NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Basis of Presentation

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary (consisting only of normal recurring accruals) to present fairly the financial information contained therein.  These statements do not include all disclosures required by accounting principles generally accepted in the United States of America (GAAP) for annual periods and should be read in conjunction with the Company’s audited consolidated financial statements and related notes for the year ended December 31, 2010.  The Company prepared the unaudited condensed consolidated financial statements following the requirements of the Securities and Exchange Commission for interim reporting.  As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP can be condensed or omitted.  The results of operations for the three month period ended March 31, 2011 are not necessarily indicative of the results to be expected for the year ending December 31, 2011 or any other period(s). 

Reclassifications

Certain reclassifications of prior year amounts have been made to conform with the current year presentation. 

Recently Adopted Accounting Standards

In December 2010, the Financial Accounting Standards Board (FASB) issued an accounting standards update that provides guidance on the recognition and classification of the annual fee imposed by the Patient Protection and Affordable Care Act as amended by the Health Care and Education Affordability Reconciliation Act on pharmaceutical companies that sell branded prescription drugs or biologics to specified government programs in the United States.  Under this guidance, the annual fee should be estimated and recognized in full as a liability upon the first qualifying sale with a corresponding deferred cost that is amortized to operating expense using a straight-line method of allocation unless another method better allocates the fee over the calendar year in which it is payable.  The annual fee ranges from $2.5 billion to $4.1 billion for all affected entities in total, a portion of which will be allocated to the Company on the basis of the amount of its branded prescription drug sales for the preceding year as a percentage of the industry’s branded prescription drug sales for the same period.  The annual fee is not deductible for federal income tax purposes.  This guidance became effective for calendar years beginning after December 31, 2010.  The Company adopted the provisions of the guidance in the first quarter of 2011 and currently estimates the annual fee for 2011 to be approximately $20.4 million. 

In December 2010, the FASB issued an accounting standards update that requires an entity to perform Step 2 of the goodwill impairment test for its reporting units with a zero or a negative carrying amount if there are qualitative factors indicating that it is more likely than not that a goodwill impairment exists.  This guidance became effective for fiscal years beginning after December 15, 2010 and was applied as a change in accounting principle with any impairment recorded as a cumulative-effect adjustment to beginning retained earnings.  The Company adopted the provisions of the guidance in the first quarter of 2011.  The adoption did not have a material impact on the Company’s consolidated financial statements. 

In December 2010, the FASB issued an accounting standards update that requires an entity to disclose pro forma revenue and earnings of the combined entity for both the year in which a business combination occurred and the prior year as if the business combination had occurred as of the beginning of prior year only.  This guidance became effective prospectively for business combinations occurring in fiscal years beginning after December 15, 2010.  The Company adopted the provisions of the guidance in the first quarter of 2011.  The adoption did not have a material impact on the Company’s consolidated financial statements. 

In April 2010, the FASB issued an accounting standards update that provides guidance on the milestone method of revenue recognition for research and development arrangements.  This guidance allows an entity to make an accounting policy election to recognize revenue that is contingent upon the achievement of a substantive milestone in its entirety in the period in which the milestone is achieved.  This guidance became effective for fiscal years beginning on or after June 15, 2010 and may be applied prospectively to milestones achieved after the adoption date or retrospectively for all periods presented, with earlier application permitted.  The Company made an accounting policy election to apply the guidance prospectively beginning in the first quarter of 2011 to recognize revenue in its entirety in the period in which a substantive milestone is achieved.  The adoption did not have a material impact on the Company’s consolidated financial statements.  As of March 31, 2011, the Company has potential future milestone receipts of approximately $473.0 million for the achievement of development, regulatory, and sales milestones in connection with certain collaboration agreements, including $373.0 million related to a development and commercialization agreement that the Company entered into in 2010 with Bristol-Myers Squibb Company that granted Bristol-Myers Squibb Company exclusive worldwide rights to develop, manufacture and commercialize an investigational drug for neuropathic pain.  Due to the challenges associated with developing and obtaining

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approval for pharmaceutical products, there is substantial uncertainty whether any of the future milestones will be achieved.  The Company evaluates whether milestone payments are substantive based on the facts and circumstances associated with each milestone payment in the period it is received. 

In October 2009, the FASB issued an accounting standards update that requires an entity to allocate arrangement consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices, eliminates the use of the residual method of allocation, and requires the relative-selling-price method in all circumstances in which an entity recognizes revenue of an arrangement with multiple deliverables.  This guidance became effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with earlier application permitted.  The Company adopted the provisions of the guidance in the first quarter of 2011.  The adoption did not have a material impact on the Company’s consolidated financial statements. 

Note 2: Acquisitions and Collaborations

Purchase of Distributor’s Business in Turkey

On July 1, 2010, the Company terminated its existing distributor agreement in Turkey and completed the purchase from its distributor of all licenses, registrations and other assets related to the selling of the Company’s products in Turkey.  Additionally, former employees of the distributor who were primarily engaged in the selling and marketing of the Company’s products were transferred to the Company on that date.  The termination of the existing distributor agreement and purchase of the commercial assets enabled the Company to initiate direct selling operations in Turkey. 

In conjunction with the termination of the existing distributor agreement, the Company paid $33.0 million, including a termination fee and related taxes, which is included in selling, general and administrative (SG&A) expenses in the third quarter of 2010.  The purchase of the commercial assets was accounted for as a business combination.  In connection with the purchase of the assets, the Company paid $6.1 million and is required to pay additional contingent consideration based on specified percentages of revenue in Turkey over the next five years.  The estimated fair value of the contingent consideration as of the acquisition date was $36.7 million.  The Company recognized goodwill of $31.5 million and intangible assets of $11.3 million based on their estimated fair values at the purchase date.  No liabilities were assumed in connection with the purchase.  In the first quarter of 2011, the Company made a contingent consideration payment of $2.9 million.  As of March 31, 2011, the total estimated fair value of the contingent consideration was $41.6 million, the majority of which was included in “Other liabilities.”

Serica Acquisition

On January 15, 2010, the Company completed the acquisition of Serica Technologies, Inc. (Serica), a development stage medical device company based in the United States focused on developing biodegradable silk-based scaffolds for use in tissue regeneration for breast reconstruction, for an aggregate purchase price of approximately $63.7 million, net of cash acquired.  In connection with the acquisition, the Company acquired assets with a fair value of $96.0 million and assumed liabilities of $32.3 million.  The acquisition was funded from the Company’s cash and equivalents balances.  The Serica acquisition provides the Company with an approved technology that has potential future application in breast augmentation, revision surgeries, as well as potential bariatric applications. 

Collaborations

In March 2010, the Company and Serenity Pharmaceuticals, LLC (Serenity) entered into an agreement for the license, development and commercialization of a Phase III investigational drug currently in clinical development for the treatment of nocturia, a common urological disorder in adults characterized by frequent urination at night time.  Under the terms of the agreement, the Company receives exclusive worldwide rights to develop, manufacture and commercialize the investigational drug for all potential indications except Primary Nocturnal Enuresis (pediatric bedwetting).  In conjunction with the agreement, the Company made an upfront payment to Serenity of $43.0 million in 2010.  The terms of the agreement also include potential future development and regulatory milestone payments to Serenity of up to $122.0 million, as well as potential future sales milestone and royalty payments.  Because the technology has not yet achieved regulatory approval, the Company recorded the upfront payment of $43.0 million as research and development (R&D) expense in the first quarter of 2010. 

In December 2010, the Company and Serenity executed a letter agreement which specified certain terms and conditions governing additional development activities for a new Phase III trial which were not set forth in the original agreement.  Under the letter agreement, the Company has agreed to share 50% of the cost of additional development activities.  The execution of the letter agreement was a reconsideration event for the Company’s variable interest in the collaboration

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agreement with Serenity, and since the Company is providing a significant amount of the funding for the new Phase III trial, it determined that Serenity had become a variable interest entity (VIE).  However, the Company determined that it is not the primary beneficiary of the VIE because it does not possess the power to direct Serenity’s research and development activities, which are the activities that most significantly impact Serenity’s economic performance.  The Company’s maximum exposure to loss is the upfront payment of $43.0 million made to Serenity and any shared costs of additional development activities. 

On January 28, 2011, the Company entered into a collaboration agreement and a co-promotion agreement with MAP Pharmaceuticals, Inc. (MAP) for the exclusive development and commercialization by the Company and MAP of Levadex ^™ within the United States to certain headache specialist physicians for the treatment of acute migraine in adults, migraine in adolescents and other indications that may be approved by the parties.  Levadex ^™ is a self-administered, orally inhaled therapy consisting of a proprietary formulation of dihydroergotamine delivered using MAP’s proprietary Tempo ^® delivery system, which has completed Phase III clinical development for the treatment of acute migraine in adults.  MAP currently intends to submit its New Drug Application for Levadex ^™ to the United States Food and Drug Administration in the first half of 2011.  Under the terms of the agreements, the Company made a $60.0 million upfront payment to MAP in February 2011, which was recorded as SG&A expense in the first quarter of 2011.  The upfront payment was expensed because Levadex ^™ has not yet achieved regulatory approval.  The terms of the agreements also include up to $97.0 million in additional payments to MAP upon MAP meeting certain development and regulatory milestones. 

Note 3: Restructuring Charges and Integration Costs

Discontinued Development of EasyBand ^™

In March 2011, the Company decided to discontinue development of the EasyBand ^™ Remote Adjustable Gastric Band System ( EasyBand ^™ ), a technology that the Company acquired in connection with its 2007 acquisition of EndoArt SA, and close the related research and development facility in Switzerland. 

As a result of discontinuing the development of EasyBand ^™ and the closure of the related research and development facility, in the first quarter of 2011 the Company recorded a pre-tax impairment charge of $16.1 million for the intangible assets associated with the EasyBand ^™ technology, fixed asset impairment charges of $2.3 million and a gain of $9.4 million from the substantially complete liquidation of the Company’s investment in a foreign subsidiary.  In addition, the Company recorded $4.6 million of restructuring charges, consisting of $3.0 million of employee severance and other one-time termination benefits for approximately 30 people affected by the facility closure, $1.5 million of contract termination costs and $0.1 million of other related costs. 

Other Restructuring Activities and Integration Costs

The Company did not incur any other restructuring charges during the three month period ended March 31, 2011. 

Included in the three month period ended March 31, 2010 are $0.1 million of restructuring charges primarily for employee severance and other one-time termination benefits related to the Company’s fiscal year 2009 restructuring plan, $0.4 million of restructuring charges primarily for employee severance related to the Serica acquisition and $0.1 million of restructuring charges for an abandoned leased facility related to the Company’s fiscal year 2005 restructuring and streamlining of its European operations. 

Included in the three month period ended March 31, 2011 are $0.6 million of SG&A expenses related to transaction costs associated with the collaboration and co-promotion agreements with MAP, $0.2 million of SG&A expenses related to integration and transaction costs associated with the purchase of the Company’s distributor’s business related to the Company’s products in Turkey and $0.2 million of SG&A expenses related to transaction costs associated with the announced purchase of the Company’s distributor’s business related to the Company’s products in South Africa. 

Included in the three month period ended March 31, 2010 are $0.5 million of SG&A expenses related to integration and transaction costs associated with the Serica acquisition, $0.2 million of SG&A expenses related to transaction costs associated with the purchase of the Company’s distributor’s business related to the Company’s products in Turkey and $0.3 million of SG&A expenses related to transaction costs associated with the license, development and commercialization agreement with Serenity. 

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Developed technology consists primarily of current product offerings, primarily breast aesthetics products, obesity intervention products, dermal fillers, skin care products and eye care products acquired in connection with business combinations, asset acquisitions and initial licensing transactions for products previously approved for marketing.  Customer relationship assets consist of the estimated value of relationships with customers acquired in connection with the Company’s 2006 acquisition of Inamed Corporation (Inamed), primarily in the breast implant market in the United States.  Licensing assets consist primarily of capitalized payments to third party licensors related to the achievement of regulatory approvals to commercialize products in specified markets and up-front payments associated with royalty obligations for products that have achieved regulatory approval for marketing.  Core technology consists of proprietary technology associated with silicone gel breast implants, gastric bands and intragastric balloon systems acquired in connection with the Inamed acquisition, dermal filler technology acquired in connection with the Company’s 2007 acquisition of Groupe Cornéal Laboratoires, and a drug delivery technology acquired in connection with the Company’s 2003 acquisition of Oculex Pharmaceuticals, Inc.  Other intangible assets consist primarily of acquired product registration rights, distributor relationships, government permits and non-compete agreements.  The in-process research and development asset consists of a dermal filler technology that has not yet achieved regulatory approval acquired in connection with the Company’s 2010 acquisition of Serica. 

In the first quarter of 2011, the Company recorded a pre-tax charge of $16.1 million related to the impairment of the developed technology and core technology associated with EasyBand ^™ as a result of the discontinued development of the technology. 

The following table provides amortization expense by major categories of acquired amortizable intangible assets for the three month periods ended March 31, 2011 and 2010, respectively:

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Amortization expense related to acquired intangible assets generally benefits multiple business functions within the Company, such as the Company’s ability to sell, manufacture, research, market and distribute products, compounds and intellectual property.  The amount of amortization expense excluded from cost of sales consists primarily of amounts amortized with respect to developed technology and licensing intangible assets. 

Estimated amortization expense is $126.1 million for 2011, $120.3 million for 2012, $106.1 million for 2013, $101.1 million for 2014 and $96.0 million for 2015. 

At March 31, 2011 and December 31, 2010, approximately $6.9 million and $6.4 million, respectively, of the Company’s finished goods inventories, primarily breast implants, were held on consignment at a large number of doctors’ offices, clinics and hospitals worldwide.  The value and quantity at any one location are not significant. 

Note 6: Convertible Notes

In 2006, the Company issued its 1.50% Convertible Senior Notes due 2026 (2026 Convertible Notes) for an aggregate principal amount of $750.0 million.  The 2026 Convertible Notes are unsecured and pay interest semi-annually on the principal amount of the notes at a rate of 1.50% per annum.  The 2026 Convertible Notes mature on April 1, 2026, unless previously redeemed by the Company or earlier converted by the note holders.  In the first quarter of 2009, the Company paid $98.3 million to repurchase $100.3 million principal amount of the 2026 Convertible Notes with a carrying value of $92.3 million and a calculated fair value of approximately $97.0 million.  The Company separately measures and accounts for the liability and equity components of the 2026 Convertible Notes.  As of March 31, 2011, the carrying value of the liability component is $648.9 million with an effective interest rate of 5.59%.  The difference between the carrying value of the liability component and the outstanding principal amount of the 2026 Convertible Notes of $649.7 million is recorded as debt discount and is being amortized to interest expense through the first note holder put date in April 2011. 

The 2026 Convertible Notes become convertible into cash and, if applicable, shares of the Company’s common stock based on a conversion rate of 15.7904 shares of the Company’s common stock per $1,000 principal amount of the 2026 Convertible Notes if the Company’s stock price reaches certain specified thresholds or the Company calls the 2026 Convertible Notes for redemption.  The Company is permitted to redeem the 2026 Convertible Notes at the principal amount plus accrued interest at any time on or after April 5, 2011. 

On March 8, 2011, the Company announced its intention to redeem the 2026 Convertible Notes at the principal amount plus accrued interest on April 5, 2011.  Under the terms of the 2026 Convertible Notes, note holders became able to surrender their notes for conversion upon the issuance of the Company’s notice of redemption. 

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Note 7: Income Taxes

The provision for income taxes is determined using an estimated annual effective tax rate, which is generally less than the U.S. federal statutory rate, primarily because of lower tax rates in certain non-U.S. jurisdictions, R&D tax credits available in the United States, California and other foreign jurisdictions and deductions available in the United States for domestic production activities.  The effective tax rate may be subject to fluctuations during the year as new information is obtained, which may affect the assumptions used to estimate the annual effective tax rate, including factors such as the mix of pre-tax earnings in the various tax jurisdictions in which the Company operates, valuation allowances against deferred tax assets, the recognition or derecognition of tax benefits related to uncertain tax positions, expected utilization of R&D tax credits and changes in or the interpretation of tax laws in jurisdictions where the Company conducts business.  The Company recognizes deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of its assets and liabilities along with net operating loss and tax credit carryovers. 

The Company records a valuation allowance against its deferred tax assets to reduce the net carrying value to an amount that it believes is more likely than not to be realized.  When the Company establishes or reduces the valuation allowance against its deferred tax assets, the provision for income taxes will increase or decrease, respectively, in the period such determination is made.  The valuation allowance against deferred tax assets was $23.8 million and $4.3 million as of March 31, 2011 and December 31, 2010, respectively. The increase in the valuation allowance was primarily due to a corresponding increase in a deferred tax asset that the Company determined required a valuation allowance. 

The total amount of unrecognized tax benefits was $37.4 million and $32.5 million as of March 31, 2011 and December 31, 2010, respectively.  The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $32.5 million and $27.5 million as of March 31, 2011 and December 31, 2010, respectively.  The Company expects that during the next 12 months it is reasonably possible that unrecognized tax benefit liabilities will decrease by approximately $8.0 million to $10.0 million due to the settlement of income tax audits in the United States and certain foreign jurisdictions. 

Total interest accrued related to uncertainty in income taxes included in the Company’s unaudited condensed consolidated balance sheet was $8.6 million and $8.1 million as of March 31, 2011 and December 31, 2010, respectively. 

The Company has not provided for withholding and U.S. taxes for the unremitted earnings of certain non-U.S. subsidiaries because it has currently reinvested these earnings indefinitely in these foreign operations.  At December 31, 2010, the Company had approximately $2,109.4 million in unremitted earnings outside the United States for which withholding and U.S. taxes were not provided.  Income tax expense would be incurred if these funds were remitted to the United States.  It is not practicable to estimate the amount of the deferred tax liability on such unremitted earnings.  Upon remittance, certain foreign countries impose withholding taxes that are then available, subject to certain limitations, for use as credits against the Company’s U.S. tax liability, if any.  The Company annually updates its estimate of unremitted earnings outside the United States after the completion of each fiscal year. 

Note 8: Share-Based Compensation

The Company recognizes compensation expense for all share-based awards made to employees and directors.  The fair value of share-based awards is estimated at the grant date using the Black-Scholes option-pricing model and the portion that is ultimately expected to vest is recognized as compensation cost over the requisite service period using the straight-line single option method.  The fair value of modifications to share-based awards is generally estimated using a lattice model. 

The determination of fair value using the Black-Scholes and lattice option-pricing models is affected by the Company’s stock price as well as assumptions regarding a number of complex and subjective variables, including expected stock price volatility, risk-free interest rate, expected dividends and projected employee stock option exercise behaviors.  The Company currently estimates stock price volatility based upon an equal weighting of the historical average over the expected life of the award and the average implied volatility of at-the-money options traded in the open market.  The Company estimates employee stock option exercise behavior based on actual historical exercise activity and assumptions regarding future exercise activity of unexercised, outstanding options. 

Share-based compensation expense is recognized only for those awards that are ultimately expected to vest, and the Company has applied an estimated forfeiture rate to unvested awards for the purpose of calculating compensation cost.  These estimates will be revised in future periods if actual forfeitures differ from the estimates. Changes in forfeiture estimates impact compensation cost in the period in which the change in estimate occurs. 

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As of March 31, 2011, total compensation cost related to non-vested stock options and restricted stock not yet recognized was approximately $215.9 million, which is expected to be recognized over the next 48 months (38 months on a weighted-average basis).  The Company has not capitalized as part of inventory any share-based compensation costs because such costs were negligible as of March 31, 2011. 

Note 9: Employee Retirement and Other Benefit Plans

The Company sponsors various qualified defined benefit pension plans covering a substantial portion of its employees.  In addition, the Company sponsors two supplemental nonqualified plans covering certain management employees and officers and one retiree health plan covering U.S. retirees and dependents. 

Components of net periodic benefit cost for the three month periods ended March 31, 2011 and 2010, respectively, were as follows:

In 2011, the Company expects to pay contributions of between $35.0 million and $45.0 million for its U.S. and non-U.S. pension plans and between $1.0 million and $2.0 million for its other postretirement plan. 

Note 10: Legal Proceedings

The following supplements and amends the discussion set forth in Note 13 “Legal Proceedings” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. 

Clayworth v. Allergan, et al.

In August 2004, James Clayworth, R.Ph., doing business as Clayworth Pharmacy, filed a complaint entitled “Clayworth v. Allergan, et al .” in the Superior Court of the State of California for the County of Alameda.  The complaint, as amended, named the Company and 12 other defendants and alleged unfair business practices, including a price fixing conspiracy relating to the reimportation of pharmaceuticals from Canada.  The complaint sought damages, equitable relief, attorneys’ fees and costs.  In January 2007, the superior court entered a notice of entry of judgment of dismissal against the plaintiffs, dismissing the plaintiffs’ complaint.  On the same date, the plaintiffs filed a notice of appeal with the Court of Appeal of the State of California.  In April 2007, the plaintiffs filed an opening brief with the court of appeal.  The defendants filed their joint opposition in July 2007, and the plaintiffs filed their reply in August 2007.  In May 2008, the court of appeal heard oral arguments and took the matter under submission.  In July 2008, the court of appeal affirmed the superior court’s ruling, granting the Company’s motion for summary judgment.  In August 2008, the plaintiffs filed a petition for rehearing with the court of appeal, which the court denied.  In September 2008, the plaintiffs filed a petition for review with the

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Supreme Court of the State of California, which the supreme court granted in November 2008.  In February 2009, the plaintiffs filed their opening brief on the merits with the supreme court and defendants filed their answer brief in May 2009.  In June 2009, the plaintiffs filed their reply brief on the merits with the supreme court.  In May 2010, the supreme court heard oral arguments.  In July 2010, the supreme court reversed the court of appeal’s judgment and remanded the case to the superior court for further proceedings.  In October 2010, plaintiffs filed a challenge to the assignment of this matter to the presiding judge alleging a conflict of interest.  In November 2010, plaintiffs’ challenge was denied.  In December 2010, plaintiffs filed a petition for writ of mandate in the Court of Appeal of the State of California seeking to overturn the order denying their challenge.  In December 2010, the court of appeal denied the petition.  In December 2010, plaintiffs filed a petition for review with the Supreme Court of the State of California.  In January 2011, the court set trial for August 1, 2011.  In February 2011, the supreme court denied plaintiffs’ petition for review.  In March 2011, the court entered judgment in favor of defendants pursuant to orders granting motions for summary judgment.  In April 2011, plaintiffs filed a notice of appeal to the Court of Appeal of the State of California. 

Kramer et al. v. Allergan, Inc.

In July 2008, a complaint entitled “Kramer, Bryant, Spears, Doolittle, Clark, Whidden, Powell, Moore, Hennessey, Sody, Breeding, Downey, Underwood-Boswell, Reed-Momot, Purdon & Hahn v. Allergan, Inc.” was filed in the Superior Court for the State of California for the County of Orange.  The complaint makes allegations against the Company relating to Botox ^® and Botox ^® Cosmetic including failure to warn, manufacturing defects, negligence, breach of implied and express warranties, deceit by concealment and negligent misrepresentation and seeks damages, attorneys’ fees and costs.  In 2009, the plaintiffs Hennessey, Hahn, Underwood-Boswell, Purdon, Moore, Clark, Reed-Momot and Whidden were dismissed without prejudice.  In October 2009, the Company filed a motion for summary judgment against plaintiff Spears, which the court denied in December 2009.  The trial related to plaintiff Spears began in January 2010.  In March 2010, the jury returned a verdict in the Company’s favor and the court entered a judgment on the special verdict.  In April 2010, plaintiff Spears filed a motion for a new trial which the court denied in May 2010.  In June 2010, the Company and plaintiff Spears entered into a settlement agreement under which the Company agreed to waive costs in exchange for plaintiff Spears agreeing not to appeal the judgment.  In September 2010, the trial related to plaintiff Bryant began and the Company subsequently entered into a settlement agreement with plaintiff Bryant.  In April 2011, the court set the trial related to plaintiff Doolittle for November 7, 2011 or, in the alternative, for January 17, 2012. 

Government Investigations

In June 2010, the Company received service of process of a Subpoena from the U.S. Securities and Exchange Commission (SEC).  The subpoena requests the production of documents relating to the Company’s affiliation with Acadia Pharmaceuticals, Inc., or Acadia, and the Company’s sale of Acadia securities.  In September 2010, the Company produced documents responsive to the Subpoena.  In January and March 2011, the SEC issued additional Subpoenas seeking further information, which has been provided. 

Stockholder Derivative Litigation

In November 2010, the Company received a demand for inspection of books and records from U.F.C.W. Local 1776 & Participating Employers Pension Fund (U.F.C.W.).  In November 2010, U.F.C.W. filed a motion to intervene in the Louisiana Municipal Police Employees’ Retirement System action, which was denied by the court in January 2011.  In February 2011, U.F.C.W. filed a complaint to compel inspection of books and records in the Court of Chancery of the State of Delaware.  In March 2011, the Company filed an answer to the complaint and the court scheduled the final hearing for April 27, 2011.  In April 2011, the court ordered that the Company produce a limited number of documents to the court for in camera inspection. 

In September 2010, Pompano Beach Police & Firefighters’ Retirement System and Western Washington Laborers-Employers Pension Trust filed a stockholder derivative complaint against the Company’s then-current Board of Directors and Allergan, Inc. in the U.S. District Court for the Central District of California.  The complaint alleges violations of federal securities laws, breaches of fiduciary duties, abuse of control, gross mismanagement, and corporate waste and seeks, among other things, damages, corporate governance reforms, attorneys’ fees, and costs.  In September 2010, plaintiffs filed a motion for consolidation with the Himmel and Rosenbloom actions, which the court granted in October 2010.  In November 2010, the plaintiffs filed their consolidated complaint.  In December 2010, the Company filed a motion to stay the consolidated action in favor of the Louisiana Municipal Police Employees’ Retirement System action.  In December 2010, the Company and the individual defendants filed motions to dismiss the consolidated complaint.  In March 2011, the court denied the motion to stay the consolidated action and the Company filed a motion for partial stay of the consolidated action in favor of the Louisiana Municipal Police Employees’ Retirement System action.  In April 2011, the court granted the motions to dismiss the consolidated complaint with leave to amend. 

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The Company is involved in various other lawsuits and claims arising in the ordinary course of business.  These other matters are, in the opinion of management, immaterial both individually and in the aggregate with respect to the Company’s consolidated financial position, liquidity or results of operations.  Because of the uncertainties related to the incurrence, amount and range of loss on any pending litigation, investigation, inquiry or claim, management is currently unable to predict the ultimate outcome of any litigation, investigation, inquiry or claim, determine whether a liability has been incurred or make an estimate of the reasonably possible liability that could result from an unfavorable outcome.  The Company believes however, that the liability, if any, resulting from the aggregate amount of uninsured damages for any outstanding litigation, investigation or claim will not have a material adverse effect on the Company’s consolidated financial position, liquidity or results of operations.  However, an adverse ruling in a patent infringement lawsuit involving the Company could materially affect the Company’s ability to sell one or more of its products or could result in additional competition.  In view of the unpredictable nature of such matters, the Company cannot provide any assurances regarding the outcome of any litigation, investigation, inquiry or claim to which the Company is a party or the impact on the Company of an adverse ruling in such matters. 

Note 11: Contingencies

In 2009, the Company established a reserve for a contingent liability associated with regulation changes resulting from a final rule issued by the U.S. Department of Defense (DoD) that placed retroactive and prospective pricing limits on certain branded pharmaceuticals under the TRICARE Retail Pharmacy Program, even though such branded pharmaceuticals have not historically been subject to a contract with the Company.  The Company is currently in negotiations with the DoD to seek a waiver of retroactive rebates.  As of March 31, 2011, the reserve for the contingent liability is $12.4 million and is included in “Other accrued expenses.”

In the third quarter of 2009, the Company entered into a co-promotion agreement with Quintiles Transnational Corp. (Quintiles), under which Quintiles co-promoted Sanctura XR ^® , Latisse ^® and Aczone ^® , generally targeting primary care physicians.  Due to significantly lower than anticipated performance under the agreement, the Company terminated this co-promotion agreement in the third quarter of 2010.  The Company estimates it will be required to pay between approximately $15.0 million and $25.0 million in costs in connection with the termination of the co-promotion agreement.  As of March 31, 2011, the Company is carrying a recorded reserve for this contingent liability within the range specified above, which is included in “Other accrued expenses.”

Note 12: Guarantees

The Company’s Amended and Restated Certificate of Incorporation provides that the Company will indemnify, to the fullest extent permitted by the Delaware General Corporation Law, each person that is involved in or is, or is threatened to be, made a party to any action, suit or proceeding by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer of the Company or was serving at the request of the Company as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise.  The Company has also entered into contractual indemnity agreements with each of its directors and executive officers pursuant to which, among other things, the Company has agreed to indemnify such directors and executive officers against any payments they are required to make as a result of a claim brought against such executive officer or director in such capacity, excluding claims (i) relating to the action or inaction of a director or executive officer that resulted in such director or executive officer gaining illegal personal profit or advantage, (ii) for an accounting of profits made from the purchase or sale of securities of the Company within the meaning of Section 16(b) of the Securities Exchange Act of 1934, as amended, or similar provisions of any state law or (iii) that are based upon or arise out of such director’s or executive officer’s knowingly fraudulent, deliberately dishonest or willful misconduct.  The maximum potential amount of future payments that the Company could be required to make under these indemnification provisions is unlimited.  However, the Company has purchased directors’ and officers’ liability insurance policies intended to reduce the Company’s monetary exposure and to enable the Company to recover a portion of any future amounts paid.  The Company has not previously paid any material amounts to defend lawsuits or settle claims as a result of these indemnification provisions, but makes no assurance that such amounts will not be paid in the future.  The Company currently believes the estimated fair value of these indemnification arrangements is minimal. 

The Company customarily agrees in the ordinary course of its business to indemnification provisions in agreements with clinical trials investigators in its drug, biologics and medical device development programs, in sponsored research agreements with academic and not-for-profit institutions, in various comparable agreements involving parties performing services for the Company in the ordinary course of business, and in its real estate leases.  The Company also customarily agrees to certain indemnification provisions in its discovery and development collaboration agreements.  With respect to the Company’s clinical trials and sponsored research agreements, these indemnification provisions typically apply to any claim asserted against the investigator or the investigator’s institution relating to personal injury or property damage, violations of

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law or certain breaches of the Company’s contractual obligations arising out of the research or clinical testing of the Company’s products, compounds or drug candidates.  With respect to real estate lease agreements, the indemnification provisions typically apply to claims asserted against the landlord relating to personal injury or property damage caused by the Company, to violations of law by the Company or to certain breaches of the Company’s contractual obligations.  The indemnification provisions appearing in the Company’s collaboration agreements are similar, but in addition provide some limited indemnification for the collaborator in the event of third party claims alleging infringement of intellectual property rights.  In each of the above cases, the terms of these indemnification provisions generally survive the termination of the agreement.  The maximum potential amount of future payments that the Company could be required to make under these provisions is generally unlimited.  The Company has purchased insurance policies covering personal injury, property damage and general liability intended to reduce the Company’s exposure for indemnification and to enable the Company to recover a portion of any future amounts paid.  The Company has not previously paid any material amounts to defend lawsuits or settle claims as a result of these indemnification provisions.  As a result, the Company believes the estimated fair value of these indemnification arrangements is minimal. 

Note 13: Product Warranties

The Company provides warranty programs for breast implant sales primarily in the United States, Europe and certain other countries.  Management estimates the amount of potential future claims from these warranty programs based on actuarial analyses.  Expected future obligations are determined based on the history of product shipments and claims and are discounted to a current value.  The liability is included in both current and long-term liabilities in the Company’s consolidated balance sheets.  The U.S. programs include the ConfidencePlus ^® and ConfidencePlus ^® Premier warranty programs.  The ConfidencePlus ^® program currently provides lifetime product replacement, $1,200 of financial assistance for surgical procedures within ten years of implantation and contralateral implant replacement.  The ConfidencePlus ^® Premier program, which normally requires a low additional enrollment fee, generally provides lifetime product replacement, $2,400 of financial assistance for saline breast implants and $3,500 of financial assistance for silicone gel breast implants for surgical procedures within ten years of implantation and contralateral implant replacement.  The enrollment fee is deferred and recognized as income over the ten year warranty period for financial assistance.  The warranty programs in non-U.S. markets have similar terms and conditions to the U.S. programs.  The Company does not warrant any level of aesthetic result and, as required by government regulation, makes extensive disclosures concerning the risks of the use of its products and breast implant surgery.  Changes to actual warranty claims incurred and interest rates could have a material impact on the actuarial analysis and the Company’s estimated liabilities.  A large majority of the product warranty liability arises from the U.S. warranty programs.  The Company does not currently offer any similar warranty program on any other product. 

The following table provides a reconciliation of the change in estimated product warranty liabilities through March 31, 2011:

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For the three month periods ended March 31, 2011 and 2010, options to purchase 4.8 million and 11.2 million shares of common stock at exercise prices ranging from $62.71 to $75.58 and $47.10 to $65.63 per share, respectively, were outstanding but were not included in the computation of diluted earnings per share because the effect from the assumed exercise of these options calculated under the treasury stock method would be anti-dilutive.  There were no potentially diluted common shares related to the Company’s 2026 Convertible Notes for the three month period ended March 31, 2010, as the Company’s average stock price for the period was less than the conversion price of the notes. 

Note 16: Financial Instruments

In the normal course of business, operations of the Company are exposed to risks associated with fluctuations in interest rates and foreign currency exchange rates.  The Company addresses these risks through controlled risk management that includes the use of derivative financial instruments to economically hedge or reduce these exposures.  The Company does not enter into derivative financial instruments for trading or speculative purposes. 

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The Company has not experienced any losses to date on its derivative financial instruments due to counterparty credit risk. 

To ensure the adequacy and effectiveness of its interest rate and foreign exchange hedge positions, the Company continually monitors its interest rate swap positions and foreign exchange forward and option positions both on a stand-alone basis and in conjunction with its underlying interest rate and foreign currency exposures, from an accounting and economic perspective. 

However, given the inherent limitations of forecasting and the anticipatory nature of the exposures intended to be hedged, the Company cannot assure that such programs will offset more than a portion of the adverse financial impact resulting from unfavorable movements in either interest or foreign exchange rates.  In addition, the timing of the accounting for recognition of gains and losses related to mark-to-market instruments for any given period may not coincide with the timing of gains and losses related to the underlying economic exposures and, therefore, may adversely affect the Company’s consolidated operating results and financial position. 

Interest Rate Risk Management

The Company’s interest income and expense is more sensitive to fluctuations in the general level of U.S. interest rates than to changes in rates in other markets.  Changes in U.S. interest rates affect the interest earned on cash and equivalents and short-term investments and interest expense on debt, as well as costs associated with foreign currency contracts. 

On January 31, 2007, the Company entered into a nine-year, two-month interest rate swap with a $300.0 million notional amount with semi-annual settlements and quarterly interest rate reset dates.  The swap receives interest at a fixed rate of 5.75% and pays interest at a variable interest rate equal to 3-month LIBOR plus 0.368%, and effectively converts $300.0 million of the Company’s $800.0 million in aggregate principal amount of 5.75% Senior Notes due 2016 (2016 Notes) to a variable interest rate.  Based on the structure of the hedging relationship, the hedge meets the criteria for using the short-cut method for a fair value hedge.  The investment in the derivative and the related long-term debt are recorded at fair value.  At March 31, 2011 and December 31, 2010, the Company recognized in its consolidated balance sheets an asset reported in “Investments and other assets” and a corresponding increase in “Long-term debt” associated with the fair value of the derivative of $37.5 million and $42.3 million, respectively.  The differential to be paid or received as interest rates change is accrued and recognized as an adjustment of interest expense related to the 2016 Notes.  During the three month periods ended March 31, 2011 and 2010, the Company recognized $3.8 million, respectively, as a reduction of interest expense due to the differential to be received. 

In February 2006, the Company entered into interest rate swap contracts based on 3-month LIBOR with an aggregate notional amount of $800.0 million, a swap period of 10 years and a starting swap rate of 5.198%.  The Company entered into these swap contracts as a cash flow hedge to effectively fix the future interest rate for the 2016 Notes.  In April 2006, the Company terminated the interest rate swap contracts and received approximately $13.0 million.  The total gain was recorded to accumulated other comprehensive loss and is being amortized as a reduction to interest expense over a 10 year period to match the term of the 2016 Notes.  During the three month periods ended March 31, 2011 and 2010, the Company recognized $0.3 million, respectively, as a reduction of interest expense due to the amortization of deferred holding gains on derivatives designated as cash flow hedges.  These amounts were reclassified from accumulated other comprehensive loss.  As of March 31, 2011, the remaining unrecognized gain of $6.6 million ($3.9 million, net of tax) is recorded as a component of accumulated other comprehensive loss.  The Company expects to reclassify an estimated pre-tax amount of $1.3 million from accumulated other comprehensive loss as a reduction in interest expense during fiscal year 2011 due to the amortization of deferred holding gains on derivatives designated as cash flow hedges. 

No portion of amounts recognized from contracts designated as cash flow hedges was considered to be ineffective during the three month periods ended March 31, 2011 and 2010, respectively. 

Foreign Exchange Risk Management

Overall, the Company is a net recipient of currencies other than the U.S. dollar and, as such, benefits from a weaker dollar and is adversely affected by a stronger dollar relative to major currencies worldwide.  Accordingly, changes in exchange rates, and in particular a strengthening of the U.S. dollar, may negatively affect the Company’s consolidated revenues or operating costs and expenses as expressed in U.S. dollars. 

From time to time, the Company enters into foreign currency option and forward contracts to reduce earnings and cash flow volatility associated with foreign exchange rate changes to allow management to focus its attention on its core business issues.  Accordingly, the Company enters into various contracts which change in value as foreign exchange rates change to

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economically offset the effect of changes in the value of foreign currency assets and liabilities, commitments and anticipated foreign currency denominated sales and operating expenses.  The Company enters into foreign currency option and forward contracts in amounts between minimum and maximum anticipated foreign exchange exposures, generally for periods not to exceed 18 months.  The Company does not designate these derivative instruments as accounting hedges. 

The Company uses foreign currency option contracts, which provide for the sale or purchase of foreign currencies to offset foreign currency exposures expected to arise in the normal course of the Company’s business.  While these instruments are subject to fluctuations in value, such fluctuations are anticipated to offset changes in the value of the underlying exposures. 

Probable but not firmly committed transactions are comprised of sales of products and purchases of raw material in currencies other than the U.S. dollar.  A majority of these sales are made through the Company’s subsidiaries in Europe, Asia Pacific, Canada and Brazil.  The Company purchases foreign exchange option contracts to economically hedge the currency exchange risks associated with these probable but not firmly committed transactions.  The duration of foreign exchange hedging instruments, whether for firmly committed transactions or for probable but not firmly committed transactions, generally does not exceed 18 months. 

All of the Company’s outstanding foreign currency option contracts are entered into to reduce the volatility of earnings generated in currencies other than the U.S. dollar, primarily earnings denominated in the Canadian dollar, Mexican peso, Australian dollar, Brazilian real, euro, Korean won and Turkish lira.  Current changes in the fair value of open foreign currency option contracts and any realized gains (losses) on settled contracts are recorded through earnings as “Other, net” in the accompanying unaudited condensed consolidated statements of earnings.  During the three month periods ended March 31, 2011 and 2010, the Company recognized realized gains on settled foreign currency option contracts of $0.5 million and $2.0 million, respectively, and net unrealized losses on open foreign currency option contracts of $6.9 million and $0.7 million, respectively.  The premium costs of purchased foreign exchange option contracts are recorded in “Other current assets” and amortized to “Other, net” over the life of the options. 

All of the Company’s outstanding foreign exchange forward contracts are entered into to offset the change in value of certain intercompany receivables or payables that are subject to fluctuations in foreign currency exchange rates.  The realized and unrealized gains and losses from foreign currency forward contracts and the revaluation of the foreign denominated intercompany receivables or payables are recorded through “Other, net” in the accompanying unaudited condensed consolidated statements of earnings.  During the three month periods ended March 31, 2011 and 2010, the Company recognized total realized and unrealized gains from foreign exchange forward contracts of $1.7 million and $0.7 million, respectively. 

The fair value of outstanding foreign exchange option and forward contracts, collectively referred to as foreign currency derivative financial instruments, are recorded in “Other current assets” and “Accounts payable.” At March 31, 2011 and December 31, 2010, foreign currency derivative assets associated with the foreign exchange option contracts of $4.6 million and $10.4 million, respectively, were included in “Other current assets.” At March 31, 2011 and December 31, 2010, net foreign currency derivative liabilities associated with the foreign exchange forward contracts of $0.2 million and $0.7 million, respectively, were included in “Accounts payable.”

At March 31, 2011 and December 31, 2010, the notional principal and fair value of the Company’s outstanding foreign currency derivative financial instruments were as follows:

The notional principal amounts provide one measure of the transaction volume outstanding as of March 31, 2011 and December 31, 2010, and do not represent the amount of the Company’s exposure to market loss.  The estimates of fair value are based on applicable and commonly used pricing models using prevailing financial market information as of March 31, 2011 and December 31, 2010.  The amounts ultimately realized upon settlement of these financial instruments, together with the gains and losses on the underlying exposures, will depend on actual market conditions during the remaining life of the instruments. 

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Other Financial Instruments

At March 31, 2011 and December 31, 2010, the Company’s other financial instruments included cash and equivalents, short-term investments, trade receivables, equity investments, accounts payable and borrowings.  The carrying amount of cash and equivalents, short-term investments, trade receivables and accounts payable approximates fair value due to the short-term maturities of these instruments.  The fair value of non-marketable equity investments which represent investments in start-up technology companies or partnerships that invest in start-up technology companies, are estimated based on the fair value and other information provided by these ventures.  The fair value of notes payable, convertible notes and long-term debt are estimated based on quoted market prices and interest rates. 

The carrying amount and estimated fair value of the Company’s other financial instruments at March 31, 2011 and December 31, 2010 were as follows:

Concentration of Credit Risk

Financial instruments that potentially subject the Company to credit risk principally consist of trade receivables.  Wholesale distributors, major retail chains and managed care organizations account for a substantial portion of trade receivables.  This risk is limited due to the number of customers comprising the Company’s customer base, and their geographic dispersion.  At March 31, 2011, no single customer represented more than 10% of trade receivables, net.  Ongoing credit evaluations of customers’ financial condition are performed and, generally, no collateral is required.  The Company has purchased an insurance policy intended to reduce the Company’s exposure to potential credit risks associated with certain U.S. customers.  To date, no claims have been made against the insurance policy.  The Company maintains reserves for potential credit losses and such losses, in the aggregate, have not exceeded management’s estimates. 

Note 17: Fair Value Measurements

The Company measures fair value based on the prices that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  Fair value measurements are based on a three-tier hierarchy that prioritizes the inputs used to measure fair value.  These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions. 

Assets and Liabilities Measured at Fair Value on a Recurring Basis

As of March 31, 2011, the Company has certain assets and liabilities that are required to be measured at fair value on a recurring basis.  These include cash equivalents, short-term investments, foreign exchange derivatives, the $300.0 million notional amount interest rate swap and contingent consideration.  These assets and liabilities are classified in the table below in one of the three categories of the fair value hierarchy described above. 

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Cash equivalents consist of commercial paper, foreign time deposits and other cash equivalents.  Short-term investments consist of commercial paper.  Cash equivalents and short-term investments are valued at cost, which approximates fair value due to the short-term maturities of these instruments.  Foreign currency derivative assets and liabilities are valued using quoted forward foreign exchange prices and option volatility at the reporting date.  The interest rate swap derivative asset and liability are valued using LIBOR yield curves at the reporting date.  The Company believes the fair values assigned to its derivative instruments as of March 31, 2011 are based upon reasonable estimates and assumptions. 

The contingent consideration liability represents future amounts the Company will be required to pay in conjunction with the 2010 purchase of commercial assets from a distributor in Turkey that was accounted for as a business combination.  The ultimate amount of future payments is based on specified percentages of the Company’s revenues in Turkey over the next five years.  The Company estimates the fair value of the contingent liability using the income approach, which involves forecasting estimated future net cash flows and discounting the net cash flows to their present value using a risk-adjusted rate of return.  As of the acquisition date, the fair value of the liability was estimated to be $36.7 million.  As of March 31, 2011 and December 31, 2010, the total estimated fair value of the contingent consideration was $41.6 million and $44.5 million, respectively.  In the first quarter of 2011, the Company made a contingent consideration payment of $2.9 million. 

Note 18: Business Segment Information

The Company operates its business on the basis of two reportable segments — specialty pharmaceuticals and medical devices.  The specialty pharmaceuticals segment produces a broad range of pharmaceutical products, including: ophthalmic products for dry eye, glaucoma, retinal diseases and ocular surface disease; Botox ^® for certain therapeutic and aesthetic indications; skin care products for acne, psoriasis, eyelash growth and other prescription and over-the-counter skin care products; and urologics products.  The medical devices segment produces a broad range of medical devices, including: breast implants for augmentation, revision and reconstructive surgery; obesity intervention products, including the Lap-Band ^® System and the Orbera ^™ Intragastric Balloon System; and facial aesthetics products.  The Company provides global marketing strategy teams to ensure development and execution of a consistent marketing strategy for its products in all geographic regions that share similar distribution channels and customers. 

The Company evaluates segment performance on a revenue and operating income basis exclusive of general and administrative expenses and other indirect costs, legal settlement expenses, intangible asset impairment and related costs, restructuring charges, in-process research and development expenses, amortization of certain identifiable intangible assets related to business combinations and asset acquisitions and related capitalized licensing costs and certain other adjustments, which are not allocated to the Company’s segments for performance assessment by the Company’s chief operating decision maker.  Other adjustments excluded from the Company’s segments for performance assessment represent income or expenses that do not reflect, according to established Company-defined criteria, operating income or expenses associated with the Company’s core business activities.  Because operating segments are generally defined by the products they design and sell, they do not make sales to each other.  The Company does not discretely allocate assets to its operating segments, nor does the Company’s chief operating decision maker evaluate operating segments using discrete asset information. 

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