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SECURITIES AND EXCHANGE COMMISSION

Commission File No. 1-15803

AVANIR Pharmaceuticals

(858) 622-5200

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

         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 an accelerated filer (as defined in Exchange Act Rule 12b-2).    Yes þ         No o

         As of the Company’s most recently completed second fiscal quarter, the aggregate market value of the outstanding shares of Class A common stock held by non-affiliates was approximately $125,000,000. For purposes of the foregoing disclosure and without admitting whether any person is an affiliate of the registrant, all shares owned directly or indirectly by officers and directors of the registrant have been treated as owned by an affiliate.

         The number of shares of Common Stock of the registrant issued and outstanding as of December 7, 2004:

DOCUMENTS INCORPORATED BY REFERENCE

         The registrant’s definitive Proxy Statement, which will be filed with the Securities and Exchange Commission on or before January 28, 2005 in connection with the registrant’s Annual Meeting of Shareholders to be held in 2005, is incorporated by reference into Part III of this report.

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PART I

      This Annual Report on Form 10-K contains forward-looking statements concerning future events and performance of our company. You should not rely excessively on these forward-looking statements, because they are only predictions based on our current expectations and assumptions. Forward-looking statements often contain words like “estimate,” “anticipate,” “believe,” “plan” or “expect.” Many known and unknown risks and uncertainties may cause our actual results to differ materially from those indicated in these forward-looking statements. You should review carefully the risks and uncertainties identified in this report. We disclaim any obligation 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.

The Company

      AVANIR Pharmaceuticals is a drug discovery and development company focused primarily on novel treatments for chronic diseases. AVANIR is currently developing Neurodex^TM for the treatment of pseudobulbar affect (“PBA”) and for the treatment of chronic diabetic neuropathic pain. We have successfully completed two Phase III trials of Neurodex in the treatment of PBA in patients with multiple sclerosis (“MS”) and with Lou Gehrig’s disease (amyotrophic lateral sclerosis or “ALS”), and one Phase II trial for the treatment of diabetic neuropathic pain. We also have a potential product for allergy and asthma, AVP-13358, which is in Phase I clinical development.

      Our clinical and preclinical research and drug discovery programs are focused primarily on small molecules that can be taken orally as therapeutic treatments. Other small molecule research programs include potential treatments for atherosclerosis and inflammation, which are both in the preclinical development stage. Using our proprietary Xenerex^TM technology, we are also conducting research to develop injectable human monoclonal antibody products for anthrax, cytomegalovirus, and other infectious diseases.

      AVANIR has demonstrated that it is capable of developing a drug from the beginning discovery stage through all clinical development stages, and in obtaining marketing approval by the U.S. Food and Drug Administration (“FDA”). AVANIR’s first product, docosanol 10% cream, (sold as Abreva® by our marketing partner GlaxoSmithKline Consumer Healthcare in North America) is the only over-the-counter (“OTC”) treatment for cold sores that has been approved by the FDA.

      AVANIR’s offices and research facilities are located at 11388 Sorrento Valley Road, San Diego, California 92121. Our telephone number is (858) 622-5200 and our e-mail address is [email protected]. Additional information about AVANIR can be found on our website, at www.avanir.com, and in our periodic and current reports filed with the Securities and Exchange Commission (“SEC”). Copies of our current and periodic reports filed with the SEC are available at the SEC Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549, and online at www.sec.gov and our website at www.avanir.com.

Neurodex^TM — PBA Indication

      PBA is a symptom complex that is characterized by unprovoked and uncontrollable episodes of crying or laughing, and afflicts patients with neurological disorders such as Lou Gehrig’s disease, Alzheimer’s disease, MS, stroke and traumatic brain injury. IMS Health has estimated PBA to be a $450 million market in the United States by 2005. Our leading drug candidate, Neurodex, is the first drug product in clinical development specifically intended to treat PBA. Neurodex is a patented, orally administered combination of dextromethorphan and an enzyme inhibitor that sustains elevated levels of dextromethorphan in the human body.

      AVANIR has achieved positive results in two pivotal Phase III clinical trials evaluating the safety and effectiveness of Neurodex in the treatment of PBA, including the latest trial completed in 2004 in patients with MS. In the double blind Phase III clinical study (AVR-106) completed in June 2004, 150 patients at 22 clinical sites were randomized to receive either placebo or Neurodex on a 12-hour dosing schedule for 90 days.

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      Overall, Neurodex was well tolerated in the patient population for AVR-106. The majority of reported side effects (adverse events) were mild or moderate. Of the adverse events reported in 5% or more of the patients, a statistically significant difference between Neurodex and placebo was observed only for dizziness. In the Neurodex group, 14% of patients withdrew from therapy due to adverse events, compared to 11% discontinuing in the placebo group.

      The first Phase III trial of Neurodex for PBA in ALS patients was completed in June 2002 (Neurology, 2004; 63:1364-1370). The double blind, controlled, multicenter clinical trial had three treatment arms and compared Neurodex to each of its two components, dextromethorphan and quinidine. Results of earlier Phase I studies demonstrated that the combination of dextromethorphan and a low dose of quinidine results in elevated and prolonged dextromethorphan blood levels (The Journal of Clinical Pharmacology, 2004; 44:1132-1142). Dextromethorphan has activity as both a sigma-1 receptor agonist and N-methyl-D-aspartate (“NMDA”) receptor antagonist.

      AVANIR is in the process of preparing its initial submission of data under a new drug application (“NDA”) to the FDA for Neurodex for the treatment of PBA. Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding this planned submission. The Company is also conducting an open-label study of PBA at 39 sites in a diverse population of patients with various neurologic disorders. The open label study is intended to establish further safety of the drug, and includes a study plan for evaluating at least 100 patients taking Neurodex for at least a one-year period and an additional 200 patients for at least a six-month period. We intend to complete the NDA submission by mid-2005.

Neurodex — Neuropathic Pain Indication

      Neuropathic pain, arising from nerve injury, results in a chronic and debilitating form of pain that in the past has been poorly diagnosed and treated. Conditions that cause neuropathic pain include trauma (e.g. car accidents), cancer, viral infection (e.g. herpes zoster) and metabolic disease (e.g. diabetic neuropathy). For example, at least half of the 15.7 million Americans who have diabetes are estimated to suffer from nerve damage caused by the disease, according to the American Diabetes Association. The damaged nerves can alter the sensitivity of pain centers in the spinal cord and consequently intensify pain transmission within the central nervous system. Diabetic neuropathic pain currently is most commonly treated with tricyclic antidepressants, anticonvulsants, opioid analgesics and local anesthetics. Most of these treatments have limited effectiveness or undesirable side effects. AVANIR intends to develop Neurodex as a viable competitor in the $1 billion plus neuropathic pain market.

      The most recently completed clinical study of Neurodex in the treatment of neuropathic pain was a four-week open label dose escalation study completed in June 2003. Results from the study indicated that Neurodex was well tolerated up to the highest target dose in the non-placebo controlled study. Patients in the study reported decreased pain intensity that was significantly different from baseline (p<0.0001). Additionally, 91% and 97% of the patients reported pain relief by Day 8 and Day 15, respectively, compared to baseline. The pain relief reported by the patients during the study improved with the duration of the study.

      The clinical trial was conducted at five U.S. sites in 36 adult volunteers with diabetic neuropathy who experienced pain on a daily basis in the lower extremities for at least the previous three months. The study was designed to evaluate the safety and tolerability of escalating doses of Neurodex for future clinical trials. Various pain assessments were included as a preliminary evaluation of pain relief. Three patients did not

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      We expect to begin a Phase III clinical trial of Neurodex for the treatment of neuropathic pain in 2005. Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more information. To help fund the cost of the clinical development program and possibly accelerating our plans for commercialization of Neurodex, we are considering licensing and co-promotion opportunities with other companies. There can be no assurances that the economic terms of any offers made to us regarding a license or co-promotion arrangement will be sufficiently attractive to warrant pursuing.

Docosanol 10% Cream

      We continue to make progress in commercializing our cold sore product, docosanol 10% cream (known as Abreva® in the U.S.), by achieving regulatory approvals and license arrangements in several foreign countries. Under the terms of the 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 AVANIR to receive a data transfer fee, potential milestone payments and royalties on product sales. For the last three years, a substantial portion of AVANIR’s revenues have come from milestone payments and royalties on product sales in the U.S. by GlaxoSmithKline and from the sale of an undivided interest in the GlaxoSmithKline license agreement to Drug Royalty USA, as further described below.

      The table below summarizes the status of commercialization of docosanol 10% cream in the United States and various other countries.

      In November 2003, the Swedish Medical Products Agency approved docosanol 10% cream for marketing as a non-prescription, OTC topical treatment for cold sores. We selected Sweden to act as the Reference Member State for obtaining regulatory approvals of docosanol 10% cream in several other European countries

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      The use of Sweden as the Reference Member State during the mutual recognition process for obtaining further regulatory approvals of docosanol 10% cream in the European Union was partially successful in 2004, based on responses from the four countries where the applications were submitted. We obtained approvals in Spain and Portugal using the evaluation conducted by Sweden as the Reference Member State. But we withdrew our applications in Italy and England, given the nature of initial questions from the respective regulatory agencies, limited procedural options, and short timelines provided by the mutual recognition process. As an alternative, we are proceeding to assist our local partner in Italy, Bruno Farmaceutici, in its application for national regulatory approval in that country. Regarding other countries in the European Union, we plan to assist our marketing partners in making the necessary regulatory submissions, which may or may not use the mutual recognition process.

      In fiscal 2003, AVANIR sold an undivided interest in the GlaxoSmithKline license agreement to Drug Royalty USA for $24.1 million. AVANIR retained the right to receive 50% of all royalties under the GlaxoSmithKline license agreement for annual sales of Abreva in excess of $62 million, a level that could be achieved in two years assuming current growth rates. AVANIR also retained its rights to develop and license docosanol 10% cream outside North America for the treatment of cold sores and to develop and license docosanol 10% cream in all jurisdictions for all other indications other than cold sore treatment.

      Docosanol inhibits fusion between the plasma membrane and the herpes simplex virus (“HSV”) envelope, thereby preventing viral entry into cells and subsequent viral replication. Normally, cold sores progress when the cold sore infection spreads from infected cells to healthy ones. Docosanol works by protecting healthy cells so the cold sore infection is less likely to spread to those cells.

      We continue to pursue licensing opportunities for docosanol 10% cream in other countries in Europe and in Japan. However, we can provide no assurance that any of our licensees will be able to obtain regulatory approval, either as an OTC product or as a prescription product, in Japan or in other countries that do not participate in the mutual recognition process.

      AVANIR continues to conduct preclinical research on potential topical formulations of docosanol in the treatment of genital herpes. Our genital herpes research during the past three years has been funded by a $1.0 million Small Business Innovative Research (“SBIR”) Phase II grant from the National Institutes of Health and an aggregate of $150,000 in grants from the San Diego Regional Technology Alliance.

AVP-13358 — Allergy/asthma Indication

      AVP-13358 is a novel, orally active drug molecule discovered by scientists at AVANIR that is intended to inhibit or prevent the production of immunoglobulin epsilon (“IgE”), a well-known mediator of allergy and asthma. Both allergies and asthma are respiratory diseases caused by agents called allergens. In allergy-prone people, the presence of invading allergens triggers the immune system to produce an extra amount of IgE, which results in an allergic response that can range from mild sneezing to a serious asthmatic attack. In addition to its effect on IgE, this compound has demonstrated an ability to suppress the antigen-stimulated IL-4 and IL-5 responses with potencies similar to those observed for IgE suppression. AVP-13358 also suppresses markers of disease in mouse models of asthma, including pulmonary lavage levels of IL-4, IL-5, eosinophils, and lymphocytes, as well as expression of CD23 and the IL-4 receptor (IL4Ra) on leukocytes.

      AVANIR is engaged in Phase I clinical development of AVP-13358. The latest study, completed in 2004, included 54 healthy volunteers and was intended to assess safety, tolerability and pharmacokinetics following a single oral administration. Results from the study suggest AVP-13358 was well tolerated at all doses. The study also demonstrated AVP-13358 was detectable in the bloodstream at all doses administered and remains

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      We estimate the worldwide market for sales of products that treat allergy and asthma is over $10 billion a year. The FDA’s recent approval of Xolair^TM, an injectable antibody that neutralizes the target IgE, helps validate IgE as a target in the treatment of patients with asthma. Presently, no small molecule drugs (which can be taken orally) have been approved by the FDA for the down-regulation of IgE, either via neutralization or suppression of its synthesis or release. We believe our new small molecule agent, AVP-13358, is an attractive candidate for developing as a treatment for allergy and asthma. There can be no assurances that AVP-13358 will successfully complete all of the repeat rising doses planned for testing the safety and bioavailability in the Phase I clinical trials, nor that it will successfully complete all of the other clinical trials required to successfully obtain the FDA’s approval of the drug.

Other Small Molecule Research Programs

      MIF inhibitor technology. AVANIR continues to conduct research on orally active drug candidates that appear capable of regulating the target, MIF (macrophage migration inhibitory factor), a protein believed to play a critical role in inflammatory disorders such as rheumatoid arthritis, inflammatory bowel disease and psoriasis. In April 2004, AVANIR presented data on its lead anti-inflammatory compounds at the Experimental Biology 2004 meeting organized by the Federation of American Societies for Experimental Biology (“FASEB”) in Washington, D.C. At the FASEB, we reported that we had developed compounds that were effective in both preventing the progression of colitis, a type of inflammatory bowel disease, and in reducing the signs and symptoms of ongoing colitis. In animal models of colitis, increased doses of AVANIR’s compounds also correlated with reduction in tumor necrosis factor-alpha (“TNFa”).

      AVANIR’s MIF inhibitory technology may also offer a novel therapeutic intervention in inflammatory neurological diseases, glomerulonephritis and asthma. We believe all of these inflammatory diseases still have unmet therapeutic needs. Sales of current drugs for these diseases exceed several billion dollars in the United States alone. Examples of successful commercialization of injectable drugs that target pro-inflammatory proteins are Enbrel® by Immunex Corporation and Remicade® by Johnson & Johnson, both of which target TNFa by binding to TNFa or the TNFa receptor, respectively. Our research program is at an early stage of development and will take several years of development effort to determine whether or not it will be successful.

      Atherosclerosis. We made important progress this past year in our atherosclerosis research program. In March 2004, we reported the discovery of a series of orally active small molecules that, in animal models, reduce the fatty deposits in blood vessel walls (commonly called plaque) typically associated with atherosclerosis. The experimental animal models that served to evaluate AVANIR’s compounds also showed favorable effects on plasma cholesterol levels in lowering LDL cholesterol while increasing HDL cholesterol.

      We chose a lead candidate, designated AVP-26452, with the objective of providing the “next generation” of lipid lowering drugs. Unlike currently available drugs that focus on lowering plasma levels of LDL cholesterol, AVANIR’s compounds are designed to promote a natural process known as reverse cholesterol transport. The reverse cholesterol transport pathway may be a more efficient mechanism to both prevent and reverse vascular diseases.

Xenerex^TM Antibody Technology

      Using our patented, proprietary Xenerex antibody technology, we are developing antibodies for use as prophylactic and therapeutic drugs to prevent and treat anthrax infections and other infectious diseases. Two of our lead antibodies, AVP-21D9 and AVP-22G12, completely inhibit anthrax toxin complex assembly, and do so by attaching to distinct domains of the toxin. Both antibodies bind to the anthrax toxin with a very high affinity, in the picomolar range. Additionally, these are two of AVANIR’s most potent anthrax toxin

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      In February 2004, we received a $750,000 grant from the National Institute of Allergy and Infectious Diseases (“NIAID”) at the National Institutes of Health for AVANIR’s two-year project on Human Antibodies for Exposure/ Protection from Anthrax. This grant follows the initial $100,000 grant from the SBIR program of NIAID that AVANIR was awarded in October 2003. The combined grants are being used to further develop AVANIR’s fully human monoclonal antibodies to anthrax toxins using our proprietary technology. We intend to seek additional government grants to complete the development process required prior to submitting an investigational new drug application (“IND”) to the FDA. However, there can be no assurance that these research programs will receive additional government grants.

      AVANIR has a cross-license and research collaboration agreement with VaxGen Inc. for the development and manufacture of pre-clinical supplies of our monoclonal antibody candidates for prevention and treatment of anthrax infections. Such collaboration for manufacturing of supplies becomes effective only if AVANIR is able to receive additional government grants. The collaboration, signed in January 2004, combines AVANIR’s proprietary expertise to discover, characterize and develop highly potent anthrax antibodies with VaxGen’s current good manufacturing practices (“cGMP”) protein manufacturing capability and experience gained through its anthrax vaccine development program.

      AVANIR’s antibody technology involves the development and generation of fully human antibodies from human lymphoid cells engrafted into severe combined immunodeficient (“SCID”) mice. We stimulate engrafted human cells in the mice with the antigenic target to which the cells respond by producing antibodies specific to the target. We identify the human cells that are producing antibodies of interest and then rescue the antibody DNA by standard recombinant technology. Our technology enables us to mimic the in vivo human antibody response in generating multiple antibodies with various combinations of affinity and specificity characteristics to an antigenic target. Our antibody technology is at an early stage of development and we cannot provide any assurances that any of our preclinical products will ever reach the clinical development stage or be successful.

Inventory and Docosanol Supply

      We purchase the active pharmaceutical ingredient (“API”), docosanol, from a large supplier in Western Europe. This manufacturing source was inspected by the FDA in 1998 and found to be operating under cGMP. Both AVANIR and GlaxoSmithKline have relied on this supplier for purchases of the API. We believe GlaxoSmithKline maintains reserves of the API as a precautionary measure in the event of a delay or problem in the manufacture of docosanol. We also maintain a certain quantity of the API for sale to our licensees. 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, which would be outside our control.

Competition

      The pharmaceutical industry is characterized by rapidly evolving technology and intense competition. Many 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 and larger research and development and clinical and regulatory affairs staffs. 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.

      Neurodex for PBA. Although we anticipate that Neurodex will be the first product to be marketed for the treatment of PBA, assuming the FDA approves the drug, we are aware that physicians may utilize other

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	•	Antidepressants, including Prozac®, Celexa®, Zoloft®, Paxil®, Elavil® and Pamelor® and others;
	•	Atypical antipsychotics agents, including Zyprexa®, Resperdal®, Abilify®, Geodon® and others; and
	•	Miscellaneous agents, including Symmetrel®, Lithium and others.

      Neurodex for neuropathic pain. We anticipate that Neurodex for the treatment of neuropathic pain, if fully developed by the Company and approved by the FDA for marketing, will compete with other drug products that are currently prescribed by physicians. Such products currently prescribed by clinicians to treat neuropathic pain include:

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

      Docosanol 10% cream. As the international product launch for docosanol 10% cream (Abreva® in the United States) progresses, the drug will face intense worldwide competition from the following products:

	•	OTC monograph preparations, including Carmex®, Zilactin®, Campho®, Orajel®, Herpecin® and others;
	•	Zovirax® acyclovir (oral and topical) and Valtrex® valacyclovir (oral) prescription products marketed by Biovail Corporation and GlaxoSmithKline, respectively, and
	•	Famvir® famciclovir (oral) and Denavir® penciclovir (topical) prescription products marketed by Novartis.

      AVP-13358 (IgE down-regulation program). Our IgE down-regulation program competes with several research approaches and numerous compounds under development by large pharmaceutical and biotechnology companies. One such example is the anti-IgE therapy using rhuMAB-E25 (Xolair®), a recombinant humanized monoclonal antibody developed in a collaboration between Genentech, Tanox and Novartis. The injectable antibody Xolair was approved for marketing by the FDA in 2003. Other competitive and successful products already established in the marketplace include non-sedative antihistamine products, such as Shering-Plough’s Claritin® loratadine ($3 billion in annual sales) and Aventis’ Allegra®/ Telfast® ($1 billion in annual sales).

      Antibody generation technology. Several companies, including Abgenix, Inc., Medarex, Inc., Cambridge Antibody Technology Group, plc., and Human Genome Sciences, Inc. have human antibody generation technologies and have been in business longer and have substantially greater financial resources and personnel than we have.

Patents and Proprietary Rights

      Patents. AVANIR presently owns or has the rights to 94 issued patents (26 U.S. and 68 foreign) and 250 applications pending (30 U.S. and 220 foreign). Patents and patent applications owned by the Company include docosanol-related products and technologies, Xenerex technologies for developing monoclonal antibodies, Neurodex^TM, compounds capable of down-regulating the target IgE in controlling symptoms of

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      Docosanol-related technologies. These patents and patent applications pending cover both medical and veterinary uses of topical and systemic formulations of docosanol 10% cream in the U.S. and in foreign countries. We also have been granted rights under selected U.S. and foreign patents and patent applications related to docosanol 10% cream held by a third party.

      Xenerex proprietary antibody generation technologies. We own the rights to several issued patents related to our Xenerex antibody generation technology.

      IgE down-regulation technology. Our patents and patent applications are for the use of various small molecules and related general structures currently under development or being used in clinical and preclinical research for the regulation of IgE in the treatment of various inflammatory diseases.

      Neurodex. We have in-licensed the rights to develop, manufacture and sell a drug combination of dextromethorphan and an enzyme inhibitor for the treatment of several central nervous system disorders.

      MIF inhibitor technology. The patent applications pending for our MIF inhibitor technology are in regard to the use of one or more of a series of small molecule compounds that target MIF as a potential novel therapeutic intervention in rheumatoid arthritis, sepsis, ulcerative colitis, Crohn’s disease, inflammatory neurological diseases, glomerulonephritis and asthma.

      Atherosclerosis. The patent applications pending for our potential treatment of atherosclerosis relate to the general structures currently under development in preclinical research.

      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 other rights owned by others, the licenses to which might not be available to us. In addition, the National Institutes of Health regulations provide that, if federally funded entities do not pursue patent applications for patentable inventions in a timely manner, then the government may exercise its rights to own these inventions.

      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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      Proprietary rights. In some cases, we may rely on trade secrets and confidentiality agreements to protect our innovations. We can provide no assurance that:

	•	Our trade secrets will be maintained;
	•	Secrecy obligations will be honored; or
	•	Others will not independently develop similar or superior technology.

      If consultants, key employees or other third parties apply technological information independently developed by them or by others to our projects, we may be subject to disputes regarding the proprietary rights to this information that may not be resolved in our favor.

      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 currently are 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 produced and marketed for human use 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 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 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 an 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 as a result of recent announcements regarding safety problems with approved drugs. (See “Risk Factors that Might Affect Future Operations.”)

      The FDA’s Center for Drug Evaluation and Research (“CDER”) must approve a new drug application or biologics license application for a drug before the drug may be marketed in the U.S. At the time, if ever, that we begin to market our proposed products for commercial sale in the U.S., any manufacturing operations

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      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 Federal Trade Commission’s Lanham Act, and other federal and state laws, including the federal anti-kickback statute.

      We currently intend to continue to seek approval to market docosanol 10% cream and other proposed products 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 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.

Human Resources

      As of December 7, 2004, we employed 60 persons, including 38 engaged in research and development activities and clinical and regulatory affairs, 5 in commercial development, and 17 engaged in administrative functions such as human resources, finance, accounting, purchasing and investor relations. Our staff includes 29 employees with Ph.D. or M.D. degrees. None of our employees are members of a union. We believe that our relationship with our employees is good.

Risk Factors That Might Affect Future Operations

      We have a history of losses and we may never achieve or maintain profitability.

      To date, we have experienced significant operating losses in funding the research, development and clinical testing of our drug candidates and we expect to continue to incur substantial operating losses through at least fiscal 2006. As of September 30, 2004, our accumulated deficit was approximately $124.4 million. To achieve profitability, we would need to generate significant additional revenue with positive gross margins to offset our other operating expenses. Additionally, we intend to increase our pre-launch activities and sales and marketing efforts over the next several quarters as we prepare for submission of an NDA to the FDA for Neurodex and await the FDA’s decision. We could also increase spending on our preclinical programs to the extent our progress in development is favorable. Although we are seeking to negotiate revenue-generating licenses and/or co-promotion arrangements for docosanol 10% cream and other product candidates, we may not find attractive arrangements, if at all, and any such arrangements may not provide adequate revenues to cover future operating expenses. Increases in expenditures may not be offset by new or adequate sources of revenues, and as a result, we may not achieve or maintain profitability.

      Although our Phase III clinical trial for Neurodex in MS patients with PBA showed favorable results, we must submit our results for this study and other studies to the FDA for review and approval prior to U.S. commercialization. Any delay in the regulatory review or approval process may harm our prospects and could harm our stock price.

      We intend to begin submission of an NDA for Neurodex to the FDA by December 31, 2004 and must obtain FDA approval prior to commercialization in the United States. Any delays in our submission or in the FDA’s review or approval would delay market launch and increase our cash requirements and could increase the volatility of our stock price and result in additional operating losses.

      The process of obtaining FDA approval typically takes many years and can vary substantially based upon the type, complexity and novelty of the products involved. FDA’s review and approval of the actual NDA

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      We also cannot be certain that Neurodex will receive a favorable recommendation from any FDA advisory committees or be approved for marketing by the FDA. Even if the FDA grants us marketing approval for Neurodex, we cannot be certain that we will be able to obtain the labeling claims necessary or desirable for the promotion of the product. In addition, delays in approvals or rejections of marketing applications may be based upon many factors, including regulatory requests for additional analyses, reports, data and/or studies, regulatory questions regarding data and results, changes in regulatory policy during the period of product development and/or the emergence of new information regarding our products or other products.

      We have yet to market or sell Neurodex or any of our other potential products.

      Although we may market Neurodex in the United States through the recruitment of experienced marketing and sales personnel, assuming Neurodex is approved by the FDA, we have never before marketed or sold any pharmaceutical products. In order to market or co-market Neurodex or certain other drug candidates, we will need to hire a significant number of people with relevant pharmaceutical experience to staff our sales force and marketing group, and possibly also to make appropriate arrangements with collaborative partners. If we cannot develop the required marketing and sales expertise internally or through our partnering arrangements, our ability to generate revenue from product sales will likely suffer.

      In the international markets, we intend to rely on collaborative partners to obtain regulatory approvals, and to market and sell our products in those markets. We have not yet entered into any collaborative arrangement with respect to marketing or selling Neurodex with the exception of agreements relating to Israel. We cannot guarantee that we will be able to enter into any other arrangements on terms favorable to us, or at all. If we are able to enter into marketing and selling arrangements with collaborative partners, we cannot assure you that such marketing collaborators will apply adequate resources and skills to their responsibilities, or that their marketing efforts will be successful. If we are unable to enter into favorable collaborative arrangements with respect to marketing or selling Neurodex or docosanol 10% cream or our marketing collaborators’ efforts are not successful, our ability to generate revenue from product sales will suffer.

      We expect that we will need to raise additional capital to fund ongoing operations through at least 2006. If we are unable to raise additional capital, we may be forced to curtail operations. If we succeed in raising additional capital through a licensing or financing transaction, it may affect our stock price and future revenues.

      In order to maintain sufficient cash and investments to fund future operations, we will need to raise additional capital. We expect to seek to raise additional capital over the next 12 to 24 months through various alternatives, including licensing or sales of our technologies and drug candidates and selling shares of our Class A common stock.

	•	If we raise capital through licensing or sales of one or more of our technologies or drug candidates, then we may not realize revenues from product sales for products that are successfully developed, approved by the FDA and marketed. If we license any of our technologies or drug candidates, then the development of these products or technologies may no longer be in our control. A licensee might not ever reach any of the milestones in a license agreement and we would not earn any additional payments

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		in such an event. Further, if we sell any of our technologies or drug candidates, the sales price may not fully cover our investment in such technology or drug candidate.
	•	If we raise capital by issuing additional shares of Class A common stock at a price per share less than the then-current market price per share, the value of the shares of Class A common stock then outstanding may be reduced. Further, even if we were to sell shares of common stock at prices equal to or higher than the current market price, the issuance of additional shares may depress the market price of our Class A common stock and dilute voting rights.
	•	We may not be able to raise capital on terms that we find acceptable, or at all. If we are unable to raise additional capital to fund future operations, then we might have to reduce operations or defer or abandon one or more of our clinical or preclinical research programs. Any of these actions could be expected to have an adverse effect on our stock price.

      We expect our quarterly operating results to fluctuate significantly from period-to-period for a number of reasons.

      Historically, we have had only limited recurring revenue. As a result, operating results have been, and will continue to be, subject to significant quarterly fluctuations based on a variety of factors, including:

	•	Co-promotion or license arrangements — We are currently seeking co-promotion or licensing partners for docosanol 10% cream and Neurodex, as well as for our compounds targeting IgE (allergy and asthma), MIF (inflammation) and apolipoprotein A1 (atherosclerosis). It is difficult to predict whether any of these discussions will result in a partnering or license arrangement and what the financial terms of such an arrangement might be. If we do enter into any such arrangements, the recognition of the revenue under those arrangements may depend on the efforts and performance of our licensees or partners in reaching milestones that are outside our control. Such milestones may include specific events, such as regulatory approval, product launch, the passage of time, or reaching a sales threshold.
	•	Limited rights to future Abreva royalties — In December 2002, we sold to Drug Royalty USA the rights to a substantial portion of our future royalty revenues from sales of Abreva by GlaxoSmithKline. We will not receive any future royalty payments unless and until annual Abreva wholesale sales exceed $62 million, at which time we will receive one-half of the stated royalty rate on any excess sales. We expect that any royalty payments on these excess sales, if any, would occur only once a year, after the end of each calendar year.
	•	Concentration of significant customers, suppliers and industries — Milestone payments, royalties earned, and revenues recognized from the sale of rights to royalties from a single licensee (GlaxoSmithKline) accounted for approximately 48%, 73% and 95% of our fiscal 2004, 2003 and 2002 revenues, respectively. We have now received all of the milestone payments from GlaxoSmithKline for North America. With the sale of our Abreva royalty rights to Drug Royalty USA, future royalty payments from GlaxoSmithKline will come exclusively from our remaining 50% share of Abreva royalties on contract sales in excess of $62 million a year. Additionally, we purchase the raw material docosanol from a sole foreign supplier that has been approved by the FDA for manufacturing. Any disturbances or delays in the manufacture of docosanol or other raw materials for our products and clinical research programs could seriously and adversely affect our business.
	•	Acquisitions/ alliances — If, in the future, we acquire technologies, products, or businesses, or we form alliances with companies requiring technology investments or commitments, we will face a number of risks to our business. The risks that we may encounter include those associated with integrating operations, personnel, and technologies acquired or licensed, and the potential for unknown liabilities of the acquired business. Our business and operating results on a quarterly basis could be adversely affected if any or our acquisition or alliance activities, to the extent they exist in the future, are not successful.

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      Our stock price is highly volatile and investors may not be able to sell their shares at or above the price they pay for them.

      The market price of our Class A common stock has been, and is likely to continue to be, highly volatile. The following factors, among others, could have a significant impact on the market price of our Class A common stock:

	•	Our success or failure in entering into license and/or co-promotion arrangements for our products and product candidates;
	•	Unfavorable or delayed announcements by us regarding clinical trial results or results of operations, or favorable announcements by our competitors;
	•	Delays in meeting goals or performance milestones by us or our marketing partners;
	•	Comments made by securities analysts, including changes in, or failure to achieve, financial estimates or milestones;
	•	Announcements of financing transactions and/or future sales of equity or debt securities;
	•	Announcements by us of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
	•	Sales of our Class A common stock by our directors, officers or significant shareholders; and
	•	Market and economic conditions.

      In addition, the market for biotechnology and pharmaceutical stocks has experienced significant price and volume fluctuations that are frequently unrelated to operating performance. This price volatility is often more pronounced for companies with a low stock price and a small market capitalization, such as ours. These broad market and industry factors might seriously harm the market price of our Class A common stock, regardless of our operating performance.

      A significant decline in our stock price, or other factors, could also result in our Class A common stock being delisted from the American Stock Exchange and could result in litigation, including a securities class action lawsuit. Such a lawsuit against us could result in substantial costs, potential liabilities and the diversion of management’s attention and resources.

      The Board of Directors has the authority to effect a reverse stock split within a stated range until March 18, 2005. If implemented, the reverse stock split may negatively affect the price and liquidity of our Class A common stock.

      At our 2004 Annual Meeting of Shareholders, the Board of Directors received the authority to implement, within its discretion and for a period of one year, a reverse split of our Class A common stock within a range of 1:2 to 1:12.5. If the Board of Directors were to effect a reverse stock split, the bid price of the Class A common stock may not continue at a level in proportion to the reduction in the number of outstanding shares resulting from the reverse stock split. For example, if the Board of Directors decided to implement a reverse stock split at a ratio of 1-for-5, the post-split market price of our Class A common stock may not be at least five times greater than the pre-split price. Accordingly, the total market capitalization of our Class A common stock after a reverse stock split, if implemented, could be lower than the total market capitalization before the proposed reverse stock split. Additionally, the liquidity of our Class A common stock could be affected adversely by the reduced number of shares outstanding after the reverse stock split.

      Developing and testing a drug candidate is a very expensive and time-consuming process that may not ultimately lead to a marketable product.

      The drug development process is lengthy and capital-intensive. Since September 1998, we have spent approximately $71.6 million in preclinical and clinical studies researching the safety and efficacy of our drug candidates and potential drug candidates. If any of our drug candidates fail to demonstrate the desired safety and efficacy, we may abandon the development of the compound, in which event we would not recover our

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      Avanir and its licensees may not be successful in obtaining regulatory approval of docosanol 10% cream immediately as an OTC product in the rest of the world, or in licensing, marketing and selling the product in foreign countries.

      Currently, docosanol 10% cream is approved for sale in the United States, Canada, Korea, Israel, Sweden, Spain and Portugal. We are currently seeking approval in various other countries in the European Union and intend to seek approval in Japan. AVANIR and its licensees face a variety of risks in foreign countries in obtaining regulatory approval and in marketing and selling docosanol 10% cream, including:

	•	Regulatory approval requirements differ by country, and obtaining approvals to market the drug in foreign countries may be difficult to obtain, may require additional costly and time consuming clinical trials, or may require being a prescription drug first before obtaining sufficient experience to warrant approval as an OTC product;
	•	Building product awareness of a new drug, whether prescription or OTC, among customers or retail store decision makers may require a substantial amount of product promotion, which does not guarantee success:
	•	Consumers may not perceive that docosanol 10% cream is superior to existing and potentially new OTC products for oral herpes;
	•	Acceptance of docosanol 10% cream in the OTC consumer market may not be widespread; and
	•	Potential price erosion could occur due to competitive products and responses to our product’s introduction.

      Foreign sales of docosanol 10% cream and other potential products are subject to various foreign trade risks.

      Our license agreement with GlaxoSmithKline is for the United States and Canada. We also have exclusive license agreements for docosanol 10% cream for approximately fourteen other countries. We are holding discussions with other potential licensees for marketing and selling docosanol 10% cream in other countries not already licensed. However, we may not finalize any license or distribution arrangements for other territories on a timely basis or on favorable terms, if at all. Further, our foreign licensees expose us to various foreign trade risks relating to development and marketing of docosanol 10% cream. We may arrange for contracts in the future for the manufacture, marketing and distribution of docosanol 10% cream overseas by foreign licensees, which will be substantially outside our control. Even if we are able to obtain experienced licensees in foreign markets, specific risks that could impact significantly our potential revenues on foreign sale include:

	•	Difficulties in obtaining regulatory approval of docosanol 10% cream in foreign countries;
	•	Changes in the regulatory and competitive environments in foreign countries;
	•	Changes in a specific country’s or region’s political or economic conditions, including related to terrorism;
	•	Difficulty in finding foreign partners with sufficient capital to effectively launch, market and promote the product;

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	•	Manufacturing and shipping delays;
	•	Difficulties in managing operations across disparate geographic areas;
	•	Fluctuations in foreign exchange rates;
	•	Prices of competitive products;
	•	Difficulties associated with enforcing agreements through foreign legal systems;
	•	Trade protection measures, including customs duties and export quotas; and
	•	Foreign tax withholding laws.

      Our inability to attract and retain key management and scientific personnel could negatively affect our business.

      Our success depends on the performance of a small core staff of key management and scientific employees with biotechnology experience. Given our small staff size and programs currently under development, we depend substantially on our ability to hire, train, retain and motivate high quality personnel, especially our scientists and management team in this field. If we were to lose one or more of our key scientists, then we would likely lose some portion of our institutional knowledge and technical know-how, potentially causing a substantial delay in one or more of our development programs until adequate replacement personnel could be hired and trained. Other than our chief executive officer, our executives do not have employment agreements. We do not have “key person” life insurance policies for any of our executives. The industry in which we compete has a high level of employee mobility and aggressive recruiting of skilled personnel. This type of environment creates intense competition for qualified personnel, particularly in product research and development, sales and marketing, and accounting and finance.

      Our patents may be challenged and our pending patents may be denied. Either result would seriously jeopardize our ability to compete in the intended markets for our proposed products.

      We rely substantially on the protection of our intellectual property through our ownership or control of 94 issued patents and 250 patent applications. Patents and patent applications owned or controlled by the Company include docosanol-related products and technologies, Neurodex, compounds capable of regulating the target IgE in controlling symptoms of allergy and asthma, compounds capable of regulating the target MIF in treatment of inflammatory diseases, compounds targeting apolipoprotein A1 for the treatment of atherosclerosis, and Xenerex technologies for developing monoclonal 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;
	•	Present and future competitors will not develop similar or superior technologies independently, duplicate our technologies or design around the patented aspects of our technologies;
	•	Our proposed technologies will not infringe other patents or rights owned by others, including licenses that may be 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.

      Our inability to obtain or maintain patent protections for our products in foreign markets may negatively affect our financial condition.

      The process for the approval of patent applications in foreign countries may differ significantly from the process in the U.S. These differences may delay our plans to market and sell docosanol 10% cream and other products in the international marketplace. Approval in one country does not indicate that approval will be obtained in other countries. 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 we must

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      We depend on third parties to manufacture 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 docosanol 10% cream, Neurodex, active pharmaceutical ingredients, and supplies for our other drug candidates. We have no experience in manufacturing and do not have any manufacturing facilities. Currently, we have only a single supplier for the raw material docosanol and we do not have any long-term supply agreements in place with this manufacturer. Although we and GlaxoSmithKline maintain a strategic reserve of the active pharmaceutical ingredient, docosanol, to mitigate against a short-term supply disruption, any sustained disruption of our supply could harm our operations.

      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 and clinical testing activities. As a result, our success depends partially on the success of these outside parties in performing their responsibilities. Although we pre-qualify our contractors and we believe that they will fully perform 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 activities in an adequate or timely manner, the development and commercialization of our drug candidates could be delayed.

      Developing new 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. We maintain product liability insurance coverage for our clinical trials in the amount of $5 million per incident and $5 million in the aggregate. However, product liability claims can be high in the pharmaceutical industry and our insurance may not sufficiently cover our actual liabilities. If a suit against our business or proposed products is successful, then the lack of or insufficiency of insurance 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.

      Abreva® faces competition from a number of existing and well-established products and the companies that market their products.

      We have the opportunity to earn royalties on Abreva product wholesale sales if sales exceed $62 million a year. Abreva competes with several other products for oral-facial herpes currently on the market in the U.S., as well as other products or potential products that are or may be under development or undergoing FDA review. Most of the competing products are manufactured by companies having substantially greater financial resources, research and development facilities and manufacturing and marketing experience than AVANIR. Even with Abreva being marketed by one of the world’s largest consumer healthcare companies, GlaxoSmithKline, not all competitive responses and the impact of those responses can be foreseen.

      Business interruptions could adversely affect our business.

      Our operations are vulnerable to interruption by fire, earthquake, power loss, telecommunications failure, and other events beyond our control. For example, during 2001 and again in 2003, we experienced electrical power outages lasting several hours. The loss of electrical power for any significant periods of time could adversely affect our ability to conduct experiments and could also harm our vendors. Further, we could lose

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      Our future financial results will be affected by changes in the accounting rules governing the recognition of stock-based compensation expense.

      We measure compensation expense for our employee stock compensation plans under the intrinsic value method of accounting prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” In addition, we provide pro forma disclosures of our operating results in our Notes to Consolidated Financial Statements as if the fair value method of accounting had been applied in accordance with SFAS No. 123, “Accounting for Stock-Based Compensation.” Had we accounted for our compensation expense under the fair value method accounting prescribed by SFAS No. 123, the charges would have been significantly higher, by approximately $1,003,000, $1,554,000 and $2,176,000 during fiscal 2004, 2003, and 2002, respectively. In October 2004, the Financial Accounting Standards Board (the “FASB”) announced the planned effective date for proposed changes to accounting rules concerning the recognition of stock option compensation expense to be the first period after June 15, 2005, or effectively July 1, 2005. We expect that the new FASB rules covering stock-based compensation will be issued soon. We and other companies will be required to measure compensation expense using the fair value method, which will adversely affect our results of operations by reducing our income or increasing our losses by an amount equal to the difference in the two measurement methods.

Risks Relating to Our Industry

      The pharmaceutical industry is highly competitive and most of our competitors are larger and have greater resources. As a result, we face significant competitive hurdles.

      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. Additionally, many physicians prescribe medications for indications other than those for which a certain drug has been approved (so called “off-label” use). For example, if the FDA approves Neurodex for marketing as a treatment of PBA, physicians may continue prescribing other products in an off-label manner for the treatment of this condition, including:

	•	Antidepressants, such as Prozac®, Celexa®, Zoloft®, Paxil®, Elavil® and Pamelor® and others;
	•	Atypical antipsychotics agents, such as Zyprexa®, Resperdal®, Abilify®, Geodon® and others; and
	•	Other agents, such as Symmetrel® and Lithium

      Our competitors may have specific expertise and 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 develop a competing product approved specifically for the treatment of PBA. If we commence commercial sales for Neurodex, we may potentially be competing with other companies and their products with respect to manufacturing efficiencies and marketing capabilities, areas where we have limited or no direct experience.

      Our industry is highly regulated and our failure or inability to comply with government regulations regarding the development, production, testing, manufacturing and marketing of our products may adversely affect our operations.

      Government authorities in the U.S., including the FDA, and other countries highly regulate the development, production, testing, manufacturing and marketing of pharmaceutical products. The clinical testing and regulatory approval process can take a number of years and requires the expenditure of substantial resources. Failure to obtain, or delays in obtaining, these approvals will adversely affect our business operations, including our ability to commence marketing of any of the proposed products. We may find it

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      Companies in our industry must protect their intellectual property rights and operate without infringing on or misappropriating the proprietary rights of others. Our inability to do so could be costly and could significantly affect our business prospects.

      Biotechnology companies such as AVANIR rely heavily on intellectual property rights to protect their innovations. Although we attempt to protect these rights by regularly filing patent applications and requiring all employees to sign confidentiality agreements, we cannot assure you that patents will be issued, that secrecy obligations will be honored, or that others will not independently develop similar or superior technology. Additionally, if our consultants, key employees or other third parties apply technological information independently developed by them or by others to our projects, then disputes may arise as to the ownership rights of these innovations.

      Even if we successfully preserve our intellectual property rights, 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 would 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 not to prevail in 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. 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.

      Companies in our industry are frequently subjected to product liability claims, which can be very costly to defend against.

      In the ordinary course of business, biotechnology and pharmaceutical companies face various claims brought by third parties, including claims relating to the safety or efficacy of 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 and financial position. Additionally, any such claims, whether or not successful, could damage our reputation and business.

      We currently lease 57,582 square feet of laboratory and office space in three buildings located at 11388, 11404, and 11408 Sorrento Valley Road, San Diego, California for combined base rental payments of approximately $142,000 per month in fiscal 2005. Our lease agreements provide for scheduled rent increases each year. The agreement for the building at 11388 Sorrento Valley Road expires on August 31, 2008. The lease agreement for buildings at 11404 and 11408 Sorrento Valley Road expires on January 14, 2013. See Note 4, “Commitments and Contingencies,” in the accompanying Notes to Consolidated Financial Statements and Exhibits 10.2 and 10.7. We maintain irrevocable standby letters of credit to the lessors or their creditors, totaling $857,000 to secure our performance under the leases.

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      In the ordinary course of business, we face various claims brought by third parties, including claims relating to 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 results of operations and financial position. Additionally, any such claims, whether or not successful, could damage our reputation and business.

      There were no matters submitted to a vote of the security holders of AVANIR Pharmaceuticals during the fourth quarter of fiscal 2004.

PART II

      Our Class A common stock trades 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 AMEX.

      On December 7, 2004, the closing sales price of Class A Common Stock was $3.16 per share.

      As of December 7, 2004, we had approximately 19,682 shareholders, including 1,055 holders of record and an estimated 18,627 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.

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      The selected consolidated financial data set forth below at September 30, 2004 and 2003, and for the fiscal years ended September 30, 2004, 2003 and 2002, 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 the independent auditors’ report thereon, 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, 2002, 2001 and 2000, and for the years ended September 30, 2001 and 2000, are derived from our audited consolidated financial statements that are contained in reports previously filed with the SEC.

      The quarterly consolidated financial data are derived from unaudited financial statements included in our Quarterly Reports on Form 10-Q.

Summary Financial Information

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      This annual report on Form 10-K contains forward-looking statements concerning future events and performance of our company. You should not rely excessively on these forward-looking statements, because they are only predictions based on our current expectations and assumptions. When used in this report, the words “intend,” “estimate,” “anticipate,” “believe,” “plan” and “expect” and similar expressions as they relate to AVANIR are included to identify forward-looking statements. Many factors could cause our actual results to differ materially from those indicated in these forward-looking statements. You should review carefully the factors identified in this report as set forth below and under the caption “Risk Factors that Might Affect Future Operations.” We disclaim any obligation 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.

Overview

      AVANIR Pharmaceuticals is a drug discovery and development company focused primarily on novel treatments for chronic diseases. AVANIR is currently developing Neurodex^TM for the treatment of pseudobulbar affect (“PBA”) and for the treatment of chronic diabetic neuropathic pain. We have successfully completed two Phase III trials of Neurodex in the treatment of PBA in patients with multiple sclerosis (“MS”) and with Lou Gehrig’s disease (amyotrophic lateral sclerosis or “ALS”), and one Phase II trial for the treatment of diabetic neuropathic pain. We also have a potential product for allergy and asthma, AVP-13358, which is in Phase I clinical development.

      Our clinical and preclinical research and drug discovery programs are focused primarily on small molecules that can be taken orally as therapeutic treatments. Other small molecule research programs include potential treatments for atherosclerosis and inflammation, which are both in the preclinical development stage. Using our proprietary Xenerex^TM technology, we are also conducting research to develop injectable human monoclonal antibody products for anthrax, cytomegalovirus, and other infectious diseases.

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      The following chart illustrates the approximate status of research activities for our products and product candidates that are under development.

      We strive to maintain a lean organizational structure while working on a diverse product development pipeline. We also strive to maintain flexibility in our cost structure, by managing over outsourced functions such as clinical trials, market research, legal counsel and portions of chemistry, rather than maintain all of these functions in house. While outsourcing can lead to higher costs in some cases, we believe the benefits of being flexible, and being able to rapidly respond to program delays, or successes, and the availability of capital to advance our programs, far outweigh the disadvantages. However, even with a lean, flexible organization, the continued development of our current product candidates and the potential launch of Neurodex will require substantial additional capital.

      We intend to partner with pharmaceutical companies that can help fund our research and development programs in exchange for sharing in the rights to commercialize new drugs. We have licensed certain rights to docosanol 10% cream and continue to seek licensees for that product and potential products in our pipeline. Research collaborations also represent a significant way to achieve our development goals by sharing the risks and the opportunities that come from such development efforts.

      We expect that our development and operational costs will continue to exceed revenues from existing sources through at least fiscal 2006. We will have to raise significant amounts of additional capital to continue our research and development activities, prepare for potential product launch of Neurodex for PBA and fund other operating activities. Our future capital needs will depend substantially on the economic terms and the timing of any new partnership or collaborative arrangements with pharmaceutical companies under which they will share the costs of such activities. If we are unable to raise capital as needed to fund our operations, or if we are unable to enter into any such collaborative arrangements, then we may need to slow the rate of development of some of our programs or sell the rights to one or more of our drug candidates.

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Critical Accounting Policies and Estimates

      The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires that management make a number of assumptions and estimates that affect the reported amounts of assets, liabilities, revenues and expenses in our consolidated financial statements and accompanying notes. Management bases its estimates on historical information and assumptions believed to be reasonable. Although these estimates are based on management’s best knowledge of current events and circumstances that may impact the Company in the future, actual results may differ from these estimates.

      Our critical accounting policies are those that affect our financial statements materially and involve a significant level of judgment by management. Our critical accounting policies regarding revenue recognition are in the following areas: milestone payments in license agreements, royalties on licensed products, sale of rights to future royalties, and recognition of revenues in research contracts. Our critical accounting policies also include recognition of expenses in research contracts and the capitalization and valuation of intangible assets.

      We recognize revenues from license fees when the performance requirements have been met, the fee is fixed or determinable, and collection of fees is probable. We defer revenues and recognize them ratably over the life of the agreement when we have continuing obligations to perform under the agreement.

      Our largest and most significant license agreement is with SB Pharmco Puerto Rico, Inc., a subsidiary of GlaxoSmithKline (“GlaxoSmithKline”). On March 31, 2000, we transferred the rights to manufacture, use, and sell Abreva in the United States and Canada to GlaxoSmithKline and gave them full control, authority and responsibility over research, development, regulatory compliance activities (including actions required to obtain appropriate government approvals), and commercialization of the product in those territories. GlaxoSmithKline has achieved and paid all of the performance milestones under the agreement, and we have no further performance obligations. Future revenues, if any, to be earned under the GlaxoSmithKline agreement will come solely from royalty revenues.

      We entered into additional agreements this year and expect to enter into additional license agreements in the future. We expect that each license agreement will have its own set of circumstances and terms of performance. We will consider the specific facts and circumstances of each license agreement to determine the appropriate revenue recognition for such items, including nonrefundable up-front fees, data transfer fees, and milestone payments and taking into consideration when the earnings process is complete and collection is reasonably assured.

      We recognize royalty revenues from our licensed products based on the reported sales by our licensees and computed in accordance with the specific terms of the license agreements. Since the launch of Abreva in October 2000 through September 30, 2004, substantially all of our royalties have come from GlaxoSmithKline. We have entered into additional license agreements that contain royalties as a source of revenues, and we expect to enter into additional similar license agreements with foreign-based companies in the future.

      In fiscal 2003, we sold an undivided interest in our license agreement with GlaxoSmithKline to Drug Royalty USA for $24.1 million. Because of our ongoing involvement with GlaxoSmithKline in earning future royalty revenues, we have recorded the amounts received from Drug Royalty USA, net of costs of the transaction and forgiveness of certain advances, as deferred revenue. The amount recorded as deferred revenue is being recognized as revenue under the units-of-revenue method over the period from October 2002 through April 2014. Under this method, the amount of deferred revenue being recognized as revenue in each period is calculated by multiplying (i) the ratio of the royalty payments due to Drug Royalty USA for the period to the

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      We may enter into research contracts or collaborations that have obligations to deliver to the customer multiple products and/or services (multiple deliverables) in exchange for fees or milestone payments. Such contracts could include antibody generation services agreements and other forms of research collaborations, as discussed below.

      Antibody generation services. As of September 30, 2004, we had $33,000 in deferred revenue related to a research collaboration agreement that had research initiation fees. In this type of agreement, the customer provides us with the target antigens. We then perform research services to develop potential antibodies for those antigens. If we are able to estimate the period of service in the contract in advance of beginning the work, then we recognize such research initiation fees ratably as revenue over the estimated period of service. If we are unable to identify the period of service in the contract in advance of beginning the work, we defer research initiation fees and recognize such fees as revenue only when we have completed our efforts to create the antibodies. In the research phases of the research collaboration agreement, we may receive payment either to start a research phase or to complete a research phase (including receipt by the customer of the deliverable). We recognize revenue once the product has been delivered because the earning process is complete and an exchange has been made. Factors taken into consideration in recognizing revenues include the following:

	•	The performance criteria have been met;
	•	Any deliverable products or services are not essential to the functionality of the delivered products or services; and
	•	Payment for the delivered products or services is not contingent on delivery of the remaining products or services.

      Other research contracts. As with all our research contracts, including the up-front initiation fee, we defer revenue recognition until services have been rendered or products (e.g. developed antibodies) are delivered. The milestones established within the contract are typically set to approximate the effort associated with the completion of each phase.

      Pursuant to management’s assessment of the progress that has been made on clinical trials and services provided in other research contracts, we recognize expenses as the services are provided. Several of our contracts extend across multiple reporting periods, including our largest contract valued at approximately $3.4 million as of September 30, 2004. A 5% variance in our estimate of the percent completed in our largest contract could increase or decrease our operating expenses by $173,000. Such contracts require an assessment of the work that has been completed during the period, including measurement of progress, analysis of data that justifies the progress, and finally, management’s judgment.

      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 of the technology or product being successful;
	•	There will be difficulty in completing the remaining development; and
	•	There is substantial cost to complete the work.

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      We capitalize legal costs incurred in connection with patents, patent applications pending, trademark applications and license agreements. We amortize costs of approved patents and license agreements over their estimated useful lives, or terms of the agreements, whichever are shorter. For patents pending, we amortize 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. We re-assess the useful lives of patents when they are issued, or whenever events or changes in circumstances indicate the useful lives may have changed. For patent and trademark applications that we abandon, we charge the remaining unamortized accumulated costs to expense. AVANIR’s amortizable intangible assets consist of the costs of patents, patent applications, and licenses.

      Intangible assets are evaluated for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. If the review indicates that 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 the 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.

      When we determine that the carrying value of intangible assets or long-lived assets are not recoverable based upon the existence of one or more of the above indicators of impairment, we may be required to record impairment charges for these assets that have not been previously recorded.

      As of September 30, 2004, our largest group of intangible assets with finite lives was for our IgE down-regulation technology, having net intangible assets of approximately $1.0 million. Any setback or failure in our IgE technology, currently in Phase I clinical development for the treatment of allergy and asthma, could cause a re-assessment of the value of this technology and possible write-down of all or a portion of the costs of these assets.

Nature of Operating Expenses

      AVANIR’s operating expenses are influenced substantially by the amount of spending devoted to clinical development programs and drug discovery research. During the past three years, we have substantially expanded our drug development pipeline, which requires that we allocate significant amounts of our resources to research and development activities and professional and consulting fees related to clinical trials programs, which also have increased substantially over the same period. We expect research and development expenses will represent approximately 60% of our operating expenses for fiscal 2005, compared with 70% for fiscal 2004, as we embark on pre-launch planning and sales and marketing programs for Neurodex.

      Other than research and development, our operating expenses are primarily related to sales and marketing and general and administrative areas. We expect that sales and marketing will increase as a percentage of total operating expenses in fiscal 2005, compared to fiscal 2004. We attribute the increased allocation to sales and marketing to our medical education and marketing programs for Neurodex. The balance of spending relates to general and administrative functions, including the Company’s board of directors, securities compliance, corporate governance, human resources, finance and investor relations. Our spending on general and administrative support staff tends to follow trends in other areas, but to a lesser extent. General and administrative expenses have tended to increase since the adoption of the Sarbanes-Oxley Act of 2002. Occupancy costs, including building rent, utilities, maintenance, operation of our laboratory and office facilities, insurance and depreciation, are allocated to the various departments based on headcount. Building rent amounting to approximately $1.8 million in fiscal 2004 has scheduled rent increases of approximately 4% a year for at least the next three years.

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      Our business is exposed to significant risks, as discussed in the section entitled “Risk Factors That Might Affect Future Operations,” 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 sales revenues and on operations has been minimal during the past three years.

Results of Operations

Comparison of Fiscal 2004 and 2003

      Revenues in fiscal 2004 amounted to $3.6 million, including $1.7 million from the recognition of deferred revenue relating to the sale of an undivided interest in our Abreva® license agreement to Drug Royalty USA (See Note 2, “Summary of Significant Accounting Policies — Deferred Revenue,” in the accompanying Notes to Consolidated Financial Statements), $787,000 in sales of the active ingredient docosanol to licensees, $759,000 from government research grants, and $328,000 from milestones and fees earned in license agreements. Revenues from government research grants included preclinical development of docosanol as a potential treatment for genital herpes ($373,000) and preclinical research on a potential antibody to anthrax ($265,000). Revenues for fiscal 2003 amounted to $2.4 million, including $1.8 million from the recognition of deferred revenue relating to the sale of an undivided interest in our Abreva license agreement, $587,000 from government research grants and $17,000 in docosanol product sales.

      During fiscal 2005, we expect to recognize approximately $1.8 million in revenues from the recognition of deferred revenue relating to the sale of an undivided interest in our Abreva license agreement and $578,000 in revenues from research being performed under government research grants. We expect sales of the active ingredient docosanol will be less than $100,000 in fiscal 2005. Projected fiscal 2005 revenues from new sources, such as license fees and milestone payments, will depend substantially on our ability to enter into additional license arrangements and achieve milestones under those arrangements. Such arrangements could be in the form of licensing or partnering agreements for docosanol 10% cream, Neurodex, or for our other product development programs including potential treatments for PBA, allergy and asthma, inflammation and atherosclerosis. Many of our product development programs could take years of additional development before they reach the stage of licensing, if ever, by other pharmaceutical companies.

      Partnering, licensing and research collaborations have been, and will continue to be, an important part of AVANIR’s business development strategy. We intend to partner with pharmaceutical companies that can help fund AVANIR’s research in exchange for sharing in the rights to commercialize new drugs resulting from this research. We have licensed and continue to seek licensees in other countries for docosanol 10% cream and other potential products in our development pipeline. Research collaborations also represent an important way to achieve our development goals, while sharing in the risks and the opportunities that come from such development efforts. Commercial contracts that remained active at the end of fiscal 2004 include seven docosanol 10% cream license agreements, one antibody license and one Neurodex sublicense. The Abreva license arrangement has been our most significant revenue source during the past four years, accounting for a majority of revenues in each of those years.

      Operating expenses. Total operating expenses amounted to $32.0 million in fiscal 2004, compared to $25.9 million in fiscal 2003. The $6.1 million or 24% increase in operating expenses was primarily caused by a $3.9 million or 21% increase in spending on research and development programs including a $2.7 million charge in fiscal 2004 related to the issuance of common stock to the Ciblex Corporation, in lieu of potential

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Operating Expenses

      Research and development (R&D) expenses. R&D expenses totaled $22.5 million in fiscal 2004, including the issuance of $2.7 million in common stock in connection with the MIF technology, compared to $18.6 million in fiscal 2003. (See Note 2, “Summary of Significant Accounting Policies — Research and Development Expenses” in the accompanying Notes to Consolidated Financial Statements.) Higher R&D spending for fiscal 2004, other than for the MIF technology, was primarily related to clinical development of Neurodex for the treatment of PBA. Neurodex had a higher number of patients enrolled in both the Phase III clinical trial and the open label safety study in the treatment of PBA in fiscal 2004, which resulted in a $2.4 million or 47% increase over fiscal 2003 program spending. Costs associated primarily with Phase I clinical trials of AVANIR’s lead compound for the treatment of allergies and asthma accounted for 16% of total R&D spending in fiscal 2004. The balance of R&D spending was for other programs, including pre-clinical research related to the development of compounds for the treatment of inflammation and atherosclerosis and antibody research programs.

      In fiscal 2003, the clinical trials of Neurodex for the treatment of PBA in patients with MS accounted for 27% of all R&D spending. Costs associated with completion of toxicology, submitting an IND, and initiating Phase I clinical trials of AVANIR’s lead compound for the treatment of allergies and asthma accounted for 25% of total R&D spending. The balance of R&D spending was for other programs, including clinical research of Neurodex for the treatment of neuropathic pain, pre-clinical research related to the development of compounds for the treatment of inflammation and atherosclerosis, and antibody research programs.

      Pharmaceutical R&D programs, by their very nature, require a substantial amount of financial and human resources and there is no assurance that any drug candidate will be approved for marketing by domestic and/or foreign regulatory agencies. The later stages of clinical development typically require substantially greater funds for development than the earlier stages. Thus, for many of our larger development programs, we intend to license our technology or partner with other pharmaceutical companies that have substantially greater financial resources. We expect that our licensees will continue to develop and fund those projects and pay us up-front license fees, data transfer fees, milestone payments, and royalties on product sales if those products are successfully developed and approved for marketing by the U.S. Food and Drug

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      The following table sets forth the status of, and costs attributable to, our proprietary research and clinical development programs.

Research and Development Projects and Expenses

(1)	Each project includes allocation of laboratory occupancy costs. “M” refers to millions. Estimated costs and timing to complete the projects are subject to the availability of funds.
(2)	Inception dates are on or after October 1, 1998, at which time we began identifying and tracking programs costs.
(3)	Total expenditures of $8.0 million include an additional $5.0 million in 2005 calendar year to complete the open label study and pay for the NDA submission fee.

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(4)	Licensing and co-promotion alternatives are being explored whereby a partner would fund a portion of clinical development. See “Research and Development Program Status and Plans.” Program expenditures for Neurodex for the treatment of neuropathic pain during each of the listed periods include allocated costs of certain research projects that are shared with Neurodex for PBA. We are in the process of developing our Phase III clinical study plan and estimated costs could change substantially.
(5)	Includes a non-cash charge of $2,733,023 related to the issuance of Class A common stock in connection with the MIF Inhibitor Technology (See Note 2, “Summary of Significant Accounting Policies — Research and Development Expense” in the accompanying Notes to Consolidated Financial Statements).
(6)	The costs and timing to complete these projects are unpredictable because of the uncertainty of outcomes of the research.
(7)	Represents the remaining balance of State and Federal research grant awards totaling $724,000 for research related to genital herpes and anthrax.

      Neurodex for the treatment of PBA. We intend to begin submission of an NDA for Neurodex^TM to the FDA by December 31, 2004 and we expect to complete its submission by mid-2005. The FDA has offered a “rolling” review of the NDA and has also indicated that Neurodex would qualify for a priority review when the submission is complete. The rolling review process will allow us to submit the NDA in modules (reviewable units), which can then be evaluated by the FDA as they are submitted. Once the submission is complete, and assuming that the FDA grants us priority review, it should take approximately six months for the FDA to complete its review of the entire submission. In June 2004, we successfully completed the treatment phase of a Phase III clinical trial of Neurodex for the treatment of PBA in 150 patients with MS. Also, AVANIR has been engaged in an open-label safety study for the treatment of PBA in a broader pool of patients who could have PBA associated with one of several underlying neurodegenerative diseases or conditions. Prior to engaging in these recent and current ongoing studies, we successfully completed the initial Phase III clinical trial of PBA in patients with amyotrophic lateral sclerosis (ALS), in May 2002.

      Neurodex for the treatment of neuropathic pain. We are currently developing our Phase III clinical development plan for the use of Neurodex in the treatment of neuropathic pain and have included the costs to complete only one Phase III clinical trial. Simultaneously, we are evaluating commercial development alternatives, including continuing development on our own or with the funding of a potential co-promotion partner or potential licensee. In mid-2003, we successfully completed a four-week open-label dose escalation study of Neurodex in patients with painful diabetic neuropathy. There can be no assurances as to the timing of a license or co-promotion arrangement, if any.

      Development program for allergy and asthma (IgE regulator). In fiscal 2004 we completed a Phase I clinical trial of our asthma/ allergy drug, AVP-13358, in 54 healthy volunteers. The placebo-controlled study was intended to assess safety, tolerability and pharmacokinetics following single rising oral doses. Results of the study suggest AVP-13358 was well tolerated at all doses up through 16 milligrams. The study also demonstrated AVP-13358 was detectable in the bloodstream at all doses administered and remains in circulation long enough to allow potentially once or twice daily dosing. We intend to continue to evaluate the safety of the drug by conducting rising multi-dose studies in healthy patients in fiscal 2005. Assuming the successful completion of Phase I clinical trials and adequate funds to continue development without a partner, we intend to continue development of the drug through Phase IIa. Assuming the results of such additional studies are favorable, we will seek to license the drug to a larger pharmaceutical company for further development.

      Development program for atherosclerosis. We are engaged in preclinical research evaluating certain small, orally active molecules as a potential treatment of atherosclerosis (the build-up of fatty plaques in blood vessel walls). Our research is focused on developing molecules that can enhance the naturally occurring

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      Anti-inflammatory research program (MIF inhibitor). We are currently conducting research on several potential drug candidates capable of inhibiting or blocking the activity of macrophage migration inhibitory factor (MIF), a protein thought to play a central role in the early stages of development of several inflammatory diseases. Our research indicates that MIF may serve as a potential drug target in a variety of diseases, including rheumatoid arthritis, Crohn’s disease, ulcerative colitis, sepsis, glomerulonephritis, and asthma. Assuming we are successful in finding a lead compound and submitting an IND to the FDA, and successfully complete some of the initial studies, we intend to license the compound to another pharmaceutical company for further development. Any delays to our product development timeline or in submitting an IND could cause a similar delay in the timing of when we expect that we could license our MIF technology.

      AVANIR acquired the rights to the MIF Inhibitor Technology from the Ciblex Corporation in August 2001 on the basis that the technology could assist us in discovering a small molecule drug capable of regulating MIF. The MIF Inhibitor Technology included several compounds, details of their chemical structures and method of preparation, data from in vitro experiments and in vivo test models, and rights to provisional patent applications filed by Ciblex regarding use of those or similar compounds in the treatment of autoimmune and inflammatory diseases.

      In August 2004, we charged $2,733,023 to research and development expense for the MIF inhibitor program, representing the cost of issuing common stock to Ciblex, in lieu of potential future milestones that would have likely been due in the future under the technology acquisition agreement, assuming continued successful development. Per the August 2004 amendment to the Ciblex Technology Acquisition Agreement (the “Amendment”), we will no longer be obligated to make up to $9.0 million in milestone payments to Ciblex upon the occurrence of certain events relating to the clinical development and/or commercialization of the MIF Inhibitor Technology in the United States, nor will we be obligated to share the receipt of other milestone payments outside the United States. We will, however, be required to pay a royalty to Ciblex if and when commercial sales under the agreement commence. In connection with entering into the Amendment, we issued Ciblex 1,036,807 shares of Class A common stock valued at $2,733,023. (See Note 6, “Shareholders’ Equity — Common Stock” in the accompanying Notes to Consolidated Financial Statements) and charged that amount to R&D expense.

      We believe that our continued research in this area likely would have resulted in the payment of one or more milestones to Ciblex. It is for that reason that AVANIR entered into the Amendment. As of the date of the Amendment, the MIF Inhibitor Technology was in the preclinical stage of development at AVANIR, but considerably further along than it was in August 2001 when we entered into the Technology Acquisition Agreement. There can be no assurance that any of the milestones under the Technology Acquisition Agreement would have ever been reached or a payment made.

      Government research grants have helped fund research on docosanol-based formulations for the treatment of genital herpes and the development of antibodies to anthrax toxins, among other research programs. Approximately $724,000 in funds remains to be spent for the remainder of 2004 and in 2005 under existing government research grants.

      Monoclonal antibodies anthrax toxin. Two of AVANIR’s most potent anthrax antibodies, AVP-21D9 and AVP-22G12, appear unique both in mechanism of action and in terms of the binding site on the anthrax toxin. AVP-21D9 is currently in preclinical development for use as a prophylactic and therapeutic drug to treat anthrax infections. Ultimately, AVANIR intends to submit an IND application seeking clearance from the FDA to begin clinical trials to evaluate the safety, tolerability, and pharmacology of AVP-21D9 in healthy human subjects. Much of our work targeting infectious diseases has been funded by government research grants. Because all of our research is at a very 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 any antibody or drug.

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      Other government-funded research. During fiscal 2004, we completed two government-funded research programs — the development of a blood donor program intended to find high-affinity antibodies to infectious diseases and research on potential antibodies to cytomegalovirus and continued to make progress in developing antibodies to the anthrax toxin.

      General and administrative expenses. Our general and administrative expenses increased to $5.9 million in fiscal 2004, compared to $4.7 million in fiscal 2003. These increased expenses primarily relate to:

	•	a $472,000 increase related to human resources, employee training, and other Company-wide employee programs;
	•	a $436,000 increase related to legal and other professional services associated with corporate governance and compliance with the Sarbanes-Oxley Act of 2002; and
	•	a $248,000 increase in building occupancy costs, primarily resulting from the utilization of additional office space in fiscal 2004.

      These increases were partially offset by a $183,000 reduction in outside services for investor relations. We expect that costs associated with compliance with the Sarbanes-Oxley Act will continue to increase.

      Sales and marketing expenses. Sales and marketing expenses increased to $3.5 million in fiscal 2004, compared to $2.6 million during fiscal 2003. Higher expenses in fiscal 2004 were related to the continued expansion of our medical education and awareness programs for PBA, market research, and pre-launch planning activities for Neurodex. We expect sales and marketing expenses will increase from 11% of our operating expenses in fiscal 2004 to 18% in fiscal 2005 as we continue to increase activities in preparation for a potential launch of Neurodex, assuming the FDA approves Neurodex.

      For fiscal 2004, the net loss attributable to common shareholders was $28.2 million, or $0.36 per share, compared to $23.3 million, or $0.39 per share in fiscal 2003. A higher average number of shares was outstanding in fiscal 2004.

      We expect to continue to pursue our drug development strategy focused on the development of Neurodex, followed by other programs in earlier stages of development that are in large therapeutic areas and that have significant partnering and licensing potential. To help fund and develop our products, we are evaluating potential alternative licensees and partners to share the costs of development. Some of these potential license arrangements could materially change our outlook for future revenues and costs. However, the timing of such potential arrangements is unpredictable. To reach the stage of partnering or licensing our product candidates or technologies or marketing our own products, we expect to continue to invest primarily in our clinical development programs, which we expect will contribute to a loss for fiscal 2005.

Comparison of Fiscal 2003 and 2002

      Revenues in fiscal 2003 amounted to $2.4 million, compared to $8.9 million in fiscal 2002. Revenues for fiscal 2003 included $1.8 million in revenues that the Company recognized from the sale of Abreva® royalty rights to Drug Royalty USA and $587,000 from government research grants. Revenues for fiscal 2002 included a final $5.0 million milestone payment relating to the one-year anniversary of Abreva® product launch, $3.4 million in royalty revenues on Abreva product sales, $226,000 in research contracts and license fees, $160,000 in federal and state grant revenues, and $41,000 in sales of the active ingredient docosanol.

      Operating expenses. Our total operating expenses increased to $25.9 million in fiscal 2003, compared to $19.5 million in fiscal 2002. The 33% increase in operating expenses was primarily caused by a 36% increase in spending on research and development programs. Research and development programs accounted for 72% and

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      Research and development expenses. R&D expenses totaled $18.6 million in fiscal 2003, compared to $13.6 million in fiscal 2002. We had four clinical trials and studies under way throughout most of fiscal 2003, compared to only one clinical trial in fiscal 2002. The Phase III clinical trial and open label study of Neurodex in the treatment of PBA accounted for $5.1 million, or 27%, of total R&D spending. Completion of toxicology, submitting an investigational new drug (IND) application to the FDA, and completion of the initial dose levels in Phase I clinical trials of our lead compound for the treatment of allergy and asthma accounted for $4.7 million, or 25%, of total R&D spending. An additional 11% of R&D spending was devoted to the development of Neurodex in the treatment of neuropathic pain, in Phase II clinical development at that time. Approximately 12% of spending was focused on research on a group of compounds targeting MIF as a potential treatment for inflammatory diseases.

      In fiscal 2002, preclinical research focused on a novel treatment for allergy and asthma, including toxicology studies, scaled-up manufacture of the lead compound, development of second generation compounds, and other related contract research, accounted for 36% of total R&D spending. Also in fiscal 2002, clinical development of Neurodex for the treatment of PBA, including a Phase III clinical trial in patients with Lou Gehrig’s disease, accounted for 22% of R&D spending. R&D related to the treatment of neuropathic pain and research on candidates for regulating MIF each accounted for 10% of total R&D spending. The balance of R&D activities in both fiscal 2003 and 2002 was primarily related to other preclinical programs addressing cholesterol reduction and programs funded by government research grants.

      General and administrative expenses. Our general and administrative expenses increased slightly to $4.7 million in fiscal 2003, compared to $4.2 million in fiscal 2002. These increased expenses primarily relate to:

	•	A $283,000 increase in building occupancy costs, including utilities, maintenance and insurance resulting from the increase in usable office space, which amounted to 57,625 square feet in fiscal 2003, compared to 27,195 square feet in fiscal 2002; and
	•	Increased legal and consulting costs relating to compliance with the Sarbanes-Oxley Act of 2002 and related rules and regulations.

      Sales and marketing expenses. Sales and marketing expenses increased to $2.6 million in fiscal 2003, compared to $1.6 million during fiscal 2002. Higher expenses in fiscal 2003 were related to market research and planning and preparation for product launch of Neurodex for the treatment of PBA. Fiscal 2002 expenses included legal, travel and consulting costs related to out-licensing docosanol 10% cream in Europe and the Middle East, establishing business relations in the People’s Republic of China, and additional licensing and other commercial development activities related to marketing our antibody generation services.

Liquidity and Capital Resources

      As of September 30, 2004, we had cash, cash equivalents and investments in securities totaling $25.9 million, including cash and cash equivalents of $13.5 million, short- and long-term investments of $11.6 million and restricted investments of $857,000. Our net working capital balance as of September 30, 2004 was $16.7 million. As of September 30, 2003, we had cash, cash equivalents and investments in securities of $17.5 million, including cash and cash equivalents of $12.2 million, short- and long-term investments of $4.4 million and restricted investments of $857,000. Our net working capital balance as of September 30, 2003

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      AVANIR has contracted obligations for long-term debt, capital (finance) lease obligations and operating lease obligations, as summarized in the table that follows. We anticipate being able to satisfy the obligations described below out of cash, cash equivalents and investments in securities held by the Company as of September 30, 2004 and proceeds from additional sales of Class A Common Stock under a shelf registration that we filed with the SEC in April 2004 (See “Financing Activities” below). See also Note 4, “Commitments and Contingencies,” and Note 5, “Notes Payable” in the accompanying Notes to Consolidated Financial Statements filed with this report.

      Operating activities. Net cash used for operating activities amounted to $25.3 million in fiscal 2004, compared to net cash provided by operating activities of $1.1 million in fiscal 2003. The net loss of $28.2 million, reflecting the high levels of spending on our R&D programs (described earlier), combined with low revenues from existing sources, primarily accounted for the cash used for operating activities in fiscal 2004. Depreciation and amortization of $1.8 million in fiscal 2004 was $815,000 higher than in fiscal 2003. The additional depreciation in fiscal 2004 represents the full-year effect of depreciation on $4.1 million in tenant improvements on approximately 30,400 square feet of additional office and laboratory space that was completed in May 2003. During fiscal 2004, the Company was able to reduce the accounts payable balance by $892,000, or from $2.9 million at September 30, 2003 to $2.0 million at September 30, 2004. During the course of fiscal 2004, the Company made payments on various contracts for services, including work performed by others on our clinical trials. Also during fiscal 2004, inventory declined by $202,000, representing the cost of docosanol sold to various licensees. We intend to replenish our docosanol inventory in early fiscal 2005.

      The net cash provided by operating activities in fiscal 2003 includes $24.1 million in cash, net of transaction costs, received from Drug Royalty USA on December 24, 2002, from the sale of an undivided interest in our Abreva® license agreement with GlaxoSmithKline. The sale of rights to future Abreva royalties was recorded as deferred revenue on the date of sale. (See Note 2, “Summary of Significant Accounting Policies — Deferred Revenue,” in the accompanying Notes to Consolidated Financial Statements.) Also in fiscal 2003 we received a royalty payment of $876,000 from GlaxoSmithKline that contributed substantially to

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      Investing activities. Net cash used for investing activities in fiscal 2004 amounted to $8.6 million, including investments in securities totaling $9.4 million, patent costs of $1.2 million, and purchases of property and equipment of $202,000, partially offset by sales and maturities of investments totaling $2.2 million. Patent costs of $1.2 million in fiscal 2004 were higher than fiscal 2003 by approximately $541,000, reflecting our continuing investment in our intellectual property, particularly in domestic and foreign patent applications pending for the MIF inhibitor technology and advances that we have made in atherosclerosis research. Capital expenditures were substantially lower in fiscal 2004, compared to fiscal 2003 when the Company was engaged in making leasehold improvements to additional office and laboratory space.

      Net cash used for investing activities during the fiscal 2003 amounted to $6.9 million, including capital expenditures related to purchases of capital equipment and leasehold improvements totaling $5.5 million, patent costs of $616,000, and investments in securities totaling $3.7 million, partially offset by sales and maturities of investments totaling $3.0 million. The leasehold improvements were related to completion of construction of laboratory and office space at our three leased buildings in San Diego. In May 2003, we completed construction on approximately 30,400 square feet of existing leased laboratory and office space, located at 11404 and 11408 Sorrento Valley Road, San Diego, California. The facilities at 11404 and 11408 Sorrento Valley Road are subject to a lease between the Company and Sorrento Plaza, a California limited partnership, effective May 20, 2002. Leasehold improvements to the Sorrento Plaza facilities were necessary before we could take occupancy. The Company also made leasehold improvements to laboratory and office space at 11388 Sorrento Valley Road to accommodate the relocation of several departments. The expenditures at all three facilities are intended to accommodate current as well as potential future expanded business operations, and capacity to accommodate up to 100 employees. (See Note 2, “Summary of Significant Accounting Policies — Property and Equipment” in the accompanying Notes to Consolidated Financial Statements.)

      Financing activities. Net cash provided by financing activities amounted to $35.2 million during fiscal 2004, consisting primarily of $26.5 million in net cash received from the sale of Class A common stock in June 2004, and $7.5 million received from the sale of Class A common stock and warrants in December 2003 (see Note 6, “Shareholders’ Equity” in the accompanying Notes to Consolidated Financial Statements). Net cash provided by financing activities in fiscal 2003 amounted to $9.3 million, including $9.4 million in net proceeds from a private placement in common stock, after taking into effect $644,000 in costs related to the transaction, and $418,000 in payments on notes and capital lease obligations.

      On December 5, 2003, we sold and issued 5,382,316 shares of Class A common stock and five-year warrants to purchase an additional 3,229,389 shares of Class A common stock to several accredited investors and received approximately $8.0 million in gross proceeds. The exercise price of the warrants is $1.75 per share. The financing transaction was made pursuant to the terms of a securities purchase agreement that provided each investor with a five-year warrant to purchase six-tenths of a share of Class A common stock for every share of Class A common stock purchased under the agreement. The effect of the financing transaction was an increase in cash and shareholders’ equity in the amount of approximately $7.5 million, after taking into effect the costs of the transaction. In connection with this transaction and its costs, the placement agent was paid $415,000 in fees and expenses, and was issued a five-year warrant to purchase 161,470 shares of the Company’s Class A common stock at $1.75 per share.

      In April 2004, the Company filed a shelf registration statement on Form S-3 with the SEC that enables the Company to sell an aggregate of up to $50.0 million in Class A common stock from time to time over a period of two years. The Company’s sale of Class A common stock in June 2004, representing $28.8 million in gross proceeds ($26.5 million net of underwriting discount and costs of the financing transaction) was the first transaction for the sale of Class A common stock under the existing shelf registration. In December 2004, we issued an additional $7.0 million in Class A common stock to an institutional investor at $3.00 per share. (See Note 11, “Subsequent Event,” in the accompanying Notes to the Consolidated Financial Statements.) The

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      In September 2004, AVANIR entered into an equipment line of credit with GE Healthcare Financial Services (“GE Capital”) for financing of up to $1.4 million. As of September 30, 2004 the Company had $914,652 in borrowed funds on hand under the line of credit. For further details concerning the financial terms with GE Capital, please see Note 5, “Notes Payable,” in the accompanying Notes to Consolidated Financial Statements.

Management Outlook

      The substantial progress in research programs in fiscal 2004 has set the stage for continued development of all of our programs in fiscal 2005, including the anticipated submission of an NDA for Neurodex in the treatment of PBA. We believe that cash, cash equivalents, and investments in securities totaling $25.9 million at September 30, 2004, the December 2004 financing, plus anticipated future revenues, should be sufficient to sustain our planned level of operations for at least the next 12 months. However, to continue to fund the development of our new drug candidates and technology platforms and potential product launch of Neurodex during the next two years (assuming that Neurodex is approved for marketing by the FDA), we expect to continue to pursue various alternatives for raising capital during this two-year period. Potential alternatives that we are considering for raising capital include, but are not limited to, partnering arrangements where partners share development costs, issuance of debt or equity securities, and licensing or sales of one or more of our platform technologies or new drug candidates.

Recent Accounting Pronouncements

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

      As described below, we are exposed to market risk related to changes in interest rates. Because substantially all 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 exposures as the needs and risks should arise.

Interest Rate Sensitivity

      Our investment portfolio consists primarily of fixed income instruments with an average duration of 1.2 years as of September 30, 2004 (2.0 years as of September 30, 2003). 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, 2004 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.

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

      None.

      With the participation of the principal executive officer and principal financial officer of AVANIR Pharmaceuticals (the “Registrant”), the Registrant’s management has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in the Securities Exchange Act of 1934, Rules 13a-15(e) and 15(d)-15(e)), as of the end of the period covered by this report. Based on that evaluation, the Registrant’s principal executive officer and principal financial officer have concluded that:

	•	Information required to be disclosed by the Registrant in this Annual Report on Form 10-K and the other reports that the Registrant files or submits under the Exchange Act would be accumulated and communicated to the Registrant’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure;
	•	Information required to be disclosed by the Registrant in this Annual Report on Form 10-K and the other reports that the Registrant files or submits under the Exchange Act would be recorded, processed, summarized and reported within the time periods specific in the SEC’s rules and forms; and
	•	The Registrant’s disclosure controls and procedures are effective as of the end of the period covered by this Annual Report on Form 10-K to ensure that material information relating to the Registrant and its consolidated subsidiary is made known to them, particularly during the period in which the Registrant’s periodic reports, including this Annual Report on Form 10-K, are being prepared.

      Additionally, there were no changes in the Registrant’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the Registrant’s fiscal quarter ended September 30, 2004, that have materially affected, or are reasonably likely to materially affect, the Registrant’s internal control over financial reporting.

      None.

PART III

      The information relating to our directors that are required by this item is incorporated by reference from the information under the caption “Election of Directors” contained in our definitive proxy statement (the “Proxy Statement”), which will be filed with the Securities and Exchange Commission in connection our Annual Meeting of Shareholders to be held in 2005.

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Executive Officers of the Registrant

      The names of our executive officers and their ages as of December 7, 2004 are set forth below. The 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.

      Gerald J. Yakatan, Ph.D. Dr. Yakatan has served as President and Chief Executive Officer since March 1998 and as Vice President of Drug Development from July 1995 to February 1998. Dr. Yakatan also has served as a director of the Company since February 1998. Dr. Yakatan has extensive executive management experience in the pharmaceutical industry. In 1996, he founded IriSys Research & Development, LLC, a privately held company (“IriSys”) where he served as President and Chief Executive Officer until joining AVANIR. He still serves as Chairman of IriSys. (See Note 8, “Related Party Transactions,” in the accompanying Notes to Consolidated Financial Statements.) Dr. Yakatan also founded Tanabe Research Laboratories, USA, Inc., in 1990 and served as President and Chief Executive Officer until 1995. Earlier in his career, Dr. Yakatan held various executive positions over a seven-year period at Warner-Lambert Co./Parke-Davis, including Vice President of worldwide product development, and as a member of the Parke-Davis pharmaceutical research management team and the Executive Committee where he had significant exposure to all stages of R&D and the sales and marketing processes. Prior to joining Warner-Lambert/Parke-Davis, Dr. Yakatan was a tenured faculty member of the University of Texas at the Austin College of Pharmacy where he was Chair of the Department of Pharmaceutics and Assistant Director of the Drug Dynamics Institute. He is a Fellow of the American Association of Pharmaceutical Scientists and the American College of Clinical Pharmacology. Dr. Yakatan received his B.S. degree in Pharmacy in 1963 and M.S. degree in Pharmaceutical Chemistry in 1965 from Temple University. In 1971, Dr. Yakatan received his Ph.D. degree in Pharmaceutical Sciences from the University of Florida.

      James E. Berg. Mr. Berg has served as Vice President, Clinical and Regulatory Affairs, since March 1997. Mr. Berg led the team responsible for the clinical trials program for docosanol 10% cream and had the responsibility for working with the FDA and other regulatory agencies that led to the approvals of the product in the U.S., Canada and Sweden and other countries. Mr. Berg is also responsible for managing the clinical trials of Neurodex for the treatment of PBA and neuropathic pain and for the Company’s lead compound for the treatment of allergy and asthma. From August 1992 to March 1997, Mr. Berg was Director of Clinical Affairs and Product Development at the Company. Earlier in his career, Mr. Berg held various sales and management positions at QUIDEL Corporation, San Diego, California, and at Krupp Bilstein Corporation of America, Inc., San Diego, California. Mr. Berg received his B.A. degree from the University of Wisconsin in 1973.

      R. Martin Emanuele, Ph.D. Dr. Emanuele has served as Vice President, Licensing and Business Development, since August 2002. Dr. Emanuel is responsible for AVANIR’S partnering, licensing and related business development activities. From May 1988 to July 2002, Dr. Emanuele was employed by CytRx Corporation, where he held a number of R&D and business development positions and attained the position of

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      Gus Fernandez, Pharm.D. Dr. Fernandez has served as Vice President, Commercial Development since March 2003. In this capacity, Dr. Fernandez is responsible for the commercial development activities for the Company’s pipeline of products, which includes comprehensive pre-launch planning activities for Neurodex. From March 2002 to March 2003, he was Executive Director, Commercial Development where he was responsible for business development and licensing activities and from November 2002 to February 2002, he was Director, Commercial Development, where he worked in the same capacity. Prior to joining the Company, Dr. Fernandez held several senior management level positions at Dura Pharmaceuticals, San Diego, California, including Senior Manager, Medical Affairs, Director of Product Management, Regional Director of Sales and Director, Sales Operations. Prior to joining Dura Pharmaceuticals, he held a number of sales and marketing positions at Eli Lilly and Company, Indianapolis, Indiana. Dr. Fernandez graduated from the University of the Pacific with a Pharm.D. degree in pharmacy, where he graduated cum laude. He also has an M.B.A. degree from Webster University, San Diego, California.

      Gregory P. Hanson, CMA. Mr. Hanson has served as Vice President, Finance and Chief Financial Officer (CFO) and Corporate Secretary since July 1998. Mr. Hanson also serves as the Corporate Compliance Officer. From September 1995 to July 1998, he was the Chief Financial Officer of XXsys Technologies Inc., a composite materials technology company; and from May 1993 to September 1995, he held a number of financial positions within The Titan Corporation, a diversified telecommunications and information technology company, including acting CFO and acting Controller for its subsidiary, Titan Information Systems. Earlier in his career, Mr. Hanson held various management positions at Ford Motor Company over a 14-year span and at Solar Turbines Incorporated, a subsidiary of Caterpillar Inc., over a three-year span. Mr. Hanson has a B.S. degree in Mechanical Engineering from Kansas State University and an M.B.A. degree with honors from the University of Michigan. He is a Certified Management Accountant and has passed the examination for Certified Public Accountants. In March 2004, Mr. Hanson was selected to be member of the Financial Accounting Standards Board’s Small Business Advisory Committee (“SBAC”). He also serves on the SBAC’s Agenda Committee.

      J. David Hansen. Mr. Hansen has served as Senior Vice President, Corporate Development, responsible for business development, licensing and product commercialization since March 2003. Mr. Hansen joined the Company in September 1998 as Vice President of Sales and Marketing. In addition, he became President of the Company’s subsidiary, Xenerex Biosciences, in March 2001. Prior to joining the Company, Mr. Hansen held various management positions at Dura Pharmaceuticals, San Diego, California, from December 1989 to September 1998, including Senior Director, Strategic Sales Systems; National Sales Director, Director of Business Development and Director of Marketing. Earlier in his career, he held various management positions at Immunetech Pharmaceuticals, San Diego, California; Schering/ Key Pharmaceuticals, Kennilworth, New Jersey; and E.R. Squibb & Sons, Princeton, New York. Mr. Hansen graduated with honors from the University of Oregon, with a B.S. degree in Chemistry in June 1974.

      Jagadish Sircar, Ph.D. Dr. Sircar has served as our Vice President, Drug Discovery since November 2002. From November 1995 to March 2000, he held the position of Director of Chemistry at AVANIR and from April 2000 to November 2002 he was Executive Director, Drug Discovery of the Company. Before joining the Company, Dr. Sircar held the position of Senior Vice President, Research and Discovery for Biofor, Inc. from January 1992 to November 1995. From 1969 to 1991, Dr. Sircar was employed by Warner-Lambert/ Parke-Davis in its Research Division (currently Pfizer), where he attained the position of Associate Research Fellow and Chairman of the Immunoinflammatory Project Team. During his tenure at Warner-Lambert/ Parke-Davis, he was responsible for the discovery and preclinical development of six compounds. Dr. Sircar holds a Ph.D. degree in Organic Chemistry, an M.S. degree in Pure Chemistry and a B.S. degree (Honors) in Chemistry, all from the University of Calcutta, Calcutta, India. Dr. Sircar has a total of 154 patents, presentations and publications that are credited to him.

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      Victoria Smith. Ms. Smith has served as Vice President, Administration since March 2003. From March 2001 to March 2003, she held the position of Executive Director, Administration and from June 1998 to March 2001 she held the position of Director, Administrative Affairs. Prior to joining the Company, Ms. Smith held various management positions for Tanabe Research Laboratories, USA, Inc., San Diego, California, from 1990 to 1996, including Director, Administrative Affairs; Manager, R&D, Administration, and Human Resources. In June 1995 she completed the Leadership Education Awareness Development (LEAD) program in San Diego, California. Ms. Smith graduated from San Diego State University with a B.A. degree in Speech Communication in 1982 and from the University of Phoenix with a M.A. degree in Organizational Management in August 1992.

      The information required by this item is incorporated by reference to the information under the caption “Executive Compensation” contained in the Proxy Statement.

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

      The information required by this item is incorporated by reference to the information under the caption “Certain Relationships and Related Transactions” contained in the Proxy Statement.

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

PART IV

      (a) Financial Statements and Schedules

	(1) Index to consolidated financial statements appears on page F-1.

      (b) Exhibits

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(1)	Incorporated by reference to the similarly described exhibit included with the Registrant’s Registration Statement on Form S-1, File No. 33-32742, declared effective by the Commission on May 8, 1990.
(2)	Incorporated by reference to the similarly described exhibit included with the Registrant’s Current Report on Form 8-K, filed March 11, 1999.
(3)	Incorporated by reference to the similarly described exhibit included with the Registrant’s Current Report on Form 8-K, filed April 1, 1999.
(4)	Incorporated by reference to the similarly described exhibit included with the Registrant’s Current Report on Form 8-K, filed December 3, 1999.
(5)	Incorporated by reference to the similarly described exhibit included with the Registrant’s Current Report on Form 8-K, filed May 4, 2000.
(6)	Incorporated by reference to the similarly described exhibit included with the Registrant’s Quarterly Report on Form 10-Q, filed August 14, 2000.

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(7)	Incorporated by reference to the similarly described exhibit included with the Registrant’s Annual Report on Form 10-K, filed December 21, 2001.
(8)	Incorporated by reference to the similarly described exhibit included with the Registrant’s Quarterly Report on Form 10-Q, filed August 13, 2002.
(9)	Incorporated by reference to the similarly described exhibit included with the Registrant’s Quarterly Report on Form 10-Q, filed May 13, 2003.

(10)	Incorporated by reference to the similarly described exhibit included with the Registrant’s Registration on From S-3, File No. 333-107820, declared effective by the Commission on August 19, 2003.
(11)	Incorporated by reference to the similarly described exhibit included with the Registrant’s Current Report on Form 8-K, filed December 11, 2003.
(12)	Incorporated by reference to the similarly described exhibit included with the Registrant’s Annual Report on Form 10-K, filed December 23, 2003.
(13)	Incorporated by reference to the similarly described exhibit included with the Registrant’s Current Report on Form 8-K, filed on April 6, 2004.
(14)	Incorporated by reference to the similarly described exhibit included with the Registrant’s Current Report on Form 8-K, filed September 1, 2004.
(15)	Incorporated by reference to the similarly described exhibit included with the Registrant’s Current Report on Form 8-K, filed September 21, 2004.

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SIGNATURES

      Pursuant to the requirements 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/ GERALD J. YAKATAN, PH.D.