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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q







|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended September 30, 2010

or



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

Commission File Number: 0-21699





VIROPHARMA
INCORPORATED

(Exact Name of Registrant as Specified in its Charter)







|                                                              |  |                                    
|------------------------------------------------------------- |  | -----------------------------------
|Delaware                                                      |  | 23-2789550                         
|(State or other jurisdiction ofincorporation or organization) |  | (I.R.S. EmployerIdentification No.)

730 Stockton Drive

Exton, Pennsylvania 19341

(Address of Principal Executive Offices and Zip Code)

610-458-7300

(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 Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No   ̈

Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ̈    No   ̈

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 |  |  ̈ |  | Accelerated Filer         |  | x
|                        |  |   | 
|Non-accelerated filer   |  |  ̈ |  | Smaller Reporting Company |  |  ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).    Yes   ̈    No  x

Number of shares outstanding of the issuers Common Stock, par value $.002 per share, as of October 22, 2010: 77,982,295 shares.









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VIROPHARMA INCORPORATED

INDEX



|           |  |                                                                                                                   |    |      |    | 
|---------- |  | ----------------------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|           |  |                                                                                                                   |    | Page |   
|PART I     |  | FINANCIAL INFORMATION                                                                                             |    |      |    | 
|           |  |                                                                                                                  
|Item 1.    |  | Financial Statements                                                                                              |    |      |    | 
|           |  |                                                                                                                  
|           |  | Condensed Consolidated Balance Sheets (unaudited)at September 30, 2010 and December 31,
2009                      |    |      | 3  | 
|           |  |                                                                                                                  
|           |  | Consolidated Statements of Operations (unaudited) for the three and nine monthsended September 30, 2010
 and 2009 |    |      | 4  | 
|           |  |                                                                                                                  
|           |  | Consolidated Statement of Stockholders Equity (unaudited) for the nine monthsended September 30,
 2010           |    |      | 5  | 
|           |  |                                                                                                                  
|           |  | Consolidated Statements of Cash Flows (unaudited) for the nine monthsended September 30, 2010 and 2009            |    |      | 6  | 
|           |  |                                                                                                                  
|           |  | Notes to the Consolidated Financial Statements (unaudited)                                                        |    |      | 7  | 
|           |  |                                                                                                                  
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                             |    |      | 18 | 
|           |  |                                                                                                                  
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                                                        |    |      | 31 | 
|           |  |                                                                                                                  
|Item 4.    |  | Controls and Procedures                                                                                           |    |      | 31 | 
|           |  |                                                                                                                  
|PART II    |  | OTHER INFORMATION                                                                                                 |    |      |    | 
|           |  |                                                                                                                  
|Item 1A.   |  | Risk Factors                                                                                                      |    |      | 33 | 
|           |  |                                                                                                                  
|Item 6.    |  | Exhibits                                                                                                          |    |      | 35 | 
|           | 
|SIGNATURES |  |                                                                                                                   | 36 |     



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ViroPharma Incorporated

Condensed Consolidated Balance Sheets

(unaudited)



|                                                                                                                                                                                   |  |                   |           |  |                  |   |           | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | --------- |  | ---------------- | - | --------- | 
|(in thousands, except share and per share data)                                                                                                                                    |  | September 30,2010 |           |  | December 31,2009 |  
|Assets                                                                                                                                                                             |  |                   |           |  |                  |   |           | 
|Current assets:                                                                                                                                                                    |  |                   |           |  |                  |   |           | 
|Cash and cash equivalents                                                                                                                                                          |  | $                 | 383,961   |  |                  | $ | 331,672   | 
|Short-term investments                                                                                                                                                             |  |                   | 64,483    |  |                  |   |          | 
|Accounts receivable, net                                                                                                                                                           |  |                   | 54,016    |  |                  |   | 41,243    | 
|Inventory                                                                                                                                                                          |  |                   | 47,506    |  |                  |   | 41,582    | 
|Prepaid expenses and other current assets                                                                                                                                          |  |                   | 11,821    |  |                  |   | 9,546     | 
|Prepaid income taxes                                                                                                                                                               |  |                   | 634       |  |                  |   | 2,256     | 
|Deferred income taxes                                                                                                                                                              |  |                   | 13,444    |  |                  |   | 20,065    | 
|                                                                                                                                                                                   |  |                   |           |  |                  |   |           | 
|Total current assets                                                                                                                                                               |  |                   | 575,865   |  |                  |   | 446,364   | 
|Intangible assets, net                                                                                                                                                             |  |                   | 627,298   |  |                  |   | 618,510   | 
|Property, equipment and building improvements, net                                                                                                                                 |  |                   | 11,192    |  |                  |   | 10,508    | 
|Goodwill                                                                                                                                                                           |  |                   | 6,364     |  |                  |   |          | 
|Debt issuance costs, net                                                                                                                                                           |  |                   | 2,494     |  |                  |   | 2,784     | 
|Other assets                                                                                                                                                                       |  |                   | 10,703    |  |                  |   | 6,285     | 
|                                                                                                                                                                                   |  |                   |           |  |                  |   |           | 
|Total assets                                                                                                                                                                       |  | $                 | 1,233,916 |  |                  | $ | 1,084,451 | 
|                                                                                                                                                                                   |  |                   |           |  |                  |   |           | 
|                                                                                                                                                                                   |  |                  
|Liabilities and Stockholders Equity                                                                                                                                               |  |                   |           |  |                  |   |           | 
|Current liabilities:                                                                                                                                                               |  |                   |           |  |                  |   |           | 
|Accounts payable                                                                                                                                                                   |  | $                 | 9,606     |  |                  | $ | 5,866     | 
|Accrued expenses and other current liabilities                                                                                                                                     |  |                   | 44,070    |  |                  |   | 33,354    | 
|Income taxes payable                                                                                                                                                               |  |                   | 10,362    |  |                  |   | 769       | 
|                                                                                                                                                                                   |  |                   |           |  |                  |   |           | 
|Total current liabilities                                                                                                                                                          |  |                   | 64,038    |  |                  |   | 39,989    | 
|Other non-current liabilities                                                                                                                                                      |  |                   | 2,590     |  |                  |   | 2,958     | 
|Contingent consideration                                                                                                                                                           |  |                   | 10,344    |  |                  |   |          | 
|Deferred tax liability, net                                                                                                                                                        |  |                   | 163,615   |  |                  |   | 152,503   | 
|Long-term debt                                                                                                                                                                     |  |                   | 143,896   |  |                  |   | 138,614   | 
|                                                                                                                                                                                   |  |                   |           |  |                  |   |           | 
|Total liabilities                                                                                                                                                                  |  |                   | 384,483   |  |                  |   | 334,064   | 
|                                                                                                                                                                                   |  |                   |           |  |                  |   |           | 
|                                                                                                                                                                                   |  |                  
|Stockholders equity:                                                                                                                                                              |  |                   |           |  |                  |   |           | 
|Preferred stock, par value $0.001 per share. 5,000,000 shares authorized; Series A convertible participating preferred stock; no
shares issued and outstanding                     |  |                   |          |  |                  |   |          | 
|                                                                                                                                                                                   |  |                  
|Common stock, par value $0.002 per share. 175,000,000 shares authorized; issued and outstanding 77,969,042 shares at
September 30, 2010 and 77,442,716 shares at December 31, 2009 |  |                   | 157       |  |                  |   | 156       | 
|                                                                                                                                                                                   |  |                  
|Additional paid-in capital                                                                                                                                                         |  |                   | 712,711   |  |                  |   | 701,063   | 
|Accumulated other comprehensive income                                                                                                                                             |  |                   | 170       |  |                  |   | 914       | 
|Retained earnings                                                                                                                                                                  |  |                   | 136,395   |  |                  |   | 48,254    | 
|                                                                                                                                                                                   |  |                   |           |  |                  |   |           | 
|Total stockholders equity                                                                                                                                                         |  |                   | 849,433   |  |                  |   | 750,387   | 
|                                                                                                                                                                                   |  |                   |           |  |                  |   |           | 
|Total liabilities and stockholders equity                                                                                                                                         |  | $                 | 1,233,916 |  |                  | $ | 1,084,451 | 
|                                                                                                                                                                                   |  |                   |           |  |                  |   |           | 

See accompanying notes to unaudited consolidated financial statements.



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ViroPharma Incorporated

Consolidated Statements of Operations

(unaudited)



|                                                         |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|-------------------------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                         |  | Three Months EndedSeptember 30, |         |   | Nine Months EndedSeptember 30, |  
|(in thousands, except per share data)                    |  | 2010                            |         |   | 2009                           |   |        | 2010 |  |   | 2009    |  
|Revenues:                                                |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|                                                         |  |                                 |         |  
|Net product sales                                        |  | $                               | 117,781 |   |                                | $ | 80,551 |      |  | $ | 317,389 |   |  | $ | 222,614 |  
|                                                         |  |                                 |         |  
|Costs and Expenses:                                      |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Cost of sales (excluding amortization of product rights) |  |                                 | 15,755  |   |                                |   | 10,216 |      |  |   | 43,354  |   |  |   | 28,266  |  
|Research and development                                 |  |                                 | 10,188  |   |                                |   | 11,006 |      |  |   | 29,153  |   |  |   | 43,158  |  
|Selling, general and administrative                      |  |                                 | 24,991  |   |                                |   | 20,153 |      |  |   | 71,333  |   |  |   | 68,140  |  
|Intangible amortization                                  |  |                                 | 7,079   |   |                                |   | 6,751  |      |  |   | 22,273  |   |  |   | 21,432  |  
|Goodwill impairment                                      |  |                                 |        |   |                                |   |       |      |  |   |        |   |  |   | 65,099  |  
|Other operating expenses                                 |  |                                 | 532     |   |                                |   |       |      |  |   | 532     |   |  |   |        |  
|                                                         |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Total costs and expenses                                 |  |                                 | 58,545  |   |                                |   | 48,126 |      |  |   | 166,645 |   |  |   | 226,095 |  
|                                                         |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Operating income (loss)                                  |  |                                 | 59,236  |   |                                |   | 32,425 |      |  |   | 150,744 |   |  |   | (3,481  | )
|                                                         |  |                                 |         |  
|Other Income (Expense):                                  |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|                                                         |  |                                 |         |  
|Interest income                                          |  |                                 | 113     |   |                                |   | 65     |      |  |   | 232     |   |  |   | 315     |  
|Interest expense                                         |  |                                 | (2,915  | ) |                                |   | (2,817 | )    |  |   | (8,656  | ) |  |   | (8,803  | )
|Other income, net                                        |  |                                 | 5,138   |   |                                |   |       |      |  |   | 1,336   |   |  |   |        |  
|Gain on long-term debt repurchase                        |  |                                 |        |   |                                |   |       |      |  |   |        |   |  |   | 9,079   |  
|                                                         |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Income (loss) before income tax expense                  |  |                                 | 61,572  |   |                                |   | 29,673 |      |  |   | 143,656 |   |  |   | (2,890  | )
|                                                         |  |                                 |         |  
|Income tax expense                                       |  |                                 | 23,233  |   |                                |   | 9,601  |      |  |   | 55,515  |   |  |   | 20,201  |  
|                                                         |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Net income (loss)                                        |  | $                               | 38,339  |   |                                | $ | 20,072 |      |  | $ | 88,141  |   |  | $ | (23,091 | )
|                                                         |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|                                                         |  |                                 |         |  
|Net income (loss) per share:                             |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Basic                                                    |  | $                               | 0.49    |   |                                | $ | 0.26   |      |  | $ | 1.13    |   |  | $ | (0.30   | )
|Diluted                                                  |  | $                               | 0.45    |   |                                | $ | 0.24   |      |  | $ | 1.04    |   |  | $ | (0.30   | )
|                                                         |  |                                 |         |  
|Shares used in computing net income (loss) per share:    |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Basic                                                    |  |                                 | 77,895  |   |                                |   | 77,440 |      |  |   | 77,744  |   |  |   | 77,417  |  
|Diluted                                                  |  |                                 | 90,081  |   |                                |   | 89,179 |      |  |   | 89,911  |   |  |   | 77,417  |  

See accompanying notes to
unaudited consolidated financial statements.



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ViroPharma Incorporated

Consolidated Statement of Stockholders Equity

(unaudited)



|                                                       |                |                 |   |        |              |   |                |  |  |        |             |  |                          |   |     |                                 |  |   |                  |  |  |                          |      |   |  |   |         |  |  |   |         |  
|------------------------------------------------------ | -------------- | --------------- | - | ------ | ------------ | - | -------------- |  |  | ------ | ----------- |  | ------------------------ | - | --- | ------------------------------- |  | - | ---------------- |  |  | ------------------------ | ---- | - |  | - | ------- |  |  | - | ------- | -
|(in thousands)                                         |                | Preferred Stock |   |        | Common Stock |   |                |  |  |        | Accumulated |  |                          |   |     |                                 |  |  
|                                                       | Numberofshares |                 |   | Amount |              |   | Numberofshares |  |  | Amount |             |  | Additionalpaid-incapital |   |     | othercomprehensiveincome (loss) |  |   | RetainedEarnings |  |  | Totalstockholdersequity |     
|Balance, December 31, 2009                             |                |                 |  |        |              | $ |               |  |  |        | 77,443      |  |                          | $ | 156 |                                 |  | $ | 701,063          |  |  | $                        | 914  |   |  | $ | 48,254  |  |  | $ | 750,387 |  
|Exercise of common stock options                       |                |                 |  |        |              |   |               |  |  |        | 462         |  |                          |   | 1   |                                 |  |   | 1,850            |  |  |                          |     |   |  |   |        |  |  |   | 1,851   |  
|Employee stock purchase plan                           |                |                 |  |        |              |   |               |  |  |        | 64          |  |                          |   |    |                                 |  |   | 202              |  |  |                          |     |   |  |   |        |  |  |   | 202     |  
|Share-based compensation                               |                |                 |  |        |              |   |               |  |  |        |            |  |                          |   |    |                                 |  |   | 8,359            |  |  |                          |     |   |  |   |        |  |  |   | 8,359   |  
|Unrealized gains on available for sale securities, net |                |                 |  |        |              |   |               |  |  |        |            |  |                          |   |    |                                 |  |   |                 |  |  |                          | 31   |   |  |   |        |  |  |   | 31      |  
|Cumulative translation adjustment, net                 |                |                 |  |        |              |   |               |  |  |        |            |  |                          |   |    |                                 |  |   |                 |  |  |                          | (775 | ) |  |   |        |  |  |   | (775    | )
|Stock option tax benefits                              |                |                 |  |        |              |   |               |  |  |        |            |  |                          |   |    |                                 |  |   | 1,237            |  |  |                          |     |   |  |   |        |  |  |   | 1,237   |  
|Net income                                             |                |                 |  |        |              |   |               |  |  |        |            |  |                          |   |    |                                 |  |   |                 |  |  |                          |     |   |  |   | 88,141  |  |  |   | 88,141  |  
|                                                       |                |                 |   |        |              |   |                |  |  |        |             |  |                          |   |     |                                 |  |   |                  |  |  |                          |      |   |  |   |         |  |  |   |         |  
|Balance, September 30, 2010                            |                |                 |  |        |              | $ |               |  |  |        | 77,969      |  |                          | $ | 157 |                                 |  | $ | 712,711          |  |  | $                        | 170  |   |  | $ | 136,395 |  |  | $ | 849,433 |  
|                                                       |                |                 |   |        |              |   |                |  |  |        |             |  |                          |   |     |                                 |  |   |                  |  |  |                          |      |   |  |   |         |  |  |   |         |  

See accompanying notes to unaudited consolidated financial statements.



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ViroPharma Incorporated

Consolidated Statements of Cash Flows

(unaudited)



|                                                                                         |  |                                |         |   |      |   |         |  
|---------------------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|                                                                                         |  | Nine Months EndedSeptember 30, |        
|(in thousands)                                                                           |  | 2010                           |         |   | 2009 |  
|Cash flows from operating activities:                                                    |  |                                |         |   |      |   |         |  
|Net income (loss)                                                                        |  | $                              | 88,141  |   |      | $ | (23,091 | )
|Adjustments to reconcile net income (loss) to net cash provided by operating activities: |  |                                |         |   |      |   |         |  
|Non-cash share-based compensation expense                                                |  |                                | 8,359   |   |      |   | 9,379   |  
|Non-cash interest expense                                                                |  |                                | 5,573   |   |      |   | 5,486   |  
|Non-cash charge for contingent consideration                                             |  |                                | 532     |   |      |   |        |  
|Gain on long-term debt repurchase                                                        |  |                                |        |   |      |   | (9,079  | )
|Non-cash goodwill impairment                                                             |  |                                |        |   |      |   | 65,099  |  
|Deferred tax provision                                                                   |  |                                | 11,204  |   |      |   | 10,934  |  
|Depreciation and amortization expense                                                    |  |                                | 23,687  |   |      |   | 22,604  |  
|Other, net                                                                               |  |                                | (1,371  | ) |      |   | 457     |  
|Changes in assets and liabilities:                                                       |  |                                |         |   |      |   |         |  
|Accounts receivable                                                                      |  |                                | (12,105 | ) |      |   | (23,314 | )
|Inventory                                                                                |  |                                | (4,814  | ) |      |   | (12,147 | )
|Prepaid expenses and other current assets                                                |  |                                | (2,282  | ) |      |   | (3,282  | )
|Prepaid income taxes/income taxes payable                                                |  |                                | 11,218  |   |      |   | 2,200   |  
|Other assets                                                                             |  |                                | (4,200  | ) |      |   | 1,966   |  
|Accounts payable                                                                         |  |                                | 3,275   |   |      |   | 6,024   |  
|Due to partners                                                                          |  |                                |        |   |      |   | (1,086  | )
|Accrued expenses and other current liabilities                                           |  |                                | 10,577  |   |      |   | (8,888  | )
|Other non-current liabilities                                                            |  |                                | (367    | ) |      |   | (1,712  | )
|                                                                                         |  |                                |         |   |      |   |         |  
|Net cash provided by operating activities                                                |  |                                | 137,427 |   |      |   | 41,550  |  
|                                                                                         |  |                               
|Cash flows from investing activities:                                                    |  |                                |         |   |      |   |         |  
|Purchase of Auralis, net of cash acquired                                                |  |                                | (13,152 | ) |      |   |        |  
|Purchase of Vancocin assets                                                              |  |                                | (7,000  | ) |      |   | (7,000  | )
|Purchase of property, equipment and building improvements                                |  |                                | (2,082  | ) |      |   | (1,308  | )
|Purchase of short-term investments                                                       |  |                                | (64,761 | ) |      |   |        |  
|                                                                                         |  |                                |         |   |      |   |         |  
|Net cash used in investing activities                                                    |  |                                | (86,995 | ) |      |   | (8,308  | )
|                                                                                         |  |                               
|Cash flows from financing activities:                                                    |  |                                |         |   |      |   |         |  
|Termination of call spread options, net                                                  |  |                                |        |   |      |   | 274     |  
|Net proceeds from issuance of common stock                                               |  |                                | 2,053   |   |      |   | 186     |  
|Excess tax benefits from share-based payment arrangements                                |  |                                | 1,237   |   |      |   |        |  
|Repayment of debt                                                                        |  |                                | (1,575  | ) |      |   | (21,150 | )
|                                                                                         |  |                                |         |   |      |   |         |  
|Net cash provided by (used in) financing activities                                      |  |                                | 1,715   |   |      |   | (20,690 | )
|                                                                                         |  |                               
|Effect of exchange rate changes on cash                                                  |  |                                | 142     |   |      |   | 539     |  
|                                                                                         |  |                                |         |   |      |   |         |  
|                                                                                         |  |                               
|Net increase in cash and cash equivalents                                                |  |                                | 52,289  |   |      |   | 13,091  |  
|                                                                                         |  |                               
|Cash and cash equivalents at beginning of period                                         |  |                                | 331,672 |   |      |   | 275,839 |  
|                                                                                         |  |                                |         |   |      |   |         |  
|Cash and cash equivalents at end of period                                               |  | $                              | 383,961 |   |      | $ | 288,930 |  
|                                                                                         |  |                                |         |   |      |   |         |  

See accompanying notes to unaudited consolidated financial statements.



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ViroPharma Incorporated

Notes to the Unaudited Consolidated Financial Statements

Note 1. Organization and Business
Activities

ViroPharma Incorporated and subsidiaries is a global biotechnology company dedicated to the development and
commercialization of products that address serious diseases, with a focus on products used by physician specialists or in hospital settings. We intend to grow through sales of our marketed products, through continued development of our product
pipeline, expansion of sales into additional territories outside the United States and through potential acquisition or licensing of products or acquisition of companies. We expect future growth to be driven by sales of Cinryze, both domestically
and internationally, and by our primary development programs, including C1 esterase inhibitor and a non-toxigenic strain of C. difficile (VP20621).

We market and sell Cinryze in the United States for routine prophylaxis against angioedema attacks in adolescent and adult patients with hereditary angioedema (HAE). Cinryze is a C1 esterase inhibitor
therapy for routine prophylaxis against HAE, also known as C1 inhibitor (C1-INH) deficiency, a rare, severely debilitating, life-threatening genetic disorder. Cinryze was obtained in October 2008, when we completed our acquisition of Lev
Pharmaceuticals, Inc. (Lev). In January 2010, we acquired expanded rights to commercialize Cinryze and future C1-INH derived products in certain European countries and other territories throughout the world as well as rights to develop future C1-INH
derived products for additional indications. In March 2010, our Marketing Authorization Application (MAA) for Cinryze for acute treatment and prophylaxis against HAE was accepted by the European Medicines Agency (EMA). We intend to seek to
commercialize Cinryze in Europe in 2011 in countries where we have distribution rights. We are currently evaluating our commercialization plans in additional territories. We also intend to conduct ViroPharma sponsored studies and
investigator-initiated studies (IIS) to identify further therapeutic uses and potentially expand the labeled indication for Cinryze to include other C1 mediated diseases, such as Antibody-Mediated Rejection (AMR) and Delayed Graft Function (DGF).
Additionally, we are currently undertaking studies on the viability of subcutaneous administration of Cinryze.

We also market and sell
Vancocin HCl capsules, the oral capsule formulation of vancomycin hydrochloride, in the U.S. and its territories. Vancocin is a potent antibiotic approved by the U.S. Food and Drug Administration, or FDA, to treat antibiotic-associated
pseudomembranous colitis caused by Clostridium difficile infection (CDI), or C. difficile, and enterocolitis caused by Staphylococcus aureus, including methicillin-resistant strains.

Our product development portfolio is primarily focused on two programs, C1 esterase inhibitor [human] and VP20621. We are working on developing further therapeutic uses; potential additional
indications in other C1 mediated diseases, and alternative modes of administration for C1 esterase inhibitor. We are also developing VP20621 for the treatment and prevention of CDI. On August 6, 2009 we announced that dosing had begun in
the Phase 1 clinical trial for VP20621 to determine the safety and tolerability of VP20621 dosed orally as a single and as repeat escalating doses in healthy young and older adults. We have successfully completed our Phase 1 clinical trial and
anticipate moving the compound into a Phase 2 clinical trial.

In addition to these programs, we have several other assets that we may make
additional investments in. These investments will be limited and dependent on our assessment of the potential future commercial success of or benefits from the asset. These assets include maribavir for CMV and other compounds. On May 28, 2010
we acquired Auralis Limited, a UK based specialty pharmaceutical company. The acquisition of Auralis provides us with the opportunity to accelerate our European commercial systems for potential future product launches and additional business
development acquisitions. The acquisition also provides immediate revenue from sales of Diamorphine (Diamorphine Hydrochloride BP Injection) for palliative care and acute pain relief in the United Kingdom.

Basis of Presentation

The consolidated
financial information at September 30, 2010 and for the three and nine months ended September 30, 2010 and 2009, is unaudited but includes all adjustments (consisting only of normal recurring adjustments) which, in the opinion of
management, are necessary to state fairly the consolidated financial information set forth therein in accordance with accounting principles generally accepted in the United States of America. The interim results are not necessarily indicative of
results to be expected for the full fiscal year. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2009 included in the
Companys Annual Report on Form 10-K filed with the Securities and Exchange Commission. We have evaluated all subsequent events through the date the financial statements were issued.

Use of estimates

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



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##### Table of Contents

ViroPharma Incorporated

Notes to the Unaudited Consolidated Financial Statements  (continued)



Adoption of Standards

In February 2010, the Financial Accounting Standards Board (FASB) amended the disclosure requirement so that SEC filers are no longer required to disclose the date through which subsequent events have
been evaluated in originally issued and revised financial statements. This revised guidance is effective immediately and we adopted this pronouncement on March 31, 2010 and have revised the disclosures as required.

Note 2. Short-Term Investments

Short-term investments consist of fixed income and debt securities with remaining maturities of greater than three months at the date of purchase. At
September 30, 2010, all of our fixed income securities were classified as available for sale investments and measured as level 1 instruments of the fair value measurements standard.

The following summarizes the Companys available for sale investments at September 30, 2010:



|                                           |  |      |        |  |                      |   |    |                       |  |   |           |  |  |   |        | 
|------------------------------------------ |  | ---- | ------ |  | -------------------- | - | -- | --------------------- |  | - | --------- |  |  | - | ------ | 
|(in thousands)                             |  | Cost |        |  | Grossunrealizedgains |   |    | Grossunrealizedlosses |  |   | Fairvalue | 
|September 30, 2010                         |  |      |        |  |                      |   |    |                       |  |   |           |  |  |   |        | 
|Debt securities:                           |  |      |        |  |                      |   |    |                       |  |   |           |  |  |   |        | 
|U.S. Treasury                              |  | $    | 39,311 |  |                      | $ | 28 |                       |  | $ | 1         |  |  | $ | 39,338 | 
|Corporate bonds                            |  |      | 25,122 |  |                      |   | 24 |                       |  |   | 1         |  |  |   | 25,145 | 
|                                           |  |      |        |  |                      |   |    |                       |  |   |           |  |  |   |        | 
|                                           |  | $    | 64,433 |  |                      | $ | 52 |                       |  | $ | 2         |  |  | $ | 64,483 | 
|                                           |  |      |        |  |                      |   |    |                       |  |   |           |  |  |   |        | 
|Maturities of investments were as follows: |  |      |        |  |                      |   |    |                       |  |   |           |  |  |   |        | 
|Less than one year                         |  |      | 59,434 |  |                      |   | 52 |                       |  |   | 1         |  |  |   | 59,485 | 
|Greater than one year                      |  |      | 4,999  |  |                      |   |   |                       |  |   | 1         |  |  |   | 4,998  | 
|                                           |  |      |        |  |                      |   |    |                       |  |   |           |  |  |   |        | 
|Total                                      |  | $    | 64,433 |  |                      | $ | 52 |                       |  | $ | 2         |  |  | $ | 64,483 | 
|                                           |  |      |        |  |                      |   |    |                       |  |   |           |  |  |   |        | 

Note 3. Inventory

Inventory is stated at the lower of cost or market using actual cost.



|                |  |                   |        |  |                  |   |        | 
|--------------- |  | ----------------- | ------ |  | ---------------- | - | ------ | 
|(in thousands)  |  | September 30,2010 |        |  | December 31,2009 |  
|Raw Materials   |  | $                 | 29,577 |  |                  | $ | 26,780 | 
|Work In Process |  |                   | 11,860 |  |                  |   | 8,533  | 
|Finished Goods  |  |                   | 6,069  |  |                  |   | 6,269  | 
|                |  |                   |        |  |                  |   |        | 
|Total           |  | $                 | 47,506 |  |                  | $ | 41,582 | 
|                |  |                   |        |  |                  |   |        | 

At September 30, 2010, approximately $2.8 million of WIP inventory is currently not available for commercial use as it
represents product produced as part of our effort to receive FDA approval for a larger scale manufacturing line. On October 21, 2010, the FDA issued a complete response letter regarding the Cinryze industrial scale manufacturing expansion
activities. The FDA has requested additional information related to observations from the pre-approval inspection and review of the technical processes. We are in the process of responding to the complete response letter. If FDA approval of the
industrial scale process is not received with sufficient lead time prior to the final product expiration date the value of this inventory may not be recoverable as commercially saleable product.



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##### Table of Contents

ViroPharma Incorporated

Notes to the Unaudited Consolidated Financial Statements  (Continued)



Note 4. Intangible Assets

The following represents the balance of the intangible assets at September 30, 2010:



|                        |  |                       |         |  |                         |   |        |                     |  |   |         | 
|----------------------- |  | --------------------- | ------- |  | ----------------------- | - | ------ | ------------------- |  | - | ------- | 
|(in thousands)          |  | GrossIntangibleAssets |         |  | AccumulatedAmortization |   |        | NetIntangibleAssets | 
|Cinryze Product rights  |  | $                     | 521,000 |  |                         | $ | 40,504 |                     |  | $ | 480,496 | 
|Vancocin Intangibles    |  |                       | 161,099 |  |                         |   | 38,019 |                     |  |   | 123,080 | 
|Auralis Contract rights |  |                       | 12,635  |  |                         |   | 350    |                     |  |   | 12,285  | 
|Auralis IPR&D           |  |                       | 11,437  |  |                         |   |       |                     |  |   | 11,437  | 
|                        |  |                       |         |  |                         |   |        |                     |  |   |         | 
|Total                   |  | $                     | 706,171 |  |                         | $ | 78,873 |                     |  | $ | 627,298 | 
|                        |  |                       |         |  |                         |   |        |                     |  |   |         | 

The following represents the balance of the intangible assets at December 31, 2009:



|                       |  |                       |         |  |                         |   |        |                     |  |   |         | 
|---------------------- |  | --------------------- | ------- |  | ----------------------- | - | ------ | ------------------- |  | - | ------- | 
|(in thousands)         |  | GrossIntangibleAssets |         |  | AccumulatedAmortization |   |        | NetIntangibleAssets | 
|Cinryze Product rights |  | $                     | 521,000 |  |                         | $ | 24,873 |                     |  | $ | 496,127 | 
|Vancocin Intangibles   |  |                       | 154,099 |  |                         |   | 31,716 |                     |  |   | 122,383 | 
|                       |  |                       |         |  |                         |   |        |                     |  |   |         | 
|Total                  |  | $                     | 675,099 |  |                         | $ | 56,589 |                     |  | $ | 618,510 | 
|                       |  |                       |         |  |                         |   |        |                     |  |   |         | 

In December 2008, FDA changed OGDs 2006 bioequivalence recommendation, which we have opposed since its original
proposal in March 2006, by issuing draft guidance for establishing bioequivalence to Vancocin which would require generic products that have the same inactive ingredients in the same quantities as Vancocin (Q1 and Q2 the same) to
demonstrate bioequivalence through comparative in-vitro dissolution testing. Under this latest proposed method, any generic product that is not Q1 and Q2 the same as Vancocin would need to conduct an in-vivo study with clinical endpoints to
demonstrate bioequivalence with Vancocin.

On August 4, 2009 the FDAs Pharmaceutical Science and Clinical Pharmacology Advisory
Committee voted in favor of the OGDs 2008 draft guidelines on bioequivalence for Vancocin. If FDAs proposed bioequivalence method for Vancocin becomes effective, the time period in which a generic competitor could be approved would be
reduced and multiple generics may enter the market, which would materially impact our operating results, cash flows and possibly intangible asset valuations. This could also result in a reduction to the useful life of the Vancocin-related intangible
assets. Management currently believes there are no indicators that would require a change in useful life as management believes that Vancocin will continue to be utilized along with generics that may enter the market, and the number of generics and
the timing of their market entry is unknown.

A reduction in the useful life, as well as the timing and number of generics, will impact our
cash flow assumptions and estimate of fair value, perhaps to a level that could result in an impairment charge. We will continue to monitor the actions of the OGD and consider the effects of our opposition actions and the announcements by generic
competitors or other adverse events for additional impairment indicators. We will reevaluate the expected cash flows and fair value of our Vancocin-related assets at such time as a triggering event occurs.

We are obligated to pay Eli Lilly and Company (Lilly) additional purchase price consideration based on net sales of Vancocin within a calendar year. The
additional purchase price consideration is determined by the annual net sales of Vancocin, is paid quarterly and is due each year through 2011. We account for these additional payments as additional purchase price which requires that the additional
purchase price consideration is recorded as an increase to the intangible asset of Vancocin and is amortized over the remaining estimated useful life of the intangible asset. In addition, at the time of recording the additional intangible assets, a
cumulative adjustment is recorded to accumulated intangible amortization, in addition to ordinary amortization expense, in order to reflect amortization as if the additional purchase price had been paid in November 2004.



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ViroPharma Incorporated

Notes to the Unaudited Consolidated Financial Statements  (Continued)



As of September 30, 2010, we have paid an aggregate of $44.1 million to Lilly in additional
purchase price consideration, as our net sales of Vancocin surpassed the maximum obligation level of $65 million in 2005 through 2010. The $44.1 million paid to Lilly was based upon 35% of $20.0 million in 2010, $20 million in 2009 and 2008, 35% of
$17 million in 2007, 35% of $19 million in 2006 and 50% of $21 million in 2005. The Company is obligated to pay Lilly additional amounts based on 35% of annual net sales between $45 and $65 million of Vancocin in 2011.

On May 28, 2010 we acquired Auralis Limited, a UK based specialty pharmaceutical company. With the acquisition of Auralis we have added one marketed
product and several development assets to our portfolio. We recognized an intangible asset related to certain supply agreements for the marketed product and one of the development assets. Additionally, we have recognized in-process research and
development (IPR&D) assets related to the development assets which are currently not approved. We determined that these assets meet the criterion for separate recognition as intangible assets and the fair value of these assets have been
determined based upon discounted cash flow models. The supply agreements will be amortized over their useful life of 12 years. The IPR&D assets used in research and development activities are classified as indefinite-lived and will be subject to
periodic impairment testing. The IPR&D assets will remain as indefinite-lived intangible assets until the projects are completed or abandoned. Upon completion of the projects, we will make a separate determination of the useful life of the asset
and begin amortization. If a project is abandoned such amounts will be written off at that time.

Note 5. Goodwill Impairment

During the first quarter of 2009 and as of March 31, 2009, the market capitalization of ViroPharma fell below the carrying
value of our net assets due to the results of our Phase 3 clinical trial evaluating maribavir used as prophylaxis in allogeneic stem cell transplant patients and our decision to discontinue dosing in our Phase 3 trial of maribavir in solid organ
(liver) transplant patients. The fact that our market capitalization fell below our carrying value required us to test for impairment of our goodwill and other intangible assets. We conducted this analysis at March 31, 2009 and concluded that
our goodwill was impaired due to our market capitalization being below the carrying value of our net assets for an extended period of time. We incurred a $65.1 million charge in the first quarter of 2009 related to this goodwill impairment.

Note 6. Property, Equipment and Building Improvements

During 2009, we reclassified property and a building that was previously held for sale to a held and use long term asset. This was due to our decision to lease our previous corporate headquarters and take
the building off the market. In accordance with the applicable accounting pronouncements, we adjusted the carrying value of the building to fair value at the time of the reclassification and incurred a $3.4 million impairment to the building in the
fourth quarter of 2009.

The useful life for the major categories of property and equipment are 30 years for the building, 3 to 5 years for
computers and equipment and 15 years for building improvements.

Note 7. Long-Term Debt

Long-term debt as of September 30, 2010 and December 31, 2009 is summarized in the following table:



|                         |  |                   |         |  |                  |   |         | 
|------------------------ |  | ----------------- | ------- |  | ---------------- | - | ------- | 
|(in thousands)           |  | September 30,2010 |         |  | December 31,2009 |  
|Senior convertible notes |  | $                 | 143,896 |  |                  | $ | 138,614 | 
|less: current portion    |  |                   |        |  |                  |   |        | 
|                         |  |                   |         |  |                  |   |         | 
|Total debt principal     |  | $                 | 143,896 |  |                  | $ | 138,614 | 
|                         |  |                   |         |  |                  |   |         | 

As of September 30, 2010 senior convertible notes representing $205.0 million of principal debt are outstanding with a
carrying value of $143.9 million.



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ViroPharma Incorporated

Notes to the Unaudited Consolidated Financial Statements  (Continued)



On March 26, 2007, we issued $250.0 million of 2% senior convertible notes due March 2017 (senior
convertible notes) in a public offering. Net proceeds from the issuance of the senior convertible notes were $241.8 million. The senior convertible notes are unsecured unsubordinated obligations and rank equally with any other unsecured
and unsubordinated indebtedness. The senior convertible notes bear interest at a rate of 2% per annum, payable semi-annually in arrears on March 15 and September 15 of each year commencing on September 15, 2007.

As of January 1, 2009 we account for the debt and equity components of our convertible debt securities as bifurcated instruments which are accounted
for separately. Accordingly, the convertible debt securities will recognize interest expense at effective rates of 8.0% as they are accreted to par value.

On March 24, 2009 we repurchased, in a privately negotiated transaction, $45.0 million in principal amount of our senior convertible notes due March 2017 for total consideration of approximately
$21.2 million. The repurchase represented 18% of our then outstanding debt and was executed at a price equal to 47% of par value. Additionally, in negotiated transactions, we sold approximately 2.38 million call options for approximately
$1.8 million and repurchased approximately 2.38 million warrants for approximately $1.5 million which terminated the call options and warrants that were previously entered into by us in March 2007. We recognized a $9.1 million gain in the first
quarter of 2009 as a result of this debt extinguishment. For tax purposes, the gain qualifies for deferral until 2014 in accordance with the provisions of the American Recovery and Reinvestment Act.

As of September 30, 2010, the Company has accrued $0.2 million in interest payable to holders of the senior convertible notes. Debt issuance
costs of $4.8 million have been capitalized and are being amortized over the term of the senior convertible notes, with the balance to be amortized as of September 30, 2010 being $2.5 million.

The senior convertible notes are convertible into shares of our common stock at an initial conversion price of $18.87 per share. The senior
convertible notes may only be converted: (i) anytime after December 15, 2016; (ii) during the five business-day period after any five consecutive trading day period (the measurement period) in which the price per note for
each trading day of that measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such day; (iii) during any calendar quarter (and only during such quarter) after
the calendar quarter ending June 30, 2007, if the last reported sale price of our common stock for 20 or more trading days in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter
exceeds 130% of the applicable conversion price in effect on the last trading day of the immediately preceding calendar quarter; or (iv) upon the occurrence of specified corporate events. Upon conversion, holders of the senior convertible notes
will receive shares of common stock, subject to ViroPharmas option to irrevocably elect to settle all future conversions in cash up to the principal amount of the senior convertible notes, and shares for any excess. We can irrevocably
elect this option at any time on or prior to the 35th scheduled trading day prior to the maturity date of the senior convertible notes. The senior convertible notes may be required to be repaid on the occurrence of certain fundamental changes,
as defined in the senior convertible notes. As of September 30, 2010, the fair value of the principal of the $205.0 million convertible senior notes outstanding was approximately $214.5 million, based on the level 2 valuation
hierarchy of the fair value measurements standard.

Concurrent with the issuance of the senior convertible notes, we entered into
privately-negotiated transactions, comprised of purchased call options and warrants sold, to reduce the potential dilution of our common stock upon conversion of the senior convertible notes. The transactions, taken together, have the effect of
increasing the initial conversion price to $24.92 per share. The net cost of the transactions was $23.3 million.

The call options allow
ViroPharma to receive up to approximately 13.25 million shares of its common stock at $18.87 per share from the call option holders, equal to the number of shares of common stock that ViroPharma would issue to the holders of the senior
convertible notes upon conversion. These call options will terminate upon the earlier of the maturity dates of the related senior convertible notes or the first day all of the related senior convertible notes are no longer outstanding due to
conversion or otherwise. Concurrently, we sold warrants to the warrant holders to receive shares of its common stock at an exercise price of $24.92 per share. These warrants expire ratably over a 60-day trading period beginning on June 13,
2017 and will be net-share settled.

The purchased call options are expected to reduce the potential dilution upon conversion of the senior
convertible notes in the event that the market value per share of ViroPharma common stock at the time of exercise is greater than $18.87, which corresponds to the initial conversion price of the senior convertible notes, but less than $24.92 (the
warrant exercise price). The warrant exercise price is 75.0% higher than the price per share of $14.24 of our price on the pricing date. If the market price per share of ViroPharma common stock at the time of conversion of any senior
convertible notes is above the strike price of the purchased call options ($18.87), the purchased call options will entitle us to receive from the counterparties in the aggregate the same number of shares of our common stock as we would be required
to issue to the holder of the converted senior convertible notes. Additionally, if the market price of ViroPharma common stock at the time of exercise of the sold warrants exceeds the strike price of the sold warrants ($24.92), we will owe the
counterparties an aggregate of approximately 13.25 million shares of ViroPharma common stock. If we have insufficient



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ViroPharma Incorporated

Notes to the Unaudited Consolidated Financial Statements  (Continued)



shares of common stock available for settlement of the warrants, we may issue shares of a newly created series of preferred stock in lieu of our obligation to deliver common stock. Any such
preferred stock would be convertible into 10% more shares of our common stock than the amount of common stock we would otherwise have been obligated to deliver under the warrants. We are entitled to receive approximately 10.87 million shares of
its common stock at $18.87 from the call option holders and if the market price of ViroPharma common stock at the time of exercise of the sold warrants exceeds the strike price of the sold warrants ($24.92), will owe the counterparties an aggregate
of approximately 10.87 million shares of ViroPharma common stock.

The purchased call options and sold warrants are separate transactions
entered into by us with the counterparties, are not part of the terms of the senior convertible notes, and will not affect the holders rights under the senior convertible notes. Holders of the senior convertible notes will not have any rights
with respect to the purchased call options or the sold warrants. The purchased call options and sold warrants meet the definition of derivatives. These instruments have been determined to be indexed to our own stock and have been recorded in
stockholders equity in our Unaudited Condensed Consolidated Balance Sheets. As long as the instruments are classified in stockholders equity they are not subject to the mark to market provisions.

Note 8. Share-based Compensation

We
recorded share-based compensation expense as follows:



|                                    |  |                                 |       |  |                                |   |       |      |  |   |       |  |  |   |       | 
|----------------------------------- |  | ------------------------------- | ----- |  | ------------------------------ | - | ----- | ---- |  | - | ----- |  |  | - | ----- | 
|                                    |  | Three Months EndedSeptember 30, |       |  | Nine Months
EndedSeptember 30, |  
|(in thousands)                      |  | 2010                            |       |  | 2009                           |   |       | 2010 |  |   | 2009  | 
|Research and development            |  | $                               | 866   |  |                                | $ | 1,003 |      |  | $ | 2,504 |  |  | $ | 2,932 | 
|Selling, general and administrative |  |                                 | 2,085 |  |                                |   | 1,597 |      |  |   | 5,855 |  |  |   | 6,447 | 
|                                    |  |                                 |       |  |                                |   |       |      |  |   |       |  |  |   |       | 
|Total                               |  | $                               | 2,951 |  |                                | $ | 2,600 |      |  | $ | 8,359 |  |  | $ | 9,379 | 
|                                    |  |                                 |       |  |                                |   |       |      |  |   |       |  |  |   |       | 

Employee Stock Option Plans

We currently have three option plans in place: a 1995 Stock Option and Restricted Share Plan (1995 Plan), a 2001 Equity Incentive Plan (2001 Plan) and a 2005 Stock Option and Restricted Share Plan (2005
Plan) (collectively, the Plans).

The following table lists the balances available by Plan at September 30, 2010:



|                                            |  |           |            |   |           |  |            |           |  |  |            |   |  |  |             |  
|------------------------------------------- |  | --------- | ---------- | - | --------- |  | ---------- | --------- |  |  | ---------- | - |  |  | ----------- | -
|                                            |  | 1995 Plan |            |   | 2001 Plan |  |            | 2005 Plan |  |  | Combined   |  
|Number of shares authorized                 |  |           | 4,500,000  |   |           |  | 500,000    |           |  |  | 12,850,000 |   |  |  | 17,850,000  |  
|Number of options granted since inception   |  |           | (6,997,515 | ) |           |  | (1,255,472 | )         |  |  | (7,486,646 | ) |  |  | (15,739,633 | )
|Number of options cancelled since inception |  |           | 3,352,652  |   |           |  | 822,932    |           |  |  | 588,727    |   |  |  | 4,764,311   |  
|Number of shares expired                    |  |           | (855,137   | ) |           |  | (7,751     | )         |  |  | (41,044    | ) |  |  | (903,932    | )
|                                            |  |           |            |   |           |  |            |           |  |  |            |   |  |  |             |  
|Number of shares available for grant        |  |           |           |   |           |  | 59,709     |           |  |  | 5,911,037  |   |  |  | 5,970,746   |  
|                                            |  |           |            |   |           |  |            |           |  |  |            |   |  |  |             |  

The Company issued stock options in the first nine-months of 2010. The weighted average fair value of each option grant was
estimated at $6.58 per share using the Black-Scholes option-pricing model using the following assumptions:



|                                         |  |                
|---------------------------------------- |  | ---------------
|Expected dividend yield                  |  |               
|Range of risk free interest rate         |  | 2.09% - 3.39%  
|Weighted-average volatility              |  | 71.47%         
|Range of volatility                      |  | 70.56% - 72.42%
|Range of expected option life (in years) |  | 5.50 - 6.25    



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##### Table of Contents

ViroPharma Incorporated

Notes to the Unaudited Consolidated Financial Statements  (Continued)



The Company has 8,771,906 option grants outstanding at September 30, 2010 with exercise prices
ranging from $0.99 per share to $38.70 per share and a weighted average remaining contractual life of 7.02 years. The following table lists the outstanding and exercisable option grants as of September 30, 2010:



|            |  |                  |           |  |                               |   |       |                                                 |  |  |                                        |  |  |   |        | 
|----------- |  | ---------------- | --------- |  | ----------------------------- | - | ----- | ----------------------------------------------- |  |  | -------------------------------------- |  |  | - | ------ | 
|            |  | Number ofoptions |           |  | Weightedaverage exerciseprice |   |       | Weightedaverageremainingcontractualterm (years) |  |  | Aggregate intrinsicvalue(in thousands) | 
|Outstanding |  |                  | 8,771,906 |  |                               | $ | 10.39 |                                                 |  |  | 7.02                                   |  |  | $ | 43,982 | 
|Exercisable |  |                  | 4,621,924 |  |                               | $ | 10.39 |                                                 |  |  | 5.53                                   |  |  | $ | 25,201 | 

As of September 30, 2010, there was
$22.2 million of total unrecognized compensation cost related to unvested share-based payments (including share options) granted under the Plans. That cost is expected to be recognized over a weighted-average period of 2.61 years.

Employee Stock Purchase Plan

Under this
plan, 27,604 shares were sold to employees during the first nine months of 2010. During the year ended December 31, 2009, 69,806 shares were sold to employees. As of September 30, 2010 there are approximately 451,365 shares available for
issuance under this plan.

Under this plan, there are two plan periods: January 1 through June 30 (Plan Period
One) and July 1 through December 31 (Plan Period Two). For Plan Period One in 2010, the fair value of approximately $60,000 was estimated using the Type B model with a risk free interest rate of 0.20%, volatility of 54.9% and an expected
option life of 0.5 years. This fair value is being amortized over the six month period ending June 30, 2010.

Note 9. Income Tax
Expense

Our income tax expense was $23.2 million and $9.6 million for the quarters ended September 30, 2010 and 2009, respectively
and $55.5 million and $20.2 million for the nine months ended September 30, 2010 and September 30, 2009, respectively. Our income tax expense includes federal, state and foreign income taxes at statutory rates and the effects of various
permanent differences. The income tax expense in the first nine months of 2009 reflects the full impact of our gain on the repurchase of a portion of our senior convertible notes and our estimate of orphan drug credits for maribavir, which will be
significantly reduced in 2010 from 2009 levels.

During the nine months ended September 30, 2010, we had no material changes to our
liability for uncertain tax positions. Our 2008 federal and various state income tax returns are currently under examination. We do not believe at this time that the results of these examinations will have a material impact on the financial
statements.

Note 10. Comprehensive Income

The following table reconciles net income (loss) to comprehensive income (loss) for the three and nine months ended September 30, 2010 and 2009:



|                                                       |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|------------------------------------------------------ |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------- | -
|                                                       |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|(in thousands)                                         |  | 2010                            |        |   | 2009                           |   |        | 2010 |  |   | 2009   |  
|Net income (loss)                                      |  | $                               | 38,339 |   |                                | $ | 20,072 |      |  | $ | 88,141 |   |  | $ | (23,091 | )
|Other comprehensive:                                   |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|Unrealized gains on available for sale securities, net |  |                                 | 27     |   |                                |   |       |      |  |   | 31     |   |  |   |        |  
|Currency translation adjustments, net                  |  |                                 | (77    | ) |                                |   | 1,888  |      |  |   | (775   | ) |  |   | 2,097   |  
|                                                       |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|Comprehensive income (loss)                            |  | $                               | 38,289 |   |                                | $ | 21,960 |      |  | $ | 87,397 |   |  | $ | (20,994 | )
|                                                       |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  



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ViroPharma Incorporated

Notes to the Unaudited Consolidated Financial Statements  (Continued)



The unrealized gains are reported net of federal and state income taxes.

Note 11. Earnings (Loss) per share



|                                                                    |  |                                 |        |  |                                |   |        |      |  |   |        |  |  |   |         |  
|------------------------------------------------------------------- |  | ------------------------------- | ------ |  | ------------------------------ | - | ------ | ---- |  | - | ------ |  |  | - | ------- | -
|                                                                    |  | Three Months EndedSeptember 30, |        |  | Nine Months EndedSeptember 30, |  
|(in thousands, except per share data)                               |  | 2010                            |        |  | 2009                           |   |        | 2010 |  |   | 2009   | 
|Basic Earnings (Loss) Per Share                                     |  |                                 |        |  |                                |   |        |      |  |   |        |  |  |   |         |  
|Net income (loss)                                                   |  | $                               | 38,339 |  |                                | $ | 20,072 |      |  | $ | 88,141 |  |  | $ | (23,091 | )
|Common stock outstanding (weighted average)                         |  |                                 | 77,895 |  |                                |   | 77,440 |      |  |   | 77,744 |  |  |   | 77,417  |  
|                                                                    |  |                                 |        |  |                                |   |        |      |  |   |        |  |  |   |         |  
|Basic net income (loss) per share                                   |  | $                               | 0.49   |  |                                | $ | 0.26   |      |  | $ | 1.13   |  |  | $ | (0.30   | )
|                                                                    |  |                                 |        |  |                                |   |        |      |  |   |        |  |  |   |         |  
|                                                                    |  |                                 |        | 
|Diluted Earnings (Loss) Per Share                                   |  |                                 |        |  |                                |   |        |      |  |   |        |  |  |   |         |  
|Net income (loss)                                                   |  | $                               | 38,339 |  |                                | $ | 20,072 |      |  | $ | 88,141 |  |  | $ | (23,091 | )
|Add interest expense on senior convertible notes, net of income tax |  |                                 | 1,802  |  |                                |   | 1,740  |      |  |   | 5,357  |  |  |   |        |  
|                                                                    |  |                                 |        |  |                                |   |        |      |  |   |        |  |  |   |         |  
|Diluted net income (loss)                                           |  | $                               | 40,141 |  |                                | $ | 21,812 |      |  | $ | 93,498 |  |  | $ | (23,091 | )
|                                                                    |  |                                 |        | 
|Common stock outstanding (weighted average)                         |  |                                 | 77,895 |  |                                |   | 77,440 |      |  |   | 77,744 |  |  |   | 77,417  |  
|Add shares from senior convertible notes                            |  |                                 | 10,864 |  |                                |   | 10,864 |      |  |   | 10,864 |  |  |   |        |  
|Add in-the-money stock options                                    |  |                                 | 1,322  |  |                                |   | 875    |      |  |   | 1,303  |  |  |   |        |  
|                                                                    |  |                                 |        |  |                                |   |        |      |  |   |        |  |  |   |         |  
|Common stock assuming conversion and stock option exercises         |  |                                 | 90,081 |  |                                |   | 89,179 |      |  |   | 89,911 |  |  |   | 77,417  |  
|                                                                    |  |                                 |        |  |                                |   |        |      |  |   |        |  |  |   |         |  
|Diluted net income (loss) per share                                 |  | $                               | 0.45   |  |                                | $ | 0.24   |      |  | $ | 1.04   |  |  | $ | (0.30   | )
|                                                                    |  |                                 |        |  |                                |   |        |      |  |   |        |  |  |   |         |  

The following common shares that are associated with stock options or the assumed conversion of convertible notes were
excluded from the calculations as their effect would be anti-dilutive:



|                                     |  |                                 |       |  |                                |  |       |      |  |  |       |  |  |  |        | 
|------------------------------------ |  | ------------------------------- | ----- |  | ------------------------------ |  | ----- | ---- |  |  | ----- |  |  |  | ------ | 
|                                     |  | Three Months EndedSeptember 30, |       |  | Nine Months EndedSeptember 30, | 
|(in thousands)                       |  | 2010                            |       |  | 2009                           |  |       | 2010 |  |  | 2009  | 
|Out-of-the-money stock options     |  |                                 | 5,827 |  |                                |  | 5,857 |      |  |  | 5,685 |  |  |  | 5,752  | 
|Shares from senior convertible notes |  |                                 |      |  |                                |  |      |      |  |  |      |  |  |  | 11,589 | 
|In-the-money stock options         |  |                                 |      |  |                                |  |      |      |  |  |      |  |  |  | 836    | 

Shares from senior convertible notes and
in-the-money stock options are included in the diluted earnings per share calculation above for the period ended September 30, 2010.

Note 12. Fair Value Measurement

Valuation HierarchyGAAP establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy
prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or
inputs that are



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ViroPharma Incorporated

Notes to the Unaudited Consolidated Financial Statements  (Continued)



observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable
inputs based on our own assumptions used to measure assets and liabilities at fair value. A financial asset or liabilitys classification within the hierarchy is determined based on the lowest level input that is significant to the fair value
measurement.

The following table provides the assets and liabilities carried at fair value measured on a recurring basis as of
September 30, 2010:



|                          |  |                                         |         |   |                                               |   |         |           |  |   |           |  |  |   |         |  
|------------------------- |  | --------------------------------------- | ------- | - | --------------------------------------------- | - | ------- | --------- |  | - | --------- |  |  | - | ------- | -
|                          |  |                                         |         |   | Fair Value Measurements at September 30, 2010 |  
|(in thousands)            |  | Total CarryingValue atSeptember 30,2010 |         |   | (Level 1)                                     |   |         | (Level 2) |  |   | (Level 3) | 
|Cash and cash equivalents |  | $                                       | 383,961 |   |                                               | $ | 383,961 |           |  | $ |          |  |  | $ |        |  
|Short term investments    |  |                                         | 64,483  |   |                                               |   | 64,483  |           |  |   |          |  |  |   |        |  
|                          |  |                                         |         |  
|Contingent consideration  |  |                                         | (10,344 | ) |                                               |   |        |           |  |   |          |  |  |   | (10,344 | )

Valuation TechniquesCash and cash
equivalents are measured at fair value using quoted market prices and are classified within Level 1 of the valuation hierarchy. There were no changes in valuation techniques during the nine months ended September 30, 2010.

The fair value of the Contingent consideration is measured using significant inputs not observable in the market, which are referred to in the guidance
as Level 3 inputs. This fair value is estimated by applying a discount rate based on an implied rate of return from the acquisition to the risk probability weighted asset cash flows and the expected approval date to the probability adjusted payment
amount. There were no changes in the valuation technique from the acquisition date. The contractual amount of contingent consideration related to the Auralis acquisition is £10.0 million (or approximately $15.8 million based on exchange
rates at September 30 2010), see Note 13 Acquisitions. The fair value at acquisition was approximately £6.2 million or approximately $9.0 million. At September 30, 2010 the fair value is approximately £6.5 million or
approximately $10.3 million. Of the total change in the carry amount approximately $0.5 million is attributable to the change in the fair value, reflected in Other operating expenses in the Consolidated Statement of Operations, with the balance
attributable to the change in the GBP/$US exchange rate during the period.

We believe that the fair values of our current assets and current
liabilities approximate their reported carrying amounts.

Note 13. Acquisitions

On May 28, 2010 we acquired a 100% ownership interest in Auralis Limited, a UK based specialty pharmaceutical company for approximately $14.5 million
in upfront consideration for the acquisition of the company and its existing pharmaceutical licenses and products. We have also agreed to pay an additional payment of £10 million Pounds Sterling (approximately $15.8 million based on the
September 30, 2010 exchange rate) upon the first regulatory approval of a product in late stage development.

The acquisition provides us
with the opportunity to accelerate our European commercial systems, which will be utilized in the commercial launch of Cinryze (C1 esterase inhibitor [human]) in Europe if approved, for future product launches and potential additional business
development acquisitions. The acquisition also provides immediate revenue from sales of a marketed product in the UK and access to two late stage development products.

The results of Auraliss operations have been included in the Condensed Consolidated Statement of Operations beginning June 1, 2010.



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ViroPharma Incorporated

Notes to the Unaudited Consolidated Financial Statements  (Continued)



The following tables summarize the consideration transferred to acquire Auralis and the amounts of
identified assets acquired and liabilities assumed at the acquisition date. This allocation of purchase price to assets acquired and liabilities assumed is preliminary and may change when final purchase price allocation is completed.

The purchase price was as follows:



|                         |  |                |        | 
|------------------------ |  | -------------- | ------ | 
|                         |  | (in thousands) |       
|Cash                     |  | $              | 14,514 | 
|Contingent Consideration |  |                | 9,000  | 
|                         |  |                |        | 
|Total purchase price     |  | $              | 23,514 | 
|                         |  |                |        | 

The total cost of the acquisition was allocated to Auraliss assets acquired and liabilities assumed as follows:



|                              |  |                |        | 
|----------------------------- |  | -------------- | ------ | 
|                              |  | (in thousands) |       
|Assets acquired:              |  |                |        | 
|Cash                          |  | $              | 1,362  | 
|Trade receivable              |  |                | 741    | 
|Inventory                     |  |                | 1,623  | 
|Property, plant and equipment |  |                | 23     | 
|Contract rights               |  |                | 11,600 | 
|IPR&D                         |  |                | 10,500 | 
|Goodwill                      |  |                | 5,851  | 
|Deferred tax assets           |  |                | 317    | 
|                              |  |                |        | 
|Total assets                  |  | $              | 32,017 | 
|                              |  |                |        | 
|                              | 
|Liabilities assumed:          |  |                |        | 
|Trade and other payables      |  | $              | 519    | 
|Loan Payable                  |  |                | 1,545  | 
|Deferred tax liabilities      |  |                | 6,439  | 
|Total liabilities             |  | $              | 8,503  | 
|                              |  |                |        | 
|                              | 
|Total purchase price          |  | $              | 23,514 | 
|                              |  |                |        | 

The contingent consideration will be payable upon the first regulatory approval of a product in late stage development. The
fair value of the contingent consideration recognized on the acquisition date was estimated by applying a discount rate based on an implied rate of return from the acquisition to the risk probability weighted asset cash flows and the expected
approval date. This fair value is based on significant inputs not observable in the market, which are referred to in the guidance as Level 3 inputs. The contingent consideration is classified as a liability and is subject to the recognition of
subsequent changes in fair value.

The fair value of the contract rights and IPR&D assets has been determined using an income approach
based upon a discounted cash flow model. That measure is based on significant inputs not observable in the market, which are referred to in the guidance as Level 3 inputs. Key assumptions include (i) a discount rate of 17.5 percent applicable
to the probability weighted cash flows, and (ii) probability adjusted levels of net income and cash flows based assumptions regarding contract renewals, development and market risks and, where applicable, approval dates.

The fair value of inventory represents net realizable value for finished goods less a normal profit on selling efforts. The fair value of the remaining
assets and liabilities acquired are based on the price that would be received on the sale of the asset or the price paid to transfer the liability to a market participant and approximates it carrying value on the measurement date.

As a result of the transaction, we recognized $5.9 million of goodwill which is not deductible for tax purposes. The amounts of revenue and earnings of
Auralis since the acquisition date and had the acquisition occurred on January 1, 2010 are immaterial to our consolidated results.



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ViroPharma Incorporated

Notes to the Unaudited Consolidated Financial Statements  (Continued)



Note 14. Collaborations

In January 2010, we entered into a collaboration agreement with Stichting Sanquin Bloedvoorziening (Sanquin Blood Supply Foundation) (Sanquin) which established a Joint Steering Committee related to the
development and commercialization of C1-INH products. The Joint Steering Committee shall serve as a forum to establish and discuss progress under, among others, (i) a Global Commercialization Plan; (ii) clinical development programs of
ViroPharma and the Sanquin early stage research programs; (iii) manufacturing Capacity Schedules; (iv) pharmacovigilence matters; (v) quality matters; (vi) manufacturing improvement programs; and (vii) regulatory matters.

Sanquin may conduct certain early stage research programs and we will provide to Sanquin 1,000,000 (approximately $1.36 million
based on the September 30, 2010 exchange rate) per year for a period of five years to support such Early Stage Research Programs. We expense these payments as R&D expense when due. We have a right of first refusal to further develop and
commercialize the subject matter of each such early stage research program worldwide (except for the excluded territory as fully described in our Form 10-K for the year ended December 31, 2009) subject to Sanquins and its research
partners right to use any such intellectual property for their internal, non-commercial research purposes. Except for the early stage research programs, we will be solely responsible for conducting all clinical trials and other development
activities necessary to support our efforts to obtain regulatory approval of Cinryze in additional territories as well as any future C1-INH derived products developed pursuant to the Rest of World Agreement, as fully described in our Form 10-K for
the year ended December 31, 2009. Sanquin has the right to approve any such clinical trials and development activities through the Joint Steering Committee.

Note 15. Supplemental Cash Flow Information



|                                                                        |  |                                |        |  |      |   |       | 
|----------------------------------------------------------------------- |  | ------------------------------ | ------ |  | ---- | - | ----- | 
|                                                                        |  | Nine Months EndedSeptember 30, |       
|(in thousands)                                                          |  | 2010                           |        |  | 2009 |  
|Supplemental disclosure of non-cash transactions:                       |  |                                |        |  |      |   |       | 
|Employee share-based compensation                                       |  | $                              | 8,359  |  |      | $ | 9,379 | 
|Unrealized gains on available for sale securities, net                  |  |                                | 31     |  |      |   |      | 
|Non-cash increase of intangible assets for Vancocin obligation to Lilly |  |                                | 7,000  |  |      |   | 7,000 | 
|Establishment of landlord allowance                                     |  |                                |       |  |      |   | 104   | 
|Debt buy back deferred tax impact                                       |  |                                |       |  |      |   | 308   | 
|Non-cash increase in contingent consideration                           |  |                                | 9,532  |  |      |   |      | 
|Supplemental disclosure of cash flow information:                       |  |                                |        |  |      |   |       | 
|Cash paid for income taxes                                              |  | $                              | 31,742 |  |      | $ | 7,856 | 
|Cash paid for interest                                                  |  |                                | 4,100  |  |      |   | 4,550 | 
|Cash received for stock option exercises                                |  |                                | 1,851  |  |      |   | 22    | 
|Cash received for employee stock purchase plan                          |  |                                | 271    |  |      |   | 164   | 



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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Executive Summary

ViroPharma
Incorporated and subsidiaries is a global biotechnology company dedicated to the development and commercialization of products that address serious diseases, with a focus on products used by physician specialists or in hospital settings. We intend
to grow through sales of our marketed products, through continued development of our product pipeline, expansion of sales into additional territories outside the United States and through potential acquisition or licensing of products or acquisition
of companies. We expect future growth to be driven by sales of Cinryze, both domestically and internationally, and by our primary development programs, including C1 esterase inhibitor and a non-toxigenic strain of C. difficile
(VP20621).

We market and sell Cinryze in the United States for routine prophylaxis against angioedema attacks in adolescent and adult
patients with hereditary angioedema (HAE). Cinryze is a C1 esterase inhibitor therapy for routine prophylaxis against HAE, also known as C1 inhibitor (C1-INH) deficiency, a rare, severely debilitating, life-threatening genetic disorder. Cinryze was
obtained in October 2008, when we completed our acquisition of Lev Pharmaceuticals, Inc. (Lev). In January 2010, we acquired expanded rights to commercialize Cinryze and future C1-INH derived products in certain European countries and other
territories throughout the world as well as rights to develop future C1-INH derived products for additional indications. In March 2010, our Marketing Authorization Application (MAA) for Cinryze for acute treatment and prophylaxis against HAE was
accepted by the European Medicines Agency (EMA). We intend to seek to commercialize Cinryze in Europe in 2011 in countries where we have distribution rights. We are currently evaluating our commercialization plans in additional territories. We also
intend to conduct ViroPharma sponsored studies and investigator-initiated studies (IIS) to identify further therapeutic uses and potentially expand the labeled indication for Cinryze to include other C1 mediated diseases, such as Antibody-Mediated
Rejection (AMR) and Delayed Graft Function (DGF). Additionally, we are currently undertaking studies on the viability of subcutaneous administration of Cinryze.

We also market and sell Vancocin HCl capsules, the oral capsule formulation of vancomycin hydrochloride, in the U.S. and its territories. Vancocin is a potent antibiotic approved by the U.S. Food and Drug
Administration (FDA), to treat antibiotic-associated pseudomembranous colitis caused by Clostridium difficile infection (CDI), or C. difficile, and enterocolitis caused by Staphylococcus aureus, including methicillin-resistant strains.

Our product development portfolio is primarily focused on two programs, C1 esterase inhibitor [human] and VP20621. We are working on developing
further therapeutic uses, potential additional indications in other C1 mediated diseases, and alternative modes of administration for C1 esterase inhibitor. We are also developing VP20621 for the treatment and prevention of CDI. On
August 6, 2009 we announced that dosing had begun in the Phase 1 clinical trial for VP20621 to determine the safety and tolerability of VP20621 dosed orally as a single and as repeat escalating doses in healthy young and older adults. We have
successfully completed our Phase 1 clinical trial and anticipate moving the compound into a Phase 2 clinical trial.

In addition to these
programs, we have several other assets that we may make additional investments in. These investments will be limited and dependent on our assessment of the potential future commercial success of or benefits from the asset. These assets include
maribavir for CMV and other compounds. On May 28, 2010 we acquired Auralis Limited, a UK based specialty pharmaceutical company. The acquisition of Auralis provides us with the opportunity to accelerate our European commercial systems, for
potential future product launches and additional business development acquisitions. The acquisition also provides immediate revenue from sales of Diamorphine (Diamorphine Hydrochloride BP Injection) for palliative care and acute pain relief in the
United Kingdom.

We intend to continue to evaluate in-licensing or other opportunities to acquire products in development, or those that are
currently on the market. We plan to seek products that treat serious or life threatening illnesses with a high unmet medical need, require limited commercial infrastructure to market, and which we believe will provide both top and bottom line growth
over time.

Since June 30, 2010, we experienced the following:

Business Activities

Cinryze:



| |  |  | Shipped approximately 13,000 doses of Cinryze to SP/SDs;
| | - |  | ---------------------------------------------------------

C. difficileinfection (CDI):



| |  |  | Presented data from Phase 1 study of non-toxigenic C. difficile (VP20621) at the Interscience Conference on Antimicrobial Agents and
Chemotherapy (ICAAC); and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Vancocin scripts decreased 7.3% in the third quarter of 2010 as compared to the third quarter of 2009;
| | - |  | ------------------------------------------------------------------------------------------------------

Financial Results



| |  |  | Increased net sales of Cinryze to $49.1 million from $29.1 million in the third quarter of 2009;
| | - |  | ------------------------------------------------------------------------------------------------



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| |  |  | Net sales of Vancocin increased to $67.6 million from $51.4 million in the third quarter of 2009; and
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | Reported net income of $38.3 million in the third quarter of 2010;
| | - |  | ------------------------------------------------------------------

Liquidity



| |  |  | Generated net cash from operations of $137.4 million for the nine months ended September 30, 2010; and
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | Ended the third quarter of 2010 with working capital of $511.8 million, which includes cash and cash equivalents of $384.0 million.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------

During the remainder of 2010 and going forward, we expect to face a number of challenges, which include the following:

The commercial sale of approved pharmaceutical products is subject to risks and uncertainties. There can be no assurance that future Vancocin
sales will meet or exceed the historical rate of sales for the product, for reasons that include, but are not limited to, generic and non-generic competition for Vancocin and/or changes in prescribing habits or disease incidence.

The FDA convened a meeting of its Advisory Committee for Pharmaceutical Science and Clinical Pharmacology to discuss bioequivalence recommendations for
oral vancomycin hydrochloride capsule drug products on August 4, 2009. The Advisory Committee was asked if the proposed guidelines are sufficient for establishing bioequivalence for generic vancomycin oral capsules. The Advisory Committee
voted unanimously in favor of the component of the proposed OGD recommendation that requires bioequivalence to be demonstrated through comparable dissolution in media of pH 1.2, 4.5 and 6.8 for potential vancomycin HCl capsule generic
products that (a) contain the same active and inactive ingredients in the same amounts as Vancocin HCl capsules; (b) meet currently accepted standards for assay, potency, purity, and stability (equivalent to those in place for Vancocin HCl
capsules); and (c) are manufactured according to cGMP. We have opposed both the substance of the FDAs bioequivalence method and the manner in which it was developed. In the event the OGDs revised approach regarding the
conditions that must be met in order for a generic drug applicant to request a waiver of in-vivo bioequivalence testing for Vancocin remains in effect, the time period in which a generic competitor may enter the market would be reduced. There can be
no assurance that the FDA will agree with the positions stated in our Vancocin related submissions or that our efforts to oppose the OGDs March 2006 and December 2008 recommendation to determine bioequivalence to Vancocin through in-vitro
dissolution testing will be successful. We cannot predict the timeframe in which the FDA will make a decision regarding either our citizen petition for Vancocin or the approval of generic versions of Vancocin. If we are unable to change the
recommendation set forth by the OGD in March 2006 as revised in December 2008 and voted upon by the Advisory Committee for Pharmaceutical Science and Clinical Pharmacology, the threat of generic competition will be high.

The FDA approved Cinryze for routine prophylaxis against angioedema attacks in adolescent and adult patients with hereditary angioedema on
October 10, 2008. Cinryze became commercially available for routine prophylaxis against HAE in December 2008 and the commercial success of Cinryze will depend on several factors, including: the number of patients with HAE that may be treated
with Cinryze; acceptance by physicians and patients of Cinryze as a safe and effective treatment; our ability to effectively market and distribute Cinryze in the United States; cost effectiveness of HAE treatment using Cinryze; relative convenience
and ease of administration of Cinryze; potential advantages of Cinryze over alternative treatments; the timing of the approval of competitive products including another C1 esterase inhibitor for the acute treatment of HAE; the market acceptance of
competing approved products such as Berinert; patients ability to obtain sufficient coverage or reimbursement by third-party payors; variations in dosing arising from physician preferences and patient compliance; sufficient supply and
reasonable pricing of raw materials necessary to manufacture Cinryze; manufacturing or supply interruptions and capacity which could impair our ability to acquire an adequate supply of Cinryze to meet demand for the product; and our ability to
achieve expansion of manufacturing capabilities in the capacities and timeframes currently anticipated. In addition, our ability to develop life cycle management plans for Cinryze, including designing and commencing clinical studies for
additional indications and pursuing regulatory approvals in additional indications or territories will impact our ability to generate future revenues from Cinryze.

In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act (PPACA), which was amended by the Health Care and Education Reconciliation Act of 2010. The PPACA, as
amended, is a sweeping measure intended to expand healthcare coverage within the United States, primarily through the imposition of health insurance mandates on employers and individuals and expansion of the Medicaid program. Several provisions
of the new law, which have varying effective dates, will affect us. These include new requirements on private insurance companies that prohibit coverage denials because of a pre-existing condition; prohibit the application of annual and
lifetime benefits limits on health insurance policies; and prohibit coverage rescissions (except for fraud) and health-based insurance rating. In addition, the PPACA, as amended, funds an interim high risk pool that states can draw on;
following the expiration of this high risk pool funding, it provides for the creation of state-run exchanges that will allow people without employer-provided coverage, or who cannot afford their employers plan, to buy health
insurance; and provides federal subsidies to those who cannot afford premiums. Collectively, these factors may increase the availability of reimbursement for patients seeking the products that ViroPharma commercializes. However, the Act,
as amended, will likely increase certain of our costs as well. For example, an increase in the Medicaid rebate rate from 15.1% to 23.1% was effective as of January 1, 2010, and the volume of rebated drugs has been expanded to include
beneficiaries in Medicaid managed care organizations, effective as of March 23, 2010.



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In 2011, the PPACA also imposes a manufacturers fee on the sale of branded Pharmaceuticals (excluding orphan drugs) to specified government programs, expands the 340B drug discount program
(excluding orphan drugs), and includes a 50% discount on brand name drugs for Medicare Part D participants in the coverage gap, or doughnut hole. Our evaluation of PPACA, as amended, will continue to enable us to determine not only
the immediate effects on our business, but also the trends and changes that may be encouraged by the legislation that may potentially impact on our business over time.

We will face intense competition in acquiring additional products to further expand our product portfolio. Many of the companies and institutions that we will compete with in acquiring additional products
to further expand our product portfolio have substantially greater capital resources, research and development staffs and facilities than we have, and greater resources to conduct business development activities. We may need additional financing in
order to acquire new products in connection with our plans as described in this report.

The outcome of our clinical development programs is
subject to considerable uncertainties. We cannot be certain that we will be successful in developing and ultimately commercializing any of our product candidates, that the FDA or other regulatory authorities will not require additional or
unanticipated studies or clinical trial outcomes before granting regulatory approval, or that we will be successful in obtaining regulatory approval of any of our product candidates in the timeframes that we expect, or at all. For example, on
February 9, 2009, we announced that our Phase 3 clinical trial evaluating maribavir used as prophylaxis in allogeneic stem cell, or bone marrow, transplant patients did not achieve its primary endpoints. We are developing a strategy for the
maribavir program in light of the Phase 3 clinical trials results and evolving information.

We cannot assure you that our current cash and
cash equivalents or cash flows from Vancocin and Cinryze sales will be sufficient to fund all of our ongoing development and operational costs, as well as the interest payable on our outstanding senior convertible notes, over the next several years,
that planned clinical trials can be initiated, or that planned or ongoing clinical trials can be successfully concluded or concluded in accordance with our anticipated schedule and costs. Moreover, the results of our business development efforts
could require considerable investments.

Our actual results could differ materially from those results expressed in, or implied by, our
expectations and assumption described in this Quarterly Report on Form 10-Q. The risks described in this report, our Form 10-Q for the Quarter ended September 30, 2010 are not the only risks facing us. Additional risks and uncertainties not
currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. Please also see our discussion of the Risk Factors as described in our Form
10-K for the year ended December 31, 2009 in Item 1A, and our Form 10-Q for the period ended June 30, 2010 which describe other important matters relating to our business.

Results of Operations

Three and Nine Months Ended September 30, 2010 and 2009



|                                                         |  |                                         |         |  |                                        |   |        |      |  |   |         |  |  |   |         |  
|-------------------------------------------------------- |  | --------------------------------------- | ------- |  | -------------------------------------- | - | ------ | ---- |  | - | ------- |  |  | - | ------- | -
|(in thousands, except per share data)                    |  | For the three months endedSeptember 30, |         |  | For the nine months endedSeptember 30, |  
|                                                         |  | 2010                                    |         |  | 2009                                   |   |        | 2010 |  |   | 2009    | 
|Net product sales                                        |  | $                                       | 117,781 |  |                                        | $ | 80,551 |      |  | $ | 317,389 |  |  | $ | 222,614 |  
|Cost of sales (excluding amortization of product rights) |  | $                                       | 15,755  |  |                                        | $ | 10,216 |      |  | $ | 43,354  |  |  | $ | 28,266  |  
|Operating income (loss)                                  |  | $                                       | 59,236  |  |                                        | $ | 32,425 |      |  | $ | 150,744 |  |  | $ | (3,481  | )
|Net income (loss)                                        |  | $                                       | 38,339  |  |                                        | $ | 20,072 |      |  | $ | 88,141  |  |  | $ | (23,091 | )
|Net income (loss) per share:                             |  |                                         |         |  |                                        |   |        |      |  |   |         |  |  |   |         |  
|Basic                                                    |  | $                                       | 0.49    |  |                                        | $ | 0.26   |      |  | $ | 1.13    |  |  | $ | (0.30   | )
|Diluted                                                  |  | $                                       | 0.45    |  |                                        | $ | 0.24   |      |  | $ | 1.04    |  |  | $ | (0.30   | )

The $59.2 million in operating income for
the three month period ended September 30, 2010 increased $26.8 million as compared to the same period in 2009. This increase is primarily the result of increased net sales ($37.2 million), and a decrease in our research and development expense
($0.8 million) partly offset by increased cost of sales ($5.5 million) mainly related to increased Cinryze volume and increased selling, general and administrative expenses ($4.8 million) related to compensation and marketing expenses. The $150.7
million in operating income for the nine months ended September 30, 2010 increased $154.2 million as compared to the same period in 2009. The primary drivers of this increase are the impairment of goodwill in the first quarter of 2009 ($65.1
million) for



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which no impairment occurred in 2010, increased net sales ($94.8 million), and a decrease in our research and development expense ($14.0 million) primarily due to the wind-down of our CMV
program. These were partly offset from increased cost of sales ($15.1 million) due to the increase in Cinryze volume and a $3.2 million increase in selling, general and administrative expense.

Revenues

Revenues consisted of the
following:



|                  |  |                                         |         |  |                                        |   |        |      |  |   |         |  |  |   |         | 
|----------------- |  | --------------------------------------- | ------- |  | -------------------------------------- | - | ------ | ---- |  | - | ------- |  |  | - | ------- | 
|(in thousands)    |  | For the three months endedSeptember 30, |         |  | For the nine months endedSeptember 30, |  
|                  |  | 2010                                    |         |  | 2009                                   |   |        | 2010 |  |   | 2009    | 
|Net product sales |  |                                         |         |  |                                        |   |        |      |  |   |         |  |  |   |         | 
|Vancocin          |  | $                                       | 67,644  |  |                                        | $ | 51,441 |      |  | $ | 191,748 |  |  | $ | 161,277 | 
|Cinryze           |  |                                         | 49,059  |  |                                        |   | 29,110 |      |  |   | 124,285 |  |  |   | 61,337  | 
|Other             |  |                                         | 1,078   |  |                                        |   |       |      |  |   | 1,356   |  |  |   |        | 
|                  |  |                                         |         |  |                                        |   |        |      |  |   |         |  |  |   |         | 
|Total revenues    |  | $                                       | 117,781 |  |                                        | $ | 80,551 |      |  | $ | 317,389 |  |  | $ | 222,614 | 
|                  |  |                                         |         |  |                                        |   |        |      |  |   |         |  |  |   |         | 

RevenueVancocin and Cinryze product sales

We sell Vancocin only to wholesalers who then distribute the product to pharmacies, hospitals and long-term care facilities, among others. Our sales of Vancocin are influenced by wholesaler forecasts of
prescription demand, wholesaler buying decisions related to their desired inventory levels, and, ultimately, end user prescriptions, all of which could be at different levels from period to period.

We sell Cinryze to specialty pharmacy/ specialty distributors (SP/SDs) who then distribute to physicians, hospitals and patients, among others. In
the second quarter of 2010, we introduced parallel chromatography produced Cinryze into the trade which increased our supply that we were able to start new patients on Cinryze as needed without undue concern of any disruption of the availability of
Cinryze to those already receiving it. Our team is still currently working with Sanquin to complete our industrial scale manufacturing process that is intended to significantly increase available supply in the future and had submitted a Prior
Approval Supplement (PAS) to the FDA in the second quarter of 2010. On October 21, 2010, the FDA issued a complete response letter regarding the Cinryze industrial scale manufacturing expansion activities. The FDA has requested additional
information related to observations from the pre-approval inspection and review of the technical processes. We are in the process of responding to the complete response letter.

During the three and nine months ended September 30, 2010, net sales of Vancocin increased 31.5% and 18.9%, respectively, compared to the same periods in 2009. The increase for the three and nine
months ended September 30, 2010 is primarily due to price increases during 2010, offset by lower sales volumes. Based upon data reported by IMS Health Incorporated, prescriptions during the three and nine months ended September 30, 2010
decreased from the same period in 2009 period by 7.3% and 6.0%, respectively, which we believe is due to a decrease in the severity of the disease state and a suspected increase in compounding seen both in the hospital and long-term care
marketplace. The units sold for the three and nine months ended September 30, 2010 decreased by 3.1% and 3.4%, respectively, compared to the same period in 2009. Our net sales of Cinryze during the three and nine months ended September 30,
2010 increased over the same periods in the prior year due to the increase in the number of patients receiving commercial drug. Our Vancocin and Cinryze net sales for the three and nine months ended September 30, 2010 were not materially
impacted by the PPACA.

Vancocin product sales are driven by demand fluctuations in trade inventories which could be at different levels from
period to period. Cinryze product sales are influenced by prescriptions and the rate at which patients are placed on commercial drug. We receive inventory data from our three largest wholesalers through our fee for service agreements and our two
SP/SDs through service agreements. We do not independently verify this data. Based on this inventory data and our estimates, we believe that as of September 30, 2010, the wholesalers and SP/SDs did not have excess channel inventory.

Cost of sales (excluding amortization of product rights)

Cost of sales increased for the three months ended September 30, 2010 as compared to the prior year by $5.5 million due to the increased Cinryze volume. Cost of sales increased for the nine months
ended September 30, 2010 by $15.1 million as compared to the same period in the prior year due to the increase in Cinryze units sold, partially offset by the impact of the step-up on 2009 cost of sales related to the acquisition of Lev ($6.9
million). We utilized all the inventory that was recorded at fair value as part of the Lev purchase during 2009. Additionally, included in the cost of sales for the nine months ended September 30, 2010 are expenses of $1.5 million related to
non-refundable start up costs paid to a new plasma supplier. Vancocin and Cinryze cost of sales includes the cost of materials and distribution costs and excludes amortization of product rights.



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Since units are shipped based upon
earliest expiration date, we would expect the cost of product sales of both Vancocin and Cinryze to fluctuate from quarter to quarter as we may experience fluctuations in quarterly manufacturing yields. Additionally, as Cinryze becomes a larger part
of our total net sales, our cost of sales (excluding amortization of product rights) as a percentage of net sales will continue to increase due to the variation in inventory costs.

Research and development expenses

For each of our research and development programs, we
incur both direct and indirect expenses. Direct expenses include third party costs related to these programs such as contract research, consulting, cost sharing payments or receipts, and preclinical and development costs. Indirect expenses include
personnel, facility, stock compensation and other overhead costs. Due to advancements in our VP20621 preclinical program, and our Cinryze Phase 4 commitment and Phase 2 study in children, we expect future costs in these programs to exceed historical
costs.

Research and development expenses were divided between our research and development programs in the following manner:



|                                               |  |                                         |        |  |                                        |   |        |      |  |   |        |  |  |   |        | 
|---------------------------------------------- |  | --------------------------------------- | ------ |  | -------------------------------------- | - | ------ | ---- |  | - | ------ |  |  | - | ------ | 
|(in thousands)                                 |  | For the three months endedSeptember 30, |        |  | For the nine months endedSeptember 30, |  
|                                               |  | 2010                                    |        |  | 2009                                   |   |        | 2010 |  |   | 2009   | 
|Direct  Core programs                         |  |                                         |        |  |                                        |   |        |      |  |   |        |  |  |   |        | 
|Non-toxigenic strains of C. difficle (VP20621) |  | $                                       | 1,697  |  |                                        | $ | 2,753  |      |  | $ | 5,590  |  |  | $ | 7,207  | 
|Cinryze & C1 esterase inhibitor                |  |                                         | 2,171  |  |                                        |   | 1,364  |      |  |   | 6,651  |  |  |   | 5,339  | 
|Vancocin                                       |  |                                         | 12     |  |                                        |   | 161    |      |  |   | 1,156  |  |  |   | 582    | 
|Direct  Other Assets                          |  |                                         |        |  |                                        |   |        |      |  |   |        |  |  |   |        | 
|CMV & other                                    |  |                                         | 1,627  |  |                                        |   | 1,862  |      |  |   | 2,163  |  |  |   | 15,016 | 
|Indirect                                       |  |                                         |        |  |                                        |   |        |      |  |   |        |  |  |   |        | 
|Development                                    |  |                                         | 4,681  |  |                                        |   | 4,866  |      |  |   | 13,593 |  |  |   | 15,014 | 
|                                               |  |                                         |        |  |                                        |   |        |      |  |   |        |  |  |   |        | 
|Total                                          |  | $                                       | 10,188 |  |                                        | $ | 11,006 |      |  | $ | 29,153 |  |  | $ | 43,158 | 
|                                               |  |                                         |        |  |                                        |   |        |      |  |   |        |  |  |   |        | 

Direct ExpensesCore Development Programs

The decrease in costs of VP20621 in the three and nine months ended September 30, 2010 compared to the same periods in 2009 relates to timing associated with costs of our Phase 1 clinical trial.

Our costs associated with our Cinryze program increased during the three and nine months ended September 30, 2010 compared to the same
periods in 2009, as we incurred costs related to our Phase 4 clinical trial and the development of our life cycle program. In the prior year, we incurred costs related to our open label trials which closed on March 31, 2009 and preparation of
our Phase 4 clinical trial.

Vancocin costs in the first nine months of 2010 and 2009 related to additional research activities.

Direct ExpensesOther Assets

Our
direct expenses related to our CMV program decreased in the three months and nine month periods ended September 30, 2010 compared to 2009 as we wound down our stem cell and liver transplant studies in 2009. The three month period in 2010
includes a one-time charge of £0.7 million (or approximately $1.1 million) associated with re-negotiation of a royalty arrangement on a product in late stage development. In February 2009, based upon preliminary analysis of the data, we
announced that our Phase 3 trial evaluating maribavir used as prophylaxis in allogeneic stem cell, or bone marrow, transplant patients did not achieve its primary endpoints. In the primary analysis, there was no statistically significant difference
between maribavir and placebo in reducing the rate of CMV disease. In addition, the study failed to meet its key secondary endpoints. We are continuing to analyze the study results. Additionally, we announced that our Phase 3 trial evaluating
maribavir in liver transplant patients was discontinued and that all patients on study drug were moved to current standard of care. This decision was made based on the results of the Phase 3 study of maribavir in stem cell transplant patients, and
the recommendation from our independent Data Monitoring Committee who considered



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the rate of viremia in both arms of the study. During 2009 we continued enrollment in our solid organ (liver) study through February 2009, conducted follow-up visits necessary to complete both
our Phase 3 studies following receipt of the results of our stem cell transplant study and continued to evaluate the results of our Phase 3 programs. We continue to evaluate any potential alternative development strategies for maribavir.

Anticipated fluctuations in future direct expenses are discussed under Liquidity  Development Programs.

Indirect Expenses

These
costs primarily relate to the compensation of and overhead attributable to our development team. During the second half of 2009, our development team shifted its focus from our CMV program to our Cinryze and VP20621 programs.

Selling, general and administrative expenses

Selling, general and administrative expenses (SG&A) increased for the three months ended September 30, 2010 by $4.8 million due to increases in compensation expense ($1.8 million), marketing
activities ($1.0 million), legal costs ($0.7 million) and medical education expenses ($0.3 million). For the nine months ended September 30, 2010, SG&A increased $3.2 million compared to the same period in 2009. The increase for the nine
month period was driven by increased marketing expenses ($2.1 million), compensation expense ($0.9 million), FDA filing fees ($1.1 million) and legal costs ($1.4 million) partly offset by decreased medical education expenses ($2.3 million).

Included in SG&A are legal and consulting costs incurred related to our opposition to the attempt by the OGD regarding the conditions
that must be met in order for a generic drug application to request a waiver of in-vivo bioequivalence testing for copies of Vancocin, which were $4.7 million and $3.3 million for the nine month period of 2010 and 2009, respectively. We anticipate
that these additional legal and consulting costs will continue at the current level, or possibly higher, in future periods as we continue this opposition. We anticipate continued increased spending in selling, general and administrative expenses in
future periods as we continue the commercial launch of Cinryze.

Intangible amortization and acquisition of technology rights

Intangible amortization is the result of the amortization of Vancocin product rights, Cinryze product rights and Auralis contract rights
which were acquired in May 2010. Additionally, as described in our agreement with Lilly, to the extent that we incur an obligation to Lilly for additional payments on Vancocin sales, we have contingent consideration. We record the obligation as an
adjustment to the carrying amount of the related intangible asset and a cumulative adjustment to the intangible amortization upon achievement of the related sales milestones. Contingent consideration and Lilly related additional payments are more
fully described in Note 4 of the Unaudited Consolidated Financial Statements.

Intangible amortization for the three and nine months ended
September 30, 2010 were $7.1 million and $22.3 million, respectively, as compared to $6.8 million and $21.4 million, respectively in 2009.

On an ongoing periodic basis, we evaluate the useful life of our intangible assets and determine if any economic, governmental or regulatory event has
modified their estimated useful lives. This evaluation did not result in a change in the life of the intangible assets during the quarter ended September 30, 2010. We will continue to monitor the actions of the FDA and OGD surrounding the
bioequivalence recommendation for Vancocin and consider the effects of our opposition efforts, the announcements by generic competitors or other adverse events for additional impairment indicators. We will reevaluate the expected cash flows and fair
value of our Vancocin-related assets, as well as estimated useful lives, at such time.

Goodwill impairment

During the first quarter of 2009, the market capitalization of ViroPharma fell below the carrying value of ViroPharmas net assets due to the
announcements surrounding our maribavir development program. This situation required us to test for impairment of our goodwill and other intangible assets which lead to a goodwill impairment charge of $65.1 million in 2009.

Other operating expenses

The
re-measurement of the fair value of the contingent consideration given relating to the acquisition of Auralis resulted in a charge to income during the quarter ended September 30, 2010 of $0.5 million.



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Other Income (Expense)

Interest Income

Interest
income for three and nine months ended September 30, 2010 was $0.1 million and $0.2 million, respectively, is relatively flat compared to $0.1 million and $0.3 million, in the respective periods in 2009.

Interest Expense



|                                                |  |                                          |       |  |                                        |   |       |      |  |   |       |  |  |   |       | 
|----------------------------------------------- |  | ---------------------------------------- | ----- |  | -------------------------------------- | - | ----- | ---- |  | - | ----- |  |  | - | ----- | 
|                                                |  | For the three 
monthsended September 30, |       |  | For the nine monthsended September 30, |  
|(in thousands)                                  |  | 2010                                     |       |  | 2009                                   |   |       | 2010 |  |   | 2009  | 
|Interest expense on 2% senior convertible notes |  | $                                        | 1,025 |  |                                        | $ | 1,069 |      |  | $ | 3,075 |  |  | $ | 3,317 | 
|Amortization of debt discount                   |  |                                          | 1,793 |  |                                        |   | 1,651 |      |  |   | 5,290 |  |  |   | 5,171 | 
|Amortization of finance costs                   |  |                                          | 97    |  |                                        |   | 97    |      |  |   | 291   |  |  |   | 315   | 
|                                                |  |                                          |       |  |                                        |   |       |      |  |   |       |  |  |   |       | 
|Total interest expense                          |  | $                                        | 2,915 |  |                                        | $ | 2,817 |      |  | $ | 8,656 |  |  | $ | 8,803 | 
|                                                |  |                                          |       |  |                                        |   |       |      |  |   |       |  |  |   |       | 

Interest expense and amortization of finance costs in 2010 and 2009 relates entirely to the senior convertible notes issued
on March 26, 2007, as described in Note 7 to the Unaudited Consolidated Financial Statements.

Other income, net

Our other income, net includes net foreign exchange gains and the rental income attributable to our previous corporate headquarters.

Income Tax Expense

Our income
tax expense was $23.2 million and $9.6 million for the three months ended September 30, 2010 and 2009, respectively, and $55.5 million and $20.2 million for the nine months ended September 30, 2010 and 2009, respectively. The increase in
the 2010 expense as compared to 2009 is primarily due to the increase in taxable income from 2009. In addition, our estimate of orphan drug credits for maribavir in 2010 is significantly reduced from 2009 levels. Our income tax expense includes
federal, state and foreign income taxes at statutory rates and the effects of various permanent differences.

Our 2008 federal and various
state income tax returns are currently under examination. We do not believe at this time that the results of these examinations will have a material impact on the financial statements.

Liquidity

We expect that our sources of revenue will continue to arise from Cinryze and
Vancocin product sales. However, future sales of Vancocin will vary based on the number of generic competitors that could enter the market if approved by the FDA, the timing of entry into the market of those generic competitors and/or the sales we
may generate from an authorized generic version of Vancocin. In addition, there are no assurances that demand for Cinryze will continue to grow or that demand for Vancocin will continue at historical or current levels.

Our ability to generate positive cash flow is also impacted by the timing of anticipated events in our Cinryze and VP20621 development programs,
including the timing of our expansion as we intend to seek to commercialize Cinryze in Europe and certain other countries, the scope of the clinical trials required by regulatory authorities, results from clinical trials, the results of our product
development efforts, and variations from our estimate of future direct and indirect expenses.

The cash flows we have used in operations
historically have been applied to research and development activities, marketing and commercial efforts, business development activities, general and administrative expenses, debt service, and income tax payments. Bringing drugs from the preclinical
research and development stage through phase 1, phase 2, and phase 3 clinical trials and FDA approval is a time consuming and expensive process. Because we have product candidates that are currently in the clinical stage of development, there are a
variety of events that could occur during the development process that will dictate the course we must take with our drug development efforts and the cost of these efforts. As a result, we cannot reasonably estimate the costs that we will incur
through the commercialization of any product candidate. However, our future costs may exceed current costs as we anticipate we will continue to invest in our pipeline on our initiative to develop non-toxigenic strains of C. difficile, our
phase 4 program for Cinryze, any additional studies to identify further therapeutic uses and expand the labeled indication for Cinryze to potentially include other C1 mediated diseases as well as new modes of administration for Cinryze. Also, we
will incur additional costs as we intend to seek to commercialize Cinryze in Europe in countries where we have distribution rights and certain other countries beginning in 2011 as well as conduct studies to identify additional C1 mediated diseases,
such as AMR and DGF, which may be of interest for further clinical development, and to evaluate new forms of administration for Cinryze. The most significant of our near-term operating development cash outflows are as described under
Development Programs as set forth below.



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We are required to pay contingent
consideration to Lev shareholders upon achievement of a commercial milestone related Cinryze sales, additional consideration to Lilly based on the net sales of Vancocin and additional consideration to Auralis shareholders upon achievement of a
regulatory milestone. Additionally, our operating expenses will not decrease significantly if there is the introduction of a generic Vancocin.

In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act (PPACA). The PPACA, as amended, will likely increase
certain of our costs as well. For example, an increase in the Medicaid rebate rate from 15.1% to 23.1% was effective as of January 1, 2010, and the volume of rebated drugs has been expanded to include beneficiaries in Medicaid managed care
organizations, effective as of March 23, 2010. In 2011, the PPACA also imposes a manufacturers fee on the sale of branded Pharmaceuticals (excluding orphan drugs) to specified government programs, expands the 340B drug discount
program (excluding orphan drugs), and includes a 50% discount on brand name drugs for Medicare Part D participants in the coverage gap, or doughnut hole.

While we anticipate that cash flows from Cinryze and Vancocin, as well as our current cash, cash equivalents and short-term investments, should allow us to fund our ongoing development and operating
costs, as well as the interest payments on our senior convertible notes, we may need additional financing in order to expand our product portfolio. At September 30, 2010, we had cash, cash equivalents and short-term investments of $448.4
million. Short-term investments consist of high quality fixed income securities with remaining maturities of greater than three months at the date of purchase and high quality debt securities or obligation of departments or agencies of the United
States. At September 30, 2010, the annualized weighted average nominal interest rate on our short-term investments was 0.3% and the weighted average length to maturity was 7.4 months.

From time to time, we may seek approval from our board of directors to evaluate additional opportunities to repurchase our common stock or convertible notes, including through open market purchases or
individually negotiated transactions.

Overall Cash Flows

During the nine months ended September 30, 2010, we generated $137.4 million of net cash from operating activities, primarily from our net income after adjustments for non-cash items. We used $87.0
million of cash from investing activities mainly in the purchase of short-term investments, as well as in the purchase of Auralis and Vancocin assets. Our net cash provided by financing activities for the nine months ended September 30, 2010
was $1.7 million which relates to stock option exercises. For the prior year period ended September 30, 2009, we were provided with $41.6 million of net cash from operating activities, primarily from our net loss after adjustments for non-cash
items which included our $65.1 million goodwill impairment. We used $8.3 million of cash from investing activities and our net cash used in financing activities for the nine months ended September 30, 2009 was $20.7 million, mainly from the
repurchase of a portion of our senior convertibles notes.

Development Programs

For each of our development programs, we incur both direct and indirect expenses. Direct expenses include third party costs related to these programs such
as contract research, consulting, cost sharing payments or receipts, and preclinical and clinical development costs. Indirect expenses include personnel, facility and other overhead costs. Additionally, for some of our development programs, we have
cash inflows and outflows upon achieving certain milestones.

Core Development Programs

CinryzeWe acquired Cinryze in October 2008 and through September 30, 2010 have spent approximately $17.7 million in direct research and
development costs related to Cinryze since acquisition. During the remainder of 2010, we continue to expect research and development costs related to Cinryze to increase as we complete our Phase 4 commitment and initiate our Phase 2 study to
evaluate Cinryze for treatment of acute HAE in children. Additionally, we will incur costs related to evaluating additional indications, formulations and territories as we develop our life cycle program related to Cinryze. We are solely responsible
for the costs of Cinryze development.

VP20621We acquired VP20621 in February 2006 and through September 30, 2010
have spent approximately $21.8 million in direct research and development costs. For the remainder of 2010 and during 2011 we expect our research and development activities related to VP20621 to increase as we continue our development program.

VancocinWe acquired Vancocin in November 2004 and through September 30, 2010 have spent approximately $2.8 million in
direct research and development costs related to Vancocin activities since acquisition.

Other Assets

CMV program & other assetsDuring the remainder of 2010, we do not anticipate that our CMV program will be a development program as
we determine whether there are any potential alternative uses for maribavir. We will continue to perform program wind



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down related activities and we expect the expenses associated with these activities to be minimal. We will continue to incur costs associated with our other development assets for direct research
and development costs for medicinal products which will address unmet medical needs. These costs include funding of Sanquins early stage research programs as described in Note 14 of the Unaudited Consolidated Financial Statements .

Business development activities

On May 28, 2010 we acquired a 100% ownership interest in Auralis Limited, a UK based specialty pharmaceutical company for approximately $14.5 million
in upfront consideration for the acquisition of the company and its existing pharmaceutical licenses and products. We have also agreed to pay an additional payment of £10 million Pounds Sterling (approximately $15.8 million based on the
September 30, 2010 exchange rate) upon the first regulatory approval of a product in late stage development.

We intend to seek to
acquire additional products or product candidates. The costs associated with evaluating or acquiring any additional product or product candidate can vary substantially based upon market size of the product, the commercial effort required for the
product, the products current stage of development, and actual and potential generic and non-generic competition for the product, among other factors. Due to the variability of the cost of evaluating or acquiring business development
candidates, it is not feasible to predict what our actual evaluation or acquisition costs would be, if any, however, the costs could be substantial.

Senior Convertible Notes

On March 26, 2007, we issued $250.0 million of 2%
senior convertible notes due March 2017 (senior convertible notes) in a public offering. Net proceeds from the issuance of the senior convertible notes were $241.8 million. The senior convertible notes are unsecured unsubordinated
obligations and rank equally with any other unsecured and unsubordinated indebtedness. The senior convertible notes bear interest at a rate of 2% per annum, payable semi-annually in arrears on March 15 and September 15 of each
year commencing on September 15, 2007.

As of January 1, 2009 we account for the debt and equity components of our convertible debt
securities as bifurcated instruments which are accounted for separately. Accordingly, the convertible debt securities will recognize interest expense at effective rates of 8.0% as they are accreted to par value.

On March 24, 2009 we repurchased, in a privately negotiated transaction, $45.0 million in principal amount of our senior convertible notes due March
2017 for total consideration of approximately $21.2 million. The repurchase represented 18% of our then outstanding debt and was executed at a price equal to 47% of par value. Additionally, in negotiated transactions, we sold approximately
2.38 million call options for approximately $1.8 million and repurchased approximately 2.38 million warrants for approximately $1.5 million which terminated the call options and warrants that were previously entered into by us in March
2007. We recognized a $9.1 million gain in the first quarter of 2009 as a result of this debt extinguishment. For tax purposes, the gain qualifies for deferral until 2014 in accordance with the provisions of the American Recovery and
Reinvestment Act.

As of September 30, 2010, the Company has accrued $0.2 million in interest payable to holders of the senior
convertible notes. Debt issuance costs of $4.8 million have been capitalized and are being amortized over the term of the senior convertible notes, with the balance to be amortized as of September 30, 2010 being $2.5 million.

The senior convertible notes are convertible into shares of our common stock at an initial conversion price of $18.87 per share. The senior
convertible notes may only be converted: (i) anytime after December 15, 2016; (ii) during the five business-day period after any five consecutive trading day period (the measurement period) in which the price per note for
each trading day of that measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such day; (iii) during any calendar quarter (and only during such quarter) after
the calendar quarter ending June 30, 2007, if the last reported sale price of our common stock for 20 or more trading days in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter
exceeds 130% of the applicable conversion price in effect on the last trading day of the immediately preceding calendar quarter; or (iv) upon the occurrence of specified corporate events. Upon conversion, holders of the senior convertible notes
will receive shares of common stock, subject to ViroPharmas option to irrevocably elect to settle all future conversions in cash up to the principal amount of the senior convertible notes, and shares for any excess. We can irrevocably
elect this option at any time on or prior to the 35th scheduled trading day prior to the maturity date of the senior convertible notes. The senior convertible notes may be required to be repaid on the occurrence of certain fundamental changes,
as defined in the senior convertible notes. As of September 30, 2010, the fair value of the principal of the $205.0 million convertible senior notes outstanding was approximately $214.5 million, based on the level 2 valuation
hierarchy of the fair value measurements standard. The carrying value of the debt at September 30, 2010 is $143.9 million.

Concurrent
with the issuance of the senior convertible notes, we entered into privately-negotiated transactions, comprised of purchased call options and warrants sold, to reduce the potential dilution of our common stock upon conversion of the senior
convertible notes. The transactions, taken together, have the effect of increasing the initial conversion price to $24.92 per share. The net cost of the transactions was $23.3 million.



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The call options allowed ViroPharma to
receive up to approximately 13.25 million shares of its common stock at $18.87 per share from the call option holders, equal to the number of shares of common stock that ViroPharma would issue to the holders of the senior convertible notes upon
conversion. These call options will terminate upon the earlier of the maturity dates of the related senior convertible notes or the first day all of the related senior convertible notes are no longer outstanding due to conversion or
otherwise. Concurrently, we sold warrants to the warrant holders to receive shares of its common stock at an exercise price of $24.92 per share. These warrants expire ratably over a 60-day trading period beginning on June 13, 2017 and will
be net-share settled.

The purchased call options are expected to reduce the potential dilution upon conversion of the senior convertible notes
in the event that the market value per share of our common stock at the time of exercise is greater than $18.87, which corresponds to the initial conversion price of the senior convertible notes, but less than $24.92 (the warrant exercise price).
The warrant exercise price is 75.0% higher than the price per share of $14.24 of our stock price on the pricing date. If the market price per share of our common stock at the time of conversion of any senior convertible notes is above the
strike price of the purchased call options ($18.87), the purchased call options will entitle us to receive from the counterparties in the aggregate the same number of shares of our common stock as we would be required to issue to the holder of the
converted senior convertible notes. Additionally, if the market price of our common stock at the time of exercise of the sold warrants exceeds the strike price of the sold warrants ($24.92), we will owe the counterparties an aggregate of
approximately 13.25 million shares of our common stock. If we have insufficient shares of common stock available for settlement of the warrants, we may issue shares of a newly created series of preferred stock in lieu of our obligation to
deliver common stock. Any such preferred stock would be convertible into 10% more shares of our common stock than the amount of common stock we would otherwise have been obligated to deliver under the warrants. We are entitled to receive
approximately 10.87 million shares of its common stock at $18.87 from the call option holders and if the market price of our common stock at the time of exercise of the sold warrants exceeds the strike price of the sold warrants ($24.92), will
owe the counterparties an aggregate of approximately 10.87 million shares of our common stock.

The purchased call options and sold
warrants are separate transactions entered into by us with the counterparties, are not part of the terms of the senior convertible notes, and will not affect the holders rights under the senior convertible notes. Holders of the senior
convertible notes will not have any rights with respect to the purchased call options or the sold warrants. The purchased call options and sold warrants meet the definition of derivatives. These instruments have been determined to be indexed to
our own stock and have been recorded in stockholders equity in our unaudited Condensed Consolidated Balance Sheets. As long as the instruments are classified in stockholders equity they are not subject to the mark to market
requirements of US GAAP.

From time to time, we may seek approval from our board of directors to evaluate additional opportunities to
repurchase our common stock or convertible notes, including through open market purchases or individually negotiated transactions.

Capital Resources

While we
anticipate that revenues from Vancocin and Cinryze will continue to generate positive cash flow and should allow us to fund substantially all of our ongoing development and other operating costs, we may need additional financing in order to expand
our product portfolio. Should we need financing, we would seek to access the public or private equity or debt markets, enter into additional arrangements with corporate collaborators to whom we may issue equity or debt securities or enter into other
alternative financing arrangements that may become available to us.

Financing

If we raise additional capital by issuing equity securities, the terms and prices for these financings may be much more favorable to the new investors than the terms obtained by our existing stockholders.
These financings also may significantly dilute the ownership of existing stockholders.

If we raise additional capital by accessing debt
markets, the terms and pricing for these financings may be much more favorable to the new lenders than the terms obtained from our prior lenders. These financings also may require liens on certain of our assets that may limit our flexibility.

Additional equity or debt financing, however, may not be available on acceptable terms from any source as a result of, among other factors,
our operating results, our inability to achieve regulatory approval of any of our product candidates, our inability to generate revenue through our existing collaborative agreements, and our inability to file, prosecute, defend and enforce patent
claims and or other intellectual property rights. If sufficient additional financing is not available, we may need to delay, reduce or eliminate current development programs, or reduce or eliminate other aspects of our business.

Critical Accounting Policies

Our
consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America. Preparing consolidated financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and contingent assets and liabilities. Actual results could



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differ from such estimates. These estimates and assumptions are affected by the application of our accounting policies. Critical policies and practices are both most important to the portrayal of
a companys financial condition and results of operations, and require managements most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently
uncertain.

Our summary of significant accounting policies is described in Note 2 to our Consolidated Financial Statements contained in our
Annual Report on Form 10-K for the year ended December 31, 2009. However, we consider the following policies and estimates to be the most critical in understanding the more complex judgments that are involved in preparing our consolidated
financial statements and that could impact our results of operations, financial position, and cash flows:



| |  |  | Product SalesOur net sales consist of revenue from sales of our products, Vancocin, Cinryze and Diamorphine, less estimates for chargebacks,
rebates, distribution service fees, returns and losses. We recognize revenue for product sales when title and risk of loss has passed to the customer, which is typically upon delivery to the customer, when estimated provisions for chargebacks,
rebates, distribution service fees, returns and losses are reasonably determinable, and when collectability is reasonably assured. Revenue from the launch of a new or significantly unique product may be deferred until estimates can be made for
chargebacks, rebates and losses and all of the above conditions are met and when the product has achieved market acceptance, which is typically based on dispensed prescription data and other information obtained during the period following launch.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | At the end of each reporting period we analyze our estimated channel inventory and we would defer recognition of revenue on product that has been
delivered if we believe that channel inventory at a period end is in excess of ordinary business needs. Further, if we believe channel inventory levels are increasing without a reasonably correlating increase in prescription demand, we proactively
delay the processing of wholesaler orders until these levels are reduced.
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We establish accruals for
chargebacks and rebates, sales discounts and product returns. These accruals are primarily based upon the history of Vancocin and for Cinryze they are based on information on payees obtained from our SP/SDs and CinryzeSolutions. We also
consider the volume and price of our products in the channel, trends in wholesaler inventory, conditions that might impact patient demand for our product (such as incidence of disease and the threat of generics) and other factors.

In addition to internal information, such as unit sales, we use information from external resources, which we do not verify, to estimate
the Vancocin channel inventory. Our external resources include prescription data reported by IMS Health Incorporated and written and verbal information obtained from our three largest wholesaler customers with respect to their inventory levels.
Based upon this information, we believe that inventory held at these warehouses are within normal levels.

Chargebacks and
rebates are the most subjective sales related accruals. While we currently have no contracts with private third party payors, such as HMOs, we do have contractual arrangements with governmental agencies, including Medicaid. We establish
accruals for chargebacks and rebates related to these contracts in the period in which we record the sale as revenue. These accruals are based upon historical experience of government agencies market share, governmental contractual prices, our
current pricing and then-current laws, regulations and interpretations. We analyze the accrual at least quarterly and adjust the balance as needed. These analyses have been adjusted to reflect the U.S. healthcare reform acts and their affect on
governmental contractual prices and rebates. We believe that a 10% change in our estimate of the actual rate of sales subject to governmental rebates would affect our operating income and accruals by approximately $0.5 million in the period of
correction, which we believe is immaterial.

Annually, as part of our process, we performed an analysis on the share of
Vancocin and Cinryze sales that ultimately go to Medicaid recipients and result in a Medicaid rebate. As part of that analysis, we considered our actual Medicaid historical rebates processed, total units sold and fluctuations in channel inventory.
We also consider our payee mix for Cinryze based on information obtained at the time of prescription.

Product return accruals
are estimated based on Vancocins history of damage and product expiration returns and are recorded in the period in which we record the sale of revenue. Cinryze has a no returns policy.



| |  |  | Impairment of Long-lived AssetsWe review our fixed and long-lived intangible assets for possible impairment annually and whenever events occur or
circumstances indicate that the carrying amount of an asset may not be recoverable. The impairment test is a two-step test. Under step one we assess the recoverability of an asset (or asset group). The carrying amount of an asset (or asset group) is
not recoverable if it exceeds the sum of the undiscounted cash flows expected from the use and eventual disposition of the asset (or asset group). The impairment loss is measured in step two as the difference between the carrying value of the asset
(or asset group) and its fair value. Assumptions and estimates used in the evaluation of impairment may affect the carrying value of long-lived assets, which could result in impairment charges in future periods. Such assumptions include, for
example, projections of future cash flows and the timing and number of
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| | generic/competitive entries into the market, in determining the undiscounted cash flows, and if necessary, the fair value of the asset and whether impairment exists. These assumptions are
subjective and could result in a material impact on operating results in the period of impairment. In the fourth quarter of 2009, we reviewed the fair value of our property and building held for sale and have determined that an additional impairment
charge was required. See Note 6 of the Unaudited Consolidated Financial Statements for further information.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

On an ongoing periodic basis, we evaluate the useful life of intangible assets and determine if any economic, governmental or regulatory
event has modified their estimated useful lives.

On August 4, 2009 the FDAs Pharmaceutical Science and Clinical
Pharmacology Advisory Committee voted in favor of the OGDs 2008 draft guidelines on bioequivalence for Vancocin. If FDAs proposed bioequivalence method for Vancocin becomes effective, the time period in which a generic competitor could
be approved would be reduced and multiple generics may enter the market, which would materially impact our operating results, cash flows and possibly intangible asset valuations. This could also result in a reduction to the useful life of the
Vancocin-related intangible assets. Management currently believes there are no indicators that would require a change in useful life as management believes that Vancocin will continue to be utilized along with generics that may enter the market, and
the number of generics and the timing of their market entry is unknown.

A reduction in the useful life, as well as the timing
and number of generics, will impact our cash flow assumptions and estimate of fair value, perhaps to a level that could result in an impairment charge. We will continue to monitor the actions of the OGD and consider the effects of our opposition
actions and any announcements by generic competitors or other adverse events for additional impairment indicators. We will reevaluate the expected cash flows and fair value of our Vancocin-related assets at such time a triggering event occurs.



| |  |  | Impairment of Goodwill and Indefinite-lived Intangible AssetsWe review the carrying value of goodwill and indefinite-lived intangible assets, to
determine whether impairment may exist. The goodwill impairment test consists of two steps. The first step compares a reporting units fair value to its carrying amount to identify potential goodwill impairment. If the carrying amount of a
reporting unit exceeds the reporting units fair value, the second step of the impairment test must be completed to measure the amount of the reporting units goodwill impairment loss, if any. Step two requires an assignment of the
reporting units fair value to the reporting units assets and liabilities to determine the implied fair value of the reporting units goodwill. The implied fair value of the reporting units goodwill is then compared with the
carrying amount of the reporting units goodwill to determine the goodwill impairment loss to be recognized, if any. The impairment test for indefinite-lived intangible assets is a one-step test, which compares the fair value of the intangible
asset to its carrying value. If the carrying value exceeds its fair value, an impairment loss is recognized in an amount equal to the excess. Based on accounting standards, it is required that these assets be assessed annually for impairment unless
a triggering event occurs between annual assessments which would then require an assessment in the period which a triggering event occurred.
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During the first quarter of 2009, our market capitalization dropped below the carrying value of our net assets due to the results of our Phase 3 trial evaluating maribavir used as prophylaxis in
allogeneic stem cell or bone marrow transplant patients. We concluded that the drop in our market cap was a triggering event which required us to perform an impairment test of our intangible assets and a step 2 test for goodwill impairment. As part
of this process, we also assessed our intangible and fixed assets for impairment. Based on the analysis performed under step two, there was no remaining implied value attributable to goodwill and accordingly, we wrote off the entire goodwill balance
and recognized a goodwill impairment charge in the first quarter of 2009.



| |  |  | Share-Based Employee CompensationThe calculation of this expense includes judgment related to the period of time used in calculating the
volatility of our common stock, the amount of forfeitures and an estimate of the exercising habits of our employees, which is also influenced by our Insider Trading Policy. Changes in the volatility of our common stock or the habits of our employees
could result in variability in the fair value of awards granted.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Income TaxesOur annual effective tax rate is based on expected pre-tax earnings, existing statutory tax rates, limitations on the use of tax
credits and net operating loss carryforwards, evaluation of qualified expenses related to the orphan drug credit and tax planning opportunities available in the jurisdictions in which we operate. Significant judgment is required in determining our
annual effective tax rate.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

On a periodic basis, we evaluate the realizability of our deferred tax assets and
liabilities and will adjust such amounts in light of changing facts and circumstances, including but not limited to future projections of taxable income, the reversal of deferred tax liabilities, tax legislation, rulings by relevant tax authorities,
tax planning strategies and the progress of ongoing tax examinations. As part of this evaluation we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income during the period in which those temporary differences becomes deductible or the



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NOLs and credit carryforwards can be utilized. When considering the reversal of valuation allowances, we consider the level of past and future taxable income, the reversal of deferred tax
liabilities, the utilization of the carryforwards and other factors. Revisions to the estimated net realizable value of the deferred tax asset could cause our provision for income taxes to vary significantly from period to period.

We recognize the benefit of tax positions that we have taken or expect to take on the income tax returns we file if such tax position is
more likely than not of being sustained. Settlement of filing positions that may be challenged by tax authorities could impact our income taxes in the year of resolution.



| |  |  | Acquisition AccountingBusinesses acquired before December 31, 2008 were accounted for in accordance with SFAS No. 141, Business
Combinationsand the total purchase price was allocated to Levs net tangible assets or identifiable intangible assets based on their fair values as of the date of the acquisition. The application of the purchase accounting requires certain
estimates and assumptions especially concerning the determination of the fair values of the acquired intangible assets and property, plant and equipment as well as the liabilities assumed at the date of the acquisition. Moreover, the useful lives of
the acquired intangible assets, property, plant and equipment have to be determined.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Businesses acquired
subsequent to January 1, 2009 will be accounted for in accordance with the new accounting standards regarding business combinations. Under the new standards, the total purchase price will be allocated to the net tangible assets, identifiable
intangible assets based on their fair values as of the date of the acquisition and the fair value of any contingent consideration. Changes in the fair value of contingent consideration will be expensed in the period in which the change in fair value
occurs. Additionally, acquired IPR&D projects will initially be capitalized and considered indefinite-lived assets subject to annual impairment reviews or more often upon the occurrence of certain events. For those compounds that reach
commercialization, the assets are amortized over the expected useful lives.

Measurement of fair value and useful lives are
based to a large extent on anticipated cash flows. If actual cash flows vary from those used in calculating fair values, this may significantly affect our future results of operations. In particular, the estimation of discounted cash flows of
intangible assets of newly developed products is subject to assumptions closely related to the nature of the acquired products. Factors that may affect the assumptions regarding future cash flows:



| |  |  | long-term sales forecasts,
| | - |  | --------------------------



| |  |  | anticipation of selling price erosion after the end of orphan exclusivity due to follow-on biologic competition in the market,
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | behavior of competitors (launch of competing products, marketing initiatives etc.).
| | - |  | -----------------------------------------------------------------------------------

For significant acquisitions, the purchase price allocation is carried out with assistance from independent third-party valuation
specialists. The valuations are based on information available at the acquisition date.

As our business evolves, we may face additional
issues that will require increased levels of management estimation and complex judgments.

Recently Issued Accounting Pronouncements

In October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue Arrangements, or ASU 2009-13. ASU 2009-13, amends
existing revenue recognition accounting pronouncements that are currently within the scope of FASB ASC Topic 605. This consensus provides accounting principles and application guidance on how the arrangement should be separated, and the
consideration allocated. This guidance changes how to determine the fair value of undelivered products and services for separate revenue recognition. Allocation of consideration is now based on managements estimate of the selling price for an
undelivered item where there is no other means to determine the fair value of that undelivered item. This new approach is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after
June 15, 2010. We are currently evaluating the guidance to determine the impact on the Companys results of operations, cash flows, and financial position.

In March 2010, the FASB ratified EITF Issue No. 08-9, Milestone Method of Revenue Recognitionand as a result of this ratification the FASB issued ASU 2010-17 in April 2010,which
states that the milestone method is a valid application of the proportional performance model for revenue recognition if the milestones are substantive and there is substantive uncertainty about whether the milestones will be achieved. The Task
Force agreed that whether a milestone is substantive is a judgment that should be made at the inception of the arrangement. To meet the definition of a substantive milestone, the consideration earned by achieving the milestone (1) would have to
be commensurate with either the level of effort required to achieve the milestone or the enhancement in the value of the item delivered, (2) would have to relate solely to past performance, and (3) should be reasonable relative to all
deliverables and payment terms in the arrangement. No bifurcation of an individual milestone is allowed and there can be more than one milestone in an arrangement. The new guidance is effective for interim and annual periods beginning on or after
June 15, 2010. We are currently evaluating the guidance to determine the impact on the Companys results of operations, cash flows, and financial position.



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Contractual Obligations

We have purchase obligations related to the supply and manufacturing of Cinryze. We have committed to purchase a minimum number of liters
of plasma per year through 2015 from our suppliers. Additionally, we are required to purchase a minimum number of units from our third party toll manufacturer. The total minimum purchase commitments for these arrangements as of September 30,
2010 are approximately $382.4 million. See Note 17 in our Form 10-K for the year ended December 
31, 2009 for further information.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

Our holdings of financial instruments are primarily comprised of money market funds holding U.S. government securities and fixed income
securities, including a mix of corporate debt, government securities and commercial paper. All such instruments are classified as securities available for sale. Our debt security portfolio represents funds held temporarily pending use in our
business and operations. We manage these funds accordingly. Our primary investment objective is the preservation of principal, while at the same time optimizing the generation of investment income. We seek reasonable assuredness of the safety of
principal and market liquidity by investing in cash equivalents (such as Treasury bills and money market funds) and fixed income securities (such as U.S. government and agency securities, municipal securities, taxable municipals, and corporate
notes) while at the same time seeking to achieve a favorable rate of return. Our market risk exposure consists principally of exposure to changes in interest rates. Our holdings are also exposed to the risks of changes in the credit quality of
issuers. Historically, we have typically invested in financial instruments with maturities of less than one year. The carrying amount, which approximates fair value based on the level 1 valuation hierarchy of the fair value measurement standard, and
the annualized weighted average nominal interest rate of our investment portfolio at September 30, 2010, was approximately $64.5 million and 0.3%, respectively. The weighted average length to maturity was 7.4 months. A one percent change in the
interest rate would have resulted in a $0.2 million impact to interest income for the quarter ended September 30, 2010.

At
September 30, 2010, we had principal outstanding of $205.0 million of our senior convertible notes. The senior convertible notes bear interest at a rate of 2% per annum, payable semi-annually in arrears on March 15 and
September 15 of each year commencing on September 15, 2007. The senior convertible notes are convertible into shares of the Companys common stock at an initial conversion price of $18.87 per share. The senior convertible notes may
only be converted: (i) anytime after December 15, 2016; (ii) during the five business-day period after any five consecutive trading day period (the measurement period) in which the price per note for each trading day of
that measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such day; (iii) during any calendar quarter (and only during such quarter) after the calendar quarter
ending June 30, 2007, if the last reported sale price of our common stock for 20 or more trading days in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter exceeds 130% of the
applicable conversion price in effect on the last trading day of the immediately preceding calendar quarter; or (iv) upon the occurrence of specified corporate events. Upon conversion, holders of the senior convertible notes will receive shares
of common stock, subject to ViroPharmas option to irrevocably elect to settle all future conversions in cash up to the principal amount of the senior convertible notes, and shares for any excess. We can irrevocably elect this option at any
time on or prior to the 35th scheduled trading day prior to the maturity date of the senior convertible notes. The senior convertible notes may be required to be repaid on the occurrence of certain fundamental changes, as defined in the senior
convertible notes. As of September 30, 2010, the fair value of the principal of the $205.0 million convertible senior notes outstanding was approximately $214.5 million, based on the level 2 valuation hierarchy of the fair value
measurements standard. The carrying value of the debt at September 30, 2010 is $143.9 million.

In connection with the issuance of the
senior convertible senior notes, we have entered into privately-negotiated transactions with two counterparties (the counterparties), comprised of purchased call options and warrants sold. These transactions are expected to generally
reduce the potential equity dilution of our common stock upon conversion of the senior convertible notes. These transactions expose the Company to counterparty credit risk for nonperformance. The Company manages its exposure to counterparty credit
risk through specific minimum credit standards, and diversification of counterparties.

ITEM 4. Controls and
Procedures

Evaluation of Disclosure Controls and Procedures

An evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer, or CEO, and our Chief Financial Officer, or CFO, of the effectiveness
of our disclosure controls and procedures, as such term



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is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act), as of September 30, 2010. Based on that evaluation, our
management, including our CEO and CFO, concluded that as of September 30, 2010 our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange
Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and that such information is accumulated and communicated to the Companys management,
including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over
Financial Reporting

During the third quarter of 2010 there were no significant changes in our internal control over financial reporting
identified in connection with the evaluation of such controls that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.



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PART II - OTHER INFORMATION

ITEM 1A. Risk Factors

We are providing the following information regarding changes that have occurred to previously disclosed risk factors from our Annual Report on Form 10-K for the year ended December 31, 2009 and
Quarterly Report on Form 10-Q for the period ended June 30, 2010. In addition to the other information set forth below and elsewhere in this report, you should carefully consider the factors discussed under the heading Risk Factors
in our Form 10-K for the year ended December 31, 2009 and Form 10-Q for the period ended June 30, 2010. The risks described in our Quarterly Report on Form 10-Q are not the only risks facing our Company. Additional risks and uncertainties
not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

During time periods that patient demand approaches our manufacturing capacity we will manage the rate at which additional new patients will receive Cinryze and will limit the number of doses
provided to patients. This would result in a reduction of potential future revenues.

Pursuant to our distribution agreement, Sanquin
Blood Supply Foundation supplies us with certain annual minimum and maximum amounts of C1 INH. We and Sanquin are undertaking process improvements and facility expansions to increase the capacity of the facilities involved in manufacturing Cinryze.
Our manufacturing scale up effort is a two-tiered approach including a parallel chromatography process, which was completed in the first quarter of 2010, with the product becoming available for commercial sale in the second quarter of 2010. The
second phase of our scale up plan involves a larger scale construction project to significantly increase the production facilities of Sanquin. Pursuant to an agreement with Sanquin we have financed a portion of the costs of the project to increase
the manufacturing capacity of its facilities. Following the completion of construction, Sanquin would need to obtain the requisite regulatory approvals for the facility on a timely basis in order to manufacture Cinryze for us at an increased
capacity. On October 21, 2010, the U.S. Food and Drug Administration (FDA) issued a complete response letter regarding the facility to be utilized for the Cinryze industrial scale manufacturing expansion activities. The FDA requested additional
information related to both (i) observations at the close of the pre-approval inspection and (ii) review of the technical processes. In order to manufacture Cinryze at the industrial scale we must respond to all FDA questions and
satisfactorily complete the FDA review.

While we believe that the data collected from our industrial scale manufacturing process demonstrates
equivalence with the existing manufacturing process, we can not guarantee that the FDA will agree with us in the timeframes we anticipate or at all as biologics such as Cinryze require processing steps that are more complex than those required for
most chemical pharmaceuticals. The FDA may view the data regarding equivalence of the industrial scale manufacturing process as insufficient or inconclusive, request additional data, require additional conformance batches, delay any decision past
the time frames anticipated by us, or deny the approval of the industrial scale manufacturing process.

The number of patients enrolling into
our treatment support service for patients with HAE and their healthcare providers, CinryzeSolutions has periodically exceeded our expectations. As a result, earlier this year we began to temporarily limit the rate at which additional
patients are started on drug to ensure that those already receiving commercial product continue with a supply of Cinryze until capacity increases. If the manufacturing capacity expansion projects at Sanquin are delayed, or do not result in the
capacity we anticipate, or if Sanquin cannot obtain necessary regulatory approvals for the contemplated facility expansions in the time frames we anticipate, if we are unable to manufacture industrial scale material at risk or if we are not able to
manufacture the anticipated volume of product at the existing scale, we may not be able to satisfy patient demand. Our inability to obtain adequate product supplies to satisfy our patient demand may create opportunities for our competitors and we
will suffer a loss of potential future revenues.

We currently depend, and will in the future continue to depend, on third parties to
manufacture raw, intermediate and finished goods for Vancocin, Cinryze and our product candidates. If these manufacturers fail to meet our requirements and the requirements of regulatory authorities, our future revenues may be materially adversely
affected.

We do not have the internal capability to manufacture quantities of pharmaceutical products to supply our clinical or
commercial needs under the current Good Manufacturing Practice regulations, or cGMPs required by the FDA and other regulatory agencies. In order to continue to develop products, apply for regulatory approvals and commercialize our products, we will
need to contract with third parties that have, or otherwise develop, the necessary manufacturing capabilities.

There are a limited number of
manufacturers that operate under cGMPs that are capable of manufacturing our products and product candidates. As such, if we are unable to enter into supply and processing contracts with any of these manufacturers or processors for our development
stage product candidates, there may be additional costs and delays in the development and commercialization of these product candidates. For example, Cinryze is a biologic which requires processing steps that are more difficult than those required
for most chemical pharmaceuticals and therefore the third party contracts must have additional technical skills and multiple steps to attempt to control the manufacturing processes.



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Problems with these manufacturing
processes such as equipment malfunctions, facility contamination, labor problems, raw material shortages or contamination, natural disasters, power outages, terrorist activities, or disruptions in the operations of our suppliers and even minor
deviations from the normal process, could result in product defects or manufacturing failures that result in lot failures, product recalls, product liability claims and insufficient inventory.

If we are required to find an additional or alternative source of supply, there may be additional costs and delays in the development or
commercialization of our product candidates. Additionally, the FDA and other regulatory agencies routinely inspect manufacturing facilities before approving a new drug application, or NDA, or biologic application, or BLA, for a drug or biologic
manufactured at those sites. If any of our manufacturers or processors fails to satisfy regulatory requirements, the approval and eventual commercialization of our products and product candidates may be delayed.

In addition, regulatory agencies subject a marketed therapy, its manufacturer and the manufacturers facilities to continual review and periodic
inspections. The discovery of previously unknown problems with a therapy or the facility or process used to produce the therapy could prompt a regulatory authority to impose restrictions on us or delay approvals for new products or could cause us to
voluntarily adopt restrictions, including withdrawal of one or more of our products or services from the market. During 2009 FDA inspected two sites maintained by our contract manufacturer for Cinryze and issued a notice of observations at the close
of the inspection on FDA Form 483 for each site. The observations at one site were subsequently remedied and a notice to this effect was issued by the FDA. Responses to the observations made at the second site have been provided to the FDA. In
addition, at the close of the pre-approval inspection of the facility at which the Cinryze industrial scale manufacturing expansion activities will occur, the FDA issued a notice of observations on FDA Form 483. If any of our manufacturers or
processors fails to satisfy regulatory requirements, operations at such facility may be halted which could result in our inability to supply product to patients and reduce our revenues.

All of our contract manufacturers must comply with the applicable cGMPs, which include quality control and quality assurance requirements as well as the corresponding maintenance of records and
documentation. If our contract manufacturers do not comply with the applicable cGMPs and other FDA regulatory requirements, we may be subject to product liability claims, the availability of marketed products for sale could be reduced, our product
commercialization could be delayed or subject to restrictions, we may be unable to meet demand for our products and may lose potential revenue and we could suffer delays in the progress of clinical trials for products under development. We do not
have control over our third-party manufacturers compliance with these regulations and standards. Moreover, while we may choose to manufacture products in the future, we have no experience in the manufacture of pharmaceutical products for
clinical trials or commercial purposes. If we decide to manufacture products, we would be subject to the regulatory requirements described above. In addition, we would require substantial additional capital and would be subject to delays or
difficulties encountered in manufacturing pharmaceutical products. No matter who manufactures the product, we will be subject to continuing obligations regarding the submission of safety reports and other post-market information.



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ITEM 6. Exhibits



|     |  |                                                                                                                                                          
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|31.1 |  | Certification by Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
|     | 
|31.2 |  | Certification by Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
|     | 
|32.1 |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*                                 



|* | Filed herewith
|- | --------------



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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.



|                       |  |                         |  |                                                                       
|---------------------- |  | ----------------------- |  | ----------------------------------------------------------------------
|                       |  | VIROPHARMA INCORPORATED
|                       |  |                        
|Date: October 27, 2010 |  | By:                     |  | /s/ Vincent J. Milano                                                 
|                       |  |                         |  | Vincent J. Milano                                                     
|                       |  |                         |  | President and Chief Executive Officer (Principal Executive Officer)   
|                       |  |                        
|                       |  | By:                     |  | /s/ Charles A. Rowland, Jr.                                           
|                       |  |                         |  | Charles A. Rowland, Jr.                                               
|                       |  |                         |  | Vice President, Chief Financial Officer (Principal Financial Officer) 
|                       |  |                        
|                       |  | By:                     |  | /s/ Richard S. Morris                                                 
|                       |  |                         |  | Richard S. Morris                                                     
|                       |  |                         |  | Chief Accounting Officer and Controller (Principal Accounting Officer)



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