##### 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
    September 30, 2003                                       
|          
|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



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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)


ICN Pharmaceuticals, Inc.

(Former name, former address and former fiscal
year, if changed since last report)


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
November 7, 2003 was 83,089,398.



---






---

TABLE OF CONTENTS



|                                |                                                                                               |  |  |  |  |  |  | 
|------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I -- FINANCIAL INFORMATION
|                                | CONSOLIDATED CONDENSED BALANCE SHEETS                                                        
|                                | CONSOLIDATED CONDENSED STATEMENTS OF INCOME                                                  
|                                | CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME                                    
|                                | CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS                                              
|                                | MANAGEMENTS STATEMENT REGARDING UNAUDITED FINANCIAL STATEMENTS                              
|                                | NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS                                         
|                                | NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS --(Continued)                           
|                                | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|                                | Item 4. Controls and Procedures.                                                             
|FORWARD LOOKING STATEMENTS     
|PART II -- OTHER INFORMATION   
|                                | Item 1. Legal Proceedings                                                                    
|                                | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                     
|EXHIBIT INDEX                  
|EXHIBIT 3.1                    
|EXHIBIT 15.1                   
|EXHIBIT 15.2                   
|EXHIBIT 31.1                   
|EXHIBIT 31.2                   
|EXHIBIT 32.1                   



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##### Table of Contents



VALEANT PHARMACEUTICALS
INTERNATIONAL

INDEX

|                                   |  |                                                                                                                                    |    |        |    | 
|---------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------- | -- | ------ | -- | 
|                                   |  |                                                                                                                                    |    | Page  
|                                   |  |                                                                                                                                    |    | Number
|                                   |  |                                                                                                                                    |    |       
|PART I  FINANCIAL
    INFORMATION
|Item 1.                            |  | Financial Statements                                                                                                               |    |        |    | 
|                                   |  | Consolidated Condensed Balance Sheets 
    September 30, 2003 and December 31, 2002                                               |    |        | 2  | 
|                                   |  | Consolidated Condensed Statements of
    Income  Three months and nine months ended
    September 30, 2003 and 2002               |    |        | 3  | 
|                                   |  | Consolidated Condensed Statements of
    Comprehensive Income  Three months and nine months
    ended September 30, 2003 and 2002 |    |        | 4  | 
|                                   |  | Consolidated Condensed Statements of Cash
    Flows  Nine months ended September 30, 2003 and
    2002                            |    |        | 5  | 
|                                   |  | Managements Statement Regarding Unaudited
    Financial Statements                                                                |    |        | 6  | 
|                                   |  | Notes to Consolidated Condensed Financial
    Statements                                                                           |    |        | 7  | 
|Item 2.                            |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations                                          |    |        | 30 | 
|Item 3.                            |  | Quantitative and Qualitative Disclosures About
    Market Risk                                                                     |    |        | 39 | 
|Item 4.                            |  | Controls and Procedures                                                                                                            |    |        | 39 | 
|PART II  OTHER
    INFORMATION   
|Item 1.                            |  | Legal Proceedings                                                                                                                  |    |        | 43 | 
|Item 6.                            |  | Exhibits and Reports on Form 8-K                                                                                                   |    |        | 43 | 
|SIGNATURES                         |  |                                                                                                                                    | 44 |       

1



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##### Table of Contents






PART I  FINANCIAL
INFORMATION

Item 1. Financial
Statements


VALEANT PHARMACEUTICALS
INTERNATIONAL






CONSOLIDATED CONDENSED BALANCE
SHEETS


September 30, 2003 and December 31,
2002


(In thousands, except per share
data)


|                                            |                                                                                                                                                                                                                            |                               |           |              |         |   |           |           |         | 
|------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------- | --------- | ------------ | ------- | - | --------- | --------- | ------- | 
|                                            |                                                                                                                                                                                                                            | September 30,                 |           | December 31,
|                                            |                                                                                                                                                                                                                            | 2003                          |           | 2002        
|                                            |                                                                                                                                                                                                                            |                               |           |             
|                                            |                                                                                                                                                                                                                            | (Unaudited)                   |           |             
|ASSETS                                     
|Current Assets:                             |                                                                                                                                                                                                                            |                               |           |              |         |   |           |          
|                                            | Cash and cash equivalents                                                                                                                                                                                                  |                               | $         | 301,028      |         |   | $         | 245,184   |        
|                                            | Accounts receivable, net                                                                                                                                                                                                   |                               |           | 156,361      |         |   |           | 215,776   |        
|                                            | Inventories, net                                                                                                                                                                                                           |                               |           | 91,812       |         |   |           | 88,862    |        
|                                            | Income taxes receivable                                                                                                                                                                                                    |                               |           |             |         |   |           | 12,779    |        
|                                            | Prepaid expenses and other current assets                                                                                                                                                                                  |                               |           | 16,771       |         |   |           | 13,972    |        
|                                            |                                                                                                                                                                                                                            |                               |           |              |         |   |           |          
|                                            |                                                                                                                                                                                                                            | Total current assets          |           |              | 565,972 |   |           |           | 576,573 | 
|Property, plant and equipment, net          |                                                                                                                                                                                                                            |                               | 235,051   |              |         |   | 242,888   |          
|Deferred tax assets, net                    |                                                                                                                                                                                                                            |                               | 89,720    |              |         |   | 39,180    |          
|Intangible assets, net                      |                                                                                                                                                                                                                            |                               | 442,809   |              |         |   | 384,547   |          
|Other assets                                |                                                                                                                                                                                                                            |                               | 44,273    |              |         |   | 43,531    |          
|                                            |                                                                                                                                                                                                                            |                               |           |              |         |   |           |          
|                                            |                                                                                                                                                                                                                            | Total non-current assets      |           |              | 811,853 |   |           |           | 710,146 | 
|Assets of discontinued operations           |                                                                                                                                                                                                                            |                               | 27,172    |              |         |   | 201,830   |          
|                                            |                                                                                                                                                                                                                            |                               |           |              |         |   |           |          
|                                            |                                                                                                                                                                                                                            | $                             | 1,404,997 |              |         | $ | 1,488,549 |          
|                                            |                                                                                                                                                                                                                            |                               |           |              |         |   |           |          
|LIABILITIES AND STOCKHOLDERS
    EQUITY   
|Current Liabilities:                        |                                                                                                                                                                                                                            |                               |           |              |         |   |           |          
|                                            | Trade payables                                                                                                                                                                                                             |                               | $         | 32,366       |         |   | $         | 33,487    |        
|                                            | Accrued liabilities                                                                                                                                                                                                        |                               |           | 124,217      |         |   |           | 142,093   |        
|                                            | Notes payable and current portion of long-term
    debt                                                                                                                                                                    |                               |           | 1,303        |         |   |           | 3,923     |        
|                                            | Income taxes payable                                                                                                                                                                                                       |                               |           | 28,250       |         |   |           |          |        
|                                            |                                                                                                                                                                                                                            |                               |           |              |         |   |           |          
|                                            |                                                                                                                                                                                                                            | Total current liabilities     |           |              | 186,136 |   |           |           | 179,503 | 
|Long-term debt, less current portion        |                                                                                                                                                                                                                            |                               | 478,652   |              |         |   | 481,548   |          
|Deferred income taxes and other liabilities |                                                                                                                                                                                                                            |                               | 73,515    |              |         |   | 52,288    |          
|Minority interest                           |                                                                                                                                                                                                                            |                               | 3,397     |              |         |   | 23,452    |          
|                                            |                                                                                                                                                                                                                            |                               |           |              |         |   |           |          
|                                            |                                                                                                                                                                                                                            | Total non-current liabilities |           |              | 555,564 |   |           |           | 557,288 | 
|Liabilities of discontinued operations      |                                                                                                                                                                                                                            |                               | 19,216    |              |         |   | 48,068    |          
|                                            |                                                                                                                                                                                                                            |                               |           |              |         |   |           |          
|Commitments and contingencies               |                                                                                                                                                                                                                            |                               |           |              |         |   |           |          
|Stockholders Equity:                       |                                                                                                                                                                                                                            |                               |           |              |         |   |           |          
|                                            | Common stock, $0.01 par value; 200,000 shares
    authorized; 83,075 (September 30, 2003) and 84,066
    (December 31, 2002) shares outstanding (after deducting
    shares in treasury of 1,068 as of September 30, 2003) |                               |           | 831          |         |   |           | 841       |        
|                                            | Additional capital                                                                                                                                                                                                         |                               |           | 1,020,829    |         |   |           | 1,027,335 |        
|                                            | Accumulated deficit                                                                                                                                                                                                        |                               |           | (330,174     | )       |   |           | (256,809  | )      
|                                            | Accumulated other comprehensive loss                                                                                                                                                                                       |                               |           | (47,405      | )       |   |           | (67,677   | )      
|                                            |                                                                                                                                                                                                                            |                               |           |              |         |   |           |          
|                                            |                                                                                                                                                                                                                            | Total stockholders equity    |           |              | 644,081 |   |           |           | 703,690 | 
|                                            |                                                                                                                                                                                                                            |                               |           |              |         |   |           |          
|                                            |                                                                                                                                                                                                                            | $                             | 1,404,997 |              |         | $ | 1,488,549 |          
|                                            |                                                                                                                                                                                                                            |                               |           |              |         |   |           |          

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

2



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##### Table of Contents



VALEANT PHARMACEUTICALS
INTERNATIONAL






CONSOLIDATED CONDENSED STATEMENTS OF
INCOME


For the three months and nine months ended
September 30, 2003 and 2002


(Unaudited, in thousands, except per share
data)


|                                                                                       |                                                         |                               |         |                   |         |      |        |         |         |  |         |         |         |  |         |          |         |  
|-------------------------------------------------------------------------------------- | ------------------------------------------------------- | ----------------------------- | ------- | ----------------- | ------- | ---- | ------ | ------- | ------- |  | ------- | ------- | ------- |  | ------- | -------- | ------- | -
|                                                                                       |                                                         |                               |         |                  
|                                                                                       |                                                         | Three Months Ended            |         | Nine Months Ended
|                                                                                       |                                                         | September 30,                 |         | September 30,    
|                                                                                       |                                                         |                               |         |                  
|                                                                                       |                                                         | 2003                          |         | 2002              |         | 2003 |        | 2002   
|                                                                                       |                                                         |                               |         |                   |         |      |        |        
|Revenues:                                                                              |                                                         |                               |         |                   |         |      |        |         |         |  |         |         |         |  |         |         
|                                                                                       | Product sales                                           |                               | $       | 131,290           |         |      | $      | 108,284 |         |  | $       | 372,956 |         |  | $       | 351,100  |        
|                                                                                       | Royalties                                               |                               |         | 36,217            |         |      |        | 63,367  |         |  |         | 136,755 |         |  |         | 186,368  |        
|                                                                                       |                                                         |                               |         |                   |         |      |        |         |         |  |         |         |         |  |         |         
|                                                                                       |                                                         | Total revenues                |         |                   | 167,507 |      |        |         | 171,651 |  |         |         | 509,711 |  |         |          | 537,468 |  
|                                                                                       |                                                         |                               |         |                   |         |      |        |         |         |  |         |         |         |  |         |         
|Costs and expenses:                                                                    |                                                         |                               |         |                   |         |      |        |         |         |  |         |         |         |  |         |         
|                                                                                       | Cost of goods sold                                      |                               |         | 42,128            |         |      |        | 39,769  |         |  |         | 131,295 |         |  |         | 113,360  |        
|                                                                                       | Selling expenses                                        |                               |         | 40,478            |         |      |        | 40,140  |         |  |         | 121,146 |         |  |         | 119,120  |        
|                                                                                       | General and administrative expenses                     |                               |         | 25,512            |         |      |        | 54,483  |         |  |         | 80,797  |         |  |         | 293,112  |        
|                                                                                       | Research and development costs                          |                               |         | 10,752            |         |      |        | 13,479  |         |  |         | 29,701  |         |  |         | 35,526   |        
|                                                                                       | Acquired in-process research and development            |                               |         | 117,609           |         |      |        |        |         |  |         | 117,609 |         |  |         |         |        
|                                                                                       | Amortization expense                                    |                               |         | 10,453            |         |      |        | 7,930   |         |  |         | 27,371  |         |  |         | 23,960   |        
|                                                                                       |                                                         |                               |         |                   |         |      |        |         |         |  |         |         |         |  |         |         
|                                                                                       |                                                         | Total expenses                |         |                   | 246,932 |      |        |         | 155,801 |  |         |         | 507,919 |  |         |          | 585,078 |  
|                                                                                       |                                                         |                               |         |                   |         |      |        |         |         |  |         |         |         |  |         |         
|                                                                                       |                                                         | Income (loss) from operations |         |                   | (79,425 | )    |        |         | 15,850  |  |         |         | 1,792   |  |         |          | (47,610 | )
|Other income, net, including translation and
    exchange                              |                                                         |                               | 2,208   |                   |         |      | 4,253  |         |         |  | 496     |         |         |  | 8,192   |         
|Gain (loss) on sale of subsidiary stock                                                |                                                         |                               |        |                   |         |      | (1,012 | )       |         |  |        |         |         |  | 261,937 |         
|Gain (loss) on early extinguishment of debt                                            |                                                         |                               |        |                   |         |      | 17,538 |         |         |  |        |         |         |  | (25,730 | )       
|Interest income                                                                        |                                                         |                               | 953     |                   |         |      | 1,458  |         |         |  | 3,066   |         |         |  | 4,434   |         
|Interest expense                                                                       |                                                         |                               | (7,871  | )                 |         |      | (9,189 | )       |         |  | (23,892 | )       |         |  | (34,381 | )       
|                                                                                       |                                                         |                               |         |                   |         |      |        |         |         |  |         |         |         |  |         |         
|Income (loss) from continuing operations
    before income taxes and minority interest |                                                         |                               | (84,135 | )                 |         |      | 28,898 |         |         |  | (18,538 | )       |         |  | 166,842 |         
|Provision for income taxes                                                             |                                                         |                               | 12,720  |                   |         |      | 7,498  |         |         |  | 37,647  |         |         |  | 58,811  |         
|Minority interest, net                                                                 |                                                         |                               | 1,656   |                   |         |      | 5,702  |         |         |  | 11,667  |         |         |  | 10,670  |         
|                                                                                       |                                                         |                               |         |                   |         |      |        |         |         |  |         |         |         |  |         |         
|                                                                                       | Income (loss) from continuing operations                |                               |         | (98,511           | )       |      |        | 15,698  |         |  |         | (67,852 | )       |  |         | 97,361   |        
|                                                                                       | Income (loss) from discontinued operations              |                               |         | 16,110            |         |      |        | (90,633 | )       |  |         | 13,992  |         |  |         | (109,742 | )      
|                                                                                       | Cumulative effect of change in accounting
    principle |                               |         |                  |         |      |        |        |         |  |         |        |         |  |         | (21,791  | )      
|                                                                                       |                                                         |                               |         |                   |         |      |        |         |         |  |         |         |         |  |         |         
|                                                                                       | Net loss                                                |                               | $       | (82,401           | )       |      | $      | (74,935 | )       |  | $       | (53,860 | )       |  | $       | (34,172  | )      
|                                                                                       |                                                         |                               |         |                   |         |      |        |         |         |  |         |         |         |  |         |         
|Basic earnings per share:                                                              |                                                         |                               |         |                   |         |      |        |         |         |  |         |         |         |  |         |         
|                                                                                       | Income (loss) from continuing operations                |                               | $       | (1.18             | )       |      | $      | 0.19    |         |  | $       | (0.81   | )       |  | $       | 1.17     |        
|                                                                                       | Discontinued operations                                 |                               |         | 0.19              |         |      |        | (1.09   | )       |  |         | 0.17    |         |  |         | (1.32    | )      
|                                                                                       | Cumulative effect of change in accounting
    principle |                               |         |                  |         |      |        |        |         |  |         |        |         |  |         | (0.26    | )      
|                                                                                       |                                                         |                               |         |                   |         |      |        |         |         |  |         |         |         |  |         |         
|                                                                                       | Basic net loss per share                                |                               | $       | (0.99             | )       |      | $      | (0.90   | )       |  | $       | (0.64   | )       |  | $       | (0.41    | )      
|                                                                                       |                                                         |                               |         |                   |         |      |        |         |         |  |         |         |         |  |         |         
|Diluted earnings per share:                                                            |                                                         |                               |         |                   |         |      |        |         |         |  |         |         |         |  |         |         
|                                                                                       | Income (loss) from continuing operations                |                               | $       | (1.18             | )       |      | $      | 0.19    |         |  | $       | (0.81   | )       |  | $       | 1.15     |        
|                                                                                       | Discontinued operations                                 |                               |         | 0.19              |         |      |        | (1.09   | )       |  |         | 0.17    |         |  |         | (1.11    | )      
|                                                                                       | Cumulative effect of change in accounting
    principle |                               |         |                  |         |      |        |        |         |  |         |        |         |  |         | (0.22    | )      
|                                                                                       |                                                         |                               |         |                   |         |      |        |         |         |  |         |         |         |  |         |         
|                                                                                       | Diluted net loss per share                              |                               | $       | (0.99             | )       |      | $      | (0.90   | )       |  | $       | (0.64   | )       |  | $       | (0.18    | )      
|                                                                                       |                                                         |                               |         |                   |         |      |        |         |         |  |         |         |         |  |         |         
|Shares used in per share computation:                                                  |                                                         |                               |         |                   |         |      |        |         |         |  |         |         |         |  |         |         
|                                                                                       | Basic                                                   |                               |         | 83,067            |         |      |        | 83,392  |         |  |         | 83,759  |         |  |         | 83,053   |        
|                                                                                       |                                                         |                               |         |                   |         |      |        |         |         |  |         |         |         |  |         |         
|                                                                                       | Diluted                                                 |                               |         | 83,067            |         |      |        | 83,484  |         |  |         | 83,759  |         |  |         | 99,023   |        
|                                                                                       |                                                         |                               |         |                   |         |      |        |         |         |  |         |         |         |  |         |         

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

3



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##### Table of Contents



VALEANT PHARMACEUTICALS
INTERNATIONAL






CONSOLIDATED CONDENSED STATEMENTS OF
COMPREHENSIVE INCOME


For the three months and nine months ended
September 30, 2003 and 2002


(Unaudited, in thousands)


|                            |                                                                      |                    |         |                   |   |      |         |        |   |   |         |        |  |   |         |        |  
|--------------------------- | -------------------------------------------------------------------- | ------------------ | ------- | ----------------- | - | ---- | ------- | ------ | - | - | ------- | ------ |  | - | ------- | ------ | -
|                            |                                                                      |                    |         |                  
|                            |                                                                      | Three Months Ended |         | Nine Months Ended
|                            |                                                                      | September 30,      |         | September 30,    
|                            |                                                                      |                    |         |                  
|                            |                                                                      | 2003               |         | 2002              |   | 2003 |         | 2002  
|                            |                                                                      |                    |         |                   |   |      |         |       
|Net loss                    |                                                                      | $                  | (82,401 | )                 |   | $    | (74,935 | )      |   | $ | (53,860 | )      |  | $ | (34,172 | )     
|Other comprehensive income: |                                                                      |                    |         |                   |   |      |         |        |   |   |         |        |  |   |         |       
|                            | Foreign currency translation adjustments                             |                    |         | (1,065            | ) |      |         | (4,677 | ) |   |         | 19,134 |  |   |         | (2,891 | )
|                            | Unrealized gain (loss) on marketable equity
    securities and other |                    |         | 1,205             |   |      |         | (3,956 | ) |   |         | 1,138  |  |   |         | (4,701 | )
|                            |                                                                      |                    |         |                   |   |      |         |        |   |   |         |        |  |   |         |       
|Comprehensive loss          |                                                                      | $                  | (82,261 | )                 |   | $    | (83,568 | )      |   | $ | (33,588 | )      |  | $ | (41,764 | )     
|                            |                                                                      |                    |         |                   |   |      |         |        |   |   |         |        |  |   |         |       

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

4



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##### Table of Contents



VALEANT PHARMACEUTICALS
INTERNATIONAL






CONSOLIDATED CONDENSED STATEMENTS OF CASH
FLOWS


For the nine months ended September 30,
2003 and 2002


(Unaudited, in thousands)


|                                                                            |                                                                                                            |                                                                            |                                                         |          |         |         |         |          |          |        |  
|--------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------- | ------------------------------------------------------- | -------- | ------- | ------- | ------- | -------- | -------- | ------ | -
|                                                                            |                                                                                                            |                                                                           
|                                                                            |                                                                                                            | Nine Months Ended                                                         
|                                                                            |                                                                                                            | September 30,                                                             
|                                                                            |                                                                                                            |                                                                           
|                                                                            |                                                                                                            | 2003                                                                       |                                                         | 2002    
|                                                                            |                                                                                                            |                                                                            |                                                         |         
|Cash flows from operating
    activities:                                   |                                                                                                            |                                                                            |                                                         |          |         |         |         |         
|                                                                            | Income (loss) from continuing operations                                                                   |                                                                            | $                                                       | (67,852  | )       |         | $       | 97,361   |         
|                                                                            | Adjustments to reconcile net income
    (loss) to net cash provided by (used in) operating
    activities: |                                                                            |                                                         |          |         |         |         |          |         
|                                                                            |                                                                                                            | Depreciation and amortization                                              |                                                         |          | 45,827  |         |         |          | 42,758   |       
|                                                                            |                                                                                                            | Provision for losses on accounts receivable and
    inventory obsolescence |                                                         |          | 3,631   |         |         |          | 4,374    |       
|                                                                            |                                                                                                            | Translation and exchange (gains) losses, net                               |                                                         |          | (496    | )       |         |          | (8,192   | )     
|                                                                            |                                                                                                            | Other non-cash items                                                       |                                                         |          | 464     |         |         |          | 44,286   |       
|                                                                            |                                                                                                            | Write-off of acquired in-process R&D                                       |                                                         |          | 117,609 |         |         |          |         |       
|                                                                            |                                                                                                            | Deferred income taxes                                                      |                                                         |          | (7,455  | )       |         |          | 34       |       
|                                                                            |                                                                                                            | Minority interest                                                          |                                                         |          | 11,667  |         |         |          | 10,670   |       
|                                                                            |                                                                                                            | Gain on sale of subsidiary stock                                           |                                                         |          |        |         |         |          | (261,937 | )     
|                                                                            |                                                                                                            | Loss on extinguishment of debt                                             |                                                         |          |        |         |         |          | 25,730   |       
|                                                                            | Change in assets and liabilities, net of effects
    of acquisitions:                                      |                                                                            |                                                         |          |         |         |         |          |         
|                                                                            |                                                                                                            | Accounts receivable                                                        |                                                         |          | 61,876  |         |         |          | 21,857   |       
|                                                                            |                                                                                                            | Inventories                                                                |                                                         |          | (510    | )       |         |          | (4,300   | )     
|                                                                            |                                                                                                            | Prepaid expenses and other assets                                          |                                                         |          | (10,236 | )       |         |          | (20,793  | )     
|                                                                            |                                                                                                            | Trade payables and accrued liabilities                                     |                                                         |          | (42,855 | )       |         |          | 10,618   |       
|                                                                            |                                                                                                            | Income taxes payable                                                       |                                                         |          | 45,582  |         |         |          | 16,813   |       
|                                                                            |                                                                                                            | Other liabilities                                                          |                                                         |          | (8,058  | )       |         |          | 4,272    |       
|                                                                            |                                                                                                            |                                                                            |                                                         |          |         |         |         |         
|                                                                            |                                                                                                            | Cash flow from operating activities in continuing
    operations           |                                                         |          | 149,194 |         |         |          | (16,449  | )     
|                                                                            |                                                                                                            | Cash flow from operating activities in
    discontinued operations         |                                                         |          | 21,938  |         |         |          | 8,065    |       
|                                                                            |                                                                                                            |                                                                            |                                                         |          |         |         |         |         
|                                                                            |                                                                                                            |                                                                            | Net cash provided by (used in) operating
    activities |          |         | 171,132 |         |          |          | (8,384 | )
|                                                                            |                                                                                                            |                                                                            |                                                         |          |         |         |         |         
|Cash flows from investing
    activities:                                   |                                                                                                            |                                                                            |                                                         |          |         |         |         |         
|                                                                            | Capital expenditures                                                                                       |                                                                            |                                                         | (9,241   | )       |         |         | (13,593  | )       
|                                                                            | Proceeds from sale of assets                                                                               |                                                                            |                                                         | 318      |         |         |         | 356      |         
|                                                                            | Proceeds from sale of subsidiary stock                                                                     |                                                                            |                                                         |         |         |         |         | 276,611  |         
|                                                                            | Acquisition of license rights, product lines and
    businesses                                            |                                                                            |                                                         | (192,923 | )       |         |         | (26,765  | )       
|                                                                            |                                                                                                            |                                                                            |                                                         |          |         |         |         |         
|                                                                            | Cash flow from investing activities in continuing
    operations                                           |                                                                            |                                                         | (201,846 | )       |         |         | 236,609  |         
|                                                                            | Cash flow from investing activities in
    discontinued operations                                         |                                                                            |                                                         | 104,276  |         |         |         | 5,621    |         
|                                                                            |                                                                                                            |                                                                            |                                                         |          |         |         |         |         
|                                                                            |                                                                                                            | Net cash (used in) provided by investing
    activities                    |                                                         |          | (97,570 | )       |         |          | 242,230  |       
|                                                                            |                                                                                                            |                                                                            |                                                         |          |         |         |         |         
|Cash flows from financing
    activities:                                   |                                                                                                            |                                                                            |                                                         |          |         |         |         |         
|                                                                            | Proceeds from issuance of long-term debt and
    notes payable                                             |                                                                            |                                                         |         |         |         |         | 686      |         
|                                                                            | Payments on long-term debt and notes payable                                                               |                                                                            |                                                         | (6,797   | )       |         |         | (273,630 | )       
|                                                                            | Proceeds from exercise of stock options                                                                    |                                                                            |                                                         | 317      |         |         |         | 12,892   |         
|                                                                            | Dividends paid                                                                                             |                                                                            |                                                         | (19,501  | )       |         |         | (19,035  | )       
|                                                                            | Repurchase of common stock                                                                                 |                                                                            |                                                         |         |         |         |         | (31,955  | )       
|                                                                            | Funds received from discontinued operations                                                                |                                                                            |                                                         | 133,774  |         |         |         | 8,706    |         
|                                                                            |                                                                                                            |                                                                            |                                                         |          |         |         |         |         
|                                                                            | Cash flow from financing activities in continuing
    operations                                           |                                                                            |                                                         | 107,793  |         |         |         | (302,336 | )       
|                                                                            | Cash flow from financing activities in
    discontinued operations                                         |                                                                            |                                                         | (134,070 | )       |         |         | (8,513   | )       
|                                                                            |                                                                                                            |                                                                            |                                                         |          |         |         |         |         
|                                                                            |                                                                                                            | Net cash used in financing activities                                      |                                                         |          | (26,277 | )       |         |          | (310,849 | )     
|                                                                            |                                                                                                            |                                                                            |                                                         |          |         |         |         |         
|Effect of exchange rate changes on cash and cash
    equivalents            |                                                                                                            |                                                                            | 966                                                     |          |         |         | (161    | )       
|                                                                            |                                                                                                            |                                                                            |                                                         |          |         |         |         |         
|Net increase (decrease) in cash and cash
    equivalents                    |                                                                                                            |                                                                            | 48,251                                                  |          |         |         | (77,164 | )       
|Cash and cash equivalents at beginning of period                            |                                                                                                            |                                                                            | 253,664                                                 |          |         |         | 325,253 |         
|                                                                            |                                                                                                            |                                                                            |                                                         |          |         |         |         |         
|Cash and cash equivalents at end of period                                  |                                                                                                            |                                                                            | 301,915                                                 |          |         |         | 248,089 |         
|Cash and cash equivalents classified as part of
    discontinued operations |                                                                                                            |                                                                            | (887                                                    | )        |         |         | (13,332 | )       
|                                                                            |                                                                                                            |                                                                            |                                                         |          |         |         |         |         
|Cash and cash equivalents of continuing operations                          |                                                                                                            | $                                                                          | 301,028                                                 |          |         | $       | 234,757 |         
|                                                                            |                                                                                                            |                                                                            |                                                         |          |         |         |         |         

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

5



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##### 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, 2002.

6



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##### Table of Contents



VALEANT PHARMACEUTICALS
INTERNATIONAL






NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS


September 30, 2003


(Unaudited)




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

Principles of Consolidation:The accompanying consolidated
condensed financial statements include the accounts of Valeant
Pharmaceuticals International (formerly known as ICN
Pharmaceuticals, Inc.) and its wholly owned subsidiaries (the
Company or Valeant) and all of its
majority-owned subsidiaries. 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.

Comprehensive Income:Accumulated other comprehensive loss
consists of accumulated foreign currency translation
adjustments, unrealized losses on marketable equity securities
and minimum pension liability. Other comprehensive loss has not
been recorded net of any tax provision or benefit as the Company
does not expect to realize any significant tax benefit or
expense from these items.

Per Share Information:In 2003, the Companys Board of
Directors declared a first, second and third quarter cash
dividends of $0.0775 per share, which were paid on
April 23, July 25 and October 29, 2003,
respectively. While the Company has historically paid quarterly
cash dividends, there can be no assurance that the Company will
continue to do so.

Goodwill and Intangible Assets:In July 2001, the Financial Accounting
Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 141,
Business Combinations,and SFAS No. 142,
Goodwill and Other Intangible Assets. During the second
quarter of 2002, the Company completed the transitional
impairment test required by SFAS No. 142. As a result,
the Company recorded an impairment loss of $25,332,000 which was
offset by a benefit of $3,541,000 for the write-off of negative
goodwill. The net amount of $21,791,000 has been recorded as a
cumulative effect of change in accounting principle in the nine
months ended September 30, 2002.

At September 30, 2003 and December 31,
2002, intangible assets were as follows (in thousands):

|                   |                |                    |   |                   |         |        |   |              |          |   |   |         |         |  |   |          |          |  
|------------------ | -------------- | ------------------ | - | ----------------- | ------- | ------ | - | ------------ | -------- | - | - | ------- | ------- |  | - | -------- | -------- | -
|                   |                |                    |   |                  
|                   |                | September 30, 2003 |   | December 31, 2002
|                   |                |                    |   |                  
|                   |                | Gross              |   | Accumulated       |         | Gross  |   | Accumulated 
|                   |                | Amount             |   | Amortization      |         | Amount |   | Amortization
|                   |                |                    |   |                   |         |        |   |             
|Intangible assets: |                |                    |   |                   |         |        |   |              |          |   |   |         |         |  |   |         
|                   | Product rights |                    | $ | 582,298           |         |        | $ | (152,566     | )        |   | $ | 511,556 |         |  | $ | (127,270 | )       
|                   | Goodwill       |                    |   | 13,077            |         |        |   |             |          |   |   | 261     |         |  |   |         |         
|                   |                |                    |   |                   |         |        |   |              |          |   |   |         |         |  |   |         
|                   |                | Total              |   | $                 | 595,375 |        |   | $            | (152,566 | ) |   | $       | 511,817 |  |   | $        | (127,270 | )
|                   |                |                    |   |                   |         |        |   |              |          |   |   |         |         |  |   |         

Estimated amortization expense for the years
ending December 31, 2004, 2005, 2006, 2007 and 2008 is
$48,000,000, $43,000,000, $43,000,000, $42,000,000 and
$35,000,000, respectively.

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 (which amends and restates the 1998 Stock Option Plan (the
Option Plan)) as all options granted under the
Option Plan had an exercise price equal to the market value of
the underlying common stock on the date of grant (excluding
options issued in exchange for Ribapharm Inc. stock
options  See Note 2). Had compensation cost for
the Option Plan been determined based on the fair value at the
grant date for awards in the three and nine months ended
September 30, 2003 and 2002 consistent with the provisions
of SFAS No. 123, the Companys net

7



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##### Table of Contents



VALEANT PHARMACEUTICALS
INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)

income and earnings per share would have been the
unaudited pro forma amounts indicated below (in thousands,
except per share data):



|                                                                                      |                                                                          |                    |         |                   |   |      |         |       |   |   |         |        |   |   |         |         |  
|------------------------------------------------------------------------------------- | ------------------------------------------------------------------------ | ------------------ | ------- | ----------------- | - | ---- | ------- | ----- | - | - | ------- | ------ | - | - | ------- | ------- | -
|                                                                                      |                                                                          |                    |         |                  
|                                                                                      |                                                                          | Three Months Ended |         | Nine Months Ended
|                                                                                      |                                                                          | September 30,      |         | September 30,    
|                                                                                      |                                                                          |                    |         |                  
|                                                                                      |                                                                          | 2003               |         | 2002              |   | 2003 |         | 2002 
|                                                                                      |                                                                          |                    |         |                   |   |      |         |      
|Net loss as reported                                                                  |                                                                          | $                  | (82,401 | )                 |   | $    | (74,935 | )     |   | $ | (53,860 | )      |   | $ | (34,172 | )      
|Compensation costs related to the Companys
    employee stock Compensation plan, net |                                                                          |                    |        |                   |   |      |        |       |   |   |        |        |   |   | 38,068  |        
|Stock based employee compensation expense                                             |                                                                          |                    |         |                   |   |      |         |       |   |   |         |        |   |   |         |        
|                                                                                      | Determined under fair value based method, net of
    related tax effects |                    |         | (965              | ) |      |         | (406  | ) |   |         | (1,910 | ) |   |         | (25,999 | )
|                                                                                      |                                                                          |                    |         |                   |   |      |         |       |   |   |         |        |   |   |         |        
|Pro forma net loss                                                                    |                                                                          | $                  | (83,366 | )                 |   | $    | (75,341 | )     |   | $ | (55,770 | )      |   | $ | (22,103 | )      
|                                                                                      |                                                                          |                    |         |                   |   |      |         |       |   |   |         |        |   |   |         |        
|Earnings per share:                                                                   |                                                                          |                    |         |                   |   |      |         |       |   |   |         |        |   |   |         |        
|                                                                                      | Basic  as reported                                                      |                    | $       | (0.99             | ) |      | $       | (0.90 | ) |   | $       | (0.64  | ) |   | $       | (0.41   | )
|                                                                                      |                                                                          |                    |         |                   |   |      |         |       |   |   |         |        |   |   |         |        
|                                                                                      | Basic  pro forma                                                        |                    | $       | (1.00             | ) |      | $       | (0.90 | ) |   | $       | (0.67  | ) |   | $       | (0.27   | )
|                                                                                      |                                                                          |                    |         |                   |   |      |         |       |   |   |         |        |   |   |         |        
|                                                                                      | Diluted  as reported                                                    |                    | $       | (0.99             | ) |      | $       | (0.90 | ) |   | $       | (0.64  | ) |   | $       | (0.18   | )
|                                                                                      |                                                                          |                    |         |                   |   |      |         |       |   |   |         |        |   |   |         |        
|                                                                                      | Diluted  pro forma                                                      |                    | $       | (1.00             | ) |      | $       | (0.90 | ) |   | $       | (0.67  | ) |   | $       | (0.06   | )
|                                                                                      |                                                                          |                    |         |                   |   |      |         |       |   |   |         |        |   |   |         |        

Under the Option Plan, all outstanding options
immediately vested as a result of the Change of Control that
occurred as a result of the May 2002 Annual Meeting of
Stockholders (See Note 6). The pro forma amounts for the
three and nine months ended September 30, 2002 include the
expense of all unvested options under the Option Plan vesting in
these periods.

Property, Plant and Equipment:During the third quarter of 2003 the
Company approved its global manufacturing strategy. Under its
manufacturing strategy, the goal is to establish a global
manufacturing and supply chain network of five manufacturing
sites which will result in the closing of eight of the
Companys current manufacturing sites. A review for
potential impairment was performed in accordance with
SFAS No. 144, Impairment of Long-Lived Assets.
In determining asset groups, the Company grouped assets at the
lowest level for which independent identifiable cash flows were
available. In determining whether an asset was impaired, the
Company compared undiscounted future cash flows and asset
residual values to the asset group carrying value on a site by
site basis. The impairment analysis indicated that the asset
groups were not impaired as of September 30, 2003,
therefore, no impairment losses were recognized in the third
quarter of 2003. Based on the estimated remaining useful lives
of the manufacturing sites to be disposed of, the book value
would exceed the residual value on the estimated disposal date
for five of the manufacturing sites. As a result, the Company
has revised the depreciation period on these assets and will
incur an additional annual depreciation expense of approximately
$6,400,000 through the third quarter of 2005.

Acquired In-Process Research and Development:In the quarter ended
September 30, 2003, the Company incurred an expense of
$117,609,000 associated with acquired in-process research and
development (IPR&D) related to the Ribapharm
Acquisition. The amount expensed as IPR&D represents an
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. The data used to determine the respective fair values
requires significant judgment, differences in those judgments
would have the impact of changing the allocation of purchase
price to other intangible assets, goodwill. The estimated fair
value of these projects was based on the use of a discounted
cash flow model (based on an estimate of future sales and a
cross margin of using a rate of 25%). For each project, the
estimated after-tax cash flows were probability weighted to take

8



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##### Table of Contents



VALEANT PHARMACEUTICALS
INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)

account of the stage of completion and the risks
surrounding the successful development and commercialization.
These cash flows were then discounted to a present value using a
discount rate of 15%. In addition, solely for the purposes of
estimating the fair value of these IPR&D projects as of
August 25, 2003, the following assumptions were made:



| |   |                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Future research and development costs of
    approximately $150,000,000 would be incurred to complete the
    IPR&D projects.                                            
|
| |  | The IPR&D projects, which are in various
    stages of development from Phase I to Phase II
    clinical trials, are expected to reach completion by the end of
    2006.

The major risks and uncertainties associated with
the timely and successful completion of these projects consist
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. For example, in October 2003, Roche notified the
Company that they are abandoning development of Levovirin.

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



|   |          
|-- | ---------
|2. | Ribapharm

In April 2002, the Company completed an
underwritten public offering of 29,900,000 shares of common
stock, par value $0.01 per share, of Ribapharm, previously a
wholly-owned subsidiary, representing 19.93% of the total
outstanding common stock of Ribapharm (the Ribapharm
Offering). In connection with the Ribapharm Offering, the
Company received net cash proceeds of $276,611,000 and recorded
a gain on the sale of Ribapharms stock of $261,937,000,
net of offering costs.

In connection with the Ribapharm Offering, the
Company paid cash bonuses to its officers, directors and
employees totaling $47,839,000 in April 2002. The Company is
seeking to recover a portion of these bonuses (See Note 9
Commitments and Contingencies  Derivative Actions).
Additionally, the Company paid other professional fees of
$13,000,000 related to the structuring of Ribapharm in April
2002. These amounts are included on the Companys
statements of income in selling, general and administrative
expenses.

In August 2003, the Company repurchased the
approximately 20% minority interest in its Ribapharm subsidiary
for an aggregated total purchase price of $207,438,000 (the
Ribapharm Acquisition). The Company paid $6.25 in
cash for each of the 29,900,703 outstanding publicly held shares
of Ribapharm. Additionally, the Company included the fair value
of the Companys stock options issued in exchange for
outstanding Ribapharm stock options in the purchase price. The
fair value of stock options issued were determined based on a
$15.43 stock price, the closing stock price on August 22,
2003, using the Black-Scholes option valuation model assuming an
expected life of 4.2 years, weighted average risk-free rate
of 2.3%, volatility of 62% and dividends of $0.31. The
acquisition increased the Companys ownership of Ribapharm
to a 100% interest and was accounted for using the purchase
method of accounting. The results of operations of Ribapharm
have always been included in the consolidated income before
minority interest of the Company. Prior to the acquisition, the
minority interest in the Ribapharm income was excluded from the
Companys consolidated net income. Since the date of
acquisition on August 25, 2003, no minority interest exists in
Ribapharm and, accordingly, the consolidated net income includes
the full amount of Ribapharms results from this date. As a
result of the acquisition, minority interest included on the
Companys consolidated balance sheet relating to Ribapharm
as of the acquisition date has been eliminated. The remaining
minority interest as of September 30, 2003 relates to
foreign subsidiaries.

9



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##### Table of Contents



VALEANT PHARMACEUTICALS
INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)

The purchase price of the Ribapharm Acquisition
was (in thousands):

|                                           |       |   |         |         | 
|------------------------------------------ | ----- | - | ------- | ------- | 
|Cash consideration                         |       | $ | 186,879 |        
|Fair value of the Companys options issued |       |   | 10,415  |        
|Transaction costs                          |       |   | 10,144  |        
|                                           |       |   |         |        
|                                           | Total |   | $       | 207,438 | 
|                                           |       |   |         |        

The following table summarizes the preliminary
estimated fair value of the assets acquired and liabilities
assumed as of the date of the Ribapharm Acquisition (in
thousands):

|                                    |  |   |         |  
|----------------------------------- |  | - | ------- | -
|In-process research and development |  | $ | 117,609 |  
|Ribavirin license agreements        |  |   | 67,376  |  
|Unearned compensation               |  |   | 2,700   |  
|Goodwill                            |  |   | 12,845  |  
|Minority interest                   |  |   | 33,859  |  
|Deferred tax liability              |  |   | (26,951 | )
|                                    |  |   |         |  
|                                    |  | $ | 207,438 |  
|                                    |  |   |         |  

The aggregate purchase price was allocated to
identifiable intangible assets acquired based on estimates of
fair value using a discounted cash flow model. The intangible
asset related to the ribavirin license agreements with Schering
and Roche is amortized using an estimated useful life of five
years. Identifiable intangible assets related to Viramidine,
Hepavir B and Levovirin totaled approximately $101,000,000,
$12,000,000 and $5,000,000, respectively, and are expensed as
in-process research and development as the technological
feasibility of these assets has not occurred. Subsequent to the
Ribapharm Acquisition, Roche notified the Company that it was no
longer developing Levovirin. The Company recorded deferred
compensation cost related to the unvested intrinsic value of the
Companys options issued in exchange for unvested Ribapharm
options, which will be amortized over 3 1/2 years. The
remaining excess of the aggregate purchase price over the fair
value of the identifiable net assets acquired has been
recognized as goodwill.

The following unaudited pro forma financial
information presents the combined results of the Company and
Ribapharm as if the acquisition had occurred at the beginning of
each period presented (in thousands except per share amounts):

|                                                                |                                                                 |                    |         |                   |  |      |         |      |  |   |         |      |  |   |         |      | 
|--------------------------------------------------------------- | --------------------------------------------------------------- | ------------------ | ------- | ----------------- |  | ---- | ------- | ---- |  | - | ------- | ---- |  | - | ------- | ---- | 
|                                                                |                                                                 |                    |         |                  
|                                                                |                                                                 | Three Months Ended |         | Nine Months Ended
|                                                                |                                                                 | September 30,      |         | September 30,    
|                                                                |                                                                 |                    |         |                  
|                                                                |                                                                 | 2003               |         | 2002              |  | 2003 |         | 2002
|                                                                |                                                                 |                    |         |                   |  |      |         |     
|Net revenue                                                     |                                                                 | $                  | 167,507 |                   |  | $    | 171,651 |      |  | $ | 509,711 |      |  | $ | 537,468 |     
|Income before discontinued operations and
    accounting change |                                                                 |                    | 23,011  |                   |  |      | 17,659  |      |  |   | 51,870  |      |  |   | 97,012  |     
|Net income (loss)                                               |                                                                 |                    | 39,121  |                   |  |      | (72,974 | )    |  |   | 65,862  |      |  |   | (34,521 | )   
|Basic net income (loss) per share:                              |                                                                 |                    |         |                   |  |      |         |      |  |   |         |      |  |   |         |     
|                                                                | Income before discontinued operations and
    accounting change |                    | $       | 0.28              |  |      | $       | 0.21 |  |   | $       | 0.62 |  |   | $       | 1.17 | 
|Net income (loss)                                               |                                                                 | $                  | 0.47    |                   |  | $    | (0.88   | )    |  | $ | 0.79    |      |  | $ | (0.42   | )   
|Diluted net income (loss) per share:                            |                                                                 |                    |         |                   |  |      |         |      |  |   |         |      |  |   |         |     
|                                                                | Income before discontinued operations and
    accounting change |                    | $       | 0.27              |  |      | $       | 0.21 |  |   | $       | 0.61 |  |   | $       | 1.15 | 
|Net income (loss)                                               |                                                                 | $                  | 0.46    |                   |  | $    | (0.87   | )    |  | $ | 0.78    |      |  | $ | (0.18   | )   

10



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VALEANT PHARMACEUTICALS
INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)

The above pro forma financial information
excludes the acquired in-process research and development charge
noted above and includes adjustments for interest income on cash
disbursed for the acquisition, amortization of identifiable
intangible assets and adjustments for the expenses incurred by
Ribapharm related to the exchange offer for all Ribapharm
outstanding publicly held shares. The expenses incurred by
Ribapharm amounted to $4,544,000 in the quarter ended
September 30, 2003.



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

In June 2002, the Company initiated a strategic
review that included retaining investment bankers and a
consulting firm. As a result of this strategic review, in the
second half of 2002 the Company made the decision to divest its
Russian Pharmaceuticals segment, Biomedicals segment, Photonics
business, raw materials businesses and manufacturing capability
in Central Europe and Circe unit.

The results of the discontinued businesses have
been reflected as discontinued operations in the consolidated
condensed financial statements in accordance with
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. The consolidated condensed
financial statements have been reclassified to conform to
discontinued operations presentation for all historical periods
presented.

On September 30, 2003, the Company sold the
remaining assets of its Biomedicals segment, Dosimetry, for
gross cash proceeds of $58,000,000. The Company recorded a net
gain on disposal of discontinued operations of $23,288,000, net
of a taxes of $15,526,000, related to the sale of Dosimetry in
the quarter ended September 30, 2003.

In June 2003, the Company sold its Russian
Pharmaceuticals segment and certain assets of its Biomedicals
segment. The Company received gross proceeds of $55,000,000 in
cash for the Russian Pharmaceuticals segment and received
727,990 shares of its common stock that was held by the
purchaser, which had a fair market value of approximately
$12,369,000, for the assets of its Biomedicals segment. The
Company recorded a net loss on disposal of discontinued
operations of $7,942,000, net of a tax benefit of approximately
$10,161,000, related to the sale of these businesses in the nine
months ended September 30, 2003.

Deferred tax assets of approximately $53,000,000
related to the businesses sold have been reclassified from net
assets of discontinued operations to deferred tax assets, net,
as of September 30, 2003 in the accompanying condensed
consolidated balance sheets.

The Company disposed of the Circe unit in the
fourth quarter of 2002 for a nominal sales price.

The Company disposed of its Photonics business in
two stages. First, it discontinued the medical services business
in September 2002. Second, the Company sold the laser device
business in March 2003 for approximately $505,000.

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.

11



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VALEANT PHARMACEUTICALS
INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)

Summarized selected financial information for
discontinued operations for the three and nine months ended
September 30, 2003 and 2002 is as follows
(in thousands):

|                                                         |                                                               |                                            |         |                   |        |      |          |         |         |   |         |       |        |   |          |         |          |  
|-------------------------------------------------------- | ------------------------------------------------------------- | ------------------------------------------ | ------- | ----------------- | ------ | ---- | -------- | ------- | ------- | - | ------- | ----- | ------ | - | -------- | ------- | -------- | -
|                                                         |                                                               |                                            |         |                  
|                                                         |                                                               | Three Months Ended                         |         | Nine Months Ended
|                                                         |                                                               | September 30,                              |         | September 30,    
|                                                         |                                                               |                                            |         |                  
|                                                         |                                                               | 2003                                       |         | 2002              |        | 2003 |          | 2002   
|                                                         |                                                               |                                            |         |                   |        |      |          |        
|Revenue                                                  |                                                               | $                                          | 10,342  |                   |        | $    | 49,008   |         |         | $ | 111,836 |       |        | $ | 165,880  |        
|                                                         |                                                               |                                            |         |                   |        |      |          |         |         |   |         |       |        |   |          |        
|Income (loss) before income taxes                        |                                                               | $                                          | 3,492   |                   |        | $    | (16,966  | )       |         | $ | 9,117   |       |        | $ | (28,257  | )      
|Income tax benefit (provision)                           |                                                               |                                            | (456    | )                 |        |      | 1,624    |         |         |   | (1,603  | )     |        |   | 1,903    |        
|                                                         |                                                               |                                            |         |                   |        |      |          |         |         |   |         |       |        |   |          |        
|                                                         | Income (loss) from discontinued operations, net               |                                            |         | 3,036             |        |      |          | (15,342 | )       |   |         | 7,514 |        |   |          | (26,354 | )       
|                                                         |                                                               |                                            |         |                   |        |      |          |         |         |   |         |       |        |   |          |        
|Income (loss) on disposal of discontinued
    operations |                                                               |                                            | 26,507  |                   |        |      | (118,438 | )       |         |   | 10,370  |       |        |   | (127,662 | )      
|Income tax benefit (provision)                           |                                                               |                                            | (13,433 | )                 |        |      | 43,147   |         |         |   | (3,892  | )     |        |   | 44,274   |        
|                                                         |                                                               |                                            |         |                   |        |      |          |         |         |   |         |       |        |   |          |        
|                                                         | Income (loss) on disposal of discontinued
    operations, net |                                            |         | 13,074            |        |      |          | (75,291 | )       |   |         | 6,478 |        |   |          | (83,388 | )       
|                                                         |                                                               |                                            |         |                   |        |      |          |         |         |   |         |       |        |   |          |        
|                                                         |                                                               | Income (loss) from discontinued operations |         | $                 | 16,110 |      |          | $       | (90,633 | ) |         | $     | 13,992 |   |          | $       | (109,742 | )
|                                                         |                                                               |                                            |         |                   |        |      |          |         |         |   |         |       |        |   |          |        

12



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VALEANT PHARMACEUTICALS
INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)

The assets and liabilities of discontinued
operations are stated separately as of September 30, 2003
and December 31, 2002 on the accompanying consolidated
condensed balance sheets. The major asset and liability
categories are as follows (in thousands):

|                                   |                                        |               |        |              |  |   |        |         | 
|---------------------------------- | -------------------------------------- | ------------- | ------ | ------------ |  | - | ------ | ------- | 
|                                   |                                        | September 30, |        | December 31,
|                                   |                                        | 2003          |        | 2002        
|                                   |                                        |               |        |             
|Cash                               |                                        | $             | 887    |              |  | $ | 9,098  |        
|Accounts receivable, net           |                                        |               | 7,132  |              |  |   | 46,601 |        
|Inventories, net                   |                                        |               | 12,123 |              |  |   | 54,306 |        
|Property, plant and equipment, net |                                        |               | 5,836  |              |  |   | 29,481 |        
|Other assets                       |                                        |               | 1,194  |              |  |   | 62,344 |        
|                                   |                                        |               |        |              |  |   |        |        
|                                   | Assets of discontinued operations      |               | $      | 27,172       |  |   | $      | 201,830 | 
|                                   |                                        |               |        |              |  |   |        |        
|Accounts payable                   |                                        | $             | 4,106  |              |  | $ | 20,010 |        
|Accrued liabilities                |                                        |               | 11,998 |              |  |   | 26,372 |        
|Other liabilities                  |                                        |               | 3,112  |              |  |   | 1,686  |        
|                                   |                                        |               |        |              |  |   |        |        
|                                   | Liabilities of discontinued operations |               | $      | 19,216       |  |   | $      | 48,068  | 
|                                   |                                        |               |        |              |  |   |        |        

Included in accumulated other comprehensive loss
are translation gains of $8,490,000 related to discontinued
operations.



|   |                                            
|-- | -------------------------------------------
|4. | Non-recurring and Other Unusual
    Charges

The Company recorded $23,920,000 and $204,958,000
of non-recurring and other unusual charges, which are included
in general and administrative expenses, for the three months and
nine months ended September 30, 2002, respectively. The
following is a summary of the non-recurring and other unusual
charges (in thousands):

|                                                                                          |  |               |        |               |  |   |         | 
|----------------------------------------------------------------------------------------- |  | ------------- | ------ | ------------- |  | - | ------- | 
|                                                                                          |  | Three Months  |        | Nine Months  
|                                                                                          |  | Ended         |        | Ended        
|                                                                                          |  | September 30, |        | September 30,
|                                                                                          |  | 2002          |        | 2002         
|                                                                                          |  |               |        |              
|Executive and director bonuses paid in connection
    with the Ribapharm IPO (Note 2)     |  | $             |       |               |  | $ | 47,839  | 
|Professional fees related to Ribapharm
    (Note 2)                                       |  |               |       |               |  |   | 13,000  | 
|Compensation costs related to the Companys
    employee stock compensation plan (Note 6) |  |               |       |               |  |   | 61,400  | 
|Long-term incentive plan compensation costs
    (Note 6)                                  |  |               |       |               |  |   | 12,022  | 
|Severance costs (Note 6)                                                                  |  |               | 18,708 |               |  |   | 30,708  | 
|Asset impairments                                                                         |  |               |       |               |  |   | 9,100   | 
|Write-off of capitalized offering costs                                                   |  |               |       |               |  |   | 18,295  | 
|Environmental remediation and related expenses                                            |  |               | 5,212  |               |  |   | 5,212   | 
|Costs incurred in the Companys 2002 proxy
    contest                                    |  |               |       |               |  |   | 7,382   | 
|                                                                                          |  |               |        |               |  |   |         | 
|                                                                                          |  | $             | 23,920 |               |  | $ | 204,958 | 
|                                                                                          |  |               |        |               |  |   |         | 

There were no non-recurring and other unusual
charges in the three and nine months ended September 30,
2003.

12



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##### Table of Contents



VALEANT PHARMACEUTICALS
INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)

During 2002, based on a number of factors,
including changes in market conditions and changes in strategic
direction, the Company evaluated the net realizable value of
certain long-lived assets, including capitalized offering costs
related to the proposed public offering of ICN International AG,
the Companys corporate aircraft and other assets. The
Company concluded that due to the passage of time and the
strategic business review, the capitalized offering costs of ICN
International AG of $18,295,000 should be written-off. Also, an
impairment charge of $9,100,000 was recorded for the difference
between the carrying value and the fair value of the corporate
aircraft, as determined by appraisals.

The Company incurred a significant amount of
professional fees in connection with proxy contests in 2002.
Proxy contest expenses were $7,382,000 for the nine months ended
September 30, 2002.



|   |                 
|-- | ----------------
|5. | Debt Repurchases

On April 17, 2002, the Company used the
proceeds of the Ribapharm Offering to complete its tender offer
and consent solicitation for all of its outstanding 8 3/4%
Senior Notes due 2008. The redemption of these notes resulted in
a loss on extinguishment of debt of $43,268,000. In July and
August 2002, the Company repurchased $59,410,000 principal
amount of its 6 1/2% Convertible Subordinated Notes due
2008. In connection with these repurchases, the Company recorded
a gain on early extinguishment of debt of $17,538,000.



|   |                  
|-- | -----------------
|6. | Change of Control

As a result of the May 29, 2002 Annual
Meeting of Stockholders, three persons nominated by Franklin
Mutual Advisors, LLC and Iridian Asset Management LLC were
elected to the Board of Directors. Under the terms of employment
agreements with some key executives, a long-term stock incentive
plan and the Option Plan, the results of the 2002 election,
together with the results of the 2001 election, constitute a
change of control (the Change of Control).

Under the terms of a long-term incentive plan,
all restricted stock awards vested immediately upon the Change
of Control on June 11, 2002. As a result, compensation
expense of $12,022,000 was recorded in the nine months ended
September 30, 2002.

The Option Plan provides that all options
immediately vested and that an option holder had sixty days
following the Change of Control to elect to surrender his or her
nonqualified options to the Company for a cash payment equal to
the excess of the highest closing market price of the stock
during the 90 days preceding the Change of Control, which
was $32.50 per share, or the closing market price on the day
preceding the date of surrender, whichever is higher, over the
exercise price for the surrendered options. During the nine
months ended September 30, 2002, the Company recorded a
charge of $61,400,000 related to the cash payment obligation
under the Option Plan.

Under employment agreements the Company had with
some of its former key executives, the Company had payment
obligations that were triggered upon a termination of the
executives employment either by the Company or the
executive following the Change of Control. During the third
quarter of 2002, the Company triggered its payment obligations
and recorded an obligation for the payments to the executives
totaling $15,507,000. The Company recorded expenses of
$3,201,000 for employee termination and severance benefits in
2002 unrelated to the aforementioned executive employment
agreements. This amount primarily relates to severance related
to former employees and the restructuring of the Companys
ICN International headquarters in Basel, Switzerland. In
addition, on June 19, 2002, Mr. Milan Panic, the
Companys former Chief Executive Officer and Chairman of
the Board, resigned with immediate effect from his positions as
Chairman and Chief Executive Officer and from all positions he
held as a director or officer of any of the Companys
affiliates. Mr. Panic also resigned as one of the
Companys employees with effect from June 30, 2002 and
is no

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##### Table of Contents



VALEANT PHARMACEUTICALS
INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)

longer one of the Companys directors. In
connection with Mr. Panics termination, the Company
recorded severance expense of $12,000,000 in the nine months
ended September 30, 2002.



|   |                   
|-- | ------------------
|7. | 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        |   | Nine Months Ended
|                            |                                                                                                                             | September 30,             |   | September 30,    
|                            |                                                                                                                             |                           |   |                  
|                            |                                                                                                                             | 2003                      |   | 2002              |   | 2003 |   | 2002  
|                            |                                                                                                                             |                           |   |                   |   |      |   |       
|Income:                     |                                                                                                                             |                           |   |                   |   |      |   |        |    |  |   |         |   |  |   |        
|                            | Numerator for basic earnings per
    share  income (loss) available to common
    stockholders                             |                           | $ | (98,511           | ) |      | $ | 15,698 |    |  | $ | (67,852 | ) |  | $ | 97,361  |       
|                            | Interest expense on convertible debt, net of tax                                                                            |                           |   |                  |   |      |   |       |    |  |   |        |   |  |   | 16,625  |       
|                            |                                                                                                                             |                           |   |                   |   |      |   |        |    |  |   |         |   |  |   |        
|                            | Numerator for diluted earnings per
    share  income (loss) available to common
    stockholders after assumed conversions |                           | $ | (98,511           | ) |      | $ | 15,698 |    |  | $ | (67,852 | ) |  | $ | 113,986 |       
|                            |                                                                                                                             |                           |   |                   |   |      |   |        |    |  |   |         |   |  |   |        
|Shares:                     |                                                                                                                             |                           |   |                   |   |      |   |        |    |  |   |         |   |  |   |        
|                            | Denominator for basic earnings per
    share  weighted-average shares outstanding                                          |                           |   | 83,067            |   |      |   | 83,392 |    |  |   | 83,759  |   |  |   | 83,053  |       
|                            | Effect of dilutive securities:                                                                                              |                           |   |                   |   |      |   |        |    |  |   |         |   |  |   |         |       
|                            |                                                                                                                             | Employee stock options    |   |                   |  |      |   |        | 92 |  |   |         |  |  |   |         | 838    | 
|                            |                                                                                                                             | Convertible debt          |   |                   |  |      |   |        |   |  |   |         |  |  |   |         | 15,132 | 
|                            |                                                                                                                             | Other dilutive securities |   |                   |  |      |   |        |   |  |   |         |  |  |   |         |       | 
|                            |                                                                                                                             |                           |   |                   |   |      |   |        |    |  |   |         |   |  |   |        
|                            | Dilutive potential common shares                                                                                            |                           |   |                  |   |      |   | 92     |    |  |   |        |   |  |   | 15,970  |       
|                            |                                                                                                                             |                           |   |                   |   |      |   |        |    |  |   |         |   |  |   |        
|                            | Denominator for diluted earnings per
    share  weighted-average shares adjusted for assumed
    conversions               |                           |   | 83,067            |   |      |   | 83,484 |    |  |   | 83,759  |   |  |   | 99,023  |       
|                            |                                                                                                                             |                           |   |                   |   |      |   |        |    |  |   |         |   |  |   |        
|Basic earnings per share:   |                                                                                                                             |                           |   |                   |   |      |   |        |    |  |   |         |   |  |   |        
|                            | Income (loss) from continuing operations                                                                                    |                           | $ | (1.18             | ) |      | $ | 0.19   |    |  | $ | (0.81   | ) |  | $ | 1.17    |       
|                            | Discontinued operations, net of taxes                                                                                       |                           |   | 0.19              |   |      |   | (1.09  | )  |  |   | 0.17    |   |  |   | (1.32   | )     
|                            | Cumulative effect of change in accounting
    principle                                                                     |                           |   |                  |   |      |   |       |    |  |   |        |   |  |   | (0.26   | )     
|                            |                                                                                                                             |                           |   |                   |   |      |   |        |    |  |   |         |   |  |   |        
|                            | Basic net loss per share                                                                                                    |                           | $ | (0.99             | ) |      | $ | (0.90  | )  |  | $ | (0.64   | ) |  | $ | (0.41   | )     
|                            |                                                                                                                             |                           |   |                   |   |      |   |        |    |  |   |         |   |  |   |        
|Diluted earnings per share: |                                                                                                                             |                           |   |                   |   |      |   |        |    |  |   |         |   |  |   |        
|                            | Income (loss) from continuing operations                                                                                    |                           | $ | (1.18             | ) |      | $ | 0.19   |    |  | $ | (0.81   | ) |  | $ | 1.15    |       
|                            | Discontinued operations, net of taxes                                                                                       |                           |   | 0.19              |   |      |   | (1.09  | )  |  |   | 0.17    |   |  |   | (1.11   | )     
|                            | Cumulative effect of change in accounting
    principle                                                                     |                           |   |                  |   |      |   |       |    |  |   |        |   |  |   | (0.22   | )     
|                            |                                                                                                                             |                           |   |                   |   |      |   |        |    |  |   |         |   |  |   |        
|                            | Diluted net loss per share                                                                                                  |                           | $ | (0.99             | ) |      | $ | (0.90  | )  |  | $ | (0.64   | ) |  | $ | (0.18   | )     
|                            |                                                                                                                             |                           |   |                   |   |      |   |        |    |  |   |         |   |  |   |        

14



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##### Table of Contents



VALEANT PHARMACEUTICALS
INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)

For the three and nine months ended
September 30, 2003, 2,961,002 and 4,966,041 weighted
average stock options, respectively, and 13,591,690 shares from
the effect of convertible debt, are not included in the
computation of earnings per share as such securities are
anti-dilutive.



|   |                           
|-- | --------------------------
|8. | Detail of Certain Accounts

|                                    |                                           |                |         |              |   |   |         |          |  
|----------------------------------- | ----------------------------------------- | -------------- | ------- | ------------ | - | - | ------- | -------- | -
|                                    |                                           | September 30,  |         | December 31,
|                                    |                                           | 2003           |         | 2002        
|                                    |                                           |                |         |             
|                                    |                                           |               
|                                    |                                           | (In thousands)
|Accounts receivable, net:           |                                           |                |         |              |   |   |         |         
|                                    | Trade accounts receivable                 |                | $       | 103,220      |   |   | $       | 100,724  |  
|                                    | Royalties receivable                      |                |         | 47,480       |   |   |         | 105,496  |  
|                                    | Other receivables                         |                |         | 13,599       |   |   |         | 17,202   |  
|                                    |                                           |                |         |              |   |   |         |         
|                                    |                                           |                | 164,299 |              |   |   | 223,422 |         
|                                    | Allowance for doubtful accounts           |                |         | (7,938       | ) |   |         | (7,646   | )
|                                    |                                           |                |         |              |   |   |         |         
|                                    |                                           | $              | 156,361 |              |   | $ | 215,776 |         
|                                    |                                           |                |         |              |   |   |         |         
|Inventories, net:                   |                                           |                |         |              |   |   |         |         
|                                    | Raw materials and supplies                |                | $       | 34,285       |   |   | $       | 42,398   |  
|                                    | Work-in-process                           |                |         | 25,959       |   |   |         | 29,290   |  
|                                    | Finished goods                            |                |         | 43,148       |   |   |         | 28,234   |  
|                                    |                                           |                |         |              |   |   |         |         
|                                    |                                           |                | 103,392 |              |   |   | 99,922  |         
|                                    | Allowance for inventory obsolescence      |                |         | (11,580      | ) |   |         | (11,060  | )
|                                    |                                           |                |         |              |   |   |         |         
|                                    |                                           | $              | 91,812  |              |   | $ | 88,862  |         
|                                    |                                           |                |         |              |   |   |         |         
|Property, plant and equipment, net: |                                           |                |         |              |   |   |         |         
|                                    | Property, plant and equipment, at cost    |                | $       | 383,425      |   |   | $       | 361,357  |  
|                                    | Accumulated depreciation and amortization |                |         | (148,374     | ) |   |         | (118,469 | )
|                                    |                                           |                |         |              |   |   |         |         
|                                    |                                           | $              | 235,051 |              |   | $ | 242,888 |         
|                                    |                                           |                |         |              |   |   |         |         



|   |                              
|-- | -----------------------------
|9. | 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 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

15



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VALEANT PHARMACEUTICALS
INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)

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.

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.

On June 3, 2003, a purported class action,
captioned Len Brody v. Roberts A. Smith,
Andre C. Dimitriadis, Santo J. Costa, James J.
Pieczynski, 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 and a status conference
has been set for November 18, 2003 in light of the
settlement of the Delaware tender offer litigation. The
settlement of the Delaware tender offer litigation will be
designed to release the claims brought in this lawsuit, although
the decision as to effect of that release will be up to 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 or 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 interests of the Companys
shareholders to pursue many of the claims in these two lawsuits,
but decided to pursue, through

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VALEANT PHARMACEUTICALS
INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)

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 action, (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 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, and a hearing on that motion
is scheduled for December 22, 2003.

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 intends to file a motion to dismiss plaintiffs
complaint.

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.
The decision and order did not rule on defendants motion
for summary judgment that the patents are invalid. This ruling
permits the FDA to approve the defendant generic companies
ANDAs, in their discretion. 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

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VALEANT PHARMACEUTICALS
INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)

for ribavirin products with labeling that omits
information about the products use in combination with
PEG-Intron® (peginterferon alfa-2b). Action by the FDA on
the Citizens Petition is pending. The successful entry of
any generic pharmaceutical company into the U.S. market will
have a material negative impact on the Companys future
U.S. royalty revenue. 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.

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 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 arbitration hearings in this matter began in
November 2002 and are continuing. The Tribunal has requested
supplemental briefing and may order one or more rounds of
additional hearings.

Circe:The former
shareholders (the Circe Stockholders) 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 Stockholders 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 Stockholders as part of the purchase
price for the Circe acquisition. The parties have selected an
arbitrator, and the arbitration hearing is scheduled for
March 22  26, 2004. The Company intends to
vigorously defend against the claim.

Russia:The Company
is involved in various legal proceedings relating to its
distribution company in Russia. These proceedings arise out of a
claim relating to non-payment under a contract entered into in
January 1995, prior to the Companys acquisition of the
Russian distribution company. The claimant, Minnex Trading
Corporation (Minnex) in July 2001 initiated
bankruptcy proceedings against OAO Pharmsnabsbyt
(PSS), the Companys Russian distribution
company, in the Arbitration Court of Moscow Region, and seeks to
recover $6,200,000 in damages, plus expenses. Certain other
Valeant affiliates are also creditors of PSS, and have asserted
claims in bankruptcy in excess of $12,000,000. Claims have also
been made that the Company is responsible for PSSs
bankruptcy. Under certain circumstances, Russian law imposes
liability on a company whose actions create liabilities or cause
bankruptcy for its Russian subsidiary. The Company intends to
vigorously assert its interests in this matter.

18



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VALEANT PHARMACEUTICALS
INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)

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 (OFAC), as well as a request for
settlement. The Company does not expect any such settlement to
have a material adverse impact on our financial situation or our
ability to operate as planned. 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.



|    |                  
|--- | -----------------
|10. | 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 (formerly Ribapharm). The segment reporting
has been reclassified to conform to discontinued operations
presentation for all periods presented. See Note 3 for
discussion of discontinued operations.

19



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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 each of
the three months and nine months ended September 30, 2003
and 2002 (in thousands):

|                                                                                                     |                         |                       |          |                   |         |      |         |        |         |   |         |         |         |   |          |         |         | 
|---------------------------------------------------------------------------------------------------- | ----------------------- | --------------------- | -------- | ----------------- | ------- | ---- | ------- | ------ | ------- | - | ------- | ------- | ------- | - | -------- | ------- | ------- | 
|                                                                                                     |                         |                       |          |                  
|                                                                                                     |                         | Three Months Ended    |          | Nine Months Ended
|                                                                                                     |                         | September 30,         |          | September 30,    
|                                                                                                     |                         |                       |          |                  
|                                                                                                     |                         | 2003                  |          | 2002              |         | 2003 |         | 2002  
|                                                                                                     |                         |                       |          |                   |         |      |         |       
|Revenues                                                                                             |                         |                       |          |                   |         |      |         |        |         |   |         |         |         |   |          |        
|Pharmaceuticals                                                                                      |                         |                       |          |                   |         |      |         |        |         |   |         |         |         |   |          |        
|                                                                                                     | North America           |                       | $        | 29,403            |         |      | $       | 16,757 |         |   | $       | 70,837  |         |   | $        | 78,151  |        
|                                                                                                     | Latin America           |                       |          | 34,746            |         |      |         | 31,985 |         |   |         | 94,802  |         |   |          | 94,019  |        
|                                                                                                     | Europe                  |                       |          | 54,512            |         |      |         | 44,334 |         |   |         | 169,396 |         |   |          | 138,632 |        
|                                                                                                     | Asia, Africa, Australia |                       |          | 12,629            |         |      |         | 15,208 |         |   |         | 37,921  |         |   |          | 40,298  |        
|                                                                                                     |                         |                       |          |                   |         |      |         |        |         |   |         |         |         |   |          |        
|                                                                                                     |                         | Total Pharmaceuticals |          |                   | 131,290 |      |         |        | 108,284 |   |         |         | 372,956 |   |          |         | 351,100 | 
|                                                                                                     | Royalty revenues        |                       |          | 36,217            |         |      |         | 63,367 |         |   |         | 136,755 |         |   |          | 186,368 |        
|                                                                                                     |                         |                       |          |                   |         |      |         |        |         |   |         |         |         |   |          |        
|                                                                                                     |                         | Consolidated revenues |          | $                 | 167,507 |      |         | $      | 171,651 |   |         | $       | 509,711 |   |          | $       | 537,468 | 
|                                                                                                     |                         |                       |          |                   |         |      |         |        |         |   |         |         |         |   |          |        
|Operating Income (Loss)                                                                              |                         |                       |          |                   |         |      |         |        |         |   |         |         |         |   |          |        
|Pharmaceuticals                                                                                      |                         |                       |          |                   |         |      |         |        |         |   |         |         |         |   |          |        
|                                                                                                     | North America           |                       | $        | 12,851            |         |      | $       | (1,012 | )       |   | $       | 18,897  |         |   | $        | 22,612  |        
|                                                                                                     | Latin America           |                       |          | 11,840            |         |      |         | 11,191 |         |   |         | 30,219  |         |   |          | 32,442  |        
|                                                                                                     | Europe                  |                       |          | 8,384             |         |      |         | 357    |         |   |         | 24,821  |         |   |          | 12,380  |        
|                                                                                                     | Asia, Africa, Australia |                       |          | 1,819             |         |      |         | (2,294 | )       |   |         | 3,407   |         |   |          | 89      |        
|                                                                                                     |                         |                       |          |                   |         |      |         |        |         |   |         |         |         |   |          |        
|                                                                                                     |                         | Total Pharmaceuticals |          |                   | 34,894  |      |         |        | 8,242   |   |         |         | 77,344  |   |          |         | 67,523  | 
|Research and development division(1)                                                                 |                         |                       | (101,279 | )                 |         |      | 46,926  |        |         |   | (30,470 | )       |         |   | 145,628  |        
|                                                                                                     |                         |                       |          |                   |         |      |         |        |         |   |         |         |         |   |          |        
|Consolidated segment operating income (loss)                                                         |                         |                       | (66,385  | )                 |         |      | 55,168  |        |         |   | 46,874  |         |         |   | 213,151  |        
|Corporate expenses                                                                                   |                         |                       | (13,040  | )                 |         |      | (39,318 | )      |         |   | (45,082 | )       |         |   | (260,761 | )      
|Interest income                                                                                      |                         |                       | 953      |                   |         |      | 1,458   |        |         |   | 3,066   |         |         |   | 4,434    |        
|Interest expense                                                                                     |                         |                       | (7,871   | )                 |         |      | (9,189  | )      |         |   | (23,892 | )       |         |   | (34,381  | )      
|Other, net                                                                                           |                         |                       | 2,208    |                   |         |      | 20,779  |        |         |   | 496     |         |         |   | 244,399  |        
|                                                                                                     |                         |                       |          |                   |         |      |         |        |         |   |         |         |         |   |          |        
|Income (loss) from continuing operations
    before provision for income taxes and minority interest |                         | $                     | (84,135  | )                 |         | $    | 28,898  |        |         | $ | (18,538 | )       |         | $ | 166,842  |        
|                                                                                                     |                         |                       |          |                   |         |      |         |        |         |   |         |         |         |   |          |        



---



|    |                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes expense associated with the write-off of
    acquired in-process research and development related to the
    Ribapharm Acquisition.

20



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VALEANT PHARMACEUTICALS
INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)

The following table sets forth the segment total
assets of the Company as of September 30, 2003 and
December 31, 2002 (in thousands):

|                                  |                         |                       |           |              |         |   |           |         |         | 
|--------------------------------- | ----------------------- | --------------------- | --------- | ------------ | ------- | - | --------- | ------- | ------- | 
|                                  |                         |                      
|                                  |                         | Total Assets         
|                                  |                         |                      
|                                  |                         | September 30,         |           | December 31,
|                                  |                         | 2003                  |           | 2002        
|                                  |                         |                       |           |             
|Pharmaceuticals                   |                         |                       |           |              |         |   |           |        
|                                  | North America           |                       | $         | 399,420      |         |   | $         | 435,506 |        
|                                  | Latin America           |                       |           | 97,146       |         |   |           | 162,877 |        
|                                  | Europe                  |                       |           | 321,390      |         |   |           | 292,047 |        
|                                  | Asia, Africa, Australia |                       |           | 22,315       |         |   |           | 19,658  |        
|                                  |                         |                       |           |              |         |   |           |        
|                                  |                         | Total Pharmaceuticals |           |              | 840,271 |   |           |         | 910,088 | 
|Corporate                         |                         |                       | 272,731   |              |         |   | 177,556   |        
|Research and development division |                         |                       | 264,823   |              |         |   | 199,075   |        
|Discontinued operations           |                         |                       | 27,172    |              |         |   | 201,830   |        
|                                  |                         |                       |           |              |         |   |           |        
|Total                             |                         | $                     | 1,404,997 |              |         | $ | 1,488,549 |        
|                                  |                         |                       |           |              |         |   |           |        



|    |                                    
|--- | -----------------------------------
|11. | Consolidating Financial Information

The Company and Ribapharm are jointly and
severally liable for the obligations under the 6 1/2%
Subordinated Convertible Notes due 2008. The following
consolidating condensed financial statements show the financial
position, results of operations and cash flow for Valeant
Pharmaceuticals International excluding Ribapharm, Ribapharm and
eliminations necessary to arrive at the Companys
consolidated financial position, results of operations and cash
flows for the periods presented.

21



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VALEANT PHARMACEUTICALS
INTERNATIONAL






NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)


Consolidating Condensed Balance Sheet as of
September 30, 2003


(Unaudited, in thousands)


|                                            |                                                         |                               |           |           |         |              |         |                 |          |   |          |         |          |   |           |           |         | 
|------------------------------------------- | ------------------------------------------------------- | ----------------------------- | --------- | --------- | ------- | ------------ | ------- | --------------- | -------- | - | -------- | ------- | -------- | - | --------- | --------- | ------- | 
|                                            |                                                         | Valeant                       |           |           |         |              |         | Valeant        
|                                            |                                                         | Excluding                     |           |           |         |              |         | Pharmaceuticals
|                                            |                                                         | Ribapharm                     |           | Ribapharm |         | Eliminations |         | International  
|                                            |                                                         |                               |           |           |         |              |         |                
|ASSETS                                     
|Current Assets:                             |                                                         |                               |           |           |         |              |         |                 |          |   |          |         |          |   |           |          
|                                            | Cash and cash equivalents                               |                               | $         | 178,500   |         |              | $       | 122,528         |          |   | $        |        |          |   | $         | 301,028   |        
|                                            | Accounts receivable, net                                |                               |           | 108,869   |         |              |         | 47,492          |          |   |          |        |          |   |           | 156,361   |        
|                                            | Inventories, net                                        |                               |           | 91,812    |         |              |         |                |          |   |          |        |          |   |           | 91,812    |        
|                                            | Prepaid expenses and other current assets               |                               |           | 12,591    |         |              |         | 4,180           |          |   |          |        |          |   |           | 16,771    |        
|                                            |                                                         |                               |           |           |         |              |         |                 |          |   |          |         |          |   |           |          
|                                            |                                                         | Total current assets          |           |           | 391,772 |              |         |                 | 174,200  |   |          |         |         |   |           |           | 565,972 | 
|Property, plant and equipment, net          |                                                         |                               | 225,456   |           |         |              | 9,595   |                 |          |   |         |         |          |   | 235,051   |          
|Deferred tax assets, net                    |                                                         |                               | 86,986    |           |         |              | 2,734   |                 |          |   |         |         |          |   | 89,720    |          
|Intangibles, net                            |                                                         |                               | 364,523   |           |         |              | 78,286  |                 |          |   |         |         |          |   | 442,809   |          
|Other assets                                |                                                         |                               | 44,265    |           |         |              | 8       |                 |          |   |         |         |          |   | 44,273    |          
|                                            |                                                         |                               |           |           |         |              |         |                 |          |   |          |         |          |   |           |          
|                                            |                                                         | Total non-current assets      |           |           | 721,230 |              |         |                 | 90,623   |   |          |         |         |   |           |           | 811,853 | 
|Assets of discontinued operations           |                                                         |                               | 27,172    |           |         |              |        |                 |          |   |         |         |          |   | 27,172    |          
|                                            |                                                         |                               |           |           |         |              |         |                 |          |   |          |         |          |   |           |          
|                                            |                                                         | $                             | 1,140,174 |           |         | $            | 264,823 |                 |          | $ |         |         |          | $ | 1,404,997 |          
|                                            |                                                         |                               |           |           |         |              |         |                 |          |   |          |         |          |   |           |          
|                                           
|LIABILITIES AND STOCKHOLDERS
    EQUITY   
|Current Liabilities:                        |                                                         |                               |           |           |         |              |         |                 |          |   |          |         |          |   |           |          
|                                            | Trade payables                                          |                               | $         | 31,949    |         |              | $       | 417             |          |   | $        |        |          |   | $         | 32,366    |        
|                                            | Accrued liabilities                                     |                               |           | 104,155   |         |              |         | 26,367          |          |   |          | (6,305  | )        |   |           | 124,217   |        
|                                            | Notes payable and current portion of long-term
    debt |                               |           | 1,303     |         |              |         |                |          |   |          |        |          |   |           | 1,303     |        
|                                            | Income taxes payable                                    |                               |           | 22,335    |         |              |         | 5,915           |          |   |          |        |          |   |           | 28,250    |        
|                                            | Intercompany payables (receivables)                     |                               |           | (185,761  | )       |              |         | 33,301          |          |   |          | 152,460 |          |   |           |          |        
|                                            |                                                         |                               |           |           |         |              |         |                 |          |   |          |         |          |   |           |          
|                                            |                                                         | Total current liabilities     |           |           | (26,019 | )            |         |                 | 66,000   |   |          |         | 146,155  |   |           |           | 186,136 | 
|Long-term debt, less current portion        |                                                         |                               | 478,652   |           |         |              | 465,590 |                 |          |   | (465,590 | )       |          |   | 478,652   |          
|Deferred income taxes and other liabilities |                                                         |                               | 46,631    |           |         |              | 26,884  |                 |          |   |         |         |          |   | 73,515    |          
|Minority interest                           |                                                         |                               | 3,397     |           |         |              |        |                 |          |   |         |         |          |   | 3,397     |          
|                                            |                                                         |                               |           |           |         |              |         |                 |          |   |          |         |          |   |           |          
|                                            |                                                         | Total non-current liabilities |           |           | 528,680 |              |         |                 | 492,474  |   |          |         | (465,590 | ) |           |           | 555,564 | 
|Liabilities of discontinued operations      |                                                         |                               | 19,216    |           |         |              |        |                 |          |   |         |         |          |   | 19,216    |          
|                                            |                                                         |                               |           |           |         |              |         |                 |          |   |          |         |          |   |           |          
|Commitments and contingencies               |                                                         |                               |           |           |         |              |         |                 |          |   |          |         |          |   |           |          
|Stockholders Equity:                       |                                                         |                               |           |           |         |              |         |                 |          |   |          |         |          |   |           |          
|                                            | Common stock                                            |                               |           | 831       |         |              |         | 1,500           |          |   |          | (1,500  | )        |   |           | 831       |        
|                                            | Additional capital                                      |                               |           | 1,020,829 |         |              |         | (300,935        | )        |   |          | 300,935 |          |   |           | 1,020,829 |        
|                                            | Accumulated deficit                                     |                               |           | (355,958  | )       |              |         | 5,784           |          |   |          | 20,000  |          |   |           | (330,174  | )      
|                                            | Accumulated other comprehensive loss                    |                               |           | (47,405   | )       |              |         |                |          |   |          |        |          |   |           | (47,405   | )      
|                                            |                                                         |                               |           |           |         |              |         |                 |          |   |          |         |          |   |           |          
|                                            |                                                         | Total stockholders equity    |           |           | 618,297 |              |         |                 | (293,651 | ) |          |         | 319,435  |   |           |           | 644,081 | 
|                                            |                                                         |                               |           |           |         |              |         |                 |          |   |          |         |          |   |           |          
|                                            |                                                         | $                             | 1,140,174 |           |         | $            | 264,823 |                 |          | $ |         |         |          | $ | 1,404,997 |          
|                                            |                                                         |                               |           |           |         |              |         |                 |          |   |          |         |          |   |           |          

22



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##### Table of Contents



VALEANT PHARMACEUTICALS
INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)

Consolidating Condensed Balance Sheet as of
December 31, 2002


(Unaudited, in thousands)


|                                            |                                                         |                               |           |           |         |              |         |                 |          |   |          |         |          |   |           |           |         | 
|------------------------------------------- | ------------------------------------------------------- | ----------------------------- | --------- | --------- | ------- | ------------ | ------- | --------------- | -------- | - | -------- | ------- | -------- | - | --------- | --------- | ------- | 
|                                            |                                                         | Valeant                       |           |           |         |              |         | Valeant        
|                                            |                                                         | Excluding                     |           |           |         |              |         | Pharmaceuticals
|                                            |                                                         | Ribapharm                     |           | Ribapharm |         | Eliminations |         | International  
|                                            |                                                         |                               |           |           |         |              |         |                
|ASSETS                                     
|Current Assets:                             |                                                         |                               |           |           |         |              |         |                 |          |   |          |         |          |   |           |          
|                                            | Cash and cash equivalents                               |                               | $         | 165,434   |         |              | $       | 79,750          |          |   | $        |        |          |   | $         | 245,184   |        
|                                            | Accounts receivable, net                                |                               |           | 110,280   |         |              |         | 105,496         |          |   |          |        |          |   |           | 215,776   |        
|                                            | Inventories, net                                        |                               |           | 88,862    |         |              |         |                |          |   |          |        |          |   |           | 88,862    |        
|                                            | Income taxes receivable                                 |                               |           | 12,779    |         |              |         |                |          |   |          |        |          |   |           | 12,779    |        
|                                            | Prepaid expenses and other current assets               |                               |           | 13,381    |         |              |         | 591             |          |   |          |        |          |   |           | 13,972    |        
|                                            |                                                         |                               |           |           |         |              |         |                 |          |   |          |         |          |   |           |          
|                                            |                                                         | Total current assets          |           |           | 390,736 |              |         |                 | 185,837  |   |          |         |         |   |           |           | 576,573 | 
|Property, plant and equipment, net          |                                                         |                               | 232,384   |           |         |              | 10,504  |                 |          |   |         |         |          |   | 242,888   |          
|Deferred tax assets, net                    |                                                         |                               | 36,446    |           |         |              | 2,734   |                 |          |   |         |         |          |   | 39,180    |          
|Intangibles, net                            |                                                         |                               | 384,547   |           |         |              |        |                 |          |   |         |         |          |   | 384,547   |          
|Other assets                                |                                                         |                               | 43,531    |           |         |              |        |                 |          |   |         |         |          |   | 43,531    |          
|                                            |                                                         |                               |           |           |         |              |         |                 |          |   |          |         |          |   |           |          
|                                            |                                                         | Total non-current assets      |           |           | 696,908 |              |         |                 | 13,238   |   |          |         |         |   |           |           | 710,146 | 
|Assets of discontinued operations           |                                                         |                               | 201,830   |           |         |              |        |                 |          |   |         |         |          |   | 201,830   |          
|                                            |                                                         |                               |           |           |         |              |         |                 |          |   |          |         |          |   |           |          
|                                            |                                                         | $                             | 1,289,474 |           |         | $            | 199,075 |                 |          | $ |         |         |          | $ | 1,488,549 |          
|                                            |                                                         |                               |           |           |         |              |         |                 |          |   |          |         |          |   |           |          
|                                           
|LIABILITIES AND STOCKHOLDERS
    EQUITY   
|Current Liabilities:                        |                                                         |                               |           |           |         |              |         |                 |          |   |          |         |          |   |           |          
|                                            | Trade payables                                          |                               | $         | 32,201    |         |              | $       | 1,286           |          |   | $        |        |          |   | $         | 33,487    |        
|                                            | Accrued liabilities                                     |                               |           | 117,964   |         |              |         | 38,000          |          |   |          | (13,871 | )        |   |           | 142,093   |        
|                                            | Notes payable and current portion of long-term
    debt |                               |           | 3,923     |         |              |         |                |          |   |          |        |          |   |           | 3,923     |        
|                                            | Income taxes payable                                    |                               |           | (17,450   | )       |              |         | 17,450          |          |   |          |        |          |   |           |          |        
|                                            | Intercompany payables (receivables)                     |                               |           | (40,766   | )       |              |         | 39,266          |          |   |          | 1,500   |          |   |           |          |        
|                                            |                                                         |                               |           |           |         |              |         |                 |          |   |          |         |          |   |           |          
|                                            |                                                         | Total current liabilities     |           |           | 95,872  |              |         |                 | 96,002   |   |          |         | (12,371  | ) |           |           | 179,503 | 
|Long-term debt, less current portion        |                                                         |                               | 481,548   |           |         |              | 465,590 |                 |          |   | (465,590 | )       |          |   | 481,548   |          
|Deferred income taxes and other liabilities |                                                         |                               | 51,581    |           |         |              | 707     |                 |          |   |         |         |          |   | 52,288    |          
|Minority interest                           |                                                         |                               | 23,452    |           |         |              |        |                 |          |   |         |         |          |   | 23,452    |          
|                                            |                                                         |                               |           |           |         |              |         |                 |          |   |          |         |          |   |           |          
|                                            |                                                         | Total non-current liabilities |           |           | 556,581 |              |         |                 | 466,297  |   |          |         | (465,590 | ) |           |           | 557,288 | 
|Liabilities of discontinued operations      |                                                         |                               | 48,068    |           |         |              |        |                 |          |   |         |         |          |   | 48,068    |          
|                                            |                                                         |                               |           |           |         |              |         |                 |          |   |          |         |          |   |           |          
|Commitments and contingencies               |                                                         |                               |           |           |         |              |         |                 |          |   |          |         |          |   |           |          
|Stockholders Equity:                       |                                                         |                               |           |           |         |              |         |                 |          |   |          |         |          |   |           |          
|                                            | Common stock                                            |                               |           | 841       |         |              |         | 1,500           |          |   |          | (1,500  | )        |   |           | 841       |        
|                                            | Additional capital                                      |                               |           | 1,027,335 |         |              |         | (479,461        | )        |   |          | 479,461 |          |   |           | 1,027,335 |        
|                                            | Accumulated deficit                                     |                               |           | (371,546  | )       |              |         | 114,737         |          |   |          |        |          |   |           | (256,809  | )      
|                                            | Accumulated other comprehensive loss                    |                               |           | (67,677   | )       |              |         |                |          |   |          |        |          |   |           | (67,677   | )      
|                                            |                                                         |                               |           |           |         |              |         |                 |          |   |          |         |          |   |           |          
|                                            |                                                         | Total stockholders equity    |           |           | 588,953 |              |         |                 | (363,224 | ) |          |         | 477,961  |   |           |           | 703,690 | 
|                                            |                                                         |                               |           |           |         |              |         |                 |          |   |          |         |          |   |           |          
|                                            |                                                         | $                             | 1,289,474 |           |         | $            | 199,075 |                 |          | $ |         |         |          | $ | 1,488,549 |          
|                                            |                                                         |                               |           |           |         |              |         |                 |          |   |          |         |          |   |           |          

23



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##### Table of Contents



VALEANT PHARMACEUTICALS
INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)

Consolidating Condensed Statement of Income
for the three months ended September 30, 2003


(Unaudited, in thousands)


|                                                                                       |                                              |                               |        |           |         |              |          |                 |          |   |       |        |   |  |         |         |         |  
|-------------------------------------------------------------------------------------- | -------------------------------------------- | ----------------------------- | ------ | --------- | ------- | ------------ | -------- | --------------- | -------- | - | ----- | ------ | - |  | ------- | ------- | ------- | -
|                                                                                       |                                              | Valeant                       |        |           |         |              |          | Valeant        
|                                                                                       |                                              | Excluding                     |        |           |         |              |          | Pharmaceuticals
|                                                                                       |                                              | Ribapharm                     |        | Ribapharm |         | Eliminations |          | International  
|                                                                                       |                                              |                               |        |           |         |              |          |                
|Revenues:                                                                              |                                              |                               |        |           |         |              |          |                 |          |   |       |        |   |  |         |        
|                                                                                       | Product sales                                |                               | $      | 131,290   |         |              | $        |                |          |   | $     |       |   |  | $       | 131,290 |        
|                                                                                       | Royalties                                    |                               |        |          |         |              |          | 36,217          |          |   |       |       |   |  |         | 36,217  |        
|                                                                                       |                                              |                               |        |           |         |              |          |                 |          |   |       |        |   |  |         |        
|                                                                                       |                                              | Total revenues                |        |           | 131,290 |              |          |                 | 36,217   |   |       |        |  |  |         |         | 167,507 |  
|                                                                                       |                                              |                               |        |           |         |              |          |                 |          |   |       |        |   |  |         |        
|Costs and expenses:                                                                    |                                              |                               |        |           |         |              |          |                 |          |   |       |        |   |  |         |        
|                                                                                       | Cost of goods sold                           |                               |        | 42,128    |         |              |          |                |          |   |       |       |   |  |         | 42,128  |        
|                                                                                       | Selling expenses                             |                               |        | 40,478    |         |              |          |                |          |   |       |       |   |  |         | 40,478  |        
|                                                                                       | General and administrative expenses          |                               |        | 17,874    |         |              |          | 7,638           |          |   |       |       |   |  |         | 25,512  |        
|                                                                                       | Research and development costs               |                               |        | 438       |         |              |          | 10,314          |          |   |       |       |   |  |         | 10,752  |        
|                                                                                       | Acquired in-process research and development |                               |        |          |         |              |          | 117,609         |          |   |       |       |   |  |         | 117,609 |        
|                                                                                       | Amortization expense                         |                               |        | 8,518     |         |              |          | 1,935           |          |   |       |       |   |  |         | 10,453  |        
|                                                                                       |                                              |                               |        |           |         |              |          |                 |          |   |       |        |   |  |         |        
|                                                                                       |                                              | Total expenses                |        |           | 109,436 |              |          |                 | 137,496  |   |       |        |  |  |         |         | 246,932 |  
|                                                                                       |                                              |                               |        |           |         |              |          |                 |          |   |       |        |   |  |         |        
|                                                                                       |                                              | Income (loss) from operations |        |           | 21,854  |              |          |                 | (101,279 | ) |       |        |  |  |         |         | (79,425 | )
|Other income, net, including translation and
    exchange                              |                                              |                               | 2,208  |           |         |              |         |                 |          |   |      |        |   |  | 2,208   |        
|Interest income                                                                        |                                              |                               | 643    |           |         |              | 310      |                 |          |   |      |        |   |  | 953     |        
|Interest expense                                                                       |                                              |                               | (7,871 | )         |         |              |         |                 |          |   |      |        |   |  | (7,871  | )      
|                                                                                       |                                              |                               |        |           |         |              |          |                 |          |   |       |        |   |  |         |        
|Income (loss) from continuing operations before
    income taxes and minority interest |                                              |                               | 16,834 |           |         |              | (100,969 | )               |          |   |      |        |   |  | (84,135 | )      
|Provision for income taxes                                                             |                                              |                               | 7,152  |           |         |              | 5,568    |                 |          |   |      |        |   |  | 12,720  |        
|Minority interest, net                                                                 |                                              |                               | 56     |           |         |              |         |                 |          |   | 1,600 |        |   |  | 1,656   |        
|                                                                                       |                                              |                               |        |           |         |              |          |                 |          |   |       |        |   |  |         |        
|                                                                                       | Income (loss) from continuing operations     |                               |        | 9,626     |         |              |          | (106,537        | )        |   |       | (1,600 | ) |  |         | (98,511 | )      
|                                                                                       | Income from discontinued operations          |                               |        | 16,110    |         |              |          |                |          |   |       |       |   |  |         | 16,110  |        
|                                                                                       |                                              |                               |        |           |         |              |          |                 |          |   |       |        |   |  |         |        
|                                                                                       | Net income (loss)                            |                               | $      | 25,736    |         |              | $        | (106,537        | )        |   | $     | (1,600 | ) |  | $       | (82,401 | )      
|                                                                                       |                                              |                               |        |           |         |              |          |                 |          |   |       |        |   |  |         |        

24



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##### Table of Contents



VALEANT PHARMACEUTICALS
INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)

Consolidating Condensed Statements of Income
for the three months ended September 30, 2002


(Unaudited, in thousands)


|                                                                                       |                                          |                               |         |           |         |              |        |                 |        |  |       |        |   |  |        |         |         | 
|-------------------------------------------------------------------------------------- | ---------------------------------------- | ----------------------------- | ------- | --------- | ------- | ------------ | ------ | --------------- | ------ |  | ----- | ------ | - |  | ------ | ------- | ------- | 
|                                                                                       |                                          | Valeant                       |         |           |         |              |        | Valeant        
|                                                                                       |                                          | Excluding                     |         |           |         |              |        | Pharmaceuticals
|                                                                                       |                                          | Ribapharm                     |         | Ribapharm |         | Eliminations |        | International  
|                                                                                       |                                          |                               |         |           |         |              |        |                
|Revenues:                                                                              |                                          |                               |         |           |         |              |        |                 |        |  |       |        |   |  |        |        
|                                                                                       | Product sales                            |                               | $       | 108,284   |         |              | $      |                |        |  | $     |       |   |  | $      | 108,284 |        
|                                                                                       | Royalties                                |                               |         |          |         |              |        | 63,367          |        |  |       |       |   |  |        | 63,367  |        
|                                                                                       |                                          |                               |         |           |         |              |        |                 |        |  |       |        |   |  |        |        
|                                                                                       |                                          | Total revenues                |         |           | 108,284 |              |        |                 | 63,367 |  |       |        |  |  |        |         | 171,651 | 
|                                                                                       |                                          |                               |         |           |         |              |        |                 |        |  |       |        |   |  |        |        
|Costs and expenses:                                                                    |                                          |                               |         |           |         |              |        |                 |        |  |       |        |   |  |        |        
|                                                                                       | Cost of goods sold                       |                               |         | 39,769    |         |              |        |                |        |  |       |       |   |  |        | 39,769  |        
|                                                                                       | Selling expenses                         |                               |         | 40,140    |         |              |        |                |        |  |       |       |   |  |        | 40,140  |        
|                                                                                       | General and administrative expenses      |                               |         | 50,851    |         |              |        | 2,922           |        |  |       | 710    |   |  |        | 54,483  |        
|                                                                                       | Research and development costs           |                               |         | 671       |         |              |        | 13,518          |        |  |       | (710   | ) |  |        | 13,479  |        
|                                                                                       | Amortization expense                     |                               |         | 7,930     |         |              |        |                |        |  |       |       |   |  |        | 7,930   |        
|                                                                                       |                                          |                               |         |           |         |              |        |                 |        |  |       |        |   |  |        |        
|                                                                                       |                                          | Total expenses                |         |           | 139,361 |              |        |                 | 16,440 |  |       |        |  |  |        |         | 155,801 | 
|                                                                                       |                                          |                               |         |           |         |              |        |                 |        |  |       |        |   |  |        |        
|                                                                                       |                                          | Income (loss) from operations |         |           | (31,077 | )            |        |                 | 46,927 |  |       |        |  |  |        |         | 15,850  | 
|Other income, net, including translation and
    exchange                              |                                          |                               | 4,253   |           |         |              |       |                 |        |  |      |        |   |  | 4,253  |        
|Loss on sale of subsidiary stock                                                       |                                          |                               | (1,012  | )         |         |              |       |                 |        |  |      |        |   |  | (1,012 | )      
|Gain on early extinguishment of debt                                                   |                                          |                               | 17,538  |           |         |              |       |                 |        |  |      |        |   |  | 17,538 |        
|Intercompany interest                                                                  |                                          |                               | 441     |           |         |              | (441   | )               |        |  |      |        |   |  |       |        
|Interest income                                                                        |                                          |                               | 1,371   |           |         |              | 87     |                 |        |  |      |        |   |  | 1,458  |        
|Interest expense                                                                       |                                          |                               | (9,189  | )         |         |              |       |                 |        |  |      |        |   |  | (9,189 | )      
|                                                                                       |                                          |                               |         |           |         |              |        |                 |        |  |       |        |   |  |        |        
|Income (loss) from continuing operations
    before income taxes and minority interest |                                          |                               | (17,675 | )         |         |              | 46,573 |                 |        |  |      |        |   |  | 28,898 |        
|Provision for income taxes                                                             |                                          |                               | (10,211 | )         |         |              | 17,709 |                 |        |  |      |        |   |  | 7,498  |        
|Minority interest, net                                                                 |                                          |                               | 127     |           |         |              |       |                 |        |  | 5,575 |        |   |  | 5,702  |        
|                                                                                       |                                          |                               |         |           |         |              |        |                 |        |  |       |        |   |  |        |        
|                                                                                       | Income (loss) from continuing operations |                               |         | (7,591    | )       |              |        | 28,864          |        |  |       | (5,575 | ) |  |        | 15,698  |        
|                                                                                       | Loss from discontinued operations        |                               |         | (90,633   | )       |              |        |                |        |  |       |       |   |  |        | (90,633 | )      
|                                                                                       |                                          |                               |         |           |         |              |        |                 |        |  |       |        |   |  |        |        
|                                                                                       | Net income (loss)                        |                               | $       | (98,224   | )       |              | $      | 28,864          |        |  | $     | (5,575 | ) |  | $      | (74,935 | )      
|                                                                                       |                                          |                               |         |           |         |              |        |                 |        |  |       |        |   |  |        |        

25



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##### Table of Contents



VALEANT PHARMACEUTICALS
INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)

Consolidating Condensed Statement of Income
for the nine months ended September 30, 2003


(Unaudited, in thousands)


|                                                                                       |                                              |                               |         |           |         |              |         |                 |         |   |        |         |   |  |         |         |         | 
|-------------------------------------------------------------------------------------- | -------------------------------------------- | ----------------------------- | ------- | --------- | ------- | ------------ | ------- | --------------- | ------- | - | ------ | ------- | - |  | ------- | ------- | ------- | 
|                                                                                       |                                              | Valeant                       |         |           |         |              |         | Valeant        
|                                                                                       |                                              | Excluding                     |         |           |         |              |         | Pharmaceuticals
|                                                                                       |                                              | Ribapharm                     |         | Ribapharm |         | Eliminations |         | International  
|                                                                                       |                                              |                               |         |           |         |              |         |                
|Revenues:                                                                              |                                              |                               |         |           |         |              |         |                 |         |   |        |         |   |  |         |        
|                                                                                       | Product sales                                |                               | $       | 372,956   |         |              | $       |                |         |   | $      |        |   |  | $       | 372,956 |        
|                                                                                       | Royalties                                    |                               |         |          |         |              |         | 136,755         |         |   |        |        |   |  |         | 136,755 |        
|                                                                                       |                                              |                               |         |           |         |              |         |                 |         |   |        |         |   |  |         |        
|                                                                                       |                                              | Total revenues                |         |           | 372,956 |              |         |                 | 136,755 |   |        |         |  |  |         |         | 509,711 | 
|                                                                                       |                                              |                               |         |           |         |              |         |                 |         |   |        |         |   |  |         |        
|Costs and expenses:                                                                    |                                              |                               |         |           |         |              |         |                 |         |   |        |         |   |  |         |        
|                                                                                       | Cost of goods sold                           |                               |         | 131,295   |         |              |         |                |         |   |        |        |   |  |         | 131,295 |        
|                                                                                       | Selling expenses                             |                               |         | 121,146   |         |              |         |                |         |   |        |        |   |  |         | 121,146 |        
|                                                                                       | General and administrative expenses          |                               |         | 62,623    |         |              |         | 18,174          |         |   |        |        |   |  |         | 80,797  |        
|                                                                                       | Research and development costs               |                               |         | 194       |         |              |         | 29,507          |         |   |        |        |   |  |         | 29,701  |        
|                                                                                       | Acquired in-process research and development |                               |         |          |         |              |         | 117,609         |         |   |        |        |   |  |         | 117,609 |        
|                                                                                       | Amortization expense                         |                               |         | 25,436    |         |              |         | 1,935           |         |   |        |        |   |  |         | 27,371  |        
|                                                                                       |                                              |                               |         |           |         |              |         |                 |         |   |        |         |   |  |         |        
|                                                                                       |                                              | Total expenses                |         |           | 340,694 |              |         |                 | 167,225 |   |        |         |  |  |         |         | 507,919 | 
|                                                                                       |                                              |                               |         |           |         |              |         |                 |         |   |        |         |   |  |         |        
|                                                                                       |                                              | Income (loss) from operations |         |           | 32,262  |              |         |                 | (30,470 | ) |        |         |  |  |         |         | 1,792   | 
|Other income, net, including translation and
    exchange                              |                                              |                               | 496     |           |         |              |        |                 |         |   |       |         |   |  | 496     |        
|Intercompany interest                                                                  |                                              |                               | 455     |           |         |              | (455    | )               |         |   |       |         |   |  |        |        
|Interest income                                                                        |                                              |                               | 2,154   |           |         |              | 912     |                 |         |   |       |         |   |  | 3,066   |        
|Interest expense                                                                       |                                              |                               | (23,892 | )         |         |              |        |                 |         |   |       |         |   |  | (23,892 | )      
|                                                                                       |                                              |                               |         |           |         |              |         |                 |         |   |        |         |   |  |         |        
|Income (loss) from continuing operations before
    income taxes and minority interest |                                              |                               | 11,475  |           |         |              | (30,013 | )               |         |   |       |         |   |  | (18,538 | )      
|Provision for income taxes                                                             |                                              |                               | 7,954   |           |         |              | 29,693  |                 |         |   |       |         |   |  | 37,647  |        
|Minority interest, net                                                                 |                                              |                               | 97      |           |         |              |        |                 |         |   | 11,570 |         |   |  | 11,667  |        
|                                                                                       |                                              |                               |         |           |         |              |         |                 |         |   |        |         |   |  |         |        
|                                                                                       | Income (loss) from continuing operations     |                               |         | 3,424     |         |              |         | (59,706         | )       |   |        | (11,570 | ) |  |         | (67,852 | )      
|                                                                                       | Income from discontinued operations          |                               |         | 13,992    |         |              |         |                |         |   |        |        |   |  |         | 13,992  |        
|                                                                                       |                                              |                               |         |           |         |              |         |                 |         |   |        |         |   |  |         |        
|                                                                                       | Net income (loss)                            |                               | $       | 17,416    |         |              | $       | (59,706         | )       |   | $      | (11,570 | ) |  | $       | (53,860 | )      
|                                                                                       |                                              |                               |         |           |         |              |         |                 |         |   |        |         |   |  |         |        

26



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##### Table of Contents



VALEANT PHARMACEUTICALS
INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)

Consolidating Condensed Statement of Income
for the nine months ended September 30, 2002


(Unaudited, in thousands)


|                                                                                |                                                         |                               |          |           |          |              |         |                 |         |  |         |         |   |  |          |         |         |  
|------------------------------------------------------------------------------- | ------------------------------------------------------- | ----------------------------- | -------- | --------- | -------- | ------------ | ------- | --------------- | ------- |  | ------- | ------- | - |  | -------- | ------- | ------- | -
|                                                                                |                                                         | Valeant                       |          |           |          |              |         | Valeant        
|                                                                                |                                                         | Excluding                     |          |           |          |              |         | Pharmaceuticals
|                                                                                |                                                         | Ribapharm                     |          | Ribapharm |          | Eliminations |         | International  
|                                                                                |                                                         |                               |          |           |          |              |         |                
|Revenues:                                                                       |                                                         |                               |          |           |          |              |         |                 |         |  |         |         |   |  |          |        
|                                                                                | Product sales                                           |                               | $        | 351,100   |          |              | $       |                |         |  | $       |        |   |  | $        | 351,100 |        
|                                                                                | Royalties                                               |                               |          |          |          |              |         | 186,368         |         |  |         |        |   |  |          | 186,368 |        
|                                                                                |                                                         |                               |          |           |          |              |         |                 |         |  |         |         |   |  |          |        
|                                                                                |                                                         | Total revenues                |          |           | 351,100  |              |         |                 | 186,368 |  |         |         |  |  |          |         | 537,468 |  
|                                                                                |                                                         |                               |          |           |          |              |         |                 |         |  |         |         |   |  |          |        
|Costs and expenses:                                                             |                                                         |                               |          |           |          |              |         |                 |         |  |         |         |   |  |          |        
|                                                                                | Cost of goods sold                                      |                               |          | 113,360   |          |              |         |                |         |  |         |        |   |  |          | 113,360 |        
|                                                                                | Selling expenses                                        |                               |          | 119,120   |          |              |         |                |         |  |         |        |   |  |          | 119,120 |        
|                                                                                | General and administrative expenses                     |                               |          | 283,941   |          |              |         | 6,999           |         |  |         | 2,172   |   |  |          | 293,112 |        
|                                                                                | Research and development costs                          |                               |          | 3,957     |          |              |         | 33,741          |         |  |         | (2,172  | ) |  |          | 35,526  |        
|                                                                                | Amortization expense                                    |                               |          | 23,960    |          |              |         |                |         |  |         |        |   |  |          | 23,960  |        
|                                                                                |                                                         |                               |          |           |          |              |         |                 |         |  |         |         |   |  |          |        
|                                                                                |                                                         | Total expenses                |          |           | 544,338  |              |         |                 | 40,740  |  |         |         |  |  |          |         | 585,078 |  
|                                                                                |                                                         |                               |          |           |          |              |         |                 |         |  |         |         |   |  |          |        
|                                                                                |                                                         | Income (loss) from operations |          |           | (193,238 | )            |         |                 | 145,628 |  |         |         |  |  |          |         | (47,610 | )
|Other income, net, including translation and
    exchange                       |                                                         |                               | 8,192    |           |          |              |        |                 |         |  |        |         |   |  | 8,192    |        
|Gain on sale of subsidiary stock                                                |                                                         |                               | 261,937  |           |          |              |        |                 |         |  |        |         |   |  | 261,937  |        
|Loss on early extinguishment of debt                                            |                                                         |                               | (25,730  | )         |          |              |        |                 |         |  |        |         |   |  | (25,730  | )      
|Intercompany interest                                                           |                                                         |                               | 614      |           |          |              | (614    | )               |         |  |        |         |   |  |         |        
|Interest income                                                                 |                                                         |                               | 4,335    |           |          |              | 99      |                 |         |  |        |         |   |  | 4,434    |        
|Interest expense                                                                |                                                         |                               | (34,381  | )         |          |              |        |                 |         |  |        |         |   |  | (34,381  | )      
|                                                                                |                                                         |                               |          |           |          |              |         |                 |         |  |         |         |   |  |          |        
|Income from continuing operations before income
    taxes and minority interest |                                                         |                               | 21,729   |           |          |              | 145,113 |                 |         |  |        |         |   |  | 166,842  |        
|Provision for income taxes                                                      |                                                         |                               | 3,657    |           |          |              | 55,154  |                 |         |  |        |         |   |  | 58,811   |        
|Minority interest, net                                                          |                                                         |                               | 180      |           |          |              |        |                 |         |  | 10,490  |         |   |  | 10,670   |        
|                                                                                |                                                         |                               |          |           |          |              |         |                 |         |  |         |         |   |  |          |        
|Income from continuing operations                                               |                                                         |                               | 17,892   |           |          |              | 89,959  |                 |         |  | (10,490 | )       |   |  | 97,361   |        
|Loss from discontinued operations                                               |                                                         |                               | (109,742 | )         |          |              |        |                 |         |  |        |         |   |  | (109,742 | )      
|                                                                                | Cumulative effect of change in accounting
    principle |                               |          | (21,791   | )        |              |         |                |         |  |         |        |   |  |          | (21,791 | )      
|                                                                                |                                                         |                               |          |           |          |              |         |                 |         |  |         |         |   |  |          |        
|                                                                                | Net Income (loss)                                       |                               | $        | (113,641  | )        |              | $       | 89,959          |         |  | $       | (10,490 | ) |  | $        | (34,172 | )      
|                                                                                |                                                         |                               |          |           |          |              |         |                 |         |  |         |         |   |  |          |        

27



---



##### Table of Contents



VALEANT PHARMACEUTICALS
INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)

Consolidating Condensed Statement of Cash Flow
for the nine months ended September 30, 2003


(Unaudited, in thousands)


|                                                                            |                                                                                              |                                                                            |                                           |           |         |              |         |                |         |        |   |         |        |   |         |          |         |         | 
|--------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------- | ----------------------------------------- | --------- | ------- | ------------ | ------- | -------------- | ------- | ------ | - | ------- | ------ | - | ------- | -------- | ------- | ------- | 
|                                                                            |                                                                                              | Valeant                                                                    |                                           |           |         |              |         | Valeant       
|                                                                            |                                                                                              | Excluding                                                                  |                                           |           |         |              |         | Pharmaceutical
|                                                                            |                                                                                              | Ribapharm                                                                  |                                           | Ribapharm |         | Eliminations |         | International 
|                                                                            |                                                                                              |                                                                            |                                           |           |         |              |         |               
|Cash flows from operating
    activities:                                   |                                                                                              |                                                                            |                                           |           |         |              |         |                |         |        |   |         |        |   |         |         
|                                                                            | Income (loss) from continuing operations                                                     |                                                                            | $                                         | 3,424     |         |              | $       | (59,706        | )       |        | $ | (11,570 | )      |   | $       | (67,852  | )      
|                                                                            | Adjustments to reconcile net income (loss) to net
    cash provided by operating activities: |                                                                            |                                           |           |         |              |         |                |         |        |   |         |        |   |         |          |        
|                                                                            |                                                                                              | Depreciation and amortization                                              |                                           |           | 41,315  |              |         |                | 4,512   |        |   |         |       |   |         |          | 45,827  |        
|                                                                            |                                                                                              | Provision for losses on accounts receivable and
    inventory obsolescence |                                           |           | 3,631   |              |         |                |        |        |   |         |       |   |         |          | 3,631   |        
|                                                                            |                                                                                              | Translation and exchange gains, net                                        |                                           |           | (496    | )            |         |                |        |        |   |         |       |   |         |          | (496    | )      
|                                                                            |                                                                                              | Other non-cash items                                                       |                                           |           | 387     |              |         |                | 77      |        |   |         |       |   |         |          | 464     |        
|                                                                            |                                                                                              | Write-off of acquired in-process R&D                                       |                                           |           |        |              |         |                | 117,609 |        |   |         |       |   |         |          | 117,609 |        
|                                                                            |                                                                                              | Deferred income taxes                                                      |                                           |           | (7,455  | )            |         |                |        |        |   |         |       |   |         |          | (7,455  | )      
|                                                                            |                                                                                              | Minority interest                                                          |                                           |           | 97      |              |         |                |        |        |   |         | 11,570 |   |         |          | 11,667  |        
|                                                                            | Change in assets and liabilities, net of effects
    of acquisitions:                        |                                                                            |                                           |           |         |              |         |                |         |        |   |         |        |   |         |          |        
|                                                                            |                                                                                              | Accounts receivable                                                        |                                           |           | 3,860   |              |         |                | 58,016  |        |   |         |       |   |         |          | 61,876  |        
|                                                                            |                                                                                              | Inventories                                                                |                                           |           | (510    | )            |         |                |        |        |   |         |       |   |         |          | (510    | )      
|                                                                            |                                                                                              | Prepaid expenses and other assets                                          |                                           |           | (6,626  | )            |         |                | (3,610  | )      |   |         |       |   |         |          | (10,236 | )      
|                                                                            |                                                                                              | Trade payables and accrued liabilities                                     |                                           |           | (37,921 | )            |         |                | (4,934  | )      |   |         |       |   |         |          | (42,855 | )      
|                                                                            |                                                                                              | Income taxes payable                                                       |                                           |           | 57,464  |              |         |                | (11,882 | )      |   |         |       |   |         |          | 45,582  |        
|                                                                            |                                                                                              | Other liabilities                                                          |                                           |           | (8,058  | )            |         |                |        |        |   |         |       |   |         |          | (8,058  | )      
|                                                                            |                                                                                              | Funds provided to (from) intercompany                                      |                                           |           | 641     |              |         |                | (641    | )      |   |         |       |   |         |          |        |        
|                                                                            |                                                                                              |                                                                            |                                           |           |         |              |         |                |         |        |   |         |        |   |         |         
|                                                                            |                                                                                              | Cash flow from operating activities in continuing
    operations           |                                           |           | 49,753  |              |         |                | 99,441  |        |   |         |       |   |         |          | 149,194 |        
|                                                                            |                                                                                              | Cash flow from operating activities in
    discontinued operations         |                                           |           | 21,938  |              |         |                |        |        |   |         |       |   |         |          | 21,938  |        
|                                                                            |                                                                                              |                                                                            |                                           |           |         |              |         |                |         |        |   |         |        |   |         |         
|                                                                            |                                                                                              |                                                                            | Net cash provided by operating activities |           |         | 71,691       |         |                |         | 99,441 |   |         |        |  |         |          |         | 171,132 | 
|                                                                            |                                                                                              |                                                                            |                                           |           |         |              |         |                |         |        |   |         |        |   |         |         
|Cash flows from investing
    activities:                                   |                                                                                              |                                                                            |                                           |           |         |              |         |                |         |        |   |         |        |   |         |         
|                                                                            | Capital expenditures                                                                         |                                                                            |                                           | (7,574    | )       |              |         | (1,667         | )       |        |   |        |        |   |         | (9,241   | )      
|                                                                            | Proceeds from sale of assets                                                                 |                                                                            |                                           | 318       |         |              |         |               |         |        |   |        |        |   |         | 318      |        
|                                                                            | Acquisition of license rights, product lines and
    businesses                              |                                                                            |                                           | (192,923  | )       |              |         |               |         |        |   |        |        |   |         | (192,923 | )      
|                                                                            |                                                                                              |                                                                            |                                           |           |         |              |         |                |         |        |   |         |        |   |         |         
|                                                                            | Cash flow from investing activities in continuing
    operations                             |                                                                            |                                           | (200,179  | )       |              |         | (1,667         | )       |        |   |        |        |   |         | (201,846 | )      
|                                                                            | Cash flow from investing activities in
    discontinued operations                           |                                                                            |                                           | 104,276   |         |              |         |               |         |        |   |        |        |   |         | 104,276  |        
|                                                                            |                                                                                              |                                                                            |                                           |           |         |              |         |                |         |        |   |         |        |   |         |         
|                                                                            |                                                                                              | Net cash used in investing activities                                      |                                           |           | (95,903 | )            |         |                | (1,667  | )      |   |         |       |   |         |          | (97,570 | )      
|                                                                            |                                                                                              |                                                                            |                                           |           |         |              |         |                |         |        |   |         |        |   |         |         
|Cash flows from financing
    activities:                                   |                                                                                              |                                                                            |                                           |           |         |              |         |                |         |        |   |         |        |   |         |         
|                                                                            | Payments on long-term debt and notes payable                                                 |                                                                            |                                           | (6,797    | )       |              |         |               |         |        |   |        |        |   |         | (6,797   | )      
|                                                                            | Proceeds from exercise of stock options                                                      |                                                                            |                                           | 317       |         |              |         |               |         |        |   |        |        |   |         | 317      |        
|                                                                            | Dividends paid                                                                               |                                                                            |                                           | (19,501   | )       |              |         |               |         |        |   |        |        |   |         | (19,501  | )      
|                                                                            | Funds provided to (from) intercompany                                                        |                                                                            |                                           | 54,996    |         |              |         | (54,996        | )       |        |   |        |        |   |         |         |        
|                                                                            | Funds received from discontinued operations                                                  |                                                                            |                                           | 133,774   |         |              |         |               |         |        |   |        |        |   |         | 133,774  |        
|                                                                            |                                                                                              |                                                                            |                                           |           |         |              |         |                |         |        |   |         |        |   |         |         
|                                                                            | Cash flow from financing activities in continuing
    operations                             |                                                                            |                                           | 162,789   |         |              |         | (54,996        | )       |        |   |        |        |   |         | 107,793  |        
|                                                                            | Cash flow from financing activities in
    discontinued operations                           |                                                                            |                                           | (134,070  | )       |              |         |               |         |        |   |        |        |   |         | (134,070 | )      
|                                                                            |                                                                                              |                                                                            |                                           |           |         |              |         |                |         |        |   |         |        |   |         |         
|                                                                            |                                                                                              | Net cash provided by (used) in financing
    activities                    |                                           |           | 28,719  |              |         |                | (54,996 | )      |   |         |       |   |         |          | (26,277 | )      
|                                                                            |                                                                                              |                                                                            |                                           |           |         |              |         |                |         |        |   |         |        |   |         |         
|Effect of exchange rate changes on cash and cash
    equivalents            |                                                                                              |                                                                            | 966                                       |           |         |              |        |                |         |        |  |         |        |   | 966     |         
|                                                                            |                                                                                              |                                                                            |                                           |           |         |              |         |                |         |        |   |         |        |   |         |         
|Net increase in cash and cash equivalents                                   |                                                                                              |                                                                            | 5,473                                     |           |         |              | 42,778  |                |         |        |  |         |        |   | 48,251  |         
|Cash and cash equivalents at beginning of period                            |                                                                                              |                                                                            | 173,914                                   |           |         |              | 79,750  |                |         |        |  |         |        |   | 253,664 |         
|                                                                            |                                                                                              |                                                                            |                                           |           |         |              |         |                |         |        |   |         |        |   |         |         
|Cash and cash equivalents at end of period                                  |                                                                                              |                                                                            | 179,387                                   |           |         |              | 122,528 |                |         |        |  |         |        |   | 301,915 |         
|Cash and cash equivalents classified as part of
    discontinued operations |                                                                                              |                                                                            | (887                                      | )         |         |              |        |                |         |        |  |         |        |   | (887    | )       
|                                                                            |                                                                                              |                                                                            |                                           |           |         |              |         |                |         |        |   |         |        |   |         |         
|Cash and cash equivalents of continuing operations                          |                                                                                              | $                                                                          | 178,500                                   |           |         | $            | 122,528 |                |         | $      |  |         |        | $ | 301,028 |         
|                                                                            |                                                                                              |                                                                            |                                           |           |         |              |         |                |         |        |   |         |        |   |         |         

28



---



##### Table of Contents



VALEANT PHARMACEUTICALS
INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)

Consolidating Condensed Statement of Cash
Flow for the nine months ended September 30, 2002


(Unaudited, in thousands)


|                                                                            |                                                                                                        |                                                                            |                                                         |           |          |              |        |                 |         |        |   |         |        |   |         |          |          |        |  
|--------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------ | -------------------------------------------------------------------------- | ------------------------------------------------------- | --------- | -------- | ------------ | ------ | --------------- | ------- | ------ | - | ------- | ------ | - | ------- | -------- | -------- | ------ | -
|                                                                            |                                                                                                        | Valeant                                                                    |                                                         |           |          |              |        | Valeant        
|                                                                            |                                                                                                        | Excluding                                                                  |                                                         |           |          |              |        | Pharmaceuticals
|                                                                            |                                                                                                        | Ribapharm                                                                  |                                                         | Ribapharm |          | Eliminations |        | International  
|                                                                            |                                                                                                        |                                                                            |                                                         |           |          |              |        |                
|Cash flows from operating
    activities:                                   |                                                                                                        |                                                                            |                                                         |           |          |              |        |                 |         |        |   |         |        |   |         |         
|                                                                            | Income (loss) from continuing operations                                                               |                                                                            | $                                                       | 17,892    |          |              | $      | 89,959          |         |        | $ | (10,490 | )      |   | $       | 97,361   |         
|                                                                            | Adjustments to reconcile net income (loss) to net
    cash provided by (used in) operating activities: |                                                                            |                                                         |           |          |              |        |                 |         |        |   |         |        |   |         |          |         
|                                                                            |                                                                                                        | Depreciation and amortization                                              |                                                         |           | 40,721   |              |        |                 | 2,037   |        |   |         |       |   |         |          | 42,758   |       
|                                                                            |                                                                                                        | Provision for losses on accounts receivable and
    inventory obsolescence |                                                         |           | 4,374    |              |        |                 |        |        |   |         |       |   |         |          | 4,374    |       
|                                                                            |                                                                                                        | Translation and exchange (gains) losses, net                               |                                                         |           | (8,192   | )            |        |                 |        |        |   |         |       |   |         |          | (8,192   | )     
|                                                                            |                                                                                                        | Other non-cash items                                                       |                                                         |           | 44,286   |              |        |                 |        |        |   |         |       |   |         |          | 44,286   |       
|                                                                            |                                                                                                        | Write-off of acquired in-process R&D                                       |                                                         |           |         |              |        |                 |        |        |   |         |       |   |         |          |         |       
|                                                                            |                                                                                                        | Deferred income taxes                                                      |                                                         |           | 34       |              |        |                 |        |        |   |         |       |   |         |          | 34       |       
|                                                                            |                                                                                                        | Minority interest                                                          |                                                         |           | 180      |              |        |                 |        |        |   |         | 10,490 |   |         |          | 10,670   |       
|                                                                            |                                                                                                        | Gain on sale of subsidiary stock                                           |                                                         |           | (261,937 | )            |        |                 |        |        |   |         |       |   |         |          | (261,937 | )     
|                                                                            |                                                                                                        | Loss on extinguishment of debt                                             |                                                         |           | 25,730   |              |        |                 |        |        |   |         |       |   |         |          | 25,730   |       
|                                                                            | Change in assets and liabilities, net of effects
    of acquisitions:                                  |                                                                            |                                                         |           |          |              |        |                 |         |        |   |         |        |   |         |          |         
|                                                                            |                                                                                                        | Accounts receivable                                                        |                                                         |           | 93,057   |              |        |                 | (71,200 | )      |   |         |       |   |         |          | 21,857   |       
|                                                                            |                                                                                                        | Inventories                                                                |                                                         |           | (4,300   | )            |        |                 |        |        |   |         |       |   |         |          | (4,300   | )     
|                                                                            |                                                                                                        | Prepaid expenses and other assets                                          |                                                         |           | (20,199  | )            |        |                 | (594    | )      |   |         |       |   |         |          | (20,793  | )     
|                                                                            |                                                                                                        | Trade payables and accrued liabilities                                     |                                                         |           | (949     | )            |        |                 | 11,567  |        |   |         |       |   |         |          | 10,618   |       
|                                                                            |                                                                                                        | Income taxes payable                                                       |                                                         |           | 16,813   |              |        |                 |        |        |   |         |       |   |         |          | 16,813   |       
|                                                                            |                                                                                                        | Other liabilities                                                          |                                                         |           | 4,272    |              |        |                 |        |        |   |         |       |   |         |          | 4,272    |       
|                                                                            |                                                                                                        | Funds provided to (from) intercompany                                      |                                                         |           | (19,933  | )            |        |                 | 19,933  |        |   |         |       |   |         |          |         |       
|                                                                            |                                                                                                        |                                                                            |                                                         |           |          |              |        |                 |         |        |   |         |        |   |         |         
|                                                                            |                                                                                                        | Cash flow from operating activities in continuing
    operations           |                                                         |           | (68,151  | )            |        |                 | 51,702  |        |   |         |       |   |         |          | (16,449  | )     
|                                                                            |                                                                                                        | Cash flow from operating activities in
    discontinued operations         |                                                         |           | 8,065    |              |        |                 |        |        |   |         |       |   |         |          | 8,065    |       
|                                                                            |                                                                                                        |                                                                            |                                                         |           |          |              |        |                 |         |        |   |         |        |   |         |         
|                                                                            |                                                                                                        |                                                                            | Net cash provided by (used in) operating
    activities |           |          | (60,086      | )      |                 |         | 51,702 |   |         |        |  |         |          |          | (8,384 | )
|                                                                            |                                                                                                        |                                                                            |                                                         |           |          |              |        |                 |         |        |   |         |        |   |         |         
|Cash flows from investing
    activities:                                   |                                                                                                        |                                                                            |                                                         |           |          |              |        |                 |         |        |   |         |        |   |         |         
|                                                                            | Capital expenditures                                                                                   |                                                                            |                                                         | (11,952   | )        |              |        | (1,641          | )       |        |   |        |        |   |         | (13,593  | )       
|                                                                            | Proceeds from sale of assets                                                                           |                                                                            |                                                         | 356       |          |              |        |                |         |        |   |        |        |   |         | 356      |         
|                                                                            | Proceeds from sale of subsidiary stock                                                                 |                                                                            |                                                         | 276,611   |          |              |        |                |         |        |   |        |        |   |         | 276,611  |         
|                                                                            | Acquisition of license rights, product lines and
    businesses                                        |                                                                            |                                                         | (26,765   | )        |              |        |                |         |        |   |        |        |   |         | (26,765  | )       
|                                                                            |                                                                                                        |                                                                            |                                                         |           |          |              |        |                 |         |        |   |         |        |   |         |         
|                                                                            | Cash flow from investing activities in continuing
    operations                                       |                                                                            |                                                         | 238,250   |          |              |        | (1,641          | )       |        |   |        |        |   |         | 236,609  |         
|                                                                            | Cash flow from investing activities in
    discontinued operations                                     |                                                                            |                                                         | 5,621     |          |              |        |                |         |        |   |        |        |   |         | 5,621    |         
|                                                                            |                                                                                                        |                                                                            |                                                         |           |          |              |        |                 |         |        |   |         |        |   |         |         
|                                                                            |                                                                                                        | Net cash (used in) provided by investing
    activities                    |                                                         |           | 243,871  |              |        |                 | (1,641  | )      |   |         |       |   |         |          | 242,230  |       
|                                                                            |                                                                                                        |                                                                            |                                                         |           |          |              |        |                 |         |        |   |         |        |   |         |         
|Cash flows from financing
    activities:                                   |                                                                                                        |                                                                            |                                                         |           |          |              |        |                 |         |        |   |         |        |   |         |         
|                                                                            | Proceeds from issuance of long-term debt and
    notes payable                                         |                                                                            |                                                         | 686       |          |              |        |                |         |        |   |        |        |   |         | 686      |         
|                                                                            | Payments on long-term debt and notes payable                                                           |                                                                            |                                                         | (273,630  | )        |              |        |                |         |        |   |        |        |   |         | (273,630 | )       
|                                                                            | Proceeds from exercise of stock options                                                                |                                                                            |                                                         | 12,892    |          |              |        |                |         |        |   |        |        |   |         | 12,892   |         
|                                                                            | Dividends paid                                                                                         |                                                                            |                                                         | (19,035   | )        |              |        |                |         |        |   |        |        |   |         | (19,035  | )       
|                                                                            | Repurchase of common stock                                                                             |                                                                            |                                                         | (31,955   | )        |              |        |                |         |        |   |        |        |   |         | (31,955  | )       
|                                                                            | Funds provided to (from) intercompany                                                                  |                                                                            |                                                         | (777      | )        |              |        | 777             |         |        |   |        |        |   |         |         |         
|                                                                            | Funds received from discontinued operations                                                            |                                                                            |                                                         | 8,706     |          |              |        |                |         |        |   |        |        |   |         | 8,706    |         
|                                                                            |                                                                                                        |                                                                            |                                                         |           |          |              |        |                 |         |        |   |         |        |   |         |         
|                                                                            | Cash flow from financing activities in continuing
    operations                                       |                                                                            |                                                         | (303,113  | )        |              |        | 777             |         |        |   |        |        |   |         | (302,336 | )       
|                                                                            | Cash flow from financing activities in
    discontinued operations                                     |                                                                            |                                                         | (8,513    | )        |              |        |                |         |        |   |        |        |   |         | (8,513   | )       
|                                                                            |                                                                                                        |                                                                            |                                                         |           |          |              |        |                 |         |        |   |         |        |   |         |         
|                                                                            |                                                                                                        | Net cash used in financing activities                                      |                                                         |           | (311,626 | )            |        |                 | 777     |        |   |         |       |   |         |          | (310,849 | )     
|                                                                            |                                                                                                        |                                                                            |                                                         |           |          |              |        |                 |         |        |   |         |        |   |         |         
|Effect of exchange rate changes on cash and cash
    equivalents            |                                                                                                        |                                                                            | (161                                                    | )         |          |              |       |                 |         |        |  |         |        |   | (161    | )       
|                                                                            |                                                                                                        |                                                                            |                                                         |           |          |              |        |                 |         |        |   |         |        |   |         |         
|Net increase (decrease) in cash and cash
    equivalents                    |                                                                                                        |                                                                            | (128,002                                                | )         |          |              | 50,838 |                 |         |        |  |         |        |   | (77,164 | )       
|Cash and cash equivalents at beginning of period                            |                                                                                                        |                                                                            | 325,253                                                 |           |          |              |       |                 |         |        |  |         |        |   | 325,253 |         
|                                                                            |                                                                                                        |                                                                            |                                                         |           |          |              |        |                 |         |        |   |         |        |   |         |         
|Cash and cash equivalents at end of period                                  |                                                                                                        |                                                                            | 197,251                                                 |           |          |              | 50,838 |                 |         |        |  |         |        |   | 248,089 |         
|Cash and cash equivalents classified as part of
    discontinued operations |                                                                                                        |                                                                            | (13,332                                                 | )         |          |              |       |                 |         |        |  |         |        |   | (13,332 | )       
|                                                                            |                                                                                                        |                                                                            |                                                         |           |          |              |        |                 |         |        |   |         |        |   |         |         
|Cash and cash equivalents of continuing operations                          |                                                                                                        | $                                                                          | 183,919                                                 |           |          | $            | 50,838 |                 |         | $      |  |         |        | $ | 234,757 |         
|                                                                            |                                                                                                        |                                                                            |                                                         |           |          |              |        |                 |         |        |   |         |        |   |         |         

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VALEANT PHARMACEUTICALS
INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|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 the 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.

Results of Operations

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 information
by business segment, see Note 10 of Notes to Consolidated
Condensed Financial Statements included elsewhere in this
Quarterly Report.

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 (formerly Ribapharm). The segment reporting
has been reclassified to conform to discontinued operations
presentation for all periods presented. See Note 3 of Notes
to Consolidated Condensed Financial Statements for the
discussion of discontinued operations.



| |                        
| | -----------------------
| | Revenues (in thousands)

|                                     |                         |                       |         |                   |         |      |         |        |         |   |         |         |         |   |         |         |         | 
|------------------------------------ | ----------------------- | --------------------- | ------- | ----------------- | ------- | ---- | ------- | ------ | ------- | - | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                                     |                         |                       |         |                  
|                                     |                         | Three Months Ended    |         | Nine Months Ended
|                                     |                         | September 30,         |         | September 30,    
|                                     |                         |                       |         |                  
|                                     |                         | 2003                  |         | 2002              |         | 2003 |         | 2002  
|                                     |                         |                       |         |                   |         |      |         |       
|Pharmaceuticals                      |                         |                       |         |                   |         |      |         |        |         |   |         |         |         |   |         |        
|                                     | North America           |                       | $       | 29,403            |         |      | $       | 16,757 |         |   | $       | 70,837  |         |   | $       | 78,151  |        
|                                     | Latin America           |                       |         | 34,746            |         |      |         | 31,985 |         |   |         | 94,802  |         |   |         | 94,019  |        
|                                     | Europe                  |                       |         | 54,512            |         |      |         | 44,334 |         |   |         | 169,396 |         |   |         | 138,632 |        
|                                     | Asia, Africa, Australia |                       |         | 12,629            |         |      |         | 15,208 |         |   |         | 37,921  |         |   |         | 40,298  |        
|                                     |                         |                       |         |                   |         |      |         |        |         |   |         |         |         |   |         |        
|                                     |                         | Total pharmaceuticals |         |                   | 131,290 |      |         |        | 108,284 |   |         |         | 372,956 |   |         |         | 351,100 | 
|Royalties                            |                         |                       | 36,217  |                   |         |      | 63,367  |        |         |   | 136,755 |         |         |   | 186,368 |        
|                                     |                         |                       |         |                   |         |      |         |        |         |   |         |         |         |   |         |        
|Total revenues                       |                         | $                     | 167,507 |                   |         | $    | 171,651 |        |         | $ | 509,711 |         |         | $ | 537,468 |        
|                                     |                         |                       |         |                   |         |      |         |        |         |   |         |         |         |   |         |        
|Cost of goods sold                   |                         | $                     | 42,128  |                   |         | $    | 39,769  |        |         | $ | 131,295 |         |         | $ | 113,360 |        
|Gross profit margin on product sales |                         |                       | 68      | %                 |         |      | 63      | %      |         |   | 65      | %       |         |   | 68      | %      

Quarter Ended September 30, 2003 Compared
to 2002



| |                         
| | ------------------------
| | Pharmaceutical Revenues:

In the North America Pharmaceuticals segment,
revenues for the three months ended September 30, 2003 were
$29,403,000 compared to $16,757,000 for the same period of 2002,
an increase of $12,646,000

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(75%). The increase in 2003 is primarily due to
revenues in the third quarter of 2002 being negatively impacted
by the inventory reduction program at the Companys
wholesalers that began in June 2002. The Company completed the
inventory reduction program in April 2003.


In the Latin America Pharmaceuticals segment,
revenues for the three months ended September 30, 2003 were
$34,746,000, compared to $31,985,000 for the same period of
2002, an increase of $2,761,000 (9%). The increase is primarily
due to price and volume increases of $4,142,000, partially
offset by a 4% decrease in the value of currencies in the region
of $1,381,000. The Company continues to see an impact from
generic substitution in the Latin American market and is taking
steps to realign and increase sales force in this region.

In the Europe Pharmaceuticals segment, revenues
for the three months ended September 30, 2003 were
$54,512,000 compared to $44,334,000 for the same period of 2002,
an increase of $10,178,000 (23%). The increase is primarily due
to an increase in the value of currencies in the region relative
to the U.S. Dollar, which resulted in an increase in
revenues of $4,815,000. Additionally, excluding the effect of
currencies, revenues in Poland increased $2,441,000.

In the Asia, Africa and Australia
(AAA) Pharmaceuticals segment, revenues for the
three months ended September 30, 2003 were $12,629,000
compared to $15,208,000 for the same period of 2002, a decrease
of $2,579,000 (17%). The decrease is primarily due to lower
sales volume primarily related to a decrease in Reptilase sales
partially off-set by an increase in sales of Nyal® products
in Australia.

Royalties:Royalty
revenues represent amounts earned under the License and Supply
Agreement with Schering-Plough Ltd. (Schering) (the
License Agreement) and for fiscal 2003, under a
license agreement with F. Hoffman-LaRoche Ltd.
(Roche). Under the License Agreement, Schering
licensed all oral forms of ribavirin for the treatment of
chronic hepatitis C in combination with Scherings
alpha interferon (the Combination Therapy).

On January 6, 2003, the Company and Roche
reached agreement on a settlement of pending patent disputes
over Roches combination anti-viral 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. Roche pays
royalty fees to the Company on all sales of Copegus for use in
combination with interferon alfa or pegylated interferon alfa.

Royalties earned for the three months ended
September 30, 2003 from Schering and Roche were $36,217,000
compared to $63,367,000 for the same period of 2002, a decrease
of $27,150,000 (43%). The Company believes that the decrease in
royalties during the three months ended September 30, 2003,
include the effects of increasing competition between Schering
and Roche, Schering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. The Company has
no information with regard to the basis for the rebate and
return provision other than public statements by Schering
suggesting generic competition in the last half of 2003 would
have an impact on demand.

Gross Profit:Gross
profit margin on product sales increased to 68% for the three
months ended September 30, 2003 compared to 63% for 2002.
The increase in gross profit is primarily due to a change in the
geographic mix in sales primarily related to higher sales in the
U.S., which increased the Companys overall margin,
partially offset costs related the Companys manufacturing
rationalization project.

Selling Expenses:Selling expenses were $40,478,000 for
the three months ended September 30, 2003, compared to
$40,140,000 for the same period in 2002, an increase of $338,000
(1%). As a percentage of sales, selling expenses decreased to
31% in the third quarter of 2003 from 37% in the same period in
2002, which reflects the Companys intention of lowering
overall costs.

General and Administrative Expenses:General and administrative expenses
were $25,512,000 for the three months ended September 30,
2003, compared to $54,483,000 for the same period in 2002, a
decrease of $28,971,000. Included in general and administrative
expenses for the quarter ended September 30, 2002 are

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reported non-recurring and other unusual charges
of $23,920,000, which include severance costs of $18,708,000 and
environmental remediation and related expenses of $5,212,000.


The remaining decrease of $5,051,000 primarily
reflects a reduction in corporate general and administrative
expenses of $4,514,000 and lower general and administrative
expenses in the pharmaceuticals segment related to the closing
of the Companys European headquarters in Basel,
Switzerland in October 2002 of $2,023,000 and expenses related
to flood damage in the Czech Republic of $1,577,000 in the third
quarter of 2002. The decrease was partially offset by an
increase in Ribapharms general and administrative expenses
related to legal and professional fees of $4,544,000 incurred by
Ribapharm in connection with the Ribapharm Acquisition.

Research and Development:Research and development expenses for
the 2003 third quarter were $10,752,000 compared to $13,479,000
for the same period in 2002. The decrease is primarily
attributable to the timing of costs associated with the clinical
trials of Viramidine and Hepavir B. It is expected that
research and development expenses will increase in the fourth
quarter of 2003 and in 2004 as the Company initiates
Phase III studies of Viramidine and progress continues with
the clinical trials of Hepavir B.

Acquired In-Process Research and Development:In the quarter ended
September 30, 2003, the Company incurred an expense of
$117,609,000 associated with acquired in-process research and
development (IPR&D) related to the Ribapharm
Acquisition. The amount expensed as IPR&D represents an
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. The data used to determine the respective fair values
requires significant judgment, differences in those judgments
would have the impact of changing the allocation of purchase
price to other intangible assets, goodwill. The estimated fair
value of these projects was based on the use of a discounted
cash flow model (based on an estimate of future sales and a
cross margin of using a rate of 25%). For each project, the
estimated after-tax cash flows were probability weighted to take
account of the stage of completion and the risks surrounding the
successful development and commercialization. These cash flows
were then discounted to a present value using a discount rate of
15%. In addition, solely for the purposes of estimating the fair
value of these IPR&D projects as of August 25, 2003,
the following assumptions were made:



| |   |                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Future research and development costs of
    approximately $150,000,000 would be incurred to complete the
    IPR&D projects.                                            
|
| |  | The IPR&D projects, which are in various
    stages of development from Phase I to Phase II
    clinical trials, are expected to reach completion by the end of
    2006.

The major risks and uncertainties associated with
the timely and successful completion of these projects consist
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. For example, in October 2003, Roche notified the
Company that they are abandoning development of Levovirin.

Other Income, Net, Including Translation and
Exchange:Other income, net, including
translation and exchange was a gain of $2,208,000 for the three
months ended September 30, 2003 compared to a gain of
$4,253,000 for the same period in 2002, a change of $2,045,000.
In the third quarter of 2003, the Company recorded translation
and exchange gains primarily related to the Companys
dollar denominated net assets in Europe of $1,604,000 and in
Canada of $1,090,000, partially off-set by translation losses in
Mexico of $396,000. The Company is currently taking steps to
mitigate the impact of foreign currency translation on the
income statement.

Gain (Loss) on Early Extinguishment of
Debt:In the three months ended
September 30, 2002, the Company recorded a gain on early
extinguishment of $17,538,000 related to the repurchase of
$59,410,000 principal amount of its 6 1/2% Convertible
Subordinated Notes due 2008. In the nine months ended
September 30, 2002, the Company recorded a loss on early
extinguishment of debt of $25,730,000. The loss

32



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was primarily related to a loss on extinguishment
of debt of $43,268,000 related to the repurchase of the
Companys outstanding 8 3/4% Senior Notes due 2008,
partially offset by a gain on early extinguishment of debt of
$17,538,000 related to the repurchase of the Companys
6 1/2% Convertible Subordinated Notes due 2008.


32.1



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Interest Expense and Income:Interest expense during the three
months ended September 30, 2003 decreased $1,318,000
compared to the same period in 2002. The decrease was the result
of the repurchase of $59,410,000 principal amount of the
Companys 6 1/2% Convertible Subordinated Notes due
2008 in July and August 2002. Interest income decreased from
$1,458,000 in the third quarter of 2002 to $953,000 in the same
period of 2003 due to lower yields on investments partially
offset by an increase in interest-bearing cash.

Income Taxes:The
Companys effective income tax rate for the three months
ended September 30, 2003 was a negative 15% compared to 26%
for the same period of 2002. The Companys negative
effective tax rate for 2003 was primarily due to the pre-tax
loss resulting from the write-off of acquired IPR&D expenses
in connection with the Ribapharm Acquisition which is not
deductible for tax purposes. Excluding the effect of the
acquired IPR&D write-off, the 2003 effective tax rate would
have been 38%. The effective tax rate for 2002 reflects a tax
benefit of $3,861,000 recognized in the third quarter of 2002
related to costs previously incurred in connection with a joint
venture in China. Excluding the effect of this benefit, the
Company had an effective tax rate of 39% for the three months
ended September 30, 2002.

Income (loss) from Discontinued Operations,
Net of Taxes:Income (loss) from
discontinued operations relating to the Companys Russian
Pharmaceuticals segment, Biomedicals segment, Photonics business
and raw materials businesses and manufacturing capabilities in
Central Europe was recorded as income of $16,110,000 for the
three months ended September 30, 2003 compared to a loss of
$90,633,000 for the same period in 2002. In September 2003, the
Company sold the remaining assets of its Biomedicals segment,
Dosimetry, for cash proceeds of $58,000,000 and recorded a net
gain on disposal of $23,288,000, net of taxes of $15,526,000.
The income in 2003 includes income from discontinued operations
of $3,036,000. The loss for 2002 includes a net loss on disposal
of discontinued operations of $75,291,000 due to impairments on
the Russian Pharmaceutical business, Photonics business and
Circe and a loss from discontinued operations of $15,342,000.

Nine Months Ended September 30, 2003
Compared to 2002



| |                         
| | ------------------------
| | Pharmaceutical Revenues:

In the North America Pharmaceuticals segment,
revenues for the nine months ended September 30, 2003 were
$70,837,000 compared to $78,151,000 for the same period of 2002,
a decrease of $7,314,000 (9%). The decrease in 2003 sales is
primarily due to reduced sales to wholesalers during the first
four months of 2003 related to an inventory reduction program at
the Companys wholesalers, which the Company began in June
2002 and completed in April 2003.

In the Latin America Pharmaceuticals segment,
revenues for the nine months ended September 30, 2003 were
$94,802,000 compared to $94,019,000 for the same period of 2002,
an increase of $783,000 (1%). Revenues in Latin America were
affected by a 10% decrease in the value of currencies in the
region of $9,403,000, offset by price and volume increases.

In the Europe Pharmaceuticals segment, revenues
for the nine months ended September 30, 2003 were
$169,396,000 compared to $138,632,000 for the same period of
2002, an increase of $30,764,000 (22%). The increase is
primarily due to an increase in the value of currencies in the
region relative to the U.S. Dollar, which resulted in an
increase in revenues of $20,870,000. Additionally, excluding the
effect of currencies, revenues in Poland increased $6,516,000
and revenues in Spain increased $1,632,000 primarily due to
price increases and new product launches. Revenues in 2003 were
affected by challenges with German health care reform,
reference-pricing litigation in Spain and price controls in
Italy.

In the AAA Pharmaceuticals segment, revenues for
the nine months ended September 30, 2003 were $37,921,000
compared to $40,298,000 for the same period of 2002, a decrease
of $2,377,000 (6%). The decrease is due to lower sales volume in
several products including Reptilase, partially offset by an
increase in sales of Nyal products in Australia.

Ribapharm Royalty Revenues:Royalties earned for the nine months
ended September 30, 2003 were $136,755,000 compared to
$186,368,000 for the same period of 2002, a decrease of
$49,613,000 (27%). The Company believes that the decrease in
royalties during the nine months ended September 30, 2003
includes

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the effects of increasing competition between
Schering and Roche, Scherings provision for estimated
rebates on its U.S. sales of ribavirin and changes in trade
inventory levels as reported to Ribapharm by Schering. The
Company has no information with regard to the basis for the
rebate and return provision other than public statements made by
Schering suggesting generic competition in the last half of 2003
would have an impact on demand.


Gross Profit:Gross
profit margin on product sales decreased to 65% for the nine
months ended September 30, 2003 compared to 68% in 2002.
The decrease in gross profit is primarily due a change in the
geographic mix in sales, primarily in the U.S. and Europe,
which lowered the Companys overall gross profit margin,
higher inefficiencies in the Companys manufacturing
operations in certain countries and costs related to a
manufacturing rationalization project.

Selling Expenses:Selling expenses were $121,146,000 for
the nine months ended September 30, 2003, compared to
$119,120,000 for the same period in 2002, an increase of
$2,026,000 (2%). The increase reflects the Companys
increased promotional efforts, mainly in Europe of $5,559,000,
partially offset by a decrease in selling expenses in North
America Pharmaceuticals segment of $2,861,000.

General and Administrative Expenses:General and administrative expenses
were $80,797,000 for the nine months ended September 30,
2003, compared to $293,112,000 for the same period in 2002, a
decrease of $212,315,000. Included in selling, general and
administrative expenses for the nine months ended
September 30, 2002, are non-recurring and other unusual
charges of $204,958,000, which primarily include stock
compensation costs related to the Companys Change of
Control under the Companys Option Plan ($61,400,000);
executive and director bonuses paid in connection with the
Ribapharm Offering ($47,839,000); professional fees related to
Ribapharm ($13,000,000); incentive compensation costs related to
the accelerated vesting of restricted stock upon the Change of
Control under the Companys Long-Term Incentive Plan
($12,022,000); costs incurred in the Companys 2002 proxy
contest ($7,382,000); the write-down of the corporate airplane
($9,100,000); the write-off of ICN International AG capitalized
offering costs ($18,295,000); and severance costs ($30,708,000).

The remaining decrease of $7,357,000 reflects a
reduction in corporate general and administrative expenses of
$14,635,000, which is mainly attributable to expenses incurred
in the nine months ended 2002 related to severance costs of
$4,343,000, a compensation charge of $2,968,000 for the exercise
of stock options, the write-off of deferred acquisition costs of
$2,674,000 and lower general and administrative expenses in the
pharmaceutical segment of $2,606,000 due primarily to the
closing of the European headquarters in Basel, Switzerland.
These expenses were partially offset by an increase in
Ribapharms general and administrative expenses of
$11,175,000 related to severance costs incurred early this year
and legal and professional fees incurred in connection with the
Ribapharm Acquisition.

Research and Development:Research and development expenses for
the nine months ended September 30, 2003 were $29,701,000,
compared to $35,526,000 for the same period in 2002. The
$5,825,000 decrease is primarily attributable to the timing of
costs associated with the clinical trials of
ViramidineTM and Hepavir BTM.

Gain on Sale of Subsidiary Stock:In April 2002, the Company sold,
through an underwritten public offering, 29,900,000 shares
of common stock representing 19.93% of the total outstanding
common stock of Ribapharm (the Ribapharm Offering).
In connection with the Ribapharm Offering, the Company received
net cash proceeds of $276,611,000 and recorded a gain on the
sale of Ribapharms stock of $261,937,000, net of offering
costs in the nine months ended September 30, 2002.

Other Income, Net, Including Translation and
Exchange:Other income, net, including
translation and exchange was a gain of $496,000 for the nine
months ended September 30, 2003, compared to a gain of
$8,192,000 for the same period in 2002. In 2003, translation
gains principally consisted of translation and exchange gains in
Europe and AAA of $4,521,000 partially offset by transaction and
exchange losses related to the Companys dollar denominated
net assets in Canada of $3,949,000.

Interest Expense and Income:Interest expense during the nine
months ended September 30, 2003 decreased $10,489,000
compared to the same period in 2002 due to repurchases of debt
in 2002. Interest

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income decreased $1,368,000 due to lower yields
on investments partially offset by an increase in
interest-bearing cash.


Income Taxes:The
Companys effective income tax rate for the nine months
ended September 30, 2003 was a negative 203% compared to
35% for the same period of 2002. The Companys negative
effective tax rate for 2003 was primarily due to the pre-tax
loss resulting from the write-off of acquired IPR&D expenses
in connection with the Ribapharm Acquisition which is not
deductible for tax purposes. Excluding the effect of the
acquired IPR&D write-off, the 2003 effective tax rate would
have been 38%. The effective tax rate for 2002 reflects a tax
benefit of $3,861,000 related to costs previously incurred in
connection with a joint venture in China. Excluding the effect
of this benefit, the Company had an effective tax rate of 38%
for the nine months ended September 30, 2002.

Minority Interest:Minority interest was $11,667,000 and $10,670,000 for the nine
months ended September 30, 2003 and 2002, respectively.
Minority interest primarily relates to the minority
shareholders portion of the net income of Ribapharm. In
connection with the Ribapharm Acquisition, Ribapharm became a
wholly owned subsidiary of the Company and the Company will no
longer record minority interest related to Ribapharm.

Income
(loss) from Discontinued Operations, Net of Taxes:Income (loss) from discontinued operations relating to the
Companys Russian Pharmaceuticals segment, Biomedicals
segment, raw materials businesses and manufacturing capabilities
in Central Europe and Photonics business (in 2002) and was
income of $13,992,000 for the nine months ended
September 30, 2003 compared to a loss of $109,742,000 for
the same period in 2002. In the nine months ended
September 30, 2003, the Company recorded income from
discontinued operations of $7,514,000 primarily related to the
Russian Pharmaceutical segment and the Biomedicals segment.
These segments were sold in 2003 for a net gain on disposal of
discontinued operations of $6,478,000. The loss for 2002
includes a net loss on disposal of discontinued operations of
$83,388,000 due to impairments on the Russian Pharmaceutical
business, Photonics business and Circe and a net loss from
discontinued operations of $26,354,000.

Liquidity and Capital Resources

Cash and cash equivalents totaled $301,028,000 at
September 30, 2003 compared to $245,184,000 at
December 31, 2002. Working capital was $379,836,000 at
September 30, 2003 compared to $397,070,000 at
December 31, 2002. The change in working capital of
$17,234,000 is primarily attributable to the use of cash in the
Ribapharm Acquisition of $186,879,000, partially offset by cash
generated from operations, cash proceeds of $113,000,000
received in connection with the sale of the Russian
Pharmaceuticals business and the Biomedicals Dosimetry business
and the decrease in the royalty receivable from Schering.

Cash provided by operating activities is expected
to continue to be the Companys primary recurring source of
funds in 2003. During the nine months ended September 30,
2003, cash provided by operating activities totaled
$171,132,000, compared to cash used in operating activities of
$8,384,000 in 2002. During the nine months ended 2003, the
Company recorded a non-cash write-off of in-process research and
development of $117,609,000. During the nine months ended
September 30, 2002, cash flow from operating activities was
negatively impacted by certain non-recurring and other unusual
cash payments. Those cash payments included cash paid for the
compensation costs related to the change of control of the
Company under the Companys Option Plan ($61,400,000),
costs incurred in the Companys 2002 proxy contest
($7,382,000), professional fees related to Ribapharm
($13,000,000) and executive and director bonuses paid in
connection with the Ribapharm Offering ($47,839,000).

Cash (used in) provided by investing activities
was $(97,570,000) for the nine months ended September 30,
2003 compared to $242,230,000 for the same period of 2002. In
2003, net cash used in investing activities consisted of
payments for the acquisition of license rights, product lines
and businesses of $192,923,000 related to the Ribapharm
Acquisition and capital expenditures of $9,241,000 partially
offset by investing activities in discontinued operations of
$104,276,000 primarily related to net proceeds from the sale of
the Russian Pharmaceuticals segment and the Biomedicals
Dosimetry business. In 2002, net cash provided by investing
activities consisted of proceeds from the sale of subsidiary
stock of $276,611,000 partially offset by

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the acquisition of license rights, product lines
and businesses of $26,765,000 and payments for capital
expenditures of $13,593,000.


Cash used in financing activities totaled
$26,277,000 for the nine months ended September 30, 2003,
including cash dividends paid on common stock of $19,501,000 and
payments on notes payable of $6,797,000. In 2002, cash used in
financing activities totaled $310,849,000 for the nine months
ended September 30, 2002, including payments on long-term
debt of $273,630,000 principally consisting of the repurchase of
$194,611,000 principal of the Companys outstanding
8 3/4% Senior Notes and the repurchase of $59,410,000
principal of the Companys 6 1/2% Convertible
Subordinated Notes due 2008, the repurchase of an aggregate
1,146,000 shares of the Companys common stock for
$31,955,000 and cash dividends paid on common stock of
$19,035,000 partially offset by proceeds from the exercise of
employee stock options of $12,892,000.

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 September 30, 2004 and to fund anticipated
acquisitions and capital expenditures and the Companys
research and development program. The Company 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.

In February and March 2003, Schering entered into
license agreements with three generic pharmaceutical companies,
which granted to each company a non-exclusive, non-sublicensable
license to Scherings U.S. ribavirin patents. In
connection with the Companys patent infringement suit
against the same three pharmaceutical companies to prevent them
from marketing a generic form of ribavirin in the U.S., the
U.S. District Court for the Central District of California
issued a memorandum of decision and order granting the generic
pharmaceutical companies motion for summary judgment of
non-infringement of the Companys asserted patents. The
decision and order did not rule on defendants motion for
summary judgment that the patents are invalid. The Company filed
a joint Citizen Petition with the FDA on July 17, 2003, and
the Company has appealed the summary judgment decision.
Competition from generic pharmaceutical companies could have a
material negative impact on the Companys future royalty
revenue. With respect to Schering, royalties will be affected by
the likelihood of reduced sales by Schering as well as a
reduction in the royalty rate per the license agreement. 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 Note 9 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 the Company will
continue to do so.

The Company evaluates the carrying value of its
inventories on a regular basis, taking into account such factors
as historical and anticipated future sales compared with
quantities on hand, the price the Company expects to obtain for
its products in their respective markets compared with
historical cost, and the remaining shelf life of goods on hand.
If actual market conditions are less favorable than those
projected by management, additional inventory write-downs may be
required. The Company also evaluates the collectibility of its
receivables on a regular basis. The Companys methodology
for establishing the allowance for bad debts varies with the
regions in which it operates. The allowance for bad debts is
based upon specific identification of customer accounts and the
Companys best estimate of the likelihood of potential
loss, taking into account such factors as the financial
condition and payment history of major customers. As of
September 30, 2003, the Company believes that adequate
provision has been made for inventory obsolescence and for
anticipated losses on uncollectible accounts receivable.

The Company is currently self-insured with
respect to product liability claims. While to date no material
adverse claim for personal injury resulting from allegedly
defective products has been successfully maintained against the
Company, a substantial claim, if successful, could have a
negative impact on the Companys liquidity and financial
performance.

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Restructuring

Discontinued
Operations

During 2002, the Company conducted a strategic
review of its operations. As a result of that review, the
Company now intends to emphasize its specialty pharmaceuticals
business, to divest itself of those businesses that do not fit
the Companys strategic growth plans and to exert efforts
to bring its overall cost structure in line with industry
averages.

As a result of this strategic review, the Company
made the decision to divest its Russian Pharmaceuticals segment,
Biomedicals segment, Photonics business, raw materials business
and manufacturing capability in Central Europe and Circe unit.
The results of these operations and the related financial
position have been reflected as discontinued operations in the
Companys consolidated condensed financial statements in
accordance with Statement of Financial Accounting Standard
(SFAS) No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. The
consolidated condensed financial statements have been
reclassified to conform to the discontinued operations
presentation for all historical periods presented.

On September 30, 2003, the Company sold the
remaining assets of its Biomedicals segment, Dosimetry, for
gross cash proceeds of $58,000,000. The Company recorded a net
gain on disposal of discontinued operations of $23,288,000, net
of a taxes of $15,526,000 related to the sale of Dosimetry in
the quarter ended September 30, 2003.

In June 2003, the Company sold its Russian
Pharmaceuticals segment and certain assets of its Biomedicals
segment. The Company received gross proceeds of $55,000,000 in
cash for the Russian Pharmaceuticals segment and received
727,990 shares of its common stock held by the purchaser, which
had a fair market value of approximately $12,369,000 for the
assets of its Biomedicals segment. The Company recorded a net
loss on disposal of discontinued operations of $7,942,000
related to the sale of these businesses in the nine months ended
September 30, 2003.

The Company is actively marketing for sale the
raw materials businesses and manufacturing capability in Hungary
and the Czech Republic and is working toward disposing of these
assets.



| |                      
| | ---------------------
| | Ribapharm Acquisition

As part of the Companys overall
restructuring strategy, the Company re-evaluated the ownership
structure of Ribapharm. The Company determined that the benefits
perceived at the time of the initial public offering of
Ribapharm had diminished and that the potential advantages to
the Company of repurchasing the publicly held shares of
Ribapharm outweighed the advantages of continuing to maintain
Ribapharm as a separate publicly-traded entity or completing a
spin-off of Ribapharm. In August 2003, the Company repurchased
the approximately 20% minority interest in its Ribapharm
subsidiary for aggregated total purchase price of $207,438,000.
The Company paid $6.25 in cash for each of the 29,900,703
outstanding publicly held shares of Ribapharm.



| |                              
| | -----------------------------
| | Global Manufacturing Strategy

During the third quarter of 2003 the Company
approved its global manufacturing strategy, which it announced
in October 2003. Under its manufacturing strategy, the goal is
to establish a global manufacturing and supply chain network of
five manufacturing sites which will result in the closing of
eight of the Companys current manufacturing sites. A
review for potential asset impairment was performed in
accordance with SFAS No. 144 Impairment of Long-Lived
Assets. In determining asset groups, the Company grouped
assets at the lowest level for which independent identifiable
cash flows were available. In determining whether an asset was
impaired, the Company compared undiscounted future cash flows
and asset residual values to the asset group carrying value on a
site by site basis. The impairment analysis indicated that the
asset groups were not impaired as of September 30, 2003,
therefore, no impairment losses were recognized in the third
quarter of 2003. Based on the estimated remaining useful lives
of the manufacturing sites to be disposed of, the book value
would exceed the residual value on the estimated disposal date
for five of the manufacturing sites. As a

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result, the Company has revised the depreciation
period on these assets and will incur an additional annual
depreciation expense of approximately $6,400,000 through the
third quarter of 2005.


The Company is currently evaluating its disposal
plan for each manufacturing site. The Companys intention
is to sell each site as an operating plant. However, the Company
may not find buyers for the all of the manufacturing sites.
Additionally, the Company may incur cash expenditures related to
severance charges and other costs in disposing of these
manufacturing sites. The Company has not determined what these
cash costs would be at this time, if any.

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 product development programs for Viramidine
and Hepavir B. For Viramidine, the Company has conducted a
Phase II study, which enrolled a total of 180 patients. The
study also included an interim analysis performed on the first
160 patients who received at least 12 weeks therapy.
Analysis of the 12-week data showed that Viramidine, in
combination with a pegylated interferon, produced a clinically
significant reduction in viral load. In addition, Viramidine,
when compared with ribavirin, produced approximately half the
drop in hemoglobin levels at treatment week four, which was
maintained through week 12. The Company has drafted a
protocol for the Phase III program for Viramidine and met
with the FDA in September 2003 to discuss preliminary
Phase II data and to discuss the possibility of early
commencement and design of Phase III clinical trials in the
United States and Europe. After that meeting the Company has
decided that it will initiate Phase III studies of
Viramidine. The Phase III program will consist of two
global studies in 80 sites with approximately 1,000
patients in each study. The studies will compare Viramidine and
ribavirin, each in conjunction with a pegylated interferon. The
Companys external research and development expenses for
Viramidine are approximately $15,142,000 from inception through
September 30, 2003.

The Company initiated a Phase I clinical
trial of Hepavir B in Europe in August 2002, and filed an
Investigational New Drug (IND) application with the
FDA in October 2002. The Company initiated a Phase I
multiple rising dose safety trial in the United States in
January 2003 and patient enrollment is progressing as planned.
Additionally, the Company has identified specific investigators
in Asia to conduct a similar multiple dose safety trial in
anticipation of conducting Phase II trials in that region.
The Companys external research and development expenses
for Hepavir BTM are approximately $12,643,000
(including a milestone payment of $1,100,000) from inception
through September 30, 2003.

Foreign Operations

Approximately 63% and 54% of the Companys
revenues from continuing operations for the nine months ended
September 30, 2003 and 2002, respectively, were generated
from operations 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.

Inflation and Changing Prices

The effects of inflation are experienced by the
Company through increases in the costs of labor, services and
raw materials. The Company is subject to price control
restrictions on its pharmaceutical products in the majority of
countries in which it operates. While the Company attempts to
raise selling prices in anticipation of inflation, the Company
operates in some markets which have price controls that may
limit its ability to raise prices in a timely fashion. Future
sales and gross profit will be reduced if the Company is unable
to obtain price increases commensurate with the levels of
inflation.

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|        |                                                               
|------- | --------------------------------------------------------------
|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 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 through net investment hedges.

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 Risk: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
September 30, 2003, the Company had $12,742,000 of foreign
denominated debt that would subject it to both interest and
currency risk. The principal financial liabilities of the
Company that are subject to interest rate risk are its
fixed-rate long-term debt (principally its 6 1/2%
Subordinated Convertible Notes due 2008) totaling approximately
$465,590,000. The Company does not use any derivatives or
similar instruments to manage its interest rate risk. A 100
basis-point increase in interest rates (approximately 15% of the
Companys weighted average interest rate on fixed-rate
debt) affecting the Companys financial instruments would
have an immaterial effect on the Companys nine month and
third quarter 2003 pretax earnings. However, such a change would
reduce the fair value of the Companys fixed-rate debt
instruments by approximately $16,700,000 as of
September 30, 2003.






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

Commencing with the fiscal quarter ended
June 30, 2002, and continuing quarterly since then, the
Company has instituted a program of questionnaires sent to,
certifications provided by, and telephonic interviews conducted
with individual officers or employees responsible for oversight
and management of parts of the Companys different business
operations. The questionnaires, certifications and interviews
are intended to reinforce the Companys existing system of
internal controls, and are designed to ensure that information
required to be disclosed by the Company in the reports that it
files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange
Commissions rules and forms. Such controls and procedures
are also designed to ensure that information required to be
disclosed by the Company in the reports that it files or submits
under that Act is accumulated and communicated to the
Companys management, including its principal executive
officer or officers and principal financial officer or officers,
or persons performing similar functions, as appropriate to allow
timely decisions regarding required disclosure. The
Companys Chief Executive Officer and Chief Financial
Officer, with the participation of the Companys
management, have conducted an evaluation of the effectiveness of
the Companys disclosure controls and procedures as of the
end of the period covered by this report. Based on this
evaluation, the Chief Executive Officer and Chief Financial
Officer have concluded that the Companys disclosure
controls and procedures are effective in making known to them
material information relating to the Company (including its
consolidated subsidiaries required to be included in this
report).

There have been no changes in the Companys
internal controls over financial reporting known to the Chief
Executive Officer or Chief Financial Officer, that occurred
during the period covered by this report that has materially
affected, or is reasonably likely to materially affect, the
Companys internal control over financial reporting.

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FORWARD LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains
statements that constitute forward looking statements. Those
statements appear in a number of places in this Quarterly Report
on Form 10-Q. Examples of forward-looking statements
include statements regarding, among other matters, the
Companys strategic review, the Companys acquisition
strategy, the Companys reorganization plans, the
Companys expectations regarding sales of products by the
North America Pharmaceutical segment, expectations regarding
research and development costs during the remainder of 2003 and
other factors affecting the Companys financial condition
or results of operations. In some cases, forward looking
statements may be identified by terminology such as
may, will, intends,
should, would, expects,
plans, anticipates,
believes, estimates,
predicts, potential, or
continue or the negative of those terms or
comparable terminology. Similarly, statements that describe the
Companys plans, strategies, intentions, expectations,
objectives, goals or prospects are forward looking. The Company
undertakes no obligation to publicly release the result of any
revisions to these forward-looking statements that may be made
to reflect events or circumstances after the date of this report
or to reflect the occurrence of unexpected events.

These forward looking statements are inherently
subject to risk and uncertainties, and the Company can give no
assurances that its expectations will prove to be correct.
Actual results could differ from those described in this report
because of numerous factors, many of which are beyond the
control of the Company. These risk factors include, without
limitation, those described below:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | A substantial portion of the Companys
    revenues are royalties generated from 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
    impact its ability to finance future research and development
    activities.                                                                                                                                                                                                                                                                                                         
|
| |  | The future growth of the Companys business
    is based upon 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 position 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. Accordingly,
    the Companys inability to successfully develop its
    products may negatively impact future revenues.
|
| |  | The Company will be able to protect the its
    products from generic substitution by third parties only to the
    extent that the 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.                                                                                                                                                                                                         
|
| |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | Uncertainties and delays inherent in the drug
    approval process in the United States and other countries 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, 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | alternatives to the Companys current
    products before it does, the Company will lose sales and
    revenues to their alternative products.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | The pharmaceutical industry is subject to
    substantial government regulation, including the approval of new
    pharmaceutical products, labeling, advertising and, in some
    countries, pricing.                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | The Company sells products in many countries that
    are susceptible to significant foreign currency risk. The
    Company generally sells products in these countries for United
    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. The Company
    currently does not enter into third party hedges to protect
    against foreign currency exposure.                                       
|
| |  | 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 FDA
    regulations and continuity of supply. Any failure by them in
    these areas could disrupt the Companys product supply and
    negatively impact its revenue.                                                                                                                                                                                                                                                                                                              
|
| |  | The Company has entered into an agreement
    granting Schering a limited right to commercialize its research
    compounds. The agreement could limit the Companys ability
    to commercially exploit some of its potential products. This
    could impede the Companys plans for growth.                                                                                                                                                                                                                                                                                                                                                             
|
| |  | If the Company is unsuccessful in the defense of
    current securities litigation, it may be ordered to pay
    significant monetary damages, which may have a material negative
    impact on the Companys current financial position.                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | 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 the 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.                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | The Company has recently announced plans to sell
    eight manufacturing facilities and establish a new global
    manufacturing and supply chain network. If the Company is
    unsuccessful in its effort to execute on these plans it may not
    achieve anticipated cost savings. Additionally, there may be
    unforeseen costs and complications with this effort to
    rationalize the Companys manufacturing operations.                                                                                                                                                                                                                       
|
| |  | 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 product liability exposure and the
    Companys lack of any insurance coverage may have a
    material negative impact on its financial position and results
    of operations.                                                          
|
| |  | Subject to the terms of the Companys
    agreements with the 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 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.

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| |   |                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Company is also subject to those risks and
    uncertainties described from time to time in Valeants
    filings with the Commission.

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
    future allegations.

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##### Table of Contents






PART II  OTHER
INFORMATION






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

See Note 9 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

| |      |  |  |  |  |                                                                                                                                                                                            
| | ---- |  |  |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3.1  |  |  |  |  | Restated Certificate of Incorporation, as amended
    to date.                                                                                                                             
| | 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

The Company filed the following reports on
Form 8-K during the quarter ended September 30, 2003:

| |    |  |  |  |  |                                                                                                                                                                                                 
| | -- |  |  |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. |  |  |  |  | Current Report on Form 8-K dated
    July 14, 2003 (the date of the earliest event reported),
    filed on July 16, 2003, for the purpose of reporting
    certain information under Item 5.    
| | 2. |  |  |  |  | Current Report on Form 8-K dated
    August 25, 2003 (the date of the earliest event reported),
    filed on August 27, 2003, for the purpose of reporting
    certain information under Item 5.

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##### Table of Contents






SIGNATURES

Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto duly
authorized.



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

Date: November 12, 2003



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

Date: November 12, 2003

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##### Table of Contents






EXHIBIT INDEX

|        |    |    |  |  |  |                                                                                                                                                                                            
|------- | -- | -- |  |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |    |  | 
|        |    |    |  | 
|        | 3  | .1 |  |  |  | Restated Certificate of Incorporation, as amended
    to date.                                                                                                                             
|        | 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.