10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended June 30, 2006

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from                      to                      .

Commission File No. 1-15803

AVANIR PHARMACEUTICALS

(Exact name of registrant as specified in its charter)

California	33-0314804
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)
11388 Sorrento Valley Road, San Diego, California	92121
(Address of principal executive offices)	(Zip Code)

(858) 622-5200
(Registrant’s telephone number, including area code)

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

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

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

As of August 4, 2006, the registrant had 31,732,836 shares of common stock issued and outstanding.

Table of Contents

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Report of Independent Registered Public Accounting Firm		3
	Condensed Consolidated Balance Sheets		4
	Condensed Consolidated Statements of Operations		5
	Condensed Consolidated Statements of Cash Flows		6
	Notes to Condensed Consolidated Financial Statements		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		24
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		40
Item 4.	Controls and Procedures		40
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings		42
Item 1A.	Risk Factors		42
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		47
Item 3.	Defaults Upon Senior Securities		47
Item 4.	Submission of Matters to a Vote of Security Holders		47
Item 5.	Other Information		48
Item 6.	Exhibits		48
Signatures			49
EXHIBIT 10.1
EXHIBIT 10.2
EXHIBIT 10.3
EXHIBIT 10.4
EXHIBIT 10.5
EXHIBIT 10.6
EXHIBIT 10.7
EXHIBIT 15.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 31.3
EXHIBIT 32.1
EXHIBIT 32.2
EXHIBIT 32.3

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PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders
Avanir Pharmaceuticals

We have reviewed the accompanying condensed consolidated balance sheet of Avanir Pharmaceuticals and subsidiaries (the “Company”) as of June 30, 2006, and the related condensed consolidated statements of operations for the three-month and nine-month periods ended June 30, 2006 and 2005, and of cash flows for the nine-month periods ended June 30, 2006 and 2005. These interim financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Avanir Pharmaceuticals and subsidiaries as of September 30, 2005, and the related consolidated statements of operations, shareholders’ equity and comprehensive loss, and cash flows for the year then ended (not presented herein); and in our report dated December 14, 2005, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of September 30, 2005 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

DELOITTE & TOUCHE LLP

San Diego, California
August 9, 2006

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Avanir Pharmaceuticals

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

	June 30,			September 30,
	2006			2005
ASSETS
Current assets:
Cash and cash equivalents	$	2,158,872		$	8,620,143
Short-term investments in securities		32,766,262			14,215,005
Receivables, net		3,577,925			1,169,654
Inventories		2,560,766			27,115
Prepaid expenses		1,866,488			2,370,801
Total current assets		42,930,313			26,402,718
Investments in securities		2,444,760			3,845,566
Restricted investments in securities		856,597			856,872
Property and equipment, net		7,770,659			6,004,527
Intangible assets, net		35,866,642			3,665,086
Long-term inventories		484,386			347,424
Other assets		446,387			279,797
TOTAL ASSETS	$	90,799,744		$	41,401,990
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	6,891,171		$	6,751,781
Accrued expenses and other liabilities		9,611,046			4,094,295
Assumed liabilities for returns and other discounts (Note 11)		6,384,089			—
Accrued compensation and payroll taxes		2,223,012			1,272,231
Deferred revenue, net		3,483,694			1,970,989
Notes payable		341,459			317,667
Capital lease obligations		161,759			26,305
Total current liabilities		29,096,230			14,433,268
Contingent consideration of the entity acquired		625,103			—
Deferred revenue, net of current portion		16,088,043			17,187,221
Notes payable, net of current portion		25,453,133			637,285
Capital lease obligations, net of current portion		331,435			9,337
Total liabilities		71,593,944			32,267,111
COMMITMENTS AND CONTINGENCIES (Note 18)
SHAREHOLDERS’ EQUITY:
Preferred stock – no par value, 10,000,000 shares authorized, no shares issued and outstanding as of June 30, 2006 and September 30, 2005		—			—
Common stock – no par value, Class A, 200,000,000 shares authorized, 31,732,269 and 27,341,732 shares issued and outstanding as of June 30, 2006 and September 30, 2005, respectively (Note 2)		211,035,731			167,738,303
Unearned compensation		—			(3,477,144	)
Accumulated deficit		(191,584,615	)		(155,012,466	)
Accumulated other comprehensive loss		(245,316	)		(113,814	)
Total shareholders’ equity		19,205,800			9,134,879
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	90,799,744		$	41,401,990

See notes to condensed consolidated financial statements.

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Avanir Pharmaceuticals

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

	Three Months Ended						Nine Months Ended
	June 30,						June 30,
	2006			2005			2006			2005
REVENUES:
Research and development services	$	1,746,581		$	263,014		$	6,181,164		$	263,014
Licenses		104,174			2,500,000			5,113,516			2,800,000
Royalties and sales of royalty rights		465,147			455,937			1,474,451			1,386,067
Government research grants		47,345			114,887			208,032			400,455
Product sales		—			—			—			17,400
Total revenues		2,363,247			3,333,838			12,977,163			4,866,936
OPERATING EXPENSES:
Research and development		9,834,721			6,470,317			27,117,970			22,952,728
Selling, general and administrative		10,105,474			5,239,076			23,366,332			11,562,262
Cost of product sales		260,164			—			260,164			3,102
Total operating expenses		20,200,359			11,709,393			50,744,466			34,518,092
LOSS FROM OPERATIONS		(17,837,112	)		(8,375,555	)		(37,767,303	)		(29,651,156	)
Interest income		551,948			179,042			1,444,536			426,021
Interest expense		(191,302	)		(22,513	)		(236,143	)		(69,458	)
Other income (expense), net		(15,029	)		11,496			(10,009	)		(50,575	)
LOSS BEFORE INCOME TAXES		(17,491,495	)		(8,207,530	)		(36,568,919	)		(29,345,168	)
Provision for income taxes		(809	)		(14	)		(3,230	)		(1,912	)
NET LOSS	$	(17,492,304	)	$	(8,207,544	)	$	(36,572,149	)	$	(29,347,080	)
NET LOSS PER SHARE:
BASIC AND DILUTED (Note 2)	$	(0.56	)	$	(0.31	)	$	(1.20	)	$	(1.17	)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
BASIC AND DILUTED (Note 2)		31,419,394			26,841,950			30,352,690			25,121,332

See notes to condensed consolidated financial statements.

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Avanir Pharmaceuticals

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	Nine Months Ended June 30,
	2006			2005
OPERATING ACTIVITIES:
Net loss	$	(36,572,149	)	$	(29,347,080	)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization		1,841,330			1,547,279
Share-based compensation expense		1,977,133			8,103
Purchased in-process research and development		2,600,000			—
Issuance of common stock in connection with the acquisition of additional contractual rights to Neurodex™		—			5,300,000
Other-than-temporary impairment of investment		—			84,252
Loss on disposal of assets		17,339			3,085
Intangible assets abandoned and impaired		350,044			234,232
Changes in operating assets and liabilities:
Receivables		(1,062,860	)		116,538
Inventories		(373,496	)		(352,077	)
Prepaid expenses and other assets		815,521			(467,365	)
Accounts payable		(732,277	)		990,155
Accrued expenses and other liabilities		3,133,706			1,126,957
Accrued compensation and payroll taxes		430,817			380,831
Deferred revenue		413,527			(1,484,051	)
Net cash used for operating activities		(27,161,365	)		(21,859,141	)
INVESTING ACTIVITIES:
Investments in securities		(59,231,954	)		(18,438,209	)
Proceeds from sales and maturities of investments in securities		41,950,275			7,830,113
Acquisition of businesses, net of cash acquired		(4,617,694	)		—
Patent costs		(515,462	)		(918,735	)
Proceeds from sale of equipment		—			800
Purchases of property and equipment		(1,391,987	)		(662,548	)
Net cash used for investing activities		(23,806,822	)		(12,188,579	)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net		44,797,440			24,255,141
Proceeds from issuance of notes payable		—			249,472
Payments on notes and capital lease obligations		(290,524	)		(374,127	)
Net cash provided by financing activities		44,506,916			24,130,486
Net decrease in cash and cash equivalents		(6,461,271	)		(9,917,234	)
Cash and cash equivalents at beginning of period		8,620,143			13,494,083
Cash and cash equivalents at end of period	$	2,158,872		$	3,576,849
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid	$	236,143		$	69,458
Income taxes paid	$	3,230		$	1,912
NONCASH INVESTING AND FINANCING ACTIVITIES:
Accounts payable and accrued expenses for purchases of property and equipment	$	109,516		$	201,112
Elimination of unearned compensation against common stock	$	3,477,144		$	—
Issuance of promissory notes as consideration for the Alamo acquisition	$	25,075,000		$	—
Accrued expenses for acquisition related transaction costs	$	130,570		$	—

See notes to condensed consolidated financial statements.

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Avanir Pharmaceuticals

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION

Avanir Pharmaceuticals (“Avanir,” “we,” or the “Company”) prepared the accompanying unaudited condensed consolidated financial statements in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) including the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Such rules and regulations allow us to condense and omit certain information and footnote disclosures normally included in audited financial statements prepared in accordance with accounting principles generally accepted in the United States. We believe these condensed consolidated financial statements reflect all adjustments (consisting only of normal, recurring adjustments and certain non-recurring adjustments resulting from the business combination discussed below) that are necessary for a fair presentation of our financial position and results of operations for the periods presented. Results of operations for the interim periods presented are not necessarily indicative of results to be expected for the year. The information included in this Form 10-Q should be read in conjunction with the financial statements and notes thereto included in our fiscal 2005 Form 10-K on file with the SEC.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent amounts in the financial statements and accompanying notes. Actual results could differ from those estimates.

The unaudited condensed consolidated financial statements include the accounts of Avanir Pharmaceuticals and its wholly-owned subsidiaries, Xenerex Biosciences, Alamo from the date of acquisition, Avanir Acquisition Corp. and Avanir Holding Company. Intercompany accounts and transactions have been eliminated.

Alamo was a privately owned specialty pharmaceutical company that developed and marketed pharmaceutical products with a sales force of approximately 41 representatives currently marketing FazaClo^® (clozapine, USP), the only orally-disintegrating formulation of clozapine for the management of severely ill schizophrenic patients who fail to respond adequately to standard schizophrenic drug treatments. FazaClo is also indicated for reducing the risk of suicidal behavior in patients with schizophrenic or schizoaffective disorder. In addition to the sales force, Alamo employs a FazaClo Patient Registry team that is composed of dedicated healthcare, registry, call center, administrative support, data management and professional management. See Note 4, “Alamo Acquisition” for further discussion.

2. REVERSE STOCK SPLIT

On January 17, 2006, we implemented a one-for-four reverse stock split of our Class A common stock (“common stock”). All share and per share information herein (including shares outstanding, earnings per share and warrant and stock option exercise prices) reflects this reverse split.

3. SIGNIFICANT ACCOUNTING POLICIES

Change in Accounting Method for Share-Based Compensation

We adopted the provisions of revised Statement of Financial Accounting Standards No. 123 (“FAS 123R”), “Share-Based Payment,” including the provisions of Staff Accounting Bulletin No. 107 (“SAB 107”) on October 1, 2005, the first day of our fiscal 2006, using the modified prospective transition method to account for our employee share-based awards. The valuation provisions of FAS 123R apply to

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new awards and to awards that are outstanding at the effective date and subsequently modified or cancelled. Estimated compensation expense for awards outstanding at the effective date are being recognized over the remaining service period using the compensation cost calculated for pro forma disclosure purposes under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“FAS 123”). Our condensed consolidated financial statements as of June 30, 2006 and for the three-month and nine-month periods ended June 30, 2006 reflect the impact of FAS 123R. In accordance with the modified prospective transition method, our consolidated financial statements for prior periods were not restated to reflect, and do not include, the impact of FAS 123R.

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

Share-based compensation expense recognized during a period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. Share-based compensation expense recognized in our consolidated statement of operations for the three-month and nine-month periods ended June 30, 2006 includes compensation expense for share-based payment awards granted prior to, but not yet vested as of, September 30, 2005 based on the grant date fair value estimated in accordance with the pro forma provisions of FAS 123 and share-based payment awards granted subsequent to September 30, 2005 based on the grant date fair value estimated in accordance with FAS 123R. For share awards granted in fiscal 2006, expenses are amortized under the straight-line attribution method. For share awards granted prior to fiscal 2006, expenses are amortized under the straight-line single option method prescribed by FAS 123. As share-based compensation expense recognized in the consolidated statement of operations for the three-month and nine-month periods ended June 30, 2006 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. FAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Pre-vesting forfeitures were estimated to be approximately 8% for both officers and directors and 13% for other employees in the nine-month period ended June 30, 2006 based on our historical experience. In our pro forma information required under FAS 123 for the periods prior to fiscal 2006, we accounted for forfeitures as they occurred.

The adoption of FAS 123R resulted in incremental share-based compensation expense of $757,000 and $2.0 million in the three-month and nine-month periods ended June 30, 2006, respectively. The incremental share-based compensation caused our net loss to increase by the same amounts and basic and diluted loss per share to increase by $0.02 per share and $0.07 per share in the three-month and nine-month periods ended June 30, 2006, respectively. Total compensation expense related to all of our share-based awards, recognized under FAS 123R, for the three-month and nine-month periods ended June 30, 2006 was comprised of the following:

	Three Months Ended			Nine Months Ended
	June 30, 2006			June 30, 2006
Research and development expense	$	160,857		$	423,194
Selling, general and administrative expense		596,543			1,553,939
Share-based compensation expense before taxes		757,400			1,977,133
Related income tax benefits		—			—
Share-based compensation expense	$	757,400		$	1,977,133
Net share-based compensation expense per common Share – basic and diluted	$	(0.02	)	$	(0.07	)

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	Three Months Ended		Nine Months Ended
	June 30, 2006		June 30, 2006
Share-based compensation expense from:
Stock options	$	397,222	$	1,044,276
Restricted stock awards		302,403		845,877
Restricted stock units		57,775		86,980
Total	$	757,400	$	1,977,133

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

Prior to fiscal year 2006, we accounted for share-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations and provided the required pro forma disclosures of FAS 123. Under the intrinsic value method, no share-based compensation expense had been recognized in our consolidated statement of operations for share-based awards to employees, because the exercise price of our stock options granted to employees equaled the fair market value of the underlying stock at the date of grant.

The following table summarizes the pro forma effect on our net loss and per share data if we had applied the fair value recognition provisions of FAS 123 to share-based employee compensation for the three-month and nine-month periods ended June 30, 2005.

	Three Months Ended			Nine Months Ended
	June 30, 2005			June 30, 2005
Net loss, as reported	$	(8,207,544	)	$	(29,347,080	)
Add: Share-based employee compensation expense		—			—
Deduct: Total share-based employee compensation expense determined under fair value based method for all awards		(703,263	)		(1,419,193	)
Pro forma net loss	$	(8,910,807	)	$	(30,766,273	)
Net loss per share:
Basic and diluted – as reported	$	(0.31	)	$	(1.17	)
Basic and diluted – pro forma	$	(0.33	)	$	(1.22	)

For employee stock options granted during the nine-month period ended June 30, 2005, we determined pro forma compensation expense under the provisions of FAS 123 using the Black-Scholes model and the following assumptions: (1) an expected volatility of 120%, (2) an expected term of 3.4 years, (3) a risk-free interest rate of 3.0% and (4) an expected dividend yield of 0%. The weighted average fair value of options granted during the nine-month period ended June 30, 2005 was $9.84 per share.

We account for stock options granted to non-employees in accordance with Emerging Issues Task Force No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services,” (“EITF 96-18”). Under EITF 96-18, we determine the fair value of the stock options granted as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable.

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Revenue Recognition

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

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

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

Revenue Arrangements with Multiple Deliverables. We have revenue arrangements whereby we deliver to the customer multiple products and/or services. Such arrangements have generally included some combination of the following: antibody generation services; licensed rights to technology, patented products, compounds, data and other intellectual property; and research and development services. In accordance with EITF 00-21, we analyze our multiple element arrangements to determine whether the elements can be separated. We perform our analysis at the inception of the arrangement and as each product or service is delivered. If a product or service is not separable when it is delivered, no revenue is allocated.

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

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

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

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

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

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

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

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

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

Product Sales – FazaClo. As discussed in Note 4, we acquired Alamo on May 24, 2006. Alamo has one product, FazaClo (clozapine, USP), that Alamo began shipping in July 2004. At that time, FazaClo had a two-year shelf life. In June 2005, Alamo received FDA approval to extend the product expiration date to three years.

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FazaClo is sold primarily to third-party wholesalers that in turn sell this product to retail pharmacies, hospitals, and other dispensing organizations. Alamo has entered into agreements with its wholesale customers, various states, hospitals, certain other medical institutions and third-party payers throughout the United States. These agreements frequently contain commercial incentives, which may include favorable product pricing and discounts and rebates payable upon dispensing the product to patients. Additionally, these agreements customarily provide the customer with rights of return of the product, subject to the terms of each contract. Consistent with industry practice, wholesale customers can return purchased product during an 18-month period that begins six months prior to the product’s expiration date and ends 12 months after the expiration date. Additionally, some dispensing organizations, such as pharmacies and hospitals, have the right to return expired product at any time.

At the present time, we are unable to reasonably estimate future returns due to the lack of sufficient historical data for FazaClo. Accordingly, we currently defer recognition of revenue on shipments of FazaClo until the right of return no longer exists, i.e. when we receive evidence that the products have been dispensed to patients. We determine when products are dispensed to patients from rebate requests that have been submitted to us by various state agencies and others. We are not able to estimate how much has been dispensed until we receive the rebate requests. Rebate requests are generally received in 90 to 120 days from the last day of the quarter in which the product was dispensed to patients.

Net deferred revenue represents the sum of all FazaClo shipments subsequent to the acquisition, net of estimated rebates and discounts, for which revenue recognition criteria have not been met. Deferred rebates and discounts are included in accrued expenses. Sales incentives are also deferred until the related product shipments are recognized as revenue. Sales incentives are classified as deductions from revenue in accordance with EITF Issue No. 01-09, “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products).” The cost of product relative to deferred revenue has also been deferred and is included in inventories, categorized as inventories subject to return.

Cost of Product Sales

Cost of product sales includes direct and indirect costs to manufacture, including shipping and handling costs. Also, classified within cost of product sales is the amortization of the acquired FazaClo product rights.

Recognition of Expenses in Outsourced Contracts

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

Research and Development Expenses

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

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

• The technology is in the early stage of development and has no alternative uses;

• There is substantial uncertainty regarding the future success of the technology or product;

• There will be difficulty in completing the remaining development; and

• There is substantial cost to complete the work.

Purchased in-process research and development. In accordance with Statement of Financial Accounting Standards No. 141, “Business Combinations” (“FAS 141”), we immediately charge purchased in-process research and development (“IPR&D”) to research and development expense upon acquisition when there is uncertainty in receiving future economic benefits from the acquired IPR&D. We determine the future economic benefits from the purchased IPR&D to be uncertain until such technology is approved by the FDA or when other significant risk factors are abated. See also Note 4, “Alamo Acquisition.”

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

Property and equipment

Property and equipment, net, is stated at cost less accumulated depreciation and amortization. Property and equipment acquired in business combinations is stated at fair value estimated to be the replacement cost. Depreciation and amortization is computed using the straight-line method over the estimated useful life of the asset or the life of the project, whichever is less, if the equipment has been purchased for a particular use. Estimated useful lives of three to five years are used on computer equipment and related software. Office equipment, furniture and fixtures are depreciated over five years. Amortization of leasehold improvements is computed using the shorter of the remaining lease term or eight years. Acquired developed software, is being amortized over its estimated useful life of five years. Leased assets meeting certain capital lease criteria are capitalized and the present value of the related lease payments is recorded as a liability. Assets under capital lease arrangements, including automobiles and research and development equipment, are depreciated using straight-line method over their estimated useful lives or their related lease term, whichever is shorter.

Capitalization and Valuation of Long-Lived and Intangible Assets

In accordance with FAS 141 and Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“FAS 142”), goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead are tested for impairment on an annual basis or more frequently if certain indicators arise. In addition, FAS 142 requires that intangible assets with finite useful lives be amortized over their respective useful lives and reviewed for impairment in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“FAS 144”). The method of amortization shall reflect the pattern in which the economic benefits of the intangible asset are consumed or otherwise used up. If that pattern cannot be reliably determined, a straight-line amortization method will be used. No goodwill has been recorded to date.

Intangible assets with finite useful lives also consist of capitalized legal costs incurred in connection with patents, patent applications pending and license agreements. We amortize costs of approved patents, patent applications pending and license agreements over their estimated useful lives, or terms of the

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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 patent applications pending and trademarks that we abandon, we charge the remaining unamortized accumulated costs to expense.

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

• A significant underperformance relative to expected historical or projected future operating results;

• A significant change in the manner of our use of the acquired asset or the strategy for our overall business; and/or

• A significant negative industry or economic trend.

4. ALAMO ACQUISITION

On May 24, 2006, pursuant to a Unit Purchase Agreement dated May 22, 2006 (the “Acquisition Agreement”), we acquired all of the outstanding equity interests in Alamo from the former members of Alamo (the “Selling Holders”) for approximately $30.0 million in consideration, consisting of approximately $4.0 million in cash, $25.1 million in promissory notes and $866,000 in acquisition related transaction costs. The results of operations of Alamo have been included in our unaudited condensed financial statements since the date of acquisition.

We also agreed to pay up to an additional $39,450,000 in revenue-based earn-out payments, based on future sales of FazaClo (clozapine USP), Alamo’s orally disintegrating drug for the treatment of refractory schizophrenia. These earn-out payments are based on FazaClo sales in the United States from the closing date of the acquisition through December 31, 2018 (the “Contingent Payment Period”) and are payable to the Selling Holders as follows:

• A promissory note that would have been issuable in the principal amount of $4,000,000 if FazaClo sales, as reported by IMS Health Incorporated, for each of the months of April and May 2006 exceeded $1,266,539. Since the closing of the acquisition, we have determined that FazaClo sales for the months April and May 2006 did not satisfy this condition and thus this promissory note will not be issued pursuant to this contingency.

• If the preceding condition is not satisfied, then (A) a promissory note, in the principal amount of $2,000,000, payable one time if monthly FazaClo net product sales, as reported by us, exceed $1,000,000 for all three months in a given fiscal quarter during the Contingent Payment Period, and (B) an additional promissory note in the principal amount of $2,000,000, payable one time if monthly FazaClo net product sales, as reported by us, exceed $1,500,000 for all three months in a given fiscal quarter during the Contingent Payment Period.

• A one-time cash payment of $10,450,000 if FazaClo net product sales, as reported by us, exceed $40.0 million over four consecutive fiscal quarters during the Contingent Payment Period.

• A one-time cash payment of $25,000,000 if FazaClo net product sales, as reported by us, exceed $50.0 million over four consecutive fiscal quarters during the Contingent Payment Period.

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Any of these additional revenue-based earn-out payments that are ultimately paid upon satisfying the contingent conditions above will be treated as additional consideration and recorded as goodwill.

We have also agreed to pay the Selling Holders one-half of all net licensing revenues that we received during the Contingent Payment Period from licenses of FazaClo outside of the United States (“Non-US Licensing Revenues”). Any amounts paid to the Selling Holders on Non-US Licensing Revenues will be recognized in the consolidated statement of operations in the period such amounts are paid.

Purchase Price Allocation

In accordance with FAS 141, we allocated on a preliminary basis the total purchase price of $30.0 million to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values using the purchase method of accounting. We recorded no goodwill in connection with the Alamo acquisition.

Pursuant to EITF 01-3, “Accounting in a Business Combination for Deferred Revenue of an Acquiree,” we did not assume Alamo’s deferred revenue balance as of the acquisition date, and accordingly will not record revenue associated with product that was shipped prior the acquisition date. However, in connection with the acquisition, we assumed an obligation for future product returns, chargebacks, rebates, discounts and royalties associated with pre-acquisition shipments of FazaClo. As such, we recorded preliminary estimated liabilities for such returns and other discounts based on our estimate of the fair values of the liabilities at the acquisition date, which is classified as Assumed Liabilities for Returns and Other Discounts in the accompanying condensed consolidated balance sheets.

The preliminary fair values of the assets acquired and liabilities assumed were determined in accordance with FAS 141. Our preliminary allocation of the purchase price includes the estimated fair values of the intangible assets, including FazaClo product rights in the amount of $32.5 million, and in-process research and development (“IPR&D”) expense related to a certain new manufacturing technology for FazaClo in the amount of $2.6 million. We may adjust the preliminary purchase price allocation after obtaining final information on identifiable intangible assets acquired and on acquired tangible assets and liabilities assumed, and after assessment of the fair value of the debt issued in connection with the acquisition. We will determine the final purchase price allocation after we have obtained all information necessary to identify and quantify the assets acquired and liabilities assumed, and will finalize our analysis within one year from the date of acquisition. Items subject to change and that could impact the purchase price allocation include identifiable intangible assets, inventories, lease obligations, FazaClo registry software and database, and identification of all liabilities assumed in connection with the acquisition.

The excess fair value of the net assets acquired over the cost of the acquired entity has been recorded as a contingent liability as of the date of acquisition due to the existence of contingent consideration. When the contingency is resolved and the consideration is issued or becomes issuable, any excess of the fair value of the contingent consideration issued or issuable over the amount that was recognized as if it was a liability will be recognized as an additional cost of the acquired entity.

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Our preliminary allocation of purchase price to assets acquired and liabilities assumed based on their estimated fair values as of the date of acquisition is as follows:

	Amount
Net tangible assets acquired:
Cash	$	157,507
Accounts receivables		1,345,412
Inventories		2,297,117
Property and equipment		1,880,826
Other assets		498,621
Identifiable intangible assets acquired:
Purchased Intangible Assets		32,500,000
In-process research and development (to be expensed)		2,600,000
Total assets acquired		41,279,483
Liabilities assumed:
Accounts payable and accrued expenses		(3,440,899	)
Assumed liabilities for returns and other discounts		(6,719,993	)
Contingent liability of the entity acquired		(625,102	)
Capital lease obligations		(512,717	)
Total liabilities assumed		(11,298,711	)
Total purchase price	$	29,980,772

Identifiable Intangible Assets

We determined preliminary fair values of identifiable intangible assets acquired based on estimates and assumptions by management on projected sales and experience to date by Alamo on product returns, rebates, chargebacks and discounts. Identifiable intangible assets acquired represent the FazaClo product rights (see Note 20, “Manufacturing Service Agreements – CIMA Labs Inc.”) (the “Purchased Intangible Asset”). The preliminary fair value of the Purchased Intangible Asset is being amortized, with the annual amortization amount being the greater of amount computed using (a) the ratio that current gross revenues for FazaClo bear to the total of current and anticipated future gross revenues for FazaClo or (b) the straight-line method over the remaining preliminary estimated economic life of thirteen years.

In-Process Research and Development

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

In order to estimate the preliminary value of the DuraSolv technology, we used the income approach on incremental product revenues and costs that could result from manufacturing with such technology.

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DuraSolv technology allows for the product to be packaged in a bottle, which is more convenient to open than the current blister packaging for FazaClo, and which we believe could result in incremental sales of approximately 10% over the current product with existing packaging. We expect to use the DuraSolv manufacturing technology to replace the current OraSolv technology for manufacturing FazaClo, assuming the manufacturing process is approved by the FDA. We applied a preliminary discount rate of 25% to value DuraSolv, which includes a risk premium over the discount rate applied to FazaClo manufactured using the OraSolv technology to account for the development risk. We determined the future economic benefits from the purchased IPR&D to be uncertain because such technology has not been approved by the FDA. No material change in pricing or manufacturing cost is anticipated. As DuraSolv was determined to be IPR&D, the preliminary estimated fair value of DuraSolv of $2.6 million was expensed for the three-month and nine-month periods ended June 30, 2006, under guidelines in FAS 141.

Pro Forma Results of Operations

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

	Three Months Ended June 30,						Nine Months Ended June 30,
	2006			2005			2006			2005
Pro forma net revenues (1)	$	2,551,000		$	3,823,000		$	15,294,000		$	5,741,000
Pro forma net loss (2)(3).	$	(9,974,000	)	$	(14,448,000	)	$	(39,643,000	)	$	(50,737,000	)
Pro forma net loss per basic and diluted share	$	(0.32	)	$	(0.54	)	$	(1.31	)	$	(2.02	)
Shares used for basic and diluted computation		31,419,394			26,841,950			30,352,690			25,121,332

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

• Amortization of Purchased Intangible Assets,

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

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

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

• The charge of $2.6 million purchased IPR&D is not included in the pro forma results of operations. The purchased IPR&D is a one-time charge directly related to the acquisition and does not have a continuing impact on our future operations.

5. EXPANSION AND RELOCATION OF COMMERCIAL AND GENERAL AND ADMINISTRATIVE OPERATIONS

On May 4, 2006, our Board of Directors authorized the relocation of our commercial and general and administrative operations. We currently occupy three laboratory buildings in San Diego, California. We are in the process of expanding our sales and marketing operations and relocating all

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operations other than research and development to Orange County, California and expect to sublease two of the San Diego buildings after our relocation is complete. We do not expect to vacate any buildings in San Diego until September or later in the year. On May 5, 2006, we entered into a lease for the new Orange County facilities, which consists initially of approximately 11,000 square feet of office space, increasing to 17,000 square feet in the second quarter of 2007, leased for an initial term of five years. The aggregate minimum payments over the initial term of the lease are expected to be approximately $2.8 million. In July 2006, we began moving our commercial and general and administrative operations from San Diego to Orange County.

In connection with the relocation of commercial and general administrative operations, ten positions are expected to be relocated from our San Diego office to our Orange County office by January 1, 2007. We anticipate that we will incur estimated restructuring charges of $419,000 relating to one-time termination and relocation benefits. In accordance with Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” a restructuring charge of $95,000 was recorded in the three-month and nine-month periods ended June 30, 2006 and included in accrued compensation and payroll taxes at June 30, 2006.

6. INVESTMENTS

Investments in securities as of June 30, 2006 and September 30, 2005 consisted of the following:

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains (1)		Losses (1)			Value
As of June 30, 2006:
Certificates of deposit	$	856,597	$	—	$	—		$	856,597
Government debt securities		35,456,338		—		(245,316	)		35,211,022
Total	$	36,312,935	$	—	$	(245,316	)	$	36,067,619
Classified and reported as:
Short term investments:
Classified as available-for-sale								$	32,766,262
Long term investments:
Classified as available-for-sale									2,444,760
Restricted investments in securities (2)									856,597
Long-term investments									3,301,357
Total								$	36,067,619

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains (3)		Losses (3)			Value
As of September 30, 2005:
Certificates of deposit	$	956,872	$	48	$	—		$	956,920
Government debt securities		18,074,385		—		(113,862	)		17,960,523
Total	$	19,031,257	$	48	$	(113,862	)	$	18,917,443
Classified and reported as:
Short term investments:
Classified as available-for-sale								$	14,215,005
Long term investments:
Classified as available-for-sale									3,845,566
Restricted investments in securities (2)									856,872
Long-term investments									4,702,438
Total								$	18,917,443

The following table presents the cumulative restructuring activities through June 30, 2006:

	Three Months		Nine Months
	Ended		Ended
	June 30, 2006		June 30, 2006
Balance, October 1, 2005	$	—	$	—
Current period expense		94,819		94,819
Payment		—		—
Balance, June 30, 2006	$	94,819	$	94,819

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(1)	Gross unrealized losses of $245,316 on government debt securities are reported as “accumulated other comprehensive loss” on the consolidated balance sheet as of June 30, 2006.
(2)	Represents amounts pledged to our bank as collateral for letters of credit issued in connection with our leases of office and laboratory space.
(3)	Gross unrealized gains of $48 and gross unrealized losses of $113,862 on government securities and certificates of deposit represent an accumulated net unrealized loss of $113,814, which is reported as “accumulated other comprehensive loss” on the consolidated balance sheet as of September 30, 2005.

7. RECEIVABLES, NET

Receivables as of June 30, 2006 and September 30, 2005 consist of the following:

	June 30,			September 30,
	2006			2005
Accounts receivable (1)	$	2,185,371		$	31,599
Unbilled receivables		1,222,734			1,010,902
Receivables		197,919			155,252
		3,606,024			1,197,753
Allowance for doubtful accounts		(28,099	)		(28,099	)
Receivables, net	$	3,577,925		$	1,169,654

(1) Accounts receivable at June 30, 2006 included those purchased as part of the Alamo acquisition.

8. INVENTORIES

Inventories include FazaClo product and active pharmaceutical ingredients docosanol, dextromethorphan, and quinidine sulfate as of June 30, 2006 and docosanol only as of September 30, 2005, with the following carrying amounts as of those dates:

	June 30,			September 30,
	2006			2005
Finished goods	$	1,747,483		$	—
Raw materials		929,918			374,539
Work in progress		173,420			—
Inventories subject to return		194,331			—
Total inventories		3,045,152			374,539
Less: current portion		(2,560,766	)		(27,115	)
Long-term portion	$	484,386		$	347,424

Inventories subject to return represent the costs of FazaClo product shipped to customers that have not been recognized as cost of product sales based on our revenue recognition policies. See Note 3, “Significant Accounting Policies – Revenue Recognition – Product Sales, FazaClo,” for further discussion.

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9. PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

	June 30, 2006							September 30, 2005
	Gross							Gross
	Carrying		Accumulated					Carrying		Accumulated
	Value		Depreciation			Net		Value		Depreciation			Net
Research and development equipment	$	4,123,355	$	(2,994,129	)	$	1,129,226	$	3,903,735	$	(2,567,843	)	$	1,335,892
Computer equipment and related software		2,132,716		(728,885	)		1,403,831		1,038,390		(565,137	)		473,253
Leasehold improvements		5,844,984		(2,195,366	)		3,649,618		5,583,177		(1,641,485	)		3,941,692
Office equipment, furniture and fixtures		1,230,940		(392,186	)		838,754		558,911		(305,221	)		253,690
Automobiles		524,675		(37,164	)		487,511		—		—			—
Manufacturing equipment		261,719		—			261,719		—		—			—
Total property and equipment	$	14,118,389	$	(6,347,730	)	$	7,770,659	$	11,084,213	$	(5,079,686	)	$	6,004,527

Property and equipment at June 30, 2006 includes $1.8 million property and equipment acquired in connection with the Alamo Acquisition.

Depreciation expense related to property and equipment for the three-month and nine-month periods ended June 30, 2006 was approximately $534,000 and $1.4 million, respectively, as compared to $393,000 and $1.2 million for the three-month and nine-month periods ended June 30, 2005, respectively. Manufacturing equipment represents the tooling purchased for the manufacture of Neurodex™, which had not been placed in service as of June 30, 2006. See Note 20, “Manufacturing Service Agreements,” for further discussion.

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10. INTANGIBLE ASSETS

At June 30, 2006 and September 30, 2005, the components of amortizable and indefinite-lived intangibles and certain other related information are as follows:

	June 30, 2006							September 30, 2005
	Gross							Gross
	Carrying		Accumulated					Carrying		Accumulated
	Value		Amortization			Net		Value		Amortization			Net
Amortizable intangible assets:
Purchased Intangible Assets	$	32,500,000	$	(260,164	)	$	32,239,836	$	—	$	—		$	—
Patent applications pending (1)		3,205,857		(576,310	)		2,629,547		3,029,127		(336,457	)		2,692,670
Patents (1)		1,682,942		(735,415	)		947,527		1,429,532		(506,144	)		923,388
Licenses		42,461		(19,595	)		22,866		42,461		(17,904	)		24,557
Total intangible assets with finite lives		37,431,260		(1,591,484	)		35,839,776		4,501,120		(860,505	)		3,640,615
Intangible assets with indefinite lives:
Trademarks (2)		26,866		—			26,866		24,471		—			24,471
Total intangible assets	$	37,458,126	$	(1,591,484	)	$	35,866,642	$	4,525,591	$	(860,505	)	$	3,665,086

(1)

Patent applications pending and patents include the net effect of $19,000 and $60,000 (net of accumulated amortization of $4,000 and $7,000) in intangible assets abandoned during the three-month and nine-month periods ended June 30, 2006, respectively. Patent applications pending include the net effect of $37,000 and $208,000 (net of accumulated amortization of $4,000 and $22,000) in intangible assets abandoned during the three-month and nine-month periods ended June 30, 2005, respectively. We abandoned certain patents and patent applications pending related to docosanol 10% cream in selected countries where we determined there are no viable markets.

(2)

Intangible assets with indefinite useful lives include the net effect of $14,000 and $23,000 in trademarks abandoned during the three-month and nine-month periods ended June 30, 2005.

Purchased Intangible Assets consist of the FazaClo product rights (see Note 20, “Manufacturing Service Agreements – CIMA Labs Inc.”) acquired in connection with the Alamo Acquisition. Amortization expense related to amortizable intangible assets for the three-month and nine-month periods ended June 30, 2006 was approximately $331,000 and $464,000, respectively, compared to $235,000 and $338,000 for the three-month and nine-month periods ended June 30, 2005, respectively. Charges for intangible assets abandoned and impaired for the three-month and nine-month periods ended June 30, 2006 were $216,000 and $350,000, respectively, compared to $56,000 and $178,000 for the three-month and nine-month periods ended June 30, 2005, respectively. Charges for patents and patent applications pending abandoned and impaired are included in research and development expense and charges for trademarks abandoned are included in selling, general and administrative expense in our unaudited condensed consolidated statements of operations.

Based solely on the amortizable intangible assets as of June 30, 2006, the estimated annual amortization expense of intangible assets for the fiscal years ending September 30 is shown in the following table. Actual amortization expense to be reported in future periods could differ from these estimates as a result of acquisitions, divestitures, and other relevant factors.

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Amortization Expense

Fiscal year ending September 30:
2006 (remaining three months)	$	700,000
2007		2,768,000
2008		2,775,000
2009		2,759,000
2010		2,732,000
2011		2,716,000
Thereafter		21,390,000
Total	$	35,840,000

11. ASSUMED LIABILITIES FOR RETURNS AND OTHER DISCOUNTS

In connection with the Alamo Acquisition, we assumed outstanding obligations for future product returns, chargebacks, rebates, discounts and royalties associated with pre-acquisition shipments of FazaClo. As such, we recorded liabilities in the amount of $6.8 million for such returns and other discounts based on estimated fair value at the acquisition date. The following table sets forth the assumed liabilities for returns and other discounts as of June 30, 2006:

Balance, at acquisition date	$	6,719,993
Payments for returns and other discounts		(335,904	)
Balance, at June 30, 2006	$	6,384,089

12. NET DEFERRED REVENUE

The following table sets forth as of June 30, 2006 the net deferred revenue balances for our sale of future abreva royalty rights to Drug Royalty USA, FazaClo product shipments and other agreements.

	Drug Royalty			FazaClo
	USA			Product		Other
	Agreement			Shipments		Agreements			Total
Net deferred revenue as of September 30, 2005	$	19,049,877		$	—	$	108,333		$	19,158,210
Changes during the period:
Shipments, net		—			1,141,040		—			1,141,040
License fee		—			—		860,215			860,215
Recognized as revenue during period		(1,474,212	)		—		(113,516	)		(1,587,728	)
Net deferred revenue as of June 30, 2006	$	17,575,665		$	1,141,040	$	855,032		$	19,571,737
Classified and reported as:
Current portion of deferred revenue,	$	2,058,508		$	1,141,040	$	284,146		$	3,483,694
Deferred revenue, net of current portion		15,517,157			—		570,886			16,088,043
Total deferred revenue	$	17,575,665		$	1,141,040	$	855,032		$	19,571,737

FazaClo Product – The amount of deferred revenue from FazaClo product shipments is shown net of estimated rebates and discounts. The amount that ultimately will be recognized as net revenue in our consolidated financial statements may be different. See Note 3, “Significant Accounting Policies – Revenue Recognition – Product Sales, FazaClo,” for further discussion.

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

In accordance with SAB Topic 13, revenues are recognized when earned, collection is reasonably assured and no additional performance of services is required. We classified the proceeds received from Drug Royalty USA as deferred revenue, to be recognized as revenue ratably over the life of the license agreement consistent with SAB 101 because of our continuing involvement over the term of the Drug Royalty Agreement. Such continuing involvement includes overseeing the performance of GlaxoSmithKline and its compliance with the covenants in the GlaxoSmithKline License Agreement, monitoring patent infringement and adverse claims or litigation involving abreva and undertaking to find a new license partner in the event that GlaxoSmithKline terminates the agreement. The Drug Royalty Agreement contains both covenants (Section 8) and events of default (Section 10) that require such performance our part. Therefore, nonperformance on our part could result in default of the arrangement, and could give rise to additional rights in favor of Drug Royalty USA under a separate security agreement with Drug Royalty USA, which could result in loss of our rights to share in future abreva royalties if wholesale sales by GlaxoSmithKline exceed $62 million a year. Because of our continuing involvement, we recorded the net proceeds of the transaction as deferred revenue, to be recognized as revenue ratably over the life of the license agreement. Based on a review of our continuing involvement, we concluded that the sale proceeds did not meet any of the rebuttable presumptions in EITF 88-18 that would require classification of the proceeds as debt.

Docosanol License Agreement – In January 2006, we signed an exclusive license agreement (the “License Agreement”) with Kobayashi Pharmaceutical Co., Ltd. (“Kobayashi”), a Japanese corporation, to allow Kobayashi to market in Japan medical products that are curative of episodic outbreaks of herpes simplex or herpes labialis and that contain a therapeutic concentration of our docosanol 10% cream either as the sole active ingredient or in combination with any other ingredient, substance or compound (the “Products”).

The License Agreement automatically expires upon the latest to occur of (1) the tenth anniversary of the first commercial sale in Japan, (2) the last expiration date of any patent licensed under the License Agreement, or (3) the last date of expiration of the post marketing surveillance period in Japan. Pursuant to the terms of the License Agreement, we received a non-refundable know-how and data transfer fee (“License Fee”) of $860,000 in March 2006. In addition, we will be eligible to receive milestone payments of up to 450 million Japanese Yen (or up to approximately U.S. $3.9 million based on the exchange rate as of June 30, 2006), subject to achievement of certain milestones relating to the regulatory approval and commercialization of docosanol in Japan and patent and know-how royalties for sales of Products in Japan, if commercial sales commence.

Under the terms of the License Agreement, Kobayashi will be responsible for obtaining all necessary approvals for marketing, all sales and marketing activities and the manufacturing and distribution of the Products. Because the know-how and expertise related to the docosanol 10% cream are proprietary to us, we will be providing assistance to Kobayashi, upon their request, in completing additional required clinical studies and filing the new drug application (“NDA”) submission for the licensed product in Japan. As of June 30, 2006, we estimated the period of time of our continuing involvement in advising and assisting Kobayashi with additional clinical studies and obtaining regulatory approval in Japan is three years. In accordance with SAB Topic 13, revenue from the License Fee of $860,000 is deferred and being recognized over three years. We recognized $71,000 and $80,000 of the License Fee in the three-month and nine-month periods ended June 30, 2006, respectively.

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13. NOTES PAYABLE

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

If the Selling Holders demand repayment of the First Note following satisfaction of the Stock Contingency, we must repay the First Note within 180 days from the demand in our choice of cash or shares of common stock. If we elect to repay the First Note in shares of common stock, the shares will be valued at 95% of the average closing price of the common stock, as reported on the NASDAQ Global Market, for the five trading days prior to repayment, subject to a price floor.

We have the right to prepay, in cash or in common stock, the amounts due under the Notes at any time, provided that we may only pay the Notes in common stock if the Stock Contingency has occurred prior to the maturity date and if we have registered the shares on an effective registration statement filed with the SEC. If we elect to prepay the Notes with common stock, the shares will be valued at 95% of the average closing price of the common stock, as reported on the NASDAQ Global Market, for the five trading days prior to repayment, subject to a price floor. As described in Note 4, the assessment of the fair value is subject to receipt of final evaluation information.

14. COMPUTATION OF NET LOSS PER COMMON SHARE

Basic net (loss) earnings per common share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period, excluding restricted stock that has been issued but is not yet vested. Diluted net (loss) earnings per common share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period plus additional weighted average common equivalent shares outstanding during the period. Common equivalent shares result from the assumed exercise of outstanding stock options and warrants (the proceeds of which are then presumed to have been used to repurchase outstanding stock using the treasury stock method) and the vesting of unvested restricted shares of common stock. In the loss periods, the common equivalent shares have been excluded from the computation of diluted net loss per share, because their effect would have been anti-dilutive. For the three-month and nine-month periods ended June 30, 2006 and 2005, 1,610,559 and 1,480,474 shares of common stock, respectively, issuable under our share-based compensation plans were excluded from the computation of diluted net loss per share. For the three-month and nine-month periods ended June 30, 2006 and 2005, warrants to purchase 269,305 and 1,122,053 shares of common stock, respectively, were excluded from the computation of diluted net loss per share.

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15. COMPREHENSIVE LOSS

Comprehensive loss consists of the following:

	Three Months Ended June 30,						Nine Months Ended June 30,
	2006			2005			2006			2005
Net loss	$	(17,492,304	)	$	(8,207,544	)	$	(36,572,149	)	$	(29,347,080	)
Other comprehensive income (loss):
Unrealized income (loss) on available-for-sale securities		59,829			(46,069	)		(131,502	)		(46,598	)
Total comprehensive loss	$	(17,432,475	)	$	(8,253,613	)	$	(36,703,651	)	$	(29,393,678	)

16. SHAREHOLDERS’ EQUITY

Unearned compensation. Pursuant to FAS 123R, unearned compensation with the balance of $3.5 million at September 30, 2005 was eliminated against common stock upon the adoption of FAS 123R on October 1, 2005. The unearned compensation was related to a restricted stock award granted to our Chief Executive Officer prior to the adoption of FAS 123R. See Note 3, “Significant Accounting Policies – Change in Accounting Method for Share-based Compensation.”

Common stock. In October 2005, we issued and sold to certain institutional investors 1,523,585 shares of our common stock at a price of $10.60 per share, for aggregate net offering proceeds of approximately $16.15 million. In December 2005, we issued and sold to certain institutional investors 1,492,538 shares of our common stock at $13.40 per share, for aggregate offering proceeds of approximately $20.0 million and net offering proceeds of approximately $19.4 million, after deducting commissions and offering fees and expenses. These offerings were made pursuant to our shelf registration statement on Form S-3, filed with the SEC in June 2005.

Between January 26, 2006 and February 7, 2006, we received proceeds of $4.7 million from the exercise of warrants to purchase 671,923 shares of Class A common stock in connection with our call for redemption of a group of outstanding warrants. The warrants had been issued in connection with a financing transaction in December 2003 involving the sale of Class A common stock and warrants (the “Warrants”). The exercise price of the Warrants was $7.00 per share. The Warrants had a five-year term, but included a provision that we could redeem the Warrants for $1.00 each if our stock price traded above twice the warrant exercise price for a certain period of time (the “Redemption Right”). On January 24, 2006, we sent the Warrant holders notice that the Redemption Right had been triggered and that the Warrants would expire, to the extent unexercised, on February 7, 2006. One of the warrants to purchase 25,167 shares of Class A common stock expired unexercised.

During the three-month period ended June 30, 2006, we issued an aggregate of 79,033 shares of common stock in connection with the exercises of employee stock options (66,533 shares at a weighted average exercise price of $6.24) and the exercise of an employee restricted stock award (12,500 shares at the purchase price of $0.004) for cash in the aggregate amount of $415,000.

As of June 30, 2006 and 2005, warrants to purchase 269,305 and 1,122,053 shares of common stock, respectively, at a weighted-average price per share of $8.92 and $7.56, respectively, remained outstanding, all of which are exercisable. As of June 30, 2006 and 2005, options to purchase 1,553,829 and 1,480,474 shares of common stock, respectively, at a weighted-average price per share of $10.44 and $8.52, respectively, remained outstanding; of these, 757,066 and 1,272,453 options were exercisable at June 30, 2006 and 2005, respectively. As of June 30, 2006 and 2005, 76,730 and 0 shares of common stock, respectively, are reserved for issuance under agreements to issue shares in connection with restricted stock awards and restricted stock units (“RSUs”).

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17. EQUITY INCENTIVE PLANS

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

During the three-month and nine-month periods ended June 30, 2006, share-based awards were granted under the 2003 Equity Incentive Plan (the “2003 Plan”) and the 2005 Equity Incentive Plan (the “2005 Plan”). Under the 2003 Plan and 2005 Plan, options to purchase shares, restricted stock units, restricted stock and other share-based awards may be granted to our employees and consultants. Under the Plans, as of June 30, 2006, we had an aggregate of 2,213,272 shares of our common stock reserved for issuance. Of those shares, 1,510,559 were subject to outstanding options and other awards and 702,713 shares were available for future grants of share-based awards. We also issued share-based awards outside of the Plans. As of June 30, 2006, an option to purchase 100,000 shares of our common stock that was issued outside of the Plans is outstanding. None of the share-based awards is classified as a liability as of June 30, 2006.

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

a.	25% of the option shares vest and become exercisable on the first anniversary of the grant date and the remaining 75% of the option shares vest and become exercisable quarterly in equal installments thereafter over three years;
b.	One-third of the option shares vest and become exercisable on the first anniversary of the grant date and the remaining two-thirds of the option shares vest and become exercisable daily or quarterly in equal installments thereafter over two years; or
c.	Options fully vest and become exercisable at the date of grant.

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

Summaries of stock options outstanding and changes during the nine-month period ended June 30, 2006 are presented below.

						Weighted
				Weighted		average
				average		remaining
				exercise		contractual		Aggregate
				price per		term		intrinsic
	Number of shares			share		(in years)		value
Outstanding, September 30, 2005		1,600,034		$	8.76
Granted		540,312		$	11.68
Exercised		(521,837	)	$	6.23
Forfeited or expired		(84,680	)	$	11.97
Outstanding, June 30, 2006		1,533,829		$	10.44		7.3	$	742,000
Exercisable, June 30, 2006		757,066		$	9.05		5.1	$	713,000

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The weighted average grant-date fair values of options granted during the nine-month periods ended June 30, 2006 and 2005 were $7.42 per share and $9.84 per share, respectively. The total intrinsic value of options exercised during the nine-month periods ended June 30, 2006 and 2005 was $4.6 million and $192,000, respectively, based on the differences in market prices on the dates of exercise and the option exercise prices.

The fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton option pricing model (“Black-Scholes model”) that uses the assumptions noted in the following table. Expected volatilities are based on historical volatility of our common stock and other factors. The expected term of options granted is based on analyses of historical employee termination rates and option exercises. The risk-free interest rates are based on the U.S. Treasury yield for a period consistent with the expected term of the option in effect at the time of the grant. Assumptions used in the Black-Scholes model for options granted during the nine-month period ended June 30, 2006 were as follows:

Expected volatility	77.5%-80.4	%
Weighted-average volatility	78.6	%
Average expected term in years	4.5
Risk-fee interest rate (zero coupon U.S. Treasury Note)	4.5	%
Expected dividend yield	0	%

Restricted stock units. RSUs generally vest based on three years of continuous service and may not be sold or transferred until the awardee’s termination of service. The following table summarizes the RSU activities for the nine-month period ended June 30, 2006:

			Weighted
	Number of		average grant
	shares		date fair value
Unvested, September 30, 2005		—	$	—
Granted		51,480	$	15.54
Unvested, June 30, 2006		51,480	$	15.54

The grant-date fair value of RSUs granted during the nine-month period ended June 30, 2006 was $800,000. No RSUs were granted during the nine-month period ended June 30, 2005. As of June 30, 2006, the total unrecognized compensation cost related to unvested shares was $609,000, which is expected to be recognized over a weighted-average period of 2.6 years, based on the vesting schedules.

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

			Weighted
	Number of		average grant
	shares		date fair value
Unvested, September 30, 2005		250,000	$	14.22
Granted		50,250	$	12.73
Unvested, June 30, 2006		300,250	$	13.97

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The grant-date fair value of restricted stock awards granted during the nine-month period ended June 30, 2006 was $640,000. No restricted stock awards were granted in the nine-month period ended June 30, 2005. As of June 30, 2006, the total unrecognized compensation cost related to unvested shares was $2.7 million, which is expected to be recognized over a weighted-average period of 2.0 years.

For the nine-month period ended June 30, 2006, we received a total of $3.3 million in cash from options exercised under all share-based payment arrangements.

18. COMMITMENTS AND CONTINGENCIES

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

19. LICENSE AGREEMENTS

AstraZeneca UK Limited (“AstraZeneca”). In July 2005, we entered into an exclusive license and research collaboration agreement with AstraZeneca to discover, develop and commercialize reverse cholesterol transport enhancing compounds for the treatment of cardiovascular disease. Under the terms of the agreement, we will be eligible to receive royalty payments, assuming the product is successfully developed by AstraZeneca and approved for marketing by the FDA. We are also eligible to receive up to $330 million in milestone payments contingent upon achievement of certain development and regulatory milestones performed by AstraZeneca, which could take several years of further development, including achievement of certain sales targets, if a licensed compound is approved for marketing by the FDA. Under this agreement, we received a license fee of $10 million in July 2005 and will also receive research funding of between $2.5 million to $4.0 million per year for providing research services to AstraZeneca for up to three years. AstraZeneca assumed responsibility for the development and commercialization of the product.

Novartis International Pharmaceutical Ltd. (“Novartis”). In April 2005, we entered into a research, development and commercialization agreement with Novartis for orally active small molecule therapeutics that regulate macrophage migration inhibitory factor (“MIF”) in the treatment of various inflammatory diseases. Under the terms of the agreement, we will be eligible to receive royalty payments, assuming the product is successfully developed and approved by Novartis for marketing by the FDA. We are also eligible to receive up to $198 million in milestone payments contingent upon achievement of certain development and regulatory milestones performed by Novartis, including approval for certain additional indications, and regulatory milestones, which could take several years of further development by Novartis, including achievement of certain sales targets, when and if a MIF compound is approved for marketing by the FDA. Additionally, we received a license fee of $2.5 million in May 2005 for the license fee and transfer of data and know-how of the MIF technology to Novartis. We will also receive research funding of between $1.5 million and $2.5 million per year for providing research services to Novartis for two years from the date of the agreement, or longer upon mutual agreement of the parties. Novartis assumed responsibility for all development expenses.

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Payments related to substantive, performance-based milestones are recognized as license revenue upon the achievement of the milestones as specified in the agreement. Revenue from research and development services is recognized during the period in which the services are performed and is based upon the number of FTE personnel working on the project at the agreed-upon rates. During the three-month and nine-month periods ended June 30, 2006, we recognized revenues in connection with the collaborative agreements with AstraZeneca and Novartis as follows:

	Three Months Ended June 30,				Nine Months Ended June 30,
	2006		2005		2006		2005
Revenues:
Licenses	$	—	$	2,500,000	$	5,000,000	$	2,500,000
Research and development services and reimbursements		1,746,581		263,014		6,181,614		263,014
Total	$	1,746,581	$	2,763,014	$	11,181,614	$	2,763,014

20. MANUFACTURING SERVICE AGREEMENTS

Patheon. In January 2006, we entered into a manufacturing services agreement with Patheon Inc. (“Patheon”), a provider of outsourced drug manufacturing services, under which Patheon will initially serve as our sole provider of drug manufacturing services for Neurodex™ (the “Neurodex Manufacturing Agreement”). Under the terms of the Manufacturing Agreement, Patheon will be responsible for manufacturing, quality control, quality assurance and stability testing of Neurodex. The Neurodex Manufacturing Agreement is effective until December 31, 2011.

CIMA Labs Inc. In connection with the Alamo Acquisition, we acquired a development, license and supply agreement with CIMA Labs Inc., which holds intellectual property rights related to certain aspects of the development and production of FazaClo (the “FazaClo Supply Agreement”). The FazaClo Supply Agreement grants, through our Alamo subsidiary, an exclusive license to us to market, distribute and sell FazaClo. The FazaClo Supply Agreement provides royalty rates of 5% to 6%, based on annual net revenue and minimum annual royalty targets set forth in the agreement. Minimum future annual royalty payments under the agreement are as follows:

Twelve-month period ending December 31:
2006	$	250,000
2007		300,000
2008 and each year thereafter and		400,000

Royalty expense is recognized in cost of product sales when revenue from FazaClo shipments is recognized. Royalty costs paid but not recognized as expense are included in prepaid expenses and other current assets in the accompanying condensed consolidated balance sheets.

21. SEGMENT INFORMATION

We currently operate our business on the basis of a single operating segment, the discovery, development and commercialization of novel therapeutics for chronic diseases. Due to the acquisition of Alamo, we are currently evaluating our reportable segments. Our chief operating decision-maker is the Chief Executive Officer, who reviews our operating results on an aggregate basis and manages our operations as a single operating segment. We have developed one commercial product, docosanol 10% cream, known as abreva in North America, we recently have begun to produce and sell FazaClo (clozapine, USP), an approved drug in the United States, and we have several other product candidates in various stages of development. We have licensed docosanol 10% cream to other companies in the world that market the product and

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provide us royalties on product sales. We also have exclusively licensed to AstraZeneca compounds for the potential treatment of atherosclerosis and we provide them with research and development services. We also have exclusively licensed to Novartis compounds that target macrophage migration inhibitory factor. We earn license fee and research and development service revenues from AstraZeneca and Novartis. These collaborative agreements with AstraZeneca and Novartis will also provide: (1) milestone payments if certain development and regulatory milestones are achieved, which could take several years of further development, (2) milestone payments upon achievement of certain sales targets, if the products are approved for marketing by the FDA, and (3) royalties on sales, if the products are approved for marketing by the FDA.

We categorize revenues by geographic area based on selling location. All our operations are currently located in the United States; therefore, total revenues for the three-month and nine-month periods ended June 30, 2006 and 2005 are attributed to the United States. All long-lived assets at June 30, 2006 and September 30, 2005 are located in the United States.

Revenues derived from our license agreement with AstraZeneca for the three-month and nine-month periods ended June 30, 2006 were 53% and 75%, respectively, of our total consolidated revenues. Revenues from our license agreement with Novartis for the three-month periods ended June 30, 2006 and 2005 were 21% and 83%, respectively, of our total consolidated revenues and 12% and 57% of our total consolidated revenues for the nine-month periods ended June 30, 2006 an 2005, respectively. Revenues from the sale of rights to royalties under the GlaxoSmithKline license agreement for the three-month periods ended June 30, 2006 and 2005 were 20% and 14%, respectively, of our total consolidated revenues and 11% and 28% of our total consolidated revenues for the nine-month periods ended June 30, 2006 and 2005, respectively. As of June 30, 2006 and September 30, 2005, receivables from AstraZeneca accounted for approximately 29% and 81%, respectively, of our total net receivables. As of June 30, 2006 and September 30, 2005, receivables from Novartis accounted for approximately 6% and 5%, respectively, of our total net receivables.

22. RECENT ACCOUNTING PRONOUNCEMENTS

Financial Accounting Standards No. 154 (“FAS 154”). In May 2005, the FASB issued FAS 154, “Accounting Changes and Error Corrections.” FAS 154 establishes retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to the newly adopted accounting principle. FAS 154 also provides guidance for determining whether retrospective application of a change in accounting principle is impracticable and for reporting a change when retrospective application is impracticable. FAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. We do not expect the adoption of FAS 154 to significantly affect our financial condition or results of operations.

Financial Accounting Standards No. 155 (“FAS 155”). In February 2006, the FASB issued FAS 155, “Accounting for Certain Hybrid Financial Instruments,” an amendment of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“FAS 133”) and Financial Accounting Standards No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” (“FAS 140”). With respect to FAS 133, FAS 155 simplifies accounting for certain hybrid financial instruments by permitting fair value remeasurement for any hybrid financial instrument that contains embedded derivative that otherwise would require bifurcation and eliminates the interim guidance in Statement 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets,” which provided that beneficial interests in securitized financial assets are not subject to the provision of FAS 133. With respect to FAS 140, FAS 155 eliminates a restriction on the passive derivative instruments that a qualifying special-purpose entity may hold. FAS 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. We do not expect the adoption of FAS 155 to significantly affect our financial condition or results of operations.

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

23. SUBSEQUENT EVENTS

On July 6, 2006, we entered into an exclusive license agreement (the “Agreement”) with Healthcare Brands International (“HBI”), pursuant to which we granted to HBI the exclusive rights to develop and commercialize docosanol 10% cream in the following countries: Austria, Belgium, Czech Republic, Estonia, France, Germany, Hungary, Ireland, Latvia, Lithuania, Luxembourg, Malta, The Netherlands, Poland, Portugal, Russia, Slovakia, Slovenia, Spain, Ukraine and the United Kingdom (the “Licensed Territory”).

Pursuant to the Agreement, we will receive an upfront data and know-how transfer fee of £750,000 (approximately $1.4 million, based on the exchange rate on July 6, 2006) in exchange for providing certain data, including contents of the Marketing Authorization Application to the Swedish Medical Products Agency. We will also be eligible to receive £750,000 for each of the first two regulatory approvals for marketing in any countries in the Licensed Territory. If there is any subsequent divestiture or sublicense of docosanol by HBI (including through a sale of HBI), or any initial public offering of HBI’s securities, we will receive an additional payment related to the future value of docosanol under the Agreement. HBI will bear all expenses related to the regulatory approval and commercialization of docosanol within the Licensed Territory. HBI also has certain financing obligations, pursuant to which it will be obligated to raise a minimum amount of working capital within certain time periods following execution of the Agreement.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q contains forward-looking statements concerning future events and performance of the Company. When used in this report, the words “intend,” “estimate,” “anticipate,” “believe,” “plan” or “expect” and similar expressions are included to identify forward-looking statements. These forward-looking statements are based on our current expectations and assumptions and many factors could cause our actual results to differ materially from those indicated in these forward-looking statements. You should review carefully the factors identified in this report under the caption, “Risk Factors” and in our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”). We disclaim any intent to update or announce revisions to any forward-looking statements to reflect actual events or developments. Except as otherwise indicated herein, all dates referred to in this report represent periods or dates fixed with reference to the calendar year, rather than our fiscal year ending September 30. The three-month and nine-month periods ended June 30, 2006 may also be referred to as the third quarter of fiscal 2006 and first nine months of fiscal 2006, respectively.

EXECUTIVE OVERVIEW

Avanir Pharmaceuticals is focused on developing, acquiring and commercializing novel therapeutic products for the treatment of chronic diseases. Our products and product candidates address therapeutic markets that include the central nervous system, cardiovascular disorders, inflammatory and infectious diseases. We currently market FazaClo, the only orally-disintegrating formulation of clozapine for the management of severely ill schizophrenic patients who fail to respond adequately to standard schizophrenic drug treatments. Our lead product candidate, Neurodex™ for the treatment of involuntary emotional expression disorder (“IEED”) also known as pseudobulbar affect (“PBA”) or emotional lability is the subject of a new drug application (“NDA”) under priority review with the U.S. Food and Drug Administration (“FDA”). Our research and drug discovery programs are focused primarily on small molecules that can be taken orally as therapeutic treatments.

Our recent developments are as follows:

• On July 6, 2006, we entered into an exclusive agreement with Healthcare Brands International (“HBI”) to develop and market our docosanol 10% cream as a treatment for cold sores in the European Union, (with the exception of Denmark, Finland, Greece, Italy, and Sweden, all of which are covered by previous license grants from us) Russia and Ukraine. The agreement provides for us to receive an upfront fee of £750,000 (approximately $1.4 million, based on the exchange rate on July 6, 2006) at signing, plus aggregate milestone payments of up to £1,500,000 if 10% docosanol cream receives certain regulatory approvals in the licensed territory. Additionally, if there is any subsequent divestiture or sublicense of 10% docosanol cream by HBI (including through a sale of HBI), or any initial public offering of HBI’s securities, we will receive a payment calculated based on a percentage of the assigned value of 10% docosanol cream to the overall value of the transaction. HBI will be responsible for all expenses related to the regulatory approval and commercialization of 10% docosanol cream in the territory.

• On June 29, 2006, we were notified that we had been awarded a $2.0 million research grant from the National Institutes of Health/National Institute of Allergy and Infectious Disease (“NIH”) for ongoing research and development related to our fully human monoclonal antibody for the treatment of post-exposure anthrax infection (the “Anthrax Antibody”). Under the terms of the grant, the NIH will reimburse us for up to $2.0 million in certain expenses (including expenses incurred in the 90 days preceding the grant award date) related to the establishment of a cGMP manufacturing process and the testing of efficacy of the Anthrax Antibody in non-human primate animal models.

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• On June 19, 2006, we were advised that the FDA extended the review period for our NDA for Neurodex™ for the treatment of IEED/PB. Accordingly, we expect the FDA to take action on October 30, 2006 (the “PDUFA date”), based on our estimates of the timing for the priority review. However, the action may be delayed if there are questions from the FDA about our NDA.

• On May 24, 2006, we acquired Alamo Pharmaceuticals, LLC (“Alamo”) as an indirect wholly owned subsidiary. Because the acquisition occurred about the middle of the third quarter of fiscal 2006, the full impact on operating expenses and interest expense associated with the acquisition will not be reflected until the fourth quarter of fiscal 2006. See Note 4, “Alamo Acquisition,” in the Notes to Condensed Consolidated Financial Statements (Unaudited) for further discussion.

• On May 4, 2006, our Board of Directors authorized a space restructuring plan and the relocation of our commercial and general and administrative operations. We currently occupy three laboratory buildings in San Diego, California. We are in the process of relocating all operations other than research and development to Orange County, California and expect to sublease two of the San Diego buildings after our relocation is complete. On May 5, 2006, we entered into a lease for the new Orange County facilities, which consists initially of approximately 11,000 square feet of office space, increasing to 17,000 square feet in the second quarter of 2007, leased for an initial term of five years. The aggregate minimum payments over the initial term of the lease are expected to be approximately $2.8 million.

• On April 3, 2006, The NASDAQ Stock Market approved our application for listing our common stock for trading on the NASDAQ Global Market (formerly the NASDAQ National Market System). On April 11, 2006, our stock began trading on the NASDAQ under the stock symbol “AVNR” simultaneously with the discontinuation of trading on the American Stock Exchange.

We are currently developing Neurodex for the treatment of IEED/PBA, and for the treatment of painful diabetic neuropathy. IEED/PBA is a complex neurological syndrome that is characterized by a lack of control of emotional expression, typically episodes of involuntary or exaggerated motor expression of emotion such as laughing and/or crying or weeping when the patient does not feel those emotions or in an exaggerated amount. IEED/PBA afflicts patients with neurological disorders such as amyotrophic lateral sclerosis (“ALS”), Alzheimer’s disease (“AD”), multiple sclerosis (“MS”), stroke, traumatic brain injury and Parkinson’s disease. While the exact number is unknown, the medical literature indicates that there are approximately 800,000 to 1,000,000 patients who have IEED/PBA in North America. Based on existing medical literature, independent surveys and our latest market research, we now believe that there are likely over a million patients in the U.S. suffering from IEED/PBA. In addition, we believe that the availability of an FDA-approved treatment option for these patients may lead to the diagnosis of additional patients, much like what happened when the first drug to treat depression was launched. If the FDA approves Neurodex, it would be the first drug approved for the treatment of IEED/PBA. Additionally, we are currently engaged in a Phase III clinical trial with Neurodex in patients with painful diabetic neuropathy and we are evaluating Neurodex for use for other clinical indications.

We have two programs in Phase I clinical development. One development program is for the treatment of atherosclerosis and is partnered with AstraZeneca. In the second half of December 2005, we successfully submitted an investigational new drug application (“IND”) to the FDA for a compound under development, AZD-26452 (also known as AVP2479), that acts as a reverse cholesterol transport enhancer. AstraZeneca paid us $5.0 million in connection with the achievement of this milestone under the agreement. Our other development program is for AVP-13358 (a selective cytokine inhibitor) and various backup compounds that are currently being evaluated in the treatment of systemic lupus erythematosus (“SLE”) .

Our pre-clinical research program targeting macrophage migration inhibitory factor (“MIF”) in the treatment of inflammatory diseases is partnered with Novartis International Pharmaceutical Ltd.

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(“Novartis”). Using our proprietary Xenerex™ technology, we continue to conduct research to develop injectable human monoclonal antibody products for anthrax and other infectious diseases.

Our first commercialized product, docosanol 10% cream, (sold as abreva by our marketing partner GlaxoSmithKline Consumer Healthcare in North America) is the only over-the-counter treatment for cold sores that has been approved by the FDA. Subsequent to the acquisition of our subsidiary Alamo in May 2006, we market FazaClo (clozapine, USP), the only orally disintegrating formulation of clozapine for the management of severely ill schizophrenic patients who fail to respond adequately to standard schizophrenic drug treatments. FazaClo is also indicated for reducing the risk of suicidal behavior in patients with schizophrenic or schizoaffective disorder.

The following chart illustrates the status of research and development activities for our products, product candidates and licensed technologies that are commercialized or under development.

We have historically sought to maintain flexibility in our cost structure by actively managing outsourced functions, such as clinical trials, legal counsel, documentation and testing of internal controls, pre-clinical development work, and manufacturing, warehousing and distribution services, rather than maintaining all of these functions in house. We believe the benefits of outsourcing, including being flexible and being able to rapidly respond to program delays or successes far outweigh the higher costs often associated with outsourcing at this stage of our development. Although with the acquisition of Alamo and as we prepare for the potential commercial launch of Neurodex, we expect more of these functions may be brought in-house.

If the Neurodex NDA is approved by the FDA, we intend to begin marketing and selling the product within several months of receiving product approval with an agreeable label. We have made tremendous strides in the transformation of our business from a research and development organization into a

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vertically integrated pharmaceutical company. In order to facilitate that transformation, we are continuing to build the necessary infrastructure to support the potential commercial launch of Neurodex. With the acquisition of Alamo and our existing commercial infrastructure, we have filled most of the key commercial positions at this time. The next major commercial expansion will be the hiring of an additional 75 sales representatives subject to FDA approval of Neurodex. We are in the process of developing our sales and marketing strategy and are continuing to recruit sales and marketing personnel for key positions within the organization.

We intend to continue to seek partnerships with pharmaceutical companies to help fund research and development programs in exchange for sharing in the rights to commercialize new drugs. We may also seek to develop new drug candidates through research collaborations with other pharmaceutical companies, allowing us to share the risks and the opportunities that come from such development efforts. Additionally, we may acquire other drugs to leverage the infrastructure and sales organization if Neurodex is approved by the FDA for IEED/PBA. We expect that our selling, marketing, development and other operational costs will continue to exceed revenues from existing sources through at least fiscal 2007. Trends in revenues and various types of expenses are discussed further in the “Results of Operations.”

We will need to raise additional capital to prepare for and execute a product launch of Neurodex™ for IEED/PBA, if approved by the FDA, and to fund our ongoing clinical trials for Neurodex for painful diabetic neuropathy, as well as selected research and other operating activities. We may seek to raise this additional capital at any time prior to the planned launch of Neurodex and may do so through various financing alternatives, including licensing or sales of our technologies and drug candidates, selling shares of common or preferred stock, or through the issuance of one or more forms of senior or subordinated debt. Our future capital needs will depend substantially on our ability to reach predetermined milestones under our existing collaboration agreements, as well as the economic terms and the timing of any new partnerships or collaborative arrangements with pharmaceutical companies under which we would expect our partners to fund the costs of such activities. If we are unable to raise capital as needed to fund our operations, or if we are unable to reach these milestones or 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, and our commercialization plans for Neurodex may be adversely affected. For additional information about the risks and uncertainties that may affect our business and prospects, please see “Risk Factors.”

Our address of record is 11388 Sorrento Valley Road, San Diego, California 92121. Our telephone number is (858) 622-5200 and our e-mail address is info@avanir.com. Additional information about Avanir can be found on our website, at www.avanir.com, and in our periodic and current reports filed with the 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. No portion of our corporate or product websites are incorporated by reference into this report.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires us to make a number of assumptions and estimates that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported periods. These items are monitored and analyzed by management for changes in facts and circumstances, and material changes in these estimates could occur in the future. Changes in estimates are recorded in the period in which they become known. We base our estimates on historical experience and various other assumptions that we believe to be

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reasonable under the circumstances. Actual results may differ from our estimates if past experience or other assumptions do not turn out to be substantially accurate.

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

Share-based compensation expense

We grant options to purchase our common stock to our employees, directors and consultants under our stock option plans. The benefits provided under these plans are share-based payments subject to the provisions of revised Statement of Financial Accounting Standards No. 123, “Share-Based Payment” (“FAS 123R”). Effective October 1, 2005, we adopted FAS 123R, including the provisions of SAB 107, and use the fair value method to account for share-based payments with a modified prospective application which provides for certain changes to the method for valuing share-based compensation. The valuation provisions of FAS 123R apply to new awards and to awards that are outstanding on the effective date and subsequently modified or cancelled. Under the modified prospective application, prior periods are not revised for comparative purposes. Total compensation costs for our share-based payments recognized in the three-month and nine-month periods ended June 30, 2006 was $757,000 and $2.0 million, respectively. Selling, general and administrative expense in the three-month and nine-month periods ended June 30, 2006 included share-based compensation of $596,000 and $1.6 million, respectively. Research and development expense in the three-month and nine-month periods ended June 30, 2006 included share-based compensation of $161,000 and $423,000, respectively.

The fair value of each option award is estimated on the date of grant using a Black-Scholes-Merton option pricing model (“Black-Scholes model”) that uses assumptions regarding a number of complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility, actual and projected employee stock option exercise behaviors, risk-free interest rate and expected dividends. Expected volatilities are based on historical volatility of our common stock and other factors. The expected term of options granted is based on analyses of historical employee termination rates and option exercises. The risk-free interest rates are based on the U.S. Treasury yield in effect at the time of the grant. Since we do not expect to pay dividends on our common stock in the foreseeable future, we estimated the dividend yield to be 0%. FAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. We estimate pre-vesting forfeitures based on our historical experience.

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

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Accounting Bulletin No. 107 (“SAB 107”) using an option-pricing model, the value derived from that model may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.

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

Theoretical valuation models and market-based methods are evolving and may result in lower or higher fair value estimates for share-based compensation. The timing, readiness, adoption, general acceptance, reliability and testing of these methods is uncertain. Sophisticated mathematical models may require voluminous historical information, modeling expertise, financial analyses, correlation analyses, integrated software and databases, consulting fees, customization and testing for adequacy of internal controls. Market-based methods are emerging that, if employed by us, may dilute our earnings per share and involve significant transaction fees and ongoing administrative expenses. The uncertainties and costs of these extensive valuation efforts may outweigh the benefits to investors.

For purpose of estimating the fair value of stock options granted during the nine-month period ended June 30, 2006 using the Black-Scholes model, we have made an estimate regarding our stock price volatility (weighted average of 78.6%). If our stock price volatility assumption were increased to 88.8%, the weighted average estimated fair value per share of stock options granted during the nine-month period ended June 30, 2006 would increase by $0.79, or 11%. The volatility percentage assumed in the nine-month period ended June 30, 2006 was based on the historical prices of our common stock.

The expected term of options granted is based on our analyses of historical employee terminations and option exercises (weighted average of 4.5 years for the nine-month period ended June 30, 2006) which, if increased to 5.5 years, would increase the weighted average estimated fair value per share of stock options granted during the nine-month period ended June 30, 2006 by $0.78 or 10%.

The risk-free interest rate is based on the U.S. Treasury yield for a period consistent with the expected term of the option in effect at the time of grant (weighted average of 4.5% for the nine-month period ended June 30, 2006) which, if increased to 5.4%, would increase the weighted average estimated fair value per share of stock options granted during the nine-month period ended June 30, 2006 by $0.27 or 4%.

The pre-vesting forfeiture rate is estimated using historical option cancellation information (weighted average of 8.0% for both officers and directors and 13% for employees for the nine-month period ended June 30, 2006) which, if decreased to 3.0% for officers and directors and 8.0% for employees, would increase the share-based compensation expense for the nine-month period ended June 30, 2006 by $185,000 or 9%. See Note 3, “Significant Accounting Policies – Change in Accounting Method for Share-Based Compensation,” in the Notes to Condensed Consolidated Financial Statements (Unaudited) for a detailed discussion.

Revenue Recognition

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

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

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

Revenue Arrangements with Multiple Deliverables. We have revenue arrangements whereby we deliver to the customer multiple products and/or services. Such arrangements have generally included some combination of the following: antibody generation services; licensed rights to technology, patented products, compounds, data and other intellectual property; and research and development services. In accordance with EITF 00-21, we analyze our multiple element arrangements to determine whether the elements can be separated. We perform our analysis at the inception of the arrangement and as each product or service is delivered. If a product or service is not separable when it is delivered, no revenue is allocated.

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

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

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

Research and Development Services. Payments related to substantive, performance-based milestones in a research and development arrangement are recognized as revenue upon the achievement of the milestones as specified in the underlying agreements when they represent the culmination of the earnings process. Revenue from research and development services is recognized during the period in which the services

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

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

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

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

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

Product Sales – FazaClo. As discussed in Note 4, “Alamo Acquisition,” in the Notes to Condensed Consolidated Financial Statements (Unaudited), we acquired Alamo Pharmaceuticals LLC (“Alamo”) on May 24, 2006. Alamo has one product, FazaClo (clozapine, USP), that Alamo began shipping in July 2004 in 48-pill units. At that time, FazaClo had a two-year shelf life. In June 2005, Alamo received FDA approval to extend the product expiration date to three years. In October 2005, Alamo began to ship 96-pill units and accepted returns of unsold or undispensed 48-pill units.

FazaClo is sold primarily to third-party wholesalers that in turn sell this product to retail pharmacies, hospitals, and other dispensing organizations. Alamo has entered into agreements with its wholesale customers, various states, hospitals, certain other medical institutions and third-party payers throughout the United States. These agreements frequently contain commercial incentives, which may include favorable product pricing and discounts and rebates payable upon dispensing the product to patients. Additionally, these agreements customarily provide the customer with rights of return of the product, subject to the terms of each contract. Consistent with industry practice, wholesale customers can return purchased product during an 18-month period that begins six months prior to the product’s expiration date

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and ends 12 months after the expiration date. Additionally, some dispensing organizations, such as pharmacies and hospitals, have the right to return expired product at any time.

At the present time, we are unable to reasonably estimate future returns due to the lack of sufficient historical data for FazaClo. Accordingly, we currently defer recognition of revenue on shipments of FazaClo until the right of return no longer exists, i.e. when we receive evidence that the products have been dispensed to patients. We determine when products are dispensed to patients from rebate requests that have been submitted to us by various state agencies and others. We are not able to estimate how much has been dispensed until we receive the rebate requests. Rebate requests are generally received in 90 to 120 days from the last day of the quarter in which the product was dispensed to patients.

Net deferred revenue represents the sum of all FazaClo shipments subsequent to the acquisition, net of estimated rebates and discounts, for which revenue recognition criteria have not been met. Deferred rebates and discounts are included in accrued expenses. Sales incentives are also deferred until the related product shipments are recognized as revenue. Sales incentives are classified as deductions from revenue in accordance with EITF Issue No. 01-09, “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products).” The cost of product relative to deferred revenue has also been deferred and is included in inventories, categorized as inventories subject to return.

Cost of Product Sales

Cost of product sales includes direct and indirect costs to manufacture, including shipping and handling costs. Also, classified within cost of product sales is the amortization of the acquired FazaClo product rights.

Recognition of Expenses in Outsourced Contracts

Pursuant to management’s assessment of the services that have been performed on clinical trials and other contracts, we recognize expenses as the services are provided. Such management assessments include, but are not limited to: (1) an evaluation by the project manager of the work that has been completed during the period, (2) measurement of progress prepared internally and/or provided by the third-party service provider, (3) analyses of data that justify the progress, and (4) management’s judgment. Several of our contracts extend across multiple reporting periods, including our largest contract, representing an $8.9 million Phase III clinical trial contract as of June 30, 2006. A 3% variance in our estimate of the work completed in our largest contract could increase or decrease our quarterly operating expenses by approximately $267,000.

Research and Development Expenses

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

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

• The technology is in the early stage of development and has no alternative uses;

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• There is substantial uncertainty regarding the future success of the technology or product;

• There will be difficulty in completing the remaining development; and

• There is substantial cost to complete the work.

Acquired in-process research and development. In accordance with Statement of Financial Accounting Standards No. 141, “Business Combinations” (“FAS 141”), we immediately charge purchased in-process research and development (“IPR&D”) to research and development expense upon acquisition when there is uncertainty in receiving future economic benefits from the acquired IPR&D. We determine the future economic benefits from the acquired IPR&D to be uncertain until such technology is approved by the FDA or when other significant risk factors are abated. See also Note 4, “Alamo Acquisition – In-Process Research and Development” in the Notes to Condensed Consolidated Financial Statements (Unaudited.)

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

Capitalization and Valuation of Long-Lived and Intangible Assets

In accordance with FAS 141 and Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“FAS 142”), goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead are tested for impairment on an annual basis or more frequently if certain indicators arise. In addition, FAS 142 requires that intangible assets with finite useful lives be amortized over their respective useful lives and reviewed for impairment in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“FAS 144”.) The method of amortization shall reflect the pattern in which the economic benefits of the intangible asset are consumed or otherwise used up. If that pattern cannot be reliably determined, a straight-line amortization method will be used. No goodwill has been recorded to date.

Intangible assets with finite useful lives also consist of capitalized legal costs incurred in connection with patents, patent applications pending and license agreements. We amortize costs of approved patents, patent applications pending 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 patent applications pending and trademarks that we abandon, we charge the remaining unamortized accumulated costs to expense.

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

• A significant underperformance relative to expected historical or projected future operating results;

• A significant change in the manner of our use of the acquired asset or the strategy for our overall business; and/or

• A significant negative industry or economic trend.

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RESULTS OF OPERATIONS

COMPARISON OF THREE MONTHS ENDED JUNE 30, 2006 AND 2005

Revenues

Total revenues decreased to $2.4 million for the three-month period ended June 30, 2006, compared to $3.3 million for the three-month period ended June 30, 2005. Revenues in the third quarter of fiscal 2006 included $1.7 million in research and development service revenues generated from our collaborative agreements with AstraZeneca and Novartis executed in July 2005 and April 2005, respectively, $465,000 from the recognition of revenue related to the sale of an undivided interest in our abreva license agreement to Drug Royalty USA and $104,000 from recognition of revenue under the Kobayashi license agreement entered into in the second quarter of fiscal 2006. Revenue in the third quarter of fiscal 2005 included $2.5 million and $263,000 from revenues from license fees and research and development services, respectively, from the Novartis agreement, $456,000 from the recognition of deferred revenue and $115,000 from government research grants.

Revenue-generating contracts that remained active as of June 30, 2006 include license agreements with AstraZeneca and Novartis, nine docosanol 10% cream license agreements and one Neurodex™ sublicense. Partnering, licensing and research collaborations have been, and will continue to be, an important part of our business development strategy. We intend to partner with pharmaceutical companies that can help fund our research in exchange for sharing in the rights to commercialize new drugs resulting from this research. 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.

Operating Expenses

Total operating expenses increased by $8.5 million, or 73%, to $20.2 million for the three-month period ended June 30, 2006, compared to $11.7 million for the same period in fiscal 2005. The increase in operating expenses was caused by a $4.9 million, or 93%, increase in selling, general and administrative expenses and $3.4 million, or 52%, increase in research and development expenses. These and other costs and trends are more fully described below.

	Three Months Ended						Nine Months Ended
	June 30,						June 30,
	2006			2005			2006			2005
Operating expenses:
Research and development		49	%		55	%		53	%		66	%
Selling, general and administrative		50	%		45	%		46	%		34	%
Costs of sales		1	%		—	%		1	%		—	%
Total operating expenses		100	%		100	%		100	%		100	%

Research and development (“R&D”) expenses. R&D expenses for the three-month periods ended June 30, 2006 and 2005 were $9.8 million and $6.5 million, respectively. R&D expenses in the third quarter of fiscal 2006 were related to a Phase III clinical trial of Neurodex for the treatment of painful diabetic neuropathy, responses to the FDA associated with the NDA submission of Neurodex for the treatment for IEED/PBA, continuation of the open label safety study of Neurodex in the treatment for IEED/PBA, and a Phase I clinical trial of our leading compound for the selective cytokine inhibitor. R&D expenses also included pre-clinical research related to antibody development programs and the compounds that regulate MIF and a potential assay for screening for reverse cholesterol transport enhancing compounds (“RCT Research”). The latter two research programs are funded by our collaborative partners. Approximately 15% and 5% of our program spending for the three-month period ended June 30, 2006 and 2005, respectively, was in connection with such research and development services funded by our partners. The higher R&D expenses in the three-month period ended June 30, 2006 was attributable to a $2.6 million charge for in-process R&D acquired in connection with the Alamo acquisition. See Note 4, “Alamo

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Acquisition – In-Process Research and Development” in the Notes to Condensed Consolidated Financial Statements (Unaudited.)

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

									Inception		Estimated Cost
	Three Months Ended				Nine Months Ended				Through		to License or
	June 30,				June 30,				June 30,		Complete
	2006 (1)		2005 (1)(4)		2006 (1)		2005 (1)(4)		2006 (1)(2)(4)		Project (1)(3)
Company-funded Projects:
Development programs for Neurodex, selective cytokine inhibitor and other programs projected through fiscal 2007 (3)	$	5,699,956	$	4,687,634	$	19,000,765	$	18,501,967	$	96,770,258	$30M to $40M
Partner-funded Projects:
Reverse cholesterol transport and MIF inhibitor research programs (4)		1,488,363		1,655,169		5,303,597		4,046,144		24,486,399	Funded by Partners
Government-funded Projects:
Preclinical research on various projects. Funding for the anthrax research project has been completed		46,402		127,514		213,608		404,617		2,699,394	$	—
Purchased in-process R&D (5)		2,600,000		—		2,600,000		—		2,600,000
Total	$	9,834,721	$	6,470,317	$	27,117,970	$	22,952,728	$	126,556,051

(1)	Each project includes an allocation of laboratory occupancy costs. “M” refers to millions. Estimated costs and timing to complete the projects are subject to the availability of funds. For each of the projects set forth in the table, other than Neurodex for IEED/PBA (which we intend to market ourselves), the reverse cholesterol transport and the MIF inhibitor programs (both of which we have partnered), we may seek development partners or licensees to defray part or all of the ongoing development costs.
(2)	Inception dates are on or after October 1, 1998, at which time we began identifying and tracking program costs.
(3)	Assumes completion of development of Neurodex in the treatment of IEED/PBA and for one Phase III clinical trial in the treatment of painful diabetic neuropathy and continuation of Phase I studies of our selective cytokine inhibitor program. Projected spending thereafter will be subject to progress made in research that is currently underway.
(4)	Includes expenses funded by us prior to partnering these projects in the amounts of $1.3 million and $3.7 million for the three-month and nine-month periods ended June 30, 2005, respectively, and $16.8 million since inception through June 30, 2006 .
(5)	See Note 4, “Alamo Acquisition.”

We expect that increases in R&D spending for painful diabetic neuropathy and potentially other indications will be partially offset by the expected decline in spending related to IEED/PBA in the coming years as we continue Phase III clinical trials of Neurodex in the treatment of painful diabetic neuropathy. All future R&D spending on compounds that regulate MIF and reverse cholesterol transport enhancing compounds is expected to be fully reimbursed by our collaborative partners. We expect that spending on our selective cytokine inhibitor program and on development of monoclonal antibodies will depend in part on the progress that we make in these programs and on our strategy for partnering these programs or in obtaining additional government grants, so that we are able to defray part or all of these ongoing development costs.

Status of R&D Programs and Plans – Company-funded Projects

Neurodex™ for the treatment of Involuntary Emotional Expression Disorder/Pseudobulbar Affect. We completed the submission of the Neurodex NDA to the FDA in January 2006, and the submission was

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accepted by the FDA for filing. The FDA subsequently extended the NDA review period to allow time to review additional safety data that we submitted. Based on this extension, we currently expect the FDA will take action on the NDA by October 30, 2006. However, this could be delayed if there are questions by the FDA about our NDA. We have been engaged in an open-label safety study for the treatment of IEED/PBA in a broad pool of patients who have IEED/PBA associated with their underlying neurodegenerative disease or condition. We expect to continue this open-label study until the drug, if approved, is available to patients through prescription channels. In June 2004, we successfully completed the treatment phase of a Phase III clinical trial of Neurodex for the treatment of IEED/PBA in 150 patients with multiple sclerosis. Prior to engaging in these recent and current ongoing studies, we successfully completed the initial Phase III clinical trial of IEED/PBA in 140 patients with ALS in May 2002.

Neurodex for the treatment of painful diabetic neuropathy. In June 2005, we initiated our first Phase III clinical trial of Neurodex in patients who have painful diabetic neuropathy and we are currently evaluating the balance of our development plan. Simultaneously, we are evaluating commercial development alternatives for this indication, including continuing development on our own (including conducting a second Phase III clinical trial) or co-promotion/licensing opportunities in which a partner would fund the second trial. Estimated timing to complete the first Phase III clinical trial from when it was started is up to two years. There can be no assurances that we will choose or be able to negotiate a licensing and/or co-promotion arrangement for Neurodex in the treatment of painful diabetic neuropathy on attractive terms, if at all.

Development program for selective cytokine inhibitor. In November 2005, we completed a multi-rising dose Phase Ib safety trial of AVP-13358 and anticipate we will submit the results to the FDA by the end of the fourth quarter of fiscal 2006 for evaluation. We are currently evaluating several therapeutic indications for this program. In 2004 we completed the first Phase Ia clinical trial of 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 Phase Ia study suggest AVP-13358 was well tolerated at all single rising doses up through 15 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.

Status of R&D Programs and Plans – Partner-funded Projects

AstraZeneca UK Limited ("AstraZeneca") In July 2005, we entered into an exclusive license and research collaboration agreement with AstraZeneca to discover, develop and commercialize reverse cholesterol transport enhancing compounds for the treatment of cardiovascular disease. Under the terms of the agreement, we will be eligible to receive royalty payments, assuming the product is successfully developed by AstraZeneca and approved for marketing by the FDA. We are also eligible to receive up to $330 million in milestone payments contingent upon achievement of certain development and regulatory milestones performed by AstraZeneca, which could take several years of AstraZeneca's further development, including achievement of certain sales targets, if a licensed compound is approved for marketing by the FDA. Under this agreement, we received a license fee of $10 million in July 2005 for the rights to the licensed compounds. We also provide certain research services on projects assigned to us by AstraZeneca. Revenue from research services provided to AstraZeneca amounts to between $2.5 million and $40 million per year for up to three years from the date of the agreement. AstraZeneca is responsible for the development and commercialization of the product.

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Novartis International Pharmaceutical Ltd. ("Novartis"). In April 2005, we entered into a research, development and commercialization agreement with Novartis for orally active small molecule therapeutics that regulate macrophage migration ihibitory factor ("MIG") in the treatment of various inflammatory diseases. Under the terms of the agreement, we will be eligible to receieve royalty payments, assuming the product is successfully developed and approved by Novartis for marketing by the FDA. We are also eligible to receive up to $198 million in milestone payments contingent upon achievement of certain development and regulatory milestones performed by Novartis, including approval for certain additional indications, and regulatory milestones, which could take several years of Novartis' further development, including achievement of certain sales targets, if a licensed compound is approved for marketing by the FDA. Under this agreement, we received a license fee of $2.5 million in May 2005 in connection with the transfer of data and know-how of the MIF technology to Novartis. We also provide certain research services on projects assigned to us by Novartis. Revenue from research services provided to Novartis amounts to between $1.5 million and $2.5 million per year for two years from the date of the agreement, or longer upon mutual agreement of the parties. Novartis is responsible for development of the compounds.

Status of R&D Programs and Plans – Government-Funded Projects

Government research grants have helped us fund research programs, including the development of antibodies to anthrax toxins and docosanol-based formulations for the treatment of genital herpes. Subject to certain conditions, we, as the awardee organization, retain the principal worldwide patent rights to any invention developed with the United States government support.

Our anthrax antibody was in preclinical development for use as a prophylactic and therapeutic drug to treat anthrax infections and was funded by a two-year $750,000 federal (SBIR) research grant. The grant was completed in the quarter ended March 31, 2006. On June 29, 2006 we were notified that we had been awarded a $2.0 million research grant from the NIH for ongoing research and development related to our anthrax antibody. Under the terms of the grant, the NIH will reimburse us for up to $2.0 million in certain expenses (including expenses incurred in the 90 days preceding the grant award date) related to the establishment of a cGMP manufacturing process and the testing of efficacy of the anthrax antibody.

Much of the work related to anthrax had been funded by government research grants, and our progress in this area will substantially depend on future grants. Because all of our monoclonal antibody 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.

Our genital herpes project came to a formal end during the third quarter of fiscal 2005 and we do not anticipate that we will perform any further work on that project. We have no grant requests pending nor do we anticipate submitting in the future any grant requests for further research related to genital herpes.

Selling, general and administrative expenses. Our selling, general and administrative expenses increased to $10.1 million for the three-month period ended June 30, 2006, compared to $5.2 million for the three-month period ended June 30, 2005. These increased expenses primarily relate to a $2.1 million increase in expenses related to the continued expansion of our pre-launch activities and market research for Neurodex for the treatment of IEED/PBA, as well as the hiring of additional sales and marketing personnel; $1.7 million in expenses from operations of Alamo; $597,000 in share-based compensation expense; a $352,000 increase in expenses related to increases in headcount and compensation levels in general and administrative areas; and a $283,000 increase in legal fees; and.

Based on our current commercial development plans for Neurodex for the treatment of IEED/PBA, we expect sales and marketing expenses in the fourth quarter of fiscal 2006 and first half of fiscal 2007 will continue to increase, although the timing and pace of these increases is difficult to predict and will be subject to fluctuation depending on the action taken by the FDA on our NDA in the first quarter of fiscal 2007. We expect that costs related to professional services associated with compliance with the Sarbanes-Oxley Act of 2002 will decline from fiscal 2006 levels, although we expect offsetting increases in connection with compliance with healthcare laws and regulations.

Cost of product sales. Cost of product sales for the quarter ended June 30, 2006 represents amortization of the acquired FazaClo product rights.

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Share-Based Compensation

Through fiscal 2005, we accounted for our stock plans using the intrinsic value method. Effective at the beginning of fiscal 2006, we adopted FAS 123R and elected to adopt the modified prospective application method. FAS 123R requires us to use a fair-valued based method to account for share-based compensation. Accordingly, share-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as expense over the employees’ requisite service period. Total compensation cost for our share-based payments in the three-month period ended June 30, 2006 was $757,000. Selling, general and administrative expense and research and development expense in the three-month period ended June 30, 2006 include share-based compensation of $596,000 and $161,000, respectively.

Interest Income

For the three-month period ended June 30, 2006, interest income increased to $552,000, compared to $179,000 for the same period in the prior year. The increase is primarily due to a 110% increase in average balance of cash, cash equivalents and investments in securities for the third quarter of fiscal 2006, compared to the same period in the prior year.

Net Loss

Net loss was $17.4 million, or $0.56 per share, in the three-month period ended June 30, 2006, compared to a net loss of $8.2 million, or $0.31 per share, in the three-month period ended June 30, 2005.

COMPARISON OF NINE-MONTH PERIODS ENDED JUNE 30, 2006 AND 2005

Revenues

Total revenues increased to $13.0 million for the nine-month period ended June 30, 2006, compared to $4.9 million for the nine-month period ended June 30, 2005. Revenues in the first nine months of fiscal 2006 included $5.0 million relating to the achievement of a milestone under the AztraZeneca license agreement, $6.2 million in research and development service revenues generated from our collaborative agreements with AstraZeneca and Novartis executed in July 2005 and April 2005, respectively, and $1.5 million from the recognition of revenue related to the sale of an undivided interest in our abreva license agreement to Drug Royalty USA. Revenues in the first nine months of fiscal 2005 included $2.5 million and $263,000 revenues from license fees and research and development services, respectively, from the Novartis agreement, $1.4 million from the recognition of deferred revenue, and $200,000 relating to the achievement of milestones under license agreements.

Operating Expenses

Total operating expenses increased to $50.7 million for the nine-month period ended June 30, 2006, compared to $34.5 million for the same period in fiscal 2005. The increase in operating expenses was caused by a $11.8 million, or 102%, increase in selling, general and administrative expenses and $4.2 million, or 18%, increase in research and development expenses.

Research and development (“R&D”) expenses. R&D expenses for the nine-month periods ended June 30, 2006 and 2005 were $27.2 million and $23.0 million, respectively. R&D expenses in the first nine months of fiscal 2006 were related to continuation of the open label safety study of Neurodex™ in the treatment for IEED/PBA, a Phase III clinical trial of Neurodex for the treatment of painful diabetic neuropathy, and a Phase I clinical trial of our leading compound for the selective cytokine inhibitor program. R&D expenses also included pre-clinical research related to antibody development programs and compounds that regulate MIF and RCT Research. The MIF and RCT Research programs are funded by our partners. The increase in R&D expenses is due to a $2.6 million charge for in-process R&D

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acquired in connection with the Alamo acquisition and a $1.7 million increase in spending for the open label safety study of Neurodex for the treatment of IEED/PBA, a $4.2 million increase in spending for a Phase III clinical trial of Neurodex for the treatment of painful diabetic neuropathy, a $1.0 million increase in pre-clinical development of our RCT Research and a $1.5 million increase in medical affairs. In the nine-month period ended June 30, 2005, we incurred a one-time $7.2 million charge in connection with the acquisition of additional contractual rights to Neurodex. Approximately 20% and 2% of our program spending for the nine-month period ended June 30, 2006 and 2005, respectively, was in connection with research services funded by our partners.

Selling, general and administrative expenses. Our selling, general and administrative expenses increased to $23.4 million for the nine-month period ended June 30, 2006, compared to $11.6 million for the nine-month period ended June 30, 2005. These increased expenses primarily relate to a $4.9 million increase in expenses related to the continued expansion of our pre-launch activities and market research for Neurodex for the treatment of IEED/PBA as well as the hiring of additional sales and marketing personnel; $1.7 million in expenses from operations of Alamo acquired in May 2006; $1.5 million in expenses from continuing medical educational grants; a $1.3 million increase in expenses related to increases in headcount and compensation levels in general and administrative areas; $1.6 million in share-based compensation expense; and a $566,000 increase in legal fees.

Cost of product sales. Cost of product sales for the nine months ended June 30, 2006 represents amortization of the acquired FazaClo product rights.

Share-Based Compensation

Total compensation cost for our share-based payments in the nine-month period ended June 30, 2006 was $2.0 million. Selling, general and administrative expense and research and development expense in the nine-month period ended June 30, 2006 include share-based compensation of $1.6 million and $423,000, respectively.

Interest Income

For the nine-month period ended June 30, 2006, interest income increased to $1.4 million, compared to $426,000 for the same period in the prior year. The increase is primarily due to a 77% increase in average balance of cash, cash equivalents and investments in securities for the first nine months of fiscal 2006, compared to the same period in the prior year.

Net Loss

Net loss was $36.6 million, or $1.20 per share, in the nine-month period ended June 30, 2006, compared to a net loss of $29.3 million, or $1.17 per share, in the nine-month period ended June 30, 2005.

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2006, we had cash, cash equivalents, investments in securities and restricted investments totaling $38.2 million, including cash and cash equivalents of $2.2 million, short- and long-term investments of $35.2 million and restricted investments in securities of approximately $857,000. Our net working capital balance as of June 30, 2006 was $13.8 million. As of September 30, 2005, we had cash, cash equivalents, investments in securities and restricted investments totaling $27.5 million, including cash and cash equivalents of $8.6 million, short- and long-term investments of $18.1 million, and restricted investments of approximately $857,000. Our net working capital balance as of September 30, 2005 was $12.0 million. Explanations of net cash provided by or used for operating, investing and financing activities are provided in the table below.

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			Increase
			(Decrease)			September 30,
	June 30, 2006		During Period			2005
Cash, cash equivalents, investment in securities and restricted investments	$	38,226,491	$	10,688,905		$	27,537,586
Cash and cash equivalents	$	2,158,872	$	(6,461,271	)	$	8,620,143
Net working capital	$	13,834,083	$	1,864,633		$	11,969,450

	Nine Months			Change			Nine Months
	Ended			Between			Ended
	June 30, 2006			Periods			June 30, 2005
Net cash used for operating activities	$	(27,161,365	)	$	(5,302,224	)	$	(21,859,141	)
Net cash (used for) provided by investing activities		(23,806,822	)		(11,618,243	)		(12,188,579	)
Net cash provided by financing activities		44,506,916			20,376,430			24,130,486
Net increase (decrease) in cash and cash equivalents	$	(6,461,271	)	$	3,455,963		$	(9,917,234	)

Operating activities. Net cash used for operating activities amounted to $27.2 million in the first nine months of fiscal 2006, $5.3 million higher than the net cash used for operating activities in the first nine months of fiscal 2005. The increase in cash used for operating activities is due to spending on an open label study and consulting fees relating to Neurodex™ in the treatment of IEED/PBA and a Phase III clinical study for Neurodex in the treatment of painful diabetic neuropathy. The increase in cash used is also due to the continued expansion of our medical education and awareness programs for IEED/PBA, market research, and pre-launch activities for Neurodex, in anticipation of the drug being approved by the FDA. Based on our current commercial development plans for Neurodex for the treatment of IEED/PBA, we expect sales and marketing expenses will continue to increase, although the timing and rate of increase will depend on the response of the FDA to our NDA for Neurodex. We expect spending on company-funded R&D programs will continue at about the same rate for the fourth quarter of fiscal 2006, including continuing clinical development of Neurodex in the treatment of painful diabetic neuropathy and the Phase III clinical trial. Additionally, we expect to continue spending at about the same rate or slightly lower on preclinical and clinical research services related to the development of compounds for the MIF and RCT programs in the fourth quarter of fiscal 2006. AstraZeneca and Novartis are funding the RCT Research and MIF programs, respectively, and pay us for these research services.

Increase in inventories at June 30, 2006 as compared to September 30, 2006 was primarily due to inventories acquired with the Alamo acquisition. Accrued expenses increased by $5.5 million to $9.6 million at June 30, 2006 from $4.1 million at September 30, 2005. This increase is due to a $2.1 million increase associated with the Alamo acquisition as well as from accruals for goods and services received in the nine-month period ended June 30, 2006 but were not yet invoiced by the vendors.

Investing activities. Net cash used for investing activities was $23.8 million in the first nine months of fiscal 2006, compared to $12.2 million provided by investing activities in the first nine months of fiscal 2005. Our investments in securities increased by $17.3 million in the first nine months of fiscal 2006 and increased by $10.6 million in the first nine months of fiscal 2005, net of proceeds from sales and maturities of investments in securities. We paid $4.7 million in cash as consideration for the Alamo acquisition and acquisition transaction costs, net of cash acquired. We invested $1.4 million in property and equipment in the first nine months of fiscal 2006, compared to $663,000 in the first nine months of fiscal 2005. The increased spending was related primarily to product tooling, additional computer equipment, and in making improvements in office space utilization to accommodate additional personnel within existing leased space. We expect that capital expenditures for property and equipment will likely increase as we make further modifications to improve office space utilization and to make accommodations for additional sales and marketing personnel that will be necessary to support commercialization of Neurodex™, assuming the drug is approved by the FDA. (See Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Selling, General and Administrative Expenses.”)

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Financing activities. Net cash provided by financing activities was $44.5 million in the first nine months of fiscal 2006, consisting of $35.6 million in net proceeds from sales of our common stock through private placements and $9.2 million from exercises of warrants and stock options to purchase our common stock. Net cash provided by financing activities amounted to $24.1 million in the first nine months of fiscal 2005, consisting of $24.3 million received from the sale of our common stock and $100,000 from exercises of stock options.

In June 2005, we filed a shelf registration statement on Form S-3 with the SEC to sell an aggregate of up to $100 million in Class A common stock and preferred stock, depositary shares, debt securities and warrants. This shelf registration statement was declared effective on August 3, 2005. In October 2005, we sold 1,523,585 shares of Class A common stock to certain institutional investors at $10.60 per share for aggregate net offering proceeds of $16.15 million. In December 2005, we sold 1,492,538 shares of our Class A common stock to certain institutional investors at $13.40 per share, for aggregate offering proceeds of approximately $20.0 million and net offering proceeds of approximately $19.4 million, after deducting commissions and offering fees and expenses.

Between January 26, 2006 and February 7, 2006, we received proceeds of $4.7 million from the exercise of warrants to purchase 671,923 shares of Class A common stock in connection with our call for redemption of a group of outstanding warrants. The warrants had been issued in connection with a financing transaction in December 2003 involving the sale of Class A common stock and warrants (the “Warrants”). The exercise price of the Warrants was $7.00 per share. The Warrants had a five-year term, but included a provision that we could redeem the Warrants for $1.00 each if our stock price traded above twice the warrant exercise price for a certain period of time (the “Redemption Right”). On January 24, 2006, we sent the Warrant holders notice that the Redemption Right had been triggered and that the Warrants would expire, to the extent unexercised, on February 7, 2006. One of the warrants to purchase 25,167 shares of Class A common stock expired unexercised.

In connection with the Alamo acquisition, we agreed to pay up to an additional $39,450,000 in revenue-based earn-out payments, based on future sales of FazaClo. These earn-out payments are based on FazaClo sales in the United States from the closing date of the acquisition through December 31, 2018 (the “Contingent Payment Period”) and are payable to the Selling Holders as follows:

• A promissory note that would have been issuable in the principal amount of $4,000,000 if FazaClo sales, as reported by IMS Health Incorporated, for each of the months of April and May 2006 exceeded $1,266,539. Since the closing of the acquisition, we have determined that FazaClo sales for the months April and May 2006 did not satisfy this condition and thus this promissory note will not be issued pursuant to this contingency.

• If the preceding condition is not satisfied, then (A) a promissory note, in the principal amount of $2,000,000, payable one time if monthly FazaClo net product sales, as reported by us, exceed $1,000,000 for all three months in a given fiscal quarter during the Contingent Payment Period, and (B) an additional promissory note in the principal amount of $2,000,000, payable one time if monthly FazaClo net product sales, as reported by us, exceed $1,500,000 for all three months in a given fiscal quarter during the Contingent Payment Period.

• A one-time cash payment of $10,450,000 if FazaClo net product sales, as reported by us, exceed $40.0 million over four consecutive fiscal quarters during the Contingent Payment Period.

• A one-time cash payment of $25,000,000 if FazaClo net product sales, as reported by us, exceed $50.0 million over four consecutive fiscal quarters during the Contingent Payment Period.

We have also agreed to pay the Selling Holders one-half of all net licensing revenues that we received during the Contingent Payment Period from licenses of FazaClo outside of the United States (“Non-US

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Licensing Revenues”). Any amounts paid to the Selling Holders on Non-US Licensing Revenues will be recognized in the consolidated statement of operations in the period such amounts are paid.

As part of the purchase consideration of the Alamo acquisition, we issued three promissory notes in the respective principal amounts of $14,400,000, $6,675,000 and $4,000,000 (the “First Note,” “Second Note” and “Third Note” respectively) (collectively, the “Notes”). The Notes bear interest at an average rate equal to the London Inter-Bank Offered Rate, or “LIBOR,” plus 1.33%. Interest accruing on the Notes is payable monthly and the principal amount of the Notes matures on May 24, 2009, provided that (i) the Selling Holders may demand early repayment of the First Note if the closing price of our common stock, as reported on the Nasdaq Global Market, equals or exceeds $15.00 per share for a total of 20 trading days in any 30 consecutive trading-day period (the “Stock Contingency”), and (ii) we must apply 20% of any future net offering proceeds from equity offerings to repay the Notes (starting with the First Note), and must repay the Notes in full if we have raised in an offering more than $100,000,000 in future aggregate net proceeds.

If the Selling Holders demand repayment of the First Note following satisfaction of the Stock Contingency, we must repay the First Note within 180 days from the demand in our choice of cash or shares of common stock. If we elect to repay the First Note in shares of common stock, the shares will be valued at 95% of the average closing price of the common stock, as reported on the NASDAQ Global Market, for the five trading days prior to repayment, subject to a price floor.

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

In connection with the Alamo acquisition, we acquired a development, license and supply agreement with CIMA Labs Inc. (“CIMA”), which holds intellectual property rights related to certain aspects of the development and production of FazaClo (the “FazaClo Supply Agreement”). The FazaClo Supply Agreement grants, through our Alamo subsidiary, an exclusive license to us to market, distribute and sell FazaClo. The FazaClo Supply Agreement provides royalty rates of 5% to 6%, based on annual net sales and minimum annual royalty targets set forth in the agreement. Minimum future annual royalty payments under the agreement are as follows:

Twelve-month period ending December 31:
2006	$	250,000
2007		300,000
2008 and each year thereafter		400,000

We hold the exclusive worldwide marketing rights to Neurodex for certain indications pursuant to an exclusive license agreement with the Center for Neurologic Study (“CNS”). We are currently developing Neurodex for the treatments of IEED/PBA and painful diabetic neuropathy. We will be obligated to pay CNS up to $400,000 in the aggregate in milestones to continue to develop both indications, assuming they are both approved for marketing by the FDA. We are not currently developing, nor do we have an obligation to develop, any other indications under the CNS license agreement. In fiscal 2005, we paid $75,000 to CNS under the CNS license agreement, and we expect to pay a $75,000 milestone in the first quarter of fiscal 2007 if the FDA approves our NDA for Neurodex for the treatment of IEED/PBA. In addition, we are obligated to pay CNS a royalty on commercial sales of Neurodex with respect to each indication, if and when the drug is approved by the FDA for commercialization. Under certain circumstances, we may have the obligation to pay CNS a portion of net revenues received if we sublicense Neurodex™ to a third party. We do not expect to pay any other milestones to CNS in fiscal 2006.

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MANAGEMENT OUTLOOK

In order to maintain sufficient cash and investments to fund future operations and to prepare for the commercialization of Neurodex, we will need to raise additional capital prior to the anticipated launch in early fiscal 2007. We may seek to raise this additional capital at any time prior to the planned launch of Neurodex and may do so through various financing alternatives, including licensing or sales of our technologies and drug candidates, selling shares of common or preferred stock, or through the issuance of one or more forms of senior or subordinated debt. The balance of securities available for sale under our existing shelf registration was approximately $63.8 million as of June 30, 2006. We believe that these anticipated offering proceeds plus our cash, cash equivalents, investments in securities and restricted investments of approximately $38.2 million at June 30, 2006 as well as anticipated future cash flows generated from licensed technologies and sales from the shipments of FazaClo should be sufficient to sustain our planned level of operations for at least the next 12 months.

During fiscal 2006, we expect to earn $7.0 million to $8.0 million for the year in revenues from R&D services that we are providing under collaborative agreements. These payments will fully offset the expenses that we incur in connection with providing those services. We do not expect to earn any additional milestones under the AstraZeneca or the Novartis license agreement in the fourth quarter of fiscal 2006. In general, potential milestone payments to be received under existing license agreements are outside of our control and the timing of potential payment cannot be predicted. Revenues from new sources in fiscal 2007, such as license fees and milestone payments, will depend substantially on whether or not we enter into additional license arrangements and whether or not we achieve milestones under those arrangements. Such arrangements may be in the form of licensing or partnering agreements for docosanol 10% cream, Neurodex, or for our other product development programs including development of a selective cytokine inhibitor. Many of our product development programs could take years of additional development before they reach the stage of being licensable to other pharmaceutical companies.

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

RECENT ACCOUNTING PRONOUNCEMENTS

See Note 3, “Significant Accounting Policies – Change in Accounting Method for Share-based Compensation” and Note 22, “Recent Accounting Pronouncements” in the Notes to Condensed Consolidated Financial Statements (Unaudited) for a discussion of recent accounting pronouncements and their effect, if any, on our financial condition or results of operations.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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Interest rate sensitivity

Our investment portfolio consists primarily of fixed income instruments with an average duration of 0.7 year as of June 30, 2006 (1.2 years as of September 30, 2005). 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 June 30, 2006 as available-for-sale and our restricted investments in securities as held-to-maturity. These available-for-sale securities are subject to interest rate risk. In general, we would expect that the volatility of this portfolio would decrease as its duration decreases. Based on the average duration of our investments as of June 30, 2006 and 2005, an increase of one percentage point in the interest rates would have resulted in increases in comprehensive losses of approximately $318,000 and $257,000, respectively.

At June 30, 2006, we had approximately $25.1 million of variable rate debt that was issued as part of the purchase price for the acquisition of Alamo. If the interest of our variable rate debt were to increase or decrease by 1%, interest expense would increase or decrease on annual basis by approximately $251,000 based on the amount of outstanding variable rate debt at June 30, 2006.

Item 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our chief executive officer and chief financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934, Rules 13a-15(e) and 15d-15(e), as of the end of the period covered by this report, have concluded that, based on such evaluation, as of June 30, 2006 our disclosure controls and procedures were effective and designed to provide reasonable assurance that the information required to be disclosed is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms. For the purpose of this review, disclosure controls and procedures means controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that we file or submit is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that we file or submit it is accumulated and communicated to management, including our principal executive officer, principal financial officer and principal accounting officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Changes in Internal Controls over Financial Reporting

There has been no change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the Company’s fiscal quarter ended June 30, 2006, that has materially affected, or is reasonably likely to materially affect the Company’s internal control over financial reporting. However, following the acquisition of Alamo in the quarter ended June 30, 2006, we are in the process of integrating Alamo’s operations and controls into our internal controls and expect that this process may result in additions or changes to our internal control over financial reporting.

PART II OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

In the ordinary course of business, we may face various claims brought by third parties and we may, from time to time, make claims to assert our rights. Any of these claims could subject us to

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costly litigation. Management believes the outcome of currently pending claims and lawsuits will not have a material effect on our financial condition or results of operations.

Item 1A. RISK FACTORS

Risks Relating to Our Business

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

We have experienced significant operating losses in funding the research, development and clinical testing of our drug candidates, accumulating operating losses totaling $191.5 million as of June 30, 2006, and we expect to continue to incur substantial operating losses through at least fiscal 2007. To achieve profitability, we will need to generate significant additional revenue with positive gross margins to offset our other operating expenses, which we expect will continue to increase as we pursue pre-launch activities and sales and marketing efforts over the next several quarters in anticipation of a favorable the FDA decision regarding the approval of Neurodex for the treatment of IEED/PBA. Even if Neurodex is approved for commercialization, our revenues from Neurodex and FazaClo sales may be inadequate to offset our current planned increases in expenses and we may not achieve profitability.

We may also increase spending on our clinical and pre-clinical programs to the extent our progress in development is favorable. Although we could seek development partnerships for certain of our research programs, including for a selective cytokine inhibitor and our antibody technology, we may not find additional attractive arrangements if pursued, 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 profitability.

We will need to raise additional capital to fund ongoing operations and support our planned product launch. 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 and to prepare for the commercialization of Neurodex, we will need to raise additional capital prior to the anticipated launch in early fiscal 2007. We may seek to raise this additional capital at any time prior to the planned launch of Neurodex and may do so through various financing alternatives, including licensing or sales of our technologies and drug candidates, selling shares of common or preferred stock, or through the issuance of one or more forms of senior or subordinated debt. Each of these financing alternatives carries certain risks. Raising capital through the issuance of common stock may depress the market price of our stock and any such financing will dilute our existing shareholders. Additionally, although we have approximately $63.8 million available for sale under our existing shelf registration statement as of June 30, 2006, the terms of any proposed stock offering may be unattractive to us given our currently low stock price, which may affect our ability or willingness to raise capital by selling stock. If we instead seek to raise capital through licensing transactions or sales of one or more of our technologies or drug candidates, as we have with our RCT and MIF technologies, then we will likely need to share a significant portion of future revenues from these drug candidates with our licensees. Additionally, the development of any drug candidates licensed or sold to third parties will no longer be in our control and thus we may not realize the full value of any such relationships. If we are unable to raise additional capital to fund future operations, then we may be unable to execute our commercialization plans for Neurodex and may be required to reduce operations or defer or abandon one or more of our clinical or pre-clinical research programs.

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Any adverse decisions or delays in the regulatory review or approval process may harm our prospects and could harm our stock price.

In April 2006, we announced that the FDA accepted our NDA submission for Neurodex with priority review. Currently, we expect that the FDA will take action on the NDA by October 30, 2006. We cannot be certain that Neurodex will be approved by the FDA for marketing or that we will be able to obtain the labeling claims that we consider most desirable for the promotion of the product. Additionally, recent announcements by others regarding safety problems with certain approved drugs may affect the FDA’s policies regarding safety data for all new drug applications and may result in the FDA requiring additional safety data before approving Neurodex and/or the FDA requiring closer surveillance after commercialization if the drug is approved.

It is also possible that we will have further delays in our FDA review process. Our NDA acceptance date was twice delayed due to formatting issues with the electronic submission and our final NDA approval date, or PDUFA date, has been delayed from June 30, 2006 to October 30, 2006. The FDA could request further extensions of the PDUFA date and any such delays could negatively affect our stock price and would delay the planned commercial launch of Neurodex.

We have only limited sales and marketing experience and capabilities and we expect to rely entirely on third parties for international sales and marketing efforts. .

Prior to the acquisition of Alamo, we had never directly marketed or sold any pharmaceutical products. In order to successfully market Neurodex, assuming it is approved by the FDA, and FazaClo, we will need to hire additional personnel with relevant pharmaceutical experience to staff our sales, sales management and marketing group. If we cannot hire such personnel, our ability to generate revenue from product sales will likely suffer.

In international markets, we intend to rely on collaborative partners to obtain regulatory approvals and to market and sell our product(s) in those markets. We have not yet entered into any collaborative arrangement with respect to marketing or selling Neurodex, with the exception of one such agreement relating to Israel. We may be unable to enter into any other arrangements on terms favorable to us, or at all and even if we are able to enter into sales and marketing arrangements with collaborative partners, we cannot assure you that their sales and marketing efforts will be successful. If we are unable to enter into favorable collaborative arrangements with respect to marketing or selling Neurodex in international markets, or if our collaborators’ efforts are unsuccessful, our ability to generate revenue from international product sales will suffer.

We are dependent on a small number of physicians for a substantial of FazaClo sales.

Currently, one physician practice accounts for approximately 35% of the total patients receiving FazaClo. While we are focusing on broadening the base of prescribing physicians, we are currently dependent on this practice to maintain our historical levels of FazaClo sales. If any of these physicians in this practice curtail or stop writing prescriptions for FazaClo, our FazaClo revenues could be adversely affected.

It is difficult to integrate acquired companies, products, technologies and personnel into our operations and our inability to do so could greatly lessen the value of any such acquisitions.

In May 2006, we acquired Alamo Pharmaceuticals and we may make additional strategic acquisitions of companies, products or technologies in the future to complement our product pipeline or to implement our business strategy. In connection with the Alamo acquisition, we added a small commercial sales force to our operations and will seek to leverage that sales force for the commercialization of Neurodex, if it is approved by the FDA. If we are unable to successfully leverage the Alamo sales force or otherwise integrate acquired businesses, products, technologies or personnel with our existing operations, we may not receive the intended benefits of such acquisitions.

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Additionally, disputes may arise following the consummation of acquisitions regarding representations and warranties, indemnities, earn-out rights and other provisions in the acquisition agreements. For these reasons, acquisitions may subject us to unanticipated liabilities or risks, disrupt our operations or divert management’s attention from day-to-day operations.

Changes in board and management composition that are intended to strengthen the board and management team could adversely disrupt our operations.

We have recently made significant changes to our senior management team and board of directors to add to our pharmaceutical experience, significantly enhance our scientific and clinical expertise, and provide depth in managing profitable pharmaceutical businesses. For example, our President and Chief Executive Officer, Chief Financial Officer, Vice President of Medical Affairs, Vice President of Sales and Vice President of Human Resources have all joined the Company in the past 12 months. We have also made significant changes to the composition of our board of directors and as we continue to recruit senior-level personnel to add to our management team, we are planning for other changes in our organization that are necessary to effect our transition from a research and development company to a pharmaceutical company. These changes could be disruptive, and we may experience difficulties in attracting and integrating new members of the management team and in transitioning our operating activities. Any significant disruptions as a result of these changes could negatively impact our planned commercial launch of Neurodex and our sales of FazaClo.

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

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. The loss of certain executive officers and other key employees could adversely affect our operations. For example, 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, which could potentially cause a substantial delay in one or more of our development programs until adequate replacement personnel could be hired and trained. In July 2006, we began moving our commercial and general and administrative operations from San Diego, California to Orange County, California. This move and having operations in multiple locations could cause us to lose affected personnel and any such losses could harm our operations.

In addition to retaining our existing workforce, we must also add high quality personnel, including a large number of sales and marketing professionals, for the planned commercialization of Neurodex and to effect our transition to being a pharmaceutical company. Any inability to attract and retain these professionals would harm our commercialization plans and could limit our growth prospects.

We generally do not control the development of compounds licensed to third parties and, as a result, we may not realize a significant portion of the potential value of any such license arrangements.

Under our license arrangements for our RCT and MIF compounds, we have no direct control over the development of these drug candidates and have only limited, if any, input on the direction of development efforts. Because much of the potential value of these license arrangements is contingent upon the successful development and commercialization of the licensed technology, the ultimate value of these licenses will depend on the efforts of our licensing partners. If our licensing partners do not succeed in developing the licensed technology for whatever reason, we may be unable to realize the potential value of these arrangements.

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

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

• The claims in any pending patent applications will be allowed or that patents will be granted;

• Competitors will not develop similar or superior technologies independently, duplicate our technologies, or design around the patented aspects of our technologies;

• Our 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.

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 could adversely affect our business, financial condition, and results of operations. Litigation is also time-consuming and would divert management’s attention and resources away from our operations and other activities. If we were to lose any litigation, in addition to any damages we would have to pay, we could be required to stop the infringing activity or obtain a license. Any required license might not be available to us on acceptable terms, or at all. Some licenses might be non-exclusive, and our competitors could have access to the same technology licensed to us. If we were to fail to obtain a required license or were unable to design around a competitor’s patent, we would be unable to sell or continue to develop some of our products, which would have a material adverse effect on our business, financial condition and results of operations.

We depend on third parties to manufacture, package and distribute compounds for our drugs and drug candidates. The failure of these third parties to perform successfully could harm our business.

We have utilized, and intend to continue utilizing, third parties to manufacture, package and distribute FazaClo, Neurodex and active pharmaceutical ingredients for docosanol 10% cream and supplies for our other drug candidates. We have no experience in manufacturing and do not have any manufacturing facilities. Currently, we have sole suppliers for the active pharmaceutical ingredients (“API”) for docosanol and Neurodex, and a sole manufacturer for the finished form of Neurodex. Additionally, we have a sole supplier for the manufacture of FazaClo. We do not have any long-term agreements in place with our current docosanol supplier or Neurodex API suppliers. Any delays or difficulties in obtaining API or in manufacturing, packaging or distributing Neurodex could delay our clinical trials for painful diabetic neuropathy and delay the commercialization of Neurodex for IEED/PBA. Additionally, the third parties we rely on for manufacturing and packaging are subject to regulatory review; and any regulatory compliance problems with these third parties could significantly delay or disrupt our commercialization activities.

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

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

Accounting for material transactions can be very complex and we face risks if regulators disagree with our accounting treatment for any of these transactions.

Many of the transactions that we engage in are recorded in our financial statements using complex accounting rules. As we prepare for the planned commercial launch of Neurodex, we expect that our financial accounting, including revenue recognition, will become even more complex. Although we believe that we have historically accounted for material transactions in accordance with generally accepted accounting principles (“GAAP”), our financial statements and related disclosure are subject to periodic reviews by the Staff of the Securities and Exchange Commission (“SEC”). The SEC is responsible for the final interpretation of GAAP and may ultimately disagree with our historic accounting practices.

In February 2006, the SEC provided comments on our Annual Report on Form 10-K for the fiscal year ended September 30, 2005 as part of the SEC’s regular review of our periodic reports and financial statements. As of the date of this filing, we remain in discussion with the SEC regarding these comments, which principally relate to our accounting and disclosure for certain transactions that occurred during fiscal 2005. The SEC’s comments relate only to non-cash accounting entries and do not affect our cash flows. Although we believe that we have properly accounted for these transactions, the SEC may ultimately disagree with our accounting treatment, in which case we may be required to restate certain financial statements in prior periods in accordance with the SEC’s requirements. Any such restatement could have a negative impact on our stock price and negatively affect the credibility of our financial reporting in future periods. Additionally, a restatement could negatively affect the assessment of the effectiveness of our internal controls over financial reporting.

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

The testing, marketing and sale of pharmaceutical products involves the risk of product liability claims by consumers and other third parties. We maintain product liability insurance coverage in the amount of $5.0 million per incident and $5.0 million in the aggregate for Neurodex and $10.0 million per incident and $10.0 million in the aggregate for FazaClo. However, product liability claims can be high in the pharmaceutical industry and our insurance may not sufficiently cover our actual liabilities. Additionally, FazaClo is required by the FDA to carry the most severe type of warning (a “black box” warning) regarding adverse side effects, including the possibility of death, and other drugs of the same class are currently the subject of large class-action lawsuits relating to adverse effects. If product liability claims were made against us, it is possible that our insurance carriers may deny, or attempt to deny, coverage in certain instances. If a lawsuit against us is successful, then the lack or insufficiency of insurance coverage could affect materially and adversely our business and financial condition. Furthermore, various distributors of pharmaceutical products require minimum product liability insurance coverage before their purchase or acceptance of products for distribution. Failure to satisfy these insurance requirements could impede our ability to achieve broad distribution of our proposed products and the imposition of higher insurance requirements could impose additional costs on us.

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Risks Relating to Our Stock

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

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

• Comments made by securities analysts, including changes in their recommendations;

• Short selling activity by certain investors, including any failures to timely settle short sale transactions;

• Announcements by us of financing transactions and/or future sales of equity or debt securities;

• Sales of our Class A common stock by our directors, officers, or significant shareholders;

• Announcements by our competitors of clinical trial results or product approvals; and

• Market and economic conditions.

Additionally, our stock price has been volatile as a result of periodic variations in our operating results. We expect our operating results to continue to vary from quarter-to-quarter due to the foregoing factors, as well as the following factors:

• Timing and outcome of FDA regulatory decisions — We are in the process of building a sales force for the planned commercialization of Neurodex. The timing and extent of these development expenditures will vary depending on the FDA’s review and decision on approval of our NDA for Neurodex. As a result, our expenses could vary significantly from quarter-to-quarter while we await regulatory decisions and complete this building process and our stock price could vary significantly depending on the outcome of the FDA’s regulatory review.

• Performance under partnering arrangements — The recognition of the revenue under our partnering arrangements, including our license agreements for our MIF and RCT technologies, will largely depend on the efforts and performance of our licensees in reaching milestones that are outside of our control, such as regulatory approval, product launch, or reaching a sales threshold.

• Acquisitions — Our acquisition of Alamo Pharmaceuticals in the third quarter of fiscal 2006 resulted in charges of approximately $2.6 million. We may acquire other companies or technologies, and if we do so, we will incur potentially significant charges in connection with such acquisitions and may have ongoing charges after the closing of any such transaction. Any such acquisitions could also be disruptive to our operations and may adversely affect our results of operations.

As a result of these factors, our stock price may continue to be volatile and investors may be unable to sell their shares at a price equal to, or above, the price paid.

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. For example, we expect that Neurodex, if approved by the FDA for marketing as a treatment of IEED/PBA, will compete against antidepressants, atypical anti-

58

psychotic agents and other agents for the treatment of this condition. Additionally, FazaClo competes with Clozaril (clozapine), which is marketed by Novartis, as well as other anti-psychotic agents, including several generic anti-psychotic drugs.

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 successfully develop competing products. We are also competing with other companies and their products with respect to manufacturing efficiencies and marketing capabilities, areas where we have limited or no direct experience.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.

Item 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

Item 5. OTHER INFORMATION

None.

Item 6. EXHIBITS

Exhibits

10.1	Unit Purchase Agreement by and among Avanir Pharmaceuticals, the Sellers and Alamo Pharmaceuticals, LLC, dated May 22, 2006.
10.2	Senior Note for $14.4 million payable to Neal R. Cutler, dated May 24, 2006.
10.3	Senior Note for $6,675,000 payable to Neal R. Cutler, dated May 24, 2006.
10.4	Senior Note for $4.0 million payable to Neal R. Cutler, dated May 24. 2006.
10.5	Amended and Restated Development, License and Supply Agreement by and between CIMA Labs Inc. and Alamo Pharmaceuticals, LLC, dated August 22, 2005.*
10.6	Amendment #1 to Amended and Restated Development, License and Supply Agreement by and between CIMA Labs Inc. and Alamo Pharmaceuticals, LLC, dated October 19, 2005.*
10.7	Registration Rights Agreement between Avanir Pharmaceuticals and Neal Cutler, dated May 24, 2006.
15.1	Letter on unaudited interim financial information.
31.1	Certification of Principal Executive Officer Required Under Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

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31.2	Certification of Principal Financial Officer Required Under Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
31.3	Certification of Principal Accounting Officer Required Under Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
32.1	Certification of Principal Executive Officer Required Under Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. 1350.
32.2	Certification of Principal Financial Officer Required Under Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. 1350.
32.3	Certification of Principal Accounting Officer Required Under Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. 1350.

* Confidential treatment requested.

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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.

Signature	Title	Date
/s/ Eric K. Brandt Eric K. Brandt	President and Chief Executive Officer (Principal Executive Officer)	August 9, 2006
/s/ Michael J. Puntoriero Michael J. Puntoriero	Senior Vice President, Finance and Chief Financial Officer (Principal Financial Officer)	August 9, 2006
/s/ Gregory P. Hanson, CMA Gregory P. Hanson, CMA	Vice President and Chief Accounting Officer (Principal Accounting Officer)	August 9, 2006

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EXHIBITS INDEX

Exhibits

10.1	Unit Purchase Agreement by and among Avanir Pharmaceuticals, the Sellers and Alamo Pharmaceuticals, LLC, dated May 22, 2006.
10.2	Senior Note for $14.4 million payable to Neal R. Cutler, dated May 24, 2006.
10.3	Senior Note for $6,675,000 payable to Neal R. Cutler, dated May 24, 2006.
10.4	Senior Note for $4.0 million payable to Neal R. Cutler, dated May 24. 2006.
10.5	Amended and Restated Development, License and Supply Agreement by and between CIMA Labs Inc. and Alamo Pharmaceuticals, LLC, dated August 22, 2005.*
10.6	Amendment #1 to Amended and Restated Development, License and Supply Agreement by and between CIMA Labs Inc. and Alamo Pharmaceuticals, LLC, dated October 19, 2005.*
10.7	Registration Rights Agreement between Avanir Pharmaceuticals and Neal Cutler, dated May 24, 2006.
15.1	Letter on unaudited interim financial information.
31.1	Certification of Principal Executive Officer Required Under Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
31.2	Certification of Principal Financial Officer Required Under Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
31.3	Certification of Principal Accounting Officer Required Under Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
32.1	Certification of Principal Executive Officer Required Under Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. 1350.
32.2	Certification of Principal Financial Officer Required Under Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. 1350.
32.3	Certification of Principal Accounting Officer Required Under Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. 1350.

* Confidential treatment requested.

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EX-10.1

EXHIBIT 10.1

EXECUTION COPY

UNIT PURCHASE AGREEMENT

by and among

Avanir Pharmaceuticals

(the “Buyer”),

The Parties Listed on Schedule A Attached Hereto

(the “Sellers”)

and

Alamo Pharmaceuticals, LLC

(the “Company”)

with respect to all outstanding units representing membership interests of the Company

Dated as of May 22, 2006

TABLE OF CONTENTS

	Page
ARTICLE I
PURCHASE AND SALE
SECTION 1.01. Purchase and Sale of the Units		1
SECTION 1.02. Purchase Price		1
SECTION 1.03. Sellers’ Payment Waterfall		2
SECTION 1.04. Contingent Payments; Non-US Licensing Earn-Out Payments; Run Rate Contingent Payments		3
SECTION 1.05. Adjustment to the Buyer Note 2 for Excess Product Returns		9
SECTION 1.06. Tax Allocation		10
SECTION 1.07. Designated Buyer Subsidiary		11
ARTICLE II
CLOSING
SECTION 2.01. Closing		11
SECTION 2.02. Closing Deliveries by the Sellers		11
SECTION 2.03. Closing Deliveries by Cutler		12
SECTION 2.04. Closing Deliveries by the Buyer		13
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE SELLER
SECTION 3.01. Organization, Authority and Qualification of the Sellers		14
SECTION 3.02. Membership Interests of the Sellers		14
SECTION 3.03. No Conflict		15
SECTION 3.04. Governmental Consents and Approvals		15
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
SECTION 4.01. Organization, Authority and Qualification of the Company		16
SECTION 4.02. Subsidiaries		16
SECTION 4.03. Membership Interests		17
SECTION 4.04. Corporate Books and Records		18
SECTION 4.05. No Conflict		18
SECTION 4.06. Governmental Consents and Approvals		18
SECTION 4.07. Financial Information; Books and Records		18
SECTION 4.08. Absence of Undisclosed Liabilities		19
SECTION 4.09. Receivables		19
SECTION 4.10. Inventories		20
SECTION 4.11. Conduct in the Ordinary Course; Absence of Certain Changes, Events and Conditions		20
SECTION 4.12. Litigation		23

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SECTION 4.13. Environmental and Other Permits and Licenses; Related Matters		23
SECTION 4.14. Material Contracts		25
SECTION 4.15. Intellectual Property		27
SECTION 4.16. Real Property		29
SECTION 4.17. Assets		31
SECTION 4.18. Customers		31
SECTION 4.19. Suppliers		32
SECTION 4.20. Employee Benefit Matters		32
SECTION 4.21. Labor Matters		34
SECTION 4.22. Certain Interests		35
SECTION 4.23. Taxes		36
SECTION 4.24. Compliance; Regulatory Compliance		37
SECTION 4.25. Product Registration Files		39
SECTION 4.26. Insurance		39
SECTION 4.27. Certain Business Practices		39
SECTION 4.28. Brokers		40
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE BUYER
SECTION 5.01. Organization and Authority of the Buyer		40
SECTION 5.02. No Conflict		40
SECTION 5.03. Governmental Consents and Approvals		41
SECTION 5.04. Investment Purpose		41
SECTION 5.05. Litigation		41
SECTION 5.06. SEC Filings; Financial Statements		41
SECTION 5.07. Brokers		42
ARTICLE VI
ADDITIONAL AGREEMENTS
SECTION 6.01. Use of Intellectual Property		42
SECTION 6.02. Intercompany Arrangements		42
SECTION 6.03. Sellers’ Representative.		42
SECTION 6.04. No Contribution/Indemnification; Offset		43
SECTION 6.05. Indemnification		43
SECTION 6.06. Release		44
SECTION 6.07. Post-Closing Operating Covenants		44
SECTION 6.08. Termination of Transfer Restrictions		45
SECTION 6.09. Further Action		45
ARTICLE VII
EMPLOYEE MATTERS
SECTION 7.01. Benefits		45
SECTION 7.02. Termination of Certain Company Plans		45
SECTION 7.03. WARN Act		46

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SECTION 7.04. Release Agreements		46
ARTICLE VIII
TAX MATTERS
SECTION 8.01. Books and Records; Cooperation		46
SECTION 8.02. Allocation of Taxes		46
SECTION 8.03. Notices		48
SECTION 8.04. Tax Clearance Certificate		48
SECTION 8.05. Transfer Taxes		48
SECTION 8.06. Miscellaneous		48
ARTICLE IX
INDEMNIFICATION
SECTION 9.01. Survival of Representations and Warranties		49
SECTION 9.02. Indemnification by Cutler		50
SECTION 9.03. No Effect on Liability		51
SECTION 9.04. Limits on Indemnification		51
SECTION 9.05. Defense of Third Party Claims		53
SECTION 9.06. Procedure for Claims between Parties		54
SECTION 9.07. Indemnification Payment		54
SECTION 9.08. Resolution of Conflicts and Claims		55
ARTICLE X
GENERAL PROVISIONS
SECTION 10.01. Certain Defined Terms		57
SECTION 10.02. Definitions		67
SECTION 10.03. Interpretation and Rules of Construction		68
SECTION 10.04. Expenses		69
SECTION 10.05. Notices		69
SECTION 10.06. Public Announcements		71
SECTION 10.07. Titles		71
SECTION 10.08. Severability		71
SECTION 10.09. Entire Agreement		71
SECTION 10.10. Assignment		71
SECTION 10.11. Amendment		72
SECTION 10.12. Waiver		72
SECTION 10.13. No Third Party Beneficiaries		72
SECTION 10.14. Specific Performance		72
SECTION 10.15. Governing Law		73
SECTION 10.16. Consent to Jurisdiction		73
SECTION 10.17. Attorneys’ Fees		73
SECTION 10.18. Currency		73
SECTION 10.19. Cumulative Remedies		73
SECTION 10.20. Representation by Counsel		73

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SECTION 10.21. Execution and Counterparts		74
SECTION 10.22. Disclosure		74

SCHEDULES

Schedule A List of the Sellers

EXHIBITS

Exhibit A	Form of Accredited Investor Certificate
Exhibit B	Form of Amended and Restated Operating Agreement
Exhibit C	Form of Assignment and Assumption of Units Agreement
Exhibit D	Form of Buyer Note 1
Exhibit E	Form of Buyer Note 2
Exhibit F	Form of Buyer Note 3
Exhibit G	Letter Agreement
Exhibit H	Form of Non-Compete Agreement
Exhibit I	Form of Pledge Agreement
Exhibit J	Form of Registration Rights Agreement
Exhibit K	Form of Release Agreement

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UNIT PURCHASE AGREEMENT

          This UNIT PURCHASE AGREEMENT dated as of May 22, 2006 (this “Agreement”), is entered into by and among Avanir Pharmaceuticals, a California corporation (the “Buyer”), the parties listed on Schedule A attached hereto (the “Sellers”) and Alamo Pharmaceuticals, LLC, a California limited liability company (the “Company”).

RECITALS

          WHEREAS, the Sellers own 10,300,000 membership interest units (the “Units”), representing all of the outstanding Equity Participations (as defined herein) of the Company;

          WHEREAS, the Company, directly and through its Subsidiaries, among other things, is engaged in the business of developing and reformulating approved drugs and development compounds into branded products and the production, distribution and marketing of the Product (as defined herein) at various locations in the United States and abroad (the “Business”);

          WHEREAS, the Sellers wish to sell to the Buyer, and the Buyer wishes to purchase from the Sellers, the Units, upon the terms and subject to the conditions set forth herein; and

          WHEREAS, certain capitalized terms used in the Agreement are defined in Section 10.01 of the Agreement.

AGREEMENT

          NOW, THEREFORE, in consideration of the mutual covenants and promises contained in this Agreement and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, and intending to be legally bound hereby, the Sellers and the Buyer hereby agree as follows:

ARTICLE I
PURCHASE AND SALE

          SECTION 1.01. Purchase and Sale of the Units. Upon the terms and subject to the conditions of this Agreement, at the Closing, the Buyer shall purchase from the Sellers, and the Sellers shall sell, assign, transfer, convey and deliver, or cause to be sold, assigned, transferred, conveyed and delivered, to the Buyer, the Units free and clear of all Encumbrances of any kind for the consideration specified in Section 1.02 below.

          SECTION 1.02. Purchase Price.

          (a) In consideration of the purchase of the Units, the Buyer agrees to pay to the Sellers’ Representative for distribution pursuant to Section 1.03 (i) the Buyer Debt Repayment Amount, (ii) the Buyer Notes, (iii) the Contingent Payments as provided in Section

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1.04, (iv) the Non-US Licensing Earn-Out Payments as provided in Section 1.04 and (v) the Contingent Note or Run Rate Contingent Payments as provided in Section 1.04 (collectively, the “Purchase Price”); provided, however that the aggregate principal amount of the Buyer Note 2 shall be reduced at the Closing and prior to issuance and delivery by the aggregate amount of the gross wholesale prices charged to the Company’s wholesalers for any shipments of the Product by the Company after the close of business on May 18, 2006 and prior to the Closing.

          (b) The Buyer shall deduct from the Purchase Price (including any amounts payable under Section 1.04) any amounts required to be withheld or deducted under the Code or other applicable Tax Law; provided that the Buyer agrees that no such deduction is required from the Buyers Debt Repayment Amount or the Buyer Notes paid at the Closing. To the extent that amounts are so withheld by the Buyer, such withheld amounts shall be treated for purposes of this Agreement as having been paid to the Seller and/or the Sellers’ Representative, as applicable, in respect of whom such deduction and withholding was made, based upon that portion of the Purchase Price to which such Seller would have been entitled pursuant to Section 1.03 and Section 1.04, as applicable, absent such deduction. Any amounts so deducted shall be remitted by the Buyer to the appropriate Governmental Authority on a timely basis.

          SECTION 1.03. Sellers’ Payment Waterfall. In consideration of the payment by Cutler on behalf of the Company of the Cutler Debt Repayment Amount and other amounts paid by Cutler in connection with the transactions contemplated by the Acquisition Documents (the “Cutler Threshold Amount”), the Sellers hereby agree that any payments of the Purchase Price made by the Buyer pursuant to this Agreement shall be made to Sellers’ Representative, who shall, in turn, distribute such payments in accordance with the following:

          (a) Cutler shall receive the Buyer Note 1, the Buyer Note 2 and the Buyer Note 3 (which shall be deemed to have been received by Cutler at the time of its issuance, even though retained by the Buyer pursuant to the terms of the Pledge Agreement);

          (b) If the Cutler Debt Repayment Amount shall have been paid to the Company Lenders prior to the Closing as confirmed in the Beneficiary Demand Statements, then Cutler shall receive the Buyer Debt Repayment Amount;

          (c) Cutler shall receive the Contingent Note or any Run Rate Contingent Payments;

          (d) Cutler shall receive any Contingent Payments and any Non-US Licensing Earn-Out Payments until Cutler has received an amount pursuant to this Section 1.03(b) equal to the Cutler Threshold Amount minus the sum of: (x) the principal amount of each of the Buyer Notes, as reduced pursuant to the terms of this Agreement, (y) the aggregate amount of any Contingent Note or any Run Rate Contingent Payments and (z) $4,000,000; and

          (e) Thereafter, any Contingent Payment and Non-US Licensing Earn-Out Payment amounts shall be distributed to the Sellers in proportion to their respective Sharing Percentages.

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          For all purposes hereunder, Sellers’ Representative, and not the Buyer, shall be responsible for distributing any amounts received by it pursuant to the terms of this Agreement in accordance with this Section 1.03.

          SECTION 1.04. Contingent Payments; Non-US Licensing Earn-Out Payments; Run Rate Contingent Payments.

          (a) Calculation of Contingent Payments. For the period beginning on the Closing Date and ending on December 31, 2018 (the “Contingent Payment Period”):

     (i) Not later than 45 calendar days following the end of the first four consecutive fiscal quarters (provided that if such fourth consecutive fiscal quarter is the fourth fiscal quarter of a fiscal year of the Buyer such time period shall be 75 calendar days) during the Contingent Payment Period that Net Product Revenues during such four consecutive fiscal quarters period exceeds $40.0 million (the “Initial Contingent Payment Determination Period”), the Buyer and the Company, jointly and severally, shall pay to the Sellers’ Representative by wire transfer of immediately available funds to an account designated by the Sellers’ Representative prior to the second Business Day preceding the end of such 45 day (or 75 day, if applicable) period after the Initial Contingent Payment Determination Period, an aggregate amount equal to Ten Million Four Hundred Fifty Thousand Dollars ($10,450,000) (the “Initial Contingent Payment”), which amount shall be distributed by the Sellers’ Representative in accordance with Section 1.03.

     (ii) In addition to the amounts payable pursuant to Section 1.04(a)(i), not later than 45 calendar days following the end of the first four consecutive fiscal quarters (provided that if such fourth consecutive fiscal quarter is the fourth fiscal quarter of a fiscal year of the Buyer such time period shall be 75 calendar days) during the Contingent Payment Period in which the Net Product Revenues during such four consecutive fiscal quarters period exceeds $50.0 million (the “Subsequent Contingent Payment Determination Period”), the Buyer and the Company, jointly and severally, shall pay to the Sellers’ Representative by wire transfer of immediately available funds to an account designated by the Sellers’ Representative prior to the second Business Day preceding the end of such 45 day (or 75 day, if applicable) period after the Subsequent Contingent Payment Determination Period, an amount equal to Twenty-Five Million Dollars ($25,000,000) (the “Subsequent Contingent Payment,” together with the Initial Contingent Payment, the “Contingent Payments”), which amount shall be distributed by the Sellers’ Representative in accordance with Section 1.03; provided, however, that if such 45 day (or 75 day, if applicable) period after the Subsequent Contingent Payment Determination Period shall end within 12 months of the date of payment by the Buyer and the Company of the Initial Contingent Payment, then the Buyer and the Company shall have until 12 months after the date of payment by the Buyer and the Company of the Initial Contingent Payment to pay the Subsequent Contingent Payment; provided further that if the Initial Contingent Payment Determination Period and the Subsequent Contingent Payment Determination Period shall include the same four consecutive fiscal quarters, the Initial Contingent Payment shall be payable by the Buyer and the Company prior to the end of the 45 day (or 75 day, if applicable) period after such four consecutive fiscal quarters and the Buyer and the Subsequent Contingent Payment shall be payable by

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the Buyer and the Company within 12 months after the date of payment by the Buyer and the Company of the Initial Contingent Payment.

          (b) Non-US Licensing Earn-Out Payments. In addition to the amounts payable pursuant to Section 1.04(a), not later than 45 calendar days following the end of each fiscal quarter (provided that such time period shall be 75 calendar days for any fourth fiscal quarter of a fiscal year of the Buyer) during the Contingent Payment Period, the Buyer and the Company, jointly and severally, shall pay to the Sellers’ Representative by wire transfer of immediately available funds to an account designated by the Sellers’ Representative prior to the second Business Day preceding the end of such 45 day (or 75 day, if applicable) period an amount equal to the product of (x) the Net Non-US Licensing Revenues received during the preceding fiscal quarter multiplied by (y) 0.5 (such product for each fiscal quarter, a “Non-US Licensing Earn-Out Payment,” and, together with all other Non-US Licensing Earn-Out Payments, the “Non-US Licensing Earn Out Payments”), which amount shall be distributed by the Sellers’ Representative in accordance with Section 1.03.

          (c) IMS Data Contingent Payments. In addition to the amounts payable pursuant to Sections 1.04(a) and 1.04(b), if the amount of sales of the Product as first reported by IMS Health Incorporated (“IMS”) on a National Sales Perspective Report (a “NSP Report”) for each of the months of April 2006 and May 2006 is equal to or exceeds $1,266,539 (as reported by IMS on the NSP Report first issued for March 2006) for each such month, then the Buyer shall issue to Cutler a senior note in the aggregate principal amount of Four Million Dollars ($4,000,000) that shall contain the same terms and conditions set forth in the Buyer Note 2 (the “Contingent Note”). The Buyer shall provide notice to the Sellers’ Representative within 15 calendar days of receipt by Buyer of the NSP Report first issued by IMS for May 2006 setting forth whether Cutler shall be entitled to the Contingent Note. The Buyer shall (A) provide to the Sellers’ Representative with such notice a copy of the NSP Reports first issued by IMS for the months of March, April and May 2006 (it being understood for purposes of this Section 1.04(c) that the data contained in such NSP Reports first issued by IMS for the months of March, April and May 2006 shall be deemed the final data upon which the determination of the amount of sales of the Product is made for each such month, and that no data for each such month as first reported by IMS shall be altered by any subsequent revisions by IMS to such data for those months in subsequent NSP Reports) and (B), if issuable pursuant to this Section 1.04(c), deliver to the Sellers’ Representative the Contingent Note for distribution to Cutler.

          (d) Run Rate Contingent Payments. In the event that the Buyer is not required to issue the Contingent Note in accordance with Section 1.04(c) because the amount of sales of the Product as first reported by IMS on a NSP Report for each of the months of April 2006 and May 2006 is not equal to or exceeds $1,266,539 for each such month, in addition to the amounts payable pursuant to Sections 1.04(a) and 1.04(b):

     (i) Subject to Section 1.04(d)(iii), not later than 45 calendar days following the first fiscal quarter (provided that such time period shall be 75 calendar days if such fiscal quarter is the fourth fiscal quarter of a fiscal year of the Buyer) during the Contingent Payment Period in which the Net Product Revenues equals or exceeds $1.0 million in each of the three consecutive months of such fiscal quarter (the “Initial Run Rate Contingent Payment Determination Period”):

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     (A) if the end of such 45 day (or 75 day, if applicable) period after the Initial Run Rate Contingent Payment Determination Period shall occur prior to the Maturity Date of the Buyer Note 2 (as defined therein), then the Buyer at its sole option shall (1) issue to Cutler a senior note in the aggregate principal amount of Two Million Dollars ($2,000,000) that shall contain the same terms and conditions set forth in the Buyer Note 2 (the “Alternate Contingent Note 1”), except the Maturity Date of such Alternate Contingent Note 1 shall be the third anniversary of the Closing Date unless prepaid in accordance with its terms prior to such date, or (2) pay, jointly and severally with the Company, to the Sellers’ Representative by wire transfer of immediately available funds to an account designated by the Sellers’ Representative prior to the second Business Day preceding the end of such 45 day (or 75 day, if applicable) period after the Initial Run Rate Contingent Payment Determination Period, an amount equal to Two Million Dollars ($2,000,000) which amount shall be distributed by the Sellers’ Representative in accordance with Section 1.03; or

     (B) if the end of such 45 day (or 75 day, if applicable) period after the Initial Run Rate Contingent Payment Determination Period shall occur on or after the Maturity Date of the Buyer Note 2, then the Buyer and the Company, jointly and severally, shall pay the Initial Run Rate Contingent Payment by wire transfer of immediately available funds to an account designated by the Sellers’ Representative prior to the second Business Day preceding the end of such 45 day (or 75 day, if applicable) period after the Initial Run Rate Contingent Payment Determination Period, an amount equal to Two Million Dollars ($2,000,000) which amount shall be distributed by the Sellers’ Representative in accordance with Section 1.03.

          The issuance of the Alternate Contingent Note 1 or the payment of the applicable cash amount as provided in this Section 1.04(d)(i) shall be the “Initial Run Rate Contingent Payment”.

     (ii) Subject to Section 1.04(d)(iii), not later than 45 calendar days following the first fiscal quarter (provided that such time period shall be 75 calendar days if such fiscal quarter is the fourth fiscal quarter of a fiscal year of the Buyer) during the Contingent Payment Period in which the Net Product Revenues equals or exceeds $1.5 million in each of the three consecutive months of such fiscal quarter (the “Subsequent Run Rate Contingent Payment Determination Period”):

     (A) if the end of such 45 day (or 75 day, if applicable) period after the Subsequent Run Rate Contingent Payment Determination Period shall occur prior to the Maturity Date of the Buyer Note 2, then the Buyer at its sole option shall (1) issue to Cutler an additional senior note in the aggregate principal amount of Two Million Dollars ($2,000,000) that shall contain the same terms and conditions set forth in the Buyer Note 2 (the “Alternate Contingent Note 2”), except the Maturity Date of such Alternate Contingent Note 2 shall be the third anniversary of the Closing Date unless prepaid in accordance with its terms prior to such date, or (2) pay, jointly and severally with the Company, to the Sellers’

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Representative by wire transfer of immediately available funds to an account designated by the Sellers’ Representative prior to the second Business Day preceding the end of such 45 day (or 75 day, if applicable) period after the Subsequent Run Rate Contingent Payment Determination Period, an amount equal to Two Million Dollars ($2,000,000) which amount shall be distributed by the Sellers’ Representative in accordance with Section 1.03; or

     (B) if the end of such 45 day (or 75 day, if applicable) period after the Subsequent Run Rate Contingent Payment Determination Period shall occur on or after the Maturity Date of the Buyer Note 2, then the Buyer and the Company, jointly and severally, shall pay the Subsequent Run Rate Contingent Payment by wire transfer of immediately available funds to an account designated by the Sellers’ Representative prior to the second Business Day preceding the end of such 45 day (or 75 day, if applicable) period after the Subsequent Run Rate Contingent Payment Determination Period, an amount equal to Two Million Dollars ($2,000,000) which amount shall be distributed by the Sellers’ Representative in accordance with Section 1.03.

          The issuance of the Alternate Contingent Note 2 or the payment of the applicable cash amount as provided in this Section 1.04(d)(ii) shall be the “Subsequent Run Rate Contingent Payment”.

     (iii) If the Initial Run Rate Contingent Payment Determination Period and the Subsequent Run Rate Contingent Payment Determination Period shall be the same fiscal quarter and the 45 day (or 75 day, if applicable) period after the end of such fiscal quarter shall:

     (A) occur prior to the Maturity Date of the Buyer Note 2, then in lieu of payment of the Initial Run Rate Contingent Payment and the Subsequent Run Rate Contingent Payment, then the Buyer at its sole option shall (1) issue to Cutler a senior note in the aggregate principal amount of Four Million Dollars ($4,000,000) that shall contain the same terms and conditions set forth in the Buyer Note 2 (the “Alternate Contingent Note 3”), except the Maturity Date of such Alternate Contingent Note 3 shall be the third anniversary of the Closing Date unless prepaid in accordance with its terms prior to such date, or (2) pay, jointly and severally with the Company, to the Sellers’ Representative by wire transfer of immediately available funds to an account designated by the Sellers’ Representative prior to the second Business Day preceding the end of such 45 day (or 75 day, if applicable) period after such fiscal quarter an amount equal to Four Million Dollars ($4,000,000) which amount shall be distributed by the Sellers’ Representative in accordance with Section 1.03; or

     (B) occur on or after the Maturity Date of the Buyer Note 2, then in lieu of payment of the Initial Run Rate Contingent Payment and the Subsequent Run Rate Contingent Payment, the Buyer and the Company, jointly and severally, shall pay the Alternate Run Rate Contingent Payment by wire transfer of immediately available funds to an account designated by the Sellers’

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Representative prior to the second Business Day preceding the end of such 45 day (or 75 day, if applicable) period after such fiscal quarter, an amount equal to Four Million Dollars ($4,000,000) which amount shall be distributed by the Sellers’ Representative in accordance with Section 1.03.

          The issuance of the Alternate Contingent Note or the payment of the applicable cash amount provided in this Section 1.04(d)(iii) shall be the “Alternate Run Rate Contingent Payment”, which together with the Initial Run Rate Contingent Payment and the Subsequent Run Rate Contingent Payment, shall be the “Run Rate Contingent Payments”.

     (iv) In no event shall any Run Rate Contingent Payments be payable by the Buyer in accordance with this Section 1.04(d) if the Buyer shall have been required to issue to Cutler the Contingent Note pursuant to Section 1.04(c).

          (e) Interim Reports. Not later than 45 calendar days following the end of each fiscal quarter during the Contingent Payment Period (provided that if such fiscal quarter is the fourth quarter of a fiscal year of the Buyer such time period shall be 75 calendar days), the Buyer shall furnish, or otherwise cause to be made available at its sole cost and expense, to the Sellers’ Representative a report (“Contingent Payment Quarterly Report”) setting forth in reasonable detail Net Product Revenues and the Net Non-US Licensing Revenues for each month of such fiscal quarter. Each Contingent Payment Quarterly Report furnished or made available to the Sellers’ Representative shall be accompanied by (i) a copy of any report covering such fiscal quarter provided by Buyer or the Company to CIMA Labs, Inc. (or its successor) in accordance with Section 4.3 of that certain Amended and Restated Development, License and Supply Agreement, dated August 22, 2005 as amended by Amendment #1 dated October 19, 2005 to which the Company is a party, and (ii) a certificate of an officer of the Buyer certifying (A) the amount of any Contingent Payment, Non-US Licensing Earn-Out Payment or Run Rate Contingent Payment due or (B) that no Contingent Payment, Non-US Licensing Earn-Out Payment or Run Rate Contingent Payment is due under the terms of this Agreement. Each Contingent Payment Quarterly Report shall be prepared in accordance with GAAP applied on a basis consistent with the preparation of the Buyer’s consolidated financial statements. Upon reasonable notice, the Buyer shall make available to Sellers’ Representative and its agents and representatives during normal business hours all of the books, records, personnel and workpapers used to prepare each Contingent Payment Quarterly Report.

          (f) Disputes. Not more than one (1) time during each calendar year during the Contingent Payment Period or the 24 month period immediately succeeding it, the Sellers’ Representative and its advisors, agents and representatives shall have the right, at its sole cost and expense, to audit the Net Product Revenues and the Net Non-US Licensing Revenues during the eight fiscal quarters preceding the commencement of such audit to the extent such fiscal quarters have not previously been audited by the Sellers’ Representative. Following such audit or review of the materials supporting the preparation of a Contingent Payment Quarterly Report specified in Section 1.04(e) hereof by Sellers’ Representative, the Sellers’ Representative shall have the right to dispute one or more Contingent Payment Quarterly Reports covered by such audit that it reasonably believes contain any errors. If the Sellers’ Representative elects to dispute one or more such Contingent Payment Quarterly Reports, in whole or in part, then Sellers’ Representative shall provide a written notice to the Buyer specifying in reasonable detail

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its objections thereto (“Contingent Payment Dispute Notice”). Promptly following receipt by the Buyer of any Contingent Payment Dispute Notice from the Sellers’ Representative, the Buyer and the Sellers’ Representative shall attempt to reconcile their differences, and any resolution by them as to any disputed amounts shall be final, binding and conclusive on the parties hereto. If the Sellers’ Representative and the Buyer are unable to reach a resolution with such effect within 20 Business Days after the receipt by the Buyer of the Contingent Payment Dispute Notice, the Sellers’ Representative and the Buyer shall submit the items remaining in dispute for resolution to an independent accounting firm of national reputation mutually and reasonably acceptable to the Sellers’ Representative and the Buyer (the “Independent Accounting Firm”), which shall, within 30 Business Days after such submission, determine and report to the Sellers’ Representative and the Buyer upon such remaining disputed items, and such report shall be final, binding and conclusive on the Sellers and the Buyer. The fees and disbursements of any accounting firm retained by the Sellers’ Representative or the Buyer to assist it in any dispute regarding any Contingent Payment Quarterly Report and the Independent Accounting Firm, if any, shall be borne by either the Buyer or Cutler in the event that either the Buyer or the Sellers’ Representative, respectively, does not prevail in the dispute (including the Company in the event that the Buyer is such non-prevailing party); provided that to the extent the dispute relates to the amount of Non-US Licensing Earn-Out Payments payable, the expenses shall be allocated between Cutler and the Buyer in the same proportion that the aggregate amount of such remaining disputed items so submitted to the Independent Accounting Firm that is unsuccessfully disputed by the Buyer or the Sellers’ Representative (as finally determined by the Independent Accounting Firm) bears to the total amount of such remaining disputed items so submitted; provided, further that Cutler shall not be entitled to reimbursement from any Seller for such fees and disbursements under this Section 1.04(f) in excess of any amount of the Purchase Price actually received by such Seller.

          (g) Late Payments. Any Contingent Payment, Non-US Licensing Earn-Out Payment or Run Rate Contingent Payment that shall not be paid when due shall bear interest at a rate equal to the prime rate of interest per annum charged by Citibank, N.A. on the date such Contingent Payment, Non-US Licensing Earn-Out Payment or Run Rate Contingent Payment was due, compounded monthly, on such past due amount from the date due until paid in full.

          (h) Payments. The Buyer and the Company, jointly and severally, shall pay each Contingent Payment, Non-US Licensing Earn-Out Payment and any cash payment for any the Run Rate Contingent Payment to the Sellers’ Representative, as and when due, by wire transfer of immediately available funds to such account as the Sellers’ Representative may reasonably direct by written notice delivered to the Buyer at least two Business Days prior to the proposed date of such payment. Sellers’ Representative shall be responsible for distributing any such Contingent Payment, Non-US Licensing Earn-Out Payment and any cash payment for any the Run Rate Contingent Payment in accordance with Section 1.03. If the Buyer issues to Cutler any of the Contingent Note 1, Contingent Note 2 or Alternate Contingent Note as payment for any Run Rate Contingent Payment as and when due, each such note shall be delivered to Sellers’ Representative for distribution to Cutler in accordance with Section 1.03.

          (i) Characterization of Payments. Other than amounts properly characterized as interest for Tax purposes, all Contingent Payments, Non-US Licensing Earn-Out Payments and Run Rate Contingent Payments made pursuant to this Section 1.04 shall constitute an

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adjustment of the consideration paid for the Assets for Tax purposes and shall be treated as such by the Buyer and the Sellers on their Tax Returns to the extent permitted by Law.

          (j) Operating Covenant. So long as Buyer’s current product portfolio is not materially modified and the Buyer is marketing products to psychiatrists, following the Closing and prior to the last day of the Contingent Payment Period, the Buyer shall cause the Company to use commercially reasonable efforts to market the Product to psychiatrists in at least a second detail position.

          SECTION 1.05. Adjustment to the Buyer Note 2 for Excess Product Returns.

          (a) Determination of Excess Returns. In the event that the Company’s gross product sales that were generated by the Product returned to the Company during the first six full calendar months after the Closing (but specifically excluding any gross product sales generated by any Product returns accepted by the Company during such period to the extent the Company was not required to accept such returns by the applicable sales terms in effect as of the Closing Date) exceeds 1% of the gross product sales of the Product during the first six full calendar months as first reported by IMS on a NPS Report for each month during such period (the “Excess Returns Amount”), then the Buyer shall deliver a written notice (the “Excess Returns Notice”) to the Sellers’ Representative within 45 calendar days of the end of such six-month period specifying the Excess Returns Amount and setting forth in reasonable detail the Buyer’s calculation of such amount, and shall attach to such notice the NPS Reports first issued by IMS for each of the first six full calendar months. Upon reasonable notice, the Buyer shall make available to the Sellers’ Representative and its agents and representatives during normal business hours all of the books, records, personnel and workpapers that are reasonably necessary for the Sellers’ Representative to understand the preparation of the Excess Returns Notice.

          (b) Dispute. If the Sellers’ Representative elects to dispute the Excess Returns Amount set forth in the Excess Returns Notice, in whole or in part, then Sellers’ Representative shall provide a written notice to the Buyer within 10 Business Days of delivery by the Buyer of the Excess Returns Notice, which shall specify the estimated amount thereof in dispute and set forth in reasonable detail the basis of its objections thereto (“Returns Dispute Notice”). Promptly following receipt by the Buyer of any Returns Dispute Notice from the Sellers’ Representative, the Buyer and the Sellers’ Representative shall attempt to reconcile their differences, and any resolution by them as to any disputed amounts shall be final, binding and conclusive on the parties hereto. If the Sellers’ Representative and the Buyer are unable to reach a resolution with such effect within 20 Business Days after the receipt by the Buyer of the Returns Dispute Notice, the Sellers’ Representative and the Buyer shall submit the items remaining in dispute for resolution to the Independent Accounting Firm, which shall, within 30 Business Days after such submission, determine and report to the Sellers’ Representative and the Buyer upon such remaining disputed items, and such report shall be final, binding and conclusive on the Sellers and the Buyer. The fees and disbursements of any accounting firm retained by the Sellers’ Representative or the Buyer to assist it in any dispute regarding the Excess Returns Notice and the Independent Accounting Firm, if any, shall be borne by either the Buyer or Cutler in the event that either the Buyer or the Sellers’ Representative, respectively, does not prevail in the dispute (including the Company in the event that the Buyer is such non-prevailing party); provided, however that if the Sellers’ Representative is not the prevailing party, Cutler shall not

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be entitled to reimbursement from any Seller for such fees and disbursements under this Section 1.05(b) in excess of any amount of the Purchase Price actually received by such Seller.

          (c) Reduction of the Buyer Note 2. In the event that (i) the Buyer shall not have received a Returns Dispute Notice within 10 Business days of delivery by the Buyer of the Excess Returns Notice or (ii) the Sellers’ Representative shall have delivered a Returns Dispute Notice and in accordance with Section 1.05(b) either (A) the Buyer and the Sellers’ Representative shall have, subsequent to the giving of such Returns Dispute Notice, mutually agreed upon the Excess Returns Amount or (ii) the Independent Accounting Firm shall have determined the Excess Returns Amount, the Buyer may unilaterally reduce the outstanding principal amount of the Buyer Note 2 by the Excess Returns Amount.

          (d) Operating Covenant. Following the Closing and prior to the end of the six full calendar months after the Closing, the Buyer shall not cause the Company to contact customers and distributors to actively solicit returns of the Product, except as may be required by Law.

          SECTION 1.06. Tax Allocation.

          (a) The Purchase Price (plus assumed liabilities to the extent properly taken into account under the Code and the Treasury regulations promulgated thereunder), shall be allocated among the Assets of the Company in accordance with Section 1060 of the Code and the Treasury regulations promulgated thereunder, as agreed upon by the Buyer and Sellers within sixty (60) days after the Closing, which agreement will be based on an independent appraisal, and which may be revised in accordance with the following sentence (the “Allocation”). The Buyer and Sellers’ Representative agree to revise the Allocation to reflect any Contingent Payments, Non-US Licensing Earn-Out Payments and Run Rate Contingent Payments made pursuant to Section 1.04 above (in each case, excluding any amounts properly characterized as interest for federal income Tax purposes).

          (b) To the extent Buyer and Sellers’ Representative cannot agree on how to prepare or revise the Allocation in accordance with Section 1.06(a) hereof, then the Buyer and the Sellers’ Representative shall attempt to determine an appropriate Allocation, and any resolution by them as to any disputed amounts shall be final, binding and conclusive on the parties hereto. If the Sellers’ Representative and the Buyer are unable to reach a resolution with such effect within 20 Business Days, the Sellers’ Representative and the Buyer shall submit the items remaining in dispute for resolution to the Independent Accounting Firm, which shall, within 30 Business Days after such submission, determine and report to the Sellers’ Representative and the Buyer upon such remaining disputed items, and such report shall be final, binding and conclusive on the Sellers and the Buyer. The fees and disbursements of the Independent Accounting Firm shall be allocated between the Sellers’ Representative and the Buyer in the same proportion that the aggregate amount of such remaining disputed items so submitted to the Independent Accounting Firm that is unsuccessfully disputed by each such party (as finally determined by the Independent Accounting Firm) bears to the total amount of such remaining disputed items so submitted.

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          (c) The Buyer and the Sellers’ Representative agree to (i) be bound by the Allocation, (ii) act in accordance with the Allocation in the preparation of all financial statements and the filing of all Tax Returns (including filing Form 8594 with their United States federal income Tax Return for the taxable year that includes the date of the Closing) and in the course of any Tax audit, Tax review or Tax litigation relating thereto, and (iii) take no position and cause their Affiliates to take no position inconsistent with the Allocation for income Tax purposes, including United States federal and state income Tax and foreign income Tax, unless otherwise required pursuant to an agreement with the IRS.

          SECTION 1.07. Designated Buyer Subsidiary. The Buyer shall have the right to designate one of its wholly-owned direct or indirect subsidiaries (the “Designated Buyer Subsidiary”) to which immediately after the Closing the Buyer may contribute and assign the Units purchased by the Buyer; provided, however that the Buyer shall remain liable for all of its obligations under this Agreement.

ARTICLE II
CLOSING

          SECTION 2.01. Closing. Subject to the terms and conditions of this Agreement, the sale and purchase of the Units contemplated by this Agreement shall take place at a closing (the “Closing”) to be held at the offices of Latham & Watkins LLP, 650 Town Center Drive, 20^th Floor, Costa Mesa, California 92626, at 9:00 A.M. local time on the Business Day following the satisfaction or waiver of all conditions to the obligations of the parties set forth in Section I.A and Section I.B of the Letter Agreement, or at such other place or at such other time or on such other date as the Sellers’ Representative and the Buyer may mutually agree upon in writing (the “Closing Date”).

          SECTION 2.02. Closing Deliveries by the Sellers.

          (a) At the Closing, the Sellers shall deliver or cause to be delivered to the Buyer:

     (i) an Assignment and Assumption of Units Agreement reflecting the assignment of the Units from each Seller to the Buyer, duly executed by the applicable Seller;

     (ii) a certificate, in form and substance reasonably acceptable to the Buyer, from the Company, signed under penalty of perjury, indicating that fifty percent or more of the value of the gross assets of the Company does not consist of U.S. real property interests, in accordance with Section 1.1445-11T(d)(2) of the Regulations;

     (iii) good standing certificates for the Company and for each Subsidiary from the Secretary of State of the jurisdiction in which such entity is incorporated or organized and from the Secretary of State in each other jurisdiction in which the properties owned or leased by any of the Company or any Subsidiary, or the operation of its business in such jurisdiction, requires the Company or any Subsidiary to qualify to do business as a foreign corporation, in each case dated as of a date not earlier than 10 Business Days

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prior to the Closing and accompanied by a bring-down letter dated as of the Closing Date;

     (iv) a report of a search of applicable Uniform Commercial Code financing statements and fixture filings, dated as of a date no more than one week prior to the Closing Date, with respect to the Company and each Subsidiary showing no Encumbrances on the Company’s or such Subsidiary’s Assets or the Units, other than Encumbrances (x) securing repayment of the Company Debt to be paid by the Buyer at the Closing pursuant to Section 1.02(a) and (y) as set forth in Section 2.02(a)(iv) of the Company Disclosure Letter;

     (v) documentation reasonably satisfactory to the Buyer evidencing the release of Encumbrances securing repayment of the Company Debt, contingent only upon payment of the Buyer Debt Repayment Amount and the Cutler Debt Repayment Amount;

     (vi) duly executed Powers of Attorney on behalf of the Company and each Subsidiary in a form reasonably acceptable to the Buyer and such other instruments as may be necessary to authorize the Buyer and its designees to become signatories on each of the bank accounts of the Company and each Subsidiary, including but not limited to the lockbox accounts of the Company and each Subsidiary, and letters from the Company and each Subsidiary to the institutions holding such accounts authorizing and directing such institutions to remove such signatories on such accounts as the Buyer may direct;

     (vii) copies of consents or waivers for the Consent Contracts listed in Section 4.14(a) of the Company Disclosure Letter in a form reasonably acceptable to the Buyer, which consents or waivers shall be effective at or prior to the Closing;

     (viii) documentation reasonably satisfactory to the Buyer evidencing the termination of each 401(k) Plan and the Phantom Unit Plan Phantom and the elimination of Pool Shares in accordance with Section 7.02;

     (ix) the Release Agreements for each of the Key Employees, duly executed by each such Employee, and documentation reasonably satisfactory to the Buyer evidencing the payment by the Company to each of the Key Employees of the amounts owed to each such Key Employee for any change of control payments applicable to such Key Employee; and

     (x) all other certificates, opinions, instruments and other documents as may be reasonably requested by the Buyer to effect the transactions contemplated hereby, in each case reasonably satisfactory in form and substance to the Buyer.

          SECTION 2.03. Closing Deliveries by Cutler.

          (a) Prior to the Closing, Cutler shall, in his individual capacity, deliver the Cutler Debt Repayment Amount in cash by wire transfer in immediately available funds to an account designated by the Company Lenders in the Beneficiary Demand Letters or assume a portion of the Company Debt equal to the Cutler Debt Repayment Amount and deliver evidence of such assumption to the Buyer in form and substance reasonably satisfactory to the Buyer.

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          (b) At the Closing, Cutler shall, in his individual capacity, deliver to the Buyer:

     (i) A Non-Compete Agreement, duly executed by Cutler;

     (ii) the Registration Rights Agreement, duly executed by Cutler;

     (iii) the Accredited Investor Certificate, duly executed by Cutler;

     (iv) each of the Buyer Notes, duly executed by Cutler;

     (v) the Pledge Agreement providing for the pledge of the Buyer Note 3 to the Buyer as security for the performance by Cutler of his obligations under Article IX, duly executed by Cutler;

     (vi) the resignation, effective as of the Closing, of Cutler as manager of the Company, duly executed by Cutler; and

     (vii) a certificate, in form and substance reasonably acceptable to the Buyer, from Cutler, signed under penalty of perjury, indicating Cutler’s tax payer identification number and stating that Cutler is a non-foreign Person pursuant to Section 1.1445-2(b)(2) of the Regulations;

          SECTION 2.04. Closing Deliveries by the Buyer.

          (a) At the Closing, the Buyer shall deliver to the Sellers:

     (i) an Assignment and Assumption of Units Agreement reflecting the assignment of the Units from each Seller to the Buyer, duly executed by the Buyer; and

     (ii) an Amended and Restated Operating Agreement for the Company duly executed by the Buyer, reflecting the Buyer as the sole member of the Company;

     (iii) A Non-Compete Agreement, duly executed by the Buyer;

          (b) At the Closing, the Buyer shall deliver the Buyer Debt Repayment Amount, by wire transfer in immediately available funds to an account designated by the Company Lenders in the Beneficiary Demand Statements, all pursuant to the documents governing the Company Debt; provided, however that if the Cutler Debt Repayment Amount shall have been paid to the Company Lenders prior to the Closing as confirmed in the Beneficiary Demand Statements, the Buyer shall deliver the Buyer Debt Repayment Amount to the Sellers’ Representative, by wire transfer in immediately available funds to an account designated by the Sellers’ Representative prior to the Closing Date to be distributed in accordance with Section 1.03.

          (c) At the Closing, the Buyer shall deliver to the Sellers’ Representative to be distributed in accordance with Section 1.03:

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     (i) the Buyer Note 1, duly executed by the Buyer;

     (ii) the Buyer Note 2, duly executed by the Buyer; and

     (iii) the Registration Rights Agreement, duly executed by the Buyer.

          (d) At the Closing, the Buyer shall issue the Buyer Note 3 in favor of Cutler and shall retain possession of the Buyer Note 3 pursuant to the terms of the Pledge Agreement.

ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE SELLER

          Each Seller severally and not jointly hereby represents and warrants to the Buyer that the statements contained in this Article III are correct and complete as of the date hereof (or, if made as of a specified date, as of such date) and will be correct and complete as of the Closing (as though made then and as though the date of the Closing were substituted for the date of this Agreement throughout this Article III):

          SECTION 3.01. Organization, Authority and Qualification of the Sellers.

          (a) If such Seller is an entity, (i) such Seller is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization and has all necessary power and authority to enter into this Agreement and the Ancillary Agreements, to carry out its obligations hereunder and thereunder, to consummate the transactions contemplated hereby and thereby and to own, hold, sell and transfer pursuant to this Agreement the Units owned by such Seller; and (ii) the execution and delivery of this Agreement and the Ancillary Agreements by such Seller, the performance by such Seller of its obligations hereunder and thereunder and the consummation by such Seller of the transactions contemplated hereby and thereby have been duly authorized by all requisite action on the part of such Seller and its equityholders.

          (b) If such Seller is an individual, such Seller has all required power, authority and capacity to execute and deliver this Agreement and the Ancillary Agreements, to perform his or her obligations hereunder and thereunder, and to consummate the transactions contemplated hereby and thereby. The execution, delivery and performance by such Seller of this Agreement and the Ancillary Agreements and the consummation of the transactions contemplated hereby and thereby have been duly authorized and approved by all required action on the part of such Seller.

          (c) This Agreement and the Ancillary Agreements to which such Seller is a party have been, duly and validly executed and delivered by such Seller, and constitute legal, valid and binding obligations of such Seller, enforceable against such Seller in accordance with their respective terms, except to the extent such enforceability (a) may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to creditors’ rights generally and (b) is subject to general principles of equity.

          SECTION 3.02. Membership Interests of the Sellers. Such Seller holds of record and owns beneficially, and has good and valid title to, all of the Units held by such Seller, which upon the Closing shall be free and clear of any Taxes and Encumbrances (other than this

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Agreement). Except for the Existing Operating Agreement and such Seller’s Transfer of Limited Liability Company Interest entered into between Cutler and such Seller pursuant to which such Seller received its Units (its “Transfer Agreement”), each of which shall terminate and have no further effect upon the Closing, (a) such Seller is not a party to any voting trust, proxy or other Contract or understanding with respect to the voting of any Units, and (b) there are no outstanding Contracts to which such Seller is a party (i) restricting the transfer of, (ii) affecting the voting rights of, (iii) requiring the repurchase, redemption or disposition of, or containing any right of first refusal with respect to, (iv) requiring the registration for sale of, or (v) granting any preemptive or antidilutive right with respect to, any Units or other Equity Participations of the Company or the Subsidiaries or otherwise granting any Person the right to make an investment in, or loan to, the Company or any Subsidiary.

          SECTION 3.03. No Conflict. Assuming that all consents, approvals, authorizations and other actions described in Section 4.06 have been obtained and all filings and notifications listed in Section 4.06 of the Company Disclosure Letter have been made, the execution, delivery and performance of this Agreement and the Ancillary Agreements to which such Seller is a party by such Seller does not and will not (a) violate, conflict with or result in the breach of any provision of the Articles of Organization, the Existing Operating Agreement or the articles of organization or operating agreement (or certificate of incorporation, bylaws, or similar organizational documents) of such Seller or (b) conflict with or violate any Law applicable to such Seller or any of its Assets (in each case, other than such conflicts, violations or breaches (i) which could not in the aggregate reasonably be expected to materially and adversely affect the validity or enforceability of this Agreement or such Ancillary Agreements, materially impair such Seller’s ability to perform its obligations under this Agreement, materially impair the ability of the Buyer to own all of the outstanding Equity Participations of the Company following the Closing or otherwise have a Material Adverse Effect or (ii) as would occur solely as a result of the identity or the legal or regulatory status of the Buyer or any of its Affiliates).

          SECTION 3.04. Governmental Consents and Approvals. The execution, delivery and performance of this Agreement and each Ancillary Agreement by such Seller does not and will not require any consent, approval, authorization or other order of, action by, permit of, filing with or notification to, any Governmental Authority on the part of such Seller, except (a) as described in Section 3.04 of the Seller Disclosure Letter, (b) where the failure to obtain any such consent, approval or action, to make any such filing or to give any such notice could not reasonably be expected to materially and adversely affect the ability of such Seller to consummate the transactions contemplated by this Agreement or to perform its obligations hereunder, materially impair the ability of the Buyer to own all of the outstanding Equity Participations of the Company following the Closing, or otherwise have a Material Adverse Effect, or (c) those as would be required solely as a result of the identity or the legal or regulatory status of the Buyer or any of its Affiliates.

ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY

          The Company hereby represents and warrants to the Buyer, that the statements contained in this Article IV are correct and complete as of the date hereof (or, if made as of a specified date, as of such date) and will be correct and complete as of the Closing (as though

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made then and as though the date of the Closing were substituted for the date of this Agreement throughout this Article IV).

          SECTION 4.01. Organization, Authority and Qualification of the Company. The Company is a limited liability company duly organized, validly existing and in good standing under the laws of the State of California and has all necessary power and authority to own, operate or lease its Assets now owned, operated or leased by it and to carry on the Business as it is currently conducted. The Company is duly licensed or qualified to do business and is in good standing under the laws of each jurisdiction in which the properties owned or leased by it or the operation of its Business makes such licensing or qualification necessary, which jurisdictions are set forth in Section 4.01 of the Company Disclosure Letter, except for those jurisdictions in which the adverse effects of all such failures by the Company or its Subsidiaries to be qualified, licensed or in good standing could not in the aggregate reasonably be expected to have a Material Adverse Effect. To the Company’s Knowledge, all material limited liability company actions taken by the Company have been duly authorized. The Company has not taken any action that in any material respect conflicts with, constitutes a default under or results in a violation of any provision of its Articles of Organization or Existing Operating Agreement. True and correct copies of the Articles of Organization and the Existing Operating Agreement of the Company, each as in effect on the date hereof, have been made available to the Buyer in the Diligence Materials.

          SECTION 4.02. Subsidiaries.

          (a) Section 4.02(a) of the Company Disclosure Letter sets forth a true and complete list of all Subsidiaries, listing for each Subsidiary its name, type of entity, the jurisdiction and date of its incorporation or organization, its authorized capital stock, partnership capital or equivalent, the number and type of its issued and outstanding shares of capital stock, partnership interests or similar ownership interests, the current ownership of such shares, partnership interests or similar ownership interests, and all jurisdictions in which it is licensed or qualified to do business.

          (b) Other than the Subsidiaries, there are no other corporations, partnerships, joint ventures, associations or other entities in which the Company or any Subsidiary owns, of record or beneficially, any direct or indirect equity or other interest or any right (contingent or otherwise) to acquire the same. Other than the Subsidiaries, neither the Company nor any Subsidiary is a member of (nor is any part of the Business conducted through) any partnership nor is the Company or any Subsidiary a participant in any joint venture or similar arrangement, it being understood that the Company’s contractual relationship with CIMA Labs, Inc. shall not constitute a joint venture or similar arrangement for purposes hereof. Except as set forth on Section 4.02 of the Company Disclosure Letter, all of the outstanding Equity Participations of each Subsidiary are owned by the Company, whether directly or indirectly through a Subsidiary, free and clear of all Encumbrances.

          (c) Each of the Subsidiaries is a limited liability company, duly organized, validly existing, and in good standing under the laws of the jurisdiction of its organization or incorporation and has all necessary power and authority to own, operate or lease its Assets now owned, operated or leased by it and to carry on its business as it is currently conducted. Each of

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the Subsidiaries is duly licensed or qualified to do business and is in good standing under the laws of each jurisdiction in which the properties owned or leased by it or the operation of its business makes such licensing or qualification necessary or desirable, which jurisdictions are set forth in Section 4.02 of the Company Disclosure Letter, except for those jurisdictions in which the adverse effects of all such failures by such Subsidiaries to be qualified, licensed or in good standing could not in the aggregate reasonably be expected to have a Material Adverse Effect. The Company has made available to the Buyer in the Diligence Materials correct and complete copies of the organizational documents, operating agreements and bylaws of each of the Subsidiaries (as amended to date). None of the Subsidiaries are in any material respect in default under or in violation of any provision of its organizational documents, operating agreements or bylaws.

          SECTION 4.03. Membership Interests.

          (a) Except as set forth in Section 4.03 of the Company Disclosure Letter, the Units owned by the Sellers are all of the outstanding Equity Participations of the Company. Upon the consummation of the transactions contemplated by this Agreement, the Buyer will acquire good and marketable title to all of the Company’s Equity Participations, which upon the Closing shall be free and clear of any Taxes, Encumbrances, warrants, purchase rights, Contracts, commitments, assessments, equities and demands. Except as set forth in Section 4.03(a) of the Company Disclosure Letter, there are no rights, commitments, or Contracts of any character to which the Company or any Subsidiary is bound relating to the issued or unissued Equity Participations of the Company, including the Units, or convertible into or exchangeable or exercisable for the Equity Participations of the Company, including the Units, or obligating the Company or the Subsidiaries to issue or sell Equity Participations of the Company or the Subsidiaries or securities convertible into or exchangeable or exercisable for the Equity Participations of the Company of the Subsidiaries.

          (b) Section 4.03(b) of the Company Disclosure Letter sets forth (i) the name and address of each Person owning Units, (ii) the number of Units owned of record by such Person, and (iii) with respect to any interest convertible, exchangeable or exercisable for Units (1) the name of the individual holding such interest, (2) the number of Units into which such interest is convertible, exchangeable or exercisable, (3) the conversion or exercise price thereof, (4) the vesting schedule applicable to such interest, if any, and (5) the Company Plan or other Contract pursuant to which such interest was issued. To the Company’s Knowledge, all of the outstanding Units and any Equity Participations convertible, exchangeable or exercisable for Units were issued in compliance with all applicable state and federal securities laws.

          (c) No bonds, debentures, notes or other Indebtedness of the Company or any of the Subsidiaries has the right to vote on any matters on which members or equityholders may vote.

          (d) Except as described in Section 4.03(d) of the Company Disclosure Letter, there are no outstanding Contracts to which the Company or any of the Subsidiaries is a party or to which any of the Assets of the Company or the Subsidiaries are subject, whether oral or written, express or implied to which any of the Company or any of the Subsidiaries is a party or by which they are otherwise bound (i) restricting the transfer of, (ii) affecting the voting rights

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of, (iii) requiring the repurchase, redemption or disposition of, or containing any right of first refusal with respect to, (iv) requiring the registration for sale of, or (v) granting any preemptive or antidilutive right with respect to, any Units or other Equity Participations of the Company or the Subsidiaries or otherwise granting any Person the right to make an investment in, or loan to, the Company or any Subsidiary. Except as disclosed in Section 4.03(d) of the Company Disclosure Letter, there are no outstanding obligations under any Contract of the Company or any Subsidiary to provide funds to, or make any investment (in the form of a loan, capital contribution or otherwise) in, any Subsidiary or any other Person, other than guarantees by the Company of any Indebtedness or other obligations of any wholly–owned Subsidiary.

          SECTION 4.04. Corporate Books and Records. To the Company’s Knowledge, all minute books and other similar records prepared by the Company and the Subsidiaries contain accurate records of, in all material respects, and accurately reflect, in all material respects, the actions described therein. Complete and accurate copies of all such minute books and other similar records have been available to the Buyer by the Company in the Diligence Materials.

          SECTION 4.05. No Conflict. Assuming that all consents, approvals, authorizations and other actions described in Section 4.06 have been obtained and all filings and notifications listed in Section 4.06 of the Company Disclosure Letter have been made, the execution, delivery and performance of this Agreement and the Ancillary Agreements by the Sellers and the Company does not and will not (a) violate, conflict with or result in the breach of any provision of the Articles of Organization, the Existing Operating Agreement or the articles of organization or operating agreement (or certificate of incorporation, bylaws, or similar organizational documents) of the Company or any Subsidiary, (b) conflict with or violate any Law applicable to the Company, any Subsidiary or any of their respective Assets (other than such conflicts, violations or breaches as would occur solely as a result of the identity or the legal or regulatory status of Buyer or any of its Affiliates), or (c) except as set forth in Section 4.05(c) of the Company Disclosure Letter, conflict with, result in any breach of, result in any loss of any benefit under or contribute to a change of control, a default (or event which with the giving of notice or lapse of time, or both, would become a default) under, require any consent under, or give to others any rights of termination, amendment, acceleration, suspension, revocation or cancellation of, or result in the creation of any Encumbrance on any of the Units or any of the Assets pursuant to, any Contract, permit, or other instrument or arrangement to which the Company or any Subsidiary is a party or by which any of the Units or any of such Assets is bound or affected.

          SECTION 4.06. Governmental Consents and Approvals. The execution, delivery and performance of this Agreement and each Ancillary Agreement by the Company does not and will not require any consent, approval, authorization or other order of, action by, permit of, filing with or notification to, any Governmental Authority on the part of the Company or any Subsidiary that is, in each case, material, except (a) as described in Section 4.06 of the Company Disclosure Letter, or (b) those as would be required solely as a result of the identity or the legal or regulatory status of the Buyer or any of its Affiliates. To Company’s Knowledge, there is no reason why all the consents, approvals and authorizations necessary for the consummation of the transactions contemplated by this Agreement that is, in each case, material, will not be received.

          SECTION 4.07. Financial Information; Books and Records.

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          (a) True and complete copies of (i) the audited consolidated balance sheets of the Company for each of the three fiscal years ended as of December 31, 2003, 2004 and 2005, and the related audited consolidated statements of operations, cash flows and statements of members’ deficit, together with all related notes and schedules thereto, accompanied by the reports thereon of the Sellers’ Accountants (collectively referred to herein as the “Financial Statements”) and (ii) the unaudited consolidated balance sheet of the Company as of April 30, 2006, and the related consolidated statement of operations and cash flows of the Company for the three month period then ended, together with all related notes and schedules thereto (collectively referred to herein as the “Interim Financial Statements”) have been delivered by the Company to the Buyer. The Financial Statements and the Interim Financial Statements (i) were prepared in accordance with the books of account and other financial records of the Company and the Subsidiaries, (ii) present fairly in all material respects the consolidated financial condition, results of operations, cash flows, changes in members’ deficit and net assets, as the case may be, of the Company and the Subsidiaries as of the dates thereof or for the periods covered thereby, subject in the case of the Interim Financial Statements, to normal and recurring year-end adjustments (the effect of which will not, individually or in the aggregate, be materially adverse to the Company and its Subsidiaries taken as a whole), and (iii) have been prepared in accordance with GAAP applied on a basis consistent with the past practices of the Company and the Subsidiaries, except as disclosed in the notes thereto and, with respect to the Interim Financial Statements, except for any absence of notes thereto.

          (b) The books of account and other financial records of the Company and the Subsidiaries: (i) reflect in all material respects all items of income and expense and all Assets and Liabilities required to be reflected therein in accordance with GAAP applied on a basis consistent with the past practices of the Company and the Subsidiaries, respectively, and (ii) are in all material respects complete and correct, and do not contain or reflect any material inaccuracies or discrepancies.

          (c) Section 4.07(c) of the Company Disclosure Letter sets forth a complete list of all Company Debt, including the amount owed to each Company Lender as of the date of this Agreement. Except as disclosed in Section 4.07(c) of the Company Disclosure Letter, there is no other outstanding Company Debt.

          SECTION 4.08. Absence of Undisclosed Liabilities. Except as disclosed in Section 4.08 of the Company Disclosure Letter, there are no Liabilities of the Company or any Subsidiary, other than Liabilities (i) reflected or reserved against in the Interim Financial Statements, (ii) Liabilities that are not required by GAAP to be reflected or reserved against in the Interim Financial Statements, or (iii) Liabilities incurred since the date of the Interim Financial Statements in the ordinary course of business consistent with past practice that are not material (individually or in the aggregate) to the Business.

          SECTION 4.09. Receivables. Section 4.09 of the Company Disclosure Letter accurately presents in all material respects an aged list of the Receivables as of the date of the Interim Financial Statements showing separately those Receivables that as of such date had been outstanding for (a) 29 days or less, (b) 30 to 59 days, (c) 60 to 89 days, (d) 90 to 119 days and (e) more than 119 days. Except to the extent, if any, reserved for in the Interim Financial Statements, all Receivables reflected in the Interim Financial Statements arose from, and the

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Receivables existing as of the Closing have arisen from, the sale of Inventory or services to Persons not affiliated with the Company or any Subsidiary and in the ordinary course of business consistent with past practice and, to the Company’s Knowledge, except as reserved against in the Interim Financial Statements, constitute or will constitute, as the case may be, only valid, undisputed claims of the Company or a Subsidiary not subject to valid claims of setoff or other defenses or counterclaims other than normal cash discounts, chargebacks and other adjustments accrued in the ordinary course of business consistent with past practice. To the Company’s Knowledge, all Receivables reflected in the Interim Financial Statements or arising from the date thereof until the Closing (subject to the reserve for bad debts, if any, reflected in the Interim Financial Statements) are or will be good and have been collected or are or will be collectible, without resort to litigation or extraordinary collection activity, within 90 days after the Closing.

          SECTION 4.10. Inventories. Subject to amounts reserved therefor in the Interim Financial Statements, the values at which all Inventories are carried in the Interim Financial Statements reflect in all material respects the historical inventory valuation policy of the Company and the Subsidiaries of stating such Inventories at the lower of cost (determined on the first-in, first-out method) or market value and all Inventories are valued such that the Company and the Subsidiaries are expected to earn their customary gross margins thereon. Except as set forth in Section 4.10 of the Company Disclosure Letter, the Company or a Subsidiary, as the case may be, has good and marketable title to the Inventories free and clear of all Encumbrances. The Inventories do not consist of, in any material amount, items that are obsolete or damaged. The Inventories do not consist of any items held on consignment. Neither the Company nor any Subsidiary is under any obligation or liability with respect to accepting returns of items of Inventory or merchandise in the possession of their customers other than in the ordinary course of business consistent with past practice. No clearance or extraordinary sale of the Inventories has been conducted since the date of the Interim Financial Statements. Since the date of the Interim Financial Statements, neither the Company nor any Subsidiary has acquired or committed to acquire or manufacture Inventory for sale which is not of a quality and quantity usable in the ordinary course of business within a reasonable period of time and consistent with past practice, nor has the Company or any Subsidiary changed the price of any Inventory except for (a) price reductions to reflect any reduction in the cost thereof to the Company or such Subsidiary, (b) reductions and increases responsive to normal competitive conditions and consistent with the Company’s or such Subsidiary’s past sales practices, (c) increases to reflect any increase in the cost thereof to the Company or such Subsidiary and (d) increases and reductions made with the written consent of the Buyer. Section 4.10 of the Company Disclosure Letter contains a complete list of the addresses of all warehouses and other facilities in which the Inventories are located. In all material respects, the Inventories are in good and merchantable condition, are suitable and usable for the purposes for which they are intended and are in a condition such that they can be sold in the ordinary course of the Business consistent with past practice. Section 4.10 of the Company Disclosure Letter sets forth a complete schedule of all wholesaler reports received by the Company since January 1, 2005. Complete and accurate copies of all such wholesaler reports have been provided by the Sellers to the Buyer in the Diligence Materials.

          SECTION 4.11. Conduct in the Ordinary Course; Absence of Certain Changes, Events and Conditions. Since the close of business on May 18, 2006 no shipments of any Product have been made by the Company to any customers or distributors. Except as set forth in

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Section 4.11 of the Company Disclosure Letter, since the date of the Interim Financial Statements, the Business has been conducted in all material respects in the ordinary course and consistent with past practice. As amplification and not limitation of the foregoing, except as set forth in Section 4.11 of the Company Disclosure Letter, since the date of the Interim Financial Statements, neither the Company nor any Subsidiary has:

          (a) permitted or allowed any of the Assets to be subjected to any Encumbrance, other than Permitted Encumbrances and Encumbrances that will be released at or prior to the Closing;

          (b) written down or written up (or failed to write down or write up in accordance with GAAP consistent with past practice) the value of any Inventories or Receivables or revalued any of the Assets other than in the ordinary course of business consistent with past practice and in accordance with GAAP;

          (c) made any change in any method of accounting or accounting practice or policy used by the Company or any Subsidiary, other than such changes as are required by GAAP and concurred with by Sellers’ Accountants;

          (d) contacted customers and distributors to actively solicit returns of the Product, except as may be required by Law;

          (e) amended, terminated, cancelled or compromised any material claims of the Company or any Subsidiary or waived any other rights of substantial value to the Company or any Subsidiary;

          (f) settled any pending or threatened litigation involving the Company or any Subsidiary (whether brought by a private party or a Governmental Authority);

          (g) sold, transferred, leased, subleased, licensed or otherwise disposed of any Assets, real, personal or mixed (including leasehold interests and intangible property), other than the sale of Inventories in the ordinary course of business consistent with past practice;

          (h) issued or sold any Equity Participations or other rights of any kind to acquire Units or other Equity Participations in the Company or any Subsidiary;

          (i) repurchased, redeemed or otherwise acquired any of the Units or Equity Participations of the Company or any Subsidiary or declared, made or paid any dividends or distributions (whether in cash, securities or other property) to the holders of Units or Equity Participations of the Company or any Subsidiary or otherwise, other than dividends, distributions and redemptions declared, made or paid by any Subsidiary solely to the Company or another Subsidiary;

          (j) split, combined or reclassified any Equity Participation of the Company or any Subsidiary;

          (k) merged with, entered into a consolidation with or acquired an interest in any Person or acquired a substantial portion of the assets or business of any Person or any

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division or line of business thereof, or otherwise acquired any material assets other than in the ordinary course of business consistent with past practice;

          (l) made any capital expenditure or commitment for any capital expenditure in excess of $5,000 individually or $20,000 in the aggregate;

          (m) made or changed any material election in respect of Taxes, adopted or changed any accounting method or period in respect of Taxes, entered into any tax-sharing, allocation, compensation or like agreement, settled any claim or assessment in respect of Taxes, requested any tax ruling or consented to any extension or waiver of the limitation period applicable to any claim or assessment in respect of Taxes;

          (n) failed to pay any creditor any amount in excess of $25,000 owed to such creditor more than 30 days past due;

          (o) (i) paid, announced, promised or granted, whether orally or in writing, any increase in the wages, salaries, compensation, bonuses, incentives, pensions, severance or termination payments, fringe benefits or other benefits payable by the Company or any Subsidiary including any increase or change pursuant to any Company Plan to (A) any of its executive officers (except as required by Law), or (B) to any of its other employees or consultants (except as required by Law or, with respect to such non-executive employees only, in the ordinary course of business consistent with the past practices of the Company or such Subsidiary), (ii) amended any Plan or Contract to accelerate the timing of payment of any severance, termination, incentive or other compensation or benefits, or (iii) entered into or amended any currently effective employment, severance, termination or indemnification Contract or any Contract the benefits of which are contingent or the terms of which would be materially altered upon the occurrence of the transactions contemplated by this Agreement (either alone or upon the occurrence of additional or subsequent events);

          (p) entered into any Contract with any of its directors, officers, managers, employees or holders of Equity Participations (or with any relative, beneficiary, spouse or Affiliate of such Persons) outside of the ordinary course of business consistent with past practice;

          (q) suffered any casualty loss or damage with respect to any of the Assets which in the aggregate have a replacement cost of more than $35,000, whether or not such loss or damage shall have been covered by insurance;

          (r) enter into any Contract containing any restriction on the ability of the Company or any Subsidiary to assign its rights, interests or obligations thereunder, unless such restriction expressly excludes any assignment to the Buyer or any Affiliate of the Buyer in connection with or following the consummation of the transactions contemplated by this Agreement;

          (s) amended or restated the articles of organization or operating agreement (or other organizational documents) of the Company or any Subsidiary, except as required pursuant to the terms of this Agreement;

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          (t) entered into any material strategic alliance, affiliate agreement or joint marketing arrangement or agreement;

          (u) suffered any Material Adverse Effect; or

          (v) agreed, whether in writing or otherwise, to take any of the actions specified in this Section 4.11 or granted any options to purchase, rights of first refusal, rights of first offer or any other similar rights or commitments with respect to any of the actions specified in this Section 4.11, except as expressly contemplated by this Agreement and the Ancillary Agreements.

          SECTION 4.12. Litigation. Except as set forth in Section 4.12 of the Company Disclosure Letter (which, with respect to each Action set forth therein, sets forth the parties, nature of the proceeding, date and method commenced, amount of charges or other relief sought and, if applicable, paid or granted) and with respect to environmental matters, which are governed by Section 4.13, there are no Actions by or against the Company or any Subsidiary (or by or against any manager or officer of the Company or any Subsidiary in their capacity as such relating to the Business, the Company or any Subsidiary) or affecting any of the Assets or the Business pending before any Governmental Authority (or, to the Company’s Knowledge, threatened to be brought by or before any Governmental Authority). None of the matters set forth in Section 4.12 of the Company Disclosure Letter has or has had a Material Adverse Effect or could reasonably be expected to affect the legality, validity or enforceability of this Agreement, any Ancillary Agreement or the consummation of the transactions contemplated hereby or thereby. Except as set forth in Section 4.12 of the Company Disclosure Letter, neither the Company nor the Subsidiaries or any of their respective Assets is subject to any continuing order, writ, injunction, judgment, arbitration ruling, award, decree or other finding, settlement agreement or other similar agreement with, or continuing investigation by any Governmental Authority (nor, to the Company’s Knowledge, are there any such order, writ, injunction, judgment, arbitration ruling, award, decree or other finding, or investigation threatened to be imposed by any Governmental Authority) which has or has had a Material Adverse Effect or could reasonably be expected to affect the legality, validity or enforceability of this Agreement, any Ancillary Agreement or the consummation of the transactions contemplated hereby or thereby.

          SECTION 4.13. Environmental and Other Permits and Licenses; Related Matters.

          (a) Except as set forth in Section 4.13 of the Company Disclosure Letter or except as would not reasonably be expected to have a Material adverse Effect:

     (i) The Company and each Subsidiary is in compliance with, and for the past three years has been in material compliance with, all applicable Environmental Laws and all Environmental Permits. All past noncompliance with Environmental Laws or Environmental Permits has been resolved without any material pending, ongoing or future obligation, cost or liability.

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     (ii) To the Company’s Knowledge, there are no underground or aboveground storage tanks or any surface impoundments, septic tanks, pits, sumps or lagoons in which Hazardous Materials are being or have been treated, stored or disposed of on any of the Leased Real Property or, during the period of the Company’s or any Subsidiary’s lease, use or occupancy thereof, on any property formerly leased, used or occupied by the Company or any Subsidiary, in each case above where such storage tanks, surface impoundments, septic tanks, pits, sumps or lagoons are or were subject to regulation under Environmental Laws.

     (iii) There has been no Release of any Hazardous Material by the Company or any Subsidiary on any of the Leased Real Property or, during the period of the Company’s or any Subsidiary’s lease, use or occupancy thereof, on any property formerly owned, leased, used or occupied by the Company or any Subsidiary, in each case above, where such Release would reasonably be expected to give rise to an obligation of the Company or any Subsidiary to conduct Remedial Action.

     (iv) Neither the Company nor any Subsidiary is conducting, and none of them has undertaken or completed, in the past five years, any Remedial Action relating to any Release or threatened Release of any Hazardous Material at the Leased Real Property or at any other site, location or operation, either voluntarily or pursuant to the order of any Governmental Authority or the requirements of any Environmental Law or Environmental Permit.

     (v) To the Company’s Knowledge, there is no asbestos or asbestos-containing material on any of the Leased Real Property.

     (vi) To the Company’s Knowledge, none of the Leased Real Property is listed or proposed for listing on the National Priorities List or CERCLIS or on any analogous federal, state or local list.

     (vii) There are no Environmental Claims pending or, to the Company’s Knowledge, threatened against the Company, any Subsidiary or the Leased Real Property, and to the Company’s Knowledge there are no circumstances that would reasonably be expected to form the basis of any such Environmental Claim, including with respect to any off-site disposal location currently or formerly used by the Company or any Subsidiary or any of its predecessors or with respect to previously operated facilities.

          (b) In the Diligence Materials, the Seller has provided the Buyer with copies of (i) any environmental assessment or audit reports or other similar studies or analyses relating to the Business, the Leased Real Property, the Company or any Subsidiary, and (ii) its current insurance policies that specifically provide coverage to the Company or any Subsidiary or the Business for environmental matters.

          (c) Neither the execution of this Agreement or the Ancillary Agreements nor the consummation of the transactions contemplated hereby or thereby will require any material

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Remedial Action or notice to or consent of Governmental Authorities or third parties pursuant to any applicable Environmental Law or Environmental Permit.

          (d) This Section 4.13 contains the sole and exclusive representations and warranties of the Sellers with respect to environmental, health and safety matters, including any matters relating to Environmental Laws, Environmental Permits or Hazardous Materials.

          SECTION 4.14. Material Contracts.

          (a) Section 4.14(a) of the Company Disclosure Letter lists each of the following Contracts of the Company and the Subsidiaries (such Contracts, together with all Contracts concerning the use, occupancy, management or operation of any Leased Real Property (including all Contracts and leases listed or otherwise set forth in Section 4.16(d) of the Company Disclosure Letter), all Company IP Agreements set forth in Section 4.15(a) of the Company Disclosure Letter, and all Company Plans set forth in Section 4.19(a) of the Company Disclosure Letter, being “Material Contracts”) and indicates thereon those Material Contracts for which consent or waiver of the right to terminate is required to be obtained by reason of the consummation of the transactions contemplated by this Agreement and the Ancillary Agreements (collectively, the “Consent Contracts”):

     (i) each Contract, invoice, purchase order and other arrangement, under the terms of which the Company or any Subsidiary: (A) was obligated to pay consideration of more than $25,000 in the aggregate, during the calendar year ended December 31, 2005, and which continue to have material executing provisions, (B) is likely to pay, otherwise give or receive consideration of more than $25,000 in the aggregate during the calendar year ended December 31, 2006, (C) is likely to pay, otherwise give consideration of more than $100,000 in the aggregate over the remaining term of such Contract or (D) cannot be cancelled by the Company or such Subsidiary without penalty or further payment or without more than 90 days’ notice;

     (ii) each Contract pursuant to which the Company, any of the Subsidiaries or any other party thereto has continuing obligations, other than a continuing obligation to maintain confidentiality, relating to the research, development, clinical trial, marketing, supply, license, manufacture, co–promotion or collaboration of any product or product candidate currently subject to research and development or being produced or sold by the Company or any of the Subsidiaries;

     (iii) each Contract pursuant to which the Company, any of the Subsidiaries or any other party thereto has continuing obligations involving the payment of royalties or other amounts calculated based upon the revenues or income of the Company or any of the Subsidiaries or income or revenues related to any product of the Company or any of the Subsidiaries;

     (iv) all broker, distributor, dealer, manufacturer’s representative, franchise, agency, sales promotion, market research, marketing, consulting and advertising Contracts pursuant to which the Company, any of the Subsidiaries or any other party thereto has continuing obligations to which the Company or any Subsidiary is a party;

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     (v) all management Contracts and Contracts with independent contractors or consultants (or similar arrangements) to which the Company or any Subsidiary is a party and which are not cancelable without penalty or further payment and without more than 90 days’ notice;

     (vi) all Contracts relating to Indebtedness of the Company or any Subsidiary;

     (vii) all Contracts with any Governmental Authority to which the Company or any Subsidiary is a party;

     (viii) all Contracts that limit or purport to limit the ability of the Company or any Subsidiary to compete in any line of business or with any Person or in any geographic area or during any period of time;

     (ix) all Contracts between or among the Company or any Subsidiary, on one hand, and the Seller or any Affiliate of the Seller (other than the Company or any Subsidiary), on the other hand, except for the Existing Operating Agreement;

     (x) all employment, consulting, severance, termination, retirement, profit sharing, bonus, incentive or deferred compensation, retention or change in control Contracts providing for benefits to any current or former employee (to the extent there are any continuing obligations thereunder), consultant or manager of the Company or any Subsidiary; and

     (xi) all other Contracts, whether or not made in the ordinary course of business, which are material to the Company, any Subsidiary or the conduct of the Business, or the absence of which would have a Material Adverse Effect.

For purposes of this Section 4.14 and Section 4.16, the term “lease” shall include any and all leases, subleases, sale/leaseback agreements or similar arrangements.

          (b) Each Material Contract: (i) is valid and binding on the Company or the Subsidiary party thereto and, to the Company’s Knowledge on the other parties thereto and is in full force and effect, except as such effectiveness may be limited by bankruptcy, insolvency, reorganization, moratorium and similar Laws relating to or affecting creditors generally and by the availability of equitable remedies (whether in proceedings at law or in equity), and represents, together with any other Material Contract listed in Section 4.16(a) of the Company Disclosure Letter that relate to the same subject matter, the material terms of the agreement between the parties with respect to the subject matter of such Material Contract, (ii) unless identified as a Consent Contract, is freely and fully assignable to the Buyer without penalty or right of termination by the other party thereto upon assignment to the Buyer and (iii) upon consummation of the transactions contemplated by this Agreement and the Ancillary Agreements, except to the extent that any consents set forth in Section 4.08 of the Company Disclosure Letter or consents required by such Material Contract to the extent identified as a Consent Contract are not obtained, shall continue in full force and effect without penalty or other adverse consequence. Neither the Company nor any Subsidiary is in material breach of, or default under, any Material Contract.

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          (c) To the Company’s Knowledge, no other party to any Material Contract is in material breach thereof or default thereunder and no event has occurred that, with notice or lapse of time, would constitute such a material breach or default, and none of the Sellers, the Company or any Subsidiary has received any notice of termination or cancellation under any Material Contract.

          (d) To Company’s Knowledge, neither the Company nor any Subsidiary has received any notice of termination, cancellation, breach or default under any Material Contract.

          (e) The Company has made available to the Buyer in the Diligence Materials true and complete copies of all Material Contracts.

          (f) Except as set forth in Section 4.14(f) of the Company Disclosure Letter, there is no Contract granting any Person any preferential right to purchase, any of the Assets.

          SECTION 4.15. Intellectual Property.

          (a) Section 4.15(a) of the Company Disclosure Letter sets forth a true and complete list of (i) all Patents and Patent applications, registered Trademarks and Trademark applications, registered Copyrights and Copyright applications, and domain names included in the Company Intellectual Property, (ii) all Company IP Agreements, other than commercially available off-the-shelf Software licensed pursuant to shrink-wrap or click-wrap licenses that is not material to the Business and (iii) other Company Intellectual Property material to the Business, including pharmaceutical products currently under development.

          (b) To the Company’s Knowledge, the operation of the Business as currently conducted, including pharmaceutical products currently under development, and the use of the Company Intellectual Property and Licensed Intellectual Property in connection therewith, does not conflict with, infringe, misappropriate or otherwise violate the Intellectual Property or other proprietary rights of any Person, and no Actions or Claims are pending or, to the Company’s Knowledge, threatened against the Sellers, the Company or any Subsidiary alleging any of the foregoing.

          (c) The Company or a Subsidiary is the exclusive owner of the entire and unencumbered right, title and interest in and to the Company Intellectual Property and Company IP Agreements, and the Company or a Subsidiary has a valid right to use the Company Intellectual Property and Licensed Intellectual Property in the ordinary course of the Business as currently conducted or as contemplated to be conducted.

          (d) Except as disclosed in Section 4.15(d) of the Company Disclosure Letter, no Company Intellectual Property or, to the Company’s Knowledge, any Licensed Intellectual Property is subject to any outstanding final judgment, decree, order, injunction or ruling restricting the use of such Intellectual Property or that would impair the validity or enforceability of such Intellectual Property.

          (e) The Company Intellectual Property and the Licensed Intellectual Property include all of the Intellectual Property necessary for the conduct of the Business as currently conducted and for the production, distribution and marketing of the Product and the

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pharmaceutical products currently under development. The Company Intellectual Property and, to the Company’s Knowledge, the Licensed Intellectual Property are subsisting, valid and enforceable, and have not been adjudged invalid or unenforceable in whole or part. Each item of Company Intellectual Property and Licensed Intellectual Property required to be listed in Section 4.15(a) of the Company Disclosure Letter and shown as registered, filed, issued or applied for, has been duly registered in, filed in or issued by the official government registrars and/or issuers (or officially recognized issuers) of Patents, Trademarks, Copyrights or internet domain names, in the various jurisdictions indicated in Schedule 4.15(a) of the Company Disclosure Letter and in all material respects each such registration, application, filing and/or issuance (i) has not been abandoned, canceled or otherwise materially compromised; (ii) has been maintained effective by all material requisite filings, renewals and payments; and (iii) remains in full force and effect. All material payments due with respect to such Company Intellectual Property and Licensed Intellectual Property, including maintenance fees and prosecution fees, have been made. The Company has taken all actions necessary to maintain and protect each item of Company Intellectual Property and Licensed Intellectual Property that Company owns or uses consistent with practices that are customary in the Company’s industry.

          (f) No Actions or Claims have been asserted or are pending or, to the Company’s Knowledge, threatened against the Company or any Subsidiary (i) based upon, affecting, challenging, or seeking to deny or restrict the use by the Company or any Subsidiary of any of the Company Intellectual Property or Licensed Intellectual Property, (ii) alleging that any services provided by, processes used by, or products manufactured or sold by the Company or any Subsidiary infringe or misappropriate any Intellectual Property right of any third party or (iii) alleging that the Licensed Intellectual Property is being licensed or sublicensed in conflict with the terms of any license or other agreement.

          (g) To the Company’s Knowledge, no Person is engaging in any activity that infringes the Company Intellectual Property or Licensed Intellectual Property. Except as set forth in Section 4.15(g) of the Company Disclosure Letter, neither the Company nor any Subsidiary has granted any license or other right to any third party with respect to the Company Intellectual Property or Licensed Intellectual Property. Except as set forth in Section 4.15(g) of the Company Disclosure Letter, the consummation of the transactions contemplated by this Agreement and the Ancillary Agreements will not result in the termination of any of the Company Intellectual Property or the Company’s right to the Licensed Intellectual Property.

          (h) To the Company’s Knowledge, (i) there has been no misappropriation of any material trade secrets or other material confidential Intellectual Property used in connection with the Business by any Person; (ii) no employee, independent contractor or agent of the Company or any Subsidiary has misappropriated any trade secrets of any other Person in the course of performance as an employee, independent contractor or agent of the Business; and (iii) no employee, independent contractor or agent of the Company or any Subsidiary is in default or breach of any term of any employment agreement, nondisclosure agreement, assignment of invention agreement or similar Contract relating in any way to the protection, ownership, development, use or transfer of Intellectual Property.

          (i) The Company’s or any Subsidiary’s operation of any web sites or databases used in connection with the Business, and content thereof and data processed,

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collected, stored or disseminated in connection therewith, do not violate any applicable U.S. Law or, to the Company’s Knowledge, the applicable Laws of any other jurisdiction, including European Directive 95/46/EC, and any Person’s right of privacy or publicity. Except as would not, individually or in the aggregate, have a Material Adverse Effect, the Company or any Subsidiary (i) has obtained all necessary permits, approvals, consents, authorizations or licenses to lawfully operate its web sites and to use its data and (ii) is operating its web sites and using its data in accordance with the scope of such permits, approvals, consents, authorizations or licenses. The Company and each Subsidiary has posted a privacy policy governing the Company’s or such Subsidiary’s use of data, and disclaimers of liability on its web sites, and the Company and each Subsidiary has complied with such privacy policy in all material respects. The Company and each Subsidiary has taken all steps in accordance with normal industry practice to secure its web sites and data, and any portion thereof, from unauthorized access or use by any Person.

          (j) The Company’s or any Subsidiary’s initiation of unsolicited commercial email used in connection with the Business does not violate any applicable U.S. Law, including the Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003 and all rules and regulations promulgated thereunder, or, to the Company’s Knowledge, the applicable Laws of any other jurisdiction.

          (k) Except as set forth in Section 4.15(k) of the Company Disclosure Letter, no current licensor, holder of Equity Participations, employee, director or officer of the Company, a Subsidiary or any of their respective Affiliates will have, directly or indirectly, any interest in any of the Company Intellectual Property, nor will any such person have any rights to past or future royalty payments or license fees from the Company, deriving from licenses, technology agreements or other Contracts, between any such person and the Company or Subsidiary or any of their respective Affiliates.

          (l) All directors, managers, officers, management employees, consultants and technical and professional employees of the Company and each Subsidiary are under written obligation to the Company or such Subsidiary to maintain in confidence all confidential or proprietary information acquired by them in the course of their employment. Each present or past employee, officer or consultant of the Company or a Subsidiary who developed any part of any of the Company Intellectual Property is a party to a written agreement that, to the extent permitted by law, conveys or obligates such person to convey to Company or a Subsidiary any and all right, title and interest in and to all such Company Intellectual Property developed by such person in connection with such person’s employment with or engagement on behalf of the Company.

          SECTION 4.16. Real Property.

          (a) Neither the Company nor any of the Subsidiaries owns or has owned any real property.

          (b) Section 4.16(b) of the Company Disclosure Letter lists: (i) the street address of each parcel of Leased Real Property, (ii) the identity of the lessor, lessee and current occupant (if different from lessee) of each such parcel of Leased Real Property, (iii) the terms

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(referencing applicable renewal periods) and rental payment amounts (including all escalations) pertaining to each such parcel of Leased Real Property and (iv) the current use of each such parcel of Leased Real Property.

          (c) Except as described in Section 4.16(c) or 4.13(a) of the Company Disclosure Letter, to the Company’s Knowledge, there is no material violation of any Law (including any building, planning or zoning law) relating to any of the Leased Real Property. Either the Company or a Subsidiary, as the case may be, is in peaceful and undisturbed possession of each parcel of Leased Real Property, and there are no contractual or legal restrictions that preclude or restrict the ability to use the Leased Real Property for the purposes for which it is currently being used. To the Company’s Knowledge, all existing water, sewer, steam, gas, electricity, telephone, cable, fiber optic cable, Internet access and other utilities required for the use, occupancy, operation and maintenance of the Leased Real Property are adequate for the conduct of the Business as currently is conducted. To the Company’s Knowledge, there are no material latent defects or material adverse physical conditions affecting the Leased Real Property or any of the facilities, buildings, structures, erections, improvements, fixtures, fixed assets and personalty of a permanent nature annexed, affixed or attached to, located on or forming part of the Leased Real Property. Neither the Company nor any Subsidiary has leased any parcel or any portion of any parcel of Leased Real Property to any other Person and no other Person has any rights to the use, occupancy or enjoyment thereof pursuant to any lease, sublease, license, occupancy or other Contract, nor has the Company or any Subsidiary assigned its interest under any lease listed in Section 4.16(b) of the Company Disclosure Letter to any third party.

          (d) Section 4.16(d) of the Company Disclosure Letter sets forth a true and complete list of all leases and subleases relating to the Leased Real Property and any and all ancillary documents (the “Ancillary Lease Documents”) pertaining thereto (including all amendments, modifications, supplements, exhibits, schedules, addenda and restatements thereto and thereof and all consents, including consents for alterations, assignments and sublets, documents recording variations, memoranda of lease, options, rights of expansion, extension, first refusal and first offer and evidence of commencement dates and expiration dates). During the past two years, with respect to each of the leases listed in Section 4.16(b) of the Company Disclosure Letter, neither the Company nor any Subsidiary has exercised or given any notice of exercise, nor has any lessor or landlord exercised or received any notice of exercise by a lessor or landlord of, any option, right of first offer or right of first refusal contained in any such lease or sublease, including any such option or right pertaining to purchase, expansion, renewal, extension or relocation (collectively, “Options”).

          (e) To the Company’s Knowledge, there are no condemnation proceedings or eminent domain proceedings of any kind pending or threatened against the Leased Real Property.

          (f) All the Leased Real Property is occupied under a valid and current certificate of occupancy or similar permit, the transactions contemplated by this Agreement and the Ancillary Agreements will not require the issuance of any new or amended certificate of occupancy and, to the Company’s Knowledge, there are no facts that would prevent the Leased Real Property from being occupied by the Company or any Subsidiary, as the case may be, after

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the Closing in the same manner as occupied by the Company or such Subsidiary immediately prior to the Closing.

          (g) To the Company’s Knowledge, no improvements on the Leased Real Property and none of the current uses and conditions thereof violate any Encumbrance, applicable deed restrictions or other applicable covenants, restrictions, agreements, existing site plan approvals, zoning or subdivision regulations or urban redevelopment plans as modified by any duly issued variances, and no permits, licenses or certificates pertaining to the ownership or operation of all improvements on the Leased Real Property, other than those which are transferable with the Leased Real Property, are required by any Governmental Authority having jurisdiction over the Leased Real Property.

          (h) The rental set forth in each lease or sublease of the Leased Real Property is the actual rental being paid, and there are no separate agreements or understandings with respect to the same.

          (i) The Company or a Subsidiary, as the case may be, has the full right to exercise any Options contained in the leases and subleases pertaining to the Leased Real Property on the terms and conditions contained therein and upon due exercise would be entitled to enjoy the full benefit of such Options with respect thereto.

          SECTION 4.17. Assets.

          (a) The Company or a Subsidiary, as the case may be, owns, leases or has the legal right to use all the Assets that are material to the operation of the Business, including the Company Intellectual Property, the Licensed Intellectual Property, the Company IP Agreements and the Leased Real Property, used or intended to be used in the conduct of the Business or otherwise owned, leased or used by the Company or any Subsidiary, and, with respect to contract rights, is a party to and enjoys the right to the benefits of all Contracts, agreements and other arrangements used or intended to be used by the Company or any Subsidiary or in or relating to the conduct of the Business. The Company or a Subsidiary, as the case may be, has good and marketable title to, or, in the case of leased or subleased Assets, valid and subsisting leasehold interests in, all the Assets, free and clear of all Encumbrances, except (i) as set forth in Section 4.15(f), 4.16(c) or 4.18(a) of the Company Disclosure Letter and (ii) Permitted Encumbrances.

          (b) All the Assets are in good operating condition and repair in all material respects and are suitable for the purposes for which they are used and intended in all material respects.

          SECTION 4.18. Customers. Listed in Section 4.18 of the Company Disclosure Letter are the names and addresses of the ten most significant customers (by revenue) of the Business for the twelve-month period ended April 30, 2006. None of the Sellers, the Company nor any Subsidiary has received any notice or has any reason to believe that any significant customer of the Business has ceased, or will cease, to use the products, equipment, goods or services of the Company or any Subsidiary, or has substantially reduced, or will substantially reduce, the use of such products, equipment, goods or services at any time.

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          SECTION 4.19. Suppliers. Listed in Section 4.19 of the Company Disclosure Letter are the names and addresses of each of the three most significant suppliers of raw materials, supplies, merchandise and other goods for the Business for the twelve-month period ended April 30, 2006 and the amount for which each such supplier invoiced the Company and the Subsidiaries during such period. None of the Seller, the Company nor any Subsidiary has received any notice or has any reason to believe that any such supplier will not sell raw materials, supplies, merchandise and other goods to the Company or any Subsidiary at any time after the Closing on terms and conditions substantially similar to those used in its current sales to the Business, subject only to general and customary price increases. Except as set forth in Section 4.14 of the Company Disclosure Letter, none of the raw materials, supplies, merchandise or other goods supplied to the Business are such that they are not generally available in the market from more than one source.

          SECTION 4.20. Employee Benefit Matters.

          (a) Section 4.20(a) of the Company Disclosure Letter sets forth each employment, consulting, severance, termination, retirement, profit sharing, bonus, incentive or deferred compensation, retention or change in control plan, program or Contract, and each bonus, pension, stock option, restricted stock or other equity-based, profit sharing, savings, life, health, disability, accident, medical, insurance, vacation, other welfare fringe benefit or other employee compensation plan, program, policy or Contract (whether formal or informal) or commitment, including each “employee benefit plan” as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) (“Plans”) under which the Company or any of the Subsidiaries has any obligation, whether actual or contingent, direct or indirect, to provide compensation or benefits to any current or former employee, consultant or director of the Company or any of the Subsidiaries (collectively the “Company Plans”). True and complete copies of each Company Plan, including, but not limited to, any trust instruments and/or insurance contracts, if any, forming a part thereof, all amendments thereto and the most recent determination letters issued by the IRS, all approvals received from any foreign Governmental Authority, the most recent summary plan descriptions (including any material modifications), the two most recent annual reports on Form 5500 (including all exhibits and attachments thereto), the two most recent actuarial reports and the two most recent audited financial reports for any funded Company Plan have been supplied or made available to the Buyer, as applicable. Neither the Company nor any Subsidiary has any existing plan or legally binding commitment to create any additional Company Plan or modify or change any existing Company Plan that would increase the compensation or benefits provided to any current or former employee, consultant or director of the Company or any Subsidiary of the Company.

          (b) With respect to each Company Plan: (i) if intended to qualify under Section 401(a) of the Code or under any Law of any foreign jurisdiction, such Company Plan has received a favorable determination letter from the IRS or required approval of a Governmental Authority of a foreign jurisdiction that has not been revoked and, to the Company’s Knowledge, no event or circumstance exists that has or is likely to adversely affect such qualification or exemption; (ii) the Company Plan has been operated and administered in compliance in all material respects with its terms and all applicable Laws (including ERISA, the Code and any relevant foreign Laws); (iii) there are no pending or, to the Company’s Knowledge, threatened claims against, by or on behalf of any Company Plans or the assets, fiduciaries or administrators

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thereof (other than routine claims for benefits); (iv) no material breaches of fiduciary duty under which the Company or a fiduciary could reasonably be expected to incur a liability have occurred; (v) no material non-exempt prohibited transaction within the meaning of Section 406 of ERISA or Section 4975 of the Code has occurred; (vi) no lien has been imposed under the Code, ERISA or any foreign Law; and (vii) all contributions, premiums and expenses to or in respect of such Company Plan have been timely paid in full or, to the extent not yet due, have been adequately accrued on the Company’s Financial Statements and Interim Financial Statements.

          (c) No Company Plan is, and neither the Company nor any ERISA Affiliate thereof contributes to, has contributed within the last six years to or has any liability or obligation, whether actual or contingent, with respect to any Company Plan that is (A) a “multiemployer plan” (within the meaning of Section 3(37) of ERISA), (B) a “multiple employer plan” (within the meaning of Section 413(c) of the Code), (C) a single employer plan or other pension plan subject to Title IV or Section 302 of ERISA or Section 412 of the Code, or (D) any foreign plan that provides defined benefits.

          (d) Neither the Company nor any Subsidiary has any obligations to provide health, life insurance, or death benefits with respect to any current or former employees, consultants or directors of the Company or any Subsidiary beyond their termination of employment or service, whether under a Company Plan or otherwise, other than as required under Section 4980B of the Code, and each such Company Plan may be amended or terminated at any time without incurring material liability thereunder (other than for benefits and administrative claims incurred in the ordinary course). There are no outstanding participant loans under the Company’s 401(k) Plan.

          (e) Neither the execution and delivery of this Agreement, nor the consummation of the transactions contemplated hereby, either alone or in combination with another event (whether contingent or otherwise) will (i) entitle any current or former employee, consultant or director of the Company or any Subsidiary or any group of such employees, consultants or directors to any payment; (ii) increase the amount of compensation or benefits due to any such employee, consultant or director; (iii) accelerate the vesting, funding or time of payment of any compensation, equity award or other benefit; or (iv) result in any “parachute payment” under Section 280G of the Code (whether or not such payment is considered to be reasonable compensation for services rendered).

          (f) No Company Plan, and neither the Company nor any Subsidiary of the Company with respect to any Company Plan, has received notice that it is the subject of an audit or investigation by the IRS, the U.S. Department of Labor, the Pension Benefit Guaranty Corporation or any other federal or state governmental agency or any foreign Governmental Authority, nor is any such audit or investigation pending or, to the Company’s Knowledge, threatened.

          (g) Neither the Company nor any Subsidiary maintains any plan, program or arrangement or is a party to any Contract that provides any benefits or payments to any current or former employee, director or consultant in, based on or measured by the value of, any equity security of, or interest in, the Company or any Subsidiary.

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          (h) To the Company’s Knowledge, neither the Company nor any Subsidiary has made any payments or provided any benefits to any “service provider,” within the meaning of Section 409A of the Code, which were or are subject to additional income tax under Section 409A(a)(1)(B) of the Code or any other taxes or penalties imposed under Section 409A.

          (i) Neither the Company nor any Subsidiary has any material liability (including a material liability arising out of an indemnification, guarantee, hold harmless or similar agreement) relating to any insurance contract held under or purchased to fund a Company Plan, the issuer of which, to the Company’s Knowledge, is or was insolvent or in reorganization or the payments under which were suspended.

          (j) Section 4.20(j) of the Company Disclosure Letter sets forth any and all Indebtedness in excess of ten thousand U.S. dollars (US $10,000) owed by any current or former employee, consultant or director of the Company or any Subsidiary of the Company to the Company or any Subsidiary of the Company.

          SECTION 4.21. Labor Matters.

          (a) Neither the Company nor any Subsidiary is a party to any collective bargaining or similar agreement, and there are no labor unions or other organizations representing, purporting to represent or, to the Company’s Knowledge, attempting to represent, any employee of the Company or any of Subsidiary. There are no unfair labor practice complaints pending against the Company or any Subsidiary before the National Labor Relations Board or any other Governmental Authority nor, to the Company’s Knowledge, are any such complaints threatened. Neither the Company nor any Subsidiary has, with respect to any employees of the Company or any Subsidiary, experienced any strike, slowdown or work stoppage during the past three years, nor, to the Company’s Knowledge, are any such strikes, slowdowns, work stoppages or lockouts threatened.

          (b) Neither the Company nor any Subsidiary has violated any Law or any order, judgment or arbitration award of any court, arbitrator or any Government Authority regarding the terms and conditions of employment of its employees, former employees or prospective employees or other labor related matters, including any Laws, orders, judgments or awards relating to wrongful discharge, discrimination, personal rights, wages, hours, collective bargaining, fair labor standards or occupational health and safety, except as would not reasonably be expected to result in a material liability to the Company or any Subsidiary. The Company and its Subsidiaries have withheld and paid to the appropriate Governmental Authority all amounts required to be withheld from compensation paid to employees of the Company or any Subsidiary and are not liable for any arrears of Taxes or penalties or other sums for failure to withhold and pay applicable Taxes.

          (c) (i) The Company and each Subsidiary have paid in full to all their respective employees or adequately accrued for in accordance with GAAP all wages, salaries, commissions, bonuses, benefits and other compensation due to or on behalf of such employees; (ii) there is no claim with respect to payment of wages, salary or overtime pay that has been asserted or is now pending or threatened before any Governmental Authority with respect to any persons currently or formerly employed by the Company or any Subsidiary; and (iii) neither the

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Company nor any Subsidiary is a party to, or otherwise bound by, any consent decree with, or citation by, any Governmental Authority relating to employees or employment practices.

          (d) In the three years prior to the date hereof, neither the Company nor any of its Subsidiaries has effectuated (i) a “plant closing” (as defined in the Worker Adjustment and Retraining Notification Act (the “WARN Act”) or any similar state, local or foreign Law) affecting any site of employment or one or more facilities or operating units within any site of employment or facility of the Company or any of its Subsidiaries or (ii) a “mass layoff” (as defined in the WARN Act, or any similar state, local or foreign law) affecting any site of employment or facility of the Company or any of its Subsidiaries.

          (e) There are no material liabilities, whether contingent or absolute, of the Company or any Subsidiary relating to workers’ compensation benefits that are not fully insured against by a bona fide third-party insurance carrier.

          (f) With respect to each Company Plan and with respect to each state workers’ compensation arrangement that is funded wholly or partially through an insurance policy or public or private fund, there is not presently any deficiency in the payment of premiums required to have been paid to the date under such insurance policy or fund.

          SECTION 4.22. Certain Interests.

          (a) Except as set forth in Section 4.22(a) of the Company Disclosure Letter, no officer or director of the Company or any Subsidiary and no relative or spouse (or relative of such spouse) who resides with, or is a dependent of, any such officer or director:

     (i) owns, directly or indirectly, in whole or in part, or has any other interest in any tangible or intangible property that the Company or any Subsidiary uses or has used in the conduct of the Business or otherwise; or

     (ii) has outstanding any Indebtedness to the Company or any Subsidiary.

          (b) Except as set forth in Section 4.22(b) of the Company Disclosure Letter, Cutler does not have any direct or indirect financial interest in any competitor, supplier or customer of the Company or any Subsidiary or the Business; provided, however, that the ownership of securities representing no more than one percent of the outstanding voting power of any competitor, supplier or customer and that are also listed on any national securities exchange, shall not be deemed to be a “financial interest” so long as Cutler has no other connection or relationship with such competitor, supplier or customer;

          (c) Except as set forth in Section 4.22(c) of the Company Disclosure Letter, and except for the payment of employee compensation, employee benefits and business expense reimbursement in the ordinary course of business consistent with past practice, none of the Company or any Subsidiary has any Liability or any other obligation of any nature whatsoever to any officer or director or former officer or director of the Company or any Subsidiary, or any Seller, other than Sellers’ rights as holders of Units set forth in the Existing Operating Agreement, or to any relative or spouse (or relative of such spouse) who resides with, or is a dependent of, any such officer, director or Seller.

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          SECTION 4.23. Taxes.

          (a) Filing of Tax Returns and Payment of Taxes. The Company and each of the Subsidiaries have duly and timely filed with the appropriate taxing authorities all Tax Returns required to be filed. All such Tax Returns filed are complete and accurate in all material respects. All material Taxes owed by the Company and each of the Subsidiaries (whether or not shown on any Tax Return) have been timely paid. Except as set forth in Section 4.23(a) of the Company Disclosure Letter, neither the Company nor any of the Subsidiaries is currently the beneficiary of any extension of time within which to file any Tax Return. Except as set forth in Section 4.23(a) of the Company Disclosure Letter, no material claim has ever been made in writing by an authority in a jurisdiction where the Company or any of the Subsidiaries does not file Tax Returns that the Company or any of the Subsidiaries is or may be subject to taxation by that jurisdiction.

          (b) Audits, Investigations, Disputes or Claims. No deficiencies for Taxes have been claimed, proposed or assessed by any Tax authority against the Company or any of the Subsidiaries. Except as disclosed in Section 4.23(b) of the Company Disclosure Letter, there are no pending or, to the Company’s Knowledge, threatened audits, investigations, disputes or claims or other actions for or relating to any Liability for Taxes with respect to the Company or any of the Subsidiaries, and there are no matters under discussion with any governmental authorities, or known to the Company, with respect to Taxes that are likely to result in a material additional Liability for Taxes with respect to the Company or any of the Subsidiaries. The Company has made available to the Buyer in the Diligence Materials complete and accurate copies of all examination reports and statements of deficiencies assessed against or agreed to by the Company and the Subsidiaries since March 13, 2000. Except as set forth in Section 4.23(b) of the Company Disclosure Letter, neither the Sellers nor the Company has waived any statute of limitations in respect of Taxes or agreed to any extension of time with respect to a Tax assessment or deficiency.

          (c) Taxes of Other Persons. Except as set forth in Section 4.23(c) of the Company Disclosure Letter, the Company and the Subsidiaries do not have Liability for the Taxes of any Person (i) under Treasury Regulations Section 1.1502-6 (or any similar provision of state, local or foreign law), (ii) as a transferee or successor, (iii) by contract, or (iv) otherwise.

          (d) Tax Sharing Agreements. There are no Tax-sharing agreements or similar arrangements (including indemnity arrangements) with respect to or involving the Company, the Subsidiaries, the Units, the Assets of the Company or the businesses conducted by the Company or the Subsidiaries, and after the Closing, none of the Company, the Subsidiaries, the Units, the Assets of the Company or the businesses conducted by the Company and the Subsidiaries, shall be bound by any such Tax-sharing agreements or similar arrangements or have any Liability thereunder for amounts due in respect of periods prior to the Closing.

          (e) No Withholding. None of the transactions contemplated hereby are subject to withholding under Section 1445 of the Code. The Company and the Subsidiaries have withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, stockholder or other third party or otherwise. The transactions contemplated herein are not subject to the tax withholding

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provisions of Section 3406 of the Code, or of Subchapter A of Chapter 3 of the Code or of any other provision of law.

          (f) Tax Treatment of the Company and Subsidiaries. At all times since its formation, the Company has been classified as a partnership for Tax purposes, and up to and including the Closing, the Company will be classified as a partnership for Tax purposes. No Form 8832 has ever been filed with respect to the Company as other than a partnership and, as of the Closing, no such election shall have been made. At all times since their formation, and up to and including the Closing, each of the Subsidiaries has been an entity with a single owner that is disregarded as separate from the Company for federal Tax purposes. No Form 8832 has ever been filed with respect to any of the Subsidiaries as other than a disregarded entity, and as of the Closing, no such election shall have been made.

          (g) (i) Section 4.23(g) of the Company Disclosure Letter (A) lists all income franchise and similar Tax Returns (federal, state, local and foreign) filed with respect to each of the Company and the Subsidiaries for taxable periods ended on or after March 13, 2000, (B) indicates the most recent income, franchise or similar Tax Return for each relevant jurisdiction for which an audit has been completed or the statute of limitations has lapsed and (C) indicates all Tax Returns that currently are the subject of an audit; and (ii) the Seller has delivered to the Buyer correct and complete copies of all federal, state, local and foreign income, franchise and similar Tax Returns, examination reports and statements of deficiencies assessed against or agreed to by the Company or any Subsidiary since March 13, 2000.

     SECTION 4.24. Compliance; Regulatory Compliance.

     (a) Each of the Company and the Subsidiaries is and has been operated in material compliance with all Laws applicable to the Company or any of the Subsidiaries or by which any Asset of the Company or any of the Subsidiaries is bound or to which it is subject and is not in material default or violation of any federal or state governmental licenses, registrations, approvals, authorizations, exemptions filings, permits or franchises (collectively, “Permits”) to which the Company or any of the Subsidiaries is a party.

     (b) Each of the Company and the Subsidiaries has in effect all material Permits necessary for the conduct of the Business as presently conducted. Except as set forth in Section 4.24(b) of the Company Disclosure Letter, neither the Company nor any Subsidiary has received any written notice or communication from any Governmental Authority asserting or alleging that it has failed to comply with applicable Law or the requirements of any Permit, or, to the Company’s Knowledge, threatening or asserting any actual or possible revocation, withdrawal, cancellation, suspension, termination or modification of any Permit, and there are no facts or circumstances that would reasonably be expected to give rise to any such notice or communication. Except as set forth on Section 4.24(b) of the Company Disclosure Letter, to the Company’s Knowledge, no such Permit will be terminated or impaired, or will become terminable, in whole or in part, as a result of the consummation of the transaction contemplated by this Agreement.

          (c) Except as set forth in Section 4.24(c) of the Company Disclosure Letter, (i) the Company meets, in all material respects, all of the requirements of participation and

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payment of Medicare, Medicaid, any other state or federal government health care programs, and any other public or private third party payor programs (collectively, “Programs”) that the Company participates in or receives payment from, (ii) the Company is not or has not been excluded from participation in any Programs, (iii) there is no audit, claim review, or other Action pending or, to the Company’s Knowledge, threatened which could result in the imposition of penalties or the exclusion of the Company from any Program and the Company has not received notice of any such audit, claim review or other Action, and (iv) all reports, documents, claims, and notices required to be filed, maintained or furnished to any U.S. Governmental Authority by the Company under any Programs have been so filed, maintained or furnished and all such reports, documents, claims and notices were complete and correct on the date filed (or were corrected or supplemented by a subsequent filing). None of the Subsidiaries of the Company participate in or receive payment from any Program.

     (d) To the Company’s Knowledge, the Company and the Subsidiaries’ manufacturers, suppliers, distributors and third party contractors, currently and at all times have manufactured, marketed, imported, exported, tested, developed, processed, packaged, labeled, stored, and distributed their products in compliance with all applicable Laws, including federal statutes, and rules and regulations promulgated by the United states Food and Drug Administration (“FDA”). All of the products currently marketed by the Company and the Subsidiaries in the United States have been approved for sale by the FDA. In addition, the Company and the Subsidiaries and, to the Company’s Knowledge, any third party manufacturer of Company products are in material compliance with all FDA requirements applicable to the Business, including the registration and listing requirements set forth in 21 C.F.R. part 207. Neither the Company nor the Subsidiaries, nor, to the Company’s Knowledge any third party manufacturers have received any notice from, or otherwise have knowledge of, the FDA or any other U.S. Governmental Authority, questioning or alleging violations with respect to its manufacturing practices, or threatening to limit, suspend, or revoke any product approval, change the marketing classification or labeling of, or otherwise require market removal or withdrawal of any of the Company’s products. Except as set forth on Section 4.24(d) of the Company Disclosure Letter, neither the Company nor the Subsidiaries have received, and to the Company’s Knowledge, there are no facts that furnish any basis for, any Form FDA-483 notice of inspectional observations, warning letters, untitled letters or other correspondence or notice from the FDA, or any applicable U.S. Governmental Authority alleging or asserting noncompliance with any applicable Laws or Permits; and there have been no voluntary or involuntary recalls, corrective actions, removals, field notifications, import alerts, product detentions, product seizures, governmental investigations, or civil or criminal enforcement action initiated relating to the products or the Company or the Subsidiaries. There has been no false information or material omission in any product application to the FDA by the Company or any Subsidiary. All United States regulatory approvals for the products currently marketed by the Company and the Subsidiaries are exclusively owned by and registered in the name of the Company or one of the Subsidiaries and are in full force and effect.

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     (e) To the Company’s Knowledge, all studies, tests, pre-clinical and clinical trials conducted by or on behalf of the Company and the Subsidiaries have been, and are being conducted in all material respects in compliance with applicable Laws, protocols, procedures, controls, rules, regulations and guidelines, including, if applicable, those promulgated by the FDA relating thereto, including the federal Food, Drug and Cosmetic Act (21 U.S.C. § 321 et seq.) and its applicable implementing regulations at 21 C.F.R. Parts 50, 54, 56, 58 and 312.

     (f) Except as set forth in Section 4.24(f) of the Company Disclosure Letter, neither the Company, nor any Subsidiary nor any current manager, officer or employee of the Company or any Subsidiary has been convicted of any crime or engaged in any conduct that could result in a material debarment or exclusion under 21 U.S.C. Section 335a or any similar state Law.

          SECTION 4.25. Product Registration Files. The product registration and approval files and the investigational new drug submissions and files of the Company and each of the Subsidiaries have at all times been maintained in all material respects in accordance with all applicable legal and regulatory requirements. The Company and each of the Subsidiaries have made available to the Buyer or its agents copies of all material documentation filed in the last three years in connection with the regulatory approval or registration of the Product, and investigational new drug applications and submissions for any pharmaceutical product candidate in development.

          SECTION 4.26. Insurance. Section 4.26 of the Company Disclosure Letter sets forth a true and complete list of all insurance policies or binders of insurance (including general liability insurance, property insurance and workers’ compensation insurance) held by the Company or any of the Subsidiaries. True and complete copies of all such insurance policies have been made available by the Company to the Buyer in the Diligence Materials. In each case, such insurance policies are with insurance companies deemed responsible by the Company, in such types and amounts and covering such risks as are consistent in all material respects with customary practices and standards of companies engaged in businesses and operations similar to those of the Company or such Subsidiary, as the case may be. No notice of cancellation or termination has been received by the Company with respect to any such insurance policies and all premiums due to date on such insurance policies have been paid. Except as set forth in Section 4.26 of the Company Disclosure Letter, during the past three years, neither the Company nor any of the Subsidiaries has been refused any insurance with respect to any aspect of operations of the Business, nor has its coverage been rescinded by any insurance carrier to which it has applied for insurance or with which it has carried insurance.

          SECTION 4.27. Certain Business Practices. None of the Company or any of the Subsidiaries or any of their respective managers, directors, officers, agents, representatives or employees (in their capacity as managers, directors, officers, agents, representatives or employees) has: (a) used any funds for unlawful contributions, gifts, entertainment or other unlawful expenses relating to political activity in respect of the Business; (b) directly or indirectly, paid or delivered any fee, commission or other sum of money or item of property, however characterized, to any finder, agent, or other party acting on behalf of or under the auspices of a governmental official or Governmental Authority, in the United States or any other country, which is in any manner illegal under any Law of the United States or any other country having jurisdiction; or (c) made any payment to any customer or supplier of the Company or any

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of the Subsidiaries or any officer, director, partner, employee or agent of any such customer or officer, director, partner, employee or agent for the unlawful reciprocal practice, or made any other unlawful payment or given any other unlawful consideration to any such customer or supplier or any such officer, director, partner, employee or agent, in respect of the Business.

          SECTION 4.28. Brokers. Except for Goldman, Sachs & Co., Inc., no broker, finder or investment banker is entitled to any brokerage, finder’s or other fee or commission in connection with the transactions contemplated by this Agreement or the Ancillary Agreements based upon arrangements made by or on behalf of the Seller. The Company is solely responsible for the fees and expenses of Goldman, Sachs & Co., Inc.

ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE BUYER

          Subject to the exceptions and qualifications set forth in the Buyer Disclosure Letter, the Buyer hereby represents and warrants to the Sellers that the statements contained in this Article V are correct and complete as of the date of this Agreement and will be correct and complete as of the Closing (as though made then and as though the date of the Closing were substituted for the date of this Agreement throughout this Article V):

          SECTION 5.01. Organization and Authority of the Buyer. (a) The Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of California and has all necessary corporate power and corporate authority to enter into this Agreement and the Ancillary Agreements to which it is a party, to carry out its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby, (b) the Buyer is duly licensed or qualified to do business and is in good standing in each jurisdiction in which the properties owned or leased by it or the operation of its business makes such licensing or qualification necessary; (c) the execution and delivery by the Buyer of this Agreement and the Ancillary Agreements to which it is a party, the performance by the Buyer of its obligations hereunder and thereunder and the consummation by the Buyer of the transactions contemplated hereby and thereby have been duly authorized by all requisite corporate action on the part of the Buyer; and (d) this Agreement and the Ancillary Agreements to which the Buyer is a party have been duly executed and delivered by the Buyer, and constitute the legal, valid and binding obligations of the Buyer, enforceable against the Buyer in accordance with their respective terms, except to the extent such enforceability (i) may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to creditors’ rights generally and (ii) is subject to general principles of equity.

          SECTION 5.02. No Conflict. Assuming that all consents, approvals, authorizations and other actions described in Section 5.03 have been obtained and all filings and notifications and other actions referred to in Section 5.03, except as may result from any facts or circumstances relating solely to the Sellers, the execution, delivery and performance by the Buyer of this Agreement and the Ancillary Agreements to which it is a party do not and will not (a) violate, conflict with or result in the breach of any provision of the Certificate of Incorporation or Bylaws of the Buyer, (b) conflict with or violate any Law applicable to the Buyer, or its assets, properties or business (other than such conflicts, violations or breaches as would occur solely as a result of the identity or legal or regulatory status of the Company, any

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Subsidiary or a Seller), or (c) conflict with, result in any breach of, constitute a default (or event which with the giving of notice or lapse of time, or both, would become a default) under, require any consent under, or give to others any rights of termination, amendment, acceleration, suspension, revocation or cancellation of or result in the creation of any Encumbrance on any of its assets pursuant to, any Contract, permit, or other instrument or arrangement to which the Buyer is a party, which would adversely affect the ability of the Buyer to carry out its obligations under, and to consummate the transactions contemplated by, this Agreement or the Ancillary Agreements.

          SECTION 5.03. Governmental Consents and Approvals. The execution, delivery and performance by the Buyer of this Agreement and each Ancillary Agreement to which the Buyer is a party do not and will not require any material consent, approval, authorization or other order of, action by, filing with, or notification to any Governmental Authority on the part of the Buyer. The Buyer knows of no reason why all the consents approvals and authorizations necessary for the consummation of the transactions contemplated by this Agreement will not be received.

          SECTION 5.04. Investment Purpose. The Buyer is acquiring the Units solely for the purpose of investment and not with a view to, or for offer or sale in connection with, any distribution thereof.

          SECTION 5.05. Litigation. Except as set forth in a writing given to the Sellers by the Buyer on the date of this Agreement, no Action by or against the Buyer is pending or, to the knowledge of the Buyer, threatened to be brought by or before any Governmental Authority, which could affect the legality, validity or enforceability of this Agreement, any Ancillary Agreement or the consummation of the transactions contemplated hereby or thereby.

          SECTION 5.06. SEC Filings; Financial Statements.

          (a) The Buyer has filed all registration statements, prospectuses, forms, reports, definitive proxy statements, schedules and documents required to be filed by it under the Securities Act or the Exchange Act, as the case may be, since January 1, 2004 (collectively, the “Buyer SEC Filings”). Each Buyer SEC Filing, (i) as of its date, complied in all material respects with the requirements of the Securities Act or the Exchange Act, as the case may be, and (ii) did not, at the time it was filed, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading, except, in each case, as such information, statement or omission has been subsequently revised, supplemented, amended or superseded by a later-filed Buyer SEC Filing.

          (b) Each of the consolidated financial statements (including, in each case, any notes thereto) contained in the Buyer SEC Filings was prepared in accordance with GAAP applied (except as may be indicated in the notes thereto and, in the case of unaudited quarterly financial statements, as permitted by Form 10-Q under the Exchange Act) on a consistent basis throughout the periods indicated (except as may be indicated in the notes thereto), and each presented fairly in all material respects the consolidated financial position, results of operations and cash flows of the Buyer as of the respective dates thereof and for the respective periods

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indicated therein (subject, in the case of unaudited statements, to normal and recurring year-end adjustments).

          SECTION 5.07. Brokers. Except for Banc of America Securities, no broker, finder or investment banker is entitled to any brokerage, finder’s or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of the Buyer. The Buyer shall be solely responsible for payment of the fees and expenses of Banc of America Securities.

ARTICLE VI
ADDITIONAL AGREEMENTS

          SECTION 6.01. Use of Intellectual Property.

          (a) The Sellers acknowledge that from and after the Closing, the name “Alamo Pharmaceuticals”, “R.T. Alamo” and all similar or related names, marks and logos (all of such names, marks and logos being the “Company Marks”) shall be owned by the Company or a Subsidiary (and indirectly by the Buyer), that neither the Sellers nor any of their Affiliates shall have any rights in the Company Marks and that neither the Sellers nor any of their Affiliates will contest the ownership or validity of any rights of the Buyer, the Company or any Subsidiary in or to the Company Marks.

          (a) From and after the Closing, neither the Sellers nor any of their Affiliates shall use any of the Company Intellectual Property or any of the Licensed Intellectual Property except as permitted by the Buyer in writing.

          SECTION 6.02. Intercompany Arrangements. Immediately prior to the consummation of the Closing, Sellers’ Representative shall contribute, or cause to be contributed, to the capital of the Company, the difference between (i) the intercompany Indebtedness owed by the Company and any Subsidiary to the Sellers and their Affiliates (other than the Company and the Subsidiaries) as of the Closing and (ii) the intercompany Indebtedness owed by the Sellers and their Affiliates (other than the Company and the Subsidiaries) to the Company as of the Closing and all such intercompany Indebtedness shall cease to exist and be of no further force or effect.

          SECTION 6.03. Sellers’ Representative.

          (a) The Sellers’ Representative shall serve as and have all powers as agent and attorney-in-fact of each Seller, for and on behalf of each Seller: (i) to give and receive notices and communications; (ii) to negotiate, enter into settlements and compromises of, and demand mediation and arbitration and comply with orders of courts and awards of arbitrators with respect to any disputes related to the indemnification provisions of Article VIII and Article IX; (iii) to litigate, mediate, arbitrate, defend, enforce or to take any other actions and execute any documents that the Sellers’ Representative deems advisable in connection with enforcing any rights or obligations or defending any claim or action under this Agreement on behalf of the Sellers; (iv) to sign receipts, consents or other documents to effect the transactions contemplated hereby; and (v) to take any and all actions necessary or appropriate in the judgment of the Sellers’ Representative for the accomplishment of the foregoing. The Sellers’

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Representative may, in all questions arising under this Agreement, rely on the advice of counsel, and shall not be liable to the Sellers for any action taken or not taken in its capacity as Sellers’ Representative in the absence of such Sellers’ Representative’s willful misconduct or bad faith.

          (b) A decision, act, consent or instruction of the Sellers’ Representative shall constitute a decision of the Sellers, and shall be final, binding and conclusive upon the Sellers and the Buyer. Each Seller agrees that Sellers’ Representative shall be vested with the sole power and authority to enforce this Agreement against the Buyer or the Company on behalf of each Seller. Any Buyer Indemnified Party may rely upon any decision, act, consent or instruction of the Sellers’ Representative as being the decision, act, consent or instruction of the Sellers. Although the Sellers’ Representative shall not be obligated to obtain instructions from the Sellers prior to any decision, act, consent or instruction, if, and to the extent that, the Sellers’ Representative receives any written instructions from the Sellers holding a majority of the Sharing Percentages, the Sellers’ Representative shall comply with such instructions.

          (c) The power of attorney granted by the Sellers to the Sellers’ Representative pursuant to this Section 6.03 is coupled with an interest and is irrevocable and shall not terminate or otherwise be affected by the death, disability, incompetence, bankruptcy or insolvency of any Seller.

          (d) All indemnification payments made pursuant to this Agreement shall be treated as an adjustment of the consideration paid for the Assets for Tax purposes.

          SECTION 6.04. No Contribution/Indemnification; Offset. Each Seller agrees that such Seller will not seek, nor will they be entitled to, contribution from, or indemnification by, the Company or any Subsidiary, under their organizational documents in connection with this Agreement and the transactions contemplated by this Agreement. Each Seller also agrees not to make any claims against any directors and officers insurance policy maintained or to be maintained by the Company or any Subsidiary in respect of amounts due by such Seller to the Buyer in connection with this Agreement and the transactions contemplated by this Agreement.

          SECTION 6.05. Indemnification. For a period of six years from and after the Closing Date, and for so long thereafter as any claim for indemnification asserted on or prior to such date has not been fully adjudicated, the Buyer shall cause the Company and the Subsidiaries and their successors to (i) to the fullest extent permitted by Law, indemnify and hold harmless each present and former director and officer of the Company, each present and former director and officer of each of its Subsidiaries and each Seller (the “D&O Indemnified Parties”), against any losses incurred or suffered by any of the D&O Indemnified Parties in connection with any liabilities or any claim, action, suit, proceeding or investigation, whether civil, criminal, administrative or investigative, in which the D&O Indemnified Party may be involved relating to the performance or nonperformance by the D&O Indemnified Party prior to the Closing Date of any act concerning the activities of the Company or the Subsidiaries in their capacity as a director, officer or member of the Company or of a Subsidiary, if (a) the D&O Indemnified Party acted in good faith and in a manner it believed to be in, or not contrary to, the best interests of the Company, and (b) the D&O Indemnified Party’s conduct did not constitute gross negligence, fraud, or willful misconduct, and (ii) advance expenses as incurred by any D&O Indemnified Party in connection with any matters for which such D&O Indemnified Party is entitled to

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indemnification from the Company and the Subsidiaries pursuant to this Section 6.05 to the fullest extent permitted under applicable Law and under the Existing Operating Agreement, the certificates of incorporation, articles or organization, operating agreements, other organizational documents of any Subsidiary, or any Contract providing for such indemnification, in each case, as in effect on the date hereof; provided, however, that the D&O Indemnified Party to whom expenses are advanced shall first provide an undertaking to repay such advances if it is ultimately determined that such D&O Indemnified Party is not entitled to indemnification under this Section 6.05. Any amount paid to indemnify directors and officers of the Company for any liability relating to the approval of this Agreement or the transactions contemplated by this Agreement shall in no event constitute Damages for purposes of Article IX.

          SECTION 6.06. Release.

          (a) Each Seller hereby agrees to release and discharge the Company and each Subsidiary from any and all obligations to indemnify such Sellers or otherwise hold them harmless pursuant to any Contract entered into prior to the Closing and any and all claims against the Company and each Subsidiary that such Seller holds as a result of being holders of the Units, including such claims pursuant to any Contract that such Seller entered into in such Seller’s capacity as a holder of the Units, provided that, for the avoidance of doubt, this paragraph shall not relieve the Buyer from any obligations it may have under the Acquisition Documents or that certain Medicare Part D Rebate Agreement by and between United HealthCare Services, Inc. and the Company, dated as of September 9, 2005 and as amended as of January 1, 2006.

          (b) Each Seller expressly waives and relinquishes any and all rights and benefits it now has or may have in the future under the terms of Section 1542 of the Civil Code of the State of California (“Section 1542”), which section reads in full as follows:

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

Notwithstanding Section 1542, and subject to the continuing obligations under the Acquisition Documents, such Seller knowingly and voluntarily waives the provisions of Section 1542 as well as any other statutory or common law provisions of similar effect and acknowledges and agrees that this waiver is an essential part of this Agreement.

          SECTION 6.07. Post-Closing Operating Covenants(a) . Except for the contribution and assignment of the Units by the Buyer to the Designated Buyer Subsidiary immediately after the Closing, the Buyer agrees that after Closing and until the last day of the Contingent Payment Period, the Buyer shall not transfer the assets of the Company related to the Product either directly through the sale of such assets or indirectly through a merger or consolidation of the Company with another Person or sale of all of the equity interests in the Company unless the acquiror or surviving Person of the merger or consolidation agrees to assume the obligation to make the Contingent Payments and the Non-US Licensing Earn-Out Payments.

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          SECTION 6.08. Termination of Transfer Restrictions. The Sellers, the Company and the Buyer hereby agree that the restrictions on the transferability of the Units contained in the Transfer Agreements of each Seller and the Existing Operating Agreement are hereby terminated upon the Closing and have no lasting effect whatsoever.

          SECTION 6.09. Further Action. Each of the parties hereto shall use all commercially reasonable efforts to take, or cause to be taken, all appropriate action, do or cause to be done all things necessary, proper or advisable under applicable Law, and to execute and deliver such documents and other papers, as may be required to carry out the provisions of this Agreement and the Ancillary Agreements to which it is a party and consummate and make effective the transactions contemplated hereby and thereby.

ARTICLE VII
EMPLOYEE MATTERS

          SECTION 7.01. Benefits.

          (a) Employees of the Company or any Subsidiary who continue to be employed by the Buyer or its subsidiaries (the “Continuing Employees”) shall receive service credit for service with the Company and its Subsidiaries, for purposes of determining eligibility to participate in any employee benefit plan or arrangement of the Buyer in which Continuing Employees are otherwise eligible to participate after the Closing Date, to the same extent such service was credited under comparable Company Plans.

          (b) No provision of this Section 7.01 shall create any third party beneficiary or other rights in any Continuing Employee or former employee (including any beneficiary or dependent thereof) in respect of (i) continued employment (or resumed employment) with the Buyer or its subsidiaries (including the Company), or (ii) any benefits that may be provided, directly or indirectly, under any Company Plans or any similar plan or arrangement which may be established by the Buyer or any of its subsidiaries. No provision of this Section 7.01 shall obligate the Buyer or any of its subsidiaries to maintain any benefit plan at any time.

          SECTION 7.02. Termination of Certain Company Plans.

          (a) Termination of 401(k) Plan. Effective as of no later than the day immediately preceding the Closing Date, each of the Company, the Subsidiaries and each of their ERISA Affiliates shall adopt resolutions terminating any and all Company Plans that include a Code Section 401(k) arrangement (each a “401(k) Plan”). The Company shall provide to the Buyer, no later than three Business Days prior to the Closing, resolutions of the Manager of the Company, its Subsidiaries and/or such ERISA Affiliates, as appropriate, evidencing the termination of any and all 401(k) Plan(s) in accordance with this Section 7.02(a). The form and substance of such resolutions shall be subject to the reasonable and timely approval of the Buyer. The Company also shall take such additional actions in furtherance of terminating such 401(k) Plan(s) as the Buyer may reasonably require.

          (b) Termination of Phantom Unit Plan. Effective as of no later than the day immediately preceding the Closing Date, the Company shall terminate the Phantom Unit Plan and eliminate all Pool Shares thereunder without payment of any consideration therefor. The

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Company shall provide to the Buyer, no later than three Business Days prior to the Closing, resolutions of the Manager of the Company evidencing the termination of the Phantom Unit Plan and the elimination all Pool Shares in accordance with this Section 7.02(b). The form and substance of such resolutions shall be subject to the reasonable and timely approval of the Buyer. The Company also shall take such additional actions in furtherance of terminating the Phantom Unit Plan and eliminating all Pool Shares thereunder as the Buyer may reasonably require.

          SECTION 7.03. WARN Act. The Buyer shall be responsible for complying with the WARN Act and any similar state, local or foreign Law, if applicable, with respect to any “plant closings” or “mass layoffs” (within the meaning of the WARN Act) occurring on or after Closing.

          SECTION 7.04. Release Agreements. Each of the Key Employees shall have executed a Release Agreement which shall provide for the payment by the Company prior to the Closing of any amounts payable to such Key Employees under any Company Plan related to a change of control of the Company applicable to such Key Employees in exchange for each Key Employee’s release and discharge of the Company and each Subsidiary from all and any future payments of such change of control payments.

ARTICLE VIII
TAX MATTERS

          SECTION 8.01. Books and Records; Cooperation. The Buyer, on one hand, and the Sellers and the Sellers’ Representative, on the other hand, agree to furnish or cause to be furnished to the other, upon reasonable request, as promptly as practicable (and only during normal business hours), such information and assistance relating to the Units and the Assets of the Company, including access to books and records, as is reasonably necessary for the filing of all Tax Returns by the Buyer or the Sellers and the Sellers’ Representative, the making of any election relating to Taxes, the preparation for any audit by any taxing authority, and the prosecution or defense of any claim, suit or proceeding relating to any Taxes. Each of the Buyer, on one hand, and the Sellers and the Sellers’ Representative, on the other hand, shall retain a copy of all books and records with respect to Taxes pertaining to the Units and the Assets of the Company, for a period of at least seven years following the Closing. At the end of such period, each of the Buyer and the Sellers’ Representative shall provide the other with at least 10 days prior written notice before transferring, destroying or discarding any such books and records, during which period the party receiving such notice can elect to take possession, at its own expense, of such books and records. The Buyer, on one hand, and the Sellers and the Sellers’ Representative, on the other hand, shall cooperate fully with the other in the conduct of any audit, litigation or other proceeding relating to Taxes involving the Units and the Assets of the Company. The Buyer, on one hand, and the Sellers and the Sellers’ Representative, on the other hand, further agree, upon reasonable request, to use their commercially reasonable efforts to obtain any certificate or other document from any governmental authority or any other Person as may be necessary to mitigate, reduce or eliminate any Tax that could be imposed (including, but not limited to, with respect to the transactions contemplated hereby).

          SECTION 8.02. Allocation of Taxes.

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          (a) Except as otherwise provided in Section 8.05 hereof relating to Transfer Taxes, the Sellers shall be responsible for and shall promptly pay when due all Taxes of the Company and all Taxes levied with respect to the Units and the Assets of the Company, in each case, attributable to the Pre-Closing Tax Period. All Taxes of the Company and all Taxes levied with respect to the Units and the Assets of the Company, in each case, for the Straddle Period shall be apportioned between the Pre-Closing Tax Period and the Post-Closing Tax Period, as follows:

          (i) in the case of any Taxes other than Taxes based upon or related to income or receipts, the portion allocable to the Pre-Closing Tax Period shall be deemed to be the amount of such Tax for the entire Straddle Period multiplied by a fraction the numerator of which is the number of days in the Tax period ending on the Closing and the denominator of which is the number of days in the entire Straddle Period, and

          (ii) in the case of any Tax based upon or related to income or receipts, the portion allocable to the Pre-Closing Tax Period shall be deemed equal to the amount which would be payable if the relevant Straddle Period ended at the close of business on the Closing Date.

Each Seller shall also include any income, gain, loss, deduction or other tax items for any period or portion thereof ending on or before the Closing Date on such Seller’s Tax Returns in a manner consistent with the Schedule K-1s furnished by Company to such Seller for such period.

          (b) Upon receipt of any bill for such Taxes (including such Taxes relating to the Units or the Assets of the Company), the Buyer, on one hand, and the Sellers and the Sellers’ Representative, on the other hand, shall present a statement to the other setting forth the amount of reimbursement to which each is entitled under this Section 8.02 together with such supporting evidence as is reasonably necessary to calculate the proration amount. The proration amount shall be paid by the party owing it to the other within 10 days after delivery of such statement. In the event that the Buyer or the Sellers shall make any payment for which it is entitled to reimbursement under this Section 8.02, the applicable party shall make such reimbursement promptly but in no event later than 10 days after the presentation of a statement setting forth the amount of reimbursement to which the presenting party is entitled along with such supporting evidence as is reasonably necessary to calculate the amount of reimbursement. Notwithstanding the foregoing, the Buyer shall not be liable for, and Cutler agrees to indemnify and hold harmless the Buyer, the Company, and each Subsidiary for, (i) any Taxes of any Seller or the Company and any Taxes levied with respect to the Units or the Assets of the Company, in each case, attributable to Pre-Closing Tax Periods, or (ii) any other Taxes of any Seller for any periods.

          (c) Cutler shall indemnify the Buyer and, following the Closing, the Company, for any Damages suffered by the Buyer as a result of the Internal Revenue Service recharacterizing the Contingent Payments or the Non-U.S. Licensing Earn-Out Payments. For purposes of this Section 8.02(c), Damages shall include any additional Tax, interest and penalties payable by the Buyer as a result of such recharacterization (net of Tax Benefits from such recharacterization in accordance with Section 9.04(d)), calculated taking into account the Buyer’s actual tax characteristics (e.g., so that a reduction in net operating losses is not to be treated as a tax detriment except at the time and to the extent such net operating losses could

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actually have been used to offset the Buyer’s income). At Cutler’s request and expense, the Buyer shall contest any recharacterization which would result in Cutler being obligated to make payments pursuant to this Section 8.02(c), and Cutler shall have the right to control the conduct of the portion of any such contest relating to such recharacterization (a “Recharacterization Contest”); provided that Cutler shall keep the Buyer informed of the progress of such Recharacterization Contest on a timely basis and, in connection with such Recharacterization Contest, shall take any actions reasonably requested by the Buyer; provided further if Cutler has the right to control the conduct and resolution of such Recharacterization Contest, but elects in writing not to do so, is not diligently pursuing resolution of such Recharacterization Contest after 10 days notice of such event given by the Buyer to Cutler or is not reasonably expected to fully indemnify the Buyer pursuant to this Agreement for any Damages arising from such Recharacterization Contest, then the Buyer shall, at Cutler’s expense, have the right to control the conduct and resolution of such Recharacterization Contest, provided that the Buyer shall keep Cutler informed of all developments on a timely basis and the Buyer shall not resolve such Recharacterization Contest in a manner that could reasonably be expected to have a material adverse effect on Cutler’s indemnification obligations under this Agreement without Cutler’s consent, which consent shall not be unreasonably withheld; provided further (a) that if, within 10 days after receiving notice of the Recharacterization Contest, Cutler agrees to, and within 30 days after receiving such notice, in fact does, indemnify the Buyer for the full amount of Damages that would be suffered by Buyer if the parties were to agree to the Internal Revenue Service’s position as asserted in the Recharacterization Contest, then the Buyer shall control the conduct and resolution of the Recharacterization Contest at the Buyer’s expense, and (b) if the Buyer elects in writing to waive its right to indemnification pursuant to this Section 8.02(c), then the Buyer shall control the conduct and resolution of such Recharacterization Contest at the Buyer’s expense.

          SECTION 8.03. Notices. The Sellers’ Representative shall promptly notify Buyer in writing upon receipt by any Seller of notice of any pending or threatened federal, state, local or foreign Tax audits or assessments relating to the income, properties or operations of any Seller that reasonably may be expected to relate to the Units or the Assets or business of the Company.

          SECTION 8.04. Tax Clearance Certificate. If the Buyer so requests in writing, at the Closing, the Sellers and the Sellers’ Representative shall use their commercially reasonable efforts to provide the Buyer with a clearance certificate or similar document(s) which may be required by any state taxing authority to relieve the Buyer of any obligation to withhold any portion of the payments to the Sellers pursuant to this Agreement; provided that, in connection with the Closing, the Buyer has not requested any and the Sellers and the Sellers’ Representative have not provided any such tax clearance certificate.

          SECTION 8.05. Transfer Taxes. The Sellers’ Representative shall be liable for all transfer, stamp, documentary, sales, use and similar Taxes arising from the transactions described in this Agreement (the “Transfer Taxes”). The Sellers’ Representative shall file in a timely fashion all Tax Returns relating to such Transfer Taxes.

          SECTION 8.06. Miscellaneous.

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          (a) The Sellers and the Sellers Representative, on the one hand, and the Buyer, on the other hand, agree to treat all payments made by any of them to or for the benefit of the other (including any payments to the Company or any Subsidiary) under this Article VIII, under other indemnity provisions of this Agreement and for any misrepresentations or breaches of warranties or covenants as adjustments to the Purchase Price or as capital contributions for Tax purposes and that such treatment shall govern for purposes hereof except to the extent that the Laws of a particular jurisdiction provide otherwise, in which case such payments shall be made in an amount sufficient to indemnify the relevant party on an after-Tax basis.

          (b) Notwithstanding any provisions in this Agreement to the contrary, the obligations of Cutler to indemnify and hold harmless the Buyer, the Company and the Subsidiaries pursuant to this Article VIII and in accordance with Article IX, and the representations and warranties contained in Section 3.05 and Section 4.23, shall terminate at the close of business on the 60th day following the expiration of the applicable statute of limitations with respect to the Tax liabilities in question (giving effect to any waiver, mitigation or extension thereof).

          (c) From and after the date of this Agreement, neither the Sellers nor the Sellers’ Representative shall, without the prior written consent of the Buyer (which may, in its reasonable discretion, withhold such consent), make, or cause or permit to be made, any Tax election that would affect the Company or any Subsidiary.

          (d) The Buyer shall be entitled to recover from Cutler professional fees and related costs that the Buyer may reasonably incur to enforce the provisions of this Article VIII.

ARTICLE IX
INDEMNIFICATION

          SECTION 9.01. Survival of Representations and Warranties.

          (a) The representations and warranties of the Sellers and the Company contained in this Agreement shall survive the Closing until one year following the Closing Date; provided, however, that (i) the representations and warranties made pursuant to Sections 3.01, 3.02, 4.01, 4.02, 4.03 and 4.28 shall survive indefinitely and (ii) the representations and warranties dealing with Tax matters and the Tax indemnities and obligations set forth in Article VIII shall survive as provided in Section 8.06(b). Neither the period of survival nor the liability of Cutler with respect to the representations and warranties of the Sellers or the Company shall be reduced by any investigation made at any time by or on behalf of the Buyer. Notwithstanding the foregoing, if written notice of a claim has been given prior to the expiration of the applicable representations and warranties by the Buyer to the Sellers’ Representative, then the relevant representations and warranties shall survive as to such claim, until such claim has been finally resolved.

          (b) The representations and warranties of the Buyer contained in this Agreement shall survive the Closing until one year following the Closing Date; provided, however, that the representations and warranties made pursuant to Sections 5.01, 5.02 and 5.07 shall survive indefinitely. Neither the period of survival nor the liability of the Buyer with

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respect to the Buyer’s representations and warranties shall be reduced by any investigation made at any time by or on behalf of the Sellers. If written notice of a claim has been given prior to the expiration of the applicable representations and warranties by the Sellers’ Representative to the Buyer, then the relevant representations and warranties shall survive as to such claim, until such claim has been finally resolved.

          SECTION 9.02. Indemnification by Cutler.

          (a) Subject to the applicable survival periods and limitations in Section 9.01 and the limitations in Section 9.04, Cutler shall, in his individual capacity and not on behalf of any other of the Sellers, indemnify, save and hold harmless the Buyer and its Affiliates (including the Company and the Subsidiaries from and after the Closing) and their respective officers, directors, employees, and agents, and each of their successors and permitted assigns (each, a “Buyer Indemnified Party” and collectively, the “Buyer Indemnified Parties”) from and against any and all costs, losses, demands, claims, debts, actions, assessments, judgments, settlements, sanctions, obligations and other liabilities (whether absolute, accrued, contingent, fixed or otherwise), monetary damages, fines, Taxes, fees, penalties, interest obligations, deficiencies and expenses (including reasonable amounts paid in settlement, interest, court costs, costs of investigation, reasonable fees and expenses of attorneys, accountants, financial advisors and other experts, and other expenses of litigation or preparation for litigation as incurred) (herein, “Damages”), incurred in connection with, arising out of, resulting from or incident to:

     (i) any untruth, inaccuracy, incorrectness or breach of any representation or warranty made by the Sellers or the Company contained in this Agreement;

     (ii) any nonfulfillment, nonperformance, nonobservance or other breach of any covenant or agreement by Cutler (including Cutler’s capacity as an individual Seller) or, prior to the Closing, the Company contained in this Agreement;

     (iii) any indemnification obligations of Cutler as provided in Article VIII; and

     (iv) fraud or willful misconduct by the Sellers, the Company or any of their Affiliates in connection with or arising out of this Agreement or the transactions contemplated hereby.

     (b) Interpretation

     (i) The term “Damages” as used in this Section 9.02 is not limited to matters asserted by third parties against a Buyer Indemnified Party, but includes Damages incurred or sustained by the Buyer Indemnified Party in the absence of third party claims.

     (ii) For purposes of determining whether the Threshold has been met pursuant to Section 9.04(d), the representations, warranties, covenants or agreements of the Sellers or the Company contained in this Agreement (including the Seller Disclosure Letter and the Company Disclosure Letter) delivered by the Sellers and the Company pursuant hereto shall be deemed not to be qualified by any limitation as to materiality (including the words “material” or “Material Adverse Effect”), and Damages incurred or suffered arising out of any such misrepresentation or breach shall be determined without

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deduction on account of any materiality qualification (including the words “material” or “Material Adverse Effect”) contained in any representation, warranty, covenant or agreement giving rise to the claim for indemnification hereunder.

          SECTION 9.03. No Effect on Liability.

          (a) Except as expressly provided herein, none of (i) the consummation of the transactions contemplated by this Agreement, (ii) the delay or omission of any of the Buyer Indemnified Parties to exercise any of its rights under this Agreement or (iii) any investigation or disclosure that any party makes, any notice that any party gives, or any knowledge that any party obtains as a result thereof, or otherwise, shall (A) affect the liability of Cutler to the Buyer Indemnified Parties pursuant to this Article IX or Article VIII or (B) prevent the Buyer or any other Buyer Indemnified Party from relying on the representations or warranties contained in this Agreement.

          SECTION 9.04. Limits on Indemnification.

          (a) Threshold. Notwithstanding the provisions of Section 9.02, no Buyer Indemnified Party shall seek, or be entitled to, indemnification from Cutler pursuant to Section 9.02 until the aggregate claims for Damages of the Buyer Indemnified Parties are more than $100,000 (the “Threshold”), in which event, the Buyer Indemnified Parties shall be entitled to recover the full amount of such Damages, including Damages comprising the Threshold; provided, however, that such Threshold will not apply to any claim for indemnification made by any Buyer Indemnified Party that results from: (i) the indemnity obligations set forth in Section 9.02(a)(i) arising from the representations and warranties set forth in Sections 3.01, 3.02, 4.01, 4.02, 4.03, 4.07(c), 4.23 or 4.28 or (ii) the indemnity obligations set forth in Sections 9.02(a)(iii) and 9.02(a)(iv).

          (b) Cap. No amounts shall be payable under this Article IX by Cutler to the Buyer Indemnified Parties to the extent such payment would result in aggregate payments by Cutler in excess of an amount equal to Four Million Dollars ($4,000,000) (the “Cap”); provided, however that the Cap with respect to the indemnity obligations set forth in Section 9.02(a)(i) arising from Section 4.23 and the indemnity obligations set forth in Section 9.02(a)(iii) shall be payable by Cutler to the Buyer Indemnified Parties to the extent such payments would not result in aggregate payments by Cutler under this Article IX in excess of Six Million Dollars ($6,000,000); provided further, that the Buyer Indemnified Parties may, without regard to the Cap, recover from Cutler the full amount of Damages in connection with claims arising from (x) the indemnity obligations set forth in Section 9.02(a)(i) arising from the representations and warranties set forth in Sections 3.01, 3.02, 4.01, 4.02, 4.03, 4.07(c), or 4.28, (y) the indemnity obligations in Section 9.02(a)(ii) or (z) the indemnity obligations in Section 9.02(a)(iv), except that no amounts shall be payable by Cutler for Damages in connection with claims arising from (x) and (y) to the extent such payment would result in aggregate payments by Cutler under this Article IX in excess of an amount equal to that portion of the Purchase Price distributed to Cutler in accordance with Section 1.03.

          (c) Insurance and Indemnity Recoveries. Any Damages for which the Buyer Indemnified Parties may seek indemnification pursuant to this Article IX shall be net of (i) any

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insurance recoveries received by the Buyer Indemnified Parties or to which the Buyer Indemnified Parties’ insurance carrier has agreed, after inquiry by the Buyer, that the Buyer Indemnified Parties are entitled to receive in respect of such Damages, which the Buyer shall in good faith attempt to obtain to the extent such attempt is commercially reasonable, and (ii) any amounts actually received by the Buyer Indemnified Parties from third parties in respect of such Damages under an indemnification agreement, which the Buyer shall attempt in good faith to obtain to the extent such attempt is commercially reasonable.

          (d) Tax Benefits. If any Damages for which the Buyer Indemnified Parties may seek indemnification pursuant to this Article IX gives rise to a currently realizable Tax Benefit by the Company or the Buyer, the Damages hereunder shall be reduced by the amount of the Tax Benefit so available. For the purposes of this Section 9.04(d), a Tax Benefit is “currently realizable” to the extent it can be reasonably anticipated that such Tax Benefit will be realized in the current or four (4) subsequent taxable periods or years or in any Tax return with respect thereto (including through a carryback to a prior taxable period) or in any taxable period or year prior to the date of the indemnity claim. In the event that there should be a determination disallowing the Tax Benefit, Cutler shall be liable to refund to the Buyer the amount of any related reduction previously allowed pursuant to this Section 9.04(d). The amount of the refunded reduction or payment shall be deemed to be Damages for purposes of Sections 9.04(a) and 9.04(b). The parties agree that any Damages paid (or adjustments) made with respect to a Tax Benefit, pursuant to this Agreement shall be treated for all Tax purposes as an adjustment to the Purchase Price, unless otherwise required by applicable law, in which event payments shall be made in an amount sufficient to indemnify the Buyer Indemnified Party on a net after-Tax basis.

          (e) Gross Negligence Limitation. No amounts of indemnity shall be payable as a result of any claim in respect of Damages arising under this Article IX to the extent that any such Damages arise from or were caused by the gross negligence of a Buyer Indemnified Party after the Closing.

          (f) Exclusive Remedy. Except for any claim (a) grounded in fraud or willful misconduct of any Person or (b) seeking specific performance, equitable relief or remedial action against any Person, the parties hereto acknowledge and agree that, from and after the Closing Date, the indemnification provisions of this Article IX shall be the exclusive remedy of the Buyer Indemnified Parties against such Person with respect to the transactions contemplated by this Agreement (including against any Seller other than Cutler). With respect to actions grounded in fraud or willful misconduct or seeking equitable relief or remedial action against any Person, (y) the right of a Buyer Indemnified Party to be indemnified and held harmless pursuant to the indemnification provisions of this Article IX shall be in addition to and cumulative of any rights of such party at law or in equity against such Person and (z) no such Buyer Indemnified Party shall, by exercising the remedy available to it under this Article IX, be deemed to have elected such remedy exclusively or to have waived any other remedy, whether at law or in equity, available to it against such Person.

          (g) Notwithstanding anything to the contrary in this Agreement, no Seller (other than Cutler) shall have any liability for monetary damages under this Agreement;

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provided, however, that this limitation shall not apply to any matter or claim arising separate and apart from the Acquisition Documents.

          SECTION 9.05. Defense of Third Party Claims.

          (a) If any lawsuit or enforcement action is filed against a Buyer Indemnified Party by any third party (each a “Third Party Claim”) for which indemnification under this Article IX may be sought, written notice (“Third Party Notice”) thereof shall be given by the Buyer Indemnified Party to Cutler as promptly as practicable, but in any event within 30 calendar days of service. The Third Party Notice shall describe in reasonable detail the facts and circumstances known to the Buyer Indemnified Party that gave rise to such indemnification claim, and the amount or good faith estimate of the amount arising therefrom. Any delay in submitting a Third Party Notice to Cutler shall not relieve him of any liability hereunder, except to the extent that he may demonstrate actual material damage or prejudice caused by such failure, and then only to the extent thereof.

          (b) After receipt of such Third Party Notice, if Cutler acknowledges in writing to the sender that he is liable, and has indemnity obligations for any Damages resulting from any such Third Party Claim, then Cutler shall be entitled, if he so elects at his own cost, risk and expense, (i) to take control of the defense and investigation of such Third Party Claim, (ii) to employ and engage attorneys of his own choice (provided, that such attorneys are reasonably acceptable to the Buyer Indemnified Party) to diligently handle and defend the same, unless the named parties to such action or proceeding include both one or more of any Seller and a Buyer Indemnified Party, and the Buyer Indemnified Party has been advised by counsel that there are one or more legal defenses available to such Buyer Indemnified Party that are different from or additional to those available to an applicable Seller or there is otherwise a conflict of interest that exists or is reasonably likely to exist that would make it inappropriate, in the reasonable judgment of counsel to the Buyer Indemnified Party, for the same counsel to represent both the Buyer Indemnified Party and any Seller, in which event such Buyer Indemnified Party shall be entitled, at the cost and expense of Cutler, to separate counsel of its own choosing (provided, that such cost and expense shall be limited to the reasonable fees of one firm of attorneys, together with appropriate local counsel, for any such Third Party Claim) and (iii) to compromise or settle such claim, which compromise or settlement shall be made only with the written consent of the Buyer Indemnified Party, unless the settlement involves any payment of cash by Cutler and the Buyer Indemnified Party and its Affiliates are released in full in connection with the settlement, such consent not to be unreasonably withheld or delayed. Notwithstanding the foregoing, Cutler shall not be entitled to assume the defense of any Third Party Claim if the Third Party Claim seeks an order, injunction or other equitable relief or relief for other than money damages against the Buyer Indemnified Party that the Buyer Indemnified Party reasonably determines, after conferring with outside counsel, cannot be separated from any related claim for money damages. If such equitable relief or relief for other than money damages portion of the Third Party Claim can be so separated from that for money damages, Cutler shall be entitled to assume the defense of the portion relating to money damages. If Cutler elects to assume the defense of a Third Party Claim, the Buyer Indemnified Party shall cooperate in all reasonable respects with him and his attorneys in the investigation, trial and defense of such Third Party Claim and any appeal arising therefrom; provided, however, that the Buyer Indemnified Party may, at its own cost, participate in the investigation, trial and defense of such lawsuit or action and any appeal arising therefrom

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and may, at its own expense, retain separate counsel of its choosing. The parties shall cooperate with each other in any notifications to insurers.

          (c) If Cutler fails to notify the Buyer Indemnified Party within 30 calendar days after receipt of the Third Party Notice that he elects to defend the Buyer Indemnified Party pursuant to this Section 9.05 or if Cutler elects to defend the Buyer Indemnified Party pursuant to this Section 9.05 but fails to diligently prosecute or settle the Third Party Claim, which failure continues for 10 calendar days after notice to him from the Buyer Indemnified Party of such failure, then the Buyer Indemnified Party against which such claim has been asserted will have the right to undertake, and Cutler shall pay the cost and expense thereof of (which covenant to pay the cost and expense thereof will constitute Damages), the defense, compromise or settlement of such Third Party Claim on behalf of and for the account and risk of Cutler, so long as such Buyer Indemnified Party diligently and in good faith defends, compromises or settles such Third Party Claim. In such event, the Buyer Indemnified Party shall have full control of such defense and proceedings; provided, however, that such claim shall not be compromised or settled without the prior written consent of Cutler, which consent shall not be unreasonably withheld or delayed. If the Buyer Indemnified Party assumes the defense of the claim, Cutler shall cooperate in all reasonable respects with the Buyer Indemnified Party in such defense and make available to the Buyer Indemnified Party at his expense, all such witnesses, records, materials and information in the Sellers’ possession or under the Sellers’ control relating thereto as are reasonably required by the Buyer Indemnified Party, and the Buyer Indemnified Party will keep Cutler reasonably informed of the progress of any such defense, compromise or settlement.

          SECTION 9.06. Procedure for Claims between Parties. If a claim for Damages is to be made by a Buyer Indemnified Party entitled to indemnification hereunder, such Buyer Indemnified Party shall give written notice to Cutler as soon as reasonably practicable after the Buyer Indemnified Party becomes aware that a fact, condition or event has occurred or exists which may give rise to Damages for which indemnification by a Buyer Indemnified Party may be sought under this Article IX (a “Claim Notice”). The Claim Notice shall (i) describe in reasonable detail the facts and circumstances known to the Buyer Indemnified Party that gave rise to such indemnification claim, and the amount or, if the amount cannot then be reasonably determined, good faith estimate of the amount arising therefrom and (ii) provide for a demand of payment of the amount or, if the amount cannot then be reasonably determined, a good faith estimate of the amount arising from such claim for Damages. Any delay in submitting a Claim Notice to Cutler shall not relieve him of any liability hereunder, except to the extent that he may demonstrate actual material damage or prejudice caused by such failure, and then only to the extent thereof.

          SECTION 9.07. Indemnification Payment.

          (a) If Cutler does not object in writing within the 30 calendar day period after delivery by the Buyer Indemnified Party of a Claim Notice (an “Objection Notice”), such failure to so object shall be an irrevocable acknowledgment by Cutler that the Buyer Indemnified Party(ies) identified in the Claim Notice is entitled to the full amount of the claim for Damages set forth in such Claim Notice. After the expiration of 30 calendar days after receipt of a Claim Notice from a Buyer Indemnified Party to Cutler, the Buyer may unilaterally reduce the outstanding principal amount of the Buyer Note 3 by an amount equal to the Damages specified

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in the Claim Notice and provide a written notice to Cutler specifying the amount of such reduction; provided, however that no such reduction in the outstanding principal amount of the Buyer Note 3 shall be made if Cutler shall have delivered an Objection Notice to the Buyer Indemnified Party prior to the expiration of such 30 calendar day period.

          (b) In the event that (a) the Buyer Indemnified Party shall not have received an Objection Notice within the 30 calendar day period specified in Section 9.07(a) or (b) Cutler shall have delivered an Objection Notice and either (i) Cutler and the Buyer Indemnified Party shall have, subsequent to the giving of such Objection Notice, mutually agreed that Cutler is obligated to indemnify the Buyer Indemnified Party for a specified amount or (ii) a judgment shall have been rendered by the court having jurisdiction over the matters relating to such claim (including any decision that has been rendered by an arbitrator(s) and entered as a judgment in any court having jurisdiction in accordance with Section 9.08), then, subject to the limitations set forth in Section 9.04:

     (i) the Buyer shall have the right to first reduce the outstanding principal and accrued but unpaid interest under the Buyer Note 3 by the amount of the Damages that Cutler is obligated to pay to the Buyer Indemnified Party under this Article IX until the Buyer Note 3 has been satisfied in full;

     (ii) the Buyer shall provide Cutler written notice of any such reduction in the Buyer Note 3 pursuant to this Section 9.07 and the amount of additional Damages that Cutler is obligated to pay pursuant to this Article IX; and

     (iii) thereafter, Cutler shall promptly pay to the Buyer Indemnified Party the additional amount of specified Damages by wire transfer of immediately available funds, or if the Buyer Note 1 or the Buyer Note 2, or any of the Contingent Note or Alternate Notes if issued, shall not yet have been repaid in full, Cutler shall be able to elect to pay such additional amount of specified Damages by having the Buyer reduce the outstanding principal and accrued but unpaid interest on such Buyer Notes, Contingent Note or Alternate Contingent Notes up to the amount of such additional amount of specified damages in lieu of making a cash payment for such additional amount of specified Damages.

          SECTION 9.08. Resolution of Conflicts and Claims.

          (a) If the Buyer Indemnified Party receives an Objection Notice from Cutler within the 30 calendar day period set forth in Section 9.07(a), the Buyer Indemnified Party and Cutler shall attempt in good faith to agree upon the rights of the respective parties with respect to each of such claims. If the Buyer Indemnified Party and Cutler should so agree, a memorandum setting forth such agreement shall be prepared and signed by both parties.

          (b) If no such agreement can be reached after good faith negotiation and prior to 30 days after delivery of an Objection Notice, the Buyer or Cutler, in its or his discretion, may:

               (i) demand arbitration of the matter unless (x) the amount of indemnifiable Damages that could result from such matter is greater than $500,000 or (y)

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the amount of the Damage that is at issue is the subject of a pending litigation involving a Third Party Claim, in which event arbitration shall not be commenced until such amount is ascertained and is less than $500,000 or both parties agree to arbitration; or

               (ii) litigate such matter before any California State court or Federal court of the United States of America, sitting in California, having jurisdiction.

          (c) If a disputed matter is properly the subject of arbitration pursuant to the terms of Section 9.08(b), the matter shall be settled by arbitration conducted by one neutral arbitrator mutually agreeable to Cutler and the Buyer. Such arbitrator shall be admitted to the Bar of the State of New York or the State of California and shall have been a judge in either such state for a period of not less than 10 years (the “Selection Criteria”). In the event that, within 15 days after submission of any dispute to arbitration, Cutler and the Buyer cannot mutually agree on one arbitrator, then, within 15 days after the end of such 15 day period, Cutler and the Buyer shall each select one arbitrator in accordance with the Selection Criteria. The two arbitrators so selected shall select a third neutral arbitrator in accordance with the Selection Criteria and such third arbitrator shall, acting alone, preside over the arbitration proceedings. If either Cutler or the Buyer fails to select an arbitrator during this 15 day period, then the parties agree that the arbitration will be conducted by one neutral arbitrator selected by the other party, if any.

          (d) Any such arbitration shall be held in San Diego, California, under the Streamlined Arbitration Rules & Procedures then in effect of JAMS. To the maximum extent practicable, an arbitration proceeding hereunder shall be concluded within 180 days of the designation of the arbitrator. Except in the event that the arbitrator determines there has been fraud or willful misconduct by a party, all expenses relating to the arbitration, including, the respective expenses of each party, the fees of the arbitrator and the administrative fee of JAMS, shall be borne in equal measure by Cutler and the Buyer. The arbitrator shall set a limited time period for the conduct of each phase of the arbitration proceedings and establish procedures designed to reduce the cost and time for adjudicating the subject matter of the dispute. The arbitrator shall rule upon motions to compel or limit discovery and shall have the authority to impose sanctions, including attorneys’ fees and costs, to the same extent as a competent court of law or equity, should the arbitrator determine that discovery was sought without substantial justification or that discovery was refused or objected to without substantial justification. The decision of the arbitrator as to the validity and amount of any claim properly brought before such arbitrator pursuant to the terms of this Section 9.08 shall be final, binding, and conclusive upon the parties to this Agreement. The arbitrator’s decision shall be a reasoned decision and shall set forth the award, judgment, decree or order awarded. Within 30 days of a decision of the arbitrator requiring payment by Cutler or the Buyer, such payment shall be made by Cutler or a Buyer Indemnified Party by wire transfer of immediately available funds, subject to Section 9.08.

          (e) Judgment upon any award rendered by the arbitrator may be entered in any court having jurisdiction.

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ARTICLE X
GENERAL PROVISIONS

          SECTION 10.01. Certain Defined Terms. For purposes of this Agreement:

          “Accredited Investor Certificate” means the certificate of Cutler in substantially the form attached hereto as Exhibit A, certifying Cutler’s status “accredited investor” within the meaning of Rule 501(a) of Regulation D promulgated under the Securities Act and Cutler’s investment intent with respect to any securities of the Buyer received by Cutler pursuant to this Agreement or the transactions contemplated by this Agreement.

          “Acquisition Documents” means this Agreement, the Ancillary Agreements, the Accredited Investor Certificate, and any certificate, Financial Statements, Interim Financial Statements, report or other document delivered pursuant to this Agreement or the transactions contemplated by this Agreement.

          “Action” means any claim, action, suit, arbitration, proceeding or investigation by or before any Governmental Authority.

          “Affiliate” means, with respect to any specified Person, any other Person that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, such specified Person.

          “Alternate Contingent Notes” means Alternate Contingent Note 1, Alternate Contingent Note 2 and Alternate Contingent Note 3.

          “Amended and Restated Operating Agreement” means the Amended and Restated Operating Agreement in substantially the form attached hereto as Exhibit B, reflecting the Buyer as the sole member of the Company, and the withdrawal of the Sellers as members of the Company.

          “Ancillary Agreements” means the Amended and Restated Operating Agreement, the Assignment and Assumption of Units Agreement, the Buyer Notes, the Contingent Note, the Alternate Contingent Notes, the Non-Compete Agreement, the Pledge Agreement, the Registration Rights Agreement and the Release Agreements.

          “Articles of Organization” means the Limited Liability Company Articles of Organization of the Company filed with the Secretary of State of the State of California on March 13, 2000, as amended by the Limited Liability Company Certificate of Amendment filed with the Secretary of State of the State of California on June 6, 2000.

          “Assets” means the assets and properties of the Company and each Subsidiary reasonably necessary for the continued operation of the Business as it is presently conducted.

          “Assignment and Assumption of Units Agreement” means an Assignment and Assumption of Units Agreement to be executed by the Designated Buyer Subsidiary and each Seller in substantially the same form attached hereto as Exhibit C.

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          “Beneficiary Demand Statements” means a statement from the applicable Company Lender setting forth the amount necessary (including prepayment expenses) to pay in full all amounts owing as of the Closing to such Company Lenders, and including wire transfer instructions necessary for such payment. If all such amounts owed to the Company Lenders have been paid in full prior to the Closing, such Beneficiary Demand Statements shall instead provide confirmation of the payment in full prior to the Closing of such amounts owed to the Company Lenders.

          “Business Day” means any day that is not a Saturday, a Sunday or other day on which banks are required or authorized by Law to be closed in The City of Los Angeles.

          “Buyer Common Stock” means the Class A common stock, no par value, of the Buyer.

          “Buyer Disclosure Letter” means the Buyer Disclosure Letter dated as of the date hereof, delivered by the Buyer to the Sellers’ Representative in connection with this Agreement.

          “Buyer Note 1” means the senior note issued by the Buyer to Cutler in the form attached hereto as Exhibit D in the aggregate principal amount of Fourteen Million Four Hundred Thousand Dollars ($14,400,000) under the terms and conditions set forth therein.

          “Buyer Note 2” means the senior note issued by the Buyer to Cutler in the form attached hereto as Exhibit E in the aggregate principal amount of Six Million Six Hundred Seventy-Five Thousand Dollars ($6,675,000), as may be reduced in amount at the Closing and prior to issuance and delivery pursuant to Section 1.02(a), under the terms and conditions set forth therein.

          “Buyer Note 3” means the senior note issued by the Buyer to Cutler in the form attached hereto as Exhibit F in the aggregate principal amount of Four Million Dollars ($4,000,000) under the terms and conditions set forth therein, and pledged to the Buyer under the terms and conditions set forth in the Pledge Agreement.

          “Buyer Notes” means the Buyer Note 1, the Buyer Note 2 and the Buyer Note 3.

          “Buyer Debt Repayment Amount” means Four Million Forty Thousand Dollars ($4,040,000).

          “CERCLA” means the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended through the Closing.

          “CERCLIS” means the Comprehensive Environmental Response, Compensation and Liability Information System, as updated through the Closing.

          “Claims” means any and all administrative, regulatory or judicial actions, suits, petitions, appeals, demands, demand letters, claims, liens, notices of noncompliance or violation, investigations, proceedings, consent orders or consent agreements.

          “Code” means the Internal Revenue Code of 1986, as amended.

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          “Company Debt” means all of the consolidated Indebtedness together with interest accrued on the principal amount thereof owed by the Company and any of its Subsidiaries, excluding any Indebtedness owed by the Company to a wholly-owned Subsidiary or any Indebtedness owed by a wholly-owned Subsidiary to the Company, through the date of Closing to the Company Lenders as set forth in Section 4.07(c) of the Company Disclosure Letter and confirmed by the Beneficiary Demand Statements delivered by the Company Lenders to the Buyer no later than the second Business Day prior to the Closing.

          “Company Intellectual Property” means Intellectual Property owned by the Company or any Subsidiary.

          “Company IP Agreements” means (a) licenses of Intellectual Property by the Company or any Subsidiary to any third party, (b) licenses of Intellectual Property by any third party to the Company or any Subsidiary, (c) agreements between the Company or any Subsidiary and any third party relating to the development or use of Intellectual Property, and (d) consents, settlements, decrees, orders, injunctions, judgments or rulings governing the use, validity or enforceability of Company Intellectual Property.

          “Company’s Knowledge” the actual knowledge after due inquiry of Neal Cutler, Sam Simmons, Susan Leveille, Elvis Reyes, Lee Tintle, Paul Duffy and John Sramek.

          “Company Lenders” means Wells Fargo Bank, National Association and Merrill Lynch Bank USA.

          “Company Software” means all Software (a) material to the operation of the Business or (b) manufactured, distributed, sold, licensed or marketed by the Company or any Subsidiary.

          “Contracts” means any of the agreements, arrangements, contracts, leases, powers of attorney, notes, bonds, loans, mortgages, indentures, evidence of indebtedness, purchase orders, letters of credit, settlement agreements, franchise agreements, undertakings, covenants not to compete, employment agreements, licenses, instruments, obligations, commitments, understandings, policies, purchase and sales orders, quotations and other executory commitments to which any Person is a party or to which any of the assets of such Person are subject, whether oral or written, express or implied.

          “control” (including the terms “controlled by” and “under common control with”), with respect to the relationship between or among two or more Persons, means the possession, directly or indirectly or as trustee, personal representative or executor, of the power to direct or cause the direction of the affairs or management of a Person, whether through the ownership of voting securities, as trustee, personal representative or executor, by Contract, credit arrangement or otherwise.

          “Copyrights” means mask works, rights of publicity and privacy, and copyrights in works of authorship of any type, including Software, registrations and applications for registration thereof throughout the world, all rights therein provided by international treaties and conventions, all moral and common law rights thereto, and all other rights associated therewith.

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          “Cutler” means Neal R. Cutler.

          “Cutler Debt Repayment Amount” means an amount of cash or assumption of Indebtedness necessary to cause the Company Debt to not exceed Four Million Dollars ($4,000,000) as of the Closing.

          “Diligence Materials” means the documents as of the second Business Day prior to the Closing Date contained in the DataSite database maintained by the Company with Merrill Corporation and made available to the Buyer and its representatives via the Internet.

          “Encumbrance” means any security interest, pledge, hypothecation, mortgage, lien (including environmental and tax liens), violation, charge, lease, license, encumbrance, servient easement, adverse claim, reversion, reverter, preferential arrangement, purchase right, assessment, commitments, restrictive covenant, condition or restriction of any kind, including any restriction on the use, voting, transfer, receipt of income or other exercise of any attributes of ownership.

          “Environment” means surface waters, groundwaters, soil, subsurface strata and ambient air.

          “Environmental Claims” means any Claims relating in any way to any Environmental Law or any Environmental Permit, including (a) any and all Claims by Governmental Authorities for enforcement, cleanup, removal, response, remedial or other actions or damages pursuant to any applicable Environmental Law and (b) any and all Claims by any Person seeking damages, contribution, indemnification, cost recovery, compensation or injunctive relief resulting from Hazardous Materials or arising from alleged injury or threat of injury to health, safety or the Environment.

          “Environmental Laws” means all Laws, as amended and now or hereafter in effect and as amended, and any judicial or administrative interpretation thereof, including any judicial or administrative order, consent decree or judgment, relating to the environment, health, safety, natural resources or Hazardous Materials, including CERCLA; the Resource Conservation and Recovery Act, 42 U.S.C. §§ 6901 et seq.; the Hazardous Materials Transportation Act, 49 U.S.C. §§ 6901 et seq.; the Clean Water Act, 33 U.S.C. §§ 1251 et seq.; the Toxic Substances Control Act, 15 U.S.C. §§ 2601 et seq.; the Clean Air Act, 42 U.S.C. §§ 7401 et seq.; the Safe Drinking Water Act, 42 U.S.C. §§ 300f et seq. and the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. §§ 136 et seq.

          “Environmental Permits” means all permits, approvals, identification numbers, licenses and other authorizations required under or issued pursuant to any applicable Environmental Law.

          “Equity Participations” means any security or right entitling the holder, absolutely or contingently, to participate in the revenues or equity appreciation of another Person, including membership interests, units, performance units, options, warrants, company appreciation rights, interests in “phantom” stock plans, restricted or contingent stock or profits interests, voting securities, stock appreciation rights or equivalents, stock loan purchase plans, convertible debentures or stock bonus plans.

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          “ERISA Affiliate” means any entity which is a member of a “controlled group of corporations” with or under “common control” with the Company, within the meaning of Sections 414(b), (c), (m) or (o) of the Code.

          “Exchange Act” means the Securities Exchange Act of 1934, as amended.

          “Existing Operating Agreement” means the Third Amended and Restated Operating Agreement of the Company dated as of June 14, 2001.

          “GAAP” means United States generally accepted accounting principles and practices in effect from time to time applied consistently throughout the periods involved.

          “Governmental Authority” means any federal, national, supranational, state, provincial, local, or similar government, governmental, regulatory or administrative authority, agency or commission or any court, tribunal, or judicial or arbitral body.

          “Gross Product Revenues” means with respect to the Product during the first full six calendar months, the gross sales of the Product in the U.S. before any adjustments for any discounts, rebates or returns.

          “Hazardous Materials” means (a) petroleum and petroleum products, radioactive materials, asbestos-containing materials, urea formaldehyde foam insulation, transformers or other equipment that contain polychlorinated biphenyls and radon gas, (b) any other chemicals, materials or substances defined as or included in the definition of “hazardous substances”, “hazardous wastes”, “hazardous materials”, “extremely hazardous wastes”, “restricted hazardous wastes”, “toxic substances”, “toxic pollutants”, “contaminants” or “pollutants”, or words of similar import, under any applicable Environmental Law, and (c) any other chemical, material or substance which is regulated by any Environmental Law.

          “Indebtedness” means, with respect to any Person, (a) all indebtedness of such Person, whether or not contingent, for borrowed money, (b) all obligations of such Person for the deferred purchase price of property or services (other than trade payables and expense accruals in the ordinary course of business consistent with past practice), (c) all obligations of such Person evidenced by notes, bonds, debentures or other similar instruments, (d) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), (e) all obligations of such Person as lessee under leases that have been or should be, in accordance with GAAP, recorded as capital leases, (f) all obligations, contingent or otherwise, of such Person under acceptance, letter of credit or similar facilities, (g) all Indebtedness of others referred to in clauses (a) through (f) above guaranteed directly or indirectly in any manner by such Person, or in effect guaranteed directly or indirectly by such Person through an agreement otherwise to assure a creditor against loss, and (h) all Indebtedness referred to in clauses (a) through (f) above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Encumbrance on property (including accounts and contract rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such Indebtedness.

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          “Intellectual Property” means (a) Patents, (b) Trademarks, (c) Copyrights, (d) Trade Secrets and (e) Software.

          “Inventories” means all inventory, merchandise, finished goods, and raw materials, packaging, labels, supplies and other personal property maintained, held or stored for sale in the ordinary course of business by or for the Company or any Subsidiary at the Closing, and any prepaid deposits for any of the same.

          “IRS” means the Internal Revenue Service of the United States.

          “Key Employees” means Paul Duffy, Susan Leveille, Elvis Reyes, Samuel Simmons and Lee Tintle.

          “Law” means any statute, law, constitution, ordinance, regulation, rule, notice, court decision, agency guideline, requirement or rule of law (including common law), code or edict issued, enacted, adopted, promulgated, implemented or otherwise put into effect by or under the authority of any Governmental Authority.

          “Leased Real Property” means the real property leased by the Company or any Subsidiary as tenant, together with, to the extent leased by the Company or any Subsidiary, all buildings and other structures, facilities or improvements currently or hereafter located thereon, all fixtures, systems, equipment and items of personal property of the Company or any Subsidiary attached or appurtenant thereto and all easements, licenses, rights and appurtenances relating to the foregoing.

          “Letter Agreement” means that certain Letter Agreement between the Buyer, the Company and Cutler attached hereto as Exhibit G, executed concurrently with this agreement.

          “Liabilities” or “Liability” means any and all Indebtedness, liabilities and obligations, whether accrued or fixed, absolute or contingent, matured or unmatured or determined or determinable, including those arising under any Law, Action or order, writ, injunction, award, judgment, decree, resolution, stipulation, or determination by any Governmental Authority, and those arising under any Contract, arrangement, commitment or undertaking.

          “Licensed Intellectual Property” means Intellectual Property licensed to the Company or any Subsidiary pursuant to the Company IP Agreements.

          “Material Adverse Effect” means any circumstance, change in or effect on the Business, the Company (considered on a consolidated basis with the Subsidiaries) that, individually or in the aggregate with all other circumstances, changes in or effects on the Business, the Company or the Subsidiaries: (a) is or is reasonably likely to be materially adverse to the business, operations, Assets or Liabilities (including contingent liabilities), employee relationships, customer or supplier relationships, results of operations or the condition (financial or otherwise) of the Business, or the Company and the Subsidiaries, taken together as a whole, or (b) is reasonably likely to materially adversely effect the ability of the Buyer to operate or conduct the Business in the manner in which it is currently or contemplated to be operated or conducted by the Company or any Subsidiary, it being understood that in no event shall any of

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the following be deemed by itself or by themselves, either individually or in the aggregate, to constitute a Material Adverse Effect: (i) the failure of the Company to meet projections of earnings, revenues or other financial measure (whether such projections were made by the Company or independent third parties), in and of itself (it being understood that the facts or occurrences giving rise or contributing to such failure may be deemed to constitute, or be taken into account in determining whether there has been, or will be, a Material Adverse Effect) or (ii) changes or other developments in the pharmaceutical industry or the general economic or financial conditions which are not unique to the Company but also affect other Persons who participate in the pharmaceutical industry, which changes or developments do not disproportionately affect the Company relative to the other participants in the pharmaceutical industry in any material respect.

          “Net Non-US Licensing Revenues” means, with respect to the Product during each fiscal quarter in the Contingent Payment Period, the licensing revenues, including royalties and milestone payments, actually received by the Buyer or any of its Affiliates from a Person (excluding any Affiliate of the Buyer) pursuant to any sublicense agreement with such Person for any territory outside of the United States relating directly and solely to the Product, reduced by any royalty payments to CIMA Labs, Inc. pursuant to the Company’s contractual obligations to CIMA Labs, Inc. for such payments.

          “Net Product Revenues” means, with respect to the Product during each fiscal quarter in the Contingent Payment Period, the sum of (i) the net sales of the Product in the U.S. as would be shown in the Buyer’s consolidated financial statements for such quarter prepared in accordance with GAAP and (ii) the net sales of the Product in the U.S. as would be shown in the consolidated financial statements prepared in accordance with GAAP for such quarter of any Person to which a sublicense directly related to the Product has been granted.

          “Non-Compete Agreement” means a Non-Compete Agreement in substantially the form attached hereto as Exhibit H.

          “Patents” means United States, foreign and international patents, patent applications and statutory invention registrations, including reissues, divisions, continuations, continuations-in-part, extensions and reexaminations thereof, and all rights therein provided by international treaties and conventions.

          “Permitted Encumbrances” means such of the following as to which no enforcement, collection, execution, levy or foreclosure proceeding shall have been commenced and as to which neither the Company nor any Subsidiary is otherwise subject to civil or criminal liability due to its existence: (a) liens for Taxes not yet due and payable, for which adequate reserves have been maintained in accordance with GAAP; (b) Encumbrances imposed by Law, such as materialmen’s, mechanics’, carriers’, workmen’s and repairmen’s liens and other similar liens arising in the ordinary course of business securing obligations that are not yet due and payable and are not in excess of $5,000 in the case of a single property or $50,000 in the aggregate at any time; (c) pledges or deposits to secure obligations under workers’ compensation laws or similar legislation or to secure public or statutory obligations; and (d) minor survey exceptions, reciprocal easement agreements and other customary encumbrances on title to real property that (i) were not incurred in connection with any Indebtedness, (ii) do not render title to

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the property encumbered thereby unmarketable and (iii) do not, individually or in the aggregate, materially adversely affect the value of or the use of such property for its current and anticipated purposes.

          “Person” means any individual, partnership, firm, corporation, limited liability company, association, trust, unincorporated organization or other entity, as well as any syndicate or group that would be deemed to be a person under Section 13(d)(3) of the Exchange Act.

          “Phantom Unit Plan” means the Alamo Pharmaceuticals, LLC Phantom Unit Plan.

          “Pharmaceutical Laws” means Laws primarily regulating the testing, clinical trials, manufacturing, storage, packaging, sale or distribution of drugs and/or medical device products.

          “Pledge Agreement” means the pledge agreement in the form attached hereto as Exhibit I to be executed by Cutler providing for the pledge of the Buyer Note 3 as a security for the performance by Cutler of his obligations under Article IX.

          “Pool Shares” means the Equity Participations granted by the Company under the Phantom Unit Plan.

          “Post-Closing Tax Period” means any Tax period beginning after the Closing and that portion of any Straddle Period beginning after the Closing.

          “Pre-Closing Tax Period” means any Tax period ending on or before the Closing and the portion of any Straddle Period ending on the Closing.

          “Product” means an orally disintegrating tablet dosage form of clozapine, USP sold in the United States pursuant to New Drug Application No. 21-590 and currently marketed under the trademark FazaClo.

          “Receivables” means any and all accounts receivable, notes and other amounts receivable from third parties, including customers and employees, arising from the conduct of the Business before the Closing, whether or not in the ordinary course, together with any unpaid financing charges accrued thereon.

          “Regulations” means the Treasury Regulations (including Temporary Regulations) promulgated by the United States Department of Treasury with respect to the Code or other federal tax statutes.

          “Registration Rights Agreement” means the registration rights agreement between the Buyer and Cutler in the form attached hereto as Exhibit J providing for the registration of the resale of the shares of the Buyer Common Stock issuable upon conversion of the Buyer Notes, if any, into shares of the Buyer Common Stock under the Securities Act with the Securities and Exchange Commission pursuant to the terms and conditions set forth therein.

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          “Release” means disposing, discharging, injecting, spilling, leaking, leaching, dumping, emitting, escaping, emptying, seeping, placing and the like into or upon any land or water or air or otherwise entering into the Environment.

          “Release Agreements” mean the releases in the form attached hereto as Exhibit K executed by each Key Employee providing for the payment by the Company prior to the Closing of any amounts payable to such Key Employees under any Company Plan related to a change of control of the Company applicable to such Key Employees in exchange for each Key Employee’s release and discharge of the Company and each Subsidiary from all and any future claims for such change of control payments.

          “Remedial Action” means all action to (a) clean up, remove, treat or handle in any other way Hazardous Materials in the Environment; (b) prevent the Release of Hazardous Materials so that they do not migrate, endanger or threaten to endanger public health or the Environment; or (c) perform remedial investigations, feasibility studies, corrective actions, closures and post-remedial or post-closure studies, investigations, operations, maintenance and monitoring.

          “Securities Act” means the Securities Act of 1933, as amended.

          “Seller Disclosure Letter” means the Seller Disclosure Letter dated as of the date hereof, delivered by the Sellers’ Representative to the Buyer in connection with this Agreement.

          “Sellers’ Accountants” means Grant Thornton LLP.

          “Sellers’ Representative” initially means Cutler. In the event of (a) the death or permanent disability of the Sellers’ Representative or (b) the Sellers’ Representative’s resignation as the Sellers’ Representative for any reason, the Sellers holding a majority of the Sharing Percentages shall by written notice to the Buyer, appoint a successor Sellers’ Representative within 30 calendar days. Each successor Sellers’ Representative shall have all of the power, authority, rights and privileges conferred by this Agreement upon the original Sellers’ Representative, and the term “Seller’s Representative” as used herein shall be deemed to include any successor Sellers’ Representative.

          “Sharing Percentage” of each Seller means a fraction (expressed as a percentage) the numerator of which is the number of Units owned by such Seller as of the Closing and the denominator of which is the aggregate number of Units owned by all Sellers as of the Closing.

          “Software” means computer software, programs and databases in any form, including Internet web sites, web content and links, source code, object code, operating systems and specifications, data, databases, database management code, utilities, graphical user interfaces, menus, images, icons, forms, methods of processing, software engines, platforms and data formats, all versions, updates, corrections, enhancements and modifications thereof, and all related documentation, developer notes, comments and annotations.

          “Straddle Period” means any Tax period beginning before and ending after the Closing.

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          “Subsidiary” or “Subsidiaries” means any corporation, partnership, limited liability company, joint venture or other legal entity of which the Company, as the case may be (either alone or through or together with any other subsidiary), owns, directly or indirectly, greater than 40% of the Units, stock or other Equity Participations, the holders of which are generally entitled to vote for the election of the Board of Directors or other governing body of such corporation or other legal entity, or of which the Company is the managing member, general partner, or which the Company is otherwise contractually entitled to direct and control such entity.

          “Tax” or “Taxes” means any and all taxes, fees, levies, duties, tariffs, imposts, and other charges of any kind (together with any and all interest, penalties, additions to tax and additional amounts imposed with respect thereto) imposed by any government or taxing authority, whether disputed or not, including taxes or other charges on or with respect to income, franchises, windfall or other profits, gross receipts, property, sales, use, capital stock, payroll, employment, social security, workers’ compensation, unemployment compensation, or net worth; taxes or other charges in the nature of excise, withholding, ad valorem, stamp, transfer, value added, or gains taxes, license, registration and documentation fees; and customs’ duties, tariffs, and similar charges.

          “Tax Benefit” means an amount by which the Tax liability of the Buyer or, following the Closing, the Company is reduced (including by deduction, reduction of income by virtue of increased Tax basis or otherwise, entitlement to refund, credit or otherwise) plus any related interest received from the relevant taxing authority. Where the Buyer or, following the Closing, the Company, has other losses, deductions, credits or items available to it, the Tax Benefit from any losses, deductions, credits or items relating to the Damages shall be deemed to be realized only after the utilization of such other losses, deductions, credits or items.

          “Tax Returns” means any return, declaration, report, election, claim for refund or information return or other statement or form relating to, filed or required to be filed with any Tax authority, including any schedule or attachment thereto or any amendment thereof.

          “Trade Secrets” means trade secrets, know-how and other confidential or proprietary technical, business and other information, including manufacturing and production processes and techniques, research and development information, technology, drawings, specifications, designs, plans, proposals, technical data, financial, marketing and business data, pricing and cost information, business and marketing plans, customer and supplier lists and information, and all rights in any jurisdiction to limit the use or disclosure thereof.

          “Trademarks” means trademarks, service marks, trade dress, logos, trade names, corporate names, URL addresses, domain names and symbols, slogans and other indicia of source or origin, including the goodwill of the business symbolized thereby or associated therewith, common law rights thereto, registrations and applications for registration thereof throughout the world, all rights therein provided by international treaties and conventions, and all other rights associated therewith.

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      SECTION 10.02. Definitions. The following terms have the meanings set forth in the Sections set forth below:

Definition	Location
“401(k) Plan”	7.02(a)
“Agreement”	Preamble
“Allocation”	1.06(a)
“Alternate Contingent Note 1”	1.04(d)(i)(A)
“Alternate Contingent Note 2”	1.04(d)(ii)(A)
“Alternate Contingent Note 3”	1.04(d)(iii)(A)
“Alternate Run Rate Contingent Payment”	1.04(d)(iii)
“Ancillary Lease Documents”	4.16(d)
“Business”	Recitals
“Buyer”	Preamble
“Buyer Indemnified Party” or “Buyer Indemnified Parties”	9.02(a)
“Buyer SEC Filings”	5.06(a)
“Claim Notice”	9.06
“Closing”	2.01
“Closing Date”	2.01
“Company”	Recitals
“Company Marks”	6.01(a)
“Consent Contracts”	4.14(a)
“Contingent Note”	1.04(c)
“Contingent Payment Dispute Notice”	1.04(f)
“Contingent Payment Quarterly Report”	1.04(e)
“Contingent Payment Period”	1.04(a)
“Contingent Payments”	1.04(a)(ii)
“Continuing Employees”	7.01(a)
“Cutler Debt Repayment Amount”	2.03
“Cutler Threshold Amount”	1.03
“Damages”	9.02(a)
“Designated Buyer Subsidiary”	1.07
“ERISA”	4.21(a)
“Excess Returns Amount”	1.05(a)
“Excess Returns Notice”	1.05(a)
“D&O Indemnified Parties”	6.09
“FDA”	4.24(d)
“Financial Statements”	4.07(a)(ii)
“IMS”	1.04(c)
“Independent Accounting Firm”	1.04(f)
“Initial Contingent Payment”	1.04(a)(i)
“Initial Contingent Payment Determination Period”	1.04(a)(i)
“Initial Run Rate Contingent Payment”	1.04(d)(i)

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Definition	Location
“Initial Run Rate Contingent Payment Determination Period”	1.04(d)(i)
“Interim Financial Statements”	4.07(a)(iii)
“lease”	4.14(a)
“Material Contracts”	4.14(a)
“Multiemployer Plan”	4.20(c)
“Multiple Employer Plan”	4.20(c)
“Non-US Licensing Earn-Out Payment” or “Non-US Licensing Earn-Out Payments”	1.04(b)
“NSP Report”	1.04(c)
“Objection Notice”	9.07(a)
“Options”	4.16(d)
“Permits”	4.24(a)
“Plans”	4.21(a)
“Programs”	4.24(c)
“Purchase Price”	1.02(a)
“Recharacterization Contest”	8.02(c)
“Returns Dispute Notice”	1.05(b)
“Run Rate Contingent Payments”	1.04(d)(iii)
“Section 1542”	6.06(b)
“Selection Criteria”	9.08(c)
“Sellers”	Preamble
“Subsequent Contingent Payment”	1.04(a)(ii)
“Subsequent Contingent Payment Determination Period”	1.04(a)(ii)
“Subsequent Run Rate Contingent Payment”	1.04(d)(ii)
“Subsequent Run Rate Contingent Payment Determination Period”	1.04(d)(ii)
“Supplemental Data”	4.07(d)
“Third Party Claim”	9.05(a)
“Third Party Notice”	9.05(a)
“Threshold”	9.04(a)
“Transfer Taxes”	8.05
“Units”	Recitals
“WARN Act”	4.21(d)

          SECTION 10.03. Interpretation and Rules of Construction. In this Agreement, except to the extent otherwise provided or that the context otherwise requires:

          (a) when a reference is made in this Agreement to an Article, Section, Exhibit or Schedule, such reference is to an Article or Section of, or a Schedule or Exhibit to, this Agreement;

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          (b) the table of contents and headings for this Agreement are for reference purposes only and do not affect in any way the meaning or interpretation of this Agreement;

          (c) whenever the words “include,” “includes” or “including” are used in this Agreement, they are deemed to be followed by the words “without limitation”;

          (d) the words “hereof,” “herein” and “hereunder” and words of similar import, when used in this Agreement, refer to this Agreement as a whole and not to any particular provision of this Agreement;

          (e) all terms defined in this Agreement have the defined meanings when used in any certificate or other document made or delivered pursuant hereto, unless otherwise defined therein;

          (f) the definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms;

          (g) any Law defined or referred to herein or in any agreement or instrument that is referred to herein means such Law or statute as from time to time amended, modified or supplemented, including by succession of comparable successor Laws;

          (h) references to a Person are also to its successors and permitted assigns; and

          (i) the use of “or” is not intended to be exclusive unless expressly indicated otherwise.

          SECTION 10.04. Expenses. Except as otherwise specified in this Agreement, all costs and expenses, including fees and disbursements of counsel, financial advisors and accountants, incurred in connection with this Agreement and the transactions contemplated by this Agreement shall be paid by the party incurring such costs and expenses, whether or not the Closing shall have occurred. Notwithstanding the foregoing, without limitation, the Buyer shall be responsible for the payment of all fees of legal counsel to the Buyer and fees of Banc of America Securities directly related to the transactions contemplated by this Agreement, and the Sellers shall be responsible for the payment of all fees of legal counsel to the Sellers and fees of Goldman, Sachs & Co. directly related to the transactions contemplated by this Agreement.

          SECTION 10.05. Notices. All notices, requests, demands, Claims and other communications which are required or may be given under this Agreement shall be in writing and shall be deemed to have been duly given when received if personally delivered; when transmitted if transmitted by confirmed facsimile with a copy sent by another means specified herein; the business day after it is sent, if sent for next day delivery to a domestic address by recognized overnight delivery service (e.g., Federal Express); and five business days after the date mailed by certified or registered mail, postage prepaid, if sent by certified or registered mail, return receipt requested. In each case notice shall be sent to:

If to the Buyer, addressed to:

Avanir Pharmaceuticals

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11388 Sorrento Valley Rd
San Diego, CA 92121

Attn: Eric K. Brandt
Telephone: (858) 622-5200
Fax: (858) 658-7447

with a copy to:

Latham & Watkins LLP
650 Town Center Drive
20^th Floor
Costa Mesa, California 92626
Attn: Cary K. Hyden and Jonn R. Beeson
Telephone: (714) 540-1235
Fax: (714) 755-8290

If to the Sellers, addressed to:

PO Box 3637
Beverly Hills, CA 90212-0637
Attn: Neal R. Cutler, as Sellers’ Representative
Telephone:
Fax:

with a copy to:

Milbank, Tweed, Hadley & McCloy LLP
601 South Figueroa Street, 30th Floor
Los Angeles, California 90017
Attn: Brett Goldblatt
Telephone: (213) 892-4000
Fax: (213) 629-5063

If to Cutler, addressed to:

Neal R. Cutler
[Address]

Telephone:
Fax:

with a copy to:

Milbank, Tweed, Hadley & McCloy LLP
601 South Figueroa Street, 30th Floor
Los Angeles, California 90017

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Attn: Brett Goldblatt
Telephone: (213) 892-4000
Fax: (213) 629-5063

or to such other place and with such other copies as each of the Buyer, the Sellers’ Representative and Cutler may designate as to itself by written notice to the other (in accordance with this Section 10.05).

          SECTION 10.06. Public Announcements. Neither party hereto shall make, or cause to be made, any press release or public announcement in respect of this Agreement or the transactions contemplated hereby or otherwise communicate with any news media without the prior written consent of the other party unless otherwise required by Law, applicable stock exchange regulation or order, writ, injunction, judgment, arbitration ruling, award, or decree by any Governmental Authority, and the parties hereto shall cooperate as to the timing and contents of any such press release, public announcement or communication.

          SECTION 10.07. Titles. The titles, captions or headings of the Articles and Sections herein are inserted for convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement.

          SECTION 10.08. Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced as a result of any rule of law or public policy, all other terms and other provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated by this Agreement is not affected in any manner materially adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that the transactions contemplated by this Agreement are fulfilled to the greatest extent possible.

          SECTION 10.09. Entire Agreement. This Agreement, including the Schedule and Exhibits hereto, the Seller Disclosure Letter and the other agreements, documents and written understandings referred to herein or otherwise entered into or delivered by the parties hereto on the date of this Agreement (including the Ancillary Agreements), constitute the entire agreement and understanding and supersede all other prior covenants, agreements, undertakings, obligations, promises, arrangements, communications, representations and warranties, whether oral or written, by any party hereto or by any director, officer, employee, agent, Affiliate or Representative of any party hereto. There are no covenants, agreements, undertakings or obligations with respect to the subject matter of this Agreement other than those expressly set forth or referred to herein or in other agreements, documents and written understandings entered into or delivered by the parties hereto on the date of this Agreement, and no representations or warranties of any kind or nature whatsoever, express or implied, including any implied warranties of merchantability or fitness for a particular purpose, are made or shall be deemed to be made herein by the parties hereto except those expressly made herein.

          SECTION 10.10. Assignment. Neither this Agreement nor any of the rights or obligations hereunder may be assigned by the Sellers without the prior written consent of the

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Buyer, or assigned by the Buyer without the prior written consent of the Sellers, except that the Buyer may, without such consent but with prior notice to the Sellers, assign its rights hereunder; provided that such assignee executes a joinder to and agrees to be bound by this Agreement. Notwithstanding the foregoing, no such assignment shall release the assignor from any of its obligations hereunder.

          SECTION 10.11. Amendment. This Agreement may not be amended except in an instrument in writing signed on behalf of each of the parties hereto or by a waiver in accordance with Section 10.12. No amendment, supplement, modification or waiver of this Agreement shall be binding unless executed in writing by the party to be bound thereby.

          SECTION 10.12. Waiver. Each party to this Agreement may (a) extend the time for the performance of any of the obligations or other acts of the other parties, (b) waive any inaccuracies in the representations and warranties of the other parties contained herein or in any document delivered by the other party pursuant hereto or (c) waive compliance with any of the agreements of the other parties or conditions to such parties’ obligations contained herein. Any such extension or waiver shall be valid only if set forth in an instrument in writing signed by the party to be bound thereby. Except where a specific period for action or inaction is provided herein, neither the failure nor any delay on the part of any party in exercising any right, power or privilege under this Agreement or the documents referred to in this Agreement shall operate as a waiver thereof, nor shall any waiver on the part of any party of any such right, power or privilege, nor any single or partial exercise of any such right, power or privilege, preclude any other or further exercise thereof or the exercise of any other such right, power or privilege. The failure of a party to exercise any right conferred herein within the time required shall cause such right to terminate with respect to the transaction or circumstances giving rise to such right, but not to any such right arising as a result of any other transactions or circumstances.

          SECTION 10.13. No Third Party Beneficiaries. This Agreement shall be binding upon and shall inure to the benefit of, the parties hereto and their respective successors and permitted assigns. This Agreement and all of its conditions and provisions are for the sole and exclusive benefit of the parties hereto and their respective successors and permitted assigns, and nothing in this Agreement, express or implied, is intended to confer upon any Person, including any union or any employee or former employee of the Seller, other than the parties hereto any rights or remedies of any nature whatsoever, including any rights of employment for any specified period, under or by reason of this Agreement or any provision hereof; provided, however, that any Person that is not a party to this Agreement but, by the terms of Section 9.02, is entitled to indemnification, shall be considered a third-party beneficiary of this Agreement, with full rights of enforcement as though such Person was a signatory to this Agreement.

          SECTION 10.14. Specific Performance. Each of the parties hereto acknowledges and agrees that the other parties would be damaged irreparably, and in a manner for which monetary damages would not be an adequate remedy, in the event any of the provisions of this Agreement are not performed in accordance with its specific terms or otherwise are breached. Accordingly, each of the parties hereto agrees that the other parties shall be entitled to an injunction or injunctions to prevent breaches of the provisions of this Agreement and to enforce specifically this Agreement and the terms and provisions hereof in any action instituted in any court of the United States or any state thereof having jurisdiction over the

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parties and the matter, in addition to any other remedy to which they may be entitled, at law or in equity.

          SECTION 10.15. Governing Law. This Agreement (and any claim or controversy arising out of or relating to this Agreement) shall be governed by the law of the State of California without regard to conflict of law principles that would result in the application of any law other than the law of the State of California.

          SECTION 10.16. Consent to Jurisdiction. Subject to Section 9.07, each party to this Agreement hereby irrevocably and unconditionally submits, for itself and its property, to the exclusive jurisdiction of any California State court, or Federal court of the United States of America, sitting in California, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement or the agreements delivered in connection herewith or the transactions contemplated hereby or thereby or for recognition or enforcement of any judgment relating thereto, and each of the parties hereby irrevocably and unconditionally (A) agrees not to commence any such action or proceeding except in such courts, (B) agrees that any claim in respect of any such action or proceeding may be heard and determined in such California State court or, to the extent permitted by law, in such Federal court, (C) waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any such action or proceeding in any such California State or Federal court, and (D) waives, to the fullest extent permitted by Law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such California State or Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by Law. Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 10.04. Nothing in this Agreement will affect the right of any party to this Agreement to serve process in any other manner permitted by Law.

          SECTION 10.17. Attorneys’ Fees. Should any litigation be commenced between the parties hereto concerning this Agreement, or in connection with the performance, breach or interpretation hereof, the party prevailing in such litigation shall be entitled, in addition to such other relief as may be granted, to reimbursement of all reasonable costs and expenses of such litigation, including attorneys’ fees, court costs, costs of investigation and other costs reasonably related to such litigation.

          SECTION 10.18. Currency. Unless otherwise specified in this Agreement, all references to currency, monetary values and dollars set forth herein shall mean United States (U.S.) dollars and all payments hereunder shall be made in United States dollars.

          SECTION 10.19. Cumulative Remedies. All rights and remedies of either party hereto are cumulative of each other and of every other right or remedy such party may otherwise have at law or in equity, and the exercise of one or more rights or remedies shall not prejudice or impair the concurrent or subsequent exercise of other rights or remedies.

          SECTION 10.20. Representation by Counsel. Each party hereto represents and agrees with each other that it has been represented by or had the opportunity to be represented

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by, independent counsel of its own choosing, and that it has had the full right and opportunity to consult with its respective attorney(s), that to the extent, if any, that it desired, it availed itself of this right and opportunity, that it or its authorized officers (as the case may be) have carefully read and fully understand this Agreement in its entirety and have had it fully explained to them by such party’s respective counsel, that each is fully aware of the contents thereof and its meaning, intent and legal effect, and that it or its authorized officer (as the case may be) is competent to execute this Agreement and has executed this Agreement free from coercion, duress or undue influence.

          SECTION 10.21. Execution and Counterparts. This Agreement may be executed in one or more counterparts, each of which when executed shall be deemed an original and all of which together shall constitute one and the same instrument. The parties agree that this Agreement shall be legally binding upon the electronic transmission, including by facsimile or email, by each party of a signed signature page to this Agreement to the other party.

          SECTION 10.22. Disclosure. Nothing in the Seller Disclosure Letter, the Company Disclosure Letter or the Buyer Disclosure Letter shall be deemed adequate to disclose an exception to a representation or warranty made herein unless the Seller Disclosure Letter, the Company Disclosure Letter or the Buyer Disclosure Letter, as the case may be, identifies the exception with particularity and describes the relevant facts in reasonable detail. Notwithstanding the foregoing, it is expressly understood and acknowledged that any information disclosed in the Seller Disclosure Letter, the Company Disclosure Letter or the Buyer Disclosure Letter under any numbered or lettered part shall be deemed to relate to and qualify representations and warranties set forth in one or more other parts of the Seller Disclosure Letter, the Company Disclosure Letter or the Buyer Disclosure Letter, as the case may be, but only where the relevance of such disclosure to such other part or parts is clear from the text of such disclosure; provided, however, the mere listing (or inclusion of a copy) of a document or other item shall not by itself be deemed adequate to disclose an exception to a representation or warranty made herein (unless the representation or warranty has to do with the existence of the document or item itself).

[Signature Pages Follow]

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          IN WITNESS WHEREOF, each of the parties, by its duly authorized representative, has entered into this Agreement as of the date first above written.

BUYER

AVANIR PHARMACEUTICALS

/s/ Eric K. Brandt

By: Eric K. Brandt

Its: President and Chief Executive Officer

Signature Page to Unit Purchase Agreement

COMPANY

ALAMO PHARMACEUTICALS, LLC

/s/ Neal R. Cutler

By: Neal R. Cutler

Its: Manager

Signature Page to Unit Purchase Agreement

SELLERS

NEAL R. CUTLER

/s/ Neal R. Cutler

Neal R. Cutler

Signature Page to Unit Purchase Agreement

SELLERS
FOR INDIVIDUALS:
	Robert D. English
	Print Name of Seller
	/s/ Robert D. English
	Signature of Seller
FOR ENTITIES:
	Print Name of Seller
By:
	Signature of Authorized Signatory
	Print Name of Authorized Signatory
	Print Title of Authorized Signatory
Address for Notices :
	Address – Line 1
	Address – Line 2
	Address – Line 3
	Attention
	Facsimile
	Telephone

Signature Page to Unit Purchase Agreement

SELLERS
FOR INDIVIDUALS:
	Michael Beckloff
	Print Name of Seller
	/s/ Michael Beckloff
	Signature of Seller
FOR ENTITIES:
	Print Name of Seller
By:
	Signature of Authorized Signatory
	Print Name of Authorized Signatory
	Print Title of Authorized Signatory
Address for Notices :
	Address – Line 1
	Address – Line 2
	Address – Line 3
	Attention
	Facsimile
	Telephone

Signature Page to Unit Purchase Agreement

SELLERS
FOR INDIVIDUALS:
	Angelico Carta
	Print Name of Seller
	/s/ Angelico Carta
	Signature of Seller
FOR ENTITIES:
	Print Name of Seller
By:
	Signature of Authorized Signatory
	Print Name of Authorized Signatory
	Print Title of Authorized Signatory
Address for Notices :
	Address – Line 1
	Address – Line 2
	Address – Line 3
	Attention
	Facsimile
	Telephone

Signature Page to Unit Purchase Agreement

SELLERS
FOR INDIVIDUALS:
	Anthony R. Disanto
	Print Name of Seller
	/s/ Anthony R. Disanto
	Signature of Seller
FOR ENTITIES:
	Print Name of Seller
By:
	Signature of Authorized Signatory
	Print Name of Authorized Signatory
	Print Title of Authorized Signatory
Address for Notices :
	Address — Line 1
	Address — Line 2
	Address — Line 3
	Attention
	Facsimile
	Telephone

Signature Page to Unit Purchase Agreement

SELLERS
FOR INDIVIDUALS:
	Robert M. Lichten
	Print Name of Seller
	/s/ Robert M. Lichten
	Signature of Seller
FOR ENTITIES:
	Print Name of Seller
By:
	Signature of Authorized Signatory
	Print Name of Authorized Signatory
	Print Title of Authorized Signatory
Address for Notices :
	Address — Line 1
	Address — Line 2
	Address — Line 3
	Attention
	Facsimile
	Telephone

Signature Page to Unit Purchase Agreement

SELLERS
FOR INDIVIDUALS:
	Lee Tintle
	Print Name of Seller
	/s/ Lee Tintle
	Signature of Seller
FOR ENTITIES:
	Print Name of Seller
By:
	Signature of Authorized Signatory
	Print Name of Authorized Signatory
	Print Title of Authorized Signatory
Address for Notices :
	Address — Line 1
	Address — Line 2
	Address — Line 3
	Attention
	Facsimile
	Telephone

Signature Page to Unit Purchase Agreement

SELLERS
FOR INDIVIDUALS:
	John J. Sramek
	Print Name of Seller
	/s/ John J. Sramek
	Signature of Seller
FOR ENTITIES:
	Print Name of Seller
By:
	Signature of Authorized Signatory
	Print Name of Authorized Signatory
	Print Title of Authorized Signatory
Address for Notices :
	Address — Line 1
	Address — Line 2
	Address — Line 3
	Attention
	Facsimile
	Telephone

Signature Page to Unit Purchase Agreement

SELLERS
FOR INDIVIDUALS:
	Samuel Simmons
	Print Name of Seller
	/s/ Samuel Simmons
	Signature of Seller
FOR ENTITIES:
	Print Name of Seller
By:
	Signature of Authorized Signatory
	Print Name of Authorized Signatory
	Print Title of Authorized Signatory
Address for Notices :
	Address — Line 1
	Address — Line 2
	Address — Line 3
	Attention
	Facsimile
	Telephone

Signature Page to Unit Purchase Agreement

SELLERS
FOR INDIVIDUALS:
	Paul F. Duffy
	Print Name of Seller
	/s/ Paul F. Duffy
	Signature of Seller
FOR ENTITIES:
	Print Name of Seller
By:
	Signature of Authorized Signatory
	Print Name of Authorized Signatory
	Print Title of Authorized Signatory
Address for Notices :
	Address — Line 1
	Address — Line 2
	Address — Line 3
	Attention
	Facsimile
	Telephone

Signature Page to Unit Purchase Agreement

SELLERS
FOR INDIVIDUALS:
	Robert L. Sevy
	Print Name of Seller
	/s/ Robert L. Sevy
	Signature of Seller
FOR ENTITIES:
	Print Name of Seller
By:
	Signature of Authorized Signatory
	Print Name of Authorized Signatory
	Print Title of Authorized Signatory
Address for Notices :
	Address – Line 1
	Address – Line 2
	Address – Line 3
	Attention
	Facsimile
	Telephone

Signature Page to Unit Purchase Agreement

SELLERS
FOR INDIVIDUALS:
	Print Name of Seller
	Signature of Seller
FOR ENTITIES:
	United Healthcare Services, Inc.
	Print Name of Seller
By:	/s/ Stephen J. Hemsley
	Signature of Authorized Signatory
	Stephen J. Hemsley
	Print Name of Authorized Signatory
	President and COO, United Health Group
	Print Title of Authorized Signatory
Address for Notices :
	United Health Group Incorporated
	Address — Line 1
	9900 Bren Road East
	Address — Line 2
	Minnetanka, MN 55343
	Address — Line 3
	General Counsel & VP Corporate Development
	Attention
	952-936-1398
	Facsimile
	952-936-5744
	Telephone

Signature Page to Unit Purchase Agreement

SCHEDULE A

     Unit Holders     

Michael Beckloff

Angelico Carta

Neal Cutler

Tony Disanto

Paul Duffy

Robert English

Robert Lichten

Bob Sevy

Sam Simmons

John Sramek

Lee Tintle

United Healthcare

Exhibit B

FOURTH AMENDED AND RESTATED
LIMITED LIABILITY COMPANY OPERATING AGREEMENT
OF
ALAMO PHARMACEUTICALS, LLC

     THIS FOURTH AMENDED AND RESTATED LIMITED LIABILITY COMPANY OPERATING AGREEMENT (the “Agreement”) of Alamo Pharmaceuticals, LLC (the “Company”) is entered into by Avanir Pharmaceuticals, a California corporation, as the sole member (the “Member”), effective as of May 24, 2006 (the “Effective Date”).

     The Member, by execution of this Agreement, hereby continues the existence of the Company as a limited liability company pursuant to the provisions in the Beverly-Killea Limited Liability Company Act, §17000, et seq., as it may be amended from time to time, and any successor to such statute (the “Act”). The rights and obligations of the Member and the administration and termination of the Company shall be governed by this Agreement and the Act. The Agreement shall be considered the “Operating Agreement” of the Company within the meaning of Section 17001(ab) of the Act. To the extent this Agreement is inconsistent in any respect with the Act, this Agreement shall control.

     1. Organizational and Other Matters.

     (a) Name. The name of the Company shall be “Alamo Pharmaceuticals, LLC”.

     (b) Principal Business Office. The principal business office of the Company shall be located at 11388 Sorrento Valley Road, San Diego, California 92121.

     (c) Registered Agent. The name and address of the registered agent of the Company for service of process on the Company in the State of California is CT Corporation System, 818 West 7^th Street, Los Angeles, California 90017, or as otherwise determined by the Member from time to time.

     (d) Term. The Company shall have a perpetual existence.

     (e) Articles of Organization. The Company was formed as a limited liability company under the Act by the filing of Articles of Organization with the Secretary of State of the State of California on March 13, 2000, as the same may be amended, restated or supplemented from time to time. The Member or an Officer (as defined below) shall execute, deliver and file any other certificates (and any amendments, supplements and/or restatements thereof) necessary for the Company to qualify to do business in any jurisdiction in which the Company may wish to conduct business. The existence of the Company as a separate legal entity shall continue until cancellation of the Articles of Organization as provided in the Act.

     2. Purpose. The business purpose of the Company is to engage in any lawful act or activity for which a limited liability company may be engaged under applicable law (including, without limitation, the Act).

     3. Management of Company. All decisions relating to the business, affairs, and properties of the Company shall be made by the Member. Any person appointed as an officer or manager of the Company prior to the Effective Date is hereby removed, provided that, at any time after the Effective Date, the Member may appoint a Board of Managers (the “Managers”) and may also appoint a President or one or more Vice Presidents and such other officers of the Company as the Member may deem necessary or advisable (the “Officers”) to manage the day-to-day business affairs of the Company. The Managers, and each of them, and the Officers, and each of them, shall have the authority to act on behalf of, bind, and execute and deliver documents in the name and on behalf of the Company. No such delegation shall cause the Member to cease to be a Member. The Member may remove any Manager or Officer and may increase or decrease the number of Managers and Officers at any time for any reason.

     4. Distributions and Allocations. Each distribution of cash or other property by the Company shall be made 100% to the Member. Each item of income, gain, loss, deduction, or credit of the Company shall be treated as income, gain, loss, deduction or credit (as applicable) of the Member.

     5. Exculpation. As of the Effective Date, neither (i) the Member, (ii) any affiliate of the Member, nor (iii) any officer, director, employee, or agent of the Company, the Member or any of its affiliates, shall be liable, responsible, or accountable in damages or otherwise to the Company or the Member by reason of, or arising from, the operations, business, or affairs of, or any action taken or failure to act on behalf of, the Company except for its or his gross negligence or willful misconduct.

     6. Indemnity. The Company shall indemnify and hold harmless (i) the Member, (ii) any affiliate of the Member, and (iii) any officer, director, employee, or agent of the Company, the Member or any of its affiliates, (each, an “Indemnitee”), from and against any claim, loss, damage, liability, or reasonable expense (including reasonable attorneys’ fees, court costs, and costs of investigation and appeal) suffered or incurred by any such Indemnitee by reason of, or arising from, the operations, business, or affairs of, or any action taken or failure to act on behalf of, the Company.

     7. Dissolution and Winding Up. The Company shall dissolve and its business and affairs shall be wound up pursuant to a written instrument executed by the Member.

     8. Amendments. This Agreement may be amended or modified from time to time only by a written instrument executed by the Member.

     9. Governing Law. The validity and enforceability of this Agreement shall be governed by and construed in accordance with the laws of the State of California without regard to otherwise governing principles of conflicts of law.

Signature Page to Fourth Amended and Restated Operating Agreement

     IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first above written.

MEMBER: AVANIR PHARMACEUTICALS, a California corporation
By:	/s/ Eric K. Brandt
	Eric K. Brandt
	President and Chief Executive Officer

Signature Page to Fourth Amended and Restated Operating Agreement

EX-10.2

EXHIBIT 10.2

NEITHER THIS SENIOR NOTE (THIS “NOTE”) NOR THE SHARES OF STOCK THAT MAY BE ISSUABLE UPON REPAYMENT OF ANY PORTION OF THIS NOTE, IF APPLICABLE, HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE HOLDER MAY NOT TRANSFER THIS NOTE OR THE SHARES OF STOCK THAT MAY BE ISSUABLE UPON REPAYMENT OF ANY PORTION OF THIS NOTE UNLESS (A) THERE IS AN EFFECTIVE REGISTRATION COVERING THIS NOTE OR THE SHARES OF STOCK THAT MAY BE ISSUABLE UPON REPAYMENT OF ANY PORTION OF THIS NOTE UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND APPLICABLE STATE SECURITIES LAWS OR (B) IF REQUESTED BY AVANIR PHARMACEUTICALS, IT FIRST RECEIVES A LETTER FROM AN ATTORNEY REASONABLY ACCEPTABLE TO IT STATING THAT IN THE OPINION OF THE ATTORNEY THE PROPOSED TRANSFER IS EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND UNDER ALL APPLICABLE STATE SECURITIES LAWS.

SENIOR NOTE

$14,400,000.00	May 24, 2006 (the “Execution Date”)
	Costa Mesa, California

          For value received Avanir Pharmaceuticals, a California corporation (“Payor”), promises to pay to Neal R. Cutler (“Holder”) the principal sum of Fourteen Million Four Hundred Thousand dollars ($14,400,000.00) in lawful money of the United States in immediately available funds and to pay interest on the outstanding principal amount of this Senior Note (this “Note”) as provided herein, until this Note is repaid in full.

          This Note is issued pursuant to and subject to the terms of the Unit Purchase Agreement dated as of May 22, 2006 (the “Purchase Agreement”) by and among Payor, the parties listed on Schedule A to the Purchase Agreement and Alamo Pharmaceuticals, LLC, a California limited liability company, and is issued concurrently with that certain Senior Note in the principal sum of $6,675,000 by and between Payor and Holder and that certain Senior Note in the principal sum of $4,000,000 by and between Payor and Holder (together, the “Additional Notes”).

          For the purposes of this Note, the following terms shall have the meanings set forth below:

          “Average Price” means the average of the per share Closing Prices of the Payor Common Stock for the 5 consecutive Trading Days ending on the Trading Day immediately preceding the date of the applicable calculation, provided that in calculating the Average Price, each Closing Price during the period commencing on the first Trading Day of such 5 consecutive Trading Day period and ending on the date of an event that would require an adjustment of the Threshold Price pursuant to Section 4 hereof, shall be appropriately adjusted to take into account the occurrence of the event that would result in an adjustment of the Threshold Price.

          “Business Day” means any day that is not a Saturday, Sunday or other day on which banks in the State of California are authorized or required to close.

          “Closing Price” of the Payor Common Stock on any date means the closing per share sale price (or, if no closing sale price is reported, the average of the bid and ask prices or, if more than one in either case, the average of the average bid and average ask prices) on such date as reported on the NASDAQ National Market (at such time that the NASDAQ National Market is not a national securities exchange), or if such bid and ask prices are not reported by the NASDAQ National Market, in a manner to be determined by the Payor on the basis of such quotation as the Payor’s Board of Directors considers appropriate in its reasonable discretion or if the Payor Common Stock is traded on a U.S. national securities exchange, the closing per share sale price of the Payor Common Stock as is reported in composite transactions for the principal U.S. securities exchange on which the Payor Common Stock is so traded.

          “Demand Repayment Notice” has the meaning set forth in Section 2.

          “Events of Default” has the meaning set forth in Section 9.1.

          “Financing Prepayment Date” means three Business Days following the consummation of the applicable Financing Transaction.

          “Financing Transaction” means each (a) sale by Payor or any of its subsidiaries of any of its debt, equity or convertible securities when such securities have been registered for public sale pursuant to the Securities Act and (b) sale by Payor or any of its subsidiaries to investors of any of its debt, equity or convertible securities in a transaction exempt from the registration requirements of the Securities Act (but, in each case, excluding the issuance of (i) options or stock issued to employees, consultants, advisors, officers or directors pursuant to a plan or arrangement approved in advance by Payor’s Board of Directors, (ii) securities issued to lessors in connection with lease financings and the like, (iii) securities issued on conversion of any outstanding convertible securities of Payor, (iv) securities issued by a subsidiary of Payor to Payor or another subsidiary of Payor and (v) and securities issued as consideration for mergers, acquisitions or to strategic partners). In no event shall a Financing Transaction include the proceeds of bank loans or credit facilities or revenues from the licensing or sale of any of Payor’s products, services or technologies.

          “Initial Threshold Price” means $15.00.

          “Interest Determination Date” has the meaning set forth in Section 1.1(a).

          “Interest Payment Date” means the last day of each month, or if such date is not a Business Day, the next succeeding Business Day.

          “Interest Period” means the period from May 24, 2006 to but excluding the first Interest Payment Date and each successive period from and including each Interest Payment Date to but excluding the following Interest Payment Date.

          “Interest Rate” has the meaning set forth in Section 1.1(a)

          “LIBOR” means the London interbank offered rates.

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          “London Business Day” is a day on which dealings in deposits in U.S. dollars are transacted in the London interbank market.

          “Market Disruption Event” means the occurrence or existence for more than one two-hour period in the aggregate on any scheduled Trading Day of any suspension or limitation imposed on trading in the Payor Common Stock or in any options, contracts or future contracts relating to the Payor Common Stock, and such suspension or limitation occurs or exists at any time before 1:00 p.m. (Eastern Time) on such day.

          “Maturity Date” means the earlier of (a) the 180^th calendar day following Payor’s receipt of a Demand Repayment Notice, or if such 180^th calendar day is not a Business Day, the next succeeding Business Day, (b) the third anniversary of the Execution Date, or if such third anniversary is not a Business Day, the next succeeding Business Day and (c) the date of the consummation of any sale of all or substantially all of the assets of Payor.

          “Payor Common Stock” means the Class A common stock, no par value, of Payor or any successor security into which Class A common stock shall have been reclassified, exchanged or converted (including as a result of a merger, reorganization, consolidation, share exchange or similar business combination).

          “Prepayment Election Date” means the date for prepayment specified in the Prepayment Election Notice, which date shall be not greater than three Trading Days following the date on which the Prepayment Election Notice is delivered to Payor and shall in all events be prior to the Maturity Date.

          “Prepayment Election Notice” means a written notice delivered by Payor to Holder stating Payor’s election to prepay all or any portion of the outstanding principal amount of this Note in shares of Repayment Stock, the Prepayment Election Date, the number of shares of Repayment Stock to be issued and the amount of cash to be paid in lieu of any fractional share of Repayment Stock.

          “Registration Rights Agreement” means the Registration Rights Agreement between Payor and Holder, dated as of the Execution Date.

          “Repayment Amount” means, as of any date of determination, the outstanding principal amount of this Note, plus any accrued and unpaid interest thereon to such date.

          “Repayment Stock” means a number of shares of Payor Common Stock that is calculated by dividing (x) the portion of the outstanding principal amount of and accrued and unpaid interest on this Note specified in the Prepayment Election Notice to be prepaid in Payor Common Stock, by (y) 95% of the Average Price calculated as of the date on which the Prepayment Election Notice is delivered to Holder.

          “Securities Act” means the Securities Act of 1933, as amended.

          “Stock Equivalents” has the meaning set forth in Section 4.1.

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          “Threshold Price” means the Initial Threshold Price as the same may be adjusted pursuant to Section 4 herein.

          “Trading Day” means any day on which (i) there is no Market Disruption Event and (ii) the NASDAQ National Market (at such time that the NASDAQ National Market is not a national securities exchange) or the U.S. national securities exchange on which the Payor Common Stock is listed, admitted for trading or quoted, is open for trading or, if the Payor Common Stock is not so listed, admitted for trading or quoted, any Business Day. A “Trading Day” only includes those days that have a scheduled closing time of 4:00 p.m. (Eastern Time) or the then standard closing time for regular trading on the relevant trading system.

          “Trigger Event” means if the Closing Price of the Payor Common Stock is equal to or greater than the Threshold Price for 20 Trading Days during any 30 consecutive Trading Day period prior to the Maturity Date.

     1. Interest; Repayment Prior to Maturity.

          1.1 Interest.

               (a) Interest on this Note shall be calculated on the basis of a 360-day year consisting of twelve 30-day months and shall be payable to Holder, in cash, by check or by wire transfer at an address or to an account designated by Holder in advance, on each Interest Payment Date until this Note is either converted or repaid in full as provided herein.

               (b) The outstanding principal amount of this Note will bear interest for each Interest Period at a per annum rate equal to LIBOR as determined on the second London Business Day preceding the commencement of such Interest Period (the “Interest Determination Date”) plus 1.33% (133 basis points) (the “Interest Rate”). The Interest Determination Date for this Note for the first Interest Period is May 22, 2006. Promptly upon determination of the rate by Payor, Payor will inform Holder of the interest rate for the next Interest Period. On any Interest Determination Date, LIBOR will be equal to the offered rate for deposits in U.S. dollars having an index maturity of one month, in amounts of at least $1.0 million, as such rate appears on Telerate Page 3750 at approximately 11:00 a.m., London time, on such Interest Determination Date. If Telerate Page 3750 is replaced by another service or ceases to exist, Payor will use the replacing service or such other service that may be nominated by the British Bankers’ Association for the purpose of displaying LIBOR for U.S. dollar deposits. If no offered rate appears on Telerate Page 3750 on an Interest Determination Date at approximately 11:00 a.m., London time, then Payor will select four major banks in the London interbank market and shall request each of their principal London offices to provide a quotation of the rate at which one-month deposits in U.S. dollars in amounts of at least $1.0 million are offered by it to prime banks in the London interbank market, on that date and at that time, that is representative of single transactions at that time. If at least two quotations are provided, LIBOR will be the arithmetic average of the quotations provided. Otherwise, Payor will select three major banks in New York City and shall request each of them to provide a quotation of the rate offered by them at approximately 11:00 a.m., New York City time, on the Interest Determination Date for loans in U.S. dollars to leading European banks having an index maturity of one month for the applicable

4

Interest Period in an amount of at least $1.0 million that is representative of single transactions at that time. If three quotations are provided, LIBOR will be the arithmetic average of the quotations provided. Otherwise, the rate of LIBOR for the next Interest Period will be set equal to the rate of LIBOR for the then-current Interest Period.

               (c) If Payor defaults in a payment of interest on the Notes, it shall pay the defaulted interest plus, to the extent permitted by law, interest payable on the defaulted interest at a rate equal to 2.76% over the Interest Rate.

          1.2 Cash Prepayment at Payor’s Option. Payor may, at its option and without penalty, prepay all or any portion of the outstanding principal amount of and accrued and unpaid interest on this Note at any time prior to the Maturity Date by payment to Holder at an address or to an account designated by Holder in advance by wire transfer of immediately available funds.

          1.3 Stock Prepayment at Payor’s Option.

               (a) Subject to paragraph (c) below, Payor may, at its sole option and without penalty, elect to prepay all or any portion of the outstanding principal amount of and accrued and unpaid interest on this Note at any time prior to the Maturity Date in Repayment Stock in the event that:

                    (i) a Trigger Event has occurred within the preceding 180 calendar days; and

                    (ii) the Average Price exceeds $[THE CLOSING PRICE ON THE TRADING DAY PRIOR TO THE CLOSING DATE] (subject to adjustment on the same basis as the Initial Threshold Price shall be adjusted in accordance with Section 4) per share (calculated as of the date on which the Prepayment Election Notice is delivered to Holder),

by delivering to Holder a Prepayment Election Notice pursuant to the notice provisions set forth in Section 11.05 of the Purchase Agreement.

               (b) Delivery of Prepayment Stock. On the Prepayment Election Date specified in the applicable Prepayment Election Notice, Payor shall, at its expense, issue and deliver to Holder at Payor’s principal office, a certificate or certificates for any shares of the Repayment Stock to which Holder is entitled (bearing such legends as are required by Section 5 and applicable state and federal securities laws), together with cash in lieu of any fractional share (determined by multiplying such fractional share by the Average Price as of the date on which the Prepayment Election Notice is delivered to Holder). Any repayment of this Note or any portion thereof in shares of Repayment Stock pursuant to this Section 1.3 will be deemed to have been made on the applicable Prepayment Election Date and such shares of Repayment Stock shall be dated as of the applicable Prepayment Election Date.

               (c) Registration. Payor shall not be permitted to prepay this Note with Repayment Stock pursuant to this Section 1.3, unless, at the time of such prepayment (i) the Securities Exchange Commission shall have declared effective a shelf registration statement under the Securities Act covering the resale of the Repayment Stock or (ii) the Repayment Stock

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shall no longer be Registerable Securities (as defined in the Registration Rights Agreement), each in accordance with the Registration Rights Agreement.

          1.4 Financing Prepayments.

               (a) Upon the consummation of a Financing Transaction that results in net proceeds to Payor and/or any of its subsidiaries of $100,000,000 or more from such Financing Transaction prior to the termination of this Note upon payment in full, Payor shall pay to Holder the Repayment Amount as of the Financing Prepayment Date at an address or to an account designated by Holder in advance by wire transfer of immediately available funds on or before the Financing Prepayment Date.

               (b) Upon the consummation of any Financing Transaction that results in net proceeds to Payor and/or any of its subsidiaries of less than $100,000,000 from such Financing Transaction prior to the termination of this Note upon payment in full, Payor shall prepay, on the applicable Financing Prepayment Date, the outstanding principal amount of and accrued and unpaid interest on this Note in an aggregate amount equal to the lesser of (x) the Repayment Amount and (y) 20% of the net proceeds of such Financing Transaction, which prepayment shall be made at an address or to an account designated by Holder in advance by wire transfer of immediately available funds on or prior to such Financing Prepayment Date.

     2. Repayment at Holders’ Demand.

          At any time following the occurrence of a Trigger Event, Holder shall have the right to demand payment of this Note in full, and not in part, by providing written notice thereof (the “Demand Repayment Notice”) in accordance with Section 15.

     3. Repayment at Maturity.

          3.1 Repayment. The Repayment Amount shall be due and payable by Payor on the Maturity Date by wire transfer of immediately available funds to an account designated by Holder prior to the second Business Day preceding the Maturity Date.

          3.2 Delivery of Note. Upon repayment of this Note to Holder in full by payment of cash and/or delivery of certificates representing the Repayment Stock in accordance with the terms of this Note (a) this Note shall become fully paid and satisfied, (b) all rights with respect to this Note shall immediately cease and terminate, except only the right to receive such repayment and/or shares of Repayment Stock in exchange therefor, and (c) Holder shall surrender this Note, duly endorsed for cancellation, to Payor.

     4. Threshold Price Adjustments.

          4.1 Stock Splits, Dividends, Etc. In the event Payor should at any time or from time to time after the Execution Date effectuate a split or subdivision of the outstanding shares of Payor Common Stock or fix a record date for the determination of holders of Payor Common Stock entitled to receive a dividend or other distribution payable in additional shares of Payor Common Stock or other securities or rights convertible into, or entitling the holder thereof

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to receive directly or indirectly, additional shares of Payor Common Stock (hereinafter referred to as “Stock Equivalents”) without payment of any consideration by such holder for the additional shares of Payor Common Stock or the Stock Equivalents, then, as of such record date (or the date of such dividend distribution, split or subdivision if no record date is fixed), the Threshold Price then in effect shall be reduced to the number obtained by multiplying the Threshold Price in effect at such date by a fraction, the numerator of which is the number of shares of Payor Common Stock outstanding immediately prior to such action, and the denominator of which shall be the number of shares of Payor Common Stock outstanding immediately following such action assuming the full conversion or exercise, as applicable, of such Stock Equivalents.

          4.2 Reverse Stock Split, Combination. If the number of shares of Payor Common Stock outstanding at any time after the Execution Date is decreased by a reverse stock split or combination of the outstanding shares of Payor Common Stock, then, following the effective date of such combination, the Threshold Price then in effect shall be increased to the number obtained by multiplying the Threshold Price in effect at such date by a fraction, the numerator of which is the number of shares of Payor Common Stock outstanding immediately prior to such action, and the denominator of which shall be the number of shares of Payor Common Stock outstanding immediately following such action.

          4.3 Successive Adjustments. Successive adjustments in the Threshold Price shall be made, without duplication, whenever any event specified in Section 4.1 or 4.2 shall occur.

          4.4 Minimal Adjustments. All calculations under this Section 4 shall be made to the nearest cent. No adjustment in the Threshold Price need be made if such adjustment would result in a change in the Threshold Price of less than $0.01. Any adjustment of less than $0.01 that is not made shall be carried forward and shall be made at the time of and together with any subsequent adjustment which, on a cumulative basis, amounts to an adjustment of $0.01 or more in the Threshold Price.

          4.5 Adjustment Notice. In the event the Threshold Price is adjusted pursuant to Section 4.1 or 4.2, Payor will promptly mail to Holder a statement setting forth in reasonable detail the event requiring the adjustment, the amount of the adjustment, and the method by which such adjustment was calculated, and the date on which such adjustment became effective.

     5. Transfer, Legend and Stop Transfer Orders.

          5.1 Holder acknowledges that this Note and the Repayment Stock have not been registered under the Securities Act and agrees not to sell, pledge, distribute, offer for sale, transfer or otherwise dispose of this Note or any Repayment Stock unless (a) there is an effective registration covering such Note or such shares of Repayment Stock, as the case may be, under the Securities Act and applicable states securities laws or (b) if requested by Payor, Payor first receives a letter from an attorney reasonably acceptable to Payor (it being understood that Milbank, Tweed, Hadley & McCloy LLP shall be deemed acceptable to Payor) stating that in the opinion of the attorney the proposed transfer is exempt from registration under the Securities

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Act, and under all applicable state securities laws. Unless the shares of Repayment Stock have been registered under the Securities Act, upon the issuance of any shares of Repayment Stock, Payor shall instruct its transfer agent or registrar to enter stop transfer orders with respect to such shares, and all certificates representing shares of Repayment Stock shall bear on the face thereof substantially the following legend:

THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE HOLDER MAY NOT TRANSFER THE SECURITIES EVIDENCED HEREBY UNLESS (A) THERE IS AN EFFECTIVE REGISTRATION COVERING THE SECURITIES EVIDENCED BY THIS CERTIFICATE UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND APPLICABLE STATE SECURITIES LAWS OR (B) IF REQUESTED BY AVANIR PHARMACEUTICALS, IT FIRST RECEIVES A LETTER FROM AN ATTORNEY REASONABLY ACCEPTABLE TO IT STATING THAT IN THE OPINION OF THE ATTORNEY THE PROPOSED TRANSFER IS EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND UNDER ALL APPLICABLE STATE SECURITIES LAWS.

          5.2 Prior to any such proposed transfer, and as a condition thereto, if such transfer is not made pursuant to an effective registration statement under the Securities Act, Holder will, if requested by Payor, deliver to Payor a certificate of the proposed transferee in the form attached to this Note as Exhibit A.

     6. Rights of Holder.

          Holder shall not, by virtue hereof, be entitled to any rights of a stockholder in Payor, either at law or in equity, and the rights of Holder are limited to those expressed in this Note.

     7. Representation and Warranties.

          7.1 Holder. Holder has delivered to Payor an Accredited Investor Certificate (as defined in the Purchase Agreement).

          7.2 Payor.

               (a) All shares of Payor Common Stock to be issued to Holder as Repayment Stock, when issued pursuant to and in accordance with this Note and the Purchase Agreement, will be duly authorized, validly issued, fully paid and non-assessable.

               (b) Payor has duly reserved a sufficient number of shares of Payor Common Stock for the issuance of the Repayment Stock.

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     8. Covenants of Payor. For so long as this Note shall remain outstanding, Payor shall keep a sufficient number of shares of Payor Common Stock reserved for the issuance of the Repayment Stock.

     9. Events of Default.

          9.1 The following events will be considered “Events of Default” with respect to this Note:

               (a) Payor defaults in the payment of any part of the Repayment Amount at the Maturity Date;

               (b) Payor defaults in the payment the amount to be paid pursuant to Section 1.4 on any Financing Prepayment Date and such default continues for a period of three Business Days;

               (c) Payor defaults in the delivery of any Repayment Stock as of the Prepayment Election Date and such default continues for a period of three Trading Days;

               (d) Payor defaults in the payment of any interest due on the Note, which default continues for 30 days;

               (e) the occurrence of an event of default under any of the Additional Notes, and any of the Contingent Note or the Alternate Contingent Notes (each as defined in the Purchase Agreement and if issued in accordance with Section 1.04(c) of the Purchase Agreement);

               (f) Payor defaults in the payment of any Contingent Payment, any Non-US Licensing Earn-Out Payment or any Run Rate Contingent Payment (each as defined in the Purchase Agreement) that the parties or the Independent Accounting Firm (as defined in the Purchase Agreement) have determined is due and payable in accordance with the terms of the Purchase Agreement and such default continues for three Business Days;

               (g) Payor makes an assignment for the benefit of creditors, or admits in writing its inability to pay its debts as they become due, or files a voluntary petition for bankruptcy, or files any petition or answer seeking for itself any reorganization, arrangement, composition, readjustment, dissolution or similar relief under any present or future statute, law or regulation, or files any answer admitting the material allegations of a petition filed against Payor in any such proceeding, or seeks or consents to, or acquiesces in, the appointment of any trustee, receiver or liquidator of Payor, or of all or any substantial part of the properties of Payor, or Payor or its respective directors or majority shareholders takes any action looking to the dissolution or liquidation of Payor; or

               (h) Within 30 days after the commencement of any proceeding against Payor seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future statute, law or regulation, such proceeding has not been dismissed or, within 30 days after the appointment without the consent

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or acquiescence of Payor of any trustee, receiver or liquidator of Payor or of all or any substantial part of the properties of Payor, such appointment will not have been vacated.

          9.2 Upon the occurrence of an Event of Default, at the option and upon the declaration of Holder, the Repayment Amount will, without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived, be forthwith due and payable, and Holder may, immediately and without expiration of any additional period of grace, enforce payment of all amounts due and owing under this Note and exercise any and all other remedies granted to it at law, in equity or otherwise. No right or remedy herein conferred upon Holder is intended to be exclusive of any other right or remedy contained in the Purchase Agreement, the Registration Rights Agreement, this Note or in any instrument or document delivered in connection with or pursuant to the Purchase Agreement, the Registration Rights Agreement or this Note and every such right or remedy contained herein and therein or now or hereafter existing at law or in equity or by statute, or otherwise may be exercised separately or in any combination. No course of dealing between Payor and the Holder or any failure or delay on the Holder’s part in exercising any rights or remedies hereunder shall operate as a waiver or preclude the exercise of any other rights or remedies hereunder.

     10. Governing Law.

          The terms of this Note and disputes arising hereunder will be construed in accordance with and governed by the laws of the State of California, as applied to contracts entered into by California residents within the State of California, which contracts are to be performed entirely within the State of California, without reference to principles of conflicts of laws.

     11. Waiver.

          A delay in exercising rights any hereunder will not constitute a waiver of any such rights.

     12. Loss, Theft, Destruction or Mutilation.

          Upon receipt by Payor of evidence and indemnity reasonably satisfactory to it of the loss, theft, destruction or mutilation of, and upon surrender and cancellation of this Note, if mutilated, Payor will make and deliver in lieu of this Note a new note of like tenor and unpaid principal amount and dated as of the date to which interest, if any, has been paid on the unpaid principal amount of this Note.

     13. Assignment.

          This Note, and the obligations and rights of Payor hereunder, will be binding upon and inure to the benefit of Payor, Holder, and their respective heirs, personal representatives, successors and assigns, except that (a) Holder may only assign or transfer any of its rights or obligations under this Note in accordance with Section 5, and (b) Payor may not assign or transfer any of its rights or obligations under this Note without the prior written consent of Holder; provided, however that Payor may assign its rights or obligations under this Note

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without obtaining such consent to any successor or purchaser in connection with a merger of Payor; provided, further that Payor shall provide Holder with written notice of the proposed assignment at least ten Business Days prior to such merger.

     14. Amendments and Waivers.

          Changes in or amendments or additions to this Note may only be made, and compliance with any term, covenant, agreement, condition or provision set forth herein may only be omitted or waived (either generally or in a particular instance and either retroactively or prospectively), upon written consent of each of Payor and Holder.

     15. Notices.

          Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified in this Section prior to 5:00 p.m. (California time) on a Business Day, (ii) the Business Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Note later than 5:00 p.m. (California time) on any date and earlier than 11:59 p.m. (California time) on such date, (iii) the Business Day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. The address for such notices and communications shall be as follows:

If to Payor:	Avanir Pharmaceuticals
	11388 Sorrento Valley Rd.
	San Diego, CA 92121
	Attention: Michael Puntoriero
	Telephone: (858) 622-5200
	Fax: (858) 658-7447
With a copy to:	Latham & Watkins LLP
	650 Town Center Drive, 20th Floor
	Costa Mesa, CA 92626
	Attention: Cary K. Hyden and Jonn R. Beeson
	Telephone: (714) 540-1235
	Fax: (714) 755-8290
If to Cutler:	Neal R. Cutler
	[Address]
With a copy to:	Milbank, Tweed, Hadley & McCloy LLP
	601 South Figueroa Street, 30th Floor
	Los Angeles, California 90017

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	Attn: Brett Goldblatt
	Telephone: (213) 892-4000
	Fax: (213) 629-5063
If to any other Person who is then the Holder:	To the address of such Holder as it appears in the certificate provided to Payor in accordance with Section 5.2

or such other address as may be designated in writing hereafter, in the same manner, by such Person.

[SIGNATURE PAGE FOLLOWS]

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          IN WITNESS WHEREOF, Payor has caused this Note to be duly executed and delivered as of the date first written above.

AVANIR PHARMACEUTICALS
By:	/s/ Michael J. Puntoriero
Name:	Michael J. Puntoriero
Title:	Senior Vice President and Chief Financial Officer

Signature Page to Buyer Note 1

          IN WITNESS WHEREOF, Holder acknowledges the terms and conditions of this Note and received delivery of this Note as of the date first written above.

NEAL R. CUTLER
By:	/s/ Neal R. Cutler
	Neal R. Cutler

Signature Page to Buyer Note 1

EXHIBIT A
CERTIFICATE OF PROPOSED TRANSFER

CERTIFICATE OF PROPOSED TRANSFER

          The undersigned holder (the “Holder”) of the senior note of Avanir Pharmaceuticals, a California Corporation (the “Company”) in the amount of $14,400,000 dated May 24, 2006, to which this Certificate is attached (the “Note”) and which may be prepaid in cash or, under certain circumstances as set forth in the Note, in shares of Class A common stock, no par value of the Company (the “Common Stock”), proposes to sell, pledge, distribute, offer for sale, transfer or otherwise dispose of this Note to the transferee identified below (the “Transferee”):

PLEASE NAME, ADDRESS AND SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF TRANSFEREE:

_________________________________

_________________________________

_________________________________

_________________________________

_________________________________

          The Holder and the Transferee acknowledge that the Holder received the Note pursuant to that certain Unit Purchase Agreement dated as of May 22, 2006 (the “Purchase Agreement”), between Company, the parties listed on Schedule A to the Purchase Agreement and Alamo Pharmaceuticals, LLC, a California limited liability company, and that in issuing the Note to the Holder, the Company relied upon a certificate executed by the Holder for purposes of demonstrating that the Holder is an “accredited investor” within the meaning of Rule 501(a) of Regulation D promulgated under the Securities Act of 1933, as amended (the “Act”). Pursuant to Section 5 of the Note, the Transferee does hereby certify as follows:

1. The Transferee falls within one or more of the following categories (please initial one or more, as applicable):

          ___ (a) a private business development company as defined in Section 202(a)(22) of the Investment Advisers Act of 1940;

          ___ (b) an organization described in Section 501(c)(3) of the Internal Revenue Code of 1986, corporation, or similar business trust, or partnership, not formed for the specific purpose of acquiring the Note or the Common Stock, with total assets in excess of $5,000,000;

          ___ (c) a natural person whose individual net worth, or joint net worth with that person’s spouse, as of the date hereof, exceeds $1,000,000;

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          ___ (d) a natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person’s spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year;

          ___ (e) a trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the Note or the Common Stock, whose acquisition is directed by a sophisticated person as described in Rule 506(b)(2)(ii) of Regulation D; and

          ___ (f) an entity in which all of the equity owners are accredited The Transferees (as defined in 2(a) – 2(e) above).

2. The Transferee is a sophisticated investor, knowledgeable, sophisticated and experienced in business and financial matters. The Transferee is able to bear the economic risk of holding the Note and the Common Stock for an indefinite period and is able to afford the complete loss of his investment in the Note and the Common Stock.

3. The Transferee has had the opportunity to consult and has been advised or has elected to proceed without advise from his legal counsel and tax advisor in connection with his acquisition of the Note and the Common Stock, and acknowledges that no representations as to potential profit and tax consequences of any sort have been made by the Company, any officer or any employee or representative or affiliate of the Company, and that projections and any other information, including, without limitation, financial and descriptive information and documentation, that may have been in any manner submitted to the Transferee shall not constitute any representation or warranty of any kind or nature, express or implied.

4. The Transferee has had access to certain financial and other information, including without limitation the Company’s most current Form 10-K and proxy statement and other filings with the Securities and Exchange Commission available on the Company’s website at www.avanir.com and has been afforded the opportunity to ask questions of representatives of the Company relating thereto, and to receive answers to those questions, as the Transferee deemed necessary in connection with the acquisition of the Note and the Common Stock. The Transferee has carefully considered potential risks relating to the Company and the acquisition of the Note and the Common Stock.

5. The Transferee acknowledges that it will acquire the Note and the Common Stock in transactions not involving any public offering within the meaning of the Act and that the Note and the shares of the Common Stock have not been registered under the Act (unless the sale of the Common Stock shall have been registered under the Act, pursuant to the terms of that certain Registration Rights Agreement dated May 24, 2006, by and between the Company and the Holder (the “Registration Rights Agreement”).

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6. The Transferee agrees not to offer, sell, transfer or otherwise dispose of the Note or the Common Stock in the absence of registration under the Act unless, if requested by the Company, the Transferee delivers to the Company an opinion of a lawyer experienced in securities law matters and reasonably acceptable to the Company (it being understood that Milbank, Tweed, Hadley & McCloy LLP shall be deemed acceptable to Payor) stating that in the opinion of the attorney the proposed sale, transfer or other disposition is exempt from registration under the Act and under all applicable state securities or blue sky laws.

     7. The Transferee acknowledges that the Note will bear a legend to the following effect:

NEITHER THIS SENIOR NOTE (THIS “NOTE”) NOR THE SHARES OF STOCK THAT MAY BE ISSUABLE UPON REPAYMENT OF ANY PORTION OF THIS NOTE, IF APPLICABLE, HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE HOLDER MAY NOT TRANSFER THIS NOTE OR THE SHARES OF STOCK THAT MAY BE ISSUABLE UPON REPAYMENT OF ANY PORTION OF THIS NOTE UNLESS (A) THERE IS AN EFFECTIVE REGISTRATION COVERING THIS NOTE OR THE SHARES OF STOCK THAT MAY BE ISSUABLE UPON REPAYMENT OF ANY PORTION OF THIS NOTE UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND APPLICABLE STATE SECURITIES LAWS OR (B) IF REQUESTED BY AVANIR PHARMACEUTICALS, IT FIRST RECEIVES A LETTER FROM AN ATTORNEY REASONABLY ACCEPTABLE TO IT STATING THAT IN THE OPINION OF THE ATTORNEY THE PROPOSED TRANSFER IS EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND UNDER ALL APPLICABLE STATE SECURITIES LAWS.

8. The Transferee acknowledges that the Common Stock will be in the form of physical certificates and that the certificates will bear a legend to the following effect (unless the sale of the Common Stock shall have been registered under the Act pursuant to the terms of the Registration Rights Agreement):

THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE HOLDER MAY NOT TRANSFER THE SECURITIES EVIDENCED HEREBY UNLESS (A) THERE IS AN EFFECTIVE REGISTRATION COVERING THE SECURITIES EVIDENCED BY THIS CERTIFICATE UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND APPLICABLE STATE SECURITIES LAWS OR (B) IF REQUESTED BY AVANIR PHARMACEUTICALS, IT FIRST RECEIVES A LETTER FROM AN ATTORNEY REASONABLY ACCEPTABLE TO IT STATING THAT IN THE OPINION OF THE ATTORNEY THE PROPOSED TRANSFER IS EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND UNDER ALL APPLICABLE STATE SECURITIES LAWS.

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9. The Transferee acknowledges that the Company may place a stop transfer order with its transfer agent or registrar to enforce the provisions of Section 5 of the Note.

10. The Transferee represents that it will acquire the Note and the Common Stock solely for his own account for the purpose of investment only and not as a nominee or agent for any other person and not with a view to, or for offer or sale in connection with, any distribution or resale thereof, in whole or in part, in violation of the Act or state securities or “blue sky” laws, without prejudice, however, to his right to sell or otherwise dispose of all or any part of the Common Stock pursuant to an effective registration statement under the Act or under an exemption from registration available under the Act.

11. The Company is entitled to rely on this Certificate in connection with its obligations pursuant to the Purchase Agreement and the Note.

[SIGNATURE PAGE FOLLOWS]

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          IN WITNESS WHEREOF, the Holder and the Transferee have executed this Certificate of Proposed Transfer as of the date first written above.

Holder
By:
	Neal R. Cutler
Transferee
By:

EX-10.3

EXHIBIT 10.3

NEITHER THIS SENIOR NOTE (THIS “NOTE”) NOR THE SHARES OF STOCK THAT MAY BE ISSUABLE UPON REPAYMENT OF ANY PORTION OF THIS NOTE, IF APPLICABLE, HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE HOLDER MAY NOT TRANSFER THIS NOTE OR THE SHARES OF STOCK THAT MAY BE ISSUABLE UPON REPAYMENT OF ANY PORTION OF THIS NOTE UNLESS (A) THERE IS AN EFFECTIVE REGISTRATION COVERING THIS NOTE OR THE SHARES OF STOCK THAT MAY BE ISSUABLE UPON REPAYMENT OF ANY PORTION OF THIS NOTE UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND APPLICABLE STATE SECURITIES LAWS OR (B) IF REQUESTED BY AVANIR PHARMACEUTICALS, IT FIRST RECEIVES A LETTER FROM AN ATTORNEY REASONABLY ACCEPTABLE TO IT STATING THAT IN THE OPINION OF THE ATTORNEY THE PROPOSED TRANSFER IS EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND UNDER ALL APPLICABLE STATE SECURITIES LAWS.

SENIOR NOTE

$6,675,000.00	May 24, 2006 (the “Execution Date”)
	Costa Mesa, California

          For value received Avanir Pharmaceuticals, a California corporation (“Payor”), promises to pay to Neal R. Cutler (“Holder”) the principal sum of Six Million Six Hundred Seventy-Five Thousand dollars ($6,675,000.00) in lawful money of the United States in immediately available funds and to pay interest on the outstanding principal amount of this Senior Note (this “Note”) as provided herein, until this Note is repaid in full.

          This Note is issued pursuant to and subject to the terms of the Unit Purchase Agreement dated as of May 22, 2006 (the “Purchase Agreement”) by and among Payor, the parties listed on Schedule A to the Purchase Agreement and Alamo Pharmaceuticals, LLC, a California limited liability company, and is issued concurrently with that certain Senior Note in the principal sum of $14,400,000 by and between Payor and Holder (the “Buyer Note 1”) and that certain Senior Note in the principal sum of $4,000,000 by and between Payor and Holder (the “Buyer Note 2”, together with Buyer Note 1, the “Additional Notes”).

          For the purposes of this Note, the following terms shall have the meanings set forth below:

          “Average Price” means the average of the per share Closing Prices of the Payor Common Stock for the 5 consecutive Trading Days ending on the Trading Day immediately preceding the date of the applicable calculation, provided that in calculating the Average Price, each Closing Price during the period commencing on the first Trading Day of such 5 consecutive Trading Day period and ending on the date of an event that would require an adjustment of the Threshold Price pursuant to Section 3 hereof, shall be appropriately adjusted to take into account the occurrence of the event that would result in an adjustment of the Threshold Price.

          “Business Day” means any day that is not a Saturday, Sunday or other day on which banks in the State of California are authorized or required to close.

          “Closing Price” of the Payor Common Stock on any date means the closing per share sale price (or, if no closing sale price is reported, the average of the bid and ask prices or, if more than one in either case, the average of the average bid and average ask prices) on such date as reported on the NASDAQ National Market (at such time that the NASDAQ National Market is not a national securities exchange), or if such bid and ask prices are not reported by the NASDAQ National Market, in a manner to be determined by the Payor on the basis of such quotation as the Payor’s Board of Directors considers appropriate in its reasonable discretion or if the Payor Common Stock is traded on a U.S. national securities exchange, the closing per share sale price of the Payor Common Stock as is reported in composite transactions for the principal U.S. securities exchange on which the Payor Common Stock is so traded.

          “Events of Default” has the meaning set forth in Section 9.1.

          “Financing Prepayment Date” means three Business Days following the consummation of the applicable Financing Transaction.

          “Financing Transaction” means each (a) sale by Payor or any of its subsidiaries of any of its debt, equity or convertible securities when such securities have been registered for public sale pursuant to the Securities Act and (b) sale by Payor or any of its subsidiaries to investors of any of its debt, equity or convertible securities in a transaction exempt from the registration requirements of the Securities Act (but, in each case, excluding the issuance of (i) options or stock issued to employees, consultants, advisors, officers or directors pursuant to a plan or arrangement approved in advance by Payor’s Board of Directors, (ii) securities issued to lessors in connection with lease financings and the like, (iii) securities issued on conversion of any outstanding convertible securities of Payor, (iv) securities issued by a subsidiary of Payor to Payor or another subsidiary of Payor and (v) and securities issued as consideration for mergers, acquisitions or to strategic partners). In no event shall a Financing Transaction include the proceeds of bank loans or credit facilities or revenues from the licensing or sale of any of Payor’s products, services or technologies.

          “Initial Threshold Price” means $15.00.

          “Interest Determination Date” has the meaning set forth in Section 1.1(b).

          “Interest Payment Date” means the 24th day of each month, or if such date is not a Business Day, the next succeeding Business Day.

          “Interest Period” means the period from May 24, 2006 to but excluding the first Interest Payment Date and each successive period from and including each Interest Payment Date to but excluding the following Interest Payment Date.

          “Interest Rate” has the meaning set forth in Section 1.1(a)

          “LIBOR” means the London interbank offered rates.

          “London Business Day” is a day on which dealings in deposits in U.S. dollars are transacted in the London interbank market.

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          “Market Disruption Event” means the occurrence or existence for more than one two-hour period in the aggregate on any scheduled Trading Day of any suspension or limitation imposed on trading in the Payor Common Stock or in any options, contracts or future contracts relating to the Payor Common Stock, and such suspension or limitation occurs or exists at any time before 1:00 p.m. (Eastern Time) on such day.

          “Maturity Date” means the earlier of (a) the third anniversary of the Execution Date, or if such third anniversary is not a Business Day, the next succeeding Business Day and (b) the date of the consummation of any sale of all or substantially all of the assets of Payor.

          “Payor Common Stock” means the Class A common stock, no par value, of Payor, or any successor security into which Class A common stock shall have been reclassified, exchanged or converted (including as a result of a merger, reorganization, consolidation, share exchange or similar business combination).

          “Prepayment Election Date” means the date for prepayment specified in the Prepayment Election Notice, which date shall be not greater than three Trading Days following the date on which the Prepayment Election Notice is delivered to Payor and shall in all events be prior to the Maturity Date.

          “Prepayment Election Notice” means a written notice delivered by Payor to Holder stating Payor’s election to prepay all or any portion of the outstanding principal amount of this Note in shares of Repayment Stock, the Prepayment Election Date, the number of shares of Repayment Stock to be issued and the amount of cash to be paid in lieu of any fractional share of Repayment Stock.

          “Repayment Amount” means, as of any date of determination, the outstanding principal amount of this Note, plus any accrued and unpaid interest thereon to such date.

          “Repayment Stock” means a number of shares of Payor Common Stock that is calculated by dividing (x) the portion of the outstanding principal amount of and accrued and unpaid interest on this Note specified in the Prepayment Election Notice to be prepaid in Payor Common Stock, by (y) 95% of the Average Price calculated as of the date on which the Prepayment Election Notice is delivered to Holder.

          “Registration Rights Agreement” means the Registration Rights Agreement between Payor and Holder, dated as of the Execution Date.

          “Securities Act” means the Securities Act of 1933, as amended.

          “Stock Equivalents” has the meaning set forth in Section 3.1.

          “Threshold Price” means the Initial Threshold Price as the same may be adjusted pursuant to Section 3 herein.

          “Trading Day” means any day on which (i) there is no Market Disruption Event and (ii) the NASDAQ National Market (at such time that the NASDAQ National Market is not a

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national securities exchange) or the U.S. national securities exchange on which the Payor Common Stock is listed, admitted for trading or quoted, is open for trading or, if the Payor Common Stock is not so listed, admitted for trading or quoted, any Business Day. A “Trading Day” only includes those days that have a scheduled closing time of 4:00 p.m. (Eastern Time) or the then standard closing time for regular trading on the relevant trading system.

          “Trigger Event” means if the Closing Price of the Payor Common Stock is equal to or greater than the Threshold Price for 20 Trading Days during any 30 consecutive Trading Day period prior to the Maturity Date.

     1. Interest; Repayment Prior to Maturity.

          1.1 Interest.

               (a) Interest on this Note shall be calculated on the basis of a 360-day year consisting of twelve 30-day months and shall be payable to Holder, in cash, by check or by wire transfer at an address or to an account designated by Holder in advance, on each Interest Payment Date until this Note is either converted or repaid in full as provided herein.

               (b) The outstanding principal amount of this Note will bear interest for each Interest Period at a per annum rate equal to LIBOR as determined on the second London Business Day preceding the commencement of such Interest Period (the “Interest Determination Date”) plus 1.33% (133 basis points) (the “Interest Rate”). The Interest Determination Date for this Note for the first Interest Period is May 22, 2006. Promptly upon determination of the rate by Payor, Payor will inform Holder of the interest rate for the next Interest Period. On any Interest Determination Date, LIBOR will be equal to the offered rate for deposits in U.S. dollars having an index maturity of one month, in amounts of at least $1.0 million, as such rate appears on Telerate Page 3750 at approximately 11:00 a.m., London time, on such Interest Determination Date. If Telerate Page 3750 is replaced by another service or ceases to exist, Payor will use the replacing service or such other service that may be nominated by the British Bankers’ Association for the purpose of displaying LIBOR for U.S. dollar deposits. If no offered rate appears on Telerate Page 3750 on an Interest Determination Date at approximately 11:00 a.m., London time, then Payor will select four major banks in the London interbank market and shall request each of their principal London offices to provide a quotation of the rate at which one-month deposits in U.S. dollars in amounts of at least $1.0 million are offered by it to prime banks in the London interbank market, on that date and at that time, that is representative of single transactions at that time. If at least two quotations are provided, LIBOR will be the arithmetic average of the quotations provided. Otherwise, Payor will select three major banks in New York City and shall request each of them to provide a quotation of the rate offered by them at approximately 11:00 a.m., New York City time, on the Interest Determination Date for loans in U.S. dollars to leading European banks having an index maturity of one month for the applicable Interest Period in an amount of at least $1.0 million that is representative of single transactions at that time. If three quotations are provided, LIBOR will be the arithmetic average of the quotations provided. Otherwise, the rate of LIBOR for the next Interest Period will be set equal to the rate of LIBOR for the then-current Interest Period.

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               (c) If Payor defaults in a payment of interest on the Notes, it shall pay the defaulted interest plus, to the extent permitted by law, interest payable on the defaulted interest at a rate equal to 2.76% over the Interest Rate.

          1.2 Cash Prepayment at Payor’s Option. Payor may, at its option and without penalty, prepay all or any portion of the outstanding principal amount of and accrued and unpaid interest on this Note at any time prior to the Maturity Date by payment to Holder at an address or to an account designated by Holder in advance by wire transfer of immediately available funds.

          1.3 Stock Prepayment at Payor’s Option.

               (a) Subject to paragraph (c) below, Payor may, at its sole option and without penalty, elect to prepay all or any portion of the outstanding principal amount of and accrued and unpaid interest on this Note at any time prior to the Maturity Date in Repayment Stock in the event that:

                    (i) a Trigger Event has occurred within the preceding 180 calendar days; and

                    (ii) the Average Price exceeds $[THE CLOSING PRICE ON THE TRADING DAY PRIOR TO THE CLOSING DATE] (subject to adjustment on the same basis as the Initial Threshold Price shall be adjusted in accordance with Section 3) per share (calculated as of the date on which the Prepayment Election Notice is delivered to Holder),

by delivering to Holder a Prepayment Election Notice pursuant to the notice provisions set forth in Section 11.05 of the Purchase Agreement.

               (b) Delivery of Prepayment Stock. On the Prepayment Election Date specified in the applicable Prepayment Election Notice, Payor shall, at its expense, issue and deliver to Holder at Payor’s principal office, a certificate or certificates for any shares of the Repayment Stock to which Holder is entitled (bearing such legends as are required by Section 5 and applicable state and federal securities laws), together with cash in lieu of any fractional share (determined by multiplying such fractional share by the Average Price as of the date on which the Prepayment Election Notice is delivered to Holder). Any repayment of this Note or any portion thereof in shares of Repayment Stock pursuant to this Section 1.3 will be deemed to have been made on the applicable Prepayment Election Date and such shares of Repayment Stock shall be dated as of the applicable Prepayment Election Date.

               (c) Registration. Payor shall not be permitted to prepay this Note with Repayment Stock pursuant to this Section 1.3, unless, at the time of such prepayment (i) the Securities Exchange Commission shall have declared effective a shelf registration statement under the Securities Act covering the resale of the Repayment Stock or (ii) the Repayment Stock shall no longer be Registerable Securities (as defined in the Registration Rights Agreement), each in accordance with the Registration Rights Agreement.

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          1.4 Financing Prepayments.

               (a) Upon the consummation of a Financing Transaction that results in net proceeds to Payor and/or any of its subsidiaries of $100,000,000 or more from such Financing Transaction prior to the termination of this Note upon payment in full, Payor shall pay to Holder the Repayment Amount as of the Financing Prepayment Date at an address or to an account designated by Holder in advance by wire transfer of immediately available funds on or before the Financing Prepayment Date.

               (b) Upon the consummation of any Financing Transaction that results in net proceeds to Payor and/or any of its subsidiaries of less than $100,000,000 from such Financing Transaction prior to the termination of this Note upon payment in full, Payor shall pay, on the applicable Financing Prepayment Date, the outstanding principal amount of and accrued and unpaid interest on this Note in an aggregate amount equal to the lesser of (x) the Repayment Amount and (y) 20% of the net proceeds of such Financing Transaction, which prepayment shall be made at an address or to an account designated by Holder in advance by wire transfer of immediately available funds on or prior to such Financing Prepayment Date; provided, however that no payment on this Note shall be made pursuant to this Section 1.4(b) until the outstanding principal amount of and accrued and unpaid interest on the Buyer Note 1 has been paid in full.

     2. Repayment at Maturity.

          2.1 Repayment. The Repayment Amount shall be due and payable by Payor on the Maturity Date by wire transfer of immediately available funds to an account designated by Holder prior to the second Business Day preceding the Maturity Date.

          2.2 Delivery of Note. Upon repayment of this Note to Holder in full by payment of cash and/or delivery of certificates representing the Repayment Stock in accordance with the terms of this Note (a) this Note shall become fully paid and satisfied, (b) all rights with respect to this Note shall immediately cease and terminate, except only the right to receive such repayment and/or shares of Repayment Stock in exchange therefor, and (c) Holder shall surrender this Note, duly endorsed for cancellation, to Payor.

     3. Threshold Price Adjustments.

          3.1 Stock Splits, Dividends, Etc. In the event Payor should at any time or from time to time after the Execution Date effectuate a split or subdivision of the outstanding shares of Payor Common Stock or fix a record date for the determination of holders of Payor Common Stock entitled to receive a dividend or other distribution payable in additional shares of Payor Common Stock or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly, additional shares of Payor Common Stock (hereinafter referred to as “Stock Equivalents”) without payment of any consideration by such holder for the additional shares of Payor Common Stock or the Stock Equivalents, then, as of such record date (or the date of such dividend distribution, split or subdivision if no record date is fixed), the Threshold Price then in effect shall be reduced to the number obtained by multiplying the Threshold Price in effect at such date by a fraction, the numerator of which is the number of

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shares of Payor Common Stock outstanding immediately prior to such action, and the denominator of which shall be the number of shares of Payor Common Stock outstanding immediately following such action assuming the full conversion or exercise, as applicable, of such Stock Equivalents.

          3.2 Reverse Stock Split, Combination. If the number of shares of Payor Common Stock outstanding at any time after the Execution Date is decreased by a reverse stock split or combination of the outstanding shares of Payor Common Stock, then, following the effective date of such combination, the Threshold Price then in effect shall be increased to the number obtained by multiplying the Threshold Price in effect at such date by a fraction, the numerator of which is the number of shares of Payor Common Stock outstanding immediately prior to such action, and the denominator of which shall be the number of shares of Payor Common Stock outstanding immediately following such action.

          3.3 Successive Adjustments. Successive adjustments in the Threshold Price shall be made, without duplication, whenever any event specified in Section 3.1 or 3.2 shall occur.

          3.4 Minimal Adjustments. All calculations under this Section 3 shall be made to the nearest cent. No adjustment in the Threshold Price need be made if such adjustment would result in a change in the Threshold Price of less than $0.01. Any adjustment of less than $0.01 that is not made shall be carried forward and shall be made at the time of and together with any subsequent adjustment which, on a cumulative basis, amounts to an adjustment of $0.01 or more in the Threshold Price.

          3.5 Adjustment Notice. In the event the Threshold Price is adjusted pursuant to Section 3.1 or 3.2, Payor will promptly mail to Holder a statement setting forth in reasonable detail the event requiring the adjustment, the amount of the adjustment, and the method by which such adjustment was calculated, and the date on which such adjustment became effective.

     4. Reduction of the Note for Excess Product Returns.

          The outstanding principal amount of this Note shall automatically be reduced by the amount of the Excess Returns Amount (as defined in the Purchase Agreement), if any, determined in accordance with the terms of Section 1.05 of the Purchase Agreement, and if the outstanding principal amount of this Note shall have been reduced to zero, Payor shall then reduce any accrued and unpaid interest. Payor shall provide Holder prompt written notice of any such reduction in the outstanding principal amount of this Note or interest payable on this Note pursuant to this Section 4. Interest shall accrue only on the outstanding principal amount of this Note after any such reduction pursuant to this Section 4.

     5. Transfer, Legend and Stop Transfer Orders.

          5.1 Holder acknowledges that this Note and the Repayment Stock have not been registered under the Securities Act and agrees not to sell, pledge, distribute, offer for sale, transfer or otherwise dispose of this Note or any Repayment Stock unless (a) there is an effective registration covering such Note or such shares of Repayment Stock, as the case may be, under

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the Securities Act and applicable states securities laws or (b) if requested by Payor, Payor first receives a letter from an attorney reasonably acceptable to Payor (it being understood that Milbank, Tweed, Hadley & McCloy LLP shall be deemed acceptable to Payor) stating that in the opinion of the attorney the proposed transfer is exempt from registration under the Securities Act, and under all applicable state securities laws. Unless the shares of Repayment Stock have been registered under the Securities Act, upon the issuance of any shares of Repayment Stock, Payor shall instruct its transfer agent or registrar to enter stop transfer orders with respect to such shares, and all certificates representing shares of Repayment Stock shall bear on the face thereof substantially the following legend:

THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE HOLDER MAY NOT TRANSFER THE SECURITIES EVIDENCED HEREBY UNLESS (A) THERE IS AN EFFECTIVE REGISTRATION COVERING THE SECURITIES EVIDENCED BY THIS CERTIFICATE UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND APPLICABLE STATE SECURITIES LAWS OR (B) IF REQUESTED BY AVANIR PHARMACEUTICALS, IT FIRST RECEIVES A LETTER FROM AN ATTORNEY REASONABLY ACCEPTABLE TO IT STATING THAT IN THE OPINION OF THE ATTORNEY THE PROPOSED TRANSFER IS EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND UNDER ALL APPLICABLE STATE SECURITIES LAWS.

          5.2 Prior to any such proposed transfer, and as a condition thereto, if such transfer is not made pursuant to an effective registration statement under the Securities Act, Holder will, if requested by Payor, deliver to Payor a certificate of the proposed transferee in the form attached to this Note as Exhibit A.

     6. Rights of Holder.

          Holder shall not, by virtue hereof, be entitled to any rights of a stockholder in Payor, either at law or in equity, and the rights of Holder are limited to those expressed in this Note.

     7. Representation and Warranties.

          7.1 Holder. Holder has delivered to Payor an Accredited Investor Certificate (as defined in the Purchase Agreement).

          7.2 Payor.

               (a) All shares of Payor Common Stock to be issued to Holder as Repayment Stock, when issued pursuant to and in accordance with this Note and the Purchase Agreement, will be duly authorized, validly issued, fully paid and non-assessable.

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               (b) Payor has duly reserved a sufficient number of shares of Payor Common Stock for the issuance of the Repayment Stock.

     8. Covenants of Payor. For so long as this Note shall remain outstanding, Payor shall keep a sufficient number of shares of Payor Common Stock reserved for the issuance of the Repayment Stock.

     9. Events of Default.

          9.1 The following events will be considered “Events of Default” with respect to this Note:

               (a) Payor defaults in the payment of any part of the Repayment Amount at the Maturity Date;

               (b) Payor defaults in the payment the amount to be paid pursuant to Section 1.4 on any Financing Prepayment Date and such default continues for a period of three Business Days;

               (c) Payor defaults in the delivery of any Repayment Stock as of the Prepayment Election Date and such default continues for a period of three Trading Days;

               (d) Payor defaults in the payment of any interest due on the Note, which default continues for 30 days;

               (e) the occurrence of an event of default under any of the Additional Notes, and any of the Contingent Note or the Alternate Contingent Notes (each as defined in the Purchase Agreement) if issued in accordance with Section 1.04(c) of the Purchase Agreement);

               (f) Payor defaults in the payment of any Contingent Payment, any Non-US Licensing Earn-Out Payment or any Run Rate Contingent Payment (each as defined in the Purchase Agreement) that the parties or the Independent Accounting Firm (as defined in the Purchase Agreement) have determined is due and payable in accordance with the terms of the Purchase Agreement and such default continues for three Business Days;

               (g) Payor makes an assignment for the benefit of creditors, or admits in writing its inability to pay its debts as they become due, or files a voluntary petition for bankruptcy, or files any petition or answer seeking for itself any reorganization, arrangement, composition, readjustment, dissolution or similar relief under any present or future statute, law or regulation, or files any answer admitting the material allegations of a petition filed against Payor in any such proceeding, or seeks or consents to, or acquiesces in, the appointment of any trustee, receiver or liquidator of Payor, or of all or any substantial part of the properties of Payor, or Payor or its respective directors or majority shareholders takes any action looking to the dissolution or liquidation of Payor; or

               (h) Within 30 days after the commencement of any proceeding against Payor seeking any reorganization, arrangement, composition, readjustment, liquidation,

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dissolution or similar relief under any present or future statute, law or regulation, such proceeding has not been dismissed or, within 30 days after the appointment without the consent or acquiescence of Payor of any trustee, receiver or liquidator of Payor or of all or any substantial part of the properties of Payor, such appointment will not have been vacated.

          9.2 Upon the occurrence of an Event of Default, at the option and upon the declaration of Holder, the Repayment Amount will, without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived, be forthwith due and payable, and Holder may, immediately and without expiration of any additional period of grace, enforce payment of all amounts due and owing under this Note and exercise any and all other remedies granted to it at law, in equity or otherwise. No right or remedy herein conferred upon Holder is intended to be exclusive of any other right or remedy contained in the Purchase Agreement, the Registration Rights Agreement, this Note or in any instrument or document delivered in connection with or pursuant to the Purchase Agreement, the Registration Rights Agreement or this Note and every such right or remedy contained herein and therein or now or hereafter existing at law or in equity or by statute, or otherwise may be exercised separately or in any combination. No course of dealing between Payor and the Holder or any failure or delay on the Holder’s part in exercising any rights or remedies hereunder shall operate as a waiver or preclude the exercise of any other rights or remedies hereunder.

     10. Governing Law.

          The terms of this Note and disputes arising hereunder will be construed in accordance with and governed by the laws of the State of California, as applied to contracts entered into by California residents within the State of California, which contracts are to be performed entirely within the State of California, without reference to principles of conflicts of laws.

     11. Waiver.

          A delay in exercising rights any hereunder will not constitute a waiver of any such rights.

     12. Loss, Theft, Destruction or Mutilation.

          Upon receipt by Payor of evidence and indemnity reasonably satisfactory to it of the loss, theft, destruction or mutilation of, and upon surrender and cancellation of this Note, if mutilated, Payor will make and deliver in lieu of this Note a new note of like tenor and unpaid principal amount and dated as of the date to which interest, if any, has been paid on the unpaid principal amount of this Note.

     13. Assignment.

          This Note, and the obligations and rights of Payor hereunder, will be binding upon and inure to the benefit of Payor, Holder, and their respective heirs, personal representatives, successors and assigns, except that (a) Holder may only assign or transfer any of its rights or obligations under this Note in accordance with Section 5, and (b) Payor may not

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assign or transfer any of its rights or obligations under this Note without the prior written consent of Holder; provided, however that Payor may assign its rights or obligations under this Note without obtaining such consent to any successor or purchaser in connection with a merger of Payor; provided, further that Payor shall provide Holder with written notice of the proposed assignment at least ten Business Days prior to such merger.

     14. Amendments and Waivers.

          Changes in or amendments or additions to this Note may only be made, and compliance with any term, covenant, agreement, condition or provision set forth herein may only be omitted or waived (either generally or in a particular instance and either retroactively or prospectively), upon written consent of each of Payor and Holder.

     15. Notices.

          Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified in this Section prior to 5:00 p.m. (California time) on a Business Day, (ii) the Business Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Note later than 5:00 p.m. (California time) on any date and earlier than 11:59 p.m. (California time) on such date, (iii) the Business Day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. The address for such notices and communications shall be as follows:

If to Payor:	Avanir Pharmaceuticals
	11388 Sorrento Valley Rd.
	San Diego, CA 92121
	Attention: Michael Puntoriero
	Telephone: (858) 622-5200
	Fax: (858) 658-7447
With a copy to:	Latham & Watkins LLP
	650 Town Center Drive, 20th Floor
	Costa Mesa, CA 92626
	Attention: Cary K. Hyden and Jonn R. Beeson
	Telephone: (714) 540-1235
	Fax: (714) 755-8290
If to Cutler:	Neal R. Cutler
	[Address]

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With a copy to:	Milbank, Tweed, Hadley & McCloy LLP
	601 South Figueroa Street, 30th Floor
	Los Angeles, California 90017
	Attn: Brett Goldblatt
	Telephone: (213) 892-4000
	Fax: (213) 629-5063
If to any other Person who is then the Holder:	To the address of such Holder as it appears in the certificate provided to Payor in accordance with Section 5.2

or such other address as may be designated in writing hereafter, in the same manner, by such Person.

[SIGNATURE PAGE FOLLOWS]

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          IN WITNESS WHEREOF, Payor has caused this Note to be duly executed and delivered as of the date first written above.

AVANIR PHARMACEUTICALS
By:	/s/ Michael J. Puntoriero
Name:	Michael J. Puntoriero
Title:	Senior Vice President and Chief Financial Officer

Signature Page to Buyer Note 2

          IN WITNESS WHEREOF, Holder acknowledges the terms and conditions of this Note and received delivery of this Note as of the date first written above.

NEAL R. CUTLER
By:	Neal R. Cutler
	Neal R. Cutler

Signature Page to Buyer Note 2

EXHIBIT A
CERTIFICATE OF PROPOSED TRANSFER

CERTIFICATE OF PROPOSED TRANSFER

          The undersigned holder (the “Holder”) of the senior note of Avanir Pharmaceuticals, a California Corporation (the “Company”) in the amount of $6,675,000 dated May 24, 2006 to which this Certificate is attached (the “Note”) and which may be prepaid in cash or, under certain circumstances as set forth in the Note, in shares of Class A common stock, no par value of the Company (the “Common Stock”), proposes to sell, pledge, distribute, offer for sale, transfer or otherwise dispose of this Note to the transferee identified below (the “Transferee”):

PLEASE NAME, ADDRESS AND SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF TRANSFEREE:

_________________________________

_________________________________

_________________________________

_________________________________

_________________________________

          The Holder and the Transferee acknowledge that the Holder received the Note pursuant to that certain Unit Purchase Agreement dated as of May 22, 2006 (the “Purchase Agreement”), between Company, the parties listed on Schedule A to the Purchase Agreement and Alamo Pharmaceuticals, LLC, a California limited liability company, and that in issuing the Note to the Holder, the Company relied upon a certificate executed by the Holder for purposes of demonstrating that the Holder is an “accredited investor” within the meaning of Rule 501(a) of Regulation D promulgated under the Securities Act of 1933, as amended (the “Act”). Pursuant to Section 5 of the Note, the Transferee does hereby certify as follows:

1. The Transferee falls within one or more of the following categories (please initial one or more, as applicable):

          ___ (a) a private business development company as defined in Section 202(a)(22) of the Investment Advisers Act of 1940;

          ___ (b) an organization described in Section 501(c)(3) of the Internal Revenue Code of 1986, corporation, or similar business trust, or partnership, not formed for the specific purpose of acquiring the Note or the Common Stock, with total assets in excess of $5,000,000;

          ___ (c) a natural person whose individual net worth, or joint net worth with that person’s spouse, as of the date hereof, exceeds $1,000,000;

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          ___ (d) a natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person’s spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year;

          ___ (e) a trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the Note or the Common Stock, whose acquisition is directed by a sophisticated person as described in Rule 506(b)(2)(ii) of Regulation D; and

          ___ (f) an entity in which all of the equity owners are accredited The Transferees (as defined in 2(a) – 2(e) above).

2. The Transferee is a sophisticated investor, knowledgeable, sophisticated and experienced in business and financial matters. The Transferee is able to bear the economic risk of holding the Note and the Common Stock for an indefinite period and is able to afford the complete loss of his investment in the Note and the Common Stock.

3. The Transferee has had the opportunity to consult and has been advised or has elected to proceed without advise from his legal counsel and tax advisor in connection with his acquisition of the Note and the Common Stock, and acknowledges that no representations as to potential profit and tax consequences of any sort have been made by the Company, any officer or any employee or representative or affiliate of the Company, and that projections and any other information, including, without limitation, financial and descriptive information and documentation, that may have been in any manner submitted to the Transferee shall not constitute any representation or warranty of any kind or nature, express or implied.

4. The Transferee has had access to certain financial and other information, including without limitation the Company’s most current Form 10-K and proxy statement and other filings with the Securities and Exchange Commission available on the Company’s website at www.avanir.com and has been afforded the opportunity to ask questions of representatives of the Company relating thereto, and to receive answers to those questions, as the Transferee deemed necessary in connection with the acquisition of the Note and the Common Stock. The Transferee has carefully considered potential risks relating to the Company and the acquisition of the Note and the Common Stock.

5. The Transferee acknowledges that it will acquire the Note and the Common Stock in transactions not involving any public offering within the meaning of the Act and that the Note and the shares of the Common Stock have not been registered under the Act (unless the sale of the Common Stock shall have been registered under the Act, pursuant to the terms of that certain Registration Rights Agreement dated May 24, 2006, by and between the Company and the Holder (the “Registration Rights Agreement”).

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6.

The Transferee agrees not to offer, sell, transfer or otherwise dispose of the Note or the Common Stock in the absence of registration under the Act unless, if requested by the Company, the Transferee delivers to the Company an opinion of a lawyer experienced in securities law matters and reasonably acceptable to the Company (it being understood that Milbank, Tweed, Hadley & McCloy LLP shall be deemed acceptable to Payor) stating that in the opinion of the attorney the proposed sale, transfer or other disposition is exempt from registration under the Act and under all applicable state securities or blue sky laws.

7.

The Transferee acknowledges that the Note will bear a legend to the following effect:

NEITHER THIS SENIOR NOTE (THIS “NOTE”) NOR THE SHARES OF STOCK THAT MAY BE ISSUABLE UPON REPAYMENT OF ANY PORTION OF THIS NOTE, IF APPLICABLE, HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE HOLDER MAY NOT TRANSFER THIS NOTE OR THE SHARES OF STOCK THAT MAY BE ISSUABLE UPON REPAYMENT OF ANY PORTION OF THIS NOTE UNLESS (A) THERE IS AN EFFECTIVE REGISTRATION COVERING THIS NOTE OR THE SHARES OF STOCK THAT MAY BE ISSUABLE UPON REPAYMENT OF ANY PORTION OF THIS NOTE UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND APPLICABLE STATE SECURITIES LAWS OR (B) IF REQUESTED BY AVANIR PHARMACEUTICALS, IT FIRST RECEIVES A LETTER FROM AN ATTORNEY REASONABLY ACCEPTABLE TO IT STATING THAT IN THE OPINION OF THE ATTORNEY THE PROPOSED TRANSFER IS EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND UNDER ALL APPLICABLE STATE SECURITIES LAWS.

8. The Transferee acknowledges that the Common Stock will be in the form of physical certificates and that the certificates will bear a legend to the following effect (unless the sale of the Common Stock shall have been registered under the Act pursuant to the terms of the Registration Rights Agreement):

THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE HOLDER MAY NOT TRANSFER THE SECURITIES EVIDENCED HEREBY UNLESS (A) THERE IS AN EFFECTIVE REGISTRATION COVERING THE SECURITIES EVIDENCED BY THIS CERTIFICATE UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND APPLICABLE STATE SECURITIES LAWS OR (B) IF REQUESTED BY AVANIR PHARMACEUTICALS, IT FIRST RECEIVES A LETTER FROM AN ATTORNEY REASONABLY ACCEPTABLE TO IT STATING THAT IN THE OPINION OF THE ATTORNEY THE PROPOSED TRANSFER IS EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND UNDER ALL APPLICABLE STATE SECURITIES LAWS.

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9.	The Transferee acknowledges that the Company may place a stop transfer order with its transfer agent or registrar to enforce the provisions of Section 5 of the Note.
10.	The Transferee represents that it will acquire the Note and the Common Stock solely for his own account for the purpose of investment only and not as a nominee or agent for any other person and not with a view to, or for offer or sale in connection with, any distribution or resale thereof, in whole or in part, in violation of the Act or state securities or “blue sky” laws, without prejudice, however, to his right to sell or otherwise dispose of all or any part of the Common Stock pursuant to an effective registration statement under the Act or under an exemption from registration available under the Act.
11.	The Company is entitled to rely on this Certificate in connection with its obligations pursuant to the Purchase Agreement and the Note.

[SIGNATURE PAGE FOLLOWS]

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          IN WITNESS WHEREOF, the Holder and the Transferee have executed this Certificate of Proposed Transfer as of the date first written above.

Holder
By:
	Neal R. Cutler
Transferee
By:

EX-10.4

EXHIBIT 10.4

NEITHER THIS SENIOR NOTE (THIS “NOTE”) NOR THE SHARES OF STOCK THAT MAY BE ISSUABLE UPON REPAYMENT OF ANY PORTION OF THIS NOTE, IF APPLICABLE, HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE HOLDER MAY NOT TRANSFER THIS NOTE OR THE SHARES OF STOCK THAT MAY BE ISSUABLE UPON REPAYMENT OF ANY PORTION OF THIS NOTE UNLESS (A) THERE IS AN EFFECTIVE REGISTRATION COVERING THIS NOTE OR THE SHARES OF STOCK THAT MAY BE ISSUABLE UPON REPAYMENT OF ANY PORTION OF THIS NOTE UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND APPLICABLE STATE SECURITIES LAWS OR (B) IF REQUESTED BY AVANIR PHARMACEUTICALS, IT FIRST RECEIVES A LETTER FROM AN ATTORNEY REASONABLY ACCEPTABLE TO IT STATING THAT IN THE OPINION OF THE ATTORNEY THE PROPOSED TRANSFER IS EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND UNDER ALL APPLICABLE STATE SECURITIES LAWS.

SENIOR NOTE

$4,000,000.00 May 24, 2006 (the “Execution Date”)
Costa Mesa, California

          For value received Avanir Pharmaceuticals, a California corporation (“Payor”), promises to pay to Neal R. Cutler (“Holder”) the principal sum of Four Million dollars ($4,000,000.00) in lawful money of the United States in immediately available funds, subject to adjustment as provided herein, and to pay interest on the outstanding principal amount of this Senior Note (this “Note”) as provided herein, until this Note is repaid in full.

          This Note is issued pursuant to and subject to the terms of the Unit Purchase Agreement dated as of May 22, 2006 (the “Purchase Agreement”) by and among Payor, the parties listed on Schedule A to the Purchase Agreement and Alamo Pharmaceuticals, LLC, a California limited liability company, and is issued concurrently with that certain Senior Note in the principal sum of $14,400,000 by and between Payor and Holder (the “Buyer Note 1”) and that certain Senior Note in the principal sum of $6,675,000 by and between Payor and Holder (the “Buyer Note 2”, together with Buyer Note 1, the “Additional Notes”).

          For the purposes of this Note, the following terms shall have the meanings set forth below:

          “Average Price” means the average of the per share Closing Prices of the Payor Common Stock for the 5 consecutive Trading Days ending on the Trading Day immediately preceding the date of the applicable calculation, provided that in calculating the Average Price, each Closing Price during the period commencing on the first Trading Day of such 5 consecutive Trading Day period and ending on the date of an event that would require an adjustment of the Threshold Price pursuant to Section 3 hereof, shall be appropriately adjusted to take into account the occurrence of the event that would result in an adjustment of the Threshold Price.

          “Business Day” means any day that is not a Saturday, Sunday or other day on which banks in the State of California are authorized or required to close.

          “Closing Price” of the Payor Common Stock on any date means the closing per share sale price (or, if no closing sale price is reported, the average of the bid and ask prices or, if more than one in either case, the average of the average bid and average ask prices) on such date as reported on the NASDAQ National Market (at such time that the NASDAQ National Market is not a national securities exchange), or if such bid and ask prices are not reported by the NASDAQ National Market, in a manner to be determined by the Payor on the basis of such quotation as the Payor’s Board of Directors considers appropriate in its reasonable discretion or if the Payor Common Stock is traded on a U.S. national securities exchange, the closing per share sale price of the Payor Common Stock as is reported in composite transactions for the principal U.S. securities exchange on which the Payor Common Stock is so traded.

          “Events of Default” has the meaning set forth in Section 9.1.

          “Financing Prepayment Date” means three Business Days following the consummation of the applicable Financing Transaction; provided, however that if any Financing Transaction shall occur before the Pledge Expiration Date, the Financing Prepayment Date for any such Financing Transaction shall be the 10th Business Day after the Pledge Expiration Date.

          “Financing Transaction” means each (a) sale by Payor or any of its subsidiaries of any of its debt, equity or convertible securities when such securities have been registered for public sale pursuant to the Securities Act and (b) sale by Payor or any of its subsidiaries to investors of any of its debt, equity or converstible securities in a transaction exempt from the registration requirements of the Securities Act (but, in each case, excluding the issuance of (i) options or stock issued to employees, consultants, advisors, officers or directors pursuant to a plan or arrangement approved in advance by Payor’s Board of Directors, (ii) securities issued to lessors in connection with lease financings and the like, (iii) securities issued on conversion of any outstanding convertible securities of Payor, (iv) securities issued by a subsidiary of Payor to Payor or another subsidiary of Payor and (v) and securities issued as consideration for mergers, acquisitions or to strategic partners). In no event shall a Financing Transaction include the proceeds of bank loans or credit facilities or revenues from the licensing or sale of any of Payor’s products, services or technologies.

          “Initial Threshold Price” means $15.00.

          “Interest Determination Date” has the meaning set forth in Section 1.1(b).

          “Interest Payment Date” means the last day of each month, or if such date is not a Business Day, the next succeeding Business Day.

          “Interest Period” means the period from May 24, 2006 to but excluding the first Interest Payment Date and each successive period from and including each Interest Payment Date to but excluding the following Interest Payment Date.

          “Interest Rate” has the meaning set forth in Section 1.1(a)

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          “LIBOR” means the London interbank offered rates.

          “London Business Day” is a day on which dealings in deposits in U.S. dollars are transacted in the London interbank market.

          “Market Disruption Event” means the occurrence or existence for more than one half hour period in the aggregate on any scheduled Trading Day of any suspension or limitation imposed on trading in the Payor Common Stock or in any options, contracts or future contracts relating to the Payor Common Stock, and such suspension or limitation occurs or exists at any time before 1:00 p.m. (Eastern Time) on such day.

          “Maturity Date” means the earlier of (a) the third anniversary of the Execution Date, or if such third anniversary is not a Business Day, the next succeeding Business Day and (b) the date of the consummation of any sale of all or substantially all of the assets of Payor.

          “Payor Common Stock” means the Class A common stock, no par value, of Payor, or any successor security into which Class A common stock shall have been reclassified, exchanged or converted (including as a result of a merger, reorganization, consolidation, share exchange or similar business combination).

          “Pledge Expiration Date” means the later of (i) the first anniversary following the Execution Date, or if such first anniversary is not a Business Day, the next succeeding Business Day, or (ii) if a written notice of a claim for Damages (as defined in the Purchase Agreement) has been given prior to the first anniversary following the Execution Date, the earlier of (a) the date that such claim has been resolved pursuant to Article X of the Purchase Agreement or (b) the Maturity Date.

          “Prepayment Election Date” means the date for prepayment specified in the Prepayment Election Notice, which date shall be not greater than three Trading Days following the date on which the Prepayment Election Notice is delivered to Payor and shall in all events be prior to the Maturity Date.

          “Prepayment Election Notice” means a written notice delivered by Payor to Holder stating Payor’s election to prepay all or any portion of the outstanding principal amount of this Note in shares of Repayment Stock, the Prepayment Election Date, the number of shares of Repayment Stock to be issued and the amount of cash to be paid in lieu of any fractional share of Repayment Stock.

          “Repayment Amount” means, as of any date of determination, the outstanding principal amount of this Note, plus any accrued and unpaid interest thereon to such date.

          “Repayment Stock” means a number of shares of Payor Common Stock that is calculated by dividing (x) the portion of the outstanding principal amount of and accrued and unpaid interest on this Note specified in the Prepayment Election Notice to be prepaid in Payor Common Stock, by (y) 95% of the Average Price calculated as of the date on which the Prepayment Election Notice is delivered to Holder.

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          “Registration Rights Agreement” means the Registration Rights Agreement between Payor and Holder, dated as of the Execution Date.

          “Securities Act” means the Securities Act of 1933, as amended.

          “Stock Equivalents” has the meaning set forth in Section 3.1.

          “Threshold Price” means the Initial Threshold Price as the same may be adjusted pursuant to Section 3 herein.

          “Trading Day” means any day on which (i) there is no Market Disruption Event and (ii) the NASDAQ National Market (at such time that the NASDAQ National Market is not a national securities exchange) or the U.S. national securities exchange on which the Payor Common Stock is listed, admitted for trading or quoted, is open for trading or, if the Payor Common Stock is not so listed, admitted for trading or quoted, any Business Day. A “Trading Day” only includes those days that have a scheduled closing time of 4:00 p.m. (Eastern Time) or the then standard closing time for regular trading on the relevant trading system.

          “Trigger Event” means if the Closing Price of the Payor Common Stock is equal to or greater than the Threshold Price for 20 Trading Days during any 30 consecutive Trading Day period prior to the Maturity Date.

     1. Interest; Repayment Prior to Maturity.

          1.1 Interest.

               (a) Interest on this Note shall be calculated on the basis of a 360-day year consisting of twelve 30-day months and shall be payable to Holder, in cash, by check or by wire transfer at an address or to an account designated by Holder in advance, on each Interest Payment Date until this Note is either converted or repaid in full as provided herein.

               (b) The outstanding principal amount of this Note will bear interest for each Interest Period at a per annum rate equal to LIBOR as determined on the second London Business Day preceding the commencement of such Interest Period (the “Interest Determination Date”) plus 1.33% (133 basis points) (the “Interest Rate”). The Interest Determination Date for this Note for the first Interest Period is May 22, 2006. Promptly upon determination of the rate by Payor, Payor will inform Holder of the interest rate for the next Interest Period. On any Interest Determination Date, LIBOR will be equal to the offered rate for deposits in U.S. dollars having an index maturity of one month, in amounts of at least $1.0 million, as such rate appears on Telerate Page 3750 at approximately 11:00 a.m., London time, on such Interest Determination Date. If Telerate Page 3750 is replaced by another service or ceases to exist, Payor will use the replacing service or such other service that may be nominated by the British Bankers’ Association for the purpose of displaying LIBOR for U.S. dollar deposits. If no offered rate appears on Telerate Page 3750 on an Interest Determination Date at approximately 11:00 a.m., London time, then Payor will select four major banks in the London interbank market and shall request each of their principal London offices to provide a quotation of the rate at which one-month deposits in U.S. dollars in amounts of at least $1.0 million are offered by it to prime banks

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in the London interbank market, on that date and at that time, that is representative of single transactions at that time. If at least two quotations are provided, LIBOR will be the arithmetic average of the quotations provided. Otherwise, Payor will select three major banks in New York City and shall request each of them to provide a quotation of the rate offered by them at approximately 11:00 a.m., New York City time, on the Interest Determination Date for loans in U.S. dollars to leading European banks having an index maturity of one month for the applicable Interest Period in an amount of at least $1.0 million that is representative of single transactions at that time. If three quotations are provided, LIBOR will be the arithmetic average of the quotations provided. Otherwise, the rate of LIBOR for the next Interest Period will be set equal to the rate of LIBOR for the then-current Interest Period.

               (c) If Payor defaults in a payment of interest on the Notes, it shall pay the defaulted interest plus, to the extent permitted by law, interest payable on the defaulted interest at a rate equal to 2.76% over the Interest Rate.

          1.2 Cash Prepayment at Payor’s Option. Payor may, at its option and without penalty, prepay all or any portion of the outstanding principal amount of and accrued and unpaid interest on this Note at any time prior to the Maturity Date by payment to Holder at an address or to an account designated by Holder in advance by wire transfer of immediately available funds.

          1.3 Stock Prepayment at Payor’s Option.

               (a) Subject to paragraph (c) below, Payor may, at its sole option and without penalty, elect to prepay all or any portion of the outstanding principal amount of and accrued and unpaid interest on this Note at any time prior to the Maturity Date in Repayment Stock in the event that:

                    (i) a Trigger Event has occurred within the preceding 180 calendar days; and

                    (ii) the Average Price exceeds $[THE CLOSING PRICE ON THE TRADING DAY PRIOR TO THE CLOSING DATE] (subject to adjustment on the same basis as the Initial Threshold Price shall be adjusted in accordance with Section 3) per share (calculated as of the date on which the Prepayment Election Notice is delivered to Holder),

by delivering to Holder, a Prepayment Election Notice pursuant to the notice provisions set forth in Section 11.05 of the Purchase Agreement.

               (b) Delivery of Prepayment Stock. On the Prepayment Election Date specified in the applicable Prepayment Election Notice, Payor shall, at its expense, issue and deliver to Holder at Payor’s principal office, a certificate or certificates for any shares of the Repayment Stock to which Holder is entitled (bearing such legends as are required by Section 4 and applicable state and federal securities laws), together with cash in lieu of any fractional share (determined by multiplying such fractional share by the Average Price as of the date on which the Prepayment Election Notice is delivered to Holder). Any repayment of this Note or any portion thereof in shares of Repayment Stock pursuant to this Section 1.3 will be deemed to have

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been made on the applicable Prepayment Election Date and such shares of Repayment Stock shall be dated as of the applicable Prepayment Election Date.

               (c) Registration. Payor shall not be permitted to prepay this Note with Repayment Stock pursuant to this Section 1.3, unless, at the time of such prepayment (i) the Securities Exchange Commission shall have declared effective a shelf registration statement under the Securities Act covering the resale of the Repayment Stock or (ii) the Repayment Stock shall no longer be Registerable Securities (as defined in the Registration Rights Agreement), each in accordance with the Registration Rights Agreement.

          1.4 Financing Prepayments.

               (a) Upon the consummation of a Financing Transaction that results in net proceeds to Payor and/or any of its subsidiaries of $100,000,000 or more from such Financing Transaction prior to the termination of this Note upon payment in full, Payor shall pay to Holder the Repayment Amount as of the Financing Prepayment Date at an address or to an account designated by Holder in advance by wire transfer of immediately available funds on or before the Financing Prepayment Date.

               (b) Upon the consummation of any Financing Transaction that results in net proceeds to Payor and/or any of its subsidiaries of less than $100,000,000 from such Financing Transaction prior to the termination of this Note upon payment in full, Payor shall pay, on the applicable Financing Prepayment Date, the outstanding principal amount of and accrued and unpaid interest on this Note in an aggregate amount equal to the lesser of (x) the Repayment Amount and (y) 20% of the net proceeds of such Financing Transaction, which prepayment shall be made at an address or to an account designated by Holder in advance by wire transfer of immediately available funds on or prior to such Financing Prepayment Date; provided, however that no payment on this Note shall be made pursuant to this Section 1.4(b) until the outstanding principal amount of and accrued and unpaid interest on the Buyer Note 1 has been paid in full.

     2. Repayment at Maturity.

          2.1 Repayment. The Repayment Amount shall be due and payable by Payor on the Maturity Date by wire transfer of immediately available funds to an account designated by Holder prior to the second Business Day preceding the Maturity Date.

          2.2 Delivery of Note. Upon repayment of this Note to Holder in full by payment of cash and/or delivery of certificates representing the Repayment Stock in accordance with the terms of this Note (a) this Note shall become fully paid and satisfied, (b) all rights with respect to this Note shall immediately cease and terminate, except only the right to receive such repayment and/or shares of Repayment Stock in exchange therefor, and (c) Holder shall surrender this Note, duly endorsed for cancellation, to Payor.

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     3. Threshold Price Adjustments.

          3.1 Stock Splits, Dividends, Etc. In the event Payor should at any time or from time to time after the Execution Date effectuate a split or subdivision of the outstanding shares of Payor Common Stock or fix a record date for the determination of holders of Payor Common Stock entitled to receive a dividend or other distribution payable in additional shares of Payor Common Stock or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly, additional shares of Payor Common Stock (hereinafter referred to as “Stock Equivalents”) without payment of any consideration by such holder for the additional shares of Payor Common Stock or the Stock Equivalents, then, as of such record date (or the date of such dividend distribution, split or subdivision if no record date is fixed), the Threshold Price then in effect shall be reduced to the number obtained by multiplying the Threshold Price in effect at such date by a fraction, the numerator of which is the number of shares of Payor Common Stock outstanding immediately prior to such action, and the denominator of which shall be the number of shares of Payor Common Stock outstanding immediately following such action assuming the full conversion or exercise, as applicable, of such Stock Equivalents.

          3.2 Reverse Stock Split, Combination. If the number of shares of Payor Common Stock outstanding at any time after the Execution Date is decreased by a reverse stock split or combination of the outstanding shares of Payor Common Stock, then, following the effective date of such combination, the Threshold Price then in effect shall be increased to the number obtained by multiplying the Threshold Price in effect at such date by a fraction, the numerator of which is the number of shares of Payor Common Stock outstanding immediately prior to such action, and the denominator of which shall be the number of shares of Payor Common Stock outstanding immediately following such action.

          3.3 Successive Adjustments. Successive adjustments in the Threshold Price shall be made, without duplication, whenever any event specified in Section 3.1 or 3.2 shall occur.

          3.4 Minimal Adjustments. All calculations under this Section 3 shall be made to the nearest cent. No adjustment in the Threshold Price need be made if such adjustment would result in a change in the Threshold Price of less than $0.01. Any adjustment of less than $0.01 that is not made shall be carried forward and shall be made at the time of and together with any subsequent adjustment which, on a cumulative basis, amounts to an adjustment of $0.01 or more in the Threshold Price.

          3.5 Adjustment Notice. In the event the Threshold Price is adjusted pursuant to Section 3.1 or 3.2, Payor will promptly mail to Holder a statement setting forth in reasonable detail the event requiring the adjustment, the amount of the adjustment, and the method by which such adjustment was calculated, and the date on which such adjustment became effective.

     4. Transfer, Legend and Stop Transfer Orders.

          4.1 Holder acknowledges that this Note and the Repayment Stock have not been registered under the Securities Act and agrees not to sell, pledge, distribute, offer for sale, transfer or otherwise dispose of this Note or any Repayment Stock unless (a) there is an effective

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registration covering such Note or such shares of Repayment Stock, as the case may be, under the Securities Act and applicable states securities laws or (b) if requested by Payor, Payor first receives a letter from an attorney reasonably acceptable to Payor (it being understood that Milbank, Tweed, Hadley & McCloy LLP shall be deemed acceptable to Payor), stating that in the opinion of the attorney the proposed transfer is exempt from registration under the Securities Act and under all applicable state securities laws. Unless the shares of Repayment Stock have been registered under the Securities Act, upon the issuance of any shares of Repayment Stock, Payor shall instruct its transfer agent or registrar to enter stop transfer orders with respect to such shares, and all certificates representing shares of Repayment Stock shall bear on the face thereof substantially the following legend:

THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE HOLDER MAY NOT TRANSFER THE SECURITIES EVIDENCED HEREBY UNLESS (A) THERE IS AN EFFECTIVE REGISTRATION COVERING THE SECURITIES EVIDENCED BY THIS CERTIFICATE UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND APPLICABLE STATE SECURITIES LAWS OR (B) IF REQUESTED BY AVANIR PHARMACEUTICALS, IT FIRST RECEIVES A LETTER FROM AN ATTORNEY REASONABLY ACCEPTABLE TO IT STATING THAT IN THE OPINION OF THE ATTORNEY THE PROPOSED TRANSFER IS EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND UNDER ALL APPLICABLE STATE SECURITIES LAWS.

          4.2 Prior to any such proposed transfer, and as a condition thereto, if such transfer is not made pursuant to an effective registration statement under the Securities Act, Holder will, if requested by Payor, deliver to Payor a certificate of the proposed transferee in the form attached to this Note as Exhibit A.

     5. Security Interest.

          5.1 Holder agrees that pursuant to the terms of the Purchase Agreement, this Note is subject to the Pledge Agreement of even date herewith by and between Payor and Holder, which provides for the pledge of this Note by Holder to Payor as a security for the performance of Holder’s obligations under Article IX of the Purchase Agreement until the Pledge Expiration Date. Holder acknowledges that this Note shall be retained by Payor until the Pledge Expiration Date, although deemed to have been received by Holder at the time of its issuance pursuant to the Purchase Agreement.

          5.2 Pursuant to Section 9.07 of the Purchase Agreement, in the event that Holder is obligated to indemnify a Buyer Indemnified Party (as defined in the Purchase Agreement) under Article IX of the Purchase Agreement, prior to the Maturity Date, Payor shall first reduce the outstanding principal amount of this Note, and if the outstanding principal amount of this Note shall have been reduced to zero, shall then reduce any accrued and unpaid interest, by the amount that Holder is obligated to pay to such Buyer Indemnified Party in lieu of

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receiving a cash payment for such amount. Payor shall provide Holder prompt written notice of any such reduction in the outstanding principal amount of this Note or interest payable on this Note pursuant to this Section 5.2. Interest shall accrue only on the outstanding principal amount of this Note after any such reduction pursuant to this Section 5.2. If prior to the Maturity Date the aggregate amount that Holder is obligated to pay all Buyer Indemnified Parties equals or exceed $4,000,000, (a) this Note shall be deemed to have been fully paid and satisfied and all rights with respect to this Note shall immediately cease and terminate, except for only the right of Holder to receive any accrued and unpaid interest, and (b) Holder shall surrender this Note, duly endorsed for cancellation, to Payor.

     6. Rights of Holder.

          Holder shall not, by virtue hereof, be entitled to any rights of a stockholder in Payor, either at law or in equity, and the rights of Holder are limited to those expressed in this Note.

     7. Representation and Warranties.

          7.1 Holder. Holder has delivered to Payor an Accredited Investor Certificate (as defined in the Purchase Agreement).

          7.2 Payor.

               (a) All shares of Payor Common Stock to be issued to Holder as Repayment Stock, when issued pursuant to and in accordance with this Note and the Purchase Agreement, will be duly authorized, validly issued, fully paid and non-assessable.

               (b) Payor has duly reserved a sufficient number of shares of Payor Common Stock for the issuance of the Repayment Stock.

     8. Covenants of Payor. For so long as this Note shall remain outstanding, Payor shall keep a sufficient number of shares of Payor Common Stock reserved for the issuance of the Repayment Stock.

     9. Events of Default.

          9.1 The following events will be considered “Events of Default” with respect to this Note:

               (a) Payor defaults in the payment of any part of the Repayment Amount at the Maturity Date;

               (b) Payor defaults in the payment the amount to be paid pursuant to Section 1.4 on any Financing Prepayment Date and such default continues for a period of three Business Days;

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               (c) Payor defaults in the delivery of any Repayment Stock as of the Prepayment Election Date and such default continues for a period of three Trading Days;

               (d) Payor defaults in the payment of any interest due on the Note, which default continues for 30 days;

               (e) the occurrence of an event of default under any of the Additional Notes, and any of the Contingent Note or the Alternate Contingent Notes (each as defined in the Purchase Agreement) if issued in accordance with Section 1.04(c) of the Purchase Agreement);

               (f) Payor defaults in the payment of any Contingent Payment, any Non-US Licensing Earn-Out Payment or any Run Rate Contingent Payment (each as defined in the Purchase Agreement) that the parties or the Independent Accounting Firm (as defined in the Purchase Agreement) have determined is due and payable in accordance with the terms of the Purchase Agreement and such default continues for three Business Days;

               (g) Payor makes an assignment for the benefit of creditors, or admits in writing its inability to pay its debts as they become due, or files a voluntary petition for bankruptcy, or files any petition or answer seeking for itself any reorganization, arrangement, composition, readjustment, dissolution or similar relief under any present or future statute, law or regulation, or files any answer admitting the material allegations of a petition filed against Payor in any such proceeding, or seeks or consents to, or acquiesces in, the appointment of any trustee, receiver or liquidator of Payor, or of all or any substantial part of the properties of Payor, or Payor or its respective directors or majority shareholders takes any action looking to the dissolution or liquidation of Payor; or

               (h) Within 30 days after the commencement of any proceeding against Payor seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future statute, law or regulation, such proceeding has not been dismissed or, within 30 days after the appointment without the consent or acquiescence of Payor of any trustee, receiver or liquidator of Payor or of all or any substantial part of the properties of Payor, such appointment will not have been vacated.

          9.2 Upon the occurrence of an Event of Default, at the option and upon the declaration of Holder, the Repayment Amount will, without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived, be forthwith due and payable, and Holder may, immediately and without expiration of any additional period of grace, enforce payment of all amounts due and owing under this Note and exercise any and all other remedies granted to it at law, in equity or otherwise. No right or remedy herein conferred upon Holder is intended to be exclusive of any other right or remedy contained in the Purchase Agreement, the Registration Rights Agreement, this Note or in any instrument or document delivered in connection with or pursuant to the Purchase Agreement, the Registration Rights Agreement or this Note and every such right or remedy contained herein and therein or now or hereafter existing at law or in equity or by statute, or otherwise may be exercised separately or in any combination. No course of dealing between Payor and the Holder or any failure or delay on the

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Holder’s part in exercising any rights or remedies hereunder shall operate as a waiver or preclude the exercise of any other rights or remedies hereunder.

     10. Governing Law.

          The terms of this Note and disputes arising hereunder will be construed in accordance with and governed by the laws of the State of California, as applied to contracts entered into by California residents within the State of California, which contracts are to be performed entirely within the State of California, without reference to principles of conflicts of laws.

     11. Waiver.

          A delay in exercising rights any hereunder will not constitute a waiver of any such rights.

     12. Loss, Theft, Destruction or Mutilation.

          Upon receipt by Payor of evidence and indemnity reasonably satisfactory to it of the loss, theft, destruction or mutilation of, and upon surrender and cancellation of this Note, if mutilated, Payor will make and deliver in lieu of this Note a new note of like tenor and unpaid principal amount and dated as of the date to which interest, if any, has been paid on the unpaid principal amount of this Note.

     13. Assignment.

          This Note, and the obligations and rights of Payor hereunder, will be binding upon and inure to the benefit of Payor, Holder, and their respective heirs, personal representatives, successors and assigns, except that (a) Holder may only assign or transfer any of its rights or obligations under this Note in accordance with Section 4, and (b) Payor may not assign or transfer any of its rights or obligations under this Note without the prior written consent of Holder; provided, however that Payor may assign its rights or obligations under this Note without obtaining such consent to any successor or purchaser in connection with a merger of Payor; provided, further that Payor shall provide Holder with written notice of the proposed assignment at least ten Business Days prior to such merger.

     14. Amendments and Waivers.

          Changes in or amendments or additions to this Note may only be made, and compliance with any term, covenant, agreement, condition or provision set forth herein may only be omitted or waived (either generally or in a particular instance and either retroactively or prospectively), upon written consent of each of Payor and Holder.

          15. Notices.

          Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest

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of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified in this Section prior to 5:00 p.m. (California time) on a Business Day, (ii) the Business Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Note later than 5:00 p.m. (California time) on any date and earlier than 11:59 p.m. (California time) on such date, (iii) the Business Day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. The address for such notices and communications shall be as follows:

If to Payor:	Avanir Pharmaceuticals
	11388 Sorrento Valley Rd.
	San Diego, CA 92121
	Attention: Michael Puntoriero
	Telephone: (858) 622-5200
	Fax: (858) 658-7447
With a copy to:	Latham & Watkins LLP
	650 Town Center Drive, 20th Floor
	Costa Mesa, CA 92626
	Attention: Cary K. Hyden and Jonn R. Beeson
	Telephone: (714) 540-1235
	Fax: (714) 755-8290
If to Cutler:	Neal R. Cutler
	[Address}
With a copy to:	Milbank, Tweed, Hadley & McCloy LLP
	601 South Figueroa Street, 30th Floor
	Los Angeles, California 90017
	Attn: Brett Goldblatt
	Telephone: (213) 892-4000
	Fax: (213) 629-5063
If to any other Person who is then the Holder:	To the address of such Holder as it appears in the certificate provided to Payor in accordance with Section 5.2

or such other address as may be designated in writing hereafter, in the same manner, by such Person.

[SIGNATURE PAGE FOLLOWS]

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          IN WITNESS WHEREOF, Payor has caused this Note to be duly executed and delivered as of the date first written above.

AVANIR	PHARMACEUTICALS
By:	/s/ Michael J. Puntoriero
Name:	Michael J. Puntoriero
Title:	Senior Vice President and Chief Financial Officer

Signature Page to Fourth Amended and Restated Operating Agreement

          IN WITNESS WHEREOF, Holder acknowledges the terms and conditions of this Note and received delivery of this Note as of the date first written above.

NEAL R. CUTLER
By:	/s/ Neal R. Cutler
	Neal R. Cutler

Signature Page to Fourth Amended and Restated Operating Agreement

EXHIBIT A
CERTIFICATE OF PROPOSED TRANSFER

CERTIFICATE OF PROPOSED TRANSFER

          The undersigned holder (the “Holder”) of the senior note of Avanir Pharmaceuticals, a California Corporation (the “Company”) in the amount of $4,000,000 dated May 24, 2006 to which this Certificate is attached (the “Note”) and which may be prepaid in cash or, under certain circumstances as set forth in the Note, in shares of Class A common stock, no par value of the Company (the “Common Stock”), proposes to sell, pledge, distribute, offer for sale, transfer or otherwise dispose of this Note to the transferee identified below (the “Transferee”):

PLEASE NAME, ADDRESS AND SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF TRANSFEREE:

          The Holder and the Transferee acknowledge that the Holder received the Note pursuant to that certain Unit Purchase Agreement dated as of May 22, 2006 (the “Purchase Agreement”), between Company, the parties listed on Schedule A to the Purchase Agreement and Alamo Pharmaceuticals, LLC, a California limited liability company, and that in issuing the Note to the Holder, the Company relied upon a certificate executed by the Holder for purposes of demonstrating that the Holder is an “accredited investor” within the meaning of Rule 501(a) of Regulation D promulgated under the Securities Act of 1933, as amended (the “Act”). Pursuant to Section 5 of the Note, the Transferee does hereby certify as follows:

1. The Transferee falls within one or more of the following categories (please initial one or more, as applicable):

                (a) a private business development company as defined in Section 202(a)(22) of the Investment Advisers Act of 1940;

                (b) an organization described in Section 501(c)(3) of the Internal Revenue Code of 1986, corporation, or similar business trust, or partnership, not formed for the specific purpose of acquiring the Note or the Common Stock, with total assets in excess of $5,000,000;

                (c) a natural person whose individual net worth, or joint net worth with that person’s spouse, as of the date hereof, exceeds $1,000,000;

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                (d) a natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person’s spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year;

                (e) a trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the Note or the Common Stock, whose acquisition is directed by a sophisticated person as described in Rule 506(b)(2)(ii) of Regulation D; and

                (f) an entity in which all of the equity owners are accredited The Transferees (as defined in 2(a) – 2(e) above).

2. The Transferee is a sophisticated investor, knowledgeable, sophisticated and experienced in business and financial matters. The Transferee is able to bear the economic risk of holding the Note and the Common Stock for an indefinite period and is able to afford the complete loss of his investment in the Note and the Common Stock.

3. The Transferee has had the opportunity to consult and has been advised or has elected to proceed without advise from his legal counsel and tax advisor in connection with his acquisition of the Note and the Common Stock, and acknowledges that no representations as to potential profit and tax consequences of any sort have been made by the Company, any officer or any employee or representative or affiliate of the Company, and that projections and any other information, including, without limitation, financial and descriptive information and documentation, that may have been in any manner submitted to the Transferee shall not constitute any representation or warranty of any kind or nature, express or implied.

4. The Transferee has had access to certain financial and other information, including without limitation the Company’s most current Form 10-K and proxy statement and other filings with the Securities and Exchange Commission available on the Company’s website at www.avanir.com and has been afforded the opportunity to ask questions of representatives of the Company relating thereto, and to receive answers to those questions, as the Transferee deemed necessary in connection with the acquisition of the Note and the Common Stock. The Transferee has carefully considered potential risks relating to the Company and the acquisition of the Note and the Common Stock.

5. The Transferee acknowledges that it will acquire the Note and the Common Stock in transactions not involving any public offering within the meaning of the Act and that the Note and the shares of the Common Stock have not been registered under the Act (unless the sale of the Common Stock shall have been registered under the Act, pursuant to the terms of that certain Registration Rights Agreement dated May 24, 2006, by and between the Company and the Holder (the “Registration Rights Agreement”).

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6. The Transferee agrees not to offer, sell, transfer or otherwise dispose of the Note or the Common Stock in the absence of registration under the Act unless, if requested by the Company, the Transferee delivers to the Company an opinion of a lawyer experienced in securities law matters and reasonably acceptable to the Company (it being understood that Milbank, Tweed, Hadley & McCloy LLP shall be deemed acceptable to Payor) stating that in the opinion of the attorney the proposed sale, transfer or other disposition is exempt from registration under the Act and under all applicable state securities or blue sky laws.

7. The Transferee acknowledges that the Note will bear a legend to the following effect:

NEITHER THIS SENIOR NOTE (THIS “NOTE”) NOR THE SHARES OF STOCK THAT MAY BE ISSUABLE UPON REPAYMENT OF ANY PORTION OF THIS NOTE, IF APPLICABLE, HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE HOLDER MAY NOT TRANSFER THIS NOTE OR THE SHARES OF STOCK THAT MAY BE ISSUABLE UPON REPAYMENT OF ANY PORTION OF THIS NOTE UNLESS (A) THERE IS AN EFFECTIVE REGISTRATION COVERING THIS NOTE OR THE SHARES OF STOCK THAT MAY BE ISSUABLE UPON REPAYMENT OF ANY PORTION OF THIS NOTE UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND APPLICABLE STATE SECURITIES LAWS OR (B) IF REQUESTED BY AVANIR PHARMACEUTICALS, IT FIRST RECEIVES A LETTER FROM AN ATTORNEY REASONABLY ACCEPTABLE TO IT STATING THAT IN THE OPINION OF THE ATTORNEY THE PROPOSED TRANSFER IS EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND UNDER ALL APPLICABLE STATE SECURITIES LAWS.

8. The Transferee acknowledges that the Common Stock will be in the form of physical certificates and that the certificates will bear a legend to the following effect (unless the sale of the Common Stock shall have been registered under the Act pursuant to the terms of the Registration Rights Agreement):

THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE HOLDER MAY NOT TRANSFER THE SECURITIES EVIDENCED HEREBY UNLESS (A) THERE IS AN EFFECTIVE REGISTRATION COVERING THE SECURITIES EVIDENCED BY THIS CERTIFICATE UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND APPLICABLE STATE SECURITIES LAWS OR (B) IF REQUESTED BY AVANIR PHARMACEUTICALS, IT FIRST RECEIVES A LETTER FROM AN ATTORNEY REASONABLY ACCEPTABLE TO IT STATING THAT IN THE OPINION OF THE ATTORNEY THE PROPOSED TRANSFER IS EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND UNDER ALL APPLICABLE STATE SECURITIES LAWS.

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9. The Transferee acknowledges that the Company may place a stop transfer order with its transfer agent or registrar to enforce the provisions of Section 5 of the Note.

10. The Transferee represents that it will acquire the Note and the Common Stock solely for his own account for the purpose of investment only and not as a nominee or agent for any other person and not with a view to, or for offer or sale in connection with, any distribution or resale thereof, in whole or in part, in violation of the Act or state securities or “blue sky” laws, without prejudice, however, to his right to sell or otherwise dispose of all or any part of the Common Stock pursuant to an effective registration statement under the Act or under an exemption from registration available under the Act.

11. The Company is entitled to rely on this Certificate in connection with its obligations pursuant to the Purchase Agreement and the Note.

[SIGNATURE PAGE FOLLOWS]

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          IN WITNESS WHEREOF, the Holder and the Transferee have executed this Certificate of Proposed Transfer as of the date first written above.

Holder
By:
	Neal R. Cutler
Transferee
By:

EX-10.5

Exhibit 10.5

CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED AND REPLACED WITH “***”. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECRETARY OF THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO AN APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE EXCHANGE ACT OF 1934.

AMENDED AND RESTATED
DEVELOPMENT, LICENSE AND SUPPLY AGREEMENT

by and between

CIMA LABS INC.

and

ALAMO PHARMACEUTICALS, LLC

dated as of August 22, 2005

AMENDED AND RESTATED
DEVELOPMENT, LICENSE AND SUPPLY AGREEMENT

     This AMENDED AND RESTATED DEVELOPMENT, LICENSE AND SUPPLY AGREEMENT (this “Agreement”), dated and effective as of August 22, 2005 (the “Effective Date”), is by and between CIMA LABS INC., a Delaware corporation (“CIMA”), and ALAMO PHARMACEUTICALS, LLC, a California Limited Liability Company (“Alamo”).

WITNESSETH

     WHEREAS, CIMA is engaged, among other things, in the business of research, development, manufacturing and commercialization of pharmaceutical products through its proprietary drug delivery technologies;

     WHEREAS, Alamo is engaged, among other things, in the business of developing, marketing and selling of pharmaceutical products;

     WHEREAS, Alamo and CIMA have previously entered into a Development, License and Supply Agreement, dated as of March 2, 2001, as amended (the “Original Agreement”), and now desire to amend and restate such agreement herein;

     WHEREAS, subject to the terms and conditions set forth in this Agreement, CIMA and Alamo wish to collaborate in the development, registration, marketing and sale of certain prescription products; and

     WHEREAS, subject to the terms and conditions set forth in this Agreement, CIMA wishes to license to Alamo and Alamo wishes to license from CIMA rights to CIMA’s DuraSolv^®, OraSolv^® and PakSolv^® technologies for use with such prescription products.

     NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby agree as follows:

SECTION 1

DEFINITIONS

     For purposes of this Agreement, the following terms shall have the meanings set forth below:

     “Activities” shall mean the development, manufacturing, marketing, selling and distributing of the Product in the Territory as contemplated by this Agreement.

     “Affiliates” shall mean, with respect to any Person, any Persons directly or indirectly controlling, controlled by, or under common control with, such other Person. For purposes

Page 2 of 44

hereof, the term “controlled” (including the terms “controlled by” and “under common control with”), as used with respect to any Person, shall mean the direct or indirect ability or power to direct or cause the direction of management policies of such Person or otherwise direct the affairs of such Person, whether through ownership of voting securities or otherwise.

     “Alamo” shall have the meaning given in the preamble and shall include its Affiliates.

     “Alamo Trademarks” shall have the meaning given in Section 9.11(d).

     “Annual Net Sales” shall mean, for any Calendar Year, the Net Sales for such Year.

     “Active Pharmaceutical Ingredient” or “API” shall mean the active ingredient clozapine.

     “cGMP” shall mean the then-current standards for the manufacture of pharmaceuticals, as set forth in the United States Federal Food, Drug and Cosmetics Act and applicable regulations promulgated thereunder, as amended from time to time, and such standards of good manufacturing practice as are required by the European Union and other organizations and governmental agencies in countries in which Product is intended to be sold, to the extent such standards are not inconsistent with United States cGMP.

     “CIMA” shall have the meaning given in the preamble and shall include its Affiliates.

     “CIMA Intellectual Property” shall mean, collectively, 1) the CIMA Patents, 2) the CIMA Technology and 3) the CIMA Trademarks.

     “CIMA Patents” shall mean United States Patent Nos. 6,024,981 (entitled “Rapidly Dissolving Robust Dosage Form”); 6,221,392 (entitled “Rapidly Dissolving Robust Dosage Form”); 5,178,878 (entitled “Effervescent Dosage Form With Microparticles”); and 6,155,423 (entitled “Blister Package and Packaged Tablet”) and any patents, patent applications, and foreign counterparts or equivalents relating thereto, including any extension, reissue, renewal, reexamination, divisional, continuation or continuation-in-part of such patents or patent applications.

     “CIMA Technology” shall mean all of CIMA’s Patents, trade secrets, technology, know-how and all other information necessary for the manufacture of the Product including, without limitation, that related to CIMA’s DuraSolv^Ò, OraSolv^Ò and PakSolv^Ò technologies.

     “CIMA Trademarks” shall mean the CIMA^sm (logo), CIMA LABS INC.^Ò, DuraSolv^Ò, OraSolv^Ò, PakSolv^Ò, and CIMA^Ò trademarks.

     “Damages” shall mean any and all actions, costs, losses, claims, liabilities, fines, penalties, demands, damages and expenses, court costs, and reasonable fees and disbursements of counsel, consultants and expert witnesses incurred by a party hereto (including interest which may be imposed in connection therewith).

Page 3 of 44

     “Defective” shall mean, as to the Product, Product samples or Product placebos, as the case may be, the failure of such to strictly conform to the Specifications, this Agreement and all applicable law, including, without limitation, all FDA regulatory filings and regulations.

     “Development Schedule” shall mean the schedule of development activities set forth on Schedule B hereto.

     “DuraSolv^Ò” shall mean CIMA’s orally disintegrating tablet formulations as described in the CIMA Patents.

     “FDA” shall mean the United States Food and Drug Administration.

     “Force Majeure” shall mean acts of God, explosion, fire, flood, tornadoes, thunderstorms, earthquake or tremor, war whether declared or not, civil strife, riots or embargo, or changes in applicable laws, regulations or orders by any government, governmental agency or instrumentality, or other similar circumstances beyond the control of each party, in each case having the effect of preventing or prohibiting a party from performing its obligations hereunder.

     “GAAP” shall mean generally accepted accounting principles in the United States as in effect from time to time.

     “Indemnified Party” shall have the meaning set forth in Section 10.2 hereof.

     “Indemnifying Party” shall have the meaning set forth in Section 10.2 hereof.

     “Launch” shall mean the date of first commercial shipment of the Product by Alamo or its sublicensees to any unaffiliated third party.

     “Licensed Assets” shall have the meaning set forth in Section 2.1 hereof.

     “Marketing Authorization Application” shall mean the principal regulatory application required to be approved in order to market the Product in the applicable jurisdiction.

     “Minimum Annual Royalty Targets” shall have the meaning given such term in Schedule A hereof.

     “Net Sales” means the gross invoice price for Product sold by Alamo or its sublicensees or subcontractors to a third party customer less the reasonable and customary accrual-basis deductions from such gross amounts for: (i) normal and customary trade, cash and other discounts, allowances and credits actually allowed and taken directly with respect to sales of Product, (ii) credits of allowances actually granted for damaged goods, returns or rejections of Product; (iii) sales or similar taxes (including duties or other governmental charges levied on, absorbed or otherwise imposed directly on the sales of Product, including, without limitation,

Page 4 of 44

value added taxes or other governmental charges otherwise measured by the billing amount) which are included in any billing amount, and excluding any taxes imposed on or measured by the net income or profits of the selling party; (iv) charge back payments and rebates granted to managed health care organizations or to federal, state and local governments, their agencies, and purchasers and reimbursers or to trade customers, including but not limited to, wholesalers and chain and pharmacy buying groups; and (v) rebates (or equivalents thereof) that are granted to or charged by national, state, provincial or local governmental authorities in countries other than the United States. Such amounts shall be determined from the books and records of Alamo and its sublicensees and subdistributors maintained in accordance with U.S. GAAP consistently applied, and such amounts shall be calculated using the same accounting principles used for other Alamo products. Sales between or among Alamo, its Affiliates and its sublicensees and subdistributors shall be excluded from the computation of Net Sales if such Affiliates or sublicensees and subdistributors are not end-users, but Net Sales shall include the subsequent final sales to third parties by any such Affiliates or sublicensees and subdistributors. Where (i) Product is sold by Alamo, its Affiliates or their respective sublicensees and subdistributors other than in an arms-length sale or as one of a number of items without a separate invoiced price; or (ii) consideration for Product shall include any non-cash element, the Net Sales applicable to any such transaction shall be deemed to be Alamo’s average Net Sales price for the applicable quantity of to the Product at that time.

     “Notice of Rejection” shall have the meaning given such term in Section 5.5(a) hereof.

     “OraSolv^Ò” shall mean CIMA’s orally disintegrating tablet formulations as described in the CIMA Patents.

     “PakSolv^Ò” shall mean CIMA’s blister package for tablets as described in the CIMA Patents.

     “PDMA” shall mean the Prescription Drug Marketing Act of 1987, as amended from time to time, together with any rules or regulations promulgated thereunder.

     “Person” shall mean a natural person, a corporation, a partnership, a trust, a joint venture, a limited liability company, any governmental authority or any other entity or organization.

     “Product” shall mean a pharmaceutical product containing 25 mg, 50 mg, 100 mg, or such other amounts as may be agreed to by the Parties, as the case may be, of API formulated in DuraSolv^Ò or OraSolv^Ò, as the case may be. The Product definition may be expanded to include a 12.5 mg DuraSolv^Ò dose should the Parties reasonably agree that such product is necessary for commercialization in the United States and such agreement is accompanied by a mutually agreeable development agreement outlining the activities and fees associated with such dose. The Parties intend to explore regulatory strategies that do not require such development.

     “Quarter” shall mean, as the case may be, the three months ending on March 31, June 30, September 30 or December 31 in any Year.

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     “Specifications” shall mean, at any time, the specifications for the Product that are included in the Technical Agreement Addendum set forth on Schedule E.

     “Territory” shall mean the Regions of the world.

     “Region” shall mean each of the following four geographical areas as outlined on Schedule G (MAP of world): (i) Asia; (ii) Americas (includes, the United States,Mexico and Canada); (iii) Europe; and (iv) the rest of the world

     “Year” shall mean a calendar year during the term of this Agreement.

SECTION 2

GRANT OF LICENSES; LICENSE OPTION

     2.1 Grant of Licenses.

     (a) CIMA hereby grants to Alamo an exclusive license for the term of this Agreement under the following assets to market, distribute and sell the Product in the Territory (such assets are referred to herein collectively as the “Licensed Assets”):

               (i) all current and future regulatory filings, approvals, registrations and governmental authorizations that relate to the Product in the Territory; and

               (ii) the CIMA Intellectual Property.

          (b) The license granted under Section 2.1(a) to Alamo will be exclusive in that during the term of this Agreement, CIMA will not grant any licenses of the Licensed Assets to any other Person with respect to the Product or otherwise market, distribute or sell (or grant any other Person the right to market, distribute or sell) any pharmaceutical product containing API formulated in either DuraSolv^® or OraSolv^® in the Territory, except as provided in Section 2.1(c).

(c) In the event that Product is not commercially available in at least ^*** countries of a Region of the Territory within *** years from the Effective Date (or such longer time as may be required to obtain regulatory approval to make Product commercially available in such *** countries, provided that during such longer time Alamo is actively involved in pursuing such regulatory approval to the reasonable satisfaction of CIMA), CIMA and Alamo agree as follows:

^*** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission.

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               (i) Alamo’s license under 2.1(a) shall terminate in each such Region (other than the Americas Region unless product is not commercialized in the US) and CIMA shall be entitled to solicit interest of third parties in making the Product commercially available in any such Region.

               (ii) In the event that CIMA licenses the Product to a third party under this Section 2.1(c) within ^*** months from termination under Section 2.1(c)(i) , Alamo shall be entitled to receive *** of any royalties or license fee (not related to any development fees) received by CIMA from sales of the Product under such license to a third party for a period of *** years in each country in which the Product is launched, provided that Alamo cooperates with CIMA and such third party in obtaining regulatory approval for the Product, including providing access to any clinical data available to Alamo and any patent or other licenses necessary to commercialize the Product in any country or countries covered under the license from CIMA.

               (iii) Termination of Alamo’s license pursuant to this Section 2.1(c) in any Region shall not affect Alamo’s license or rights under this Agreement in any other Region in the Territory.

     2.2 Sublicenses. Alamo shall have the right to extend the licenses granted pursuant to this Section 2 in whole or in part to any Affiliate of Alamo, provided that Alamo is not then in material default with respect to any of its obligations to CIMA under this Agreement. All the terms and provisions of this Agreement shall apply to the Affiliate to which this license has been extended to the same extent as they apply to Alamo, and the operations of the Affiliate shall be deemed to be the operations of Alamo. In addition, Alamo shall have the right to extend the licenses granted pursuant to this Section 2 in whole or in part to Persons who are not Affiliates of Alamo with the prior written consent of CIMA, such consent not to be unreasonably withheld or delayed.

     2.3 Developments, Marketing, Distribution and Sale. Alamo shall use its commercially reasonable efforts to market, distribute and sell the Product in the Territory. Such efforts shall be consistent with industry norms, given the product profile, product potential and the state of the market, in each case, as existing from time to time.

     2.4 Minimum Annual Royalties. Alamo shall meet or exceed the Minimum Annual Royalty Targets set forth on Schedule A hereto or the provisions of this Section 2.4 shall apply. In the event that Alamo does not meet or expect to achieve the Minimum Annual Royalty Targets set forth on Schedule A hereto for any Year following the Year in which the Product is Launched, Alamo may elect either to terminate, upon written notification to CIMA, its license or to retain the license and pay the minimum royalty amount specified in Schedule A for such Year. If Alamo elects not to continue the license, then the license granted hereunder to Alamo will

^*** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission.

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terminate, and an amount equal to the Minimum Annual Royalty Target will be due for the Year during which such Minimum Annual Royalty Targets was not satisfied.

SECTION 3

PRODUCT DEVELOPMENT

     3.1 Obligations of CIMA. To the extent that such obligations have not been previously fulfilled, CIMA agrees as follows: CIMA shall be responsible for the successful performance of each of the development activities set forth on Schedule B within the respective time periods set forth on Schedule B.

     3.2 Obligations of Alamo. To the extent that such obligations (including, but not limited to payments) have not been previously made, Alamo agrees as follows: Alamo shall be responsible for the obligations and the payment obligations specified in Schedule B upon the successful performance of each of the development activities set forth on Schedule B within the respective time periods set forth on Schedule B.

     3.3 Regulatory Matters. CIMA represents and warrants that all Product supplied to Alamo shall be produced under cGMP and in accordance with the Specifications. CIMA shall furnish Alamo with a Certificate of Analysis with a cGMP statement to demonstrate that each shipment of Product has been manufactured under cGMP and other FDA guidelines and that the Specifications have been met. In addition, not more than once per Year unless unless otherwise agreed Alamo or its third party designee as approved by CIMA, such approval not to be unreasonably withheld, may, at its own expense, audit the facilities of CIMA, including its processes, records and other facets of the operation as may be necessary to assure that all applicable regulations have been complied with, and the Specifications have been met. CIMA shall permit duly authorized representatives of Alamo to audit all manufacturing and processing operations related to this Agreement at mutually agreeable reasonable times with a prior appointment. The right to audit shall commence with the Effective Date. These audits will be conducted to assure compliance with all pertinent acts, regulations, and guidelines promulgated by the FDA and other regulatory authorities, as well as standards then in effect in the regulatory environment. Such audits will be permitted during normal business hours and will be performed with a minimum of disruption. Alamo’s exercise or failure to exercise any of its rights to audit CIMA’s facilities and/or records pursuant to this Section 3.3 shall in no way alter or affect CIMA’s obligations under this Agreement.

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SECTION 4

ROYALTY PAYMENTS

     4.1 Royalty Payments.

     (a) Subject to CIMA’s supply of Product in accordance with Section 5 hereof, Alamo shall make royalty payments to CIMA in the amounts set forth on Schedule C.

     (b) Alamo and CIMA acknowledge and agree that as of the Effective Date all payments set forth on Schedule D of the Original Agreement have been satisfied in full.

     (c) [Reserved]

     4.2 Records and Audit. Alamo and its Affiliates shall keep full, true and accurate books of account containing all particulars that may be necessary for the purpose of showing the amounts payable to CIMA hereunder. Such books of account shall be kept at Alamo’s principal place of business or the principal place of business of the appropriate Affiliate of Alamo to which this Agreement relates. Such books and the supporting data shall be open, at all reasonable times and upon reasonable notice during the term of this Agreement and for ^*** years after its termination, to the inspection by a firm of certified public accountants selected by CIMA and reasonably acceptable to Alamo, for the limited purpose of verifying Alamo’s royalty statements; provided, however, that such examination shall not take place more often than once each Year, shall not cover more than the preceding *** Years, with no right to audit any period previously audited and shall not occur during the 90-day period following the end of Alamo’s fiscal Year without the mutual agreement by Alamo. Except as otherwise provided in this Section, the cost of any such examination shall be paid by CIMA. In the event that any such inspection reveals a deficiency in excess of ***% of the reported royalty for the period covered by the inspection, Alamo shall promptly pay CIMA the deficiency, plus interest at the rate of ***% per annum (which interest shall accrue from the date any such deficiency payment was due), and shall reimburse CIMA for the reasonable fees and expenses paid to such accountants in connection with their inspection for such period. In the event that any such inspection reveals a deficiency that is less than ***% of the reported royalty for the period covered by the inspection, Alamo shall promptly pay CIMA the deficiency, plus interest at the rate of ***% per annum (which interest shall accrue from the date any such deficiency payment is due). In the event that any such inspection reveals an overpayment, CIMA shall promptly pay Alamo the overpayment. The parties agree that neither party shall be required to retain books and records with respect to the above other than books and records relating to the current Year and the immediately preceding *** Years.

^*** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission.

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     4.3 Quarterly Reports and Payment of Royalties. In any Year following Launch of the Product, Alamo shall, within ^*** days after the end of the first, second and third Quarter, deliver to CIMA reports, certified by an authorized official of Alamo, setting forth the Net Sales and total royalties due under Section 4.1(a) for such Quarter. Alamo shall pay such royalties within *** days after the end of each Quarter by wire transfer, at CIMA’s cost, or such other method as CIMA may designate. In any Year following Launch of the Product, Alamo shall, within *** days after the end of the fourth (4^th) Quarter, deliver to CIMA reports, certified by an authorized official of Alamo, setting forth the Net Sales and total royalties due under Section 4.1 (a). Alamo shall pay such royalties within *** days after the end of the fourth (4^th) Quarter by wire transfer, or such other method as CIMA may designate. If no royalties are due, Alamo shall so report.

SECTION 5

SUPPLY OF PRODUCT

     5.1 Supply of Product.

     (a) Subject to Section 5.7, for the term of this Agreement, Alamo agrees to purchase from CIMA and CIMA agrees to supply Alamo with all of Alamo’s requirements for the Product, Product samples and Product placebos for their subsequent use, sale, offer for sale, lease or transfer by Alamo. Alamo shall be responsible for procurement of API or require, upon reasonable notice, CIMA to procure all API necessary for the satisfaction of its obligations under this Agreement. If Alamo procures the API necessary for CIMA to perform the supply activities described in this Section 5.1, then Alamo shall pay CIMA ***% of the API cost (net of any rebates, credits or refunds) for CIMA’s costs and expenses for handling the API. If CIMA, at Alamo’s request, procures the API necessary for CIMA to perform the supply activities described in this Section 5.1, then Alamo shall reimburse CIMA for CIMA’s certified direct out-of-pocket costs plus *** percent (***%) (net of any rebates, credits or refunds) for the acquisition of the API

     (b) Alamo agrees to initiate purchases of the Product, Product samples and Product placebos hereunder by issuing CIMA binding purchase orders not less than *** days prior to the required shipping date set forth therein. In addition, after the *** month period following Launch in any Region, Alamo will also provide a *** day forecast that is ***% binding for the next *** day period (i.e., if the forecast shows *** units in each quarter, then the first *** is ***% binding, second quarter is ***% binding or Alamo can reduce to *** units). CIMA agrees to accept any order issued in accordance with this Section 5.1(b) and to meet the delivery dates specified therein so long as at the time of receiving the purchase order, all artwork, API and

^*** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission.

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other responsibilities of Alamo are delivered in fine form to CIMA. All purchase orders hereunder shall be on Alamo’s standard purchase order form (a copy of which is attached as Schedule D hereto and which shall not, for purposes of this Agreement only, be modified in any material respect without CIMA’s prior written consent, such consent not to be unreasonably withheld or delayed) and shall be directed to CIMA at the address set forth below. The terms and conditions of purchase enumerated on the reverse side of such standard purchase order form shall prevail over any inconsistent or conflicting language as may exist on invoices, confirmation or order acknowledgment forms of CIMA, provided, however, that in the event any terms thereof are in conflict, or are inconsistent with any terms of this Agreement, the terms and conditions hereof shall prevail. No Product delivered by CIMA shall have a shelf life that is more than ^*** months less than the maximum shelf life of such product; and, in any case, all Product delivered by CIMA shall have no more than *** months into the regulatory approved expiry date of shelf life remaining upon delivery to Alamo. CIMA will use reasonable efforts to deliver to Alamo Product with more than *** months of shelf life if possible.

     (c) Purchase order quantities shall be equivalent to the batch size of the Product, Product samples or Product placebos which shall be determined during the development activities, approximately *** tablets for the 25 mg dose, and *** tablets for the 100 mg dose, in the aggregate for any single purchase order, unless otherwise mutually agreed by the parties. The delivery quantity of tablets for trade shall not exceed a total of *** batches in any one calendar month, unless otherwise agreed to by the Parties.

     (d) Purchase orders shall clearly state that the order is for tablets for sale, tablets for samples or placebos, as well as the shipping destination and address. Alamo and CIMA will work together to agree on reasonable quantities of tablets for samples if needed.

     5.2 Identification. Alamo may market the Product under its name, with its packaging and logo; Alamo will, however, identify CIMA as the supplier in a fair manner, reasonably acceptable to CIMA. Alamo may use CIMA’s name and derivations thereof in promoting, marketing and selling the Product in the Territory; provided, however, that the particular formulation of any reference to CIMA’s name in any promotional material shall be subject to CIMA’s review and consent; and provided further, that once the formulation of any such reference has been reviewed and consented to by CIMA, any subsequent reference to CIMA’s name using such formulation shall not be subject to the further review or consent of CIMA. All samples shall be clearly marked “for sample use only” or some similar phrasing suggested by Alamo. CIMA shall design and develop labels for the bulk tablet containers and Alamo shall review and approve such labels. Such approval shall not be unreasonably withheld.

     5.3 Trade and Sample Product Price. CIMA shall supply Product, Product samples and Product placebos to Alamo at the price set forth on Schedule F, subject to adjustment as set forth therein.

^*** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission.

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     5.4 Forecasts, Delivery and Quality.

     (a) Alamo shall provide CIMA with ^***-months non-binding forecasts within *** days after the end of each Quarter. Such forecasts shall be revised and extended in each succeeding Quarter. The first *** days of such forecast will be binding and a purchase order will be issued by Alamo for this amount. After *** post Launch in each Region, Alamo will also provide a ***% binding forecast for the subsequent *** day period (i.e., months *** will be ***% binding).

     (b) Delivery of the Product, Product samples and Product placebos shall be in accordance with the means of transportation, destination and dates set forth in Alamo’s purchase order, and shipped in full batch sized quantities. Delivery of the Product shall be EXW (Incoterms 2000) CIMA’s manufacturing facility in Minneapolis, Minnesota.

     (c) All deliveries of the Product hereunder shall include a Certificate of Analysis provided by the quality assurance manager of CIMA attesting to the fact that the Product (i) has been manufactured by a process which complies with cGMP and (ii) are of quality which is in accordance with criteria established in the Specifications and all FDA requirements.

     (d) The Product, Product samples and Product placebos supplied hereunder shall have been manufactured by a process which complies with GMP Quality Specifications.

     5.5 Rejection and Replacement.

     (a) In the event that Alamo determines that any Product, Product samples or Product placebos as manufactured and/or packaged by CIMA is Defective, then: (i) *** days from receipt of Product, Product samples or Product placebos to Alamo or to Alamo’s designated agent for final packaging; or (ii) in the event that such Product, Product samples or Product placebos is Defective as a result of a latent defect, within *** days of the discovery of such latent defect, Alamo shall provide to CIMA a written notice of rejection, specifying in reasonable detail the manner in which the Product is Defective (the “Notice of Rejection”). If no written Notice of Rejection is given to CIMA by Alamo within the period specified in clauses (i) and (ii), such Product, Product samples or Product placebos shall be deemed to have been accepted by Alamo, provided, however, that nothing contained in this Section 5.5(a) shall be deemed to relieve CIMA of its obligations under this Agreement.

     (b) Upon receipt of a Notice of Rejection from Alamo and in order to minimize any hardship to Alamo’s customers, CIMA shall use reasonable commercial efforts to promptly supply to Alamo a quantity of replacement Product, Product samples or Product placebos meeting the Specifications equal to the size of the lot which Alamo claims was Defective. In the

^*** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission.

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event that such Defective Product, Defective Product samples or Defective Product placebos are due to: (i) faulty manufacture; faulty release; faulty primary packaging or labeling of the relevant batch(es) of the Product; or (ii) improper shipping to Alamo’s designated agent for final packaging (which fact shall be established on the basis of the corresponding sealed samples retained by CIMA and/or Alamo’s designated agent for final packaging, utilizing an outside independent laboratory if necessary, the cost of which is borne by both parties and whose findings shall be binding), CIMA shall replace such batches free of charge, otherwise Alamo shall promptly pay CIMA for all such Product, Product samples or Product placebos, including any Defective Product, in accordance with Section 5.6. If CIMA is responsible for any Product deemed to be defective pursuant to this Section 5.5(b), then such Product will be destroyed by Alamo or returned to CIMA, at CIMA’s option and expense.

     5.6 Invoices and Payment. Upon CIMA’s shipment to Alamo or its designated agent of any Product, Product samples, or Product placebos CIMA shall be entitled to submit an invoice to Alamo, and Alamo agrees to remit payment with respect to such invoice within ^*** days from receipt of both such invoice and the shipment to which such invoice relates, unless within *** days from receipt of such shipment of Product Alamo sends a Notice of Rejection to CIMA under Section 5.5(a); provided, that payment of any invoice pursuant to this Section 5.6 shall not constitute or be deemed to constitute acceptance of any Product, Product samples or Product placebos, or in any way limit Alamo’s rights to inspect and/or reject any of the foregoing pursuant to Section 5.5 hereof. Within *** business days of delivery of the Product, Product samples, or Product placebos Alamo or its designated agent shall acknowledge the delivery of Product, Product samples, or Product placebos and shall notify CIMA’s shipping department of any obvious shipping damage; provided, that failure to provided any such notice shall not constitute a waiver or in any way limit Alamo’s rights under Section 5.5 with respect to such shipment. There will be a ***%, of invoice price, penalty per month, for each month a payment is past due. Such penalty shall not exceed ***% per annum.

     5.7 Supply Disruption; Alternate Manufacturing Site.

     (a) CIMA shall supply Alamo with the Product, Product samples and Product placebos in a timely manner in accordance with the complete orders and forecasts received by CIMA pursuant to Sections 5.1(b) and 5.4(a), respectively. In any consecutive *** month period, should CIMA fail to supply Alamo with substantially all of the Product, Product samples or Product placebos ordered for such period pursuant to Section 5.1(b), Alamo shall have the right to require CIMA to transfer the manufacture of the Product to another manufacturing facility designated by Alamo and approved by CIMA, such approval not to be unreasonably withheld, which manufacturing facility agrees to be bound by Section 9.4 hereof. CIMA will assume all costs of, take all actions and grant all rights with respect to CIMA Technology as shall be necessary to effect such transfer. No additional royalties shall be imposed on Alamo or any manufacturer as a result of any transfer under this Section 5.7. Should CIMA cure its failure

^*** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission.

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to supply, CIMA shall have the right to resume the manufacture of the Product and Alamo and CIMA shall, at CIMA’s expense, transfer the manufacture of the Product back to CIMA, if needed, within a commercially reasonable amount of time and all rights granted under the sublicense shall terminate.

     (b) If at any time following the Launch, if a second manufacturing facility is needed and Alamo wishes to qualify such a second manufacturing facility, capable of supplying the Product in accordance with the terms of this Agreement, CIMA and Alamo shall, as soon as practicable following the date of Launch, qualify a manufacturing plant designated by Alamo as an alternate FDA approved manufacturing and packaging site for the Product. The costs of obtaining such approval shall be borne by Alamo.

     5.8 CIMA’s Obligation to Continue Manufacture. If this Agreement terminates or expires through a material breach of CIMA, CIMA shall reasonably cooperate with Alamo in transferring the manufacture of the Product, including all necessary CIMA Technology related to the Product without the right to sublicense other than provided for in this Section 5.8, to Alamo, its Affiliate or a third-party appointed by Alamo (which manufacturing facility agrees to be bound by Section 9.4 hereof), and CIMA shall, if requested by Alamo, continue to supply the Product to Alamo pursuant to the terms of this Agreement until ^*** months from the date this Agreement is terminated or expires pursuant to Section 11.1 or until such manufacturing has been successfully transferred, whichever is sooner. Such a transfer will be at Alamo’s expense. Should Alamo desire to have CIMA continue the manufacture of Product beyond the ***-month period provided for in this Section 5.8, CIMA agrees to enter into good faith negotiations with Alamo to discuss terms of manufacture.

     5.9 EXCEPT AS SPECIFICALLY PROVIDED HEREIN, THE PRODUCT WILL BE SUPPLIED BY CIMA WITH NO WARRANTIES, EXPRESS OR IMPLIED, OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.

SECTION 6

[RESERVED]

^*** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission.

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SECTION 7

REPRESENTATIONS AND WARRANTIES OF CIMA

     CIMA hereby represents and warrants to Alamo that:

     7.1 Organization, Power and Authority. CIMA is a corporation duly organized and validly existing under the laws of the State of Delaware. CIMA has all necessary corporate power and authority to enter into, and be bound by the terms and conditions of, this Agreement, and to license the Licensed Assets to Alamo pursuant hereto.

     7.2 Due Authority; No Breach. The execution, delivery and performance by CIMA of this Agreement and each agreement or instrument contemplated by this Agreement, and the performance of the transactions contemplated hereby and thereby, have been duly authorized by all necessary corporate action by CIMA. This Agreement is, and each agreement or instrument contemplated by this Agreement, when executed and delivered by CIMA in accordance with the provisions hereof, will be (assuming the due execution and delivery hereof and thereof by Alamo) the legal, valid and binding obligation of CIMA, in each case enforceable against CIMA in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, moratorium, reorganization, or similar laws from time to time in effect which affect the enforcement of creditors’ rights generally and by legal and equitable limitations on the availability of specific performance and other equitable remedies against CIMA. All persons who have executed this Agreement on behalf of CIMA, or who will execute on behalf of CIMA any agreement or instrument contemplated by this Agreement, have been duly authorized to do so by all necessary corporate action. Neither the execution and delivery of this Agreement or any such other agreement or instrument by CIMA, nor the performance of the obligations contemplated hereby and thereby, will (i) conflict with or result in any violation of or constitute a breach of any of the terms or provisions of, or result in the acceleration of any obligation under, or constitute a default under any provision of the articles of incorporation or by-laws of CIMA or any material contract or any other material obligation to which CIMA is a party or to which it is subject or bound, or (ii) violate any judgment, order, injunction, decree or award of any court, administrative agency, arbitrator or governmental body against, or affecting or binding upon, CIMA or upon the securities, property or business of CIMA, or (iii) constitute a violation by CIMA of any applicable law or regulation of any jurisdiction as such law or regulation relates to CIMA, or to the property or business of CIMA except for such conflict, acceleration, default, breach or violation that is not reasonably likely to have a material adverse effect on CIMA’s ability to perform its obligations under this Agreement or under any agreement or instrument contemplated hereby.

     7.3 Intellectual Property. CIMA is the lawful owner of the Licensed Assets, CIMA can license the Licensed Assets without the consent of any third party, there is no pending or overtly threatened claim against CIMA asserting that any of the Licensed Assets infringes or violates the rights of third parties or that Alamo, by practicing under the Licensed Assets in performing the Activities, would violate any of the intellectual property rights of any third party, and nothing has come to the attention of CIMA which has, or reasonably should have, led CIMA

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to believe that any of the Licensed Assets infringes or violates the right of third parties. CIMA has not given any notice to any third parties asserting infringement by such third parties upon any of the Licensed Assets. CIMA is not aware of and has not received any communications challenging the ownership, validity, enforceability or effectiveness of any of the Licensed Assets. CIMA has not granted any right to any third party relating to the Activities which would violate the terms of or conflict with the rights granted to Alamo pursuant to this Agreement.

     7.4 [RESERVED]

     7.5 Litigation. There are no pending or, to the best of CIMA’s knowledge, threatened judicial, administrative or arbitral actions, claims, suits or proceedings pending as of the date hereof against CIMA relating to the Activities, or the Licensed Assets which, either individually or together with any other, would have a material adverse effect on the Activities, the Licensed Assets, or the ability of CIMA to perform its obligations under this Agreement or any agreement or instrument contemplated hereby. There are no pending, and CIMA does not presently contemplate bringing, any actions or suits relating to the Activities, or the Licensed Assets against others.

     7.6 Governmental Approval. No consent, approval, waiver, order or authorization of, or registration, declaration or filing with, any governmental authority is required in connection with the execution, delivery and performance of this Agreement, or any agreement or instrument contemplated by this Agreement, by CIMA or the performance by CIMA of its obligations contemplated hereby and thereby.

     7.7 Brokerage. No broker, finder or similar agent has been employed by or on behalf of CIMA, and no Person with which CIMA has had any dealings or communications of any kind is entitled to any brokerage commission, finder’s fee or any similar compensation, in connection with this Agreement or the transactions contemplated hereby.

SECTION 8

REPRESENTATIONS AND WARRANTIES OF ALAMO

     Alamo represents and warrants to CIMA that:

     8.1 Organization, Power and Authority. Alamo is a limited liability company duly organized, validly existing and in good standing under the laws of the State of California . Alamo has all necessary power and authority to enter into, and be bound by the terms and conditions of, this Agreement and to license the Licensed Assets.

     8.2 Due Authority; No Breach. The execution, delivery and performance by Alamo of this Agreement, and each agreement or instrument contemplated by this Agreement, and the performance of the transactions contemplated hereby and thereby, have been duly authorized by all necessary action by Alamo. This Agreement is, and each agreement or instrument

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contemplated by this Agreement, when executed and delivered by Alamo in accordance with the provisions hereof, will be (assuming due execution and delivery hereof and thereof by CIMA) the legal, valid and binding obligation of Alamo, in each case enforceable against Alamo in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, moratorium, reorganization, or similar laws from time to time in effect which affect the enforcement of creditor’s rights generally and by legal and equitable limitations on the availability of specific performance and other equitable remedies against Alamo. All persons who have executed this Agreement on behalf of Alamo, or who will execute on behalf of Alamo any agreement or instrument contemplated by this Agreement, have been duly authorized to do so by all necessary action. Neither the execution and delivery of this Agreement by Alamo, or any such other agreement or instrument by Alamo, nor the performance of the obligations contemplated hereby and thereby, will (i) conflict with or result in any violation of or constitute a breach of any of the terms or provisions of, or result in the acceleration of any obligation under, or constitute a default under any provision of its articles of organization or other governing documents or any material contract or any other material obligation to which Alamo is a party or to which it is subject or bound, or (ii) violate any judgment, order, injunction, decree or award of any court, administrative agency, arbitrator or government body against, or affecting or binding upon, Alamo or upon the securities, property or business of Alamo, or (iii) constitute a violation by Alamo of any applicable law or regulation of any jurisdiction as such law or regulation relates to Alamo or to the property or business of Alamo, except for such conflict, acceleration, default, breach or violation that is not reasonably likely to have a material adverse effect on Alamo’s ability to perform its obligations under this Agreement or any agreement or instrument contemplated hereby.

     8.3 Brokerage. No broker, finder or similar agent has been employed by or on behalf of Alamo and no Person with which Alamo has had any dealings or communications of any kind is entitled to any brokerage commission, finder’s fee or any similar compensation, in connection with this Agreement or the transactions contemplated hereby.

     8.4 Litigation. There are no pending or, to the best of Alamo’s knowledge, threatened judicial, administrative or arbitral actions, claims, suits or proceedings pending as of the date hereof against Alamo which, either individually or together with any other, will have a material adverse effect on the ability of Alamo to perform its obligations under this Agreement or any agreement or instrument contemplated hereby.

     8.5 Governmental Approval. No consent, approval, waiver, order or authorization of, or registration, declaration or filing with, any governmental authority is required in connection with the execution, delivery and performance of this Agreement, or any agreement or instrument contemplated by this Agreement, by Alamo or the performance by Alamo of its obligations contemplated hereby and thereby.

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SECTION 9

ADDITIONAL COVENANTS AND AGREEMENTS OF THE PARTIES

     9.1 Governmental Filings. CIMA and Alamo each agree to prepare and file whatever filings, listings, requests or applications are required to be filed with any governmental authority in connection with this Agreement or the Product and to cooperate with one another as reasonably necessary to accomplish the foregoing.

     9.2 Compliance with Law. Alamo and CIMA shall each use commercially reasonable efforts to comply with federal, state and local laws and regulations applicable to the performance of their respective rights and obligations hereunder. CIMA and Alamo each shall keep all records and reports required to be kept by applicable laws and regulations, and each shall make its facilities available at reasonable times during business hours for inspection by representatives of governmental agencies. CIMA and Alamo each shall notify the other within forty-eight (48) hours of receipt of any notice or any other indication what so ever of any FDA or other governmental agency inspection, investigation or other inquiry, or other material notice or communication of any type, involving the Product. Alamo and CIMA shall cooperate with each other during any such inspection, investigation or other inquiry including, but not limited to, allowing upon request a representative of the other to be present during the applicable portions of any such inspection, investigation or other inquiry and providing copies of all relevant documents. Alamo and CIMA shall discuss any written response to material observations or notifications received in connection with any such inspection, investigation or other inquiry and each shall give the other an opportunity to comment upon any proposed response before it is made. In the event of disagreement concerning the form or content of such response, however, CIMA shall be responsible for deciding the appropriate form and content of any response with respect to any of its cited activities and Alamo shall be responsible for deciding the appropriate form and content of any response with respect to any of its cited activities.

     9.3 Recall. Alamo and CIMA shall consult with one another as to all decisions concerning recall or withdrawal of the Product from the market, including, but not limited to, determining whether or not to make any such recall or withdrawal, the timing and scope thereof, and the means of conducting any recall or withdrawal. The party requesting any recall or withdrawal must receive the prior written consent of the other party, such consent not to be unreasonably withheld, prior to initiating such recall or withdrawal. No consent shall be necessary if the recall or withdrawal is requested by the FDA or other governmental authority. CIMA shall bear the costs (including but not limited to, shipping and product credits) for any recall or withdrawal due to CIMA’s failure to comply with this Agreement, including Product failure relating to CIMA’s cGMP or CIMA’s failure to meet the Specifications . The costs for any other recall or withdrawal shall be the responsibility of Alamo.

     9.4 Confidentiality. Alamo shall treat as confidential the Licensed Assets and all other information of CIMA of which Alamo becomes aware in connection with this Agreement (collectively, “CIMA Proprietary Information”). Alamo shall neither disclose CIMA Proprietary Information to any third party nor use CIMA Proprietary Information for any purpose other than

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as set forth in this Agreement. CIMA shall treat as confidential all other information of Alamo of which CIMA became aware of prior to the Effective Date or becomes aware in connection with this Agreement (collectively, “Alamo Proprietary Information”). CIMA shall neither disclose Alamo Proprietary Information to any third party nor use Alamo Proprietary Information for any purpose other than as set forth in this Agreement.

     Nothing contained herein will in any way restrict or impair either party’s (the “Using Party’s”) right to use, disclose or otherwise deal with any Proprietary Information of the other party which:

          (a) at the time of disclosure is known to the public or thereafter becomes known to the public by publication or otherwise through no fault of the Using Party;

          (b) the Using Party can establish was in its possession prior to the time of the disclosure and was not obtained directly or indirectly from the other party;

          (c) is independently made available to the Using Party by a third party who is not thereby in violation of a confidential relationship with the other party known to the Using Party;

          (d) is developed by the Using Party independently of the Proprietary Information received from the other party and the Using Party can establish such development; or

          (e) is information required to be disclosed by legal or regulatory process; provided, in each case the Using Party timely informs the other party and uses reasonable efforts to limit the disclosure and maintain confidentiality to the extent possible and permits the other party to intervene and contest or attempt to limit the disclosure.

Alamo shall obtain no right or license of any kind under the CIMA Proprietary Information except as set forth in this Agreement. CIMA shall obtain no right or license of any kind under the Alamo Proprietary Information except as set forth in this Agreement.

     9.5 Expenses. CIMA and Alamo shall each bear their own direct and indirect expenses incurred in connection with the negotiation and preparation of this Agreement and, except as set forth in this Agreement, the performance of the obligations contemplated hereby.

     9.6 Reasonable Efforts. CIMA and Alamo each hereby agrees to use all reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done all things necessary or proper to make effective the transactions contemplated by this Agreement, including such actions as may be reasonably necessary to obtain approvals and consents of governmental Persons and other Persons.

     9.7 Publicity. Except as expressly contemplated hereby, the parties agree that no publicity release or announcement concerning the transactions contemplated hereby shall be

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issued without the advance written consent of the other, which consent shall not be unreasonably withheld or delayed, except as such release or announcement may be required by law, including but not limited to the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, in which case the party making the release or announcement shall, before making any such release or announcement, afford the other party a reasonable opportunity to review and comment upon such release or announcement; provided, that the party making the release or announcement or otherwise disclosing this Agreement to any governmental agency in accordance with the foregoing exception shall use its best efforts to obtain confidential treatment of the terms hereof to the fullest extent permitted by applicable law.

     9.8 Cooperation. If either party shall become engaged in or participate in any investigation, claim, litigation or other proceeding with any third party, including the FDA, relating in any way to the Product or any of the Licensed Assets the other party shall cooperate in all reasonable respects with such party in connection therewith, including, without limitation, using its reasonable efforts to make available to the other such employees who may be helpful with respect to such investigation, claim, litigation or other proceeding, provided that, for purposes of this provision, reasonable efforts to make available any employee shall be deemed to mean providing a party with reasonable access to any such employee at no cost for a period of time not to exceed 24 hours (e.g., three 8-hour business days). Thereafter, any such employee shall be made available for such time and upon such terms and conditions (including, but not limited to, compensation) as the parties may mutually agree.

     9.9 Competition; No Sale for Resale. Neither Alamo nor any sub-licensee of Alamo shall knowingly sell any Product to anyone in the Territory for subsequent distribution or resale outside the Territory and each shall take all reasonable precautions to prevent such distribution or resale outside the Territory. Except as provided in 2.1 (c), CIMA shall not knowingly sell any Product to anyone in the Territory or outside the Territory for subsequent distribution or resale in the Territory and CIMA shall take all reasonable precautions to prevent such distribution or resale in the Territory.

     9.10 Conflicting Rights. CIMA shall not grant any right to any third party relating to the Activities which would violate the terms of or conflict with the rights granted to Alamo pursuant to this Agreement.

     9.11 Patent and Trademark Maintenance.

          (a) CIMA hereby represents and warrants that, to the best of its knowledge, the CIMA Technology, when used with the API, includes all the technology, patents, know-how, trade secrets and other intellectual property necessary to manufacture the Product. Any improvement (whether or not patentable) in the technology used in manufacturing the Product shall be owned by CIMA.

          (b) CIMA shall be solely responsible for filing, prosecuting, and maintaining all of the CIMA Patents, and CIMA shall pay the costs associated therewith. CIMA shall file, prosecute, and maintain all CIMA Patents so as to fully continue the benefits under the licenses

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granted to Alamo hereunder. CIMA may, however, discontinue prosecuting or maintaining any CIMA Patent if (i) CIMA has a valid business reason to do so, and (ii) CIMA notifies Alamo of this decision in which event, Alamo shall have the right, but not the obligation, to prosecute or maintain any such patent, with the full cooperation of CIMA, in Alamo’s name and at Alamo’s expense.

          (c) CIMA shall be solely responsible for filing, prosecuting, and maintaining all CIMA Trademarks, and CIMA shall pay the costs associated therewith. All registrations, variations, logos, goodwill and other rights under or acquired through use of the CIMA Trademarks shall accrue and belong to CIMA. Except as provided herein, Alamo shall have no rights to use the CIMA Trademarks. Alamo will not use in its business, in or outside of the Territory, any other mark or name which is similar to or nearly resembles any of the CIMA Trademarks in use by CIMA to indicate the source and origin of the CIMA Technology as to be likely to cause deception or confusion. Alamo recognizes that CIMA is the owner of all CIMA Trademarks used in commerce to indicate the source of the CIMA Technology and agrees that the CIMA Trademarks shall remain vested in CIMA both during the term of this Agreement and thereafter. Alamo shall not contest the validity of the CIMA Trademarks or CIMA’s ownership of the CIMA Trademarks. Use of the CIMA Trademarks by Alamo in conjunction with the manufacture, use, and sale of the Product and all goodwill related thereto shall inure to the benefit of CIMA for purposes of building the longevity and extent of use of the CIMA Trademarks.

          (d) Alamo shall be solely responsible for filing, prosecuting, and maintaining all trademarks it develops or owns for the Product (the “Alamo Trademarks”), and Alamo shall pay the costs associated therewith. All registrations, variations, logos, goodwill and other rights under or acquired through use of the Alamo Trademarks shall accrue and belong to Alamo. CIMA shall have no rights to use the Alamo Trademarks. CIMA will not use in its business, in or outside of the Territory, any other mark or name which is similar to or nearly resembles the Alamo Trademarks in use by Alamo in a manner that is likely to cause deception or confusion. CIMA recognizes that Alamo is the owner of all of the Alamo Trademarks used in commerce to indicate the source of the Product and agrees that the Alamo Trademarks shall remain vested in Alamo both during the term of this Agreement and thereafter. CIMA shall not contest the validity of the Alamo Trademarks or Alamo’s ownership of the Alamo Trademarks. Use of the Alamo Trademarks by Alamo in conjunction with the manufacture, use, and sale of the Product and all goodwill related thereto shall inure to the benefit of Alamo for purposes of building the longevity and extent of use of the Alamo Trademarks.

          (e) Alamo and CIMA agree that, where applicable and appropriate, all packaging of the Product shall identify (i) the number of the CIMA Patents and CIMA as the owner thereof and (ii) Alamo as the owner of the Alamo Trademarks.

          (f) Any provisions in this Agreement to the contrary notwithstanding, Alamo acknowledges that, for all purposes, CIMA is the owner of the CIMA Technology.

Page 21 of 44

     9.12 Infringement; Enforcement of Proprietary Rights.

          (a) Infringement of Patent Rights. Each party shall promptly notify the other of any alleged infringement by third parties of any CIMA Patent and provide any information available to that party relating to such alleged infringement.

          (i) Within a reasonable time (not to exceed 30 days) following such notification, the parties shall meet to discuss a desirable response to such infringement and enter into good faith negotiations to determine an agreed upon course of action to end such infringement and the appropriate allocation of any costs or recoveries associated therewith.

          (ii) If the parties are unable to agree upon the course of action or the appropriate allocation of any costs associated therewith, CIMA shall have the responsibility to investigate such alleged infringement and shall have the first right, at its own expense, to end any infringement of such rights that materially affect Alamo’s rights pursuant to this Agreement, including, but not limited to, bringing suit against such third party infringer. In the event that CIMA does not bring suit against such third party infringer, Alamo may bring suit against such third party infringer on CIMA’s behalf.

          (b) Procedures. No settlement, consent judgment or other voluntary final disposition of any suit contemplated by Section 9.12(a) may be entered into without the consent of each party, which consent shall not be unreasonably withheld or delayed. Unless otherwise agreed by the parties, to the extent that any suit contemplated by Section 9.12 (a) is directly related to the Product, any recovery of Damages to the extent related to the Product (net of the respective out-of-pocket legal fees and associated costs) in any such suit shall be allocated among the parties hereto assuming that such Damages constitute Net Sales by Alamo hereunder and then ^*** split between the parties thereafter. In the event of any infringement suit against a third party brought by either party pursuant to this Section 9.12, the party not bringing such suit shall cooperate in all respects, execute any documents reasonably necessary to permit the other party to prosecute such suit, and to the extent reasonable, shall make available its employees and relevant records to provide evidence for such suit.

     9.13 Referral of Orders and Inquiries. Except as provided in 2.1 (c), CIMA shall refer all Persons sending orders or making inquiries regarding the Product within the Territory to Alamo and shall promptly notify Alamo of the name of each such Person and the nature of the inquiry of such Person.

^*** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission.

Page 22 of 44

SECTION 10

INDEMNIFICATION

     10.1 Indemnification.

     (a) CIMA shall indemnify, defend and hold Alamo (and its directors, officers, employees, and Affiliates) harmless from and against any and all Damages incurred or suffered by Alamo (and its directors, officers, employees, and Affiliates) as a consequence of:

          (i) any breach of any representation, warranty or covenant made by CIMA in this Agreement or any agreement, instrument or document delivered by CIMA pursuant to the terms of this Agreement;

          (ii) any failure to perform duly and punctually any covenant, agreement or undertaking on the part of CIMA contained in this Agreement; or

          (iii) any act or omission of CIMA with respect to the operation of CIMA’s business, or the handling, manufacturing, or use of the Product by CIMA; or

          (iv) any claim or demand that the manufacture, use, sale or offer for sale of the Product by reason of CIMA Technology infringes any United States or foreign patent.

     (b) Alamo shall indemnify, defend and hold CIMA (and its directors, officers, employees, and Affiliates) harmless from and against any and all Damages incurred or suffered by CIMA (and its directors, officers, employees, and Affiliates) as a consequence of:

          (i) any breach of any representation, warranty or covenant made by Alamo in this Agreement or any agreement, instrument or document delivered by Alamo pursuant to the terms of this Agreement;

          (ii) any failure to perform duly and punctually any covenant, agreement or undertaking on the part of Alamo contained in this Agreement; or

          (iii) any act or omission of Alamo with respect to the operation of Alamo’s business or the handling, manufacturing, sale, consumption or use of the Product by Alamo.

     10.2 Notice and Opportunity To Defend. Promptly after receipt by a party hereto of notice of any claim which could give rise to a right to indemnification pursuant to Section 10.1. such party (the “Indemnified Party”) shall give the other party (the “Indemnifying Party”) written notice describing the claim in reasonable detail. The failure of an Indemnified Party to give notice in the manner provided herein shall not relieve the Indemnifying Party of its obligations under this Section, except to the extent that such failure to give notice materially prejudices the Indemnifying Party’s ability to defend such claim. The Indemnifying Party shall

Page 23 of 44

have the right, at its option, to compromise or defend, at its own expense and by counsel mutually agreed by the Parties, any such matter involving the asserted liability of the party seeking such indemnification. If the Indemnifying Party shall undertake to compromise or defend any such asserted liability, it shall promptly (and in any event not less than 10 days after receipt of the Indemnified Party’s original notice) notify the Indemnified Party in writing of its intention to do so, provided such compromise in no way imputes guilt or fault upon, or imposes any obligations on, Indemnified Party. The Indemnified Party agrees to cooperate fully with the Indemnifying Party and its counsel in the compromise or defense against any such asserted liability. All reasonable costs and expenses incurred in connection with such cooperation shall be borne by the Indemnifying Party, as incurred by the Indemnified Party. If the Indemnifying Party elects not to compromise or defend the asserted liability, fails to notify the Indemnified Party of its election to compromise or defend as herein provided, fails to admit its obligation to indemnify under this Agreement with respect to the claim, or, if in the reasonable opinion of the Indemnified Party, the claim could result in the Indemnified Party becoming subject to injunctive relief or relief other than the payment of money damages that could materially adversely affect the ongoing business of the Indemnified Party in any manner, the Indemnified Party shall have the right, at its option, to pay, compromise or defend such asserted liability by its own counsel and its reasonable costs and expenses shall be included as part of the indemnification obligation of the Indemnifying Party hereunder and shall be due and payable within thirty (30) days of receipt of the invoice therefor. Notwithstanding the foregoing, neither the Indemnifying Party nor the Indemnified Party may settle or compromise any claim over the reasonable objection of the other. In any event, the Indemnified Party and the Indemnifying Party may participate, at their own expense, in the defense of such asserted liability. If the Indemnifying Party chooses to defend any claim, the Indemnified Party shall make available to the Indemnifying Party any books, records or other documents within its control that are necessary for such defense. Notwithstanding anything to the contrary in this Section 10.2, (i) the party conducting the defense of a claim shall (A) keep the other party informed on a reasonable and timely basis as to the status of the defense of such claim (but only to the extent such other party is not participating jointly in the defense of such claim), and (B) conduct the defense of such claim in a prudent manner, and (ii) the Indemnifying Party shall not cease to defend, settle or otherwise dispose of any claim without the prior written consent of the Indemnified Party (which consent shall not be unreasonably withheld). Upon the final determination of liability and the amount of the indemnification payment under this Section 10, the appropriate party shall pay to the other, as the case may be, within 10 business days after such determination, the amount of any claim for indemnification made hereunder.

     10.3 Survival. The provisions of Section 10 shall survive any termination of this Agreement. Each Indemnified Party’s rights under Section 10 shall not be deemed to have been waived or otherwise affected by such Indemnified Party’s waiver of the breach of any representation, warranty, agreement or covenant contained in or made pursuant this Agreement, unless such waiver expressly and in writing also waives any or all of the Indemnified Party’s right under Section 10.

Page 24 of 44

     10.4 Insurance. Alamo shall maintain throughout the term of this Agreement comprehensive general liability insurance, including product liability insurance underwritten by an insurance company reasonably acceptable to CIMA. This insurance coverage shall provide protection of not less than ten ($10) million, combined single limit for personal injury and property damage (on a per occurrence basis) with CIMA named as an additional insured. Such liability insurance shall be maintained on an occurrence basis to provide such protection after expiration or termination of the policy itself and/or this Agreement. Alamo shall furnish to CIMA certificates issued by the insurance company setting forth the amount of the liability insurance and a provision that CIMA shall receive thirty (30) days written notice prior to termination, reduction or modification of coverage.

SECTION 11

TERMINATION

     11.1 Termination. The term of this Agreement shall begin upon the Effective Date and, unless sooner terminated as hereinafter provided, shall end upon the later of expiration of the last CIMA Patent to expire on a Region-by-Region and Product-by-Product basis or ^*** years from Launch in the particular Region, or, if later, the expiration of any other patent resulting from the development process contemplated hereby. Should Alamo desire to have CIMA continue the manufacture of Product beyond the date of Termination, CIMA agrees to enter into good faith negotiations with Alamo to discuss terms of manufacture up to an additional *** months. Notwithstanding the foregoing, this Agreement may be terminated as follows:

          (a) Termination for Insolvency. If either Alamo or CIMA (i) makes a general assignment for the benefit of creditors or becomes insolvent; (ii) files an insolvency petition in bankruptcy; (iii) petitions for or acquiesces in the appointment of any receiver, trustee or similar officer to liquidate or conserve its business or any substantial part of its assets; (iv) commences under the laws of any jurisdiction any proceeding involving its insolvency, bankruptcy, reorganization, adjustment of debt, dissolution, liquidation or any other similar proceeding for the release of financially distressed debtors; or (v) becomes a party to any proceeding or action of the type described above in (iii) or (iv) and such proceeding or action remains undismissed or unstayed for a period of more than 60 days, then the other party may by written notice terminate this Agreement in its entirety with immediate effect.

          (b) Termination for Default. Alamo and CIMA each shall have the right to terminate this Agreement for default upon the other’s failure to comply in any material respect with the terms and conditions of this Agreement. At least 60 days prior to any such termination for default, the party seeking to so terminate shall give the other written notice of its intention to terminate this Agreement in accordance with the provisions of this Section 11.1(b), which notice shall set forth the default(s) which form the basis for such termination. If the defaulting party fails to correct such default(s) within 60 days after receipt of notification, then such party

^*** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission.

Page 25 of 44

immediately may terminate this Agreement. This Section 11.1(b) shall not be exclusive and shall not be in lieu of any other remedies available to a party hereto for any default hereunder on the part of the other party.

          (c) Termination for Failure to Pay Minimum Royalties. Subject to Section 2.4, CIMA may terminate this Agreement in accordance with the procedure provided for in Section 11.1(b) in the event Alamo fails to pay CIMA an amount equal to the Minimum Annual Royalty Target in accordance with Exhibit A of this Agreement during or within ^*** days after the end of each Year during the term.

          (d) Termination for Failure to Commercialize. CIMA may terminate this Agreement on a Region-by-Region basis for Alamo’s failure to commercialize the Product in that Region in accordance with Section 2.1(c) of this Agreement.

          (e) Continuing Obligations. Termination of this Agreement for any reason shall not relieve the parties of any obligation accruing prior thereto with respect to the Product and any ongoing obligations hereunder with respect to the remaining Product and shall be without prejudice to the rights and remedies of either party with respect to any antecedent breach of the provisions of this Agreement. Without limiting the generality of the foregoing, no termination of this Agreement, whether by lapse of time or otherwise, shall serve to terminate the obligations of the parties hereto under Sections 7, 8, 9.3, 9.4, 9.6, 9.8, 10, 11.1(c) and 12 hereof, and such obligations shall survive any such termination.

SECTION 12

MISCELLANEOUS

     12.1 Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns; provided, however, that neither CIMA nor Alamo may assign any of its rights, duties or obligations hereunder without the prior written consent of the other, except that no prior written consent shall be required in the event that a third party acquires substantially all of the assets or outstanding shares of, or merges with, Alamo or CIMA, as the case may be.

     12.2 Notices. All notices or other communications required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given if delivered by hand or facsimile and confirmed in writing, or mailed first class, postage prepaid, by registered or certified mail, return receipt requested (mailed notices and notices sent by facsimile shall be deemed to have been given on the date received) as follows:

^***     Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission.

Page 26 of 44

     If to CIMA, as follows:

CIMA LABS INC.
10000 Valley View Road
Eden Prairie, MN 55344
Facsimile: (952)947-8770
Attention: General Manager

     with a copy to:

CIMA LABS INC.
7325 Aspen Lane
Brooklyn Park, MN 55428
Facsimile: (763) 488-4770
Attention: Sr. Counsel/Dir. of Legal Services

     If to Alamo, as follows:

Alamo Pharmaceuticals, LLC
8501 Wilshire Blvd.,
Suite 318
Beverly Hills, CA 90211
Facsimile: (310) 854-0739
Attention: Chief Financial Officer

     with a copy to:

Milbank, Tweed, Hadley & McCloy LLP
601 S. Figueroa Street
Los Angeles, CA 90017
Facsimile: (213) 629-5063
Attention: Kenneth J. Baronsky

or in any case to such other address or addresses as hereafter shall be furnished as provided in this Section 12.2 by any party hereto to the other party.

     12.3 Waiver; Remedies. Any term or provision of this Agreement may be waived at any time by the party entitled to the benefit thereof by a written instrument executed by such party. No delay on the part of CIMA or Alamo in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any waiver on the part of either CIMA or Alamo of any right, power or privilege hereunder operate as a waiver of any other right, power or privilege hereunder nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder.

Page 27 of 44

     12.4 Survival of Representations. Each of the representations and warranties made in this Agreement shall survive the term of this Agreement.

     12.5 Independent Contractors. The parties hereto are independent contractors and nothing contained in this Agreement shall be deemed to create the relationship of partners, joint venturers, or of principal and agent, franchiser and franchisee, or of any association or relationship between the parties other than as expressly provided in this Agreement. Alamo acknowledges that it does not have, and Alamo shall not make representations to any third party, either directly or indirectly, indicating that Alamo has any authority to act for or on behalf of CIMA or to obligate CIMA in any way whatsoever. CIMA acknowledges that it does not have, and it shall not make any representations to any third party, either directly or indirectly, indicating that it has any authority to act for or on behalf of Alamo or to obligate Alamo in any way whatsoever.

     12.6 Entire Agreement. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior agreements or understandings of the parties relating thereto.

     12.7 Amendment. This Agreement may be modified or amended only by written agreement of the parties hereto.

     12.8 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original but all of which together shall constitute a single instrument.

     12.9 Governing Law. This Agreement shall be governed and construed in accordance with the laws of the State of New York excluding any choice of law rules which may direct the application of the law of another state.

     12.10 Dispute Resolution. To the extent a dispute arises with respect to a term or provision of this Agreement which is not subject to a specific time period or remedy, the Parties will use all reasonable efforts to resolve in an amicable fashion any dispute, claim or controversy that may arise relating to the terms or performance of this Agreement. If the Parties are unable to resolve such dispute within thirty (30) days after initial notice, either party, by notice to the other, have such dispute referred to a senior officer of each company. Such officers shall attempt to resolve the dispute by good faith negotiation within thirty (30) days after receipt of such notice.

     12.11 Captions. All section titles or captions contained in this Agreement, in any Schedule referred to herein or in any Exhibit annexed hereto, and the table of contents, if any, to this Agreement are for convenience only, shall not be deemed a part of this Agreement and shall not affect the meaning or interpretation of this Agreement.

Page 28 of 44

     12.12 No Third-Party Rights. No provision of this Agreement shall be deemed or construed in any way to result in the creation of any rights or obligation in any Person not a party or not affiliated with a party to this Agreement.

     12.13 Severability. If any provision of this Agreement is found or declared to be invalid or unenforceable by any court or other competent authority having jurisdiction, such finding or declaration shall not invalidate any other provision hereof, and this Agreement shall thereafter continue in full force and effect.

     12.14 Attachments. All Schedules, Exhibits and other attachments to this Agreement are by this reference incorporated herein and made a part of this Agreement.

     12.15 Force Majeure. In the event that a party is prevented from carrying out its obligations under this Agreement by an event of Force Majeure, then such party’s performance of its obligations under this Agreement shall be excused during the period of such event and for a subsequent reasonable period of recovery.

     12.16 Effect on Original Agreement. This Agreement replaces and supersedes the Original Agreement in its entirety and constitutes the entire understanding of the parties with respect to the subject matter contained herein.

Page 29 of 44

     IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered on the day and year first above written.

CIMA LABS INC.
By:	/s/ Todd MacLaughlan
	Name:	Todd MacLaughlan
	Title:	General Manager

ALAMO PHARMACEUTICALS, LLC
By:	/s/ Neal R. Cutler
	Name:	Neal R. Cutler, M.D.
	Title:	President and C.E.O.

Page 30 of 44

Amended and Restated Development, License and Supply Agreement
Schedule A

Minimum Annual Royalty Targets

     Pursuant to Section 2.4, in each Year during the term, Alamo shall meet or exceed the minimum annual royalty targets set forth below (“Minimum Annual Royalty Targets”), or pay such amounts to CIMA within ^*** days after the end of each Year. Any royalties paid by Alamo with respect to Net Sales of the Products for such Year shall be credited toward achievement of the Minimum Annual Royalty Targets.

     Minimum Annual Royalty Targets

	Minimum Annual
Year	Royalty Targets
***	$	*	**
***	$	*	**
***	$	*	**
***	$	*	**

^*** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission.

Page 31 of 44

Amended and Restated Development, License and Supply Agreement
Schedule B

Development Schedule

***	***	***	***
***	***	***
***	***	***	***
***	***	***	***
***	***	***	***
	***	***
	***	***	***
***	***	***	***
***	***	***	***
***	***	***
	***	***	***

			***
	***
	***
	***
***
***
	***
***
	***
	***
		***
	***

^***     Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission.

Page 32 of 44

*

**

*

**

***

*

**

*

**

*

**

*

**

*

**

*

**

*

**

*

**

*

**

***

*

**

*

**

*

**

*

**

***

*

**

*

**

*

**

*

**

***

*

**

*

**

*

**

*

**

*

**

*

**

*

**

*

**

***

***

*

**

******Any additional work beyond this proposal will be charged per activity.******

     Below please find the cost schedule for the commercial stability program for Fazaclo tablets. A commercial lot includes process validation lots, annual maintenance lots, and any lot set on stability for any other reason as agreed upon between Alamo and CIMA.

Table 1. Cost Schedule

Activity	Cost
Per lot set up fee	$	*	**
Cost for time zero (included in release testing)	$	*	**
Cost per sample pull	$	*	**

The set up fee includes protocol generation, sampling, labeling, inventory, and storage at all specified conditions. Cost per sample pull includes testing, data review, data entry into database, and reporting. A single lot pulled from two conditions and subsequently tested constitutes two sample pulls. Detail of total sample pulls and costs are shown in Tables 2 and 3.

^***      Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission.

Page 33 of 44

^***

***

     ***

^***     Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission.

Page 34 of 44

Amended and Restated Development, License and Supply Agreement
Schedule B (continued)

Table 2. Detail of Expected Study Starts and Sample Pulls

2004

2005

2006

2007

Set ups

*

**

*

**

*

**

*

**

Val batch pulls

*

**

*

**

*

**

*

**

Annual batch pulls

*

**

*

**

*

**

*

**

Table 3. Detail of Expected Costs per Year

2004

2005

2006

2007

Set ups

*

**

*

**

*

**

*

**

Val batch pulls

*

**

*

**

*

**

*

**

Annual batch pulls

*

**

*

**

*

**

*

**

Total

$

*

**

$

*

**

$

*

**

$

*

**

Invoicing will occur as stability pulls are tested.

^***     Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission.

Page 35 of 44

Amended and Restated Development, License and Supply Agreement
Schedule C

Royalty Rates

     Pursuant to Sections 4.1(a) and 4.3, if Alamo exceeds the Minimum Annual Royalty Targets specified in Schedule A, Alamo shall pay to CIMA a percentage of annual Net Sales actually recorded during such Year, as indicated on the following schedule under Tier 1. Should Alamo not achieve the Annual Royalty Targets specified in Schedule A, Alamo shall pay to CIMA the higher amount of (a) Minimum Annual Royalty Targets or (b) a percentage of annual Net Sales actually recorded during such Year, as indicated on the following schedule under Tier 2.

Tier	Royalty Rate
Tier 1	*** % of Net Sales
Tier 2	***% of Net Sales

^***     Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission.

Page 36 of 44

Amended and Restated Development, License and Supply Agreement
Schedule D

Alamo Purchase Order

[See Attached]

Page 37 of 44

Amended and Restated Development, License and Supply Agreement
Schedule E

Technical Agreement Addendum

     CIMA will be accountable for all aspects of the Product research and development and manufacturing other than (i) the design and conduct of clinical trials, (ii) the assembly and filing of the regulatory documents and (iii) the final packaging artwork and sales of Product. Specifications will be mutually agreed by both parties on or prior to the final regulatory filing.

Clozapine OraSolvÒ

Anticipated Product Attributes:

^***

^*** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission.

Page 38 of 44

Amended and Restated Development, License and Supply Agreement
Schedule E (continued)

Clozapine DuraSolvÒ

Anticipated Product Attributes:

^***

^***     Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission.

Page 39 of 44

Amended and Restated Development, License and Supply Agreement
Schedule F

Cost of Goods

     Pursuant to Sections 5.1, 5.3 and 5.6, Alamo shall pay to CIMA the amounts indicated on the following schedule in respect of CIMA’s manufacturing obligations hereunder.

          TRADE and SAMPLES (cost per tablet) — 2004

Potency	Total Cost(1) (2)	Packaging
25 mg	$ ***	Bulk, in fiber drums
50 mg	$***	Bulk, in fiber drums
100 mg	$***	Bulk, in fiber drums

1)	The cost per tablet does not include the cost of API.
2)	Per tablet costs will be adjusted annually on January 1st, but increases shall not exceed the PPI (Pharmaceutical) increase for that year.

          PLACEBOS (cost per tablet)

Placebo
Type	Total Cost	Packaging
25 mg	$***	Bulk, in fiber drums
50 mg	$***	Bulk, in fiber drums
100 mg	$***	Bulk, in fiber drums

^***     Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission.

Page 40 of 44

Amended and Restated Development, License and Supply Agreement
Schedule G

Begins on Next Page

Page 41 of 44

Page 42 of 44

Page 43 of 44

TABLE OF CONTENTS

SCHEDULES
Schedule A	Minimum Annual Royalty Targets
Schedule B	Development Schedule
Schedule C	Royalty Rates
Schedule D	Alamo Purchase Order
Schedule E	Technical Agreement Addendum
Schedule F	Cost Of Goods
Schedule G	Map of Regions

Page 44 of 44

EX-10.6

Exhibit 10.6

CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED AND REPLACED WITH “***”. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECRETARY OF THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO AN APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE EXCHANGE ACT OF 1934.

AMENDMENT #1
TO AMENDED AND RESTATED DEVELOPMENT,
LICENSE AND SUPPLY AGREEMENT

     This Amendment #1 effective as of the last date on the signature page hereof (“Effective Date”), by and between CIMA LABS INC. (“CIMA”) and Alamo Pharmaceuticals, LLC (“ALAMO”) and amends and supplements that certain Amended And Restated Development, License and Supply Agreement between CIMA and ALAMO dated August 22, 2005 (the “Agreement”).

     WHEREAS, CIMA has developed 25 mg., 50 mg. and 100 mg. orally disintegrating tablet doses of the Product for ALAMO, using CIMA’s OraSolv^® technology, under the terms of the Agreement;

     WHEREAS, CIMA has performed feasibility activities on a 100 mg. orally disintegrating tablet dose of the Product for ALAMO, using CIMA’s DuraSolv^® technology, under the terms of the Agreement;

     WHEREAS, ALAMO has requested that CIMA, perform feasibility and development activities to formulate additional 12.5mg., 25 mg. and 50 mg. orally disintegrating tablet doses of the Product for ALAMO using CIMA’s DuraSolv^® technology; and development activities for the 100 mg. orally disintegrating tablet dose of the Product for ALAMO using CIMA’s DuraSolv^® technology; and

     WHEREAS, the parties have agreed that in consideration for such dosage feasibility and development activities, ALAMO shall pay to CIMA such additional sums under the Agreement as are provided for in this Amendment #1.

          NOW, THEREFORE, the parties hereby agree to amend the Agreement as follows:

1. Except as expressly defined herein, all capitalized terms shall have the meanings set forth in the Agreement.

2. In addition to Schedule B of the Agreement, Schedule B-l attached hereto shall be incorporated into the Agreement in its entirety and included for all purposes under the Agreement as if it formed part of Schedule B. Activities of two or more Stages set forth in Schedule B-l may run concurrently.

3. In addition to Schedule E of the Agreement, Schedule E-l attached hereto shall be incorporated into the Agreement in its entirety and included for all purposes under the

Agreement as if it formed part of Schedule E.

4. Unless otherwise set forth in this Amendment, all references to Sections, Schedules or Appendices refer to Sections, Schedules or Appendices of the Agreement.

Page 1 of 10

5. In the event of any conflict between this Amendment #1 and the Agreement, the terms of
this Amendment #1 shall control.

6. All other terms and conditions of the Agreement shall remain in full force and effect.

     IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed in three originals by their duly authorized representatives.

CIMA LABS INC.	ALAMO PHARMACEUTICALS, LLC
BY: /s/ R. K. Khankari	BY:/s/ Samuel Simmons
NAME: R. K. Khankari	NAME: Samuel Simmons
TITLE: V.P. Worldwide Drug Delivery, R&D	TITLE: Chief Financial Officer
DATE: October 14, 2005	DATE: October 19, 2005

Page 2 of 10

Amended and Restated Development, License and Supply Agreement
Schedule B-l

Details of Development Activities, Costs and Timing

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Amended and Restated Development, License and Supply Agreement
Schedule B-l (Continued)

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Amended and Restated Development, License and Supply Agreement
Schedule B-l (Continued)

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Amended and Restated Development, License and Supply Agreement
Schedule B-l (Continued)

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Amended and Restated Development, License and Supply Agreement
Schedule B-l (Continued)

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Amended and Restated Development, License and Supply Agreement
Schedule B-l (Continued)

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Amended and Restated Development, License and Supply Agreement
Schedule B-l (Continued)

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Amended and Restated Development, License and Supply Agreement
Schedule E-l

Clozapine DuraSolv^®

Anticipated Product Attributes:

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EX-10.7

EXHIBIT 10.7

REGISTRATION RIGHTS AGREEMENT

          This Registration Rights Agreement (this “Agreement”) is made and entered into as of May 24, 2006, by and among Avanir Pharmaceuticals, a California corporation (the “Company”) and Neal R. Cutler (“Cutler”).

          This Agreement is made pursuant to the Unit Purchase Agreement, dated as of May 22, 2006, among the Company, Alamo Pharmaceuticals, LLC and the Parties listed on Schedule A attached to the Unit Purchase Agreement (the “Purchase Agreement”).

          NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in this Agreement, and for other good and valuable consideration the receipt and adequacy of which are hereby acknowledged, the Company and Cutler agree as follows:

     1. Definitions. Capitalized terms used and not otherwise defined herein that are defined in the Purchase Agreement shall have the meanings given such terms in the Purchase Agreement. As used in this Agreement, the following terms shall have the respective meanings set forth in this Section 1:

          “Advice” shall have the meaning set forth in Section 6(b).

          “Buyer Notes” shall have the meaning set forth in the Purchase Agreement.

          “California Courts” shall have the meaning set forth in Section 6(h).

          “Commission” means the United States Securities and Exchange Commission.

          “Common Stock” means the Class A common stock, no par value, of the Company.

          “Effectiveness Period” shall have the meaning set forth in Section 2(a).

          “Exchange Act” means the Securities Exchange Act of 1934, as amended.

          “Holder” or “Holders” means the holder or holders, as the case may be, from time to time of Registrable Securities.

          “Indemnified Party” shall have the meaning set forth in Section 5(c).

          “Indemnifying Party” shall have the meaning set forth in Section 5(c).

          “Losses” shall have the meaning set forth in Section 5(a).

          “Person” means any individual, partnership, firm, corporation, limited liability company, association, trust, unincorporated organization or other entity, as well as any syndicate or group that would be deemed to be a person under Section 13(d)(3) of the Exchange Act.

          “Plan of Distribution” has the meaning set forth in Section 2(a).

          “Prepayment Election Date” has the meaning set forth in the Buyer Notes.

          “Proceeding” means an action, claim, suit, investigation or proceeding (including, without limitation, an investigation or partial proceeding, such as a deposition), whether commenced or threatened.

          “Prospectus” means the prospectus included in a Registration Statement (including, without limitation, a prospectus that includes any information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A promulgated under the Securities Act), as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Registrable Securities covered by a Registration Statement, and all other amendments and supplements to the Prospectus, including post-effective amendments, and all material incorporated by reference or deemed to be incorporated by reference in such Prospectus.

          “Registrable Securities” means the Repayment Stock, together with any securities issued or issuable with respect thereto upon any stock split, dividend or other distribution, recapitalization or similar event.

          “Registration Statement” means each of the registration statement that is required to register the resale of the Registrable Securities, including the Prospectus, amendments and supplements to such registration statement or Prospectus, including pre- and post-effective amendments, all exhibits thereto, and all material incorporated by reference or deemed to be incorporated by reference in such registration statement.

          “Repayment Stock” means the Common Stock issued upon the conversion of the Buyer Notes.

          “Rule 144” means Rule 144 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule.

          “Rule 415” means Rule 415 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule.

          “Rule 416” means Rule 416 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule.

          “Rule 424” means Rule 424 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule.

          “Securities Act” means the Securities Act of 1933, as amended.

     2. Registration.

          (a) In the event the Company determines that it may desire to issue Repayment Stock in satisfaction of the Buyer Notes in accordance with the terms thereof, the Company may prepare and file with the Commission a Registration Statement covering the resale of all Registrable Securities not already covered by an existing and effective Registration Statement for an offering to be made on a continuous basis pursuant to Rule 415. In such event, the Registration Statement shall be on Form S-3 (except if the Company is not then eligible to register for resale the Registrable Securities on Form S-3, in which case such registration shall be on another appropriate form for such purpose) and shall contain (except if otherwise required pursuant to written comments received from the Commission upon a review of such Registration Statement) the “Plan of Distribution” in substantially the form attached hereto as Annex A (with such changes as required by law or as reasonably agreed to by the parties hereto, the “Plan of Distribution”). The Company shall cause the Registration Statement to be declared effective under the Securities Act as soon as possible, but in no event later than 180 calendar days from the occurrence of the Trigger Event (as defined in the Buyer Notes); provided, however that the Company shall have an additional 60 calendar days to respond to and resolve any comments from the Securities and Exchange Commission on the Registration Statement and any documents incorporated by reference therein. The Company shall use its reasonable best efforts to keep the Registration Statement continuously effective under the Securities Act until the date that is two years after the date that the Company issues the Repayment Stock (provided that such two-year period will be extended by the amount of time the Registration Statement ceases to be effective for any reason) or such earlier date when all Registrable Securities covered by the Registration Statement have been sold or may be sold without volume restrictions pursuant to Rule 144(k) (the “Effectiveness Period”). Such Registration Statement shall also cover, to the extent allowable under the Securities Act and the rules and regulations promulgated thereunder (including Rule 416), such indeterminate number of additional shares of Common Stock resulting from stock splits, stock dividends or similar transactions with respect to the Registrable Securities.

          (b) Unless otherwise agreed to in writing by a Holder (but only with respect to the delivery of Common Stock to such Holder), the Company shall not be permitted to satisfy any portion of the Buyer Notes by the issuance of Common Stock unless the Registration Statement has been declared effective by the Commission on or prior to the Prepayment Election Date.

     3. Registration Procedures

          In connection with the Company’s registration obligations hereunder, the Company shall:

          (a) Not less than four Trading Days prior to the filing of the Registration Statement or any related Prospectus or any amendment or supplement thereto, furnish to the Holders copies of all such documents proposed to be filed (other than those incorporated by reference), and shall not file the Registration Statement or any such Prospectus or any amendments or supplements thereto to which the Holders of a majority of the Registrable

Securities shall reasonably object in good faith prior to the close of business on the fourth Business Day after such Registration Statement and Prospectus are provided.

          (b) (i) Prepare and file with the Commission such amendments, including post-effective amendments, to the Registration Statement and the Prospectus used in connection therewith as may be necessary to keep such Registration Statement continuously effective as to the applicable Registrable Securities for the Effectiveness Period; (ii) cause the related Prospectus to be amended or supplemented by any required Prospectus supplement, and as so supplemented or amended to be filed pursuant to Rule 424; (iii) respond as promptly as reasonably possible to any comments received from the Commission with respect to the Registration Statement or any amendment thereto; (iv) comply in all material respects with the provisions of the Securities Act and the Exchange Act with respect to the Registration Statements and the disposition of all Registrable Securities covered by each Registration Statement; (v) use reasonable best efforts to cause the Registration Statement and any amendment thereto, as of its effective date, not to contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading; and (vi) use its reasonable best efforts to cause the Prospectus included in the Registration Statement or any amendment or supplements to the Prospectus not to include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances in which they are made, not misleading.

          (c) Notify the Holders as promptly as reasonably possible: (i) with respect to the Registration Statement or any post-effective amendment, when the same has been declared effective; (ii) of any request by the Commission or any other federal or state governmental authority for amendments or supplements to a Registration Statement or Prospectus or for additional information that pertains to the Holders as selling stockholders under the Registration Statement or the Plan of Distribution; (iii) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the initiation of any Proceedings for that purpose; and (iv) of the occurrence of any event or passage of time that, to the Company’s knowledge, makes the financial statements included in the Registration Statement ineligible for inclusion therein or any statement made in such Registration Statement or Prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires any revisions to such Registration Statement, Prospectus or other documents so that, in the case of such Registration Statement or the Prospectus, as the case may be, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading.

          (d) Use its reasonable best efforts to avoid the issuance of, or, if issued, use its reasonable best efforts to obtain the withdrawal of (i) any order suspending the effectiveness of the Registration Statement, or (ii) any suspension of the qualification (or exemption from qualification) of any of the Registrable Securities for sale in any jurisdiction, at the earliest practicable moment.

          (e) Furnish to each Holder, without charge, at least one conformed copy of the Registration Statement and each amendment thereto and all exhibits to the extent requested by such Person (including those previously furnished or incorporated by reference) promptly after

the filing of such documents with the Commission; provided, that the Company shall have no obligation to provide any document or exhibit pursuant to this clause that is available on the EDGAR system.

          (f) Following the effectiveness of the Registration Statement, promptly deliver to each Holder without charge, as many copies of each Prospectus or Prospectuses (including each form of prospectus) and each amendment or supplement thereto as such Persons may reasonably request to facilitate the disposition of the Registrable Securities owned by them. The Company hereby consents to the use of such Prospectus and each amendment or supplement thereto by each of the selling Holders in connection with the offering and sale of the Registrable Securities covered by such Prospectus and any amendment or supplement thereto.

          (g) Cooperate with the Holders to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be delivered to a transferee pursuant to the Registration Statement, which certificates shall be free, to the extent permitted by the Purchase Agreement and the Buyer Notes, of all restrictive legends, and to enable such Registrable Securities to be in such denominations and registered in such names as any such Holders may request.

          (h) Upon the occurrence of any event contemplated by Section 3(c)(iv), use its reasonable best efforts to, as promptly as reasonably possible, prepare a supplement or amendment, including a post-effective amendment, to the affected Registration Statement or a supplement to the related Prospectus or any document incorporated or deemed to be incorporated therein by reference, and file any other required document so that, as thereafter delivered, neither the Registration Statement nor any Prospectus will contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading.

          (i) The Company may require each selling Holder to furnish to the Company a certified statement as to the number of shares of Common Stock beneficially owned by such Holder and any Affiliate thereof.

          (j) Arrange for the qualification (or exemption from such qualification) of the Registrable Securities for sale under the securities laws of those jurisdictions within the United States as any Holder shall reasonably request in writing and shall maintain such qualification (or exemptions from qualification) in effect during the Effectiveness Period; provided that in no event shall the Company be obligated to qualify to do business in any jurisdiction where it is not then so qualified, subject the Company to any material tax in any such jurisdiction where it is not then so subject or to take any action that would subject it to service of process in suits in any jurisdiction where it is not then so subject.

          (k) Use its reasonable best efforts to cause all such Registrable Securities to be listed on a securities exchange or any automated quotation system (such as NASDAQ) on which similar securities issued by the Company are then listed.

          (l) Provide a transfer agent and registrar for all Registrable Securities registered pursuant hereunder and a CUSIP number for all such Registrable Securities, in each case not later than the effective date of the Registration Statement.

4. Registration Expenses. All fees and expenses incident to the Company’s performance of or compliance with its obligations under this Agreement (excluding any underwriting discounts and selling commissions and all legal fees and expenses of legal counsel for any Holder, except for the reasonable fees and disbursements of one counsel for the selling Holders as provided below in this Section 4) shall be borne by the Company whether or not any Registrable Securities are sold pursuant to the Registration Statement. The fees and expenses referred to in the foregoing sentence shall include, without limitation, (i) all registration and filing fees (including, without limitation, fees and expenses (A) with respect to filings required to be made with the Nasdaq National Market on which the Common Stock is listed for trading, and (B) in compliance with applicable state securities or Blue Sky laws), (ii) printing expenses (including, without limitation, expenses of printing certificates for Registrable Securities and of printing prospectuses if the printing of prospectuses is reasonably requested by the holders of a majority of the Registrable Securities included in the Registration Statement), (iii) messenger, telephone and delivery expenses, (iv) fees and disbursements of counsel for the Company, (v) Securities Act liability insurance, if the Company so desires such insurance, (vi) the reasonable fees and disbursements of one counsel for the selling Holders, and (vii) fees and expenses of all other Persons retained by the Company in connection with the consummation of the transactions contemplated by this Agreement. In addition, the Company shall be responsible for all of its internal expenses incurred in connection with the consummation of the transactions contemplated by this Agreement (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit and the fees and expenses incurred in connection with the listing of the Registrable Securities on any securities exchange as required hereunder.

     5. Indemnification.

          (a) Indemnification by the Company. The Company shall indemnify and hold harmless each Holder, the officers, directors, agents, partners, members, stockholders and employees of each of them, each Person who controls any such Holder (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) and the officers, directors, agents and employees of each such controlling Person, from and against any and all losses, claims, damages, liabilities, costs (including, without limitation, reasonable costs of preparation and reasonable attorneys’ fees) and expenses (collectively, “Losses”), arising out of or relating to any untrue or alleged untrue statement of a material fact contained in the Registration Statement, any Prospectus or any form of prospectus or in any amendment or supplement thereto (it being understood that the Holder has approved Annex A hereto for this purpose) or in any preliminary prospectus, or arising out of or relating to any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein (in the case of any Prospectus or form of prospectus or supplement thereto, in light of the circumstances under which they were made) not misleading, except to the extent that (1) such untrue statements, alleged untrue statements, omissions or alleged omissions are based solely upon information regarding such Holder furnished in writing to the Company by such Holder expressly for use therein, or to the extent that such information relates to such Holder or such Holder’s proposed method of distribution of Registrable Securities and was reviewed by such Holder expressly for use in the Registration Statement, such Prospectus or such form of Prospectus or in any

amendment or supplement thereto (it being understood that the Holder has approved Annex A hereto for this purpose) or (2) in the case of an occurrence of an event of the type specified in Section 3(c)(ii)-(iv), the use by such Holder of an outdated or defective Prospectus after the Company has notified such Holder in writing that the Prospectus is outdated or defective and prior to the receipt by such Holder of an Advice (as defined in Section 6(b) below) or an amended or supplemented Prospectus, but only if and to the extent that following the receipt of the Advice or the amended or supplemented Prospectus the misstatement or omission giving rise to such Loss would have been corrected. The Company shall notify the Holders promptly of the institution, threat or assertion of any Proceeding of which the Company is aware in connection with the transactions contemplated by this Agreement.

          (b) Indemnification by Holders. Each Holder shall, severally and not jointly, indemnify and hold harmless the Company, its directors, officers, agents and employees, each Person who controls the Company (within the meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the directors, officers, agents or employees of such controlling Persons, from and against all Losses, as incurred, arising solely out of or based solely upon: (x) if the Company has notified such Holder in writing that the Company is no longer a “Seasoned Issuer” and the prospectus delivery requirements of the Securities Act apply to sales by such Holder, such Holder’s failure to comply with the prospectus delivery requirements of the Securities Act or (y) any untrue statement of a material fact contained in the Registration Statement, any Prospectus, or any form of prospectus, or in any amendment or supplement thereto, or arising solely out of or based solely upon any omission of a material fact required to be stated therein or necessary to make the statements therein (in the case of any Prospectus, or any form of prospectus or supplement thereto, in light of the circumstances under which they were made) not misleading, but only to the extent that, (1) such untrue statements or omissions are based solely upon information regarding such Holder furnished in writing to the Company by such Holder expressly for use therein, or to the extent that such information relates to such Holder or such Holder’s proposed method of distribution of Registrable Securities and was reviewed and expressly approved in writing by such Holder expressly for use in the Registration Statement (it being understood that the Holder has approved Annex A hereto for this purpose), such Prospectus or such form of Prospectus or in any amendment or supplement thereto, or (2) in the case of an occurrence of an event of the type specified in Section 3(c)(ii)(iv), the use by such Holder of an outdated or defective Prospectus after the Company has notified such Holder in writing that the Prospectus is outdated or defective and prior to the receipt by such Holder of advice (the “Advice”) in writing by the Company that the use of the applicable Prospectus may be resumed, or of an amended or supplemented Prospectus, but only if and to the extent that following the receipt of the Advice or the amended or supplemented Prospectus the misstatement or omission giving rise to such Loss would have been corrected; provided, however, that in no event shall any indemnity of any Holder under this paragraph (b) exceed the net proceeds from the offering received by such Holder, less any amounts paid under paragraph (d).

          (c) Conduct of Indemnification Proceedings. If any Proceeding shall be brought or asserted against any Person entitled to indemnity hereunder (an “Indemnified Party”), such Indemnified Party shall promptly notify the Person from whom indemnity is sought (the “Indemnifying Party”) in writing, and the Indemnifying Party shall assume the defense thereof, including the employment of counsel reasonably satisfactory to the Indemnified Party and the payment of all fees and expenses incurred in connection with defense thereof; provided, that the failure of any Indemnified Party to give such notice shall not relieve the

Indemnifying Party of its obligations or liabilities pursuant to this Agreement, except (and only) to the extent that such failure shall have proximately and materially adversely prejudiced the Indemnifying Party.

          An Indemnified Party shall have the right to employ separate counsel in any such Proceeding and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party or Parties unless: (1) the Indemnifying Party has agreed in writing to pay such fees and expenses; (2) the Indemnifying Party shall have failed promptly to assume the defense of, and diligently prosecute, such Proceeding and to employ counsel reasonably satisfactory to such Indemnified Party in any such Proceeding following its receipt of the notice described above in this Section 5(c); or (3) the named parties to any such Proceeding (including any impleaded parties) include both such Indemnified Party and the Indemnifying Party, and such Indemnified Party shall have been advised by counsel that a conflict of interest is likely to exist if the same counsel were to represent such Indemnified Party and the Indemnifying Party (in which case, if such Indemnified Party notifies the Indemnifying Party in writing that it elects to employ separate counsel at the expense of the Indemnifying Party, the Indemnifying Party shall not have the right to assume the defense thereof and such counsel shall be at the expense of the Indemnifying Party), provided, that the Indemnifying Party shall not be liable for the fees and expenses of more than one separate firm of attorneys at any time for all Indemnified Parties. The Indemnifying Party shall not be liable for any settlement of any such Proceeding effected without its written consent, which consent shall not be unreasonably withheld.

          (d) Contribution. If a claim for indemnification under Section 5(a) or 5(b) is unavailable to an Indemnified Party (by reason of public policy or otherwise), then each Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such Losses, in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party and Indemnified Party in connection with the actions, statements or omissions that resulted in such Losses as well as any other relevant equitable considerations. The relative fault of such Indemnifying Party and Indemnified Party shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission of a material fact, has been taken or made by, or relates to information supplied by, such Indemnifying Party or Indemnified Party, and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such action, statement or omission. The amount paid or payable by a party as a result of any Losses shall be deemed to include, subject to the limitations set forth in Section 5(c), any reasonable attorneys’ or other reasonable fees or expenses incurred by such party in connection with any Proceeding to the extent such party would have been indemnified for such fees or expenses if the indemnification provided for in this Section was available to such party in accordance with its terms. Notwithstanding the foregoing, in no event shall the contribution by any Holder under this paragraph (d) exceed the net proceeds from the offering received by such Holder, less any amounts paid under paragraph (b).

          The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 5(d) were determined by pro rata allocation or by any other method of allocation that does not take into account the equitable considerations referred to in the immediately preceding paragraph. No person guilty of fraudulent misrepresentation (within the

meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation.

     6. Miscellaneous

          (a) Compliance. Each Holder covenants and agrees that it will comply with the prospectus delivery requirements of the Securities Act as applicable to it in connection with sales of Registrable Securities pursuant to the Registration Statement.

          (b) Discontinued Disposition. Each Holder agrees by its acquisition of such Registrable Securities that, upon receipt of a notice from the Company of the occurrence of any event of the kind described in Section 3(c), such Holder will forthwith discontinue disposition of such Registrable Securities under the Registration Statement until such Holder’s receipt of the copies of the supplemented Prospectus and/or amended Registration Statement or until it is advised in writing (the “Advice”) by the Company that the use of the applicable Prospectus may be resumed, and, in either case, has received copies of any additional or supplemental filings that are incorporated or deemed to be incorporated by reference in such Prospectus or Registration Statement. The Company may provide appropriate stop orders to enforce the provisions of this paragraph.

          (c) Amendments and Waivers. No provision of this Agreement may be waived or amended except in a written instrument signed by the Company and the Holder or Holders (as applicable) of no less than two-thirds of the then outstanding Registrable Securities. The Company shall provide prior notice to all Holders of any proposed waiver or amendment. No waiver of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any subsequent default or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of either party to exercise any right hereunder in any manner impair the exercise of any such right.

          (d) Notices. Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified in this Section prior to 5:00 p.m. (California time) on a Business Day, (ii) the Business Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Agreement later than 5:00 p.m. (California time) on any date and earlier than 11:59 p.m. (California time) on such date, (iii) the Business Day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. The address for such notices and communications shall be as follows:

If to the Company:	Avanir Pharmaceuticals
	11388 Sorrento Valley Rd.
	San Diego, CA 92121
	Attention: Michael Puntoriero
	Telephone: (858) 622-5200
	Fax: (858) 658-7447

With a copy to:	Latham & Watkins LLP
	650 Town Center Drive, 20th Floor
	Costa Mesa, CA 92626
	Attention: Jonn R. Beeson
	Telephone: (714) 540-1235
	Fax: (714) 755-8290
If to Cutler:	Neal R. Cutler
	[Address]
With a copy to:	Milbank, Tweed, Hadley & McCloy LLP
	601 South Figueroa Street, 30th Floor
	Los Angeles, California 90017
	Attn: Brett Goldblatt
	Telephone: (213) 892-4000
	Fax: (213) 629-5063
If to any other Person who is then the registered Holder:	To the address of such Holder as it appears in the stock transfer books of the Company

or such other address as may be designated in writing hereafter, in the same manner, by such Person.

          (e) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns of each of the parties and shall inure to the benefit of each Holder. The Company may not assign its rights or obligations hereunder without the prior written consent of the Holders of no less than two-thirds of the then outstanding Registrable Securities, which consent shall not be unreasonably withheld. Each Holder may not assign its respective rights hereunder without Company’s prior written consent, which consent shall not be unreasonably withheld.

          (f) Minimum Transfer. If a Holder transfers less than 200,000 shares of Registerable Securities to a Person that is not a Holder prior to the effectiveness of a Registration Statement, such shares of Common Stock shall no longer be Registerable Securities.

          (g) Execution and Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and, all of which taken together shall constitute one and the same Agreement. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid binding obligation of the party executing (or on whose behalf such signature is executed) the same with the same force and effect as if such facsimile signature were the original thereof.

          (h) Governing Law. This Agreement (and any claim or controversy arising out of or relating to this Agreement) shall be governed by the law of the State of California without regard to conflict of law principles that would result in the application of any law other than the law of the State of California.

          (i) Consent to Jurisdiction. Each party to this Agreement hereby irrevocably and unconditionally submits, for itself and its property, to the exclusive jurisdiction of any California State court, or Federal court of the United States of America, sitting in California, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement or the agreements delivered in connection herewith or the transactions contemplated hereby or thereby or for recognition or enforcement of any judgment relating thereto, and each of the parties hereby irrevocably and unconditionally (A) agrees not to commence any such action or proceeding except in such courts, (B) agrees that any claim in respect of any such action or proceeding may be heard and determined in such California State court or, to the extent permitted by law, in such Federal court, (C) waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any such action or proceeding in any such California State or Federal court, and (D) waives, to the fullest extent permitted by Law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such California State or Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by Law. Each party hereto hereby irrevocably waives personal service of process and consents to process being served in any such Proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing in this Agreement will affect the right of any party to this Agreement to serve process in any other manner permitted by Law.

          (j) Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their reasonable best efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable.

          (k) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof.

          IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the date first written above.

AVANIR PHAMACEUTICALS
By:	/s/ Eric K. Brandt
Name: Eric K. Brandt
Title: President and Chief Executive Officer

          IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the date first written above.

NEAL R. CUTLER
 

/s/ Neal Cutler  

ANNEX A

PLAN OF DISTRIBUTION

     The Selling Stockholders and any of their pledgees, donees, transferees, assignees or other successors-in-interest may, from time to time, sell, transfer or otherwise dispose of any or all of their shares of common stock or interests in shares of common stock on any stock exchange, market or trading facility on which the shares are traded or in private transactions. These dispositions may be at fixed prices, at prevailing market prices at the time of sale, at prices related to the prevailing market price, at varying prices determined at the time of sale, or at negotiated prices. The Selling Stockholders may use one or more of the following methods when disposing of the shares or interests therein:

• ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;

• block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;

• purchases by a broker-dealer as principal and resale by the broker-dealer for its account;

• an exchange distribution in accordance with the rules of the applicable exchange;

• privately negotiated transactions;

• short sales entered into after the effective date of the registration statement of which this prospectus is a part;

• through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise;

• broker-dealers may agree with the Selling Stockholders to sell a specified number of such shares at a stipulated price per share;

• a combination of any such methods of disposition; and

• any other method permitted pursuant to applicable law.

     The Selling Stockholders may also sell shares under Rule 144 under the Securities Act, if available, rather than under this prospectus.

     Broker-dealers engaged by the Selling Stockholders may arrange for other broker-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the Selling Stockholders (or, if any broker-dealer acts as agent for the purchaser of shares, from the

purchaser) in amounts to be negotiated. The Selling Stockholders do not expect these commissions and discounts to exceed what is customary in the types of transactions involved.

     The Selling Stockholders may from time to time pledge or grant a security interest in some or all of the Shares owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell shares of common stock from time to time under this prospectus, or under an amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act of 1933 amending the list of selling stockholders to include the pledgee, transferee or other successors in interest as selling stockholders under this prospectus.

     Upon the Company being notified in writing by a Selling Stockholder that any material arrangement has been entered into with a broker-dealer for the sale of common stock through a block trade, special offering, exchange distribution or secondary distribution or a purchase by a broker or dealer, a supplement to this prospectus will be filed, if required, pursuant to Rule 424(b) under the Securities Act, disclosing (i) the name of each such Selling Stockholder and of the participating broker-dealer(s), (ii) the number of shares involved, (iii) the price at which such shares of common stock were sold, (iv) the commissions paid or discounts or concessions allowed to such broker-dealer(s), where applicable, (v) that such broker-dealer(s) did not conduct any investigation to verify the information set out or incorporated by reference in this prospectus, and (vi) other facts material to the transaction. In addition, upon the Company being notified in writing by a Selling Stockholder that a donee or pledge intends to sell more than 500 shares of common stock, a supplement to this prospectus will be filed if then required in accordance with applicable securities law.

     The Selling Stockholders also may transfer the shares of common stock in other circumstances, in which case the transferees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus.

     In connection with the sale of the shares of common stock or interests in shares of common stock, the Selling Stockholders may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of the common stock in the course of hedging the positions they assume. The Selling Stockholders may also sell shares of common stock short and deliver these securities to close out their short positions, or loan or pledge the common stock to broker-dealers that in turn may sell these securities. The Selling Stockholders may also enter into option or other transactions with broker-dealers or other financial institutions or the creation of one or more derivative securities that require the delivery to such broker-dealer or other financial institution of shares offered by this prospectus, which shares such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction).

     The Selling Stockholders and any broker-dealers or agents that are involved in selling the shares may be deemed to be “underwriters” within the meaning of the Securities Act in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act.

2

     The Company has advised the Selling Stockholders that they are required to comply with Regulation M promulgated under the Securities and Exchange Act during such time as they may be engaged in a distribution of the shares. The foregoing may affect the marketability of the common stock.

     The Company is required to pay all fees and expenses incident to the registration of the shares. The Company has agreed to indemnify the Selling Stockholders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act or otherwise.

     The Company has agreed with the Selling Stockholders to keep the registration statement of which this prospectus constitutes a part effective until the earlier of (a) such time as all of the shares covered by this prospectus have been disposed of pursuant to and in accordance with the registration statement or (b) the date on which the shares may be sold without any volume limitations pursuant to Rule 144(k) of the Securities Act.

3

EX-15.1

Exhibit 15.1

August 9, 2006

AVANIR Pharmaceuticals
11388 Sorrento Valley Road
San Diego, California 92121

We have reviewed, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the unaudited interim financial information of AVANIR Pharmaceuticals and subsidiaries for the periods ended June 30, 2006 and 2005, as indicated in our report dated August 9, 2006; because we did not perform an audit, we expressed no opinion on that information.

We are aware that our report referred to above, which is included in your Quarterly Report on Form 10-Q for the quarter ended June 30, 2006, 2006, is incorporated by reference in Registration Statements No. 33-71276, 33-94370, 333-83089, 333-84183, 333-38094, 333-108716, and 333-125743 on Form S-8 and Registration Statements No. 33-49082, 33-76094, 333-24549, 333-76641, 333-77925, 333-31442, 333-32776, 333-34958, 333-35934, 333-107820, 333-111680, 333-114389, 333-123867, 333-124230, and 333-125979 on Form S-3.

We also are aware that the aforementioned report, pursuant to Rule 436(c) under the Securities Act of 1933, is not considered a part of the Registration Statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of that Act.

Yours truly,

/s/ Deloitte & Touche LLP

EX-31.1

EXHIBIT 31.1

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Eric K. Brandt, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Avanir Pharmaceuticals;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

     a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

     b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

     c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

     d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s Board of Directors (or persons performing the equivalent functions):

     a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

     b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: August 9, 2006	/s/ Eric K. Brandt
	Eric K. Brandt
	President and Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Michael J. Puntoriero, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Avanir Pharmaceuticals;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

     a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

     b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

     c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

     d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s Board of Directors (or persons performing the equivalent functions):

     a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

     b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: August 9, 2006	/s/ Michael J. Puntoriero
	Michael J. Puntoriero
	Senior Vice President, Finance, and Chief Financial Officer

EX-31.3

EXHIBIT 31.3

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Gregory P. Hanson, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Avanir Pharmaceuticals;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

     a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

     b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

     c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

     d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s Board of Directors (or persons performing the equivalent functions):

     a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

     b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: August 9, 2006	/s/ Gregory P. Hanson, CMA
	Gregory P. Hanson, CMA
	Vice President and Chief Accounting Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SECTION 1350)

In connection with the accompanying Quarterly Report of Avanir Pharmaceuticals (the “Company”) on Form 10-Q for the fiscal quarter ended June 30, 2006 (the “Report”), I, Eric K. Brandt, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

     (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

     (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: August 9, 2006	/s/ Eric K. Brandt
	Eric K. Brandt
	President and Chief Executive Officer [principal executive officer]

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SECTION 1350)

In connection with the accompanying Quarterly Report of Avanir Pharmaceuticals (the “Company”) on Form 10-Q for the fiscal quarter ended June 30, 2006 (the “Report”), I, Michael J. Puntoriero, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

     (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

     (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: August 9, 2006	/s/ Michael J. Puntoriero
	Michael J. Puntoriero
	Senior Vice President, Finance, and Chief Financial Officer [principal financial officer]

EX-32.3

EXHIBIT 32.3

CERTIFICATION PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SECTION 1350)

In connection with the accompanying Quarterly Report of Avanir Pharmaceuticals (the “Company”) on Form 10-Q for the fiscal quarter ended June 30, 2006 (the “Report”), I, Gregory P. Hanson, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

     (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

     (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: August 9, 2006	/s/ Gregory P. Hanson, CMA
	Gregory P. Hanson, CMA
	Vice President and Chief Accounting Officer [principal accounting officer]