##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





Form 10-Q


|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934 
|           |  | For the quarterly period ended March 31, 2006                                               
|          
|           |  | or                                                                                          
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
|           |  | For the transition period
    from           to                                             

Commission file number: 1-11397





Valeant Pharmaceuticals International


(Exact name of registrant as specified in its charter)


|                                                                                       |  |                                                   
|-------------------------------------------------------------------------------------- |  | --------------------------------------------------
|Delaware(State or other jurisdiction of
     incorporation or organization)            |  | 33-0628076(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)


þ o


12b-2


þ o o


12b-2 o þ












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##### 










VALEANT PHARMACEUTICALS INTERNATIONAL


INDEX


|                                   |  |                                                                                                                     |    |        |    | 
|---------------------------------- |  | ------------------------------------------------------------------------------------------------------------------- | -- | ------ | -- | 
|                                   |  |                                                                                                                     |    | Page   |   
|                                   |  |                                                                                                                     |    | Number |   
|                                   |  |                                                                                                                     |    |        |   
|PART I  FINANCIAL
    INFORMATION
|Item 1.                            |  | Financial Statements                                                                                                |    |        |    | 
|                                   |  | Consolidated Condensed Balance Sheets as of
    March 31, 2006 and December 31, 2005                                |    |        | 2  | 
|                                   |  | Consolidated Condensed Statements of
    Operations for the three months ended March 31, 2006 and
    2005          |    |        | 3  | 
|                                   |  | Consolidated Condensed Statements of
    Shareholders Equity for the three months ended March 31,
    2006 and 2005 |    |        | 4  | 
|                                   |  | Consolidated Condensed Statements of Cash
    Flows for the three months ended March 31, 2006 and 2005              |    |        | 5  | 
|                                   |  | Notes to Consolidated Condensed Financial
    Statements                                                            |    |        | 6  | 
|Item 2.                            |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                           |    |        | 24 | 
|Item 3.                            |  | Quantitative and Qualitative Disclosures
    About Market Risk                                                      |    |        | 40 | 
|Item 4.                            |  | Controls and Procedures                                                                                             |    |        | 41 | 
|                                  
|PART II  OTHER
    INFORMATION   
|Item 1.                            |  | Legal Proceedings                                                                                                   |    |        | 42 | 
|Item 1A.                           |  | Risk Factors                                                                                                        |    |        | 42 | 
|Item 6.                            |  | Exhibits                                                                                                            |    |        | 42 | 
|SIGNATURES                         |  |                                                                                                                     | 43 |       
|EXHIBIT 15.1                      
|EXHIBIT 15.2                      
|EXHIBIT 31.1                      
|EXHIBIT 31.2                      
|EXHIBIT 32.1                      



1



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##### Table of Contents






PART I  FINANCIAL INFORMATION







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

VALEANT PHARMACEUTICALS INTERNATIONAL





CONSOLIDATED CONDENSED BALANCE SHEETS


As of March 31, 2006 and December 31, 2005


(In thousands, except par value data)


|                                       |                                                                                                                                                                                                                                              |                               |           |           |              |   |           |           |         | 
|-------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------- | --------- | --------- | ------------ | - | --------- | --------- | ------- | 
|                                       |                                                                                                                                                                                                                                              | March 31,                     |           |           | December 31, |  
|                                       |                                                                                                                                                                                                                                              | 2006                          |           |           | 2005         |  
|                                       |                                                                                                                                                                                                                                              |                               |           |           |              |  
|                                       |                                                                                                                                                                                                                                              | (Unaudited)                   |           |           |             
|ASSETS                                
|Current Assets:                        |                                                                                                                                                                                                                                              |                               |           |           |              |   |           |          
|                                       | Cash and cash equivalents                                                                                                                                                                                                                    |                               | $         | 244,362   |              |   | $         | 224,856   |        
|                                       | Marketable securities                                                                                                                                                                                                                        |                               |           | 11,121    |              |   |           | 10,210    |        
|                                       | Accounts receivable, net                                                                                                                                                                                                                     |                               |           | 174,433   |              |   |           | 187,987   |        
|                                       | Inventories, net                                                                                                                                                                                                                             |                               |           | 137,729   |              |   |           | 136,034   |        
|                                       | Prepaid expenses and other current assets                                                                                                                                                                                                    |                               |           | 38,862    |              |   |           | 36,652    |        
|                                       |                                                                                                                                                                                                                                              |                               |           |           |              |  
|                                       |                                                                                                                                                                                                                                              | Total current assets          |           |           | 606,507      |   |           |           | 595,739 | 
|Property, plant and equipment, net     |                                                                                                                                                                                                                                              |                               | 217,813   |           |              |   | 230,126   |          
|Deferred tax assets, net               |                                                                                                                                                                                                                                              |                               | 21,510    |           |              |   | 45,904    |          
|Goodwill                               |                                                                                                                                                                                                                                              |                               | 79,767    |           |              |   | 79,486    |          
|Intangible assets, net                 |                                                                                                                                                                                                                                              |                               | 519,614   |           |              |   | 536,319   |          
|Other assets                           |                                                                                                                                                                                                                                              |                               | 45,284    |           |              |   | 43,176    |          
|Assets of discontinued operations      |                                                                                                                                                                                                                                              |                               | 105       |           |              |   | 127       |          
|                                       |                                                                                                                                                                                                                                              |                               |           |           |              |  
|                                       |                                                                                                                                                                                                                                              | Total non-current assets      |           |           | 884,093      |   |           |           | 935,138 | 
|                                       |                                                                                                                                                                                                                                              |                               |           |           |              |  
|                                       |                                                                                                                                                                                                                                              | $                             | 1,490,600 |           |              | $ | 1,530,877 |          
|                                       |                                                                                                                                                                                                                                              |                               |           |           |              |  
|                                      
|LIABILITIES AND STOCKHOLDERS EQUITY  
|Current Liabilities:                   |                                                                                                                                                                                                                                              |                               |           |           |              |   |           |          
|                                       | Trade payables                                                                                                                                                                                                                               |                               | $         | 48,708    |              |   | $         | 55,279    |        
|                                       | Accrued liabilities                                                                                                                                                                                                                          |                               |           | 135,043   |              |   |           | 136,701   |        
|                                       | Notes payable and current portion of long-term debt                                                                                                                                                                                          |                               |           | 346       |              |   |           | 495       |        
|                                       | Income taxes payable                                                                                                                                                                                                                         |                               |           | 37,995    |              |   |           | 42,452    |        
|                                       |                                                                                                                                                                                                                                              |                               |           |           |              |  
|                                       |                                                                                                                                                                                                                                              | Total current liabilities     |           |           | 222,092      |   |           |           | 234,927 | 
|Long-term debt, less current portion   |                                                                                                                                                                                                                                              |                               | 785,850   |           |              |   | 788,439   |          
|Deferred tax liabilities, net          |                                                                                                                                                                                                                                              |                               | 5,126     |           |              |   | 28,770    |          
|Other liabilities                      |                                                                                                                                                                                                                                              |                               | 19,918    |           |              |   | 16,372    |          
|Liabilities of discontinued operations |                                                                                                                                                                                                                                              |                               | 23,024    |           |              |   | 23,118    |          
|                                       |                                                                                                                                                                                                                                              |                               |           |           |              |  
|                                       |                                                                                                                                                                                                                                              | Total non-current liabilities |           |           | 833,918      |   |           |           | 856,699 | 
|                                       |                                                                                                                                                                                                                                              |                               |           |           |              |  
|Commitments and contingencies          |                                                                                                                                                                                                                                              |                               |           |           |              |   |           |          
|Stockholders Equity:                  |                                                                                                                                                                                                                                              |                               |           |           |              |   |           |          
|                                       | Common stock, $0.01 par value; 200,000 shares
    authorized; 92,793 (March 31, 2006) and 92,760
    (December 31, 2005) shares outstanding (after deducting
    shares in treasury of 1,068 as of March 31, 2006 and
    December 31, 2005) |                               |           | 928       |              |   |           | 928       |        
|                                       | Additional capital                                                                                                                                                                                                                           |                               |           | 1,209,926 |              |   |           | 1,203,814 |        
|                                       | Accumulated deficit                                                                                                                                                                                                                          |                               |           | (757,480  | )            |   |           | (743,950  | )      
|                                       | Accumulated other comprehensive income (loss)                                                                                                                                                                                                |                               |           | (18,784   | )            |   |           | (21,541   | )      
|                                       |                                                                                                                                                                                                                                              |                               |           |           |              |  
|                                       |                                                                                                                                                                                                                                              | Total stockholders equity    |           |           | 434,590      |   |           |           | 439,251 | 
|                                       |                                                                                                                                                                                                                                              |                               |           |           |              |  
|                                       |                                                                                                                                                                                                                                              | $                             | 1,490,600 |           |              | $ | 1,530,877 |          
|                                       |                                                                                                                                                                                                                                              |                               |           |           |              |  



2



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VALEANT PHARMACEUTICALS INTERNATIONAL





CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS


For the three months ended March 31, 2006 and 2005


(Unaudited, in thousands, except per share data)


|                                                                                       |                                              |                               |         |         |         |   |          |          |          |  
|-------------------------------------------------------------------------------------- | -------------------------------------------- | ----------------------------- | ------- | ------- | ------- | - | -------- | -------- | -------- | -
|                                                                                       |                                              | Three Months Ended            |        
|                                                                                       |                                              | March 31,                     |        
|                                                                                       |                                              |                               |        
|                                                                                       |                                              | 2006                          |         |         | 2005    |  
|                                                                                       |                                              |                               |         |         |         |  
|Revenues:                                                                              |                                              |                               |         |         |         |   |          |         
|                                                                                       | Product sales                                |                               | $       | 180,757 |         |   | $        | 161,803  |         
|                                                                                       | Ribavirin royalties                          |                               |         | 18,091  |         |   |          | 19,335   |         
|                                                                                       |                                              |                               |         |         |         |  
|                                                                                       |                                              | Total revenues                |         |         | 198,848 |   |          |          | 181,138  |  
|                                                                                       |                                              |                               |         |         |         |  
|Costs and expenses:                                                                    |                                              |                               |         |         |         |   |          |         
|                                                                                       | Cost of goods sold (excluding amortization)  |                               |         | 58,580  |         |   |          | 48,721   |         
|                                                                                       | Selling expenses                             |                               |         | 64,270  |         |   |          | 52,815   |         
|                                                                                       | General and administrative expenses          |                               |         | 28,540  |         |   |          | 24,577   |         
|                                                                                       | Research and development costs               |                               |         | 29,535  |         |   |          | 25,724   |         
|                                                                                       | Acquired in-process research and development |                               |         |        |         |   |          | 126,399  |         
|                                                                                       | Gain on settlement of litigation             |                               |         | (34,000 | )       |   |          |         |         
|                                                                                       | Restructuring charges                        |                               |         | 26,466  |         |   |          | 1,695    |         
|                                                                                       | Amortization expense                         |                               |         | 17,523  |         |   |          | 13,968   |         
|                                                                                       |                                              |                               |         |         |         |  
|                                                                                       |                                              | Total costs and expenses      |         |         | 190,914 |   |          |          | 293,899  |  
|                                                                                       |                                              |                               |         |         |         |  
|                                                                                       |                                              | Income (loss) from operations |         |         | 7,934   |   |          |          | (112,761 | )
|Other income (loss), net, including translation and exchange                           |                                              |                               | 937     |         |         |   | (1,791   | )       
|Interest income                                                                        |                                              |                               | 2,657   |         |         |   | 3,015    |         
|Interest expense                                                                       |                                              |                               | (10,437 | )       |         |   | (9,681   | )       
|                                                                                       |                                              |                               |         |         |         |  
|Income (loss) from continuing operations before income taxes and
    minority interest |                                              |                               | 1,091   |         |         |   | (121,218 | )       
|Provision for income taxes                                                             |                                              |                               | 7,242   |         |         |   | 16,367   |         
|Minority interest, net                                                                 |                                              |                               | 1       |         |         |   | 171      |         
|                                                                                       |                                              |                               |         |         |         |  
|                                                                                       | Loss from continuing operations              |                               |         | (6,152  | )       |   |          | (137,756 | )       
|                                                                                       | Loss from discontinued operations            |                               |         | (212    | )       |   |          | (1,503   | )       
|                                                                                       |                                              |                               |         |         |         |  
|                                                                                       | Net loss                                     |                               | $       | (6,364  | )       |   | $        | (139,259 | )       
|                                                                                       |                                              |                               |         |         |         |  
|Basic and diluted loss per share:                                                      |                                              |                               |         |         |         |   |          |         
|                                                                                       | Loss from continuing operations              |                               | $       | (0.07   | )       |   | $        | (1.55    | )       
|                                                                                       | Loss from discontinued operations            |                               | $       | (0.00   | )       |   |          | (0.02    | )       
|                                                                                       |                                              |                               |         |         |         |  
|                                                                                       | Basic and diluted net loss per share         |                               | $       | (007    | )       |   | $        | (1.57    | )       
|                                                                                       |                                              |                               |         |         |         |  
|Basic and diluted shares used in per share computation                                 |                                              |                               | 92,770  |         |         |   | 88,836   |         
|                                                                                       |                                              |                               |         |         |         |  
|Dividends paid per share of common stock                                               |                                              | $                             | 0.08    |         |         | $ | 0.08     |         
|                                                                                       |                                              |                               |         |         |         |  
|Dividends declared per share of common stock                                           |                                              | $                             | 0.08    |         |         | $ | 0.08     |         
|                                                                                       |                                              |                               |         |         |         |  



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VALEANT PHARMACEUTICALS INTERNATIONAL





CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS
EQUITY


For the three months ended March 31, 2006 and 2005


(Unaudited, in thousands)


|                                                                                   |                                                           |                                   |        |   |            |   |     |             |               |             |           |   |  |        |          |        |        |   |         |       |       |   |         |        |        |  
|---------------------------------------------------------------------------------- | --------------------------------------------------------- | --------------------------------- | ------ | - | ---------- | - | --- | ----------- | ------------- | ----------- | --------- | - |  | ------ | -------- | ------ | ------ | - | ------- | ----- | ----- | - | ------- | ------ | ------ | -
|                                                                                   |                                                           |                                   |        |   |            |   |     |             |               | Accumulated |           |   | 
|                                                                                   |                                                           |                                   |        |   |            |   |     | Other       |               |             |          
|                                                                                   |                                                           | Common Stcok                      |        |   |            |   |     |             | Comprehensive |             |           |  
|                                                                                   |                                                           |                                   |        |   | Additional |   |     | Accumulated |               |             | Income    |   |  |       
|                                                                                   |                                                           | Shares                            |        |   | Amount     |   |     | Capital     |               |             | Deficit   |   |  | (Loss) |          |        | Total  |  
|                                                                                   |                                                           |                                   |        |   |            |   |     |             |               |             |           |   |  |        |          |        |        |  
|Balance at December 31, 2005                                                       |                                                           |                                   | 92,760 |   |            | $ | 928 |             |               | $           | 1,203,814 |   |  | $      | (743,950 | )      |        | $ | (21,541 | )     |       | $ | 439,251 |       
|Comprehensive income:                                                              |                                                           |                                   |        |   |            |   |     |             |               |             |           |   |  |        |          |        |        |   |         |       |       |   |         |       
|                                                                                   | Net loss                                                  |                                   |        |  |            |   |     |            |               |             |           |  |  |        |          | (6,364 | )      |   |         |      |       |   |         | (6,364 | )     
|                                                                                   | Foreign currency translation adjustments                  |                                   |        |  |            |   |     |            |               |             |           |  |  |        |          |       |        |   |         | 2,346 |       |   |         | 2,346  |       
|                                                                                   | Unrealized loss on marketable equity securities and other |                                   |        |  |            |   |     |            |               |             |           |  |  |        |          |       |        |   |         | 411   |       |   |         | 411    |       
|                                                                                   |                                                           |                                   |        |   |            |   |     |             |               |             |           |   |  |        |          |        |        |  
|                                                                                   |                                                           | Total comprehensive income (loss) |        |   |            |   |     |             |               |             |           |   |  |        |          |        | (6,364 | ) |         |       | 2,757 |   |         |        | (3,607 | )
|Exercise of stock options                                                          |                                                           |                                   | 33     |   |            |   |    |             |               |             | 430       |   |  |        |         |        |        |   |        |       |       |   | 430     |       
|Stock compensation related to restricted stock unit grants                         |                                                           |                                   |       |   |            |   |    |             |               |             | 637       |   |  |        |         |        |        |   |        |       |       |   | 637     |       
|Stock-based compensation related to stock options and employee
    stock purchases |                                                           |                                   |       |   |            |   |    |             |               |             | 5,045     |   |  |        |         |        |        |   |        |       |       |   | 5,045   |       
|Dividends                                                                          |                                                           |                                   |       |   |            |   |    |             |               |             |          |   |  |        | (7,166   | )      |        |   |        |       |       |   | (7,166  | )     
|                                                                                   |                                                           |                                   |        |   |            |   |     |             |               |             |           |   |  |        |          |        |        |  
|Balance at March 31, 2006                                                          |                                                           |                                   | 92,793 |   |            | $ | 928 |             |               | $           | 1,209,926 |   |  | $      | (757,480 | )      |        | $ | (18,784 | )     |       | $ | 434,590 |       
|                                                                                   |                                                           |                                   |        |   |            |   |     |             |               |             |           |   |  |        |          |        |        |  

|                                                             |                                                           |                          |        |   |            |   |     |            |               |             |           |   |  |        |          |          |          |   |        |         |         |   |         |          |          |  
|------------------------------------------------------------ | --------------------------------------------------------- | ------------------------ | ------ | - | ---------- | - | --- | ---------- | ------------- | ----------- | --------- | - |  | ------ | -------- | -------- | -------- | - | ------ | ------- | ------- | - | ------- | -------- | -------- | -
|                                                             |                                                           |                          |        |   |            |   |     |            |               | Accumulated |           |   | 
|                                                             |                                                           |                          |        |   |            |   |     | Other      |               |             |          
|                                                             |                                                           | Common Stcok             |        |   |            |   |     |            | Comprehensive |             |           |  
|                                                             |                                                           |                          |        |   | Additional |   |     | Accumulate |               |             | Income    |   |  |       
|                                                             |                                                           | Shares                   |        |   | Amount     |   |     | Capital    |               |             | Deficit   |   |  | (Loss) |          |          | Total    |  
|                                                             |                                                           |                          |        |   |            |   |     |            |               |             |           |   |  |        |          |          |          |  
|Balance at December 31, 2004                                 |                                                           |                          | 84,219 |   |            | $ | 842 |            |               | $           | 1,004,875 |   |  | $      | (534,205 | )        |          | $ | 4,711  |         |         | $ | 476,223 |         
|Comprehensive income:                                        |                                                           |                          |        |   |            |   |     |            |               |             |           |   |  |        |          |          |          |   |        |         |         |   |         |         
|                                                             | Net loss                                                  |                          |        |  |            |   |     |           |               |             |           |  |  |        |          | (139,259 | )        |   |        |        |         |   |         | (139,259 | )       
|                                                             | Foreign currency translation adjustments                  |                          |        |  |            |   |     |           |               |             |           |  |  |        |          |         |          |   |        | (15,363 | )       |   |         | (15,363  | )       
|                                                             | Unrealized loss on marketable equity securities and other |                          |        |  |            |   |     |           |               |             |           |  |  |        |          |         |          |   |        | 3,258   |         |   |         | 3,258    |         
|                                                             |                                                           |                          |        |   |            |   |     |            |               |             |           |   |  |        |          |          |          |  
|                                                             |                                                           | Total comprehensive loss |        |   |            |   |     |            |               |             |           |   |  |        |          |          | (139,259 | ) |        |         | (12,105 | ) |         |          | (151,364 | )
|Exercise of stock options                                    |                                                           |                          | 41     |   |            |   |    |            |               |             | 640       |   |  |        |         |          |          |   |       |         |         |   | 640     |         
|Stock compensation related to restricted stock unit grants   |                                                           |                          |       |   |            |   |    |            |               |             | 544       |   |  |        |         |          |          |   |       |         |         |   | 544     |         
|Issuance of common stock in connection with Xcel acquisition |                                                           |                          | 8,280  |   |            |   | 83  |            |               |             | 189,310   |   |  |        |         |          |          |   |       |         |         |   | 189,393 |         
|Dividends                                                    |                                                           |                          |       |   |            |   |    |            |               |             |          |   |  |        | (7,154   | )        |          |   |       |         |         |   | (7,154  | )       
|                                                             |                                                           |                          |        |   |            |   |     |            |               |             |           |   |  |        |          |          |          |  
|Balance at March 31, 2005                                    |                                                           |                          | 92,540 |   |            | $ | 925 |            |               | $           | 1,195,369 |   |  | $      | (680,618 | )        |          | $ | (7,394 | )       |         | $ | 508,282 |         
|                                                             |                                                           |                          |        |   |            |   |     |            |               |             |           |   |  |        |          |          |          |  



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VALEANT PHARMACEUTICALS INTERNATIONAL





CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS


For the three months ended March 31, 2006 and 2005


(Unaudited, in thousands)


|                                                                            |                                                                                     |                                                                            |         |         |         |   |         |          |         |  
|--------------------------------------------------------------------------- | ----------------------------------------------------------------------------------- | -------------------------------------------------------------------------- | ------- | ------- | ------- | - | ------- | -------- | ------- | -
|                                                                            |                                                                                     | Three Months Ended                                                         |        
|                                                                            |                                                                                     | March 31,                                                                  |        
|                                                                            |                                                                                     |                                                                            |        
|                                                                            |                                                                                     | 2006                                                                       |         |         | 2005    |  
|                                                                            |                                                                                     |                                                                            |         |         |         |  
|Cash flows from operating activities:                                       |                                                                                     |                                                                            |         |         |         |   |         |         
|                                                                            | Net Loss                                                                            |                                                                            | $       | (6,364  | )       |   | $       | (139,259 | )      
|                                                                            | Loss from discontinued operations                                                   |                                                                            |         | 212     |         |   |         | 1,503    |        
|                                                                            |                                                                                     |                                                                            |         |         |         |  
|                                                                            | Loss from continuing operations                                                     |                                                                            |         | (6,152  | )       |   |         | (137,756 | )      
|                                                                            | Adjustments to reconcile net loss to net cash provided by
    operating activities: |                                                                            |         |         |         |   |         |          |        
|                                                                            |                                                                                     | Depreciation and amortization                                              |         |         | 23,482  |   |         |          | 21,038  |  
|                                                                            |                                                                                     | Provision for losses on accounts receivable and inventory
    obsolescence |         |         | 3,597   |   |         |          | 1,594   |  
|                                                                            |                                                                                     | Stock compensation expense                                                 |         |         | 5,682   |   |         |          | 544     |  
|                                                                            |                                                                                     | Translation and exchange (gains) losses, net                               |         |         | (937    | ) |         |          | 1,791   |  
|                                                                            |                                                                                     | Impairment charges and other non-cash items                                |         |         | 20,426  |   |         |          | 1,461   |  
|                                                                            |                                                                                     | Acquired in-process research and development                               |         |         |        |   |         |          | 126,399 |  
|                                                                            |                                                                                     | Deferred income taxes                                                      |         |         | 1,910   |   |         |          | (14,026 | )
|                                                                            | Change in assets and liabilities, net of effects of acquisitions:                   |                                                                            |         |         |         |   |         |          |        
|                                                                            |                                                                                     | Accounts Receivable                                                        |         |         | 13,779  |   |         |          | 6,482   |  
|                                                                            |                                                                                     | Inventories                                                                |         |         | (3,736  | ) |         |          | (10,951 | )
|                                                                            |                                                                                     | Prepaid expenses and other assets                                          |         |         | 1,216   |   |         |          | (129    | )
|                                                                            |                                                                                     | Trade payables and accrued liabilities                                     |         |         | (9,886  | ) |         |          | (7,740  | )
|                                                                            |                                                                                     | Income taxes payable                                                       |         |         | (9,085  | ) |         |          | 15,960  |  
|                                                                            |                                                                                     | Other liabilities                                                          |         |         | 842     |   |         |          | 3,995   |  
|                                                                            |                                                                                     |                                                                            |         |         |         |  
|                                                                            |                                                                                     | Cash flow from operating activities in continuing operations               |         |         | 41,138  |   |         |          | 8,662   |  
|                                                                            |                                                                                     | Cash flow from operating activities in discontinued operations             |         |         | (281    | ) |         |          | (471    | )
|                                                                            |                                                                                     |                                                                            |         |         |         |  
|                                                                            |                                                                                     | Net cash provided by operating activities                                  |         |         | 40,857  |   |         |          | 8,191   |  
|                                                                            |                                                                                     |                                                                            |         |         |         |  
|Cash flows from investing activities:                                       |                                                                                     |                                                                            |         |         |         |   |         |         
|                                                                            | Capital expenditures                                                                |                                                                            |         | (13,351 | )       |   |         | (4,848   | )      
|                                                                            | Proceeds from sale of assets                                                        |                                                                            |         | 135     |         |   |         | 762      |        
|                                                                            | Proceeds from investments                                                           |                                                                            |         | 2,000   |         |   |         | 498,600  |        
|                                                                            | Purchase of investments                                                             |                                                                            |         | (3,940  | )       |   |         | (296,213 | )      
|                                                                            | Acquisition of businesses, license rights and product lines                         |                                                                            |         |        |         |   |         | (281,778 | )      
|                                                                            |                                                                                     |                                                                            |         |         |         |  
|                                                                            | Cash flow from investing activities in continuing operations                        |                                                                            |         | (15,156 | )       |   |         | (83,477  | )      
|                                                                            | Cash flow from investing activities in discontinued operations                      |                                                                            |         | (1      | )       |   |         | 1        |        
|                                                                            |                                                                                     |                                                                            |         |         |         |  
|                                                                            |                                                                                     | Net cash used in investing activities                                      |         |         | (15,157 | ) |         |          | (83,476 | )
|                                                                            |                                                                                     |                                                                            |         |         |         |  
|Cash flows from financing activities:                                       |                                                                                     |                                                                            |         |         |         |   |         |         
|                                                                            | Payments on long-term debt and notes payable                                        |                                                                            |         | (157    | )       |   |         | (593     | )      
|                                                                            | Proceeds from issuance of stock                                                     |                                                                            |         | 430     |         |   |         | 640      |        
|                                                                            | Proceeds from stock offering                                                        |                                                                            |         |        |         |   |         | 189,393  |        
|                                                                            | Dividends paid                                                                      |                                                                            |         | (7,173  | )       |   |         | (6,502   | )      
|                                                                            |                                                                                     |                                                                            |         |         |         |  
|                                                                            |                                                                                     | Net cash provided by (used in) financing activities                        |         |         | (6,900  | ) |         |          | 182,938 |  
|                                                                            |                                                                                     |                                                                            |         |         |         |  
|Effect of exchange rate changes on cash and cash equivalents                |                                                                                     |                                                                            | 728     |         |         |   | (4,794  | )       
|                                                                            |                                                                                     |                                                                            |         |         |         |  
|Net increase (decrease) in cash and cash equivalents                        |                                                                                     |                                                                            | 19,528  |         |         |   | 102,859 |         
|Cash and cash equivalents at beginning of period                            |                                                                                     |                                                                            | 224,903 |         |         |   | 222,719 |         
|                                                                            |                                                                                     |                                                                            |         |         |         |  
|Cash and cash equivalents at end of period                                  |                                                                                     |                                                                            | 244,431 |         |         |   | 325,578 |         
|Cash and cash equivalents classified as part of discontinued
    operations |                                                                                     |                                                                            | (69     | )       |         |   | (132    | )       
|                                                                            |                                                                                     |                                                                            |         |         |         |  
|Cash and cash equivalents of continuing operations                          |                                                                                     | $                                                                          | 244,362 |         |         | $ | 325,446 |         
|                                                                            |                                                                                     |                                                                            |         |         |         |  



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##### Table of Contents



VALEANT PHARMACEUTICALS INTERNATIONAL





NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS


March 31, 2006


(Unaudited)


10-K




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

Organization:


Principles of Consolidation:


Marketable Securities:


Acquired In-Process Research and Development:






6



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##### Table of Contents



VALEANT PHARMACEUTICALS INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)




Derivative Financial Instruments:


Comprehensive Income: Reporting Comprehensive Income.


Per Share Information:


Stock-Based Compensation Expense:






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##### Table of Contents



VALEANT PHARMACEUTICALS INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)








Assets Held for Sale:


Use of Estimates:


Reclassifications:




|   |              
|-- | -------------
|2. | Restructuring







8



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##### Table of Contents



VALEANT PHARMACEUTICALS INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)














|   |             
|-- | ------------
|3. | Acquisitions

Infergen:


Xcel Pharmaceuticals, Inc.:


9



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##### Table of Contents



VALEANT PHARMACEUTICALS INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)








|                                      |                                 |      |          |       |  
|------------------------------------- | ------------------------------- | ---- | -------- | ----- | -
|                                      |                                 | 2005 |         
|                                      |                                 |      |         
|Net revenues                          |                                 | $    | 200,471  |      
|Loss from continuing operations       |                                 |      | (195,522 | )    
|Net loss                              |                                 |      | (197,025 | )    
|Basic and diluted net loss per share: |                                 |      |          |      
|                                      | Loss from continuing operations |      | $        | (2.11 | )
|                                      | Net loss                        |      | $        | (2.13 | )





|   |                        
|-- | -----------------------
|4. | Discontinued Operations



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##### Table of Contents



VALEANT PHARMACEUTICALS INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)




|                                            |                                            |                    |      |      |      |   |        |        |  
|------------------------------------------- | ------------------------------------------ | ------------------ | ---- | ---- | ---- | - | ------ | ------ | -
|                                            |                                            | Three Months Ended |     
|                                            |                                            | March 31,          |     
|                                            |                                            |                    |     
|                                            |                                            | 2006               |      |      | 2005 |  
|                                            |                                            |                    |      |      |      |  
|Revenues                                    |                                            | $                  |     |      |      | $ | 2,092  |       
|                                            |                                            |                    |      |      |      |  
|Loss before income taxes                    |                                            | $                  | (212 | )    |      | $ | (1,285 | )     
|Loss on disposal of discontinued operations |                                            |                    |     |      |      |   | (218   | )     
|                                            |                                            |                    |      |      |      |  
|                                            | Income (loss) from discontinued operations |                    | $    | (212 | )    |   | $      | (1,503 | )
|                                            |                                            |                    |      |      |      |  



|                                   |                                        |           |        |        |              |   |        |        | 
|---------------------------------- | -------------------------------------- | --------- | ------ | ------ | ------------ | - | ------ | ------ | 
|                                   |                                        | March 31, |        |        | December 31, |  
|                                   |                                        | 2006      |        |        | 2005         |  
|                                   |                                        |           |        |        |              |  
|Cash                               |                                        | $         | 69     |        |              | $ | 47     |       
|Accounts receivable, net           |                                        |           | 29     |        |              |   | 45     |       
|Property, plant and equipment, net |                                        |           |       |        |              |   | 18     |       
|Other assets                       |                                        |           | 7      |        |              |   | 17     |       
|                                   |                                        |           |        |        |              |  
|                                   | Assets of discontinued operations      |           | $      | 105    |              |   | $      | 127    | 
|                                   |                                        |           |        |        |              |  
|Accounts payable                   |                                        | $         | 7      |        |              | $ | 13     |       
|Accrued liabilities                |                                        |           | 19,018 |        |              |   | 19,118 |       
|Other liabilities                  |                                        |           | 3,999  |        |              |   | 3,987  |       
|                                   |                                        |           |        |        |              |  
|                                   | Liabilities of discontinued operations |           | $      | 23,024 |              |   | $      | 23,118 | 
|                                   |                                        |           |        |        |              |  



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##### Table of Contents



VALEANT PHARMACEUTICALS INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)




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



|                                  |                                                                                                          |                    |   |        |      |  |   |          |  
|--------------------------------- | -------------------------------------------------------------------------------------------------------- | ------------------ | - | ------ | ---- |  | - | -------- | -
|                                  |                                                                                                          | Three Months Ended |  
|                                  |                                                                                                          | March 31,          |  
|                                  |                                                                                                          |                    |  
|                                  |                                                                                                          | 2006               |   |        | 2005 | 
|                                  |                                                                                                          |                    |   |        |      | 
|Income (loss):                    |                                                                                                          |                    |   |        |      |  |   |         
|                                  | Numerator for basic and dilutive earnings per share 
    loss attributable to stockholders              |                    | $ | (6,364 | )    |  | $ | (139,259 | )
|                                  |                                                                                                          |                    |   |        |      | 
|Shares:                           |                                                                                                          |                    |   |        |      |  |   |         
|                                  | Denominator for basic and dilutive earnings per
    share  adjusted weighted-average shares outstanding |                    |   | 92,770 |      |  |   | 88,836   |  
|                                  |                                                                                                          |                    |   |        |      | 
|Basic and diluted loss per share: |                                                                                                          |                    |   |        |      |  |   |         
|                                  | Loss from continuing operations                                                                          |                    | $ | (0.07  | )    |  | $ | (1.55    | )
|                                  | Loss from discontinued operations                                                                        |                    |   | (0.00  | )    |  |   | (0.02    | )
|                                  |                                                                                                          |                    |   |        |      | 
|                                  | Basic and diluted net loss per share                                                                     |                    | $ | (0.07  | )    |  | $ | (1.57    | )
|                                  |                                                                                                          |                    |   |        |      | 





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##### Table of Contents



VALEANT PHARMACEUTICALS INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)




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



|                                    |                                           |           |         |          |              |   |         |          |  
|----------------------------------- | ----------------------------------------- | --------- | ------- | -------- | ------------ | - | ------- | -------- | -
|                                    |                                           | March 31, |         |          | December 31, |  
|                                    |                                           | 2006      |         |          | 2005         |  
|                                    |                                           |           |         |          |              |  
|Accounts receivable, net:           |                                           |           |         |          |              |   |         |         
|                                    | Trade accounts receivable                 |           | $       | 134,912  |              |   | $       | 149,017  |  
|                                    | Royalties receivable                      |           |         | 18,111   |              |   |         | 27,306   |  
|                                    | Other receivables                         |           |         | 27,222   |              |   |         | 17,149   |  
|                                    |                                           |           |         |          |              |  
|                                    |                                           |           | 180,245 |          |              |   | 193,472 |         
|                                    | Allowance for doubtful accounts           |           |         | (5,812   | )            |   |         | (5,485   | )
|                                    |                                           |           |         |          |              |  
|                                    |                                           | $         | 174,433 |          |              | $ | 187,987 |         
|                                    |                                           |           |         |          |              |  
|Inventories, net:                   |                                           |           |         |          |              |   |         |         
|                                    | Raw materials and supplies                |           | $       | 34,448   |              |   | $       | 34,931   |  
|                                    | Work-in-process                           |           |         | 27,520   |              |   |         | 28,726   |  
|                                    | Finished goods                            |           |         | 89,604   |              |   |         | 85,152   |  
|                                    |                                           |           |         |          |              |  
|                                    |                                           |           | 151,572 |          |              |   | 148,809 |         
|                                    | Allowance for inventory obsolescence      |           |         | (13,843  | )            |   |         | (12,775  | )
|                                    |                                           |           |         |          |              |  
|                                    |                                           | $         | 137,729 |          |              | $ | 136,034 |         
|                                    |                                           |           |         |          |              |  
|Property, plant and equipment, net: |                                           |           |         |          |              |   |         |         
|                                    | Property, plant and equipment, at cost    |           | $       | 393,408  |              |   | $       | 401,613  |  
|                                    | Accumulated depreciation and amortization |           |         | (175,595 | )            |   |         | (171,487 | )
|                                    |                                           |           |         |          |              |  
|                                    |                                           | $         | 217,813 |          |              | $ | 230,126 |         
|                                    |                                           |           |         |          |              |  

Intangible assets:


|                   |                    |                         |   |         |                   |  |   |          |          |   |              |         |         |  |   |          |          |  
|------------------ | ------------------ | ----------------------- | - | ------- | ----------------- |  | - | -------- | -------- | - | ------------ | ------- | ------- |  | - | -------- | -------- | -
|                   |                    | March 31, 2006          |   |         | December 31, 2005 | 
|                   |                    |                         |   |         |                   | 
|                   |                    | Gross                   |   |         | Accumulated       |  |   | Gross    |          |   | Accumulated  |        
|                   |                    | Amount                  |   |         | Amortization      |  |   | Amount   |          |   | Amortization |        
|                   |                    |                         |   |         |                   |  |   |          |          |   |              |        
|Intangible assets: |                    |                         |   |         |                   |  |   |          |          |   |              |         |         |  |   |         
|                   | Product rights     |                         | $ | 764,471 |                   |  | $ | (271,743 | )        |   | $            | 763,653 |         |  | $ | (257,380 | )       
|                   | License agreements |                         |   | 67,376  |                   |  |   | (40,490  | )        |   |              | 67,376  |         |  |   | (37,330  | )       
|                   |                    |                         |   |         |                   |  |   |          |          |   |              |        
|                   |                    | Total intangible assets |   | $       | 831,847           |  |   | $        | (312,233 | ) |              | $       | 831,029 |  |   | $        | (294,710 | )
|                   |                    |                         |   |         |                   |  |   |          |          |   |              |        





|   |             
|-- | ------------
|7. | Income Taxes



13



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##### Table of Contents



VALEANT PHARMACEUTICALS INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)








|   |                                    
|-- | -----------------------------------
|8. | Common Stock and Share Compensation

Stock Incentive Plan:


Stock Options Issued Under the Incentive Plan:


|                                                 |           |           |        |          |          |   |       |       | 
|------------------------------------------------ | --------- | --------- | ------ | -------- | -------- | - | ----- | ----- | 
|                                                 |           |           |        | Weighted |         
|                                                 |           |           |        | Average  |         
|                                                 |           | Number of |        |          | Exercise |  
|                                                 |           | Shares    |        |          | Price    |  
|                                                 |           |           |        |          |          |  
|Shares under option, December 31, 2004           |           |           | 13,336 |          |          | $ | 17.93 |      
|                                                 | Granted   |           |        | 2,192    |          |   | $     | 18.16 | 
|                                                 | Exercised |           |        | (160     | )        |   | $     | 20.10 | 
|                                                 | Canceled  |           |        | (736     | )        |   | $     | 22.28 | 
|                                                 |           |           |        |          |          |  
|Shares under option, December 31, 2005           |           |           | 14,632 |          |          | $ | 17.80 |      
|                                                 | Granted   |           |        | 130      |          |   | $     | 17.22 | 
|                                                 | Exercised |           |        | (33      | )        |   | $     | 13.07 | 
|                                                 | Canceled  |           |        | (257     | )        |   | $     | 27.64 | 
|                                                 |           |           |        |          |          |  
|Shares Under Option, March 31, 2006              |           |           | 14,472 |          |          | $ | 17.63 |      
|                                                 |           |           |        |          |          |  
|Exercisable at December 31, 2005                 |           |           | 7,197  |          |          | $ | 17.82 |      
|                                                 |           |           |        |          |          |  
|Exercisable at March 31, 2006                    |           |           | 7,387  |          |          | $ | 17.39 |      
|                                                 |           |           |        |          |          |  
|Options available for grant at December 31, 2005 |           |           | 513    |          |          |   |       |      
|                                                 |           |           |        |          |          |  
|Options available for grant at March 31, 2006    |           |           | 635    |          |          |   |       |      
|                                                 |           |           |        |          |          |  

14



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##### Table of Contents



VALEANT PHARMACEUTICALS INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)




|                         |  |             |        |          |             |   |       |           |          |  |          |           |  |              |       |  |  |  |      | 
|------------------------ |  | ----------- | ------ | -------- | ----------- | - | ----- | --------- | -------- |  | -------- | --------- |  | ------------ | ----- |  |  |  | ---- | 
|                         |  | Outstanding |        |          | Exercisable |   |       |          
|                         |  |             |        |          |             |   |       | Weighted  |         
|                         |  |             |        | Weighted |             |   |       |           | Weighted |  |          | Average   | 
|                         |  |             |        | Average  |             |   |       |           | Average  |  |          | Remaining | 
|                         |  | Number      |        |          | Exercise    |   |       | Number    |          |  | Exercise |           |  | Contractual  |      
|Range of Exercise Prices |  | of Shares   |        |          | Price       |   |       | of Shares |          |  | Price    |           |  | Term (Years) |      
|                         |  |             |        |          |             |   |       |           |          |  |          |           |  |              |      
|$8.10 to $13.08          |  |             | 4,845  |          |             | $ | 10.29 |           |          |  | 3,308    |           |  | $            | 10.07 |  |  |  | 6.71 | 
|$13.67 to $18.55         |  |             | 5,250  |          |             | $ | 17.87 |           |          |  | 1,657    |           |  | $            | 17.90 |  |  |  | 8.34 | 
|18.70 to 46.25           |  |             | 4,377  |          |             | $ | 25.46 |           |          |  | 2,422    |           |  | $            | 27.05 |  |  |  | 7.17 | 
|                         |  |             |        |          |             |   |       |           |          |  |          |           |  |              |      
|                         |  |             | 14,472 |          |             |   |       |           |          |  | 7,387    |           |  |              |       |  |  |  |      | 
|                         |  |             |        |          |             |   |       |           |          |  |          |           |  |              |      



|                                       |  |      |      |   |      |   |      |  
|-------------------------------------- |  | ---- | ---- | - | ---- | - | ---- | -
|                                       |  | 2006 |      |   | 2005 |  
|                                       |  |      |      |   |      |  
|Weighted-average life (years)          |  |      | 4.1  |   |      |   | 4.1  |  
|Volatility                             |  |      | 39   | % |      |   | 41   | %
|Expected dividend per share            |  | $    | 0.31 |   |      | $ | 0.31 |  
|Risk-free interest rate                |  |      | 4.80 | % |      |   | 4.33 | %
|Weighted-average fair value of options |  | $    | 5.48 |   |      | $ | 6.10 |  



Restricted Stock Units Issued Under the Incentive Plan:


2003 Employee Stock Purchase Plan:


15



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##### Table of Contents



VALEANT PHARMACEUTICALS INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)






|                                       |                              |                |       |       |             |   |        |        | 
|-------------------------------------- | ---------------------------- | -------------- | ----- | ----- | ----------- | - | ------ | ------ | 
|                                       |                              |                |       | To be |            
|                                       |                              | Recorded as    |       |       | Recorded as |  
|                                       |                              | Expense        |       |       | Expense in  |  
|                                       |                              | through        |       |       | Future      |  
|                                       |                              | March 31, 2006 |       |       | Periods     |  
|                                       |                              |                |       |       |             |  
|                                       | Employee stock options       |                | $     | 4,925 |             |   | $      | 23,266 | 
|                                       | Restricted stock units       |                |       | 637   |             |   |        | 1,664  | 
|                                       | Employee Stock Purchase Plan |                |       | 120   |             |   |        |       | 
|                                       |                              |                |       |       |             |  
|Total stock based compensation expense |                              | $              | 5,682 |       |             | $ | 24,930 |       
|                                       |                              |                |       |       |             |  



|                                    |  |                    |       | 
|----------------------------------- |  | ------------------ | ----- | 
|                                    |  | Three Months Ended |      
|                                    |  | March 31, 2006     |      
|                                    |  |                    |      
|Cost of goods sold                  |  | $                  | 413   | 
|Selling expenses                    |  |                    | 848   | 
|General and administrative expenses |  |                    | 3641  | 
|Research and development costs      |  |                    | 780   | 
|                                    |  |                    |      
|                                    |  | $                  | 5,682 | 
|                                    |  |                    |      



|                    |  |   |        | 
|------------------- |  | - | ------ | 
|Remainder of 2006   |  | $ | 12,670 | 
|2007                |  |   | 8,160  | 
|2008                |  |   | 3,251  | 
|2009 and thereafter |  |   | 849    | 
|                    |  |   |       
|                    |  | $ | 24,930 | 
|                    |  |   |       

Dividends:


16



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##### Table of Contents



VALEANT PHARMACEUTICALS INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)




|   |                              
|-- | -----------------------------
|9. | Commitments and Contingencies





| |                          
| | -------------------------
| | Securities Class Actions:

Section 10b-5
Litigation: 10b-5




Derivative Actions: James Herrig, IRA v. Milan
Panic et al


Paul Gerstley v. Norman
Barker, Jr. et al






17



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##### Table of Contents



VALEANT PHARMACEUTICALS INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)


Ribapharm Bonuses.


Patent Oppositions:




Serbia & Montenegro: predecessors-in


18



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##### Table of Contents



VALEANT PHARMACEUTICALS INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)




Argentina Antitrust Matter:




| |                                
| | -------------------------------
| | Permax Product Liability Cases:

Valvular Heart Disease.


Compulsive Gambling.




Kali Litigation: ®


19



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##### Table of Contents



VALEANT PHARMACEUTICALS INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)






Trademark litigation:


Breach of contract:


Other:




|    |                  
|--- | -----------------
|10. | Business Segments



20



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##### Table of Contents



VALEANT PHARMACEUTICALS INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)






|                                                                                                     |               |                                 |         |        |         |   |          |        |         | 
|---------------------------------------------------------------------------------------------------- | ------------- | ------------------------------- | ------- | ------ | ------- | - | -------- | ------ | ------- | 
|                                                                                                     |               | Three Months Ended              |        
|                                                                                                     |               | March 31,                       |        
|                                                                                                     |               |                                 |        
|                                                                                                     |               | 2006                            |         |        | 2005    |  
|                                                                                                     |               |                                 |         |        |         |  
|Revenues                                                                                             |               |                                 |         |        |         |   |          |       
|Specialty pharmaceuticals                                                                            |               |                                 |         |        |         |   |          |       
|                                                                                                     | North America |                                 | $       | 75,212 |         |   | $        | 48,943 |        
|                                                                                                     | Latin America |                                 |         | 35,788 |         |   |          | 32,060 |        
|                                                                                                     | Europe        |                                 |         | 56,257 |         |   |          | 65,875 |        
|                                                                                                     | AAA           |                                 |         | 13,500 |         |   |          | 14,925 |        
|                                                                                                     |               |                                 |         |        |         |  
|                                                                                                     |               | Total specialty pharmaceuticals |         |        | 180,757 |   |          |        | 161,803 | 
|Ribavirin royalties                                                                                  |               |                                 | 18,091  |        |         |   | 19,335   |       
|                                                                                                     |               |                                 |         |        |         |  
|                                                                                                     |               | Consolidated revenues           |         | $      | 198,848 |   |          | $      | 181,138 | 
|                                                                                                     |               |                                 |         |        |         |  
|Operating Income (Loss)                                                                              |               |                                 |         |        |         |   |          |       
|Specialty pharmaceuticals                                                                            |               |                                 |         |        |         |   |          |       
|                                                                                                     | North America |                                 | $       | 22,492 |         |   | $        | 16,694 |        
|                                                                                                     | Latin America |                                 |         | 8,684  |         |   |          | 9,818  |        
|                                                                                                     | Europe        |                                 |         | 4,550  |         |   |          | 11,734 |        
|                                                                                                     | AAA           |                                 |         | 154    |         |   |          | 790    |        
|                                                                                                     |               |                                 |         |        |         |  
|                                                                                                     |               |                                 | 35,880  |        |         |   | 39,036   |       
|Corporate expenses(1)                                                                                |               |                                 | (23,190 | )      |         |   | (14,367  | )     
|                                                                                                     |               |                                 |         |        |         |  
|                                                                                                     |               | Total specialty pharmaceuticals |         |        | 12,690  |   |          |        | 24,669  | 
|Restructuring charges(2)                                                                             |               |                                 | (26,466 | )      |         |   | (1,695   | )     
|Gain on litigation settlement                                                                        |               |                                 | 34,000  |        |         |   |         |       
|Research and development                                                                             |               |                                 | (12,290 | )      |         |   | (9,336   | )     
|Acquired IPR&D(2)                                                                                    |               |                                 |        |        |         |   | (126,399 | )     
|                                                                                                     |               |                                 |         |        |         |  
|Consolidated segment operating income (loss)                                                         |               |                                 | 7,934   |        |         |   | (112,761 | )     
|Interest income                                                                                      |               |                                 | 2,657   |        |         |   | 3,015    |       
|Interest expense                                                                                     |               |                                 | (10,437 | )      |         |   | (9,681   | )     
|Other, net                                                                                           |               |                                 | 937     |        |         |   | (1,791   | )     
|                                                                                                     |               |                                 |         |        |         |  
|Income (loss) from continuing operations before provision for
    income taxes and minority interest |               | $                               | 1,091   |        |         | $ | (121,218 | )     
|                                                                                                     |               |                                 |         |        |         |  






|    |                                                                                                                                                                                                                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | All stock based compensation expense has been considered a
    corporate cost as management excludes this item in assessing the
    financial performance of individual business segments and
    considers it a function of valuation factors that pertain to
    overall corporate stock performance.
|   
|(2) | Restructuring charges and IPR&D are not included in the
    applicable segments as management excludes these items in
    assessing the financial performance of these segments, primarily
    due to their non-operational nature.                                                                    

21



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VALEANT PHARMACEUTICALS INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)




|      |                                   |              |           |         |              |   |           |         | 
|----- | --------------------------------- | ------------ | --------- | ------- | ------------ | - | --------- | ------- | 
|      |                                   | Total Assets |          
|      |                                   |              |          
|      |                                   | March 31,    |           |         | December 31, |  
|      |                                   | 2006         |           |         | 2005         |  
|      |                                   |              |           |         |              |  
|      | North America                     |              | $         | 500,161 |              |   | $         | 503,196 | 
|      | Latin America                     |              |           | 134,882 |              |   |           | 131,070 | 
|      | Europe                            |              |           | 379,841 |              |   |           | 373,974 | 
|      | AAA                               |              |           | 60,403  |              |   |           | 62,886  | 
|      | Corporate                         |              |           | 202,054 |              |   |           | 240,681 | 
|      | Research and development division |              |           | 213,154 |              |   |           | 218,943 | 
|      | Discontinued operations           |              |           | 105     |              |   |           | 127     | 
|      |                                   |              |           |         |              |  
|Total |                                   | $            | 1,490,600 |         |              | $ | 1,530,877 |        
|      |                                   |              |           |         |              |  



|      |                                   |                  |         |         |              |   |         |         | 
|----- | --------------------------------- | ---------------- | ------- | ------- | ------------ | - | ------- | ------- | 
|      |                                   | Long Term Assets |        
|      |                                   |                  |        
|      |                                   | March 31,        |         |         | December 31, |  
|      |                                   | 2006             |         |         | 2005         |  
|      |                                   |                  |         |         |              |  
|      | North America                     |                  | $       | 418,779 |              |   | $       | 426,745 | 
|      | Latin America                     |                  |         | 38,970  |              |   |         | 39,287  | 
|      | Europe                            |                  |         | 130,274 |              |   |         | 129,952 | 
|      | AAA                               |                  |         | 21,072  |              |   |         | 21,762  | 
|      | Corporate                         |                  |         | 121,814 |              |   |         | 158,801 | 
|      | Research and development division |                  |         | 153,184 |              |   |         | 158,464 | 
|      |                                   |                  |         |         |              |  
|Total |                                   | $                | 884,093 |         |              | $ | 935,011 |        
|      |                                   |                  |         |         |              |  

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VALEANT PHARMACEUTICALS INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)




|                                          |  |                    |         |  |           |   |         |            |  |  |     |   
|----------------------------------------- |  | ------------------ | ------- |  | --------- | - | ------- | ---------- |  |  | --- | --
|                                          |  | Three Months Ended |         |  |          
|                                          |  | March 31,          |         |  | %         |  
|                                          |  |                    |         |  | Increase/ |  
|                                          |  | 2006               |         |  | 2005      |   |         | (Decrease) | 
|                                          |  |                    |         |  |           |   |         |            | 
|Dermatology                               |  |                    |         |  |           |   |         |            |  |  |     |   
|Efudix/
    Efudex®(b)                    |  | $                  | 15,581  |  |           | $ | 19,276  |            |  |  | (19 | )%
|Kinerase®(b)                              |  |                    | 6,860   |  |           |   | 4,435   |            |  |  | 55  | % 
|Oxsoralen-Ultra®(b)                       |  |                    | 3,508   |  |           |   | 2,968   |            |  |  | 18  | % 
|Dermatixtm                                |  |                    | 1,834   |  |           |   | 1,896   |            |  |  | (3  | )%
|Other Dermatology                         |  |                    | 8,569   |  |           |   | 8,133   |            |  |  | 5   | % 
|Infectious Disease                        |  |                    |         |  |           |   |         |            |  |  |     |   
|Infergen®(b)                              |  |                    | 13,705  |  |           |   |        |            |  |  |    |   
|Virazole®(b)                              |  |                    | 5,157   |  |           |   | 4,195   |            |  |  | 23  | % 
|Other Infectious Disease                  |  |                    | 4,731   |  |           |   | 5,853   |            |  |  | (19 | )%
|Neurology                                 |  |                    |         |  |           |   |         |            |  |  |     |   
|Diastat(b)                                |  |                    | 12,022  |  |           |   | 5,177   |            |  |  | 132 | % 
|Mestinon®(b)                              |  |                    | 9,817   |  |           |   | 9,860   |            |  |  | (0  | )%
|Cesamet                                   |  |                    | 3,303   |  |           |   | 2,055   |            |  |  | 61  | % 
|Migranal                                  |  |                    | 3,115   |  |           |   | 774     |            |  |  | 302 | % 
|Librax                                    |  |                    | 2,919   |  |           |   | 4,080   |            |  |  | (28 | )%
|Dalmane/ Dalmadorm                        |  |                    | 2,466   |  |           |   | 2,642   |            |  |  | (7  | )%
|Limbitrol                                 |  |                    | 1,510   |  |           |   | 1,294   |            |  |  | 17  | % 
|TASMAR®                                   |  |                    | 1,185   |  |           |   | 939     |            |  |  | 26  | % 
|Other Neurology                           |  |                    | 14,591  |  |           |   | 10,568  |            |  |  | 38  | % 
|Other Therapeutic Classes                 |  |                    |         |  |           |   |         |            |  |  |     |   
|Bedoyectatm(b)                            |  |                    | 10,580  |  |           |   | 9,244   |            |  |  | 14  | % 
|Bisocard(b)                               |  |                    | 3,565   |  |           |   | 2,655   |            |  |  | 34  | % 
|Solcoseryl(b)                             |  |                    | 3,377   |  |           |   | 4,194   |            |  |  | (19 | )%
|Calcitonin                                |  |                    | 1,850   |  |           |   | 2,585   |            |  |  | (28 | )%
|Nyal                                      |  |                    | 1,754   |  |           |   | 2,474   |            |  |  | (29 | )%
|Aclotin                                   |  |                    | 1,372   |  |           |   | 1,520   |            |  |  | (10 | )%
|Espaven                                   |  |                    | 1,302   |  |           |   | 1,562   |            |  |  | (17 | )%
|Other pharmaceutical products             |  |                    | 46,084  |  |           |   | 53,424  |            |  |  | (14 | )%
|                                          |  |                    |         |  |           |   |         |            | 
|Total product sales                       |  | $                  | 180,757 |  |           | $ | 161,803 |            |  |  | 12  | % 
|                                          |  |                    |         |  |           |   |         |            | 
|Total promoted product sales(a)           |  | $                  | 106,782 |  |           | $ | 83,825  |            |  |  | 27  | % 
|                                          |  |                    |         |  |           |   |         |            | 
|Total top 10 products based on 2006 sales |  | $                  | 84,172  |  |           | $ | 62,004  |            |  |  | 36  | % 
|                                          |  |                    |         |  |           |   |         |            | 






|    |                                                                                                                
|--- | ---------------------------------------------------------------------------------------------------------------
|(a) | The products named above are all promoted products with
    estimated annualized sales in excess of $5 million.



|    |  |                                                                                           
|--- |  | ------------------------------------------------------------------------------------------
|(b) |  | Represents ten products with the largest amount of sales in the
    first quarter of 2006.



23



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

Overview








| |                          
| | -------------------------
| | Specialty Pharmaceuticals







| |                     
| | --------------------
| | Clinical Development







| |                    
| | -------------------
| | Ribavirin Royalties



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Company Strategy and Restructuring






| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Targeted Growth of Existing Products.We focus our
    business on key markets, across three core therapeutic areas. We
    believe that our core therapeutic areas are positioned for
    further growth and that it is possible for a mid-sized company
    to attain a leadership position within these categories. We
    intend to continue to pursue life cycle management strategies
    for our products.                                                                                                                                                                                                                                                                                                                                                                                                         
|
| | Efficient Manufacturing and Supply Chain Organization.The objective of the restructuring program as it relates to
    manufacturing is to further rationalize our manufacturing
    operations and further reduce our excess capacity after
    considering the likely delay in the launch of Viramidine. Under
    our global manufacturing strategy, we also seek to minimize our
    costs of goods sold by increasing capacity utilization in our
    manufacturing facilities or by outsourcing or by other actions
    to improve efficiencies. We have undertaken major process
    improvement initiatives and the deployment of lean six sigma
    process improvements, affecting all phases of our operations,
    from raw material and supply logistics, to manufacturing,
    warehousing and distribution.
|
| | Clinical Development Activities.We are focusing efforts
    and expenditures on three late stage projects (Viramidine and
    Infergen, both of which are potential treatments of patients
    with hepatitis C, and retigabine, a potential treatment for
    partial onset seizures of patients with epilepsy) currently in
    development. The restructuring program is designed to
    rationalize our investments in research and development efforts
    in line with our financial resources. We intend to sell rights
    to, out-license or secure partners to share the costs of other
    major clinical projects and discovery programs that the research
    and development division has underway.                                                                                                        
|
| | Product Acquisitions.We plan to selectively license or
    acquire product candidates, technologies and businesses from
    third parties which complement our existing business and provide
    for effective life cycle management of key products. We believe
    that our drug development and commercialization expertise will
    allow us to recognize licensing opportunities and to capitalize
    on research initially conducted and funded by others.                                                                                                                                                                                                                                                                                                                                                        







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Results of Operations








|                                                       |                         |                                 |         |        |           |   |         |            |         |   |          |         |        |  |       |      |    | 
|------------------------------------------------------ | ----------------------- | ------------------------------- | ------- | ------ | --------- | - | ------- | ---------- | ------- | - | -------- | ------- | ------ |  | ----- | ---- | -- | 
|                                                       |                         | Three Months Ended              |         |        |           |   |        
|                                                       |                         | March 31,                       |         |        |           |   |        
|                                                       |                         |                                 |         |        | Increase/ |   |         | Percent    |        
|                                                       |                         | 2006                            |         |        | 2005      |   |         | (Decrease) |         |   | Change   |        
|                                                       |                         |                                 |         |        |           |   |         |            |         |   |          |        
|Revenues                                               |                         |                                 |         |        |           |   |         |            |         |   |          |         |        |  |       |     
|Specialty pharmaceuticals                              |                         |                                 |         |        |           |   |         |            |         |   |          |         |        |  |       |     
|                                                       | North America           |                                 | $       | 75,212 |           |   | $       | 48,943     |         |   | $        | 26,269  |        |  |       | 54   | % 
|                                                       | Latin America           |                                 |         | 35,788 |           |   |         | 32,060     |         |   |          | 3,728   |        |  |       | 12   |   
|                                                       | Europe                  |                                 |         | 56,257 |           |   |         | 65,875     |         |   |          | (9,618  | )      |  |       | (15  | ) 
|                                                       | AAA                     |                                 |         | 13,500 |           |   |         | 14,925     |         |   |          | (1,425  | )      |  |       | (10  | ) 
|                                                       |                         |                                 |         |        |           |   |         |            |         |   |          |        
|                                                       |                         | Total specialty pharmaceuticals |         |        | 180,757   |   |         |            | 161,803 |   |          |         | 18,954 |  |       |      | 12 | 
|Ribavirin royalties                                    |                         |                                 | 18,091  |        |           |   | 19,335  |            |         |   | (1,244   | )       |        |  | (6    | )   
|                                                       |                         |                                 |         |        |           |   |         |            |         |   |          |        
|Total revenues                                         |                         |                                 | 198,848 |        |           |   | 181,138 |            |         |   | 17,710   |         |        |  | 10    |     
|Costs and Expenses                                     |                         |                                 |         |        |           |   |         |            |         |   |          |         |        |  |       |     
|Cost of goods sold (excluding amortization)            |                         |                                 | 58,580  |        |           |   | 48,721  |            |         |   | 9,859    |         |        |  | 20    |     
|Selling expenses                                       |                         |                                 | 64,270  |        |           |   | 52,815  |            |         |   | 11,455   |         |        |  | 22    |     
|General and administrative expenses                    |                         |                                 | 28,540  |        |           |   | 24,577  |            |         |   | 3,963    |         |        |  | 16    |     
|Research and development costs                         |                         |                                 | 29,535  |        |           |   | 25,724  |            |         |   | 3,811    |         |        |  | 15    |     
|Gain on settlement of litigation                       |                         |                                 | (34,000 | )      |           |   |        |            |         |   | (34,000  | )       |        |  |       |     
|Acquired IPR&D                                         |                         |                                 |        |        |           |   | 126,399 |            |         |   | (126,399 | )       |        |  | (100  | )   
|Restructuring charges                                  |                         |                                 | 26,466  |        |           |   | 1,695   |            |         |   | 24,771   |         |        |  | 1,461 |     
|Amortization expense                                   |                         |                                 | 17,523  |        |           |   | 13,968  |            |         |   | 3,555    |         |        |  | 25    |     
|                                                       |                         |                                 |         |        |           |   |         |            |         |   |          |        
|                                                       | Operating income (loss) |                                 | $       | 7,934  |           |   | $       | (112,761   | )       |   | $        | 120,695 |        |  |       | (107 | ) 
|                                                       |                         |                                 |         |        |           |   |         |            |         |   |          |        
|Gross profit on product sales (excluding amortization) |                         | $                               | 122,177 |        |           | $ | 113,082 |            |         | $ | 9,095    |         |        |  | 8     |     
|                                                       |                         |                                 |         |        |           |   |         |            |         |   |          |        
|Gross profit margin on product sales                   |                         |                                 | 68      | %      |           |   | 70      | %          |         |   |          |         |        |  |       |     
|                                                       |                         |                                 |         |        |           |   |         |            |         |   |          |        

Specialty Pharmaceutical Revenues:


26



---



##### Table of Contents







direct-to






Ribavirin Royalties:




Gross Profit Margin (excluding amortization):


Selling Expenses:


27



---



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General and Administrative Expenses:


Research and Development:


Gain on litigation settlement:


Acquired In-Process Research and Development:


Restructuring Charges:






Amortization:


Other Income, Net, Including Translation and Exchange:


Interest Expense and Income:


Income Taxes:


28



---



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Loss from Discontinued Operations, Net of Taxes:


Liquidity and Capital Resources
















29



---



##### Table of Contents





Products in Development


Viramidine (taribavirin):










Retigabine: End-of








Infergen:


30



---



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follow-up


Zelapar: ®


Pradefovir (formerly called remofovir):


VRX-840773: VRX-840773.


31



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Foreign Operations






Critical Accounting Estimates








| |                    
| | -------------------
| | Revenue Recognition







32



---



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-course-of




| |             
| | ------------
| | Income Taxes



33



---



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| |                                            
| | -------------------------------------------
| | Impairment of Property, Plant and Equipment





| |                               
| | ------------------------------
| | Valuation of Intangible Assets









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



Assets
Acquired in Business Combinations to be Used in Research and
Development Activities: A Focus in Software, Electronic Devices
and Pharmaceutical Industries.


34



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| |                                 
| | --------------------------------
| | Stock-based Compensation Expense





35



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|                                       |  |      |      |  
|-------------------------------------- |  | ---- | ---- | -
|                                       |  | 2006 |     
|                                       |  |      |     
|Weighted-average life (years)          |  |      | 4.1  |  
|Volatility                             |  |      | 39   | %
|Expected dividend per share            |  | $    | 0.31 |  
|Risk-free interest rate                |  |      | 4.80 | %
|Weighted-average fair value of options |  | $    | 5.48 |  









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

Accounting
for Contingencies


Other Financial Information




36



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Forward-Looking Statements


10-Q 10-Q, 10-K


RISK FACTORS


10-K




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The future growth of our business depends on the development and
    approval of new products, including Viramidine, pradefovir and
    retigabine. The process of developing new drugs has an inherent
    risk of failure. For example, product candidates may turn out to
    be ineffective or unsafe in clinical testing; their patent
    protection may become compromised; other therapies may prove
    safer or more effective; or the prevalence of the disease for
    which they are being developed may decrease. Our inability to
    successfully develop our products due to these or other factors
    could have a material adverse effect on future revenues.                                                                                        
|
| |  | We can protect our products from generic substitution by third
    parties only to the extent that our technologies are covered by
    valid and enforceable patents, are effectively maintained as
    trade secrets or are protected by data exclusivity. However, our
    pending or future patent applications may not issue as patents.
    Any patent issued may be challenged, invalidated, held
    unenforceable or circumvented. Furthermore, our patents may not
    be sufficiently broad to prevent third parties competing
    products. The expiration of patent protection for ribavirin has
    resulted in significant competition from generic substitutes and
    declining royalty revenues and may negatively impact future
    financial results.
|
| |  | Trade secret protection is less effective than patent protection
    because competitors may discover the our technology or develop
    parallel technology.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | The scope of protection afforded by a patent can be highly
    uncertain. A pending claim or a result unfavorable to us in a
    patent dispute may preclude development or commercialization of
    products or impact sales of existing products, result in
    cessation of royalty payments to us and/or result in payment of
    monetary damages.                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Obtaining drug approval in the United States and other countries
    is costly and time consuming. Uncertainties and delays inherent
    in the process can preclude or delay development and
    commercialization of our products.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Our current business plan includes targeted expansion through
    acquisitions of compatible businesses and product lines and the
    formation of strategic alliances, joint ventures and other
    business combinations, in addition to the development of new
    products. If we are unable to successfully execute on our                                                                                                                                                                                                                                                                                                                                                                                                                                          

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | expansion plans to find attractive acquisition candidates at
    appropriate prices, and to integrate successfully any acquired
    companies or products, the expected growth of our business may
    be negatively affected.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | We and our competitors are always striving to develop products
    that are more effective, safer, more easily tolerated or less
    costly. If our competitors succeed in developing better
    alternatives to our current products before we do, we will lose
    sales and revenues to their alternative products. If vaccines
    are introduced to prevent the diseases treated by our products,
    our potential sales and revenues will decrease.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | The pharmaceutical industry is subject to substantial government
    regulation, including the approval of new pharmaceutical
    products, labeling, advertising and, in most countries, pricing,
    as well as inspection and approval of manufacturing facilities.
    The costs of complying with these regulations are high, and
    failure to comply could result in fines or interruption in our
    business.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | We collect and pay a substantial portion of our sales and
    expenditures in currencies other than the U.S. dollar. As a
    result, fluctuations in foreign currency exchange rates affect
    our operating results. Additionally, future exchange rate
    movements, inflation or other related factors may have a
    material adverse effect on our sales, gross profit or operating
    expenses. At March 31, 2006 we have in place foreign
    currency hedge transactions to reduce our exposure to
    variability in the Polish Zloty. We continue to evaluate the
    possibility of entering into additional hedge arrangements.                                                                                                                                                                                                                                                                                                              
|
| |  | A significant part of our revenue is derived from products
    manufactured by third parties. We rely on their quality level,
    compliance with the FDA regulations or similar regulatory
    requirements enforced by regulatory agencies in other countries
    and continuity of supply. Any failure by them in these areas
    could disrupt our product supply and negatively impact our
    revenues.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Our flexibility in maximizing commercialization opportunities
    for our compounds may be limited by our obligations to
    Schering-Plough. In November 2000, we entered into an agreement
    that provides Schering-Plough with an option to acquire the
    rights to up to three of our products intended to treat
    hepatitis C that Schering-Plough designates prior to our
    entering Phase 2 clinical trials and a right for first/last
    refusal to license various compounds we may develop and elect to
    license to others. Viramidine was not subject to the option of
    Schering-Plough, but it would be subject to their right of
    first/last refusal if we elected to license it to a third party.
    The interest of potential collaborators in obtaining rights to
    our compounds or the terms of any agreement we ultimately enter
    into for these rights may be hindered by our agreement with
    Schering-Plough.
|
| |  | To purchase our 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 us to realize an appropriate return on our
    investment in product development and our continued manufacture
    and sale of existing drugs.                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Some of our development programs are based on the library of
    nucleoside compounds we have developed. It is not practicable to
    create backups for our nucleoside library, and accordingly it is
    at risk of loss in earthquakes, fire and other natural disasters
    and catastrophes. Any insurance we maintain may not be adequate
    to cover our losses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | All drugs have potential harmful side effects and can expose
    drug manufacturers and distributors to liability. In the event
    one or more of our products is found to have harmed an
    individual or individuals, we may be responsible for paying all
    or substantially all damages awarded. A successful product
    liability claim against us could have a material negative impact
    on our financial position and results of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Our debt agreements permit us to incur additional debt, subject
    to certain restrictions, but there is no guaranty that we will
    actually be able to borrow any money should the need for it
    arise.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We are involved in several legal proceedings, including those
    described in Note 9 to notes to consolidated condensed
    financial statements, any of which could result in substantial
    cost and divert managements attention and resources.                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Dependence on key personnel leaves us vulnerable to a negative
    impact if they leave. Our continued success will depend, to a
    significant extent, upon the efforts and abilities of the key
    members of management. The loss of their services could have a
    negative impact on us.                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Our research and development activities involve the controlled
    use of potentially harmful biological materials as wells as
    hazardous materials, chemicals and various radioactive
    compounds. We cannot completely eliminate the risk of accidental
    contamination or injury from the use, storage, handling or
    disposal of these materials. In the event of contamination or
    injury, we could be held liable for damages that result. Any
    liability could exceed our resources.                                                                                                                                                                                                       
|
| |  | Our stockholder rights plan, provisions of our certificate of
    incorporation and provisions of the Delaware General Corporation
    Law could provide our Board of Directors with the ability to
    deter hostile takeovers or delay, deter or prevent a change in
    control of our company, including transactions in which
    stockholders might otherwise receive a premium for their shares
    over then current market prices.                                                                                                                                                                                                                                                                      
|
| |  | We are authorized to issue, without stockholder approval,
    approximately 10,000,000 shares of preferred stock,
    200,000,000 shares of common stock and securities
    convertible into either shares of common stock or preferred
    stock. If we issue additional equity securities, the price of
    our securities may be materially and adversely affected. The
    Board of Directors can also use issuances of preferred or common
    stock to deter a hostile takeover or change in control of our
    company.                                                                                                                                                                                   
|
| |  | We are subject to a consent order with the Securities and
    Exchange Commission, which permanently enjoins us 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 with respect to forward-looking statements we
    made prior to November 28, 2005. The existence of the
    permanent injunction under the consent order, and the lack of
    protection under the safe harbor with respect to forward-looking
    statements made prior to November 28, 2005 may limit our
    ability to defend against future allegations.

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





|                    |  |           |         |                      |          |   |          |       |  |   |          |  
|------------------- |  | --------- | ------- | -------------------- | -------- | - | -------- | ----- |  | - | -------- | -
|                    |  |           |         | Assets (Liabilities) |         
|                    |  | Notional/ |         |                      |          |  
|                    |  | Contract  |         |                      | Carrying |   |          | Fair  | 
|Description         |  | Amount    |         |                      | Value    |   |          | Value | 
|                    |  |           |         |                      |          |   |          |       | 
|Forward contracts   |  | $         | 45,000  |                      |          | $ | (2,345   | )     |  | $ | (2,345   | )
|Interest rate swaps |  |           | 150,000 |                      |          |   | (6,982   | )     |  |   | (6,982   | )
|Outstanding debt    |  |           | 780,000 |                      |          |   | (780,000 | )     |  |   | (720,000 | )





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##### Table of Contents








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







41



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##### Table of Contents






PART II  OTHER INFORMATION







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








|         |             
|-------- | ------------
|Item 1A. | Risk Factors

10-K 10-Q, 10-K. 10-K 10-Q.




| |                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we do not realize the expected benefits from the
    restructuring plan we announced in April 2006, our operating
    results and financial conditions would be negatively
    impacted.








|        |         
|------- | --------
|Item 6. | Exhibits

(a)     Exhibits


|        |    |    |  |                                                                                                                                                                                                                 
|------- | -- | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |   
|        |    |   
|        | 10 | .1 |  | Description of Registrants Executive Incentive Plan,
    previously filed as Item 1.01 in the Registrants Current
    Report on Form 8-K, dated April 19, 2006, which is
    incorporated herein by reference.
|       
|        | 15 | .1 |  | Review Report of Independent Registered Public Accounting Firm.                                                                                                                                                 
|       
|        | 15 | .2 |  | Awareness Letter of Independent Registered Public Accounting
    Firm.                                                                                                                                          
|       
|        | 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.                     

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##### Table of Contents






SIGNATURES


10-Q




| |                                                    
| | ---------------------------------------------------
| | Valeant Pharmaceuticals
    InternationalRegistrant
|
| | /s/ Timothy C. Tyson                               
| |                                                    
| | Timothy C. Tyson                                   
| | President and Chief Executive Officer              





| |                                                     
| | ----------------------------------------------------
| | /s/ Bary G. Bailey                                  
| |                                                     
| | Bary G. Bailey                                      
| | Executive Vice President and Chief Financial Officer
| | (Principal Financial and Accounting Officer)        



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EXHIBIT INDEX


|        |    |    |  |                                                                                                                                                                                                                 
|------- | -- | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |   
|        |    |   
|        | 10 | .1 |  | Description of Registrants Executive Incentive Plan,
    previously filed as Item 1.01 in the Registrants Current
    Report on Form 8-K, dated April 19, 2006, which is
    incorporated herein by reference.
|       
|        | 15 | .1 |  | Review Report of Independent Registered Public Accounting Firm.                                                                                                                                                 
|       
|        | 15 | .2 |  | Awareness Letter of Independent Registered Public Accounting
    Firm.                                                                                                                                          
|       
|        | 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.                     

44