated data, which captures end-user consumption from retail-dispensed prescriptions based upon projected data from pharmacies estimated to represent approximately 60% to 70% of the U.S. prescription universe. Further, we analyzed historical rebates and chargebacks earned by State Medicaid, Medicare Part D and managed care customers. Based upon this additional information and analysis obtained, we estimated the amount of product that was shipped that was no longer in the wholesale or outlet channels, and hence no longer subject to a right of return. Therefore, we began recognizing revenues, net of returns, chargebacks, rebates, and discounts, in the first quarter of fiscal 2007, for product that we estimated had been sold to patients and that was no longer subject to a right of return.

FazaClo product revenues were recorded net of provisions for estimated product pricing allowances including: State Medicaid base and supplemental rebates, Medicare Part D discounts, managed care contract discounts and prompt payment discounts were at an aggregate rate of approximately 25.8% of gross revenues for the fiscal year ended September 30, 2007. Provisions for these allowances are estimated based upon contractual terms and require management to make estimates regarding customer mix to reach. We considered our current contractual rates with States related to Medicaid base and supplemental rebates, with private organizations for Medicare Part D discounts and contracts with managed care organizations. We review these rates at least quarterly and make adjustments, if necessary.

Nature of Operating Expenses

In fiscal 2007, our operating expenses were influenced substantially by the amount of spending devoted to sales and marketing of FazaClo, program research funded by our partners and Zenvia clinical development expenses. During the past three years, we substantially expanded our drug development pipeline, which required that we allocate significant amounts of our resources to such programs, including increased spending on clinical

29

trials as those programs advance in their development. We believe that future operating expenses over the next two years will be comprised mainly of our Phase III clinical trial expenses and general and administrative expenses such as finance, human resources and facilities.

Our business is exposed to significant risks, as discussed in the section entitled “Risk Factors,” which may result in additional expenses, delays and lost opportunities that could have a material adverse effect on our results of operations and financial condition.

Effects of Inflation

We believe the impact of inflation and changing prices on net revenues and on operations has been minimal during the past three years.

Results of Operations

We operate our business on the basis of a single reportable segment, which is the business of discovery, development and commercialization of novel therapeutics for chronic diseases. Our chief operating decision-maker is the Chief Executive Officer, who evaluates our company as a single operating segment.

We categorize revenues by geographic area based on selling location. All our operations are currently located in the United States; therefore, total revenues for fiscal 2007, 2006 and 2005 are attributed to the United States. All long-lived assets for fiscal 2007 and 2006 are located in the United States.

Comparison of Fiscal 2007 and 2006

Revenues

Net product revenues were $72,000 and $18,000 for the fiscal years ended September 30, 2007 and 2006 respectively. See section “Loss from Discontinued Operations” for a detailed discussion of net revenues related to FazaClo.

Revenues from licenses, research services and grants declined to $9.2 million for the fiscal year ended September 30, 2007 compared to $15.2 million for the fiscal year ended September 30, 2006. This decline was principally due to a decrease in research revenues of $5.4 million due to a $5.0 million milestone earned under the AstraZeneca license agreement in the first quarter of fiscal year 2006 that was not repeated in the first quarter of fiscal year 2007. In addition, revenue from license arrangements declined $3.5 million. As a result of the termination of the contract research services that we were providing to AstraZeneca and Novartis, our revenues were lower than in 2006. These decreases were partially offset by an increase in revenue from royalties of $2.3 million primarily from the receipt of $1.5 million from HBI for their achievement of a regulatory milestone. However, we expect our related research and development expenses to be reduced by a corresponding amount in future periods. See Note 16 “License and Research Collaboration Agreements” and Note 19 “Segment Information” in Notes to Consolidated Financial Statements.

Cost of Revenues

Cost of product revenues was $328,000 and $3,000 for the fiscal years ended September 30, 2007 and 2006, respectively. The cost of product revenues in fiscal year ended September 30, 2007 is attributable to a $260,000 write off of obsolete inventory in the second quarter of 2007. See section “Loss from Discontinued Operations” for a detailed discussion of cost of product revenues related to FazaClo.

Cost of licenses, research services and grants declined to $4.3 million or 47% of revenues compared with $7.5 million or 49% of revenues for the fiscal year ended September 30, 2006. The cost of licenses, research services and grants includes primarily direct and indirect payroll costs and the costs of outside vendors.

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	Fiscal Year Ended
	2007		2006		$ Change			% Change
OPERATING EXPENSES
Research and development	$	13,115,712	$	26,994,335	$	(13,878,623	)		−51	%
Selling, general and administrative		20,830,188		32,375,366		(11,545,178	)		−36	%
Total Operating Expenses	$	33,945,900	$	59,369,701	$	(25,423,801	)		−43	%

Research and Development Expenses

Research and development expenses decreased $13.9 million or 51% for the fiscal year ended September 30, 2007 compared to the fiscal year ended September 30, 2006. The decrease is primarily due to decreased costs of $13.9 million incurred for Zenvia product research and development (PBA/IEED and DPN), which was spent in fiscal year ended September 30, 2006 in preparation for the planned product launch. In addition, decreased costs of $652,000 were incurred for the AVP-13358 Allergy study.

Over the next two years, we expect that our research and development costs will consist mainly of expenses related to the confirmatory Phase III trial for Zenvia for PBA.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased $11.5 million, or 36% for the fiscal year ended September 30, 2007, compared to the fiscal year ended September 30, 2006. The decrease is primarily attributed to fiscal year 2006 expenditures that were not repeated in fiscal 2007 relating to external marketing costs in the amount of $7.7 million associated with the anticipated Zenvia product launch, for which commercialization was delayed in October 2006 following receipt of the approvable letter. In addition, $1.7 million for continuing medical education grants related to PBA/IEED in the prior fiscal year were not repeated in fiscal 2007 and fiscal 2007 compensation expense decreased by $1.4 million as compared to the prior year due to related decreases in overall headcount and compensation levels in general and administrative areas.

Additionally, in September 2007, a court awarded reimbursement of attorneys fees spent over a four-year period in connection with the enforcement of a settlement agreement entered into with a former employee. The total fees awarded were approximately $1.3 million. We cannot currently estimate the timing for collection or the probability of collecting the full amount, and therefore, no amounts have been recognized in income as of September 30, 2007.

Share-Based Compensation

Total compensation expense for our share-based payments in the fiscal year ended September 30, 2007 and 2006 was $2.2 million (excluding $508,000 included in discontinued operations) and $2.8 million (excluding $283,000 included in discontinued operations), respectively. Selling, general and administrative expense in the fiscal years ended September 30, 2007 and 2006 includes share-based compensation expense of $1.9 million and $2.4 million, respectively. Research and development expense in the fiscal year ended September 30, 2007 and 2006 includes share-based compensation expense of $365,000 and $465,000, respectively. As of September 30, 2007, $1.7 million of total unrecognized compensation costs related to unvested awards is expected to be recognized over a weighted average period of 2.1 years. See Note 2, “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements for further discussion.

Interest Expense and Interest Income

For the fiscal year ended September 30, 2007, interest expense increased to $1.2 million, compared to $406,000 for the prior fiscal year. The increase is primarily due to the Seller Notes with an original balance of $25.1 million issued in May 2006 in connection with the purchase of Alamo.

For the fiscal year ended September 30, 2007, interest income decreased to $623,000, compared to $1.8 million for the prior fiscal year. The decrease is due to approximately a 58% decrease in the average balance of cash, cash

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equivalents and investments in securities for fiscal year ended September 30, 2007, compared to the prior fiscal year.

Net Loss

Net loss was $20.9 million, or $0.53 per share, for the fiscal year ended September 30, 2007, compared to a net loss of $62.6 million, or $2.04 per share for the fiscal year ended September 30, 2006. The decrease in net loss is primarily attributed to decreased operating expenses totaling $24.9 million which is mainly due to decreased spending in the Zenvia product research and development area of $13.9 million, as well as, the decreased spending in marketing costs from the Zenvia product launch of $7.7 million, the gain on the sale of the FazaClo product line of $12.2 million, the decrease in the discontinued operations loss of $3.9 million and the $3.6 million cumulative effect of the change in accounting principle which occurred in 2006 only.

Income/(Loss) from Discontinued Operations

For the fiscal year ended September 30, 2007, income from discontinued operations was $7.5 million, compared to a loss of $8.7 million for the fiscal year ended September 30, 2006. This decrease in loss was mainly due to the recognition of net product revenues of FazaClo of $17.0 million in fiscal 2007, including revenue that was deferred as of September 30, 2006. No product revenues were recognized for FazaClo in the fiscal year ended September 30, 2006. Product margin on these net sales were $12.4 million for the year ended September 30, 2007. The product margin was offset with operating expenses incurred of $16.7 million in fiscal year ended September 30, 2007 compared to $7.9 million in fiscal year ended September 30, 2006. A majority of the operating expenses incurred in fiscal year 2007 pertain to the FazaClo product launch as well as the increase in headcount as a result of the Alamo acquisition. Also contributing to the decrease in net loss is the gain recorded in fiscal 2007 on the sale of FazaClo in the amount of $12.2 million.

Comparison of Fiscal 2006 and 2005

Revenues

Revenues decreased by $1.5 million, or 9%, to $15.2 million in fiscal 2006 from $16.7 million in fiscal 2005. The decrease is mainly due to a $7.6 million decrease in license revenues; partially offset by a $6.2 million increase in research and development service revenues. License revenues in fiscal 2006 consist mainly of our receipt of a $5.0 million payment relating to the achievement of a milestone under the AstraZeneca license agreement. License revenues in fiscal 2005 included $12.8 million of license fees from the AstraZeneca and Novartis license agreements. Research and development service revenues increased in fiscal 2006 as compared to the prior period due to the full year effect of research revenues generated from the AstraZeneca and Novartis license agreements in the current year, as opposed to our receipt of revenue for only a partial year in fiscal 2005.

Potential revenue-generating contracts that remained active as of September 30, 2006 included license agreements with AstraZeneca and Novartis, nine docosanol 10% cream license agreements and one Zenvia sublicense. AstraZeneca and Novartis were engaged in preclinical and/or clinical development efforts of our licensed RCT and MIF programs. See Note 16 “License and Research Collaboration Agreements” and Note 19 “Segment Information” in Notes to Consolidated Financial Statements.

Cost of Revenues

Cost of licenses, research services and grants increased to $7.5 million or 49% of revenues for the fiscal year ended September 30, 2006 compared with $2.8 million or 17% of revenues for the fiscal year ended September 30, 2005. The increase was due to a $4.9 million increase in cost of research services funded by partners.

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	Fiscal Year Ended
	2006		2005		$ Change		% Change
OPERATING EXPENSES
Research and development	$	26,994,335	$	26,140,504	$	853,831		3	%
Selling, general and administrative		32,375,366		18,796,188		13,579,178		72	%
Total Operating Expenses	$	59,369,701	$	44,936,692	$	14,433,009		32	%

Research and Development Expenses

R&D expenses increased $854,000 or 3% for the fiscal year ended September 30, 2006 compared to the fiscal year ended September 30, 2005. R&D expenses increased to $27.0 million in fiscal 2006 from $26.1 million in fiscal 2005. R&D expenses in fiscal 2006 were related to continuation of the open label safety study of Zenvia in the treatment for IEED/PBA, a Phase III clinical trial of Zenvia for the treatment of diabetic neuropathic pain, and a Phase I clinical trial of our leading compound for the selective cytokine inhibitor program. R&D expenses also included pre-clinical research related to antibody development programs and compounds that regulate MIF and RCT Research. The MIF and RCT research programs were funded by our partners. The increase in R&D expenses was due to a $1.8 million increase in spending for the open label safety study of Zenvia for the treatment of IEED/PBA, a $7.6 million increase in spending for the Phase III clinical trial of Zenvia for the treatment of diabetic neuropathic pain and a $2.4 million increase in medical affairs. The increase was offset in part by a $3.7 million decrease in spending on the MIF and RCT research programs as they were fully funded by partners in fiscal 2006. In fiscal 2005, we incurred a one-time $7.2 million charge in connection with the acquisition of additional contractual rights to Zenvia.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $13.6 million, or 72% for the fiscal year ended September 30, 2006, compared to the fiscal year ended September 30, 2005. Our selling, general and administrative expenses increased to $32.4 million in fiscal 2006, compared to $18.8 million in fiscal 2005. These increased expenses primarily related to a $6.2 million increase in expenses related to the expansion of our pre-launch activities and market research for Zenvia for the treatment of IEED/PBA, as well as the hiring of additional sales and marketing personnel; $2.5 million in share-based compensation expense; $1.7 million in expenses from continuing medical educational grants; a $1.4 million increase in expenses related to increases in headcount and compensation levels in general and administrative areas; and a $622,000 increase in legal fees.

Share-Based Compensation

Through fiscal year 2005, we accounted for our stock plans using the intrinsic value method. Effective at the beginning of fiscal year 2006, we adopted FAS 123R and elected to adopt the modified prospective application method. FAS 123R requires us to use a fair-valued based method to account for share-based compensation. Accordingly, share-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as expense over the employees’ requisite service period. Total compensation cost for our share-based payments in fiscal 2006 was $2.8 million (excluding $283,000 included in discontinued operations), including $302,500 related to stock options granted in fiscal 1999 as discussed below. Selling, general and administrative expense and research and development expense in fiscal 2006 include: share-based compensation of $2.4 million and $465,000, respectively. As of September 30, 2006, $7.2 million of total unrecognized compensation costs related to unvested awards is expected to be recognized over a weighted average period of 2.7 years. See Note 2, “Significant Accounting Policies — Change in Accounting Method for Share-Based Compensation” in the Notes to Consolidated Financial Statements for further discussion.

On July 28, 2006, the Public Company Accounting Oversight Board (PCAOB) issued Staff Audit Practice Alert No. 1 entitled, “Matters Relating to Timing and Accounting for Options Grants.” Prompted by the PCAOB release, the Company and the independent audit committee of the Board of Directors authorized a review of the

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Company’s historical stock option practices. The review was conducted with the assistance of an outside law firm and an outside consulting firm.

As a result of this review, one exception was found in which the measurement date for 50,000 fully vested common stock options should have been November 30, 1999 instead of October 30, 1999. Based on this, the Company should have recorded a non-cash charge of $302,500 and a corresponding increase in common stock in the first quarter of fiscal year 2000. The Company has concluded that this adjustment is not material to the Company’s consolidated financial statements in any interim or annual period presented in this or any previously filed Form 10-K. Therefore, the charge was recognized in the quarter ended September 30, 2006.

Based upon this review, management and the independent audit committee of the Board of Directors were satisfied that no evidence was found that indicated that the Company otherwise intentionally manipulated stock option grant dates or was remiss in communicating grants to optionees in a timely manner. Further, the Company’s documentation and practices followed the intent of the Board of Directors in granting such options and that the methods of approval and the Company’s practices did not provide for management discretion in selecting or manipulating the option grant dates.

Interest Expense and Interest Income

For the fiscal year ended September 30, 2006, interest expense increased to $406,000, compared to $93,000 for the prior fiscal year. The increase was primarily due to the Seller Notes with an original balance of $25.1 million issued in May 2006 in connection with the purchase of Alamo.

For the fiscal year ended September 30, 2006, interest income increased to $1.8 million, compared to $620,000 for the prior fiscal year. The increase was primarily due to a 73% increase in average balance of cash, cash equivalents and investments in securities in fiscal 2006, compared to the prior year.

Cumulative Effect of Change in Accounting Principle

In the fourth quarter of fiscal 2006, we changed our method of accounting, effective October 1, 2006 for legal costs, all of which were 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 for fiscal 2006 was to increase the net loss by $3.7 million, $3.6 million of which represents the cumulative effect of the change on prior years, or $0.12 per basic and diluted share.

Net Loss

Net loss was $62.6 million, or $2.04 per share, in fiscal 2006, compared to a net loss of $30.6 million, or $1.19 per share, in fiscal 2005. The increase in net loss was primarily attributed to the $3.6 million cumulative effect of the change of accounting method for legal costs, the $13.6 million increase in selling, general and administrative costs (that was mainly due to increased spending related to the expansion of the pre-launch activities and market research for Zenvia for the treatment of IEED/PBA), the increase in the discontinued operations loss of $8.7 million, and $4.7 million increase in cost of licenses, research services and grants mainly due to increased spending for research services funded by partners.

Loss from Discontinued Operations

For the fiscal year ended September 30, 2006, loss from discontinued operations was $8.7 million, compared to no loss for the fiscal year ended September 30, 2005. The loss from discontinued operations is a result of the operations of FazaClo, which was acquired in May of 2006 as part of the Alamo acquisition.

Liquidity and Capital Resources

We assess our liquidity by our ability to generate cash to fund future operations. Key factors in the management of our liquidity are: cash required to fund operating activities including expected operating losses and the levels of accounts receivable, inventories, accounts payable and capital expenditures; the timing and extent of cash received

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from milestone payments under license agreements; funds required for acquisitions; funds required to repay notes payable and capital lease obligations as they become due; adequate credit facilities; and financial flexibility to attract long-term equity capital on favorable terms. Historically, cash required to fund on-going business operations has been provided by financing activities and used to fund operations and working capital requirements and investing activities.

Cash, cash equivalents and investments, as well as, net cash provided by or used for operating, investing and financing activities, are summarized in the table below.

			Increase
	September 30,		(Decrease)		September 30,
	2007		During Period		2006
Cash, cash equivalents and investment in securities	$	33,641,398	$	8,891,325	$	24,750,073
Cash and cash equivalents	$	30,487,962	$	25,589,748	$	4,898,214
Net working capital (deficit)	$	29,336,776	$	36,306,553	$	(6,969,777	)

	Twelve Months						Twelve Months
	Ended			Change			Ended
	September 30,			Between			September 30,
	2007			Periods			2006
Net cash used for operating activities	$	(46,644,434	)	$	(5,834,918	)	$	(40,809,516	)
Net cash provided by (used for) investing activities		59,569,310			66,949,792			(7,380,482	)
Net cash provided by financing activities		12,664,872			(31,803,197	)		44,468,069
Net increase (decrease) in cash and cash equivalents	$	25,589,748		$	29,311,677		$	(3,721,929	)

Operating activities.  Net cash used for operating activities amounted to $46.6 million in the fiscal year 2007 compared to $40.8 million in the fiscal year 2006. The increase in cash used is primarily related to funding the operating loss for the period, recognition of deferred revenues, and reductions in accounts payable. Accounts payable and accrued expenses decreased by $13.9 million and was primarily due to payments of invoices in clinical, marketing and general and administrative activities.

Investing activities.  Net cash provided by investing activities was $59.6 million in the fiscal year 2007, compared to net cash of $7.4 million used in the fiscal year 2006. This increase is mainly due to proceeds from investments in securities of $16.9 million compared to investments in securities of $65.8 million offset by proceeds from investments of $64.9 million in 2006. Net cash provided by investing activities of discontinued operations was $42.1 million compared to net cash used by investing activities of discontinued operations of $4.8 million in 2006. We invested $59,000 in property and equipment in fiscal 2007, compared to $1.7 million in fiscal 2006. In fiscal 2007, we generated $774,000 from disposals of property and equipment.

Financing activities.  Net cash provided by financing activities was $12.7 million in fiscal year 2007, consisting of $30.9 million in net proceeds from sales of our common stock offset by $6.8 million to reduce long-term debt and $11.4 million net cash used in financing activities of discontinued operations in 2007. Net cash provided by financing activities amounted to $44.5 million in fiscal 2006, consisting of $44.8 million received from the sale of our common stock through private placements and from exercises of warrants and stock options.

In June 2005, we filed a shelf registration statement on Form S-3 with the SEC to sell an aggregate of up to $100 million in Class A common stock and preferred stock, depositary shares, debt securities and warrants. This shelf registration statement was declared effective on August 3, 2005 and through September 30, 2007, we had sold a total of 14,406,755 shares of Class A common stock under this registration statement, raising gross offering proceeds of approximately $71.5 million and net offering proceeds of approximately $69.5 million. We have also issued under this registration statement common stock warrants to purchase a total of 1,053,000 shares of our

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Class A common stock at an exercise price of $3.30 per share. The warrants became exercisable in May 2007 and all unexercised warrants expired in November 2007. The warrants may be exercised on a net basis in certain circumstances but in no event would the company be required to settle the warrants in cash.

In December 2006 we entered into a financing facility with Brinson Patrick Securities Corporation. Under this facility, we have offered and sold an aggregate of 6,126,000 shares of Class A common stock, which resulted in net proceeds of $16.1 million. As of December 14, 2007, 5.6 million shares remained available for sale under this facility. Sales are made under our effective shelf registration statement.

As of September 30, 2007, we have contractual obligations for long-term debt, capital (finance) lease obligations and operating lease obligations, as summarized in the table that follows. We have no off-balance sheet arrangements.

	Payments Due by Period
			Less than						More than
	Total		1 Year		1-3 Years		3-5 Years		5 Years
Long-term debt (principal and interest)	$	13,339,769	$	1,048,710	$	12,291,059	$	—	$	—
Operating lease obligations		8,279,685		2,216,923		3,005,360		2,705,743		351,659
Purchase obligations(1)		2,763,172		2,763,172		—		—		—
Total	$	24,382,626	$	6,028,805	$	15,296,419	$	2,705,743	$	351,659

(1) Purchase obligations consist of the total of trade accounts payable and trade related accrued expenses at September 30, 2007, which approximates our contractual commitments for goods and services in the normal course of our business.

As part of the purchase consideration of the Alamo acquisition, we initially issued three promissory notes in the principal amounts of $14,400,000, $6,675,000 and $4,000,000 (the “First Note,” “Second Note” and “Third Note”, respectively) (collectively, the “Notes”). The Notes bear interest at an average rate equal to the London Inter-Bank Offered Rate, or “LIBOR,” plus 1.33%. Interest accruing on the Notes is payable monthly and the principal amount of the Notes matures on May 24, 2009, provided that (i) the Selling Holders may demand early repayment of the First Note if the closing price of our common stock, as reported on the NASDAQ Global Market, equals or exceeds $15.00 per share for a total of 20 trading days in any 30 consecutive trading-day period (the “Stock Contingency”), and (ii) we must apply 20% of any future net offering proceeds from equity offerings and other financing transactions to repay the Notes (starting with the First Note), and must repay the Notes in full if we have raised in an offering more than $100,000,000 in future aggregate net proceeds. In connection with the equity offering we completed in the first nine months of fiscal year 2007, and in accordance with the terms of the Notes, we used approximately $6.1 million or 20% of the net proceeds received to pay down the First Note. In connection with our sale of FazaClo in August 2007, we agreed to prepay $11 million of outstanding principal due under the Notes, and the Note holder agreed to suspend the Company’s obligation to use a portion of future equity offering proceeds to repay the Notes, up to $55 million in net offering proceeds. Twenty percent of any offering proceeds above this amount will need to be paid to the Note holders, as per the original agreement.

We have the right to prepay, in cash or in common stock, the amounts due under the Notes at any time, provided that we may only pay the Notes in common stock if the Stock Contingency has occurred prior to the maturity date and if we have registered the shares on an effective registration statement filed with the SEC. If we elect to prepay the Notes with common stock, the shares will be valued at 95% of the average closing price of the common stock, as reported on the NASDAQ Global Market, for the five trading days prior to repayment, subject to a price floor.

Alamo Earn-Out Payments.  In connection with the Alamo acquisition, we agreed to pay up to an additional $39,450,000 in revenue-based earn-out payments, based on future sales of FazaClo. These earn-out payments are based on FazaClo sales in the U.S. from the closing date of the acquisition through December 31, 2018 (the “Contingent Payment Period”). Based on the results of the quarters ended March 31, 2007 and June 30, 2007, we issued the first and second of these revenue-based payments through the issuance of additional promissory notes in the principal amount of $2,000,000 per note. As previously discussed in this filing, we sold the FazaClo product line

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to Azur Pharma. Our future earn-out obligations that would have been payable to the prior owner of Alamo Pharmaceuticals upon the achievement of certain milestones were assumed by Azur Pharma.

Eurand Milestone and Royalty Payments.  In August 2006, we entered into a development and license agreement (“Eurand Agreement”) with Eurand, Inc. (“Eurand”), under which Eurand will provide R&D services using Eurand’s certain proprietary technology to develop a once-a-day controlled release capsule, a new formulation of Zenvia for the treatment of IEED/PBA (“Controlled-Release Zenvia”). Under the terms of the Eurand Agreement, we will pay Eurand for development services on a time and material basis. We will be required to make payments up to $7.6 million contingent upon achievement of certain development milestones and up to $14.0 million contingent upon achievement of certain sales targets. In addition, we will be required to make royalty payments based on sales of Controlled-Release Zenvia, if it is approved for commercialization. Development milestone events include program initiation, delivery of prototypes, delivery of clinical trial material for phase 1, achieving target PK Profile in the pilot clinical study, delivery of clinical trial material for phase 3, and filing of the first NDA for the Product with the FDA, completion of manufacturing validation and approval of the NDA with the FDA. Sales target milestones are $2.0 million upon achieving $100 million of U.S. net revenues, $4.0 million upon achieving $200 million of U.S. net revenues and $8.0 million upon achieving $400 million of U.S. net revenues. The agreement remains in effect on a country by country basis for the longer of 10 years after first commercial sale or the life of any Eurand patent, unless earlier terminated in accordance with the agreement. In November 2006, we notified Eurand to suspend activity on this project until further notice. The Company may terminate the agreement upon 30 days’ notice. Upon expiration of the agreement the Company shall own a fully-paid irrevocable license. Effective December 2006, we suspended further work under this agreement until resolution of further development plans for Zenvia resulting from our meeting with the FDA in late February 2007. All material remaining obligations would only be due in the event we reinstate the agreement in future.

Zenvia License Milestone Payments.  We hold the exclusive worldwide marketing rights to Zenvia for certain indications pursuant to an exclusive license agreement with the Center for Neurologic Study (“CNS”). We will be obligated to pay CNS up to $400,000 in the aggregate in milestones to continue to develop both indications, assuming they are both approved for marketing by the FDA. We are not currently developing, nor do we have an obligation to develop, any other indications under the CNS license agreement. In fiscal 2005, we paid $75,000 to CNS under the CNS license agreement, and will need to pay a $75,000 milestone if the FDA approves our NDA for Zenvia for the treatment of PBA/IEED. In addition, we are obligated to pay CNS a royalty on commercial sales of Zenvia with respect to each indication, if and when the drug is approved by the FDA for commercialization. Under certain circumstances, we may have the obligation to pay CNS a portion of net revenues received if we sublicense Zenvia to a third party.

Under our agreement with CNS, we are required to make payments on achievements of up to a maximum of ten milestones, based upon five specific medical indications. Maximum payments for these milestone payments could total approximately $2.1 million if we pursued the development of Zenvia for all of the licensed indications. Of the clinical indications that we currently plan to pursue, expected milestone payments could total $800,000. In general, individual milestones range from $150,000 to $250,000 for each accepted NDA and a similar amount for each approved NDA. In addition, we are obligated to pay CNS a royalty ranging from approximately 5% to 8% of net revenues.

Management Outlook

The minimum amount of securities available for sale under our existing shelf registration was approximately $28.5 million as of September 30, 2007. We believe that cash equivalents and unrestricted investments in securities of approximately $33.6 million at September 30, 2007, which includes the net proceeds from the sale of FazaClo, will be sufficient to sustain our planned level of operations for the next twelve months. However, the Company cannot provide assurances that our plans will not change, or that changed circumstances will not result in the depletion of capital resources more rapidly than anticipated. If we are unable to generate sufficient cash flows from licensed technologies or are unable to raise sufficient capital, management believes that expenditures could be curtailed in order to continue operations for the next 12 months.

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For information regarding the risks associated with our need to raise capital to fund our ongoing and planned operations, please see “Risk Factors.”

Recent Accounting Pronouncements

See Note 2, “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements for a discussion of recent accounting pronouncements and their effect, if any, on the Company.

Item 7A.   Quantitative and Qualitative Disclosures About Market Risk

As described below, we are exposed to market risks related to changes in interest rates. Because substantially all of our revenue, expenses, and capital purchasing activities are transacted in U.S. dollars, our exposure to foreign currency exchange rates is immaterial. However, in the future we could face increasing exposure to foreign currency exchange rates as we expand international distribution of docosanol 10% cream and purchase additional services from outside the U.S. Until such time as we are faced with material amounts of foreign currency exchange rate risks, we do not plan to use derivative financial instruments, which can be used to hedge such risks. We will evaluate the use of derivative financial instruments to hedge our exposure as the needs and risks should arise.

Interest Rate Sensitivity

Our investment portfolio consists primarily of fixed income instruments with an average duration of approximately 14 months as of September 30, 2007 (11 months as of September 30, 2006). The primary objective of our investments in debt securities is to preserve principal while achieving attractive yields, without significantly increasing risk. We classify our investments in securities as of September 30, 2007 as available-for-sale and our restricted investments in securities as held-to-maturity. These available-for-sale securities are subject to interest rate risk. In general, we would expect that the volatility of this portfolio would decrease as its duration decreases. Based on the average duration of our investments as of September 30, 2007 and 2006, an increase of one percentage point in the interest rates would have resulted in increases in comprehensive losses of approximately $280,000 and $171,000, respectively.

At September 30, 2007, we had approximately $11.7 million of variable rate debt that was issued as part of the purchase price for the acquisition of Alamo. Based on the amount of outstanding variable rate debt at September 30, 2007, if the interest of our variable rate debt were to increase or decrease by 1%, interest expense would increase or decrease on an annual basis by approximately $117,000.

Item 8.   Financial Statements and Supplementary Data

Our financial statements are annexed to this report beginning on page F-1.

Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A.   Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Interim Chief Financial Officer, of the effectiveness of our “disclosure controls and procedures” as of the end of the period covered by this report, pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended.

As previously reported, in connection with that evaluation, our CEO and Interim CFO concluded that our disclosure controls and procedures were not effective as of March 31, 2007 due to a material weakness in internal controls over financial reporting. Subsequently, we determined that it was necessary to restate our condensed consolidated financial statements for the fiscal quarters ended March 31, 2007 and June 30, 2007 and that these financial statements should no longer be relied upon.

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These restatements had no impact on the Company’s previously reported revenues, cash flows from operations or total cash and cash equivalents shown in the Company’s condensed consolidated financial statements for the three and six months ended March 31, 2007 and the three and nine months ended June 30, 2007.

The Company did not have effective internal controls over financial reporting for the calculation of share-based compensation expense. Previous versions of a widely utilized software program used to calculate share-based compensation expense incorrectly applied a weighted average forfeiture rate in the calculation of share-based compensation. Previous versions consistently applied the forfeiture rate throughout the vesting period and allowed for a true-up of share-based compensation expense once the award had vested in full. The true-up was necessary because the old versions did not properly attribute the expense over the vesting period. Because of the use of this method, the old version failed to properly account for the full expense of vested awards during the interim periods prior to the award reaching its final vest date.

Under the new version of the software, forfeiture rates are applied in the calculation of share-based compensation expense up to the point each individual tranche is fully vested. As each tranche vests, the new version properly recognizes 100% of share-based compensation expense over the attribution period related to these vested tranches.

In addition, the Company’s evaluation of share-based compensation expense uncovered a data input error when the forfeiture rate was adjusted to 30%. This data input error, combined with the software version issue discussed above, resulted in a material understatement of share-based compensation expense as of March 31, 2007.

The error had no impact on the Company’s previously reported revenues, cash flows from operations or total cash and cash equivalents shown in the Company’s condensed consolidated financial statements for the fiscal quarter ended March 31, 2007.

The Company’s corporate monitoring controls failed to operate at a sufficient level of precision to detect the understatement of share-based compensation expense and the material misstatement of operating expenses and net loss.

The Company intends to review share-based compensation expense on a quarterly basis, supplemented by external consultants and independent computational reviews, to ensure that total share-based compensation expense is recognized for vested shares. The Company is in the process of evaluating remediation efforts to address the issues affecting the calculation of share-based compensation expense. The Company will perform these measures during the preparation of the 2008 first quarter financial reports. Additional measures may be forthcoming as the Company evaluates the effectiveness of these efforts.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. However, we have initiated or intend to initiate remediation measures to address the material weakness identified above. The remediation measures include or are expected to include the following:

•  The Company intends to review share-based compensation expense on a quarterly basis with the assistance of consultants and their computational review to ensure that total share-based compensation expense is recognized for vested shares.

•  The Company has hired a FAS 123R consultant who is also an experienced user of the software system utilized by the Company. This consultant will assist in the FAS 123R calculation and the Company’s quarterly analysis of total share-based compensation.

•  The Company has hired a consulting firm that offers FAS 123R calculation services for clients. This consulting firm will perform shadow calculations on certain awards to ensure that the software system is calculating share-based compensation expense accurately.

We may adopt additional remediation measures related to the identified control deficiencies as necessary as well as to continue to evaluate our internal controls on an ongoing basis and to upgrade and enhance them as needed.

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Our Audit Committee has taken an active role in reviewing and discussing the identified material weakness with our auditors and financial management. Our management and the Audit Committee will actively monitor the implementation and effectiveness of the remediation measures taken by the Company’s financial management.

Item 9B.  Other Information

In November 2007, we entered into a task order (the “Task Order”) under the Company’s Clinical Development Master Service Agreement (the “Agreement”) with Kendle International Inc. (“Kendle”). Pursuant to the Task Order, Kendle will provide clinical trial management and related clinical services to the Company relating to the Company’s planned Phase III trial for Zenvia for the treatment of pseudobulbar affect (PBA) (An extension of services for Protocol No. 07-AVP-123, entitled: “A Double-Blind, Randomized, Placebo Controlled, Multicenter Study to Assess the Safety and Efficacy and to Determine the Pharmacokinetics of Two Doses of AVP-923 (Dextromethorphan/Quinidine) in the treatment of Pseudobulbar Affect (PBA) in Patients with Amyotrophic Lateral Sclerosis and Multiple Sclerosis.”)

This Task Order is effective as of November 1, 2007 and will terminate on September 9, 2009. Either party may terminate the Agreement or the Task Order upon material breach or insolvency or on 60 days’ prior written notice. In addition to the Double-Blind study, we also have a contract with Kendle to perform our Open Label study. .

PART III

Item 10.   Directors, Executive Officers and Corporate Governance

The information relating to our directors that is required by this item is incorporated by reference from the information under the captions “Election of Directors”, “Corporate Governance”, and “Board of Directors and Committees” contained in our definitive proxy statement (the “Proxy Statement”), which will be filed with the Securities and Exchange Commission in connection with our 2008 Annual Meeting of Shareholders.

Additionally, information relating to reporting of insider transactions in Company securities is incorporated by reference from the information under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement.

Executive Officers and Key Employees of the Registrant

The names of our executive officers and key employees and their ages as of December 14, 2007 are set forth below. Officers are elected annually by the Board of Directors and hold office until their respective successors are qualified and appointed or until their resignation, removal or disqualification.

Keith A. Katkin	35	President and Chief Executive Officer
Randall E. Kaye, M.D.	45	Senior Vice President, Chief Medical Officer
Martin J. Sturgeon	49	Vice President, Finance, Interim Chief Financial Officer
Eric S. Benevich	42	Vice President, Communications
Gregory J. Flesher	37	Vice President, Business Development

Keith Katkin.  Mr. Katkin joined Avanir in July of 2005 as Senior Vice President of Sales and Marketing. In March 2007 he was promoted to President and Chief Executive Officer and as a director. Prior to joining Avanir, Mr. Katkin previously served as Vice President of Commercial Development for Peninsula Pharmaceuticals from May 2004 to July 2005, playing a key role in the sale of Peninsula to Johnson & Johnson. Prior to his tenure at Peninsula, Mr. Katkin was Vice President of Pulmonary and Infectious Disease Marketing at InterMune, Inc., a biopharmaceutical company, from May 2002 to April 2004. From 1996 to April 2002, Mr. Katkin held Sales and Marketing positions with Amgen Inc., a global biotechnology company. Earlier in his career, Mr. Katkin spent several years at Abbott Laboratories. Mr. Katkin received a Bachelor of Science degree in Business and Accounting from Indiana University and an M.B.A. degree in Finance from the Anderson School of Management at UCLA, graduating with honors. Mr. Katkin is also a Certified Public Accountant.

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Randall E. Kaye, M.D.  Dr. Kaye joined Avanir in January 2006 as Vice President of Medical Affairs and assumed the role of Chief Medical Officer in February 2007. Immediately prior to joining Avanir, from 2004 to 2006, Dr. Kaye was the Vice President of Medical Affairs for Scios Inc., a division of Johnson & Johnson. From 2002 to 2004, Dr. Kaye recruited and managed the Medical Affairs department for InterMune Inc. Previously, Dr. Kaye served for nearly a decade in a variety of Medical Affairs and Marketing positions for Pfizer Inc. Dr. Kaye earned his Doctor of Medicine, Masters in Public Health and Bachelor of Science degrees at George Washington University in Washington, D.C. and was a Research Fellow in Allergy and Immunology at Harvard Medical School.

Martin J. Sturgeon.  Mr. Sturgeon joined Avanir in February 2007 as Vice President and Chief Accounting Officer. In July 2007 Mr. Sturgeon assumed the role of Interim Chief Financial Officer. Previously, Mr. Sturgeon was a consultant with DLC, Inc., a consulting firm, serving in senior finance roles including Chief Accounting Officer and Chief Financial Officer for several publicly traded client companies. Mr. Sturgeon has over 25 years of experience in senior financial positions including eight years with Toshiba America Information Systems, Inc. as the Vice President, Group Controller. His career also includes experience in executive financial roles with companies such as Western Digital, Corinthian Colleges, and Novacare. Mr. Sturgeon holds a Bachelor’s of Business Administration degree in Accounting from the University of San Diego and an M.B.A. in Finance from IESE, a European M.B.A. program sponsored by Harvard University.

Eric S. Benevich.  Mr. Benevich joined Avanir in July 2005 as Senior Director of Marketing. In October 2006 he became the Executive Director of Marketing and in August 2007 he was promoted to Vice President of Communications. Previously, Mr. Benevich was the Senior Director of Marketing at Peninsula Pharmaceuticals leading all pre-launch activities to support the launch of two antibiotics into the hospital market. Mr. Benevich also has experience in other commercial areas such as sales, market research, and brand marketing at companies such as Astra Merck and Amgen Inc. Mr. Benevich completed his undergraduate studies in International Business at Washington State University and has completed several MBA courses at Villanova University.

Gregory J. Flesher.  Mr. Flesher joined Avanir in 2006 as Senior Director of Commercial Strategy and was responsible for lifecycle and new product planning. While in this role, he also led the commercial integration of Alamo Pharmaceuticals following their acquisition. In November 2006 he became the Executive Director of Business Development and Portfolio Strategy and in August of 2007 he was promoted to Vice President of Business Development. Mr. Flesher has over 14 years of biotechnology and pharmaceutical industry experience and has held positions of increasing responsibility across R&D, Sales, Marketing, and Business Development. Prior to joining Avanir, he was a Sales Director at Intermune Pharmaceuticals with responsibility for trade relations, managed care, and patient support programs. Mr. Flesher also has brand management and commercial analytics experience from Amgen Inc. and Eli Lilly and Company. He began his career within the R&D organization of Eli Lilly and Company. Mr. Flesher completed his undergraduate studies in Biology at Purdue University and his doctorate studies in Biochemistry and Molecular Biology at Indiana University School of Medicine.

Code of Ethics

We have adopted a code of ethics for directors, officers (including our principal executive officer, principal financial officer, and principal accounting officer and controller), and employees. This code of ethics is available on our website at www.avanir.com. Any waivers from or amendments to the code of ethics will be filed with the SEC on Form 8-K.

Item 11.   Executive Compensation

The information required by this item is incorporated by reference to the information under the captions “Executive Compensation” and “Compensation Committee Interlocks and Insider Participation” contained in the Proxy Statement.

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Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this item is incorporated by reference to the information under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” contained in the Proxy Statement.

Item 13.   Certain Relationships and Related Transactions and Director Independence

The information required by this item is incorporated by reference to the information under the captions “Certain Relationships and Related Party Transactions,” “Director Independence” and “Board Committees” contained in the Proxy Statement.

Item 14.   Principal Accountant Fees and Services

The information required by this item is incorporated by reference to the information under the caption “Fees for Independent Registered Public Accounting Firm” contained in the Proxy Statement.

PART IV

Item 15.   Exhibits and Financial Statement Schedules

(a) Financial Statements and Schedules

Financial statements for the three years ended September 30, 2007, 2006 and 2005 are attached. The index to these financial statements appears on page F-1.

(b) Exhibits

The following exhibits are incorporated by reference or filed as part of this report.

Exhibit		Incorporated by Reference Herein
Number	Description	Form	Date
3.1	Amended and Restated Articles of Incorporation of the Registrant, as amended January 5, 2006	Filed herewith
3.2	Amended and Restated Bylaws of the Registrant, dated September 25, 2005	Current Report on% Form 8-K, as Exhibit 3.2	September 29, 2005
4.1	Form of Class A Common Stock Certificate	Registration Statement on Form S-1 (File No. 33-32742), declared effective by the Commission on May 8, 1990	May 8, 1990
4.2	Certificate of Determination with respect to Series C Junior Participating Preferred Stock of the Registrant	Current Report on Form 8-K, as Exhibit 4.1	March 11, 1999
4.3	Rights Agreement, dated as of March 5, 1999, with American Stock Transfer & Trust Company	Current Report on Form 8-K, as Exhibit 4.1	March 11, 1999
4.4	Form of Rights Certificate with respect to the Rights Agreement, dated as of March 5, 1999	Current Report on Form 8-K, as Exhibit 4.1	March 11, 1999
4.5	Amendment No. 1 to Rights Agreement, dated November 30, 1999, with American Stock Transfer & Trust Company	Current Report on Form 8-K, as Exhibit 4.5	December 3, 1999

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Exhibit		Incorporated by Reference Herein
Number	Description	Form	Date
4.6	Form of Class A Stock Purchase Warrant, issued in connection with the Securities Purchase Agreement dated July 21, 2003	Registration Statement on Form S-3 (File No. 333-107820), declared effective by the Commission on August 19, 2003	August 8, 2003
4.7	Form of Class A Stock Purchase Warrant, issued in connection with the Securities Purchase Agreement dated November 25, 2003	Current Report on Form 8-K, as Exhibit 4.2	December 11, 2003
4.8	Form of Class A Stock Purchase Warrant, issued in connection with the Securities Purchase Agreement dated November 2, 2006	Filed herewith
10.1	License Agreement, dated March 31, 2000, by and between Avanir Pharmaceuticals and SB Pharmco Puerto Rico, a Puerto Rico Corporation	Current Report on Form 8-K, as Exhibit 10.1	May 4, 2000
10.2	License Purchase Agreement, dated November 22, 2002, by and between Avanir Pharmaceuticals and Drug Royalty USA, Inc.	Current Report on Form 8-K, as Exhibit 99.1	January 7, 2003
10.3	Research, Development and Commercialization Agreement, dated April 27, 2005, by and between Avanir Pharmaceuticals and Novartis International Pharmaceutical Ltd.*	Quarterly Report on Form 10-Q for the quarter ended June 30, 2005, as Exhibit 10.1	August 15, 2005
10.4	Research Collaboration and License Agreement, dated July 8, 2005, by and between Avanir Pharmaceuticals and AstraZeneca UK Limited*	Annual Report on Form 10-K for the fiscal year ended September 30, 2005, as Exhibit 10.4	December 14, 2005
10.5	Standard Industrial Net Lease by and between Avanir Pharmaceuticals and BC Sorrento, LLC, effective September 1, 2000	Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, as Exhibit 10.1	August 14, 2000
10.6	Standard Industrial Net Lease by and between Avanir Pharmaceuticals (“Tenant”) and Sorrento Plaza, a California limited partnership (“Landlord”), effective May 20, 2002	Quarterly Report on Form 10-Q for the quarter ended June 30, 2002, as Exhibit 10.1	August 13, 2002
10.7	Office lease agreement, dated April 28, 2006, by and between RREEF America REIT II Corp. FFF and Avanir Pharmaceuticals	Annual Report on Form 10-K for the fiscal year ended September 30, 2006, as Exhibit 10.7	December 18, 2006
10.8	License Agreement, dated August 1, 2000, by and between Avanir Pharmaceuticals (“Licensee”) and IriSys Research & Development, LLC, a California limited liability company	Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, as Exhibit 10.2	August 14, 2000

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Exhibit		Incorporated by Reference Herein
Number	Description	Form	Date
10.9	Sublease agreement, dated September 5, 2006, by and between Avanir Pharmaceuticals and Sirion Therapeutics, Inc.	Annual Report on Form 10-K for the fiscal year ended September 30, 2006, as Exhibit 10.9	December 18, 2006
10.10	Exclusive Patent License Agreement, dated April 2, 1997, by and between IriSys Research & Development, LLC and the Center for Neurologic Study	Quarterly Report on Form 10-Q for the quarter ended March 31, 2005, as Exhibit 10.1	May 13, 2005
10.11	Amendment to Exclusive Patent License Agreement, dated April 11, 2000, by and between IriSys Research & Development, LLC and the Center for Neurologic Study	Quarterly Report on Form 10-Q for the quarter ended March 31, 2005, as Exhibit 10.2	May 13, 2005
10.12	Clinical Development Agreement, dated March 22, 2005, by and between Avanir Pharmaceuticals and SCIREX Corporation	Quarterly Report on Form 10-Q for the quarter ended March 31, 2005, as Exhibit 10.3	May 13, 2005
10.13	Unit Purchase Agreement, dated May 22, 2006, by and among Avanir Pharmaceuticals, the Sellers and Alamo Pharmaceuticals, LLC*	Quarterly Report on Form 10-Q for the quarter ended June 30, 2006, as Exhibit 10.1	August 9, 2006
10.14	Senior Note for $14.4 million payable to Neal R. Cutler, dated May 24, 2006	Quarterly Report on Form 10-Q for the quarter ended June 30, 2006, as Exhibit 10.2	August 9, 2006
10.15	Senior Note for $6,675,000 payable to Neal R. Cutler, dated May 24, 2006	Quarterly Report on Form 10-Q for the quarter ended June 30, 2006, as Exhibit 10.3	August 9, 2006
10.16	Senior Note for $4.0 million payable to Neal R. Cutler, dated May 24, 2006	Quarterly Report on Form 10-Q for the quarter ended June 30, 2006, as Exhibit 10.4	August 9, 2006
10.17	Registration Rights Agreement, dated May 24, 2006, by and between Avanir Pharmaceuticals and Neil Cutler	Quarterly Report on Form 10-Q for the quarter ended June 30, 2006, as Exhibit 10.7	August 9, 2006
10.18	Amended and Restated Development, License and Supply Agreement, dated August 22, 2005, by and between CIMA Labs Inc. and Alamo Pharmaceuticals, LLC*	Quarterly Report on Form 10-Q for the quarter ended June 30, 2006, as Exhibit 10.5	August 9, 2006
10.19	Amendment #1 to Amended and Restated Development, License and Supply Agreement, dated October 19, 2005, by and between CIMA Labs Inc. and Alamo Pharmaceuticals, LLC*	Quarterly Report on Form 10-Q for the quarter ended June 30, 2006, as Exhibit 10.6	August 9, 2006
10.20	Manufacturing Services Agreement, dated January 4, 2006, by and between Patheon Inc. and Avanir Pharmaceuticals*	Quarterly Report on Form 10-Q for the quarter ended March 31, 2006, as Exhibit 10.1	May 10, 2006

44

Exhibit		Incorporated by Reference Herein
Number	Description	Form	Date
10.21	Quality Agreement, dated January 4, 2006, by and between Avanir Pharmaceuticals and Patheon Inc.*	Quarterly Report on Form 10-Q for the quarter ended March 31, 2006, as Exhibit 10.2	May 10, 2006
10.22	Docosanol License Agreement, dated January 5, 2006, by and between Kobayashi Pharmaceutical Co., Ltd. and Avanir Pharmaceuticals*	Quarterly Report on Form 10-Q for the quarter ended March 31, 2006, as Exhibit 10.3	May 10, 2006
10.23	Docosanol Data Transfer and Patent License Agreement, dated July 6, 2006, by and between Avanir Pharmaceuticals and Healthcare Brands International Limited*	Annual Report on Form 10-K for the fiscal year ended September 30, 2006, as Exhibit 10.21	December 18, 2006
10.24	Development and License Agreement, dated August 7, 2006, by and between Eurand, Inc. and Avanir Pharmaceuticals*	Annual Report on Form 10-K for the fiscal year ended September 30, 2006, as Exhibit 10.22	December 18, 2006
10.25	Amended and Restated 1998 Stock Option Plan	Annual Report on Form 10-K for the fiscal year ended September 30, 2001, as Exhibit 10.2	December 21, 2001
10.26	Amended and Restated 1994 Stock Option Plan	Annual Report on Form 10-K for the fiscal year ended September 30, 2001, as Exhibit 10.4	December 21, 2001
10.27	Amended and Restated 2000 Stock Option Plan	Quarterly Report on Form 10-Q for the quarter ended March 31, 2003, as Exhibit 10.1	May 14, 2003
10.28	Form of Restricted Stock Grant Notice for use with Amended and Restated 2000 Stock Option Plan	Quarterly Report on Form 10-Q for the quarter ended March 31, 2003, as Exhibit 10.2	May 14, 2003
10.29	2003 Equity Incentive Plan	Quarterly Report on Form 10-Q for the quarter ended March 31, 2003, as Exhibit 10.3	May 14, 2003
10.30	Form of Non-Qualified Stock Option Award Notice for use with 2003 Equity Incentive Plan	Quarterly Report on Form 10-Q for the quarter ended March 31, 2003, as Exhibit 10.4	May 14, 2003
10.31	Form of Restricted Stock Grant for use with 2003 Equity Incentive Plan	Quarterly Report on Form 10-Q for the quarter ended March 31, 2003, as Exhibit 10.5	May 14, 2003
10.32	Form of Restricted Stock Grant Notice (cash consideration) for use with 2003 Equity Incentive Plan	Quarterly Report on Form 10-Q for the quarter ended March 31, 2003, as Exhibit 10.6	May 14, 2003
10.33	Form of Indemnification Agreement with certain Directors and Executive Officers of the Registrant	Annual Report on Form 10-K for the fiscal year ended September 20, 2003, as Exhibit 10.4	December 23, 2003
10.34	2005 Equity Incentive Plan	Annual Report on Form 10-K for the fiscal year ended September 30, 2005, as Exhibit 10.21	December 14, 2005
10.35	Form of Stock Option Agreement for use with 2005 Equity Incentive Plan	Current Report on Form 8-K, as Exhibit 10.1	March 23, 2005

45

Exhibit		Incorporated by Reference Herein
Number	Description	Form	Date
10.36	Form of Restricted Stock Unit Grant Agreement for use with 2005 Equity Incentive Plan and 2003 Equity Incentive Plan	Filed herewith
10.37	Form of Restricted Stock Purchase Agreement for use with 2005 Equity Incentive Plan	Annual Report on Form 10-K for the fiscal year ended September 30, 2006, as Exhibit 10.35	December 18, 2006
10.38	Form of Change of Control Agreement	Current Report on Form 8-K, as Exhibit 10.2	December 10, 2007
10.39	Employment Agreement with Keith Katkin, dated June 13, 2005	Annual Report on Form 10-K for the fiscal year ended September 30, 2005, as Exhibit 10.25	December 14, 2005
10.40	Employment Agreement with Randall Kaye, dated December 23, 2005	Quarterly Report on Form 10-Q for the quarter ended December 31, 2005, as Exhibit 10.1	February 9, 2006
10.41	Separation and Consulting Agreement, dated November 7, 2006, by and between Avanir Pharmaceuticals and James E. Berg	Filed herewith
10.42	Employment Agreement with Martin J. Sturgeon, dated February 12, 2007	Filed herewith
10.43	Amended and Restated Change of Control Agreement, dated February 27, 2007, by and between Avanir Pharmaceuticals and Randall Kaye	Filed herewith
10.44	Employment Agreement with Keith Katkin, dated March 13, 2007	Filed herewith
10.45	Bonus Agreement, dated September 10, 2007, by and between Avanir Pharmaceuticals and Keith Katkin	Current Report on Form 8-K, as Exhibit 10.1	December 10, 2007
10.46	Separation and Consulting Agreement, dated June 25, 2007, by and between Avanir Pharmaceuticals and Jagadish Sircar	Filed herewith
10.47	Sales Agreement, dated December 15, 2006, by and between Avanir Pharmaceuticals and Brinson Patrick Securities Corporation	Current Report on Form 8-K, as Exhibit 10.1	June 4, 2007
10.48	Amendment No. 1 to Sales Agreement, dated June 4, 2007, by and between Avanir Pharmaceuticals and Brinson Patrick Securities Corporation	Current Report on Form 8-K, as Exhibit 10.2	June 4, 2007
10.49	Asset Purchase Agreement, dated July 2, 2007, by and among Avanir Pharmaceuticals, Alamo Pharmaceuticals, LLC and Azur Pharma Inc.*	Filed herewith

46

Exhibit		Incorporated by Reference Herein
Number	Description	Form	Date
10.50	Agreement, dated July 2, 2007, by and between Avanir Pharmaceuticals and Neal R. Cutler	Filed herewith
10.51	Sublease Agreement, dated July 2, 2007, by and between Avanir Pharmaceuticals and Halozyme, Inc. (11388 Sorrento Valley Rd., San Diego, CA)	Filed herewith
10.52	Sublease Agreement, dated July 2, 2007, by and between Avanir Pharmaceuticals and Halozyme, Inc. (11404 Sorrento Valley Rd., San Diego, CA)	Filed herewith
10.53	Third Amendment to Lease, dated July 19, 2007, by and between Avanir Pharmaceuticals and RREEF America REIT II Corp. FFF	Filed herewith
21.1	List of Subsidiaries	Annual Report on Form 10-K for the fiscal year ended September 30, 2006	December 18, 2006
23.1	Consent of Independent Registered Public Accounting Firm	Filed herewith
23.2	Consent of Independent Registered Public Accounting Firm	Filed herewith
31.1	Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002	Filed herewith
31.2	Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002	Filed herewith
32.1	Certification of Chief Executive Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002	Filed herewith
32.2	Certification of Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002	Filed herewith

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

47

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Avanir Pharmaceuticals

By:  /s/  Keith A. Katkin

Keith A. Katkin

President and Chief Executive Officer

Date: December 20, 2007

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.

Signature	Title	Date
/s/  Keith A. Katkin Keith A. Katkin	President and Chief Executive Officer (Principal Executive Officer)	December 20, 2007
/s/  Martin J. Sturgeon Martin J. Sturgeon	Vice President and Interim Chief Financial Officer (Principal Financial Officer)	December 20, 2007
/s/  Charles A. Mathews Charles A. Mathews	Director	December 20, 2007
/s/  Stephen G. Austin, CPA Stephen G. Austin, CPA	Director	December 20, 2007
/s/  David J. Mazzo, Ph.D. David J. Mazzo, Ph.D.	Director	December 20, 2007
/s/  Dennis G. Podlesak Dennis G. Podlesak	Director	December 20, 2007
/s/  Paul G. Thomas Paul G. Thomas	Director	December 20, 2007
/s/  Craig A. Wheeler Craig A. Wheeler	Director	December 20, 2007
/s/  Scott M. Whitcup, M.D. Scott M. Whitcup, M.D.	Director	December 20, 2007

48

Avanir Pharmaceuticals

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Reports of Independent Registered Public Accounting Firms		F-2
Financial Statements:
Consolidated Balance Sheets		F-4
Consolidated Statements of Operations		F-5
Consolidated Statements of Shareholders’ Equity (Deficit) and Comprehensive Loss		F-6
Consolidated Statements of Cash Flows		F-7
Notes to Consolidated Financial Statements		F-8
Financial 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

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
Avanir Pharmaceuticals

We have audited the accompanying consolidated balance sheet of AVANIR Pharmaceuticals and subsidiaries (the “Company”) as of September 30, 2007, and the related consolidated statements of operations, shareholders’ equity (deficit) and comprehensive loss, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company has determined that it is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of AVANIR Pharmaceuticals and subsidiaries as of September 30, 2007 and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

We have also audited the retrospective adjustments to the Company’s consolidated financial statements as of and for the year ended September 30, 2006 for the operations discontinued by the Company during 2007 discussed in Note 3 to the consolidated financial statements. Our audit procedures included auditing the reclassification of the discontinued operations in the 2006 consolidated financial statements and related disclosures. In our opinion, such retrospective adjustments to the consolidated financial statements and related disclosures for 2006 in Note 3 are appropriate and have been appropriately applied. However, we were not engaged to audit, review, or apply any procedures to the 2006 consolidated financial statements of the Company other than with respect to the retrospective adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2006 consolidated financial statements taken as a whole.

/s/ KMJ Corbin & Company LLP

Irvine, California

December 19, 2007

F-2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
Avanir Pharmaceuticals

We have audited, before the effects of the retrospective adjustments for the discontinued operations discussed in Note 3 to the consolidated financial statements, the accompanying consolidated balance sheet of Avanir Pharmaceuticals and subsidiaries (the “Company”) as of September 30, 2006, and the related consolidated statements of operations, shareholders’ (deficit) equity and comprehensive loss, and cash flows for each of the two years in the period ended September 30, 2006 (the 2006 and 2005 consolidated financial statements before the effects of the adjustments discussed in Note 3 to the consolidated financial statements are not presented herein). These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such 2006 and 2005 consolidated financial statements, before the effects of the retrospective adjustments for the discontinued operations discussed in Note 3 to the consolidated financial statements, present fairly, in all material respects, the financial position of Avanir Pharmaceuticals and subsidiaries as of September 30, 2006, and the results of their operations and their cash flows for each of the two years in the period ended September 30, 2006, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 2 to the financial statements, the Company (1) adopted Statement of Financial Accounting Standards No. 123(R), Share-based Payment, and (2) changed its method of accounting for certain patent related costs, effective October 1, 2005.

We were not engaged to audit, review, or apply any procedures to the retrospective adjustments for the discontinued operations discussed in Note 3 to the consolidated financial statements and, accordingly, we do not express an opinion or any other form of assurance about whether such retrospective adjustments are appropriate and have been properly applied. Those retrospective adjustments were audited by other auditors.

/s/ Deloitte & Touche LLP

Costa Mesa, California

December 15, 2006

F-3

Avanir Pharmaceuticals

CONSOLIDATED BALANCE SHEETS

	September 30,
	2007			2006
ASSETS
Current assets:
Cash and cash equivalents	$	30,487,962		$	4,898,214
Short-term investments in marketable securities		1,747,761			16,778,267
Receivables, net		988,450			1,123,699
Inventories		17,000			3,098
Prepaid expenses		1,479,992			1,651,118
Current portion of restricted investments in marketable securities		688,122			—
Current assets of discontinued operations		—			4,878,674
Total current assets		35,409,287			29,333,070
Investments in marketable securities		249,078			2,216,995
Restricted investments in marketable securities, net of current portion		468,475			856,597
Property and equipment, net		1,215,666			4,521,713
Intangible assets, net		41,048			43,305
Long-term inventories		1,337,991			347,424
Other assets		374,348			391,367
Non-current assets of discontinued operations		—			33,751,866
TOTAL ASSETS	$	39,095,893		$	71,462,337
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	307,700		$	10,845,057
Accrued expenses and other liabilities		2,050,864			6,276,505
Accrued compensation and payroll taxes		1,191,677			2,610,407
Current portion of deferred revenues		2,267,594			3,637,413
Current portion of notes payable		254,676			670,737
Capital lease obligations		—			9,336
Current liabilities of discontinued operations		—			12,253,392
Total current liabilities		6,072,511			36,302,847
Accrued expenses and other liabilities, net of current portion		1,170,396			230,450
Deferred revenues, net of current portion		13,052,836			15,716,762
Notes payable, net of current portion		11,769,916			13,715,905
Non-current liabilities of discontinued operations		—			11,170,908
Total liabilities		32,065,659			77,136,872
Commitments and contingencies (Notes 3, 13, 16, and 18) Shareholders’ equity (deficit):
Preferred stock — no par value, 10,000,000 shares authorized, no shares issued or outstanding as of September 30, 2007 and 2006		—			—
Common stock — no par value, 200,000,000 shares authorized; 43,117,358 and 31,708,461 shares issued and outstanding as of September 30, 2007 and 2006, respectively		245,531,712			211,993,249
Accumulated deficit		(238,498,733	)		(217,565,280	)
Accumulated other comprehensive loss		(2,745	)		(102,504	)
Total shareholders’ equity (deficit)		7,030,234			(5,674,535	)
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)	$	39,095,893		$	71,462,337

See notes to consolidated financial statements.

F-4

Avanir Pharmaceuticals

CONSOLIDATED STATEMENTS OF OPERATIONS

	Years Ended September 30,
	2007			2006			2005
REVENUES FROM PRODUCT SALES
Net revenues	$	72,000		$	18,270		$	17,400
Cost of revenues		(328,184	)		(3,102	)		(3,102	)
Product gross (deficit) margin		(256,184	)		15,168			14,298
REVENUES AND COST OF RESEARCH SERVICES AND OTHER
Revenues from research and development services		2,372,384			7,837,788			1,617,525
Cost of research and development services		(2,994,905	)		(7,198,397	)		(2,346,044	)
Revenues from government research grant services		914,834			236,882			503,328
Cost of government research grant services		(1,324,427	)		(292,111	)		(497,210	)
Revenues from license agreements		1,614,091			5,154,709			12,800,000
Revenue from royalties and royalty rights		4,251,252			1,938,203			1,752,321
Research services and other gross margin		4,833,229			7,677,074			13,829,920
Total gross margin		4,577,045			7,692,242			13,844,218
OPERATING EXPENSES
Research and development		13,115,712			26,994,335			26,140,504
Selling, general and administrative		20,830,188			32,375,366			18,796,188
Total operating expenses		33,945,900			59,369,701			44,936,692
Loss from continuing operations		(29,368,855	)		(51,677,459	)		(31,092,474	)
OTHER INCOME (EXPENSES)
Interest income		622,687			1,794,049			619,857
Interest expense		(1,247,875	)		(405,752	)		(92,533	)
Other		1,615,519			57,552			(39,601	)
Loss from continuing operations before provision for income taxes		(28,378,524	)		(50,231,610	)		(30,604,751	)
Provision for income taxes		(3,200	)		(2,430	)		(1,813	)
Loss before discontinued operations and cumulative effect of change in accounting principle		(28,381,724	)		(50,234,040	)		(30,606,564	)
DISCONTINUED OPERATIONS
Loss from discontinued operations		(4,760,056	)		(8,702,716	)		—
Gain on sale of discontinued operations		12,208,327			—			—
Income (loss) from discontinued operations		7,448,271			(8,702,716	)		—
Loss before cumulative effect of change in accounting principle		(20,933,453	)		(58,936,756	)		(30,606,564	)
Cumulative effect of change in accounting principle		—			(3,616,058	)		—
Net Loss	$	(20,933,453	)	$	(62,552,814	)	$	(30,606,564	)
BASIC AND DILUTED NET (LOSS) INCOME PER SHARE:
Loss before discontinued operations and cumulative effect of change in accounting principle	$	(0.72	)	$	(1.64	)	$	(1.19	)
Income (loss) from discontinued operations		0.19			(0.28	)		—
Cumulative effect of change in accounting principle		—			(0.12	)		—
Net Loss	$	(0.53	)	$	(2.04	)	$	(1.19	)
Basic and diluted weighted average number of common shares outstanding		39,643,876			30,634,872			25,617,432

See notes to consolidated financial statements.

F-5

Avanir Pharmaceuticals

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT) AND COMPREHENSIVE LOSS

																	Accumulated
	Common Stock																Other			Total
	Class A						Class B				Accumulated			Unearned			Comprehensive			Shareholders’			Comprehensive
	Shares			Amount			Shares		Amount		Deficit			Compensation			Income (Loss)			Equity (Deficit)			Loss
BALANCE, OCTOBER 1, 2004		23,826,439		$	134,687,535			—	$	—	$	(124,405,902	)	$	—		$	(84,374	)	$	10,197,259
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																1,293,339
Exercise of stock options		27,974			125,491																125,491
Sale of stock and warrants		2,525,833			22,765,135																22,765,135
Acquisition of certain contractual rights to Zenvia		500,000			5,300,000																5,300,000
Issuance of restricted awards		250,000			3,556,000										(3,555,000	)					1,000
Amortization of unearned compensation															77,856						77,856
Share-based compensation expense					10,803																10,803
Unrealized losses on investments in marketable securities																		(29,440	)		(29,440	)		(29,440	)
BALANCE, SEPTEMBER 30, 2005		27,341,732			167,738,303			—		—		(155,012,466	)		(3,477,144	)		(113,814	)		9,134,879		$	(30,636,004	)
Net loss												(62,552,814	)								(62,552,814	)	$	(62,552,814	)
Issuance of Class A common stock in connection with:
Exercise of warrants		827,575			5,908,997																5,908,997
Exercise of stock options		524,807			3,264,953																3,264,953
Sale of stock and warrants		3,016,122			35,637,905																35,637,905
Issuance 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																3,120,621
Unrealized gains on investments in marketable securities																		11,310			11,310			11,310
BALANCE, SEPTEMBER 30, 2006		31,708,461			211,993,249			—		—		(217,565,280	)		—			(102,504	)		(5,674,535	)	$	(62,541,504	)
Net loss												(20,933,453	)								(20,933,453	)	$	(20,933,453	)
Issuance of Class A common stock in connection with:
Exercise of stock options		67,758			294,699																294,699
Sale of stock and warrants, net of offering costs		11,388,790			30,547,713																30,547,713
Issuance of restricted awards		44,250			—																—
Vesting of restricted stock units		83,900			—																—
Common stock surrendered		(18,135	)		(41,209	)															(41,209	)
Forfeiture of restricted awards		(157,666	)		(500	)															(500	)
Share-based compensation expense					2,737,760																2,737,760
Unrealized gains on investments in marketable securities																		99,759			99,759			99,759
BALANCE, SEPTEMBER 30, 2007		43,117,358		$	245,531,712			—	$	—	$	(238,498,733	)	$	—		$	(2,745	)	$	7,030,234		$	(20,833,694	)

See notes to consolidated financial statements.

F-6

Avanir Pharmaceuticals

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Years Ended September 30,
	2007			2006			2005
OPERATING ACTIVITIES:
Net loss	$	(20,933,453	)	$	(62,552,814	)	$	(30,606,564	)
(Income) loss from discontinued operations		(7,448,271	)		8,702,716			—
Adjustments to reconcile loss before discontinued operations to net cash used in operating activities:
Cumulative effect of change in accounting principle		—			3,616,058			—
Depreciation and amortization		2,843,814			2,964,741			1,852,427
Share-based compensation expense		2,230,122			2,837,640			88,659
Amortization of debt discount		413,822			85,400			—
Expense for issuance of common stock in connection with the acquisition of additional contractual rights to Zenvia		—			—			5,300,000
Loss on sale and impairment of investment		—			—			84,252
(Gain) loss on disposal of assets		(229,829	)		36,985			16,400
Intangible assets impaired and abandoned		—			8,222			423,123
Changes in operating assets and liabilities (net of effects of acquisition/disposition of FazaClo):
Receivables		135,249			45,955			(929,775	)
Inventories		(1,004,469	)		24,017			(365,237	)
Prepaid and other assets		167,105			582,454			(848,219	)
Accounts payable		(10,537,357	)		4,200,733			4,615,629
Accrued expenses and other liabilities		(3,327,404	)		2,472,798			1,604,136
Accrued compensation and payroll taxes		(1,418,730	)		1,338,176			561,863
Deferred revenue		(4,033,745	)		195,965			(1,850,905	)
Net cash used in operating activities of continuing operations		(43,143,146	)		(35,440,954	)		(20,054,211	)
Net cash used in operating activities of discontinued operations		(3,501,288	)		(5,368,562	)		—
Net cash used in operating activities		(46,644,434	)		(40,809,516	)		(20,054,211	)
INVESTING ACTIVITIES:
Investments in securities		(101,818	)		(65,823,381	)		(23,448,802	)
Proceeds from sales and maturities of investments in securities		16,900,000			64,900,275			16,830,113
Patent costs		—			—			(1,278,935	)
Purchase of property and equipment		(58,699	)		(1,663,347	)		(990,601	)
Proceeds from disposal of assets		774,058			—			—
Net cash provided by (used in) investing activities of continuing operations		17,513,541			(2,586,453	)		(8,888,225	)
Net cash provided by (used in) investing activities of discontinued operations		42,055,769			(4,794,029	)		—
Net cash provided by (used in) investing activities		59,569,310			(7,380,482	)		(8,888,225	)
FINANCING ACTIVITIES:
Proceeds from issuances of common stock and warrants, net of commissions and offering costs		30,870,014			44,811,855			24,184,966
Proceeds from issuances of notes payable		—			359,875			395,244
Tax withholding payments reimbursed by restricted stock payments on debt		(27,602	)		(200,386	)		—
Payments on notes and capital lease obligations		(6,785,208	)		(382,891	)		(511,714	)
Net cash provided by financing activities of continuing operations		24,057,204			44,588,453			24,068,496
Net cash used in financing activities of discontinued operations		(11,392,332	)		(120,384	)		—
Net cash provided by financing activities		12,664,872			44,468,069			24,068,496
Net increase (decrease) in cash and cash equivalents		25,589,748			(3,721,929	)		(4,873,940	)
Cash and cash equivalents at beginning of year		4,898,214			8,620,143			13,494,083
Cash and cash equivalents at ending of year	$	30,487,962		$	4,898,214		$	8,620,143
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid	$	1,435,982		$	681,122		$	92,533
Income taxes paid	$	22,368		$	2,430		$	1,912
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Purchase price adjustment of assumed liabilities	$	3,980,229		$	—		$	—
Issuance of notes payable as additional consideration for the Alamo acquisition	$	4,000,000		$	—		$	—
Issuance of promissory notes to sellers as consideration for the Alamo acquisition, net of discount (See Note 3 for other liabilities assumed and assets acquired in the acquisition)	$	—		$	24,343,000		$	—
Elimination of unearned compensation	$	—		$	3,477,144		$	—
Issuance of 250,000 shares of restricted Class A common stock for unearned compensation cost	$	—		$	—		$	3,555,000
Accounts payable and accrued expenses for purchase of property plant and equipment	$	—		$	74,617		$	242,213
Restricted stock surrendered	$	13,607		$	18,135		$	—

See notes to consolidated financial statements.

F-7

Avanir Pharmaceuticals

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   Description of Business

Avanir Pharmaceuticals (“AVANIR,” “we,” or the “Company,”) is a pharmaceutical company focused on developing, acquiring and commercializing novel therapeutic products for the treatment of chronic diseases. Our product candidates address therapeutic markets that include the central nervous system, inflammatory diseases and infectious diseases. Our lead product candidate, Zenvia^tm (dextromethorphan hydrobromide/quinidine sulfate), is currently in Phase III clinical development for the treatment of pseudobulbar affect (“PBA”) and diabetic peripheral neuropathic pain (“DPN pain”). Our first commercialized product, docosanol 10% cream, (sold as Abreva^® by our marketing partner GlaxoSmithKline Consumer Healthcare in North America) is the only over-the-counter treatment for cold sores that has been approved by the FDA. Our inflammatory disease program, which targets macrophage migration inhibitory factor (“MIF”), is currently partnered with Novartis and our infectious disease program, which is focused primarily on anthrax antibodies, is currently being funded by grants from the National Institute of Health/National Institute of Allergy and Infectious Disease (“NIH/NIAID”).

Our operations are subject to certain risks and uncertainties frequently encountered by companies in the early stages of operations, particularly in the evolving market for small biotech and specialty pharmaceuticals companies. Such risks and uncertainties include, but are not limited to, timing and uncertainty of achieving milestones in clinical trials and in obtaining approvals by the FDA and regulatory agencies in other countries.Our ability to generate revenues in the future will depend on license arrangements, the timing and success of reaching development milestones, in obtaining regulatory approvals and ultimately market acceptance of Zenvia^tm (formerly referred to as Neurodex^tm) for the treatment of PBA/IEED, assuming the FDA approves our new drug application. Our operating expenses depend substantially on the level of expenditures for clinical development activities for Zenvia for the treatment of PBA/IEED and diabetic neuropathic pain, and program funding authorized by our research partners and the rate of progress being made on such programs.

2.   Summary of Significant Accounting Policies

Basis of presentation

The consolidated financial statements include the accounts of Avanir Pharmaceuticals and its wholly-owned subsidiaries, Alamo Pharmaceuticals LLC (“Alamo”) from the date of acquisition, Xenerex Biosciences, AVANIR Holding Company and AVANIR Acquisition Corp. All intercompany accounts and transactions have been eliminated. Certain amounts from prior years have been reclassified to conform to the current year presentation. Our fiscal year ends on September 30 of each year. The years ended September 30, 2007, 2006 and 2005 may be referred to as fiscal 2007, fiscal 2006 and fiscal 2005, respectively.

Management estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Significant estimates made by management include, among others, provisions for uncollectible receivables and sales returns, valuation of inventories, recoverability of long-lived assets, purchase price allocations, share-based compensation expense, determination of expenses in outsourced contracts and realization of deferred tax assets.

Purchase Price Allocation

The allocation of purchase price for acquisitions requires extensive use of accounting estimates and judgments to allocate the purchase price to the identifiable tangible and intangible assets acquired, including in-process research and development, and liabilities assumed based on their respective fair values. In fiscal 2006, we completed the acquisition of Alamo Pharmaceuticals LLC. See Note 3, “Acquisition of Alamo Pharmaceuticals, Inc. / Sale of FazaClo” for detailed discussion.

F-8

Avanir Pharmaceuticals

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Cash and cash equivalents

Cash and cash equivalents consist of cash and highly liquid investments with maturities of three months or less at the date of acquisition.

Restricted investments in marketable securities

We have restricted investments in two securities totaling $1,156,597 and $856,597 as of September 30, 2007 and 2006, respectively. These restricted investments represent amounts pledged to our bank as collateral for letters of credit issued in connection with certain of our lease agreements, and are classified as held-to-maturity and are stated at the lower of cost or market. The restricted amounts that apply to the terms of the leases are as follows:

	Restricted		Restricted
	Amount as of		Amount as of
	September 30,		September 30,		Lease Term
Lease Description	2007		2006		Expires on
Facility lease —	$	388,122	$	388,122		08/31/08
11388 Sorrento Valley Road, San Diego
Facility lease —		468,475		468,475		01/14/13
11404 and 11408 Sorrento Valley Road, San Diego
Equipment lease — GE Capital Fleet		300,000		—		10/23/07
Total	$	1,156,597	$	856,597

Investments in Marketable Securities

We account for and report our investments in marketable securities in accordance with Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” Investments are comprised of marketable securities consisting primarily of certificates of deposit, federal, state and municipal government obligations and corporate bonds. All marketable securities are held in our name and primarily under the custodianship of two major financial institutions. Our policy is to protect the principal value of our investment portfolio and minimize principal risk. Except for restricted investments, our marketable securities are classified as “available-for-sale” and stated at fair value, with net unrealized gains or losses recorded as a component of accumulated other comprehensive loss. Short-term investments are marketable securities with maturities of less than one year from the balance sheet date. Marketable security investments are evaluated periodically for impairment. If it is determined that a decline of any investment is other than temporary, then the investment basis would be written down to fair value and the write-down would be included in earnings as a loss.

Concentrations

Substantially all of our cash and cash equivalents are maintained with two major financial institutions in the United States. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and, therefore, bear minimal risk.

Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents and marketable securities, interest rate instruments and accounts receivable. The counterparties to our investment securities and interest rate instruments are various major corporations and financial institutions of high credit standing.

We perform ongoing credit evaluations of our customers’ financial conditions and would limit the amount of credit extended if deemed necessary but usually we have required no collateral. See Note 19 “Segment Information” in Notes to Condensed Consolidated Financial Statements”.

F-9

Avanir Pharmaceuticals

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Allowance for doubtful accounts

We evaluate the collectibility of accounts receivable on a regular basis. The allowance is based upon various factors including the financial condition and payment history of major customers, an overall review of collections experience on other accounts and economic factors or events expected to affect our future collections experience.

Inventories

Inventories are stated at the lower of cost or market. Cost is determined on a first-in, first-out (“FIFO”) basis. We evaluate the carrying value of inventories on a regular basis, taking into account such factors as historical and anticipated future sales compared to quantities on hand, the price we expect to obtain for products in their respective markets compared with historical cost and the remaining shelf life of goods on hand. Write-downs of inventories are considered to be permanent reductions in the cost basis of inventories.

Property and equipment

Property and equipment, net, is stated at cost less accumulated depreciation and amortization. Depreciation and amortization is computed using the straight-line method over the estimated useful life of the asset. Estimated useful lives of three to five years are used on computer equipment and related software. Office equipment, furniture and fixtures are depreciated over five years. Amortization of leasehold improvements is computed using the remaining lease term. Leased assets meeting certain capital lease criteria are capitalized and the present value of the related lease payments is recorded as a liability. Assets under capital lease arrangements are depreciated using the straight-line method over their estimated useful lives or their related lease term, whichever is shorter.

Capitalization and valuation of long-lived and intangible assets

In accordance with Statement of Financial Accounting Standards No. 141, “Business Combinations” (“FAS 141”) and Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“FAS 142”), goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead are tested for impairment on an annual basis or more frequently if certain indicators arise. Goodwill represents the excess of purchase price of an acquired business over the fair value of the underlying net tangible and intangible assets. The Company operates in one segment and goodwill is evaluated at the Company level as there is only one reporting unit. Goodwill is evaluated in the fourth quarter of each fiscal year. The Company’s goodwill and other intangible assets at September 30, 2006 related to the FazaClo assets acquired from Azur, have been classified with assets of discontinued operations (See Note 3 “Acquisition of Alamo Pharmaceuticals, Inc. / Sale of FazaClo”). The Company had no goodwill as of September 30, 2007 as a result of the sale of FazaClo. There was no impairment of goodwill for the fiscal years ended September 30, 2007 and 2006.

Intangible assets with finite useful lives are amortized over their respective useful lives and reviewed for impairment in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“FAS 144”). The method of amortization shall reflect the pattern in which the economic benefits of the intangible asset are consumed or otherwise used up. If that pattern cannot be reliably determined, a straight-line amortization method will be used. Intangible assets with finite useful lives include product rights, customer relationships, trade name, non-compete agreement and license agreement, and are being amortized over their estimated useful lives ranging from one to 15.5 years.

In accordance with FAS 144, intangible assets and other long-lived assets, except for goodwill, are evaluated for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. If the review indicates that intangible assets or long-lived assets are not recoverable (i.e. the carrying

F-10

Avanir Pharmaceuticals

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

amount is less than the future projected undiscounted cash flows), their carrying amount would be reduced to fair value. Factors we consider important that could trigger an impairment review include the following:

•  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.

Prior to October 1, 2005, intangible assets with finite useful lives also included capitalized legal costs incurred in connection with approved patents and patent applications pending. We amortized costs of patents and patent applications pending over their estimated useful lives. For patents pending, we amortized the costs over the shorter of a period of twenty years from the date of filing the application or, if licensed, the term of the license agreement. For patent and patent applications pending and trademarks that we abandon, we charge the remaining unamortized accumulated costs to expense.

Change in Accounting for Patent-Related Costs

In the fourth quarter of fiscal 2006, we changed our method of accounting, effective October 1, 2005 for legal costs, all of which were external, associated with the application for patents. Prior to the change, we expensed as incurred all internal costs associated with the application for patents and capitalized external legal costs associated with the application for patents. Costs of approved patents were amortized over their estimated useful lives or if licensed, the terms of the license agreement, whichever was shorter, while costs for patents pending were amortized over the shorter period of twenty years from the date of the filing application or if licensed, the term of the license agreement. Amortization expense for these capitalized costs was classified as research and development expenses in our consolidated statements of operations. Under the new method, external legal costs are expensed as incurred and classified as research and development expenses in our consolidated statements of operations. We believe that this change is preferable because it will result in a consistent treatment for all costs, that is, under our new method both internal and external costs associated with the application for patents are expensed as incurred. In addition, the change will provide a better comparison with our industry peers. 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 for fiscal 2006 was to increase the net loss by $3.7 million, $3.6 million of which represents the cumulative effect of the change on prior years, or $0.12 per basic and diluted share.

Pro forma amounts assuming the new method for patent-related costs was applied retroactively are as follows:

	Fiscal 2006			Fiscal 2005
Net loss	$	(58,936,756	)	$	(31,255,373	)
Basic and diluted loss per share	$	(1.92	)	$	(1.22	)

Deferred rent

We account for rent expense by accumulating total minimum rent payments on non-abandoned leases over the lives of the lease agreements and recognize the rent as expense on a straight-line basis. The difference between the actual amount paid and the amount recorded as rent expense in each fiscal year has been recorded as an adjustment to deferred rent. The amount classified as deferred rent as of September 30, 2007 and 2006 was $34,000 and $681,000, respectively.

Fair value of financial instruments

At September 30, 2007 and 2006, our financial instruments included cash and cash equivalents, receivables, investments in marketable securities, accounts payable, accrued expenses, accrued compensation and payroll taxes and long-term borrowings. The carrying amount of cash and cash equivalents, receivables, accounts payable,

F-11

Avanir Pharmaceuticals

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

accrued expenses and accrued compensation and payroll taxes approximates fair value due to the short-term maturities of these instruments. Our short- and long-term investments in marketable securities are carried at fair value based on quoted market prices. The fair value of our notes payable and capital lease obligations were estimated based on quoted market prices or pricing models using current market rates. At September 30, 2007 and 2006, the fair value of our notes payable approximate the carrying value of the notes.

Revenue recognition

General.  We recognize revenue in accordance with the SEC’s Staff Accounting Bulletin Topic 13 (“Topic 13”), “Revenue Recognition.” Revenue is recognized when all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the seller’s price to the buyer is fixed and determinable; and (4) collectibility is reasonably assured.

Certain product sales are subject to rights of return. For these products, our revenue recognition policy is consistent with the requirements of Statement of Financial Accounting Standards No. 48, “Revenue Recognition When Right of Return Exists” (“FAS 48”). FAS 48 states that revenue from sales transactions where the buyer has the right to return the product shall be recognized at the time of sale only if several criteria are met, including that the seller be able to reasonably estimate future returns.

Certain revenue transactions include multiple deliverables. We allocate revenue to separate elements in multiple element arrangements based on the guidance in Emerging Issues Task Force No. 00-21 (“EITF 00-21”), “Accounting for Revenue Arrangements with Multiple Deliverables.” Revenue is allocated to a delivered product or service when all of the following criteria are met: (1) the delivered item has value to the customer on a standalone basis; (2) there is objective and reliable evidence of the fair value of the undelivered item; and (3) if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item is considered probable and substantially in our control. We use the relative fair values of the separate deliverables to allocate revenue.

Revenue Arrangements with Multiple Deliverables.  We have revenue arrangements whereby we deliver to the customer multiple products and/or services. Such arrangements have generally included some combination of the following: antibody generation services; licensed rights to technology, patented products, compounds, data and other intellectual property; and research and development services. In accordance with EITF 00-21, we analyze our multiple element arrangements to determine whether the elements can be separated. We perform our analysis at the inception of the arrangement and as each product or service is delivered. If a product or service is not separable, the combined deliverables will be accounted for as a single unit of accounting.

When a delivered product or service (or group of delivered products or services) meets the criteria for separation in EITF 00-21, we allocate revenue based upon the relative fair values of each element. We determine the fair value of a separate deliverable using the price we charge other customers when we sell that product or service separately; however if we do not sell the product or service separately, we use third-party evidence of fair value. We consider licensed rights or technology to have standalone value to our customers if we or others have sold such rights or technology separately or our customers can sell such rights or technology separately without the need for our continuing involvement.

License Arrangements.  License arrangements may consist of non-refundable upfront license fees, data transfer fees, research reimbursement payments, exclusive licensed rights to patented or patent pending compounds, technology access fees, various performance or sales milestones and future product royalty payments. Some of these arrangements are multiple element arrangements.

Non-refundable, up-front fees that are not contingent on any future performance by us, and require no consequential continuing involvement on our part, are recognized as revenue when the license term commences and the licensed data, technology and/or compound is delivered. Such deliverables may include physical quantities of compounds, design of the compounds and structure-activity relationships, the conceptual framework and

F-12

Avanir Pharmaceuticals

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

mechanism of action, and rights to the patents or patents pending for such compounds. We defer recognition of non-refundable upfront fees if we have continuing performance obligations without which the technology, right, product or service conveyed in conjunction with the non-refundable fee has no utility to the licensee that is separate and independent of our performance under the other elements of the arrangement. In addition, if we have continuing involvement through research and development services that are required because our know-how and expertise related to the technology is proprietary to us, or can only be performed by us, then such up-front fees are deferred and recognized over the period of continuing involvement.

Payments related to substantive, performance-based milestones in a research and development arrangement are recognized as revenue upon the achievement of the milestones as specified in the underlying agreements when they represent the culmination of the earnings process.

Research and Development Services.  Revenue from research and development services is recognized during the period in which the services are performed and is based upon the number of full-time-equivalent personnel working on the specific project at the agreed-upon rate. Reimbursements from collaborative partners for agreed upon direct costs including direct materials and outsourced, or subcontracted, pre-clinical studies are classified as revenue in accordance with EITF Issue No. 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent,” and recognized in the period the reimbursable expenses are incurred. Payments received in advance are recorded as deferred revenue until the research and development services are performed or costs are incurred.

Royalty Revenues.  We recognize royalty revenues from licensed products when earned in accordance with the terms of the license agreements. Net sales figures used for calculating royalties include deductions for costs of unsaleable returns, managed care chargebacks, cash discounts, freight and warehousing, and miscellaneous write-offs.

Revenues from Sale of Royalty Rights.  When we sell our rights to future royalties under license agreements and also maintain continuing involvement in earning such royalties, we defer recognition of any upfront payments and recognize them as revenue over the life of the license agreement. We recognize revenue for the sale of an undivided interest of our Abreva license agreement to Drug Royalty USA under the “units-of-revenue method.” Under this method, the amount of deferred revenue to be recognized as revenue in each period is calculated by multiplying the following: (1) the ratio of the royalty payments due to Drug Royalty USA for the period to the total remaining royalties that we expect GlaxoSmithKline will pay Drug Royalty USA over the term of the agreement by (2) the unamortized deferred revenue amount.

Government Research Grant Revenue.  We recognize revenues from federal research grants during the period in which the related expenditures are incurred.

Product Sales — Active Pharmaceutical Ingredient Docosanol (“API Docosanol”).  Revenue from sales of our API Docosanol is recorded when title and risk of loss have passed to the buyer and provided the criteria in SAB Topic 13 are met. We sell the API Docosanol to various licensees upon receipt of a written order for the materials. Shipments generally occur fewer than five times a year. Our contracts for sales of the API Docosanol include buyer acceptance provisions that give our buyers the right of replacement if the delivered product does not meet specified criteria. That right requires that they give us notice within 30 days after receipt of the product. We have the option to refund or replace any such defective materials; however, we have historically demonstrated that the materials shipped from the same pre-inspected lot have consistently met the specified criteria and no buyer has rejected any of our shipments from the same pre-inspected lot to date. Therefore, we recognize revenue at the time of delivery without providing any returns reserve.

Product Sales — FazaClo (Sales from Discontinued Operations).  In August 2007, we sold FazaClo to Azur and as a result, all revenues, cost of revenues, and operating expenses related to FazaClo for fiscal 2007 and 2006 have been classified as discontinued operations in the accompanying consolidated financial statements (See Note 3 “Acquisition of Alamo Pharmaceuticals, Inc. / Sale of FazaClo”).

F-13

Avanir Pharmaceuticals

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

As discussed in Note 3, “Acquisition of Alamo Pharmaceuticals, Inc. / Sale of FazaClo” to consolidated financial statements, we acquired Alamo Pharmaceuticals LLC (“Alamo”) on May 24, 2006, with one marketed product, FazaClo (clozapine, USP), that began shipping to wholesale customers in July 2004 in 48-pill units. At that time, FazaClo had a two-year shelf life. In June 2005, Alamo received FDA approval to extend the product expiration date to three years. In October 2005, Alamo began shipping 96-pill units and accepted returns of unsold or undispensed 48-pill units.

During fiscal 2007 and 2006, we sold FazaClo to pharmaceutical wholesalers, the three largest of which accounted for approximately 83% and 86%, respectively, of our net wholesale shipments. They resold our product to outlets such as pharmacies, hospitals and other dispensing organizations. We had agreements with our wholesale customers, various states, hospitals, certain other medical institutions and third-party payers throughout the U.S. These agreements frequently contained commercial incentives, which may have included pricing allowances and discounts payable at the time the product was sold to the dispensing outlet or upon dispensing the product to patients. Consistent with pharmaceutical industry practice, wholesale customers can return purchased product during an 18-month period that begins six months prior to the product’s expiration date and ends 12 months after the expiration date. Additionally, several of our dispensing outlets have the right to return expired product at any time. Once products have been dispensed to patients the right of return expires. However, upon the sale of the FazaClo assets, Azur assumed all liabilities for returns and allowances related to the FazaClo sales that were made by the Company. Therefore, as of the date of the sale of the FazaClo assets, we no longer had responsibility for returns and allowances related to our sales of FazaClo.

Beginning in the first quarter of fiscal 2007, we obtained third-party information regarding certain wholesaler inventory levels, a sample of outlet inventory levels and third-party market research data regarding FazaClo sales. The third-party data includes, (i) IMS Health Audit — National Sales Perspective reports (“NSP”), which is a projection of near-census data of wholesaler shipments of product to all outlet types, including retail and non-retail and; (ii) IMS Health National Prescription Audit (“NPA”) Syndicated data, which captures end-user consumption from retail dispensed prescriptions based upon projected data from pharmacies estimated to represent approximately 60% to 70% of the U.S. prescription universe. Further, we analyzed historical rebates and chargebacks earned by State Medicaid, Medicare Part D and managed care customers. Based upon this additional information and analysis obtained, we estimated the amount of product that was shipped that was no longer in the wholesale or outlet channels, and hence no longer subject to a right of return. Therefore, we began recognizing revenues, net of returns, chargebacks, rebates, and discounts, in the first quarter of fiscal 2007, for product that we estimated had been sold to patients and that was no longer subject to a right of return.

FazaClo product revenues were recorded net of provisions for estimated product pricing allowances including: State Medicaid base and supplemental rebates, Medicare Part D discounts, managed care contract discounts and prompt payment discounts were at an aggregate rate of approximately 25.8% of gross revenues for the fiscal year ended September 30, 2007. Provisions for these allowances are estimated based upon contractual terms and require management to make estimates regarding customer mix to reach. We considered our current contractual rates with States related to Medicaid base and supplemental rebates, with private organizations for Medicare Part D discounts and contracts with managed care organizations.

Cost of Revenues

Cost of revenues includes direct and indirect costs to manufacture product sold, including the write-off of obsolete inventory, and to provide research and development services. Amortization of acquired FazaClo product rights is classified within cost of product sales under discontinued operations.

F-14

Avanir Pharmaceuticals

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Shipping and Handling Costs

We do not charge customers for shipping and handling. We expense shipping and handling costs as incurred. Shipping and handling costs charged to selling, general and administration expense amounted to $72,000, $29,000 and $0 for fiscal 2007, 2006 and 2005, respectively.

Recognition of Expenses in Outsourced Contracts

Pursuant to management’s assessment of the services that have been performed on clinical trials and other contracts, we recognize expenses as the services are provided. Such management assessments include, but are not limited to: (1) an evaluation by the project manager of the work that has been completed during the period, (2) measurement of progress prepared internally and/or provided by the third-party service provider, (3) analyses of data that justify the progress, and (4) management’s judgment. Several of our contracts extend across multiple reporting periods, including our largest contract, representing a $7.1 million Phase III clinical trial contract effective August 13, 2007 (see Note 21, “Subsequent Events”). A 3% variance in our estimate of the work completed in our largest contract could increase or decrease our quarterly operating expenses by approximately $213,000.

Research and Development Expenses

Research and development expenses consist of expenses incurred in performing research and development activities including salaries and benefits, facilities and other overhead expenses, clinical trials, contract services and other outside expenses. Research and development expenses are charged to operations as they are incurred. Up-front payments to collaborators made in exchange for the avoidance of potential future milestone and royalty payments on licensed technology are also charged to research and development expense when the drug is still in the development stage, has not been approved by the FDA for commercialization and concurrently has no alternative uses.

We assess our obligations to make milestone payments that may become due under licensed or acquired technology to determine whether the payments should be expensed or capitalized. We charge milestone payments to research and development expense when:

•  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.  In accordance with FAS 141, we immediately charge the costs associated with acquired in-process research and development (“IPR&D”) to research and development expense upon acquisition. These amounts represent an estimate of the fair value of purchased IPR&D for projects that, as of the acquisition date, had not yet reached technological feasibility, had no alternative future use, and had uncertainty in receiving future economic benefits from the acquired IPR&D. We determine the future economic benefits from the acquired IPR&D to be uncertain until such technology is approved by the FDA or when other significant risk factors are abated. We incurred significant IPR&D expense related to the Alamo acquisition. See also Note 3, “Acquisition of Alamo Pharmaceuticals, Inc. / Sale of FazaClo.”

Acquired contractual rights.  Payments to acquire contractual rights to a licensed technology or drug candidate are expensed as incurred when there is uncertainty in receiving future economic benefits from the acquired contractual rights. We consider the future economic benefits from the acquired contractual rights to a drug candidate to be uncertain until such drug candidate is approved by the FDA or when other significant risk factors are abated.

F-15

Avanir Pharmaceuticals

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Share-Based Compensation

We adopted the provisions of revised Statement of Financial Accounting Standards No. 123 (“FAS 123R”), “Share-Based Payment,” including the provisions of Staff Accounting Bulletin No. 107 (“SAB 107”) on October 1, 2005, the first day of our fiscal 2006, using the modified prospective transition method to account for our employee share-based awards. The valuation provisions of FAS 123R apply to new awards and to awards that are outstanding at the effective date and subsequently modified or cancelled. Estimated compensation expense for awards outstanding at the effective date are being recognized over the remaining service period using the compensation cost calculated for pro forma disclosure purposes under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“FAS 123”). Our consolidated financial statements as of September 30, 2007 and 2006 and for the fiscal years ended September 30, 2007 and 2006 reflect the impact of FAS 123R. In accordance with the modified prospective transition method, our consolidated financial statements for prior periods were not restated to reflect, and do not include, the impact of FAS 123R.

On November 10, 2005, the FASB issued FASB Staff Position No. FAS 123R-3, “Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards” (“FAS 123R-3”). We have elected to adopt the alternative transition method provided in FAS 123R-3. The alternative transition method includes a simplified method to establish the beginning balance of the additional paid-in capital pool (“APIC pool”) related to the tax effects of employee share-based compensation, which is available to absorb tax deficiencies recognized subsequent to the adoption of FAS 123R.

Share-based compensation expense recognized during a period is based on the value of the portion of share-based payment awards that is ultimately expected to vest. Share-based compensation expense recognized in our consolidated statements of operations for fiscal 2007 and 2006 includes compensation expense for share-based payment awards granted prior to, but not yet vested as of September 30, 2005 based on the grant date fair value estimated in accordance with the pro forma provisions of FAS 123, adjusted for estimated forfeitures, and share-based payment awards granted subsequent to September 30, 2005 based on the grant date fair value estimated in accordance with FAS 123R. For share-based awards granted in fiscal 2007 and 2006, expenses are amortized under the straight-line attribution method. For share awards granted prior to fiscal 2006, expenses are amortized under the straight-line single option method prescribed by FAS 123. As share-based compensation expense recognized in the consolidated statements of operations for fiscal 2007 and 2006 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. FAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. In our pro forma information required under FAS 123 for the periods prior to fiscal 2006, we accounted for forfeitures as they occurred.

The Company considers many factors when estimating expected forfeitures, including types of awards, employee class and historical experience. The Company most recently updated its projected forfeiture rates in the second quarter of fiscal 2007 as it applies to share-based compensation, considering recent actual data following the implementation of various restructuring initiatives earlier that year. The pre-vesting forfeiture rate for fiscal 2007 was estimated to be 30% for officers, directors and other employees. The pre-vesting forfeiture rates for fiscal 2006 were estimated to be approximately 8% for both officers and directors and 13% for other employees in fiscal 2006. The pre-vesting forfeiture rates for fiscal 2006 for officers, directors and other employees were subsequently adjusted to 30% in fiscal 2007. Future estimates, may differ substantially from the Company’s current estimates.

F-16

Avanir Pharmaceuticals

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Total compensation expense related to all of our share-based awards, recognized under FAS 123R, for fiscal 2007 and 2006 was comprised of the following:

	Fiscal 2007		Fiscal 2006
From Continuing Operations:
Selling, general and administrative expense	$	1,864,689	$	2,372,356
Research and development expense		365,433		465,284
Share-based compensation expense related to continuing operations		2,230,122		2,837,640
From Discontinued Operations:		507,638		282,981
Share-based compensation expense	$	2,737,760	$	3,120,621

	Fiscal 2007		Fiscal 2006
Share-based compensation expense from:
Stock options	$	1,304,944	$	1,795,610
Restricted stock awards		707,448		1,179,621
Restricted stock units		725,368		145,390
Total	$	2,737,760	$	3,120,621

Since we have a net operating loss carry-forward as of September 30, 2007 and 2006, no excess tax benefits for the tax deductions related to share-based awards were recognized in the consolidated statement of operations. Additionally, no incremental tax benefits were recognized from stock options exercised in fiscal 2007 and 2006 that would have resulted in a reclassification to reduce net cash provided by operating activities with an offsetting increase in net cash provided by financing activities. Compensation expense relating to employee share-based awards was not recognized in fiscal year ended September 30, 2005.

Prior to fiscal year 2006, we accounted for share-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations and provided the required pro forma disclosures of FAS 123.

The following table summarizes the pro forma effect on our net loss and per share data if we had applied the fair value recognition provisions of FAS 123 to share-based employee compensation for fiscal 2005.

	Fiscal 2005
Net loss, as reported	$	(30,606,564	)
Add: Share-based employee compensation expense		77,856
Deduct: Total share-based employee compensation expense determined under fair value based method for all awards		(1,777,838	)
Pro forma net loss	$	(32,306,546	)
Net loss per share:
Basic and diluted — as reported	$	(1.19	)
Basic and diluted — pro forma	$	(1.26	)

For employee stock options granted in fiscal 2005, we determined pro forma compensation expense under the provisions of FAS 123 using the Black-Scholes model and the following assumptions: (1) an expected volatility of 95%, (2) an expected term of 3.4 years, (3) a risk-free interest rate of 3.8% and (4) an expected dividend yield of 0%. The weighted average fair value of options granted in fiscal 2005 was $11.36 per share.

F-17

Avanir Pharmaceuticals

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

We account for stock options granted to non-employees in accordance with Emerging Issues Task Force 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”). Under EITF 96-18, we determine the fair value of the stock options granted as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable.

Restructuring expense

We record costs and liabilities associated with exit and disposal activities, as defined in Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“FAS 146”), at fair value in the period the liability is incurred. In periods subsequent to initial measurement, changes to a liability are measured using the credit-adjusted risk-free rate applied in the initial period. In fiscal 2006 and 2007, we recorded costs and liabilities for exit and disposal activities related to a relocation plan, including a decision to discontinue occupying certain leased office and laboratory facilities, in accordance with FAS 146. The liability is evaluated and adjusted as appropriate on at least a quarterly basis for changes in circumstances. Please refer to Note 4, “Relocation of Commercial and General and Administrative Operations” for further information.

Advertising expenses

Advertising costs are expensed as incurred, and these costs are included in selling, general and administrative expenses. Advertising costs were $1.1 million, $1.3 million and $61,000 for fiscal 2007, 2006 and 2005, respectively.

Income taxes

We account for income taxes and the related accounts under the liability method. Deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amounts and the income tax bases of assets and liabilities. A valuation allowance is applied against any net deferred tax asset if, based on available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

Comprehensive loss

Comprehensive loss is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources, including foreign currency translation adjustments and unrealized gains and losses on marketable securities. We present an accumulated other comprehensive loss in our consolidated statements of shareholders’ (deficit) equity and comprehensive loss.

Computation of net loss per common share

Basic net loss per common share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period (“Basic EPS Method”). Diluted net loss per common share is computed by dividing net loss by the weighted-average number of common and dilutive common equivalent shares outstanding during the period (“Diluted EPS Method”). In the loss periods, the shares of common stock issuable upon exercise of stock options and warrants are excluded from the computation of diluted net loss per share, as their effect is anti-dilutive. For fiscal 2007, 2006 and 2005, 22,500, 194,665 and 250,000 restricted shares, respectively, of Class A common stock with a right of repurchase have been excluded from the computation of basic net loss per share, because the right of repurchase for these restricted shares has not lapsed.

F-18

Avanir Pharmaceuticals

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

For fiscal 2007, 2006, and 2005, the following options and warrants to purchase shares of common stock, restricted stock awards and restricted stock units were excluded from the computation of diluted net loss per share, as the inclusion of such shares would be anti-dilutive:

	Fiscal 2007		Fiscal 2006		Fiscal 2005
Stock options		1,040,581		1,587,070		1,600,034
Stock warrants		1,322,305		269,305		1,122,047
Restricted stock awards		—		29,250		—
Restricted stock units		1,914,988		51,480		—

Recent accounting pronouncements

FASB Interpretation No. 48 (“FIN 48”).  In July 2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB No. 109” which prescribes a recognition threshold and measurement process for recording in the financial statements uncertain tax positions taken or expected to be taken. Additionally, FIN 48 provides guidance on derecognition, classification, accounting in interim periods and disclosure requirements for uncertain tax positions. The accounting provisions of FIN 48 will be effective for us beginning October 1, 2007. We are in the process of determining the effect, if any, of the adoption of FIN 48 will have on our consolidated financial statements.

Financial Accounting Standards No. 157 (“FAS 157”).  In September 2006, the FASB issued FAS 157, “Fair Value Measurements.” FAS 157 defines fair value, established a framework for measuring fair value in generally accepted accounting principles (GAAP) and expands disclosures about fair value measurements. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We do not expect the adoption of FAS 157 to significantly affect our consolidated financial condition or results of operations.

Financial Accounting Standards No. 159 (“FAS 159”).  In February 2007, the FASB issued FAS 159, The Fair Value Option for Financial Assets and Financial Liabilities— Including an amendment of FASB Statement 115, which provides companies with an option to measure eligible financial assets and liabilities in their entirety at fair value. The fair value option may be applied instrument by instrument, and may be applied only to entire instruments. If a company elects the fair value option for an eligible item, changes in the item’s fair value must be reported as unrealized gains and losses in earnings at each subsequent reporting date. FAS 159 is effective for fiscal years beginning after November 15, 2007. The Company is evaluating the options provided under FAS 159 and their potential impact on its financial condition and results of operations if implemented. We do not expect the adoption of FAS 159 to significantly affect our consolidated financial condition or results of operations.

Staff Accounting Bulletin No. 108 (“SAB 108”).  In September 2006, the SEC released SAB 108 to address diversity in practice regarding consideration of the effects of prior year errors when quantifying misstatements in current year financial statements. The SEC staff concluded that registrants should quantify financial statement errors using both a balance sheet approach and an income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. SAB 108 states that if correcting an error in the current year materially affects the current year’s income statement, the prior period financial statements must be restated. SAB 108 is effective for fiscal years ending after November 15, 2006. The Company adopted SAB 108 in fiscal 2007. The adoption of SAB 108 did not materially affect the Company’s consolidated financial statements.

3.   Acquisition of Alamo Pharmaceuticals, Inc. / Sale of Fazaclo

On May 24, 2006, pursuant to a Unit Purchase Agreement dated May 22, 2006 (the “Acquisition Agreement”), we acquired all of the outstanding equity interests in Alamo from the former members of Alamo (the “Selling Holders”) for approximately $30.0 million in consideration, consisting of approximately $4.0 million in cash, $25.1 million in promissory notes and $912,000 in acquisition-related transaction costs. The purchase price

F-19

Avanir Pharmaceuticals

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

exceeded the net assets acquired resulting in the recognition of $22.1 million of goodwill. The results of operations of Alamo have been included in our consolidated financial statements since the date of acquisition. The Company intended to leverage the FazaClo sales force to assist with the commercial launch of Zenvia, which was planned for early 2007; however, due to the receipt of the approvable letter and resulting delay in the planned launch of Zenvia, we entered into an agreement to sell FazaClo in July 2007. Details of the sale of FazaClo are described below.

In connection with the Alamo acquisition, we also agreed to pay the Selling Holders up to an additional $39,450,000 in revenue-based earn-out payments, based on future sales of FazaClo (clozapine USP), an orally disintegrating drug for the treatment of refractory schizophrenia. On May 15, 2007, we issued an additional $2,000,000 promissory note based on FazaClo sales rates through that quarter and on August 15, 2007, we issued a second promissory note, also in the principal amount of $2,000,000. The remaining earn-out payments of $35,450,000 are based on the achievement of certain target levels of FazaClo sales in the U.S. from the closing date of the acquisition through December 31, 2018. In connection with the FazaClo sale, Azur assumed these remaining contingent payment obligations; however, we are still contingently liable in the event of default by Azur.

We also previously agreed to pay the Selling Holders one-half of all net licensing revenues that we may receive through December 31, 2018 from licenses of FazaClo outside of the U.S., if any (“Non-US Licensing Revenues”). There were no Non-US Licensing Revenues through August 3, 2007, the date of sale of FazaClo, and these future obligations have been assumed by Azur as described below. We also agreed to apply 20% of any future net offering proceeds to repay the promissory notes and through June 30, 2007, we paid approximately $6.1 million of the principal amounts due under the notes. In August 2007, we paid an additional $11 million of outstanding principal and interest under these notes and amended our agreement with the Selling Holders to partially suspend the early payment obligations remaining under the promissory notes.

Purchase Price Allocation

In accordance with FAS 141, we allocated the total purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of the date of acquisition, using the purchase method of accounting. The components of the purchase price allocation are as follows:

Purchase price:
Cash paid at closing	$	4,040,000
Estimated fair value of notes payable issued		24,343,000
Transaction costs		911,536
	$	29,294,536
Allocation:
Net tangible assets acquired	$	5,749,898
Identifiable intangible assets acquired		11,960,000
Goodwill		22,110,328
Total assets acquired		39,820,226
Accounts payable and accrued expenses		(3,611,653	)
Liabilities assumed		(6,401,321	)
Capital lease obligations		(512,716	)
	$	29,294,536

None of the goodwill for the acquisition of FazaClo is deductible for tax purposes.

F-20

Avanir Pharmaceuticals

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The purchase price allocation shown above was adjusted during fiscal 2007 due to the following:

•  Issuance of additional notes payable totaling $4,000,000 issued in fiscal 2007 as the result of the contingency of certain revenue-based earn-out obligations being met.

•  The reduction of $3,980,229 of the liabilities related to the product returns and discounts from the original amounts.

•  A net increase of $19,771 to goodwill as a result of the two items described above.

The following table sets forth adjustments to goodwill during the fiscal year ending September 30, 2007:

Goodwill, as of the year ended September 30, 2006	$	22,110,328
Contingent Consideration — Issuance of additional notes payable		4,000,000
Reduction of assumed liabilities		(3,980,229	)
Goodwill, balance prior to sale of FazaClo	$	22,130,099

Pursuant to EITF 01-3, “Accounting in a Business Combination for Deferred Revenue of an Acquiree,” we did not assume Alamo’s deferred revenue balance as of the acquisition date, and accordingly will not record revenue associated with product that was shipped prior to the acquisition date. However, in connection with the acquisition, we assumed an obligation for future product returns, chargebacks, rebates, discounts and royalties associated with pre-acquisition shipments of FazaClo. As such, we recorded preliminary estimated liabilities for such returns and other discounts of $6.4 million based on our estimate of the fair values of these liabilities at the acquisition date, which is included in current liabilities of discontinued operations in the accompanying consolidated balance sheet as of September 30, 2006. Since the acquisition in May 2006 through the date of the sale of the FazaClo assets, the Company received and analyzed historical data regarding FazaClo product returns and product pricing allowances (See Note 2 “Summary of Significant Accounting Policies — Revenue Recognition”). Based on this analysis, the Company recorded net total adjustments of $4.0 million in fiscal 2007 to reduce the preliminary estimate of these assumed liabilities and to also reduce goodwill by the same amount. The remaining liabilities associated with Fazaclo have been eliminated as of September 30, 2007 in connection with our sale of FazaClo.

We acquired Alamo for the purpose of acquiring the sales force and a product that showed potentially greater sales opportunity with enhanced marketing and promotion. The value of the sales force is encompassed in goodwill. The lower allocation to intangible assets reflects a higher risk-adjusted discount rate for the identifiable intangible assets than other assets purchased in the transaction, which lowered the fair values of the intangible assets acquired and increased the residual being applied to goodwill.

We determined fair values of identifiable intangible assets acquired based on estimates and assumptions by management on projected sales and product returns, pricing allowances and discounts. Identifiable intangible assets acquired represent expected benefits of the FazaClo product rights, customer relationships, trade name and non-compete agreement. The fair values of the customer relationships, technology, trade name and covenants not to compete were determined using an income approach and discounted cash flow (“DCF”) techniques. The fair value of the software registry and assembled workforce were determined using a cost approach. The remaining goodwill value of the Company was determined using a residual approach, by comparing the total fair market value of the assumed liabilities and equity consideration paid less the fair value of the tangible and identified intangible assets.

Identifiable Intangible Assets

We determined fair values of identifiable intangible assets acquired based on estimates and assumptions by management on projected sales and product returns, pricing allowances and discounts. Identifiable intangible assets acquired represent expected benefits of the FazaClo product rights, customer relationships, trade name and non-compete agreement. The fair values of the customer relationships, technology, trade name and covenants not to compete were determined using an income approach and discounted cash flow (“DCF”) techniques. The fair value

F-21

Avanir Pharmaceuticals

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

of the software registry and assembled workforce were determined using a cost approach. The remaining goodwill value of the Company was determined using a residual approach, by comparing the total fair market value of the assumed liabilities and equity consideration paid less the fair value of the tangible and identified intangible assets.

The identifiable intangible assets prior to the sale of the FazaClo assets were being amortized, with the annual amortization amount based on the rate of consumption of the expected benefits of the intangible or the straight-line method over the remaining estimated economic life ranging from one to 12 years, if the rate of consumption of the expected benefits could not be reasonably determined otherwise. Since the acquisition of Alamo, the Company has recorded amortization expense relating to the identifiable intangible assets of $2.0 million.

In-Process Research and Development

We evaluated research and development projects including new manufacturing technology for FazaClo under development by CIMA Labs. As the basis for identifying whether or not the development projects represented in-process research and development (“IPR&D”), we conducted an evaluation in the context of FASB Interpretation 4 (“FIN 4: Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method”). In accordance with these provisions, we examined the research and development projects to determine whether any alternative future uses existed. Such evaluation consisted of a specific review of the efforts, including the overall objectives of the project, progress toward the objectives, and the uniqueness of the developments of these objectives as well as our intended use of the developments. Further, we reviewed each development project to determine whether technological feasibility had been achieved. Based on our analysis, we determined that the DuraSolv technology, a certain technology being developed in collaboration with CIMA Labs for manufacturing FazaClo, was IPR&D.

In order to estimate the fair value of the DuraSolv technology, we used the relief from royalty valuation approach on incremental product revenues that could result from manufacturing with such technology. The fair value of the IPR&D was determined by measuring the present value of the after-tax cash flows from revenues from such technology based on an appropriate technology royalty rate. DuraSolv technology allows for the product to be packaged in a bottle, which is more convenient to open than the current blister packaging for FazaClo. We expected to use the DuraSolv manufacturing technology to replace the current OraSolv technology for manufacturing FazaClo, assuming the manufacturing process was approved by the FDA. We determined the future economic benefits from the purchased IPR&D to be uncertain because such technology has not been approved by the FDA. As DuraSolv was determined to be IPR&D, the estimated fair value of DuraSolv of $1.3 million was expensed in fiscal 2006, under guidelines in FAS 141.

Sale of FazaClo and Presentation of Discontinued Operations

In August 2007, the Company sold FazaClo to Azur. In connection with the sale, the Company received approximately $43.9 million in upfront consideration and has the right to receive up to an additional $10 million in contingent payments in 2009, subject to the satisfaction of certain regulatory conditions. In addition, the Company could receive up to $2 million in royalties, based on 3% of annualized net product revenues in excess of $17 million. The Company’s earn-out obligations that would have been payable to the prior owner of Alamo upon the achievement of certain milestones were assumed by Azur; however, the Company is contingently liable in the event of default. The Company transferred all FazaClo related business operations to Azur in August 2007.

In accordance with FAS 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”, the financial results relating to FazaClo have been classified as discontinued operations in the accompanying consolidated statements of operations for all periods presented. In addition, the asset and liabilities associated with FazaClo are separately presented on the accompanying consolidated balance sheet as of September 30, 2006 as assets of discontinued operations or liabilities of discontinued operations.

F-22

Avanir Pharmaceuticals

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Summarized statements of operations for the discontinued operations for fiscal 2007 and 2006 is as follows:

	FIscal 2007			Fiscal 2006
REVENUES FROM PRODUCT SALES
Net revenues	$	17,132,171		$	—
Cost of revenues		4,599,105			411,943
Product gross margin (loss)		12,533,066			(411,943	)
OPERATING EXPENSES
Research and development		3,159,117			2,227,754
Selling, general and administrative		13,486,361			5,678,853
Loss from operations		(4,112,412	)		(8,318,550	)
OTHER INCOME (EXPENSES)
Interest expense		(647,644	)		(359,727	)
Gain on sale of FazaClo		12,208,327			—
Other		—			(24,439	)
Income (loss) before income taxes		7,448,271			(8,702,716	)
Provision for income taxes		—			—
NET INCOME (LOSS )	$	7,448,271		$	(8,702,716	)

Summarized balance sheet information for the discontinued operations as of September 30, 2006 is set forth below:

	Fiscal 2006
Accounts receivable, net	$	1,918,769
Inventories, net		2,832,105
Prepaid expenses and other current assets		127,800
Current assets of discontinued operations		4,878,674
Property, plant and equipment, net		1,526,016
Other assets		45,498
Intangible assets, net		10,070,024
Goodwill		22,110,328
Non-current assets of discontinued operations		33,751,866
Assets of discontinued operations	$	38,630,540
Current portion of capital leases and long-term debt	$	221,424
Deferred revenue		3,955,150
Assumed liabilities for returns and other discounts		3,980,229
Other accrued expenses		4,096,589
Current liabilities of discontinued operations		12,253,392
Capital leases and long-term debt, net of current portion		11,170,908
Liabilities of discontinued operations	$	23,424,300

F-23

Avanir Pharmaceuticals

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

In connection with the sale of the FazaClo assets, the Company recognized a gain of approximately $12.2 million in the fourth quarter of fiscal 2007. The following presents the calculation of the gain on sale and the carrying amounts of the major classes of the assets and liabilities related to FazaClo at the date of sale:

Consideration, net of transaction costs of $1,829,000	$	42,055,000
Assets and liabilities related to FazaClo:
Current assets	$	3,835,000
Property and equipment		612,000
Net intangible assets		8,653,000
Goodwill		22,130,000
Less: Current liabilities		(5,383,000	)
Net assets		29,847,000
Gain on sale	$	12,208,000

Pro Forma Results of Operations

The following unaudited financial information presents the pro forma results of operations and gives effect to the Alamo acquisition as if the acquisition was consummated at the beginning of fiscal 2005. This information is presented for informational purposes only, and is not intended to be indicative of any expected results of operations for future periods, or the results of operations that actually would have been realized if the acquisition had in fact occurred as of the beginning of fiscal 2005.

	Fiscal 2006			Fiscal 2005
Pro forma net revenues(1)	$	17,503,000		$	18,522,000
Pro forma loss before cumulative effect of change in accounting principle(2)	$	(62,963,000	)	$	(56,307,000	)
Pro forma net loss(2)	$	(66,579,000	)	$	(56,307,000	)
Pro forma loss per basic and diluted share:
Loss before cumulative effect of change in accounting principle	$	(2.06	)	$	(2.20	)
Net loss	$	(2.17	)	$	(2.20	)
Shares used for basic and diluted computation		30,634,872			25,617,432

(1)	In accordance with the provisions of EITF 01-3 we did not assume Alamo’s reported deferred revenue balance as of the acquisition date and accordingly did not record revenue associated with such deferred revenue, resulting in lower net revenues in the periods following the merger than Alamo would have achieved as a separate company.
(2)	Pro forma net loss for the periods presented included the following pro forma adjustments:

•  Amortization of identifiable intangible assets,

•  Interest expense associated with the notes payable issued as part of purchase price,

•  Elimination of interest expense associated with Alamo’s historical debt that was assumed by us in the acquisition,

•  Reduction of interest income by an amount determined by applying the average rate of return for the respective periods to the decrease in our cash balance of $4.0 million used to fund the acquisition,

•  Amortization of discount associated with the notes payable, and

F-24

Avanir Pharmaceuticals

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

•  The charge of $1.3 million purchased IPR&D is not included in the pro forma results of operations. The purchased IPR&D is a one-time charge directly related to the acquisition and does not have a continuing impact on our future operations.

Assumed Liabilities for Returns and Other Discounts of Discontinued Operations

In connection with the Alamo Acquisition, we assumed outstanding obligations for future product returns, chargebacks, rebates, discounts and royalties associated with pre-acquisition shipments of FazaClo. As such, we recorded liabilities in the amount of $6.4 million for such returns and other discounts based on the estimated fair value at the acquisition date. The following table summarizes activity related to the assumed liabilities for returns and other discounts as of September 30, 2007 and 2006:

	2007			2006
Balance, at beginning of year	$	3,980,229		$	—
Assumed liabilities for returns and other		—			6,401,321
Payments for returns and other discounts		—			(2,421,092	)
Adjustment to goodwill		(3,980,229	)		—
Balance, at end of year	$	—		$	3,980,229

The assumed liabilities for returns and other discounts are classified in current liabilities of discontinued operations as of September 30, 2006.

4.   Relocation of Commercial and General and Administrative Operations

In fiscal 2006, we relocated all operations other than research and development from San Diego, California to Aliso Viejo, California and recorded restructuring and other related expenses of $515,000 which are included in selling, general and administrative expenses, and consisting of $237,000 for employee severance and relocation benefits and $278,000 of lease restructuring liability. Further, in the quarter ended June 30, 2007, the Board of Directors approved a plan to exit the Company’s facilities in San Diego. Pursuant to this plan, the Company subleased a total of approximately 49,000 square feet of laboratory and office space in San Diego and relocated remaining personnel and clinical trial support functions to the Company’s offices in Aliso Viejo, California. The disposition of these facilities follows the Company’s receipt of non-renewal and termination notices from Novartis and AstraZeneca in March 2007. In fiscal 2007, the Company recorded restructuring expenses of approximately $3.8 million which are included in selling, general and administrative expenses. These restructuring expenses include severance of approximately $848,000, the acceleration of amortization of leasehold improvements of approximately $828,000 and the recognition of the estimated loss under the terms of the Company’s leases of approximately $2.1 million. No further costs are expected to be incurred related to these restructuring events in fiscal 2008.

F-25

Avanir Pharmaceuticals

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table presents the restructuring activities for fiscal 2006:

	Balance at							Balance at
	September 30,		Charges/		Net Payments/			September 30,
	2005		Additions		Reductions			2006
Accrued Restructuring:
Employee severance and relocation benefits	$	—	$	237,050	$	—		$	237,050
Lease restructuring liability		—		277,627		(3,629	)		273,998
Total		—		514,677		(3,629	)		511,048
Less current portion		—							(280,598	)
Total	$	—						$	230,450

The following table presents the restructuring activities for fiscal 2007:

	Balance at								Balance at
	September 30,			Charges/		Net Payments/			September 30,
	2006			Additions		Reductions			2007
Accrued Restructuring:
Employee severance and relocation benefits	$	237,050		$	847,642	$	(1,008,902	)	$	75,790
Lease restructuring liability		273,998			2,101,771		(151,967	)		2,223,802
Total		511,048			2,949,413		(1,160,869	)		2,299,592
Less current portion		(280,598	)							(1,163,627	)
Total	$	230,450							$	1,135,965

The current portion of the lease restructuring liability of $1,088,000 is included in “Accrued Expenses and Other Liabilities” and the non-current portion of lease restructuring liability of $1,136,000 is included in “Accrued Expenses and Other Liabilities, Net of Current Portion” in the accompanying consolidated balance sheets.

F-26

Avanir Pharmaceuticals

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

5.   Investments in Marketable Securities

The following tables summarize our investments in securities, all of which are classified as available-for-sale except for restricted investments, which are classified as held-to-maturity.

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses(1)			Value
As of September 30, 2007:
Certificates of deposit	$	1,156,597		—		—		$	1,156,597
Government debt securities		1,999,584		—		(2,745	)		1,996,839
Total	$	3,156,181		—	$	(2,745	)	$	3,153,436
Reported as:
Current investments in securities:
Restricted investments(2)								$	688,122
Classified as available for sale									1,747,761
Total current investments in securities:									2,435,883
Non-current investments in securities:
Restricted investments(2)									468,475
Classified as available for sale									249,078
Non-current investments in securities:									717,553
Total investments in securites								$	3,153,436

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses(1)			Value
As of September 30, 2006:
Certificates of deposit	$	856,597		—		—		$	856,597
Government debt securities		19,097,766		—		(102,504	)		18,995,262
Total	$	19,954,363		—	$	(102,504	)	$	19,851,859
Reported as:
Current investments in securities:
Classified as available for sale								$	16,778,267
Total current investments in securities:									16,778,267
Non-current investments in securities:
Classified as available for sale									2,216,995
Restricted investments(2)									856,597
Non-current investments in securities:									3,073,592
Total investments in securites								$	19,851,859

(1) Unrealized loss is reported as “accumulated other comprehensive loss” on the consolidated balance sheets.

F-27

Avanir Pharmaceuticals

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(2) Restricted investments represent amounts pledged to our bank as collateral for letters of credit issued in connection with our leases of office and laboratory space.

The gross realized loss for fiscal 2005 was $6,240. There were no realized gains or losses for fiscal 2007 and 2006.

6.   Receivables, Net

Receivables as of September 30, 2007 and 2006 consist of the following:

	2007		2006
Accounts receivable(1)	$	592,035	$	49,300
Unbilled receivables		—		908,284
Other receivables		396,415		176,714
		988,450		1,134,298
Allowance for doubtful accounts		—		(10,599	)
Receivables, net of allowances	$	988,450	$	1,123,699

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

7.   Inventories

Inventories relate to the active pharmaceutical ingredients docosanol and Zenvia.

The composition of inventories as of September 30, 2007 and 2006 is as follows:

	2007			2006
Raw materials	$	1,354,991		$	350,522
Less: current portion		(17,000	)		(3,098	)
Long-term portion	$	1,337,991		$	347,424

The amount classified as long-term inventories is comprised of docosanol and the raw material components for Zenvia, dextromethorphan and quinidine, which will be used in the manufacture of Zenvia capsules in the future.

F-28

Avanir Pharmaceuticals

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

8.   Property and Equipment

Property and equipment as of September 30, 2007 and 2006 consist of the following:

	2007							2006
	Gross							Gross
	Carrying		Accumulated					Carrying		Accumulated
	Value		Depreciation			Net		Value		Depreciation			Net
Research and development equipment	$	761,815	$	(588,325	)	$	173,490	$	4,210,214	$	(3,134,970	)	$	1,075,244
Computer equipment and related software		1,285,454		(941,628	)		343,826		1,345,321		(751,391	)		593,930
Leasehold improvements		37,790		(3,787	)		34,003		5,671,209		(3,649,499	)		2,021,710
Office equipment furniture and fixtures		767,313		(364,685	)		402,628		990,654		(421,544	)		569,110
Manufacturing equipment		261,719		—			261,719		261,719		—			261,719
Total property and equipment	$	3,114,091	$	(1,898,425	)	$	1,215,666	$	12,479,117	$	(7,957,404	)	$	4,521,713

Depreciation expense associated with property and equipment was $3.6 million of which $768,000 was related to discontinued operations, $3.3 million of which $300,000 was related to discontinued operations and $1.6 million for fiscal 2007, 2006 and 2005, respectively. In connection with the relocation plan discussed in Note 4, “Relocation of Commercial and General and Administrative Operations”, we revised the estimated remaining economic lives of the leasehold improvements in the buildings under the BC Sorrento lease and recorded additional depreciation expense of $1.3 million in fiscal 2006.

At September 30, 2007, scientific equipment acquired under capital leases totaled $601,000 with accumulated depreciation of $601,000. At September 30, 2006 scientific equipment acquired under capital leases totaled $601,000 with accumulated depreciation of $529,000. Depreciation expense associated with scientific equipment acquired under capital leases was $72,000 for fiscal 2007 due to the consolidation of operations to the Aliso Viejo office. Depreciation expense associated with scientific equipment acquired under capital leases was $102,000 and $106,000 for fiscal 2006 and 2005, respectively.

9.   Intangible Assets

Intangible Assets.  Intangible assets, consisting of both intangible assets with finite and indefinite useful lives as of September 30, 2007 and 2006, are as follows:

	2007
	Gross							Weighted Average
	Carrying		Accumulated					Amortization
	Value		Amortization			Net		Period (in years)
Intangible assets with finite lives:
Licenses	$	42,461	$	(22,418	)	$	20,043		15.5
Total intangible assets with finite lives		42,461		(22,418	)		20,043
Intangible assets with indefinite lives		21,005		—			21,005
Total intangible assets	$	63,466	$	(22,418	)	$	41,048

F-29

Avanir Pharmaceuticals

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	2006
	Gross							Weighted Average
	Carrying		Accumulated					Amortization
	Value		Amortization			Net		Period (in years)
Intangible assets with finite lives:
Licenses	$	42,461	$	(20,161	)	$	22,300		15.5
Intangible assets with finite lives		42,461		(20,161	)		22,300
Intangible assets with indefinite lives		21,005		—			21,005
Total intangible assets	$	63,466	$	(20,161	)	$	43,305

In the fourth quarter of fiscal 2006, we changed our method of accounting, effective October 1, 2005 for legal costs, all of which were external, associated with the application for patents. See Note 2, “Summary of Significant Accounting Policies — Change in Accounting for Patent-Related Costs” for detailed discussion.

During fiscal 2006, FazaClo product rights (see Note 16, “Research and Licensing Agreements — CIMA Labs Inc. Royalty Agreement”), customer relationships, a trade name and a non-compete agreement valued at a total of $10,660,000 were acquired in connection with the Alamo Acquisition.

During fiscal 2007, the Company sold FazaClo and therefore our intangible assets pertaining to FazaClo product rights, customer relationships, trade name and Non-compete agreements with a net book value of $10.1 million were eliminated in the transaction.

Amortization expense related to amortizable intangible assets was $1.4 million, $592,000 and $226,000 for fiscal 2007, 2006 and 2005, respectively. Charges for intangible assets abandoned and impaired for fiscal 2007, 2006 and 2005 were $0, $8,000 and $423,000 respectively. Charges for patents and patent applications pending abandoned and impaired in fiscal 2005 were included in research and development expense in our consolidated statements of operations. Charges for trademarks abandoned are included in selling, general and administrative expense in our consolidated statements of operations.

Estimated amortization expense of intangible assets for fiscal years ending September 30 is as follows:

	Amortization
	Expense
Fiscal year ending September 30:
2008	$	2,257
2009		2,257
2010		2,257
2011		2,257
2012		2,257
Thereafter		8,758
Total	$	20,043

In connection with the Alamo acquisition, we recognized $22.1 million of goodwill in fiscal 2006.

F-30

Avanir Pharmaceuticals

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

10.   Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities at September 30, 2007 and 2006 are as follows:

	2007			2006
Accrued research and development expenses	$	419,989		$	3,947,191
Accrued sales and marketing expenses		—			1,146,222
Accrued general and admistrative expenses		287,517			299,190
Deferred rent		34,432			679,421
Lease restructuring liability		2,223,802			273,998
Other		255,520			160,933
Total accrued expenses and other liabilities		3,221,260			6,506,955
Less current		(2,050,864	)		(6,276,505	)
Non-current total accrued expenses and other liabilities	$	1,170,396		$	230,450

11.   Deferred Revenues

The following table sets forth as of September 30, 2007 and 2006 the net deferred revenue balances for our sale of future Abreva^® royalty rights to Drug Royalty USA and other agreements.

	Drug Royalty
	USA Agreement			Other Agreements			Total
Net deferred revenues as of October 1, 2005	$	19,049,877		$	108,333		$	19,158,210
Changes during the period:
License fees		—			2,288,638			2,288,638
Recognized as revenues during period		(1,937,964	)		(154,709	)		(2,092,673	)
Net deferred revenues as of September 30, 2006	$	17,111,913		$	2,242,262		$	19,354,175
Classified and reported as:
Current portion of deferred revenues	$	1,981,799		$	1,655,614		$	3,637,413
Deferred revenues, net of current portion		15,130,114			586,648			15,716,762
Total deferred revenues	$	17,111,913		$	2,242,262		$	19,354,175

	Drug Royalty
	USA Agreement			Other Agreements			Total
Net deferred revenues as of October 1, 2006	$	17,111,913		$	2,242,262		$	19,354,175
Changes during the period:
Shipments, net		—			278,910			278,910
Recognized as revenues during period		(2,373,404	)		(1,939,251	)		(4,312,655	)
Net deferred revenues as of September 30, 2007	$	14,738,509		$	581,921		$	15,320,430
Classified and reported as:
Current portion of deferred revenues	$	1,969,507		$	298,087		$	2,267,594
Deferred revenues, net of current portion		12,769,002			283,834			13,052,836
Total deferred revenues	$	14,738,509		$	581,921		$	15,320,430

F-31

Avanir Pharmaceuticals

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Drug Royalty Agreement — In December 2002, we sold to Drug Royalty USA an undivided interest in our rights to receive future Abreva royalties under the license agreement with GlaxoSmithKline for $24.1 million (the “Drug Royalty Agreement” and the “GlaxoSmithKline License Agreement,” respectively). Under the Drug Royalty Agreement, Drug Royalty USA has the right to receive royalties from GlaxoSmithKline on sales of Abreva until December 2013.

In accordance with SAB Topic 13, revenues are recognized when earned, collection is reasonably assured and no additional performance of services is required. We classified the proceeds received from Drug Royalty USA as deferred revenue, to be recognized as revenue ratably over the life of the license agreement consistent with SAB Topic 13 because of our continuing involvement over the term of the Drug Royalty Agreement. Such continuing involvement includes overseeing the performance of GlaxoSmithKline and its compliance with the covenants in the GlaxoSmithKline License Agreement, monitoring patent infringement, adverse claims or litigation involving Abreva, and undertaking to find a new license partner in the event that GlaxoSmithKline terminates the agreement. The Drug Royalty Agreement contains both covenants (Section 8) and events of default (Section 10) that require such performance on our part. Therefore, nonperformance on our part could result in default of the arrangement, and could give rise to additional rights in favor of Drug Royalty USA under a separate security agreement with Drug Royalty USA, which could result in loss of our rights to share in future Abreva royalties if wholesale sales by GlaxoSmithKline exceed $62 million a year. Because of our continuing involvement, we recorded the net proceeds of the transaction as deferred revenue, to be recognized as revenue ratably over the life of the license agreement. Based on a review of our continuing involvement, we concluded that the sale proceeds did not meet any of the rebuttable presumptions in EITF 88-18 that would require classification of the proceeds as debt.

Kobayashi Docosanol License Agreement — In January 2006, we signed an exclusive license agreement with Kobayashi Pharmaceutical Co., Ltd. (“Kobayashi”), a Japanese corporation, to allow Kobayashi to market in Japan medical products that are curative of episodic outbreaks of herpes simplex or herpes labialis and that contain a therapeutic concentration of our docosanol 10% cream either as the sole active ingredient or in combination with any other ingredient, substance or compound (the “Products”) (the “Kobayashi License Agreement”). Pursuant to the terms of the Kobayashi License Agreement, we received a non-refundable know-how and data transfer fee (“License Fee”) of $860,000 in March 2006. In addition, we will be eligible to receive milestone payments of up to 450 million Japanese Yen (or up to approximately U.S. $3.9 million based on the exchange rate as of September 30, 2007), subject to achievement of certain milestones relating to the regulatory approval and commercialization of docosanol in Japan and patent and know-how royalties for sales of Products in Japan, if commercial sales commence.

Under the terms of the Kobayashi License Agreement, Kobayashi will be responsible for obtaining all necessary approvals for marketing, all sales and marketing activities and the manufacturing and distribution of the Products. Because the know-how and expertise related to the docosanol 10% cream are proprietary to us, we will be providing assistance to Kobayashi, upon their request, in completing additional required clinical studies and in filing the new drug application (“NDA”) submission for the licensed product in Japan. As of September 30, 2007, we estimated the period of time of our continuing involvement in advising and assisting Kobayashi with additional clinical studies and obtaining regulatory approval in Japan to be approximately three years. Pursuant to SAB Topic 13, revenue from the License Fee of $860,000 is deferred and being recognized on a straight-line basis over 3.75 years. Accordingly, we recognized $227,000 and $121,000 of the License Fee in fiscal 2007 and 2006, respectively, which is included in revenues from license agreements.

HBI Docosanol License Agreement — In July 2006, we entered into an exclusive license agreement with Healthcare Brands International (“HBI”), pursuant to which we granted to HBI the exclusive rights to develop and commercialize docosanol 10% in the following countries: Austria, Belgium, Czech Republic, Estonia, France, Germany, Hungary, Ireland, Latvia, Lithuania, Luxembourg, Malta, The Netherlands, Poland, Portugal, Russia, Slovakia, Slovenia, Spain, Ukraine and United Kingdom.

F-32

Avanir Pharmaceuticals

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Pursuant to the HBI License Agreement, we received an upfront data and know-how transfer fee of $1.4 million in July 2006 in exchange for providing certain data (“Data Transfer Requirements”). We received official notice from HBI in April 2007 that we met the initial data transfer obligations under the license agreement. As a result, we recognized the $1.4 million as license revenue during fiscal 2007. We will also be eligible to receive £750,000 (or approximately U.S. $1.5 million based on the exchange rate as of September 30, 2007) for each of the first two regulatory approvals for marketing in any countries in the Licensed Territory. In July 2007, we received notice from HBI of HBI’s achievement of regulatory approval in the European market. As a result, we received our first of two milestone payments in the amount of $1.5 million which was recorded as royalty revenue during the year ended September 30, 2007. If there is any subsequent divestiture or sublicense of docosanol by HBI (including through a sale of HBI), or any initial public offering of HBI’s securities, we will receive an additional payment related to the future value of docosanol under the Agreement.

HBI will bear all expenses related to the regulatory approval and commercialization of docosanol within the Licensed Territory. HBI also has certain financing obligations, pursuant to which it will be obligated to raise a minimum amount of working capital within certain time periods following execution of the HBI License Agreement.

12.   Commitments and Contingencies

Operating lease commitments.  We lease laboratory and office space and certain equipment under non-cancelable operating leases. In May 2006, we entered into a five-year lease agreement for a total of approximately 17,000 square feet of office space, commencing on July 10, 2006 with 6,245 square feet and increasing to the full amount in the second quarter of 2007. On July 1, 2007, we signed an amendment to the original lease to assume a total of only 11,319 square feet. As of September 30, 2007, we were in possession of 11,319 square feet of this office space. The lease has scheduled rent increases each year and expires on July 9, 2011. As of September 30, 2007, the financial commitment for the remainder of the term of the lease is $1.5 million.

In March 2000 (as amended in March 2006), we entered into an eight-year lease for 27,575 square feet of office and lab space in a building located at 11388 Sorrento Valley Road, Suite 200, San Diego, California, commencing on September 1, 2000. The lease has scheduled rent increases each year and expires on August 31, 2008. As of September 30, 2007, the financial commitment for the remainder of the term of the lease is approximately $793,000. We delivered an irrevocable standby letter of credit to the lessor in the amount of approximately $388,000, to secure our performance under the lease. In July 2007 we entered into a sublease agreement with Halozyme to sublease this building at 11388 Sorrento Valley Road. We anticipate receiving approximately $308,000 of sublease payments in fiscal 2008.

In May 2002, we signed a ten-year lease for approximately 26,770 square feet of office and lab space in buildings adjacent to our existing facilities, commencing on January 15, 2003. In April 2003, we signed an amendment to the lease for an additional 3,600 square feet of space in the building adjacent to our existing facilities. The lease has scheduled rent increases each year and expires on January 14, 2013. In September 2006, we subleased approximately 9,000 square feet of these buildings. The sublease has scheduled rent increases each year and a three-year term that expires in September 2009. In addition, the sublease provides the sublessee the option to renew the sublease through January 14, 2013. In July 2007 we subleased approximately 21,184 rentable square feet to Halozyme Inc. The sublease has scheduled rent increases each year and expires on January 14, 2013. As of September 30, 2007, the financial commitment for the remainder of the term of the lease is $6.0 million (excluding $3.8 million of payments to be received from the subleases). We delivered an irrevocable standby letter of credit to the lessor in the amount of approximately $468,000, to secure our performance under the lease.

In June 2007, we entered into a one-year lease for 1,594 square feet of office and lab space in a building located at 4050 Sorrento Valley Blvd, Suite J, San Diego, California, commencing on July 1, 2007. As of September 30, 2007, the financial commitment for the remainder of the term of the lease is $18,000.

F-33

Avanir Pharmaceuticals

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Rental expenses, excluding common area charges and other executory costs, were $2.3 million in fiscal 2007, $1.9 million in fiscal 2006 and $1.8 million in fiscal 2005. Sublease rental income was approximately $292,000 in fiscal 2007 and $18,000 in fiscal 2006. Future minimum rental payments under non-cancelable operating lease commitments as of September 30, 2007 are as follows:

			Less Payments to
	Minimum		be Received from
Year Ending September 30,	Payments		Subleases		Net Payments
2008	$	2,217,000	$	888,000	$	1,329,000
2009		1,475,000		904,000		571,000
2010		1,530,000		680,000		850,000
2011		1,483,000		708,000		775,000
2012		1,223,000		736,000		487,000
Thereafter		352,000		216,000		136,000
Total	$	8,280,000	$	4,132,000	$	4,148,000

Legal contingencies.  In the ordinary course of business, we may face various claims brought by third parties and we may, from time to time, make claims or take legal actions to assert our rights, including intellectual property rights as well as claims relating to employment and the safety or efficacy of our products. Any of these claims could subject us to costly litigation and, while we generally believe that we have adequate insurance to cover many different types of liabilities, our insurance carriers may deny coverage or our policy limits may be inadequate to fully satisfy any damage awards or settlements. If this were to happen, the payment of any such awards could have a material adverse effect on our operations, cash flows and financial position. Additionally, any such claims, whether or not successful, could damage our reputation and business. Management believes the outcome of currently pending claims and lawsuits will not likely have a material effect on our operations or financial position.

In September 2007, a court awarded reimbursement of attorneys fees spent over a four-year period in connection with the enforcement of a settlement agreement entered into with a former employee. The total fees awarded were approximately $1.3 million. We cannot currently estimate the timing for collection or the probability of collecting the full amount.

Guarantees and Indemnities.  We indemnify our directors and officers to the maximum extent permitted under the laws of the State of California, and various lessors in connection with facility leases for certain claims arising from such facilities or leases. Additionally, the Company periodically enters into contracts that contain indemnification obligations, including contracts for the purchase and sale of assets, clinical trials, pre-clinical development work and securities offerings. These indemnification obligations provide the contracting parties with the contractual right to have Avanir pay for the costs associated with the defense and settlement of claims, typically in circumstances where Avanir has failed to meet its contractual performance obligations in some fashion.

The maximum amount of potential future payments under such indemnifications is not determinable. We have not incurred significant amounts related to these guarantees and indemnifications, and no liability has been recorded in the consolidated financial statements for guarantees and indemnifications as of September 30, 2007 and 2006.

F-34

Avanir Pharmaceuticals

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

13.   Notes Payable

As of September 30, 2007 and 2006, notes payable consist of the following:

	September 30,
	2007			2006
Senior notes with an interest rate of LIBOR + 1.33%; interest payable monthly; principal due May 2009, net of unamortized discount of $232,778 and $646,600, respectively	$	11,737,087		$	13,428,400
9.5% equipment loan due April 2008		174,224			451,405
7.9% business insurance financing repaid in June 2007		—			320,957
10.43% equipment loan due February 2009		65,442			106,170
10.17% equipment loan due January 2009		47,839			79,710
Total		12,024,592			14,386,642
Less: current portion		(254,676	)		(670,737	)
Total long-term notes payable	$	11,769,916		$	13,715,905

Senior Notes.  In connection with the Alamo Acquisition, we issued three promissory notes in the respective principal amounts of $14,400,000, $6,675,000 and $4,000,000 (the “First Note,” “Second Note” and “Third Note”, respectively) (collectively, the “Notes”). The Notes bear interest at an average rate equal to the London Inter-Bank Offered Rate, or “LIBOR,” plus 1.33%. The LIBOR rate at September 30, 2007 and 2006 was 5.12% and 5.33%, respectively. Interest accruing on the Notes is payable monthly and the principal amount of the Notes matures on May 24, 2009, provided that (i) the Selling Holders may demand early repayment of the First Note if the closing price of our common stock, as reported on the Nasdaq Global Market, equals or exceeds $15.00 per share for a total of 20 trading days in any 30 consecutive trading-day period (the “Stock Contingency”), and (ii) we must apply 20% of any future net offering proceeds from equity offerings to repay the Notes (starting with the First Note), and must repay the Notes in full if we have raised in an offering more than $100,000,000 in future aggregate net proceeds. In connection with the equity offering we completed in the fiscal year, and in accordance with the terms of the Notes, we used approximately $6.1 million or 20% of the net proceeds received to pay down the First Note. We classified the Notes as long term, because they are not reasonably expected to require any payments through fiscal 2008.

In connection with the Alamo acquisition, we agreed to pay up to an additional $39,450,000 in revenue-based earn-out payments, based on future sales of FazaClo. These earn-out payments are based on FazaClo sales in the U.S. from the closing date of the acquisition through December 31, 2018. Based on the results in the fiscal year 2007, we issued the first of these revenue-based payments through the issuance of an additional promissory note in the principal amount of $2,000,000 on May 15, 2007. We issued a second promissory note in the principal amount of $2,000,000 on August 15, 2007.

In connection with our sale of FazaClo in August 2007, we agreed to prepay $11 million of outstanding principal due under the Notes. Therefore, $8.3 million was applied against the First Note, reducing the balance to $0, and the remaining $2.7 million was applied to the Second Note.

We have the right to prepay, in cash or in common stock, the amounts due under the Notes at any time, provided that we may only pay the Notes in common stock if the Stock Contingency has occurred prior to the maturity date and if we have registered the shares on an effective registration statement filed with the SEC. If we elect to prepay the Notes with common stock, the shares will be valued at 95% of the average closing price of the common stock, as reported on the NASDAQ Global Market, for the five trading days prior to repayment, subject to a price floor.

We have concluded that the First Note, Second Note and Third Note had fair values of $14.0 million, $6.4 million, and $3.9 million, respectively at date of issuance. These fair value amounts were determined by

F-35

Avanir Pharmaceuticals

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

discounting the expected payments on the notes to present value based on an estimated market rate of 10.75%. The timing and amount of expected payments were determined by 1) the note repayment terms, 2) mandatory prepayments as a result of future financings, and 3) lender prepayment rights in the event a trigger event occurs. Mandatory prepayments were developed based upon management’s expectations regarding future financing activities. Trigger event likelihoods were determined based upon a Monte Carlo model using an expected annual volatility of 53%. The fair values are the amounts recognized for these notes as part of recording the business combination. We recorded the notes at their fair values at the acquisition date and are accreting the debt discount over the three-year periods of the notes as interest expense. Accretion of the debt discount for fiscal 2007 and 2006 was $414,000 and $85,000, respectively.

We also evaluated the three promissory notes for features that may be considered to be embedded derivatives under Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“FAS 133”). We concluded that the embedded derivatives shall not be bifurcated from the host contracts and accounted for separately as derivative instruments because they fail the test of not being clearly and closely related. Our assessment is based on the fact that the notes were not issued at a substantial discount to the face value, which is the first test for bifurcation from the host debt instrument.

Equipment Loans.  In September 2004, we entered into a finance agreement with GE Healthcare Financial Services (“GE Capital”) that provides for loans to purchase equipment, secured by the equipment purchased. The amount of capital equipment financed and subject to lien at September 30, 2007 and 2006 under the GE Capital finance agreement is approximately $288,000 and $637,000, respectively. The loans are for a term of 42 months at annual interest rates ranging from 9.5% to 10.4% per year with fixed monthly payments.

Aggregate annual maturities of notes payable as of September 30, 2007, are as follows:

	Minimum
Year Ending September 30,	Payments
2008	$	1,040,250
2009		12,582,533
Total		13,622,783
Less amount representing interest		(1,365,413	)
Present value of payments		12,257,370
Less unamortized discount		(232,778	)
Less current portion		(254,676	)
Long-term portion of obligation	$	11,769,916

14.   Shareholders’ Equity (Deficit)

The share and per share amounts and share prices have been adjusted for a one-for-four reverse stock split.

Preferred Stock

In March 1999, our Board of Directors approved a shareholder rights plan (the “Plan”) that provides for the issuance of Series C junior participating preferred stock to each of our shareholders of record under certain circumstances. None of the Series C junior participating preferred stock was outstanding on September 30, 2007 and 2006. The Plan provided for a dividend distribution of one preferred share purchase right (the “Right”) on each outstanding share of our common stock, payable on shares outstanding as of March 25, 1999 (the “Record Date”). All shares of common stock issued by the Company after the Record Date have been issued with such Rights attached. Subject to limited exceptions, the Rights would become exercisable if a person or group acquires 15% or more of our common stock or announces a tender offer for 15% or more of our common stock (a “Trigger Event”).

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If and when the Rights become exercisable, each Right will entitle shareholders, excluding the person or group causing the Trigger Event (an “Acquiring Person”), to buy a fraction of a share of our Series C junior participating preferred stock at a fixed price. In certain circumstances following a Trigger Event, each Right will entitle its owner, who is not an Acquiring Person, to purchase at the Right’s then current exercise price, a number of shares of common stock having a market value equal to twice the Right’s exercise price. Rights held by any Acquiring Person would become void and not be exercisable to purchase shares at the discounted purchase price.

Our Board of Directors may redeem the Rights at $0.01 per Right at any time before a person has acquired 15% or more of the outstanding common stock. The Rights will expire on March 25, 2009.

Common stock

Fiscal 2007.  In November 2006, we sold 5,263,158 shares of our common stock for aggregate gross offering proceeds of $15.0 million ($14.4 million after expenses). In connection with this offering, we issued warrants to purchase a total of 1,053,000 shares of our common stock at an exercise price of $3.30 per share. The warrants became exercisable beginning in May 2007 and all unexercised warrants expired in November 2007.

During fiscal 2007 we sold 6,125,632 shares of our common stock under our financing facility with Brinson Patrick Securities Corporation, raising net offering proceeds of $16.1 million. These offerings were made pursuant to our shelf registration statement on Form S-3 filed on July 22, 2005. Approximately $6.1 million of the net proceeds from these offerings were used to partially repay the outstanding principal balance of a note payable issued in the Alamo acquisition, with such repayment being made in accordance with the terms of the note. See Note 13 “Notes Payable”. As of December 14, 2007, 5.6 million shares remained available for sale under this facility. Sales are made under our effective shelf registration statement.

Also during fiscal 2007, we issued to employees 29,250 shares of restricted stock related to awards granted in fiscal 2006 and 15,000 shares of restricted stock at a weighted average grant date fair value of $7.34 and with a purchase price of $0.01 per share. In fiscal 2007, we also awarded 2,321,043 of restricted stock units with a grant date fair value of $1.74 and no purchase price per share.

During fiscal 2007, our CEO and CFO exercised their option to pay for minimum required withholding taxes associated with certain vested shares of their restricted stock awards by surrendering 16,943 and 1,192 shares of common stock, respectively, at an average market price of $2.19 and $3.38, respectively.

Fiscal 2006.  In October 2005, we issued and sold to certain institutional investors 1,523,585 shares of our common stock at a price of $10.60 per share, for aggregate net offering proceeds of approximately $16.2 million. In December 2005, we issued and sold to certain institutional investors 1,492,538 shares of our common stock at $13.40 per share, for aggregate offering proceeds of approximately $20.0 million and net offering proceeds of approximately $19.4 million, after deducting commissions and offering fees and expenses. These offerings were made pursuant to our shelf registration statement on Form S-3, filed with the SEC in June 2005.

In September 2006, our CEO exercised his option to pay for minimum required withholding taxes associated with certain vested shares of his restricted stock award by surrendering 29,775 shares of common stock at the market price of $6.73.

Also during fiscal 2006, we issued an aggregate of 1,352,382 shares of common stock in connection with the exercises of stock purchase warrants (827,575 shares at a weighted average price of $7.14 per share), employee stock options (524,807 shares at a weighted average price of $6.22 per share) and restricted stock awards (28,000 shares at a price of $0.00) for cash in the aggregate amount of approximately $9.2 million.

Fiscal 2005.  In September 2005, we issued to our CEO a restricted stock award to purchase 250,000 shares of common stock at an exercise price of $0.004 per share (“Restricted Stock”). The Restricted Stock is subject to a right of repurchase by us at the original issue price of $0.004 per share that lapsed as to one-third of the shares in September 2006 and lapses as to an additional one-twelfth of the shares quarterly thereafter. In September 2005, the

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award was exercised to purchase all of the 250,000 shares of Restricted Stock for total cash of $1,000. The fair value of the award totaled $3.6 million based on the 5-day average closing sales price beginning two days before, the day of, and two days after the date of the agreement. The value of the Restricted Stock was recorded as unearned compensation in a separate component of shareholders’ equity to be amortized as compensation expense ratably over the repurchase period of three years. Pursuant to FAS 123R, unamortized unearned compensation of $3.5 million at October 1, 2005 was eliminated against common stock upon the adoption of FAS 123R. See Note 2, “Significant Accounting Policies — Share-based Compensation.” During fiscal 2006 and 2005, $1.1 million and $78,000, respectively, was charged to compensation expense. As of September 30, 2006 and 2005, 83,335 and 0 shares, respectively, of the Restricted Stock were vested.

In April 2005, we issued and sold 1,942,500 shares of common stock in a registered direct offering at a price of $8.80 per share, for aggregate offering proceeds of approximately $17.1 million and net offering proceeds of approximately $15.9 million, after deducting commissions and offering fees and expenses. The offering was made pursuant to our shelf registration statement on Form S-3, filed with the SEC on April 9, 2004.

In March 2005, we issued 500,000 shares of common stock, with a fair value of $5.3 million, to IriSys, Inc. (“IriSys”) in connection with the acquisition of additional contractual rights to Zenvia, our late-stage drug candidate for the treatment of multiple central nervous system disorders. We valued these shares at $10.60 per share, based on the 5-day average closing price of our common stock, beginning two days before and ending two days after the close and announcement of the agreement on March 9, 2005. See Note 18, “Related Party Transactions,” for further discussions.

In December 2004, we issued and sold to an institutional investor, 583,333 shares of common stock at a price of $12.00 per share, for aggregate net offering proceeds of approximately $7 million. The offering was made pursuant to our shelf registration statement on Form S-3, filed with the SEC on April 9, 2004.

Also during fiscal 2005, we issued an aggregate of 239,459 shares of common stock in connection with the exercise of stock purchase warrants (211,486 shares at a weighted average price of $6.12 per share) and employee stock options (27,973 shares at a weighted average price of $4.48 per share) for cash in the aggregate amount of approximately $1.4 million.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

A summary of common stock transactions during fiscal 2007, 2006 and 2005 are shown below.

		Common Stock		Gross Amount		Average Price
Common Stock Issued and Warrants and Stock Options Exercised	Date	Shares		Received(1)		per Share(2)
Fiscal year ended September 30, 2007:
Private placement of common stock	November 2006		5,263,158	$	14,999,999	$	2.85
Private placement of common stock	Various		6,125,632		16,827,007	$	2.75
Restricted stock awards and restricted stock units	Various		128,150		—	$	—
Stock options	Various		67,758		294,699	$	4.33
Total			11,584,698	$	32,121,705
Fiscal year ended September 30, 2006:
Private placement of common stock	October 2005		1,523,585	$	16,150,001	$	10.60
Private placement of common stock	December 2005		1,492,538		19,400,002	$	13.00
Restricted stock award	Various		28,000		112	$	—
Stock options	Various		524,807		3,264,953	$	6.22
Warrants(3)	Various		827,575		5,908,997	$	7.14
Total			4,396,505	$	44,724,065
Fiscal year ended September 30, 2005:
Private placement of common stock	December 2004		583,333	$	6,999,999	$	12.00
Private placement of common stock	April 2005		1,942,500		17,094,000	$	8.80
Acquisition of certain contractual rights to Zenvia	March 2005		500,000		5,300,000	$	10.60
Restricted stock award	September 2005		250,000		1,000	$	—
Stock options	Various		27,974		125,491	$	4.49
Warrants(3)	Various		211,486		1,293,339	$	6.12
Total			3,515,293	$	30,813,829

(1)	Amount received represents the amount before the cost of financing and after underwriter’s discount, if any.
(2)	Average price per share has been rounded to two decimal places.
(3)	Includes 4,780 shares issued on a “cashless” exercise basis at an average exercise price of $4.20 per share.

Warrants

In November 2006, 1,053,000 shares of our common stock were issued in connection with a private placement offering at an exercise price of $3.30 per share. The warrants became exercisable in May 2007 and all unexercised warrants expired in November 2007. None of the warrants were exercised.

Between January 26, 2006 and February 7, 2006, we received proceeds of $4.7 million from the exercise of warrants to purchase 671,923 shares of common stock in connection with our call for redemption of a group of outstanding warrants. The warrants had been issued in connection with a financing transaction in December 2003 involving the sale of common stock and warrants (the “Warrants”). The exercise price of the Warrants was $7.00 per share. The Warrants had a five-year term, but included a provision that we could redeem the Warrants for $1.00 each if our stock price traded above twice the warrant exercise price for a certain period of time (the “Redemption Right”). On January 24, 2006, we sent the Warrant holders notice that the Redemption Right had been triggered

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and that the Warrants would expire, to the extent unexercised, on February 7, 2006. One of the warrants to purchase 25,167 shares of common stock expired unexercised.

Also during fiscal 2006, warrant holders exercised their rights to purchase an aggregate of 155,652 shares of common stock for total cash of $1.2 million. As of September 30, 2007, warrants to purchase 269,305 shares at $8.92 remained outstanding, in addition to the 1,053,000 warrants at $3.30 per share that expired in November 2007.

The following table summarizes all warrant activity for fiscal 2007, 2006 and 2005:

	Shares of			Weighted
	Common Stock			Average
	Purchasable Upon			Exercise Price		Range of
	Exercise of Warrants			per Share		Exercise Prices
Outstanding at September 30, 2004		1,333,539		$	7.32	$	5.52-$10.88
Exercised		(211,492	)	$	6.12	$	5.80-$8.76
Outstanding at September 30, 2005		1,122,047		$	7.56	$	7.00-$8.92
Exercised		(827,575	)	$	7.14	$	7.00-$8.92
Expired		(25,167	)	$	7.00	$	7.00
Outstanding at September 30, 2006		269,305		$	8.92	$	8.92
Issued		1,053,000		$	3.30	$	3.30
Outstanding at September 30, 2007		1,322,305		$	4.45	$	8.92

Employee Equity Incentive Plans

We currently have five equity incentive plans (the “Plans”): the 2005 Equity Incentive Plan (the “2005 Plan”), the 2003 Equity Incentive Plan (the “2003 Plan”), the 2000 Stock Option Plan (the “2000 Plan”), the 1998 Stock Option Plan (the “1998 Plan”) and the 1994 Stock Option Plan (the “1994 Plan”), which are described below. All of the Plans were approved by the shareholders, except for the 2003 Equity Incentive Plan, which was approved solely by the Board of Directors. Share-based awards are subject to terms and conditions established by the Compensation Committee of our Board of Directors. Our policy is to issue new common shares upon the exercise of stock options, conversion of share units or purchase of restricted stock.

During fiscal 2007 and 2006, we granted share-based awards under both the 2003 Plan and the 2005 Plan. Under the 2003 Plan and 2005 Plan, options to purchase shares, restricted stock units, restricted stock and other share-based awards may be granted to our employees and consultants. Under the Plans, as of September 30, 2007, we had an aggregate of 3,856,015 shares of our common stock reserved for issuance. Of those shares, 2,933,069 were subject to outstanding options and other awards and 922,946 shares were available for future grants of share-based awards. We also issued share-based awards outside of the Plans. As of September 30, 2007, options to purchase 45,000 shares of our common stock that were issued outside of the Plans (inducement option grants) are outstanding. None of the share-based awards is classified as a liability as of September 30, 2007.

2005 Equity Incentive Plan.  On March 17, 2005, our shareholders approved the adoption of the 2005 Plan that initially provided for the issuance of up to 500,000 shares of common stock, plus an annual increase beginning in fiscal 2006 equal to the lesser of (a) 1% of the shares of common stock outstanding on the last day of the immediately preceding fiscal year, (b) 325,000 shares of common stock, or (c) such lesser number of shares of common stock as the board of directors shall determine. Pursuant to the provisions of annual increases, the number of authorized shares of common stock for issuance under the 2005 Plan increased by 273,417 shares effective November 16, 2005 and increased an additional 317,084 shares to 1,090,501 shares effective November 30, 2006. In February 2006, our shareholders eliminated the limitation on the number of shares of common stock that may be

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

issued as restricted stock under the 2005 Plan. The 2005 Plan allows us to grant options, restricted stock awards and stock appreciation rights to our directors, officers, employees and consultants. As of September 30, 2007, 204,047 shares of common stock remained available for issuance under the 2005 Plan.

2003 Equity Incentive Plan.  On March 13, 2003, the board of directors approved the adoption of the 2003 Plan that provides for the issuance of up to 625,000 shares of common stock, plus an annual increase beginning January 2004 equal to the lesser of (a) 5% of the number of shares of common stock outstanding on the immediately preceding December 31, or (b) a number of shares of common stock set by the board of directors. Pursuant to the provisions of annual increases, the number of authorized shares of common stock for issuance under the 2003 Plan increased by 1,528,474 shares to 2,153,474 effective November 30, 2005. The 2003 Plan allows us to grant options, restricted stock awards and stock appreciation rights to our directors, officers, employees and consultants. As of September 30, 2007, 151,817 shares of common stock remained available for issuance under the 2003 Plan. On August 3, 2007, the number of shares of common stock available for issuance under the 2003 Plan increased by 1,857,928 shares to 4,011,402 shares in accordance with the provisions for increases set by the Board of Directors under the 2003 Plan.

2000 Stock Option Plan.  On March 23, 2000, our shareholders approved the adoption of the 2000 Plan, pursuant to which an aggregate of 575,000 shares of our common stock have been reserved for issuance. On March 14, 2002, our shareholders approved an amendment to the 2000 Plan to increase the number of shares of common stock issuable under the Plan by 250,000 shares, for an aggregate of 825,000 shares. On March 13, 2003, we amended the 2000 Plan to allow for the issuance of restricted stock awards. As of September 30, 2007, 482,608 shares of common stock were available for grant under the 2000 Plan.

1998 Stock Option Plan.  On February 19, 1999, our shareholders approved the 1998 Plan. The 1998 Plan as amended in 2002 provides for the issuance of up to an aggregate of 468,750 shares of common stock. The 1998 Plan allows us to grant options to our directors, officers, employees and consultants. As of September 30, 2007, options to purchase 84,474 shares of common stock were available for grant under the 1998 Plan.

Stock Options.  Stock options are granted with an exercise price equal to the current market price of our common stock at the grant date and have 10-year contractual terms. Options awards typically vest in accordance with one of the following schedules:

a. 25% of the option shares vest and become exercisable on the first anniversary of the grant date and the remaining 75% of the option shares vest and become exercisable quarterly in equal installments thereafter over three years;

b. One-third of the option shares vest and become exercisable on the first anniversary of the grant date and the remaining two-thirds of the option shares vest and become exercisable daily or quarterly in equal installments thereafter over two years; or

c. Options fully vest and become exercisable at the date of grant.

Certain option awards provide for accelerated vesting if there is a change in control (as defined in the Plans).

Summaries of stock options outstanding and changes during fiscal 2007, 2006 and 2005 are presented below.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

						Weighted Average
				Weighted Average		Remaining		Aggregate
				Exercise Price per		Contractual Term		Intrinsic
	Number of Shares			Share		(in Years)		Value
Outstanding, September 30, 2004		1,313,398		$	7.80
Granted		379,875		$	12.60
Exercised		(27,974	)	$	4.48
Forfeited		(56,641	)	$	14.18
Expired		(8,624	)	$	13.75
Outstanding, September 30, 2005		1,600,034		$	8.76
Granted		658,312		$	10.83
Exercised		(524,807	)	$	6.22
Forfeited		(146,094	)	$	12.68
Expired		(375	)	$	10.00
Outstanding, September 30, 2006		1,587,070		$	10.07
Granted		490,161		$	4.47
Exercised		(67,758	)	$	4.33
Forfeited		(960,767	)	$	10.22
Expired		(8,125	)	$	7.89
Outstanding, September 30, 2007		1,040,581		$	7.69		6.9	$	130,000
Vested and expected to vest in the future, September 30, 2007		714,230		$	8.68		5.8	$	47,000
Exercisable, September 30, 2007		458,240		$	9.85		4.0	$	—
Exercisable, September 30, 2006		765,411		$	8.98
Exercisable, September 30, 2005		1,257,896		$	7.92

The weighted average grant-date fair values of options granted during fiscal 2007, 2006 and 2005 were $2.12, $6.85 and $11.36 per share, respectively. The total intrinsic value of options exercised during fiscal 2007, 2006 and 2005 was approximately $271,000, $4.6 million and $228,000, respectively, based on the differences in market prices on the dates of exercise and the option exercise prices. As of September 30, 2007, the total unrecognized compensation cost related to options was $1.7 million, which is expected to be recognized over a weighted-average period of 2.1 years, based on the vesting schedules.

The fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton option pricing model (“Black-Scholes model”) that uses the assumptions noted in the following table. Expected volatilities are based on historical volatility of our common stock and other factors. The expected term of options granted is based on analyses of historical employee termination rates and option exercises. The risk-free interest rates are

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based on the U.S. Treasury yield for a period consistent with the expected term of the option in effect at the time of the grant.

Assumptions used in the Black-Scholes model for options granted during fiscal 2007, 2006 and 2005 were as follows:

	2007	2006	2005
Expected volatility	75.0% — 113.4%	77.4% — 80.4%	76.6% — 130.2%
Weighted-average volatility	93.7%	78.4%	95.5%
Average expected term in years	6.0	4.5	3.4
Risk-free interest rate (zero coupon U.S. Treasury Note)	4.3% — 4.7%	4.5%	3.8%
Expected dividend yield	0%	0%	0%

The following table summarizes information concerning outstanding and exercisable stock options as of September 30, 2007:

	Options Outstanding
			Weighted				Options Exercisable
			Average		Weighted				Weighted
			Remaining		Average				Average
	Number		Contractual		Exercise		Number		Exercise
Range of Exercise Prices	Outstanding		Life in Years		Price		Exercisable		Price
$ 1.20-$ 1.29		150,960		9.5	$	1.28		—	$	—
$ 2.30-$ 2.88		154,685		9.1	$	2.44		13,904	$	2.88
$ 2.92-$ 6.80		154,429		5.3	$	5.64		98,492	$	5.63
$ 6.92-$ 9.92		175,169		5.4	$	8.12		96,272	$	8.37
$10.24-$11.76		243,354		5.7	$	11.40		163,752	$	11.26
$12.12-$16.60		148,709		7.7	$	14.14		72,545	$	13.92
$19.38		13,275		3.8	$	19.38		13,275	$	19.38
		1,040,581		6.9	$	7.69		458,240	$	9.85

Restricted stock units.  RSUs generally vest based on three years of continuous service and may not be sold or transferred until the awardee’s termination of service. The following table summarizes the RSU activities for fiscal 2007:

				Weighted Average
				Grant Date
	Number of Shares			Fair Value
Unvested, October 1, 2006		51,480		$	15.54
Granted		2,321,043		$	1.74
Vested		(83,900	)	$	2.76
Forfeited		(373,635	)	$	1.19
Unvested, September 30, 2007		1,914,988		$	2.17

The weighted average grant-date fair value of RSUs granted during fiscal 2007 and 2006 was $1.74 and $15.54 per unit, respectively. There were no RSUs granted in fiscal 2005. The fair value of RSUs vested during fiscal 2007 was $232,000 and no shares vested in fiscal 2006. No RSUs were granted during fiscal 2005. As of September 30, 2007, the total unrecognized compensation cost related to unvested shares was $2.9 million, which is expected to be recognized over a weighted-average period of 2.5 years, based on the vesting schedules.

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Restricted stock awards.  Restricted stock awards are grants that entitle the holder to acquire shares of restricted common stock at a fixed price, which is typically nominal. The shares of restricted stock cannot be sold, pledged, or otherwise disposed of until the award vests and any unvested shares may be reacquired by us for the original purchase price following the awardee’s termination of service. The restricted stock awards typically vest on the second or third anniversary of the grant date or on a graded vesting schedule over three years of employment. A summary of our unvested restricted stock awards at September 30, 2007 and 2006 and changes during fiscal 2007 are presented below.

				Weighted Average
				Grant Date
	Number of Shares			Fair Value
Unvested, October 1, 2006		223,915		$	13.48
Granted		15,000		$	7.34
Vested		(58,749	)	$	12.68
Forfeited		(157,666	)	$	13.42
Unvested, September 30, 2007		22,500		$	11.87

The weighted average grant-date fair value of restricted stock awards granted in fiscal 2007 and 2006 was $7.34 and $11.34, respectively. The fair value of restricted stock awards vested in fiscal 2007 and 2006 was $745,000 and $1.2 million, respectively. No restricted stock awards vested in fiscal 2005. As of September 30, 2007, the total unrecognized compensation cost related to unvested shares was $164,000, which is expected to be recognized over a weighted-average period of 0.5 years.

During fiscal 2007, 2006 and 2005, we received a total of approximately $295,000, $3.3 million and $126,000, respectively, in cash from exercised options and restricted stock awards under all share-based payment arrangements. No tax benefit was realized for the tax deductions from option exercise of the share-based payment arrangements in fiscal 2007, 2006 and 2005.

Review of Stock Options Practices and Related Accounting.  On July 28, 2006, the Public Company Accounting Oversight Board (PCAOB) issued Staff Audit Practice Alert No. 1 entitled, “Matters Relating to Timing and Accounting for Options Grants.” Prompted by the PCAOB release, the Company and the independent audit committee of the Board of Directors authorized a review of the Company’s historical stock option practices. The review was conducted with the assistance of an outside law firm and an outside consulting firm.

As a result of this review one exception was found in which the measurement date for 50,000 fully vested common stock options was determined to be later than the day that the Compensation Committee had initially met to approve the awards. Based on this, the Company should have recorded a non-cash charge of $302,500 and a corresponding increase in common stock in the first quarter of fiscal year 2000. The Company has concluded that this adjustment is not material to the Company’s consolidated financial statements in any interim or annual period presented in this or any previously filed Form 10-K. Therefore, the charge was recognized in the quarter ended September 30, 2006.

Based upon this review, management and the independent audit committee of the Board of Directors were satisfied that no evidence was found that indicated that the Company otherwise intentionally manipulated stock option grant dates or was remiss in communicating grants to optionees in a timely manner. Further, the Company’s documentation and practices followed the intent of the Board of Directors in granting such options and that the methods of approval and the Company’s practices did not provide for management discretion in selecting or manipulating the option grant dates.

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Avanir Pharmaceuticals

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

15.   Research and Licensing Agreements

Center for Neurologic Study (“CNS”) — We hold the exclusive worldwide marketing rights to Zenvia for certain indications pursuant to an exclusive license agreement with CNS. We will be obligated to pay CNS up to $400,000 in the aggregate in milestones to continue to develop Zenvia for both IEED/PBA and diabetic peripheral neuropathic pain (“DPN pain”), assuming they are both approved for marketing by the FDA. We are not currently developing, nor do we have an obligation to develop, any other indications under the CNS license agreement. In fiscal 2005, we paid $75,000 to CNS under the CNS license agreement, and will need to pay a $75,000 milestone if the FDA approves Zenvia for the treatment of IEED/PBA. In addition, we are obligated to pay CNS a royalty on commercial sales of Zenvia with respect to each indication, if and when the drug is approved by the FDA for commercialization. Under certain circumstances, we may have the obligation to pay CNS a portion of net revenues received if we sublicense Zenvia to a third party. Under our agreement with CNS, we are required to make payments on achievements of up to a maximum of ten milestones, based upon five specific medical indications. Maximum payments for these milestone payments could total approximately $2.1 million if we pursued the development of Zenvia for all of the licensed indications. Of the clinical indications that we currently plan to pursue, expected milestone payments could total $800,000. In general, individual milestones range from $150,000 to $250,000 for each accepted new drug application (“NDA”) and a similar amount for each approved NDA. In addition, we are obligated to pay CNS a royalty ranging from approximately 5% to 7% of net revenues.

Eurand, Inc.  In August 2006, we entered into a development and license agreement (“Eurand Agreement”) with Eurand, Inc. (“Eurand”), under which Eurand will provide research and development services (“R&D”) using Eurand’s certain proprietary technology to develop a once-a-day controlled release capsule, a new formulation, of Zenvia for the treatment of IEED/PBA (“Controlled-Release Zenvia”). Under the terms of the Eurand Agreement, we will pay Eurand for development services on a time and material basis. We will be required to make payments up to $7.6 million contingent upon achievement of certain development milestones and up to $14.0 million contingent upon achievement of certain sales targets. In addition, we will be required to make royalty payments based on sales of Controlled-Release Zenvia. No such payments were made in fiscal 2007. We have recorded $283,000 in fees and services relating to the Eurand Agreement in fiscal 2006.

CIMA Labs Inc. Royalty Agreement. — In connection with the Alamo Acquisition, we acquired a development, license and supply agreement with CIMA Labs Inc., which holds intellectual property rights related to certain aspects of the development and production of FazaClo (the “FazaClo Supply Agreement”). The FazaClo Supply Agreement was assigned to Azur in connection with the sale of FazaClo.

The FazaClo Supply Agreement granted, through our Alamo subsidiary, an exclusive license to us to market, distribute and sell FazaClo. The FazaClo Supply Agreement provided royalty rates of 5% to 6%, based on annual net revenue and minimum annual royalty targets set forth in the agreement. Minimum future annual royalty payments under the agreement were as follows:

Twelve-month period ending September 30:

2006	$	250,000
2007	$	300,000
2008 and each year thereafter	$	400,000

Royalty expense was recognized in cost of product sales when revenue from FazaClo shipments was recognized. As of September 30, 2007, $665,000 in royalty costs were paid and are classified under loss from discontinued operations. As of September 30, 2006, $106,000 in royalty costs were paid but not recognized as expense and are included in current assets of discontinued operations in the accompanying consolidated balance sheet.

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Avanir Pharmaceuticals

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

16.   License and Research Collaboration Agreements

AstraZeneca UK Limited (“AstraZeneca”).  In July 2005, we entered into an exclusive license and research collaboration agreement with AstraZeneca regarding the license of certain compounds for the potential treatment of cardiovascular disease. In March 2007, the Research Collaboration and License Agreement was mutually terminated. Pursuant to the agreement, AstraZeneca was required to pay the Company for certain research services for a period of up to three years. Included in other income in fiscal 2007 is a one-time termination fee in the amount of $1,250,000.

Under the terms of the agreement, we were eligible to receive royalty payments, assuming the licensed product was successfully developed by AstraZeneca and approved for marketing by the FDA. We were also eligible to receive up to $330 million in milestone payments contingent upon AstraZeneca’s performance and achievement of certain development and regulatory milestones, which could take several years of further development, including achievement of certain sales targets, if a licensed compound was approved for marketing by the FDA. Pursuant to the agreement with AstraZeneca, we could also perform certain research activities directed and funded by AstraZeneca.

Under this agreement, we received a license fee of $10 million in July 2005 that we recognized as revenue upon delivery of certain physical quantities of compounds, the designs of the compounds and structure-activity relationships, the conceptual framework and mechanism of action, and the rights to the patents or patents pending for such compounds. In determining whether the license had standalone value from the research activities, which was one of the necessary conditions for allocating revenue under a multiple deliverable arrangement, we concluded that AstraZeneca had the ability to continue development of the licensed compounds without our expertise and knowledge. AstraZeneca controls all aspects of development of the lead compound and other compounds that were provided by us under the agreement, and was solely responsible for ongoing development costs and efforts. We were not obligated to, and do not, take part in the ongoing development of any of the compounds, nor was our expertise and knowledge necessary for AstraZeneca’s continued development.

Also under the agreement, AstraZeneca was paying us for certain research services of between $2.5 million and $4.0 million a year for a period of up to three years. Such research services that we provided to AstraZeneca were for specific projects and research activities assigned and directed by AstraZeneca that were primarily in connection with discovery of a screening assay, which was a unique method of testing or screening for additional compounds that could be used for the same therapeutic target. Such additional research and testing activities performed by us were not necessary for the successful development of the licensed compounds. Further, a reduction in, or termination of, the research services under the agreement did not affect other rights and obligations under the agreement, including the license grant to AstraZeneca, our right to keep the license fees already received from AstraZeneca, and the milestone and royalty payments that we would have been entitled to receive if the licensed compounds were successfully developed and commercialized by AstraZeneca. The rate being billed by us for the services represented fair value for such services, and was consistent with average rates charged by contract research organizations and other similar service providers in the biopharmaceutical industry.

In accordance with EITF 00-21, we determined that the license fee and research and development services were separate units of accounting, because the license had value to AstraZeneca on a standalone basis, there was objective and reliable evidence of the fair value of the undelivered research collaboration services and there was no right of return or refund relative to the license. We determined that the license fee had a standalone value because similar technology was sold separately by other vendors and AstraZeneca had the ability to sell or transfer the license. Revenue from research and development services was recognized during the period in which the services were performed and was based upon the number of FTE personnel working on the project at the agreed-upon rates. Payments related to substantive, performance-based milestones were recognized as revenue upon the achievement of the milestones as specified in the agreement.

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Avanir Pharmaceuticals

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

As of September 30, 2005, we had delivered the license and therefore, we recognized the $10.0 million up-front payment as revenue in fiscal 2005. In fiscal 2006, we recognized $5.0 million revenue upon achievement of the first milestone. In addition, we have recorded research and development services and direct cost reimbursement revenues of approximately $1.2 million, $5.8 million and $825,000 in fiscal 2007, 2006 and 2005, respectively.

Novartis International Pharmaceutical Ltd. (“Novartis”).  In April 2005, we entered into an exclusive Research Collaboration and License Agreement with Novartis regarding the license of certain compounds that regulate macrophage migration inhibitory factor (“MIF”) in the treatment of various inflammatory diseases. For two years, we provided research support services to Novartis under this agreement and, in March 2007, Novartis made the decision to continue the MIF research program internally. As a result, the research collaboration portion of this agreement was not renewed. Under the terms of the agreement, AVANIR is eligible to receive over $200 million in combined upfront and milestone payments upon achievement of development, regulatory, and sales objectives. AVANIR is also eligible to receive escalating royalties on any worldwide product sales generated from this program.

In May 2005, under the terms of this agreement, we received a data transfer fee of $2.5 million that we recognized as revenue upon the transfer and delivery of certain physical quantities of compounds that regulate MIF, the designs of the compounds and structure-activity relationships, the conceptual framework and mechanism of action, and the rights to the patents or patents pending for such compounds. In determining whether the license had standalone value from the research activities, we concluded that Novartis had the ability to continue development of the licensed compounds without our expertise and knowledge. Novartis controlled all aspects of development of the licensed compounds that were provided by us under the agreement, and was solely responsible for ongoing development costs and efforts. We were not obligated to, and do not, take part in the ongoing development of any of the compounds, nor was our expertise and knowledge necessary for Novartis’ continued development.

Also under the agreement, Novartis was paying us for certain research services of between $1.5 million and $2.5 million a year for two years from the date of the agreement. Such research services that we provided to Novartis were for specific projects and research activities assigned and directed by Novartis. Such additional research and testing activities performed by us were not necessary for the successful development of the licensed compounds. Further, a reduction in, or termination of, the research services under the agreement did not affect other rights and obligations under the agreement, including the license grant to Novartis, our right to keep the data transfer fee already received from Novartis, and the milestone and royalty payments that we were entitled to receive if one or more of the licensed compounds were successfully developed and commercialized by Novartis. The rate being billed by us for the services represents fair value for such services, and was consistent with average rates charged by contract research organizations and other similar service providers in the biopharmaceutical industry.

In accordance with EITF 00-21, we determined that the license fee and research and development services were separate units of accounting, because the license had value to Novartis on a standalone basis, there was objective and reliable evidence of the fair value of the undelivered research collaboration services and there was no right of return or refund relative to the license. We determined that the license fee had a standalone value because similar technology was sold separately by other vendors and Novartis had the ability to sell or transfer the license. Revenue from research and development services was recognized during the period in which the services were performed and was based upon the number of FTE personnel working on the project at the agreed-upon rates. Payments related to substantive, performance-based milestones were recognized as revenue upon the achievement of the milestones as specified in the agreement.

As of September 30, 2005, we had delivered the license and therefore, we recognized the $2.5 million up-front payment as revenue in fiscal 2005. In addition, we have recorded research and development services revenue of approximately $1.2 million, $2.0 million and $682,000 in fiscal 2007, 2006 and 2005, respectively.

HBI Docosanol License Agreement — In July 2006, we entered into an exclusive license agreement with Healthcare Brands International, pursuant to which we granted to HBI the exclusive rights to develop and

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Avanir Pharmaceuticals

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

commercialize docosanol 10% in the following countries: Austria, Belgium, Czech Republic, Estonia, France, Germany, Hungary, Ireland, Latvia, Lithuania, Luxembourg, Malta, The Netherlands, Poland, Portugal, Russia, Slovakia, Slovenia, Spain, Ukraine and the United Kingdom. The HBI License Agreement automatically expires on a country-by-country basis upon the later to occur of (a) the 15th anniversary of the first commercial sale in each respective country in the Licensed Territory or (b) the date the last claim of any patent licensed under the HBI License Agreement expires or is invalidated that covers sales of licensed products in each such country in the Licensed Territory. In April 2007, we recognized approximately $1.4 million of deferred revenue when we met the initial data transfer obligation under the license agreement. We received a payment of approximately $1.5 million in August 2007 due the European regulatory approval and clearance to sell. No revenue was generated from this license agreement in 2006.

Kobayashi Docosanol License Agreement — In January 2006, we signed an exclusive license agreement with Kobayashi Pharmaceutical Co., Ltd., a Japanese corporation, to allow Kobayashi to market in Japan medical products that are curative of episodic outbreaks of herpes simplex or herpes labialis and that contain a therapeutic concentration of our docosanol 10% cream either as the sole active ingredient or in combination with any other ingredient, substance or compound. The Kobayashi License Agreement automatically expires upon the latest to occur of (1) the tenth anniversary of the first commercial sale in Japan, (2) the last expiration date of any patent licensed under the Kobayashi License Agreement, or (3) the last date of expiration of the post marketing surveillance period in Japan. We recognized approximately $227,000 and approximately $121,000 of deferred revenue in fiscal 2007 and 2006, respectively.

Boryung Pharmaceuticals Company Ltd (“Boryung”).  In March 1994, we entered into a 12-year exclusive license and supply agreement with Boryung, giving them the rights to manufacture and sell docosanol 10% cream in the Republic of Korea. Under the terms of the agreement, Boryung is responsible for manufacturing, marketing, sales and distribution of docosanol 10% cream, and paying a royalty to us on product sales. The agreement includes a supply provision under which Boryung purchases from us its entire requirement of active ingredient for use in the manufacture of topical docosanol 10% cream. Boryung launched the product, Herepair, in June 2002.

GlaxoSmithKline Subsidiary, SB Pharmco Puerto Rico, Inc. (“GlaxoSmithKline”).  On March 31, 2000, we signed an exclusive license agreement with GlaxoSmithKline (NYSE: GSK) for rights to manufacture and sell Abreva (docosanol 10% cream) as an over-the-counter product in the United States and Canada as a treatment for recurrent oral-facial herpes. Under the terms of the license agreement, GlaxoSmithKline Consumer Healthcare is responsible for all sales and marketing activities and the manufacturing and distribution of Abreva in North America. The terms of the license agreement provide for us to earn royalties on product sales. In October 2000 and August 2005, GlaxoSmithKline launched Abreva in the United States and Canada, respectively. All milestones under the agreement were earned and paid prior to fiscal 2003. During fiscal 2003, we sold an undivided interest in the GlaxoSmithKline license agreement to Drug Royalty with a term until the later of December 13, 2013 or until the expiration of the patent for Abreva. (See Note 11, “Deferred Revenues.”)

Bruno Farmaceutici (“Bruno”).  In July 2002, we entered into an agreement with Bruno giving them the rights to manufacture and sell docosanol 10% cream in Italy, Europe’s fourth largest market for the topical treatment of cold sores. The agreement requires that Bruno purchase its entire requirement of raw materials from us and pay us a royalty on product sales. Docosanol 10% cream is not yet approved for marketing in Italy. Bruno is responsible for obtaining regulatory approval in Italy. This agreement will continue until the fifteenth anniversary of the first shipment date. In September 2007 we recognized $75,000 of revenue that was deferred in fiscal 2004. No revenue was recognized in relation to this agreement in 2006 or 2005.

P.N. Gerolymatos SA. (“Gerolymatos”).  In May 2004, we signed an exclusive agreement with Gerolymatos giving them the rights to manufacture and sell docosanol 10% cream as a treatment for cold sores in Greece, Cyprus, Turkey and Romania. Under the terms of the agreement, Gerolymatos will be responsible for all sales and marketing activities, as well as manufacturing and distribution of the product. The terms of the agreement provide for us to receive a license fee, royalties on product sales and milestones related to product approvals in Greece,

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Avanir Pharmaceuticals

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Cyprus, Turkey and Romania. This agreement will continue until the latest of the 12th anniversary of the first commercial sale in each of those respective countries, or the date that the patent expires, or the last date of the expiration of any period of data exclusivity in those countries. Gerolymatos is also responsible for regulatory submissions to obtain marketing approval of the product in the licensed territories. In September 2006, we recognized approximately $18,000 for the sale of docosanol. In January 2005, we received a milestone payment of $100,000. No revenues were recognized from this agreement in fiscal 2007.

ACO HUD.  In September 2004, we signed an exclusive agreement with ACO HUD giving them the rights to manufacture and sell docosanol 10% cream as a treatment for cold sores in Sweden, Norway, Denmark and Finland. Stockholm-based ACO HUD is the Scandinavian market leader in sales of cosmetic and medicinal skincare products. ACO HUD launched the product in fiscal 2005. Under the terms of the agreement, ACO HUD will be responsible for all sales and marketing activities, as well as manufacturing and distribution of the product. The terms of the agreement provide for us to receive a license fee, royalties on product sales and milestones related to product approvals in Norway, Denmark and Finland. This agreement will continue until either: 15 years from the anniversary of the first commercial sale in each of those respective countries, or, until the date that the patent expires, or, the last date of the expiration of any period of data exclusivity in those countries, whichever occurs last. ACO HUD is also responsible for regulatory submissions to obtain marketing approval of the product in the licensed territories. Royalties in the amount of approximately $115,000 and $100,000 were recorded in September 2007 and May 2005, respectively. No royalties were recognized from this agreement in fiscal 2006.

Government research grants.  We are also engaged in various research programs funded by government research grants. The government research grants are to be used for conducting research on various docosanol-based formulations for a potential genital herpes product and development of antibodies to anthrax toxins. In June 2006, we were notified that we had been awarded a $2.0 million research grant from the NIH for ongoing research and development related to our anthrax antibody. In May 2007, we were notified that we had been awarded a one-year extension of our $2.0 million research grant from the NIH/NIAID for ongoing research and development related to our 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. The balance remaining under the research grants as of September 30, 2007 and 2006 was approximately $1.1 million and $2.0 million, respectively.

17.   Income Taxes

Components of the income tax benefit (provision) are as follows for the fiscal years ended September 30:

	2007			2006			2005
Current:
State and foreign	$	(3,200	)	$	(2,430	)	$	(1,813	)
Deferred:
Federal		7,011,828			20,625,828			10,143,270
State and foreign		714,424			(540,800	)		5,017,269
		7,726,252			20,085,028			15,160,539
Increase in deferred income tax asset valuation allowance		(7,726,252	)		(20,085,028	)		(15,160,539	)
Total income tax provision	$	(3,200	)	$	(2,430	)	$	(1,813	)

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Avanir Pharmaceuticals

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Deferred income taxes reflect the income tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our net deferred income tax balance were as follows:

	September 30,
	2007			2006
Net operating loss carryforwards	$	75,965,310		$	64,594,100
Deferred revenue		6,118,100			9,274,407
Research credit carryforwards		10,295,636			9,682,998
Capitalized research and development costs		1,379,468			1,800,079
Capitalized license fees and patents		3,724,831			4,037,033
Share-based compensation and options		1,946,490			1,136,117
Purchased intangible assets		—			450,751
Foreign tax credits		595,912			595,912
Other		1,387,534			2,036,885
Deferred income tax assets		101,413,281			93,608,282
Deferred tax liabilities:
Other		(78,748	)		—
Deferred tax liabilities		(78,748	)		—
Less valuation allowance for net deferred income tax assets		(101,334,533	)		(93,608,282	)
Net deferred tax assets / (liabilities)	$	—		$	—

We have provided a full valuation allowance against the net deferred income tax assets recorded as of September 30, 2007 and 2006 as we concluded that they are unlikely to be realized. As of September 30, 2007 we had federal and state net operating loss carryforwards of $200,400,000 and $127,000,000, respectively. As of September 30, 2007 we had federal and California research and development credits of $6,600,000 and $5,600,000, respectively. The net operating loss and research credit carryforwards begin to expire in 2011, unless previously utilized. In the event of certain ownership changes, the Tax Reform Act of 1986 imposes certain restrictions on the amount of net operating loss and credit carry forwards that we may use in any year.

A reconciliation of the federal statutory income tax rate and the effective income tax rate is as follows for the fiscal years ended September 30:

	2007			2006			2005
Federal statutory rate		(34	)%		(34	)%		(34	)%
Increase in deferred income tax asset valuation allowance		36			32			50
State income taxes, net of federal effect		(6	)		(5	)		(6	)
Research and development credits		(4	)		(2	)		(5	)
Expired net operating loss and other credits		6			2			—
Other		2			7			(5	)
Effective income tax rate		0	%		0	%		0	%

18.   Employee Savings Plan

We have established an employee savings plan pursuant to Section 401(k) of the Internal Revenue Code. The plan allows participating employees to deposit into tax deferred investment accounts up to 50% of their salary,

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Avanir Pharmaceuticals

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

subject to annual limits. We are not required to make matching contributions under the plan. However, we voluntarily contributed $206,000 in fiscal 2007, $132,000 in fiscal 2006 and $96,000 in fiscal 2005 to the plan.

19.   Segment Information

We operate our business on the basis of a single reportable segment, which is the business of discovery, development and commercialization of novel therapeutics for chronic diseases. Our chief operating decision-maker is the Chief Executive Officer, who evaluates our company as a single operating segment.

We categorize revenues by geographic area based on selling location. All our operations are currently located in the United States; therefore, total revenues for fiscal 2007, 2006 and 2005 are attributed to the United States. All long-lived assets at September 30, 2007 and 2006 are located in the United States. The evaluation for impairment of goodwill is done as the single operating segment.

Revenues derived from our license agreements with AstraZeneca and Novartis accounted for approximately 5% and 5%, respectively, of our total revenues in fiscal 2007 and 71% and 13%, respectively, of our total revenues in fiscal 2006 and 66% and 19%, respectively, of our total revenues in fiscal 2005. Approximately 11%, 13% and 10% of our total revenues in fiscal 2007, 2006 and 2005, respectively, are derived from our license agreement with GlaxoSmithKline and the sale of rights to royalties under that agreement. Net receivables from AstraZeneca and Novartis accounted for approximately 10% and 19%, respectively, of our net receivables at September 30, 2007 and 26% and 3%, respectively, of our total net receivables at September 30, 2006.

The wholesale value of FazaClo shipments, net of returns, to McKesson Corporation, AmeriSourceBergen Corporation and Cardinal Health were 37%, 20% and 26%, respectively, of our total net shipments totaling $19.2 million in fiscal 2007. Such amounts are disclosed in discontinued operations for fiscal 2007. The wholesale value of FazaClo shipments, net of returns, to McKesson Corporation, AmeriSourceBergen Corporation and Cardinal Health were 53%, 18% and 16%, respectively, of our total net shipments totaling $6.2 million in fiscal 2006. Such amounts are disclosed in discontinued operations for fiscal 2007. (See Note 3 “Acquisition of Alamo Pharmaceuticals, Inc. / Sale of FazaClo”.)

20.   Related Party Transactions

IriSys Research and Development, LLC

License Agreement.  On August 1, 2000, we entered into an agreement with IriSys Inc. (formerly IriSys Research and Development, LLC) to sublicense the exclusive worldwide rights to a patented drug formulation, Zenvia, to treat multiple central nervous system disorders (“Sublicense Agreement”). IriSys held exclusive rights to Zenvia under an Exclusive Patent License Agreement with the Center for Neurologic Study (“CNS”), dated April 2, 1997 (the “License Agreement”). Under the Sublicense Agreement, we were obligated to make certain payments upon achieving certain specified milestones, royalties on product sales and a specified percentage of any future royalties that we might have received from potential licensees. We had never made any payments nor were any payments due to IriSys under the Sublicense Agreement.

In March 2005, we entered into an Asset Purchase Agreement, pursuant to which our wholly owned subsidiary, Avanir Holding Company, acquired from IriSys certain additional contractual rights to Zenvia. As a result, through our wholly owned subsidiary we hold the exclusive worldwide marketing rights to Zenvia for certain indications as set forth under the License Agreement and have no further license arrangements with IriSys. We will be obligated to pay CNS milestone payments upon achievement of certain future events relating to the FDA’s regulatory approval process for Zenvia and a royalty on commercial sales of Zenvia, if and when the drug is approved by the FDA for commercialization. Under certain circumstances, we may have the obligation to pay CNS a share of net revenues received if we sublicense Zenvia to a third party.

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Avanir Pharmaceuticals

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Pursuant to the Asset Purchase Agreement, we paid IriSys a purchase price of $7.2 million including $1.9 million in cash and 500,000 shares of our Class A common stock with a fair value of $5.3 million. The value of the acquired assets was determined based on various financial models for the commercialization of Zenvia for different indications, as well as the projected discounted cash flow and net present value under each such model. The fair value of the common stock issued in the transaction was calculated at $10.60 per share using the 5-day average closing price of our common stock, beginning two days before and ending two days after the close and announcement of the agreement on March 9, 2005. Because of the uncertainty of receiving future economic benefits from the acquired contractual rights, particularly given that Zenvia had not been approved by the FDA for commercialization at the time of this transaction, the purchase price was immediately charged to research and development expense in accordance with United States generally accepted accounting principles.

Dr. Yakatan, our former president and chief executive officer, was a founder and the majority shareholder of IriSys. As required by the Asset Purchase Agreement, Dr. Yakatan resigned as a director of IriSys effective April 9, 2005. In May 2005, Dr. Yakatan resigned as our president and chief executive officer and director. In connection with Dr. Yakatan’s resignation, we agreed to pay him severance payments in the aggregate amount of approximately $496,000, which included health benefits for a period of 12 months. We also agreed to pay him a bonus of $88,000 for fiscal 2005 which was paid in full as of September 30, 2005. The severance payment obligations were expensed during fiscal 2005 and were paid in 26 installments over the period of one year from May 16, 2005.

Dr. Yakatan was retained by us as a consultant at an agreed-upon hourly rate until May 15, 2006 to advise us on FDA regulatory matters, if and as needed. Additionally, the vesting of options to purchase 227,580 shares of Class A common stock, held by Dr. Yakatan as of the resignation date, was accelerated to become immediately vested. No compensation charge had been recorded in the fiscal year ended September 30, 2005 for the accelerated vesting, because the acceleration did not result in any of the in-the-money options vesting that otherwise would have expired unvested at the conclusion of the consulting agreement.

21.   Subsequent Events

Clinical Master Service Agreement

On November 9, 2007, we entered into a task order (the “Task Order”) under our Clinical Development Master Service Agreement (the “Agreement”) with Kendle International Inc. (“Kendle”). Pursuant to the Task Order, Kendle will provide clinical trial management and related clinical services to us relating to our planned Phase III trial for Zenvia for the treatment of pseudobulbar affect (PBA) (A Double-Blind, Randomized, Placebo Controlled, Multicenter Study to Assess the Safety and Efficacy and to Determine the Pharmakinetics of Two Doses of AVP-923 (Dextromethorphan/Quinidine) in the Treatment of Pseudobulbar Affect (PBA) in Patients with Amyotrophic Lateral Sclerosis and Multiple Sclerosis). In addition to the Double-Blind study, we also have a contract with Kendle to perform our Open Label study.

We expect to incur total costs of approximately $7 million over the next three fiscal years in connection with Kendle’s performance of its services under the Task Order. The Task Order is effective as of August 13, 2007 and will terminate on August 19, 2009. A “good faith” payment totaling approximately $700,000 was paid and recorded in fiscal 2007 pursuant to a Letter of Intent that was signed in September 2007. Such amount is included in prepaid expenses in the accompanying consolidated balance sheet at September 30, 2007. Either party may terminate the Agreement or the Task Order upon material breach or insolvency or on 60 days’ prior written notice.

Stock Issuance

In October 2007, 4,500 shares were issued pursuant to the vesting of restricted stock units.

* * * * *

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EX-3.1

Exhibit 3.1

AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
AVANIR PHARMACEUTICALS

     Gerald J. Yakatan and Gregory P. Hanson hereby certify that:

1. They are the President and Chief Executive Officer and the Vice President, Chief Financial Officer and Secretary, respectively, of AVANIR Pharmaceuticals, a California corporation (the “Corporation”).

2. The Articles of Incorporation of the Corporation, as amended to the date of the filing of this certificate, including amendments set forth herein but not separately filed (and with the omissions required by Section 910 of the California Corporations Code (the “Corporations Code”)) are restated as follows:

ARTICLE 1

     The name of this Corporation is AVANIR Pharmaceuticals.

ARTICLE 2

     The purpose of this Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the Corporations Code.

ARTICLE 3

     3.1. This Corporation is authorized to issue two classes of shares, designated respectively Class A Common Stock (the “Common Stock”), and Preferred Stock (the “Preferred Stock”). The authorized number of shares of Common Stock is two hundred million (200,000,000). The authorized number of shares of Preferred Stock is ten million (10,000,000). Each share of the series designated “Class A Common Stock” that is outstanding is hereby reclassified into one share of the class designated “Class A Common Stock.”

     3.2. The Board of Directors of the Corporation (the “Board Of Directors”) may divide the Preferred Stock into any number of series. The Board of Directors shall fix the designation and number of shares of each such series. The Board of Directors may determine and alter the rights, preferences, privileges and restrictions, including, but not limited to, voting rights, granted to and imposed upon any wholly unissued series of the Preferred Stock. The Board of Directors (within the limits and restrictions of any resolutions adopted originally fixing the number of shares of any series) may increase or decrease the number of shares of that series; provided, that no such decrease shall reduce the number of shares of such series to a number less than the number of shares of such series then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issues by the Corporation convertible into shares of such series.

ARTICLE 4

     4.1. Designation and Amount of Series C Preferred Stock. A series of Preferred Stock is designated as Series C Junior Participating Preferred Stock (the “Series C Preferred Stock”). The number of shares constituting such series is one million (1,000,000). Such number of shares may be increased or decreased by resolution of the Board of Directors; provided, that no such decrease shall reduce the number of shares of Series C Preferred Stock to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the Corporation convertible into Series C Preferred Stock.

     4.2. Dividends and Distributions.

          (A) Subject to the prior and superior rights of the holders of any shares of any class or series of stock of this Corporation ranking prior and superior to the Series C Preferred Stock with respect to dividends, the holders of shares of Series C Preferred Stock, in preference to the holders of Common Stock of the Corporation, and of any other stock ranking junior to the Series C Preferred Stock, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the first day of March, June, September and December in each year (each such date being referred to herein as a “Quarterly Dividend Payment Date”), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series C Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (1) $1.00 or (2) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions, other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series C Preferred Stock. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision, combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount to which holders of shares of Series C Preferred Stock were entitled immediately prior to such event under clause (2) of the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.

          (B) The Corporation shall declare a dividend or distribution on the Series C Preferred Stock as provided in paragraph (A) of this Section 4.2 immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $1.00 per share on the Series C

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Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date.

          (C) Dividends shall begin to accrue and be cumulative on outstanding shares of Series C Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series C Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series C Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series C Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be not more than 60 days prior to the date fixed for the payment thereof.

     4.3. Voting Rights. The holders of shares of Series C Preferred Stock shall have the following voting rights:

          (A) Subject to the provision for adjustment hereinafter set forth, each share of Series C Preferred Stock shall entitle the holder thereof to 100 votes on all matters submitted to a vote of the shareholders of the Corporation. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision, combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the number of votes per share to which holders of shares of Series C Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.

          (B) Except as otherwise provided herein, in any certificate of determination creating a series of Preferred Stock or any similar stock, or by law, the holders of shares of Series C Preferred Stock and the holders of shares of Common Stock and any other capital stock of the Corporation having general voting rights shall vote together as one class on all matters submitted to a vote of shareholders of the Corporation.

          (C) Except as set forth herein, or as otherwise provided by law, holders of Series C Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action.

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     4.4. Certain Restrictions.

          (A) Whenever quarterly dividends or other dividends or distributions payable on the Series C Preferred Stock as provided in Section 4.2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series C Preferred Stock outstanding shall have been paid in full, the Corporation shall not:

               (i) declare or pay dividends, or make any other distributions, on any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series C Preferred Stock;

               (ii) declare or pay dividends, or make any other distributions, on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series C Preferred Stock, except dividends paid ratably on the Series C Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled;

               (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series C Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such junior stock in exchange for shares of any stock of the Corporation ranking junior (both as to dividends and upon dissolution, liquidation or winding up) to the Series C Preferred Stock; or

               (iv) redeem or purchase or otherwise acquire for consideration any shares of Series C Preferred Stock, or any shares of stock ranking on a parity with the Series C Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes.

          (B) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (A) of this Section 4.4, purchase or otherwise acquire such shares at such time and in such manner.

     4.5. Reacquired Shares. Any shares of Series C Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock subject to the conditions and restrictions on issuance set forth herein or in any certificate of determination creating a series of Preferred Stock or any similar stock or as otherwise required by law.

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     4.6. Liquidation, Dissolution or Winding Up.

          (A) Upon any liquidation, dissolution or winding up of the Corporation, voluntary or otherwise, no distribution shall be made (1) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series C Preferred Stock unless, prior thereto, the holders of shares of Series C Preferred Stock shall have received an amount per share (the “Series C Liquidation Preference”) equal to $100 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, provided that the holders of shares of Series C Preferred Stock shall be entitled to receive an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount to be distributed per share to holders of shares of Class A Common Stock, or (2) to the holders of shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series C Preferred Stock, except distributions made ratably on the Series C Preferred Stock and all such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision, combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the aggregate amount to which holders of shares of Series C Preferred Stock were entitled immediately prior to such event under the proviso in clause (1) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that are outstanding immediately prior to such event.

          (B) In the event, however, that there are not sufficient assets available to permit payment in full of the Series C Liquidation Preference and the liquidation preferences of all other classes and series of stock of the Corporation, if any, that rank on a parity with the Series C Preferred Stock in respect thereof, then the assets available for such distribution shall be distributed ratably to the holders of the Series C Preferred Stock and the holders of such parity shares in proportion to their respective liquidation preferences.

          (C) Neither the merger or consolidation of the Corporation into or with another corporation nor the merger or consolidation of any other corporation into or with the Corporation shall be deemed to be a liquidation, dissolution or winding up of the Corporation within the meaning of this Section 4.6.

     4.7. Consolidation, Merger, etc. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case each share of Series C Preferred Stock shall at the same time be similarly exchanged or changed into an amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Class A Common Stock is changed or exchanged. In the event the Corporation shall at any time

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declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision, combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series C Preferred Stock shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.

     4.8. No Redemption. The shares of Series C Preferred Stock shall not be redeemable by the Corporation.

     4.9. Rank. The Series C Preferred Stock shall rank, with respect to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up, junior to all series of any other class of the Corporation’s Preferred Stock, except to the extent that any such other series specifically provides that it shall rank on a parity with or junior to the Series C Preferred Stock.

     4.10. Amendment. At any time any shares of Series C Preferred Stock are outstanding, the Articles of Incorporation of the Corporation shall not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series C Preferred Stock so as to affect them adversely without the affirmative vote of the holders of at least two-thirds of the outstanding shares of Series C Preferred Stock, voting separately as a single class.

     4.11. Fractional Shares. Series C Preferred Stock may be issued in fractions of a share that shall entitle the holder, in proportion to such holder’s fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series C Preferred Stock.

ARTICLE 5

     The liability of the directors of this Corporation for monetary damages shall be eliminated to the fullest extent permissible under the laws of California. This Corporation is authorized to provide indemnification of agents (as defined in Section 317 of the Corporations Code) for breach of duty to this Corporation and its shareholders through bylaw provisions, agreements or otherwise, in excess of the indemnification otherwise permitted by Section 317 of the Corporations Code, subject to the limits on such excess indemnification set forth in Section 204 of the Corporations Code.

3. These Amended and Restated Articles of Incorporation have been duly approved by the Board of Directors of the Corporation.

4. The foregoing Amended and Restated Articles of Incorporation (other than omissions required by Section 910 of the Corporations Code) have been duly approved by the required vote of the shareholders in accordance with Sections 902 and 903 of the Corporations Code. The outstanding shares of the Corporation consist of 71,266,550 shares of the series designated Class

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A Common Stock, and no shares of the series designated Class B Common Stock, Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock. The number of shares of each class voting in favor of the amendments equaled or exceeded the vote required. The percentage vote required for the approval of the amendments was more than 50 percent of each class entitled to vote.

     Dated: March 31, 2004

/s/ Gerald J. Yakatan  

Gerald J. Yakatan, President/ 

Chief Executive Officer 

/s/ Gregory P. Hanson  

Gregory P. Hanson, Vice President/ 

Chief Financial Officer/Secretary 

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VERIFICATION

     We further declare under penalty of perjury under the laws of the State of California that the matters set forth in these Amended and Restated Articles of Incorporation are true and correct of our own knowledge.

     Executed this 31st day of March, 2004 at San Diego, California.

/s/ Gerald J. Yakatan  

Gerald J. Yakatan 

/s/ Gregory P. Hanson  

Gregory P. Hanson 

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CERTIFICATE OF AMENDMENT
OF
RESTATED ARTICLES OF INCORPORATION, AS AMENDED
OF
AVANIR PHARMACEUTICALS

Eric K. Brandt and Gregory P. Hanson hereby certify that:

     1. They are the President and Chief Executive Officer and the Vice President, Chief Financial Officer and Secretary, respectively, of AVANIR Pharmaceuticals, a California corporation (the “Corporation”).

     2. Article 3.1 of the Restated Articles of Incorporation of the Corporation, as amended to the date of the filing of this certificate, is amended to read in full as follows:

     “This Corporation is authorized to issue two classes of shares, designated respectively Class A Common Stock (the “COMMON STOCK”), and Preferred Stock (the “PREFERRED STOCK”). The authorized number of shares of Common Stock is two hundred million (200,000,000). The authorized number of shares of Preferred Stock is ten million (10,000,000). At the Effective Time (as defined below) of the amendment of this Article to read as herein set forth, each four (4) outstanding shares of Class A Common Stock of the Corporation shall be combined and converted automatically into one (1) share of Class A Common Stock. In lieu of any fractional shares to which a holder would be otherwise entitled, the Corporation shall pay cash equal to such fraction multiplied by the fair market value of one share (post-reverse-split), as determined by the Board of Directors of the Corporation. The Effective Time of this amendment shall mean 4:00 p.m., Pacific Time, January 17, 2006.”

     3. The Effective Time is not more than 90 days subsequent to the filing date hereof and is requested pursuant to Section 110(c) of the California General Corporation Law.

     4. This Certificate of Amendment has been duly approved by the Board of Directors of the Corporation.

     5. The foregoing Amendment to the Restated Articles of Incorporation, as amended, has been duly approved by the required vote of the shareholders in accordance with Sections 902 and 903 of the California General Corporation Law. The outstanding shares of the Corporation consist of 97,722,585 shares of Common Stock and no shares of Preferred Stock. The number of shares of each class voting in favor of the amendments equaled or exceeded the vote required. The percentage vote required for the approval of the amendments was more than 50 percent of each class entitled to vote.

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     We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge.

     Executed this 5th day of January, 2006, at San Diego, California.

/s/ Eric K. Brandt  

Eric K. Brandt 

President and Chief Executive Officer 

/s/ Gregory P. Hanson  

Gregory P. Hanson, CMA 

Vice President, Chief Financial Officer and Secretary 

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EX-4.8

Exhibit 4.8

AVANIR PHARMACEUTICALS

CLASS A COMMON STOCK WARRANT

     This certifies that _____________ (the “Holder”), or assigns, for value received, is entitled to purchase from Avanir Pharmaceuticals (the “Company”), subject to the terms set forth below, a maximum of ________ fully-paid and nonassessable shares (subject to adjustment as provided herein) of the Company’s Class A Common Stock, no par value, (the “Warrant Shares”) for cash at a price of $3.30 per share (the “Exercise Price”) (subject to adjustment as provided herein) at any time or from time to time on or after May ___, 2007 (the “Initial Exercise Date”) and up to and including 5:00 p.m. (New York City Time) on November ___, 2007 (the “Expiration Date”) upon surrender to the Company at its principal office (or at such other location as the Company may advise the Holder in writing) of this Warrant properly endorsed with the Form of Subscription attached hereto duly completed and signed and upon payment in cash or by check of the aggregate Exercise Price for the number of shares for which this Warrant is being exercised determined in accordance with the provisions hereof. The Exercise Price is subject to adjustment as provided in Section 3 of this Warrant. This Warrant is issued subject to the following terms and conditions:

     1. Exercise, Issuance of Certificates. The Holder may exercise this Warrant at any time or from time to time on or after the Initial Exercise Date and on or prior to the Expiration Date, for all or any part of the Warrant Shares (but not for a fraction of a share) which may be purchased hereunder, as that number may be adjusted pursuant to Section 3 of this Warrant. The Company agrees that the Warrant Shares purchased under this Warrant shall be and are deemed to be issued to the Holder hereof as the record owner of such Warrant Shares as of the close of business on the date on which this Warrant shall have been surrendered, properly endorsed, the completed and executed Form of Subscription delivered, and payment made for such Warrant Shares (such date, a “Date of Exercise”). Certificates for the Warrant Shares so purchased, together with any other securities or property to which the Holder hereof is entitled upon such exercise, shall be delivered to the Holder hereof by the Company at the Company’s expense as soon as practicable after the rights represented by this Warrant have been so exercised, but in any event not later than the third trading day following the Date of Exercise (“Warrant Share Delivery Date”). In case of a purchase of less than all the Warrant Shares which may be purchased under this Warrant, the Company shall cancel this Warrant and execute and deliver to the Holder hereof within a reasonable time a new Warrant or Warrants of like tenor for the balance of the Warrant Shares purchasable under the Warrant surrendered upon such purchase. Each stock certificate so delivered shall be registered in the name of such Holder and issued without legend if there is an effective registration statement covering such Warrant Shares or if exercised via cashless exercise pursuant to the terms set forth below and such Warrant Shares shall be transmitted by the transfer agent of the Company to the Holder by crediting the account of the Holder’s prime broker with the Depository Trust Company through its Deposit Withdrawal Agent Commission (“DWAC”) system. If this Warrant is exercised for cash at a time when there is no effective Registration Statement, the Warrant Shares may be issued with a restrictive legend.

          If, but only if, there is no effective Registration Statement covering the Warrant Shares at the time of exercise, this Warrant may also be exercised at such time by means of a

“cashless exercise” in which the Holder shall be entitled to receive a certificate for the number of Warrant Shares equal to the quotient obtained by dividing [(A-B) (X)] by (A), where:

(A)	= the VWAP on the trading day preceding the date of such election;
(B)	= the Exercise Price of the Warrants, as adjusted; and
(X)	= the number of Warrant Shares issuable upon exercise of the Warrants in accordance with the terms of this Warrant.

     As used herein, “VWAP” means, for any date, the price determined by the first of the following clauses that applies: (a) if the common stock of the Company (the “Common Stock”) is then listed or quoted on a Trading Market, the daily volume weighted average price of the Common Stock for such date (or the nearest preceding date) on the Trading Market on which the Common Stock is then listed or quoted as reported by Bloomberg Financial L.P. (based on a trading day from 9:30 a.m. Eastern Time to 4:02 p.m. Eastern Time); (b) if the Common Stock is not then listed or quoted on a Trading Market and if prices for the Common Stock are then quoted on the OTC Bulletin Board, the volume weighted average price of the Common Stock for such date (or the nearest preceding date) on the OTC Bulletin Board; (c) if the Common Stock is not then listed or quoted on the OTC Bulletin Board and if prices for the Common Stock are then reported in the “Pink Sheets” published by the Pink Sheets LLC (or a similar organization or agency succeeding to its functions of reporting prices), the most recent bid price per share of the Common Stock so reported; or (d) in all other cases, the fair market value of a share of Common Stock as determined in good faith by the Company’s Board of Directors.

     2. Holder’s Restrictions. The Company shall not effect any exercise of this Warrant, and a Holder shall not have the right to exercise any portion of this Warrant, pursuant to Section 1 or otherwise, to the extent that after giving effect to such issuance after exercise, such Holder (together with such Holder’s affiliates, and any other person or entity acting as a group together with such Holder or any of such Holder’s affiliates), as set forth on the applicable Form of Subscription, would beneficially own in excess of the Beneficial Ownership Limitation (as defined below). For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by such Holder and its affiliates shall include the number of shares of Common Stock issuable upon exercise of this Warrant with respect to which the determination of such sentence is being made, but shall exclude the number of shares of Common Stock which would be issuable upon (A) exercise of the remaining, nonexercised portion of this Warrant beneficially owned by such Holder or any of its affiliates and (B) exercise or conversion of the unexercised or nonconverted portion of any other securities of the Company (including, without limitation, any other Warrants) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by such Holder or any of its affiliates. Except as set forth in the preceding sentence, for purposes of this Section 2, beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder, it being acknowledged by a Holder that the Company is not representing to such Holder that such calculation is in compliance with Section 13(d) of the Exchange Act and such Holder is solely responsible for any schedules required to be filed in accordance therewith. To the extent that the limitation contained in this Section 2 applies, the determination of whether this Warrant is exercisable (in relation to other securities owned by

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such Holder) and of which a portion of this Warrant is exercisable shall be in the sole discretion of a Holder, and the submission of a Form of Subscription shall be deemed to be each Holder’s determination of whether this Warrant is exercisable (in relation to other securities owned by such Holder) and of which portion of this Warrant is exercisable, in each case subject to such aggregate percentage limitation, and the Company shall have no obligation to verify or confirm the accuracy of such determination. In addition, a determination as to any group status as contemplated above shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. The “Beneficial Ownership Limitation” shall be 4.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon exercise of this Warrant. The provisions of this paragraph shall be implemented in a manner otherwise than in strict conformity with the terms of this Section 2 to correct this paragraph (or any portion hereof) which may be defective or inconsistent with the intended Beneficial Ownership Limitation herein contained or to make changes or supplements necessary or desirable to properly give effect to such limitation. The limitations contained in this paragraph shall apply to a successor holder of this Warrant.

     3. (a) Rescission Rights. If the Company fails to cause its transfer agent to transmit to the Holder a certificate or certificates representing the Warrant Shares pursuant to Section 1 by the 2^nd business day following the Warrant Share Delivery Date, then the Holder will have the right to rescind such exercise.

          (b) Compensation for Buy-In on Failure to Timely Deliver Certificates Upon Exercise. In addition to any other rights available to the Holder, if the Company fails to cause its transfer agent to transmit to the Holder a certificate or certificates representing the Warrant Shares pursuant to an exercise on or before the 2^nd trading day following the Warrant Share Delivery Date, and if after such date the Holder is required by its broker to purchase (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Warrant Shares which the Holder anticipated receiving upon such exercise (a “Buy-In”), then the Company shall (1) pay in cash to the Holder the amount by which (x) the Holder’s total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased exceeds (y) the amount obtained by multiplying (A) the number of Warrant Shares that the Company was required to deliver to the Holder in connection with the exercise at issue times (B) the price at which the sell order giving rise to such purchase obligation was executed, and (2) at the option of the Holder, either reinstate the portion of the Warrant and equivalent number of Warrant Shares for which such exercise was not honored or deliver to the Holder the number of shares of Common Stock that would have been issued had the Company timely complied with its exercise and delivery obligations hereunder. For example, if the Holder purchases Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted exercise of shares of Common Stock with an aggregate sale price giving rise to such purchase obligation of $10,000, under clause (1) of the immediately preceding sentence the Company shall be required to pay the Holder $1,000. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In, together with applicable confirmations and other evidence reasonably requested by the Company. Nothing herein shall limit a Holder’s right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company’s failure to timely

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deliver certificates representing shares of Common Stock upon exercise of the Warrant as required pursuant to the terms hereof.

     4. Shares to be Fully Paid; Reservation of Shares. The Company covenants and agrees that all Warrant Shares, will, upon issuance and, if applicable, payment of the applicable Exercise Price, be duly authorized, validly issued, fully paid and nonassessable, and free of all preemptive rights, liens and encumbrances, except for restrictions on transfer provided for herein. The Company shall at all times reserve and keep available out of its authorized and unissued Class A Common Stock, solely for the purpose of providing for the exercise of the rights to purchase all Warrant Shares granted pursuant to this Warrant, such number of shares of Common Stock as shall, from time to time, be sufficient therefor.

     5. Adjustment of Exercise Price and Number of Shares. The Exercise Price and the total number of Warrant Shares shall be subject to adjustment from time to time upon the occurrence of certain events described in this Section 3. Upon each adjustment of the Exercise Price, the Holder of this Warrant shall thereafter be entitled to purchase, at the Exercise Price resulting from such adjustment, the number of shares obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of shares purchasable pursuant hereto immediately prior to such adjustment, and dividing the product thereof by the Exercise Price resulting from such adjustment.

          5.1. Subdivision or Combination of Stock. In the event the outstanding shares of the Company’s Common Stock shall be increased by a stock dividend payable in Common Stock, stock split, subdivision, or other similar transaction occurring after the date hereof into a greater number of shares of Common Stock, the Exercise Price in effect immediately prior to such subdivision shall be proportionately reduced and the number of Warrant Shares issuable hereunder proportionately increased. Conversely, in the event the outstanding shares of the Company’s Common Stock shall be decreased by reverse stock split, combination, consolidation, or other similar transaction occurring after the date hereof into a lesser number of shares of Common Stock, the Exercise Price in effect immediately prior to such combination shall be proportionately increased and the number of Warrant Shares issuable hereunder proportionately decreased.

          5.2. Reclassification. If any reclassification of the capital stock of the Company or any reorganization, consolidation, merger, or any sale, lease, license, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all, of the business and/or assets of the Company (the “Reclassification Events”) shall be effected in such a way that holders of Common Stock shall be entitled to receive stock, securities, or other assets or property, then, as a condition of such Reclassification Event lawful and adequate provisions shall be made whereby the Holder hereof shall thereafter have the right to purchase and receive (in lieu of the shares of Common Stock of the Company immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby) such shares of stock, securities, or other assets or property as may be issued or payable with respect to or in exchange for a number of outstanding shares of such Common Stock equal to the number of shares of such stock immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby. In any Reclassification Event, appropriate provision shall be made with respect to the rights and interests of the Holder of this Warrant to the end that the provisions

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hereof (including, without limitation, provisions for adjustments of the Exercise Price and of the number of Warrant Shares), shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, securities, or assets thereafter deliverable upon the exercise hereof.

          5.3. Notice of Adjustment. Upon any adjustment of the Exercise Price or any increase or decrease in the number of Warrant Shares, the Company shall give written notice thereof, by first class mail postage prepaid, addressed to the registered Holder of this Warrant at the address of such Holder as shown on the books of the Company. The notice shall be prepared and signed by the Company’s Chief Financial Officer and shall state the Exercise Price resulting from such adjustment and the increase or decrease, if any, in the number of shares purchasable at such price upon the exercise of this Warrant, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based.

     6. No Voting or Dividend Rights. Nothing contained in this Warrant shall be construed as conferring upon the holder hereof the right to vote or to consent to receive notice as a shareholder of the Company on any other matters or any rights whatsoever as a shareholder of the Company. No dividends or interest shall be payable or accrued in respect of this Warrant or the interest represented hereby or the shares purchasable hereunder until, and only to the extent that, this Warrant shall have been exercised.

     7. Modification and Waiver. This Warrant and any provision hereof may be changed, waived, discharged, or terminated only by an instrument in writing signed by the party against whom enforcement of the same is sought.

     8. Notices. Any notice, request, or other document required or permitted to be given or delivered to the Holder hereof or the Company shall be delivered by hand or messenger or shall be sent by certified mail, postage prepaid, or by overnight courier to each such Holder at its address as shown on the books of the Company or to the Company at its principal place of business or such other address as either may from time to time provide to the other. Each such notice or other communication shall be treated as effective or having been given: (i) when delivered if delivered personally, (ii) if sent by registered or certified mail, at the earlier of its receipt or three business days after the same has been registered or certified as aforesaid, (iii) if sent by overnight courier, on the next business day after the same has been deposited with a nationally recognized courier service, or (iv) the date of transmission, if such notice or communication is delivered via facsimile prior to 5:00 p.m. (New York City time) on a trading day at a facsimile number as either may from time to time provide to the other and a confirming copy of such notice is sent the same day by first class mail.

     9. Governing Law. All questions concerning the construction, validity, enforcement and interpretation of this Warrant shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflicts of law thereof. Each party agrees that all legal proceedings concerning the interpretations, enforcement and defense of this Warrant and the transactions herein contemplated (“Proceedings”) (whether brought against a party hereto or its respective Affiliates, employees or agents) shall be commenced exclusively in the state and federal courts sitting in the City of New York (the “Courts”). Each party hereto hereby irrevocably submits to the exclusive jurisdiction of the Courts for the adjudication of any dispute hereunder or in connection herewith or with any

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transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any Proceeding, any claim that it is not personally subject to the jurisdiction of any Court, or that such Proceeding has been commenced in an improper or inconvenient forum. Each party hereto hereby irrevocably waives personal service of process and consents to process being served in any such Proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Warrant and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. Each party hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Warrant or the transactions contemplated hereby. If either party shall commence a Proceeding to enforce any provisions of this Warrant, then the prevailing party in such Proceeding shall be reimbursed by the other party for its reasonable attorney’s fees and other costs and expenses incurred with the investigation, preparation and prosecution of such Proceeding.

     10. Lost or Stolen Warrant. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction, or mutilation of this Warrant and, in the case of any such loss, theft or destruction, upon receipt of an indemnity reasonably satisfactory to the Company, or in the case of any such mutilation, upon surrender and cancellation of such Warrant, the Company, at its expense, will make and deliver a new Warrant, of like tenor, in lieu of the lost, stolen, destroyed or mutilated Warrant.

     11. Fractional Shares. No fractional shares shall be issued upon exercise of this Warrant. The Company shall, in lieu of issuing any fractional share, pay the Holder entitled to such fraction a sum in cash equal to such fraction (calculated to the nearest 1/100th of a share) multiplied by the then effective Exercise Price on the date the Form of Subscription is received by the Company.

     12. Acknowledgement. Upon the request of the Holder, the Company will at any time during the period this Warrant is outstanding acknowledge in writing, in form satisfactory to Holder, the continued validity of this Warrant and the Company’s obligations hereunder.

     13. Successors and Assigns. This Warrant and the rights evidenced hereby shall inure to the benefit of and be binding upon the successors of the Company and the successors and assigns of the Holder. The provisions of this Warrant are intended to be for the benefit of all Holders from time to time of this Warrant, and shall be enforceable by any such Holder.

     14. Severability of Provisions. In case any one or more of the provisions of this Warrant shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Warrant shall not in any way be affected or impaired thereby and the parties will attempt in good faith to agree upon a valid and enforceable provision which shall be a commercially reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Warrant.

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     IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed by its officer, thereunto duly authorized on this ___ day of November 2006.

Avanir Pharmaceuticals, a California corporation
By:
	Gregory P. Hanson, CMA
	Vice President and Chief Accounting Officer

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FORM OF SUBSCRIPTION

(To be signed only upon exercise of Warrant)

To: Avanir Pharmaceuticals

     The undersigned, the holder of the attached Class A Common Stock Warrant, hereby elects to exercise the purchase right represented by such Warrant for, and to purchase thereunder,                                         ¹ shares of Class A Common Stock of Avanir Pharmaceuticals and makes payment of $                                therefor.

     By its delivery of this Form of Subscription, the undersigned represents and warrants to the Company that in giving effect to the exercise evidenced hereby the Holder will not beneficially own in excess of the number of shares of Common Stock (determined in accordance with Section 13(d) of the Securities Exchange Act of 1934) permitted to be owned under Warrant to which this notice relates.

The undersigned requests that certificates for such shares be issued in the name of, and delivered to:
whose address is:	.

DATED:                                         

(Signature must conform in all respects to name of Holder
as specified on the face of the Warrant)

Name: 

Title: 

¹ Insert here the number of shares called for on the face of the Warrant (or, in the case of a partial exercise, the portion thereof as to which the Warrant is being exercised), in either case without making any adjustment for any stock or other securities or property or cash which, pursuant to the adjustment provisions of the Warrant, may be deliverable upon exercise.

EX-10.36

Exhibit 10.36

AVANIR PHARMACEUTICALS

Restricted Stock Unit Grant Agreement

     This Restricted Stock Unit Grant Agreement (the “Agreement”) is dated as of [         ] and is entered into between Avanir Pharmaceuticals, a California corporation (the “Company”), and [         ] (the “Awardee”). Capitalized terms not otherwise defined herein shall have the respective meanings set forth in the Plan.

RECITALS

     A. The Company’s [2003 / 2005] Equity Incentive Plan (the “Plan”) provides that the Company may issue stock awards, including awards of restricted stock units.

     B. On [         ], the Board of Directors, acting directly or through its Compensation Committee, approved the grant of the following restricted stock units, representing the right to receive shares of Class A common stock of the Company upon the vesting schedule set forth below in Section 2 (the “Restricted Stock Units”).

AGREEMENT

     In consideration of the mutual promises set forth below, the parties hereto agree as follows:

     1. Award of Restricted Stock Units. Subject to the terms and conditions of this Agreement and the Plan (the terms of which are incorporated herein by reference) and effective as of the date set forth above, the Company hereby grants to the Awardee [         ] Restricted Stock Units.

     2. Vesting. The Restricted Stock Units shall vest with respect to one-quarter of the Restricted Stock Units on the first anniversary of the grant date, and then with respect to the remaining Restricted Stock Units, in equal portions on a quarterly basis thereafter over the next three years.

     3. Effect of Termination. Following the Termination of a Awardee’s service, the unvested portions of the Restricted Stock Units, if any, as of the date of Termination shall be forfeited.

     4. Distribution. Stock certificates evidencing a one-for-one conversion (adjusted as provided in the Plan) of vested Restricted Stock Units into Shares (the “Certificate”) shall be issued and registered in the Awardee’s name as promptly as practicable following a particular Vesting Date. Notwithstanding the foregoing, the distribution of the shares and the issuance of the Certificates may, for directors and officers of the Company, be deferred beyond the vesting date if such director or officer executes and delivers a deferral election form, which is available from Secretary of the Company. In the case of Awardee’s death, Certificates shall be delivered to the Awardee’s beneficiary or estate as soon as practicable.

     5. Dividends. Participants holding Restricted Stock Units shall not be entitled to receive cash payments equal to any cash dividends and other distributions paid with respect to a corresponding number of Shares until the underlying Shares have been delivered in accordance with this Agreement.

     6. Tax Withholding Obligations. In circumstances in which tax withholding is applicable, to meet any such obligations of the Company and Awardee that might arise with respect to any withholding taxes, FICA contributions, or the like under any federal, state, or local statute, ordinance, rule, or regulation in or connection with the award, deferral, or settlement of the Restricted Stock Units, the Awardee shall remit to the Company an amount of cash sufficient to meet the withholding requirements and/or the Company shall withhold the required amounts from the Awardee’s pay. Notwithstanding the foregoing, the Committee may, in its sole discretion, allow Awardee to satisfy such withholding obligations upon settlement of the Restricted Stock Units by withholding a number of Shares having a Fair Market Value equal to the Company’s statutory withholding obligations. The Company shall not deliver any of the Certificates until and unless the Awardee has made the payment(s) required herein or proper provision for required withholding has been made. The Awardee hereby consents to any action reasonably taken by the Company to meet the withholding obligations.

     7. Restriction on Transferability. Restricted Stock Units may not be sold, transferred, pledged, assigned, or otherwise alienated at any time. Any attempt to do so contrary to the provisions hereof shall be null and void. Notwithstanding the above, transfers can be made pursuant to intra-family transfer instruments or to an inter vivos trust.

     8. Rights as Shareholder. The Awardee shall not have voting or any other rights as a shareholder of the Company with respect to the Restricted Stock Units. Upon settlement of the Restricted Stock Units into Shares, the Awardee will obtain full voting and other rights as a shareholder of the Company.

     9. Administration. The Committee shall have the power to interpret the Plan and this Agreement and to adopt such rules for the administration, interpretation, and application of the Plan as are consistent therewith and to interpret or revoke any such rules. All actions taken and all interpretations and determinations made by the Committee shall be final and binding upon the Awardee, the Company, and all other interested persons. No member of the Committee shall be personally liable for any action, determination, or interpretation made in good faith with respect to the Plan or this Agreement.

     10. Effect on Other Employee Benefit Plans. The value of the Restricted Stock Units granted pursuant to this Agreement shall not be included as compensation, earnings, salaries, or other similar terms used when calculating the Awardee’s benefits under any Awardee or other benefit plan sponsored by the Company or any Affiliate except as such plan otherwise expressly provides. The Company expressly reserves its rights to amend, modify, or terminate any of the Company’s or any Affiliate’s employee benefit plans.

     11. Effect on Service. The award of the Restricted Stock Units pursuant to this Agreement shall not give the Awardee any right to remain in the service of the Company or any Affiliate. The award is completely within the discretion of the Company. It is not made as a part

of any ongoing element of compensation or something that the Awardee should expect to receive annually or on any other periodic basis. It does not constitute part of the Awardee’s compensation for purposes of determining any post-employment payment or severance.

     12. Amendment. This Agreement may be amended only by a writing executed by the Company and the Awardee which specifically states that it is amending this Agreement. Notwithstanding the foregoing, this Agreement may be amended solely by the Committee by a writing which specifically states that it is amending this Agreement, so long as a copy of such amendment is delivered to the Awardee, and provided that no such amendment adversely affects the rights of the Awardee (but limiting the foregoing, the Committee reserves the right to change, by written notice to the Awardee, the provisions of the Restricted Stock Units or this Agreement in any way it may deem necessary or advisable to carry out the purpose of the grant as a result of any change in applicable laws or regulations or any future law, regulation, ruling, or judicial decision, provided that any such change shall be applicable only to Restricted Stock Units which are then subject to restrictions as provided herein).

     13. Notices. Any notice to be given under the terms of this Agreement to the Company shall be addressed to the Secretary of the Company. Any notice to be given to the Awardee shall be addressed to the Awardee at the address listed in the Company’s records. By a notice given pursuant to this Section, either party may designate a different address for notices. Any notice shall have been deemed given when actually delivered.

     14. Severability. If all or any part of this Agreement or the Plan is declared by any court or governmental authority to be unlawful or invalid, such unlawfulness or invalidity shall not invalidate any portion of this Agreement or the Plan not declared to be unlawful or invalid. Any Section of this Agreement (or part of such a Section) so declared to be unlawful or invalid shall, if possible, be construed in a manner which will give effect to the terms of such Section or part of a Section to the fullest extent possible while remaining lawful and valid.

     15. Construction. The Restricted Stock Units are being issued pursuant to the Plan and are subject to the terms of the Plan, the terms of which are incorporated herein by reference. A copy of the Plan has been given to the Awardee, and additional copies of the Plan are available upon request during normal business hours at the principal executive offices of the Company. To the extent that any provision of this Agreement violates or is inconsistent with an express provision of the Plan, the Plan provision shall govern and any inconsistent provision in this Agreement shall be of no force or effect.

     16. Miscellaneous.

          (a) The Board may terminate, amend, or modify the Plan; provided, however, that no such termination, amendment, or modification of the Plan may in any way adversely affect the Participant’s rights under this Agreement, without the Participant’s written approval.

          (b) This Agreement shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required.

          (c) All obligations of the Company under the Plan and this Agreement, with respect to the Restricted Stock Units, shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all of the business and/or assets of the Company.

          (d) By signing this Agreement, the Awardee acknowledges that his or her personal employment information regarding participation in the Plan and information necessary to determine and pay, if applicable, benefits under the Plan must be shared with other entities, including companies related to the Company and persons responsible for certain acts in the administration of the Plan. By signing this Agreement the Awardee consents to such transmission of personal data as the Company believes is appropriate to administer the Plan.

          (e) To the extent not preempted by federal law, this Agreement shall be governed by, and construed in accordance with, the laws of the State of California.

     IN WITNESS WHEREOF, the parties have executed and delivered this Agreement effective as of the day and year first above written.

AWARDEE	AVANIR PHARMACEUTICALS
	By:
Signature		Name:
		Title:
Print Name

EX-10.41

Exhibit 10.41

SEPARATION AGREEMENT AND RELEASE OF CLAIMS
(Agreement provided to Employee November 7, 2006)

     If you choose to accept Avanir Pharmaceuticals (“The Company”) Severance Package, please sign and return this Agreement to Theresa Hope-Reese, Vice President Human Resources, by no later than 5:00 p.m. on November 29th. You may scan and e-mail the signed Agreement to Theresa Hope-Reese at THope-Reese@Avanir.com. and mail the original to her at The Company’s offices at 101 Enterprise, Suite 300, Aliso Viejo, California 92656, telephone 949.389.6745.

RECITALS

     WHEREAS, Mr. Berg will conclude his employment with the Company, as described herein;

     WHEREAS, after the conclusion of Mr. Berg’s employment with the Company, Mr. Berg wishes to serve as a consultant to the Company, and the Company wishes to retain Mr. Berg as a consultant; and

     WHEREAS, each of the Parties to this Agreement desires an amicable separation of employment and to resolve any and all claims, disputes, issues, or matters that were asserted or could be asserted;

     NOW THEREFORE, in consideration of the promises, covenants and agreements set forth herein, and subject to the terms and conditions set forth below, the Parties desire to, and hereby do, agree as follows:

1.	Mr. Berg’s employment with the Company will terminate effective November 7, 2006 (the “Termination Date”);
2.	For a term of twelve (12) months following the Termination Date (the “Consulting Period”), the Company will retain Mr. Berg and Mr. Berg agrees to provide services as an independent contractor on the terms provided in the independent contractor agreement attached hereto as Exhibit A. The Parties agree that, concurrent with the signing of this Agreement, they will sign the independent contract agreement that is attached hereto as Exhibit A.
3.	In exchange for agreeing to be bound by the terms of this Agreement and the attached Consulting Agreement, the Company will provide Mr. Berg with the following separation payments to which she/he otherwise would not be entitled:

• Thirty-nine (39) weeks of separation pay, calculated based on Berg’s current base salary, less all the required withholdings and taxes.

• If Berg chooses to elect continuation of coverage under federal law known as COBRA, the Company will continue to pay his medical, dental and vision premium through 31 August 2007, unless he becomes eligible for coverage

	under another group insurance plan before that date. Effective 01 September 2007, COBRA payments become Berg’s responsibility.
•	Outplacement benefits as approved and offered through Right Management Consultants.

The payment described in this paragraph will become due fourteen (14) days after the Effective Date of this Agreement, as defined herein, provided that Employee complies with his obligations under Section (e) below.

     4. Release.

               4.1 Berg, for himself and his heirs, agents, assigns, executors, successors and each of them, unconditionally, irrevocably and absolutely releases and discharges the Company, and any parent and subsidiary corporations, divisions, and affiliated corporations, partnerships or other affiliated entities of the Company, past and present, as well as the Company’s employees, officers, directors, agents, predecessors, successors and assigns (collectively “Released Parties”), from all claims related in any way to the transactions or occurrences between them to date, to the fullest extent permitted by law, including, but not limited to, Berg’s employment with the Company, the termination of his employment, and all other losses, liabilities, claims, demands and causes of action, known or unknown, suspected or unsuspected, arising directly or indirectly out of or in any way connected with Berg’s employment with the Company and the termination of that employment. This release is intended to have the broadest possible application permitted by law and includes, but is not limited to, any tort, contract, common law, constitutional or statutory claims and all claims for attorneys’ fees, costs and expenses. Notwithstanding the foregoing, this release shall not serve as a waiver of Berg’s rights to (i) vested benefits such as the Avanir Pharmaceuticals Employee Savings and Protection Plan, (ii) workers compensation or unemployment benefits, (iii) statutorily-required indemnification under California Labor Code Section 2802 or any comparable provisions of other states’ laws, or (iv) any other benefits or claims that cannot be released as a matter of law.

               4.2 Berg declares and represents that he intends this Agreement to be complete and not subject to any claim of mistake, and that the release herein expresses a full and complete release and, regardless of the adequacy or inadequacy of the consideration, the Parties intend the release to be final and complete. The Parties execute this release with the full knowledge that this release covers all possible claims against the Released Parties, to the fullest extent permitted by law.

     5. Acknowledgement of Understanding. Berg and The Company acknowledge that they may discover facts or law different from, or in addition to, the facts or law that they know or believe to be true with respect to the claims released in this Agreement and agree, nonetheless, that this Agreement and the release contained in it shall be and remain effective in all respects notwithstanding such different or additional facts or the discovery of them. Berg and The Company expressly acknowledge and agree that Berg’s rights under Section 1542 of the California Civil Code and any comparable provisions of other states’ and federal law are expressly waived. That section provides:

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A general release does not extend to claims which 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.

     6. Pursuit of Released Claims. Berg represents that, as of the date of this Agreement, he has not filed any lawsuits, charges, complaints, petitions, claims or other accusatory pleadings against Released Parties in any court or with any governmental agency. Berg further agrees that, to the fullest extent permitted by law, he/she will not prosecute, nor allow to be prosecuted on his behalf, in any court, whether state or federal, any claim or demand of any type related to the matters released above, it being the intention of Berg that with the execution of this release, Released Parties will be absolutely, unconditionally and forever discharged of and from all obligations to or on behalf of Berg related in any way to the matters discharged herein. Berg further represents that he has not assigned any claim he may have against Released Parties to any other person or entity. Nothing in this Agreement limits Berg’s right to file a charge or complaint with any state or federal agency or to participate or cooperate in such a matter, but Berg acknowledges that he is not entitled to any other monies other than those payments described in this Agreement.

     7. Return of Company Property. By signing this Agreement, Berg represents and warrants that he will have returned to the Company on or before the Effective Date of this Agreement, all Company property, including all originals and copies of documents removed from The Company’s premises at any time during his employment with The Company. Berg will not be entitled to the Severance Package described in Paragraph 3 herein unless and until all such property is returned to The Company.

     8. Expense Reimbursement. By signing this Agreement, Berg agrees to submit all outstanding reimbursements he incurred as an employee of the Company to the Company on or before the Effective Date of this Agreement.

     9. Nondisparagement. Berg will not make any voluntary statements, written or verbal, or cause or encourage others to make any such statements that defame, disparage or in any way criticize the Company’s business reputation, practices or conduct.

     10. Arbitration of Disputes and Enforcement of Agreement.

               10.1 Berg and the Company agree to resolve any claims they may have against each other or that Berg has with any other Released Party through final and binding arbitration. This agreement to arbitrate applies to any and all disputes about the validity, interpretation, or effect of this Agreement or alleged violations of it and whether a particular claim is covered by this Agreement (“Arbitrable Claims”). Except as provided in Section (h)(3) below, arbitration shall be the exclusive remedy for any such claim or dispute, and the parties expressly waive their rights to a jury trial on any such claim or dispute. Arbitration shall be conducted through JAMS or, if JAMS is not available, through another arbitration provider mutually acceptable to the parties. However, either party may bring an action in court to compel arbitration under this Agreement or to enforce an arbitration award. The Federal Arbitration Act shall govern the interpretation and enforcement of this section. If a court or arbitrator finds the Federal

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Arbitration Act does not govern, then California law shall govern the interpretation and enforcement of this section.

               10.2 In any arbitration, legal proceeding or other proceeding brought to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to recover reasonable attorneys’ fees and costs. In addition, should Berg or the Company attempt to resolve any claim waived by this Agreement or pursue any Arbitrable Claim by any method other than arbitration (except to the extent allowed in Section (h)(3) below) the responding party will be entitled to recover from the initiating party all damages, costs, expenses, and attorneys’ fees incurred as a result of that breach.

               10.3 The requirement to arbitrate disputes shall not preclude Berg from filing a charge or with a state or federal government agency. However, Berg acknowledges that he is not entitled to any other monies other than those payments described in this Agreement.

     11. Older Workers’ Benefit Protection Act. This Agreement is intended to satisfy the requirements of the Older Workers’ Benefit Protection Act, 29 U.S.C. sec. 626(f). The following general provisions, along with the other provisions of this Agreement, are agreed to for this purpose:

               11.1 Berg acknowledges and agrees that he has read and understands the terms of this Agreement.

               11.2 Berg acknowledges that this Agreement advises him in writing that he may consult with an attorney before executing this Agreement, and that he has obtained and considered such legal counsel as he deems necessary, such that he is entering into this Agreement freely, knowingly and voluntarily.

               11.3 Berg acknowledges that he has been given at least twenty-one (21) days in which to consider whether or not to enter into this Agreement. Berg understands that, at his option, he may elect not to use the full twenty-one (21) day period.

               11.4 Berg shall have seven (7) days after signing this Agreement to revoke this Agreement. This Agreement will not become effective until the expiration of the revocation period. Berg’s revocation of this Agreement must be in writing and received by Theresa Hope-Reese, Vice President Human Resources, no later than 5:00 p.m. on the seventh day in order to be effective. If Employee does not revoke acceptance within the seven (7) day period, this Agreement will become fully effective and enforceable on the eighth day after the Agreement is signed (the “Effective Date”).

               11.5 Berg does not waive or release any rights or claims that he may have under the Age Discrimination in Employment Act that arise after the execution of this Agreement. Berg is not waiving his right to file a complaint or charge with the EEOC (including a challenge to the validity of this Agreement) or participate in any investigation or proceeding conducted by the EEOC.

     12. Miscellaneous. This Agreement and the exhibit hereto sets forth the entire agreement between Berg and the Company pertaining to the subject matter of this Agreement.

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This Agreement may not be modified or canceled in any manner except by a writing signed by both Berg and an authorized Company official. Berg acknowledges that the Company has made no representations or promises to him, other than those in this Agreement. If any provision in this Agreement is found to be unenforceable, that provision will be enforced to the greatest extent permitted by law and all other provisions will remain fully enforceable. This Agreement binds the Parties and their heirs, administrators, representatives, executors, successors, and assigns. This Agreement shall be construed as a whole according to its fair meaning. It shall not be construed strictly for or against Berg or the Released Parties. Unless the context indicates otherwise, the term “or” shall be deemed to include the term “and” and the singular or plural number shall be deemed to include the other. This Agreement shall be governed by the law of the State of California, excluding its laws relating to the choice of laws.

     13. Counterparts. This Agreement may be executed by facsimile or facsimile signature, and in separate counterparts, each of which shall be deemed an original but all of which, when taken together, shall constitute one and the same instrument.

     Please read this Agreement and carefully consider all of its provisions before signing it. This Agreement includes a release of known and unknown claims. This Agreement also includes an arbitration clause in which both parties waive any rights they may have to trial by jury with regard to arbitrable claims. If you wish, you should take advantage of the twenty-one (21) day consideration period provided by this Agreement and consult your attorney.

Date	11/28/2006	/s/ James E. Berg
		Employee
Date	07 Nov 06	/s/ Theresa Hope-Reese
		Company

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EXHIBIT A
TO SEPARATION AGREEMENT AND RELEASE OF CLAIMS

INDEPENDENT CONTRACTOR AGREEMENT
07 November 2006

     This Independent Contractor Agreement (“Agreement”) is entered into by and between Avanir Pharmaceuticals, a California corporation (“Avanir” or the “Company”), and James E. Berg (collectively referred to as the “Parties”).

     WHEREAS, Mr. Berg will terminate his employment with Avanir, as described in the Separation Agreement and Release entered into by Mr. Berg and Avanir (the “Separation Agreement”);

     WHEREAS, after the conclusion of Mr. Berg’s employment with Avanir, Mr. Berg wishes to serve as a consultant to Avanir, and Avanir wishes to retain Mr. Berg as a consultant; and

     WHEREAS, each of the Parties to this Agreement desires, through a release of claims, to resolve any and all claims, disputes, issues, or matters that were asserted or could have been asserted or could be asserted.

     NOW, THEREFORE, in consideration of the mutual promises made herein, the Parties hereby agree as follows:

     1. Consultancy. Mr. Berg shall serve as a consultant to the Company for a twelve (12)-month period commencing on the date Mr. Berg’s employment with Avanir concludes pursuant to the Separation Agreement and concluding twelve (12) months thereafter (“Consulting Period”).

     2. Scope of Work. During the Consulting Period, Mr. Berg agrees to make himself available at reasonable times and places to perform consulting services as requested by the Company. Such services include, but are not limited to, providing advice and assistance regarding special projects, conference appearances or any other matter consistent with Mr. Berg’s background, skills and experience, as requested by the Chief Executive Officer of Avanir. Mr. Berg further agrees that during the Consulting Period he will make himself available and use his best efforts in the transition of his former duties to designated representatives or employees of the Company. Such efforts include, but are not limited to, providing corporate records, files and other materials. Except as otherwise requested by the Company, Mr. Berg shall not perform his duties on the Company’s premises, nor will he be provided with use of the Company’s telephones, voice-mail, e-mail, internet or other Company property.

     3. Consulting Fee. As compensation for providing consulting services during the Consulting Period, Mr. Berg will receive a $105.30 per hour of consulting service provided. If Avanir terminates Mr. Berg’s consultancy prior to the expiration of the Consulting Period,

Avanir will continue to pay Mr. Berg any unpaid portion in accordance with the payment schedule set forth above. Notwithstanding the preceding sentence or any other provision of this Agreement, Avanir may terminate Mr. Berg’s consultancy and not make any further payments to Mr. Berg should Mr. Berg violate any provision of this Agreement, including but not limited to the provisions of Section 5, below. The Company shall reimburse Mr. Berg for reasonable expenses incurred on behalf of the Company during the Consulting Period, provided that such expenses are approved in advance and substantiated in accordance with Company policies.

     4. Benefits. As an independent contractor, Mr. Berg is not entitled to any Company employee benefits, other than as outlined in the Separation Agreement and Release of Claims.

     5. Noncompetition. During the Consulting Period, Mr. Berg may engage in other employment, consulting or businesses, provided such activity does not preclude him from making himself reasonably available to provide consulting services to the Company as provided above.

     6. Nonsolicitation. Through 08 August 2007, Mr. Berg will not either directly or indirectly solicit, induce, recruit or encourage any of the Company’s employees or consultants to terminate their relationship with the Company, or attempt to solicit, induce, recruit, encourage or take away employees or consultants of the Company, either for himself or for any other person or entity.

     7. Confidential Information. Mr. Berg understands and agrees that his obligations to the Company under the Employee Invention Assignment, Patent and Confidential Information Agreement entered into between Mr. Berg and the Company on 07 April 1999 (the “Proprietary Agreement”) shall continue through the Consulting Period and shall survive the termination of his relationship with the Company under this Agreement.

     8. Breach of this Agreement. Mr. Berg acknowledges that upon his material breach of any provision of this Agreement or the Proprietary Agreement, the Company would sustain irreparable harm from such breach, and, therefore, Mr. Berg agrees that in addition to any other remedies which the Company may have under this Agreement, the Proprietary Agreement or otherwise, the Company shall be entitled to obtain equitable relief (without the posting of a bond) including specific performance, injunctions and restraining Mr. Berg from committing or continuing any such violation of this Agreement or the Proprietary Agreement.

     9. Independent Contractor Status. In performance of services under this Agreement, Mr. Berg will be an independent contractor of, and is not an agent or employee of, and has no authority to bind, the Company by contract or otherwise.

     10. Employment Taxes. Mr. Berg agrees that he shall report as self-employment income all compensation he receives pursuant to this Agreement and is solely responsible for any taxes, withholdings and similar statutory obligations. Mr. Berg will indemnify the Company and its officers, directors, shareholders and employees and agents and will hold it and them harmless from any and all claims made by any entity on account of an actual or alleged failure by Mr. Berg to satisfy any such tax or withholding obligations.

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     11. Authority. The Company represents and warrants that the undersigned has the authority to act on behalf of the Company and to bind the Company and all who may claim through it to the terms and conditions of this Agreement. Mr. Berg represents and warrants that he has the capacity to act on his own behalf and on behalf of all whom might claim through him to bind them to the terms and conditions of this Agreement. Each Party warrants and represents that there are no liens or claims of lien or assignments in law or equity or otherwise of or against any of the claims or causes of action released herein.

     12. No Representations. Neither Party has relied upon any representations or statements made by the other Party hereto which are not specifically set forth in this Agreement the Separation Agreement or the Proprietary Agreement.

     13. Severability. In the event that any provision hereof becomes or is declared by a court or other tribunal of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect, and any such provision will be limited or eliminated to the minimum extent necessary so that this Agreement shall otherwise remain in full force and effect and enforceable.

     14. Entire Agreement. This Agreement, and the exhibit hereto, represent the entire agreement and understanding between the Company and Mr. Berg concerning his consultancy with the Company, and supersede and replace any and all prior agreements and understandings concerning Mr. Berg’s relationship with the Company and his compensation by the Company, with the exception of the Proprietary Agreement and the Separation Agreement. To the extent any provision of the Proprietary Agreement may conflict with any provision of this Agreement or the Separation Agreement, this Agreement and the Separation Agreement shall prevail.

     15. No Oral Modification. This Agreement may only be amended in a writing signed by Mr. Berg and the Company.

     16. Governing Law. This Agreement shall be governed by the laws of the State of California, without regard to its conflicts of law provisions.

     17. Effective Date. This Agreement shall he effective upon the Effective Date as defined in the Separation Agreement and Release of Claims to which this Agreement is an exhibit.

     18. Counterparts. This Agreement may be executed in counterparts, and each counterpart shall have the same force and effect as an original and shall constitute an effective, binding agreement on the part of each of the undersigned.

     19. Assignment. This Agreement may not be assigned by Mr. Berg or the Company without the prior written consent of the Company. Notwithstanding the foregoing, this Agreement may be assigned by the Company to a corporation controlling, controlled by or under common control with the Company without the consent of Mr. Berg.

     20. Voluntary Execution of Agreement. This Agreement is executed voluntarily and without any duress or undue influence on the part or behalf of the Parties hereto, with the full intent of releasing all claims. The Parties acknowledge that:

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               a. they have read this Agreement;

               b. they have been represented in the preparation, negotiation, and execution of this Agreement by legal counsel of their own choice or that they have voluntarily declined to seek such counsel;

               c. they understand the terms and consequences of this Agreement and of the releases it contains; and

               d. they are fully aware of the legal and binding effect of this Agreement.

     IN WITNESS WHEREOF, each of the Parties has executed this Agreement, in the case of the Company by its duly authorized officer as of the day and year first written above.

AVANIR PHARMACEUTICALS
By	Theresa Hope-Reese 07 Nov 06
	Theresa Hope-Reese
JAMES E. BERG, an individual
	James E. Berg
James E. Berg

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EX-10.42

Exhibit 10.42

EMPLOYMENT AGREEMENT

     This EMPLOYMENT AGREEMENT (“Agreement”), dated as of 12 February 2007 (the “Effective Date”), is made by and between AVANIR PHARMACEUTICALS, a California corporation having its principal offices at 101 Enterprise, Suite 300, Aliso Viejo, California, 92656 (the “Company”), and Martin J. Sturgeon (“Employee”).

AGREEMENT

     1. Commencement Date.

          Employee’s employment under this Agreement shall commence on 12 February 2007 (“Commencement Date”).

     2. At-will Employment.

     Employee’s employment relationship with the Company (“Employment”) is at-will, terminable at any time with or without cause or advance notice 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. Employee shall be Vice President of Finance and Chief Accounting Officer of the Company and shall be assigned duties and responsibilities consistent with that position at the discretion of the Company.

          (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.

          (c) Policy Compliance. Employee shall comply with all of the Company’s policies, practices and procedures, including the terms of the Confidentiality Agreement (defined below).

     4. Compensation.

          (a) Base Salary. The Company shall pay Employee a base salary of $16,666.67 per month (an annual rate of $200,000), or such higher amount as the Company may determine from time to time (“Base Salary”), payable in accordance with the Company’s regular payroll practices.

          (b) Bonus Compensation. In addition to the Base Salary, Employee shall be eligible for an annual discretionary bonus of up to 25% of the Employee’s then-current annual base salary (pro-rated for fiscal 2007 as described below), with such bonus to be determined and paid in the first quarter of each fiscal year with respect to Employee and Company performance in the prior fiscal year. The actual bonus may be higher or lower than the 25% target amount, at the discretion of the Company. Any bonus payable with regard to performance in fiscal 2007

will be prorated on account of Employee’s commencement of employment less than one year prior to the payment date. Employee must be employed by the Company when bonuses are distributed in order to be eligible to receive such bonus. If Employee leaves the employ of the Company for any reason prior to the distribution of annual bonuses in any given year, he will not be eligible to receive any part of that year’s discretionary bonus.

          (c) Equity Compensation. The Company has recommend to its Board of Directors that Employee be granted the following equity awards as additional compensation and such awards have been approved, pending the commencement of employment:

               (i) Subject to the commencement of employment, Employee shall be granted a restricted stock unit on the Commencement Date representing 10,000 shares of Class A common stock (the “RSU’s”). The RSU’s shall vest in full upon Employee’s completion of two full years of employment (the “Vesting Date”). The RSU’s will be granted pursuant to the Company’s equity compensation plans (the “Equity Plans”) and will be governed by the terms and conditions of such plans. Except as set forth in Section 10(d)(ii), the RSU’s shall be forfeited if the Employment is terminated prior to the Vesting Date.

               (ii) Subject to the commencement of employment, Employee shall be granted an option on the Commencement Date to purchase 20,000 shares of Class A common stock, with an exercise price equal to 100% of the fair market value of the underlying shares on the date of grant, subject to a four-year vesting schedule (25% vesting on the first anniversary of the Commencement Date and the remainder vesting in 12 equal installments each quarter thereafter over the next three years). This option shall be granted as an “inducement option” under NASDAQ Marketplace Rule 4350 and shall be granted outside of the Equity Plans, but shall be governed in all material respects as if it was granted under the Company’s 2005 Equity Incentive Plan, mutatis mutandis. This option will be treated for tax purposes as a non-statutory stock option.

     The foregoing share amounts and share purchase prices shall be adjusted, as necessary, to give effect to any stock split, reverse stock split, stock dividend, recapitalization or similar transaction affecting the Company’s Class A common stock that is effected after the Effective Date.

          (d) 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. The Employee’s participation in such Company plans or programs shall be on the same basis and terms as are applicable to other executive employees of the Company. Employee shall accrue 5 weeks of vacation the first year of service.

          (e) 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, in accordance with the Company’s policies and procedures.

     5. Confidentiality Agreement. Employee shall concurrently herewith execute and deliver to the Company the Employee Invention Assignment, Patent and Confidential Information Agreement (“Confidentiality Agreement”) in the form attached hereto as Exhibit B.

     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 a Competitor of the Company, unless such participation or interest is fully disclosed to the Company and approved by the Board. “Competitor,” as used in this paragraph, refers to any company that has therapeutic products (i) on the market or in clinical development and (ii) that are in competition with the products the Company has on the market or that have entered clinical development. Notwithstanding the above, Employee may own securities in any Competitor that is a public company, so long as Employee does not own, of record or beneficially, more than an aggregate of five percent of the outstanding securities of such company.

     7. Non-Solicitation. 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: (i) identify any Company employees to any third party as potential candidates for employment, such as by disclosing the names, backgrounds, compensation or qualifications of any Company employees; (ii) personally or through any other person approach, recruit or otherwise solicit employees of Company to work for any other employer; or (iii) 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. Employee understands and acknowledges that his employment with the Company is contingent upon his compliance with any and all agreements between him and his prior employers.

     9. Change of Control. Upon commencement of employment, Employee shall be eligible to enter into the Company’s standard Change of Control Agreement for executive officers (the “Change of Control Agreement”) in the form attached hereto as Exhibit A.

     10. Voluntary Resignation or Termination for “Cause.”

          (a) Payment upon Voluntary Resignation or Termination for Cause. If Employee voluntarily resigns his Employment, and such resignation is not a “Resignation for Good Reason” (as defined in the Change of Control Agreement), or if Employee is terminated for Cause (defined below), the Company shall pay Employee all accrued and unpaid Base Salary through the date of termination and any vacation that is accrued but 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” means:

               (i) Employee’s material breach of this Agreement or any confidentiality agreement between the Company and Employee; or

               (ii) Employee’s willful and intentional failure or refusal to comply with the Company’s Employee Manual, the Company’s Code of Business Conduct and Ethics, or other policies or procedures established by the Company; or

               (iii) Employee’s willful and intentional 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; or

               (iv) Employee’s misappropriation (or attempted misappropriation) of any of the Company’s funds or material property; or

               (v) Employee’s conviction of, or the entering of a guilty plea or plea of no contest with respect to, a felony, the equivalent thereof, or any other crime with respect to which imprisonment is a possible punishment; or

               (vi) Employee’s willful and intentional misconduct or incompetence; or

               (vii) Employee’s becoming “disabled,” (defined in Section 409A(a)(2)(C) of the Code), resulting in his inability to perform the essential functions of his position, with reasonable accommodation; or

               (viii) Employee’s death.

          (c) In each case, “Cause” shall be determined conclusively by the Board, acting in good faith. Notwithstanding the foregoing, no event described in Section 10(b)(i), (ii), (iii) and (vi) above will give rise to “Cause” unless it is communicated by the Company to Employee in writing and unless it is not corrected by the Employee in a manner that is reasonable satisfactory to Company within 30 days of the Employee’s receipt of such written notice.

          (d) Termination Without Cause or Resignation for Good Reason. Subject to Section 9, if Employee: (i) is terminated without “Cause,” or (ii) resigns in a “Resignation for Good Reason,” (as defined in the Change of Control Agreement), then Employee shall be paid all accrued and unpaid Base Salary and any accrued but unused vacation through the date of termination. In addition, 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 and in substantially the form attached to the Change of Control Agreement, and if Employee is not then entitled to severance benefits under the Change of Control Agreement in connection with such termination or resignation, then

               (i) Employee shall be eligible to receive severance payments under this Agreement in an amount equal to six months Base Salary and an amount equal to the greater of (x) 12.5% of Base Salary or (y) 50% of the last bonus, if any, paid to Employee pursuant to Section 4 (the “Severance Payments”), payable on the earliest of (A) the date that is six months and a day after Employee’s “separation from service” for any reason, other than death or becoming “disabled” (as such terms are used in Section 409A(a)(2) of the Code), (B) the date of Employee’s death or on which Employee becomes “disabled” (as such term is used in Section 409A(a)(2)(C) of the Code), (C) the effective date of a “change in the ownership or effective control” of the Company (as such term is used in Section 409A(a)(2)(A)(v) of the Code) or (D) the date such payments or benefits are no longer deemed by the Code to be subject to penalty tax or interest. The payment timing provisions of this paragraph shall only apply to the extent required to avoid Employee’s incurrence of any penalty tax or interest under Section 409A of the Code or any regulations or Treasury guidance promulgated thereunder. In addition, if any provision of this Agreement would cause Employee to incur any penalty tax or interest under Section 409A of the Code or any regulations or Treasury guidance promulgated thereunder, the Company shall, upon the written request of Employee, reform such provision to maintain, to the maximum extent practicable, the original intent of the applicable provision without violating the provisions of Section 409A of the Code and without creating additional cost for the Company; and

               (ii) The vesting of the RSU’s shall accelerate and the RSU’s shall become fully vested.

     11. 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 Orange 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 C. The arbitrator’s decision shall be final, conclusive and binding on the parties to the arbitration pursuant to the Mutual Arbitration Agreement. Judgment may be entered on the decision of the arbitrator in any court having competent jurisdiction.

     12. 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 or other current address:

     If to AVANIR:

Avanir Pharmaceuticals
101 Enterprise, Suite
Aliso Viejo, California 92656
Attn: Vice President Human Resources

     If to Employee:

Martin J. Sturgeon
1 Windy Hill Lane
Laguna Hills, CA 92653

     13. Withholding. All payments, including Base Salary, bonus and Severance Payments, shall be paid less applicable Federal and state withholding taxes. In the case of the rights referred to in Section 4(c) (Equity Compensation) above, Employee shall be responsible for furnishing the Company with the amount of any required withholding at the time it is due, and the Company’s obligations with respect to such rights shall be conditioned upon Employee’s compliance with this Section 13.

     14. 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 her 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) 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.

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

          (h) 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.

          (i) 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.

          (j) 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.

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EXECUTED at Aliso Viejo, California, this 12^th day of February, 2007.

	AVANIR PHARMACEUTICALS
Dated: February 12, 2007	By:	/s/ Eric K. Brandt
		Eric K. Brandt
		Chief Executive Officer
	EMPLOYEE
Dated: February 12, 2007	/s/ Martin J. Sturgeon
	Martin J. Sturgeon

EX-10.43

Exhibit 10.43

AMENDED AND RESTATED
CHANGE OF CONTROL AGREEMENT

     This Amended and Restated Change of Control Agreement (the “Agreement”), dated as of February 27, 2007 (the “Effective Date”), is made by and between Avanir Pharmaceuticals, a California corporation having its principal offices at 101 Enterprise, Suite 300, Aliso Viejo, CA 92656 (the “Company”) and Randall Kaye (“Employee”).

RECITALS

     A. Employee and the Company previously entered into a Change of Control Agreement, dated June 23, 2006, in substantially the form of this Agreement (the “Prior Agreement”).

     B. On February 27, 2007, Employee was promoted to become the Company’s Senior Vice President and Chief Medical Officer, as a result of which Employee became eligible for greater benefits than originally provided for under the Prior Agreement.

     C. The Company and Employee now wish to amend and restate the Prior Agreement as set forth herein to provide Employee with the greater severance benefits for which he has become eligible.

     NOW, THEREFORE, in consideration of the mutual promises, covenants and agreements contained herein, and in consideration of the continuing employment of Employee by the Company, the parties hereto agree as follows:

1. Definitions.

     1.1 “Awards” means Employee’s outstanding stock options, restricted stock awards, restricted stock units, stock appreciation rights and other equity-based awards granted under the Company Equity Plans, in each case that remain outstanding immediately following a Change of Control.

     1.2 “Base Salary” means Employee’s gross monthly salary on the date of calculation, excluding bonus and other incentive compensation.

     1.3 “Cause” shall, if applicable, have the meaning set forth in the definitive written employment agreement between Employee and the Company (the “Employment Agreement”); provided, however, that if there is no Employment Agreement, or if the Employment Agreement does not define what shall constitute a termination for “cause” (or a substantially similar term), then “Cause” for purposes of this Agreement shall mean: (i) Employee’s material breach of this Agreement or any confidentiality agreement between the Company and Employee; (ii) Employee’s failure or refusal to comply with the Company’s Employee Manual, the Company’s Code of Business Conduct and Ethics, or other policies or procedures established by the Company (iii) Employee’s 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) Employee’s

misappropriation (or attempted misappropriation) of any of the Company’s funds or material property; (v) Employee’s conviction of, or the entering of a guilty plea or plea of no contest with respect to a felony, the equivalent thereof, or any other crime with respect to which imprisonment is a possible punishment; (vi) Employee’s willful misconduct or incompetence; (vii) Employee’s physical or mental disability or other inability to perform the essential functions of his position, with or without reasonable accommodation; or (viii) Employee’s death.

     1.4 “CCC” means the California Code of Civil Procedure.

     1.5 A “Change of Control” shall have occurred if, and only if:

          (a) 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 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; or

          (b) if those individuals who constituted the Board at the Effective Date cease to constitute a majority of the Board as a result of, or in connection with, a proxy solicitation made by a third party pursuant to Regulation 14A under the Securities Exchange Act of 1934; or

          (c) 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’s then outstanding securities entitled to vote in the election of directors of the Company or of the securities of any other corporation resulting from such Transaction; or

          (d) all or substantially all of the assets of the Company are sold, liquidated or distributed, other than in connection with a bankruptcy, insolvency or other similar proceeding, or an assignment for the benefit of creditors.

     1.6 A “Change of Control Termination” shall have occurred if Employee’s employment by the Company, or any of its subsidiaries or affiliates, is terminated without Cause or the Employee resigns in a Resignation for Good Reason, in either case within 12 months following the effective date of a Change of Control.

     1.7 “COBRA” means the Consolidated Omnibus Budget Reconciliation Act of 1985.

     1.8 “Code” means the Internal Revenue Code of 1986, as amended.

     1.9 “Company Equity Plans” means the Company’s 1994 Stock Option Plan, 1998 Stock Option Plan, 2000 Stock Option Plan, 2003 Equity Incentive Plan and 2005 Equity Incentive Plan, each as may be amended from time to time, and any stock option agreements, award notices, stock purchase agreements or other agreements or instruments executed and delivered pursuant thereto.

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     1.10 “Release” means a general release, in the form attached hereto as Exhibit A, by Employee of all claims against the Company and its affiliates as of the date of the Change of Control Termination.

     1.11 “Resignation for Good Reason” means a resignation based on:

          (a) a material reduction in Employee’s duties and responsibilities from those in effect upon execution of this Agreement; or

          (b) a reduction by the Company in Employee’s Base Salary as of the date of this Agreement; or

          (c) a relocation of Employee’s place of work more than 50 miles without reimbursement of reasonable relocation expenses.

An event described in this Section 1.11 will not give rise to a Resignation for Good Reason unless it is communicated by Employee to the Company in writing and unless it is not corrected by the Company in a manner that is reasonably satisfactory to Employee within 10 business days of the Company’s receipt of such written notice.

     1.12 “Severance Payments” means severance pay in an amount equal to 24 months of Base Salary, plus an amount equal to the greater of (A) the aggregate bonus payment(s) received by the Employee in the Company’s preceding fiscal year or (B) the target bonus amount, such payments to be paid in accordance with the terms in Section 2.1(b) below. Notwithstanding the foregoing, if the tenure of Employee’s employment with the Company at the time of termination is less than one year, then the bonus amount calculated under this Section 1.11 shall be pro rated for the partial year of service.

     1.13 “Severance Period” means the 12-month period following a Change of Control Termination.

2. Change of Control Termination.

     2.1 Payment upon Change of Control Termination. Subject to Sections 2.2 and 2.3, in the event of a Change of Control Termination:

          (a) The Company shall promptly pay Employee all accrued but unpaid Base Salary and all accrued but unused vacation time, each through the date of termination; and

          (b) The Company shall pay Employee the Severance Payments immediately following the Deferred Payment Date, as defined below. Since at the time of this Agreement Employee will be a “specified employee” as defined in Section 409A of the Code and one or more of the payments or benefits which may be paid pursuant to this Agreement would constitute deferred compensation subject to Section 409A, no such payment or benefit will be provided until the date (the “Deferred Payment Date”) which is the earliest of (A) the date which is six (6) months and a day after Employee’s “separation from service” for any reason, other than death or becoming “disabled” (as such terms are used in Section 409A(a)(2) of the Code), (B) the date of Employee’s death or on which Employee becomes “disabled” (as such term is used in

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Section 409A(a)(2)(C) of the Code), (C) the effective date of a “change in the ownership or effective control” of the Company (as such term is used in Section 409A(a)(2)(A)(v) of the Code) or (D) the date such payments or benefits are no longer deemed by the Code to be subject to penalty tax or interest. The provisions of this paragraph shall only apply to the extent required to avoid Employee’s incurrence of any penalty tax or interest under Section 409A of the Code or any regulations or Treasury guidance promulgated thereunder. In addition, if any provision of this Agreement would cause Employee to incur any penalty tax or interest under Section 409A of the Code or any regulations or Treasury guidance promulgated thereunder, the Company shall, upon the written request of Employee, reform such provision to maintain to the maximum extent practicable the original intent of the applicable provision without violating the provisions of Section 409A of the Code and without creating additional cost for the Company; and

          (c) If Employee elects to continue insurance coverage as afforded to Employee according to COBRA, the Company will reimburse Employee the amount of premiums incurred by Employee during the Severance Period. Section 409A of the Code would be applicable to the reimbursement of COBRA payments, then Employee will pay COBRA premiums until the Deferred Payment Date and then the Company will reimburse Employee for all payments made by the Employee through such date. Thereafter, the Company will pay COBRA premiums on Employee’s behalf through the remainder of the Severance Period. Nothing in this Agreement will extend Employee’s COBRA period beyond the period allowed under COBRA, nor is Company assuming any responsibility for Employee’s election to continue coverage; and

          (d) The vesting of all Awards shall accelerate in full and all rights of repurchase of Award shares shall immediately lapse; and

          (e) The Employee shall also be entitled to receive any additional benefits provided for under the Employment Agreement in the event of a Change in Control or a Change in Control Termination.

     2.2 Employee Release. In consideration for the benefits set forth above in Sections 2.1(b), 2.1(c) and 2.1(d), following a Change of Control Termination, Employee shall promptly execute and deliver the Release. The Company shall have no obligation to pay or grant the benefits set forth in Sections 2.1(b), 2.1(c) and 2.1(d) if Employee does not execute and deliver the Release, or if Employee subsequently revokes, or attempts in writing to revoke, any portion of the Release.

     2.3 Other Benefits. In the event that the Employment Agreement provides for specific benefits upon a Change of Control and/or a Change of Control Termination that are materially more favorable to the Employee than like benefits set forth herein, then the Employee shall be entitled to those benefits set forth in the Employment Agreement in lieu of the lesser like benefits set forth herein.

3. Dispute Resolution Procedures. Any dispute or claim arising out of this Agreement shall be subject to final and binding arbitration. The arbitration will be conducted by one arbitrator who is a member of the American Arbitration Association (AAA) or of the Judicial Arbitration and Mediation Services (JAMS). The arbitration shall be held in Orange County, California.

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The arbitrator shall have all authority to determine the arbitrability of any claim and enter a final and binding judgment at the conclusion of any proceedings in respect of the arbitration. Notwithstanding any rule of AAA or JAMS to the contrary, the provisions of Title 9 of Part 3 of the CCC including Section 1283.05, and successor statutes, permitting expanded discovery proceedings shall be applicable to all disputes that are arbitrated under this paragraph. The arbitrator shall have all power and authority to enter orders relating to such discovery as are allowed under the CCC. The party prevailing in the resolution of any such claim will be entitled, in addition to such other relief as may be granted, to an award of all fees and costs incurred in pursuit of the claim (including reasonable attorneys’ fees) without regard to any statute, schedule, or rule of court purported to restrict such award.

4. At-Will Employment. Notwithstanding anything to the contrary herein, Employee reaffirms that Employee’s employment relationship with the Company is at-will, terminable at any time and for any reason by either the Company or Employee. While certain paragraphs of this Agreement describe events that could occur at a particular time in the future, nothing in this Agreement may be construed as a guarantee of employment of any length.

5. General Provisions.

     5.1 Governing Law. This Agreement will be governed by and construed in accordance with the laws of the State of California, without regard to conflict-of-law principles.

     5.2 Successors and Assigns. The provisions of this Agreement shall inure to the benefit of, and be binding upon, the Company and its successors and assigns. Employee may not assign, pledge or encumber his interest in this Agreement or any part thereof, provided, however, that the provisions of this Agreement shall inure to the benefit of, and be binding upon Employee’s estate.

     5.3 No Waiver of Breach. If either party should waive any breach of any provisions of this Agreement, he or it shall not thereby be deemed to have waived any preceding or succeeding breach of the same or any other provision of this Agreement. The rights granted the parties are cumulative, and the election of one will not constitute a waiver of such party’s right to assert all other legal and equitable remedies available under the circumstances.

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

     5.5 Entire Agreement; Amendment. This Agreement, including Exhibit A, constitutes 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, oral or written (including the Prior Agreement), except those provisions of the Employment Agreement expressly referred to herein. This Agreement may be amended or supplemented only by writing signed by both of the parties hereto.

     5.6 Modification; Waivers. No modification, termination or attempted waiver of this Agreement will be valid unless in writing, signed by the party against whom such modification, termination or waiver is sought to be enforced.

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     5.7 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 instrument.

     5.8 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. As used in this Agreement, words of the masculine gender shall mean and include corresponding neuter words or words of the feminine gender.

     5.9 No Mitigation. No payment to which Employee is entitled pursuant to Section 2.1 hereof shall be reduced by reason of compensation or other income received by him for services rendered after termination of his employment with the Company.

     5.10 Withholding of Taxes. The Company shall withhold appropriate federal, state, local (and foreign, if applicable) income and employment taxes from any payments hereunder.

     5.11 Drafting Ambiguities; Representation by Counsel. Each party to this Agreement and its counsel have reviewed and revised this Agreement and the Release. 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, the Release or any of the amendments to this Agreement.

* * *

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     In witness whereof, this Change of Control Agreement has been executed as of the date first set forth above.

AVANIR Pharmaceuticals
By:	/s/ Keith Katkin
	Keith Katkin
	President and Chief Executive Officer
Employee
/s/ Randall Kaye
Randall Kaye, M.D.

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EXHIBIT A

GENERAL RELEASE

     This General Release (“Release”) is entered into effective as of                     , 200   , (the “Effective Date”) by and between Avanir Pharmaceuticals, a California corporation, having its principal offices at [                    ] (“Company”) and [                    ], an individual residing at [                    ] (“Employee”) with reference to the following facts:

RECITALS

     A. The parties hereto entered into a Change of Control Agreement dated                     , 200    (“Agreement”), by which the parties agreed that in certain circumstances Employee would become eligible for severance payments following a termination of service in connection with a change in control and the reimbursement of certain insurance premiums in exchange for Employee’s release of the Company from all claims which Employee may have against the Company.

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

AGREEMENT

     1. Release. Employee, for himself/herself and his heirs, successors and assigns, fully releases, and discharges Company, its officers, directors, employees, shareholders, attorneys, accountants, other professionals, insurers and agents (collectively “Agents), and all entities related to each such 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, rules, 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 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 known or unknown to Employee. Employee expressly waives all rights under §1542 of the Civil Code of the State of California, which Employee understands provides as follows:

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

Employee acknowledges that he may discover facts different from or in addition to those that 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 21-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 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.

     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.

     7. Counterparts. This Release may be executed simultaneously in one or more counterparts, each of, which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Release may be executed by facsimile, with originals to follow by overnight courier.

     8. Dispute Resolution Proceedings. Any dispute or claim arising out of this Release shall be subject to final and binding arbitration. The arbitration will be conducted by one arbitrator who is a member of the American Arbitration Association (AAA) or of the Judicial Arbitration and Mediation Services (JAMS) and will be governed by the Model Employment Arbitration rules of AAA. The arbitration shall be held in Orange County, California. The arbitrator shall have all authority to determine the arbitrability of any claim and enter a final and binding judgment at the conclusion of any proceedings in respect of the arbitration. Any final judgment only may be appealed on the grounds of improper bias or improper conduct of the arbitrator. Notwithstanding any rule of AAA or JAMS to the contrary, the provisions of Title 9 of Part 3 of the California Code of Civil Procedure (the “Code”) including Section 1283.05, and successor statutes, permitting expanded discovery proceedings shall be applicable to all disputes

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that are arbitrated under this paragraph. The arbitrator shall have all power and authority to enter orders relating to such discovery as are allowed under the Code. The party prevailing in the resolution of any such claim will be entitled, in addition to such other relief as may be granted, to an award of all fees and costs incurred in pursuit of the claim (including reasonable attorneys’ fees) without regard to any statute, schedule, or rule of court purported to restrict such award.

     9. Entire Agreement. This Agreement constitutes 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, oral or written.

     10. Modification; Waivers. No modification, termination or attempted waiver of this Agreement will be valid unless in writing, signed by the party against whom such modification, termination or waiver is sought to be enforced.

     11. Amendment. This Agreement may be amended or supplemented only by writing signed by Employee and the Company.

Dated:
	Employee Name

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EX-10.44

Exhibit 10.44

March 13, 2007

Keith Katkin
c/o Avanir Pharmaceuticals
101 Enterprise, Suite 300
Aliso Viejo, CA 92656

Dear Keith:

     We are pleased to present the following definitive terms for your appointment as President and Chief Executive Officer. The terms of this offer are set forth below:

TITLE AND RESPONSIBILITIES

     Your position will be that of President and Chief Executive Officer and you will have such responsibilities as set forth in the Company’s bylaws and as may be prescribed from time to time by the Board of Directors. Your appointment in this capacity will be effective as of March 13, 2007 (the “Effective Date”) and you will serve until the earlier of your resignation or removal. Notwithstanding the foregoing, your appointment in this position and the terms of this agreement are subject to the satisfactory completion of a customary background check.

COMPENSATION

     Base Salary. Your starting base salary will be $27,083 per month (an annual rate of $325,000), or such higher amount as the Compensation Committee of the Board of Directors may determine from time to time (“Base Salary”), payable in accordance with the Company’s regular payroll practices. The minimum Base Salary increase for fiscal 2008 will be 4% (without any pro-ration for fiscal 2007).

     Bonus. In addition to the Base Salary, you will be eligible for an annual target bonus equal to 50% of the Base Salary. This annual bonus will be payable in the first quarter of each fiscal year (commencing in the first quarter of fiscal 2008, without any pro-ration for fiscal 2007) based on performance in the prior year. The actual bonus may be higher or lower than the target amount, depending on your satisfaction of performance criteria established by the Compensation Committee of the Board and the Company’s overall performance.

     Equity Awards. The Compensation Committee will award you with equity compensation on terms to be mutually agreed upon between you and the Compensation Committee. It is expected that the targeted fair value of the initial equity award will be $800,000 (with fair value being calculated in accordance with the Company’s accounting for equity awards at the time of grant) and that the award would vest on the earliest of: (a) the third anniversary of the Effective Date, (b) upon the consummation of certain significant corporate transactions (such as a change of control of the Company) to be identified by the Compensation Committee at the time the awards are granted, or (c) such earlier time as may be agreed upon by the Compensation Committee at the time the award is granted. This initial equity award will be comprised of (i) stock options and (ii) restricted stock or restricted stock units, with 25% of the target value being granted in options and 75% of the value being granted in restricted stock or restricted stock units.

The timing for the grant of such awards may be affected by equity plan limits, stock exchange shareholder approval rules and other relevant considerations.

     The Compensation Committee ordinarily assesses performance and makes annual equity compensation grants following the end of each fiscal year (i.e., in the first quarter of the following fiscal year). The specific terms of such annual awards will be determined by the Compensation Committee and will be based on performance and the results of periodic surveys of comparable compensation data at peer companies identified by the Compensation Committee.

BENEFITS AND EXPENSES

     As an AVANIR employee you will be eligible for all other customary employee benefits relating to health insurance, life insurance, disability insurance, etc., the details of which you can obtain once you have started your employment. In addition, all travel and other reasonable business expenses incurred by you in the performance of your duties will be reimbursed to you.

     Additionally, as a member of AVANIR’s senior management team, you will remain eligible to receive those change of control severance benefits to which you are currently entitled under the Company’s standard form of Change of Control Agreement (i.e., two years of severance).

     In addition, if the Company terminates your employment without Cause or you Resign for Good Reason (each as defined in the Change of Control Agreement), then, subject to your entering into and not revoking the Company’s standard form of release of claims in favor of the Company, you will be entitled to severance pay equal to one year of Base Salary, with such severance benefit to be paid ratably over a one-year period following termination, provided that the payment of the first six months of severance benefits shall be accelerated if necessary so as to avoid the imposition of any excise taxes under Section 409A of the Internal Revenue Code. Additionally, in the event of your termination without Cause or a resignation for Good Reason, the vesting of all of your unvested stock option shares will be accelerated in full so as to vest as of the date of termination, and you will have 90 days to exercise all those stock option shares that have vested as of the date of termination and the vesting of all restricted stock awards shall accelerate so that such awards are fully vested.

OTHER ITEMS

     Employment with AVANIR Pharmaceuticals is considered “at will”, meaning it is for an unspecified period of time and that the employment relationship may be terminated by yourself or by AVANIR Pharmaceuticals at any time, with or without cause. Nothing in the Change of Control Agreement will modify this at will employment relationship.

     You will be required to devote your full time, attention, energy and skills to the Company during the period you are employed under this Agreement. During your employment, you may 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

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competition with the business of Avanir, unless such participation or interest is fully disclosed to the Company and approved by the Board.

     This offer, the Change of Control Agreement and the Inventions Agreement previously executed by you constitute the entire agreement between you and Avanir with respect to the terms of your employment and, by signing below, will supersede all prior and contemporaneous negotiations, agreements and understandings between you and Avanir, whether oral or written (including your prior employment agreement, but excluding any agreements governing outstanding equity awards). Any amendments to this agreement shall be in writing and signed by both parties.

     In closing, we are delighted to offer you this position and look forward to your contributions to Avanir.

	Respectfully,
	Avanir Pharmaceuticals,
	/s/ Paul Thomas
	Paul Thomas
	Chairman, Compensation Committee
Acceptance of Offer:

/s/ Keith A. Katkin                         

Date:                                                  

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EX-10.46

Exhibit 10.46

SEPARATION AGREEMENT AND RELEASE OF CLAIMS

     If you choose to accept Avanir Pharmaceuticals’ (“the Company”) Severance Package, please sign and return this Agreement to Jesus Varela, Director of Human Resources, by no later than 5:00 p.m. on 29 June 2007. You may scan and e-mail the signed Agreement to Jesus Varela at jvarela@avanir.com and mail the original to him at the Company’s offices at 101 Enterprise, Suite 300, Aliso Viejo, California 92656, telephone 949.389.6747.

RECITALS

     WHEREAS, Jagadish Sircar (“Employee”) will conclude his employment with the Company (collectively the “Parties”), as described herein;

     WHEREAS, after the conclusion of Employee’s employment with the Company, the Employee wishes to serve as a consultant to the Company, and the Company wishes to retain the Employee as a consultant, on the terms and conditions described herein; and

     WHEREAS, each of the Parties to this Agreement desires an amicable separation of the Employee’s employment with the Company, and to resolve any and all claims, disputes, issues, or matters that were asserted or could be asserted;

     NOW THEREFORE, in consideration of the mutual covenants and agreements herein contained and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Parties agree as follows:

(a) Termination Date

     Employee’s employment with the Company will terminate effective 29 June 2007 (the “Termination Date”);

(b) Consulting Services

     Employee agrees to provide to the Company consulting services, defined below, as an independent contractor for a term of six (6) months following the Termination Date (the “Consulting Period”) at any reasonable times requested by the Company; provided that the Company shall not require the Employee to provide any such services to an extent that would unreasonably interfere with the Employee’s search for employment or with any subsequent employment. Such services include, but are not limited to, providing advice and assistance pertaining to research collaborations and patent portfolio, special projects, conference/meeting appearances or any other matter consistent with the Employee’s background, skills and experience, as requested by Keith Katkin, President & Chief Executive Officer (the “Consulting Services”). Such Consulting Services shall be limited to a maximum of one (1) full day per week. As compensation for providing Consulting Services during the Consulting Period, Employee will receive $1,000.00 per week payable by the Company within thirty (30) days following its receipt of an invoice for the Work. The Company shall reimburse Employee for reasonable expenses, including travel expenses, incurred on behalf of the Company during the Consulting Period, provided that such expenses are approved in advance and substantiated in accordance with Company policies. Employee understands and agrees that his obligations to the Company under the Employee Invention Assignment, Patent and Confidential Information Agreement entered into between Employee and the Company on 15

May 1996, a copy of which is attached to this Agreement, shall continue through the Consulting Period. The Consulting Period will terminate on 31 December 2007 unless extended upon mutual agreement.

     If, at any time within the Consulting Period, the Company enters into a definitive agreement with a strategic partner pertaining to the development and/or commercialization of AVP-13358, Xenerex™, and/or RCT, Employee shall be entitled to an incentive payment in an amount equal to $15,000.00 (the “Incentive Payment”) for each transaction. In addition, Employee shall be entitled to an incentive payment in an amount equal to $5,000.00 for each additional cytokine inhibitor that is included within the same, or different, definitive agreement. The Incentive Payment(s) shall be made to Employee within five (5) days following the execution of the definitive agreement(s) which triggered such Incentive Payment(s). Employee acknowledges and agrees that the Company shall withhold appropriate federal, state, local (and foreign, if applicable) income and employment taxes from the Incentive Payment(s).

(c) Severance

   In exchange for agreeing to be bound by the terms of this Agreement, the Company will provide Employee with the following payments and incentives to which he otherwise would not be entitled:

a)	The Company will make a cash severance payment to Employee in an amount equal to thirty-nine (39) weeks of Employee’s current base salary, less all the required withholdings and taxes, payable in a lump sum.
b)	If Employee chooses to elect continuation of coverage under the federal law known as COBRA, the Company will continue to pay his medical, dental and vision premiums through 31 March 2008, unless Employee becomes eligible for coverage under another group insurance plan before that date, at which time the Company’s payment obligations would terminate. Effective 01 April 2008, COBRA payments become Employee’s sole responsibility.
c)	Right Management Consultants will be available to Employee for the purpose of providing executive outplacement services, provided that Employee begins utilizing such services no later than two (2) months after the date of this Agreement. Included in the outplacement services offered will be:

• Coaching with an Executive Career Management Consultant

• Logistics and Support with an Office

• Unlimited Access Right Management’s Learning Center

• Marketplace Resources

• Computer, Phone

The payments described in this Section will become due one business day after the Date of Irrevocability (defined below), provided that Employee complies with his obligations under this Agreement.

(d) Release

     (1) Employee for himself and his heirs, agents, assigns, executors, successors and each of them, unconditionally, irrevocably and absolutely releases and discharges the Company, and any parent and subsidiary corporations, divisions, and affiliated corporations, partnerships or other affiliated entities of the Company, past and present, as well as the Company’s employees, officers, directors, agents, predecessors, successors and assigns (collectively “Released Parties”) from all claims related in any way to the transactions or occurrences between them to date, to the fullest extent permitted by law, including, but not limited to, Employee’s employment with the Company, the termination of his employment, and

2

all other losses, liabilities, claims, demands and causes of action, known or unknown, suspected or unsuspected, arising directly or indirectly out of or in any way connected with Employee’s employment with the Company and the termination of that employment. This release is intended to have the broadest possible application permitted by law and includes, but is not limited to, any tort, contract, common law, constitutional or statutory claims (including, without limitation, claims under the Americans with Disabilities Act, Title VII of the Civil Rights Act of 1964, Older Workers Benefit Protection Act and Age Discrimination in Employment Act, California Fair Employment and Housing Act, state or local fair employment practices laws or ordinances, and state or federal plant closing laws) and all claims for attorneys’ fees, costs and expenses. Notwithstanding the foregoing, this release shall not serve as a waiver of Employee’s rights to (i) vested benefits such as in the Avanir Pharmaceuticals Employee Savings and Protection Plan, (ii) workers compensation benefits, (iii) statutorily-required indemnification under California Labor Code Section 2802 or any comparable provisions of other states’ laws, or (iv) any other benefits or claims that cannot be released as a matter of law.

     (2) Employee declares and represents that he intends this Agreement to be complete and not subject to any claim of mistake, and that the release herein expresses a full and complete release and, regardless of the adequacy or inadequacy of the consideration, the Parties intend the release to be final and complete. The Parties execute this release with the full knowledge that this release covers all possible claims against the Released Parties, to the fullest extent permitted by law.

     (3) Employee acknowledges that the Company has advised him to review this Agreement with an attorney before signing it. Employee has 21 days within which to review and consider this Agreement before signing it, which period may be waived. Should Employee decide not to use the entire 21 days, he knowingly and voluntarily waives any claim that he was not in fact given that period of time or did not use the entire 21 days to consult an attorney and/or consider this Agreement. Employee may revoke the Agreement for up to 7 calendar days after signing it, which period may not be waived, and this Agreement shall not become effective or enforceable until the revocation period has passed (such date of effectiveness being the “Date of Irrevocability”). Any revocation of this Agreement must be in writing addressed to and received by Human Resources on behalf of the Company no later than 5:00 p.m. on the 7th day after Employee signs it. If Employee revokes this Agreement, he will not receive any of the benefits described in this Agreement. This Agreement does not waive or release any rights or claims Employee may have under the Age Discrimination in Employment Act that arise after the execution of this Agreement.

(e) Acknowledgement of Understanding

     Employee and the Company acknowledge that they may discover facts or law different from, or in addition to, the facts or law that they know or believe to be true with respect to the claims released in this Agreement and agree, nonetheless, that this Agreement and the release contained in it shall be and remain effective in all respects notwithstanding such different or additional facts or the discovery of them. Employee and the Company expressly acknowledge and agree that Employee’s rights under Section 1542 of the California Civil Code and any comparable provisions of other states’ and federal law are expressly waived. That section provides:

A general release does not extend to claims which 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.

(f) Pursuit of Released Claims

     Employee represents that, as of the date of this Agreement, he has not filed any lawsuits, charges, complaints, petitions, claims or other accusatory pleadings against Released Parties in any court or with

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any governmental agency. Employee further agrees that, to the fullest extent permitted by law, he will not prosecute, nor allow to be prosecuted on his behalf, in any court, whether state or federal, any claim or demand of any type related to the matters released above, it being the intention of Employee that with the execution of this release, Released Parties will be absolutely, unconditionally and forever discharged of and from all obligations to or on behalf of Employee related in any way to the matters discharged herein. Employee further represents that he has not assigned any claim he may have against Released Parties to any other person or entity. Nothing in this Agreement affects Employee’s right to file a charge or complaint with the Equal Employment Opportunity Commission (EEOC).

(g) Return of Company Property

     By signing this Agreement, Employee represents and warrants that he will have returned to the Company on or before 29 June 2007, all Company property, including all originals and copies of documents removed from the Company’s premises at any time during his employment with the Company. Employee will not be entitled to the Severance Package described in Section (c) herein unless and until all such property is returned to the Company.

(h) Expense Reimbursement, Vacation Advance Reimbursement

     By signing this Agreement, Employee agrees that all outstanding claims for reimbursements have been submitted to the Company.

(i) Nondisparagement

     Employee will not make any voluntary statements, written or verbal, or cause or encourage others to make any such statements that defame, disparage or in any way criticize Released Parties’ business reputation, practices or conduct.

(j) Arbitration of Disputes and Enforcement of Agreement

     (1) Employee and the Company agree to resolve any claims they may have against each other or that Employee has with any other Released Party through final and binding arbitration. This agreement to arbitrate applies to any and all disputes about the validity, interpretation, or effect of this Agreement or alleged violations of it and whether a particular claim is covered by this Agreement (“Arbitrable Claims”). Except as provided in Section (j)(3) below, arbitration shall be the exclusive remedy for any such claim or dispute, and the parties expressly waive their rights to a jury trial on any such claim or dispute. Arbitration shall be conducted in Orange County, California through JAMS or, if JAMS is not available, through another arbitration provider mutually acceptable to the parties. However, either party may bring an action in court to compel arbitration under this Agreement or to enforce an arbitration award. The Federal Arbitration Act shall govern the interpretation and enforcement of this section. If a court or arbitrator finds the Federal Arbitration Act does not govern, then California law shall govern the interpretation and enforcement of this section.

     (2) In any arbitration, legal proceeding or other proceeding brought to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to recover reasonable attorneys’ fees and costs. In addition, should Employee or the Company attempt to resolve any claim waived by this Agreement or pursue any Arbitrable Claim by any method other than arbitration (except to the extent allowed in Section (j)(3) below), the responding party will be entitled to recover from the initiating party all damages, costs, expenses, and attorneys’ fees incurred as a result of that breach.

     (3) The requirement to arbitrate disputes shall not preclude Employee from filing a charge or complaint with the EEOC, including a challenge to the validity of this Agreement.

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(k) Miscellaneous

     This Agreement sets forth the entire agreement between Employee and the Company pertaining to the subject matter of this Agreement and supersedes any previous agreements or understandings between Employee and the Company except the 15 May 1996 Employee Invention Assignment, Patent and Confidential Information Agreement (attached hereto) (the “Employee Invention Assignment, Patent and Confidential Information Agreement”) which remains in full force and effect and the terms of any outstanding stock options and restricted stock awards previously granted to Employee under any of the following Company’s equity incentive plans: 1994 Stock Option Plan, 1998 Stock Option Plan, 2000 Stock Option Plan, 2003 Equity Incentive Plan and 2005 Equity Incentive Plan (the “Equity Plans”). This Agreement may not be modified or canceled in any manner except by a writing signed by both Employee and an authorized official of the Company. Employee acknowledges that the Company has made no representations or promises to him, other than those in this Agreement. If any provision in this Agreement is found to be unenforceable, that provision will be enforced to the greatest extent permitted by law and all other provisions will remain fully enforceable. This Agreement binds the Parties and their heirs, administrators, representatives, attorneys, executors, successors, and assigns. This Agreement shall be construed as a whole according to its fair meaning. It shall not be construed strictly for or against Employee or the Released Parties. Unless the context indicates otherwise, the term “or” shall be deemed to include the term “and” and the singular or plural number shall be deemed to include the other. This Agreement shall be governed by the law of the State of California, excluding its laws relating to the choice of laws.

(l) Treatment of Equity Awards

     Nothing in this Agreement shall affect or modify any outstanding equity award granted to Employee under the Equity Plans. Company and Employee acknowledge that pursuant to the terms of the Equity Plans, that if Employee accepts this Agreement and commences service as a consultant immediately after the Termination Date, that he will have no break in his continuous service to the Company. As a result, all stock options and restricted stock awards previously issued to and held by Employee as of the Termination Date will continue to vest through the duration of the Consulting Period, in accordance with their existing terms and provisions. If Employee’s service as a consultant hereunder begins more than one business day after the Termination Date, then the Employee’s service would be considered terminated under the Equity Plans.

(m) Counterparts

     This Agreement may be executed by facsimile or facsimile signature, and in separate counterparts, each of which shall be deemed an original but all of which, when taken together, shall constitute one and the same instrument.

Please read this Agreement and carefully consider all of its provisions before signing it. This Agreement includes a release of known and unknown claims. This Agreement also includes an arbitration clause in which both parties waive any rights they may have to trial by jury with regard to Arbitrable Claims. You may consider consulting with an attorney before signing this Agreement.

I represent and agree that I have carefully read and fully understand all of the provisions of this Separation Agreement and Release of Claims and that I am voluntarily agreeing to those provisions.

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Enclosures: Employee Invention Assignment, Patent and Confidential Information Agreement

Date	6/25/07	/s/ Jagadish Sircar
		Employee
Date	6/21/07	/s/ Jesus Varela       Director Human Resources
		Company

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EX-10.49

Exhibit 10.49

CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED AND REPLACED WITH “***”.
A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECRETARY OF
THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO AN APPLICATION REQUESTING
CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE EXCHANGE ACT OF 1934.

ASSET PURCHASE AGREEMENT

by and among

AVANIR PHARMACEUTICALS, and

ALAMO PHARMACEUTICALS, LLC

on the one hand

and

AZUR PHARMA INTERNATIONAL III LIMITED, and

AZUR PHARMA INC.

on the other hand

Dated as of July 2, 2007

TABLE OF CONTENTS

		Page
ARTICLE I DEFINITIONS			1
1.1	Defined Terms		1
1.2	Other Defined Terms		12
1.3	Seller Knowledge		13
ARTICLE II PURCHASE AND SALE OF ASSETS			13
2.1	Transfer of Assets		13
2.2	Assumption of Liabilities		14
2.3	Purchase Price		14
2.4	Payment of Sales Percentage Amount		15
2.5	Allocation of Purchase Price		16
2.6	Closing Costs; Transfer Taxes and Fees		16
2.7	Further Assurances		17
2.8	Determination of Net Working Capital		17
2.9	Withholding Tax		19
ARTICLE III CLOSING			19
3.1	Closing		19
3.2	Deliveries at Closing		19
3.3	Consents to Assignment and Transfer of Certain Rights and Liabilities		21
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE SELLING PARTIES AND PARENT			21
4.1	Organization		22
4.2	Authorization		22
4.3	No Conflict or Violation; Consents and Approvals	22
4.4	Financial Information		23
4.5	Absence of Certain Changes or Events		23
4.6	Title to Purchased Assets and Sufficiency		23
4.7	Material Contracts		23
4.8	Permits		24
4.9	Litigation		24
4.10	Compliance with Laws		24
4.11	Brokers or Finders		26
4.12	Employment, Labor and Employee Benefit Matters		26
4.13	Intellectual Property		27

		Page
4.14	Environmental Matters		28
4.15	Inventory		28
4.16	Insurance		29
4.17	Customers		29
4.18	Taxes		29
4.19	Cutler Agreement		30
ARTICLE V REPRESENTATIONS AND WARRANTIES OF BUYER			30
5.1	Organization of Buyer		30
5.2	Authorization		30
5.3	Compliance with Applicable Law		30
5.4	Litigation		30
5.5	No Conflict or Violation; Consents and Approvals	30
5.6	No Brokers or Finders		31
5.7	Sufficiency of Consideration		31
5.8	[* * *]		31
ARTICLE VI COVENANTS OF THE SELLING PARTIES AND BUYER			32
6.1	Access by Buyer; Confidentiality Agreement		32
6.2	Conduct of Business		33
6.3	Employee Matters		34
6.4	No Additional Representations and Warranties		36
6.5	Disclaimer of Estimates and Projections		37
6.6	Revision of Marketing Materials; Use of Names	37
6.7	Customer Notifications		37
6.8	Regulatory Matters, Etc		38
6.9	Post Closing Cooperation		39
6.10	Consents		40
6.11	Financing		40
6.12	Transition Services		40
6.13	Transition Services Contracts		43
6.14	Reporting Obligations		44
6.15	Operation of Business by Buyer		44
6.16	[* * *]		44
6.17	Supplement of Disclosure Schedules		45
ARTICLE VII CONDITIONS TO THE SELLING PARTIES’ OBLIGATIONS			46
7.1	Representations, Warranties and Covenants		46

^{* * *} Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission

		Page
7.2	No Laws or Governmental Orders		46
7.3	Deliveries		46
ARTICLE VIII CONDITIONS TO BUYER’S OBLIGATIONS			46
8.1	Representations, Warranties and Covenants		46
8.2	No Law or Governmental Orders		47
8.3	Deliveries		47
8.4	Consents		47
8.5	Employees		47
ARTICLE IX POST-CLOSING COVENANTS			47
9.1	Selling Parties Maintenance of Insurance		47
9.2	Survival		47
9.3	Indemnification		48
9.4	Indemnification Procedures		49
9.5	Limitation on Liability		52
9.6	Calculation and Characterization of Damages		52
9.7	Exclusive Remedy		52
9.8	Mitigation of Damages		53
9.9	Certain Damages		53
9.10	Covenant Not to Compete		53
ARTICLE X MISCELLANEOUS			54
10.1	Termination		54
10.2	Assignment		54
10.3	Cooperation		55
10.4	Notices		55
10.5	Governing Law		56
10.6	Entire Agreement; Amendments and Waivers		56
10.7	Counterparts		56
10.8	No Third Party Beneficiaries; Expenses		56
10.9	Severability		57
10.10	Titles; Gender; Certain Interpretive Matters		57
10.11	Publicity		57
10.12	Exhibits and Schedules; Construction of Certain Provisions	58
10.13	Bulk Transfer Laws		58
10.14	Cumulative Remedies		58
10.15	Arbitration		58
10.16	Time of Essence		58
10.17	Drafting		59

EXHIBITS

Exhibit A-1		Form of Inc. Assignment and Assumption Agreement
Exhibit A-2		Form of Limited Assignment and Assumption Agreement
Exhibit B-1	—	Form of Inc. Assignment of Contracts
Exhibit B-2		Form of Limited Assignment of Contracts
Exhibit C	—	Form of Assignment of Owned Intellectual Property
Exhibit D	—	Form of Assignment and Assumption of Lease

ASSET PURCHASE AGREEMENT

          THIS ASSET PURCHASE AGREEMENT, dated as of July 2, 2007, is by and among Avanir Pharmaceuticals, a California corporation (“Parent”), Alamo Pharmaceuticals, LLC, a California limited liability company (“Seller” and together, the “Selling Parties”), and Azur Pharma Inc., a New York corporation (“Azur Inc.”), and Azur Pharma International III Limited, a Bermuda limited liability company (“Azur Limited” and together with Azur Inc., “Buyer”).

RECITALS

          WHEREAS, Seller is a pharmaceutical company focused on developing, acquiring and commercializing therapeutic products for the treatment of chronic diseases, including a product known as FazaClo, an orally disintegrating tablet that addresses the adherence needs in patients with refractory schizophrenia;

          WHEREAS, Seller is a wholly owned Subsidiary of Parent; and

          WHEREAS, Buyer desires to purchase from the Selling Parties, and the Selling Parties desire to sell to Buyer, certain assets relating to the Business (as defined in Section 1.1 below) and Buyer desires to assume from, and the Selling Parties desire to transfer to Buyer, certain liabilities relating to the Business, in each case upon the terms and subject to the conditions of this Agreement.

AGREEMENT

          NOW, THEREFORE, in consideration of the foregoing and the respective representations, warranties, covenants and agreements of the parties contained herein, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows:

ARTICLE I
DEFINITIONS

          1.1 Defined Terms. As used herein, the terms below when used with an initial capital letter shall have the following meanings. Any of such terms, unless the context otherwise requires, may be used in the singular or plural, depending upon the reference.

          “Action” means any action, Claim, suit, litigation or other proceeding commenced, brought, conducted or heard by or before, or otherwise involving, any Governmental Authority or arbitrator.

          “Affiliate” has the meaning set forth in Rule 12b-2 of the regulations promulgated under the Exchange Act.

          “Agreement” means this Asset Purchase Agreement, including all exhibits and schedules hereto (including the Disclosure Schedules), as the same may be amended, modified or supplemented from time to time in accordance with its terms.

          “Ancillary Agreements” means, collectively, (a) the Assignment and Assumption Agreements, (b) the Assignments of Contracts, (c) the Assignment of Owned Intellectual Property, (d) the Assignment and Assumption of Lease and (e) all other instruments, certificates and documents delivered by the parties pursuant to this Agreement, as each may be amended, modified or supplemented from time to time in accordance with its terms.

          ^{[* * *]}

          “Assumed Liabilities” means all Liabilities, whether or not accruing, arising out of or relating to events or occurrences happening or conditions existing, before, on or after the Closing Date, which relate directly or indirectly to the Business, other than Retained Liabilities. Without limiting the foregoing, Assumed Liabilities include:

     (a) the UPA Payments;

     (b) all rebates, chargebacks (including all pricing allowances) and Product returns relating exclusively to the Business;

     (c) all accounts payable and accrued expenses relating exclusively to the Business;

     (d) all payment and performance obligations of the Selling Parties under the Business Contracts (including the lease under which Seller is the tenant and relating to the Facility, with respect to periods on and after the Closing Date);

     (e) the Assumed Tax Liabilities;

     (f) except for Taxes to be paid by the Selling Parties under Section 2.6, all Liabilities, whether or not accrued, arising out of or relating to events or occurrences happening or conditions occurring after the Closing, for any Tax that may be imposed by any Governmental Authority on the ownership, sale, operation or use of the Purchased Assets; and

     (g) the Liabilities specified in Schedule 1.1(a).

          “Assumed Tax Liabilities” means all Liabilities for Taxes and fees with respect to the Purchased Assets for which Buyer is liable pursuant to Section 2.6 hereof.

^{[* * *]} Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission.

          “Business” means the business activities and operations of the Selling Parties involving the development, formulation, testing, production, licensing, commercialization and distribution of the Product, including the development and maintenance of a patient registry and sub-registry with respect to the Product.

          “Business Contracts” means all executory Contracts between the Selling Parties or their Affiliates, on the one hand, and a third party, on the other hand, relating exclusively to the operation of the Business, and all Contracts of the Business listed on Schedule 1.1(b) but in all events excluding the Contracts listed on Schedule 1.1(c).

          “Business Day” means any day other than Saturday, Sunday or any day that is a legal holiday or a day in which banking institutions in Los Angeles, California are authorized by Law or other governmental action to close.

          “Business Employees” means employees of the Selling Parties or any of their Affiliates identified on Schedule 1.1(d) attached hereto.

          “Buyer Employees” means Business Employees who accept offers of employment from Azur Inc. pursuant to Section 6.3(a) hereof.

          “CERCLA” means the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. § 9601, et seq., as amended to date.

          “CIMA Agreements” means, in each case as amended, supplemented or otherwise modified from time to time (a) that certain Amended and Restated Development, License and Supply Agreement, dated as of August 22, 2005, by and between Cima Labs Inc. and Seller; (b) that certain Quality Agreement, dated as of December 29, 2003, by and between Cima Labs Inc. and Seller; and (c) that certain Feasability Plan for Alamo Clozapine DuraSolv, dated as of May 2, 2005, by and between Cima Labs Inc. and Seller.

          “Claim” means any claim, demand, cause of action, chose in action, right of recovery or right of set-off of whatever kind or description against any Person.

          “Closing Net Working Capital Overage” shall exist when the Closing Net Working Capital Estimate exceeds the Target Net Working Capital and shall be equal to the difference between the Closing Net Working Capital Estimate and the Target Net Working Capital.

          “Closing Net Working Capital Underage” shall exist when the Closing Net Working Capital Estimate is less than the Target Net Working Capital and shall be equal to the difference between the Target Net Working Capital and the Closing Net Working Capital Estimate.

          “Clozapine” or “clozapine” means the active ingredient in the currently marketed product known as FazaClo^® and shall include 8-chloro-11-(4-methyl-l-piperazinyl)-5H-dibenzo(b,e)(1,4) diazepine and any salts, esters, metabolites, polymorphs, isomers, racemates, hydrates, solvates, crystalline forms thereof and/or pro-drugs thereof.

          “COBRA” shall mean the continuation coverage requirements set forth in Sections 601 et seq. of the Employee Retirement Income Security Act of 1974 and Section 4980B of the Code.

          “Code” means the Internal Revenue Code of 1986, as amended.

          “Confidentiality Agreement” means that certain confidentiality agreement dated March 13, 2007 by and between Azur Pharma Limited and Seller.

          “Contract” means all contracts, subcontracts, agreements, leases, licenses, commitments, loan agreements, mortgages, security agreements, trust indentures, sales and purchase orders, statements of work, and other instruments, arrangements or understandings of any kind, including any amendments or alterations thereto.

          “Disclosure Schedules” means the disclosure schedules delivered by the Selling Parties to Buyer on the date hereof which, among other things, set forth certain exceptions to the representations and warranties contained in Article IV.

          “Domain Names” means the domain names listed on Schedule 1.1(e).

          “Employee Records” means, with respect to Buyer Employees, copies of all job-related employment documents.

          “Encumbrance” means any lien (including environmental and tax liens), pledge, charge, other security interest, easement, servient easement, reversion, reverter or purchase right.

          “Environmental Laws” means all Laws, as amended and now or hereafter in effect and as amended, and any judicial or administrative interpretation thereof, including any judicial or administrative order, consent decree or judgment, relating to the environment (including ambient air, indoor air, surface water, ground water, land surface and subsurface strata), health, safety, natural resources or Hazardous Substances, including CERCLA; the Resource Conservation and Recovery Act of 1976, 42 U.S.C. §§ 6901 et seq.; the Hazardous Materials Transportation Act, 49 U.S.C. §§ 6901 et seq.; the Clean Water Act, 33 U.S.C. §§ 1251 et seq.; the Toxic Substances Control Act, 15 U.S.C. §§ 2601 et seq.; the Clean Air Act, 42 U.S.C. §§ 7401 et seq.; the Safe Drinking Water Act, 42 U.S.C. §§ 300f et seq. and the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. §§ 136 et seq.

          “ERISA” means the United States Employee Retirement Income Security Act of 1974 and the rules and regulations promulgated thereunder.

          “ERISA Affiliate” means any Person that, together with the Seller, would be deemed a “single employer” within the meaning of Section 414 of the Code.

          “Exchange Act” means the Securities Exchange Act of 1934, as amended.

          “Excluded Assets” means any and all assets, properties, rights or interests of the Selling Parties or their Affiliates that are not described in the definition of Purchased Assets.

          “Facility” means that certain facility used solely in connection with the Business and located in New Jersey.

          “FDA” means the United States Food and Drug Administration, or any successor agency thereto.

          “Federal Food, Drug and Cosmetic Act” means the Federal Food, Drug and Cosmetic Act of 1938, as amended.

          “Final Net Working Capital Overage” shall only exist when the Final Net Working Capital exceeds the Closing Net Working Capital Estimate by more than Two Hundred Fifty Thousand Dollars ($250,000) and shall be equal to the difference between the Final Net Working Capital and the Closing Net Working Capital Estimate.

          “Final Net Working Capital Underage” shall only exist when the Final Net Working Capital is less than the Closing Net Working Capital Estimate by more than Two Hundred Fifty Thousand Dollars ($250,000) and shall be equal to the difference between the Closing Net Working Capital Estimate and the Final Net Working Capital.

          “Fixtures and Equipment” means all of the computers (but not software), equipment, furniture, fixtures, furnishings, machinery, vehicles and other tangible personal property owned or leased by the Selling Parties or their Affiliates and solely used in connection with the Business, including those items set forth on Schedule 1.1(f).

          “GAAP” means United States generally accepted accounting principles.

          “Governmental Authority” means any court, government (federal, state, local, foreign or multinational) or other regulatory, administrative or governmental agency or authority.

          “Governmental Order” means any judgment, decision, consent decree, injunction, ruling, writ or order of or entered by any Governmental Authority that is binding on any Person or its property under applicable Law.

          “Hazardous Substance” means petroleum, petroleum by-products, polychlorinated biphenyls, asbestos, or substances containing asbestos, mold and any other chemicals, compounds, constituents materials, substances or wastes in any form regulated, or which can give rise to liability under any Environmental Law.

          “Inc. Assumed Liabilities” means all Assumed Liabilities other than the Limited Assumed Liabilities.

          “Inc. Business Contracts” means all Business Contracts other than the Limited Business Contracts.

          “Inc. Purchased Assets” means all Purchased Assets other than the Limited Purchased Assets.

          “IND” means (a) the Investigational New Drug Application, as defined in the Federal Food, Drug and Cosmetic Act and as it may be superseded or amended from time to time, and the regulations promulgated thereunder, which is required to be filed with the FDA before beginning clinical testing of a product in human subjects, or any successor application or procedure, and (b) all supplements and amendments that may be filed in respect to the foregoing.

          “Intellectual Property” means (a) Know How, (b) trademarks (including service marks), trademark applications, trade dress, logos, trademark rights, (c) United States, foreign and international patents and patent applications (including any divisionals, continuation, continuations in part), (d) copyrights, including registrations and applications for registration thereof and (e) internet domain names.

          “Inventory” means all of the Selling Parties’ or any Affiliate’s inventory held for resale in the Business and all of the Selling Parties’ or any Affiliate’s raw materials, work in process or finished goods held for use in the Business, including the inventory set forth on Schedule 1.1(g)

          “Know How” means confidential specifications, processes, designs, plans, trade secrets, manufacturing, engineering and other manuals and drawings, standard operating procedures, flow diagrams, safety, quality assurance and quality control information, data, invention disclosures, customer and supplier lists and all other similar confidential technical and business information and data.

          “Laws” means any laws, statutes, ordinances, regulations, rules, executive orders, court decisions and orders of any Governmental Authority.

          “Liabilities” means any direct or indirect liability, indebtedness, obligation, commitment, expense, claim, deficiency, guaranty or endorsement of or by any Person of any type, whether absolute or contingent, matured or unmatured, liquidated or unliquidated, accrued or unaccrued, asserted or unasserted, known or unknown, whenever arising, including all costs and expenses relating thereto, and including those liabilities, indebtedness and obligations arising under any Law, Action, threatened Action, Governmental Order or any award of any arbitrator of any kind, and those arising under any Contract, commitment or undertaking.

          “Licensing Revenues” means, with respect to the Product, the licensing revenues, including royalties, actually received by the Buyer or any of its Affiliates from a Person (excluding any direct or indirect wholly-owned subsidiary of Azur Pharma Limited) pursuant to any sublicense agreement with such Person relating directly to the Product in any territory outside the United States, reduced by (i) any royalty payments to CIMA Labs, Inc. pursuant to Seller’s current contractual obligations to CIMA Labs, Inc. for such payments, (ii) any Net Non-US Licensing Revenues (as such term is defined in the Unit Purchase Agreement) payable pursuant to the Unit Purchase Agreement and (iii) any of such licensing revenues that are non-recurring milestone payments not based upon Product sales.

          “Licensed Intellectual Property” means the Intellectual Property subject to the Licenses.

          “Licenses” means the specific licenses and license rights set forth on Schedule 1.1(h).

          “Limited Assumed Liabilities” means the Assumed Liabilities consisting of (i) the UPA Payments and (ii) those Assumed Liabilities identified in subsections (b) and (c) of the definition of Assumed Liabilities.

          “Limited Business Contracts” means the CIMA Agreements and the Supply Agreements.

          “Limited Purchased Assets” means all Transferred Intellectual Property, all Product Applications, all Product Registrations, all accounts receivable relating exclusively to the Business, the Limited Business Contracts and all Inventory.

          “Material Adverse Effect” means any event, circumstance or occurrence that has had or that would be reasonably likely to have a material adverse change in, or material adverse effect on, the financial condition or results of operations of the Business, taken as a whole; provided that any such change or effect resulting from (a) any change in general economic conditions or in the industries in which the Business operates, to the extent the Business is not disproportionately affected, (b) any change in Law, rule or regulation or GAAP or interpretations thereof, or (c) the announcement or pendency of this Agreement, the Ancillary Agreements or the transactions contemplated hereby or thereby, shall not be considered when determining whether a Material Adverse Effect has occurred.

          “Most Recent Fiscal Month End” means May 31, 2007.

          “NDA” means a New Drug Application for any product, as appropriate, requesting permission to place a drug on the market in accordance with the Federal Food, Drug and Cosmetic Act, and all supplements or amendments filed pursuant to the requirements of the FDA, including all documents, data and other information concerning a product which are reasonably necessary for FDA approval to market a product in the United States.

          “Net Sales” means, with respect to any period, the sum (without duplication) of (i) the net sales of the Product in the Territory as would be shown in the consolidated financial statements of Buyer’s ultimate parent entity for such period, prepared in accordance with GAAP, (ii) the net sales of the Product in the U.S. as would be shown in the consolidated financial statements for such period of any Person to which a sublicense directly related to the Product has been granted, prepared in accordance with GAAP and (iii) Licensing Revenues for such period.

          “Net Sales Baseline” means Seventeen Million Dollars ($17,000,000); provided that, with respect to the calendar year ended December 31, 2007, the Net Sales Baseline shall be Seventeen Million Dollars ($17,000,000) multiplied by the number of days between the Closing Date and December 31, 2007 and divided by 365.

          “Net Working Capital” means (i) the value of Inventory, plus (ii) accounts receivable (less any reserves for uncollectibility and payment discounts), plus (iii) current prepaid expenses related to the Business minus (iv) accounts payable to be assumed by Buyer under this Agreement, minus (v) all accrued expenses, including rebates, chargebacks, Product returns (re-

lating exclusively to Products sold prior to the Closing Date) and all other pricing allowances (but excluding accrued compensation expenses), with each amount determined in accordance with GAAP applied on a basis consistent with the past practices of Parent. For purposes of this Agreement, Net Working Capital shall, in all events, exclude cash, fixed assets, deferred tax assets, goodwill, intangible assets and long term debt.

          “Ordinary Course of Business” or “Ordinary Course” or any similar phrase means the ordinary course of the business conducted by the Selling Parties or any Affiliate with respect to the Business consistent with past practice (including with respect to quantity and frequency).

          “Owned Intellectual Property” means all Intellectual Property owned by the Selling Parties that is exclusively used in the Business, including (i) the Product Trademarks, (ii) the Patent Rights, (iii) the Domain Names and (iv) the other Intellectual Property set forth on Schedule 1.1(i). Included within Owned Intellectual Property shall be the right to sue for past infringement thereof.

          “Patent Rights” means the patents, patent applications (including any divisionals, continuation, continuations-in-part) and patent rights set forth on Schedule 1.1(j).

          “Permits” means permits, licenses, franchises and other governmental authorizations, consents and approvals.

          “Permitted Encumbrances” means (a) Encumbrances imposed by Law, such as carriers’, cashiers’, workmen’s, warehousemen’s, repairmen’s, mechanics’, materialmen’s, landlords’, laborers’, suppliers’ and vendors’ liens securing obligations which are not yet due or which are being contested in good faith, (b) Permitted Tax Liens, (c) other Encumbrances which do not materially detract from the value of, materially interfere with, or otherwise individually or collectively materially adversely affect the present use and enjoyment of the asset or property subject thereto or affected thereby, (d) any extensions, renewals and replacements of any of the foregoing and (e) any of the foregoing disclosed in the Disclosure Schedules.

          “Permitted Tax Liens” means (a) Encumbrances securing the payment of Taxes which are being contested in good faith by appropriate proceedings and (b) Encumbrances for current Taxes not yet due and payable.

          “Person” means an individual, a partnership, a corporation, a limited liability company, a trust, an unincorporated organization, a Governmental Authority or any department or agency thereof.

          “Post-Closing Net Working Capital” means the Net Working Capital reflected on the Statement of Post-Closing Net Working Capital.

          “Product” means, individually and collectively, the orally disintegrating pharmaceutical products that address the adherence needs in patients with refractory schizophrenia (and all improvements to and formulations thereof) currently marketed and sold in the United States pursuant to New Drug Application No. 21-590 (or the foreign equivalent thereof) under the Product Trademarks and, for the avoidance of doubt, includes the licenses applicable to the DuraSolv and OraSolv formulations.

          “Product Applications” means (i) the application for approval or registrations by the Selling Parties and its Affiliates, for the investigation, sale, distribution and/or marketing of the Product in the Territory set forth on Schedule 1.1(k), and (ii) all dossiers, reports, data and other written materials prepared by or filed as part of such applications for approvals or registrations, or maintained by the Selling Parties and its Affiliates and relating to such applications for approvals or registrations.

          “Product Records” means to the extent permitted by Law, all existing books and records related solely to the conduct of the Business, including copies of all material customer and supplier lists, account lists, sales history, marketing studies, consultant reports, registry, subregistry and correspondence (excluding invoices) with respect to the Product or the Business to the extent maintained by the Selling Parties, all annual reports and adverse event reports, correspondence with the FDA or any equivalent foreign Governmental Authority (to the extent maintained by the Selling Parties), exception reports, specifications for raw materials and, to the extent maintained by the Selling Parties, FDA or any equivalent foreign Governmental Authority communication thereon, communication relating to manufacturing or packaging with any of the FDA or any equivalent foreign Governmental Authority, vendors or suppliers, and all complaint files and adverse event files with respect to the Product, provided, however, that (a) the Selling Parties may retain (i) a copy of any such books and records to the extent necessary for Tax, accounting, litigation or other valid business purposes and (ii) a copy of all books, documents, records and files maintained by the Selling Parties and/or its Representatives, agents or licensees in connection with their respective Tax, legal, regulatory or reporting requirements, and (b) the following shall be excluded from Product Records (i) attorney work product, attorney-client communications and other items protected by privilege, (ii) Employee Records and (ii) all books, documents, records and files prepared in connection with the Agreement and the Ancillary Agreements, including bids received from other parties and strategic, financial or Tax analyses relating to the divestiture of the Purchased Assets, the Assumed Liabilities, the Product and the Business.

          “Product Registrations” means (i) the approvals or registrations which have been received by the Selling Parties or their Affiliates, for the investigation, sale, distribution and/or marketing of the Product or a current Product improvement in the Territory (including any NDAs, INDs and other relevant applications/approvals), including those approvals and registrations set forth on Schedule 1.1(l), and (ii) all dossiers, reports, data and other written materials filed as part of such approvals or registrations, or maintained by the Selling Parties and their Affiliates and relating to such approvals or registrations.

          “Product Trademarks” means trademarks (including service marks), trademark applications, trade dress, logos and trademark rights as set forth on Schedule 1.1(m).

          “Purchased Assets” means all of the Selling Parties’ or any of their Affiliate’s right, title and interest in and to only the following properties:

(a)	all assets listed on Schedule 1.1(n) hereto;
(b)	all Inventory;

(c)	all Business Contracts;
(d)	all Fixtures and Equipment;
(e)	the Permits set forth on Schedule 1.1(o);
(f)	the Transferred Intellectual Property;
(g)	all Product Applications and Product Registrations;
(h)	the Software;
(i)	all accounts receivable relating exclusively to the Business; and
(j)	the Product Records, including those Product Records set forth on Schedule 1.1(p), other than to the extent they contain information, data, Know-How or trade secrets of the Selling Parties not used in the Business. Notwithstanding the foregoing, the Purchased Assets shall not include any of the Excluded Assets.

          “Release” means any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping or disposing of a Hazardous Substance into the environment.

          “Representative” means, with respect to any Person, any officer, director, principal, attorney, agent, employee or other authorized representative of such Person.

          “Retained Liabilities” means the following, and only the following, Liabilities of the Selling Parties or any Affiliates relating to the Business, which, notwithstanding any other provision of this Agreement, will not be assumed by Buyer:

     (a) all Liabilities of the Selling Parties to the extent relating to Excluded Assets;

     (b) all Liabilities of the Selling Parties for Taxes incurred, or arising out of the operation of the Business through the Closing, other than Liabilities that are apportioned to Buyer pursuant to Section 2.6 hereof;

     (c) all Liabilities arising out of, relating to or in connection with any Action involving the Purchased Assets which was asserted before the Closing;

     (d) the notes in the original principal amount of $6.675 million, $14.4 million, $4 million, and $2 million (Alternate Contingent Note 1) each with Avanir as Payor and Neal R. Cutler as note holder, as described in Section 1.04(d)(ii) of the Unit Purchase Agreement;

     (e) the Subsequent Run Rate Contingent Payment (that is dependent upon achieving $1.5 million of Net Product Revenues (as defined in the Unit Purchase Agreement) for three (3) consecutive months within a fiscal quarter), as more clearly described

in the Unit Purchase Agreement, and all other obligations and liabilities relating to the Unit Purchase Agreement (other than the UPA Payments);

     (f) all Liabilities under the Selling Parties Plans, except as otherwise set forth in Section 6.3 hereof;

     (g) subject to Section 6.3 hereof, all Liabilities for wages, pensions, incentive compensation, equity compensation, severance, COBRA, retiree or other benefits, overtime, workers compensation benefits, occupational safety and health liabilities and other similar Liabilities in respect of Buyer Employees relating to the period through the Closing and in respect of employees of the Selling Parties or their Affiliates who are not Buyer Employees, whether relating to the period before or after the Closing;

     (h) all Liabilities of the Selling Parties for costs and expenses (including legal fees and expenses) that the Selling Parties have incurred in connection with this Agreement and the transactions contemplated hereby;

     (i) all Liabilities resulting from any material quality, design manufacture or safety defect in any Product sold prior to the Closing Date, whether used prior to or after the Closing Date; and

     (j) any liability or obligation of the Selling Parties under this Agreement and the Ancillary Agreements.

          “Sales Percentage Amount” means three percent (3%) multiplied by the difference between (a) the Net Sales minus (b) the Net Sales Baseline.

          “Selling Parties Plans” means any bonus, deferred compensation, pension, retirement, profit-sharing, thrift, savings, employment, termination, retention, severance, compensation, life insurance, retiree health benefits, workers’ compensation, medical, health or other plans, agreements, policies or arrangements that cover the Business Employees, whether offered by the Selling Parties or any of their Affiliates.

          “Software” means the computer software and programs set forth on Schedule 1.1(q).

          “Supply Agreements” means, in each case as amended, supplemented or otherwise modified from time to time, (a) that certain Clozapine Supply Agreement, dated June 1, 2005, by and among Betachem, Inc., Medichem, S.A. and Seller; (b) that certain Packaging Agreement, dated as of January 13, 2005, by and between Cardinal Health PTS, LLC and Seller; (c) that certain Quality Agreement, dated as of June 22, 2004, by and between Cardinal Health PTS, LLC and Seller; (d) that certain Exclusive Distribution Agreement, dated as of July 29, 2004, by and between Cardinal Health PTS, LLC and Seller; and (e) that certain Technical Test Protocol, designated TTP-AHJ-M0004.00, titled “Retain Storage of Fazaclo Tablets” by and between Cardinal Health PTS, LLC and Seller.

          “Target Net Working Capital” means a Net Working Capital of Zero Dollars ($0).

          “Tax or Taxes” means all taxes (including franchise taxes), charges, fees, levies or other assessments imposed by any Taxing Authority and based on or measured solely with respect to net income or profits, including any interest, penalties or additions attributable or imposed with respect thereto, and all taxes, charges, levies, fees or other assessments, including transfer, gross receipt, sales, use, service, occupation, ad valorem, property, payroll, personal property, excise, severance, premium, stamp, documentary, license, registration, social security, employment, unemployment, disability, environmental (including taxes under Section 59A of the Code), add-on, value-added, withholding (whether payable directly or by withholding and whether or not requiring the filing of a Tax Return therefor), commercial rent and occupancy taxes, and any estimated taxes, deficiency assessments, interest, penalties and additions to tax or additional amounts in connection therewith, imposed by any Taxing Authority, and including any obligation to indemnify or otherwise assume or succeed to the Tax Liability of any other Person.

          “Tax Return” means any return, report or similar statement or form required to be filed with respect to any Tax (including any attached schedules and related or supporting information), including, without limitation, any information return, claim for refund, amended return or declaration of estimated Tax.

          “Taxing Authority” means any Governmental Authority responsible for the imposition of any Tax or exercising Tax regulatory authority.

          “Transferred Intellectual Property” means all Owned Intellectual Property and all Licenses.

          “Unit Purchase Agreement” means that certain Unit Purchase Agreement by and among the Selling Parties and certain other parties listed therein, dated as of May 22, 2006.

          “UPA Payments” means the Contingent Payments and the Non-U.S. Licensing Earn-Out Payments, as such terms are defined in the Unit Purchase Agreement, including all reporting obligations related thereto.

          1.2 Other Defined Terms. The following terms shall have the meanings defined for such terms in the Sections set forth below:

Term	Section
Accounting Firm	2.8(c)
Assignment and Assumption Agreements	3.2(a)(i)
Assignment and Assumption of Lease	3.2(a)(iv)
Assignments of Contracts	3.2(a)(ii)
Assignment of Owned Intellectual Property	3.2(a)(iii)
Buyer Indemnified Parties	9.3(a)
Buyer Plans	6.3(c)
Buyer Welfare Plans	6.3(d)
Claim Notice	9.4(a)
Closing	3.1
Closing Date	3.1

Term	Section
Closing Net Working Capital Estimate	2.8(a)
Contingent Cash Purchase Price	2.3
Contingent Payment Quarterly Report	Unit Purchase Agreement
Damages	9.3(a)
Deductible Amount	9.5(a)
Final Net Working Capital	2.8(c)
Inc. Purchase Price Allocation Schedule	2.5(a)
Inc. Up-Front Cash Purchase Price	2.3(b)
Indemnified Party	9.4(a)
Indemnifying Party	9.4(a)
Indemnity Notice	9.4(b)
Limited Purchase Price Allocation Schedule	2.5(a)
Limited Up-Front Cash Purchase Price	2.3(a)
Material Contracts	4.7(a)
Notice of Disagreement	2.8(c)
Purchase Price	2.3(b)
Reimbursement	9.6(a)
Sales Percentage Amount Dispute Notice	2.4(b)
Selling Parties	Preamble
Seller Indemnified Parties	9.3(b)
Selling Parties Welfare Plans	6.3(d)
SOL Representations and Warranties	9.2(b)
Statement of Post-Closing Net Working Capital	2.8(b)
Surviving Covenants	9.2(c)
Territory	9.10
Third-Party Claim	9.4(a)
Transfer Fees	2.6
Up-Front Cash Purchase Price	2.3
WARN Act	6.3(e)

          1.3 Seller Knowledge. Whenever a phrase herein is qualified by “to the knowledge of Seller” or a similar phrase, it shall mean, with respect to a fact, (a) the current actual knowledge of any of the following individuals: Keith Katkin, Michael Puntoriero, Greg Flesher, Matt Ruth, Eric Benevich, Randall Kaye, Mike Cruse, Susan Work and Laura Randa-King and (b) the knowledge of such individuals obtained after making an inquiry of their direct reports or current counsel or consultants of Parent most likely to have knowledge of such fact; provided, however, that with respect to this subsection (b), with respect to facts related to the Licensed Intellectual Property, the knowledge of Seller shall only relate to facts of which the foregoing individuals have been informed of by the applicable licensor.

ARTICLE II
PURCHASE AND SALE OF ASSETS

          2.1 Transfer of Assets.

          (a) Upon the terms and subject to the conditions set forth in this Agreement, at the Closing, the Selling Parties shall sell, convey, transfer, assign and deliver to Azur Limited, and Azur Limited shall purchase and acquire from the Selling Parties, the Selling Parties’ right, title and interest in and to the Limited Purchased Assets free and clear of all Encumbrances, except for Permitted Encumbrances, for the consideration specified below in Section 2.3(a).

          (b) Upon the terms and subject to the conditions set forth in this Agreement, at the Closing, the Selling Parties shall sell, convey, transfer, assign and deliver to Azur Inc. the Inc. Purchased Assets free and clear of all Encumbrances, except for Permitted Encumbrances, for the consideration specified below in Section 2.3(b).

          2.2 Assumption of Liabilities.

          (a) Upon the terms and subject to the conditions set forth in this Agreement, at the Closing, Azur Limited shall assume, pay and perform and discharge in due course the Limited Assumed Liabilities. Azur Limited shall take, or cause to be taken, all actions necessary to cause the assumption at the Closing Date by Azur Limited of the Limited Assumed Liabilities, including the execution and delivery at the Closing of the Limited Assignment and Assumption Agreement.

          (b) Upon the terms and subject to the conditions set forth in this Agreement, at the Closing, Azur Inc. shall assume, pay, perform and discharge in due course the Inc. Assumed Liabilities. Azur Inc. shall take, or cause to be taken, all actions necessary to cause the assumption on the Closing Date by Azur Inc. of the Inc. Assumed Liabilities, including the execution and delivery at the Closing of the Inc. Assignment and Assumption Agreement.

          2.3 Purchase Price. (a) The purchase price for the Limited Purchased Assets (the “Limited Purchase Price”) shall be an amount equal to the sum of (a) (i) Forty Million Seven Hundred Thousand Dollars ($40,700,000) plus (ii) the Closing Net Working Capital Overage, if any, minus (iii) the Closing Net Working Capital Underage, if any (the sum of the foregoing “(i)”, "(ii)” and “(iii)”, the “Limited Up-Front Cash Purchase Price”), payable in cash at the Closing, plus (b) Four Million Dollars ($4,000,000) payable on May 1, 2009 (the “First Contingent Payment”), plus (c) Six Million Dollars ($6,000,000) payable on December 31, 2009 (the “Second Contingent Payment” and, together with the First Contingent Payment, the “Contingent Cash Purchase Price”) plus (d) the Sales Percentage Amount, payable as set forth in Section 2.4, plus (e) the assumption of the Limited Assumed Liabilities. Notwithstanding the foregoing, Azur Limited shall have no obligation to make the First Contingent Payment and/or the Second Contingent Payment in the event that on or before the date such payment is otherwise required to be made Buyer provides (i) notice to the Selling Parties, together with reasonable supporting documentation, that ^{[* * *]} and (ii) a certificate executed by an executive officer of Azur Pharma Limited certifying that Buyer and its Affiliates have at all times been in compliance with the

^{[* * *]} Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission.

covenant set forth in Section 6.16. If on or prior to September 30, 2010, Buyer provides (i) a certificate executed by an executive officer of Azur Pharma Limited certifying that Buyer and its Affiliates have at all times been in compliance with the covenant set forth in Section 6.16 and (ii) notice to the Selling Parties, together with reasonable supporting documentation, that ^{[* * *]} prior to (y) the date the First Contingent Payment was required to be paid, the Selling Parties shall, within ten (10) Business Days after the receipt of such notice, remit the First Contingent Payment to Azur Limited and/or (z) the date the Second Contingent Payment was required to be paid, the Selling Parties shall, within ten (10) Business Days after the receipt of such notice, remit the Second Contingent Payment to Azur Limited.

          (b) The purchase price for the Inc. Purchased Assets (the “Inc. Purchase Price” and together with the “Limited Purchase Price,” the “Purchase Price”) shall be an amount equal to One Million Three Hundred Thousand Dollars ($1,300,000 ) (the “Inc. Up-Front Cash Purchase Price”) plus the assumption of the Inc. Assumed Liabilities.

          2.4 Payment of Sales Percentage Amount.

          (a) Until such time as Azur Limited has paid to Parent an aggregate Sales Percentage Amount equal to Two Million Dollars ($2,000,000), Azur Limited shall pay to Parent the Sales Percentage Amount in respect of each prior calendar year (or with respect to the calendar year ended December 31, 2007, the portion of such calendar year between the Closing Date and December 31, 2007), if any. The Sales Percentage amount in respect of a calendar year, if any, shall be due and payable concurrently with the delivery of the Contingent Payment Quarterly Report to the Selling Parties pursuant to Section 6.14, delivered pursuant to the Unit Purchase Agreement for the quarter ending December 31 of such prior calendar year.

          (b) Not more than one (1) time during each calendar year, the Selling Parties and their Representatives shall have the right, at their sole cost and expense, to audit the Net Sales during the eight (8) fiscal quarters preceding the commencement of such audit to the extent such fiscal quarters have not previously been audited by the Selling Parties. Following such audit or review of the materials supporting the preparation of a Contingent Payment Quarterly Report, the Selling Parties shall have the right to dispute one or more Contingent Payment Quarterly Reports covered by such audit that it reasonably believes contain any errors. If the Selling Parties elect to dispute one or more such Contingent Payment Quarterly Reports, in whole or in part, then the Selling Parties shall provide a written notice to Azur Limited specifying in reasonable detail its objections thereto (“Sales Percentage Amount Dispute Notice”). Promptly following receipt by Azur Limited of any Sales Percentage Amount Dispute Notice from the Selling Parties, Azur Limited and the Selling Parties shall attempt to reconcile their differences, and any resolution by them as to any disputed amounts shall be final, binding and conclusive on the parties hereto. If the Selling Parties and Azur Limited are unable to reach a resolution with such effect within twenty (20) Business Days after the receipt by Azur Limited of the Sales Percent-

^{[* * *]} Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission.

age Amount Dispute Notice, the Selling Parties and Azur Limited shall submit the items remaining in dispute for resolution to the Accounting Firm, which shall, within thirty (30) days after such submission, determine and report to the Selling Parties and Azur Limited upon such remaining disputed items, and such report shall be final, binding and conclusive on the Selling Parties and Azur Limited. The fees and disbursements of any accounting firm retained by the Selling Parties or Azur Limited to assist it in any dispute regarding any Contingent Payment Quarterly Report, together with the fees and expenses of the Accounting Firm, shall be borne by the Selling Parties if an adjustment to the Sales Percentage Amount for the period under dispute is less than five percent (5%) of the Sales Percentage Amount reported for such prior calendar year. Otherwise, the fees and disbursements of any accounting firm retained by the Selling Parties or Azur Limited to assist it in any dispute regarding any Contingent Payment Quarterly Report, together with the fees and expenses of the Accounting Firm, shall be borne by Azur Limited.

          2.5 Allocation of Purchase Price.

          (a) The Limited Purchase Price shall be allocated among the Limited Purchased Assets in accordance with Schedule 2.5(a)(i) hereof, as revised pursuant to Section 2.5(b) hereof (the “Limited Purchase Price Allocation Schedule”), and the Inc. Purchase Price shall be allocated among the Inc. Purchased Assets in accordance with Schedule 2.5(a)(ii) hereof (the “Inc. Purchase Price Allocation Schedule”). The Selling Parties and Azur Limited shall prepare mutually acceptable and substantially identical IRS Forms 8594 “Asset Acquisition Statements Under Section 1060” consistent with the Limited Purchase Price Allocation Schedule and the Selling Parties and Azur Inc. shall prepare mutually acceptable and substantially identical IRS Forms 8594 consistent with the Inc. Purchase Price Allocation Schedule, which forms the parties shall use to report the transactions contemplated by this Agreement to the applicable Taxing Authorities. Each of the Selling Parties and Buyer agrees to provide the other promptly with any other information required to complete IRS Form 8594. Except as otherwise required by a “determination” within the meaning of Section 1313(a) of the Code, the Selling Parties and Buyer agree not to take any position inconsistent with that allocation on their respective Tax Returns or during any audit, examination or other administrative or judicial proceeding.

          (b) Within thirty (30) days after the determination of the Final Working Capital, the Selling Parties shall prepare and deliver to Azur Limited an amended Limited Purchase Price Allocation Schedule prepared in accordance with Schedule 2.5(a)(i) hereof and Section 1060 of the Code and the regulations thereunder that reflects (i) the Final Working Capital and (ii) any adjustments in the allocation of the initial Limited Purchase Price and Limited Assumed Liabilities among the Limited Purchased Assets reasonably necessary to reflect changes in the Limited Purchased Assets between the date hereof and the Closing Date.

          2.6 Closing Costs; Transfer Taxes and Fees. Buyer, on the one hand, and the Selling Parties, on the other hand, shall each pay half (1/2) of (a) all U.S. sales, use, transfer and other Taxes and fees, if any, imposed by reason of the transfer of the Purchased Assets and the assumption of the Assumed Liabilities provided hereunder (and any deficiency, interest or penalty asserted with respect thereto), and (b) all recording, filing and registration fees or other charges in connection with or as a direct result of the transfer of the Purchased Assets (the foregoing a “Transfer Fee” and collectively, the “Transfer Fees”). At Closing, upon the delivery by Buyer of reasonable documents identifying such Transfer Fees, the Selling Parties’ half of the

Transfer Fees shall be deducted from the Limited Up-Front Cash Purchase Price, to the extent that such Transfer Fees relate to the Limited Purchased Assets, and the Inc. Up-Front Cash Purchase Price, to the extent that such Transfer Fees relate to the Inc. Purchased Assets. Azur Limited shall pay all non-U.S. sales, use, transfer and other Taxes and fees, if any, imposed by reason of the transfer of the Limited Purchased Assets and the assumption of the Limited Assumed Liabilities provided hereunder. Azur Inc. shall pay all non-U.S. sales, use, transfer and other Taxes and fees, if any, imposed by reason of the transfer of the Inc. Purchased Assets and the assumption of Assumed Liabilities other than Limited Assumed Liabilities. Buyer shall provide the Selling Parties with any documentation that would exempt Buyer from or reduce sales, use, transfer and other Taxes and shall file all necessary documentation and Tax Returns required to be filed by Buyer with respect to such Transfer Fees, and the Selling Parties shall reasonably cooperate upon Buyer’s request.

          2.7 Further Assurances. Upon the terms and subject to the conditions contained herein, the parties agree, both before and after the Closing, (i) to use commercially reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable to consummate and make effective the transactions contemplated by this Agreement, including using commercially reasonable efforts to satisfy the conditions precedent to each party’s obligations hereunder, (ii) to execute any documents, instruments or conveyances of any kind which may be reasonably necessary or advisable to carry out any of the transactions contemplated hereunder and (iii) to cooperate with each other in connection with the foregoing. In furtherance and not in limitation of the foregoing, each party hereto agrees (1) to file all necessary applications for all necessary Governmental Approvals with the appropriate Governmental Authority with respect to the transactions contemplated hereby as promptly as practical after the date hereof, (including the FDA transfer of ownership letters with respect to the transfer of the NDAs with respect to the Products from the Selling Parties to Buyer), and (2) to use commercially reasonable efforts to obtain from any Governmental Authority any non-actions, clearances, waivers, consents, approvals, authorizations, permits or orders required to be obtained in connection with the execution and performance of this Agreement or the transactions contemplated by this Agreement.

          2.8 Determination of Net Working Capital.

          (a) At least one (1) Business Day prior to the Closing Date, the Selling Parties shall deliver to Buyer a certificate signed by an executive officer of Parent, stating the estimated Net Working Capital as of the Closing Date, prepared using the same principles as the unaudited statement of net assets as of May 31, 2007 described in Section 4.4 (the “Closing Net Working Capital Estimate”) and, if any, the resulting Closing Net Working Capital Overage (which amount shall be used in determining the Limited Up-Front Cash Purchase Price), or the resulting Closing Net Working Capital Underage (which amount shall be used in determining the Limited Up-Front Cash Purchase Price), together with related supporting schedules, calculations and documentation.

          (b) Prior to the fifth (5^th) month anniversary of the Closing Date, Buyer shall review the records and inventory of the Business to determine the Net Working Capital existing as of the Closing Date and deliver a statement of Net Working Capital to the Selling Parties and Buyer signed by an executive officer of Buyer’s ultimate parent (the “Statement of Post-Closing

Net Working Capital”). The Statement of Post-Closing Net Working Capital shall set forth the Net Working Capital, including a detailed breakdown of the various amounts of each component of Net Working Capital at the Closing Date, prepared using the same principles as the unaudited statement of net assets as of May 31, 2007 described in Section 4.4, but taking into account additional information that becomes available or events occurring after the Closing Date and prior to the preparation of the Statement of Post-Closing Net Working Capital.

          (c) Within thirty (30) days following the Buyer’s delivery of the Statement of Post Closing Net Working Capital, Parent shall deliver written notice (the “Notice of Disagreement”) to Buyer of any dispute Parent has with respect to the preparation or content of the Statement of Post Closing Net Working Capital, including the Post Closing Net Working Capital. The Notice of Disagreement shall describe in reasonable detail the items contained in the Statement of Post Closing Net Working Capital that Parent disputes and the basis for any such disputes. If Parent does not notify Buyer of a dispute with respect to the Statement of Post Closing Net Working Capital within such 30-day period, such Statement of Post Closing Net Working Capital shall be final, conclusive and binding on the parties and the Post Closing Net Working Capital reflected thereon shall become the “Final Net Working Capital.” In the event a Notice of Disagreement is delivered to Buyer, Buyer and Parent shall negotiate in good faith to resolve such dispute and agree upon the “Final Net Working Capital.” If Buyer and Parent, notwithstanding such good faith effort, fail to resolve such dispute within fourteen (14) days after Parent delivers the Notice of Disagreement, then Buyer and Parent jointly shall engage a U.S. accounting firm of national reputation as is reasonably acceptable to Buyer and Parent that has not provided services to either of Buyer or its Affiliates or the Selling Parties or their Affiliates during the prior three (3) years (the “Accounting Firm”) to resolve such dispute in accordance with the standards set forth in this Section 2.8. Parent and Buyer shall use commercially reasonable efforts to cause the Accounting Firm to render a written decision resolving the matters submitted to the Accounting Firm within thirty (30) days after the making of such submission. The Accounting Firm shall address only those items in dispute. The Accounting Firm shall determine, on such basis, whether and to what extent, the Post Closing Net Working Capital or Closing Net Working Capital Estimate require adjustment, which determination shall be consistent with either the position of Buyer or the position of Parent or between the positions of Buyer and Parent and the amount determined by the Accounting Firm shall become the “Final Net Working Capital.” Judgment may be entered upon the determination of the Accounting Firm in any court having jurisdiction over the party against which such determination is to be enforced. All determinations made by the Accounting Firm will be final, conclusive and binding on the parties. Buyer and/or Parent shall share the fees and expenses of the Accounting Firm proportionately based on which party’s position was closer to the determination by the Accounting Firm.

          (d) If there is a Final Net Working Capital Overage, then, within five (5) Business Days after the determination of the Final Net Working Capital, Azur Limited shall pay to the Selling Parties an amount equal to the Final Net Working Capital Overage by wire transfer to an account designated by Parent.

          (e) If there is a Final Net Working Capital Underage, then, within five (5) Business Days of the determination of the Final Working Capital the Selling Parties shall pay to Azur Limited an amount equal to the Final Net Working Capital Underage by wire transfer to an account designated by Azur Limited.

          (f) Any amount payable by Buyer to the Selling Parties or by the Selling Parties to Buyer pursuant to Section 2.8(d) or Section 2.8(e) shall constitute an adjustment to the Purchase Price.

          (g) For purposes of complying with the terms set forth in this Section 2.8, each party shall cooperate with and make available to the other parties and their respective representatives all information, records, data and working papers, and shall permit reasonable access to its facilities and personnel, as may be reasonably required in connection with the preparation and analysis of the Closing Net Working Capital Estimate and the Statement of Post Closing Net Working Capital.

          2.9 Withholding Tax. Solely to the extent required by Law, Buyer shall be entitled to deduct and withhold, or cause to be deducted and withheld, the applicable Taxes from the amounts otherwise payable pursuant to this Agreement. To the extent that amounts are so withheld, they shall be treated for all purposes of this Agreement as having been paid to the Person for whom such deduction and withholding was made.

ARTICLE III
CLOSING

          3.1 Closing. Unless this Agreement shall have been terminated in accordance with Section 10.1 hereof, the closing of the purchase and sale of the Purchased Assets, the assumption of the Assumed Liabilities and the consummation of the other transactions contemplated herein relative thereto (the “Closing”) shall be held at 8:00 a.m. Pacific time at 101 Enterprise, Suite 300, Aliso Viejo, California on the later of (a) the thirtieth (30^th) day after the date of this Agreement or (b) the third (3^rd) Business Day following the satisfaction or waiver of all of the conditions precedent to the obligations of the parties set forth in Articles VII and VIII (other than conditions which are not capable of being satisfied until the Closing, but subject to the fulfillment or waiver of those conditions at the Closing) (the “Closing Date”), unless the parties hereto otherwise agree in writing.

          3.2 Deliveries at Closing.

          (a) To effect the transactions contemplated hereby, the Selling Parties shall, at the Closing, deliver to Buyer, or cause to be delivered to Buyer (unless previously delivered):

          (i) (x) an instrument of assignment and assumption in substantially the form attached hereto as Exhibit A-1 conveying to Azur Inc. the owned tangible personal property included in the Inc. Purchased Assets and assumption by Azur Inc. of the Inc. Assumed Liabilities (the “Inc Assignment and Assumption Agreement”), and (y) an instrument of assignment and assumption in substantially the form attached hereto as Exhibit A-2 conveying to Azur Limited the owned tangible personal property included in the Limited Purchased Assets and assumption by Azur Limited of the Limited Assumed Liabilities (the “Limited Assignment and Assumption Agreement”), each duly executed by the Selling Parties (collectively, the “Assignment and Assumption Agreements”);

          (ii) subject to Section 3.3 hereof, (x) an assignment and assumption document in substantially the form attached hereto as Exhibit B-1 assigning the Inc. Business Contracts to Azur Inc. (the “Inc Assignment of Contracts”), and (y) an assignment and assumption document in substantially the form attached hereto as Exhibit B-2 assigning the Limited Business Contracts to Azur Limited (the “Limited Assignment of Contracts”, duly executed by the Selling Parties (collectively, the “Assignments of Contracts”);

          (iii) an assignment of the Intellectual Property in substantially the form attached hereto as Exhibit C (the “Assignment of Owned Intellectual Property”), duly executed by the Selling Parties;

          (iv) an assignment and assumption of lease in substantially the form attached hereto as Exhibit D (the “Lease Assignment”), duly executed by Seller;

          (v) counterparts to any other Ancillary Agreements, duly executed by Parent or Seller or other Person, as applicable;

          (vi) a certificate from each of Seller and Parent, dated as of the Closing Date, stating that such Person is not a “foreign person” within the meaning of Section 1445(b)(2) of the Code; and

          (vii) the certificates and other documents required to be delivered at Closing as described in Article VIII, duly executed by the Selling Parties, as applicable.

          (b) To effect the transactions contemplated hereby, Buyer shall, at the Closing, deliver to the Selling Parties, or cause to be delivered to the Selling Parties (unless previously delivered):

          (i) an amount in cash equal to the Inc. Up-Front Cash Purchase Price, payable by Azur Inc., and an amount in cash equal to the Limited Up-Front Cash Purchase Price payable by Azur Limited, each by wire transfer of immediately available funds to an account designated in writing by Parent;

          (ii) a counterpart to the Inc Assignment and Assumption Agreement, duly executed by Azur Inc., and a counterpart to the Limited Assignment and Assumption, duly executed by Azur Limited;

          (iii) a counterpart to the Inc Assignment of Contracts, duly executed by Azur Inc., and a counterpart to the Limited Assignment of Contracts, duly executed by Azur Limited;

          (iv) a counterpart to the Assignment of Owned Intellectual Property, duly executed by Azur Limited;

          (v) a counterpart to the Assignment and Assumption of Lease duly executed by Azur Inc.;

          (vi) counterparts to any other Ancillary Agreements, duly executed by Buyer; and

          (vii) the certificates and other documents required to be delivered at the Closing as described in Article VII, duly executed by Buyer.

          (c) To the extent that a form of any document to be delivered hereunder is not attached as an Exhibit hereto, such documents shall be in form and substance, and shall be executed and delivered in a manner, reasonably satisfactory to the parties.

          3.3 Consents to Assignment and Transfer of Certain Rights and Liabilities. Notwithstanding anything in this Agreement to the contrary, this Agreement shall not constitute an agreement to assign any Business Contract or any claim or right or any benefit arising thereunder or resulting therefrom if an attempted assignment or transfer thereof, without the consent of a third party thereto, would constitute a breach or default thereof or give rise to a right of termination or cancellation thereunder, or in any way materially adversely affect the rights of Buyer thereunder. If such consent is not obtained, or if an attempted assignment thereof would be ineffective or would materially adversely affect the rights of Buyer thereunder, the Selling Parties will cooperate with Buyer, and use commercially reasonable efforts, at Buyer’s expense, to provide to Buyer the benefits under any such Business Contract or claim or right, including enforcement for the benefit of Buyer of any and all rights of the Selling Parties against a third party thereto arising out of the breach, default, termination or cancellation by such third party or otherwise or, at the Selling Parties’ option, to the maximum extent permitted by Law and such Business Contract, appoint Buyer to be the Selling Parties’ Representative and agent with respect to such Business Contract, as applicable. Following the Closing, Buyer and the Selling Parties shall continue to cooperate and use commercially reasonable efforts to effect the transfer to Buyer of such Business Contracts. Subject to Article IX, Buyer shall indemnify, defend and hold harmless the Selling Parties from and against any and all Liabilities incurred by the Selling Parties in connection with, arising out of or resulting from any actions taken or not taken by Buyer after the Closing Date as Representative or agent with respect to any Business Contract or the non-compliance by Buyer on or following the Closing Date with any Laws applicable to any such Business Contract. Subject to Article IX, the Selling Parties shall indemnify, defend and hold harmless Buyer from and against any and all Liabilities incurred by Buyer in connection with, arising out of or resulting from any actions taken by the Selling Parties on or after the Closing Date with respect to any such Business Contract, other than actions taken in compliance with any such Business Contract or as directed by Buyer.

ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE SELLING PARTIES AND PARENT

          Contemporaneously with the execution and delivery of this Agreement by the Selling Parties, the Selling Parties are delivering to Buyer the Disclosure Schedules with numbered sections and subsections corresponding to the relevant sections and subsections in this Agreement. Disclosures included in any Schedule to this Agreement shall be considered to be made for purposes of all sections and subsections of the Disclosure Schedules to the extent that such item of disclosure is made with such specificity that it is reasonably apparent that such disclosure applies to such other Schedules. Nothing in the Disclosure Schedules is intended to

broaden the scope of any representation, warranty or covenant of the Selling Parties contained in this Agreement. The inclusion of any information in the Disclosure Schedules shall not be deemed to be an admission or acknowledgment, in and of itself, that such information is required by the terms hereof to be disclosed, is material to the Business, has resulted in or would result in a Material Adverse Effect or is outside the Ordinary Course of Business. The Selling Parties hereby represent and warrant to Buyer as of (a) the date hereof and (b) the Closing Date, except (i) as to certain representations and warranties that address matters as of a particular date, which are given only as of such date and (ii) as otherwise set forth on the Disclosure Schedules, as follows:

          4.1 Organization. Seller is a limited liability company duly organized, validly existing and in good standing under the laws of the State of California. Parent is a corporation duly organized, validly existing and in good standing under the laws of the State of California. The Selling Parties are in good standing in each jurisdiction where such qualification is required, except for any jurisdictions where the failure to so qualify does not have, individually or in the aggregate, a Material Adverse Effect.

          4.2 Authorization. Each Selling Party has all requisite power and authority to execute and deliver this Agreement and the Ancillary Agreements to which it is a party and to consummate the transactions contemplated hereby and thereby. Without limiting the generality of the foregoing, the execution and delivery of this Agreement and the Ancillary Agreements to which a Selling Party is a party and the consummation of the transactions contemplated hereby and thereby have been duly and validly authorized and approved by all requisite action on the part of such Selling Party and its equity owners. This Agreement has been, and as of the Closing each of the Ancillary Agreements to which each Selling Party is a party will have been, duly executed and delivered by such Selling Party, and, assuming the due authorization, execution and delivery of this Agreement and the Ancillary Agreements by Buyer, will be at the Closing valid and binding obligations of the Selling Parties, enforceable against the Selling Parties in accordance with their terms, except as may be limited by the effects of bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar Laws relating to or affecting creditors’ rights generally and general equitable principles (whether considered in a proceeding in equity or at law).

          4.3 No Conflict or Violation; Consents and Approvals.

          (a) Neither the execution, delivery or performance by the Selling Parties of this Agreement or the Ancillary Agreements nor the consummation by the Selling Parties of the transactions contemplated hereby and thereby will (i) violate or conflict with any provision of the articles of organization or operating agreement of Parent or Seller (as applicable), (ii) violate, conflict with, or result in or constitute a breach or default under (with the giving of notice or passage of time or both), or result in the termination of, or accelerate the performance required by, or result in a right of termination or acceleration under, any Business Contract, or (iii) violate any Law or Governmental Order applicable to the Selling Parties, the Business or the Purchased Assets, except in the case of each of clauses (ii) and (iii) above, for such violations, conflicts, breaches, defaults, terminations or accelerations which do not, individually or in the aggregate, have a Material Adverse Effect or materially and adversely affect the ability of the Selling Parties to consummate the transactions contemplated hereby.

          (b) No consent, approval, order or authorization of, or registration, declaration or filing with any Governmental Authority is required by or with respect to the Business as a result of the execution and delivery of this Agreement by the Selling Parties or the consummation of the transactions contemplated hereby, except for any approval of or filing with a Governmental Authority required by virtue of Buyer’s or their ultimate parent’s identity.

          4.4 Financial Information. Set forth on Schedule 4.4 is an unaudited statement of net assets as of May 31, 2007 and an unaudited statement of net wholesale shipments and direct operating expenses for the eight (8) month period ended May 31, 2007 for the Business. Such statements were prepared in accordance with the books and accounts and other financial records of the Selling Parties and present fairly in all material respects the net wholesale shipments, direct operating expenses and net assets of the Business based on managements’ reasonable assumptions as of and for the periods indicated and such statements have been prepared in accordance with GAAP, applied on a basis consistent with the past practices of Parent, except as indicated on Schedule 4.4.

          4.5 Absence of Certain Changes or Events. Since December 31, 2006, (a) the Selling Parties have not engaged in any practice or taken any action, or entered into any transaction with respect to the Business outside the Ordinary Course of Business, (b) there has not occurred any event which if it had occurred between the date hereof and the Closing Date would have been prohibited by Section 6.2(b), and (c) there has not occurred any Material Adverse Effect.

          4.6 Title to Purchased Assets and Sufficiency. The Selling Parties have good and valid title to the Purchased Assets, free and clear of all Encumbrances, except for Permitted Encumbrances. All the tangible personal property (other than the Inventory) included in the Purchased Assets is suitable for purposes for which it is used in good working condition, reasonable wear and tear excepted. The Purchased Assets constitute all the assets required for the operation of the Business, as currently conducted, in all material respects.

          4.7 Material Contracts.

          (a) Schedule 4.7(a) sets forth as of the date hereof each Business Contract (i) involving individual annual payments in excess of One Hundred Thousand Dollars ($100,000) and pursuant to which a Selling Party has continuing obligations (other than an obligation of confidentiality), (ii) relating to the Transferred Intellectual Property, (iii) that limits or purports to limit the ability of a Selling Party to compete in any line of business or with any Person in any geographic area or for any period of time or (iv) requiring the Selling Parties to make payments to an unaffiliated third party based on the level of income or revenues of the Selling Parties (collectively, the “Material Contracts”).

          (b) Copies of the Material Contracts and all amendments and agreements relating thereto have been made available to Buyer. To the knowledge of the Selling Parties, all Business Contracts are in full force and effect and capable of assignment without any additional consents or approvals. Except for such exceptions as would not be material, (i) the Selling Parties have performed all obligations required to be performed by them under each of the Business Contracts, (ii) the Selling Parties are not in breach or violation of, or default under, any of the

Business Contracts, (iii) the Selling Parties have not received any written notice that either is currently in breach or violation of any of the Business Contracts and (iv) to the knowledge of the Selling Parties, no other party to any Business Contract is (with or without the lapse of time or the giving of notice or both) in breach thereof.

          4.8 Permits. To the knowledge of the Selling Parties, the Selling Parties or their Affiliates have all Permits necessary to own and operate the Business and the Purchased Assets as presently conducted, in all material respects. Such Permits are in full force and effect, except for such failures to be in full force and effect as do not have, individually or in the aggregate, a Material Adverse Effect. The Selling Parties are not in material default, nor have they received written notice of any claim of default, with respect to any such Permit.

          4.9 Litigation.

          (a) There is no material Action pending or, to the knowledge of the Selling Parties, threatened, against or affecting the Purchased Assets or the Business, (b) neither the Selling Parties nor Parent is subject to any material Governmental Order relating to the Purchased Assets or the Business and (c) there are no unsatisfied judgments against the Purchased Assets or the Business.

          (b) Between May 26, 2006 and the date of this Agreement, (i) the Selling Parties have not been notified of any Claim against them or their insurers relating to product liability or similar Liability in respect of the Product and (ii) no payment or settlement of any kind has been made in response to or in anticipation of such a Claim.

          (c) There are no outstanding Government Orders that apply to the Purchased Assets or the Business that restrict the ownership, disposition or use of the Purchased Assets or the conduct of the Business.

          (d) Schedule 4.9(d) lists, as of the date hereof, all litigation to which any of the Selling Parties or their Affiliates is a party relating to the Business.

          4.10 Compliance with Laws.

          (a) The Business is conducted by the Selling Parties and their Affiliates in compliance with Laws including the Social Security Act, the rules and regulations and policies of the U.S. Department of Health and Human Services, and all public health and safety provisions of state Law and regulations, permits, governmental licenses, registrations, approvals, concessions, franchises, authorizations, orders, injunctions and decrees and applicable laws, except as does not have, individually or in the aggregate, a Material Adverse Effect.

          (b) Except as does not have, individually or in the aggregate, a Material Adverse Effect, since May 26, 2006, no Governmental Authority has given written notice to the Selling Parties or any of their Affiliates that the Business (as of the date of this Agreement) or the Purchased Assets were or are in violation of any Law or the subject of any investigation.

          (c) Except as does not have, individually or in the aggregate, a Material Adverse Effect, since May 26, 2006, none of the Selling Parties or their Affiliates has received writ-

ten notice from any Governmental Authority that there are any circumstances currently existing that would reasonably be expected to lead to any withdrawal of, loss of or refusal to renew any material Permit or Product Registrations relating to the Product or the Purchased Assets on terms less advantageous to the Selling Parties or any of their Affiliates than the terms of those Permits currently in force.

          (d) (i) Except as does not have, individually or in the aggregate, a Material Adverse Effect, (A) the Business is conducted in compliance with all applicable Laws in connection with the preparation and submission to the FDA or any equivalent foreign Governmental Authority of each of the Product Applications (including the INDs or NDAs) relating to the Product, (B) each of the Product Registrations (including the INDs or NDAs) relating to the Product has been approved by the FDA, (C) none of the Selling Parties or their Affiliates has received any written notice that any of the Product Registrations (including the INDs or NDAs) relating to the Product are not currently in good standing with the FDA in the United States or any equivalent foreign Governmental Authority in the country or countries of its jurisdiction. The Selling Parties or their Affiliates have filed with the FDA all required notices, supplemental applications and annual or other reports, including adverse experience reports, with respect to each Product Registration and Product Application (including IND or NDA) relating to the Product, except as does not have, individually or in the aggregate, a Material Adverse Effect. To the knowledge of the Selling Parties, with respect to the Product, the applicant of each Product Registration and Product Application (including IND or NDA) relating to the Product acted in compliance with 21 U.S.C. § 355 and 21 C.F.R. Parts 312 or 314 et seq., respectively, and all terms and conditions of such applications.

               (ii) To the knowledge of the Selling Parties, no Governmental Authority (including the FDA) has commenced or threatened to initiate any action to request the recall of the Product, or commenced or threatened to initiate any action to enjoin production of the Product at any facility, nor have the Selling Parties or their Affiliates received any notice to such effect. To the knowledge of the Selling Parties, ^{[* * *]}.

               (iii) To the knowledge of the Selling Parties, all manufacturing and processing operations conducted by their current suppliers relating to the manufacturing of the Product have, since May 26, 2006, been conducted in compliance in all material respects with the FDA’s current Good Manufacturing Practice regulations at 21 CFR Parts 210 and 211 as applicable to products sold in the United States.

               (iv) With respect to current suppliers, the Selling Parties and their Affiliates have delivered to Buyer copies of all (A) reports of the FDA Form 483 inspection observations, (B) establishment inspection reports, (C) warning letters, and (D) other documents that assert ongoing lack of compliance in any material respect with any applicable laws or regulatory requirements (including those of the FDA), in each case to the extent received since May 26,

^{[* * *]} Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission.

2006 by the Selling Parties or their Affiliates from the FDA or any equivalent foreign Governmental Authority relating to the Product and/or arising out of the conduct of the Business.

               (v) To the knowledge of the Selling Parties, no employees or agents of the Selling Parties or their Affiliates have made an untrue statement of a material fact to any Governmental Authority with respect to the Product or a current Product improvement (whether in any submission to such Governmental Authority or otherwise), or failed to disclose a material fact required to be disclosed to any Governmental Authority with respect to the Product or a current Product improvement.

               (vi) To the knowledge of the Selling Parties, since May 26, 2006 the Selling Parties have materially complied with all regulations promulgated by the FDA specific to the controlled distribution and operation and maintenance of a patient registry in respect of the Product and complied with FDA regulations and other applicable law in relation to the development of the subregistry.

          4.11 Brokers or Finders. Except for Reedland Capital Partners, neither the Selling Parties nor Parent has engaged or made any agreement with any broker, finder or similar agent or any Person or firm which will result in the obligation of Buyer to pay any finder’s fee, brokerage fees or commission or similar payment in connection with the transactions contemplated hereby. The Selling Parties shall be solely responsible for the payment of any fees, commissions or similar payments owed to Reedland Capital Partners.

          4.12 Employment, Labor and Employee Benefit Matters.

          (a) No liability under Title IV or Part 3 of Title I, Subtitle B of ERISA or Section 4971 of the Code has been incurred by the Selling Parties or any ERISA Affiliate for which the Buyer would be liable under applicable Law as a result of the transactions contemplated by this Agreement.

          (b) There are no collective bargaining agreements involving any Business Employees or any pending applications for certification of a collective bargaining agreement against the Seller as of the date of this Agreement. There are no employment or wage and hour claims pending or, to the knowledge of the Selling Parties, threatened against or involving the Business. There is no claim with the United States Equal Employment Opportunity Commission or similar Governmental Authority pending or, to the knowledge of the Selling Parties, threatened against or involving the Business. There is no unfair labor practice complaint against the Business or pending before the National Labor Relations Board or any other Governmental Authority relating to labor practices of the Business. There is no labor strike, material dispute, slowdown or stoppage actually pending or, to the knowledge of the Selling Parties, threatened against or involving the Business.

          (c) The Selling Parties have made available to Buyer copies of the Selling Parties Plans to which the Business Employees set forth on Schedule 6.3(a)(i) are subject.

          4.13 Intellectual Property.

          (a) (i) No claim has been asserted or, to the knowledge of the Selling Parties, threatened against the Selling Parties that the conduct of the Business as currently conducted infringes upon the Intellectual Property rights of any third party; (ii) the Selling Parties own the Owned Intellectual Property free and clear of all Encumbrances, other than Permitted Encumbrances; (iii) the Selling Parties have the right to assign their rights with respect to the Licenses; (iv) the Owned Intellectual Property and, to the knowledge of the Selling Parties, the Licenced Intellectual Property, has not been adjudged, nor, to the knowledge of the Selling Parties, asserted to be, invalid or unenforceable in whole or in part; (v) to the knowledge of the Selling Parties, no loss or expiration of any Transferred Intellectual Property is threatened, pending or reasonably foreseeable, except for patents expiring at the end of their statutory terms (and not as a result of any act or omission by the Selling Parties, including a failure by the Selling Parties to pay any required maintenance fees); (vi) to the knowledge of the Selling Parties, the conduct of the Business as currently conducted does not infringe upon the Intellectual Property rights of any third party; (vii) to the knowledge of the Selling Parties, no Person is engaging in any activity that infringes upon the Transferred Intellectual Property; (viii) the Transferred Intellectual Property contains all of the Intellectual Property materially necessary to conduct the Business as presently conducted; (ix) the Selling Parties have neither licensed any of the Owned Intellectual Property nor sublicensed any of the Licensed Intellectual Property to any third parties; (x) to the knowledge of the Selling Parties, Parent has not failed to assert any breach of any representation and warranty set forth in Section 4.15 of the Unit Purchase Agreement that it has the legal right to assert; and (xi) to the knowledge of the Selling Parties, the representations and warranties provided by the applicable licensor with respect to the licensee are true and correct in all material respects.

          (b) The Selling Parties have the unrestricted right to assign, transfer and/or grant to Buyer all rights in the Product Trademarks that are being assigned, transferred and/or granted to Buyer under this Agreement and the Ancillary Agreements, in each case free of Encumbrances, other than Permitted Encumbrances.

          (c) Any necessary registration, maintenance and renewal fees due in connection with the Product Trademarks have been paid in a timely manner and all materially necessary documents and certificates in connection with the Product Trademarks have, for the purposes of maintaining such Product Trademarks, been filed in a timely manner with the relevant Governmental Entities.

          (d) The Selling Parties have taken reasonable and customary measures to maintain and protect, as applicable, the confidentiality of the Know-How.

          (e) All current and former employees and consultants of the Selling Parties who are or have been substantively involved in the design, review, evaluation or development of the inventions embodied in the Product or the Know-How have executed written contracts or are otherwise obligated to protect the confidential status and value thereof and to vest in the Selling Parties’ exclusive ownership of such Product Trademarks or Know-How.

          4.14 Environmental Matters. Except as does not have a Material Adverse Effect:

          (a) The Business and Purchased Assets, and the Selling Parties as relates to the Business and Purchased Assets, are in compliance in all material respects with applicable Environmental Laws;

          (b) The Selling Parties have not received any written claim, complaint, demand, notice of violation, notice of potential liability or request for information, and there is no suit, action, proceeding or investigation pending, or to the knowledge of the Selling Parties threatened, regarding any alleged violation of, or potential liability under, any Environmental Law relating to the Business or Purchased Assets;

          (c) There has been no Release of Hazardous Substances at, on, under or from any properties or facilities currently or formerly owned, operated or leased by the Selling Parties in connection with the Business, or any Purchased Assets which would reasonably be expected to result in any material liability of the Selling Parties under any Environmental Law;

          (d) No Hazardous Substances generated in connection with the Business or any of its operations, properties or facilities, have been disposed of at, or transported for disposal or treatment to, any location that would reasonably be expected to result in material liability on the part of the Selling Parties under any Environmental Law;

          (e) The Selling Parties are not currently financing or conducting any investigation, response or corrective action at the Purchased Assets, or at any other location, pursuant to any Environmental Law relating to the Business nor are the Selling Parties subject or party to any decree, order or agreement which would reasonably be expected to result in liability of the Selling Parties under any Environmental Law relating to the Business or the Purchased Assets;

          (f) To the knowledge of the Selling Parties, there are no aboveground or underground storage tanks or related piping, or asbestos or asbestos-containing materials at any Purchased Assets; and

          (g) The Selling Parties have provided to Buyer all assessments, audits, reports and other information in their possession or under their control relating to environmental conditions at the Purchased Assets, if any.

          4.15 Inventory.

          (a) All finished Product that is included in the Inventory is in a condition such that it would be saleable in the Ordinary Course of Business. To the knowledge of the Selling Parties, the Inventory has been produced or manufactured and stored in accordance with the Selling Parties specifications established for the manufacture and storage thereof. All work-in-progress included in the Inventory is, to the knowledge of the Selling Parties, usable in the Ordinary Course of Business.

          (b) The amount of Product in the wholesale channel does not exceed seven (7) weeks’ of demand for the Product. The value at which the Inventory is carried on the books and

records of the Selling Parties is at the lower of cost (determined on a first-in or first-out method) or market values. The Inventory does not consist of, in any material amount, items that are obsolete or damaged, except as reflected or reserved on the statement of net assets to be delivered pursuant to Section 4.4 or the Closing Net Working Capital Estimate. The Inventory does not consist of any items held on consignment. Neither of the Selling Parties is under any obligation or liability with respect to accepting returns of items of Inventory in the possession of their customers other than in the Ordinary Course of Business and consistent with the Selling Parties’ Product returns policy. Schedule 4.15 contains a complete list of the addresses of all warehouses and other facilities in which the Inventory is located. Schedule 4.15 sets forth a complete schedule of all wholesaler reports received by the Selling Parties since January 1, 2007 and complete and accurate copies of all such wholesalers reports have been provided by the Selling Parties to the Buyer.

          4.16 Insurance. Schedule 4.16 sets forth the current product liability insurance held by Parent with respect to the Product as of the date hereof.

          4.17 Customers. The Selling Parties have used commercially reasonable efforts to maintain, and, as of the date of this Agreement, currently maintain, good working relationships with all of the customers, processors and suppliers of the Business, taken as a whole. Schedule 4.17 specifies for the year ended December 31, 2006 and the three-month period ended March 31, 2007 the names of the customers that were, in the aggregate, the three (3) largest customers in terms of dollar value of Products sold by the Business during such periods. As of the date of this Agreement, none of such customers has given the Selling Parties written notice terminating, canceling or threatening to terminate or cancel any contract or relationship with the Selling Parties relating to the Business.

          4.18 Taxes.

          (a) The Selling Parties have timely filed all material Tax Returns required to be filed relating to the Purchased Assets and such Tax Returns were correct and compete in all material respects at the time of filing.

          (b) The Selling Parties have timely paid all material Taxes relating to the Purchased Assets required to be paid or collected by them.

          (c) Neither of the Selling Parties has received from any Taxing Authority any written notice of proposed adjustment, deficiency or underpayment of any material Taxes relating to the Purchased Assets that has not been satisfied by payment or withdrawn, and no written claims related to such Taxes have been asserted or threatened against the Selling Parties.

          (d) No agreement for the extension of time for the assessment of any material Taxes relating to the Purchased Assets is currently in effect.

          (e) There are no liens for Taxes on the Purchased Assets other than Permitted Tax Liens.

          (f) Neither of the Selling Parties is a “foreign person” within the meaning of Section 1445(b)(2) of the Code.

          4.19 Cutler Agreement. As of the date hereof, the Selling Parties have entered into an agreement with Neal R. Cutler, substantially in the form previously provided to Buyer.

ARTICLE V
REPRESENTATIONS AND WARRANTIES OF BUYER

          Each Buyer hereby represents and warrants to the Selling Parties and their Affiliates as of (a) the date hereof and (b) the Closing Date as follows:

          5.1 Organization of Buyer. Azur Inc. is duly organized, validly existing and in good standing under the laws of New York. Azur Limited is duly organized and validly existing under the laws of Bermuda.

          5.2 Authorization. Each Buyer has all requisite corporate power and authority, and has taken all corporate action necessary, to execute and deliver this Agreement and the Ancillary Agreements to which it is a party, to consummate the transactions contemplated hereby and thereby and to perform its obligations hereunder and thereunder. Without limiting the generality of the foregoing, the execution and delivery of this Agreement and the Ancillary Agreements to which each Buyer is a party and the consummation of the transactions contemplated hereby and thereby have been duly and validly authorized and approved by all requisite action on the part of each Buyer and its equity owners. This Agreement has been, and as of the Closing each of the Ancillary Agreements to which either Buyer is a party will have been, duly executed and delivered by such Buyer, and, assuming the due authorization, execution and delivery of this Agreement and the Ancillary Agreements by the Selling Parties, is or, if executed at the Closing, will be, the valid and binding obligations of such Buyer, enforceable against such Buyer in accordance with their terms, except as may be limited by the effects of bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar Laws relating to or affecting creditors’ rights generally and general equitable principles (whether considered in a proceeding in equity or at law).

          5.3 Compliance with Applicable Law. Each Buyer conducts its business in compliance in all material respects with all applicable Laws, except for violations, if any, which would not, individually or in the aggregate, reasonably be expected to materially affect or delay the ability of either Buyer to consummate the transactions contemplated hereby.

          5.4 Litigation. There is no material Action pending, or to the knowledge of each Buyer, threatened against such Buyer that is reasonably likely to adversely affect such Buyer’s performance under this Agreement or the consummation of the transactions contemplated herein.

          5.5 No Conflict or Violation; Consents and Approvals.

          (a) Neither the execution, delivery or performance by either Buyer of this Agreement or the Ancillary Agreements nor the consummation by either Buyer of the transactions contemplated hereby and thereby will (i) violate or conflict with any provision of the organizational documents of such Buyer, (ii) violate, conflict with, or result in or constitute a breach or default under (with the giving of notice or passage of time or both), or result in the

termination of, or accelerate the performance required by, or result in a right of termination or acceleration under, any of the terms, conditions or provisions of any Contract to which such Buyer is a party or by which its assets are bound or (iii) violate any Law or Governmental Order applicable to such Buyer, except in the case of each of clauses (ii) and (iii) above, for such violations, breaches, defaults, terminations or accelerations which would not reasonably be expected to materially adversely affect the ability of such Buyer to consummate the transactions contemplated hereby or subject any of the Selling Parties to any Liability.

          (b) No material consent, approval, order or authorization of, or registration, declaration or filing with, any Governmental Authority or other Person, is required by or with respect to each Buyer or any Affiliate of such Buyer as a result of the execution and delivery of this Agreement by Buyer or the consummation of this transaction.

          5.6 No Brokers or Finders. Each Buyer has not engaged or made any agreement with any broker, finder or similar agent or any Person or firm which will result in the obligation of the Selling Parties or any of their Affiliates to pay any finder’s fee, brokerage fees or commission or similar payment in connection with the transactions contemplated hereby.

          5.7 Sufficiency of Consideration. Each Buyer has cash on hand or commitments (which commitments are in full force and effect and neither Buyer is in breach of any term thereof) sufficient, in the aggregate, to consummate the transactions contemplated by this Agreement to pay the Limited Up-Front Cash Purchase Price, the Inc. Up-Front Cash Purchase Price and all other costs and expenses arising in connection herewith and therewith.

          5.8 ^{[* * *]}. To the knowledge of Buyer, after due inquiry, [* * *]. Neither Buyer (including any partnership or joint venture of which Buyer or any of its Affiliates is a party), nor any of its Affiliates (other than their employees outside of their capacity as such) or Representatives (in their capacity as such) is currently:

          (a) [* * *];

          (b) [* * *];

          (c) [* * *]

          (d) [* * *],

[* * *]

^{[* * *]} Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission.

ARTICLE VI
COVENANTS OF THE SELLING PARTIES AND BUYER

          The Selling Parties and Buyer each covenant with the other as follows:

          6.1 Access by Buyer; Confidentiality Agreement.

          (a) From the date hereof through the Closing, the Selling Parties shall permit (and shall cause their Representatives to permit) Buyer and its Representatives to have access at reasonable times within normal business hours, to all personnel, books, records (including Tax records), Business Contracts and offices of the Business as may be reasonably requested by Buyer. Any information furnished to Buyer or which Buyer receives in exercising its rights pursuant to this Section 6.1(a) shall be subject to the terms of Section 6.1(b) hereof; provided, however, that (i) any such investigation shall be conducted in such a manner as not to interfere unreasonably with the operation of the Business or the conduct of the Business, (ii) the Selling Parties shall not be required to take any action which would constitute a waiver of the attorney-client privilege, (iii) the Selling Parties need not supply Buyer with any access or information (A) which the Selling Parties are under a legal obligation not to supply or (B) with respect to a Retained Liability or Excluded Asset, and (iv) the Selling Parties shall not be required to provide such information or access to any employee records other than the Employee Records. In the event that the Selling Parties or their Affiliates receive written notice by a Governmental Entity of a violation of any regulatory or other requirement relating to the Business, any Purchased Assets, the Product or Product Registrations, they shall promptly provide Buyer a copy of any such written notice and use commercially reasonable efforts to undertake, in consultation with Buyer, all such actions as may be reasonably necessary to cure such violation.

          (b) The parties to this Agreement hereby agree to be bound by and comply with the terms of the Confidentiality Agreement, which are hereby incorporated into this Agreement by reference and shall continue in full force and effect after the Closing Date, such that the information obtained by any party to this Agreement, or its Representatives, during any investigation conducted pursuant to this Section 6.1, or in connection with the negotiation and execution of this Agreement or the consummation of the transactions contemplated by this Agreement and the Ancillary Agreements, or otherwise, shall be governed by the terms of the Confidentiality Agreement.

          (c) The Selling Parties agree to keep confidential for five (5) years after the Closing date all information regarding the Business, except as required by Law, Exchange Act regulation or the rules of any national securities exchange on which its securities are listed. Notwithstanding the foregoing, the Selling Parties shall not be obligated to keep any information confidential that (i) is or becomes generally available to the public, other than as a result of a disclosure by the Selling Parties, or (ii) becomes available to the Selling Parties on a non-confidential basis from a Person that is not, to the knowledge of Seller, bound by a confidentiality agreement with, or other contractual, legal or fiduciary obligation of confidentiality to, Buyer or any other party with respect to such information.

          6.2 Conduct of Business.

          (a) From the date hereof through the Closing, the Selling Parties shall, except as contemplated by this Agreement and except as set forth on Schedule 6.2, or as consented to in advance by Buyer in writing, operate the Business in the Ordinary Course of Business and shall use their commercially reasonable efforts to maintain intact the Business as it is currently organized and maintain good relations with their suppliers, customers, creditors, employees, agents and others (taken as a whole) having a relationship with the Business (taken as a whole); provided, however, the Selling Parties shall use commercially reasonable efforts to (i) market, sell and distribute the Product and deal with any customer orders for Product in the Ordinary Course of Business, (ii) continue to meet any contractual obligations owing and pay any amounts due in respect of the Business, Product and the Purchased Assets as they mature in the Ordinary Course of Business, (iii) continue to procure, and order the processing and manufacturing of, the Product in the Ordinary Course of Business and (iv) continue the pre-launch activities related to DuraSolv. The parties do not intend the foregoing provisions of this Section 6.2 or any other provision in this Agreement to effect an assignment of, or transfer of control related to, the Purchased Assets prior to Closing.

          (b) Without limiting the generality of Section 6.2(a), the Selling Parties shall not, with respect to the Business, except as set forth on Schedule 6.2 or as consented to in advance by Buyer in writing, which consent shall not be unreasonably withheld or delayed, take any of the following actions from the date hereof through the Closing:

          (i) (other than with respect to any confidentiality or non-competition agreement relating to the Business) enter into, extend, modify, terminate or renew any Material Contract, except in the Ordinary Course of Business;

          (ii) sell, assign, transfer, convey, lease or otherwise dispose of any of the Purchased Assets, or any interests therein, except, subject to clause (vi) of this Section 6.2(b), for sales of Product in the Ordinary Course of Business;

          (iii) subject any of the Purchased Assets or any part thereof, to any Encumbrance, other than Permitted Encumbrances;

          (iv) pay, loan or advance any material amount to any Affiliate of the Selling Parties in connection with the Business;

          (v) settle, release or forgive any Action relating to the Purchased Assets or the Business, or waive any right thereto;

          (vi) fulfill any orders for the Product other than in the Ordinary Course of Business;

          (vii) grant any license or sublicense to any Transferred Intellectual Property;

          (viii) fail to maintain all Product Records in the Ordinary Course of Business in all material respects;

          (ix) fail to hold and store all Inventory in material compliance with (i) all applicable Laws, (ii) in compliance in all material respects with the FDA’s current Good Manufacturing Practice regulations at 21 CFR Parts 210 and 211 as applicable to products sold in the United States and (iii) the approvals of Governmental Authorities, and (iv) applicable analytical methods and procedures, material specifications, master batch records and stability protocols established by the Selling Parties, if any; and

          (x) enter into any agreement, or otherwise become obligated, to do any of the foregoing.

          6.3 Employee Matters.

          (a) As soon as reasonably practicable but in any event within five (5) Business Days after the date hereof, Azur Inc. shall make offers of employment (to be effective as of the Closing Date) to the Business Employees set forth on Schedule 6.3(a)(i) who are then actively employed by Seller or Parent immediately prior to the Closing. Effective as of the Closing, the Selling Parties shall terminate the employment of all Buyer Employees. Azur Inc. shall communicate offers of employment to such Business Employees in accordance with applicable legal requirements and in a form determined by Azur Inc., which form is reasonably acceptable to the Selling Parties. Such offers of employment shall provide each of such Business Employees, effective immediately after the Closing and for a period of six months thereafter, with (i) employment at a level and with responsibilities that are substantially commensurate with their level and responsibilities immediately prior to the Closing, (ii) base salary that is at least comparable to the present base salary and bonus opportunity that is at least comparable to their bonus opportunity immediately prior to the Closing, (iii) health, dental, vision, 401(k) and other insurance benefits that are at least comparable in the aggregate to their benefits immediately prior to the Closing, (iv) a plan that would allow Buyer Employees that have over funded their healthcare spending accounts with a Selling Party as of the Closing Date to elect to continue to participate in such Selling Party’s healthcare spending plan by electing COBRA coverage with respect to such plan at the Buyer Employee’s expense, and (v) severance benefits equal to two weeks per year of service with the Selling Parties or their Affiliates (recognizing such Buyer Employee’s service with a Selling Party or any Affiliate of a Selling Party that is recognized under the Selling Parties Plans for severance purposes). In addition, Azur Inc. shall offer the Business Employees set forth on Schedule 6.3(a)(i) employment at a location within a reasonable commuting distance from their place of employment immediately prior to the Closing; provided that Azur Inc. may require the Business Employees set forth on Schedule 6.3(a)(ii) to relocate their principal location of employment anywhere within the United States as a condition to such Business Employees’ employment with Azur Inc. Following the Closing Date, Azur Inc. shall not be obligated to continue the employment of any Buyer Employee for any period of time.

          (b) As soon as practicable following the Closing Date, the Selling Parties shall cause the account balances of all Buyer Employees in any 401(k) plans maintained by the Selling Parties to be fully vested and distributed and Azur Inc. shall permit Buyer Employees who are participants in said plans to rollover such distributions (including outstanding participant loan balances) into Azur Inc.’s 401(k) plan. As soon as practicable following the Closing Date, Parent shall cause all unvested equity awards held by the Buyer Employees (including stock options, stock grants and restricted stock units which do not provide for accelerated vesting) to become

fully vested and exercisable by the holder thereof for the period specified in the relevant Selling Parties Plan.

          (c) Effective as of the Closing Date, Azur Inc. or its designated Affiliate shall cause each Buyer Employee who was covered under the Selling Parties Plans immediately prior to such date to be covered under employee benefit plans, programs and arrangements maintained or established by Azur Inc. (the “Buyer Plans”). However, the Buyer Employees shall continue to participate in the Selling Parties Plans providing for medical, dental and vision benefits through the sixtieth (60^th) day anniversary of the date of this Agreement, and Azur Inc. shall bear the cost of such continued participation, which cost shall be an amount equal to the COBRA continuation premium for the Selling Parties Plans applicable to each Buyer Employee for the period of continued coverage after the Closing Date. The Buyer Plans shall recognize each Buyer Employee’s service with the Selling Parties or any Affiliate that is recognized under the Selling Parties Plans (and prior service with the Selling Parties’ predecessors to the extent such prior service is recognized under the Selling Parties Plans) for eligibility and vesting purposes, but not benefit accrual purposes.

          (d) Effective as of the Closing Date, each Buyer Employee shall cease to be covered by the Selling Parties Plans, except as otherwise described above. The Selling Parties shall retain responsibility for all claims for welfare benefits incurred by Business Employees prior to Closing Date. For purposes of this subsection, a claim shall be deemed to have been incurred on the date the medical, dental or vision service giving rise to the claim is performed. With respect to the Buyer Employees, effective as of the Closing Date, Azur Inc. shall use commercially reasonable efforts to cause all applicable Buyer Plans that provide medical or dental coverage, life and accident insurance, and disability or similar coverage (collectively, the “Buyer Welfare Plans”) to waive pre-existing condition exclusions, evidence of insurability provisions, waiting period requirements or similar provisions to the extent such exclusions, requirements and provisions were waived or satisfied under the applicable Selling Parties Welfare Plan as of the Closing Date. In addition, Azur Inc. shall cause the applicable Buyer Welfare Plans to credit Buyer Employees with amounts credited by the Selling Parties under the Selling Parties’ health and dental plans toward the satisfaction of annual deductible and out-of-pocket maximums under such Azur Inc. health and dental plans during the calendar year which includes the Closing Date.

          (e) The Selling Parties shall provide to Azur Inc., at Buyer’s request, access to job-related employment documents with the exception of non-work-related medical records or other records the disclosure of which would be in violation of applicable Law, as needed for Buyer to comply with this Section 6.3 prior to the Closing Date. The Selling Parties and Azur Inc. shall each cooperate with the other and shall provide to the other such documentation, information and assistance as is reasonably necessary to effect the provisions of this Section 6.3. Buyer is solely responsible for the use of the Employee Records and other employee information furnished by the Selling Parties and, subject to Article IX Buyer shall indemnify and hold the Selling Parties harmless from and against any Damages or Liabilities incurred by the Selling Parties as a result of Azur Inc.’s use of such Employee Records or other employee information.

          (f) The Selling Parties shall be responsible for providing or discharging any and all notifications, benefits and Liabilities to Business Employees and governmental entities under the Worker Adjustment and Retraining Notification Act of 1988 (the “WARN Act”) or by

any other Law relating to plant closings, mass layoffs or employee separations or severance pay that are first required to be provided or discharged on or prior to the Closing Date, and Azur Inc. shall be responsible for providing any notice required pursuant to the WARN Act with respect to a plant closing, layoff or employee separation or severance pay relating to the Buyer Employees after the Closing Date. Azur Inc. shall be responsible for the administration of and shall assume any and all obligations, if any, arising after the Closing Date under COBRA with respect to Buyer Employees and their beneficiaries.

          (g) From the date hereof until the Closing Date, the Selling Parties shall not increase or change the compensation or benefits for the Business Employees other than in the Ordinary Course of Business.

          (h) The provisions of this Section 6.3 pertaining to the employment and employee benefits of the Buyer Employees are solely for the benefit of the parties to this Agreement, and no employee or former employee of the Selling Parties or Buyer or any other individual associated therewith shall be regarded for any purpose as a third party beneficiary of this Agreement.

          6.4 No Additional Representations and Warranties. Buyer acknowledges and agrees that except for the representations and warranties contained in Article IV (as modified by the Disclosure Schedules), neither the Selling Parties nor any other Person makes any express or implied representation or warranty, including as to the accuracy or completeness of any information regarding the Business, on behalf of the Selling Parties. The Selling Parties specifically disclaim any such representation or warranty, whether by the Selling Parties or any of their Representatives or any other Person, with respect to the execution and delivery of this Agreement, the Ancillary Agreements or the consummation of the transactions contemplated hereby or the Business or Purchased Assets notwithstanding the delivery or disclosure to Buyer or any of its Representatives or any other Person of any documentation or other information with respect to the foregoing. Buyer further agrees that neither the Selling Parties nor any other Person shall have or be subject to any Liability to Buyer or any other Person resulting from the distribution to Buyer or such Person, or Buyer’s or such Person’s use of, any such information, including any information, documents, data or materials made available to Buyer by the Selling Parties, management presentations or other form in expectation of the transactions contemplated by this Agreement. OTHER THAN THE EXPRESS REPRESENTATIONS AND WARRANTIES SET FORTH IN ARTICLE IV (AS MODIFIED BY THE DISCLOSURE SCHEDULES), IT IS THE EXPRESS INTENT OF THE PARTIES HERETO THAT THE SELLING PARTIES MAKE NO REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS OR IMPLIED, AT LAW OR IN EQUITY IN RESPECT OF THE BUSINESS OR THE PURCHASED ASSETS OR ANY OTHER MATTER, INCLUDING, ANY IMPLIED REPRESENTATION OR WARRANTY AS TO THE CONDITION, MERCHANTABILITY, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE OF THE PURCHASED ASSETS, AND ANY SUCH REPRESENTATIONS OR WARRANTIES ARE EXPRESSLY DISCLAIMED. THE SELLING PARTIES RECOGNIZE AND AGREE THAT BUYER, IN CONNECTION WITH THE EXECUTION AND DELIVERY OF THIS AGREEMENT, IS RELYING UPON THE REPRESENTATIONS AND WARRANTIES EXPRESSLY GIVEN IN ARTICLE IV OF THIS AGREEMENT (AS MODIFIED BY THE DISCLOSURE SCHEDULES).

          6.5 Disclaimer of Estimates and Projections. In connection with Buyer’s investigation of the Business and the Purchased Assets, Buyer may have received from or on behalf of the Selling Parties certain estimates, forecasts, plans and financial projections. Buyer acknowledges that (a) there are uncertainties inherent in making such estimates, forecasts, plans and projections and that Buyer is familiar with such uncertainties, and (b) Buyer is taking full responsibility for conducting its own evaluation of the adequacy and accuracy of such estimates, forecasts, plans and projections (including the reasonableness of the assumptions underlying such estimates, forecasts, plans and projections) and (c) Buyer shall have no Claim against Seller, Parent, any of their Affiliates or any other Person with respect to such estimates, forecasts, plans or projections. Accordingly, the Selling Parties are making no representation or warranty with respect to such estimates, forecasts, plans and projections (including such underlying assumptions).

          6.6 Revision of Marketing Materials; Use of Names.

          (a) Removal of Names. Buyer shall revise all marketing materials and other product literature related to the Product to delete all reference to the names and other references to the Selling Parties and implement such materials as soon as reasonably practicable, and in any event, within one (1) year after the date of this Agreement.

          (b) Transitional Use of Names. For one (1) year after the Closing Date, Buyer may continue to distribute marketing materials in connection with the marketing of the Product that use names, addresses or phone numbers to the extent that such marketing materials exist at the Closing Date.

          (c) No Other Use. Other than as expressly provided in this Agreement, Buyer shall not use or permit any of its Affiliates or distributors to use any of the names or any other corporate, trademarks or service marks or names now or hereafter owned or used by the Selling Parties or any of its Affiliates, other than the Transferred Intellectual Property (on the terms provided herein and in the Ancillary Agreements).

          (d) Website Information. Within thirty (30) days following the Closing Date, the Selling Parties shall remove all references to the Product from the “Products” section of their website.

          6.7 Customer Notifications. Promptly after the Closing Date, Buyer shall notify all current customers of the Product (i) of the transfer of the Purchased Assets to Buyer and (ii) that all purchase orders for Product received by the Selling Parties or any of their Affiliates prior to the Agreement Date but not filled as of such date will be transferred to Buyer; provided, however, that to the extent that any purchase order cannot be so transferred, the Selling Parties and Buyer shall cooperate with each other to ensure that such purchase order is filled and that Buyer receives the same economic benefit and assumes the same liability associated with filling such purchase order as if such purchase order had been so transferred; provided, however, that Buyer’s obligations to provide such notices is subject to the Selling Parties providing Buyer with a complete list of all current customers of the Product and their contact information.

          6.8 Regulatory Matters, Etc.

          (a) From and after the Closing Date, Buyer shall assume all regulatory responsibilities in connection with the Products and the Product Applications, including responsibility for (i) all periodic and annual reports or other regulatory filings with the FDA or any equivalent foreign Governmental Authority with respect to the 2007 calendar year (provided that Selling Parties shall provide assistance as reasonably requested in connection with such reports and filings), (ii) reporting any product quality complaints and adverse drug events in connection with the NDA, and (iii) compliance with the Federal Food, Drug and Cosmetic Act and the Public Health Service Act, as the same may be amended from time to time. For a period of six (6) months after the Closing Date, if the Selling Parties receive any adverse event reports regarding the Product, the Selling Parties shall promptly notify Buyer of such.

          (b) Notwithstanding anything in this Agreement to the contrary and subject to Section 2.7, the Selling Parties shall have no obligation whatsoever in connection with any regulatory filings, requests or applications related to the Product.

          (c) From and after the Closing Date, the Selling Parties shall direct all complaints or inquiries concerning the Product to Buyer to the attention of the “Senior Director of Medical Affairs” of Buyer, or such other person or persons as Buyer may specify from time to time by written notice to the Selling Parties.

          (d) From and after the Closing Date, Buyer shall have all responsibility for any and all Governmental Authority fee obligations for holders or owners of the Product Registration and the Product Applications that relate to periods on or after the Closing Date, and the Selling Parties shall retain responsibility for such fee obligations as they relate to periods prior to the Closing Date. Each party shall promptly reimburse the other to the extent a party pays amounts that are the responsibility of the other party hereunder.

          (e) From and after the Closing Date, Buyer shall have the sole authority and responsibility to respond to any Governmental Authorities, to respond to product technical complaints and medical complaints and to handle all recalls, market withdrawals and field corrections of the Product in accordance with applicable Laws, all at Buyer’s sole cost and expense.

          (f) Beginning at the Closing Date and ending two (2) years thereafter, Buyer shall promptly (but in any case, within forty-eight (48) hours) notify the Selling Parties in writing of any decision, order, request or directive of a court or other Governmental Authority to recall, withdraw, or field correct the Product. Buyer has the sole authority and responsibility for determining if and when to issue any recall, withdrawal, or field correction (but shall comply with all applicable laws, rules, regulations, directives and orders in making such determination), with respect to all Products whether they are sold or distributed before, on or after the Closing Date. Except as otherwise provided in this Agreement, Buyer shall be responsible for, and, subject to Article IX, shall indemnify the Selling Parties with respect to, the cost and expense of any such recall, withdrawal, or field correction, with respect to any Products sold or distributed by Buyer after the Closing Date. The Selling Parties shall have sole responsibility for, and, subject to Article IX, shall indemnify the Buyer with respect to, the cost and expense of any such recall, with-

drawal, or field correction, with respect to any Product sold or distributed by the Selling Parties on or prior to the Closing Date.

          6.9 Post Closing Cooperation.

          (a) Each party further agrees that it will cooperate with and make available to the other party, its employees, auditors, counsel and representatives, during normal business hours, all books and records, information and employees (without substantial disruption of employment) retained and remaining in existence after the Closing which are necessary or useful in connection with any Tax filing inquiry, audit, investigation or dispute, any litigation or investigation or any other matter requiring any such books and records, information or employees for any reasonable business purpose. Buyer shall retain all such books and records in a manner consistent with the Selling Parties’ record retention policy. The party requesting any such books and records, information or employees shall bear all of the out-of-pocket costs and expenses (including attorneys’ fees, but excluding reimbursement for salaries and employee benefits) reasonably incurred in connection with providing such books and records, information or employees. All information received pursuant to this Section 6.9 shall be subject to the terms of Section 6.1(b) hereof.

          (b) For a period of four (4) years after the Closing Date, the Selling Parties shall (i) cooperate with Buyer in connection with Buyer’s preparation of financial statements, and use commercially reasonable efforts to provide Buyer with such information or documents, pertaining to the Product that Buyer reasonably requests in connection therewith and (ii) use commercially reasonable efforts to cause the accountants for the Selling Parties to deliver such information and provide access to files and work papers in connection therewith as Buyer may reasonably request. Buyer shall pay for all third party costs related to such work and those reasonable costs related to the Selling Parties’ time and expenses.

          (c) After the Closing Date, upon reasonable written notice, Buyer and the Selling Parties shall furnish or cause to be furnished to each other, as promptly as practicable, such information and assistance (to the extent within the control of such party) relating to the Purchased Assets (including access to books and records) as is reasonably requested for the filing of all Tax Returns, and making of any election related to Taxes, the preparation for any audit by any Taxing authority, and the prosecution or defense of any claim, suit or proceeding related to any Tax Return. In the event it is necessary under this Agreement to allocate any Tax between pre- and post- Closing periods, such allocation shall be performed based on the number of days in each such period, on the basis of a 365-day calendar year, or such other method as the parties hereto shall reasonably agree. The Selling Parties and Buyer shall cooperate with each other in the conduct of any audit or other proceeding relating to Taxes involving the Purchased Assets. Buyer shall retain the books and records of the Selling Parties and their Affiliates included in the Purchased Assets for a period of seven years after the Closing Date. After the end of such seven-year period, before disposing of such books or records, Buyer shall give notice to such effect to the Selling Parties and shall give the Selling Parties, at the Selling Parties’ cost and expense, an opportunity to remove and retain all or any part of such books or records as the Selling Parties may select.

          (d) The Selling Parties shall provide assistance to Buyer as reasonably requested with respect to financial and other information relating to the conduct of the Business prior to the Closing Date in connection with Buyer’s performance of obligations and enjoyment of benefits under the Business Contracts.

          6.10 Consents. The parties hereto shall use commercially reasonable efforts to obtain the approvals of the FDA and consents of the Persons listed on Schedule 6.10 on the Closing Date. The Selling Parties shall use commercially reasonable efforts to deliver to each relevant Governmental Authority and to Buyer a copy of the Selling Parties’ FDA transfer of ownership letter, and each other document required to initiate transfer of any Permits.

          6.11 Financing. Buyer shall use its commercially reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable to arrange and obtain the financing on the terms and conditions described in its financing commitment letter, including using commercially reasonable efforts to (a) maintain in effect the financing commitment letter and negotiate and enter into definitive agreements with respect to the financing on the terms and conditions reflected in the financing commitment letter, (b) satisfy on a timely basis all material conditions applicable to Buyer in such definitive agreements that are within its control, (c) consummate the financing at such time or from time to time as is necessary for Buyer to satisfy its obligations under this Agreement (d) enforce its rights under the financing commitment letter; provided, however, that Buyer shall have the right to substitute alternative financing with a different letter or a letter from alternative lenders so long as such substitute letter is subject to financing conditions that are at least as favorable to Buyer as the financing conditions set forth in the financing commitment letter. In the event any portion of the financing becomes unavailable on the terms and conditions contemplated in the financing commitment letter for any reason, Buyer shall use it’s commercially reasonable efforts to obtain alternative financing from alternative sources as promptly as practicable following the occurrence of such event. For the avoidance of doubt, Buyer’s obligation to consummate the transactions contemplated by this Agreement are not (and shall not be) subject to any financing condition.

          6.12 Transition Services.

          (a) Following the Closing and for a period of six (6) months thereafter (the “Transition Period”), Azur Inc. shall have the right, subject to Sections 6.12(b) and (f) through (k) below, to utilize the services of each employee or consultant of the Selling Parties identified on Schedule 6.12 as a “FazaClo Transition Services Employee” (the “FazaClo Transition Services Employees”) for transition services within such employee’s area of responsibility mutually agreed to by the parties (such services, the “FazaClo Transition Services”). As used in this Section 6.12, a month shall be defined as each monthly anniversary of the Closing Date. The parties agree that in the event Azur Inc. seeks, after the Closing, to utilize services of additional employees of the Selling Parties that were useful in the operation of the Business and did not become Buyer Employees, the parties will consult with one another to reach mutual agreement regarding an amendment to Schedule 6.12 that identifies the terms of, and payment associated with, the services to be provided by such employees.

          (b) Azur Inc. shall pay a monthly fee for each FazaClo Transition Services Employee equal to the amount set forth opposite such FazaClo Transition Services Employee’s

name for the applicable month following the Closing on Schedule 6.12 (the aggregate of such monthly fees payable is referred to herein as the “FazaClo Monthly Fee”). In the event that, during the Transition Period, Azur Inc. determines that it no longer requires the services of a FazaClo Transition Services Employee, Azur Inc. may provide Parent with written notice to that effect (a “Termination Notice”). Such Termination Notice shall be effective beginning on the first Monday following five (5) Business Days after its receipt by Parent and the monthly fee amount applicable to such FazaClo Transition Services Employee shall thereafter no longer be taken into account in calculating the FazaClo Monthly Fee (with any amount of FazaClo Monthly Fee relating to such FazaClo Transition Services Employee for the month in which the Termination Notice is delivered, pro rated on the basis of a 30 day month).

          (c) During the Transition Services Period, Azur Inc. shall have the right, subject to Sections 6.12(e)-(k) below, to utilize the services of each employee of the Selling Parties identified on Schedule 6.12 as an “Administrative Transition Services Employees” (the “Administrative Transition Services Employees”) for transition services within such employee’s area of responsibility mutually agreed to by the parties (such services, the “Administrative Transition Services”), up to the maximum percentage of such Administrative Transition Services Employee’s time during such month as is set forth opposite such Administrative Transition Services Employee’s name on Schedule 6.12. The monthly rate payable for each such Administrative Transition Services Employee’s time shall be equal to the fully burdened annual base salary and bonus (which amount is listed opposite such Administrative Transition Services Employee’s name on Schedule 6.12 under the heading “Annual Base Salary”), divided by 365 and multiplied by the number of days (including any fraction of a day and with partially worked days aggregated) in such month in which such Administrative Transition Services Employee provided Administrative Transition Services (the aggregate of such monthly fees payable is referred to herein as the “Admin Monthly Fee”).

          (d) During the Transition Services Period, Azur Inc. shall have the right, subject to Sections 6.12(e)-(k) below, to utilize the services of each consultant of the Selling Parties identified on Schedule 6.12 as a “Transition Consultant” (the “Transition Consultants”, and along with the FazaClo Transition Services Employees and the Administrative Transition Services Employees, the “Transition Services Employees”) for transition services within such consultant’s area of responsibility mutually agreed to by the parties for up to the maximum percentage of such Transition Consultant’s time set forth opposite such Transition Consultant’s name on Schedule 6.12 (such services, the “Consultant Transition Services”). In respect of the Consultant Transition Services, Azur Inc. shall pay the monthly rate set forth opposite such Transition Consultant’s name on Schedule 6.12 (the aggregate of such monthly fees payable is referred to herein as the “Consultant Monthly Fee”; the aggregate FazaClo Monthly Fee, Admin Monthly Fee and the Consultant Monthly Fee referred to herein as the “Monthly Fee”). Notwithstanding the foregoing provisions of this Section 6.12(d), following the sixtieth (60th) day after the Closing, Parent may notify Azur Inc. that it no longer requires the services of any one or more Transition Consultants. Within five (5) days of receiving such notice, Azur Inc. shall indicate either (i) that the services of the Transition Consultant may be terminated (which shall have the same effect as the delivery of a Termination Notice as described in the remainder of this Section 6.12(d)) or (ii) that it commits to increase the percentage of time associated with such Transition Consultant on Schedule 6.12, and until a Termination Notice is delivered and effective, to pay for, 100% of

such Transition Consultant’s time. In the event that, during the Transition Period, Azur Inc. determines that it no longer requires the services of a Transition Consultant, Azur Inc. may provide Parent with a Termination Notice. Such Termination Notice shall be effective beginning on the first Monday following five (5) Business Days after its receipt by Parent and the monthly fee amount applicable to such Transition Consultant shall thereafter no longer be taken into account in calculating the Consultant Monthly Fee (with any amount of Consultant Monthly Fee relating to such Transition Consultant for the month in which the Termination Notice is delivered, pro rated on the basis of a 30 day month).

          (e) The Monthly Fee shall be payable each month in which Administrative Transition Services are provided within five (5) Business Days after the end of such month by wire transfer of immediately available funds to an account designated by Parent.

          (f) The parties agree that neither the Selling Parties nor any of their Affiliates shall be obligated to replace any Transition Services Employee whose employment terminates during the Transition Period either at the election of the Transition Services Employee or at the election of Parent for cause or, with respect to an Administrative Transition Service Employee, in connection with layoffs or other reorganization by Parent. In the event of such a termination, the Monthly Fee, as applicable to such Transition Services Employee, shall no longer be payable by Buyer; provided that if Parent elects to replace any Administrative Transition Services Employee whose employment is terminated, such replacement employee shall provide the Administrative Transition Services to Azur Inc. on the same terms and at the same rate as the terminated Administrative Transition Services Employee provided such services. Except as otherwise provided herein, the Selling Parties agree not to terminate the employment of any FazaClo Transition Services Employee during the Transition Period, unless Azur Inc. has delivered a Termination Notice in respect of such FazaClo Transition Services Employee. In no event shall Parent be obligated to provide any replacement services or arrange for substitute employees to provide services during the Transition Services Period, if any, that a Transition Services Employee is absent from work and uses illness, personal or vacation time accrued under Parent’s illness, personal or vacation policy in the Ordinary Course of Business. Notwithstanding anything to the contrary in this Section 6.12, if and only if the Selling Parties terminate the contract of a Transition Consultant, then Azur Inc. may engage such Transition Consultant for all of the services provided under such contract.

          (g) During the Transition Period, Parent shall make available the Transition Services Employees that are then providing Transition Services pursuant to this Section 6.12 for reasonable consultation with Azur Inc.’s representatives, whether via telephone, written or electronic correspondence or in person at the Parent’s facilities, for the purpose of conveying and transferring information and performing activities related to the Business. Such consultation shall occur for reasonable periods of time and during Parent’s normal business hours. All Transition Services shall be performed at or from the premises of Parent or an Affiliate of Parent, unless otherwise agreed by Parent and Azur Inc.

          (h) Parent shall use commercially reasonable efforts to cause the Transition Services Employees to perform Transition Services with at least the same level of quality and efforts they rendered in relation to the Business prior to the Closing Date; provided, that Azur

Inc.’s sole recourse for any breach of this Section 6.12 by a Transition Services Employee (e.g., for failure or refusal of such employee to provide Transition Services or to provide Transition Services of an acceptable quality) shall be the termination of such Transition Services in the manner set forth in Section (b) above. The parties agree to cooperate in good faith to realize their intent in relation to the provision of Transition Services, including:

          (i) Parent and Azur Inc. agree to each appoint and maintain a coordinator with responsibility for coordinating the provision of the Transition Services;

          (ii) Parent shall, consistent with past practice, supervise the activities of its officers, employees and representatives with respect to provision of the Transition Services;

          (iii) Parent shall maintain books and records relevant to the provision of the Transition Services in a manner consistent with past practice and shall make such books and records available to Azur Inc. upon reasonable request by Azur Inc.; and

          (iv) The parties will use their commercially reasonable efforts to ensure that all transactions and activities conducted by Transition Services Employees hereunder are conducted in material compliance with all applicable Laws.

          (i) Transition Services Employees shall act, and the parties intend that they be treated, as employees of Parent or its Affiliates. Nothing contained in this Agreement shall be construed or implied to create an agency, partnership, joint venture, or employer and employee relationship between Azur Inc. and the Transition Services Employees.

          (j) Except as otherwise provided herein, neither party may make any representation, warranty or commitment, whether express or implied, on behalf of or incur any charges or expenses for or in the name of the other party. No party shall be liable for the act of any other party except as otherwise provided herein or unless such act is otherwise expressly authorized in writing by both parties hereto. For the avoidance of doubt, Transition Services Employees shall not have the authority to negotiate or enter into contracts or agreements on behalf of Azur Inc. or any of their Affiliates.

          (k) Notwithstanding anything to the contrary set forth in this Section 6.12, Selling Parties shall provide Azur Inc. a credit in the amount of Four Hundred Thousand Dollars ($400,000) to be applied exclusively to each consecutive Monthly Fee after the Closing Date, and Azur Inc. shall not be required to make any cash payments to the Selling Parties for any Transition Services under this Section 6.12 until such credit has been exhausted.

          6.13 Transition Services Contracts. Schedule 6.13 lists certain Contracts that are included in the Excluded Assets but may be useful to Azur Inc. in the operation of the Business (the “Transition Services Contracts”). Following the Closing and for a period of ninety (90) days thereafter, Parent shall request on behalf of Azur Inc. that the other party to the applicable Transition Services Contract provide such services as Azur Inc. requests and Azur Inc. shall pay all amounts due and payable for such services to Parent or, if so directed by Parent, to the other party to the Transition Services Contract upon the terms and subject to the conditions of such

Transition Services Contract. Subject to Article IX, Buyer shall indemnify Parent for Buyer’s failure to comply with the foregoing sentence. It is expressly understood by the parties that nothing in this Section 6.13 shall limit or in anyway modify Parent’s rights under the Transition Services Contracts. It is further understood that Parent is not liable for any loss incurred by the Azur Inc. due to the expiration or termination of any of the Transition Services Contracts.

          6.14 Reporting Obligations. Azur Limited acknowledges and agrees that it shall deliver to Sellers’ Representative (as defined in the Unit Purchase Agreement) the Contingent Payment Quarterly Report throughout the term of the Contingent Payment Period (as defined in the Unit Purchase Agreement) at the time and in the manner required under the Unit Purchase Agreement. Furthermore, Azur Limited acknowledges and agrees that it shall deliver to Seller, at least five (5) Business Days before the delivery to the Sellers’ Representative, and thereafter so long as Azur Limited has an obligation to make payment of the Sales Percentage Amount, a copy of the Contingent Payment Quarterly Report (provided that such reports shall be deliverable by Azur Limited once annually within seventy five (75) days after the end of each calendar year after the Subsequent Run Rate Contingent Payment has become due and payable by Parent under the Unit Purchase Agreement). In addition to the applicable Contingent Payment Quarterly Report, Azur Limited shall deliver to Parent a consolidated report of each of the Contingent Payment Quarterly Reports delivered in the applicable calendar year. Upon reasonable notice, Azur Limited shall make available to the Selling Parties and their Representatives during normal business hours all of the books, records, personnel and workpapers used by Azur Limited to prepare each Contingent Payment Quarterly Report. Azur Limited shall notify Parent as soon as reasonably practicable if Buyer reasonably believes the Subsequent Run Rate Contingent Payment (that is dependent upon achieving One Million Five Hundred Thousand Dollars ($1,500,000) of Net Product Revenues for three (3) consecutive months within a fiscal quarter) will be earned under the Unit Purchase Agreement.

          6.15 Operation of Business by Buyer. Buyer agrees that, to the full extent that it fails to operate the Business in such a manner as to not negatively affect the Final Net Working Capital (or the financial components contained therein), including failing to use its commercially reasonable efforts to collect all accounts receivable reflected in the Closing Net Working Capital Estimate or taking actions to accept Product returns other than in accordance with the Selling Parties’ return policy in effect as of the date of this Agreement (including, with the commercial launch of DuraSolv), the effect of such actions on the Net Working Capital shall not be taken into account by the parties or the Accounting Firm in determining the Post-Closing Statement of Net Working Capital or otherwise calculating the Final Net Working Capital.

          6.16 ^{[* * *]} . Prior to the earlier of (i) January 1, 2010 and (ii) the date on which the full amount of the Contingent Cash Purchase Price has been paid or is no longer payable, neither Buyer (including any successor (that at the time of becoming a successor is not already actively engaged in taking any of the actions set forth in this Section 6.16), partnership or joint

^{[* * *]} Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission.

venture of which Buyer or any of its Affiliates is a party), nor any of its Affiliates (other than their employees outside of their capacity as such) or Representatives (in their capacity as such) shall:

          (a) ^{[* * *]};

          (b) [* * *];

          (c) [* * *]

          (d) [* * *],

[* * *], provided, further, however, if Buyer or an Affiliate of Buyer invests in or provides financing to any Person which Buyer or such Affiliate does not control and continues not to control, and at the time of such investment the Person in which the investment is being made, to the knowledge of Buyer and its Affiliates after due inquiry, does not plan to and is not preparing to [* * *], such Person thereafter [* * *] shall not be a violation of this Section 6.16.

          6.17 Supplement of Disclosure Schedules. The Selling Parties may (but shall not be required to) from time to time, prior to the Closing Date, supplement the Disclosure Schedules in writing to disclose events or information that occurred or became available after the date of this Agreement that would otherwise render any representation or warranty of the Selling Parties contained in Article IV, if made on such Closing Date (or, in the case of representations and warranties which address matters only as of a particular date, as of such date), untrue or inaccurate in a manner that would reasonably be expected to cause the Selling Parties to be unable to satisfy the condition set forth in Section 8.1 hereof (any such notice, a “Seller Notice”). For a period of five (5) Business Days following its receipt of a Seller Notice (and in the event such Seller Notice is provided within five (5) Business Days of the Closing, the Closing shall occur not earlier than the sixth (6^th) Business Day after the delivery of such Seller Notice), Buyer shall have the right to, in its sole discretion, terminate this Agreement by providing written notice of such termination to the Selling Parties. Such right to terminate shall be Buyer’s sole and exclusive remedy relating to any matters set forth in the Seller Notice. If Buyer fails to provide written notice of such termination to the Selling Parties by the fifth Business Day after Buyer’s receipt of the Seller Notice then the Seller Notice shall be deemed to have amended the Disclosure Schedules, to have qualified the representations and warranties in Article IV, and to have cured any misrepresentation or breach of representation or warranty that otherwise might have existed hereunder by reason of the occurrence, or failure to occur, of the event or events set forth in the Seller Notice.

^{[* * *]} Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission.

ARTICLE VII
CONDITIONS TO THE SELLING PARTIES’ OBLIGATIONS

          The obligations of the Selling Parties to consummate the transactions contemplated by this Agreement are subject to the satisfaction, on or prior to the Closing Date, of each of the following conditions, any of which may be waived by the Selling Parties:

          7.1 Representations, Warranties and Covenants. All representations and warranties of Buyer contained in this Agreement (disregarding all qualifications and exceptions contained herein relating to materiality or Material Adverse Effect) shall be true and correct as of the Closing Date or, in the case of representations and warranties that address matters only as of a particular date, as of such date, in each case except to the extent that the failure of such representations and warranties to be true and correct would not, individually or in the aggregate, (a) have a material adverse effect on the ability of Buyer to consummate the transactions contemplated hereby or (b) subject the Selling Parties to any Liability. Buyer shall have performed and satisfied in all material respects the agreements and covenants required hereby to be performed by it prior to or on the Closing Date. Buyer shall furnish the Selling Parties with a certificate executed by a duly authorized officer of Buyer to the effect that the conditions set forth in this Section 7.1 are satisfied.

          7.2 No Laws or Governmental Orders. No preliminary or permanent injunction or other Governmental Order which prevents the consummation of the sale of the Purchased Assets contemplated hereby shall have been issued and remain in effect (each party agreeing to use its commercially reasonable efforts to have any such injunction or Governmental Order lifted) and no Law shall have been enacted which prohibits the consummation of the sale of the Purchased Assets.

          7.3 Deliveries. The Selling Parties shall have received from Buyer each of the deliveries described in Section 3.2(b) hereof.

ARTICLE VIII
CONDITIONS TO BUYER’S OBLIGATIONS

          The obligations of Buyer to consummate the transactions contemplated by this Agreement are subject to the satisfaction, on or prior to the Closing Date, of each of the following conditions, any of which may be waived by Buyer:

          8.1 Representations, Warranties and Covenants. All representations and warranties of the Selling Parties contained in this Agreement (disregarding all qualifications and exceptions contained herein relating to materiality or Material Adverse Effect) shall be true and correct as of the Closing Date or, in the case of representations and warranties that address matters only as of a particular date, as of such date, in each case except to the extent that the failure of such representations and warranties to be true and correct do not, individually or in the aggregate, have a Material Adverse Effect. The Selling Parties shall have performed and satisfied in all material respects the agreements and covenants required hereby to be performed by them prior to or on the Closing Date. The Selling Parties shall furnish Buyer with a certificate exe-

cuted by a duly authorized officer of each Selling Party to the effect that the conditions set forth in this Section 8.1 are satisfied.

          8.2 No Law or Governmental Orders. No preliminary or permanent injunction or other Governmental Order which prevents the consummation of the sale of the Purchased Assets contemplated hereby shall have been issued and remain in effect (each party agreeing to use its commercially reasonable efforts to have any such injunction or Governmental Order lifted) and no Law shall have been enacted which prohibits the consummation of the sale of the Purchased Assets.

          8.3 Deliveries. Buyer shall have received from the Selling Parties each of the deliveries described in Section 3.2(a) hereof.

          8.4 Consents. The consents of the Persons listed on Schedule 8.4 shall have been duly obtained and shall be in full force and effect on the Closing Date.

          8.5 Employees. At least eighty percent (80%) of the Business Employees identified on Schedule 6.3(a)(i) shall have accepted Azur Inc.’s offer of employment pursuant to Section 6.3.

ARTICLE IX
POST-CLOSING COVENANTS

          9.1 Selling Parties Maintenance of Insurance. The Selling Parties shall maintain product liability insurance against claims regarding the manufacture and use of the Products in amounts of not less than Five Million Dollars ($5,000,000) for each claim and Ten Million Dollars ($10,000,000) in the aggregate for a period of not less than one (1) year following the Closing Date.

          9.2 Survival.

          (a) The representations, warranties and covenants of the parties contained in this Agreement shall survive the Closing Date for the applicable period set forth in this Section 9.2, and no party shall have any liability to the other for breach of a representation, warranty or covenant except to the extent that notice of a Claim is asserted in writing and delivered to it prior to the termination of the applicable survival period. No notice of a Claim with respect to a breach of a representation, warranty or covenant may be given after the applicable time set forth above.

          (b) Each and every representation and warranty contained in this Agreement and the Ancillary Agreements (other than the representations and warranties contained in Sections 4.1 (the Selling Parties’ Organization), 4.2 (the Selling Parties’ Authorization), 4.6 (Title to Purchased Assets), 4.11 (No Brokers or Finders), (Buyer’s Organization), 5.2 (Buyer’s Authorization), and 5.6 (No Brokers or Finders) hereof (collectively, the “SOL Representations and Warranties”)) shall survive the Closing Date solely for purposes of Section 9.3 hereof until the first anniversary of the Closing Date and then expire. Each SOL Representation and Warranty

shall survive the Closing Date solely for purposes of Section 9.3 hereof until, and will expire when, the statute of limitation applicable to such SOL Representation and Warranty expires.

          (c) Each and every covenant contained in this Agreement and the Ancillary Agreements (other than the covenants contained in Section 6.1(b), covenants for which a party hereto has brought a Claim prior to the Closing Date against the other party for a breach of such covenant and the covenants contained in this Agreement and the Ancillary Agreements, which by their terms are to be performed by the parties following the Closing (collectively, the “Surviving Covenants”)), shall expire with, and be terminated and extinguished by, the consummation of the sale of the Purchased Assets and the transfer of the Assumed Liabilities pursuant to this Agreement and shall not survive the Closing Date; and none of the Selling Parties, Buyer or any Representative or Affiliate of any of them shall have any Liability whatsoever with respect to any such covenant. Each Surviving Covenant shall survive the Closing Date solely for purposes of Sections 3.3, 6.3, 6.8, 6.13 and this Article IX until, and will expire when, the statute of limitation applicable to the performance of such covenant expires. The Selling Parties’ indemnification obligations pursuant to Section 9.3(a)(iii) and Buyer’s indemnification obligations pursuant to Section 9.3(b)(iv) shall survive the Closing Date in perpetuity.

          (d) The expiration of the representations, warranties, covenants and indemnification obligations as provided in this Section 9.2 shall not affect the rights of a party in respect of any Claim made by such party in a writing received by the other party prior to the expiration of the applicable survival period provided herein, which Claim shall survive until its ultimate resolution.

          9.3 Indemnification.

          (a) Subject to the provisions of this Article IX, after the Closing, the Selling Parties shall indemnify and hold harmless Buyer and its Affiliates and Buyer’s and such Affiliates’ respective Representatives, and each of their respective successors and assigns (collectively, the “Buyer Indemnified Parties”) from and against all losses, liabilities, damages, (excluding, except as stated in the last paragraph of Section 9.9, consequential, incidental, special or punitive damages), Actions, Claims, judgments, injunctions, orders, decrees, rulings, settlements, costs, expenses (including reasonable fees and expenses of counsel, consultants, experts and other professional fees), demands, penalties, fines, interest and assessments (collectively, “Damages”) incurred by the Buyer Indemnified Parties or any of them arising from or as a result of:

          (i) the breach of any representation or warranty of the Selling Parties in this Agreement (provided that any “Material Adverse Effect” qualification limiting the scope of such representation or warranty shall not be given effect and any such representation or warranty so modified shall be breached only if such representation or warranty as so modified is not accurate in all material respects);

          (ii) the breach or non-performance of any Surviving Covenant made by the Selling Parties in this Agreement or any Ancillary Agreement;

          (iii) any Retained Liabilities; and

          (iv) the indemnification obligations of the Selling Parties under Section 3.3 and 6.8(f) hereof.

          (b) Subject to the provisions of this Article IX, after the Closing, Buyer shall indemnify and hold harmless each of the Selling Parties and their Affiliates and the Selling Parties’ and such Affiliates’ Representatives, and each of their respective successors and assigns (collectively, the “Seller Indemnified Parties”) from and against all Damages as incurred by the Seller Indemnified Parties or any of them arising from or as a result of:

          (i) the breach of any representation or warranty of Buyer in this Agreement (provided that any “Material Adverse Effect” qualification limiting the scope of such representation or warranty shall not be given effect and any such representation or warranty so modified shall be breached only if such representation or warranty as so modified is not accurate in all material respects);

          (ii) the breach or non-performance of any Surviving Covenant made by Buyer in this Agreement or any Ancillary Agreement;

          (iii) the indemnification obligations of Buyer under Sections 3.3, 6.3, 6.8, and 6.13 hereof; and

          (iv) any Assumed Liabilities.

          (c) The knowledge of an Indemnifying Party of a breach of representation, warranty or covenant hereunder (other than by virtue of any Disclosure Schedule) shall not affect the obligation of an Indemnifying Party to indemnify an Indemnified Party for Damages resulting from such breach.

          9.4 Indemnification Procedures. Claims for indemnification under this Agreement shall be asserted and resolved as follows:

          (a) A party claiming indemnification hereunder (an “Indemnified Party”) with respect to any Claims asserted against it by an unaffiliated third-party (a “Third-Party Claim”) that could give rise to a right of indemnification hereunder shall promptly (and in any event within ten (10) Business Days) (i) notify the party from whom indemnification is sought (such notified party, the “Indemnifying Party”) of the Third-Party Claim, and (ii) transmit to the Indemnifying Party a written notice (a “Claim Notice”) describing in reasonable detail the nature of the Third-Party Claim, a copy of all papers served with respect to such Claim (if any), the basis of the Indemnified Party’s request for indemnification hereunder and a good-faith estimate of the amount of Damages attributable to such Claim. Failure to provide such Claim Notice shall not affect the right of the Indemnified Party’s indemnification hereunder, except to the extent that the Indemnifying Party is materially prejudiced as a result of such failure.

          (b) The Indemnifying Party shall have the right to defend the Indemnified Party against such Third-Party Claim, it being understood that such election shall be without prejudice to the right of the Indemnifying Party to dispute whether such Claim involves indemnifiable Damages hereunder. If the Indemnifying Party notifies the Indemnified Party within thirty (30) days after receipt of any Claim Notice that the Indemnifying Party elects to assume the de-

fense of the Third-Party Claim, then the Indemnifying Party shall have the right to defend such Third-Party Claim with counsel selected by the Indemnifying Party who is reasonably acceptable to the Indemnified Party, by all appropriate proceedings. If the Indemnifying Party irrevocably agrees that the Third Party Claim involves Damages entitled to be indemnified, all costs of such defense or any settlement by Seller as Indemnifying Party, including reasonable attorneys’ fees, accountants’ fees and any other reasonable fees and expenses related to such defense, shall, subject to the limitations set forth in this Article IX, be indemnifiable Damages. The Indemnifying Party shall have full control of such defense and proceedings, including any compromise or settlement thereof, provided that the Indemnifying Party shall not consent to the entry of a judgment or enter into any settlement with respect to the matter without the prior written consent of the Indemnified Party (which consent shall not be unreasonably withheld or delayed). If an Indemnifying Party assumes such defense, the Indemnifying Party shall not be liable for any amount required to be paid by the Indemnified Party that exceeds, where the Indemnified Party has withheld or delayed consent in connection with the proposed compromise or settlement of a Third-Party Claim, the amount for which that Third-Party Claim could have been settled pursuant to that proposed compromise or settlement (provided that (i) such final compromise or settlement is on substantially the same terms (other than the monetary amount) as the proposed compromise or settlement where the Indemnified Party has withheld or delayed such consent, or (ii) any final judgment in such matter is for a larger monetary amount). No Third-Party Claim that is being defended in good faith by the Indemnifying Party shall be settled or compromised by the Indemnified Party without the written consent of the Indemnifying Party (which consent shall not be unreasonably withheld or delayed). Notwithstanding any dispute as to liability as between any parties hereunder, if requested by the Indemnifying Party, the Indemnified Party shall act in good faith in responding to, defending against, settling or otherwise dealing with any Third-Party Claim and the Indemnified Party shall (in addition to, and not in limitation of, its obligation to act in good faith), at the sole cost and expense of the Indemnifying Party, cooperate with the Indemnifying Party and its counsel in contesting any Third-Party Claim which the Indemnifying Party elects to contest, including the making of any related counterclaim against the Person asserting the Third-Party Claim or any cross complaint against any Person and making available to the Indemnifying Party all witnesses, records, materials and information in the Indemnified Party’s possession or under its control (or in the possession or control of any of its Affiliates or Representatives) relating to the Third-Party Claim as may be reasonably requested by the Indemnifying Party or its counsel. The Indemnified Party may participate in, but not control, any defense or settlement of any Third-Party Claim controlled by the Indemnifying Party pursuant to this Section 9.4(b), and the Indemnified Party shall bear its own costs and expenses with respect to such participation; provided, however, if in the opinion of counsel of the Indemnified Party there is a conflict of interest between the Indemnifying Party and the Indemnified Party, the Indemnifying Party shall bear the reasonable costs and expenses of one counsel to the Indemnified Party in connection with such defense.

          (c) If the Indemnifying Party fails to notify the Indemnified Party within thirty (30) days after receipt of any Claim Notice that the Indemnifying Party elects to defend the Indemnified Party pursuant to Section 9.4(b), the Indemnified Party shall have the right to defend, at, subject to the limitations of this Article IX and the last sentence of this Section 9.4(c), the sole cost and expense of the Indemnifying Party, the Third-Party Claim by all appropriate proceedings. The Indemnified Party shall have full control of such defense and proceedings; provided, however, that the Indemnified Party may not enter into any compromise or settlement

of such Third-Party Claim if indemnification is to be sought hereunder, without the Indemnifying Party’s consent, which consent shall not be unreasonably withheld or delayed. The Indemnifying Party may participate in, but not control, any defense or settlement controlled by the Indemnified Party pursuant to this Section 9.4(c), and the Indemnifying Party shall bear its own costs and expenses with respect to such participation. If the Indemnifying Party elects not to (or is deemed to have elected not to) assume the defense of a Third-Party Claim, or elects to assume the defense of a Third-Party Claim, but reserves the right to dispute whether such Claim is an indemnifiable Damage hereunder, the determination of whether the Indemnified Party is entitled to indemnification hereunder shall be resolved either by the parties hereto or pursuant to arbitration as provided herein.

          (d) With respect to any indemnification sought by an Indemnified Party from the Indemnifying Party that does not involve a Third-Party Claim, the Indemnified Party shall promptly provide written notice to the Indemnifying Party of any Claim with respect to which the Indemnified Party believes it is or may be entitled to indemnification hereunder (an “Indemnity Notice”). The Indemnity Notice shall describe in reasonable detail the nature of the Claim, the Indemnified Party’s best estimate of the amount of Damages attributable to such Claim (the “Claimed Amount”) and the basis of the Indemnified Party’s request for indemnification hereunder.

          (e) If the Indemnifying Party does not notify the Indemnified Party within thirty (30) days after its receipt of the Indemnity Notice that the Indemnifying Party disputes such Claim (the “Dispute Notice”) in which the Indemnifying Party (i) agrees that part, but not all, of the Claimed Amount is owed to the Indemnified Party (the “Agreed Amount”) or (ii) asserts that no part of the Claimed Amount is owed to the Indemnified Party (any part of the Claimed Amount that is not agreed by the Indemnifying Party to be owed to the Indemnified Party pursuant to the Dispute Notice (or the entire Claimed Amount if the Indemnifying Party asserts that no part of the Claimed Amount is owed) shall be referred to as the “Contested Amount”), the Indemnifying Party shall be deemed to have accepted and agreed with such Claim. The Indemnifying Party shall pay within fifteen (15) days of the receipt of the Dispute Notice the Agreed Amount.

          (f) If the Indemnifying Party has disputed a Claim for indemnification (including any Third-Party Claim), the Indemnifying Party and the Indemnified Party shall proceed in good faith to negotiate a resolution to such dispute. If the Indemnifying Party and the Indemnified Party are unable to resolve such dispute regarding a Contested Amount within thirty (30) days after delivery of the Dispute Notice, such dispute shall be resolved by confidential binding arbitration as provided in Section 10.15. Neither party shall have the right to offset any amounts owed to the other party for Damages such party is otherwise entitled to recover unless so determined by the arbitrator or such amount is an Agreed Amount.

          (g) The term “Damages” as used in this Article IX is not limited to matters asserted by third parties against an Indemnified Party, but includes Damages incurred or sustained by an Indemnified Party in the absence of Third-Party Claims. An Indemnified Party’s right to indemnification pursuant to this Article IX shall not be conditioned upon the payment of amounts by such Indemnified Party.

          9.5 Limitation on Liability. Notwithstanding anything to the contrary in this Agreement:

          (a) (i) the Selling Parties shall not be obligated to indemnify any Buyer Indemnified Party under Sections 9.3(a)(i) or 9.3(a)(ii), and (ii) Buyer shall not be obligated to indemnify any Seller Indemnified Party under Section 9.3(b)(i) or 9.3(b)(ii), unless and until the aggregate Damages suffered by all Buyer Indemnified Parties or by all the Seller Indemnified Parties, as the case may be, that would otherwise be subject to indemnification hereunder, exceeds the sum of Five Hundred Thousand Dollars ($500,000) (the “Deductible Amount”), and then such Indemnified Party shall be entitled to indemnification for all Damages in excess of the Deductible Amount;

          (b) Except for Damages indemnified pursuant to Section 9.3(a)(iii) or Section 9.3(b)(iv), no Indemnifying Party shall be responsible for indemnifying any Indemnified Party for any individual Claims or series of related Claims under this Agreement where the Damages relating thereto are less than Thirty Thousand Dollars ($30,000), and such items shall not be aggregated for purposes of clause (a) above; and

          (c) (i) the Selling Parties shall not be obligated to indemnify any Buyer Indemnified Party under Sections 9.3(a)(i) or 9.3(a)(ii), and (ii) Buyer shall not be obligated to indemnify any Seller Indemnified Party under Section 9.3(b)(i) or 9.3(b)(ii), to the extent the aggregate liability of the Selling Parties to the Buyer Indemnified Parties and Buyer to the Seller Indemnified Parties for indemnification, as the case may be, exceeds an aggregate amount equal to Eight Million Dollars ($8,000,000).

          9.6 Calculation and Characterization of Damages.

          (a) In calculating the amount of the Damages to any Indemnified Party hereunder, the amount of Damages will be net of (i) any amounts recovered by the Indemnified Party from any third party (including insurance proceeds) as a result of the facts or circumstances giving rise to the Damages and (ii) any Tax benefits or Tax losses that are actually realized by the Indemnified Party as a result of the incurrence of Damages from which indemnification is sought (such amounts referred to in clauses (i) or (ii), a “Reimbursement”). The Indemnified Parties shall pursue payment under or from any insurer or third party in respect of such Damages prior to pursuing payment from any Indemnifying Party.

          (b) Any indemnity payment made pursuant to the provisions of this Article IX shall be deemed to be and treated, to the extent permitted by Law, as an adjustment to the Purchase Price for all purposes.

          9.7 Exclusive Remedy. From and after the Closing, except for any equitable relief to which any party hereto may be entitled or in the case of actual fraud, the indemnification provisions of Sections 3.3, 6.3, 6.8, 6.13 and this Article IX shall be the sole and exclusive remedy with respect to any and all Claims relating to the subject matter of this Agreement and no party shall pursue or seek to pursue any other remedy. In furtherance of the foregoing, Buyer hereby waives, to the fullest extent permitted under applicable Law, any and all rights, Claims

and causes of action it or any of its Affiliates may have against the Selling Parties arising under or based upon any Law.

          9.8 Mitigation of Damages. The parties hereto shall cooperate with each other to mitigate any Damages.

          9.9 Certain Damages. IN NO EVENT SHALL THE INDEMNIFICATION OBLIGATIONS UNDER THIS AGREEMENT (INCLUDING UNDER THIS ARTICLE IX) OR THE TERM “DAMAGES” COVER OR INCLUDE CONSEQUENTIAL, INCIDENTAL, SPECIAL, INDIRECT, OR PUNITIVE DAMAGES OR LOST PROFITS, DIMINUTION IN VALUE OR ANY DAMAGES BASED ON ANY TYPE OF MULTIPLE, WHETHER BASED ON STATUTE, CONTRACT, TORT OR OTHERWISE, AND WHETHER OR NOT ARISING FROM THE INDEMNIFYING PARTY’S SOLE, JOINT OR CONCURRENT NEGLIGENCE, STRICT LIABILITY OR OTHER FAULT.

          For the avoidance of doubt, in the event a third party obtains consequential, incidental, special, indirect or punitive Damages or lost profits from a Buyer Indemnified Party or a Seller Indemnified Party, such Damages shall, to the extent they would otherwise be indemnifiable under this Agreement but for the fact that they are consequential, incidental, special, indirect or punitive Damages, be direct Damages to such Buyer Indemnified Party or Seller Indemnified Party for purposes of this Agreement.

          9.10 Covenant Not to Compete.

          (a) As an inducement to Buyer to enter into this Agreement, the Selling Parties and their Affiliates agree that for a period of five (5) years after the Closing Date the Selling Parties shall not, directly or indirectly, own an interest in, manage, operate, join, control or participate in the ownership, management, operation or control of any profit or non-profit business or organization which anywhere in the world (the “Territory”) develops, formulates, tests, produces, licenses, commercializes, manufactures or distributes a product for medical or industry purposes incorporating Clozapine.

          (b) If a court determines that the foregoing restrictions are too broad or otherwise unreasonable under applicable Law, including with respect to time or space, the court is hereby requested and authorized by the parties to revise the foregoing restriction to include the maximum restrictions allowable under applicable Law. Each of the parties acknowledges, however, that this Section 9.10 has been negotiated by the parties and that the geographical and time limitations on activities are reasonable in light of the circumstances pertaining to the parties.

          (c) In the event of any breach or threatened breach by the Selling Parties of any provision of this Section 9.10, Buyer shall be entitled to seek injunctive or other equitable relief restraining such party from competing or soliciting in violation of this Section. Such relief, if obtained, shall be in addition to and not in lieu of any other remedies that may be available, including an action for the recovery of Damages.

          (d) Notwithstanding the foregoing, the covenant not to compete contained in this Section 9.10 shall not apply to any independent third party that has initiated the development, formulation, test, production, license, commercialization, manufacture or distribution of a

product for medical or industry purposes incorporating Clozapine and that subsequently acquires control of a Selling Party or any of its Affiliates by way of merger, stock purchase, unit purchase or otherwise, or acquires all or substantially all of the assets of the Selling Parties or any of their Affiliates and holds such assets in a separate subsidiary, but the provisions of this Section 9.10 shall thereafter continue to apply to the acquired Selling Party, Affiliate or such Subsidiary.

ARTICLE X
MISCELLANEOUS

          10.1 Termination.

          (a) This Agreement may be terminated at any time prior to Closing:

          (i) by mutual written consent of Buyer and Parent;

          (ii) by Buyer or either Selling Party if the Closing shall not have occurred on or before the date which is sixty (60) days after date of this Agreement, unless the failure to consummate the transactions contemplated hereby on or prior to such date is the result of any action or inaction under this Agreement by the party seeking to terminate the Agreement pursuant to the terms of this Section 10.1(a)(ii); or

          (iii) by Buyer or either Selling Party by written notice to the other party if any Governmental Authority with jurisdiction over such matters shall have issued a Governmental Order permanently restraining, enjoining or otherwise prohibiting the transactions contemplated hereby, and such Governmental Order shall have become final and unappealable; provided, however, that the terms of this Section 10.1(a)(iii) shall not be available to any party unless such party shall have used its commercially reasonable efforts to oppose any such Governmental Order or to have such Governmental Order vacated or made inapplicable to the transactions contemplated hereby.

          (b) In the event of termination of this Agreement, no party hereto shall have any Liability under this Agreement to any other party hereto, except for any willful breach of this Agreement occurring prior to the termination of this Agreement for which all legal remedies will remain available. Upon any such termination, each party will redeliver all documents, work papers and other material of any other party relating to the transactions contemplated hereby, whether so obtained before or after the execution hereof, to the party furnishing the same. The provisions of Section 6.2(b) and this Article X shall continue in full force and effect notwithstanding any termination of this Agreement or any provision hereof to the contrary.

          10.2 Assignment. Neither this Agreement nor any of the rights or obligations hereunder may be assigned by any party (by Contract, operation of Law or otherwise) without the prior written consent of the other party. Notwithstanding the foregoing, each of the Selling Parties and Buyer shall have the right, in its sole and absolute discretion, to assign this Agreement and its rights and obligations hereunder to the acquiring party in connection with the sale of all or substantially all of its assets or in connection with a merger between it and a Person that is not an Affiliate of Parent. No such assignment shall relieve the assignor of its obligations here-

under. Subject to the foregoing, this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns.

          10.3 Cooperation. To the extent the parties determine after the Closing that any of the Purchased Assets were not conveyed or delivered to Buyer at the Closing, the Selling Parties shall and shall cause their Affiliates to, subject to Section 3.3, transfer and deliver such assets to Buyer without additional consideration and, upon reasonable request, execute and deliver a bill of sale or other instrument of transfer evidencing such transfer. To the extent the parties determine after the Closing that any of the Excluded Assets were conveyed or are in the possession of Buyer, Buyer shall and shall cause its Affiliates to, subject to Section 3.3, transfer and deliver such assets to the Selling Parties without consideration and, upon reasonable request, execute and deliver a bill of sale or other instrument of transfer evidencing such transfer.

          10.4 Notices. All notices, requests, demands and other communications which are required or may be given under this Agreement shall be in writing and shall be deemed to have been duly given (a) when received if personally delivered, (b) when transmitted if transmitted by telecopy, electronic or digital transmission with confirmation of delivery, (c) the day after it is sent, if sent for next day delivery to a domestic address by recognized overnight delivery service and (d) upon receipt, if sent by certified or registered mail, return receipt requested. In each case any such notice, request, demand or other communication shall be sent to:

          If to the Selling Parties or Parent, to:

Avanir Pharmaceuticals
101 Enterprise, Suite 300
Aliso Viejo, CA 92656
Attention: Greg Flesher
Facsimile: (949) 643-6869

          with a copy to (which shall not constitute notice):

Latham & Watkins LLP
650 Town Center Drive, 20th Floor
Costa Mesa, CA 92626-1925
Attention: Jonn R. Beeson, Esq.
Facsimile: (714) 755-8212

          If to Buyer, to:

Azur Pharma International III Limited
Clarendon House
2 Church Street
Hamilton HM11 Bermuda
Attention: Secretary
Facsimile: (441) 295-2408

Azur Pharma Inc.
102 Pickering Way, Suite 200
Exton, PA 19341
Attention: Michael Kelly
Facsimile: (484) 875-5814

          with a copy to (which shall not constitute notice):

Cahill Gordon & Reindel llp
80 Pine Street
New York, NY 10005
Attention: Christopher T. Cox
Facsimile: (212) 378-2173

or to such other place and with such other copies as either party may designate as to itself by written notice to the other.

          10.5 Governing Law. THIS AGREEMENT SHALL BE CONSTRUED, INTERPRETED AND THE RIGHTS OF THE PARTIES AND ALL CLAIMS ARISING OUT OF OR RELATING TO THIS AGREEMENT DETERMINED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK (WITHOUT REFERENCE TO THE CHOICE OF LAW PROVISIONS).

          10.6 Entire Agreement; Amendments and Waivers. This Agreement (together with all Exhibits and Schedules hereto), the Confidentiality Agreement and the Ancillary Agreements constitute the entire agreement among the parties pertaining to the subject matter hereof and thereof and supersede all prior agreements, understandings, negotiations and discussions, whether oral or written, of the parties. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto. No amendment, supplement, modification or waiver of this Agreement shall be binding unless executed in writing by the party to be bound thereby. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision hereof (whether or not similar), nor shall such waiver constitute a continuing waiver unless otherwise expressly provided.

          10.7 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument, binding upon the parties hereto. A facsimile signature page shall be deemed an original, unless an original is required by applicable Law.

          10.8 No Third Party Beneficiaries; Expenses.

          (a) This Agreement and all of its conditions and provisions are for the sole and exclusive benefit of the parties hereto and their respective successors and permitted assigns, and nothing in this Agreement, express or implied, is intended to confer upon any other Person, including any union or employee or former employee of the Selling Parties any rights or remedies of any nature whatsoever, including any rights of employment for any specified period, under or by reason of this Agreement or any provision hereof; provided, however, that any Person

that is not a party to this Agreement, but, by the terms of Article IX, is entitled to indemnification, shall be considered a third-party beneficiary of this Agreement, with full rights of enforcement as though such Person was a signatory to this Agreement; provided, however, that Cutler (as defined in the Unit Purchase Agreement) and the Sellers’ Representative (as defined in the Unit Purchase Agreement) shall be considered a third-party beneficiary of this Agreement, with full rights of enforcement as though such Person was a signatory to this Agreement with respect to Buyer’s assumption of the obligations relating to the Contingent Payments and Non-U.S. Licensing Earn-Out Payment, including the reporting obligations related thereto.

          (b) Except as otherwise provided in Section 2.6 hereof, each party hereto shall pay the fees and expenses incurred by it in connection with the negotiation and preparation of this Agreement and the Ancillary Agreements, the performance of the terms of this Agreement and the Ancillary Agreements and the consummation of the transactions contemplated hereby and thereby.

          10.9 Severability. In the event that any one or more of the provisions contained in this Agreement or in any other instrument referred to herein shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, then to the maximum extent permitted by Law, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement or any other such instrument.

          10.10 Titles; Gender; Certain Interpretive Matters. The titles, captions or headings of the Articles and Sections herein, and the use of a particular gender, are for convenience of reference only and are not intended to be a part of or to affect or restrict the meaning or interpretation of this Agreement. Any terms used in this Agreement, unless the context otherwise requires, may be used in the singular or plural, depending upon the reference. All references in this Agreement to Dollars or “$” shall mean U.S. Dollars. Except as otherwise provided or if the context otherwise requires, whenever used in this Agreement, (a) the terms “include” and “including” shall be deemed to be followed by the phrase “without limitation,” (b) the words “herein,” “hereof” and “hereunder” and other words of similar import refer to this Agreement as a whole and not to any particular Section or other subdivision, (c) any definition of or reference to any Law, agreement, instrument or other document herein will be construed as referring to such Law, agreement, instrument or other document as from time to time amended, supplemented or otherwise modified and (d) any definition of or reference to any statute will be construed as referring also to any rules and regulations promulgated thereunder.

          10.11 Publicity. Except as required by Law, the rules of any national securities exchange on which its securities are listed or otherwise consistent with Parent’s past practices as a publicly traded company, the parties hereto shall not, without the prior consent of the other parties, which shall not be unreasonably withheld or delayed, issue any press release or make any public statement regarding the transactions contemplated hereby. Notwithstanding anything to the contrary herein, the Buyer may make such disclosure, after Closing, as it reasonably deems appropriate in connection with communications with its co-investors or in connection with a private placement of its equity or debt securities. Notwithstanding anything to the contrary herein, Buyer, the Selling Parties or any of their respective Affiliates may make any public statement in response to specific questions by the press, analysts, investors or those attending industry conferences or financial analyst conference calls, so long as any such statements are not inconsistent

with previous press releases, public disclosures or public statements made by Buyer and the Selling Parties and do not reveal non-public information regarding Buyer or the Selling Parties.

          10.12 Exhibits and Schedules; Construction of Certain Provisions. The Exhibits and Schedules referred to in this Agreement shall be construed with and be deemed as an integral part of this Agreement to the same extent as if the same had been set forth in their entirety herein.

          10.13 Bulk Transfer Laws. Buyer acknowledges that the Selling Parties will not comply with the provisions of any bulk transfer laws of any jurisdiction in connection with the transactions contemplated by this Agreement and waives any remedies against the Selling Parties for noncompliance therewith.

          10.14 Cumulative Remedies. Subject to Section 9.7 hereof, all rights and remedies of either party hereto are cumulative of each other and of every other right or remedy such party may otherwise have at Law or in equity, and the exercise of one or more rights or remedies shall not prejudice or impair the concurrent or subsequent exercise of other rights or remedies.

          10.15 Arbitration. If any controversy or claim arising out of or relating to this Agreement or any Ancillary Agreement, or the breach thereof, cannot first be resolved by the parties within thirty (30) days after the written notice thereof, then either party may submit the controversy or claim to confidential binding arbitration in accordance with the JAMS Comprehensive Arbitration Rules and Procedures then in effect. The arbitration will be conducted by one arbitrator, mutually selected by the Indemnified Party and the Indemnifying Party; provided, however, that if the Indemnified Party and the Indemnifying Party fail to mutually select an arbitrator within fifteen (15) Business Days after the contested portion of the indemnification claim is submitted to arbitration, then the arbitrator shall be selected by JAMS in accordance with its Comprehensive Arbitration Rules and Procedures then in effect. The parties agree to use commercially reasonable efforts to cause the arbitration hearing to be conducted within seventy-five (75) days after the appointment of the arbitrator, and to use commercially reasonable efforts to cause the decision of the arbitrator to be furnished within fifteen (15) days after the conclusion of the arbitration hearing. The final decision of the arbitrator shall be furnished in writing to the Indemnifying Party and the Indemnified Party and include (a) the dollar amount of the award to the Indemnified Party, if any, and (b) a determination as to whether either party to the arbitration shall be required to bear and pay all or a portion of the other party’s attorneys’ fees and other expenses relating to the arbitration. Judgment upon any award, judgment, decree or order rendered by the arbitrator may be entered in any court having competent jurisdiction. The place of the arbitration shall be in the City of New York, New York and the language of the arbitration shall be English.

          10.16 Time of Essence. Time is of the essence in this Agreement. If the date specified in this Agreement for giving any notice or taking any action is not a Business Day (or if the period during which any notice is required to be given or any action taken expires on a date which is not a Business Day), then the date for giving such notice or taking such action (and the expiration date of such period during which notice is required to be given or action taken) shall be the next day which is a Business Day.

          10.17 Drafting. The parties hereto agree that this Agreement is the product of negotiations between sophisticated parties and individuals, all of whom were represented by counsel, and each of whom had an opportunity to participate in and did participate in, the drafting of each provision hereof. Accordingly, ambiguities in this Agreement, if any, shall not be construed strictly or in favor of or against any party hereto but rather shall be given a fair and reasonable construction without regard to the rule of contra proferentem.

[Signature Page Follows]

          IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed on their respective behalves, by their respective officers thereunto duly authorized, all as of the day and year first above written.

Seller: ALAMO PHARMACEUTICALS, LLC, a California limited liability corporation
By:	Avanir Pharmaceuticals, its sole member
By:
	Name:	Keith Katkin
	Title:	President and Chief Executive Officer
Parent: AVANIR PHARMACEUTICALS, a California corporation
By:
	Name:	Keith Katkin
	Title:	President and Chief Executive Officer

Signature Page To Asset Purchase Agreement

[Signature Page of Buyer]

Buyer: AZUR PHARMA INTERNATIONAL III LIMITED
By:
	Name:
	Title:
AZUR PHARMA INC.
By:
	Name:
	Title:

Signature Page To Asset Purchase Agreement

EXHIBIT A-1

FORM OF INC. ASSIGNMENT AND ASSUMPTION AGREEMENT

EXHIBIT A-2

FORM OF LIMITED ASSIGNMENT AND ASSUMPTION AGREEMENT

EXHIBIT B-1

FORM OF INC. ASSIGNMENT OF CONTRACTS

EXHIBIT B-2

FORM OF LIMITED ASSIGNMENT OF CONTRACTS

EXHIBIT C

FORM OF ASSIGNMENT OF OWNED INTELLECTUAL PROPERTY

EXHIBIT D

FORM OF ASSIGNMENT AND ASSUMPTION OF LEASE

EX-10.50

Exhibit 10.50

SETTLEMENT AGREEMENT

     This Settlement Agreement (“Settlement Agreement”) is entered into as of July 2, 2007 (the “Effective Date”) by and between Dr. Neal R. Cutler, an individual (“Cutler”), and Avanir Pharmaceuticals, a California corporation (“Avanir”), together with its affiliates and subsidiaries (Avanir and Cutler are each referred to as a “Party” or collectively as the “Parties”).

     WHEREAS, Cutler and Avanir are each party to that certain Unit Purchase Agreement by and between Avanir, Cutler and certain other parties listed therein, dated as of May 22, 2006 (the “Alamo Purchase Agreement”) relating to the sale of all outstanding ownership interests in Alamo Pharmaceuticals, LLC, a California limited liability company (“Alamo”), to Avanir;

     WHEREAS, unless separately defined within this Settlement Agreement or otherwise indicated, all capitalized terms used herein shall have the meaning given to such terms in the Alamo Purchase Agreement;

     WHEREAS, the consideration Avanir paid to acquire Alamo included three Buyer Notes in the aggregate principal amount of $25,075,000 issued at the closing of the transactions contemplated by the Alamo Purchase Agreement and an Alternate Contingent Note 1 in the aggregate principal amount of $2,000,000, issued subsequent to such closing;

     WHEREAS, Avanir may be required to issue an Alternate Contingent Note 2, subject to and in accordance with the terms of the Alamo Purchase Agreement (the Buyer Notes, Alternate Contingent Note 1 and Alternate Contingent Note 2 may be referred to collectively herein as the “Notes”);

     WHEREAS, Avanir is actively engaged in an effort to sell the business activities and operations of Avanir and its subsidiaries involving the development, formulation, testing, production, licensing, commercialization and distribution, including assets, inventory, contracts, permits and intellectual property associated therewith of: (i) FazaClo (the “FazaClo Business”), (ii) certain compounds that are not currently commercialized for the potential treatment of cardiovascular disease, (iii) Xenerex antibody technology and (iv) the orally active drug molecule AVP-13358 — Selective Cytokine Inhibitor currently in clinical trial; for purposes of this Agreement, “Business” means (a) the FazaClo Business and (b) if the aggregate cumulative Consideration (as defined below) with respect to the businesses described in clauses “(ii)”, "(iii)” and “(iv)” does not exceed $8 million in the aggregate for all such businesses, the businesses described in clauses “(ii)”, “(iii)” and “(iv)”, collectively, it being understood and agreed that if the Consideration with respect to such businesses exceeds $8,000,000 in the aggregate for all such businesses at any time, the term “Business” shall be limited to the FazaClo Business and shall not include such businesses for all purposes of this Settlement Agreement; for purposes of this Agreement, “Consideration” means with respect to any business (x) the amount of cash and the fair market value of non-cash consideration paid

at the closing of the sale of such business and (y) the amount of cash and the fair market value of non-cash consideration paid within six months of such closing; and

     WHEREAS, the Parties wish to settle a dispute between them regarding whether a sale of the Business would cause the Notes to become due and payable (the “Dispute”).

     NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Parties hereby agree as follows:

     1. Payment to Cutler Upon Sale of the FazaClo Business. Upon the consummation of a sale of all or substantially all of the FazaClo Business by Avanir, either directly or through its subsidiaries, to any party that is not a wholly-owned subsidiary of Avanir, Avanir shall pay $11,000,000 to Cutler (the “Sale Payment”). The Sale Payment shall be made in immediately available funds pursuant to wire transfer instructions to be provided by Cutler.

     2. Effect of Sale Payment on Avanir Payment Obligations Under the Notes. Upon making the Sale Payment, the payment obligations set forth in the Notes shall be affected as follows:

     (a) Application of Sale Payment. The Sale Payment shall be applied first to reduce the outstanding principal of, and interest on, Buyer Note 1 until such note is paid in full, second to reduce the outstanding principal of, and interest on, Buyer Note 2 and thereafter to reduce the outstanding principal of, and interest on, the other Notes in an order to be specified by Avanir.

     (b) Credit Against Obligation To Make Financing Prepayments. Upon Avanir making the Sale Payment to Cutler (the date of such payment, the “Payment Date”), Avanir shall not be obligated to make any payment against the Notes in connection with Financing Transactions (as such term is defined in the Notes) consummated on or after the Payment Date until such time as Avanir and/or its subsidiaries shall have received aggregate net proceeds from all Financing Transactions consummated on and after the Payment Date of $55,000,000 (the “Financing Threshold”). Upon reaching the Financing Threshold, Avanir’s obligations to make payments against the Notes in connection with Financing Transactions (or a portion thereof to the extent net proceeds therefrom exceeds $55,000,000 in the case of the Financing Transaction that results in the Financing Threshold being exceeded) shall resume with respect to the net proceeds of Financing Transactions that are in excess of the Financing Threshold. Until the Financing Threshold has been achieved, promptly following the consummation of any Financing Transaction, Avanir shall provide Cutler with a report indicating the net proceeds that Avanir and/or any of its subsidiaries realized from the Financing Transaction at issue. Such notice(s) shall be sent to Cutler as set forth in Section 10.05 of the Alamo Purchase Agreement.

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     (c) All Other Payment Obligations Under the Alamo Purchase Agreement Remain in Full Force and Effect. Except as expressly set forth in Sections 1, 2(a), 2(b) and 3 of this Settlement Agreement, all obligations set forth in the Alamo Purchase Agreement and the Notes shall remain in full force and effect and Cutler retains all rights that exist under the Alamo Purchase Agreement and the Notes.

     3. Conditional Waiver of Right To Full Payment Upon Sale of the Business. Conditioned upon Avanir making the Sale Payment, Cutler on his own behalf and on behalf of his predecessors, successors, assigns and Affiliates (as such term is defined below), hereby consents to a sale of the Business and waives any rights he or they may have to assert and further agrees that he and they will not assert, that a sale of the Business in one or a series of transactions, by itself, will cause the Notes to become due and payable or assert that any of the underlying bases that would result in the Notes becoming due and payable as a result of such sale have occurred as a result of such sale (this waiver shall be referred to hereafter as the “Limited Waiver and Agreement”). The Limited Waiver and Agreement applies only to a sale of the Business by itself in one or a series of transactions, and does not preclude Cutler from asserting that sales of other assets, before or contemporaneous with any sale of the Business constitutes a sale of substantially all of Avanir’s assets.

     4. Releases.

          (a) Each Party, on behalf of itself and on behalf of its predecessors, successors, assigns and persons or entities that control it or that are controlled by it (“Affiliates”), hereby generally release and forever discharge the other Party, and each of the other Party’s respective past and present agents, representatives, shareholders, officers, directors, managers, attorneys, employers, employees, servants, assigns, subsidiaries, divisions, affiliates, partners, partnerships, bonding companies, related companies, parent companies, immediate family members, spouses, insurers, and predecessor or successor companies, and the officers, directors, employees, agents, heirs, executors, administrators, and assigns of each of these, from any and all claims, demands, rights, suits, liens, obligations, damages, liabilities, and causes of action, known or unknown, suspected or unsuspected, from the beginning of time through the date this Settlement Agreement is fully executed, that arise out of, are connected with, relate to, or are incidental to the Dispute. The Parties acknowledge that they may hereafter discover facts different from or in addition to those now known or believed to be true and agree that this Settlement Agreement shall remain in full force and effect, notwithstanding the potential existence of such different or additional facts.

          (b) The Parties acknowledge that they have been advised regarding the effect of California Civil Code Section 1542, which provides as follows:

“A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE,

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     WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR.”

          The Parties having been so advised, agree that the provisions of California Civil Code section 1542 and all similar federal or state laws, rights, rules and legal principles of any other jurisdiction or political subdivision which may be applicable hereto, to the extent they apply to any of the matters relating to the Dispute released herein, ARE KNOWINGLY AND VOLUNTARILY WAIVED AND RELINQUISHED BY THE PARTIES, in each and every capacity, to the fullest extent possible, and the Parties FURTHER AGREE AND ACKNOWLEDGE that this waiver is an essential term of the releases set forth in this Agreement, without which the other Party would not have entered into this Agreement.

          (c) Each Party hereby agrees to indemnify the other Party, and defend and hold the other Party harmless, from and against any liability, loss, cost, and expense whatsoever (including attorneys’ fees) incurred as a direct or indirect result of any lawsuit or other proceeding commenced on any claim released pursuant to this Agreement.

     5. Limitation. Notwithstanding anything to the contrary herein, the Limited Waiver and Agreement set forth in Section 3 and the release set forth in Section 4 shall be null and void if both (i) a sale of all or substantially all of the FazaClo Business shall not have occurred prior to the 12-month anniversary of the date hereof and (ii) at the time of any sale of all or substantially all of the FazaClo Business, there has been a material diminution in the value of Avanir’s assets not primarily used in the FazaClo Business from the value of such assets as of the date hereof.

     6. Assignment. Neither this Settlement Agreement nor any of the rights or obligations hereunder may be assigned by a Party to any third party unless specifically agreed to in writing by the other Party.

     7. Waiver. The failure or delay by any Party to exercise any rights under this Settlement Agreement shall not operate as a waiver of any rights under this Settlement Agreement. The Parties may affirmatively waive rights under this Settlement Agreement, but to be effective, such waiver must be in writing and signed by the Party to be bound thereby.

     8. Governing Law. This Settlement Agreement and any claim or controversy arising out of or relating to this Settlement Agreement, shall be governed by the law of the State of California without regard to conflict of law principles that would result in the application of any law other than the State of California.

     9. Currency. All payments made pursuant to this Settlement Agreement shall be in U.S. dollars.

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     10. Cumulative Remedies. All rights and remedies of either Party are cumulative of each other and of every other right or remedy such Party may otherwise have at law or in equity, and the exercise of one or more rights or remedies shall not prejudice or impair the concurrent or subsequent exercise of other rights or remedies.

     11. Representation by Counsel. The Parties hereto acknowledge that they are each represented by counsel of their choice and that have had adequate opportunity to consult with counsel prior to signing this Settlement Agreement. The Parties have carefully reviewed the terms of this Settlement Agreement and fully understand its contents. The Parties agree that this Settlement Agreement shall be treated as having been drafted by both Parties, with no presumption or interpretation against either Party as the drafter of this Settlement Agreement.

     12. Representations and Warranties. Each of the Parties represents, warrants, and agrees as follows:

          (a) Such Party has all requisite power and authority to enter into this Settlement Agreement and to perform its obligations hereunder.

          (b) All action on the part of such Party necessary for the authorization, execution and delivery of this Settlement Agreement and the consummation of the transactions contemplated hereby, have been duly taken. This Settlement Agreement constitutes the legal, valid and binding obligation of such Party, enforceable against such Party in accordance with its terms.

          (c) There has been no assignment or other transfer of any interest in any Claims which such Party has or may have had against the other, or any of them.

          (d) Such Party has received prior independent legal advice from legal counsel of such Party’s choice with respect to the advisability of making the settlement provided for in this Settlement Agreement and with respect to the advisability of executing this Settlement Agreement. Such Party’s attorney has reviewed this Settlement Agreement at length and made any desired changes.

          (e) In executing this Settlement Agreement such Party has relied solely on the statements expressly set forth herein. Such Party further represents, warrants, and agrees that in executing this Agreement it has placed no reliance whatsoever on any statement, representation or promise of any other Party or any other person or entity, not expressly set forth herein, or upon the failure of any other Party or any other person or entity to make any statement, representation or disclosure of anything whatsoever.

          (f) Such Party has read this Settlement Agreement carefully, knows and understands the contents of this Settlement Agreement, and has made such investigation of the facts pertaining to the settlement and this Settlement Agreement as such Party deems necessary or desirable.

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          13. Settlement of Claims. The Parties acknowledge and covenant that this Settlement Agreement represents a settlement and compromise of disputed claims, and that by entering into this Settlement Agreement, no Party admits or acknowledges the existence of any liability or wrongdoing, all such liability or wrongdoing being expressly denied. No provision of this Settlement Agreement shall be construed as an admission or concession of any factual conclusion, status, or liability on the part of any Party or any liability or wrongdoing or of any preexisting liability or wrongdoing of any Party. The terms of this Settlement Agreement are contractual, not a mere recital, and are the result of negotiations between the Parties.

     14. Confidentiality. The Parties agree that, unless required to be disclosed by law, strict confidentiality of the financial and other terms of this Settlement Agreement is of the essence. The Parties represent that prior to the execution of this Settlement Agreement, they have not disclosed the terms of content of this Settlement Agreement, including any monetary figures discussed by the Parties in settlement negotiations, to any person, organization, or entity other than legal counsel to such Party, accountants and tax or financial advisors to such Party or employees of such Party. Except as required by law or in any legal, administrative or regulatory proceeding, the parties shall maintain in strict confidence and shall not disclose to anyone the contents of this Settlement Agreement (including the consideration received hereunder) or publicly discuss any aspect of the dispute between the parties which led up to this Settlement Agreement or the nature of the dispute. Notwithstanding the foregoing, such information may be disclosed in a legal action or proceeding to approve, interpret, or enforce this Settlement Agreement; by order of a court of competent jurisdiction; and to the parties’ respective spouses, employees, accountants, tax or financial advisors, lenders, potential lenders, insurers, and with respect to such professionals only to the extent necessary to permit such individuals or entities to perform required tax, accounting, financial, legal, or administrative tasks or services, which individuals shall be directed to refrain from disclosing the information. The Parties may disclose, without providing any details of the terms of this Settlement Agreement, that this matter has settled.

     15. Attorneys’ Fees. In the event that a Party files an action or proceeding to enforce or interpret or for breach of this Agreement, the prevailing Party in that action or proceeding shall be entitled to recover its costs and expenses (including reasonable attorneys’ fees).

     16. Execution and Counterparts. This Settlement Agreement may be executed in two or more counterparts, each of which when executed shall be deemed an original and all of which together shall constitute a single instrument. The Parties agree that facsimile signatures shall be deemed effective as original signatures.

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     IN WITNESS WHEREOF, each of the parties, individually or by its duly authorized representative, has entered into this Settlement Agreement as of the date first above written.

AVANIR PHARMACEUTICALS

     /s/ Keith A. Katkin

By: Keith Katkin

Its: President and Chief Executive Officer

DR. NEAL R. CUTLER

     /s/ Neal R. Cutler

[Signature Page to Settlement Agreement]

EX-10.51

Exhibit 10.51

SUBLEASE AGREEMENT

between

AVANIR PHARMACEUTICALS,
as Sublandlord

and

HALOZYME, INC.
as Subtenant

Building Address: 11388 Sorrento Valley Road
San Diego, California 92121

SUBLEASE AGREEMENT

     THIS SUBLEASE AGREEMENT (“Sublease”) is made as of this 2nd day of July, 2007 (the “Effective Date”), by and between AVANIR PHARMACEUTICALS, a California corporation (“Sublandlord”) and HALOZYME, INC., a California corporation (“Subtenant”), a subsidiary of HALOZYME THERAPEUTICS, INC., a Nevada corporation (“Parent”), with Sublandlord and Subtenant hereinafter sometimes referred to collectively as the “Parties” and individually as a “Party”).

W I T N E S S E T H:

     WHEREAS, BC Sorrento, LLC, a California limited liability company (“Master Landlord”) and Sublandlord, are parties to a certain Standard Industrial Net Lease, dated as of March 20, 2000, as amended by that certain First Amendment to Standard Industrial Net Lease, dated as of February 1, 2001, and as amended by that certain Second Amendment to Standard Industrial Net Lease, dated as of March 1, 2006 (collectively, the “Master Lease”), a copy of which is attached hereto as Exhibit A;

     WHEREAS, pursuant to the terms of the Master Lease, Master Landlord has leased to Sublandlord, certain premises consisting of approximately 27,575 rentable square feet (the “Master Lease Premises”) and which are located in an office industrial center with a street address of 11388 Sorrento Valley Road, San Diego, California 92121 (collectively, the “Center”);

     WHEREAS, Sorrento Plaza, a California limited partnership (“Additional Master Landlord”) and Sublandlord, are parties to a certain Standard Industrial Net Lease, dated May 20, 2002 (the “Additional Master Lease”);

     WHEREAS, pursuant to the terms of the Additional Master Lease, Additional Master Landlord has leased to Sublandlord, a portion of the premises (the “Additional Master Lease Premises”) which are part of an office industrial center which includes 11404 and 11408 Sorrento Valley Road, San Diego, California 92121 (the “Additional Center”), collectively the Center and the Additional Center will herein be referred to as the Campus (“the Campus”);

     (Initially capitalized terms not otherwise defined in this Sublease shall have the meanings attributed to such terms in the Master Lease, and unless otherwise expressly provided herein, all references in this Sublease to “Section” shall refer to the respective “Section” of the Master Lease and all references to “Paragraph” in this Sublease shall refer to the respective “Paragraph” of this Sublease.)

     WHEREAS, Sublandlord now desires to sublease to Subtenant and Subtenant now desires to sublease from Sublandlord the Master Lease Premises containing approximately 27,575 rentable square feet (the “Sublease Premises”), on the terms, covenants and conditions hereinafter provided; and

     NOW, THEREFORE, Sublandlord and Subtenant covenant and agree as follows:

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1. Summary and Definitions: The following definitions apply in this Sublease:

(a) Base Rent. Base Rent shall be as follows:

Period During
Sublease Term	Monthly Base Rent
Sublease Commencement Date (estimated to be July 1, 2007) through and including December 31, 2007	$0.00
January 1, 2008 through and including June 30, 2008	$1.10 per sq. foot per month or $30,332.50
July 1, 2008 through and including August 31, 2008	$2.288 per sq. foot per month or $63,091.60

(b)	Security Deposit: $400,000.00. Subtenant’s obligation to make a Security Deposit may be satisfied by the deposit of a letter of credit, which letter of credit’s principal face amount is subject to reduction on certain terms and conditions, all as set forth in Paragraph 16 hereof. Sublandlord and Subtenant acknowledge that the deposit of a single letter of credit in the principal face amount of $400,000 in connection with that certain sublease governing the premises located at 11404 Sorrento Valley Road, San Diego, California 92121 shall satisfy the Subtenant’s obligation to make a Security Deposit under this Sublease.
(c)	Sublease Premises: The entirety of the Master Lease Premises constituting approximately 27,575 rentable square feet at 11388 Sorrento Valley Road, San Diego, California 92121 (the “Building”), as depicted on Exhibit B attached hereto.
(d)	Term: The term of this Sublease (“Sublease Term”) shall commence on the later of the following two occurrences: 1) the date upon which Subtenant shall have obtained the consent of Master Landlord to this Sublease, which shall be diligently prosecuted, or 2) the date upon which Subtenant obtains clearance of its license applications required for the conduct of its business, which shall be diligently prosecuted (“Sublease Commencement Date”). The Sublease Term shall expire on August 31, 2008, or such earlier date on which this Sublease may be terminated in accordance with the provisions hereof or the provisions of the Master Lease, as incorporated herein (“Sublease Expiration Date”), in which case Sublandlord shall promptly provide Subtenant with prior written notice of such termination. In no event shall Subtenant conduct Subtenant’s business operations from the Sublease Premises prior to the Sublease Commencement

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Date. Subtenant shall have the right to enter the Sublease Premises upon execution of the Sublease prior to the anticipated Sublease Commencement Date for any purposes other than to conduct its business operations, including but not limited to, monitoring construction, installing furniture, networks, telecommunication equipment and fiber and any other personal property, provided, however that any such entry shall be subject to Subtenant’s waiver and indemnity provisions set forth in this Sublease and Subtenant shall not interfere with any activity of Sublandlord on the Sublease Premises.

2.	Sublease.
	Sublandlord hereby subleases to Subtenant, and Subtenant hereby subleases from Sublandlord, the Sublease Premises, together with all appurtenances thereto as provided in the Master Lease, for the Sublease Term and on the terms and conditions contained in this Sublease. Subtenant’s sublease of the Sublease Premises is subject to the terms and conditions of the Master Lease as incorporated herein and further subject to the terms and conditions of this Sublease.
3.	Condition of Sublease Premises.

(a)	In entering into this Sublease, Subtenant acknowledges that, except as expressly set forth in this Sublease, Subtenant has not relied upon or been induced by any statements or representations of Sublandlord or any other parties or persons with respect to the physical condition of the Sublease Premises or with respect to any other matter affecting the Sublease Premises, that might be pertinent in considering the leasing of the Sublease Premises or the execution of this Sublease. Subtenant has, on the contrary and except as expressly set forth in this Sublease, relied solely on such investigations, examinations and inspections as Subtenant has chosen to make or have made on its behalf. Upon taking possession of the Sublease Premises, Subtenant shall be deemed to have accepted the Sublease Premises in its then “as-is” “where-is” condition.
(b)	Sublandlord represents and warrants that: (i) to the best of its knowledge, as of the Sublease Commencement Date, the Sublease Premises complies with all laws, codes, ordinances and other governmental requirements then applicable to the Sublease Premises and (ii) to the best of its knowledge, as of the Sublease Commencement Date, there are no material defects in the Sublease Premises which would unreasonably interfere with Subtenant’s use and enjoyment of the Sublease Premises.
(c)	By taking possession of the Sublease Premises, Subtenant shall conclusively evidence that the Sublease Premises are fully completed and are suitable for Subtenant’s purposes, that the Building and the Sublease Premises are in good and satisfactory condition, and that Subtenant waives any defect therein.
(d)	Sublandlord shall complete an Exit Assessment as described in Section 14.8 of the Master Lease and shall obtain any required regulatory certification of the

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Sublease Premises at least five (5) days prior to the Sublease Commencement Date, unless waived in writing by Subtenant.

(e)

Subject to the terms and conditions of this Paragraph 3(e), Sublandlord and its agents, employees and contractors shall be afforded full access to the Sublease Premises during normal business hours for the purpose of removing the Cesium 137 Irradiator (the “Irradiator”) and removing any Hazardous Materials from the Sublease Premises that were caused by the Irradiator. Sublandlord shall remove the Irradiator and such Hazardous Materials by July 31, 2007. Sublandlord shall hold harmless, defend and indemnify Subtenant from all liability, costs (including reasonable attorneys’ fees), damage and claims arising from any bodily injury, property damage or mechanics’ lien claims directly and solely resulting from entry and activities on the Sublease Premises by Sublandlord, its agents, employees and contractors arising from the Irradiator and the existence and removal of Hazardous Materials caused by the Irradiator. Notwithstanding the foregoing, Sublandlord shall not be liable to Subtenant, nor shall Sublandlord have any obligation to hold harmless, defend or indemnify Subtenant from any liability, costs, damage or claims which are related to Subtenant’s gross negligence or willful misconduct.

4. Base Rent.

          During the Sublease Term, Subtenant shall pay Sublandlord, as rent for the Sublease Premises, the Base Rent as set forth in Paragraph 1 of this Sublease, without set-off or deduction whatsoever, except as otherwise provided herein. Base Rent shall be due and payable by Subtenant in immediately available funds, in advance on or before the first day of each calendar month without notice or demand.

5. Additional Rent.

          In addition to the Base Rent under Paragraph 4 above, any and all charges, expenses or other sums Subtenant is required to pay under the terms of this Sublease, including, without limitation, any additional rent required under the Master Lease shall be deemed additional rent (“Additional Rent,” and together with Base Rent and Additional Operating Costs, “Subtenant’s Rent”) and shall be paid by Subtenant. Sublandlord shall have the same rights and remedies with respect to payment of Additional Rent as Sublandlord shall have with respect to the Base Rent. Subtenant shall remain responsible for Subtenant’s Rent and any other charges, expenses or other sums which first arise, accrue or are invoiced at any time during or after the expiration of the Sublease Term, whether by Sublandlord or Master Landlord, to the extent they arise or accrue with respect to any period during the Sublease Term from any liabilities or obligations of Subtenant under the provisions of this Sublease (including any obligations under the Master Lease which are incorporated herein as liabilities or obligations of Subtenant). Notwithstanding anything to the contrary set forth in this Sublease, Subtenant shall not be required to pay any Additional Rent, or to perform any obligation that is (i) allocable to any period of time prior to the Sublease Commencement Date or following the expiration or sooner termination of the Sublease (for any reason other than Subtenant’s default), (ii) allocable to any portion of the Master Premises other than the Sublease Premises, (iii) payable as a result of a default by

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Sublandlord of any of its obligations under the Master Lease, or as a result of the gross negligence or willful misconduct of Sublandlord or any of its agents, employees or contractors, or (iv) are incurred for the sole and exclusive benefit of Sublandlord.

6. Rent Payments.

(a)	Subtenant’s Rent and all other charges, expenses or other sums Subtenant is required to pay to Sublandlord hereunder shall be due and payable without billing or demand, and without deduction, set-off or counterclaim, except as otherwise provided herein, in lawful money of the United States of America, at Sublandlord’s address for notices in Paragraph 15 hereof or to such other person or at such other place as Sublandlord may designate in writing, and shall be due and payable by Subtenant to Sublandlord on or before the date specified in this Sublease, provided that if no date is specified as to the applicable payment, then on or before (i) three (3) business days prior to the corresponding date provided in the Master Lease for payment of the same by Sublandlord to Master Landlord (provided that in no event shall such period be shortened to a duration of less than two (2) business days) or (ii) if there is no corresponding date provided in the Master Lease for payment of the same by Sublandlord to Master Landlord, then ten (10) business days after written request from Sublandlord to Subtenant. The failure of Subtenant to make payment in full of Subtenant’s Rent or any other charges, expenses or other sums Subtenant is required to pay to Sublandlord hereunder by the due date provided herein for such payment, shall potentially subject Subtenant to the obligation to pay to Sublandlord interest in accordance with the provisions of Paragraph 18.
(b)	If the Sublease Term commences on a day other than the first day of a calendar month or ends on a day other than the last day of a calendar month, then Subtenant’s Rent for the first and last fractional months of the Sublease Term shall be appropriately prorated.
(c)	Sublandlord may upon reasonable prior written notice (which notice shall include Master Landlord’s address and Master Landlord’s acknowledgement of such notice) instruct Subtenant to make any payment of Subtenant’s Rent directly to Master Landlord, in which event Subtenant shall timely make all such payments so instructed directly to Master Landlord (with a copy of the check to be contemporaneously forwarded by Subtenant to Sublandlord at the time of making of each such payment), and in such event Sublandlord shall have no responsibility to Subtenant for the payment of any such amount, and Subtenant shall be solely responsible for any interest or late charges that may be imposed as a result of any failure of Subtenant to have timely and properly made any such payment to Master Landlord. Any payment made directly by Subtenant to Master Landlord at the request of Sublandlord shall be credited against any of Subtenant’s Rent due under this Sublease as and when received by Master Landlord.

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7. Use.

          Subtenant shall use and occupy the Sublease Premises only for the purposes permitted under, and in a manner consistent with, the provisions of the Master Lease. Subtenant will pay for any damage to any part of the Sublease Premises, Building or Center, subject to any applicable waiver of subrogation provisions, if (i) caused by any act or omission by Subtenant or Subtenant’s employees, agent, licensees, contractors or invitees and (ii) Sublandlord is required to pay for such damage under the Master Lease. Subtenant will comply with applicable provisions of the Master Lease and the Center’s Rules and Regulations.

8. Operating Costs, Real Estate Taxes and Utilities.

(a)

Commencing on the Sublease Commencement Date, Subtenant shall pay Subtenant’s Pro Rata Share (as defined below) of Operating Costs (as defined in the Master Lease), Real Property Taxes (as defined in the Master Lease), and insurance costs incurred by Sublandlord under the Master Lease. Subtenant’s Pro Rata Share is one hundred percent (100%), which represents the ratio of the rentable square footage of the Sublease Premises to the Rentable Square Footage of the Master Lease Premises (“Subtenant’s Pro Rata Share”). Subtenant’s Pro Rata Share shall be computed by Sublandlord on a monthly or other periodic basis selected by Sublandlord. Subtenant’s shall pay the amount of such pro rata share within ten (10) business days after receipt of a statement from Sublandlord.

(b)

Sublandlord may incur actual, third-party, out-of-pocket costs and expenses related to the operation of the Center or Campus, as more specifically described on Exhibit F attached hereto (collectively, “Additional Operating Costs”). Subtenant shall be responsible for reimbursing Sublandlord for Subtenant’s prorate share of such Additional Operating Costs as provided below. Subtenant’s pro rata share of Additional Operating Costs shall be one hundred percent (100%) with respect to Additional Operating Costs that are incurred by Sublandlord for the sole benefit of the Sublease Premises. To the extent that the Additional Operating Costs are not for the sole benefit of the Sublease Premises and benefit or are related to the Campus and/or Center as a whole, then Subtenant’s pro rata share of the Additional Operating costs shall represent the ratio of the Rentable Square Footage of the Sublease Premises to the Rentable Square Footage of the Campus and/or the Center, as applicable; provided, however, that in no event shall Subtenant have any obligation to reimburse Sublandlord for any Additional Operating Costs that are incurred for the sole benefit of the premises located at 11388 Sorrento Valley Road. Subtenant shall pay the amount of such pro rata share within ten (10) business days after receipt of a statement from Sublandlord along with reasonable documentary evidence of Sublandlord’s payment of such costs. Subtenant shall bear such Additional Operating Costs commencing on the Sublease Commencement Date. The Additional Operating Costs shall be included in the defined term Subtenant’s Rent.

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9. Status of Master Lease.

(a)	Sublandlord and Subtenant confirm and agree that this Sublease is subject and subordinate to all of the terms, covenants and conditions of the Master Lease and to the matters to which the Master Lease shall be subordinate. Without limiting the generality of the foregoing, in the event of termination of Sublandlord’s interest under the Master Lease for any reason (including, without limitation, upon the occurrence of any casualty or condemnation pertaining to the Sublease Premises) this Sublease shall terminate coincidentally therewith and Sublandlord shall return to Subtenant the Security Deposit and any prepaid Subtenant’s Rent not applied to a default of Subtenant within twenty (20) days of such termination.
(b)	Sublandlord represents to Subtenant that the Master Lease represents that entire agreement between Master Landlord and Sublandlord respecting the subject matter thereof, is in full force and effect, and, that to Sublandlord’s knowledge, no default or event that, with the passing of time or the giving of notice or both, would constitute a default, exists on the part of Sublandlord, or, to Sublandlord’s knowledge, the Master Landlord. Sublandlord agrees to perform all of its obligations under the Master Lease and, except for a termination of the Master Lease in connection with a casualty or condemnation pursuant to Sublandlord’s express rights as set forth therein, to maintain the Master Lease in full force and effect, except to the extent that any failure to maintain the Master Lease is due to the failure of Subtenant to comply with any of its obligations under this Sublease. Sublandlord shall not amend or modify the Master Lease in such a manner as to materially adversely affect Subtenant’s use of the Subleased Premises or increase the obligations or decrease the rights of Subtenant hereunder, without the prior written consent of Subtenant, which may be granted or withheld at Subtenant’s sole discretion.
(c)	If Sublandlord fails to pay any sum of money to Master Landlord, or fails to perform any other act on its part to be performed under the Master Lease or this Sublease, then Subtenant may, but shall not be obligated to, make such payment or perform such act. All such sums paid, and all reasonable costs and expenses of performing any such act, shall be payable by Sublandlord to Subtenant upon demand.
(d)	In the event that Subtenant desires to make any alterations or improvements, or otherwise take any action that will require the consent of Master Landlord, then Subtenant shall process such consent with the Master Landlord. Sublandlord shall cooperate, at no cost or expense to Sublandlord in connection with Subtenant obtaining such consent of Master Landlord.

10. Incorporation of Master Lease Terms.

(a) The applicable terms, covenants and conditions contained in the Master Lease are hereby incorporated herein and shall, as between Sublandlord and Subtenant, constitute additional terms, covenants and conditions of this Sublease, except to

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	the extent set forth below. Except as provided in this Paragraph 10, all references in the Master Lease to “Landlord” “Tenant” “Lease” “Premises” “Commencement Date” and “Rent” shall, for purposes of incorporation thereof into this Sublease, mean and refer to “Sublandlord”, “Subtenant”, “Sublease”, “Sublease Premises”, “Sublease Commencement Date” and “Subtenant’s Rent”, respectively. Subtenant agrees to be bound by the provisions of the Master Lease incorporated herein and to keep, observe and perform for the benefit of the Master Landlord and Sublandlord each off the terms, covenants and conditions on its part to be kept, observed and performed hereunder as well as those applicable terms, covenants and conditions to be observed and performed by Sublandlord as Tenant under the Master Lease with respect to the Sublease Premises. Without limiting the foregoing, Subtenant shall not commit or permit to be committed on the Sublease Premises any act or omission which shall violate any term, covenant or condition of the Master Lease. Subtenant shall under no circumstances have any rights with respect to the Sublease Premises greater than Sublandlord’s rights under the Master Lease.
(b)	In the event of conflict between any provision of the Master Lease which is incorporated herein as described above in this Paragraph 10 and any provision of this Sublease, the provisions of this Sublease shall control.
(c)	The following Sections and provisions of the Mater Lease do not apply to, shall not be a part of, and are not incorporated into this Sublease.

		Specific Section Excluded
Section	Subject Matter	If not entire Section)
Section 1	Basic Lease Terms	1.1, 1.2, 1.3, 1.4, 1.5, 1.6, 1.7, 1.11, 1.12
Section 2	The Premises
Section 3	Lease Term
Section 4	Rent	Section 4.1 (Minimum Monthly Rent)
Section 5	Security Deposit
Section 6	Operating Expenses	6.1, 6.2, 6.5
Section 8	Real Property Taxes	8.1, 8.2
Section 16	Damage and Destruction
Section 17	Condemnation
Section 18	Assignment and Subletting	18.2(c)
Section 20	Surrender	20.4
Section 21	Default by Tenant	Section 21(d)(v)
Section 23	Default by Landlord	23.3(a)
Section 24	General Provisions	24.6

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Exhibits B “Rules and Regulations” to the Master Lease shall be incorporated into this Sublease but all other exhibits and references thereto shall be excluded.

(d)	References in the following sections of the Master Lease to “Landlord” shall be deemed to refer to Master Landlord only: 7.2, 9.1, 9.4, 9.7, 11.5, and 24.24.
(e)	The reference to “Avanir Pharmaceuticals” in Section 14.2 shall be deemed to refer to Halozyme, Inc.
(f)	Sublandlord and Subtenant agree that Sublandlord shall not be responsible or liable to Subtenant for the performance or non-performance of any obligations of Master Landlord under the Master Lease, and in furtherance thereof agree as follows:

(i)

Notwithstanding anything to the contrary contained in this Sublease, Sublandlord shall not be required to (A) provide or perform any insurance and services or any alterations, improvements, improvement allowances or other construction obligations as to the Sublease Premises, (B) perform any maintenance or make any of the repairs to the Sublease Premises, Building or the Center, (C) comply with any laws or requirements of governmental authorities regarding the maintenance or operation of the Sublease Premises after Subtenant takes possession of the Premises or prior thereto the extent required to be complied with by Master Landlord under the Master Lease, (D) take any other action relating to the operation, maintenance, repair, alteration or servicing of the Sublease Premises that Master Landlord may have agreed to provide, furnish, make, comply with, or take, or cause to be provided, furnished, made, complied with or taken under the Master Lease, or (E) provide Subtenant with any rebate, credit, allowance or other concession required of Master Landlord for any reason pursuant to the Master Lease unless Sublandlord receives a rent abatement with respect to the Sublease Premises and Subtenant is not in default of its obligations under the Sublease, beyond all applicable notice and cure periods. Sublandlord makes no representation or warranty of quiet enjoyment as to any persons claiming by, through or under Master Landlord, but Sublandlord represents and warrants quiet enjoyment as against any person claiming by, through or under Sublandlord.

(ii)

Sublandlord agrees, upon request of Subtenant, to use reasonable efforts, at Subtenant’s sole cost and expense, to cause Master Landlord to provide, furnish, or comply with any of Master Landlord’s obligations under the Master Lease or to provide any required consents or approvals; provided, however, that Sublandlord shall not be obligated to use such efforts or take any action which, in Sublandlord’s reasonable judgment, might give rise to a default by Sublandlord under the Master Lease. Such efforts shall

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	include, without limitation, upon Subtenant’s request, notifying Master Landlord within two (2) business days of its non-performance under the Master Lease and requesting that Master Landlord perform its obligations thereunder. If Master Landlord shall default in the performance of any of its obligations under the Master Lease or at law, Sublandlord shall, upon request and at the expense of Subtenant, cooperate with Subtenant in the prosecution of any reasonable action or proceeding, in order to have Master Landlord (A) make such repairs, furnish such electricity, provide such services or comply with any other obligation of Master Landlord under the Master Lease or as required by law, (B) compensate Subtenant for any earlier default by Master Landlord in the payment or performance of its liabilities and obligations under the Master Lease during the Sublease Term, and/or (C) assigning Sublandlord’s rights under the Master Lease to Subtenant to the extent necessary to permit Subtenant to institute legal proceedings against Master Landlord to obtain the performance of Master Landlord’s obligations under the Master Lease; provided, however, that if Subtenant commences a lawsuit or other action, Subtenant shall pay all costs and expenses incurred in connection therewith (with any matter affecting the Sublease Premises, or a proportionate share of such costs if the matter also effects the Master Premises), and Subtenant shall indemnify Sublandlord against, and hold Sublandlord harmless from, all costs and expenses incurred by Sublandlord in connection therewith.
(iii)	Subtenant shall not make any claim against Sublandlord for any damage which may arise by reason of: (i) the failure of Master Landlord to keep, observe or perform any of its obligations under the Master Lease; or (ii) the acts or omissions of Master Landlord or its employees, agents, licensees, contractors or invitees.
(iv)	Subtenant agrees that any waiver of liability, waiver of subrogation rights, or indemnification provisions in the Master Lease which are incorporated herein as waivers or obligations of Subtenant (including, but not limited to, in Sections 9.5, 12.2, 13 and 14.5 of the Master Lease, to the extent applicable to and incorporated in this Sublease), shall be deemed expanded so as to provide for Subtenant to make such waivers and provide such indemnities not only in favor of Sublandlord, but also in favor of Master Landlord, and the respective affiliated employees, agents and the like of both Sublandlord and Master Landlord as enumerated in such provisions.

(g) In the event that Sublandlord, as Tenant, is entitled to termination rights for all or a portion of the Sublease Premises, including, without limitation, as a result of (i) damage and destruction under Section 16 of the Master Lease, or (ii) a partial condemnation under Section 17 of the Master Lease, then Subtenant shall be entitled to similar termination rights with respect to the portion or all of the

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	Sublease Premises affected, regardless of whether or not Sublandlord seeks to enforce such termination rights under the Master Lease.
(h)	In the event that Sublandlord, as Tenant, receives a rent abatement for all or a portion of the Sublease Premises, including, without limitation, as a result of (i) damage and destruction under Section 16 of the Master Lease, or (ii) a partial condemnation under Section 17 of the Master Lease, then Subtenant shall be entitled to similar abatement of Subtenant’s Rent with respect to the portion or all of the Sublease Premises affected.
(i)	Notwithstanding the incorporation of Section 6 of the Master Lease, Subtenant shall only be responsible for its proportionate share of Operating Costs, Additional Operating Costs, Real Property Taxes and insurance costs incurred by the Master Landlord under the Master Lease and charged through to Sublandlord. Subject to the provisions of Section 8(b) above, under no circumstances shall Subtenant be liable for any such costs directly incurred by Sublandlord.

11. Insurance.

          Subtenant shall comply at all times and in all respects with the provisions of Section 9 of the Master Lease with regard to the maintenance of insurance by “Tenant”. Such insurance shall name, as additional insureds, Master Landlord, Sublandlord and any other parties required to be named under the terms of the Master Lease, and a policy or certificate thereof shall be provided to Sublandlord not later than two (2) business days prior to the Sublease Commencement Date. The maintenance of insurance coverage with respect to the Sublease Premises and any property of Subtenant shall be the sole obligation of Subtenant. All insurance required to be maintained by Subtenant shall provide for thirty (30) days prior written notice to Sublandlord and Master Landlord in the event of any termination or reduction in coverage of such insurance. All property insurance policies which either Party obtains affecting the Sublease Premises shall include a clause or endorsement denying the insurer any rights of subrogation against the other Party or Master Landlord. Sublandlord and Subtenant waive any rights of recovery against the other for any actually insured injury or loss including all amounts within any deductible or self-insured retention amount applicable to any such insured injury or loss.

12. Surrender of Sublease Premises; Holding Over.

(a) As soon as its right to possession ends, Subtenant shall surrender the Sublease Premises to Sublandlord in as good repair and condition as when Subtenant first occupied, except for reasonable wear and tear and those improvements that Sublandlord made to the Sublease Premises that were not otherwise acquired by Subtenant in connection with this Sublease, or as otherwise consented to by the Master Landlord in the consent. Subtenant will concurrently deliver to Sublandlord all keys to the Sublease Premises, and restore any locks that it has changed to the system that existed at the commencement of the Sublease Term. If possession is not immediately surrendered, Sublandlord may enter upon and take possession of the Sublease Premises and expel or remove Subtenant and any other person who may be occupying the Sublease Premises or any part thereof.

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(b)	(b) At the expiration or termination of the Sublease Term, Sublandlord may require the removal of any or all furniture, personal property and equipment from the Sublease Premises, and the restoration of the Sublease Premises to its prior condition, except for reasonable wear and tear, at Subtenant’s expense. All of Subtenant’s furniture, personal property and equipment on or about the Sublease Premises, shall be removed from the Sublease Premises by Subtenant at the expiration or termination of the Sublease Term. All removals by Subtenant will be accomplished in a good and workmanlike manner so as not to damage any portion of the Center, Building or the Master Lease Premises and Subtenant will promptly repair and restore all damage done except for normal wear and tear. If Subtenant does not so remove any property which it has the right or duty to remove, Sublandlord may immediately either claim it as abandoned property, or remove, store and dispose of it in any manner Sublandlord may choose, at Subtenant’s cost and without liability to Subtenant or any other party.
(c)	As a condition to this Sublease and to facilitate Sublandlord’s performance of its obligations under the Master Lease, Subtenant agrees that Sublandlord shall be entitled to enter the Sublease Premises, upon two (2) business days’ advance notice to Subtenant, at any time during the ten (10) days preceding the Sublease Expiration Date for the purpose of making any repairs or modifications or removing any alterations or other improvements required under the terms of the Master Lease to the extent the same will not materially interfere with Subtenant’s continuous use of the Sublease Premises for the purposes of conducting its business therein. Sublandlord’s right to enter the Sublease Premises under this Paragraph 12(c) shall not be exclusive of any other right of entry Sublandlord may have under the terms of this Sublease.
(d)	If Subtenant does not surrender the Sublease Premises as required and holds over after its right to possession ends, Subtenant shall become a tenant at sufferance only, at a monthly rental rate equal to the greater of (i) one hundred fifty percent (150%) of the total Subtenant’s Rent payable in the last prior full month, or (ii) the amount payable by Sublandlord as “Tenant” under the Master Lease as a result of such holdover, without renewal, extension or expansion rights, and otherwise subject to the terms, covenants and conditions herein specified, so far as applicable. Nothing other than a fully executed written agreement of the Parties creates any other relationship. Subtenant will be liable for Sublandlord’s loss, costs and damage from such holding over, including, without limitation, those from Sublandlord’s delay in delivering possession to other parties. These provisions are in addition to other rights of Sublandlord hereunder and as provided by law.

13. Waiver and Indemnification.

          The provisions of the Master Lease relating to waiver of liability, waiver of subrogation and indemnification shall apply to this Sublease as incorporated by Paragraph 10 hereof.

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14. Hazardous Materials.

(a)

The provisions of the Master Lease relating to Hazardous Materials shall apply to this Sublease as incorporated by Paragraph 10. Notwithstanding anything in this Sublease to the contrary, Subtenant shall have no liability or obligation whatsoever for any Hazardous Materials located in, on or about the Center, Building or Sublease Premises prior to the Sublease Commencement Date or that migrate onto the property on which the Center is located or appear within the Center, Building, or Sublease Premises, provided that neither Subtenant nor its employees, agents, licensees, contractors or invitees was the cause or source of such Hazardous Materials.

(b)

To the extent required by law or for Subtenant’s use and occupancy of the Building and Sublease Premises, Sublandlord shall cause, at its sole cost and expense, any and all such Hazardous Materials discovered in, on or about the Building or Sublease Premises to be removed or otherwise remediated.

15. Notices.

          In the event any notice from the Master Landlord or otherwise relating to this Sublease or the Master Lease is delivered to, or is otherwise received by, Sublandlord, then Sublandlord shall, as soon thereafter as possible, but in any event within forty-eight (48) hours, deliver such notice to Subtenant if such notice is written or advise Subtenant thereof by telephone if such notice is oral. All notices, demands, statements and other communications that may or are required to be given by either Party to the other hereunder shall be in writing and shall be (i) personally delivered to the address or addressee provided herein, or (ii) sent by certified mail, postage prepaid and return receipt requested or (iii) delivered by a reputable messenger or overnight courier service and, in any case, addressed as follows:

If to Sublandlord:	Avanir Pharmaceuticals
	c/o Chief Financial Officer
	101 Enterprise, Suite 300
	Aliso Viejo, CA 92656
	Attention: Michael J. Puntoriero
With a copy to:	Goodwin Procter LLP
	4370 La Jolla Village Drive, Suite 400
	San Diego, CA 92122
	Fax: (858) 232-0349
	Attention: Ryan Murr, Esq.
If to Subtenant prior to the Sublease Commencement Date:	Halozyme, Inc. 11588 Sorrento Valley Rd, Suite 17
	San Diego, CA 92121
	Fax: (858) 259-2539
	Attention: Chief Financial Officer

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If to Subtenant after the Sublease Commencement Date	Halozyme, Inc. 11388 Sorrento Valley Rd
	San Diego, CA 92121
	Fax: TBD
	Attention: Chief Financial Officer
With a copy to:	Morrison & Foerster LLP
	425 Market Street
	San Francisco, CA 94105-2482
	Fax: (415) 268-7522
	Attention: Derek Boswell, Esq.

Any notice or document addressed to the Parties hereto at the respective addresses set forth on this Sublease or at such other address as they may specify from time to time by written notice delivered in accordance with this Paragraph 15 shall be considered delivered (w) in the case of personal delivery, at the time of delivery or refusal to accept delivery; (x) on the third day after deposit in the United States mail, certified mail, postage prepaid; (y) in the case of reputable messenger or overnight courier service, upon delivery or refusal to accept delivery; or (z) in the event of failure of delivery by reason of changed address of which no notice was delivered or refusal to accept delivery, as of the date of such failure or refusal. If any such day of delivery is not a business day, the notice or document will be considered delivered on the next business day.

16. Security Deposit.

          Within one business day of the Effective Date, Subtenant shall provide Sublandlord with a letter of credit for the full initial amount of the Security Deposit listed in Paragraph 1(b) (the “Letter of Credit”). Such Letter of Credit shall be in a form and substance reasonably acceptable to Sublandlord (with the form attached hereto as Exhibit “C” deemed acceptable). The Letter of Credit shall have an original term of no less than one year with provisions for extensions unless sixty (60) days prior notice is given to Sublandlord by the issuing bank. Subtenant shall keep the Letter of Credit in force throughout the Sublease Term and for sixty days after (i) the Sublease Expiration Date of the Sublease Term or (ii) the earlier termination of the Sublease Term, except that if such earlier termination is based on Subtenant’s default, Subtenant shall keep the Letter of Credit in force until sixty days after the date when the Sublease Term would have expired had it not been earlier terminated. Subtenant shall deliver to Sublandlord a renewal Letter of Credit no later than thirty days prior to the expiration date of any Letter of Credit issued under this Paragraph 16, and if Subtenant fails to do so, Sublandlord may draw the entire amount of the expiring Letter of Credit and hold the proceeds in cash for the same purposes as the Letter of Credit. The Letter of Credit shall be issued by Silicon Valley Bank (or other bank satisfactory to and approved in advance by Sublandlord). The Letter of Credit shall be reduced to $300,000 on July 1, 2008.

17. Assignment and Subletting.

          Subject to the prior written consent of both Sublandlord (which shall not be unreasonably withheld, conditioned or delayed) and Master Landlord, Subtenant shall have the same rights as Sublandlord enjoys as Tenant under such portions of Section 18 of the Master Lease as are

14

incorporated herein, to assign this Sublease or sub-sublease the Sublease Premises. Except in connection with a Permitted Transfer (as defined below), Sublandlord shall have the right to fifty percent (50%) of all subrent or other consideration (net of Subtenant’s reasonable expenses in connection with such assignment or sub sublease, including, without limitation, brokerage commissions, legal costs, and tenant improvement costs or allowances) to be paid to Subtenant under the terms of any assignment or sub sublease in excess of the total Subtenant’s Rent due hereunder. Notwithstanding anything in this Sublease to the contrary, Subtenant may assign the Sublease or sublet the Sublease Premises, or any portion thereof, without Sublandlord’s consent, to any entity which controls, is controlled by, or is under common control with Subtenant; to any entity which results from a merger of, reorganization of, or consolidation with Subtenant; to any entity which acquires substantially all of the stock or assets of Subtenant, as a going concern, with respect to the business that is being conducted in the Sublease Premises (hereinafter each a “Permitted Transfer”). In addition, a sale or transfer of the majority capital stock of Subtenant shall be deemed a Permitted Transfer if (1) such sale or transfer occurs in connection with any bona fide financing or capitalization for the benefit of Subtenant, or (2) Subtenant is or becomes a publicly traded corporation. Sublandlord shall have no right to terminate the Lease in connection with, and shall have no right to any sums or other economic consideration resulting from any Permitted Transfer.

18. Interest on Subtenant’s Obligations.

          Any Subtenant’s Rent or other charge, expense or other sum due from Subtenant to Sublandlord under this Sublease which is not paid on the date due, shall bear interest from the date such payment is due until paid (computed on the basis of a 365-day-year) at the lesser of (a) the maximum lawful rate per annum or (b) twelve percent (12%) per annum. The payment of such interest shall not excuse or cure a default by Subtenant hereunder.

19. Authority.

          By delivering this Sublease, each Party hereby represents and warrants to the other that such execution and delivery has been duly authorized by all necessary corporate or partnership action and that the person(s) executing same have been duly authorized to do so.

20. Signage and Access.

          Subject to Master Landlord’s approval, Subtenant shall have the right to install signage at the Center, Building and Sublease Premises, at its sole cost and expense, subject to, and in compliance with, the provisions of the Master Lease. In addition, subject to Master Landlord’s approval, Subtenant shall have the right, at its sole cost and expense, to install signage that is visible from Sorrento Valley Road, subject to the provisions of the Master Lease. At its cost, Subtenant shall remove any such signage at the expiration of the Sublease Term and repair any damage caused thereby.

21. Commissions.

          Sublandlord has entered into certain listing agreements with Grubb & Ellis/BRE Commercial, pursuant to which Sublandlord shall pay any commission payable in connection

15

with this Sublease. Sublandlord hereby represents and warrants to Subtenant, and Subtenant hereby represents and warrants to Subtenant, that no other broker or finder has been engaged by it, respectively, in connection with any of the transactions contemplated by this Sublease or to its knowledge is in any way connected with any such transactions. In the event of any other claims for brokers’ or finders’ fees or commissions in connection with the negotiation, execution or consummation of this Sublease, then Subtenant shall indemnify, save harmless and defend Sublandlord from and against such claims if they shall be based upon any statement, representation or agreement by Subtenant, and Sublandlord shall indemnify, save harmless and defend Subtenant from and against such claims if they shall be based upon any statement, representation or agreement by Sublandlord.

22. Captions.

          The captions in this Sublease are used for convenience and reference only and are not to be taken as part of this Sublease or to be used in determining the intent of the Parties or otherwise interpreting this Sublease.

23. Successors and Assigns.

          Subject to the restrictions on assignment set forth in this Sublease and the Master Lease, this Sublease shall be binding upon and inure to the benefit of Sublandlord and Subtenant and their respective successors and assigns.

24. Parking.

          Subtenant shall have the non-exclusive right to use all parking areas available to Sublandlord under the Master Lease.

25. Master Landlord Consent.

          This Sublease shall not become effective and shall not be deemed to be an offer to sublease or create any rights or obligations between Subtenant or Sublandlord unless and until Sublandlord and Subtenant have executed and delivered the same, and Master Landlord has executed and delivered a consent to this Sublease in the form attached hereto as Exhibit D, with such changes as may reasonably be accepted by Subtenant and Sublandlord as long as Master Landlord does not change the non-disturbance language of paragraph 4 of the consent set forth in Exhibit D. Subtenant shall use commercially reasonable efforts to obtain the consent of Master Landlord promptly following mutual execution hereon. If no such consent to this Sublease is given by Master Landlord within thirty (30) days after the delivery of a copy of the fully executed Sublease to Master Landlord, then either Sublandlord or Subtenant shall have the right, by written notice to the other, to terminate this Sublease at any time prior to such consent from Master Landlord being given. By delivering this Sublease, each Party hereby represents and warrants to the other that such execution and delivery has been duly authorized by all necessary corporate or partnership action and that the person(s) executing same have been duly authorized to do so.

16

          In the event the Master Lease is terminated prior to the expiration of the Sublease Term, whether as a result of a voluntary termination by Sublandlord or a default on the part of Sublandlord, this Sublease shall, upon notice from Master Landlord to Subtenant, remain in full force and effect as a direct lease between Subtenant and Master Landlord (in which event Subtenant shall attorn to Master Landlord).

26. Financial Statements.

          Subtenant represents, warrants and covenants that any financial statements heretofore furnished to Sublandlord, in connection with this Sublease, are accurate and are not materially misleading.

27. Parent Guaranty.

          Concurrent with the execution of this Sublease, Parent covenants and agrees to execute a guaranty substantially in the form attached hereto as Exhibit E.

28. Miscellaneous.

(a)	Time is of the essence of each and every term of this Sublease.
(b)	Subtenant waives any right it may now or hereafter have (i) for exemption of property from liability for debt or for distress for rent or (ii) relating to notice or delay in levy of execution in case of eviction for nonpayment of rent.
(c)	If there is more than one party constituting Subtenant, their obligations are joint and several, and Sublandlord need not first proceed against all of them before proceeding against any or all of the others.
(d)	Subtenant acquires no rights by implication from this Sublease, and is not a beneficiary of any past, current or future agreements between Sublandlord and third parties.
(e)	California law governs this Sublease. Neither Party may record this Sublease or a copy or memorandum thereof. Submission of this Sublease to Subtenant is not an offer, and Subtenant will have no rights hereunder until each Party executes a counterpart and delivers it to the other Party.
(f)	This Sublease cannot be changed or terminated orally. All informal understandings and agreements, representation or warranties heretofore made between the Parties are merged in this Sublease, which alone fully and completely expresses the agreement between Sublandlord and Subtenant as to the subleasing of the Sublease Premises.
(g)	Each and every indemnification obligation set forth in this Sublease, or incorporated into this Sublease from the Master Lease, shall survive the expiration or earlier termination of the term of this Sublease.

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(h)	If, for any reason, any suit be initiated between Sublandlord and Subtenant to interpret or enforce any provision of this Sublease, the prevailing Party shall be entitled to recover from the other Party its legal costs, expert witness expenses, and reasonable attorneys’ fees, as fixed by the court.
(i)	The Parties mutually acknowledge that this Sublease has been negotiated at arm’s length. The provisions of this Sublease shall be deemed to have been drafted by all of the Parties and this Sublease shall not be interpreted or constructed against any Party solely by virtue of the fact that such Party or its counsel was responsible for its preparation.
(j)	This Sublease may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one instrument.

[Remainder of page intentionally blank]

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          IN WITNESS WHEREOF, this Sublease has been executed as of the day and year first above written.

          “SUBLANDLORD”:

AVANIR PHARMACEUTICALS, a California corporation
By:	/s/ Michael J. Puntoriero
Name:	Michael J. Puntoriero
Title:	CFO
“SUBTENANT”:
HALOZYME, INC., a California corporation
By:	/s/ Jonathan Lim
Name:	Jonathan Lim
Title:	President and CEO
The undersigned “Parent” has executed this Sublease for the purpose of affirming its obligation under Section 28.
“PARENT”:
HALOZYME THERAPEUTICS, INC., a Nevada corporation
By:	/s/ Jonathan Lim
Name:	Jonathan Lim
Title:	President and CEO

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EXHIBIT A

MASTER LEASE

A-1

EXHIBIT B

FLOOR PLAN OF SUBLEASE PREMISES

B-1

B-2

EXHIBIT C

FORM OF LETTER OF CREDIT

BENEFICIARY:
AVANIR PHARMACEUTICALS,
CORPORATE HEADQUARTERS
101 ENTERPRISE, SUITE
ALISO VIEJO, CA 92656

AS “SUBLANDLORD”

APPLICANT:
HALOZYME, INC.
11588 SORRENTO VALLEY ROAD, SUITE 17
SAN DIEGO, CA 92121

AS “SUBTENANT”

AMOUNT:	US $400,000.00 (FOUR HUNDRED THOUSAND AND NO/100 U.S.)
DOLLARS)

EXPIRATION DATE:                     ___, 20___

LOCATION: SANTA CLARA, CALIFORNIA

LADIES AND GENTLEMEN:

WE HEREBY ESTABLISH OUR IRREVOCABLE STANDBY LETTER OF CREDIT NO. SVBSF___ IN YOUR FAVOR. THIS LETTER OF CREDIT IS AVAILABLE BY SIGHT PAYMENT WITH OURSELVES ONLY AGAINST PRESENTATION AT THIS OFFICE OF THE FOLLOWING DOCUMENTS:

1.	THE ORIGINAL OF THIS LETTER OF CREDIT AND ALL AMENDMENT (S), IF ANY.
2.	YOUR SIGHT DRAFT DRAWN ON US IN THE FORM ATTACHED HERETO AS EXHIBIT “A”.
3.	A DATED CERTIFICATION PURPORTEDLY SIGNED BY AN AUTHORIZED OFFICER OR REPRESENTATIVE OF THE BENEFICIARY, FOLLOWED BY HIS/HER PRINTED NAME AND DESIGNATED TITLE, STATING EITHER OF THE FOLLOWING WITH INSTRUCTIONS IN BRACKETS THEREIN COMPLIED WITH:

A) “THE AMOUNT DRAWN PER THE ACCOMPANYING SIGHT DRAFT IS DUE TO SUBLANDLORD UNDER THAT CERTAIN SUBLEASE AGREEMENT DATED [INSERT DATE] BY AND BETWEEN HALOZYME, INC. AS SUBTENANT, AND BENEFICIARY, AS SUBLANDLORD BECAUSE SUBTENANT

C-1

OWES SUCH AMOUNTS AS A DRAW UPON SUBTENANT’S SECURITY DEPOSIT AS DEFINED IN SECTION 17 THEREUNDER.”

OR

B) “SUBLANDLORD HAS NOT RECEIVED AN AMENDMENT EXTENDING THE EXPIRATION DATE OF SILICON VALLEY BANK IRREVOCABLE STANDBY LETTER OF CREDIT NO. SVBSF___ FOR AN ADDITIIONAL ONE (1) YEAR PERIOD OR AN ACCEPTABLE LETTER OF CREDIT IN REPLACEMENT AND SUBLANDLORD IS THUS ENTITLED TO DRAW UPON THE BALANCE OF THIS LETTER OF CREDIT.”

          THE SUBLEASE AGREEMENT MENTIONED ABOVE IS FOR IDENTIFICATION PURPOSES ONLY AND IS NOT INTENDED THAT SAID SUBLEASE AGREEMENT BE INCORPORATED HEREIN OR FORM PART OF THIS LETTER OF CREDIT.

PARTIAL AND MULTIPLE DRAWINGS ARE ALLOWED. IN THE EVENT BENEFICIARY ELECTS TO DRAW UPON THIS LETTER OF CREDIT FOR LESS THAN THE FULL STATED AMOUNT HEREOF, THE AMOUNT AVAILABLE UNDER THIS LETTER OF CREDIT WILL BE REDUCED BY THE AMOUNT OF ANY PARTIAL DRAWINGS HEREUNDER.

          THIS LETTER OF CREDIT MUST ACCOMPANY ANY DRAWINGS HEREUNDER FOR ENDORSEMENT OF THE DRAWING AMOUNT AND WILL BE RETURNED TO THE BENEFICIARY UNLESS IT IS FULLY UTILIZED.

          WE AGREE THAT WE SHALL HAVE NO DUTY OR RIGHT TO INQUIRE AS TO THE BASIS UPON WHICH BENEFICIARY HAS DETERMINED THAT THE AMOUNT IS DUE AND OWING OR HAS DETERMINED TO PRESENT TO US ANY DRAFT UNDER THIS LETTER OF CREDIT, AND THE PRESENTATION OF SUCH DRAFT IN STRICT COMPLIANCE WITH THE TERMS AND CONDITIONS OF THIS LETTER OF CREDIT, SHALL AUTOMATICALLY RESULT IN PAYMENT TO THE BENEFICIARY.

          THE AMOUNT OF THIS LETTER OF CREDIT SHALL BE AUTOMATICALLY DECREASED WITHOUT AMENDMENT(S) TO THE NEW AGGREGATE AMOUNT(S) ON THE EFFECTIVE DATES BELOW, PROVIDED THAT THE AVAILABLE AMOUNT EXCEEDS THE AGGREGATE AMOUNT(S) LISTED BELOW AND ISSUING BANK HAS NOT RECEIVED WRITTEN NOTICE FROM AN AUTHORIZED REPRESENTATIVE OF THE BENEFICIARY BY OVERNIGHT COURIER AT LEAST TEN (10) BUSINESS DAYS PRIOR TO ANY SCHEDULED REDUCTION DATE, ADVISING ISSUING BANK THAT APPLICANT IS IN DEFAULT AND ANY SCHEDULED DECREASE IN THE AGGREGATE AVAILABLE AMOUNT SHOULD NOT BE EFFECTED:

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EFFECTIVE DATE(S)	NEW AGGREGATE AMOUNT(S)
JULY 1, 2008	US$300,000.00
[INSERT DATE]	US$250,000.00
[INSERT DATE]	US$200,000.00
[INSERT DATE]	US$150,000.00
[INSERT DATE]	US$100,000.00
[INSERT DATE]	US$50,000.00

          THIS LETTER OF CREDIT SHALL BE AUTOMATICALLY EXTENDED FOR AN ADDITIONAL PERIOD OF ONE YEAR, WITHOUT AMENDMENT, FROM THE PRESENT OR EACH FUTURE EXPIRATION DATE UNLESS AT LEAST SIXTY (60) DAYS PRIOR TO THE THEN CURRENT EXPIRATION DATE WE NOTIFY YOU BY REGISTERED MAIL/OVERNIGHT COURIER SERVICE AT THE ABOVE ADDRESS THAT THIS LETTER OF CREDIT WILL NOT BE EXTENDED BEYOND THE CURRENT EXPIRATION DATE. BUT IN ANY EVENT THIS LETTER OF CREDIT WILL NOT BE EXTENDED BEYOND                      ___, 20___, WHICH SHALL BE THE FINAL EXPIRATION DATE OF THIS LETTER OF CREDIT.

THE DATE THIS LETTER OF CREDIT EXPIRES IN ACCORDANCE WITH THE ABOVE PROVISION IS THE “FINAL EXPIRATION DATE”. UPON THE OCCURRENCE OF THE FINAL EXPIRATION DATE THIS LETTER OF CREDIT SHALL FULLY AND FINALLY EXPIRE AND NO PRESENTATIONS MADE UNDER THIS LETTER OF CREDIT AFTER SUCH DATE WILL BE HONORED.

THIS LETTER OF CREDIT IS TRANSFERABLE BY US, THE ISSUING BANK, ONE OR MORE TIMES, BUT IN EACH INSTANCE ONLY TO A SINGLE BENEFICIARY AS TRANSFEREE AND ONLY UP TO THE THEN AVAILABLE AMOUNT IN FAVOR OF ANY NOMINATED TRANSFEREE THAT IS THE SUCCESSOR IN INTEREST TO BENEFICIARY (“TRANSFEREE”), ASSUMING SUCH TRANSFER TO SUCH TRANSFEREE WOULD BE IN COMPLIANCE WITH THEN APPLICABLE LAW AND REGULATION, INCLUDING BUT NOT LIMITED TO THE REGULATIONS OF THE U. S. DEPARTMENT OF TREASURY AND U. S. DEPARTMENT OF COMMERCE. AT THE TIME OF TRANSFER, THE ORIGINAL LETTER OF CREDIT AND ORIGINAL AMENDMENT(S), IF ANY, MUST BE SURRENDERED TO US AT OUR ADDRESS INDICATED IN THIS LETTER OF CREDIT TOGETHER WITH OUR LETTER OF TRANSFER DOCUMENTATION AS PER ATTACHED EXHIBIT “B” DULY EXECUTED.

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THE CORRECTNESS OF THE SIGNATURE AND TITLE OF THE PERSON SIGNING THE TRANSFER FORM MUST BE VERIFIED BY BENEFICIARY’S BANK. BENEFICIARY SHALL PAY OUR TRANSFER FEE OF ¹/4 OF 1% OF THE TRANSFER AMOUNT (MINIMUM US$250.00) UNDER THIS LETTER OF CREDIT. ANY REQUEST FOR TRANSFER WILL BE EFFECTED BY US SUBJECT TO THE ABOVE CONDITIONS. ANY TRANSFER OF THIS LETTER OF CREDIT MAY NOT CHANGE THE PLACE OR DATE OF EXPIRATION OF THE LETTER OF CREDIT FROM OUR ABOVE SPECIFIED OFFICE. EACH TRANSFER SHALL BE EVIDENCED BY OUR ENDORSEMENT ON THE REVERSE OF THE LETTER OF CREDIT AND WE SHALL FORWARD THE ORIGINAL OF THE LETTER OF CREDIT SO ENDORSED TO THE TRANSFEREE.

DRAFT(S) AND DOCUMENTS MUST INDICATE THE NUMBER AND DATE OF THIS LETTER OF CREDIT.

          DOCUMENTS MUST BE DELIVERED TO US DURING REGULAR BUSINESS HOURS ON A BUSINESS DAY OR FORWARDED TO US BY OVERNIGHT DELIVERY SERVICE TO: SILICON VALLEY BANK, 3003 TASMAN DRIVE, 2^ND FLOOR, MAIL SORT HF210, SANTA CLARA, CALIFORNIA 95054, ATTENTION: GLOBAL FINANCIAL SERVICES — STANDBY LETTER OF CREDIT DEPARTMENT (THE “BANK’S OFFICE”).

AS USED HEREIN, THE TERM “BUSINESS DAY” MEANS A WEEKDAY OTHER THAN A BANK HOLIDAY (I.E. A HOLIDAY OBSERVED BY THE FEDERAL RESERVE SYSTEM OR OTHERWISE GENERALLY OBSERVED BY BANKS IN SANTA CLARA). NOTWITHSTANDING ANY PROVISION TO THE CONTRARY IN THE UCP (AS HEREINAFTER DEFINED), IF THE EXPIRATION DATE OR THE FINAL EXPIRATION DATE IS NOT A BUSINESS DAY THEN SUCH DATE SHALL BE AUTOMATICALLY EXTENDED TO THE NEXT SUCCEEDING DATE WHICH IS A BUSINESS DAY.

          WE HEREBY ENGAGE WITH YOU THAT DRAFT(S) DRAWN AND/OR DOCUMENTS PRESENTED UNDER AND IN ACCORDANCE WITH THE TERMS AND CONDITIONS OF THIS LETTER OF CREDIT SHALL BE DULY HONORED UPON PRESENTATION TO SILICON VALLEY BANK, IF PRESENTED ON OR BEFORE THE EXPIRATION DATE OF THIS CREDIT.

IF ANY INSTRUCTIONS ACCOMPANYING A DRAWING UNDER THIS LETTER OF CREDIT REQUEST THAT PAYMENT IS TO BE MADE BY TRANSFER TO YOUR ACCOUNT WITH ANOTHER BANK, WE WILL ONLY EFFECT SUCH PAYMENT BY FED WIRE TO A U.S. REGULATED BANK, AND WE AND/OR SUCH OTHER BANK MAY RELY ON AN ACCOUNT NUMBER SPECIFIED IN SUCH INSTRUCTIONS EVEN IF THE NUMBER IDENTIFIES A PERSON OR ENTITY DIFFERENT FROM THE INTENDED PAYEE.

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          THIS LETTER OF CREDIT IS SUBJECT TO THE UNIFORM CUSTOMS AND PRACTICE FOR DOCUMENTARY CREDITS (1993 REVISION), INTERNATIONAL CHAMBER OF COMMERCE, PUBLICATION NO. 500, (THE “UCP”).

SILICON VALLEY BANK,

(FOR BANK USE ONLY)	(FOR BANK USE ONLY)
AUTHORIZED SIGNATURE	AUTHORIZED SIGNATURE

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EXHIBIT “A”

          (i) SIGHT DRAFT/BILL OF EXCHANGE

	DATE:	REF. NO.
	AT SIGHT OF THIS BILL OF EXCHANGE
	PAY TO THE ORDER OF
US$
	U.S. DOLLARS
	“DRAWN UNDER SILICON VALLEY BANK, SANTA CLARA, CALIFORNIA, IRREVOCABLE STANDBY LETTER OF CREDIT NUMBER NO. SVBSF                     DATED                             , 20          ”
	TO:      SILICON VALLEY BANK
	3003 TASMAN DRIVE SANTA CLARA, CA 95054	[INSERT NAME OF BENEFICIARY]
		Authorized Signature

GUIDELINES TO PREPARE THE SIGHT DRAFT OR BILL OF EXCHANGE:

1.	DATE          INSERT ISSUANCE DATE OF DRAFT OR BILL OF EXCHANGE.
2.	REF. NO.          INSERT YOUR REFERENCE NUMBER IF ANY.
3.	PAY TO THE ORDER OF:          INSERT NAME OF BENEFICIARY
4.	US$          INSERT AMOUNT OF DRAWING IN NUMERALS/FIGURES.
5.	U.S. DOLLARS           INSERT AMOUNT OF DRAWING IN WORDS.
6.	LETTER OF CREDIT NUMBER          INSERT THE LAST DIGITS OF OUR STANDBY L/C NUMBER THAT PERTAINS TO THE DRAWING.
7.	DATED          INSERT THE ISSUANCE DATE OF OUR STANDBY L/C.

     NOTE:      BENEFICIARY SHOULD ENDORSE THE BACK OF THE SIGHT DRAFT

     OR BILL OF EXCHANGE AS YOU WOULD A CHECK.

IF YOU NEED FURTHER ASSISTANCE IN COMPLETING THIS SIGHT DRAFT OR BILL OF EXCHANGE, PLEASE CALL OUR L/C PAYMENT SECTION AND ASK FOR: EFRAIN TUVILLA AT (408) 654-6349 OR ALICE DALUZ AT (408) 654-7120.

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EXHIBIT “B”

  DATE:

TO:	SILICON VALLEY BANK
	3003 TASMAN DRIVE
	SANTA CLARA, CA 95054
	ATTENTION: GLOBAL FINANCIAL SERVICES
RE:	SILICON VALLEY BANK, SANTA CLARA, CALIFORNIA
	IRREVOCABLE STANDBY LETTER OF CREDIT NO. SVBSF
	DATED                                   , 20                     AMOUNT: US$                    .

     GENTLEMEN:

     FOR VALUE RECEIVED, THE UNDERSIGNED BEING A DULY AUTHORIZED REPRESENTATIVE OR OFFICER OF THE BENEFICIARY (“BENEFICIARY”) HEREBY IRREVOCABLY TRANSFERS TO:

(NAME OF TRANSFEREE)

(ADDRESS)

     (“TRANSFEREE”) ALL RIGHTS OF THE BENEFICIARY TO DRAW UNDER THE ABOVE LETTER OF CREDIT UP TO ITS AVAILABLE AMOUNT AS SHOWN ABOVE AS OF THE DATE OF THIS TRANSFER.

     BY THIS TRANSFER, ALL RIGHTS OF THE UNDERSIGNED BENEFICIARY IN SUCH LETTER OF CREDIT ARE TRANSFERRED TO THE TRANSFEREE. TRANSFEREE SHALL HAVE THE SOLE RIGHTS AS BENEFICIARY THEREOF, INCLUDING SOLE RIGHTS RELATING TO ANY AMENDMENTS, WHETHER INCREASES OR EXTENSIONS OR OTHER AMENDMENTS, AND WHETHER NOW EXISTING OR HEREAFTER MADE. ALL AMENDMENTS ARE TO BE ADVISED DIRECTLY TO THE TRANSFEREE WITHOUT NECESSITY OF ANY CONSENT OF OR NOTICE TO THE UNDERSIGNED BENEFICIARY.

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     THE ORIGINAL OF SUCH LETTER OF CREDIT IS RETURNED HEREWITH, AND WE ASK YOU TO ENDORSE THE TRANSFER ON THE REVERSE THEREOF, AND FORWARD IT DIRECTLY TO THE TRANSFEREE WITH YOUR CUSTOMARY NOTICE OF TRANSFER.

SINCERELY,

(BENEFICIARY’S NAME)

(SIGNATURE OF BENEFICIARY)

(PRINTED NAME AND TITLE)

SIGNATURE AUTHENTICATED

THE NAME(S) TITLE(S), AND SIGNATURE(S) CONFORM TO THAT/THOSE ON FILE WITH US FOR THE COMPANY AND THE SIGNATURE(S) IS/ARE AUTHORIZED TO EXECUTE THIS INSTRUMENT.

WE FURTHER CONFIRM THAT THE COMPANY HAS BEEN IDENTIFIED APPLYING THE APPROPRIATE DUE DILIGENCE AND ENHANCED DUE DILIGENCE AS REQUIRED BY THE BANK SECRECY ACT AND ALL ITS SUBSEQUENT AMENDMENTS.

(NAME OF BANK)

(ADDRESS OF BANK)

(CITY, STATE, ZIP CODE)

(AUTHORIZED SIGNATURE)

(PRINTED NAME AND TITLE)

(TELEPHONE NUMBER)

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EXHIBIT D

CONSENT TO SUBLEASE AGREEMENT

     THIS CONSENT TO SUBLEASE AGREEMENT (“Consent” or “Agreement”), dated for reference purposes only July ___, 2007, is made by and among BC SORRENTO, LLC, a California limited liability company (“Landlord”), AVANIR PHARMACEUTICALS, a California corporation (“Tenant”), and HALOZYME, INC., a California corporation (“Subtenant”), with reference to the following facts:

RECITALS

     A. Landlord and Tenant have entered into that certain Standard Industrial Net Lease dated March 20, 2000, as amended (the “Lease”), a copy of which is attached as Exhibit A, for the lease of certain premises currently consisting of 27,575 rentable square feet (the “Premises”) as more particularly described in the Lease, located at 11388 Sorrento Valley Road, San Diego, California 92121.

     B. Tenant and Subtenant desire to enter into that certain sublease of the Premises (the “Sublease”), a copy of which is attached hereto as Exhibit B, for Subtenant’s use and occupancy of the entire Premises for the remainder of the term of the Lease.

     C. Landlord has agreed to consent to the Sublease subject to the terms and conditions of this Agreement.

     D. Landlord, Tenant and Subtenant desire to enter into certain other agreements concerning the Lease and the Sublease as set forth herein.

AGREEMENT

     NOW, THEREFORE, in consideration of the mutual covenants contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows:

     1. Consent.

          (a) Landlord hereby consents to the subletting of the Premises by Tenant to Subtenant pursuant to the Sublease, subject to and upon the terms and conditions stated in this Agreement. Except as may be expressly set forth herein, nothing contained in this Consent shall (i) operate as a consent to or approval or ratification by Landlord of any of the provisions of the Sublease or as a representation or warranty by Landlord, and Landlord shall not be bound or estopped in any way by the provisions of the Sublease, nor (ii) be construed to waive any present or future breach or default on the part of Tenant under the Lease.

          (b) The Sublease shall in all respects be subject and subordinate to the terms and conditions of the Lease. In the event of any inconsistency or conflict between the terms of this Consent and any of the terms of the Sublease or the Lease, the terms and conditions of this Consent shall prevail. No merger shall result from the Sublease, any surrender of the Lease, nor

any mutual cancellation of the Lease, and in any of such events, subject to the provisions of Section 5 below, Landlord may either terminate the Sublease or succeed to the interest of Tenant or any other person therein.

          (c) Tenant shall remain primarily liable to pay the rent and all other amounts payable by Tenant under the Lease and to perform all other obligations of Tenant under the Lease, except as otherwise expressly set forth herein. If Subtenant or any of its successors or assigns causes a default under the Lease, Landlord may proceed directly against Tenant without pursuing any remedies whatsoever against Subtenant or any other person.

     2. Future Transfers.

          (a) Landlord may consent to subsequent subleases by Subtenant or any other person without notifying Tenant or obtaining its consent, and no such action shall relieve Tenant of its primary liability and obligations under the Lease and this Consent. This Consent applies only to the specific Sublease described herein, and neither the execution hereof by Landlord, nor the acceptance of rent by Landlord from any other person, including Subtenant, shall constitute a consent to any subsequent sublease or a waiver of any of Landlord’s rights hereunder or under the Lease.

          (b) Notwithstanding the foregoing, so long as no event of default has occurred under the Lease, Subtenant may assign the Sublease or sublet the Premises, or any portion thereof, without Tenant’s or Landlord’s consent, to any entity which controls, is controlled by, or is under common control with Subtenant; to any entity which results from a merger of, reorganization of, or consolidation with Subtenant; to any entity which acquires substantially all of the stock or assets of Subtenant, as a going concern, with respect to the business that is being conducted in the Sublease Premises (hereinafter each a “Permitted Transfer”). In addition, a sale or transfer of the majority capital stock of Subtenant shall be deemed a Permitted Transfer if (1) such sale or transfer occurs in connection with any bona fide financing or capitalization for the benefit of Subtenant, or (2) Subtenant is or becomes a publicly traded corporation. Tenant shall have no right to terminate the Sublease, and Landlord shall have no right to terminate the Lease, in connection with, and shall have no right to any sums or other economic consideration resulting from, any Permitted Transfer.

     3. Condition of Premises.

          (a) Tenant acknowledges its responsibilities under the Lease to remove and remediate any and all contamination and other effects arising from the use of radioactive materials in the Premises. Such responsibilities include, without limitation, the filing of a Certificate of Disposition of Materials with the California Department of Health Services (the “Department of Health Services”) [this issue is still under review by Avanir](the “Closure Certificate”). Tenant agrees to pursue the final acceptance of its Closure Certificate with commercially reasonable diligence following the date hereof, and to obtain such final acceptance as soon as practicable. Notwithstanding anything set forth in the Lease, Tenant agrees that no portion of its security deposit (including any letter of credit) shall be returned to Tenant until the Closure Certificate is accepted as final by the Department of Health Services, and if the Closure

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Certificate is not accepted by the end of the term of the Lease, Landlord shall have the right to draw upon the amount of the letter of credit and hold the cash proceeds of such draw until the Closure Certificate is obtained. Landlord agrees to return the original letter of credit to Tenant promptly upon submission of written proof by the Tenant that the Closure Certificate has been accepted as final by the Department of Health. A true and correct copy of the Closure Certificate is attached as Exhibit C.

          (b) Section 20.2 of the Lease provides that certain fixtures and other items of personal property that are integrated into the Premises are not to be removed by Tenant at the end of the term of the Lease, and that certain other items are removable at the end of the term of the Lease by Tenant. However, Landlord, Subtenant and Tenant acknowledge that Landlord and Subtenant have entered into an agreement for the lease of the Premises following the end of the term of the Lease and that significant opportunity for confusion may exist at the end of that subsequent lease as to what fixtures and other such personal property are to remain in the Premises and which may be removed by Tenant or Subtenant. In order to avoid such confusion, Landlord, Subtenant and Tenant agree to conduct a coordinated inspection of the Premises as soon as reasonably practicable after the execution of this Agreement and to mutually develop and agree upon a list of the existing items in the Premises that are not to be removed at the end of the term of either the Lease or such subsequent lease. Such meetings, inspection and mutual agreement shall occur on or before August 1, 2007.

          (c) Notwithstanding Section 3(b) above or any provision in the Lease or the Sublease to the contrary, (i) Landlord agrees that it has no ownership interest in the furniture, fixtures and equipment listed on Exhibit C to the Sublease or the emergency power generator (including all monitoring, connecting and operating equipment and parts) currently servicing the Premises and further agrees that Tenant may remove or transfer the same in its discretion, (ii) Subtenant shall not be required to remove or restore at the expiration of the Sublease term or otherwise, any alterations or improvements made to the Sublease Premises prior to the date of this Consent, and (iii) Subtenant shall retain ownership of all of its fixtures, machinery, equipment, and other items of personal property and may remove the same from the Premises provided such removal can be accomplished (and is accomplished) without material physical damage to the Building or material impairment of the operation thereof.

          (d) Landlord acknowledges and agrees to accept the Exit Assessment specified in Section 14.8 of the Lease which Tenant has provided or will provide to Subtenant in connection with the Sublease (the “Sublease Exit Assessment”). The Sublease Exit Assessment will satisfy Tenant’s obligation to provide an Exit Assessment to the Landlord under Section 14.8 of the Lease. Notwithstanding anything to the contrary contained in the Lease, Tenant’s obligation to provide any further Exit Assessments is and will be extinguished when the Sublease Exit Assessment is provided to Subtenant and Landlord. Tenant will remain responsible for the implementation of any recommended actions contained in the Sublease Exit Assessment. This provision does not affect Subtenant’s obligation to procure, issue and implement the recommendations of an Exit Assessment at the end of the Lease Term, if required pursuant to the terms of the Lease.

     4. Status of the Lease.

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          (a) Tenant agrees that the Lease is in full force and effect and that there are no breaches or defaults thereunder on the part of Landlord, nor does any condition exist that, with the passage of time or the giving of notice or both, would constitute such a breach or default on the part of Landlord under the Lease.

          (b) Landlord and Tenant agree that attached hereto as Exhibit B is a true, correct and complete copy of the Lease, and that the Lease represents the entire agreement between Landlord and Tenant governing the leasing relationship between Landlord and Tenant with respect to the Premises. Subtenant acknowledges and agrees that it is has received and reviewed the Lease and is not relying on any other document, instrument or agreement as governing the leasing relationship or the occupancy of the Premises.

          (c) Landlord agrees that the Lease is in full force and effect and that no Event of Default under the Lease on the part of Tenant has occurred and is continuing, and to Landlord’s actual knowledge without investigation, no condition exists that with the passage of time or the giving of notice or both, including the execution of the Sublease and the performance of the duties and obligations thereunder, would constitute an Event of Default on the part of Tenant under the Lease.

          (d) Except as may be specifically set forth in the Lease or otherwise agreed in writing, Landlord has no obligation to renew or extend the term of the Lease, has made no representations, express or implied regarding the same nor is Landlord under any duty to offer to rent the Premises or any other space to Tenant at such expiration. Subtenant takes the Lease with full knowledge that the Lease term may not be extended or renewed at the time of expiration.

     5. New Lease.

          (a) If the Lease terminates for any reason, then within ten (10) business days following any such termination, Landlord shall offer to lease the Premises to Subtenant for the remaining term of the Lease at the same rent and on the same terms and conditions as set forth in the Lease, commencing concurrently with the termination of the Lease. Subtenant shall have five (5) business days after receipt of such offer within which to unconditionally accept the same. If Subtenant fails to unconditionally accept Landlord’s offer to enter into such replacement lease by the end of such five (5) business day period, then Landlord shall nevertheless have the right to require Subtenant to enter into a replacement lease agreement with Landlord, effective as of the date of termination of the Lease, for the remaining term of the Sublease on the terms and conditions of the Sublease, and such of the terms of the Lease as are not inconsistent with the Sublease. In the event Subtenant does not exercise its right to lease the Premises on the same terms and conditions as set forth in the Lease and Landlord does not exercise its right to require Subtenant to enter into a replacement lease agreement with Landlord, then the Sublease shall terminate at the end of such five (5) business day period.

     6. Notices. All notices required by this Agreement shall be in writing, shall be effective upon receipt or upon refusal of delivery, and shall be delivered by (i) hand, (ii) certified mail, return receipt requested (iii) overnight courier service, or (iv) facsimile, addressed to the other party as follows, or at such address or facsimile number as to which such party from time

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to time may give proper notice to the other party. Notices shall be deemed to have been received: if hand delivered, when so delivered or when such delivery is refused; five days after deposit as certified mail; on the date scheduled for delivery if sent by courier; and on the date shown on the report generated by the sending machine if sent by facsimile.

To Landlord:	BC Sorrento, LLC
	505 Lomas Santa Fe, Suite 100
	Solana Beach, CA 92075
	Attention: Mr. William R. Beckman
To Tenant:	Prior to the Effective Date:
	101 Enterprise Suite 300
	Aliso Viejo CA 92656
	Attn: Mr. Michael J. Puntoriero
	After the Effective Date:
	101 Enterprise Suite 300
	Aliso Viejo CA 92656
	Attn: Mr. Michael J. Puntoriero
To Subtenant:	Prior to the Effective Date:
	11588 Sorrento Valley Rd., Suite 17
	San Diego, California 92121
	Attention: Chief Financial Officer
	After the Effective Date:
	11388 Sorrento Valley Rd., Suite 17
	San Diego, California 92121
	Attention: Chief Financial Officer

     7. Miscellaneous.

          (a) The reference to “Avanir Pharmaceuticals” in Section 14.2 of the Lease, for so long as the Sublease is in existence, shall be deemed to refer to Halozyme, Inc. for purposes of the Premises.

          (b) This Agreement will be governed and construed in accordance with the laws of the State of California, regardless of the choice of law provisions of California or any other jurisdiction.

          (c) No alteration, amendment or modification of or to this Agreement shall be effective unless it is made in writing and signed on behalf of each of the parties to this Agreement.

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          (d) This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same document.

          (e) This Agreement constitutes the entire agreement between the parties pertaining to the subject matter contained in it and supersedes all prior and contemporaneous agreements, representations, and understandings of the parties. No representation, warranty, promise, inducement or statement of intention has been made by either party which is not embodied in this Agreement.

          (f) In any action between the parties hereto seeking enforcement of any of the terms and provisions of this Agreement, the prevailing party in such action shall be entitled to have and to recover from the other party its reasonable attorneys’ fees and other reasonable expenses in connection with such action or proceeding, in addition to its recoverable court costs.

          (g) Nothing in this Agreement is intended to create any rights by persons not a party to this Agreement and no other party will be construed to be a third party beneficiary of this Agreement or otherwise have any legal or equitable rights under it.

          (h) Time is of the essence in this Agreement.

          (i) If any part of this Agreement is held by a court to be illegal, invalid, or unenforceable, the remainder of this Agreement will remain in full force and effect and will be interpreted to achieve, to the greatest extent possible, the objectives of this Agreement taken as a whole, including the illegal, invalid or unenforceable provision.

     IN WITNESS WHEREOF, this Consent to Sublease Agreement is executed as of the date first above written.

LANDLORD:

BC SORRENTO, LLC, a California limited

liability company

By:

Name:

Title:

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TENANT:

AVANIR PHARMACEUTICALS, INC., a

Delaware corporation

By:

Name: Michael J. Puntoriero

Title: Chief Financial Officer

SUBTENANT:

HALOZYME, INC., a California corporation

By:

Name:

Title:

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EXHIBIT “A”

LEASE

D-8

EXHIBIT “B”

SUBLEASE AGREEMENT

D-9

EXHIBIT “C”

CLOSURE CERTIFICATE

D-10

EXHIBIT E

GUARANTY

     THIS GUARANTY OF LEASE (“Guaranty”) is made as of July ___, 2007, by HALOZYME THERAPEUTICS, INC., a Nevada corporation (“Guarantor”), in favor of AVANIR PHARMACEUTICALS, a California corporation (“Lessor”), in connection with that certain Sublease dated July ___, 2007 (the “Lease”), pursuant to which Lessor leases to HALOZYME, INC., a California corporation (“Lessee”), approximately 21,184 square feet of office space, located at 11404 Sorrento Valley Road, San Diego, California (the “Premises”). As a material inducement to and in consideration of Lessor’s entering into the Lease, Lessor having indicated that it would not enter into the Lease without the execution of this Guaranty, Guarantor does hereby agree with Lessor as follows:

     (i) Guarantor does hereby unconditionally guarantee, without deduction by reason of set off, defense or counterclaim, as a primary obligor and not as a surety, and promises to perform and be liable for any and all obligations and liabilities of Lessee under the terms of the Lease, including without implied limitation the Lessee’s obligation to pay such rents, charges, costs and impositions as are set forth in the Lease. Guarantor further agrees to defend with counsel acceptable to Lessor, and to indemnify, defend, and save Lessor harmless from and against any and all loss, cost, damage or liability arising out of any breach by Lessee of any of the terms, conditions and covenants of the Lease, or out of any breach of warranty or misrepresentation made by Lessee under or in connection with the Lease, including reasonable attorneys’ fees and any other costs incurred by Lessor in connection therewith.

     (ii) The undertakings contained in this Guaranty shall be the personal liability of Guarantor. Guarantor acknowledges that after any default by Lessee in the performance of any term, condition or covenant of the Lease, the liability of Guarantor under this Guaranty shall be primary and that, in the enforcement of its rights, Lessor shall be entitled to look to Guarantor for the performance of the obligations of Lessee which Guarantor has guaranteed, without first commencing any action or proceedings against Lessee, and likewise, enforcement of Lessor’s rights against Lessee shall not impair the right of Lessor to enforce this Guaranty, and any such action by Lessor shall not operate as a release of the liability of Guarantor under this Guaranty. The liability of Guarantor under this Guaranty is a guaranty of payment and performance and not of collectibility, is not conditional upon the pursuit by Lessor of any remedies which it now has or may hereafter have with respect thereto under the Lease, at law, in equity or otherwise, and will not be diminished or affected by a claim by Lessee that the Lease was not duly executed and delivered by Lessee or that the execution, delivery and performance of the Lease was not duly authorized or that the Lease when executed by Lessee was not the legal, valid and binding obligation of Lessee or not generally enforceable against Lessee. Except as otherwise expressly provided herein, the obligations of the Guarantor shall be absolute and unconditional and shall remain in full force and effect until all amounts due pursuant to the Lease have been paid in full and all of Lessee’s obligations thereunder have been performed in full.

     (iii) If Lessee shall at any time default in the performance or observance of any of the terms, covenants or conditions in the Lease on Lessee’s part to be kept performed or observed, Guarantor will keep, perform and observe same, as the case may be, in the place and stead of Lessee.

     (iv) The obligations of Guarantor hereunder shall not be released by Lessor’s receipt, application or release of any security given for the performance and observance of any covenant or condition in the Lease on Lessee’s part to be performed or observed, regardless of whether Guarantor consents thereto or receives notice thereof.

     (v) The liability of Guarantor hereunder shall in no way be affected by (a) the release or discharge of Lessee or any other party or the release of Lessee in any creditor’s receivership, bankruptcy or other proceeding; (b) the impairment, limitation or modification of the liability of Lessee or the estate of Lessee in bankruptcy, or of any remedy for the enforcement of Lessee’s liability under the Lease resulting from the operation of any present or future provision of the Bankruptcy Code or other statute or from the decision in any court; (c) the rejection of the Lease in any such proceedings; (d) the assignment or transfer of the Lease by Lessee; (e) any disability of Lessee;

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(f) the cessation from any cause other than as provided under the Lease whatsoever of the liability of Lessee; (g) the exercise by Lessor of any of its rights or remedies reserved under the Lease or by law; or (h) any termination of the Lease. As used herein, “Bankruptcy Code” means Title 11 of the U.S. Code, as applicable, or any similar federal or state laws for the relief of debtors, each as hereafter amended.

     (vi) Guarantor agrees that none of its obligations and no right against Guarantor hereunder shall in any way be discharged, impaired, or otherwise affected by any extension of time by Lessor for, or by any partial or complete waiver by Lessor of the performance or failure by Lessor to enforce of any of Lessee’s obligations under the Lease, or by any other alteration, amendment, assignment, expansion, extension or modification by Lessor in or to the Lease, or by any release or waiver by Lessor of any term, covenant or condition of the Lease, or by any delay by Lessor in the enforcement of or waiver of any rights against Lessee, Guarantor or any other person or entity under the Lease; provided, however, that to the extent Lessee’s obligations under the Lease are reduced as a result of the foregoing, Guarantor’s obligations under this Guaranty shall likewise be reduced. Without limitation, Guarantor agrees that the Premises may be subleased or the Lease may be altered, amended, assigned, expanded, extended or modified from time to time on such terms and provisions as may be satisfactory to Lessor without notice to or further assent by Guarantor, and Guarantor hereby waives notice of acceptance of this Guaranty, notice of any obligations guaranteed hereby or of any action taken or omitted in reliance hereon, and notice of any defaults of Lessee under the Lease and waives presentment, diligence, demand for payment or performance, protest, notice of dishonor, nonpayment or nonperformance of any such obligations, suit or taking of other action by Lessor against, and any other notice to, any party liable thereon and waives suretyship defenses generally, other than full and timely payment and performance of all obligations hereby guaranteed, and Guarantor agrees to cause Lessee to preserve the enforceability of all instruments hereby guaranteed, as modified with Lessor’s consent, and not to cause Lessee to take any act or make any omission which might be the basis for a claim that Guarantor has any defense to Guarantor’s obligations hereunder, exclusive only of the defense that Lessee has fully and timely paid and performed all obligations hereby guaranteed. No insolvency, bankruptcy, liquidation proceeding or dissolution affecting Lessee or Guarantor shall affect, impair or be a defense to this Guaranty. The liability of the Guarantor hereunder is primary and, except as otherwise set forth herein, unconditional and, except as otherwise set forth herein shall not be subject to any offset, defense or counterclaim of Guarantor. This is a continuing guaranty. Guarantor waives any other circumstance whatsoever that might otherwise constitute a legal or equitable discharge, release of defense of a guarantor or surety, or that might otherwise limit recourse against Guarantor, except and to the extent that Lessee is released from its obligations under the Lease other than in the context of a bankruptcy of Lessee or a claim by Lessee that the Lease was unenforceable against Lessee as of the date of its execution. Moreover, Guarantor agrees that its obligations shall not be affected by any circumstances which constitute a legal or equitable discharge of a guarantor or surety, except and to the extent that Lessee is released from its obligations under the Lease (other than in the context of a bankruptcy of Lessee or a claim by Lessee that the Lease was unenforceable against Lessee as of the date of its execution).

     (vii) Guarantor represents that this Guaranty and the Lease, as originally delivered and as modified, amended or supplemented, have been duly authorized and are the legal, valid and binding obligations of Guarantor and Lessee, enforceable in accordance with their respective terms.

     (viii) Without in any manner limiting the generality of the foregoing, Guarantor hereby waives the benefits of the provisions of Sections 2809, 2810, 2847 and 2848 of the California Civil Code and any similar or analogous statutes of California or any other jurisdiction and all principles or provisions of law or equity which conflict with the terms of this Guaranty. In addition, without limiting the generality of the foregoing, Guarantor hereby expressly waives any and all benefits under California Civil Code Sections 2815, 2819, 2845, 2849 and 2850 and the second sentence of CC Section 2822(a). In addition, each Guarantor agrees that Lessor (not Lessee or any other person or entity) shall have the sole right to designate the portion of Lessee’s obligations under the Lease that is satisfied by a partial payment by Lessee. Notwithstanding anything to the contrary contained herein, other than with respect to the potential duplication of enforcement costs, in no event shall Guarantor’s liability under this Guaranty exceed the liability which Guarantor would have incurred (in the absence of a creditor’s receivership, bankruptcy or other proceeding involving Guarantor or its assignee) if Guarantor had entered into the Lease.

     (ix) Guarantor further agrees that it may be joined in any action against Lessee in connection with the obligations of Lessee under the Lease and recovery may be had against Guarantor in any such action. Lessor may

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enforce the obligations of Guarantor hereunder without first taking any action whatsoever against Lessee or its successors and assigns, or pursue any other remedy or apply any security it may hold.

     (x) Guarantor: (a) subordinates any right of subrogation it may have against Lessee to the obligations of Lessee under, arising out of or related to the Lease or Lessee’s use or occupancy of the Premises (as defined in the Lease); and (b) until all of Lessee’s obligations under the Lease are fully performed, unconditionally and irrevocably subordinates any liability or indebtedness of Lessee now or hereafter held by Guarantor to the obligations of Lessee under, arising out of or related to the Lease or Lessee’s use of the Premises. Furthermore, from and after the occurrence of any Event of Default (as defined in the Lease), Guarantor agrees that any payment on account of any indebtedness from Lessee to Guarantor during such time shall be held in trust for Lessor.

     (xi) The liability of Guarantor and all rights, powers and remedies of Lessor hereunder and under any other agreement now or at any time hereafter in force between Lessor and Guarantor relating to the Lease shall be cumulative and not alternative and such rights, powers and remedies shall be in addition to all rights, powers and remedies given to Lessor by law.

     (xii) This Guaranty applies to, inures to the benefit of and binds all parties hereto, and their successors and assigns. This Guaranty may be assigned by Lessor voluntarily or by operation of law.

     (xiii) If Lessor desires to sell, finance or refinance the Premises, or any part thereof, Guarantor hereby agrees to execute such reasonable documentation as shall be required by Lessor re-affirming Guarantor’s obligations under this Guaranty.

     (xiv) Notwithstanding any modification, discharge or extension of the guaranteed obligations or any amendment, modification, stay or cure of Lessor’s rights which may occur in any bankruptcy or reorganization case or proceeding concerning Lessee, whether permanent or temporary, and whether or not assented to by Lessor, Guarantor hereby agrees that it shall be obligated hereunder to pay and perform the guaranteed obligations and discharge its other obligations in accordance with the terms of the guaranteed obligations and the terms of this Guaranty. Guarantor understands and acknowledges that by virtue of this Guaranty, it has specifically assumed any and all risks of a bankruptcy or reorganization case or proceeding with respect to Lessee. Without in any way limiting the generality of the foregoing, any subsequent modification of the guaranteed obligations in any reorganization case concerning Lessee shall not affect the obligation of Guarantor to pay and perform the guaranteed obligations in accordance with their original terms. If Lessor is required to pay, return or restore to Lessee or any other person any amounts previously paid on account of any of the guaranteed obligations because of any bankruptcy or other voluntary or involuntary proceeding involving Lessee, in or out of court, for the adjustment of debtor-creditor relationships, or because of any stop notice or any other reason, the obligations of Guarantor shall be reinstated and revived, and the rights of Lessor shall continue, with respect to such amounts, all as though they had never been paid to Lessor.

     (xv) This Guaranty shall constitute the entire agreement between Guarantor and the Lessor with respect to the subject matter hereof. No provision of this Guaranty or right of Lessor hereunder may be waived nor may any guarantor be released from any obligation hereunder except by a writing duly executed by an authorized officer of Lessor.

     (xvi) When the context and construction so requires, all words used in the singular herein shall be deemed to have been used in the plural. The word “person” as used herein shall include an individual, company, firm, association, partnership, corporation, trust or other legal entity of any kind whatsoever.

     (xvii) Should any one or more provisions of this Guaranty be determined to be illegal or unenforceable, all other provisions shall nevertheless be effective.

     (xviii) Guarantor represents that the person signing below is duly authorized to execute this Guaranty on behalf of Guarantor and to bind Guarantor hereby.

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     (xix) The waiver or failure to enforce any provision of this Guaranty shall not operate as a waiver of any other breach of such provision or any other provisions hereof.

     (xx) If either party hereto participates in an action against the other party arising out of or in connection with this Guaranty, the prevailing party shall be entitled to have and recover from the other party reasonable attorneys’ fees, collection costs and other costs incurred in and in preparation for the action.

     (xxi) Guarantor agrees that this Guaranty shall be governed by and construed in accordance with the laws of the State of California.

     (xxii) The term “Lessor” whenever used herein refers to and means the Lessor in the foregoing Lease specifically named and also any assignee of said Lessor, whether by outright assignment or by assignment for security, and also any successor to the interest of said Lessor or of any assignee of such Lease or any part thereof whether by assignment or otherwise. The term “Lessee” whenever used herein refers to and means the Lessee in the foregoing Lease specifically named and also any assignee of said Lessee or assignee of such Lease or any part thereof, whether by assignment or otherwise.

     (xxiii) Any notice or other communication to be given under this Agreement by either party to the other will be in writing and delivered personally or mailed by certified mail, postage prepaid and return receipt requested, or delivered by an express overnight delivery service, charges prepaid, or transmitted by facsimile, as follows:

If to Lessor:	Avanir Pharmaceuticals, Inc.
	Attention:
With copies to:
	Attention:
	Attention:
If to Guarantor:	Halozyme Therapeutics, Inc.
	Attention:
With a copy to:
	Attention:

     Any address or name specified above may be changed by a notice given by the addressee to the other party in accordance with this numbered paragraph. Any notice will be deemed given and effective (i) if given by personal

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delivery, as of the date of delivery in person; or (ii) if given by mail, upon receipt as set forth on the return receipt; or (iii) if given by overnight courier, one (1) business day after timely deposit with the courier; or (iv) if given by facsimile, upon receipt of the appropriate confirmation of transmission by facsimile. The inability to deliver because of a changed address of which no notice was given of the rejection or other refusal to accept any notice will be deemed to be the receipt of the notice as of the date of such inability to deliver or the rejection or refusal to accept.

     (xxiv) Waiver of Jury Trial. THE PARTIES HERETO WAIVE TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY ANY PARTY(IES) AGAINST ANY OTHER PARTY(IES) ON ANY MATTER ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS GUARANTY OR THE RELATIONSHIP OF THE PARTIES CREATED HEREUNDER (EACH A “DISPUTE” AND COLLECTIVELY, THE “DISPUTES”).

     (xxv) Consent to Judicial Reference. If and to the extent that paragraph (xxv) immediately above is determined by a court of competent jurisdiction to be unenforceable or is otherwise not applied by any such court, each of Landlord and Tenant hereby consents and agrees that (a) any and all Disputes shall be heard by a referee in accordance with the general reference provisions of California Code of Civil Procedure Section 638, sitting without a jury in the County of Los Angeles, California, (b) such referee shall hear and determine all of the issues in any Dispute (whether of fact or of law), including issues pertaining to a “provisional remedy” as defined in California Code of Civil Procedure Section 1281.8, including without limitation, entering restraining orders, entering temporary restraining orders, issuing temporary and permanent injunctions and appointing receivers, and shall report a statement of decision; provided that, if during the course of any Dispute, any party desires to seek such a “provisional remedy” at a time when a referee has not yet been appointed or is otherwise unavailable to hear the request for such provisional remedy, then such party may apply to the Los Angeles County Superior Court for such provisional relief, and (c) pursuant to California Code of Civil Procedure Section 644(a), judgment may be entered upon the decision of such referee in the same manner as if the Dispute had been tried directly by a court. The parties shall use their respective commercially reasonable and good faith efforts to agree upon and select such referee, provided that such referee must be a retired California state or federal judge, and further provided that if the parties cannot agree upon a referee, the referee shall be appointed by the Presiding Judge of the Los Angeles County Superior Court. Each party hereto acknowledges that this consent and agreement is a material inducement to consummate the transactions contemplated hereby and by the Lease, and that each will continue to be bound by and to rely on this consent and agreement in their related future dealings. The parties shall share the cost of the referee and reference proceedings equally; provided that, the referee may award attorneys’ fees and reimbursement of the referee and reference proceeding fees and costs to the prevailing party, whereupon all referee and reference proceeding fees and charges will be payable by the non-prevailing party (as so determined by the referee). Each party hereto further warrants and represents that it has reviewed this consent and agreement with legal counsel of its own choosing, or has had an opportunity to do so, and that it knowingly and voluntarily gives this consent and enters into this agreement having had the opportunity to consult with legal counsel. This consent and agreement is irrevocable, meaning that it may not be modified either orally or in writing unless agreed to by Lessor, and this consent and agreement shall apply to any subsequent amendments, renewals, supplements, or modifications to this Guaranty or any other agreement or document entered into between the parties in connection with this Guaranty. In the event of litigation, this Agreement may be filed as evidence of either or both parties’ consent and agreement to have any and all Disputes heard and determined by a referee under California Code of Civil Procedure Section 638.

     (xxvi) This Guaranty is solely for the benefit of Lessor and its successors and assigns and is not intended to nor shall it be deemed to be for the benefit of any third party, including, without limitation, Lessee.

     (xxvii) Guarantor shall have no right to assign its obligations under this Guaranty without obtaining Lessor’s prior written consent which consent may be granted or withheld in Lessor’s sole and absolute discretion. For purposes of this Guaranty, the following shall not constitute an assignment necessitating Lessor’s consent (but Guarantor shall notify Lessor of the same): (a) a change in Guarantor’s name, type of entity and/or state of domicile; and (b) a merger or similar transaction in which the surviving entity purchases all or substantially all of Guarantor’s stock and/or assets; provided, however, that the resulting entity in either (a) or (b) shall remain bound by this Guaranty and will upon request, reaffirm and ratify the obligations of Guarantor under this Guaranty.

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     (xxviii) Guarantor hereby consents to the exclusive jurisdiction and venue of any state or federal court located within Los Angeles County, State of California in any suit, action or proceeding brought under or arising out of this Guaranty (and further agrees not to assert or claim that such venue is inconvenient or otherwise inappropriate or unsuitable).

     IN WITNESS WHEREOF, Guarantor has executed this Guaranty as of the date first above written.

“Guarantor”
HALOZYME THERAPEUTICS, INC.,
a Nevada corporation
By:
Name:
Title:
By:
Name:
	Title:

E-6

EXHIBIT F

ADDITIONAL OPERATING COSTS

Locksmith services

Security services

Central Monitoring Services

Armed Response services

Alarm Company & 1118722 (MAINTENANCE ACCESS) & 1118721 (CAMERA MAINTENANCE)

Drain Service

Air filtration repair and maintenance

Air handlers and chiller maintenance services

HVAC Vendor Services

HVAC MAINTENANCE AND REPAIR

EMERGENCY POWER SYSTEMS maintenance and repair

CONSULTING — FACILITY MAINTENANCE

HVAC PM — 11388 SV Rd

HVAC PM — 11404, 11408 SV Rd

Licenses and Permits

Signs

Hardware Supplies

Vendor for automated controls

Maintenance Supplies

FIRE EXTINGUISHER INSPECTION

Sound Diverters

HEALTH & SAFETY CONSULTING SVC

Guard Svcs 11388 Sorrento

DATA/SHREDDED&DESTROYED

F-1

Janitorial Services

WATER TREATMENT PROGRAM

San Diego Police Department services

F-2

EX-10.52

Exhibit 10.52

SUBLEASE AGREEMENT

between

AVANIR PHARMACEUTICALS,
as Sublandlord

and

HALOZYME, INC.
as Subtenant

Building Address: 11404 Sorrento Valley Road
San Diego, California 92121

SUBLEASE AGREEMENT

     THIS SUBLEASE AGREEMENT (“Sublease”) is made as of this 2nd day of July, 2007 (the “Effective Date”), by and between AVANIR PHARMACEUTICALS, a California corporation (“Sublandlord”) and HALOZYME, INC., a California corporation (“Subtenant”), a subsidiary of HALOZYME THERAPEUTICS, INC., a Nevada corporation (“Parent”), with Sublandlord and Subtenant hereinafter sometimes referred to collectively as the “Parties” and individually as a “Party”).

W I T N E S S E T H:

     WHEREAS, Sorrento Plaza, a California limited partnership (“Master Landlord”) and Sublandlord, are parties to a certain Standard Industrial Net Lease, dated as of May 20, 2002, as amended by that certain First Amendment to Standard Industrial Net Lease, dated as of August 1, 2002, and as amended by that certain Second Amendment to Standard Industrial Net Lease, dated as of April 2, 2003 (collectively, the “Master Lease”), a copy of which is attached hereto as Exhibit A;s

     WHEREAS, pursuant to the terms of the Master Lease, Master Landlord has leased to Sublandlord, certain premises consisting of approximately 30,370 rentable square feet (the “Master Lease Premises”) and which are located in an office industrial center with a street address of 11404 and 11408 Sorrento Valley Road, San Diego, California 92121 (collectively, the “Center”);

     WHEREAS, BC Sorrento, LLC, a California limited liability company (“Additional Master Landlord”) and Sublandlord, are parties to a certain Standard Industrial Net Lease, dated March 20, 2000 (the “Additional Master Lease”).

     WHEREAS, pursuant to the terms of the Additional Master Lease, Additional Master Landlord has leased to Sublandlord, a portion of the premises (the “Additional Master Lease Premises”) which are part of an office industrial center which includes 11388 Sorrento Valley Road, San Diego, California 92121 (the “Additional Center”), collectively the Center and the Additional Center will herein be referred to as the Campus (“the Campus”).

     (Initially capitalized terms not otherwise defined in this Sublease shall have the meanings attributed to such terms in the Master Lease, and unless otherwise expressly provided herein, all references in this Sublease to “Section” shall refer to the respective “Section” of the Master Lease and all references to “Paragraph” in this Sublease shall refer to the respective “Paragraph” of this Sublease.)

     WHEREAS, Sublandlord now desires to sublease to Subtenant and Subtenant now desires to sublease from Sublandlord a portion of the Master Lease Premises containing approximately 21,184 rentable square feet with a street address of 11404 Sorrento Valley Road (the “Sublease Premises”), on the terms, covenants and conditions hereinafter provided; and

     NOW, THEREFORE, Sublandlord and Subtenant covenant and agree as follows:

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1. Summary and Definitions: The following definitions apply in this Sublease:

(a) Base Rent. Base Rent shall be as follows:

		Annual Base Rent
Period During Sublease		(or shorter period as
Term	Monthly Base Rent	noted)
Sublease Commencement Date (estimated to be July 1, 2007, through and including December 31, 2007)	$0.00	$ 0.00
January 1, 2008 through and including June 30, 2008	$1.225 per sq. foot per month or $25,950.40	$155,702.40 (for the six month period)
July 1, 2008 through and including June 30, 2009	$2.548 per sq. foot per month or $53,976.83	$647,722.00
July 1, 2009 through and including June 30, 2010	$2.65 per sq. foot per month or $56,137.60	$673,651.20
July 1, 2010 through and including June 30, 2011	$2.756 per sq. foot per month or $58,383.10	$700,597.20
July 1, 2011 through and including June 30, 2012	$2.866 per sq. foot per month or $60,713.34	$728,556.08
July 1, 2012 through and including January 14, 2013	$2.981 per sq. foot per month or $63,149.50	$407,963.07 (for the six months and 14 day period)

(b)	Security Deposit: $400,000.00, subject to reduction on certain terms and conditions, all as set forth in Paragraph 16 hereof. Subtenant’s obligation to make a Security Deposit shall be satisfied by the delivery of a letter of credit.
(c)	Sublease Premises: A portion of the Master Lease Premises constituting approximately 21,184 Rentable Square Feet at 11404 Sorrento Valley Road, San Diego, California 92121 (the “Building”), as depicted on Exhibit B attached hereto.
(d)	Term: The term of this Sublease (“Sublease Term”) shall commence on the later of the following two occurrences: 1) the date upon which Subtenant shall have obtained the consent of Master Landlord to this Sublease, which shall be diligently prosecuted, or 2) the date upon which Subtenant obtains clearance of its license applications required for the conduct of its business, which shall be diligently prosecuted (“Sublease Commencement Date”). The Sublease Term shall expire on January 14, 2013, or such earlier date on which this Sublease may be terminated in accordance with the provisions hereof or the provisions of the Master Lease, as incorporated herein (“Sublease Expiration Date”), in which case Sublandlord shall promptly provide Subtenant with prior written notice of such termination. In no event shall Subtenant conduct Subtenant’s business

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operations from the Sublease Premises prior to the Sublease Commencement Date. Subtenant shall have the right to enter the Sublease Premises upon execution of the Sublease prior to the anticipated Sublease Commencement Date for any purposes other than to conduct its business operations, including but not limited to monitoring construction, installing furniture, networks, telecommunication equipment and fiber and any other personal property, provided, however that any such entry shall be subject to Subtenant’s waiver and indemnity provisions set forth in this Sublease and Subtenant shall not interfere with any activity of Sublandlord on the Sublease Premises.

2. Sublease.

Sublandlord hereby subleases to Subtenant, and Subtenant hereby subleases from Sublandlord, the Sublease Premises, together with all appurtenances thereto as provided in the Master Lease, for the Sublease Term and on the terms and conditions contained in this Sublease. Subtenant’s sublease of the Sublease Premises is subject to the terms and conditions of the Master Lease as incorporated herein and further subject to the terms and conditions of this Sublease.

3. Condition of Sublease Premises.

(a)	In entering into this Sublease, Subtenant acknowledges that, except as expressly set forth in this Sublease, Subtenant has not relied upon or been induced by any statements or representations of Sublandlord or any other parties or persons with respect to the physical condition of the Sublease Premises or with respect to any other matter affecting the Sublease Premises, that might be pertinent in considering the leasing of the Sublease Premises or the execution of this Sublease. Subtenant has, on the contrary and except as expressly set forth in this Sublease, relied solely on such investigations, examinations and inspections as Subtenant has chosen to make or have made on its behalf. Upon taking possession of the Sublease Premises, Subtenant shall be deemed to have accepted the Sublease Premises in its then “as-is” “where-is” condition, except for Sublandlord’s remediation obligations set forth in Paragraph 3 of this Sublease.
(b)	Sublandlord represents and warrants that: (i) to the best of its knowledge, as of the Sublease Commencement Date, the Sublease Premises complies with all laws, codes, ordinances and other governmental requirements then applicable to the Sublease Premises and (ii) to the best of its knowledge, as of the Sublease Commencement Date, there are no material defects in the Sublease Premises which would unreasonably interfere with Subtenant’s use and enjoyment of the Sublease Premises.
(c)	By taking possession of the Sublease Premises, Subtenant shall conclusively evidence that the Sublease Premises are fully completed and are suitable for Subtenant’s purposes, that the Building and the Sublease Premises are in good and satisfactory condition, and that Subtenant waives any defect therein.

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(d) Sublandlord shall complete an Exit Assessment as described in Section 14.8 of the Master Lease and shall obtain any required regulatory certification of the Sublease Premises at least five (5) days prior to the Sublease Commencement Date, unless waived in writing by Subtenant.

4. Base Rent.

     During the Sublease Term, Subtenant shall pay Sublandlord, as rent for the Sublease Premises, the Base Rent as set forth in Paragraph 1 of this Sublease, without set-off or deduction whatsoever, except as otherwise provided herein. Base Rent shall be due and payable by Subtenant in immediately available funds, in advance on or before the first day of each calendar month without notice or demand.

5. Additional Rent.

     In addition to the Base Rent under Paragraph 4 above, any and all charges, expenses or other sums Subtenant is required to pay under the terms of this Sublease, including, without limitation, any additional rent required under the Master Lease shall be deemed additional rent (“Additional Rent,” and together with Base Rent, “Subtenant’s Rent”) and shall be paid by Subtenant. Sublandlord shall have the same rights and remedies with respect to payment of Additional Rent as Sublandlord shall have with respect to the Base Rent. Subtenant shall remain responsible for Subtenant’s Rent and any other charges, expenses or other sums which first arise, accrue or are invoiced at any time during or after the expiration of the Sublease Term, whether by Sublandlord or Master Landlord, to the extent they arise or accrue with respect to any period during the Sublease Term from any liabilities or obligations of Subtenant under the provisions of this Sublease (including any obligations under the Master Lease which are incorporated herein as liabilities or obligations of Subtenant). Notwithstanding anything to the contrary set forth in this Sublease, Subtenant shall not be required to pay any Additional Rent, or to perform any obligation that is (i) allocable to any period of time prior to the Sublease Commencement Date or following the expiration or sooner termination of the Sublease (for any reason other than Subtenant’s default), (ii) allocable to any portion of the Master Premises other than the Sublease Premises, (iii) payable as a result of a default by Sublandlord of any of its obligations under the Master Lease, or as a result of the gross negligence or willful misconduct of Sublandlord or any of its agents, employees or contractors, or (iv) are incurred for the sole and exclusive benefit of Sublandlord.

6. Rent Payments.

(a) Subtenant’s Rent and all other charges, expenses or other sums Subtenant is required to pay to Sublandlord hereunder shall be due and payable without billing or demand, and without deduction, set-off or counterclaim, except as otherwise provided herein, in lawful money of the United States of America, at Sublandlord’s address for notices in Paragraph 15 hereof or to such other person or at such other place as Sublandlord may designate in writing, and shall be due and payable by Subtenant to Sublandlord on or before the date specified in this Sublease, provided that if no date is specified as to the applicable payment, then on or before (i) three (3) business days prior to the corresponding date

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	provided in the Master Lease for payment of the same by Sublandlord to Master Landlord (provided that in no event shall such period be shortened to a duration of less than two (2) business days) or (ii) if there is no corresponding date provided in the Master Lease for payment of the same by Sublandlord to Master Landlord, then ten (10) business days after written request from Sublandlord to Subtenant. The failure of Subtenant to make payment in full of Subtenant’s Rent or any other charges, expenses or other sums Subtenant is required to pay to Sublandlord hereunder by the due date provided herein for such payment, shall potentially subject Subtenant to the obligation to pay to Sublandlord interest in accordance with the provisions of Paragraph 18.
(b)	If the Sublease Term commences on a day other than the first day of a calendar month or ends on a day other than the last day of a calendar month, then Subtenant’s Rent for the first and last fractional months of the Sublease Term shall be appropriately prorated.
(c)	Sublandlord may upon reasonable prior written notice (which notice shall include Master Landlord’s address and Master Landlord’s acknowledgement of such notice) instruct Subtenant to make any payment of Subtenant’s Rent directly to Master Landlord, in which event Subtenant shall timely make all such payments so instructed directly to Master Landlord (with a copy of the check to be contemporaneously forwarded by Subtenant to Sublandlord at the time of making of each such payment), and in such event Sublandlord shall have no responsibility to Subtenant for the payment of any such amount, and Subtenant shall be solely responsible for any interest or late charges that may be imposed as a result of any failure of Subtenant to have timely and properly made any such payment to Master Landlord. Any payment made directly by Subtenant to Master Landlord at the request of Sublandlord shall be credited against any of Subtenant’s Rent due under this Sublease as and when received by Master Landlord.

7. Use.

     Subtenant shall use and occupy the Sublease Premises only for the purposes permitted under, and in a manner consistent with, the provisions of the Master Lease. Subtenant will pay for any damage to any part of the Sublease Premises, Building or Center, subject to any applicable waiver of subrogation provisions, if (i) caused by any act or omission by Subtenant or Subtenant’s employees, agent, licensees, contractors or invitees and (ii) Sublandlord is required to pay for such damage under the Master Lease. Subtenant will comply with applicable provisions of the Master Lease and the Center’s Rules and Regulations.

8. Operating Costs, Real Estate Taxes and Utilities.

(a) Commencing on the Sublease Commencement Date, Subtenant shall pay Subtenant’s Pro Rata Share (as defined below) of Operating Costs (as defined in the Master Lease), Real Property Taxes (as defined in the Master Lease), and insurance costs incurred by Sublandlord under the Master Lease. Subtenant’s Pro Rata Share is sixty-nine and three quarters percent (69.75%), which represents the

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	ratio of the Rentable Square Footage of the Sublease Premises to the Rentable Square Footage of the Master Lease Premises (“Subtenant’s Pro Rata Share”). Subtenant’s Pro Rata Share shall be computed by Sublandlord on a monthly or other periodic basis selected by Sublandlord. Subtenant’s shall pay the amount of such pro rata share within ten (10) business days after receipt of a statement from Sublandlord.
(b)	Sublandlord may incur actual, third-party, out-of-pocket costs and expenses related to the operation of the Center or Campus, as more specifically described on Exhibit I attached hereto (collectively, “Additional Operating Costs”). Subtenant shall be responsible for reimbursing Sublandlord for Subtenant’s prorate share of such Additional Operating Costs as provided below. Subtenant’s pro rata share of Additional Operating Costs shall be one hundred percent (100%) with respect to Additional Operating Costs that are incurred by Sublandlord for the sole benefit of the Sublease Premises. To the extent that the Additional Operating Costs are not for the sole benefit of the Sublease Premises and benefit or are related to the Campus and/or Center as a whole, then Subtenant’s pro rata share of the Additional Operating costs shall represent the ratio of the Rentable Square Footage of the Sublease Premises to the Rentable Square Footage of the Campus and/or the Center, as applicable; provided, however, that in no event shall Subtenant have any obligation to reimburse Sublandlord for any Additional Operating Costs that are incurred for the sole benefit of the premises located at 11404 Sorrento Valley Road. Subtenant shall pay the amount of such pro rata share within ten (10) business days after receipt of a statement from Sublandlord along with reasonable documentary evidence of Sublandlord’s payment of such costs. Subtenant shall bear such Additional Operating Costs commencing on the Sublease Commencement Date. The Additional Operating Costs shall be included in the defined term Subtenant’s Rent.
(c)	To the extent not separately metered or monitored with respect to the Sublease Premises, Sublandlord shall use commercially reasonable efforts to provide those utilities set forth in Exhibit G attached hereto (as provided in the Sublease Premises, the “Utilities”). Subtenant shall be responsible for its Pro Rata Share of Sublandlord’s cost of those Utilities in accordance with Paragraph 8(a) above. Sublandlord shall in no way be liable or responsible for any loss, damage or expense the Subtenant may sustain or incur by reason of any change, failure, interruption, interference or defect in the supply or character of the electricity or other Utilities supplied to the Sublease Premises. Sublandlord makes no representation or warranty as the suitability of the Utility service for Subtenant’s requirements, and no such change, failure, defect, unavailability or unsuitability shall constitute any actual or constructive eviction, in whole or in part, or entitle Subtenant to any abatement or diminution of rent, or relieve Subtenant of any of its obligations under this Sublease. Sublandlord shall not be liable in damages or otherwise for any failure or interruption of any Utility service, and no such failure or interruption shall entitle Subtenant to terminate this Sublease or abate the rent due hereunder.

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9. Status of Master Lease.

(a)	Sublandlord and Subtenant confirm and agree that this Sublease is subject and subordinate to all of the terms, covenants and conditions of the Master Lease and to the matters to which the Master Lease shall be subordinate. Without limiting the generality of the foregoing, in the event of termination of Sublandlord’s interest under the Master Lease for any reason (including, without limitation, upon the occurrence of any casualty or condemnation pertaining to the Sublease Premises) this Sublease shall terminate coincidentally therewith and Sublandlord shall return to Subtenant the Security Deposit and any prepaid Subtenant’s Rent not applied to a default of Subtenant within twenty (20) days of such termination.
(b)	Sublandlord represents to Subtenant that the Master Lease represents that entire agreement between Master Landlord and Sublandlord respecting the subject matter thereof, is in full force and effect, and, that to Sublandlord’s knowledge, no default or event that, with the passing of time or the giving of notice or both, would constitute a default, exists on the part of Sublandlord, or, to Sublandlord’s knowledge, the Master Landlord. Sublandlord agrees to perform all of its obligations under the Master Lease and, except for a termination of the Master Lease in connection with a casualty or condemnation pursuant to Sublandlord’s express rights as set forth therein, to maintain the Master Lease in full force and effect, except to the extent that any failure to maintain the Master Lease is due to the failure of Subtenant to comply with any of its obligations under this Sublease. Sublandlord shall not amend or modify the Master Lease in such a manner as to materially adversely affect Subtenant’s use of the Subleased Premises or increase the obligations or decrease the rights of Subtenant hereunder, without the prior written consent of Subtenant, which may be granted or withheld at Subtenant’s sole discretion.
(c)	If Sublandlord fails to pay any sum of money to Master Landlord, or fails to perform any other act on its part to be performed under the Master Lease or this Sublease, then Subtenant may, but shall not be obligated to, make such payment or perform such act. All such sums paid, and all reasonable costs and expenses of performing any such act, shall be payable by Sublandlord to Subtenant upon demand.
(d)	In the event that Subtenant desires to make any alterations or improvements, or otherwise take any action that will require the consent of Master Landlord, then Subtenant shall process such consent with the Master Landlord. Sublandlord shall cooperate, at no cost or expense to Sublandlord in connection with Subtenant obtaining such consent of Master Landlord.

10. Incorporation of Master Lease Terms.

(a) The applicable terms, covenants and conditions contained in the Master Lease are hereby incorporated herein and shall, as between Sublandlord and Subtenant, constitute additional terms, covenants and conditions of this Sublease, except to

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	the extent set forth below. Except as provided in this Paragraph 10, all references in the Master Lease to “Landlord” “Tenant” “Lease” “Premises” “Commencement Date” and “Rent” shall, for purposes of incorporation thereof into this Sublease, mean and refer to “Sublandlord”, “Subtenant”, “Sublease”, “Sublease Premises”, “Sublease Commencement Date” and “Subtenant’s Rent”, respectively. Subtenant agrees to be bound by the provisions of the Master Lease incorporated herein and to keep, observe and perform for the benefit of the Master Landlord and Sublandlord each off the terms, covenants and conditions on its part to be kept, observed and performed hereunder as well as those applicable terms, covenants and conditions to be observed and performed by Sublandlord as Tenant under the Master Lease with respect to the Sublease Premises. Without limiting the foregoing, Subtenant shall not commit or permit to be committed on the Sublease Premises any act or omission which shall violate any term, covenant or condition of the Master Lease. Subtenant shall under no circumstances have any rights with respect to the Sublease Premises greater than Sublandlord’s rights under the Master Lease.
(b)	In the event of conflict between any provision of the Master Lease which is incorporated herein as described above in this Paragraph 10 and any provision of this Sublease, the provisions of this Sublease shall control.
(c)	The following Sections and provisions of the Mater Lease do not apply to, shall not be a part of, and are not incorporated into this Sublease.

		Specific Section Excluded
Section	Subject Matter	If not entire Section)
Section 1	Basic Lease Terms	1.1, 1.2, 1.3, 1.4, 1.5, 1.6, 1.7, 1.9, 1.10
Section 2	The Premises
Section 3	Lease Term
Section 4	Rent	Section 4.1 (Minimum Monthly Rent)
Section 5	Security Deposit
Section 6	Operating Expenses	6.1, 6.2, 6.5
Section 8	Real Property Taxes	8.1, 8.2
Section 16	Damage and Destruction
Section 17	Condemnation
Section 18	Assignment and Subletting	18.2(c)
Section 20	Surrender	20.4
Section 21	Default by Tenant	Section 21(d)(v)
Section 23	Default by Landlord	23.3(a)
Section 24	General Provisions	24.6

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Exhibits B “Rules and Regulations” and C “Sign Criteria” to the Master Lease shall be incorporated into this Sublease but all other exhibits and references thereto shall be excluded.
(d)	References in the following sections of the Master Lease to “Landlord” shall be deemed to refer to Master Landlord only: 7.2, 9.1, 9.4, 9.7, 11.5, and 24.24.
(e)	The reference to “Avanir Pharmaceuticals” in Section 14.2 shall be deemed to refer to Halozyme, Inc.
(f)	Sublandlord and Subtenant agree that Sublandlord shall not be responsible or liable to Subtenant for the performance or non-performance of any obligations of Master Landlord under the Master Lease, and in furtherance thereof agree as follows:

(i)

Notwithstanding anything to the contrary contained in this Sublease, Sublandlord shall not be required to (A) provide or perform any insurance and services or any alterations, improvements, improvement allowances or other construction obligations as to the Sublease Premises, (B) perform any maintenance or make any of the repairs to the Sublease Premises, Building or the Center, (C) comply with any laws or requirements of governmental authorities regarding the maintenance or operation of the Sublease Premises after Subtenant takes possession of the Premises or prior thereto the extent required to be complied with by Master Landlord under the Master Lease, (D) take any other action relating to the operation, maintenance, repair, alteration or servicing of the Sublease Premises that Master Landlord may have agreed to provide, furnish, make, comply with, or take, or cause to be provided, furnished, made, complied with or taken under the Master Lease, or (E) provide Subtenant with any rebate, credit, allowance or other concession required of Master Landlord for any reason pursuant to the Master Lease unless Sublandlord receives a rent abatement with respect to the Sublease Premises and Subtenant is not in default of its obligations under the Sublease, beyond all applicable notice and cure periods. Sublandlord makes no representation or warranty of quiet enjoyment as to any persons claiming by, through or under Master Landlord, but Sublandlord represents and warrants quiet enjoyment as against any person claiming by, through or under Sublandlord.

(ii)

Sublandlord agrees, upon request of Subtenant, to use reasonable efforts, at Subtenant’s sole cost and expense, to cause Master Landlord to provide, furnish, or comply with any of Master Landlord’s obligations under the Master Lease or to provide any required consents or approvals; provided, however, that Sublandlord shall not be obligated to use such efforts or take any action which, in Sublandlord’s reasonable judgment, might give rise

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	to a default by Sublandlord under the Master Lease. Such efforts shall include, without limitation, upon Subtenant’s request, notifying Master Landlord within two (2) business days of its non-performance under the Master Lease and requesting that Master Landlord perform its obligations thereunder. If Master Landlord shall default in the performance of any of its obligations under the Master Lease or at law, Sublandlord shall, upon request and at the expense of Subtenant, cooperate with Subtenant in the prosecution of any reasonable action or proceeding, in order to have Master Landlord (A) make such repairs, furnish such electricity, provide such services or comply with any other obligation of Master Landlord under the Master Lease or as required by law, (B) compensate Subtenant for any earlier default by Master Landlord in the payment or performance of its liabilities and obligations under the Master Lease during the Sublease Term, and/or (C) assigning Sublandlord’s rights under the Master Lease to Subtenant to the extent necessary to permit Subtenant to institute legal proceedings against Master Landlord to obtain the performance of Master Landlord’s obligations under the Master Lease; provided, however, that if Subtenant commences a lawsuit or other action, Subtenant shall pay all costs and expenses incurred in connection therewith (with any matter affecting the Sublease Premises, or a proportionate share of such costs if the matter also effects the Master Premises), and Subtenant shall indemnify Sublandlord against, and hold Sublandlord harmless from, all costs and expenses incurred by Sublandlord in connection therewith.
(iii)	Subtenant shall not make any claim against Sublandlord for any damage which may arise by reason of: (i) the failure of Master Landlord to keep, observe or perform any of its obligations under the Master Lease; or (ii) the acts or omissions of Master Landlord or its employees, agents, licensees, contractors or invitees.
(iv)	Subtenant agrees that any waiver of liability, waiver of subrogation rights, or indemnification provisions in the Master Lease which are incorporated herein as waivers or obligations of Subtenant (including, but not limited to, in Sections 9.5, 12.2, 13 and 14.5 of the Master Lease, to the extent applicable to and incorporated in this Sublease), shall be deemed expanded so as to provide for Subtenant to make such waivers and provide such indemnities not only in favor of Sublandlord, but also in favor of Master Landlord, and the respective affiliated employees, agents and the like of both Sublandlord and Master Landlord as enumerated in such provisions.

(g) In the event that Sublandlord, as Tenant, is entitled to termination rights for all or a portion of the Sublease Premises, including, without limitation, as a result of (i) damage and destruction under Section 16 of the Master Lease, or (ii) a partial condemnation under Section 17 of the Master Lease, then Subtenant shall be entitled to similar termination rights with respect to the portion or all of the

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	Sublease Premises affected, regardless of whether or not Sublandlord seeks to enforce such termination rights under the Master Lease.
(h)	In the event that Sublandlord, as Tenant, receives a rent abatement for all or a portion of the Sublease Premises, including, without limitation, as a result of (i) damage and destruction under Section 16 of the Master Lease, or (ii) a partial condemnation under Section 17 of the Master Lease, then Subtenant shall be entitled to similar abatement of Subtenant’s Rent with respect to the portion or all of the Sublease Premises affected.
(i)	Notwithstanding the incorporation of Section 6 of the Master Lease, Subtenant shall only be responsible for its proportionate share of Operating Costs, Real Property Taxes and insurance costs incurred by the Master Landlord under the Master Lease and charged through to Sublandlord. Subject to the provisions of Section 8(b) above, under no circumstances shall Subtenant be liable for any such costs directly incurred by Sublandord.

11. Insurance.

     Subtenant shall comply at all times and in all respects with the provisions of Section 9 of the Master Lease with regard to the maintenance of insurance by “Tenant”. Such insurance shall name, as additional insureds, Master Landlord, Sublandlord and any other parties required to be named under the terms of the Master Lease, and a policy or certificate thereof shall be provided to Sublandlord not later than two (2) business days prior to the Sublease Commencement Date. The maintenance of insurance coverage with respect to the Sublease Premises and any property of Subtenant shall be the sole obligation of Subtenant. All insurance required to be maintained by Subtenant shall provide for thirty (30) days prior written notice to Sublandlord and Master Landlord in the event of any termination or reduction in coverage of such insurance. All property insurance policies which either Party obtains affecting the Sublease Premises shall include a clause or endorsement denying the insurer any rights of subrogation against the other Party or Master Landlord. Sublandlord and Subtenant waive any rights of recovery against the other for any actually insured injury or loss including all amounts within any deductible or self-insured retention amount applicable to any such insured injury or loss.

12. Surrender of Sublease Premises; Holding Over.

(a) As soon as its right to possession ends, Subtenant shall surrender the Sublease Premises to Sublandlord in as good repair and condition as when Subtenant first occupied, except for reasonable wear and tear and those improvements that Sublandlord made to the Sublease Premises that were not otherwise acquired by Subtenant in connection with this Sublease, or as otherwise consented to by the Master Landlord in the consent. Subtenant will concurrently deliver to Sublandlord all keys to the Sublease Premises, and restore any locks that it has changed to the system that existed at the commencement of the Sublease Term. If possession is not immediately surrendered, Sublandlord may enter upon and take possession of the Sublease Premises and expel or remove Subtenant and any other person who may be occupying the Sublease Premises or any part thereof.

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(b)	(b) At the expiration or termination of the Sublease Term, Sublandlord may require the removal of any or all furniture, personal property and equipment from the Sublease Premises, and the restoration of the Sublease Premises to its prior condition, except for reasonable wear and tear, at Subtenant’s expense. All of Subtenant’s furniture, personal property and equipment on or about the Sublease Premises, shall be removed from the Sublease Premises by Subtenant at the expiration or termination of the Sublease Term. All removals by Subtenant will be accomplished in a good and workmanlike manner so as not to damage any portion of the Center, Building or the Master Lease Premises and Subtenant will promptly repair and restore all damage done except for normal wear and tear. If Subtenant does not so remove any property which it has the right or duty to remove, Sublandlord may immediately either claim it as abandoned property, or remove, store and dispose of it in any manner Sublandlord may choose, at Subtenant’s cost and without liability to Subtenant or any other party.
(c)	As a condition to this Sublease and to facilitate Sublandlord’s performance of its obligations under the Master Lease, Subtenant agrees that Sublandlord shall be entitled to enter the Sublease Premises, upon two (2) business days’ advance notice to Subtenant, at any time during the ten (10) days preceding the Sublease Expiration Date for the purpose of making any repairs or modifications or removing any alterations or other improvements required under the terms of the Master Lease to the extent the same will not materially interfere with Subtenant’s continuous use of the Sublease Premises for the purposes of conducting its business therein. Sublandlord’s right to enter the Sublease Premises under this Paragraph 12(c) shall not be exclusive of any other right of entry Sublandlord may have under the terms of this Sublease.
(d)	If Subtenant does not surrender the Sublease Premises as required and holds over after its right to possession ends, Subtenant shall become a tenant at sufferance only, at a monthly rental rate equal to the greater of (i) one hundred fifty percent (150%) of the total Subtenant’s Rent payable in the last prior full month, or (ii) the amount payable by Sublandlord as “Tenant” under the Master Lease as a result of such holdover, without renewal, extension or expansion rights, and otherwise subject to the terms, covenants and conditions herein specified, so far as applicable. Nothing other than a fully executed written agreement of the Parties creates any other relationship. Subtenant will be liable for Sublandlord’s loss, costs and damage from such holding over, including, without limitation, those from Sublandlord’s delay in delivering possession to other parties. These provisions are in addition to other rights of Sublandlord hereunder and as provided by law.

13. Waiver and Indemnification.

     The provisions of the Master Lease relating to waiver of liability, waiver of subrogation and indemnification shall apply to this Sublease as incorporated by Paragraph 10 hereof.

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14. Hazardous Materials.

(a)

The provisions of the Master Lease relating to Hazardous Materials shall apply to this Sublease as incorporated by Paragraph 10. Notwithstanding anything in this Sublease to the contrary, Subtenant shall have no liability or obligation whatsoever for any Hazardous Materials located in, on or about the Center, Building or Sublease Premises prior to the Sublease Commencement Date or that migrate onto the property on which the Center is located or appear within the Center, Building, or Sublease Premises, provided that neither Subtenant nor its employees, agents, licensees, contractors or invitees was the cause or source of such Hazardous Materials.

(b)

To the extent required by law or for Subtenant’s use and occupancy of the Building and Sublease Premises, Sublandlord shall cause, at its sole cost and expense, any and all such Hazardous Materials discovered in, on or about the Building or Sublease Premises to be removed or otherwise remediated.

15. Notices.

     In the event any notice from the Master Landlord or otherwise relating to this Sublease or the Master Lease is delivered to, or is otherwise received by, Sublandlord, then Sublandlord shall, as soon thereafter as possible, but in any event within forty-eight (48) hours, deliver such notice to Subtenant if such notice is written or advise Subtenant thereof by telephone if such notice is oral. All notices, demands, statements and other communications that may or are required to be given by either Party to the other hereunder shall be in writing and shall be (i) personally delivered to the address or addressee provided herein, or (ii) sent by certified mail, postage prepaid and return receipt requested or (iii) delivered by a reputable messenger or overnight courier service and, in any case, addressed as follows:

If to Sublandlord:	Avanir Pharmaceuticals
	c/o Chief Financial Officer
	101 Enterprise, Suite 300
	Aliso Viejo, CA 92656
	Attention: Michael J. Puntoriero
With a copy to:	Goodwin Procter LLP
	4370 La Jolla Village Drive, Suite 400
	San Diego, CA 92122
	Fax: (858) 232-0349
	Attention: Ryan Murr, Esq.
If to Subtenant prior to the Sublease Commencement Date:	Halozyme, Inc.
	11588 Sorrento Valley Rd, Suite 17
	San Diego, CA 92121
	Fax: (858) 259-2539
	Attention: Chief Financial Officer

13

If to Subtenant after the Sublease Commencement Date	Halozyme, Inc.
	11388 Sorrento Valley Rd
	San Diego, CA 92121
	Fax: TBD
	Attention: Chief Financial Officer
With a copy to:	Morrison & Foerster LLP
	425 Market Street
	San Francisco, CA 94105-2482
	Fax: (415) 268-7522
	Attention: Derek Boswell, Esq.

Any notice or document addressed to the Parties hereto at the respective addresses set forth on this Sublease or at such other address as they may specify from time to time by written notice delivered in accordance with this Paragraph 15 shall be considered delivered (w) in the case of personal delivery, at the time of delivery or refusal to accept delivery; (x) on the third day after deposit in the United States mail, certified mail, postage prepaid; (y) in the case of reputable messenger or overnight courier service, upon delivery or refusal to accept delivery; or (z) in the event of failure of delivery by reason of changed address of which no notice was delivered or refusal to accept delivery, as of the date of such failure or refusal. If any such day of delivery is not a business day, the notice or document will be considered delivered on the next business day.

16. Security Deposit.

     Within one business day of the Effective Date, Subtenant shall provide Sublandlord with a letter of credit for the full initial amount of the Security Deposit listed in Paragraph 1(a) (the “Letter of Credit”). Such Letter of Credit shall be in a form and substance reasonably acceptable to Sublandlord (with the form attached hereto as Exhibit “D” deemed acceptable). The Letter of Credit shall have an original term of no less than one year with provisions for extensions unless sixty (60) days prior notice is given to Sublandlord by the issuing bank Subtenant shall keep the Letter of Credit in force throughout the Term and for sixty days after (i) the Sublease Expiration Date of the Term or (ii) the earlier termination of the Term, except that if such earlier termination is based on Subtenant’s default, Subtenant shall keep the Letter of Credit in force until sixty days after the date when the Term would have expired had it not been earlier terminated. Subtenant shall deliver to Sublandlord a renewal Letter of Credit no later than thirty days prior to the expiration date of any Letter of Credit issued under this Paragraph 16, and if Subtenant fails to do so, Sublandlord may draw the entire amount of the expiring Letter of Credit and hold the proceeds in cash for the same purposes as the Letter of Credit. The Letter of Credit shall be issued by Silicon Valley Bank (or other bank satisfactory to and approved in advance by Sublandlord). The Letter of Credit shall be reduced to $300,000 on July 1, 2008. On the third anniversary of the Sublease Commencement Date and thereafter on each anniversary thereof, the principal amount of the Letter of Credit shall be reduced by $50,000; provided, however, that Parent’s unrestricted cash and marketable securities on hand are greater than the amount of cash used in operations for the prior 6 months), as reflected in Halozyme Therapeutics, Inc.’s most recently filed 10-Q or 10-K.

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17. Assignment and Subletting.

     Subject to the prior written consent of both Sublandlord (which shall not be unreasonably withheld, conditioned or delayed) and Master Landlord, Subtenant shall have the same rights as Sublandlord enjoys as Tenant under such portions of Section 18 of the Master Lease as are incorporated herein, to assign this Sublease or sub-sublease the Sublease Premises. Except in connection with a Permitted Transfer (as defined below), Sublandlord shall have the right to fifty percent (50%) of all subrent or other consideration (net of Subtenant’s reasonable expenses in connection with such assignment or sub sublease, including, without limitation, brokerage commissions, legal costs, and tenant improvement costs or allowances) to be paid to Subtenant under the terms of any assignment or sub sublease in excess of the total Subtenant’s Rent due hereunder. Notwithstanding anything in this Sublease to the contrary, Subtenant may assign the Sublease or sublet the Sublease Premises, or any portion thereof, without Sublandlord’s consent, to any entity which controls, is controlled by, or is under common control with Subtenant; to any entity which results from a merger of, reorganization of, or consolidation with Subtenant; to any entity which acquires substantially all of the stock or assets of Subtenant, as a going concern, with respect to the business that is being conducted in the Sublease Premises (hereinafter each a “Permitted Transfer”). In addition, a sale or transfer of the majority capital stock of Subtenant shall be deemed a Permitted Transfer if (1) such sale or transfer occurs in connection with any bona fide financing or capitalization for the benefit of Subtenant, or (2) Subtenant is or becomes a publicly traded corporation. Sublandlord shall have no right to terminate the Lease in connection with, and shall have no right to any sums or other economic consideration resulting from any Permitted Transfer.

18. Interest on Subtenant’s Obligations.

     Any Subtenant’s Rent or other charge, expense or other sum due from Subtenant to Sublandlord under this Sublease which is not paid on the date due, shall bear interest from the date such payment is due until paid (computed on the basis of a 365-day-year) at the lesser of (a) the maximum lawful rate per annum or (b) twelve percent (12%) per annum. The payment of such interest shall not excuse or cure a default by Subtenant hereunder.

19. Authority.

     By delivering this Sublease, each Party hereby represents and warrants to the other that such execution and delivery has been duly authorized by all necessary corporate or partnership action and that the person(s) executing same have been duly authorized to do so.

20. Signage and Access.

     Subject to Master Landlord’s approval, Subtenant shall have the right to install signage at the Center, Building and Sublease Premises, at its sole cost and expense, subject to, and in compliance with, the provisions of the Master Lease. In addition, subject to Master Landlord’s approval, Subtenant shall have the right, at its sole cost and expense, to install signage that is visible from Sorrento Valley Road, subject to the provisions of the Master Lease. At its cost, Subtenant shall remove any such signage at the expiration of the Sublease Term and repair any damage caused thereby.

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21. Commissions.

     Sublandlord has entered into certain listing agreements with Grubb & Ellis/BRE Commercial, pursuant to which Sublandlord shall pay any commission payable in connection with this Sublease. Sublandlord hereby represents and warrants to Subtenant, and Subtenant hereby represents and warrants to Subtenant, that no other broker or finder has been engaged by it, respectively, in connection with any of the transactions contemplated by this Sublease or to its knowledge is in any way connected with any such transactions. In the event of any other claims for brokers’ or finders’ fees or commissions in connection with the negotiation, execution or consummation of this Sublease, then Subtenant shall indemnify, save harmless and defend Sublandlord from and against such claims if they shall be based upon any statement, representation or agreement by Subtenant, and Sublandlord shall indemnify, save harmless and defend Subtenant from and against such claims if they shall be based upon any statement, representation or agreement by Sublandlord.

22. Captions.

     The captions in this Sublease are used for convenience and reference only and are not to be taken as part of this Sublease or to be used in determining the intent of the Parties or otherwise interpreting this Sublease.

23. Successors and Assigns.

     Subject to the restrictions on assignment set forth in this Sublease, this Sublease shall be binding upon and inure to the benefit of Sublandlord and Subtenant and their respective successors and assigns.

24. Parking.

     Subtenant shall have the non-exclusive right to use all parking areas available to Sublandlord under the Master Lease, which are adjacent to 11404 Sorrento Valley Road, provided Subtenant shall not use more than fifty-two (52) spaces at any one time, which represents Subtenant’s Pro Rata Share or parking spaces at the Center.

25. Master Landlord Consent.

     This Sublease shall not become effective and shall not be deemed to be an offer to sublease or create any rights or obligations between Subtenant or Sublandlord unless and until Sublandlord and Subtenant have executed and delivered the same, and Master Landlord has executed and delivered a consent to this Sublease in the form attached hereto as Exhibit E, with such changes as may reasonably be accepted by Subtenant and Sublandlord as long as Master Landlord does not change the non-disturbance language of paragraph 4 of the consent set forth in Exhibit E. Subtenant shall use commercially reasonable efforts to obtain the consent of Master Landlord promptly following mutual execution hereon. If no such consent to this Sublease is given by Master Landlord within thirty (30) days after the delivery of a copy of the fully executed Sublease to Master Landlord, then either Sublandlord or Subtenant shall have the right, by written notice to the other, to terminate this Sublease at any time prior to such consent from

16

Master Landlord being given. By delivering this Sublease, each Party hereby represents and warrants to the other that such execution and delivery has been duly authorized by all necessary corporate or partnership action and that the person(s) executing same have been duly authorized to do so.

     In the event the Master Lease is terminated prior to the expiration of the Sublease Term, whether as a result of a voluntary termination by Sublandlord or a default on the part of Sublandlord, this Sublease shall, upon notice from Master Landlord to Subtenant, remain in full force and effect as a direct lease between Subtenant and Master Landlord (in which event Subtenant shall attorn to Master Landlord).

26. Financial Statements.

     Subtenant represents, warrants and covenants that any financial statements heretofore furnished to Sublandlord, in connection with this Sublease, are accurate and are not materially misleading.

27. Furniture, Fixtures and Equipment.

     As of the Sublease Commencement Date, Sublandlord does hereby sell, transfer, and convey to Subtenant the furniture, fixtures and equipment described on Exhibit C attached hereto (the “FF&E”) for a purchase price of $173,000.00. Sublandlord covenants and warrants that it has full legal title to the FF&E and that the FF&E is free and clear of any and all security agreements, financings statements or other liens and encumbrances. Except as set froth in the immediately preceding sentence, the FF&E is sold to Subtenant in its then “as-is” condition, and Sublandlord makes no, and Subtenant acknowledges it is not relying on any, representation or warranty of any kind whatsoever, express or implied, as to any other matters concerning the FF&E including, without limitation, any implied warranties of merchantability or fitness for a particular purpose.

28. Parent Guaranty.

     Concurrent with the execution of this Sublease, Parent covenants and agrees to execute a guaranty substantially in the form attached hereto as Exhibit H.

29. Miscellaneous.

(a)	Time is of the essence of each and every term of this Sublease.
(b)	Subtenant waives any right it may now or hereafter have (i) for exemption of property from liability for debt or for distress for rent or (ii) relating to notice or delay in levy of execution in case of eviction for nonpayment of rent.
(c)	If there is more than one party constituting Subtenant, their obligations are joint and several, and Sublandlord need not first proceed against all of them before proceeding against any or all of the others.

17

(d)	Subtenant acquires no rights by implication from this Sublease, and is not a beneficiary of any past, current or future agreements between Sublandlord and third parties.
(e)	California law governs this Sublease. Neither Party may record this Sublease or a copy or memorandum thereof. Submission of this Sublease to Subtenant is not an offer, and Subtenant will have no rights hereunder until each Party executes a counterpart and delivers it to the other Party.
(f)	This Sublease cannot be changed or terminated orally. All informal understandings and agreements, representation or warranties heretofore made between the Parties are merged in this Sublease, which alone fully and completely expresses the agreement between Sublandlord and Subtenant as to the subleasing of the Sublease Premises.
(g)	Each and every indemnification obligation set forth in this Sublease, or incorporated into this Sublease from the Master Lease, shall survive the expiration or earlier termination of the term of this Sublease.
(h)	If, for any reason, any suit be initiated between Sublandlord and Subtenant to interpret or enforce any provision of this Sublease, the prevailing Party shall be entitled to recover from the other Party its legal costs, expert witness expenses, and reasonable attorneys’ fees, as fixed by the court.
(i)	The Parties mutually acknowledge that this Sublease has been negotiated at arm’s length. The provisions of this Sublease shall be deemed to have been drafted by all of the Parties and this Sublease shall not be interpreted or constructed against any Party solely by virtue of the fact that such Party or its counsel was responsible for its preparation.
(j)	This Sublease may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one instrument.

[Remainder of page intentionally blank]

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     IN WITNESS WHEREOF, this Sublease has been executed as of the day and year first above written.

“SUBLANDLORD”:
AVANIR PHARMACEUTICALS,
a California corporation
By:	/s/ Michael J. Puntoriero
Name:	Michael J. Puntoriero
Title:	CFO
“SUBTENANT”:
HALOZYME, INC.,
a California corporation
By:	/s/ Jonathan Lim
Name:	Jonathan Lim
Title:	President and CEO

The undersigned “Parent” has executed this Sublease for the purpose of affirming its obligation under Section 28.

“PARENT”:
HALOZYME THERAPEUTICS, INC.,
a Nevada corporation
By:	/s/ Jonathan Lim
Name:	Jonathan Lim
Title:	President and CEO

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EXHIBIT A

MASTER LEASE

(Intentionally omitted)

A-1

EXHIBIT B

FLOOR PLAN OF SUBLEASE PREMISES

(Intentionally omitted)

B-1

EXHIBIT C

FURNITURE, FIXTURES AND EQUIPMENT

Avanir Office Furniture:

Note: Chairs included only where stated so.

White and Silver Furniture:

25 – private office units – U shaped desk, (2 or 3) wall mounted upper cabinets, 2-drawer lateral file cabinet, rolling 3-drawer unit (not including chairs)

9 – cubicles – U shaped desk w/transaction counter, (3) wall mounted upper cabinets, 2-drawer lateral file cabinet, rolling 3-drawer unit.

2 – large cubicles – L shaped desk, (2) partition mounted upper cabinets, 2-drawer lateral file cabinet, rolling 3-drawer unit

1 – 3 person office unit – 9’ X 12’ L shaped desk,(4) wall mounted upper cabinets, 2-drawer lateral file cabinet

1 – reception unit – same as cubicles except no upper cabinets

1 – conference room table, seats 8 – (2) end pieces, (2) mid pieces w/cable trays, pieces on rollers and interlock with each other

1 – conference room table w/chairs, seats 8 – (2) end pieces, (2) mid pieces w/cable trays, pieces on rollers and interlock with each other

4 – 3 person work stations (each 3 person station mounts to 1 wall) – partitioned work area, work surface, upper and lower cabinets,
use flat screen monitors mounted on wall

Black & Maple Office Units

5 – desks w/return, credenza, hutch, bookcase
4 – 3’ X 5’ desks
1 – 3’ X 5’ desk w/return

Office Chairs – 25 Herman Miller Aeron

Conference Center Furniture

30 tables – seats 3, rigid detachable tops, folding legs, with rolling racks for storage 100 chairs – with rolling storage racks

Boardroom Table w/ chairs, Seats 20 – Granite table top, 4 pedestals w/data ports, etc.
6 ft. X 15ft. 6 in.

Conference Table w/chairs (8) – Dark wood, racetrack shape

CEO’s Desk - Granite top, 2 work surfaces

C-1

High Density Rolling File System – 12 cabinet system

High Density Rolling File System – 13 cabinet system

Additional Items

Whiteboards – Multiple throughout buildings
Intercom system for both buildings with an emergency evacuation announcement system

Café Furniture

(We use Conf. Ctr. tables and chairs)
10 – Barstools
3 – Top of the line Microwave Ovens
2 – Refrigerators/freezers w/icemakers

Kitchens

2 – Refrigerator/Freezers w/icemakers
2 – Microwave ovens
6 – Reverse osmosis water filtering systems
               (2 in Café, 1 in every kitchen – upstairs, Boardroom, downstairs, Conference Center)
1 – Refrigerator under counter in Boardroom kitchen
1 – Freezer under counter in Boardroom kitchen

Misc.

Multiple first aid boxes throughout bldgs. (need refill)
Multiple clocks throughout

VIVARIUM ASSETS
Item Description	Serial Number		Asset Tag #	Disposition
Aluminum Dunnage Racks: 5' x 18" 16 ea
Aluminum Dunnage Racks: 4' x 18" 6 ea
Aluminum Dunnage Racks: 3' x 18" 4 ea
Baker SterilGard BSC Class II Type A/B3 2 feet		SC46077V	00076 LDK	proc room
EZ Anesthesia — Isoflurane vaporizer with flow meter, manifold and stand and oxygen regulator and accessories		EZ061			proc room
EZ Anesthesia — Model EP-1100 low pressure CO2 regulator w/6' hose & quick disconnect					11404
Gaymar T/Pump Model TP-500		TP500 B30D78
Primus Autoclave PSS5-B-MESD		15873			11404
Scientec Bottle Filler w/20 bottle racks		660	20501 AVN		11404
Washer, Bottle and Cage, Steris Basil CW400 double door		3604803001	20772 AVN		11404
LabConco Bedding Disposal Station			20614 AVN		11404
Hotpoint Refrigerator/Freezer			00668 LDK		proc room
Kenmore Refrigerator/Freezer Model 106.74942400		ER3829566	20818 AVN		rm 138
Kenmore Box Freezer 25"W x 22"D — ANCIENT					11404
Labconco 6' BSC, Model 3623043726		—	—		rm 144
Labconco 6' BSC, Model 3623043726		—	—		rm 145
Labconco 6' BSC, Model 3623043726		—	—		rm 146
Sentry Fire Safe Model S3417

C-2

VIVARIUM ASSETS
Item Description	Serial Number	Asset Tag #	Disposition
5' SS table w/drawer		20624 AVN	rm 158
5' SS table w/drawer		20626 AVN	rm 157
5' SS table			hall
5' SS table with splashguard
5' SS table
5' SS table with drawer and splashguard
Allentown Caging Equipment SS 7 shelf rack - 9 each
Allentown Caging Equipment SS 5 shelf rack - 2 each
Allentown Caging Equipment 2x3 Rabbit Rack		20613 AVN
Rabbit Restrainer - unused PlasLabs Model 502-AR
Rabbit Restrainer - unused in box Plas Labs Model 503-XL
Nalgene Mouse Metabolic Cages w/stands & accessories 5 sets
Eagle Model 1924 12 gal. Capacity Flammable Cabinet
vortexers 3 ea
red biohazard trash containers w/step-on lid, 5 ea
scales - multiple AccuLab for animal weights
All caging and assorted “soft” items not listed
Stainless steel shelving on walls

ADDITIONAL PROPERTY

1.	Networking Equipment – 1, 5308 Switch
2.	Videoconferencing Equipment in the board room
3.	Audio-visual Equipment in the conference center
4.	1, 4 ft. biosafety cabinet
5.	2, double-stack CO2 incubators
6.	Autoclave (currently located in the vivarium at 11388 Sorrento Valley Road)
7.	Generators:

a.	11388 Sorrento Valley Road
	Spectrum Detroit Diesel
	Sales order # 1867450
	Generator Set Model 300DSE
	S/N 0707976
	Spec GM13659-GA1S
	Gen. Model 4VA13
	Hours - 182.7
b.	11404-11408
	Spectrum Detroit Diesel
	Sales order # 3270063
	Generator Set Model 300DSE
	S/N 0749628
	Spec GM13659-GA1S
	Gen. Model 4VA13
	Hours - 150.6

C-3

EXHIBIT D

FORM OF LETTER OF CREDIT

BENEFICIARY:
AVANIR PHARMACEUTICALS, INC.
CORPORATE HEADQUARTERS
101 ENTERPRISE, SUITE
ALISO VIEJO, CA 92656

AS “SUBLANDLORD”

APPLICANT:
HALOZYME, INC.
11588 SORRENTO VALLEY ROAD, SUITE 17
SAN DIEGO, CA 92121

AS “SUBTENANT”

AMOUNT: US $400,000.00 (FOUR HUNDRED THOUSAND AND NO/100 U.S.)
DOLLARS)

EXPIRATION DATE:                                  , 20                     

LOCATION: SANTA CLARA, CALIFORNIA

LADIES AND GENTLEMEN:

WE HEREBY ESTABLISH OUR IRREVOCABLE STANDBY LETTER OF CREDIT NO. SVBSF ___ IN YOUR FAVOR. THIS LETTER OF CREDIT IS AVAILABLE BY SIGHT PAYMENT WITH OURSELVES ONLY AGAINST PRESENTATION AT THIS OFFICE OF THE FOLLOWING DOCUMENTS:

1.	THE ORIGINAL OF THIS LETTER OF CREDIT AND ALL AMENDMENT (S), IF ANY.
2.	YOUR SIGHT DRAFT DRAWN ON US IN THE FORM ATTACHED HERETO AS EXHIBIT “A”.
3.	A DATED CERTIFICATION PURPORTEDLY SIGNED BY AN AUTHORIZED OFFICER OR REPRESENTATIVE OF THE BENEFICIARY, FOLLOWED BY HIS/HER PRINTED NAME AND DESIGNATED TITLE, STATING EITHER OF THE FOLLOWING WITH INSTRUCTIONS IN BRACKETS THEREIN COMPLIED WITH:

A) “THE AMOUNT DRAWN PER THE ACCOMPANYING SIGHT DRAFT IS DUE TO SUBLANDLORD UNDER THAT CERTAIN SUBLEASE AGREEMENT DATED [INSERT DATE] BY AND BETWEEN HALOZYME, INC. AS SUBTENANT, AND BENEFICIARY, AS SUBLANDLORD BECAUSE SUBTENANT

D-1

OWES SUCH AMOUNTS AS A DRAW UPON SUBTENANT’S SECURITY DEPOSIT AS DEFINED IN SECTION 17 THEREUNDER.”

OR

B) “SUBLANDLORD HAS NOT RECEIVED AN AMENDMENT EXTENDING THE EXPIRATION DATE OF SILICON VALLEY BANK IRREVOCABLE STANDBY LETTER OF CREDIT NO. SVBSF                     FOR AN ADDITIIONAL ONE (1) YEAR PERIOD OR AN ACCEPTABLE LETTER OF CREDIT IN REPLACEMENT AND SUBLANDLORD IS THUS ENTITLED TO DRAW UPON THE BALANCE OF THIS LETTER OF CREDIT.”

     THE SUBLEASE AGREEMENT MENTIONED ABOVE IS FOR IDENTIFICATION PURPOSES ONLY AND IS NOT INTENDED THAT SAID SUBLEASE AGREEMENT BE INCORPORATED HEREIN OR FORM PART OF THIS LETTER OF CREDIT.

PARTIAL AND MULTIPLE DRAWINGS ARE ALLOWED. IN THE EVENT BENEFICIARY ELECTS TO DRAW UPON THIS LETTER OF CREDIT FOR LESS THAN THE FULL STATED AMOUNT HEREOF, THE AMOUNT AVAILABLE UNDER THIS LETTER OF CREDIT WILL BE REDUCED BY THE AMOUNT OF ANY PARTIAL DRAWINGS HEREUNDER.

     THIS LETTER OF CREDIT MUST ACCOMPANY ANY DRAWINGS HEREUNDER FOR ENDORSEMENT OF THE DRAWING AMOUNT AND WILL BE RETURNED TO THE BENEFICIARY UNLESS IT IS FULLY UTILIZED.

     WE AGREE THAT WE SHALL HAVE NO DUTY OR RIGHT TO INQUIRE AS TO THE BASIS UPON WHICH BENEFICIARY HAS DETERMINED THAT THE AMOUNT IS DUE AND OWING OR HAS DETERMINED TO PRESENT TO US ANY DRAFT UNDER THIS LETTER OF CREDIT, AND THE PRESENTATION OF SUCH DRAFT IN STRICT COMPLIANCE WITH THE TERMS AND CONDITIONS OF THIS LETTER OF CREDIT, SHALL AUTOMATICALLY RESULT IN PAYMENT TO THE BENEFICIARY.

     THE AMOUNT OF THIS LETTER OF CREDIT SHALL BE AUTOMATICALLY DECREASED WITHOUT AMENDMENT(S) TO THE NEW AGGREGATE AMOUNT(S) ON THE EFFECTIVE DATES BELOW, PROVIDED THAT THE AVAILABLE AMOUNT EXCEEDS THE AGGREGATE AMOUNT(S) LISTED BELOW AND ISSUING BANK HAS NOT RECEIVED WRITTEN NOTICE FROM AN AUTHORIZED REPRESENTATIVE OF THE BENEFICIARY BY OVERNIGHT COURIER AT LEAST TEN (10) BUSINESS DAYS PRIOR TO ANY SCHEDULED REDUCTION DATE, ADVISING ISSUING BANK THAT APPLICANT IS IN DEFAULT AND ANY SCHEDULED DECREASE IN THE AGGREGATE AVAILABLE AMOUNT SHOULD NOT BE EFFECTED:

D-2

EFFECTIVE DATE(S)	NEW AGGREGATE AMOUNT(S)
JULY 1, 2008	US$	300,000.00
[INSERT DATE]	US$	250,000.00
[INSERT DATE]	US$	200,000.00
[INSERT DATE]	US$	150,000.00
[INSERT DATE]	US$	100,000.00
[INSERT DATE]	US$	50,000.00

     THIS LETTER OF CREDIT SHALL BE AUTOMATICALLY EXTENDED FOR AN ADDITIONAL PERIOD OF ONE YEAR, WITHOUT AMENDMENT, FROM THE PRESENT OR EACH FUTURE EXPIRATION DATE UNLESS AT LEAST SIXTY (60) DAYS PRIOR TO THE THEN CURRENT EXPIRATION DATE WE NOTIFY YOU BY REGISTERED MAIL/OVERNIGHT COURIER SERVICE AT THE ABOVE ADDRESS THAT THIS LETTER OF CREDIT WILL NOT BE EXTENDED BEYOND THE CURRENT EXPIRATION DATE. BUT IN ANY EVENT THIS LETTER OF CREDIT WILL NOT BE EXTENDED BEYOND                             , 20       , WHICH SHALL BE THE FINAL EXPIRATION DATE OF THIS LETTER OF CREDIT.

THE DATE THIS LETTER OF CREDIT EXPIRES IN ACCORDANCE WITH THE ABOVE PROVISION IS THE “FINAL EXPIRATION DATE”. UPON THE OCCURRENCE OF THE FINAL EXPIRATION DATE THIS LETTER OF CREDIT SHALL FULLY AND FINALLY EXPIRE AND NO PRESENTATIONS MADE UNDER THIS LETTER OF CREDIT AFTER SUCH DATE WILL BE HONORED.

THIS LETTER OF CREDIT IS TRANSFERABLE BY US, THE ISSUING BANK, ONE OR MORE TIMES, BUT IN EACH INSTANCE ONLY TO A SINGLE BENEFICIARY AS TRANSFEREE AND ONLY UP TO THE THEN AVAILABLE AMOUNT IN FAVOR OF ANY NOMINATED TRANSFEREE THAT IS THE SUCCESSOR IN INTEREST TO BENEFICIARY (“TRANSFEREE”), ASSUMING SUCH TRANSFER TO SUCH TRANSFEREE WOULD BE IN COMPLIANCE WITH THEN APPLICABLE LAW AND REGULATION, INCLUDING BUT NOT LIMITED TO THE REGULATIONS OF THE U. S. DEPARTMENT OF TREASURY AND U. S. DEPARTMENT OF COMMERCE. AT THE TIME OF TRANSFER, THE ORIGINAL LETTER OF CREDIT AND ORIGINAL AMENDMENT(S), IF ANY, MUST BE SURRENDERED TO US AT OUR ADDRESS INDICATED IN THIS LETTER OF CREDIT TOGETHER WITH OUR LETTER OF TRANSFER DOCUMENTATION AS PER ATTACHED EXHIBIT “B” DULY EXECUTED. THE CORRECTNESS OF THE SIGNATURE AND TITLE OF THE PERSON SIGNING THE

D-3

TRANSFER FORM MUST BE VERIFIED BY BENEFICIARY’S BANK. BENEFICIARY SHALL PAY OUR TRANSFER FEE OF ¹/4 OF 1% OF THE TRANSFER AMOUNT (MINIMUM US$250.00) UNDER THIS LETTER OF CREDIT. ANY REQUEST FOR TRANSFER WILL BE EFFECTED BY US SUBJECT TO THE ABOVE CONDITIONS. ANY TRANSFER OF THIS LETTER OF CREDIT MAY NOT CHANGE THE PLACE OR DATE OF EXPIRATION OF THE LETTER OF CREDIT FROM OUR ABOVE SPECIFIED OFFICE. EACH TRANSFER SHALL BE EVIDENCED BY OUR ENDORSEMENT ON THE REVERSE OF THE LETTER OF CREDIT AND WE SHALL FORWARD THE ORIGINAL OF THE LETTER OF CREDIT SO ENDORSED TO THE TRANSFEREE.

DRAFT(S) AND DOCUMENTS MUST INDICATE THE NUMBER AND DATE OF THIS LETTER OF CREDIT.

     DOCUMENTS MUST BE DELIVERED TO US DURING REGULAR BUSINESS HOURS ON A BUSINESS DAY OR FORWARDED TO US BY OVERNIGHT DELIVERY SERVICE TO: SILICON VALLEY BANK, 3003 TASMAN DRIVE, 2^ND FLOOR, MAIL SORT HF210, SANTA CLARA, CALIFORNIA 95054, ATTENTION: GLOBAL FINANCIAL SERVICES – STANDBY LETTER OF CREDIT DEPARTMENT (THE “BANK’S OFFICE”).

AS USED HEREIN, THE TERM “BUSINESS DAY” MEANS A WEEKDAY OTHER THAN A BANK HOLIDAY (I.E. A HOLIDAY OBSERVED BY THE FEDERAL RESERVE SYSTEM OR OTHERWISE GENERALLY OBSERVED BY BANKS IN SANTA CLARA). NOTWITHSTANDING ANY PROVISION TO THE CONTRARY IN THE UCP (AS HEREINAFTER DEFINED), IF THE EXPIRATION DATE OR THE FINAL EXPIRATION DATE IS NOT A BUSINESS DAY THEN SUCH DATE SHALL BE AUTOMATICALLY EXTENDED TO THE NEXT SUCCEEDING DATE WHICH IS A BUSINESS DAY.

     WE HEREBY ENGAGE WITH YOU THAT DRAFT(S) DRAWN AND/OR DOCUMENTS PRESENTED UNDER AND IN ACCORDANCE WITH THE TERMS AND CONDITIONS OF THIS LETTER OF CREDIT SHALL BE DULY HONORED UPON PRESENTATION TO SILICON VALLEY BANK, IF PRESENTED ON OR BEFORE THE EXPIRATION DATE OF THIS CREDIT.

IF ANY INSTRUCTIONS ACCOMPANYING A DRAWING UNDER THIS LETTER OF CREDIT REQUEST THAT PAYMENT IS TO BE MADE BY TRANSFER TO YOUR ACCOUNT WITH ANOTHER BANK, WE WILL ONLY EFFECT SUCH PAYMENT BY FED WIRE TO A U.S. REGULATED BANK, AND WE AND/OR SUCH OTHER BANK MAY RELY ON AN ACCOUNT NUMBER SPECIFIED IN SUCH INSTRUCTIONS EVEN IF THE NUMBER IDENTIFIES A PERSON OR ENTITY DIFFERENT FROM THE INTENDED PAYEE.

     THIS LETTER OF CREDIT IS SUBJECT TO THE UNIFORM CUSTOMS AND PRACTICE FOR DOCUMENTARY CREDITS (1993 REVISION), INTERNATIONAL CHAMBER OF COMMERCE, PUBLICATION NO. 500, (THE “UCP”).

D-4

SILICON VALLEY BANK,

(FOR BANK USE ONLY)	(FOR BANK USE ONLY)
AUTHORIZED SIGNATURE	AUTHORIZED SIGNATURE

D-5

EXHIBIT “A”

(i)
(ii)	SIGHT DRAFT/BILL OF EXCHANGE

      DATE:                                                                                                    REF. NO.                                           

     AT SIGHT OF THIS BILL OF EXCHANGE

     PAY TO THE ORDER OF                                                                                                
US$                                          

           U.S. DOLLARS
                                                                                                                                                                                  

“DRAWN UNDER SILICON VALLEY BANK, SANTA CLARA, CALIFORNIA, IRREVOCABLE STANDBY LETTER OF CREDIT NUMBER NO. SVBSF                      DATED                      , 20               ”

     TO: SILICON VALLEY BANK

3003 TASMAN DRIVE	[INSERT NAME OF BENEFICIARY]
SANTA CLARA, CA 95054
	Authorized Signature

GUIDELINES TO PREPARE THE SIGHT DRAFT OR BILL OF EXCHANGE:

1.	DATE INSERT ISSUANCE DATE OF DRAFT OR BILL OF EXCHANGE.
2.	REF. NO.INSERT YOUR REFERENCE NUMBER IF ANY.
3.	PAY TO THE ORDER OF:INSERT NAME OF BENEFICIARY
4.	US$ INSERT AMOUNT OF DRAWING IN NUMERALS/FIGURES.
5.	U.S. DOLLARSINSERT AMOUNT OF DRAWING IN WORDS.
6.	LETTER OF CREDIT NUMBERINSERT THE LAST DIGITS OF OUR STANDBY L/C NUMBER THAT PERTAINS TO THE DRAWING.
7.	DATED INSERT THE ISSUANCE DATE OF OUR STANDBY L/C.
	NOTE: BENEFICIARY SHOULD ENDORSE THE BACK OF THE SIGHT DRAFT OR BILL OF EXCHANGE AS YOU WOULD A CHECK.

IF YOU NEED FURTHER ASSISTANCE IN COMPLETING THIS SIGHT DRAFT OR BILL OF EXCHANGE, PLEASE CALL OUR L/C PAYMENT SECTION AND ASK FOR: EFRAIN TUVILLA AT (408) 654-6349 OR ALICE DALUZ AT (408) 654-7120.

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EXHIBIT “B”

DATE:

TO: SILICON VALLEY BANK

        3003 TASMAN DRIVE

        SANTA CLARA, CA 95054

        ATTENTION: GLOBAL FINANCIAL SERVICES

RE: SILICON VALLEY BANK, SANTA CLARA, CALIFORNIA

        IRREVOCABLE STANDBY LETTER OF CREDIT NO. SVBSF                    

        DATED                      , 20                       AMOUNT: US$                                           .

GENTLEMEN:

              FOR VALUE RECEIVED, THE UNDERSIGNED BEING A DULY AUTHORIZED REPRESENTATIVE OR OFFICER OF THE BENEFICIARY (“BENEFICIARY”) HEREBY IRREVOCABLY TRANSFERS TO:

(NAME OF TRANSFEREE)

(ADDRESS)

           (“TRANSFEREE”) ALL RIGHTS OF THE BENEFICIARY TO DRAW UNDER THE ABOVE LETTER OF CREDIT UP TO ITS AVAILABLE AMOUNT AS SHOWN ABOVE AS OF THE DATE OF THIS TRANSFER.

           BY THIS TRANSFER, ALL RIGHTS OF THE UNDERSIGNED BENEFICIARY IN SUCH LETTER OF CREDIT ARE TRANSFERRED TO THE TRANSFEREE. TRANSFEREE SHALL HAVE THE SOLE RIGHTS AS BENEFICIARY THEREOF, INCLUDING SOLE RIGHTS RELATING TO ANY AMENDMENTS, WHETHER INCREASES OR EXTENSIONS OR OTHER AMENDMENTS, AND WHETHER NOW EXISTING OR HEREAFTER MADE. ALL AMENDMENTS ARE TO BE ADVISED DIRECTLY TO THE TRANSFEREE WITHOUT NECESSITY OF ANY CONSENT OF OR NOTICE TO THE UNDERSIGNED BENEFICIARY.

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     THE ORIGINAL OF SUCH LETTER OF CREDIT IS RETURNED HEREWITH, AND WE ASK YOU TO ENDORSE THE TRANSFER ON THE REVERSE THEREOF, AND FORWARD IT DIRECTLY TO THE TRANSFEREE WITH YOUR CUSTOMARY NOTICE OF TRANSFER.

SINCERELY,

     (BENEFICIARY’S NAME)

     (SIGNATURE OF BENEFICIARY)

     (PRINTED NAME AND TITLE)

SIGNATURE AUTHENTICATED

THE NAME(S) TITLE(S), AND SIGNATURE(S)CONFORM TO THAT/THOSE ON FILE WITH US FOR THE COMPANY AND THE SIGNATURE(S) IS/ARE AUTHORIZED TO EXECUTE THIS INSTRUMENT.

WE FURTHER CONFIRM THAT THE COMPANY HAS BEEN IDENTIFIED APPLYING THE APPROPRIATE DUE DILIGENCE AND ENHANCED DUE DILIGENCE AS REQUIRED BY THE BANK SECRECY ACT AND ALL ITS SUBSEQUENT AMENDMENTS.

(NAME OF BANK)

(ADDRESS OF BANK)

(CITY, STATE, ZIP CODE)

(AUTHORIZED SIGNATURE)

(PRINTED NAME AND TITLE)

(TELEPHONE NUMBER)

D-8

EXHIBIT E

CONSENT TO SUBLEASE AGREEMENT

     THIS CONSENT TO SUBLEASE AGREEMENT (“Consent” or “Agreement”), dated for reference purposes only July                     , 2007, is made by and among SORRENTO PLAZA, a California limited partnership (“Landlord”), AVANIR PHARMACEUTICALS, a California corporation (“Tenant”), and HALOZYME, INC., a California corporation (“Subtenant”), with reference to the following facts:

RECITALS

     A. Landlord and Tenant have entered into that certain Standard Industrial Net Lease dated as of May 20, 2002, as amended by that certain First Amendment to Standard Industrial Net Lease, dated as of August 1, 2002, and as amended by that certain Second Amendment to Standard Industrial Net Lease, dated as of April 2, 2003 (the “Lease”), a copy of which is attached as Exhibit A, for the lease of certain premises currently consisting of 30,370 rentable square feet (the “Premises”) as more particularly described in the Lease, located at 11404 Sorrento Valley Road, San Diego, California 92121.

     B. Tenant and Subtenant desire to enter into that certain sublease of the Premises (the “Sublease”), a copy of which is attached hereto as Exhibit B, for Subtenant’s use and occupancy of the entire Premises for the remainder of the term of the Lease.

     C. Landlord has agreed to consent to the Sublease subject to the terms and conditions of this Agreement.

     D. Landlord, Tenant and Subtenant desire to enter into certain other agreements concerning the Lease and the Sublease as set forth herein.

AGREEMENT

     NOW, THEREFORE, in consideration of the mutual covenants contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows:

     1. Consent.

          (a) Landlord hereby consents to the subletting of the Premises by Tenant to Subtenant pursuant to the Sublease, subject to and upon the terms and conditions stated in this Agreement. Except as may be expressly set forth herein, nothing contained in this Consent shall (i) operate as a consent to or approval or ratification by Landlord of any of the provisions of the Sublease or as a representation or warranty by Landlord, and Landlord shall not be bound or estopped in any way by the provisions of the Sublease, nor (ii) be construed to waive any present or future breach or default on the part of Tenant under the Lease.

          (b) The Sublease shall in all respects be subject and subordinate to the terms and conditions of the Lease. In the event of any inconsistency or conflict between the terms of

this Consent and any of the terms of the Sublease or the Lease, the terms and conditions of this Consent shall prevail. No merger shall result from the Sublease, any surrender of the Lease, nor any mutual cancellation of the Lease, and in any of such events, subject to the provisions of Section 5 below, Landlord may either terminate the Sublease or succeed to the interest of Tenant or any other person therein.

          (c) Tenant shall remain primarily liable to pay the rent and all other amounts payable by Tenant under the Lease and to perform all other obligations of Tenant under the Lease, except as otherwise expressly set forth herein. If Subtenant or any of its successors or assigns causes a default under the Lease, Landlord may proceed directly against Tenant without pursuing any remedies whatsoever against Subtenant or any other person.

     2. Future Transfers.

          (a) Landlord may consent to subsequent subleases by Subtenant or any other person without notifying Tenant or obtaining its consent, and no such action shall relieve Tenant of its primary liability and obligations under the Lease and this Consent. This Consent applies only to the specific Sublease described herein, and neither the execution hereof by Landlord, nor the acceptance of rent by Landlord from any other person, including Subtenant, shall constitute a consent to any subsequent sublease or a waiver of any of Landlord’s rights hereunder or under the Lease.

          (b) Notwithstanding the foregoing, so long as no event of default has occurred under the Lease, Subtenant may assign the Sublease or sublet the Premises, or any portion thereof, without Tenant’s or Landlord’s consent, to any entity which controls, is controlled by, or is under common control with Subtenant; to any entity which results from a merger of, reorganization of, or consolidation with Subtenant; to any entity which acquires substantially all of the stock or assets of Subtenant, as a going concern, with respect to the business that is being conducted in the Sublease Premises (hereinafter each a “Permitted Transfer”). In addition, a sale or transfer of the majority capital stock of Subtenant shall be deemed a Permitted Transfer if (1) such sale or transfer occurs in connection with any bona fide financing or capitalization for the benefit of Subtenant, or (2) Subtenant is or becomes a publicly traded corporation. Tenant shall have no right to terminate the Sublease, and Landlord shall have no right to terminate the Lease, in connection with, and shall have no right to any sums or other economic consideration resulting from, any Permitted Transfer.

     3. Condition of Premises.

          (a) Tenant acknowledges its responsibilities under the Lease to remove and remediate any and all contamination and other effects arising from the use of radioactive materials in the Premises. Such responsibilities include, without limitation, the filing of a Certificate of Disposition of Materials with the California Department of Health Services (the “Department of Health Services”) [this issue is still under review by Avanir](the “Closure Certificate”). Tenant agrees to pursue the final acceptance of its Closure Certificate with commercially reasonable diligence following the date hereof, and to obtain such final acceptance as soon as practicable. Notwithstanding anything set forth in the Lease, Tenant agrees that no

2

portion of its security deposit (including any letter of credit) shall be returned to Tenant until the Closure Certificate is accepted as final by the Department of Health Services, and if the Closure Certificate is not accepted by the end of the term of the Lease, Landlord shall have the right to draw upon the amount of the letter of credit and hold the cash proceeds of such draw until the Closure Certificate is obtained. Landlord agrees to return the original letter of credit to Tenant promptly upon submission of written proof by the Tenant that the Closure Certificate has been accepted as final by the Department of Health. A true and correct copy of the Closure Certificate is attached as Exhibit C.

          (b) Section 20.2 of the Lease provides that certain fixtures and other items of personal property that are integrated into the Premises are not to be removed by Tenant at the end of the term of the Lease, and that certain other items are removable at the end of the term of the Lease by Tenant. However, Landlord, Subtenant and Tenant acknowledge that Landlord and Subtenant have entered into an agreement for the lease of the Premises following the end of the term of the Lease and that significant opportunity for confusion may exist at the end of that subsequent lease as to what fixtures and other such personal property are to remain in the Premises and which may be removed by Tenant or Subtenant. In order to avoid such confusion, Landlord, Subtenant and Tenant agree to conduct a coordinated inspection of the Premises as soon as reasonably practicable after the execution of this Agreement and to mutually develop and agree upon a list of the existing items in the Premises that are not to be removed at the end of the term of either the Lease or such subsequent lease. Such meetings, inspection and mutual agreement shall occur on or before August 1, 2007.

          (c) Notwithstanding Section 3(b) above or any provision in the Lease or the Sublease to the contrary, (i) Landlord agrees that it has no ownership interest in the furniture, fixtures and equipment listed on Exhibit C to the Sublease or the emergency power generator (including all monitoring, connecting and operating equipment and parts) currently servicing the Premises and further agrees that Tenant may remove or transfer the same in its discretion, (ii) Subtenant shall not be required to remove or restore at the expiration of the Sublease term or otherwise, any alterations or improvements made to the Sublease Premises prior to the date of this Consent, and (iii) Subtenant shall retain ownership of all of its fixtures, machinery, equipment, and other items of personal property and may remove the same from the Premises provided such removal can be accomplished (and is accomplished) without material physical damage to the Building or material impairment of the operation thereof.

          (d) Landlord acknowledges and agrees to accept the Exit Assessment specified in Section 14.8 of the Lease which Tenant has provided or will provide to Subtenant in connection with the Sublease (the “Sublease Exit Assessment”). The Sublease Exit Assessment will satisfy Tenant’s obligation to provide an Exit Assessment to the Landlord under Section 14.8 of the Lease. Notwithstanding anything to the contrary contained in the Lease, Tenant’s obligation to provide any further Exit Assessments is and will be extinguished when the Sublease Exit Assessment is provided to Subtenant and Landlord. Tenant will remain responsible for the implementation of any recommended actions contained in the Sublease Exit Assessment. This provision does not affect Subtenant’s obligation to procure, issue and implement the recommendations of an Exit Assessment at the end of the Lease Term, if required pursuant to the terms of the Lease.

3

     4. Status of the Lease.

          (a) Tenant agrees that the Lease is in full force and effect and that there are no breaches or defaults thereunder on the part of Landlord, nor does any condition exist that, with the passage of time or the giving of notice or both, would constitute such a breach or default on the part of Landlord under the Lease.

          (b) Landlord and Tenant agree that attached hereto as Exhibit B is a true, correct and complete copy of the Lease, and that the Lease represents the entire agreement between Landlord and Tenant governing the leasing relationship between Landlord and Tenant with respect to the Premises. Subtenant acknowledges and agrees that it is has received and reviewed the Lease and is not relying on any other document, instrument or agreement as governing the leasing relationship or the occupancy of the Premises.

          (c) Landlord agrees that the Lease is in full force and effect and that no Event of Default under the Lease on the part of Tenant has occurred and is continuing, and to Landlord’s actual knowledge without investigation, no condition exists that with the passage of time or the giving of notice or both, including the execution of the Sublease and the performance of the duties and obligations thereunder, would constitute an Event of Default on the part of Tenant under the Lease.

          (d) Except as may be specifically set forth in the Lease or otherwise agreed in writing, Landlord has no obligation to renew or extend the term of the Lease, has made no representations, express or implied regarding the same nor is Landlord under any duty to offer to rent the Premises or any other space to Tenant at such expiration. Subtenant takes the Lease with full knowledge that the Lease term may not be extended or renewed at the time of expiration.

     5. New Lease.

          (a) If the Lease terminates for any reason, then within ten (10) business days following any such termination, Landlord shall offer to lease the Premises to Subtenant for the remaining term of the Lease at the same rent and on the same terms and conditions as set forth in the Lease, commencing concurrently with the termination of the Lease. Subtenant shall have five (5) business days after receipt of such offer within which to unconditionally accept the same. If Subtenant fails to unconditionally accept Landlord’s offer to enter into such replacement lease by the end of such five (5) business day period, then Landlord shall nevertheless have the right to require Subtenant to enter into a replacement lease agreement with Landlord, effective as of the date of termination of the Lease, for the remaining term of the Sublease on the terms and conditions of the Sublease, and such of the terms of the Lease as are not inconsistent with the Sublease. In the event Subtenant does not exercise its right to lease the Premises on the same terms and conditions as set forth in the Lease and Landlord does not exercise its right to require Subtenant to enter into a replacement lease agreement with Landlord, then the Sublease shall terminate at the end of such five (5) business day period.

     6. Notices. All notices required by this Agreement shall be in writing, shall be effective upon receipt or upon refusal of delivery, and shall be delivered by (i) hand, (ii) certified

4

mail, return receipt requested (iii) overnight courier service, or (iv) facsimile, addressed to the other party as follows, or at such address or facsimile number as to which such party from time to time may give proper notice to the other party. Notices shall be deemed to have been received: if hand delivered, when so delivered or when such delivery is refused; five days after deposit as certified mail; on the date scheduled for delivery if sent by courier; and on the date shown on the report generated by the sending machine if sent by facsimile.

To Landlord:
	Attention:
To Tenant:	Prior to the Effective Date:
	101 Enterprise Suite 300
	Aliso Viejo CA 92656
	Attn: Mr. Michael J. Puntoriero
	After the Effective Date:
	101 Enterprise Suite 300
	Aliso Viejo CA 92656
	Attn: Mr. Michael J. Puntoriero
To Subtenant:	Prior to the Effective Date:
	11588 Sorrento Valley Rd., Suite 17
	San Diego, California 92121
	Attention: Chief Financial Officer
	After the Effective Date:
	11388 Sorrento Valley Rd., Suite 17
	San Diego, California 92121
	Attention: Chief Financial Officer

     7. Miscellaneous.

          (a) The reference to “Avanir Pharmaceuticals” in Section 14.2 of the Lease, for so long as the Sublease is in existence, shall be deemed to refer to Halozyme, Inc. for purposes of the Premises.

          (b) This Agreement will be governed and construed in accordance with the laws of the State of California, regardless of the choice of law provisions of California or any other jurisdiction.

          (c) No alteration, amendment or modification of or to this Agreement shall be effective unless it is made in writing and signed on behalf of each of the parties to this Agreement.

5

          (d) This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same document.

          (e) This Agreement constitutes the entire agreement between the parties pertaining to the subject matter contained in it and supersedes all prior and contemporaneous agreements, representations, and understandings of the parties. No representation, warranty, promise, inducement or statement of intention has been made by either party which is not embodied in this Agreement.

          (f) In any action between the parties hereto seeking enforcement of any of the terms and provisions of this Agreement, the prevailing party in such action shall be entitled to have and to recover from the other party its reasonable attorneys’ fees and other reasonable expenses in connection with such action or proceeding, in addition to its recoverable court costs.

          (g) Nothing in this Agreement is intended to create any rights by persons not a party to this Agreement and no other party will be construed to be a third party beneficiary of this Agreement or otherwise have any legal or equitable rights under it.

          (h) Time is of the essence in this Agreement.

          (i) If any part of this Agreement is held by a court to be illegal, invalid, or unenforceable, the remainder of this Agreement will remain in full force and effect and will be interpreted to achieve, to the greatest extent possible, the objectives of this Agreement taken as a whole, including the illegal, invalid or unenforceable provision.

     IN WITNESS WHEREOF, this Consent to Sublease Agreement is executed as of the date first above written.

LANDLORD:

BC SORRENTO, LLC, a California limited
liability company

By:

Name:

Title:

6

TENANT:
AVANIR PHARMACEUTICALS, a California corporation
By:
Name:	Michael J. Puntoriero
Title:	Chief Financial Officer
SUBTENANT:
HALOZYME, INC., a California corporation
By:
Name:
Title:

7

EXHIBIT “A”

LEASE

E-8

EXHIBIT “B”

SUBLEASE AGREEMENT

E-9

EXHIBIT “C”

CLOSURE CERTIFICATE

E-10

EXHIBIT F

[Reserved]

F-1

EXHIBIT G

UTILITIES

Schedule of Utility Obligations: 11404 & 11408

	VENDOR		SERVICE/UTILITY		STATUS
1.	§	SDG&E	§	Gas meter #0945199 (serves both buildings)	§	Sublandlord to provide for Subtenant and pass through prorated costs
2.	§	San Diego Municipal Water	§	Water (handled by property manager)	§	Sublandlord to provide and pass through prorated costs to Subtenant
3.	§	Bay City Electric (preventive maintenance)	§	Emergency generator	§	Sublandlord to provide and pass through prorated costs to Subtenant
4.	§	SDG&E	§ § §	Electric Meter #1769979 #1675220 #1730133	§	Sublandlord to provide and pass through prorated costs to Subtenant
					§	Sublandlord to stay on for outside lights & emergency power
5.	§	Biosources (outside of the buildings maintenance)	§	HVAC system (interwoven between 11404 & 11408)	§	Sublandlord to provide and pass through prorated costs to Subtenant
					§	Subtenant to do own HVAC maintenance inside the building;
6.	§	Trident	§	Water treatment	§	Sublandlord to provide and pass through prorated costs to Subtenant

G-1

EXHIBIT H

GUARANTY

     THIS GUARANTY OF LEASE (“Guaranty”) is made as of June ___, 2007, by HALOZYME THERAPEUTICS, INC., a Nevada corporation (“Guarantor”), in favor of AVANIR PHARMACEUTICALS, a California corporation (“Lessor”), in connection with that certain Sublease dated June ___, 2007 (the “Lease”), pursuant to which Lessor leases to HALOZYME, INC., a California corporation (“Lessee”), approximately 21,184 square feet of office space, located at 11404 Sorrento Valley Road, San Diego, California (the “Premises”). As a material inducement to and in consideration of Lessor’s entering into the Lease, Lessor having indicated that it would not enter into the Lease without the execution of this Guaranty, Guarantor does hereby agree with Lessor as follows:

     (i) Guarantor does hereby unconditionally guarantee, without deduction by reason of set off, defense or counterclaim, as a primary obligor and not as a surety, and promises to perform and be liable for any and all obligations and liabilities of Lessee under the terms of the Lease, including without implied limitation the Lessee’s obligation to pay such rents, charges, costs and impositions as are set forth in the Lease. Guarantor further agrees to defend with counsel acceptable to Lessor, and to indemnify, defend, and save Lessor harmless from and against any and all loss, cost, damage or liability arising out of any breach by Lessee of any of the terms, conditions and covenants of the Lease, or out of any breach of warranty or misrepresentation made by Lessee under or in connection with the Lease, including reasonable attorneys’ fees and any other costs incurred by Lessor in connection therewith.

     (ii) The undertakings contained in this Guaranty shall be the personal liability of Guarantor. Guarantor acknowledges that after any default by Lessee in the performance of any term, condition or covenant of the Lease, the liability of Guarantor under this Guaranty shall be primary and that, in the enforcement of its rights, Lessor shall be entitled to look to Guarantor for the performance of the obligations of Lessee which Guarantor has guaranteed, without first commencing any action or proceedings against Lessee, and likewise, enforcement of Lessor’s rights against Lessee shall not impair the right of Lessor to enforce this Guaranty, and any such action by Lessor shall not operate as a release of the liability of Guarantor under this Guaranty. The liability of Guarantor under this Guaranty is a guaranty of payment and performance and not of collectibility, is not conditional upon the pursuit by Lessor of any remedies which it now has or may hereafter have with respect thereto under the Lease, at law, in equity or otherwise, and will not be diminished or affected by a claim by Lessee that the Lease was not duly executed and delivered by Lessee or that the execution, delivery and performance of the Lease was not duly authorized or that the Lease when executed by Lessee was not the legal, valid and binding obligation of Lessee or not generally enforceable against Lessee. Except as otherwise expressly provided herein, the obligations of the Guarantor shall be absolute and unconditional and shall remain in full force and effect until all amounts due pursuant to the Lease have been paid in full and all of Lessee’s obligations thereunder have been performed in full.

     (iii) If Lessee shall at any time default in the performance or observance of any of the terms, covenants or conditions in the Lease on Lessee’s part to be kept performed or observed, Guarantor will keep, perform and observe same, as the case may be, in the place and stead of Lessee.

     (iv) The obligations of Guarantor hereunder shall not be released by Lessor’s receipt, application or release of any security given for the performance and observance of any covenant or condition in the Lease on Lessee’s part to be performed or observed, regardless of whether Guarantor consents thereto or receives notice thereof.

     (v) The liability of Guarantor hereunder shall in no way be affected by (a) the release or discharge of Lessee or any other party or the release of Lessee in any creditor’s receivership, bankruptcy or other proceeding; (b) the impairment, limitation or modification of the liability of Lessee or the estate of Lessee in bankruptcy, or of any remedy for the enforcement of Lessee’s liability under the Lease resulting from the operation of any present or future provision of the Bankruptcy Code or other statute or from the decision in any court; (c) the rejection of the Lease in any such proceedings; (d) the assignment or transfer of the Lease by Lessee; (e) any disability of Lessee;

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(f) the cessation from any cause other than as provided under the Lease whatsoever of the liability of Lessee; (g) the exercise by Lessor of any of its rights or remedies reserved under the Lease or by law; or (h) any termination of the Lease. As used herein, “Bankruptcy Code” means Title 11 of the U.S. Code, as applicable, or any similar federal or state laws for the relief of debtors, each as hereafter amended.

     (vi) Guarantor agrees that none of its obligations and no right against Guarantor hereunder shall in any way be discharged, impaired, or otherwise affected by any extension of time by Lessor for, or by any partial or complete waiver by Lessor of the performance or failure by Lessor to enforce of any of Lessee’s obligations under the Lease, or by any other alteration, amendment, assignment, expansion, extension or modification by Lessor in or to the Lease, or by any release or waiver by Lessor of any term, covenant or condition of the Lease, or by any delay by Lessor in the enforcement of or waiver of any rights against Lessee, Guarantor or any other person or entity under the Lease; provided, however, that to the extent Lessee’s obligations under the Lease are reduced as a result of the foregoing, Guarantor’s obligations under this Guaranty shall likewise be reduced. Without limitation, Guarantor agrees that the Premises may be subleased or the Lease may be altered, amended, assigned, expanded, extended or modified from time to time on such terms and provisions as may be satisfactory to Lessor without notice to or further assent by Guarantor, and Guarantor hereby waives notice of acceptance of this Guaranty, notice of any obligations guaranteed hereby or of any action taken or omitted in reliance hereon, and notice of any defaults of Lessee under the Lease and waives presentment, diligence, demand for payment or performance, protest, notice of dishonor, nonpayment or nonperformance of any such obligations, suit or taking of other action by Lessor against, and any other notice to, any party liable thereon and waives suretyship defenses generally, other than full and timely payment and performance of all obligations hereby guaranteed, and Guarantor agrees to cause Lessee to preserve the enforceability of all instruments hereby guaranteed, as modified with Lessor’s consent, and not to cause Lessee to take any act or make any omission which might be the basis for a claim that Guarantor has any defense to Guarantor’s obligations hereunder, exclusive only of the defense that Lessee has fully and timely paid and performed all obligations hereby guaranteed. No insolvency, bankruptcy, liquidation proceeding or dissolution affecting Lessee or Guarantor shall affect, impair or be a defense to this Guaranty. The liability of the Guarantor hereunder is primary and, except as otherwise set forth herein, unconditional and, except as otherwise set forth herein shall not be subject to any offset, defense or counterclaim of Guarantor. This is a continuing guaranty. Guarantor waives any other circumstance whatsoever that might otherwise constitute a legal or equitable discharge, release of defense of a guarantor or surety, or that might otherwise limit recourse against Guarantor, except and to the extent that Lessee is released from its obligations under the Lease other than in the context of a bankruptcy of Lessee or a claim by Lessee that the Lease was unenforceable against Lessee as of the date of its execution. Moreover, Guarantor agrees that its obligations shall not be affected by any circumstances which constitute a legal or equitable discharge of a guarantor or surety, except and to the extent that Lessee is released from its obligations under the Lease (other than in the context of a bankruptcy of Lessee or a claim by Lessee that the Lease was unenforceable against Lessee as of the date of its execution).

     (vii) Guarantor represents that this Guaranty and the Lease, as originally delivered and as modified, amended or supplemented, have been duly authorized and are the legal, valid and binding obligations of Guarantor and Lessee, enforceable in accordance with their respective terms.

     (viii) Without in any manner limiting the generality of the foregoing, Guarantor hereby waives the benefits of the provisions of Sections 2809, 2810, 2847 and 2848 of the California Civil Code and any similar or analogous statutes of California or any other jurisdiction and all principles or provisions of law or equity which conflict with the terms of this Guaranty. In addition, without limiting the generality of the foregoing, Guarantor hereby expressly waives any and all benefits under California Civil Code Sections 2815, 2819, 2845, 2849 and 2850 and the second sentence of CC Section 2822(a). In addition, each Guarantor agrees that Lessor (not Lessee or any other person or entity) shall have the sole right to designate the portion of Lessee’s obligations under the Lease that is satisfied by a partial payment by Lessee. Notwithstanding anything to the contrary contained herein, other than with respect to the potential duplication of enforcement costs, in no event shall Guarantor’s liability under this Guaranty exceed the liability which Guarantor would have incurred (in the absence of a creditor’s receivership, bankruptcy or other proceeding involving Guarantor or its assignee) if Guarantor had entered into the Lease.

     (ix) Guarantor further agrees that it may be joined in any action against Lessee in connection with the obligations of Lessee under the Lease and recovery may be had against Guarantor in any such action. Lessor may

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enforce the obligations of Guarantor hereunder without first taking any action whatsoever against Lessee or its successors and assigns, or pursue any other remedy or apply any security it may hold.

     (x) Guarantor: (a) subordinates any right of subrogation it may have against Lessee to the obligations of Lessee under, arising out of or related to the Lease or Lessee’s use or occupancy of the Premises (as defined in the Lease); and (b) until all of Lessee’s obligations under the Lease are fully performed, unconditionally and irrevocably subordinates any liability or indebtedness of Lessee now or hereafter held by Guarantor to the obligations of Lessee under, arising out of or related to the Lease or Lessee’s use of the Premises. Furthermore, from and after the occurrence of any Event of Default (as defined in the Lease), Guarantor agrees that any payment on account of any indebtedness from Lessee to Guarantor during such time shall be held in trust for Lessor.

     (xi) The liability of Guarantor and all rights, powers and remedies of Lessor hereunder and under any other agreement now or at any time hereafter in force between Lessor and Guarantor relating to the Lease shall be cumulative and not alternative and such rights, powers and remedies shall be in addition to all rights, powers and remedies given to Lessor by law.

     (xii) This Guaranty applies to, inures to the benefit of and binds all parties hereto, and their successors and assigns. This Guaranty may be assigned by Lessor voluntarily or by operation of law.

     (xiii) If Lessor desires to sell, finance or refinance the Premises, or any part thereof, Guarantor hereby agrees to execute such reasonable documentation as shall be required by Lessor re-affirming Guarantor’s obligations under this Guaranty.

     (xiv) Notwithstanding any modification, discharge or extension of the guaranteed obligations or any amendment, modification, stay or cure of Lessor’s rights which may occur in any bankruptcy or reorganization case or proceeding concerning Lessee, whether permanent or temporary, and whether or not assented to by Lessor, Guarantor hereby agrees that it shall be obligated hereunder to pay and perform the guaranteed obligations and discharge its other obligations in accordance with the terms of the guaranteed obligations and the terms of this Guaranty. Guarantor understands and acknowledges that by virtue of this Guaranty, it has specifically assumed any and all risks of a bankruptcy or reorganization case or proceeding with respect to Lessee. Without in any way limiting the generality of the foregoing, any subsequent modification of the guaranteed obligations in any reorganization case concerning Lessee shall not affect the obligation of Guarantor to pay and perform the guaranteed obligations in accordance with their original terms. If Lessor is required to pay, return or restore to Lessee or any other person any amounts previously paid on account of any of the guaranteed obligations because of any bankruptcy or other voluntary or involuntary proceeding involving Lessee, in or out of court, for the adjustment of debtor-creditor relationships, or because of any stop notice or any other reason, the obligations of Guarantor shall be reinstated and revived, and the rights of Lessor shall continue, with respect to such amounts, all as though they had never been paid to Lessor.

     (xv) This Guaranty shall constitute the entire agreement between Guarantor and the Lessor with respect to the subject matter hereof. No provision of this Guaranty or right of Lessor hereunder may be waived nor may any guarantor be released from any obligation hereunder except by a writing duly executed by an authorized officer of Lessor.

     (xvi) When the context and construction so requires, all words used in the singular herein shall be deemed to have been used in the plural. The word “person” as used herein shall include an individual, company, firm, association, partnership, corporation, trust or other legal entity of any kind whatsoever.

     (xvii) Should any one or more provisions of this Guaranty be determined to be illegal or unenforceable, all other provisions shall nevertheless be effective.

     (xviii) Guarantor represents that the person signing below is duly authorized to execute this Guaranty on behalf of Guarantor and to bind Guarantor hereby.

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     (xix) The waiver or failure to enforce any provision of this Guaranty shall not operate as a waiver of any other breach of such provision or any other provisions hereof.

     (xx) If either party hereto participates in an action against the other party arising out of or in connection with this Guaranty, the prevailing party shall be entitled to have and recover from the other party reasonable attorneys’ fees, collection costs and other costs incurred in and in preparation for the action.

     (xxi) Guarantor agrees that this Guaranty shall be governed by and construed in accordance with the laws of the State of California.

     (xxii) The term “Lessor” whenever used herein refers to and means the Lessor in the foregoing Lease specifically named and also any assignee of said Lessor, whether by outright assignment or by assignment for security, and also any successor to the interest of said Lessor or of any assignee of such Lease or any part thereof whether by assignment or otherwise. The term “Lessee” whenever used herein refers to and means the Lessee in the foregoing Lease specifically named and also any assignee of said Lessee or assignee of such Lease or any part thereof, whether by assignment or otherwise.

     (xxiii) Any notice or other communication to be given under this Agreement by either party to the other will be in writing and delivered personally or mailed by certified mail, postage prepaid and return receipt requested, or delivered by an express overnight delivery service, charges prepaid, or transmitted by facsimile, as follows:

If to Lessor:		Avanir Pharmaceuticals, Inc.
		Attention:
	With copies to:
		Attention:
		Attention:
If to Guarantor:		Halozyme Therapeutics, Inc.
		Attention:
	With a copy to:
		Attention:

     Any address or name specified above may be changed by a notice given by the addressee to the other party in accordance with this numbered paragraph. Any notice will be deemed given and effective (i) if given by personal

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delivery, as of the date of delivery in person; or (ii) if given by mail, upon receipt as set forth on the return receipt; or (iii) if given by overnight courier, one (1) business day after timely deposit with the courier; or (iv) if given by facsimile, upon receipt of the appropriate confirmation of transmission by facsimile. The inability to deliver because of a changed address of which no notice was given of the rejection or other refusal to accept any notice will be deemed to be the receipt of the notice as of the date of such inability to deliver or the rejection or refusal to accept.

     (xxiv) Waiver of Jury Trial. THE PARTIES HERETO WAIVE TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY ANY PARTY(IES) AGAINST ANY OTHER PARTY(IES) ON ANY MATTER ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS GUARANTY OR THE RELATIONSHIP OF THE PARTIES CREATED HEREUNDER (EACH A “DISPUTE” AND COLLECTIVELY, THE “DISPUTES”).

     (xxv) Consent to Judicial Reference. If and to the extent that paragraph (xxv) immediately above is determined by a court of competent jurisdiction to be unenforceable or is otherwise not applied by any such court, each of Landlord and Tenant hereby consents and agrees that (a) any and all Disputes shall be heard by a referee in accordance with the general reference provisions of California Code of Civil Procedure Section 638, sitting without a jury in the County of Los Angeles, California, (b) such referee shall hear and determine all of the issues in any Dispute (whether of fact or of law), including issues pertaining to a “provisional remedy” as defined in California Code of Civil Procedure Section 1281.8, including without limitation, entering restraining orders, entering temporary restraining orders, issuing temporary and permanent injunctions and appointing receivers, and shall report a statement of decision; provided that, if during the course of any Dispute, any party desires to seek such a “provisional remedy” at a time when a referee has not yet been appointed or is otherwise unavailable to hear the request for such provisional remedy, then such party may apply to the Los Angeles County Superior Court for such provisional relief, and (c) pursuant to California Code of Civil Procedure Section 644(a), judgment may be entered upon the decision of such referee in the same manner as if the Dispute had been tried directly by a court. The parties shall use their respective commercially reasonable and good faith efforts to agree upon and select such referee, provided that such referee must be a retired California state or federal judge, and further provided that if the parties cannot agree upon a referee, the referee shall be appointed by the Presiding Judge of the Los Angeles County Superior Court. Each party hereto acknowledges that this consent and agreement is a material inducement to consummate the transactions contemplated hereby and by the Lease, and that each will continue to be bound by and to rely on this consent and agreement in their related future dealings. The parties shall share the cost of the referee and reference proceedings equally; provided that, the referee may award attorneys’ fees and reimbursement of the referee and reference proceeding fees and costs to the prevailing party, whereupon all referee and reference proceeding fees and charges will be payable by the non-prevailing party (as so determined by the referee). Each party hereto further warrants and represents that it has reviewed this consent and agreement with legal counsel of its own choosing, or has had an opportunity to do so, and that it knowingly and voluntarily gives this consent and enters into this agreement having had the opportunity to consult with legal counsel. This consent and agreement is irrevocable, meaning that it may not be modified either orally or in writing unless agreed to by Lessor, and this consent and agreement shall apply to any subsequent amendments, renewals, supplements, or modifications to this Guaranty or any other agreement or document entered into between the parties in connection with this Guaranty. In the event of litigation, this Agreement may be filed as evidence of either or both parties’ consent and agreement to have any and all Disputes heard and determined by a referee under California Code of Civil Procedure Section 638.

     (xxvi) This Guaranty is solely for the benefit of Lessor and its successors and assigns and is not intended to nor shall it be deemed to be for the benefit of any third party, including, without limitation, Lessee.

     (xxvii) Guarantor shall have no right to assign its obligations under this Guaranty without obtaining Lessor’s prior written consent which consent may be granted or withheld in Lessor’s sole and absolute discretion. For purposes of this Guaranty, the following shall not constitute an assignment necessitating Lessor’s consent (but Guarantor shall notify Lessor of the same): (a) a change in Guarantor’s name, type of entity and/or state of domicile; and (b) a merger or similar transaction in which the surviving entity purchases all or substantially all of Guarantor’s stock and/or assets; provided, however, that the resulting entity in either (a) or (b) shall remain bound by this Guaranty and will upon request, reaffirm and ratify the obligations of Guarantor under this Guaranty.

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     (xxviii) Guarantor hereby consents to the exclusive jurisdiction and venue of any state or federal court located within Los Angeles County, State of California in any suit, action or proceeding brought under or arising out of this Guaranty (and further agrees not to assert or claim that such venue is inconvenient or otherwise inappropriate or unsuitable).

     IN WITNESS WHEREOF, Guarantor has executed this Guaranty as of the date first above written.

“Guarantor”
HALOZYME THERAPEUTICS, INC., a Nevada corporation
By:
Name:
Title:
By:
Name:
	Title:

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EXHIBIT I

ADDITIONAL OPERATING COSTS

Locksmith services

Security services

Central Monitoring Services

Armed Response services

Alarm Company & 1118722 (MAINTENANCE ACCESS) & 1118721 (CAMERA MAINTENANCE)

Drain Service

Air filtration repair and maintenance

Air handlers and chiller maintenance services

HVAC Vendor Services

HVAC MAINTENANCE AND REPAIR

EMERGENCY POWER SYSTEMS maintenance and repair

CONSULTING - FACILITY MAINTENANCE

HVAC PM - 11388 SV Rd

HVAC PM - 11404, 11408 SV Rd

Licenses and Permits

Signs

Vendor for automated controls

Maintenance Supplies

Hardware Supplies

FIRE EXTINGUISHER INSPECTION

Sound diverters

HEALTH & SAFETY CONSULTING SVC

Guard Svcs 11388 Sorrento

DATA/SHREDDED & DESTROYED

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Janitorial Services

WATER TREATMENT PROGRAM

San Diego Police Department services

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EX-10.53

Exhibit 10.53

THIRD AMENDMENT TO LEASE

          THIS THIRD AMENDMENT TO LEASE (this “Amendment”) is made and entered into as of July 18, 2007, by and between RREEF AMERICA REIT II CORP. FFF, a Maryland corporation (“Landlord”), and AVANIR PHARMACEUTICALS, a California corporation (“Tenant”).

RECITALS

A.

Landlord and Tenant are parties to that certain Lease, dated April 28, 2006 (the “Original Lease”), which Original Lease has been previously amended by that certain First Amendment to Lease, dated December 14, 2006, and that certain Second Amendment to Lease, dated March 13, 2007 (collectively, the “Lease”). Pursuant to the Lease, Landlord has leased to Tenant space currently containing approximately 17,609 rentable square feet (the “Original Premises”) described as Suite No. 300A and 300B (collectively, “Suite 300”) and Suite 320 (“Suite 320”, together with Suite 300, the “Initial Premises”) and Suites 330 and 335 (collectively, the “Additional Premises”) on the third floor of the building located at 101 Enterprise, Aliso Viejo, California (the “Building”).

B.

Tenant desires to surrender to Landlord the Additional Premises containing approximately 6,290 rentable square feet described as Suite No. 330 (“Suite 330”) and Suite No. 335 (“Suite 335”) of the Building as shown on Exhibit A hereto (collectively, the “Reduction Space”) (the Original Premises, less the Reduction Space, is referred to herein as the “Remaining Premises”) and that the Lease be appropriately amended, and Landlord is willing to accept such surrender on the following terms and conditions.

          NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant agree as follows:

1. Reduction.

1.1

Tenant shall vacate the Reduction Space in accordance with the terms of the Lease on or prior to July 31, 2007, which is the date immediately preceding the Reduction Effective Date (defined in 1.2 below) and, except as expressly set forth in this Section 1.1, Tenant shall fully comply with all obligations under the Lease respecting the Reduction Space up to the Reduction Effective Date, including those provisions relating to the condition of the Reduction Space and removal of Tenant’s Property therefrom; provided however, Landlord and Tenant hereby acknowledge that as of the date hereof, notwithstanding the applicable Additional Premises Commencement Dates with respect to Suite 300 and Suite 335 (as more particularly described in the first sentence of Section 2 below), Tenant has never physically occupied the Reduction Space and therefore shall not have any obligation to remove any personal property, equipment or fixtures from the Reduction Space or to restore the Reduction Space. Tenant hereby agrees that Tenant shall have no right to enter or occupy the Reduction Space at any time and, accordingly, Tenant shall return all keys to the Reduction Space and shall deliver possession of the Reduction Space to Landlord upon Tenant’s execution hereof.

1.2

Effective as of August 1, 2007 (the “Reduction Effective Date”), the Premises is decreased from approximately 17,609 rentable square feet of the Building to approximately 11,319 rentable square feet comprised of Suite 300 and Suite 320 of the Building by the elimination of the Reduction Space, and the number of unreserved parking spaces available to Tenant

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shall be proportionately reduced. As of the Reduction Effective Date, the Reduction Space shall be deemed surrendered by Tenant to Landlord, the Lease shall be deemed terminated with respect to the Reduction Space, and the “Premises”, as defined in the Lease and as used herein shall be deemed to mean the Remaining Premises; provided, if Tenant shall violate any provision hereof or if Tenant’s representations herein shall be false or materially misleading, Landlord shall have the right to declare this Amendment null and void and to reinstate the Lease with respect to the Reduction Space in addition to, and not in lieu of, any other rights or remedies available to Landlord.

1.3

If Tenant shall holdover in the Reduction Space beyond the day immediately preceding the Reduction Effective Date, Tenant shall be liable for Monthly Installment of Rent, Tenant’s Proportionate Share of Expenses, Insurance Costs and Taxes and other charges respecting the Reduction Space equal to 150% of the amount in effect under the Lease prorated on a per diem basis and on a per square foot basis for the Reduction Space. Such holdover amount shall not be in limitation of Tenant’s liability for damages arising from Tenant’s holding over nor shall it be deemed permission for Tenant to holdover in the Reduction Space. If, as a result of Tenant’s holding over, Landlord shall install a wall separating the Reduction Space from the balance of the Premises or otherwise incur expense in installing separate utility meters or effecting similar separations, Tenant, upon demand, shall reimburse Landlord’s costs in connection therewith.

2. Monthly Installment of Rent. Tenant hereby acknowledges and agrees that (a) the Additional Premises Commencement Date with respect to Suite 335 occurred on April 15, 2007 and the Additional Premises Commencement Date with respect to Suite 330 occurred on July 1, 2007; and (b) Tenant shall pay Monthly Installment of Rent and Tenant’s Proportionate Share of Expenses, Taxes and Insurance Costs with respect to Suite 335 and Suite 330 for the period beginning on the applicable Additional Premises Commencement Date and ending on the Reduction Effective Date. Concurrently with Tenant’s execution of this Amendment, Tenant shall deliver to Landlord an amount equal to $26,091.60, representing the Monthly Installment of Rent owed with respect to the Suite 335 for the months (or applicable portion thereof) of April, May, June and July of 2007 and with respect to Suite 330 for the month of July of 2007. Tenant shall remain liable, subject to and in accordance with the terms of the Lease, for the payment of Tenant’s Proportionate Share of Expenses, Taxes and Insurance Costs with respect to the Additional Premises accruing prior to the Reduction Effective Date. Effective as of the Reduction Effective Date, the schedule of Monthly Installment of Rent contained in the Lease is deleted, and the following is substituted therefor:

	Rentable		Annual Rate				Monthly
	Square		Per Square				Installment of
Period	Footage		Foot		Annual Rent		Rent
7/1/07 – 7/9/07		11,319	$	31.80	$	359,944.20	$	29,995.35
7/10/07 – 7/9/08		11,319	$	32.75	$	370,697.25	$	30,891.44
7/10/08 – 7/9/09		11,319	$	33.73	$	381,789.87	$	31,815.82
7/10/09 – 7/9/10		11,319	$	34.74	$	393,222.06	$	32,768.51
7/10/10 – 7/9/11		11,319	$	35.78	$	404,993.82	$	33,749.49

	All such Monthly Installment of Rent shall be payable by Tenant in accordance with the terms of the Lease, as amended hereby.
3.	Additional Security Deposit. No additional Security Deposit shall be required in connection with this Amendment. Notwithstanding the foregoing, and provided that, during the twelve (12) month

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	period immediately preceding the effective date of any reduction of the Security Deposit, Tenant has timely paid all Monthly Installments of Rent, Tenant’s Proportionate Share of Expenses and Taxes and all other sums and charges payable under this Lease and no default has occurred under this Lease (the “Security Reduction Conditions”), Tenant shall have the right to reduce the amount of the Security Deposit so that the new Security Deposit amount will be as follows: $37,124.65 effective as of August 1, 2008. If Tenant is entitled to a reduction in the Security Deposit, Tenant shall provide Landlord with written notice on or before June 15, 2008 requesting that the Security Deposit be reduced as provided above (the “Security Reduction Notice”). If Tenant provides Landlord with a Security Reduction Notice, and Tenant is entitled to reduce the Security Deposit as provided herein, Landlord shall refund the applicable portion of the Security Deposit to Tenant within forty-five (45) days after the later to occur of (a) Landlord’s receipt of the Security Reduction Notice, or (b) the date upon which Tenant is entitled to a reduction in the Security Deposit as provided above.
4.	Additional Consideration. As additional consideration for this Amendment, Tenant agrees to pay Landlord upon the Reduction Effective Date: (a) with respect to Suite 330, an amount equal to $63,187.45, plus the Additional Amount (as defined below), and (b) with respect to Suite 335, an amount equal to $10,350.39. As used herein, “Additional Amount” means an amount equal to the rent (i.e., monthly installments of rent plus tenant’s proportionate share of expenses, insurance costs and taxes) due and payable by Barney (as defined in Section 10 below), as tenant, under the Barney Lease (as defined in Section 10 below) with respect to the period beginning on the Substitution Effective Date (as defined in the Barney Amendment (as defined in Section 10 below)) and ending on January 31, 2008; provided, however, that in no event shall the Additional Amount exceed $42,185.00, which Landlord represents is the sum of five (5) months of monthly installment of rent payable by Barney pursuant to the terms of the Barney Lease (and Landlord shall provide to Tenant an invoice showing such amount).
5.	Tenant’s Proportionate Share. For the period commencing on the Reduction Effective Date and ending on the Termination Date, Tenant’s Proportionate Share of the Building for Expenses and Insurance Costs is 14.13%, and Tenant’s Proportionate Share of the Building for Taxes is 6.71% Notwithstanding anything in this Amendment to the contrary, Tenant shall remain liable for all year-end adjustments with respect to Tenant’s Proportionate Share of Expenses, Insurance Costs and Taxes applicable to the Reduction Space for that portion of the calendar year commencing on the applicable Additional Premises Commencement Date and ending on the Reduction Effective Date for each of Suites 330 and 335, respectively. Such adjustments shall be paid at the time, in the manner and otherwise in accordance with the terms of the Lease, unless otherwise specified herein.
6.	Expenses, Insurance Costs and Taxes. For the period commencing on the Reduction Effective Date and ending on the Termination Date, Tenant shall pay for Tenant’s Proportionate Share of Expenses, Insurance Costs, and Taxes in accordance with the terms of the Lease.
7.	Improvements to Remaining Premises.

7.1 Condition of Remaining Premises. Tenant is in possession of the Remaining Premises and agrees to accept the same “as is” without any agreements, representations, understandings or obligations on the part of Landlord to perform any alterations, repairs or improvements, except as may be expressly provided otherwise in this Amendment. Tenant hereby acknowledges and agrees that, effective as of the date hereof, Tenant is not entitled to the Additional Premises Maximum Amount (as defined in Exhibit B to the Original Lease) or any portion thereof, and such Additional Premises Maximum Amount has been, in effect,

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	credited to Tenant as reflected in the calculation of the consideration owed by Tenant pursuant to the terms of Section 4 above.
7.2	Responsibility for Improvements to Remaining Premises. Any construction, alterations or improvements to the Remaining Premises shall be performed by Tenant at its sole cost and expense using contractors selected by Tenant and approved by Landlord and shall be governed in all respects by the provisions of Article 6 of the Original Lease.

8.

Representations. Each party represents to the other that it has full power and authority to execute this Amendment. Tenant represents that it has not made any assignment, sublease, transfer, conveyance of the Lease or any interest therein or in the Reduction Space other than those explicitly recited herein and further represents that there is not and will not hereafter be any claim, demand, obligation, liability, action or cause of action by any other party claiming through Tenant respecting, relating to or arising out of the Reduction Space, and Tenant agrees to indemnify and hold harmless Landlord and the Landlord Related Parties (as defined in Section 11.6 below) from all liabilities, expenses, claims, demands, judgments, damages or costs arising from any of the same, including without limitation, attorneys’ fees. Tenant acknowledges that Landlord will be relying on this Amendment in entering into leases for the Reduction Space with other parties.

9.

Other Pertinent Provisions. Landlord and Tenant agree that, effective as of the date of this Amendment (unless different effective date(s) is/are specifically referenced in this Section), the Lease shall be amended in the following additional respects:

9.1	Additional Premises References. Effective as of the Reduction Effective Date, any references in the Original Lease to the “Additional Premises” or the “Additional Premises Commencement Date” are hereby deleted in their entirety.
9.2	Monument Signage. Article 45 (Monument Signage) is hereby deleted in its entirety.
9.3	Right of First Offer. The first sentence of Section 41.1 of the Lease is hereby deleted in its entirety and replaced with the following: “Tenant shall have the on-going right of offer (the “Offer Right”) to lease space located on the third (3rd) floor of the Building (“Offer Space”), provided that said space is not already encumbered by options of existing tenants at the Building, effective at such time as the subject Offer Space is vacated by the prior tenant (or, if the prior tenant has confirmed in writing that tenant will not extend or renew its lease prior to vacating the Offer Space, upon such time as Landlord receives such written confirmation).”

10. Contingencies. This Amendment, as it relates to Suite 330, specifically is contingent upon the modification of that certain Lease, dated December 20, 2005 (the “Barney Lease”), by and between Landlord and Barney & Barney, LLC, a California limited liability company (“Barney”). This Amendment, as it relates to Suite 335, specifically is contingent upon the modification of that certain Lease, dated January 18, 2006 (the “NCSoft Lease”), by and between Landlord and NCSoft Corporation, a Korean corporation (“NCSoft”). Landlord currently is negotiating the terms of an agreement with Barney to amend the Barney Lease (the “Barney Amendment”) to relocate Barney to Suite 330, and Landlord currently is negotiating the terms of an agreement with NCSoft to amend the NCSoft Lease (the “NCSoft Amendment”) to expand the premises leased thereunder to include Suite 335. Landlord and Tenant agree that the foregoing contingencies are independent of each other. For the avoidance of doubt, this Amendment shall be effective (a) with respect to Suite 330 if an acceptable Barney Amendment is executed by Landlord and Barney on or before the Contingency Date (as defined below), and (b) with respect to Suite 335, if an acceptable NCSoft Amendment is

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executed by Landlord and NCSoft on or before the Contingency Date. If Landlord fails to enter into the Barney Amendment with Barney and/or the NCSoft Amendment with NCSoft in form and substance satisfactory to Landlord on or before the date (the “Contingency Date”) that is the later of (i) July 20, 2007, or (ii) five (5) days following the date this Amendment, executed by Tenant, is delivered to Landlord, then Landlord may terminate this Amendment (or relevant portions thereof) by providing written notice thereof to Tenant, and Landlord and Tenant shall enter into an amendment or other agreement to document any necessary revisions related thereto (i.e., changes to the rent chart reflecting Monthly Installment of Rent, Tenant’s Proportionate Share, etc.).

11.

Miscellaneous.

11.1	This Amendment, including Exhibit A (Outline and Location of Reduction Space) attached hereto, sets forth the entire agreement between the parties with respect to the matters set forth herein. There have been no additional oral or written representations or agreements. Under no circumstances shall Tenant be entitled to any rent abatement, improvement allowance, leasehold improvements, or other work to the Premises, or any similar economic incentives that may have been provided Tenant in connection with entering into the Lease, unless specifically set forth in this Amendment. This Amendment shall not be relied upon by any other party, individual, corporation, partnership or entity as a basis for reducing its lease obligations with Landlord or for any other purpose. Tenant agrees that it shall not disclose any matters set forth in this Amendment or disseminate or distribute any information concerning the terms, details or conditions hereof to any person, firm or entity without obtaining the express written consent of Landlord.
11.2	Except as herein modified or amended, the provisions, conditions and terms of the Lease shall remain unchanged and in full force and effect.
11.3	In the case of any inconsistency between the provisions of the Lease and this Amendment, the provisions of this Amendment shall govern and control.
11.4	Submission of this Amendment by Landlord is not an offer to enter into this Amendment but rather is a solicitation for such an offer by Tenant. Landlord shall not be bound by this Amendment until Landlord has executed and delivered the same to Tenant.
11.5	The capitalized terms used in this Amendment shall have the same definitions as set forth in the Lease to the extent that such capitalized terms are defined therein and not redefined in this Amendment.
11.6	Tenant hereby represents to Landlord that Tenant has dealt with no broker in connection with this Amendment. Tenant agrees to indemnify and hold Landlord, its members, principals, beneficiaries, partners, officers, directors, employees, representatives, mortgagee(s) and agents, and the respective principals and members of any such agents (collectively, the “Landlord Related Parties”) harmless from all claims of any brokers claiming to have represented Tenant in connection with this Amendment. Landlord hereby represents to Tenant that Landlord has dealt with no broker in connection with this Amendment. Landlord agrees to indemnify and hold Tenant, its officers, directors, shareholders, employees, representatives and agents harmless from all claims of any brokers claiming to have represented Landlord in connection with this Amendment.
11.7	Each signatory of this Amendment represents hereby that he or she has the authority to execute and deliver the same on behalf of the party hereto for which such signatory is acting.

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Tenant hereby represents and warrants that neither Tenant, nor any persons or entities holding any legal or beneficial interest whatsoever in Tenant, are (i) the target of any sanctions program that is established by Executive Order of the President or published by the Office of Foreign Assets Control, U.S. Department of the Treasury (“OFAC”); (ii) designated by the President or OFAC pursuant to the Trading with the Enemy Act, 50 U.S.C. App. § 5, the International Emergency Economic Powers Act, 50 U.S.C. §§ 1701-06, the Patriot Act, Public Law 107-56, Executive Order 13224 (September 23, 2001) or any Executive Order of the President issued pursuant to such statutes; or (iii) named on the following list that is published by OFAC: “List of Specially Designated Nationals and Blocked Persons.” If the foregoing representation is untrue at any time during the Term, an Event of Default under the Lease will be deemed to have occurred, without the necessity of notice to Tenant.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

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11.8 Redress for any claim against Landlord under the Lease and this Amendment shall be limited to and enforceable only against and to the extent of Landlord’s interest in the Property. The obligations of Landlord under the Lease are not intended to and shall not be personally binding on, nor shall any resort be had to the private properties of, any of its trustees or board of directors and officers, as the case may be, its investment manager, the general partners thereof, or any beneficiaries, stockholders, employees, or agents of Landlord or the investment manager.

          IN WITNESS WHEREOF, Landlord and Tenant have duly executed this Amendment as of the day and year first above written.

LANDLORD:		TENANT:
RREEF AMERICA REIT II CORP. FFF, a Maryland corporation		AVANIR PHARMACEUTICALS, a California corporation
By:	RREEF Management Company, a Delaware corporation, its Authorized Agent
By:	/s/ Keith Walters	By:	/s/ Keith Katkin
Name:	Keith Walters	Name:	Keith Katkin
Title:	Vice President, District Manager	Title:	President and CEO
Dated:	7/19/07	Dated:	7/18/07
		By:	/s/ Martin Sturgeon
		Name: Title:	Martin Sturgeon CFO
		Dated:	7/18/07

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EXHIBIT A — OUTLINE AND LOCATION OF REDUCTION SPACE

attached to and made a part of the Amendment dated as of July 18, 2007,
between RREEF AMERICA REIT II CORP. FFF, a Maryland corporation,
as Landlord and AVANIR PHARMACEUTICALS, a California corporation, as Tenant

Exhibit A is intended only to show the general layout of the Reduction Space as of the beginning of the Reduction Effective Date. It does not in any way supersede any of Landlord’s rights set forth in the Lease with respect to arrangements and/or locations of public parts of the Building and changes in such arrangements and/or locations. It is not to be scaled; any measurements or distances shown should be taken as approximate.

Initials

A-1

EX-23.1

EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statements No. 33-71276, 33-94370, 333-83089, 333-84183, 333-38094, 333-108716, 333-125743, and 333-144221 on Form S-8 and Registration Statements No. 33-49082, 33-76094, 333-24549, 333-76641, 333-77925, 333-31442, 333-32776, 333-34958, 333-35934, 333-107820, 333-111680, 333-114389, 333-123867, 333-124230 and 333-125979 on Form S-3 of our report dated December 15, 2006, relating to the financial statements, before the effects of retrospective adjustments for discontinued operations (not presented herein), of AVANIR Pharmaceuticals (which report expresses an unqualified opinion and includes an explanatory paragraph relating to the adoption of Statement of Financial Accounting Standards No. 123(R), Share-based Payment, and the change in method of accounting for certain patent related costs, effective October 1, 2005), appearing in this Annual Report on Form 10-K of AVANIR Pharmaceuticals for the year ended September 30, 2007.

/s/ DELOITTE & TOUCHE LLP

Costa Mesa, California
December 19, 2007

EX-23.2

EXHIBIT 23.2

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statements No. 33-71276, 33-94370, 333-83089, 333-84183, 333-38094, 333-108716, 333-125743 and 333-144221 on Form S-8 and Registration Statements No. 33-49082, 33-76094, 333-24549, 333-76641, 333-77925, 333-31442, 333-32776, 333-34958, 333-35934, 333-107820, 333-111680, 333-114389, 333-123867, 333-124230 and 333-125979 on Form S-3 of our report dated December 19, 2007, relating to the consolidated financial statements of AVANIR Pharmaceuticals and subsidiaries appearing in this Annual Report on Form 10-K of AVANIR Pharmaceuticals for the year ended September 30, 2007.

/s/ KMJ Corbin & Company LLP

Irvine, California
December 19, 2007

EX-31.1

EXHIBIT 31.1

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Keith A. Katkin, certify that:

1.	I have reviewed this Form 10-K of AVANIR Pharmaceuticals;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.	[Omitted]
c.	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s Board of Directors (or persons performing the equivalent functions):

a.	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: December 19, 2007	/s/ Keith A Katkin
	Keith A. Katkin
	President and Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Martin J. Sturgeon, certify that:

1.	I have reviewed this Form 10-K of AVANIR Pharmaceuticals;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.	[Omitted]
c.	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s Board of Directors (or persons performing the equivalent functions):

a.	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: December 19, 2007	/s/ Martin J. Sturgeon
	Martin J. Sturgeon
	Vice President and Interim Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SECTION 1350)

In connection with the accompanying Annual Report of AVANIR Pharmaceuticals (the “Company”) on Form 10-K for the fiscal year ended September 30, 2007 (the “Report”), I, Keith A Katkin, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: December 19, 2007	/s/ Keith A Katkin
	Keith A. Katkin
	President and Chief Executive Officer [Principal Executive Officer]

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SECTION 1350)

In connection with the accompanying Annual Report of AVANIR Pharmaceuticals (the “Company”) on Form 10-K for the fiscal year ended September 30, 2007 (the “Report”), I, Martin J. Sturgeon, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: December 19, 2007	/s/ Martin J. Sturgeon
	Martin J. Sturgeon
	Vice President and Interim Chief Financial Officer [Principal Financial Officer]