##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




---

Form 10-Q

|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | QUARTERLY REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|           |  | For the quarterly period ended March 31,
    2004                                           
|          
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|           |  | For the transition period
    from           to                                             

Commission file number: 1-11397



---

Valeant Pharmaceuticals
International

(Exact name of registrant as specified in its
charter)


|                                                                                          |  |                                         
|----------------------------------------------------------------------------------------- |  | ----------------------------------------
|Delaware                                                                                  |  | 33-0628076                              
|(State or other jurisdiction of
    incorporation or organization)                        |  | (I.R.S. Employer
    Identification No.)
|                                                                                         
|3300 Hyland Avenue
    Costa Mesa, California(Address of principal executive
    offices) |  | 92626(Zip Code)                         

(714) 545-0100

(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 þ          No o

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Exchange Act
Rule 12b-2).     Yes þ          No o

The number of outstanding shares of the
registrants Common Stock, $0.01 par value, as of
May 3, 2004 was 83,779,887.



---






---










VALEANT PHARMACEUTICALS
INTERNATIONAL

INDEX

|                                    |  |                                                                                                                |    |        |    | 
|----------------------------------- |  | -------------------------------------------------------------------------------------------------------------- | -- | ------ | -- | 
|                                    |  |                                                                                                                |    | Page  
|                                    |  |                                                                                                                |    | Number
|                                    |  |                                                                                                                |    |       
|PART I   FINANCIAL
    INFORMATION
|Item 1.                             |  | Financial Statements                                                                                           |    |        |    | 
|                                    |  | Consolidated Condensed
    Balance Sheets  March 31, 2004 and
    December 31, 2003                           |    |        | 3  | 
|                                    |  | Consolidated Condensed
    Statements of Income  Three months ended
    March 31, 2004 and 2003               |    |        | 4  | 
|                                    |  | Consolidated Condensed
    Statements of Comprehensive Income  Three months
    ended March 31, 2004 and 2003 |    |        | 5  | 
|                                    |  | Consolidated Condensed
    Statements of Cash Flows  Three months ended
    March 31, 2004 and 2003           |    |        | 6  | 
|                                    |  | Managements Statement
    Regarding Unaudited Financial Statements                                            |    |        | 7  | 
|                                    |  | Notes to Consolidated
    Condensed Financial Statements                                                       |    |        | 8  | 
|Item 2.                             |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations                      |    |        | 25 | 
|Item 3.                             |  | Quantitative and Qualitative
    Disclosures About Market Risk                                                 |    |        | 34 | 
|Item 4.                             |  | Controls and Procedures                                                                                        |    |        | 34 | 
|PART II 
    OTHER INFORMATION    
|Item 1.                             |  | Legal Proceedings                                                                                              |    |        | 39 | 
|Item 6.                             |  | Exhibits and Reports on
    Form 8-K                                                                           |    |        | 39 | 
|SIGNATURES                          |  |                                                                                                                | 40 |       
|EXHIBIT 15.1                       
|EXHIBIT 15.2                       
|EXHIBIT 31.1                       
|EXHIBIT 31.2                       
|EXHIBIT 32.1                       



2



---



##### Table of Contents






PART I  FINANCIAL
INFORMATION




|        |                     
|------- | --------------------
|Item 1. | Financial Statements

VALEANT PHARMACEUTICALS
INTERNATIONAL



CONSOLIDATED CONDENSED BALANCE
SHEETS


March 31, 2004 and December 31,
2003


(In thousands, except per share
data)


|                                            |                                                                                                                                                                                        |                                                       |           |              |           |   |           |          |           | 
|------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------- | --------- | ------------ | --------- | - | --------- | -------- | --------- | 
|                                            |                                                                                                                                                                                        | March 31,                                             |           | December 31,
|                                            |                                                                                                                                                                                        | 2004                                                  |           | 2003        
|                                            |                                                                                                                                                                                        |                                                       |           |             
|                                            |                                                                                                                                                                                        | (Unaudited)                                           |           |             
|ASSETS                                     
|Current Assets:                             |                                                                                                                                                                                        |                                                       |           |              |           |   |           |         
|                                            | Cash and cash equivalents                                                                                                                                                              |                                                       | $         | 845,516      |           |   | $         | 872,056  |          
|                                            | Restricted cash                                                                                                                                                                        |                                                       |           | 7,819        |           |   |           | 1,925    |          
|                                            | Accounts receivable, net                                                                                                                                                               |                                                       |           | 135,053      |           |   |           | 162,402  |          
|                                            | Inventories, net                                                                                                                                                                       |                                                       |           | 99,699       |           |   |           | 91,906   |          
|                                            | Prepaid expenses and other current assets                                                                                                                                              |                                                       |           | 13,718       |           |   |           | 13,863   |          
|                                            |                                                                                                                                                                                        |                                                       |           |              |           |   |           |         
|                                            |                                                                                                                                                                                        | Total current assets                                  |           |              | 1,101,805 |   |           |          | 1,142,152 | 
|Property, plant and equipment, net          |                                                                                                                                                                                        |                                                       | 234,074   |              |           |   | 241,016   |         
|Deferred tax assets, net                    |                                                                                                                                                                                        |                                                       | 81,134    |              |           |   | 68,601    |         
|Intangible assets, net                      |                                                                                                                                                                                        |                                                       | 460,270   |              |           |   | 435,029   |         
|Other assets                                |                                                                                                                                                                                        |                                                       | 52,654    |              |           |   | 62,145    |         
|                                            |                                                                                                                                                                                        |                                                       |           |              |           |   |           |         
|                                            |                                                                                                                                                                                        | Total non-current assets                              |           |              | 828,132   |   |           |          | 806,791   | 
|Assets of discontinued operations           |                                                                                                                                                                                        |                                                       | 26,252    |              |           |   | 27,994    |         
|                                            |                                                                                                                                                                                        |                                                       |           |              |           |   |           |         
|                                            |                                                                                                                                                                                        | $                                                     | 1,956,189 |              |           | $ | 1,976,937 |         
|                                            |                                                                                                                                                                                        |                                                       |           |              |           |   |           |         
|LIABILITIES AND STOCKHOLDERS
    EQUITY   
|Current Liabilities:                        |                                                                                                                                                                                        |                                                       |           |              |           |   |           |         
|                                            | Trade payables                                                                                                                                                                         |                                                       | $         | 30,067       |           |   | $         | 36,073   |          
|                                            | Accrued liabilities                                                                                                                                                                    |                                                       |           | 115,428      |           |   |           | 114,406  |          
|                                            | Notes payable and current portion of long-term
    debt                                                                                                                                |                                                       |           | 1,294        |           |   |           | 1,343    |          
|                                            | Income taxes payable                                                                                                                                                                   |                                                       |           | 10,570       |           |   |           | 14,962   |          
|                                            |                                                                                                                                                                                        |                                                       |           |              |           |   |           |         
|                                            |                                                                                                                                                                                        | Total current liabilities                             |           |              | 157,359   |   |           |          | 166,784   | 
|Long-term debt, less current portion        |                                                                                                                                                                                        |                                                       | 1,121,649 |              |           |   | 1,119,802 |         
|Deferred income taxes and other liabilities |                                                                                                                                                                                        |                                                       | 71,341    |              |           |   | 66,799    |         
|Minority interest                           |                                                                                                                                                                                        |                                                       | 3,479     |              |           |   | 3,493     |         
|                                            |                                                                                                                                                                                        |                                                       |           |              |           |   |           |         
|                                            |                                                                                                                                                                                        | Total non-current liabilities                         |           |              | 1,196,469 |   |           |          | 1,190,094 | 
|Liabilities of discontinued operations      |                                                                                                                                                                                        |                                                       | 15,253    |              |           |   | 14,698    |         
|                                            |                                                                                                                                                                                        |                                                       |           |              |           |   |           |         
|Commitments and contingencies               |                                                                                                                                                                                        |                                                       |           |              |           |   |           |         
|Stockholders Equity:                       |                                                                                                                                                                                        |                                                       |           |              |           |   |           |         
|                                            | Common stock, $0.01 par value;
    200,000 shares authorized; 83,583 (March 31, 2004) and
    83,185 (December 31, 2003) shares outstanding (after
    deducting shares in treasury of |                                                       |           |              |           |   |           |          |          
|                                            |                                                                                                                                                                                        | 1,068 as of March 31, 2004 and
    December 31, 2003) |           |              | 836       |   |           |          | 832       | 
|                                            | Additional capital                                                                                                                                                                     |                                                       |           | 982,268      |           |   |           | 976,773  |          
|                                            | Accumulated deficit                                                                                                                                                                    |                                                       |           | (358,460     | )         |   |           | (338,384 | )        
|                                            | Accumulated other comprehensive loss                                                                                                                                                   |                                                       |           | (37,536      | )         |   |           | (33,860  | )        
|                                            |                                                                                                                                                                                        |                                                       |           |              |           |   |           |         
|                                            |                                                                                                                                                                                        | Total stockholders equity                            |           |              | 587,108   |   |           |          | 605,361   | 
|                                            |                                                                                                                                                                                        |                                                       |           |              |           |   |           |         
|                                            |                                                                                                                                                                                        | $                                                     | 1,956,189 |              |           | $ | 1,976,937 |         
|                                            |                                                                                                                                                                                        |                                                       |           |              |           |   |           |         

The accompanying notes are an integral part of
these consolidated condensed financial statements.

3



---



##### Table of Contents






VALEANT PHARMACEUTICALS
INTERNATIONAL

CONSOLIDATED CONDENSED STATEMENTS OF
INCOME

For the three months ended March 31, 2004
and 2003


(Unaudited, in thousands, except per share
data)


|                                                                                       |                                              |                               |         |         |         |   |        |         |         | 
|-------------------------------------------------------------------------------------- | -------------------------------------------- | ----------------------------- | ------- | ------- | ------- | - | ------ | ------- | ------- | 
|                                                                                       |                                              |                              
|                                                                                       |                                              | Three Months Ended           
|                                                                                       |                                              | March 31,                    
|                                                                                       |                                              |                              
|                                                                                       |                                              | 2004                          |         | 2003   
|                                                                                       |                                              |                               |         |        
|Revenues:                                                                              |                                              |                               |         |         |         |   |        |        
|                                                                                       | Product sales                                |                               | $       | 132,325 |         |   | $      | 110,134 |        
|                                                                                       | Royalties                                    |                               |         | 25,377  |         |   |        | 48,583  |        
|                                                                                       |                                              |                               |         |         |         |   |        |        
|                                                                                       |                                              | Total revenues                |         |         | 157,702 |   |        |         | 158,717 | 
|                                                                                       |                                              |                               |         |         |         |   |        |        
|Costs and expenses:                                                                    |                                              |                               |         |         |         |   |        |        
|                                                                                       | Cost of goods sold                           |                               |         | 46,712  |         |   |        | 41,239  |        
|                                                                                       | Selling expenses                             |                               |         | 47,742  |         |   |        | 37,278  |        
|                                                                                       | General and administrative expenses          |                               |         | 23,875  |         |   |        | 30,593  |        
|                                                                                       | Research and development costs               |                               |         | 18,463  |         |   |        | 9,159   |        
|                                                                                       | Acquired in-process research and development |                               |         | 11,386  |         |   |        |        |        
|                                                                                       | Amortization expense                         |                               |         | 13,287  |         |   |        | 8,067   |        
|                                                                                       |                                              |                               |         |         |         |   |        |        
|                                                                                       |                                              | Total expenses                |         |         | 161,465 |   |        |         | 126,336 | 
|                                                                                       |                                              |                               |         |         |         |   |        |        
|                                                                                       |                                              | Income (loss) from operations |         |         | (3,763  | ) |        |         | 32,381  | 
|Other income (loss), net, including translation
    and exchange                       |                                              |                               | (1,046  | )       |         |   | 4,091  |        
|Interest income                                                                        |                                              |                               | 3,060   |         |         |   | 982    |        
|Interest expense                                                                       |                                              |                               | (14,959 | )       |         |   | (8,292 | )      
|                                                                                       |                                              |                               |         |         |         |   |        |        
|Income (loss) from continuing operations before
    income taxes and minority interest |                                              |                               | (16,708 | )       |         |   | 29,162 |        
|Provision (benefit) for income taxes                                                   |                                              |                               | (6,182  | )       |         |   | 11,082 |        
|Minority interest, net                                                                 |                                              |                               | (14     | )       |         |   | 4,859  |        
|                                                                                       |                                              |                               |         |         |         |   |        |        
|                                                                                       | Income (loss) from continuing operations     |                               |         | (10,512 | )       |   |        | 13,221  |        
|                                                                                       | Income (loss) from discontinued operations   |                               |         | (3,061  | )       |   |        | 449     |        
|                                                                                       |                                              |                               |         |         |         |   |        |        
|                                                                                       | Net income (loss)                            |                               | $       | (13,573 | )       |   | $      | 13,670  |        
|                                                                                       |                                              |                               |         |         |         |   |        |        
|Basic earnings (loss) per share:                                                       |                                              |                               |         |         |         |   |        |        
|                                                                                       | Income (loss) from continuing operations     |                               | $       | (0.12   | )       |   | $      | 0.16    |        
|                                                                                       | Discontinued operations                      |                               |         | (0.04   | )       |   |        |        |        
|                                                                                       |                                              |                               |         |         |         |   |        |        
|                                                                                       | Basic net income (loss) per share            |                               | $       | (0.16   | )       |   | $      | 0.16    |        
|                                                                                       |                                              |                               |         |         |         |   |        |        
|Diluted earnings (loss) per share:                                                     |                                              |                               |         |         |         |   |        |        
|                                                                                       | Income (loss) from continuing operations     |                               | $       | (0.12   | )       |   | $      | 0.16    |        
|                                                                                       | Discontinued operations                      |                               |         | (0.04   | )       |   |        |        |        
|                                                                                       |                                              |                               |         |         |         |   |        |        
|                                                                                       | Diluted net income (loss) per share          |                               | $       | (0.16   | )       |   | $      | 0.16    |        
|                                                                                       |                                              |                               |         |         |         |   |        |        
|Shares used in per share computation:                                                  |                                              |                               |         |         |         |   |        |        
|                                                                                       | Basic                                        |                               |         | 83,447  |         |   |        | 84,104  |        
|                                                                                       |                                              |                               |         |         |         |   |        |        
|                                                                                       | Diluted                                      |                               |         | 83,447  |         |   |        | 84,307  |        
|                                                                                       |                                              |                               |         |         |         |   |        |        

The accompanying notes are an integral part of
these consolidated condensed financial statements.

4



---



##### Table of Contents






VALEANT PHARMACEUTICALS
INTERNATIONAL

CONSOLIDATED CONDENSED STATEMENTS OF
COMPREHENSIVE INCOME

For the three months ended March 31, 2004
and 2003


(Unaudited, in thousands)


|                            |                                                                                                 |                    |         |        |   |   |        |        |  
|--------------------------- | ----------------------------------------------------------------------------------------------- | ------------------ | ------- | ------ | - | - | ------ | ------ | -
|                            |                                                                                                 |                   
|                            |                                                                                                 | Three Months Ended
|                            |                                                                                                 | March 31,         
|                            |                                                                                                 |                   
|                            |                                                                                                 | 2004               |         | 2003  
|                            |                                                                                                 |                    |         |       
|Net income (loss)           |                                                                                                 | $                  | (13,573 | )      |   | $ | 13,670 |       
|Other comprehensive income: |                                                                                                 |                    |         |        |   |   |        |       
|                            | Foreign currency translation adjustments                                                        |                    |         | (5,004 | ) |   |        | (6,052 | )
|                            | Unrealized loss on marketable equity securities
    and other                                   |                    |         | (177   | ) |   |        | (352   | )
|                            | Reclassification adjustment for realized loss on
    marketable equity securities in net income |                    |         | 1,506  |   |   |        |       |  
|                            |                                                                                                 |                    |         |        |   |   |        |       
|Comprehensive income (loss) |                                                                                                 | $                  | (17,248 | )      |   | $ | 7,266  |       
|                            |                                                                                                 |                    |         |        |   |   |        |       

The accompanying notes are an integral part of
these consolidated condensed financial statements.

5



---



##### Table of Contents






VALEANT PHARMACEUTICALS
INTERNATIONAL

CONSOLIDATED CONDENSED STATEMENTS OF CASH
FLOWS

For the three months ended March 31, 2004
and 2003


(Unaudited, in thousands)


|                                                                            |                                                                                                        |                                                                            |                                           |         |         |        |         |        |         |        | 
|--------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------ | -------------------------------------------------------------------------- | ----------------------------------------- | ------- | ------- | ------ | ------- | ------ | ------- | ------ | 
|                                                                            |                                                                                                        |                                                                           
|                                                                            |                                                                                                        | Three Months Ended                                                        
|                                                                            |                                                                                                        | March 31,                                                                 
|                                                                            |                                                                                                        |                                                                           
|                                                                            |                                                                                                        | 2004                                                                       |                                           | 2003   
|                                                                            |                                                                                                        |                                                                            |                                           |        
|Cash flows from operating
    activities:                                   |                                                                                                        |                                                                            |                                           |         |         |        |         |       
|                                                                            | Income (loss) from continuing operations                                                               |                                                                            | $                                         | (10,512 | )       |        | $       | 13,221 |        
|                                                                            | Adjustments to reconcile net income (loss) to net
    cash provided by (used in) operating activities: |                                                                            |                                           |         |         |        |         |        |        
|                                                                            |                                                                                                        | Depreciation and amortization                                              |                                           |         | 21,657  |        |         |        | 14,263  |       
|                                                                            |                                                                                                        | Provision for losses on accounts receivable and
    inventory obsolescence |                                           |         | 689     |        |         |        | 2,036   |       
|                                                                            |                                                                                                        | Translation and exchange (gains) losses, net                               |                                           |         | 103     |        |         |        | (4,091  | )     
|                                                                            |                                                                                                        | Other non-cash items                                                       |                                           |         | 1,512   |        |         |        | 497     |       
|                                                                            |                                                                                                        | Write-off of in-process R&D                                                |                                           |         | 11,386  |        |         |        |        |       
|                                                                            |                                                                                                        | Deferred income taxes                                                      |                                           |         | (12,542 | )      |         |        | 2,013   |       
|                                                                            |                                                                                                        | Minority interest                                                          |                                           |         | (14     | )      |         |        | 4,859   |       
|                                                                            | Change in assets and liabilities, net of effects
    of acquisitions:                                  |                                                                            |                                           |         |         |        |         |        |        
|                                                                            |                                                                                                        | Accounts receivable                                                        |                                           |         | 25,044  |        |         |        | 47,452  |       
|                                                                            |                                                                                                        | Inventories                                                                |                                           |         | (5,584  | )      |         |        | (996    | )     
|                                                                            |                                                                                                        | Prepaid expenses and other assets                                          |                                           |         | 1,796   |        |         |        | (322    | )     
|                                                                            |                                                                                                        | Trade payables and accrued liabilities                                     |                                           |         | (14,022 | )      |         |        | (23,414 | )     
|                                                                            |                                                                                                        | Income taxes payable                                                       |                                           |         | (4,321  | )      |         |        | 17,442  |       
|                                                                            |                                                                                                        | Other liabilities                                                          |                                           |         | 4,306   |        |         |        | (3,810  | )     
|                                                                            |                                                                                                        |                                                                            |                                           |         |         |        |         |       
|                                                                            |                                                                                                        | Cash flow from operating activities in continuing
    operations           |                                           |         | 19,498  |        |         |        | 69,150  |       
|                                                                            |                                                                                                        | Cash flow from operating activities in
    discontinued operations         |                                           |         | (624    | )      |         |        | 9,725   |       
|                                                                            |                                                                                                        |                                                                            |                                           |         |         |        |         |       
|                                                                            |                                                                                                        |                                                                            | Net cash provided by operating activities |         |         | 18,874 |         |        |         | 78,875 | 
|                                                                            |                                                                                                        |                                                                            |                                           |         |         |        |         |       
|Cash flows from investing
    activities:                                   |                                                                                                        |                                                                            |                                           |         |         |        |         |       
|                                                                            | Capital expenditures                                                                                   |                                                                            |                                           | (3,971  | )       |        |         | (2,510 | )      
|                                                                            | Proceeds from sale of assets and investments                                                           |                                                                            |                                           | 11,208  |         |        |         | 67     |        
|                                                                            | Increase in restricted cash                                                                            |                                                                            |                                           | (5,894  | )       |        |         | (3     | )      
|                                                                            | Acquisition of license rights, product lines and
    businesses                                        |                                                                            |                                           | (44,358 | )       |        |         | (150   | )      
|                                                                            |                                                                                                        |                                                                            |                                           |         |         |        |         |       
|                                                                            | Cash flow from investing activities in continuing
    operations                                       |                                                                            |                                           | (43,015 | )       |        |         | (2,596 | )      
|                                                                            | Cash flow from investing activities in
    discontinued operations                                     |                                                                            |                                           | 23      |         |        |         | (1,936 | )      
|                                                                            |                                                                                                        |                                                                            |                                           |         |         |        |         |       
|                                                                            |                                                                                                        | Net cash used in investing activities                                      |                                           |         | (42,992 | )      |         |        | (4,532  | )     
|                                                                            |                                                                                                        |                                                                            |                                           |         |         |        |         |       
|Cash flows from financing
    activities:                                   |                                                                                                        |                                                                            |                                           |         |         |        |         |       
|                                                                            | Payments on long-term debt and notes payable                                                           |                                                                            |                                           | (568    | )       |        |         | (3,039 | )      
|                                                                            | Proceeds from exercise of stock options                                                                |                                                                            |                                           | 4,938   |         |        |         |       |        
|                                                                            | Dividends paid                                                                                         |                                                                            |                                           | (6,432  | )       |        |         | (6,500 | )      
|                                                                            | Funds received from discontinued operations                                                            |                                                                            |                                           | (90     | )       |        |         | 7,936  |        
|                                                                            |                                                                                                        |                                                                            |                                           |         |         |        |         |       
|                                                                            | Cash flow from financing activities in continuing
    operations                                       |                                                                            |                                           | (2,152  | )       |        |         | (1,603 | )      
|                                                                            | Cash flow from financing activities in
    discontinued operations                                     |                                                                            |                                           | 90      |         |        |         | (8,203 | )      
|                                                                            |                                                                                                        |                                                                            |                                           |         |         |        |         |       
|                                                                            |                                                                                                        | Net cash used in financing activities                                      |                                           |         | (2,062  | )      |         |        | (9,806  | )     
|                                                                            |                                                                                                        |                                                                            |                                           |         |         |        |         |       
|Effect of exchange rate changes on cash and cash
    equivalents            |                                                                                                        |                                                                            | (871                                      | )       |         |        | (553    | )     
|                                                                            |                                                                                                        |                                                                            |                                           |         |         |        |         |       
|Net increase (decrease) in cash and cash
    equivalents                    |                                                                                                        |                                                                            | (27,051                                   | )       |         |        | 63,984  |       
|Cash and cash equivalents at beginning of period                            |                                                                                                        |                                                                            | 872,969                                   |         |         |        | 253,664 |       
|                                                                            |                                                                                                        |                                                                            |                                           |         |         |        |         |       
|Cash and cash equivalents at end of period                                  |                                                                                                        |                                                                            | 845,918                                   |         |         |        | 317,648 |       
|Cash and cash equivalents classified as part of
    discontinued operations |                                                                                                        |                                                                            | (402                                      | )       |         |        | (8,344  | )     
|                                                                            |                                                                                                        |                                                                            |                                           |         |         |        |         |       
|Cash and cash equivalents of continuing operations                          |                                                                                                        | $                                                                          | 845,516                                   |         |         | $      | 309,304 |       
|                                                                            |                                                                                                        |                                                                            |                                           |         |         |        |         |       

The accompanying notes are an integral part of
these consolidated condensed financial statements.

6



---



##### Table of Contents






MANAGEMENTS STATEMENT REGARDING
UNAUDITED FINANCIAL STATEMENTS

The consolidated condensed financial statements
included herein have been prepared by the Company, without
audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared
on the basis of accounting principles generally accepted in the
United States of America have been condensed or omitted pursuant
to such rules and regulations. The results of operations
presented herein are not necessarily indicative of the results
to be expected for a full year. Although the Company believes
that all adjustments (consisting only of normal, recurring
adjustments) necessary for a fair presentation of the interim
periods presented are included and that the disclosures are
adequate to make the information presented not misleading, these
consolidated condensed financial statements should be read in
conjunction with the consolidated financial statements and notes
thereto included in the Companys Annual Report on
Form 10-K for the year ended December 31, 2003.

7



---



##### Table of Contents






VALEANT PHARMACEUTICALS
INTERNATIONAL

NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS

March 31, 2004


(Unaudited)




|   |                                                                
|-- | ---------------------------------------------------------------
|1. | Organization and Summary of Significant
    Accounting Policies

Organization:Valeant Pharmaceuticals International (Valeant) and
its subsidiaries (collectively, the Company) is a
global, research-based, specialty pharmaceutical company that
discovers, develops, manufactures, and markets a broad range of
pharmaceutical products. Through its wholly owned subsidiary,
Ribapharm, Inc. (Ribapharm), which conducts research
and new product development initiatives, the Company generates
royalty revenues from the sale of ribavirin by Schering-Plough
Ltd. (Schering-Plough) and F. Hoffman-LaRoche
(Roche).

Principles of
Consolidation:The accompanying
consolidated condensed financial statements include the accounts
of Valeant, its wholly owned subsidiaries and all of its
majority-owned subsidiaries that it controls. Minority interest
in results of operations of consolidated subsidiaries represents
the minority shareholders share of the income or loss of
such consolidated subsidiaries. All significant intercompany
account balances and transactions have been eliminated.

Acquired In-Process Research and
Development:In the quarter ended
March 31, 2004, the Company incurred an expense of
$11,386,000 associated with acquired in-process research and
development (IPR&D) related to the acquisition
of Amarin Pharmaceuticals, Inc. (Amarin) and all of
its U.S. product rights. The amount expensed as IPR&D
represents an estimate of the fair value of purchased in-process
technology for Zelapar® that, as of the acquisition date,
had not yet reached technological feasibility and had no
alternative future use. The data used to determine fair value
requires significant judgment. The estimated fair value was
based on the use of a discounted cash flow model (based on an
estimate of future sales and an average gross margin of 66%).
The estimated after-tax cash flows (using a tax rate of 40%)
were then discounted to a present value using a discount rate of
20%, which is the Companys risk adjusted after tax
weighted average cost of capital. The Company estimates that the
Zelapar studies will be completed in 2004 and revenue for
Zelapar will commence in 2005. See Note 2 for discussion of
the acquisition of Amarin.

The major risks and uncertainties associated with
the timely and successful completion of Zelapar consists of the
ability to confirm the safety and efficacy of the technology
based on the data from clinical trials and obtaining necessary
regulatory approvals. In addition, no assurance can be given
that the underlying assumptions used to forecast the cash flows
or the timely and successful completion of such projects will
materialize, as estimated. For these reasons, among others,
actual results may vary significantly from the estimated results.

Derivative Financial
Instruments:The Companys
accounting policies for derivative instruments are based on
whether they meet the Companys criteria for designation as
hedging transactions, either as cash flow or fair value hedges.
The Companys derivative instruments are recorded at fair
value and included in other current assets, other assets,
accrued liabilities or debt. Depending on the nature of the
hedge, changes in the fair value of the hedged item are either
offset against the change in the fair value of the hedged item
through earnings or recognized in other comprehensive income
until the hedged item is recognized in earnings.

Comprehensive
Income:The Company has adopted the
provisions of SFAS No. 130, Reporting Comprehensive
Income. Accumulated other comprehensive loss consists of
accumulated foreign currency translation adjustments, unrealized
losses on marketable equity securities, minimum pension
liability and changes in the fair value of derivative financial
instruments.

Per Share
Information:Basic earnings per share
is computed by dividing income available to common stockholders
by the weighted-average number of shares outstanding. In
computing diluted earnings per share, the weighted-average
number of shares outstanding is adjusted to reflect the effect
of potentially dilutive securities including options, warrants,
and convertible debt or preferred stock; income available to
common

8



---



##### Table of Contents



VALEANT PHARMACEUTICALS
INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)

stockholders is adjusted to reflect any changes
in income or loss that would result from the issuance of the
dilutive common shares.

In March 2004, the Companys Board of
Directors declared a first quarter cash distribution of
$0.0775 per share, payable on April 28, 2004. While
the Company has historically paid quarterly cash dividends,
there can be no assurance that it will continue to do so.

Stock-Based
Compensation:The Company has adopted
the disclosure-only provisions of SFAS No. 123 and
SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure.
Compensation cost for stock-based compensation issued to
employees has been measured using the intrinsic value method
provided by Accounting Principles Board Opinion No. 25.
Accordingly, no compensation cost has been recognized for
options granted under the Companys 2003 Equity Incentive
Plan (the Incentive Plan) as all options granted
under the Incentive Plan had an exercise price equal to the
market value of the underlying common stock on the date of
grant. Had compensation cost for the Incentive Plan been
determined based on the fair value at the grant date for awards
in the three months ended March 31, 2004 and 2003
consistent with the provisions of SFAS No. 123, the
Companys net income and earnings per share would have been
the unaudited pro forma amounts indicated below (in thousands,
except per share data):

|                                                                                                                       |                       |                    |         |       |   |   |        |      | 
|---------------------------------------------------------------------------------------------------------------------- | --------------------- | ------------------ | ------- | ----- | - | - | ------ | ---- | 
|                                                                                                                       |                       |                   
|                                                                                                                       |                       | Three Months Ended
|                                                                                                                       |                       | March 31,         
|                                                                                                                       |                       |                   
|                                                                                                                       |                       | 2004               |         | 2003 
|                                                                                                                       |                       |                    |         |      
|Net income (loss) as reported                                                                                          |                       | $                  | (13,573 | )     |   | $ | 13,670 |     
|Stock based employee compensation expense
    included in net income, net of tax                                       |                       |                    | 96      |       |   |   |       |     
|Stock based employee compensation expense
    determined under fair value based method, net of related tax
    effects |                       |                    | (1,645  | )     |   |   | (471   | )   
|                                                                                                                       |                       |                    |         |       |   |   |        |     
|Pro forma net income (loss)                                                                                            |                       | $                  | (15,122 | )     |   | $ | 13,199 |     
|                                                                                                                       |                       |                    |         |       |   |   |        |     
|Earnings (loss) per share:                                                                                             |                       |                    |         |       |   |   |        |     
|                                                                                                                       | Basic  as reported   |                    | $       | (0.16 | ) |   | $      | 0.16 | 
|                                                                                                                       |                       |                    |         |       |   |   |        |     
|                                                                                                                       | Basic  pro forma     |                    | $       | (0.18 | ) |   | $      | 0.16 | 
|                                                                                                                       |                       |                    |         |       |   |   |        |     
|                                                                                                                       | Diluted  as reported |                    | $       | (0.16 | ) |   | $      | 0.16 | 
|                                                                                                                       |                       |                    |         |       |   |   |        |     
|                                                                                                                       | Diluted  pro forma   |                    | $       | (0.18 | ) |   | $      | 0.16 | 
|                                                                                                                       |                       |                    |         |       |   |   |        |     

Reclassifications:Certain prior year items have been reclassified to conform to
the current year presentation, with no effect on previously
reported net income or stockholders equity.



|   |                             
|-- | ----------------------------
|2. | Amarin Pharmaceuticals, Inc.

On February 25, 2004, the Company acquired
from Amarin Corporation, plc its U.S.-based subsidiary, Amarin
and all of its U.S. product rights (the Amarin
Acquisition). Under the terms of the transaction, the
Company paid $38,000,000 in cash at the closing for the rights
to Amarins product portfolio, which includes Permax®
and a primary care portfolio with a broad range of indications.
The Company also acquired in the transaction the rights to
Zelapar, a late-stage candidate for the treatment of
Parkinsons disease. Amarin has received an approvable
letter from the FDA for Zelapar, subject to the completion of
two safety studies, which Amarin will fund and expects to
complete in 2004. The agreement calls for the Company to make
additional milestone payments of up to $8,000,000 to Amarin
based on the successful completion of the studies and final
approval by the FDA of Zelapar. In addition, the Company will
make a milestone payment of $10,000,000 to the developer of
Zelapar upon the attainment of specified sales thresholds.

9



---



##### Table of Contents



VALEANT PHARMACEUTICALS
INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)

The Amarin Acquisition has been accounted for
using the purchase method of accounting, and Amarins
results of operations have been included in the Companys
consolidated condensed financial statements from the date of
acquisition. Allocation of the purchase price for the Amarin
Acquisition is based on estimates of the fair value of the
assets acquired and liabilities assumed at the date of
acquisition. However, these estimates may be incomplete or
inaccurate, and unanticipated events and circumstances may
occur. Additionally, estimates for the purchase price allocation
may change as subsequent information becomes available.
Subsequent to the Amarin Acquisition, the Company became aware
of a significant amount of dated products in wholesaler
channels. Under terms of the purchase agreement, Amarin
Corporation, plc is responsible for any excess inventory at
wholesalers that existed at the date of acquisition. The Company
has established a reserve to cover sales returns consistent with
the terms of the agreement. Pro forma results are not presented
as the acquisition did not materially affect the Companys
results of operations.

The components of the purchase price allocation
for the Amarin Acquisition is as follows (in thousands):

|                |                                |   |        |        |  
|--------------- | ------------------------------ | - | ------ | ------ | -
|Purchase price: |                                |   |        |       
|                | Cash paid                      |   | $      | 38,000 |  
|                | Transaction costs              |   |        | 2,513  |  
|                | Less: Cash acquired            |   |        | (601   | )
|                |                                |   |        |       
|                |                                | $ | 39,912 |       
|                |                                |   |        |       
|Allocation:     |                                |   |        |       
|                | Current assets                 |   | $      | 2,642  |  
|                | Property, plant, and equipment |   |        | 205    |  
|                | Acquired intangible assets     |   |        | 35,616 |  
|                | Acquired IPR&D                 |   |        | 11,386 |  
|                | Other liabilities assumed      |   |        | (9,937 | )
|                |                                |   |        |       
|                |                                | $ | 39,912 |       
|                |                                |   |        |       



|   |                        
|-- | -----------------------
|3. | Discontinued Operations

In the second half of 2002, the Company made a
strategic decision to divest its Russian Pharmaceuticals
segment, biomedicals segment, Photonics business, raw materials
businesses and manufacturing capability in Central Europe and
Circe unit. During 2003, the Company disposed of its Russian
Pharmaceuticals segment, biomedicals segment, Photonics business
and Circe unit. The Company is actively marketing for sale the
raw materials businesses and manufacturing capability in Central
Europe and is working toward disposing of these assets.

10



---



##### Table of Contents



VALEANT PHARMACEUTICALS
INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)

Summarized selected financial information for
discontinued operations for the three months ended
March 31, 2004 and 2003 is as follows (in thousands):

|                                            |                                                  |                                            |        |        |        |   |        |     |     | 
|------------------------------------------- | ------------------------------------------------ | ------------------------------------------ | ------ | ------ | ------ | - | ------ | --- | --- | 
|                                            |                                                  |                                           
|                                            |                                                  | Three Months Ended                        
|                                            |                                                  | March 31,                                 
|                                            |                                                  |                                           
|                                            |                                                  | 2004                                       |        | 2003  
|                                            |                                                  |                                            |        |       
|Revenue                                     |                                                  | $                                          | 5,522  |        |        | $ | 52,345 |    
|                                            |                                                  |                                            |        |        |        |   |        |    
|Income (loss) before income taxes           |                                                  | $                                          | (2,413 | )      |        | $ | 1,886  |    
|Income tax provision                        |                                                  |                                            |       |        |        |   | (1,437 | )  
|                                            |                                                  |                                            |        |        |        |   |        |    
|                                            | Income (loss) from discontinued operations, net  |                                            |        | (2,413 | )      |   |        | 449 |    
|                                            |                                                  |                                            |        |        |        |   |        |    
|Loss on disposal of discontinued operations |                                                  |                                            | (648   | )      |        |   |       |    
|Income tax provision                        |                                                  |                                            |       |        |        |   |       |    
|                                            |                                                  |                                            |        |        |        |   |        |    
|                                            | Loss on disposal of discontinued operations, net |                                            |        | (648   | )      |   |        |    |    
|                                            |                                                  |                                            |        |        |        |   |        |    
|                                            |                                                  | Income (loss) from discontinued operations |        | $      | (3,061 | ) |        | $   | 449 | 
|                                            |                                                  |                                            |        |        |        |   |        |    

The assets and liabilities of discontinued
operations are stated separately as of March 31, 2004 and
December 31, 2003 on the accompanying consolidated
condensed balance sheets. The major assets and liability
categories are as follows (in thousands):

|                                   |                                        |           |       |              |  |   |        |        | 
|---------------------------------- | -------------------------------------- | --------- | ----- | ------------ |  | - | ------ | ------ | 
|                                   |                                        | March 31, |       | December 31,
|                                   |                                        | 2004      |       | 2003        
|                                   |                                        |           |       |             
|Cash                               |                                        | $         | 402   |              |  | $ | 913    |       
|Accounts receivable, net           |                                        |           | 8,040 |              |  |   | 6,422  |       
|Inventories, net                   |                                        |           | 9,125 |              |  |   | 10,756 |       
|Property, plant and equipment, net |                                        |           | 8,014 |              |  |   | 8,671  |       
|Other assets                       |                                        |           | 671   |              |  |   | 1,232  |       
|                                   |                                        |           |       |              |  |   |        |       
|                                   | Assets of discontinued operations      |           | $     | 26,252       |  |   | $      | 27,994 | 
|                                   |                                        |           |       |              |  |   |        |       
|Accounts payable                   |                                        | $         | 3,021 |              |  | $ | 3,127  |       
|Accrued liabilities                |                                        |           | 9,124 |              |  |   | 8,465  |       
|Other liabilities                  |                                        |           | 3,108 |              |  |   | 3,106  |       
|                                   |                                        |           |       |              |  |   |        |       
|                                   | Liabilities of discontinued operations |           | $     | 15,253       |  |   | $      | 14,698 | 
|                                   |                                        |           |       |              |  |   |        |       

Included in accumulated other comprehensive loss
are translation gains of $8,557,000 related to discontinued
operations as of March 31, 2004.



|   |                                   
|-- | ----------------------------------
|4. | Derivatives and Hedging Activities

The Company uses derivative financial instruments
to hedge foreign currency and interest rate exposures. The
Company does not speculate in derivative instruments in order to
profit from foreign currency exchange or interest rate
fluctuations; nor does the Company enter into trades for which
there is no underlying exposure.

Interest Rate Swap
Agreement:In January 2004, the
Company entered into an interest rate swap agreement with
respect to $150,000,000 principal amount of the 7.0% Senior
Notes due 2011 (the Interest Rate Swap), with the
objective of reducing interest costs. The agreement provides
that the Company will exchange its 7.0% fixed-rate payment
obligation for variable rate payments of six-month LIBOR plus
2.409% (3.7% as of March 31, 2004). While the objective of
the swap is to reduce the Companys overall interest cost,
if LIBOR rates increase over 4.59%, our cost of debt will equal
or exceed the current fixed rate amount subject

11



---



##### Table of Contents



VALEANT PHARMACEUTICALS
INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)

to the swap. The swap has terms expiring at the
maturity of the debt. The swap arrangement is with different
counterparties than the holders of the underlying debt.
Management believes that any credit risk associated with the
swap is remote based on the creditworthiness of the financial
institutions issuing the swap. The Interest Rate Swap is
designated as a fair value hedge and is deemed perfectively
effective. At March 31, 2004, the fair value of the
Interest Rate Swap was $2,693,000 and is included in other
long-term assets with an offsetting credit included in long-term
debt as a fair value adjustment.

In support of the Companys obligation under
the Interest Rate Swap, the Company is required to maintain a
minimum level of cash and investment collateral depending on the
fair market value of the Interest Rate Swap. As of
March 31, 2004, $5,684,000 is recorded on the balance sheet
in restricted cash related to collateral on the Interest Rate
Swap.

Foreign Currency Hedge
Transaction:In March 2004, the
Company entered into a series of forward contracts to reduce its
exposure to variability in the Euro compared to the
U.S. Dollar (the Hedge). The Hedge will cover
the EUR denominated royalty payments on forecasted EUR royalty
revenue.

The Hedge is designated and qualifies as a cash
flow hedge. The Hedge is consistent with the Companys risk
management policy, which allows for the hedging of risk
associated with fluctuations in foreign currency for anticipated
future transactions. The Hedge is determined to be fully
effective as a hedge in reducing the risk of the underlying
transaction. An unrealized loss of $567,000 has been recorded in
other comprehensive income as of March 31, 2004. This
unrealized loss will be reclassified into earnings as the
forward contracts are settled on a monthly basis through
December 30, 2005.

In connection with the Hedge, the Company is
required to maintain a margin account with a minimum level of
cash and investment collateral depending on the fair market
value of the Hedge. As of March 31, 2004, $1,977,000 is
recorded on the balance sheet in restricted cash related to
collateral on the Hedge.



|   |                   
|-- | ------------------
|5. | Earnings Per Share

The following table sets forth the computation of
basic and diluted earnings per share (in thousands, except per
share data):

|                                 |                                                                                                                 |                        |   |         |   |  |   |        |     | 
|-------------------------------- | --------------------------------------------------------------------------------------------------------------- | ---------------------- | - | ------- | - |  | - | ------ | --- | 
|                                 |                                                                                                                 |                       
|                                 |                                                                                                                 | Three Months Ended    
|                                 |                                                                                                                 | March 31,             
|                                 |                                                                                                                 |                       
|                                 |                                                                                                                 | 2004                   |   | 2003   
|                                 |                                                                                                                 |                        |   |        
|Income:                          |                                                                                                                 |                        |   |         |   |  |   |       
|                                 | Numerator for basic and dilutive earnings per
    share  income available to common stockholders               |                        | $ | (13,573 | ) |  | $ | 13,670 |    
|                                 |                                                                                                                 |                        |   |         |   |  |   |       
|Shares:                          |                                                                                                                 |                        |   |         |   |  |   |       
|                                 | Denominator for basic earnings per
    share  weighted-average shares outstanding                              |                        |   | 83,447  |   |  |   | 84,104 |    
|                                 | Effect of dilutive securities:                                                                                  |                        |   |         |   |  |   |        |    
|                                 |                                                                                                                 | Employee stock options |   |         |  |  |   |        | 203 | 
|                                 |                                                                                                                 |                        |   |         |   |  |   |       
|                                 | Denominator for diluted earnings per
    share  adjusted weighted-average shares after assumed
    conversions |                        |   | 83,447  |   |  |   | 84,307 |    
|                                 |                                                                                                                 |                        |   |         |   |  |   |       
|Basic earnings (loss) per share: |                                                                                                                 |                        |   |         |   |  |   |       
|                                 | Income (loss) from continuing operations                                                                        |                        | $ | (0.12   | ) |  | $ | 0.16   |    
|                                 | Discontinued operations, net of taxes                                                                           |                        |   | (0.04   | ) |  |   |       |    
|                                 |                                                                                                                 |                        |   |         |   |  |   |       
|                                 | Basic net income (loss) per share                                                                               |                        | $ | (0.16   | ) |  | $ | 0.16   |    
|                                 |                                                                                                                 |                        |   |         |   |  |   |       

12



---



##### Table of Contents



VALEANT PHARMACEUTICALS
INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)

|                                   |                                          |                    |   |       |   |  |   |      | 
|---------------------------------- | ---------------------------------------- | ------------------ | - | ----- | - |  | - | ---- | 
|                                   |                                          |                   
|                                   |                                          | Three Months Ended
|                                   |                                          | March 31,         
|                                   |                                          |                   
|                                   |                                          | 2004               |   | 2003 
|                                   |                                          |                    |   |      
|Diluted earnings (loss) per share: |                                          |                    |   |       |   |  |   |     
|                                   | Income (loss) from continuing operations |                    | $ | (0.12 | ) |  | $ | 0.16 | 
|                                   | Discontinued operations, net of taxes    |                    |   | (0.04 | ) |  |   |     | 
|                                   |                                          |                    |   |       |   |  |   |     
|                                   | Diluted net income (loss) per share      |                    | $ | (0.16 | ) |  | $ | 0.16 | 
|                                   |                                          |                    |   |       |   |  |   |     

For the three months ended March 31, 2004,
2,903,000 weighted average stock options, and for 2004 and 2003,
the effect of convertible debt, are not included in the
computation of earnings per share as such securities are
anti-dilutive.



|   |                           
|-- | --------------------------
|6. | Detail of Certain Accounts

|                                    |                                           |           |         |              |   |   |         |          |  
|----------------------------------- | ----------------------------------------- | --------- | ------- | ------------ | - | - | ------- | -------- | -
|                                    |                                           | March 31, |         | December 31,
|                                    |                                           | 2004      |         | 2003        
|                                    |                                           |           |         |             
|Accounts receivable, net:           |                                           |           |         |              |   |   |         |         
|                                    | Trade accounts receivable                 |           | $       | 106,708      |   |   | $       | 121,651  |  
|                                    | Royalties receivable                      |           |         | 25,780       |   |   |         | 36,690   |  
|                                    | Other receivables                         |           |         | 10,292       |   |   |         | 10,724   |  
|                                    |                                           |           |         |              |   |   |         |         
|                                    |                                           |           | 142,780 |              |   |   | 169,065 |         
|                                    | Allowance for doubtful accounts           |           |         | (7,727       | ) |   |         | (6,663   | )
|                                    |                                           |           |         |              |   |   |         |         
|                                    |                                           | $         | 135,053 |              |   | $ | 162,402 |         
|                                    |                                           |           |         |              |   |   |         |         
|Inventories, net:                   |                                           |           |         |              |   |   |         |         
|                                    | Raw materials and supplies                |           | $       | 30,831       |   |   | $       | 36,288   |  
|                                    | Work-in-process                           |           |         | 21,550       |   |   |         | 23,731   |  
|                                    | Finished goods                            |           |         | 61,324       |   |   |         | 43,470   |  
|                                    |                                           |           |         |              |   |   |         |         
|                                    |                                           |           | 113,705 |              |   |   | 103,489 |         
|                                    | Allowance for inventory obsolescence      |           |         | (14,006      | ) |   |         | (11,583  | )
|                                    |                                           |           |         |              |   |   |         |         
|                                    |                                           | $         | 99,699  |              |   | $ | 91,906  |         
|                                    |                                           |           |         |              |   |   |         |         
|Property, plant and equipment, net: |                                           |           |         |              |   |   |         |         
|                                    | Property, plant and equipment, at cost    |           | $       | 398,642      |   |   | $       | 399,512  |  
|                                    | Accumulated depreciation and amortization |           |         | (164,568     | ) |   |         | (158,496 | )
|                                    |                                           |           |         |              |   |   |         |         
|                                    |                                           | $         | 234,074 |              |   | $ | 241,016 |         
|                                    |                                           |           |         |              |   |   |         |         

13



---



##### Table of Contents



VALEANT PHARMACEUTICALS
INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)

Goodwill and intangible
assets:As of March 31, 2004 and
December 31, 2003, goodwill and intangible assets were as
follows (in thousands):

|                   |                   |                |   |                   |         |        |   |              |          |   |   |         |         |  |   |          |          |  
|------------------ | ----------------- | -------------- | - | ----------------- | ------- | ------ | - | ------------ | -------- | - | - | ------- | ------- |  | - | -------- | -------- | -
|                   |                   |                |   |                  
|                   |                   | March 31, 2004 |   | December 31, 2003
|                   |                   |                |   |                  
|                   |                   | Gross          |   | Accumulated       |         | Gross  |   | Accumulated 
|                   |                   | Amount         |   | Amortization      |         | Amount |   | Amortization
|                   |                   |                |   |                   |         |        |   |             
|Intangible assets: |                   |                |   |                   |         |        |   |              |          |   |   |         |         |  |   |         
|                   | Product rights    |                | $ | 558,518           |         |        | $ | (167,056     | )        |   | $ | 520,025 |         |  | $ | (158,743 | )       
|                   | License agreement |                |   | 67,376            |         |        |   | (11,887      | )        |   |   | 67,376  |         |  |   | (6,911   | )       
|                   | Goodwill          |                |   | 13,319            |         |        |   |             |          |   |   | 13,282  |         |  |   |         |         
|                   |                   |                |   |                   |         |        |   |              |          |   |   |         |         |  |   |         
|                   |                   | Total          |   | $                 | 639,213 |        |   | $            | (178,943 | ) |   | $       | 600,683 |  |   | $        | (165,654 | )
|                   |                   |                |   |                   |         |        |   |              |          |   |   |         |         |  |   |         

Amortization expense for the three months ended
March 31, 2004 was $13,287,000. Estimated amortization
expense for the years ending December 31, 2004, 2005, 2006,
2007 and 2008 is $54,000,000, $54,000,000, $49,000,000,
$33,000,000 and $32,000,000, respectively.



|   |                              
|-- | -----------------------------
|7. | Commitments and Contingencies

Ribapharm Tender Offer
Litigation:In June 2003, seven
purported class actions on behalf of certain stockholders of
Ribapharm were filed against the Company, Ribapharm and certain
directors and officers of Ribapharm in the Delaware Court of
Chancery. Six of these complaints were consolidated under the
caption In re Ribapharm Inc. Shareholders Litigation,
Consol. C.A. No. 20337. The seventh suit has not yet been
formally consolidated into C.A. No. 20337 but is proceeding
in coordination with the consolidated case. On June 26,
2003, the plaintiffs in the consolidated action filed a First
Amended Class Action Complaint naming only the Company as a
defendant. The First Amended Class Action Complaint
alleges, among other things, that the Company breached its
fiduciary duties as a controlling stockholder of Ribapharm in
connection with its tender offer for the shares of Ribapharm it
did not already own. On August 4, 2003, the Company and the
plaintiffs reached an agreement in principle to settle these
lawsuits for a nominal amount and, after settlement papers are
prepared, will present that settlement to the Court of Chancery
for its approval.

On June 25, 2003, the Company instituted a
suit captioned ICN Pharmaceuticals, Inc. v. Ribapharm,
Inc., Daniel J. Paracka, Santo J. Costa, Gregory F. Boron, James
Pieczynski and Andre Dimitriadis, C.A. No. 20387
for declaratory and injunctive relief against Ribapharm and
certain of its directors in the Delaware Court of Chancery. This
complaint alleges, among other things, that the defendants
breached their fiduciary duties and certain contracts by
implementing a shareholder rights plan in response to the
Companys tender offer. The Company requested a preliminary
injunction hearing prior to the expiration of the tender offer
on July 22, 2003 and sought a temporary restraining order
barring the defendants from taking certain actions with respect
to Ribapharms newly enacted shareholders rights plan. On
June 30, 2003, the Court of Chancery scheduled a
preliminary injunction hearing for September 3, 2003. This
hearing did not occur because the parties had reached an
agreement in principle to settle this lawsuit for a nominal
amount.

On June 27, 2003, a purported class action
on behalf of certain stockholders of Ribapharm was filed against
the Company in the Delaware Court of Chancery. This class action
is captioned Maxine Phillips, Robert Garfield, Nora Mazzini,
Andrew Samet, Kathleen A. Pasek, Richard Jacob and Steven
Silverberg v. ICN Pharmaceuticals, Inc., C.A.
No. 20391, and seeks a declaration that the shareholders
rights plan is valid and enforceable. This action has been
consolidated with the suit instituted by the Company on
June 25, 2003 and captioned In re Ribapharm, Inc. Rights
Plan Litigation, Consol. C.A. No. 20387. On
August 4, 2003, the Company and the plaintiffs reached an
agreement in principle to settle this lawsuit. Such settlement
will be completed in combination with the settlement In re
Ribapharm Inc. Shareholders Litigation, Consol. C.A.
No. 20337.

14



---



##### Table of Contents



VALEANT PHARMACEUTICALS
INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)

On June 3, 2003, a purported class action,
captioned Len Brody v. Roberts A. Smith, Andre C.
Dimitriadis, Santo J. Costa, James J. Peiczynski, Daniel J.
Paracka, Gregory F. Boron, Ribapharm, Inc. and ICN
Pharmaceuticals, Inc., Case No. 03 CC 00211,
was filed in the Superior Court of Orange County, California,
against the Company, Ribapharm and certain of Ribapharms
officers and directors. The complaint in this action purports to
assert the same claims, on behalf of the same class of
plaintiffs and against the same defendants as in the seven
lawsuits filed in Delaware that are described above. This
California action has been stayed in light of the settlement of
the Delaware tender offer litigation. The settlement of the
Delaware tender offer litigation has been designed to release
the claims brought in this lawsuit, although the decision as to
effect of that release will be subject to the discretion of the
California court.

In the opinion of management, the ultimate
resolution of these matters will not have a material effect on
the Companys consolidated financial position, results of
operations or liquidity.

Derivative Actions:The Company is a nominal defendant in a shareholder derivative
lawsuit pending in state court in Orange County, California.
This lawsuit, which was filed on June 6, 2002, purports to
assert derivative claims on behalf of the Company against
certain current and/or former officers and directors of the
Company. The lawsuit asserts claims for breach of fiduciary
duties, abuse of control, gross mismanagement and waste of
corporate assets. The plaintiff seeks, among other things,
damages and a constructive trust over cash bonuses paid to the
officer and director defendants in connection with the Ribapharm
Offering (the Ribapharm Bonuses). Because it is a
derivative lawsuit, the plaintiff does not seek recovery from
the Company but rather on behalf of the Company.

On October 1, 2002, several former and
current directors of the Company, as individuals, as well as the
Company, as a nominal defendant, were named as defendants in a
second shareholders derivative complaint filed in Delaware
Chancery Court. The complaint purports to state causes of action
for violation of Delaware General Corporate Law
Section 144, breach of fiduciary duties and waste of
corporate assets in connection with the defendants
management of the Company. Because it is a derivative lawsuit,
the complaint does not seek recovery from the Company but rather
on behalf of the Company. The allegations largely duplicate
those contained in the derivative lawsuit filed in Orange
County, California, but add a disclosure-based claim relating to
the allegations of federal securities law violations made in the
class actions.

The Company established a Special Litigation
Committee to evaluate the plaintiffs claims in both
derivative actions. The Special Litigation Committee concluded
that it would not be in the best interest of the Companys
shareholders to pursue many of the claims in these two lawsuits,
but decided to pursue, through litigation or settlement, claims
arising from the April 2002 decision of the Board to approve the
payment of approximately $50,000,000 in bonuses to various
members of the Board and management arising from the initial
public offering of Ribapharm. On April 25, 2003, the
Company filed a motion to stay or dismiss the California
plaintiffs complaint in favor of the Company amending the
existing Delaware derivative action to substitute the Company as
the plaintiff. Following limited discovery pertaining to the
Special Litigation Committees investigation, the Court
granted the Companys motion. The Court stayed the
plaintiffs prosecution of the claim concerning the
Ribapharm bonuses in favor of similar proceedings in Delaware,
and dismissed each of the plaintiffs remaining claims with
prejudice. On June 27, 2003, pursuant to the Special
Litigation Committees recommendation, the Company filed a
motion in the Delaware derivative action to (a) realign
itself as plaintiff in this section, (b) pursue the primary
derivative claims relating to the Ribapharm Bonuses,
(c) seek dismissal of the secondary derivative claims, and
(d) settle certain claims with respect to certain of the
defendants. The Court granted the Companys motion for
realignment on October 27, 2003. Additional aspects of the
Companys motion are still pending.

Securities
Class Actions:Since
July 25, 2002, multiple class actions have been filed in
the United States District Courts for the Eastern District of
New York, the District of New Jersey and the Central
District of California against the Company and some of its
current and former executive officers. The lawsuits allege that
the defendants violated Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, and Rule 10b-5

15



---



##### Table of Contents



VALEANT PHARMACEUTICALS
INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)

promulgated thereunder, by issuing false and
misleading financial results to the market during different
class periods ranging from May 3, 2001 to July 10,
2002, thereby artificially inflating the price of the
Companys stock. The lawsuits generally claim that the
Company issued false and misleading statements regarding the
Companys earnings prospects and sales figures, its
operations in Russia and the earnings and sales of its Photonics
division. The plaintiffs generally seek to recover compensatory
damages, including interest. The actions filed in the Eastern
District of New York and the District of New Jersey have
been transferred to the Central District of California by
stipulation of the parties. The parties to all of the class
actions pending in the Central District of California have filed
an Initial Case Management Order seeking to have all related
actions consolidated before the Honorable David O. Carter. The
Company filed a motion to dismiss plaintiffs consolidated
amended complaint on August 29, 2003, which the Court
granted in January 2004. The plaintiffs filed a second amended
consolidated complaint in February 2004. The Company filed a
motion to dismiss plaintiffs second amended consolidated
complaint and a hearing on that motion is scheduled for
May 24, 2004.

On May 9, 2003, a bondholder filed a class
action lawsuit in Orange County Superior Court against the
Company and some of its current and former directors and
executive officers. The lawsuit alleges that defendants violated
Sections 11 and 15 of the Securities Act of 1933 by making
false and misleading statements in connection with an offering
of Convertible Subordinated Notes in November 2001, thereby
artificially inflating the market price of the Notes. The
plaintiffs generally seek to recover compensatory damages,
including interest. The Company removed this action to federal
court, and the plaintiff filed an amended complaint on
December 17, 2003. The Company filed a motion to dismiss
the amended complaint, and a hearing on that motion is currently
scheduled for May 24, 2004.

Generic Litigation:Three generic pharmaceutical companies, Geneva Pharmaceuticals
Technology Corporation, which merged into its parent Geneva
Pharmaceuticals, Inc. (Geneva), Three Rivers
Pharmaceuticals, LLC (Three Rivers) and Teva
Pharmaceuticals USA, Inc. (Teva), filed Abbreviated
New Drug Applications (ANDA) with the FDA to market
generic forms of ribavirin for use as part of a combination
therapy for the treatment of hepatitis C. The Company sued
all three of these pharmaceutical companies to prevent them from
marketing a generic form of ribavirin in the United States
market. The three cases were all before the same judge, and
summary judgment motions were filed by the defendants. In July
2003, the U.S. District Court for the Central District of
California issued a memorandum of decision and order granting
the defendants their motion for summary judgment of
non-infringement of the asserted patents in the patent
infringement suit brought by the Company. On August 11,
2003, the District Court ordered entry of judgment dismissing
the action against Teva and Three Rivers based on its July
decision. On September 10, 2003, the Company filed notices
of appeal with respect to these judgments. The District Court
also entered an order on October 14, 2003 certifying its
July 2003 decision as a final appealable decision with respect
Geneva, and on October 16, 2003, the Company filed a notice
of appeal of the July decision in the Geneva actions. On
October 28, 2003, the Federal Circuit consolidated the
Geneva, Teva, and Three Rivers appeals. The Company filed its
initial brief on December 29, 2003, and opposing briefs
were filed on February 20, 2004. Oral arguments on the
appeal are scheduled for June 8, 2004.

On July 17, 2003, the Company filed a
Citizens Petition with the FDA requesting that the
Commissioner of Food and Drugs refrain from approving ANDA for
ribavirin products with labeling that omits information about
the products use in combination with PEG-Intron®
(peginterferon alfa-2b). On April 6, 2004 the
Citizens Petition was denied and the FDA approved the
marketing and sale of generic ribavirin by Teva and Three
Rivers. The entry of these generic pharmaceutical companies into
the U.S. market will have a material negative impact on the
Companys future U.S. royalty revenue. The Company is
considering its response to these developments, including
whether it should impact the Companys appeal of the
generic litigation.

Patents:Various
parties are opposing the Companys ribavirin patents in
actions before the European Patent Office, and the Company is
responding to these oppositions. Regardless of the outcome of
these

16



---



##### Table of Contents



VALEANT PHARMACEUTICALS
INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)

oppositions, the Company believes the combination
therapies marketed by Schering and Roche will continue to
benefit from a period of data and marketing protection in the
major markets of the European Union until 2009 for Schering and
2012 for Roche.

Yugoslavia:In March
1999, arbitration was initiated in the following matters before
the International Chamber of Commerce International Court of
Arbitration: (a) State Health Fund of Serbia v. ICN
Pharmaceuticals, Inc., Case No. 10 373/AMW/BDW, and
(b) ICN Pharmaceuticals, Inc. v. Federal Republic of
Yugoslavia and Republic of Serbia, Case
No. 10 439/BWD. At issue in these matters is the
parties respective ownership percentages in ICN
Yugoslavia, a joint venture formed by the parties
purported predecessors-in-interest in 1990.

In these proceedings, the Company has asserted
claims and counterclaims against the Federal Republic of
Yugoslavia and the Republic of Serbia for unlawful expropriation
of its majority interest in the joint venture, failure to pay
obligations in excess of $176,000,000, violation of a
contractual right of first refusal regarding the minority
owners sale of its interest, and failure to return the
Companys contributed intangible assets following partial
appropriation of the Companys majority interest. The State
Health Fund of Serbia has asserted a claim against the Company
for breach of the joint venture agreement based on the
Companys alleged failure to contribute certain intangible
assets and alleged mismanagement. The final arbitral hearings in
this matter were held March 29 and March 30, 2004 and
the Company is awaiting the decision of the arbitrator.

Circe:The former
shareholders (the Circe Shareholders) of Circe
Biomedical, Inc. (Circe) filed in July 2003 a demand
for arbitration claiming indemnification from the Company for
approximately $10,000,000 of purported financial losses, based
on provisions of an agreement entered into at the time the
Company acquired Circe. The Circe Shareholders claim to have
suffered such losses as a result of the Companys alleged
breach of its obligations to register for resale the Company
shares issued to the Circe Shareholders as part of the purchase
price for the Circe acquisition. The arbitration hearing,
previously scheduled for May 2004, has been postponed
indefinitely. Instead of proceeding to hearing, the parties will
brief the issue of whether alleged damages were excluded by the
parties contract. The Company intends to vigorously defend
against the claim.

Other:The Company
has also identified potential violations of the U.S. Asset
Control Regulations by its subsidiaries with respect to certain
business transactions. The Company submitted a voluntary
disclosure of the potential violations to the Office of Foreign
Assets Control, and reached an agreement to settle the matter in
March 2004. The Company is a party to other pending lawsuits or
subject to a number of threatened lawsuits. While the ultimate
outcome of pending and threatened lawsuits or pending violations
cannot be predicted with certainty, and an unfavorable outcome
could have a negative impact on the Company, at this time in the
opinion of management, the ultimate resolution of these matters
will not have a material effect on the Companys
consolidated financial position, results of operations or
liquidity.



|   |                  
|-- | -----------------
|8. | Business Segments

The Company has four reportable pharmaceutical
segments comprising the Companys pharmaceutical operations
in North America, Latin America, Europe and Asia, Africa and
Australia. In addition, the Company has a research and
development division. The segment reporting has been
reclassified to conform to discontinued operations presentation
for all periods presented. See Note 3 for discussion of
discontinued operations.

17



---



##### Table of Contents



VALEANT PHARMACEUTICALS
INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)

The following table sets forth the amounts of
segment revenues and operating income of the Company for the
three months ended March 31, 2004 and 2003 (in thousands):

|                |                         |                       |   |        |         |  |   |        |         | 
|--------------- | ----------------------- | --------------------- | - | ------ | ------- |  | - | ------ | ------- | 
|                |                         |                      
|                |                         | Three Months Ended   
|                |                         | March 31,            
|                |                         |                      
|                |                         | 2004                  |   | 2003  
|                |                         |                       |   |       
|Revenues        |                         |                       |   |        |         |  |   |       
|Pharmaceuticals |                         |                       |   |        |         |  |   |       
|                | North America           |                       | $ | 27,629 |         |  | $ | 15,371 |        
|                | Latin America           |                       |   | 29,153 |         |  |   | 26,371 |        
|                | Europe                  |                       |   | 63,119 |         |  |   | 55,576 |        
|                | Asia, Africa, Australia |                       |   | 12,424 |         |  |   | 12,816 |        
|                |                         |                       |   |        |         |  |   |       
|                |                         | Total pharmaceuticals |   |        | 132,325 |  |   |        | 110,134 | 
|                | Royalty revenues        |                       |   | 25,377 |         |  |   | 48,583 |        
|                |                         |                       |   |        |         |  |   |       
|                |                         | Consolidated revenues |   | $      | 157,702 |  |   | $      | 158,717 | 
|                |                         |                       |   |        |         |  |   |       

18



---



##### Table of Contents



VALEANT PHARMACEUTICALS
INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)

|                        |                                                                                               |                       |        |         |       |  |        |         |        | 
|----------------------- | --------------------------------------------------------------------------------------------- | --------------------- | ------ | ------- | ----- |  | ------ | ------- | ------ | 
|                        |                                                                                               |                      
|                        |                                                                                               | Three Months Ended   
|                        |                                                                                               | March 31,            
|                        |                                                                                               |                      
|                        |                                                                                               | 2004                  |        | 2003   
|                        |                                                                                               |                       |        |        
|Operating Income (Loss) |                                                                                               |                       |        |         |       |  |        |        
|Pharmaceuticals         |                                                                                               |                       |        |         |       |  |        |        
|                        | North America                                                                                 |                       | $      | 6,884   |       |  | $      | (2,931  | )     
|                        | Latin America                                                                                 |                       |        | 5,813   |       |  |        | 6,779   |       
|                        | Europe                                                                                        |                       |        | 8,614   |       |  |        | 7,138   |       
|                        | Asia, Africa, Australia                                                                       |                       |        | (123    | )     |  |        | 1,650   |       
|                        |                                                                                               |                       |        |         |       |  |        |        
|                        |                                                                                               |                       | 21,188 |         |       |  | 12,636 |        
|                        | IPR&D(1)                                                                                      |                       |        | (11,386 | )     |  |        |        |       
|                        |                                                                                               |                       |        |         |       |  |        |        
|                        |                                                                                               | Total pharmaceuticals |        |         | 9,802 |  |        |         | 12,636 | 
|                        | Research and development                                                                      |                       |        | (972    | )     |  |        | 33,543  |       
|                        |                                                                                               |                       |        |         |       |  |        |        
|                        | Consolidated segment operating income                                                         |                       |        | 8,830   |       |  |        | 46,179  |       
|                        | Corporate expenses                                                                            |                       |        | (12,593 | )     |  |        | (13,798 | )     
|                        | Interest income                                                                               |                       |        | 3,060   |       |  |        | 982     |       
|                        | Interest expense                                                                              |                       |        | (14,959 | )     |  |        | (8,292  | )     
|                        | Other, net                                                                                    |                       |        | (1,046  | )     |  |        | 4,091   |       
|                        |                                                                                               |                       |        |         |       |  |        |        
|                        | Income from continuing operations before
    provision for income taxes and minority interest |                       | $      | (16,708 | )     |  | $      | 29,162  |       
|                        |                                                                                               |                       |        |         |       |  |        |        




|    |                                                                                                                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | IPR&D is not included in the North America
    pharmaceutical segment as the Companys chief decision
    maker excludes this item in assessing the financial performance
    of this segment, primarily due to its non-operational nature.

The following table sets forth the segment total
assets of the Company as of March 31, 2004 and
December 31, 2003 (in thousands):

|                         |                         |                       |           |              |         |   |           |         |         | 
|------------------------ | ----------------------- | --------------------- | --------- | ------------ | ------- | - | --------- | ------- | ------- | 
|                         |                         |                      
|                         |                         | Total Assets         
|                         |                         |                      
|                         |                         | March 31,             |           | December 31,
|                         |                         | 2004                  |           | 2003        
|                         |                         |                       |           |             
|Pharmaceuticals          |                         |                       |           |              |         |   |           |        
|                         | North America           |                       | $         | 437,916      |         |   | $         | 400,265 |        
|                         | Latin America           |                       |           | 109,242      |         |   |           | 105,333 |        
|                         | Europe                  |                       |           | 339,212      |         |   |           | 350,142 |        
|                         | Asia, Africa, Australia |                       |           | 22,921       |         |   |           | 25,631  |        
|                         |                         |                       |           |              |         |   |           |        
|                         |                         | Total pharmaceuticals |           |              | 909,291 |   |           |         | 881,371 | 
|Corporate                |                         |                       | 791,752   |              |         |   | 853,718   |        
|Research and development |                         |                       | 228,894   |              |         |   | 213,854   |        
|Discontinued operations  |                         |                       | 26,252    |              |         |   | 27,994    |        
|                         |                         |                       |           |              |         |   |           |        
|Total                    |                         | $                     | 1,956,189 |              |         | $ | 1,976,937 |        
|                         |                         |                       |           |              |         |   |           |        

19



---



##### Table of Contents



VALEANT PHARMACEUTICALS
INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)



|   |                                    
|-- | -----------------------------------
|9. | Consolidating Financial Information

The Company and Ribapharm are jointly and
severally liable for the obligations under the
3.0% Convertible Subordinated Notes due 2010,
4.0% Convertible Subordinated Notes due 2013,
7.0% Senior Notes due 2011 and 6 1/2% Convertible
Subordinated Notes due 2008. Ribapharm is an obligor under the
3.0% Notes, 4.0% Notes and 7.0% Notes only for so
long as Ribapharm shall have obligations under the
6 1/2% Notes. The Company intends to repurchase the
remaining 6 1/2% Notes outstanding in July 2004. The
following consolidating financial statements show the financial
position, results of operations and cash flows for Valeant,
Ribapharm, Valeant Non-Obligor Subsidiaries and eliminations
necessary to arrive at the Companys consolidated financial
position, results of operations and cash flows for the periods
presented. The consolidating statements of the results of
operations and cash flows for the three months ended
March 31, 2003 are not presented as Ribapharm was not a
wholly-owned subsidiary as of these dates. See Ribapharms
financial statements in their Form 10-Q for the quarter
ended March 31, 2003.

20



---



##### Table of Contents



VALEANT PHARMACEUTICALS
INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)

Consolidating Condensed Balance Sheet as of
March 31, 2004

(Unaudited, in thousands)


|                                            |                                                         |                               |           |           |           |              |           |              |           |                 |         |         |         |   |            |          |            |   |           |          |           | 
|------------------------------------------- | ------------------------------------------------------- | ----------------------------- | --------- | --------- | --------- | ------------ | --------- | ------------ | --------- | --------------- | ------- | ------- | ------- | - | ---------- | -------- | ---------- | - | --------- | -------- | --------- | 
|                                            |                                                         | Valeant                       |           |           |           | Valeant      |           |              |           | Valeant        
|                                            |                                                         | Obligor                       |           |           |           | Non-Obligor  |           |              |           | Pharmaceuticals
|                                            |                                                         | Subsidiary                    |           | Ribapharm |           | Subsidiaries |           | Eliminations |           | International  
|                                            |                                                         |                               |           |           |           |              |           |              |           |                
|ASSETS                                     
|Current Assets:                             |                                                         |                               |           |           |           |              |           |              |           |                 |         |         |         |   |            |          |            |   |           |         
|                                            | Cash and cash equivalents                               |                               | $         | 589,713   |           |              | $         | 101,172      |           |                 | $       | 154,631 |         |   | $          |         |            |   | $         | 845,516  |          
|                                            | Restricted cash                                         |                               |           | 7,819     |           |              |           |             |           |                 |         |        |         |   |            |         |            |   |           | 7,819    |          
|                                            | Accounts receivable, net                                |                               |           | 14,148    |           |              |           | 25,780       |           |                 |         | 95,125  |         |   |            |         |            |   |           | 135,053  |          
|                                            | Inventories, net                                        |                               |           | 10,309    |           |              |           |             |           |                 |         | 99,875  |         |   |            | (10,485  | )          |   |           | 99,699   |          
|                                            | Prepaid expenses and other current assets               |                               |           | 4,051     |           |              |           | 2,200        |           |                 |         | 7,467   |         |   |            |         |            |   |           | 13,718   |          
|                                            |                                                         |                               |           |           |           |              |           |              |           |                 |         |         |         |   |            |          |            |   |           |         
|                                            |                                                         | Total current assets          |           |           | 626,040   |              |           |              | 129,152   |                 |         |         | 357,098 |   |            |          | (10,485    | ) |           |          | 1,101,805 | 
|Property, plant and equipment, net          |                                                         |                               | 55,236    |           |           |              | 9,129     |              |           |                 | 169,709 |         |         |   |           |          |            |   | 234,074   |         
|Deferred tax assets, net                    |                                                         |                               | 78,819    |           |           |              |          |              |           |                 | 2,315   |         |         |   |           |          |            |   | 81,134    |         
|Intangible assets, net                      |                                                         |                               | 190,235   |           |           |              | 68,590    |              |           |                 | 201,445 |         |         |   |           |          |            |   | 460,270   |         
|Other assets                                |                                                         |                               | 32,184    |           |           |              | 24        |              |           |                 | 20,446  |         |         |   |           |          |            |   | 52,654    |         
|Investment in subsidiaries                  |                                                         |                               | 841,517   |           |           |              |          |              |           |                 | 142,482 |         |         |   | (983,999   | )        |            |   |          |         
|                                            |                                                         |                               |           |           |           |              |           |              |           |                 |         |         |         |   |            |          |            |   |           |         
|                                            |                                                         | Total non-current assets      |           |           | 1,197,991 |              |           |              | 77,743    |                 |         |         | 536,397 |   |            |          | (983,999   | ) |           |          | 828,132   | 
|Assets of discontinued operations           |                                                         |                               | 201       |           |           |              |          |              |           |                 | 26,051  |         |         |   |           |          |            |   | 26,252    |         
|                                            |                                                         |                               |           |           |           |              |           |              |           |                 |         |         |         |   |            |          |            |   |           |         
|                                            |                                                         | $                             | 1,824,232 |           |           | $            | 206,895   |              |           | $               | 919,546 |         |         | $ | (994,484   | )        |            | $ | 1,956,189 |         
|                                            |                                                         |                               |           |           |           |              |           |              |           |                 |         |         |         |   |            |          |            |   |           |         
|                                           
|LIABILITIES AND STOCKHOLDERS
    EQUITY   
|Current Liabilities:                        |                                                         |                               |           |           |           |              |           |              |           |                 |         |         |         |   |            |          |            |   |           |         
|                                            | Trade payables                                          |                               | $         | 8,828     |           |              | $         | 222          |           |                 | $       | 21,017  |         |   | $          |         |            |   | $         | 30,067   |          
|                                            | Accrued liabilities                                     |                               |           | 62,858    |           |              |           | 27,365       |           |                 |         | 40,170  |         |   |            | (14,965  | )          |   |           | 115,428  |          
|                                            | Notes payable and current portion of long-term
    debt |                               |           |          |           |              |           |             |           |                 |         | 1,294   |         |   |            |         |            |   |           | 1,294    |          
|                                            | Income taxes payable                                    |                               |           | 4,828     |           |              |           |             |           |                 |         | 5,742   |         |   |            |         |            |   |           | 10,570   |          
|                                            | Intercompany payables (receivables)                     |                               |           | (24,153   | )         |              |           | (25,126      | )         |                 |         | 44,021  |         |   |            | 5,258    |            |   |           |         |          
|                                            |                                                         |                               |           |           |           |              |           |              |           |                 |         |         |         |   |            |          |            |   |           |         
|                                            |                                                         | Total current liabilities     |           |           | 52,361    |              |           |              | 2,461     |                 |         |         | 112,244 |   |            |          | (9,707     | ) |           |          | 157,359   | 
|Long-term debt, less current portion        |                                                         |                               | 1,108,694 |           |           |              | 1,108,694 |              |           |                 | 12,955  |         |         |   | (1,108,694 | )        |            |   | 1,121,649 |         
|Deferred income taxes and other liabilities |                                                         |                               | 38,185    |           |           |              |          |              |           |                 | 33,156  |         |         |   |           |          |            |   | 71,341    |         
|Minority interest                           |                                                         |                               |          |           |           |              |          |              |           |                 | 3,479   |         |         |   |           |          |            |   | 3,479     |         
|Advances from (to) affiliates               |                                                         |                               | (38,815   | )         |           |              |          |              |           |                 | 44,052  |         |         |   | (5,237     | )        |            |   |          |         
|                                            |                                                         |                               |           |           |           |              |           |              |           |                 |         |         |         |   |            |          |            |   |           |         
|                                            |                                                         | Total non-current liabilities |           |           | 1,108,064 |              |           |              | 1,108,694 |                 |         |         | 93,642  |   |            |          | (1,113,931 | ) |           |          | 1,196,469 | 
|Liabilities of discontinued operations      |                                                         |                               | 6,001     |           |           |              |          |              |           |                 | 9,252   |         |         |   |           |          |            |   | 15,253    |         
|                                            |                                                         |                               |           |           |           |              |           |              |           |                 |         |         |         |   |            |          |            |   |           |         
|Commitments and contingencies               |                                                         |                               |           |           |           |              |           |              |           |                 |         |         |         |   |            |          |            |   |           |         
|Stockholders Equity:                       |                                                         |                               |           |           |           |              |           |              |           |                 |         |         |         |   |            |          |            |   |           |         
|                                            | Common stock                                            |                               |           | 838       |           |              |           | 1,500        |           |                 |         | 155,158 |         |   |            | (156,660 | )          |   |           | 836      |          
|                                            | Additional capital                                      |                               |           | 984,432   |           |              |           | (952,092     | )         |                 |         | 398,290 |         |   |            | 551,638  |            |   |           | 982,268  |          
|                                            | Accumulated deficit                                     |                               |           | (328,018  | )         |              |           | 46,332       |           |                 |         | 189,050 |         |   |            | (265,824 | )          |   |           | (358,460 | )        
|                                            | Accumulated other comprehensive loss                    |                               |           | 554       |           |              |           |             |           |                 |         | (38,090 | )       |   |            |         |            |   |           | (37,536  | )        
|                                            |                                                         |                               |           |           |           |              |           |              |           |                 |         |         |         |   |            |          |            |   |           |         
|                                            |                                                         | Total stockholders equity    |           |           | 657,806   |              |           |              | (904,260  | )               |         |         | 704,408 |   |            |          | 129,154    |   |           |          | 587,108   | 
|                                            |                                                         |                               |           |           |           |              |           |              |           |                 |         |         |         |   |            |          |            |   |           |         
|                                            |                                                         | $                             | 1,824,232 |           |           | $            | 206,895   |              |           | $               | 919,546 |         |         | $ | (994,484   | )        |            | $ | 1,956,189 |         
|                                            |                                                         |                               |           |           |           |              |           |              |           |                 |         |         |         |   |            |          |            |   |           |         

21



---



##### Table of Contents



VALEANT PHARMACEUTICALS
INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)

Consolidating Condensed Balance Sheet as of
December 31, 2003

(In thousands)


|                                                        |                                                         |                               |           |           |           |              |           |              |           |                 |         |         |         |   |            |          |            |   |           |          |           | 
|------------------------------------------------------- | ------------------------------------------------------- | ----------------------------- | --------- | --------- | --------- | ------------ | --------- | ------------ | --------- | --------------- | ------- | ------- | ------- | - | ---------- | -------- | ---------- | - | --------- | -------- | --------- | 
|                                                        |                                                         | Valeant                       |           |           |           | Valeant Non- |           |              |           | Valeant        
|                                                        |                                                         | Obligor                       |           |           |           | Obligor      |           |              |           | Pharmaceuticals
|                                                        |                                                         | Subsidiary                    |           | Ribapharm |           | Subsidiaries |           | Eliminations |           | International  
|                                                        |                                                         |                               |           |           |           |              |           |              |           |                
|ASSETS                                                 
|Current Assets:                                         |                                                         |                               |           |           |           |              |           |              |           |                 |         |         |         |   |            |          |            |   |           |         
|                                                        | Cash and cash equivalents                               |                               | $         | 664,586   |           |              | $         | 90,595       |           |                 | $       | 116,875 |         |   | $          |         |            |   | $         | 872,056  |          
|                                                        | Restricted cash                                         |                               |           | 1,925     |           |              |           |             |           |                 |         |        |         |   |            |         |            |   |           | 1,925    |          
|                                                        | Accounts receivable, net                                |                               |           | 17,867    |           |              |           | 36,690       |           |                 |         | 107,845 |         |   |            |         |            |   |           | 162,402  |          
|                                                        | Inventories, net                                        |                               |           | 7,252     |           |              |           |             |           |                 |         | 96,001  |         |   |            | (11,347  | )          |   |           | 91,906   |          
|                                                        | Prepaid expenses and other current assets               |                               |           | 4,483     |           |              |           | 3,159        |           |                 |         | 6,221   |         |   |            |         |            |   |           | 13,863   |          
|                                                        |                                                         |                               |           |           |           |              |           |              |           |                 |         |         |         |   |            |          |            |   |           |         
|                                                        |                                                         | Total current assets          |           |           | 696,113   |              |           |              | 130,444   |                 |         |         | 326,942 |   |            |          | (11,347    | ) |           |          | 1,142,152 | 
|Property, plant and equipment, net                      |                                                         |                               | 55,108    |           |           |              | 9,856     |              |           |                 | 176,052 |         |         |   |           |          |            |   | 241,016   |         
|Deferred tax assets, net                                |                                                         |                               | 66,090    |           |           |              |          |              |           |                 | 2,511   |         |         |   |           |          |            |   | 68,601    |         
|Intangible assets, net                                  |                                                         |                               | 154,807   |           |           |              | 73,530    |              |           |                 | 206,692 |         |         |   |           |          |            |   | 435,029   |         
|Other assets                                            |                                                         |                               | 37,187    |           |           |              | 24        |              |           |                 | 24,934  |         |         |   |           |          |            |   | 62,145    |         
|Investment in subsidiaries                              |                                                         |                               | 819,480   |           |           |              |          |              |           |                 | 115,320 |         |         |   | (934,800   | )        |            |   |          |         
|                                                        |                                                         |                               |           |           |           |              |           |              |           |                 |         |         |         |   |            |          |            |   |           |         
|                                                        |                                                         | Total non-current assets      |           |           | 1,132,672 |              |           |              | 83,410    |                 |         |         | 525,509 |   |            |          | (934,800   | ) |           |          | 806,791   | 
|Assets of discontinued operations                       |                                                         |                               | 235       |           |           |              |          |              |           |                 | 27,759  |         |         |   |           |          |            |   | 27,994    |         
|                                                        |                                                         |                               |           |           |           |              |           |              |           |                 |         |         |         |   |            |          |            |   |           |         
|                                                        |                                                         | $                             | 1,829,020 |           |           | $            | 213,854   |              |           | $               | 880,210 |         |         | $ | (946,147   | )        |            | $ | 1,976,937 |         
|                                                        |                                                         |                               |           |           |           |              |           |              |           |                 |         |         |         |   |            |          |            |   |           |         
|                                                       
|LIABILITIES AND STOCKHOLDERS
    EQUITY               
|Current Liabilities:                                    |                                                         |                               |           |           |           |              |           |              |           |                 |         |         |         |   |            |          |            |   |           |         
|                                                        | Trade payables                                          |                               | $         | 9,977     |           |              | $         | 1,855        |           |                 | $       | 24,241  |         |   | $          |         |            |   | $         | 36,073   |          
|                                                        | Accrued liabilities                                     |                               |           | 60,072    |           |              |           | 21,279       |           |                 |         | 45,847  |         |   |            | (12,792  | )          |   |           | 114,406  |          
|                                                        | Notes payable and current portion of long-term
    debt |                               |           |          |           |              |           |             |           |                 |         | 1,343   |         |   |            |         |            |   |           | 1,343    |          
|                                                        | Income taxes payable                                    |                               |           | 7,200     |           |              |           |             |           |                 |         | 7,762   |         |   |            |         |            |   |           | 14,962   |          
|                                                        | Intercompany payables (receivables)                     |                               |           | (68,645   | )         |              |           | 35,996       |           |                 |         | 27,409  |         |   |            | 5,240    |            |   |           |         |          
|                                                        |                                                         |                               |           |           |           |              |           |              |           |                 |         |         |         |   |            |          |            |   |           |         
|                                                        |                                                         | Total current liabilities     |           |           | 8,604     |              |           |              | 59,130    |                 |         |         | 106,602 |   |            |          | (7,552     | ) |           |          | 166,784   | 
|Long-term debt, less current portion                    |                                                         |                               | 1,106,001 |           |           |              | 1,106,001 |              |           |                 | 13,800  |         |         |   | (1,106,000 | )        |            |   | 1,119,802 |         
|Deferred income taxes and other liabilities             |                                                         |                               | 38,368    |           |           |              |          |              |           |                 | 28,431  |         |         |   |           |          |            |   | 66,799    |         
|Minority interest                                       |                                                         |                               |          |           |           |              |          |              |           |                 | 3,493   |         |         |   |           |          |            |   | 3,493     |         
|Advances from (to) affiliates                           |                                                         |                               | (40,715   | )         |           |              |          |              |           |                 | 45,953  |         |         |   | (5,238     | )        |            |   |          |         
|                                                        |                                                         |                               |           |           |           |              |           |              |           |                 |         |         |         |   |            |          |            |   |           |         
|                                                        |                                                         | Total non-current liabilities |           |           | 1,103,654 |              |           |              | 1,106,001 |                 |         |         | 91,677  |   |            |          | (1,111,238 | ) |           |          | 1,190,094 | 
|Liabilities of discontinued operations                  |                                                         |                               | 5,285     |           |           |              |          |              |           |                 | 9,413   |         |         |   |           |          |            |   | 14,698    |         
|                                                        |                                                         |                               |           |           |           |              |           |              |           |                 |         |         |         |   |            |          |            |   |           |         
|Commitments and contingencies Stockholders
    Equity: |                                                         |                               |           |           |           |              |           |              |           |                 |         |         |         |   |            |          |            |   |           |         
|                                                        | Common stock                                            |                               |           | 834       |           |              |           | 1,500        |           |                 |         | 155,146 |         |   |            | (156,648 | )          |   |           | 832      |          
|                                                        | Additional capital                                      |                               |           | 979,130   |           |              |           | (947,451     | )         |                 |         | 349,140 |         |   |            | 595,954  |            |   |           | 976,773  |          
|                                                        | Accumulated deficit                                     |                               |           | (269,608  | )         |              |           | (5,326       | )         |                 |         | 203,213 |         |   |            | (266,663 | )          |   |           | (338,384 | )        
|                                                        | Accumulated other comprehensive loss                    |                               |           | 1,121     |           |              |           |             |           |                 |         | (34,981 | )       |   |            |         |            |   |           | (33,860  | )        
|                                                        |                                                         |                               |           |           |           |              |           |              |           |                 |         |         |         |   |            |          |            |   |           |         
|                                                        |                                                         | Total stockholders equity    |           |           | 711,477   |              |           |              | (951,277  | )               |         |         | 672,518 |   |            |          | 172,643    |   |           |          | 605,361   | 
|                                                        |                                                         |                               |           |           |           |              |           |              |           |                 |         |         |         |   |            |          |            |   |           |         
|                                                        |                                                         | $                             | 1,829,020 |           |           | $            | 213,854   |              |           | $               | 880,210 |         |         | $ | (946,147   | )        |            | $ | 1,976,937 |         
|                                                        |                                                         |                               |           |           |           |              |           |              |           |                 |         |         |         |   |            |          |            |   |           |         

22



---



##### Table of Contents



VALEANT PHARMACEUTICALS
INTERNATIONAL

NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)

Consolidating Condensed Statement of Income
for the three months ended March 31, 2004

(Unaudited, in thousands)


|                                                                                       |                                          |                               |         |           |         |              |        |              |        |                 |        |         |         |  |        |         |         |   |         |         |         |  
|-------------------------------------------------------------------------------------- | ---------------------------------------- | ----------------------------- | ------- | --------- | ------- | ------------ | ------ | ------------ | ------ | --------------- | ------ | ------- | ------- |  | ------ | ------- | ------- | - | ------- | ------- | ------- | -
|                                                                                       |                                          | Valeant                       |         |           |         | Valeant      |        |              |        | Valeant        
|                                                                                       |                                          | Obligor                       |         |           |         | Non-Obligor  |        |              |        | Pharmaceuticals
|                                                                                       |                                          | Subsidiary                    |         | Ribapharm |         | Subsidiaries |        | Eliminations |        | International  
|                                                                                       |                                          |                               |         |           |         |              |        |              |        |                
|Revenues:                                                                              |                                          |                               |         |           |         |              |        |              |        |                 |        |         |         |  |        |         |         |   |         |        
|                                                                                       | Product sales                            |                               | $       | 24,057    |         |              | $      |             |        |                 | $      | 108,268 |         |  | $      |        |         |   | $       | 132,325 |        
|                                                                                       | Royalties                                |                               |         |          |         |              |        | 25,377       |        |                 |        |        |         |  |        |        |         |   |         | 25,377  |        
|                                                                                       | Intercompany revenues                    |                               |         |          |         |              |        | 11,163       |        |                 |        |        |         |  |        | (11,163 | )       |   |         |        |        
|                                                                                       |                                          |                               |         |           |         |              |        |              |        |                 |        |         |         |  |        |         |         |   |         |        
|                                                                                       |                                          | Total revenues                |         |           | 24,057  |              |        |              | 36,540 |                 |        |         | 108,268 |  |        |         | (11,163 | ) |         |         | 157,702 |  
|                                                                                       |                                          |                               |         |           |         |              |        |              |        |                 |        |         |         |  |        |         |         |   |         |        
|Costs and expenses:                                                                    |                                          |                               |         |           |         |              |        |              |        |                 |        |         |         |  |        |         |         |   |         |        
|                                                                                       | Cost of goods sold                       |                               |         | 7,655     |         |              |        |             |        |                 |        | 39,057  |         |  |        |        |         |   |         | 46,712  |        
|                                                                                       | Selling expenses                         |                               |         | 12,515    |         |              |        |             |        |                 |        | 35,227  |         |  |        |        |         |   |         | 47,742  |        
|                                                                                       | General and administrative expenses      |                               |         | 11,101    |         |              |        | 2,575        |        |                 |        | 10,181  |         |  |        | 18      |         |   |         | 23,875  |        
|                                                                                       | Research and development costs           |                               |         | 609       |         |              |        | 17,646       |        |                 |        | 11,371  |         |  |        | (11,163 | )       |   |         | 18,463  |        
|                                                                                       | IPR&D                                    |                               |         | 11,386    |         |              |        |             |        |                 |        |        |         |  |        |        |         |   |         | 11,386  |        
|                                                                                       | Amortization expense                     |                               |         | 3,060     |         |              |        | 4,976        |        |                 |        | 5,251   |         |  |        |        |         |   |         | 13,287  |        
|                                                                                       |                                          |                               |         |           |         |              |        |              |        |                 |        |         |         |  |        |         |         |   |         |        
|                                                                                       |                                          | Total expenses                |         |           | 46,326  |              |        |              | 25,197 |                 |        |         | 101,087 |  |        |         | (11,145 | ) |         |         | 161,465 |  
|                                                                                       |                                          |                               |         |           |         |              |        |              |        |                 |        |         |         |  |        |         |         |   |         |        
|                                                                                       |                                          | Income (loss) from operations |         |           | (22,269 | )            |        |              | 11,343 |                 |        |         | 7,181   |  |        |         | (18     | ) |         |         | (3,763  | )
|Other income, net, including translation and
    exchange                              |                                          |                               | 528     |           |         |              |       |              |        |                 | (1,574 | )       |         |  |       |         |         |   | (1,046  | )      
|Intercompany interest                                                                  |                                          |                               | 335     |           |         |              |       |              |        |                 | (403   | )       |         |  | 68     |         |         |   |        |        
|Intercompany expenses (credits)                                                        |                                          |                               | (493    | )         |         |              | (2     | )            |        |                 | (364   | )       |         |  | 859    |         |         |   |        |        
|Equity in net income of subsidiaries                                                   |                                          |                               | 6,089   |           |         |              |       |              |        |                 |       |         |         |  | (6,089 | )       |         |   |        |        
|Interest, net                                                                          |                                          |                               | (12,899 | )         |         |              | 246    |              |        |                 | 823    |         |         |  | (69    | )       |         |   | (11,899 | )      
|                                                                                       |                                          |                               |         |           |         |              |        |              |        |                 |        |         |         |  |        |         |         |   |         |        
|Income (loss) from continuing operations before
    income taxes and minority interest |                                          |                               | (28,709 | )         |         |              | 11,587 |              |        |                 | 5,663  |         |         |  | (5,249 | )       |         |   | (16,708 | )      
|Provision (benefit) for income taxes                                                   |                                          |                               | (14,944 | )         |         |              |       |              |        |                 | 8,762  |         |         |  |       |         |         |   | (6,182  | )      
|Minority interest, net                                                                 |                                          |                               |        |           |         |              |       |              |        |                 | (14    | )       |         |  |       |         |         |   | (14     | )      
|                                                                                       |                                          |                               |         |           |         |              |        |              |        |                 |        |         |         |  |        |         |         |   |         |        
|                                                                                       | Income (loss) from continuing operations |                               |         | (13,765   | )       |              |        | 11,587       |        |                 |        | (3,085  | )       |  |        | (5,249  | )       |   |         | (10,512 | )      
|                                                                                       | Loss from discontinued operations        |                               |         | (648      | )       |              |        |             |        |                 |        | (2,413  | )       |  |        |        |         |   |         | (3,061  | )      
|                                                                                       |                                          |                               |         |           |         |              |        |              |        |                 |        |         |         |  |        |         |         |   |         |        
|                                                                                       | Net income (loss)                        |                               | $       | (14,413   | )       |              | $      | 11,587       |        |                 | $      | (5,498  | )       |  | $      | (5,249  | )       |   | $       | (13,573 | )      
|                                                                                       |                                          |                               |         |           |         |              |        |              |        |                 |        |         |         |  |        |         |         |   |         |        

23



---



##### Table of Contents



VALEANT PHARMACEUTICALS
INTERNATIONAL

NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)

Consolidating Condensed Statement of Cash Flow
for the three months

ended March 31, 2004


(Unaudited, in thousands)


|                                          |                                                                                                    |                                                                            |                                                  |                                                         |         |              |         |              |        |                 |         |         |        |      |        |        |   |   |         |         |         |      |         |  
|----------------------------------------- | -------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------- | ------------------------------------------------ | ------------------------------------------------------- | ------- | ------------ | ------- | ------------ | ------ | --------------- | ------- | ------- | ------ | ---- | ------ | ------ | - | - | ------- | ------- | ------- | ---- | ------- | -
|                                          |                                                                                                    | Valeant                                                                    |                                                  |                                                         |         | Valeant      |         |              |        | Valeant        
|                                          |                                                                                                    | Obligor                                                                    |                                                  |                                                         |         | Non-Obligor  |         |              |        | Pharmaceuticals
|                                          |                                                                                                    | Subsidiary                                                                 |                                                  | Ribapharm                                               |         | Subsidiaries |         | Eliminations |        | International  
|                                          |                                                                                                    |                                                                            |                                                  |                                                         |         |              |         |              |        |                
|Cash flows from operating
    activities: |                                                                                                    |                                                                            |                                                  |                                                         |         |              |         |              |        |                 |         |         |        |      |        |        |   |   |         |        
|                                          | Income (loss) from continuing operations                                                           |                                                                            | $                                                | (13,765                                                 | )       |              | $       | 11,587       |        |                 | $       | (3,085  | )      |      | $      | (5,249 | ) |   | $       | (10,512 | )      
|                                          | Adjustments to reconcile income (loss) to net
    cash provided by (used in) operating activities: |                                                                            |                                                  |                                                         |         |              |         |              |        |                 |         |         |        |      |        |        |   |   |         |         |        
|                                          |                                                                                                    | Depreciation and amortization                                              |                                                  |                                                         | 3,936   |              |         |              | 5,911  |                 |         |         | 11,810 |      |        |        |  |   |         |         | 21,657  |     
|                                          |                                                                                                    | Provision for losses on accounts receivable and
    inventory obsolescence |                                                  |                                                         | 243     |              |         |              |       |                 |         |         | 446    |      |        |        |  |   |         |         | 689     |     
|                                          |                                                                                                    | Translation and exchange gains, net                                        |                                                  |                                                         |        |              |         |              |       |                 |         |         | 103    |      |        |        |  |   |         |         | 103     |     
|                                          |                                                                                                    | Other non-cash items                                                       |                                                  |                                                         | 42      |              |         |              |       |                 |         |         | 1,470  |      |        |        |  |   |         |         | 1,512   |     
|                                          |                                                                                                    | Write-off of in-process R&D                                                |                                                  |                                                         | 11,386  |              |         |              |       |                 |         |         |       |      |        |        |  |   |         |         | 11,386  |     
|                                          |                                                                                                    | Deferred income taxes                                                      |                                                  |                                                         | (12,729 | )            |         |              |       |                 |         |         | 187    |      |        |        |  |   |         |         | (12,542 | )   
|                                          |                                                                                                    | Minority interest                                                          |                                                  |                                                         |        |              |         |              |       |                 |         |         | (14    | )    |        |        |  |   |         |         | (14     | )   
|                                          | Change in assets and liabilities, net of effects
    of acquisitions:                              |                                                                            |                                                  |                                                         |         |              |         |              |        |                 |         |         |        |      |        |        |   |   |         |         |        
|                                          |                                                                                                    | Accounts and notes receivable                                              |                                                  |                                                         | 2,599   |              |         |              | 10,910 |                 |         |         | 11,535 |      |        |        |  |   |         |         | 25,044  |     
|                                          |                                                                                                    | Inventories                                                                |                                                  |                                                         | 554     |              |         |              |       |                 |         |         | (6,138 | )    |        |        |  |   |         |         | (5,584  | )   
|                                          |                                                                                                    | Prepaid expenses and other assets                                          |                                                  |                                                         | 4,733   |              |         |              | 959    |                 |         |         | (3,896 | )    |        |        |  |   |         |         | 1,796   |     
|                                          |                                                                                                    | Trade payables and accrued liabilities                                     |                                                  |                                                         | (8,897  | )            |         |              | 2,280  |                 |         |         | (7,405 | )    |        |        |  |   |         |         | (14,022 | )   
|                                          |                                                                                                    | Income taxes payable                                                       |                                                  |                                                         | (2,372  | )            |         |              |       |                 |         |         | (1,949 | )    |        |        |  |   |         |         | (4,321  | )   
|                                          |                                                                                                    | Other liabilities                                                          |                                                  |                                                         | (183    | )            |         |              |       |                 |         |         | 4,489  |      |        |        |  |   |         |         | 4,306   |     
|                                          |                                                                                                    |                                                                            |                                                  |                                                         |         |              |         |              |        |                 |         |         |        |      |        |        |   |   |         |        
|                                          |                                                                                                    |                                                                            | (14,453                                          | )                                                       |         |              | 31,647  |              |        |                 | 7,553   |         |        |      | (5,249 | )      |   |   | 19,498  |        
|                                          |                                                                                                    |                                                                            | Operating cash flow from discontinued operations |                                                         |         | (648         | )       |              |        |                |         |         |        | 24   |        |        |   |  |         |         |         | (624 | )      
|                                          |                                                                                                    |                                                                            |                                                  |                                                         |         |              |         |              |        |                 |         |         |        |      |        |        |   |   |         |        
|                                          |                                                                                                    |                                                                            |                                                  | Net cash provided by (used in) operating
    activities |         |              | (15,101 | )            |        |                 | 31,647  |         |        |      | 7,577  |        |   |   | (5,249  | )       |         |      | 18,874  |  
|                                          |                                                                                                    |                                                                            |                                                  |                                                         |         |              |         |              |        |                 |         |         |        |      |        |        |   |   |         |        
|Cash flows from investing
    activities: |                                                                                                    |                                                                            |                                                  |                                                         |         |              |         |              |        |                 |         |         |        |      |        |        |   |   |         |        
|                                          | Capital expenditures                                                                               |                                                                            |                                                  | (800                                                    | )       |              |         | (208         | )      |                 |         | (2,963  | )      |      |        |       |   |   |         | (3,971  | )      
|                                          | Proceeds from sale of assets                                                                       |                                                                            |                                                  | 5,825                                                   |         |              |         |             |        |                 |         | 5,383   |        |      |        |       |   |   |         | 11,208  |        
|                                          | Increase in restricted cash                                                                        |                                                                            |                                                  | (5,894                                                  | )       |              |         |             |        |                 |         |        |        |      |        |       |   |   |         | (5,894  | )      
|                                          | Acquisition of license rights, product lines and
    businesses                                    |                                                                            |                                                  | (44,112                                                 | )       |              |         |             |        |                 |         | (246    | )      |      |        |       |   |   |         | (44,358 | )      
|                                          |                                                                                                    |                                                                            |                                                  |                                                         |         |              |         |              |        |                 |         |         |        |      |        |        |   |   |         |        
|                                          |                                                                                                    |                                                                            | (44,981                                          | )                                                       |         |              | (208    | )            |        |                 | 2,174   |         |        |      |       |        |   |   | (43,015 | )      
|                                          |                                                                                                    |                                                                            | Investing cash flow from discontinued operations |                                                         |         |             |         |              |        |                |         |         |        | 23   |        |        |   |  |         |         |         | 23   |        
|                                          |                                                                                                    |                                                                            |                                                  |                                                         |         |              |         |              |        |                 |         |         |        |      |        |        |   |   |         |        
|                                          |                                                                                                    |                                                                            |                                                  | Net cash provided by (used in) investing
    activities |         |              | (44,981 | )            |        |                 | (208    | )       |        |      | 2,197  |        |   |   |        |         |         |      | (42,992 | )
|                                          |                                                                                                    |                                                                            |                                                  |                                                         |         |              |         |              |        |                 |         |         |        |      |        |        |   |   |         |        
|Cash flows from financing
    activities: |                                                                                                    |                                                                            |                                                  |                                                         |         |              |         |              |        |                 |         |         |        |      |        |        |   |   |         |        
|                                          | Payments on long-term debt and notes payable                                                       |                                                                            |                                                  |                                                        |         |              |         |             |        |                 |         | (568    | )      |      |        |       |   |   |         | (568    | )      
|                                          | Proceeds from exercise of stock options                                                            |                                                                            |                                                  | 4,938                                                   |         |              |         |             |        |                 |         |        |        |      |        |       |   |   |         | 4,938   |        
|                                          | Dividends paid                                                                                     |                                                                            |                                                  | (6,432                                                  | )       |              |         |             |        |                 |         |        |        |      |        |       |   |   |         | (6,432  | )      
|                                          | Funds received from discontinued operations                                                        |                                                                            |                                                  | (614                                                    | )       |              |         |             |        |                 |         | 524     |        |      |        |       |   |   |         | (90     | )      
|                                          | Funds provided to (from) intercompany                                                              |                                                                            |                                                  | (13,331                                                 | )       |              |         | (20,862      | )      |                 |         | 28,944  |        |      |        | 5,249  |   |   |         |        |        
|                                          |                                                                                                    |                                                                            |                                                  |                                                         |         |              |         |              |        |                 |         |         |        |      |        |        |   |   |         |        
|                                          |                                                                                                    |                                                                            | (15,439                                          | )                                                       |         |              | (20,862 | )            |        |                 | 28,900  |         |        |      | 5,249  |        |   |   | (2,152  | )      
|                                          |                                                                                                    |                                                                            | Financing cash flow from discontinued operations |                                                         |         | 614          |         |              |        |                |         |         |        | (524 | )      |        |   |  |         |         |         | 90   |        
|                                          |                                                                                                    |                                                                            |                                                  |                                                         |         |              |         |              |        |                 |         |         |        |      |        |        |   |   |         |        
|                                          |                                                                                                    |                                                                            |                                                  | Net cash provided by (used in) financing
    activities |         |              | (14,825 | )            |        |                 | (20,862 | )       |        |      | 28,376 |        |   |   | 5,249   |         |         |      | (2,062  | )
|                                          |                                                                                                    |                                                                            |                                                  |                                                         |         |              |         |              |        |                 |         |         |        |      |        |        |   |   |         |        
|                                          | Effect of exchange rate changes on cash and cash
    equivalents                                   |                                                                            |                                                  |                                                        |         |              |         |             |        |                 |         | (871    | )      |      |        |       |   |   |         | (871    | )      
|                                          |                                                                                                    |                                                                            |                                                  |                                                         |         |              |         |              |        |                 |         |         |        |      |        |        |   |   |         |        
|                                          | Net increase (decrease) in cash and cash
    equivalents                                           |                                                                            |                                                  | (74,907                                                 | )       |              |         | 10,577       |        |                 |         | 37,279  |        |      |        |       |   |   |         | (27,051 | )      
|                                          | Cash and cash equivalents at beginning of period                                                   |                                                                            |                                                  | 664,821                                                 |         |              |         | 90,595       |        |                 |         | 117,553 |        |      |        |       |   |   |         | 872,969 |        
|                                          |                                                                                                    |                                                                            |                                                  |                                                         |         |              |         |              |        |                 |         |         |        |      |        |        |   |   |         |        
|                                          | Cash and cash equivalents at end of period                                                         |                                                                            |                                                  | 589,914                                                 |         |              |         | 101,172      |        |                 |         | 154,832 |        |      |        |       |   |   |         | 845,918 |        
|                                          | Cash and cash equivalents classified as part of
    discontinued operations                        |                                                                            |                                                  | (201                                                    | )       |              |         |             |        |                 |         | (201    | )      |      |        |       |   |   |         | (402    | )      
|                                          |                                                                                                    |                                                                            |                                                  |                                                         |         |              |         |              |        |                 |         |         |        |      |        |        |   |   |         |        
|                                          | Cash and cash equivalents of continuing operations                                                 |                                                                            | $                                                | 589,713                                                 |         |              | $       | 101,172      |        |                 | $       | 154,631 |        |      | $      |       |   |   | $       | 845,516 |        
|                                          |                                                                                                    |                                                                            |                                                  |                                                         |         |              |         |              |        |                 |         |         |        |      |        |        |   |   |         |        

24



---



##### Table of Contents






Item 2.Managements
Discussion and Analysis of Financial Condition and Results of
Operations

The following discussion relates to the
information presented in the Consolidated Condensed Financial
Statements included in this Quarterly Report. With respect to
certain items set forth in such Consolidated Condensed Financial
Statements, management has sought, in connection with its
discussion of the material changes in the Companys
financial condition and results of operations between the
periods for which information is presented in the Consolidated
Condensed Financial Statements, to identify and, in some cases,
quantify, the material factors which contributed to such
material changes. However, the quantification of such factors
may result in the presentation of numerical measures that
exclude amounts that are included in the most directly
comparable measure calculated and presented in accordance with
accounting principles generally accepted in the United States
(GAAP). Management is providing this information
because it believes that it is useful to enable readers to
assess material changes in the Companys financial
condition and results of operations between periods for which
information is presented in the Financial Statements. In each
instance, such information is presented immediately following
(and in connection with an explanation of) the most directly
comparable financial measure calculated in accordance with GAAP,
and includes other material information necessary to reconcile
the information with the comparable GAAP financial measure.

Overview

The Company is a global, research-based specialty
pharmaceutical company that discovers, develops, manufactures
and markets a broad range of pharmaceutical products. The
Company generates revenues from product sales and royalty
revenues. Product sales accounted for approximately 84% and 69%
of the Companys total revenues from continuing operations
for the three months ended March 31, 2004 and 2003,
respectively. The Company generates royalty revenues from the
sale of ribavirin by Schering-Plough and Roche. Royalty revenues
decreased $23,206,000 (48%) and accounted for 16% of the
Companys total revenues from continued operations for the
three months ended March 31, 2004 compared to 31% for the
same period in 2003. Based on the Companys research and
development capability and a worldwide capacity to commercialize
its products, the Company expects to leverage its position as a
global fully integrated specialty pharmaceutical company focused
on neurology, dermatology and infectious disease both near term
with existing and acquired products and long term through
commercialization of products developed internally.

The Company has undergone significant changes in
its leadership, strategic direction and operations in the past
two years. In an effort to drive change, the Companys
shareholders elected new directors at two successive annual
meetings, resulting in a new board composition and the
appointment of a new senior management team. The new board and
management team conducted a comprehensive review of the
Companys operations and business plan. Based on this
review, management initiated a three-phased effort to
restructure the Company, transform the business and grow through
innovation. The Company has largely completed the restructuring
phase with the substantial completion of its divestiture
program, the restructuring of the management team, the
implementation of strong governance protocols and the
strengthening of the Companys research and development
capability through the acquisition of the outstanding interest
in Ribapharm. The Company is well under way in the
transformation phase with the development of a growth strategy
leveraging its current products, further reducing costs,
rationalizing its supply chain and employing tools such as
LeanSixSigma to obtain significant efficiencies. The Company has
at the same time entered the innovate and grow phase through
increased investment in its research and development activities
and through acquisitions.

Transformation

Targeted Growth
of Existing Products

In order to drive specialty pharmaceuticals sales
growth, the Company will focus its business on the following
specific markets, therapeutic areas and brands:



| |                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Focus on 10 Key Geographic
    Regions.The Company has four
    pharmaceutical segments comprising its pharmaceutical operations
    in North America, Latin America, Europe and Asia, Africa and
    Australia. Within these four pharmaceutical segments, the
    Company will focus on 10 key geographic

25



---



##### Table of Contents



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | regions: the United States, Canada, Mexico,
    United Kingdom, France, Italy, Poland, Germany, Spain and China.
    In particular, as the Company pursues acquisition opportunities
    and product line extensions, it plans to focus on North America,
    the largest pharmaceutical market worldwide and thus its biggest
    growth opportunity.                                                                                                                                                                                                                                                                                                                                                                                                  
|
| | Focus on Three Core Therapeutic
    Classes.The Company will focus on
    infectious disease, neurology and dermatology. Historically, the
    Company has had significant revenue in these areas, especially
    in infectious disease, where the ribavirin royalty is derived.
    The Company believes that these three therapeutic classes are
    positioned for further growth, and that it is possible for a
    mid-sized company, such as ourselves, to attain a leadership
    position within these categories.                                                                                                                                                                                                                              
|
| | Focus on Nine Global
    Brands.The Company will focus on nine
    global brands, seven of which are currently being marketed and
    accounted for 25% and 20% of its product sales for the three
    months ended March 31, 2004 and 2003, respectively. Two of
    these brands, Viramidine and remofovir, are currently in
    clinical development. All of these nine global brands are within
    the Companys three targeted core therapeutic classes. The
    Company believes that these brands have the potential for global
    penetration and growth rates above industry averages. The
    Company intends to actively pursue life cycle management
    strategies for all of its global brands and selectively for its
    other brands.

Efficient
Manufacturing and Supply Chain Organization

The Company currently operates 15 manufacturing
facilities. Under the Companys global manufacturing
strategy announced in October 2003, the Company plans to reduce
the number of manufacturing facilities to five by 2006, in order
to increase capacity utilization and improve efficiencies. In
conjunction with the rationalization of the Companys
manufacturing facilities, it has undertaken a major process
improvement initiative, affecting all phases of its operations,
from raw material and supply logistics, to manufacturing,
warehousing and distribution. In addition, procurement efforts
have been centralized to realize economies of scale.

Innovate and
Grow

Development of
New Products Via Internal Research and Development
Activities

The Company seeks to discover, develop and
commercialize innovative products for the treatment of
significant unmet medical needs, principally in the areas of
infectious diseases and cancer. The Company intends to combine
its scientific expertise with advanced drug screening techniques
in order to discover and develop new antiviral candidates from
its nucleoside analog and non-nucleoside libraries. Except as
otherwise required by the terms of its agreement with
Schering-Plough, the Company intends to retain control of its
product candidates in order to obtain the maximum value from its
research efforts.

Product
Acquisitions

In addition to the Companys in-house
development efforts, its plans to selectively license or acquire
product candidates, technologies and businesses from third
parties which complement its existing business and provide for
effective life cycle management of key products. The Company
believes that its drug development expertise may allow it to
recognize licensing opportunities and to capitalize on research
initially conducted and funded by others.

In February 2004, the Company acquired from
Amarin Corporation, plc its U.S.-based subsidiary, Amarin
Pharmaceuticals, Inc. (Amarin), and all of its
U.S. product rights (the Amarin Acquisition),
which includes Permax® and a primary care portfolio with a
broad range of indications. The Company also acquired in the
transaction the rights to Zelapar®, a late-stage candidate
for the treatment of Parkinsons disease. Amarin has
received an approvable letter from the FDA for Zelapar, subject
to the completion of two safety studies, which Amarin will fund
and expects to complete in 2004.

In April 2004, the Company acquired the rights to
Tasmar® in the U.S. and certain non-Europe markets from
Roche for $13,500,000 in cash, plus future royalties.

26



---



##### Table of Contents



Critical Accounting Policies and
Estimates

The discussion and analysis of the Companys
financial condition and results of operations are based upon its
Consolidated Condensed Financial Statements, which have been
prepared in conformity with accounting principles generally
accepted in the United States. The preparation of these
statements requires the Company to make estimates and
assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting periods. On an
on-going basis, the Company evaluates its estimates, including
those related to product returns, collectibility of receivables,
inventories, intangible assets, income taxes and contingencies
and litigation. The actual results could differ form those
estimates.

The Company believes the following critical
accounting policies affect its more significant judgments and
estimates used in the preparation of its consolidated condensed
financial statements.

Revenue
Recognition

The Company recognizes revenues from product
sales when the goods are shipped and title passes to the
customer. Revenues are recorded net of provisions for rebates,
discounts and returns, which are established at the time of
sale. Allowances for future returns of products sold to the
Companys direct and indirect customers, who include
wholesalers, retail pharmacies and hospitals, are calculated as
a percent of sales based on historical return percentages.
Adjustments are made to the accrual based upon estimated
inventory levels, expiration dating, and product demand at the
Companys major wholesalers. Actual results could be
different from the Companys estimates resulting in future
adjustments to revenue. The Company conducts a review of the
current methodology and assesses the adequacy of the allowance
for returns on a quarterly basis, adjusting for changes in
assumptions, historical results and business practices, as
necessary.

Income
Taxes

The Company operates in numerous countries where
its income tax returns are subject to audit. Internal and
external tax professionals are employed to minimize tax audit
adjustments where possible. The Company considers the expected
outcome of these audits in the calculation of its tax provision.

The Company assesses whether its is more likely
than not that it will realize the tax benefits associated with
its deferred tax assets and establishes a valuation allowance
for assets that do not meet this criteria. A significant amount
of judgment is used in this process, including preparation of
forecasts of future taxable income and evaluation of tax
planning initiatives. If the Company revises these forecasts or
determines that certain planning events will not occur, an
adjustment to the valuation allowance will be made to tax
expense in the period such determination is made.

Valuation of
Intangible Assets

The Company periodically reviews intangible
assets for impairment using an undiscounted net cash flows
approach. The Company determines whether there has been
impairment by comparing the anticipated undiscounted future
operating income of the product line with its carrying value. If
the undiscounted operating income is less than the carrying
value, the amount of the impairment, if any, will be determined
by comparing the value of each intangible asset with its fair
value. Fair value is generally based on a discounted cash flows
analysis.

The Company uses a discounted cash flow model to
value intangible assets acquired and for the assessment of
impairment. The discounted cash flow model requires assumptions
about the timing and amount of future cash inflows and outflows,
risk, the cost of capital, and terminal values. Each of these
factors can significantly affect the value of the intangible
asset. The Company evaluated the businesses included in
discontinued operations by comparing the carrying value of each
intangible asset to their fair value, as determined using
discounted cash flows analysis, appraisals, and purchase offers.

27



---



##### Table of Contents



The estimates of future cash flows, based on
reasonable and supportable assumptions and projections, require
managements judgment. Any changes in key assumptions about
our businesses and their prospects, or changes in market
conditions, could result in an impairment charge.



| |                                                                                     
| | ------------------------------------------------------------------------------------
| | Purchase Price Allocation Including
    Acquired In-Process Research and Development

The purchase price for the Amarin Acquisition was
allocated to the tangible and identifiable intangible assets
acquired and liabilities assumed based on their estimated fair
values at the acquisition date. Such a valuation requires
significant estimates and assumptions, including but not limited
to: determining the timing and expected costs to complete the
in-process projects; projecting regulatory approvals; estimating
future cash flows from product sales resulting from completed
products and in-process projects; and developing appropriate
discount rates and probability rates by project. The Company
believes the fair values assigned to the assets acquired and
liabilities assumed are based on reasonable assumptions.
However, these assumptions may be incomplete or inaccurate, and
unanticipated events and circumstances may occur. Additionally,
estimates for the purchase price allocation may change as
subsequent information becomes available.

The Company values in-process research and
development (IPR&D) acquired in a business
combination based on an approach consistent with the AICPA
Practice Aid, Assets Acquired in Business Combinations to be
Used in Research and Development Activities: A Focus in
Software, Electronic Devices and Pharmaceutical Industries.
The amount expensed as acquired IPR&D represents an estimate
of the fair value of purchased in-process technology for Zelapar
that, as of the acquisition date, had not yet reached
technological feasibility and had no alternative future use. The
data used to determine fair value requires significant judgment.
The estimated fair value was based on the Companys use of
a discounted cash flow model (based on an estimate of future
sales and an average gross margin of 66%). The estimated
after-tax cash flows (using a tax rate of 40%) were then
discounted to a present value using a discount rate of 20%. The
Company estimates that the Zelapar studies will be completed in
2004 and revenue for Zelapar will commence in 2005. See
Note 2 for discussion of the Amarin Acquisition.

The major risks and uncertainties associated with
the timely and successful completion of these projects include
the uncertainty of the Companys ability to confirm the
safety and efficacy of the technology based on the data from
clinical trials and of obtaining necessary regulatory approvals.
In addition, no assurance can be given that the underlying
assumptions the Company used to forecast the cash flows or the
timely and successful completion of these projects will
materialize as estimated. For these reasons, among others,
actual results may vary significantly from the estimated results.



| |              
| | -------------
| | Contingencies

The Company is exposed to contingencies in the
ordinary course of business, such as legal proceedings and
business-related claims, which range from product and
environmental liabilities to tax matters. In accordance with
SFAS No. 5, Accounting for Contingencies, we
record accruals for such contingencies when it is probable that
a liability will be incurred and the amount of loss can be
reasonably estimated. The estimates are refined each accounting
period, as additional information is known. See Note 8 of
Notes to Consolidated Condensed Financial Statements for a
discussion of contingencies.

Results of Operations

The Company has four reportable pharmaceutical
segments comprising the Companys pharmaceuticals
operations in North America, Latin America, Europe and Asia,
Africa and Australia. In addition, the Company has a research
and development division. Certain financial information for the
Companys business segments is set forth below. This
discussion should be read in conjunction with the Consolidated
Condensed Financial Statements of the Company included elsewhere
in this Quarterly Report. For additional financial

28



---



##### Table of Contents



information by business segment, See Note 9
of Notes to Consolidated Condensed Financial Statements included
elsewhere in this Quarterly Report.


|                                    |                         |                       |         |           |         |            |         |        |         |   |         |         |        |  |     |    |    | 
|----------------------------------- | ----------------------- | --------------------- | ------- | --------- | ------- | ---------- | ------- | ------ | ------- | - | ------- | ------- | ------ |  | --- | -- | -- | 
|                                    |                         |                       |         |           |         |           
|                                    |                         | Three Months Ended    |         |           |         |           
|                                    |                         | March 31,             |         |           |         |           
|                                    |                         |                       |         | Increase/ |         | Percent   
|                                    |                         | 2004                  |         | 2003      |         | (Decrease) |         | Change
|                                    |                         |                       |         |           |         |            |         |       
|Pharmaceuticals                     |                         |                       |         |           |         |            |         |        |         |   |         |         |        |  |     |   
|                                    | North America           |                       | $       | 27,629    |         |            | $       | 15,371 |         |   | $       | 12,258  |        |  |     | 80 | % 
|                                    | Latin America           |                       |         | 29,153    |         |            |         | 26,371 |         |   |         | 2,782   |        |  |     | 11 |   
|                                    | Europe                  |                       |         | 63,119    |         |            |         | 55,576 |         |   |         | 7,543   |        |  |     | 14 |   
|                                    | Asia, Africa, Australia |                       |         | 12,424    |         |            |         | 12,816 |         |   |         | (392    | )      |  |     | (3 | ) 
|                                    |                         |                       |         |           |         |            |         |        |         |   |         |         |        |  |     |   
|                                    |                         | Total pharmaceuticals |         |           | 132,325 |            |         |        | 110,134 |   |         |         | 22,191 |  |     |    | 20 | 
|Royalties                           |                         |                       | 25,377  |           |         |            | 48,583  |        |         |   | (23,206 | )       |        |  | (48 | ) 
|                                    |                         |                       |         |           |         |            |         |        |         |   |         |         |        |  |     |   
|Total revenues                      |                         |                       | 157,702 |           |         |            | 158,717 |        |         |   | (1,015  | )       |        |  | (1  | ) 
|Cost of goods sold                  |                         |                       | 46,712  |           |         |            | 41,239  |        |         |   | 5,473   |         |        |  | 13  |   
|Selling expenses                    |                         |                       | 47,742  |           |         |            | 37,278  |        |         |   | 10,464  |         |        |  | 28  |   
|General and administrative expenses |                         |                       | 23,875  |           |         |            | 30,593  |        |         |   | (6,718  | )       |        |  | (22 | ) 
|Research and development costs      |                         |                       | 18,463  |           |         |            | 9,159   |        |         |   | 9,304   |         |        |  | 102 |   
|Acquired IPR&D                      |                         |                       | 11,386  |           |         |            |        |        |         |   | 11,386  |         |        |  |    |   
|Amortization expense                |                         |                       | 13,287  |           |         |            | 8,067   |        |         |   | 5,220   |         |        |  | 65  |   
|                                    |                         |                       |         |           |         |            |         |        |         |   |         |         |        |  |     |   
|                                    | Operating income (loss) |                       | $       | (3,763    | )       |            | $       | 32,381 |         |   | $       | (36,144 | )      |  |     |   |   
|                                    |                         |                       |         |           |         |            |         |        |         |   |         |         |        |  |     |   
|Gross profit on product sales       |                         | $                     | 85,613  |           |         | $          | 68,895  |        |         | $ | 16,718  |         |        |  | 24  |   
|                                    |                         |                       |         |           |         |            |         |        |         |   |         |         |        |  |     |   
|Gross profit % on product sales     |                         |                       | 65      | %         |         |            | 63      | %      |         |   |        | %       |        |  | 2   | % 
|                                    |                         |                       |         |           |         |            |         |        |         |   |         |         |        |  |     |   

Pharmaceutical
Revenues:The Company experienced an
increase in pharmaceutical product sales of
$22,191,000 (20%) for the three months ended March 31,
2004 over the same period in 2003. Foreign currency contributed
$8,023,000 (7%) on a net basis to the increase in overall
product sales primarily due to the increase in the value of the
Euro over the U.S. Dollar. Sales from the Companys
seven global brands increased $11,012,000 (49%) for the
three months ended March 31, 2004 over the same period in
2003, with $10,512,000 of this increase being attributed to
increased sales of Efudex. A substantial portion of this
increase is attributed to the Companys decision to reduce
sales in the prior year in order to reduce inventory levels at
wholesale distributors. Over the next several years the Company
expects to see industry level growth of between 5 and
10 percent per year in pharmaceutical revenues excluding
increases due to product acquisitions. The Company expects to
see continued generic and other competition to its products in
2004 and beyond, and it expects to see continued pricing
challenges through price controls in Europe and the rest of the
world as governments take steps to reduce their overall costs of
healthcare.

In the North America Pharmaceuticals segment,
revenues for the three months ended March 31, 2004 were
$27,629,000 compared to $15,371,000 for the same period in 2003,
an increase of $12,258,000 (80%). The increase is primarily
due to the completion of an inventory reduction program at the
Companys wholesalers in 2003, which began in June 2002 and
was completed in April 2003.

In the Latin America Pharmaceuticals segment,
revenues for the three months ended March 31, 2004 were
$29,153,000 compared to $26,371,000 for the same period in 2003,
an increase of $2,782,000 (11%). The increase is primarily
due to price increases throughout the region.

In the Europe Pharmaceuticals segment, revenues
for the three months ended March 31, 2004 were $63,119,000
compared to $55,576,000 for the same period in 2003, an increase
of $7,543,000 (14%). The increase in the value of currencies in
the region as compared to the U.S. Dollar contributed
$6,183,000 to the increase in revenues in the region.

29



---



##### Table of Contents



In the Asia, Africa and Australia
(AAA) Pharmaceuticals segment, revenues for the
three months ended March 31, 2004 were $12,424,000 compared
to $12,816,000 for the same period in 2003, a decrease of
$392,000 (3%). The decrease is primarily due to lower sales
volume primarily from lower sales of Reptilase due to supply
chain issues and a higher level of Virazole sales in 2003 as a
result of the outbreak of SARS, partially offset by an increase
in the value of currencies in the region of $948,000. While the
most recent supply chain issues with Reptilase have been
resolved, the Company must continue to closely monitor the
responsiveness of vendors in the supply chain for Reptilase to
assure an adequate supply of product to the market.

Royalties:Royalty
revenues represent amounts earned under the license and supply
agreement with Schering-Plough and Roche. Under the license and
supply agreement, Schering-Plough licensed all oral forms of
ribavirin for the treatment of chronic hepatitis C.

In January 2003, the Company reached an agreement
with Roche on a settlement of pending patent disputes over
Roches combination antiviral product containing
Roches version of ribavirin, known as Copegus. Under the
agreement, Roche may continue to register and commercialize
Copegus globally. The financial terms of this settlement
agreement include a license by the Company of ribavirin to
Roche. The license authorizes Roche to make or have made and to
sell Copegus under the Companys patents in combination
with interferon alfa or pegylated interferon alfa. Except in
markets where a generic form of oral ribavirin has been
introduced, Roche pays royalty fees to the Company on all sales
of Copegus for use in combination with interferon alfa or
pegylated interferon alfa.

Royalties for the three months ended
March 31, 2004 from Schering-Plough and Roche were
$25,377,000 compared to $48,583,000 for the same period in 2003,
a decrease of $23,206,000 (48%). The decrease in royalties
include the effects of increasing competition between
Schering-Plough and Roche, and Schering-Ploughs provision
for estimated rebates on its U.S. sales of ribavirin and
changes in trade inventory levels as reported to the Company by
Schering-Plough. Approval of a generic form of oral ribavirin by
the U.S. Food and Drug Administration (FDA) in
the U.S. was announced on April 7, 2004. The impact of
this approval will be a continued erosion of the royalty amount
from sales in the U.S. and total royalties in the second quarter
of 2004 will be somewhat lower than the first quarter of 2004
amount. Schering-Plough also announced its launch of a generic
version of ribavirin. Under the license and supply agreement,
Schering-Plough is obligated to pay the Company royalties for
sales of their generic ribavirin.

Gross Profit:Gross
profit on product sales increased to 65% for the three months
ended March 31, 2004 compared to 63% in 2003. The increase
in gross profit is primarily due to an increase in sales from
North America, partially offset by costs related to the
Companys manufacturing rationalization project incurred in
2004. These costs include the impact of accelerated depreciation
charges of $1,787,000 associated with the rationalization
effort. To the extent that the Companys estimates of net
realizable value of facilities to be sold is higher or lower
than ultimately realized or the timing of such sales differs
from the initial expectations, the Company could incur losses on
the disposal of the facilities.

Selling Expenses:Selling expenses were $47,742,000 for the three months ended
March 31, 2004 compared to $37,278,000 for the same period
in 2003, an increase of $10,464,000 (28%). As a percent of
product sales, selling expenses increased from 34% in the three
months ended March 31, 2003 to 36% in the comparable period
in 2004. The increase reflects the Companys increased
promotional efforts in North America and Europe of $3,521,000
and $2,790,000, respectively. Additionally, marketing expenses
associated with the Companys identified global products
increased $2,421,000 reflecting the Companys continued
emphasis on leveraging its global footprint and targeted
investments in building the initial foundations for
commercialization of pipeline products.

General and Administrative
Expenses:General and administrative
expenses were $23,875,000 for the three months ended
March 31, 2004 compared to $30,593,000 for the same period
in 2003, a decrease of $6,718,000 (22%). The decrease is
primarily due to reduced legal fees. While steps continue to be
taken to more effectively manage these costs, legal fees can
vary period to period based on the level of activity surrounding
outstanding legal challenges.

30



---



##### Table of Contents



Research and
Development:Research and development
expenses for the three months ended March 31, 2004 were
$18,463,000 compared to $9,159,000 for the same period in 2003.
The increase is primarily attributable to the acceleration of
Phase 3 clinical trials of Viramidine and initial steps
taken in anticipation of remofovir entering Phase 2
clinical trials. It is expected that research and development
expenses will increase significantly in 2004 and into 2005 as
the Company has initiated Phase 3 studies in parallel with
the completion of Phase 2 studies of Viramidine and
progress continues with the clinical trials of remofovir.

Acquired In-Process Research and
Development:In the three months ended
March 31, 2004, the Company incurred an expense of
$11,386,000 associated with IPR&D related to the Amarin
Acquisition that occurred in February 2004. The amount expensed
as IPR&D represents the Companys estimate of the fair
value of purchased in-process technology for projects that, as
of the acquisition date, had not yet reached technological
feasibility and had no alternative future use.

Amortization:Amortization expense for the three months ended March 31,
2004 was $13,287,000 compared to $8,067,000 for the same period
in 2003. The increase was primarily related to amortization of
intangibles related to the acquisition of Ribapharm of
$4,976,000 in 2004.

Other Income, Net, Including Translation and
Exchange:Other income, net, including
translation and exchange was a loss of $1,046,000 for the three
months ended March 31, 2004 compared to a gain of
$4,091,000 for the same period in 2003. In 2004, losses
principally resulted from the sale of certain long-term
investments prior management had made in Europe. As a result of
the strengthening of the Swiss franc to the U.S. dollar,
the Company was able to realize returns at a level consistent
with the original investment. The Companys translation and
exchange losses are primarily related to U.S. dollar
denominated assets and liabilities at its foreign currency
denominated subsidiaries.

Interest Expense and
Income:Interest expense during the
three months ended March 31, 2004 increased $6,667,000
compared to the same period in 2003. The increase was due to the
issuance of $480,000,000 of 3.0% and 4.0% Convertible
Subordinated Notes and $300,000,000 of 7.0% Senior Notes in
the fourth quarter of 2003. The Company intends to repurchase
the 6 1/2% Convertible Subordinated Notes in July 2004.
Interest income increased $2,078,000 during the three months
ended March 31, 2004 compared to the same period in 2003
primarily due to higher cash balances.

Income Taxes:As a
result of the Companys loss from continuing operations for
the three months ended March 31, 2004, its effective income
tax rate was a benefit of 37% compared to a provision of 38% for
the same period of 2003.

Income (loss) from Discontinued Operations,
Net of Taxes:Income (loss) from
discontinued operations was a loss of $3,061,000 for the three
months ended March 31, 2004 compared to income of $449,000
for the same period in 2003. The loss in 2004 relates to the
Companys sales of products manufactured in its facilities
in Central Europe. The Company expects to sell these facilities
prior to the end of the year. The income in 2003 relates to the
Companys Russian Pharmaceuticals segment, Biomedicals
segment and raw materials businesses and manufacturing
capabilities in Central Europe.

Liquidity and Capital Resources

Cash and cash equivalents totaled $845,516,000 at
March 31, 2004 compared to $872,056,000 at
December 31, 2003. Working capital was $944,446,000 at
March 31, 2004 compared to $975,368,000 at
December 31, 2003. The decrease in working capital of
$30,922,000 was primarily attributable to the use of cash in the
Amarin Acquisition and various other product rights of
$44,358,000, partially offset by cash generated from operations
of $18,874,000.

Cash provided by operating activities is expected
to be the Companys primary recurring source of funds in
2004. During the three months ended March 31, 2004, cash
provided by operating activities totaled $18,874,000 compared to
$78,875,000 for the same period in 2003. The decrease in cash
provided by operating activities is primarily due to increased
spending in research and development in the three months ended
March 31, 2004 and the difference in the change in accounts
receivable of $22,408,000 related to the

31



---



##### Table of Contents



collection of 2002 royalty payments during the
three months ended March 31, 2003. The Company expects to
see the effect of increased research and development and lower
royalty for the remainder of the year.


Cash used in investing activities was $42,992,000
for the three months ended March 31, 2004 compared to
$4,532,000 for the same period in 2003. In 2004, net cash used
in investing activities consisted of payments for the Amarin
Acquisition and various other product rights of $44,358,000,
increase in restricted cash of $5,894,000 related to the
interest rate swap on the 7% Senior Notes due 2011 (the
7.0% Notes) and foreign currency hedge and
capital expenditures of $3,971,000, partially offset by proceeds
from sale of assets of $11,208,000 primarily related to the sale
of investments. In 2003, net cash used in investing activities
consisted of payments for capital expenditures of $2,510,000 and
cash used in investing activities in discontinued operations of
$1,936,000.

Cash used in financing activities was $2,062,000
for the three months ended March 31, 2004, including cash
dividends paid on common stock of $6,432,000 and payments on
long-term debt and notes payable of $568,000, partially offset
by proceeds received from the exercise of stock options of
$4,938,000. In 2003, cash used in financing activities was
$9,806,000 for the three months ended March 31, 2003,
including dividends paid on common stock of $6,500,000 and
payments on long-term debt and notes payable of $3,039,000.

In January 2004, the Company entered into an
interest rate swap agreement with respect to $150,000,000
principal amount of the 7.0% Notes. The interest rate on
the swap will be variable at LIBOR plus 2.41%. The effect of
this transaction is to lower the Companys effective rate
on that portion outstanding 7.0% Notes. On a prospective
basis, the effective rate will float and correlate to the
variable interest earned on the Companys cash held. The
Company has previously stated that it expects to retain minimum
cash levels of between $100,000,000 and $150,000,000. The
Company also expects to further reduce its interest expense in
2004 by repurchasing or redeeming the balance of its outstanding
6 1/2% convertible subordinated notes due 2008 by July
2004.

In February 2004, the Company completed the
Amarin Acquisition. Under the terms of the transaction, the
Company paid $38,000,000 in cash at the closing for the rights
to Amarins product portfolio, which includes Permax and a
primary care portfolio with a broad range of indications. The
Company also acquired in the transaction the rights to Zelapar,
a late-stage candidate for the treatment of Parkinsons
disease. Amarin has received an approvable letter from the
U.S. Food and Drug Administration (FDA) for
Zelapar, subject to the completion of two safety studies, which
Amarin will fund and expect to complete in 2004. The agreement
calls for the Company to make additional milestone payments of
up to $8,000,000 to Amarin based on the successful completion of
the studies and final approval by the FDA of Zelapar. In
addition, the Company will make a milestone payment of
$10,000,000 to the developer of Zelapar upon the attainment of
specified sales thresholds. Subsequent to the Amarin
Acquisition, the Company became aware of a significant amount of
dated products in wholesaler channels. Under the terms of the
purchase agreement, Amarin Corporation, plc is responsible for
any excess inventory at wholesalers that existed at the date of
acquisition. The Company has established a reserve to cover
sales returns consistent with the terms of the agreement.

Management believes that the Companys
existing cash and cash equivalents and funds generated from
operations will be sufficient to meet its operating requirements
at least through March 31, 2005, to repurchase the
$326,001,000 principal amount of its
6 1/2% Convertible Subordinated Notes due 2008
outstanding and to fund anticipated acquisitions, capital
expenditures and its research and development program. While the
Company has no current intent to issue additional debt or equity
securities, it may also seek additional debt financing or issue
additional equity securities to finance future acquisitions. The
Company funds its cash requirements primarily from cash provided
by its operating activities. The Companys sources of
liquidity are its cash and cash equivalent balances and its cash
flow from operations.

Competition from generic pharmaceutical companies
will have a material negative impact on the Companys
future royalty revenue. With respect to Schering-Plough,
effective royalty rates increase in tiers based on increased
sales levels. As a result of reduced sales, the likelihood of
achieving the maximum effective royalty rate in the U.S. is
diminished. With respect to Roche, under the license agreement,
introduction of generics in any market will eliminate the
obligation of Roche to pay royalties for sales in that market.
See

32



---



##### Table of Contents



Note 8 of Notes to Consolidated Condensed
Financial Statements regarding Commitments and
Contingencies  Generic Litigation.


While the Company has historically paid quarterly
cash dividends, there can be no assurance that it will continue
to do so in the future.

The Company currently has no product liability
insurance for a majority of its products in the United States.
In connection with the Amarin Acquisition, the Company acquired
product liability insurance for one of the products purchased,
which it will continue to provide for, as a result of this
product being subject to settled and pending product liability
litigation. While, to date, no material adverse claim for
personal injury resulting from allegedly defective products has
been successfully maintained against it, a substantial claim, if
successful, could have a negative impact on the Companys
liquidity and financial performance. The Company has in place
worldwide clinical trial insurance.

Products in Development

The Company expects its research and development
expenses to increase in the future, of which a large percentage
will be to support the continuing product development programs
for Viramidine and remofovir. The Company expects that it will
spend approximately $40 to $45 million in 2004 on the
product development programs for Viramidine and remofovir.

For Viramidine, the Company is continuing its
Phase 2 study in 180 patients with hepatitis C.
This study began in 2003 and will continue into 2004. The study
included an interim analysis performed on the first
160 patients who received at least 12 weeks of
therapy. In the second half of 2003, protocols for two
Phase 3 Viramidine studies were developed. The Company
decided to initiate the Phase 3 studies of Viramidine prior
to the completion of the Phase 2 clinical trials. Each of
the two Phase 3 studies will be conducted on a global
basis, and each study will consist of approximately 100
investigative sites and approximately 1,000 enrolled
patients. The studies will compare Viramidine and ribavirin,
each in conjunction with a pegylated interferon. The first of
the two global studies, known as VISER 1, began enrollment in
the fourth quarter of 2003. The second study, known as VISER 2,
is expected to begin in the second half of 2004. The
Companys external research and development expenses for
Viramidine were approximately $5,800,000 for the three months
ended March 31, 2004 and approximately $24,600,000 from
inception through March 31, 2004.

For remofovir, the Company has completed two
Phase 1 clinical trials in a total of 47 healthy
volunteers. Remofovir is currently being evaluated in a third
Phase 1 study, which is designed as a 28 day,
randomized, placebo-controlled, double-blind, dose-escalation
clinical trial in up to 40 patients with hepatitis B
in the U.S. The results of this U.S. Phase 1
study are expected in late 2004. Further, a fourth Phase 1
multiple dose study in Taiwan completed enrollment in January
2004. A 48-week dose-ranging Phase 2 study is expected to
begin in Asia in the second half of 2004. The Companys
external research and development expenses for remofovir were
approximately $1,500,000 for the three months ended
March 31, 2004 and $14,600,000 (including a milestone
payment of $1,100,000) from inception through March 31,
2004.

Foreign Operations

Approximately 80% and 78% of the Companys
revenues from continuing operations for the three months ended
March 31, 2004 and 2003, respectively, were generated from
operations or earned outside the United States. All of the
Companys foreign operations are subject to risks inherent
in conducting business abroad, including possible
nationalization or expropriation, price and currency exchange
controls, fluctuations in the relative values of currencies,
political instability and restrictive governmental actions.
Changes in the relative values of currencies occur from time to
time and may, in some instances, materially affect the
Companys results of operations. The effect of these risks
remains difficult to predict.

33



---



##### Table of Contents








|        |                                                               
|------- | --------------------------------------------------------------
|Item 3. | Quantitative and Qualitative Disclosures
    About Market Risk

The Companys business and financial results
are affected by fluctuations in world financial markets. The
Company evaluates its exposure to such risks on an ongoing
basis, and reviews its risk management policy to manage these
risks to an acceptable level, based on managements
judgment of the appropriate trade-off between risk, opportunity
and costs. The Company does not hold any significant amount of
market risk sensitive instruments whose value is subject to
market price risk. The Companys significant foreign
currency exposure relates to the Euro, the Mexican Peso, the
Polish Zloty, the Swiss Franc and the Canadian Dollar. The
Company seeks to manage its foreign currency exposure by
maintaining the majority of cash balances at foreign
subsidiaries in the U.S. Dollar and through operational
means by managing local currency revenues in relation to local
currency costs. The Company is currently taking steps to
mitigate the impact of foreign currency on the income statement,
which include hedging its foreign currency exposure. In March
2004, the Company entered into a foreign currency hedge
transaction to reduce its exposure to variability in the Euro.

In the normal course of business, the Company
also faces risks that are either non-financial or
non-quantifiable. Such risks principally include country risk,
credit risk and legal risk and are not discussed or quantified
in the following analysis.

Interest Rate and Currency
Risks:The Company currently does not
hold financial instruments for trading or speculative purposes.
The financial assets of the Company are not subject to
significant interest rate risk due to their short duration. At
March 31, 2004, the Company had $13,172,000 of foreign
denominated variable rate debt that would subject it to both
interest rate and currency risks. In January 2004, the Company
entered into an interest rate swap agreement with respect to
$150,000,000 principal amount of the 7.0% Notes. A
100 basis-point increase in interest rates affecting the
Companys financial instruments would have an immaterial
effect on the Companys first quarter 2004 pretax earnings.
In addition, the Company currently has $1,106,001,000 of fixed
rate debt that require U.S. Dollar repayment. To the extent
that the Company requires, as a source of debt repayment,
earnings and cash flow from some of its units located in foreign
countries, the Company is subject to the risk of changes in the
value of certain currencies relative to the U.S. Dollar.
However, the increase of a 100 basis-point in interest rates
would reduce the fair value of the Companys fixed-rate
debt instruments by approximately $65,200,000 as of
March 31, 2004.

The Company estimated the sensitivity of the fair
value of its derivative foreign exchange contracts to a
hypothetical 10% strengthening and 10% weakening of the spot
exchange rates for the U.S. dollar against the Euro at
March 31, 2004. The analysis showed that a 10%
strengthening of the U.S. dollar would result in a gain
from a fair value change of $4,200,000 and a 10% weakening of
the U.S. dollar would result in a loss from a fair value
change of $6,400,000 in these instruments. Losses and gains on
the underlying transactions being hedged would largely offset
any gains and losses on the fair value of derivative contracts.
These offsetting gains and losses are not reflected in the above
analysis.






|        |                        
|------- | -----------------------
|Item 4. | Controls and Procedures

The Company maintains disclosure controls and
procedures that are designed to ensure that information required
to be disclosed in the Companys Exchange Act reports is
recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms and that
such information is accumulated and communicated to the
Companys management, including its Chief Executive Officer
and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure. In designing and
evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management
necessarily is required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.

As of March 31, 2004, the Company conducted
an evaluation of the effectiveness of the design and operation
of the Companys disclosure controls and procedures. This
evaluation was carried out under the supervision and with the
participation of the Companys management, including the
Companys Chief Executive Officer and Chief Financial
Officer. Based upon the foregoing, the Companys Chief
Executive Officer and Chief Financial Officer concluded that the
Companys disclosure controls and procedures were

34



---



##### Table of Contents



effective in making known to them material
information relating to the Company (including its consolidated
subsidiaries) required to be included in this report.


There has been no change in the Companys
internal controls over financial reporting, known to the Chief
Executive Officer or the Chief Financial Officer, that occurred
during the quarter ended March 31, 2004 that has materially
affected, or is reasonably likely to materially affect, the
Companys internal controls over financial reporting.

35



---



##### Table of Contents



FORWARD LOOKING STATEMENTS

Except for the historical information contained
herein, the matters addressed in this Quarterly Report on
Form 10-Q constitute forward-looking
statements. In addition, forward-looking statements may be
identified by the use of the words anticipates,
expects, intends, plans, and
variations or similar expressions. These forward-looking
statements are subject to a variety of risks and uncertainties,
including those discussed below and elsewhere in this Quarterly
Report on Form 10-Q, which could cause actual results to
differ materially from those anticipated by the Companys
management. In addition, the information set forth in the
Companys Form 10-K for the fiscal year ended
December 31, 2003, describes certain additional risks and
uncertainties that could cause actual results to vary materially
from the future results covered in such forward-looking
statements. Readers are cautioned not to place undue reliance on
any of these forward-looking statements, which speak only as of
the date of this report. The Company undertakes no obligation to
update any of these forward-looking statements to reflect events
or circumstances after the date hereof or to reflect actual
outcomes.

The short and long-term success of the company is
subject to a variety of risks and uncertainties, many of which
are beyond the Companys control. Stockholders and
prospective stockholders in the Company should consider
carefully the following risk factors, in addition to other
information contained in this report. The Companys actual
results could differ materially from these anticipated in this
report as a result of various factors, including those set forth
below.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | A substantial portion of the Companys
    revenues are royalties generated form sales of ribavirin by the
    Companys licensees. The launch of generic versions of
    ribavirin in the United States is expected soon. Additionally,
    there is the potential for other of the Companys products
    to face generic competition. Sales of generic versions of the
    Companys products may reduce future revenues, and may
    reduce its ability to finance future research and development
    activities.                                                                                                                                                                                                                                                                                                                
|
| |  | The future growth of the Companys business
    depends on the development and approval of new products,
    including Viramidine. The process of developing new drugs has an
    inherent risk of failure. Although certain of the Companys
    research compounds show promise at their current stages of
    development, the Company may fail to commercialize them for
    various reasons. For example, they may turn out to be
    ineffective or unsafe in clinical or pre-clinical testing; their
    patent protection may become compromised; other therapies may
    prove more safe or effective; or the prevalence of the disease
    for which they are being developed may decrease. The
    Companys inability to successfully develop its products
    due to these or other factors would reduce future revenues.
|
| |  | The Company can protect its products from generic
    substitution by third parties only to the extent that its
    technologies are covered by valid and enforceable patents, are
    effectively maintained as trade secrets or are protected by data
    exclusivity. However, the Companys presently pending or
    future patent applications may not issue as patents. Any patent
    issued may be challenged, invalidated, held unenforceable or
    circumvented. Furthermore, the Companys patents may not be
    sufficiently broad to prevent third parties competing
    products.                                                                                                                                                                                                                                    
|
| |  | Trade secret protection is less effective than
    patent protection because competitors may discover our
    technology or develop parallel technology.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | The scope of protection afforded by a patent can
    be highly uncertain. A pending claim or a result unfavorable to
    the Company in a patent dispute may preclude development or
    commercialization of products or impact sales of existing
    products, and result in payment of monetary damages.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | Obtaining drug approval in the United States and
    other countries is costly and time consuming. Uncertainties and
    delays inherent in the process can preclude or delay development
    and commercialization of the Companys products.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | The Companys current business plan includes
    expansion through acquisitions, in addition to the development
    of new products. If the Company is unable to successfully
    execute on its expansion plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

36



---



##### Table of Contents



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | to find attractive acquisition candidates at
    appropriate prices, and to integrate successfully any acquired
    companies or products, the growth of the Companys business
    will be impeded.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | The Company and its competitors are always
    striving to develop products that are more effective, safer,
    more easily tolerated or less costly. If the Companys
    competitors succeed in developing better alternatives to the
    Companys current products before it does, the Company will
    lose sales and revenues to their alternative products. If
    vaccines are introduced to prevent the diseases treated by the
    Companys products, the Companys potential sales and
    revenues will decrease.                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | The pharmaceutical industry is subject to
    substantial government regulation, including the approval of new
    pharmaceutical products, labeling, advertising and, in most
    countries, pricing, as well as inspection and approval of
    manufacturing facilities. The costs of complying with these
    regulations is high, and failure to comply could result in fines
    or interruption in our business.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | The Company sells products in many countries that
    are susceptible to significant foreign currency risk. The
    Company generally sells products in these countries for Untied
    States dollars. While this eliminates the Companys direct
    currency risk, it increases the Companys credit risk
    because if a local currency is devalued significantly, it
    becomes more expensive for customers in that market to purchase
    the Companys products in United States dollars. In
    March 2004, the Company entered into foreign currency hedge
    transactions to reduce its exposure to variability in the Euro.                                                                                                                                                                                                                                                                                                                     
|
| |  | A significant part of the Companys revenue
    is derived from products manufactured by third parties. The
    Company relies on their quality level, compliance with the FDA
    regulations and continuity of supply. Any failure by them in
    these areas could disrupt the Companys product supply and
    negatively impact its revenues.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | The Companys flexibility in maximizing
    commercialization opportunities for its compounds may be limited
    by its obligations to Schering-Plough. In November 2000,
    the Company entered into an agreement that provides
    Schering-Plough with an option to acquire the rights to up to
    three of its products that they designate at an early stage of
    product development and a right for first/last refusal to
    license various compounds the Company may develop and elect to
    license to others. Viramidine was not subject to the option of
    Schering-Plough, but it would be subject to their right of
    first/last refusal if the Company elected to license it to a
    third party. The interest of potential collaborators in
    obtaining rights to the Companys compounds or the terms of
    any agreement it ultimately enters into for these rights may be
    hindered by its agreement with Schering-Plough.
|
| |  | To purchase the Companys products, many
    patients rely on reimbursement by third party payors such as
    insurance companies, HMOs and government agencies. These third
    party payors are increasingly attempting to contain costs by
    limiting both coverage and the level of reimbursement of new
    drug products. The reimbursement levels established by third
    party payors in the future may not be sufficient for the Company
    to realize an appropriate return on its investment in product
    development.                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | Some of the Companys development programs
    are based on the library of nucleoside compounds it has
    developed. The Companys nucleoside library is at risk of
    loss in earthquakes, fire and other natural disasters.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | All drugs have potential harmful side effects and
    can expose drug manufacturers and distributors to liability. The
    Company generally does not maintain product liability insurance.
    As a result, in the event one or more of the Companys
    products is found to have harmed an individual or individuals,
    it may be responsible for paying all or substantially all
    damages awarded. Any event causing product liability while the
    Company lacks any insurance coverage could have a material
    negative impact on its financial position and results of
    operations.                                                                                                                                                                                                                                                                                                                                                        
|
| |  | Subject to the terms of the Companys
    agreements with its existing lenders, the Company may incur
    additional indebtedness from time to time to finance working
    capital needs, acquisitions, capital expenditures or for other
    purposes. There can be no assurance that financing will continue
    to be available on terms acceptable to the Company or at all.
    The absence of such financing will reduce the                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

37



---



##### Table of Contents



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | Companys ability to respond to changing
    business and economic conditions, to fund scheduled investments
    and capital expenditures, to make future acquisitions and to
    absorb negative operating results.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | The Company is involved in several legal
    proceedings, including those described in Note 7 to Notes
    to Consolidated Condensed Financial Statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | Dependence on key personnel leaves the Company
    vulnerable to a negative impact if they leave. The
    Companys continued success will depend, to a significant
    extent, upon the efforts and abilities of the key members of
    management. The loss of their services could have a negative
    impact on the Company.                                                                                                                                                                                                                                                                                                                                                         
|
| |  | The Companys research and development
    activities involve the controlled use of potentially harmful
    biological materials as wells as hazardous materials, chemicals
    and various radioactive compounds. The Company cannot completely
    eliminate the risk of accidental contamination or injury from
    the use, storage, handling or disposal of these materials. In
    the event of contamination, the Company could be held liable for
    damages that result. Any liability could exceed the
    Companys resources.                                                                                                                                               
|
| |  | The Companys stockholder rights plan,
    provisions of its certificate of incorporation and provisions of
    the Delaware General Corporation Law could provide its board of
    directors with the ability to deter hostile takeovers or delay,
    deter or prevent a change in control of the Company, including
    transactions in which stockholders might otherwise receive a
    premium for their shares over then current market prices.                                                                                                                                                                                                                                    
|
| |  | The Company is authorized to issue, without
    stockholder approval, 10,000,000 shares of preferred stock,
    200,000,000 shares of common stock and securities
    convertible into either shares of common stock or preferred
    stock. If the Company issues additional equity securities, the
    price of its securities may be materially and adversely
    affected. The board of directors can also use issuances of
    preferred or common stock to defer a hostile takeover or change
    in control of the Company.                                                                                                                                                       
|
| |  | The Company is subject to a Consent Order with
    the Securities and Exchange Commission, which among other things
    requires the Company to pre-clear all FDA-related press releases
    with the FDA, and permanently enjoins the Company from violating
    securities laws and regulations. The Consent Order also
    precludes protection for forward-looking statements under the
    Safe Harbor provisions of the Private Securities Litigation
    Reform Act of 1995. The existence of the permanent injunction
    under the Consent Order, and the lack of protection under the
    Safe Harbor may limit the Companys ability to defend
    against future allegations.

38



---



##### Table of Contents






PART II  OTHER
INFORMATION






|        |                  
|------- | -----------------
|Item 1. | Legal Proceedings

See Note 7 of Notes to Consolidated
Condensed Financial Statements in Item 1 of Part I of
this Quarterly Report, which is incorporated herein by reference.






|        |                                     
|------- | ------------------------------------
|Item 6. | Exhibits and Reports on
    Form 8-K

(a) Exhibits

| |      |  |  |  |  |                                                                                                                                                                                            
| | ---- |  |  |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 15.1 |  |  |  |  | Review Report of Independent Accountants.                                                                                                                                                  
| | 15.2 |  |  |  |  | Awareness Letter of Independent Accountants.                                                                                                                                               
| | 31.1 |  |  |  |  | Certification of Chief Executive Officer pursuant
    to Rule 13a-14(a) under the Exchange Act and
    Section 302 of the Sarbanes-Oxley Act of 2002.                                      
| | 31.2 |  |  |  |  | Certification of Chief Financial Officer pursuant
    to Rule 13a-14(a) under the Exchange Act and
    Section 302 of the Sarbanes-Oxley Act of 2002.                                      
| | 32.1 |  |  |  |  | Certification of Chief Executive Officer and
    Chief Financial Officer of Periodic Financial Reports pursuant
    to Section 906 of the Sarbanes-Oxley Act of 2002,
    18 U.S.C. § 1350.

(b) Reports on Form 8-K

None.

39



---



##### Table of Contents






SIGNATURES

Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this
Quarterly Report on Form 10-Q to be signed on its behalf by
the undersigned thereunto duly authorized.



| |                                                      
| | -----------------------------------------------------
| | VALEANT PHARMACEUTICALS INTERNATIONAL                
| | Registrant                                           
|
| | /s/ ROBERT W. OLEARY                                
| |                                                      
| | Robert W. OLeary                                    
| | Chairman of the Board and Chief Executive
    Officer

Date: May 10, 2004



| |                                                         
| | --------------------------------------------------------
| | /s/ BARY G. BAILEY                                      
| |                                                         
| | Bary G. Bailey                                          
| | Executive Vice President and Chief Financial
    Officer
| | (principal financial and accounting
    officer)        

Date: May 10, 2004

40



---



##### Table of Contents



EXHIBIT INDEX

|        |    |    |  |  |  |                                                                                                                                                                                            
|------- | -- | -- |  |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |    |  | 
|        |    |    |  | 
|        | 15 | .1 |  |  |  | Review Report of Independent Accountants.                                                                                                                                                  
|        | 15 | .2 |  |  |  | Awareness Letter of Independent Accountants.                                                                                                                                               
|        | 31 | .1 |  |  |  | Certification of Chief Executive Officer pursuant
    to Rule 13a-14(a) under the Exchange Act and
    Section 302 of the Sarbanes-Oxley Act of 2002.                                      
|        | 31 | .2 |  |  |  | Certification of Chief Financial Officer pursuant
    to Rule 13a-14(a) under the Exchange Act and
    Section 302 of the Sarbanes-Oxley Act of 2002.                                      
|        | 32 | .1 |  |  |  | Certification of Chief Executive Officer and
    Chief Financial Officer of Periodic Financial Reports pursuant
    to Section 906 of the Sarbanes-Oxley Act of 2002,
    18 U.S.C. § 1350.