EMPLOYMENT AGREEMENT

EXHIBIT 10.1

EMPLOYMENT AGREEMENT

     This EMPLOYMENT AGREEMENT (“Agreement”), dated as of December 21, 2005 (the “ Effective Date ”), is made by and between AVANIR PHARMACEUTICALS, a California corporation having its principal offices at 11388 Sorrento Valley Road, San Diego, California, 92121 (the “ Company ”), and Randall Kaye (“ Employee ”).

AGREEMENT

     1.  Commencement Date .

          Employee’s employment under this Agreement shall commence on January 16, 2006 (“ Commencement Date ”).

     2.  At-will Employment .

          Employee’s employment relationship with the Company (“ Employment ”) is at-will, terminable at any time and for any or no reason by either the Company or Employee. While certain sections of this Agreement describe events that could occur at a particular time in the future, nothing in this Agreement shall be construed as a guarantee of employment of any length.

     3.  Employment Duties .

          a. Title . Employee shall be Vice-President of Medical Affairs of the Company and shall be assigned duties and responsibilities consistent with that position at the discretion of the Company, including but not limited to working closely with the R&D organization.

          b. Full-Time Attention . Employee shall devote his full time, attention, energy and skills to the Company during the period he is employed under this Agreement.

          c. Policy Compliance . Employee shall comply with all of the Company’s policies, practices and procedures, including the terms of the Confidentiality Agreement (defined below).

     4.  Compensation .

          a. Base Salary . The Company shall pay Employee a base salary of $21,666.67 per month (an annual rate of $260,000), or such higher amount as the Company may determine from time to time (“ Base Salary ”), payable in accordance with the Company’s regular payroll practices.

          b. Bonus Compensation . In addition to the Base Salary, Employee shall be eligible for an annual discretionary bonus of up to 30% of the then-current annual Base Salary, which is payable in October and annually thereafter, provided that the actual bonus may be higher or lower than the target amount, at the discretion of the Company. No bonus will be payable if Employee is not employed by the Company at the normal time of bonus payment. Any bonus payable in October 2006 will not be prorated on account of commencement of employment less than one year prior to October 2006.

          Employee must be employed by the Company when bonuses are distributed in order to be eligible to receive any portion of such bonus.

          c. Signing Bonus . Four months from Commencement Date, assuming Employee is still employed by the Company Employee shall receive a signing bonus in the amount of $50,000 to compensate him for forfeiture of his annual bonus at his prior employer. In the event that Employee receives his annual bonus from his prior employer in an amount equal to or greater than $50,000, the Company will not be obligated to pay this signing bonus. The signing bonus shall be immediately repaid to the Company if, within one year from the Commencement Date, Employee resigns except for good cause.

          d. Equity Compensation . The Company will recommend to its Board of Directors that Employee be granted the following equity awards as additional compensation:

                i. Subject to Board approval, Employee shall be granted the option to purchase 50,000 shares of Class A common stock (the “ Restricted Shares ”) at a purchase price of $0.001 per share. The Restricted Shares shall vest in full upon Employee’s completion of two full years of employment and will be governed by the terms and conditions of the 2003 Equity Incentive Plan of the Company and the form of Restricted Stock Grant Notice, Restricted Stock Agreement and other related documents attached hereto as Exhibit A. The fair market value of the Restricted Shares as of the grant date will be determined by the Board.

                ii. Subject to Board approval, Employee shall be granted the option to purchase 150,000 shares of Class A common stock, with an exercise price equal to 100% of the fair market value of the underlying shares on the date of grant, subject to a four-year vesting schedule (25% vesting as of January 16, 2007 and the remainder vesting in 12 equal installments on April 16, 2007, July 16, 2007, October 16, 2007, January 16, 2008, April 16, 2008, July 16, 2008, October 16, 2008, January 16, 2009, April 16, 2009, July 16, 2009, October 16, 2009, and January 16, 2010. ) This option shall be subject to the terms and conditions of the Company’s 2003 Equity Incentive Plan. The options will be intended to be incentive stock options under Internal Revenue Code Section 422 to the extent permitted by law, and any excess will be intended to be nonstatutory stock options. The Company has no responsibility as to actual tax treatment, however.

The foregoing share amounts and share purchase prices shall be adjusted, as necessary, to give effect to any stock split, reverse stock split, stock dividend, recapitalization or similar transaction affecting the Company’s Class A common stock that is effected after the Effective Date.

          e. Employee Benefits . Employee shall be entitled to participate in all employee benefit plans, programs and arrangements maintained by the Company and made available to employees generally. The Employee’s participation in such Company plans or programs shall be on the same basis and terms as are applicable to other executive employees of the Company.

          f. Reimbursement of Expenses . During his employment with the Company, Employee shall be entitled to reimbursement for all reasonable and necessary business expenses incurred on behalf of the Company, in accordance with the Company’s policies and procedures.

          g. Reimbursement of Moving/Housing Expenses . The Company shall pay Employee $50,000 as reimbursement for moving and housing expenses related to his employment with Company. Payment shall be made on the Commencement Date.

     5.  Confidentiality Agreement . Employee shall concurrently herewith execute and deliver to the Company the Employee Confidential Disclosure Agreement (“ Confidentiality Agreement ”) in the form attached hereto as Exhibit B .

     6.  Non-Competition . During his Employment, Employee shall not, directly or indirectly, either as an employee, employer, consultant, corporate officer or director, investor, or in any other capacity, engage or participate in any business that is a Competitor of the Company, unless such participation or interest is fully disclosed to the Company and approved by the Board. “Competitor” as used in this paragraph refers to any company that has therapeutic products (i) on the market or in clinical development and (ii) that are in competition with the products the Company has on the market or that have entered clinical development. Notwithstanding the above, Employee may own securities in any Competitor that is a public company, so long as Employee does not own, of record or beneficially, more than an aggregate of five percent of the outstanding securities of such company.

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

     8.  Agreement with Previous Employers . Employee represents and warrants to the Company that he does not have any agreement with any previous employer that prevents him from performing his duties and responsibilities under this Agreement or (other than customary confidentiality agreements) that in any way limits his performance hereunder. Employee understands and acknowledges that his employment with Avanir is contingent upon his compliance with any and all agreements between him and his prior employers.

     9.  Change of Control . Employee shall be eligible to participate in any future change of control plan or policy generally applicable to Officers of the Company which, will supersede any then-existing agreement inconsistent with its terms.

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

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

     If to AVANIR:

                     Avanir Pharmaceuticals
                     11388 Sorrento Valley Road
                     San Diego, California 92121
                     Fax: (858) 658-7455
                     Attn: Chief Executive Officer

     If to Employee:

                     Randall Kaye
                     [address]

     12.  Withholding . All payments, except the payment for moving/housing expenses to be made hereunder where proof of such expenses is provided to the Company, including Base Salary and bonus, shall be paid less applicable Federal and state withholding taxes. In the case

of the rights referred to in Section 4(c) (Equity Compensation) above, Employee shall be responsible for furnishing the Company with the amount of any required withholding at the time it is due, and the Company’s obligations with respect to such rights shall be conditioned upon Employee’s compliance with this Section 12.

     13.  General Provisions .

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

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

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

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

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

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

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

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

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

          j. Drafting Ambiguities . Each party to this Agreement and its counsel have reviewed and revised this Agreement. The rule of construction that any ambiguities are to be

resolved against the drafting party shall not be employed in the interpretation of this Agreement or any of the amendments to this Agreement.

EXECUTED at San Diego, California, this 21st day of December, 2005.

EXHIBIT A

AVANIR PHARMACEUTICALS

RESTRICTED STOCK PURCHASE AGREEMENT

     This Restricted Stock Purchase Agreement (the “ Agreement ”) is made as of December ___, 2005 by and between Avanir Pharmaceuticals, a California corporation (the “ Company ”), and Randall Kaye (“ Purchaser ”).

     A. Purchaser and the Company are parties to an Employment Agreement, effective December 21, 2005 (the “ Employment Agreement ”).

     B. Purchaser and the Company desire to specify the terms and conditions of Purchaser’s restricted stock participation in the Company as contemplated in the Employment Agreement.

     THE PARTIES AGREE AS FOLLOWS:

     1.  Sale of Stock . In satisfaction of the Company’s obligations under Section 4(d)(i) of the Employment Agreement, and subject to the terms and conditions of this Agreement, on the Purchase Date (as defined below) the Company will issue and sell to Purchaser, and Purchaser agrees to purchase from the Company, 50,000 shares of the Company’s Class A Common Stock (the “ Purchased Shares ”) at a purchase price of $0.001 per Share for a total purchase price of $50. The term “ Shares ” refers to the Purchased Shares and all securities received in replacement of the Purchased Shares or as stock dividends or splits, all securities received in replacement of the Shares in a recapitalization, merger, reorganization, exchange or the like, and all new, substituted or additional securities or other properties to which Purchaser is entitled by reason of Purchaser’s ownership of the Shares (including the Purchased Shares).

     2.  Purchase . The purchase and sale of the Shares under this Agreement shall occur at the principal office of the Company simultaneously with the execution of this Agreement by the parties or on such other date as the Company and Purchaser shall agree (the “ Purchase Date ”). As promptly as practicable after the Purchase Date, the Company will deliver to the Company’s Secretary pursuant to Section 4 a certificate representing the Shares to be purchased by Purchaser (which shall be issued in Purchaser’s name) against payment of the purchase price therefor on the Purchase Date by Purchaser by cash or check made payable to the Company.

     3.  Limitations on Transfer . In addition to any other limitation on transfer created by applicable securities laws, Purchaser shall not assign, encumber or dispose of any interest in any portion of the Shares which are subject to the Repurchase Option. After any portion of the Shares has been released from the Repurchase Option, Purchaser shall not assign, encumber or dispose of any interest in such portion except in compliance with the provisions below and applicable securities laws.

          (a) Repurchase Option .

                (i) In the event of the voluntary or involuntary termination of Purchaser’s employment or consulting relationship with the Company for any reason (including death or disability), with or without cause, upon the date of such termination (the “ Termination Date ”), the Company shall have an irrevocable, exclusive option (the “ Repurchase Option ”) for a period of 90 days from such date to repurchase all or any portion of the Shares held by Purchaser as of the Termination Date which have not yet been released from the Company’s Repurchase Option at the original purchase price per Share specified in Section 1 (adjusted for any stock splits, stock dividends and the like).

                (ii) Unless the Company notifies Purchaser within 90 days from the Termination Date that it does not intend to exercise its Repurchase Option with respect to some or all of the Shares, the Repurchase Option shall be deemed automatically exercised by the Company as of the 90th day following the Termination Date, provided that the Company may notify Purchaser that it is exercising its Repurchase Option as of a date prior to such 90th day. Unless Purchaser is otherwise notified by the Company pursuant to the preceding sentence that the Company does not intend to exercise its Repurchase Option as to some or all of the Shares to which it applies at the time of termination, execution of this Agreement by Purchaser constitutes written notice to Purchaser of the Company’s intention to exercise its Repurchase Option with respect to all Shares to which such Repurchase Option applies. The Company, at its choice, may satisfy its payment obligation to Purchaser with respect to exercise of the Repurchase Option by either (A) delivering a check to Purchaser in the amount of the purchase price for the Shares being repurchased, or (B) in the event Purchaser is indebted to the Company, canceling an amount of such indebtedness equal to the purchase price for the Shares being repurchased, or (C) by a combination of (A) and (B) so that the