##### 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 June 30, 2005                                                
|          
|           |  | 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


þ o












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VALEANT PHARMACEUTICALS INTERNATIONAL


INDEX


|                                   |  |                                                                                                                                    |    |        |    | 
|---------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------- | -- | ------ | -- | 
|                                   |  |                                                                                                                                    |    | Page   |   
|                                   |  |                                                                                                                                    |    | Number |   
|                                   |  |                                                                                                                                    |    |        |   
|PART I  FINANCIAL
    INFORMATION
|Item 1.                            |  | Financial Statements (Unaudited)                                                                                                   |    |        | 2  | 
|                                   |  | Consolidated Condensed Balance Sheets as of
    June 30, 2005 and December 31, 2004                                                |    |        | 2  | 
|                                   |  | Consolidated Condensed Statements of
    Operations for the three months and six months ended
    June 30, 2005 and 2004           |    |        | 3  | 
|                                   |  | Consolidated Condensed Statements of
    Comprehensive Income for the three months and six months ended
    June 30, 2005 and 2004 |    |        | 4  | 
|                                   |  | Consolidated Condensed Statements of Cash
    Flows for the six months ended June 30, 2005 and 2004                                |    |        | 5  | 
|                                   |  | Notes to Consolidated Condensed Financial
    Statements                                                                           |    |        | 6  | 
|Item 2.                            |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                                          |    |        | 23 | 
|Item 3.                            |  | Quantitative and Qualitative Disclosures
    About Market Risk                                                                     |    |        | 36 | 
|Item 4.                            |  | Controls and Procedures                                                                                                            |    |        | 37 | 
|                                  
|PART II  OTHER
    INFORMATION   
|Item 1.                            |  | Legal Proceedings                                                                                                                  |    |        | 41 | 
|Item 4.                            |  | Submission of Matters to a Vote of Security
    Holders                                                                            |    |        | 41 | 
|Item 5.                            |  | Other Information                                                                                                                  |    |        | 41 | 
|Item 6.                            |  | Exhibits                                                                                                                           |    |        | 41 | 
|SIGNATURES                         |  |                                                                                                                                    | 43 |       
|EXHIBIT 10.5                      
|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 June 30, 2005 and December 31, 2004


(Unaudited, in thousands, except par value data)


|                                       |                                                                                                                                                                                                                                            |                               |           |           |              |   |           |           |         | 
|-------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ----------------------------- | --------- | --------- | ------------ | - | --------- | --------- | ------- | 
|                                       |                                                                                                                                                                                                                                            | June 30,                      |           |           | December 31, |  
|                                       |                                                                                                                                                                                                                                            | 2005                          |           |           | 2004         |  
|                                       |                                                                                                                                                                                                                                            |                               |           |           |              |  
|ASSETS                                
|Current Assets:                        |                                                                                                                                                                                                                                            |                               |           |           |              |   |           |          
|                                       | Cash and cash equivalents                                                                                                                                                                                                                  |                               | $         | 326,155   |              |   | $         | 222,590   |        
|                                       | Marketable securities                                                                                                                                                                                                                      |                               |           | 31,093    |              |   |           | 238,918   |        
|                                       | Accounts receivable, net                                                                                                                                                                                                                   |                               |           | 171,763   |              |   |           | 171,860   |        
|                                       | Inventories, net                                                                                                                                                                                                                           |                               |           | 122,673   |              |   |           | 112,250   |        
|                                       | Prepaid expenses and other current assets                                                                                                                                                                                                  |                               |           | 23,509    |              |   |           | 25,049    |        
|                                       |                                                                                                                                                                                                                                            |                               |           |           |              |  
|                                       |                                                                                                                                                                                                                                            | Total current assets          |           |           | 675,193      |   |           |           | 770,667 | 
|Property, plant and equipment, net     |                                                                                                                                                                                                                                            |                               | 220,407   |           |              |   | 233,258   |          
|Deferred tax assets, net               |                                                                                                                                                                                                                                            |                               | 5,740     |           |              |   |          |          
|Goodwill                               |                                                                                                                                                                                                                                            |                               | 74,630    |           |              |   | 20,499    |          
|Intangible assets, net                 |                                                                                                                                                                                                                                            |                               | 500,936   |           |              |   | 432,277   |          
|Other assets                           |                                                                                                                                                                                                                                            |                               | 38,912    |           |              |   | 41,280    |          
|                                       |                                                                                                                                                                                                                                            |                               |           |           |              |  
|                                       |                                                                                                                                                                                                                                            | Total non-current assets      |           |           | 840,625      |   |           |           | 727,314 | 
|Assets of discontinued operations      |                                                                                                                                                                                                                                            |                               | 12,883    |           |              |   | 23,894    |          
|                                       |                                                                                                                                                                                                                                            |                               |           |           |              |  
|                                       |                                                                                                                                                                                                                                            | $                             | 1,528,701 |           |              | $ | 1,521,875 |          
|                                       |                                                                                                                                                                                                                                            |                               |           |           |              |  
|                                      
|LIABILITIES AND STOCKHOLDERS EQUITY  
|Current Liabilities:                   |                                                                                                                                                                                                                                            |                               |           |           |              |   |           |          
|                                       | Trade payables                                                                                                                                                                                                                             |                               | $         | 44,882    |              |   | $         | 48,713    |        
|                                       | Accrued liabilities                                                                                                                                                                                                                        |                               |           | 109,750   |              |   |           | 122,297   |        
|                                       | Notes payable and current portion of long-term debt                                                                                                                                                                                        |                               |           | 428       |              |   |           | 929       |        
|                                       | Income taxes payable                                                                                                                                                                                                                       |                               |           | 41,143    |              |   |           | 20,266    |        
|                                       |                                                                                                                                                                                                                                            |                               |           |           |              |  
|                                       |                                                                                                                                                                                                                                            | Total current liabilities     |           |           | 196,203      |   |           |           | 192,205 | 
|Long-term debt, less current portion   |                                                                                                                                                                                                                                            |                               | 793,047   |           |              |   | 793,139   |          
|Deferred tax liabilities, net          |                                                                                                                                                                                                                                            |                               |          |           |              |   | 13,823    |          
|Other liabilities                      |                                                                                                                                                                                                                                            |                               | 13,719    |           |              |   | 14,429    |          
|                                       |                                                                                                                                                                                                                                            |                               |           |           |              |  
|                                       |                                                                                                                                                                                                                                            | Total non-current liabilities |           |           | 806,766      |   |           |           | 821,391 | 
|Liabilities of discontinued operations |                                                                                                                                                                                                                                            |                               | 30,231    |           |              |   | 32,056    |          
|                                       |                                                                                                                                                                                                                                            |                               |           |           |              |  
|Commitments and contingencies          |                                                                                                                                                                                                                                            |                               |           |           |              |   |           |          
|Stockholders Equity:                  |                                                                                                                                                                                                                                            |                               |           |           |              |   |           |          
|                                       | Common stock, $0.01 par value; 200,000 shares
    authorized; 92,598 (June 30, 2005) and 84,219
    (December 31, 2004) shares outstanding (after deducting
    shares in treasury of 1,068 as of June 30, 2005 and
    December 31, 2004) |                               |           | 926       |              |   |           | 842       |        
|                                       | Additional capital                                                                                                                                                                                                                         |                               |           | 1,196,519 |              |   |           | 1,004,875 |        
|                                       | Accumulated deficit                                                                                                                                                                                                                        |                               |           | (681,165  | )            |   |           | (534,204  | )      
|                                       | Accumulated other comprehensive income (loss)                                                                                                                                                                                              |                               |           | (20,779   | )            |   |           | 4,710     |        
|                                       |                                                                                                                                                                                                                                            |                               |           |           |              |  
|                                       |                                                                                                                                                                                                                                            | Total stockholders equity    |           |           | 495,501      |   |           |           | 476,223 | 
|                                       |                                                                                                                                                                                                                                            |                               |           |           |              |  
|                                       |                                                                                                                                                                                                                                            | $                             | 1,528,701 |           |              | $ | 1,521,875 |          
|                                       |                                                                                                                                                                                                                                            |                               |           |           |              |  



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##### Table of Contents



VALEANT PHARMACEUTICALS INTERNATIONAL





CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS


For the three months and six months ended June 30, 2005
and 2004


(Unaudited, in thousands, except per share data)


|                                                                                       |                                              |                               |         |         |                  |   |         |         |         |   |          |          |         |   |         |         |         |  
|-------------------------------------------------------------------------------------- | -------------------------------------------- | ----------------------------- | ------- | ------- | ---------------- | - | ------- | ------- | ------- | - | -------- | -------- | ------- | - | ------- | ------- | ------- | -
|                                                                                       |                                              | Three Months Ended            |         |         | Six Months Ended |  
|                                                                                       |                                              | June 30,                      |         |         | June 30,         |  
|                                                                                       |                                              |                               |         |         |                  |  
|                                                                                       |                                              | 2005                          |         |         | 2004             |   |         | 2005    |         |   | 2004     |         
|                                                                                       |                                              |                               |         |         |                  |   |         |         |         |   |          |         
|Revenues:                                                                              |                                              |                               |         |         |                  |   |         |         |         |   |          |          |         |   |         |        
|                                                                                       | Product sales                                |                               | $       | 180,828 |                  |   | $       | 147,634 |         |   | $        | 342,631  |         |   | $       | 279,959 |        
|                                                                                       | Ribavirin royalties                          |                               |         | 24,206  |                  |   |         | 22,734  |         |   |          | 43,541   |         |   |         | 48,111  |        
|                                                                                       |                                              |                               |         |         |                  |   |         |         |         |   |          |         
|                                                                                       |                                              | Total revenues                |         |         | 205,034          |   |         |         | 170,368 |   |          |          | 386,172 |   |         |         | 328,070 |  
|                                                                                       |                                              |                               |         |         |                  |   |         |         |         |   |          |         
|Costs and expenses:                                                                    |                                              |                               |         |         |                  |   |         |         |         |   |          |          |         |   |         |        
|                                                                                       | Cost of goods sold (excluding amortization)  |                               |         | 52,940  |                  |   |         | 45,938  |         |   |          | 101,661  |         |   |         | 92,650  |        
|                                                                                       | Selling expenses                             |                               |         | 61,454  |                  |   |         | 53,575  |         |   |          | 114,269  |         |   |         | 101,317 |        
|                                                                                       | General and administrative expenses          |                               |         | 25,985  |                  |   |         | 24,849  |         |   |          | 50,562   |         |   |         | 48,724  |        
|                                                                                       | Research and development costs               |                               |         | 27,559  |                  |   |         | 20,921  |         |   |          | 53,283   |         |   |         | 39,384  |        
|                                                                                       | Acquired in-process research and development |                               |         |        |                  |   |         | 384     |         |   |          | 126,399  |         |   |         | 11,770  |        
|                                                                                       | Restructuring charges                        |                               |         | (1,324  | )                |   |         | 20,185  |         |   |          | 371      |         |   |         | 20,185  |        
|                                                                                       | Amortization expense                         |                               |         | 17,211  |                  |   |         | 14,133  |         |   |          | 31,179   |         |   |         | 27,420  |        
|                                                                                       |                                              |                               |         |         |                  |   |         |         |         |   |          |         
|                                                                                       |                                              | Total costs and expenses      |         |         | 183,825          |   |         |         | 179,985 |   |          |          | 477,724 |   |         |         | 341,450 |  
|                                                                                       |                                              |                               |         |         |                  |   |         |         |         |   |          |         
|                                                                                       |                                              | Income (loss) from operations |         |         | 21,209           |   |         |         | (9,617  | ) |          |          | (91,552 | ) |         |         | (13,380 | )
|Other income (loss), net, including translation and exchange                           |                                              |                               | (2,631  | )       |                  |   | (632    | )       |         |   | (4,422   | )        |         |   | (1,678  | )      
|Loss on early extinguishment of debt                                                   |                                              |                               |        |         |                  |   | (5,898  | )       |         |   |         |          |         |   | (5,898  | )      
|Interest income                                                                        |                                              |                               | 3,119   |         |                  |   | 3,110   |         |         |   | 6,134    |          |         |   | 6,170   |        
|Interest expense                                                                       |                                              |                               | (10,063 | )       |                  |   | (14,284 | )       |         |   | (19,744  | )        |         |   | (29,243 | )      
|                                                                                       |                                              |                               |         |         |                  |   |         |         |         |   |          |         
|Income (loss) from continuing operations before income taxes and
    minority interest |                                              |                               | 11,634  |         |                  |   | (27,321 | )       |         |   | (109,584 | )        |         |   | (44,029 | )      
|Provision (benefit) for income taxes                                                   |                                              |                               | 10,059  |         |                  |   | (99     | )       |         |   | 26,426   |          |         |   | (6,281  | )      
|Minority interest, net                                                                 |                                              |                               | 134     |         |                  |   | 103     |         |         |   | 305      |          |         |   | 89      |        
|                                                                                       |                                              |                               |         |         |                  |   |         |         |         |   |          |         
|                                                                                       | Income (loss) from continuing operations     |                               |         | 1,441   |                  |   |         | (27,325 | )       |   |          | (136,315 | )       |   |         | (37,837 | )      
|                                                                                       | Loss from discontinued operations            |                               |         | (1,988  | )                |   |         | (13,966 | )       |   |          | (3,491   | )       |   |         | (17,027 | )      
|                                                                                       |                                              |                               |         |         |                  |   |         |         |         |   |          |         
|                                                                                       | Net loss                                     |                               | $       | (547    | )                |   | $       | (41,291 | )       |   | $        | (139,806 | )       |   | $       | (54,864 | )      
|                                                                                       |                                              |                               |         |         |                  |   |         |         |         |   |          |         
|Basic and diluted income (loss) per share:                                             |                                              |                               |         |         |                  |   |         |         |         |   |          |          |         |   |         |        
|                                                                                       | Income (loss) from continuing operations     |                               | $       | 0.02    |                  |   | $       | (0.32   | )       |   | $        | (1.50    | )       |   | $       | (0.45   | )      
|                                                                                       | Loss from discontinued operations            |                               |         | (0.03   | )                |   |         | (0.17   | )       |   |          | (0.04    | )       |   |         | (0.21   | )      
|                                                                                       |                                              |                               |         |         |                  |   |         |         |         |   |          |         
|                                                                                       | Basic and diluted Net loss per share         |                               | $       | (0.01   | )                |   | $       | (0.49   | )       |   | $        | (1.54    | )       |   | $       | (0.66   | )      
|                                                                                       |                                              |                               |         |         |                  |   |         |         |         |   |          |         
|Shares used in per share computation:                                                  |                                              |                               |         |         |                  |   |         |         |         |   |          |          |         |   |         |        
|                                                                                       | Basic                                        |                               |         | 92,568  |                  |   |         | 83,880  |         |   |          | 90,712   |         |   |         | 83,663  |        
|                                                                                       |                                              |                               |         |         |                  |   |         |         |         |   |          |         
|                                                                                       | Diluted                                      |                               |         | 95,591  |                  |   |         | 83,880  |         |   |          | 90,712   |         |   |         | 83,663  |        
|                                                                                       |                                              |                               |         |         |                  |   |         |         |         |   |          |         
|Dividends paid per share of common stock                                               |                                              | $                             | 0.08    |         |                  | $ | 0.08    |         |         | $ | 0.16     |          |         | $ | 0.16    |        
|                                                                                       |                                              |                               |         |         |                  |   |         |         |         |   |          |         
|Dividends declared per share of common stock                                           |                                              | $                             | 0.00    |         |                  | $ | 0.08    |         |         | $ | 0.08     |          |         | $ | 0.16    |        
|                                                                                       |                                              |                               |         |         |                  |   |         |         |         |   |          |         



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VALEANT PHARMACEUTICALS INTERNATIONAL





CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE LOSS


For the three months and six months ended June 30, 2005
and 2004


(Unaudited, in thousands)


|                                   |                                                                        |                    |         |         |                  |   |         |       |   |   |          |         |   |   |         |        |  
|---------------------------------- | ---------------------------------------------------------------------- | ------------------ | ------- | ------- | ---------------- | - | ------- | ----- | - | - | -------- | ------- | - | - | ------- | ------ | -
|                                   |                                                                        | Three Months Ended |         |         | Six Months Ended |  
|                                   |                                                                        | June 30,           |         |         | June 30,         |  
|                                   |                                                                        |                    |         |         |                  |  
|                                   |                                                                        | 2005               |         |         | 2004             |   |         | 2005  |   |   | 2004     |        
|                                   |                                                                        |                    |         |         |                  |   |         |       |   |   |          |        
|Net loss                           |                                                                        | $                  | (547    | )       |                  | $ | (41,291 | )     |   | $ | (139,806 | )       |   | $ | (54,864 | )     
|Other comprehensive income (loss): |                                                                        |                    |         |         |                  |   |         |       |   |   |          |         |   |   |         |       
|                                   | Foreign currency translation adjustments                               |                    |         | (16,378 | )                |   |         | 2,981 |   |   |          | (31,740 | ) |   |         | (2,020 | )
|                                   | Unrealized gain (loss) on marketable equity securities and other       |                    |         | 2,993   |                  |   |         | (396  | ) |   |          | 6,251   |   |   |         | (577   | )
|                                   | Reclassification adjustment for loss realized included in net
    loss |                    |         |        |                  |   |         |      |   |   |          |        |   |   |         | 1,506  |  
|                                   |                                                                        |                    |         |         |                  |   |         |       |   |   |          |        
|Comprehensive loss                 |                                                                        | $                  | (13,932 | )       |                  | $ | (38,706 | )     |   | $ | (165,295 | )       |   | $ | (55,955 | )     
|                                   |                                                                        |                    |         |         |                  |   |         |       |   |   |          |        



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VALEANT PHARMACEUTICALS INTERNATIONAL





CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS


For the six months ended June 30, 2005 and 2004


(Unaudited, in thousands)


|                                                                            |                                                                                     |                                                                            |                                           |          |         |        |          |         |         |        | 
|--------------------------------------------------------------------------- | ----------------------------------------------------------------------------------- | -------------------------------------------------------------------------- | ----------------------------------------- | -------- | ------- | ------ | -------- | ------- | ------- | ------ | 
|                                                                            |                                                                                     | Six Months Ended                                                           |                                          
|                                                                            |                                                                                     | June 30,                                                                   |                                          
|                                                                            |                                                                                     |                                                                            |                                          
|                                                                            |                                                                                     | 2005                                                                       |                                           |          | 2004    |       
|                                                                            |                                                                                     |                                                                            |                                           |          |         |       
|Cash flows from operating activities:                                       |                                                                                     |                                                                            |                                           |          |         |        |          |        
|                                                                            | Loss from continuing operations                                                     |                                                                            | $                                         | (136,315 | )       |        | $        | (37,837 | )      
|                                                                            | Adjustments to reconcile net loss to net cash provided by
    operating activities: |                                                                            |                                           |          |         |        |          |         |        
|                                                                            |                                                                                     | Depreciation and amortization                                              |                                           |          | 45,498  |        |          |         | 41,869  |       
|                                                                            |                                                                                     | Provision for losses on accounts receivable and inventory
    obsolescence |                                           |          | 3,805   |        |          |         | 74      |       
|                                                                            |                                                                                     | Translation and exchange losses, net                                       |                                           |          | 4,422   |        |          |         | 735     |       
|                                                                            |                                                                                     | Impairment charges and other non-cash items                                |                                           |          | 2,407   |        |          |         | 21,674  |       
|                                                                            |                                                                                     | Acquired in-process research and development                               |                                           |          | 126,399 |        |          |         | 11,770  |       
|                                                                            |                                                                                     | Deferred income taxes                                                      |                                           |          | (18,215 | )      |          |         | (21,729 | )     
|                                                                            |                                                                                     | Minority interest                                                          |                                           |          | (305    | )      |          |         | 89      |       
|                                                                            |                                                                                     | Loss on extinguishment of debt                                             |                                           |          |        |        |          |         | 5,898   |       
|                                                                            | Change in assets and liabilities, net of effects of acquisitions:                   |                                                                            |                                           |          |         |        |          |         |        
|                                                                            |                                                                                     | Accounts receivable                                                        |                                           |          | 2,154   |        |          |         | 20,186  |       
|                                                                            |                                                                                     | Inventories                                                                |                                           |          | (13,518 | )      |          |         | (8,719  | )     
|                                                                            |                                                                                     | Prepaid expenses and other assets                                          |                                           |          | 3,916   |        |          |         | 2,045   |       
|                                                                            |                                                                                     | Trade payables and accrued liabilities                                     |                                           |          | (21,176 | )      |          |         | (11,629 | )     
|                                                                            |                                                                                     | Income taxes payable                                                       |                                           |          | 21,744  |        |          |         | 84      |       
|                                                                            |                                                                                     | Other liabilities                                                          |                                           |          | 1,589   |        |          |         | 470     |       
|                                                                            |                                                                                     |                                                                            |                                           |          |         |       
|                                                                            |                                                                                     | Cash flow from operating activities in continuing operations               |                                           |          | 22,405  |        |          |         | 24,980  |       
|                                                                            |                                                                                     | Cash flow from operating activities in discontinued operations             |                                           |          | (1,129  | )      |          |         | (5,641  | )     
|                                                                            |                                                                                     |                                                                            |                                           |          |         |       
|                                                                            |                                                                                     |                                                                            | Net cash provided by operating activities |          |         | 21,276 |          |         |         | 19,339 | 
|                                                                            |                                                                                     |                                                                            |                                           |          |         |       
|Cash flows from investing activities:                                       |                                                                                     |                                                                            |                                           |          |         |        |          |        
|                                                                            | Capital expenditures                                                                |                                                                            |                                           | (15,021  | )       |        |          | (8,923  | )      
|                                                                            | Proceeds from sale of assets                                                        |                                                                            |                                           | 5,876    |         |        |          | 11,323  |        
|                                                                            | Proceeds from investments                                                           |                                                                            |                                           | 506,600  |         |        |          |        |        
|                                                                            | Purchase of investments                                                             |                                                                            |                                           | (299,672 | )       |        |          | (13,476 | )      
|                                                                            | Cash acquired in connection with acquisition                                        |                                                                            |                                           | 11,198   |         |        |          | 601     |        
|                                                                            | Acquisition of businesses, license rights and product lines                         |                                                                            |                                           | (292,979 | )       |        |          | (63,862 | )      
|                                                                            |                                                                                     |                                                                            |                                           |          |         |       
|                                                                            | Cash flow from investing activities in continuing operations                        |                                                                            |                                           | (83,998  | )       |        |          | (74,337 | )      
|                                                                            | Cash flow from investing activities in discontinued operations                      |                                                                            |                                           | (132     | )       |        |          | 395     |        
|                                                                            |                                                                                     |                                                                            |                                           |          |         |       
|                                                                            |                                                                                     | Net cash used in investing activities                                      |                                           |          | (84,130 | )      |          |         | (73,942 | )     
|                                                                            |                                                                                     |                                                                            |                                           |          |         |       
|Cash flows from financing activities:                                       |                                                                                     |                                                                            |                                           |          |         |        |          |        
|                                                                            | Payments on long-term debt and notes payable                                        |                                                                            |                                           | (708     | )       |        |          | (95,868 | )      
|                                                                            | Proceeds from issuance of stock                                                     |                                                                            |                                           | 1,646    |         |        |          | 10,563  |        
|                                                                            | Proceeds from stock offering                                                        |                                                                            |                                           | 189,030  |         |        |          |        |        
|                                                                            | Dividends paid                                                                      |                                                                            |                                           | (13,650  | )       |        |          | (12,901 | )      
|                                                                            |                                                                                     |                                                                            |                                           |          |         |       
|                                                                            |                                                                                     | Net cash provided by (used in) financing activities                        |                                           |          | 176,318 |        |          |         | (98,206 | )     
|                                                                            |                                                                                     |                                                                            |                                           |          |         |       
|Effect of exchange rate changes on cash and cash equivalents                |                                                                                     |                                                                            | (9,033                                    | )        |         |        | (1,675   | )      
|                                                                            |                                                                                     |                                                                            |                                           |          |         |       
|Net increase (decrease) in cash and cash equivalents                        |                                                                                     |                                                                            | 104,431                                   |          |         |        | (154,484 | )      
|Cash and cash equivalents at beginning of period                            |                                                                                     |                                                                            | 222,719                                   |          |         |        | 872,969  |        
|                                                                            |                                                                                     |                                                                            |                                           |          |         |       
|Cash and cash equivalents at end of period                                  |                                                                                     |                                                                            | 327,150                                   |          |         |        | 718,485  |        
|Cash and cash equivalents classified as part of discontinued
    operations |                                                                                     |                                                                            | (995                                      | )        |         |        | (696     | )      
|                                                                            |                                                                                     |                                                                            |                                           |          |         |       
|Cash and cash equivalents of continuing operations                          |                                                                                     | $                                                                          | 326,155                                   |          |         | $      | 717,789  |        
|                                                                            |                                                                                     |                                                                            |                                           |          |         |       



5



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##### Table of Contents



VALEANT PHARMACEUTICALS INTERNATIONAL





NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS


June 30, 2005


(Unaudited)






|   |                                                                
|-- | ---------------------------------------------------------------
|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 Loss: Reporting Comprehensive
Income.


Per Share Information:




Stock-Based Compensation: Accounting for Stock-Based Compensation Accounting for Stock- Based
Compensation  Transition and Disclosure.


7



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##### Table of Contents



VALEANT PHARMACEUTICALS INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)




|                                                                                                                   |                                 |                    |        |       |                  |   |         |       |   |   |          |       |   |   |         |       |  
|------------------------------------------------------------------------------------------------------------------ | ------------------------------- | ------------------ | ------ | ----- | ---------------- | - | ------- | ----- | - | - | -------- | ----- | - | - | ------- | ----- | -
|                                                                                                                   |                                 | Three Months Ended |        |       | Six Months Ended |  
|                                                                                                                   |                                 | June 30,           |        |       | June 30,         |  
|                                                                                                                   |                                 |                    |        |       |                  |  
|                                                                                                                   |                                 | 2005               |        |       | 2004             |   |         | 2005  |   |   | 2004     |      
|                                                                                                                   |                                 |                    |        |       |                  |   |         |       |   |   |          |      
|Net loss as reported                                                                                               |                                 | $                  | (547   | )     |                  | $ | (41,291 | )     |   | $ | (139,806 | )     |   | $ | (54,864 | )    
|Compensation costs related to the Companys employee stock
    compensation plan, net of tax                       |                                 |                    |       |       |                  |   |        |       |   |   |         |       |   |   | 96      |      
|Stock-based employee compensation expense determined under fair
    value based method, net of related tax effects |                                 |                    | (5,073 | )     |                  |   | (2,746  | )     |   |   | (10,122  | )     |   |   | (5,399  | )    
|                                                                                                                   |                                 |                    |        |       |                  |   |         |       |   |   |          |      
|Pro forma net loss                                                                                                 |                                 | $                  | (5,620 | )     |                  | $ | (44,037 | )     |   | $ | (149,928 | )     |   | $ | (60,167 | )    
|                                                                                                                   |                                 |                    |        |       |                  |   |         |       |   |   |          |      
|Loss per share:                                                                                                    |                                 |                    |        |       |                  |   |         |       |   |   |          |       |   |   |         |      
|                                                                                                                   | Basic and diluted  as reported |                    | $      | (0.01 | )                |   | $       | (0.49 | ) |   | $        | (1.54 | ) |   | $       | (0.66 | )
|                                                                                                                   |                                 |                    |        |       |                  |   |         |       |   |   |          |      
|                                                                                                                   | Basic and diluted  pro forma   |                    | $      | (0.06 | )                |   | $       | (0.53 | ) |   | $        | (1.65 | ) |   | $       | (0.72 | )
|                                                                                                                   |                                 |                    |        |       |                  |   |         |       |   |   |          |      



Accounting for Stock Appreciation Rights and Other Variable
Stock Option or Award Plans


Use of Estimates:


Reclassifications:


New Accounting Pronouncements: Inventory Costs  an
amendment of ARB No. 43, Chapter 4. Inventory Pricing


8



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##### Table of Contents



VALEANT PHARMACEUTICALS INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)


Accounting and Disclosure Guidance for the Foreign Earnings
Repatriation Provision within the American Jobs Creation Act of
2004.


Share-Based Payment Accounting for Stock Issued to Employees. Amendment to Rule 4-01(a) of
Regulation S-X Regarding the Compliance Date for Statement
of Financial Accounting Standards No. 123 (Revised 2004),
Share-Based Payment.




|   |            
|-- | -----------
|2. | Acquisition

Xcel Pharmaceuticals, Inc.:






9



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##### Table of Contents



VALEANT PHARMACEUTICALS INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)




|                |                                                              |   |         |         | 
|--------------- | ------------------------------------------------------------ | - | ------- | ------- | 
|Purchase price: |                                                              |   |         |        
|                | Cash paid                                                    |   | $       | 280,000 | 
|                | Working capital adjustment                                   |   |         | 7,470   | 
|                | Transaction costs                                            |   |         | 5,435   | 
|                |                                                              |   |        
|                |                                                              | $ | 292,905 |        
|                |                                                              |   |        
|Allocation:     |                                                              |   |         |        
|                | Xcel net book value of assets acquired  tangible
    assets |   | $       | 8,875   | 
|                | In-process research and development                          |   |         | 126,399 | 
|                | Product rights                                               |   |         | 103,500 | 
|                | Goodwill                                                     |   |         | 54,131  | 
|                |                                                              |   |        
|                |                                                              | $ | 292,905 |        
|                |                                                              |   |        





|                                               |                                          |                    |         |       |                  |   |         |       |   |   |          |       |   |   |          |       |  
|---------------------------------------------- | ---------------------------------------- | ------------------ | ------- | ----- | ---------------- | - | ------- | ----- | - | - | -------- | ----- | - | - | -------- | ----- | -
|                                               |                                          | Three Months Ended |         |       | Six Months Ended |  
|                                               |                                          | June 30,           |         |       | June 30,         |  
|                                               |                                          |                    |         |       |                  |  
|                                               |                                          | 2005               |         |       | 2004             |   |         | 2005  |   |   | 2004     |      
|                                               |                                          |                    |         |       |                  |   |         |       |   |   |          |      
|Net revenues                                   |                                          | $                  | 205,034 |       |                  | $ | 186,173 |       |   | $ | 397,755  |       |   | $ | 356,461  |      
|Income (loss) from continuing operations       |                                          |                    | 1,441   |       |                  |   | (25,055 | )     |   |   | (137,416 | )     |   |   | (170,633 | )    
|Net loss                                       |                                          |                    | (547    | )     |                  |   | (39,021 | )     |   |   | (140,907 | )     |   |   | (187,660 | )    
|Basic and diluted net income (loss) per share: |                                          |                    |         |       |                  |   |         |       |   |   |          |       |   |   |          |      
|                                               | Income (loss) from continuing operations |                    | $       | 0.02  |                  |   | $       | (0.27 | ) |   | $        | (1.51 | ) |   | $        | (1.89 | )
|                                               | Net loss                                 |                    | $       | (0.01 | )                |   | $       | (0.42 | ) |   | $        | (1.55 | ) |   | $        | (2.08 | )





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



10



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##### Table of Contents



VALEANT PHARMACEUTICALS INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)






|                                                     |                                        |                                   |        |        |                  |   |         |         |         |   |        |        |        |   |         |         |         |  
|---------------------------------------------------- | -------------------------------------- | --------------------------------- | ------ | ------ | ---------------- | - | ------- | ------- | ------- | - | ------ | ------ | ------ | - | ------- | ------- | ------- | -
|                                                     |                                        | Three Months Ended                |        |        | Six Months Ended |  
|                                                     |                                        | June 30,                          |        |        | June 30,         |  
|                                                     |                                        |                                   |        |        |                  |  
|                                                     |                                        | 2005                              |        |        | 2004             |   |         | 2005    |         |   | 2004   |       
|                                                     |                                        |                                   |        |        |                  |   |         |         |         |   |        |       
|Revenue                                              |                                        | $                                 | 5,630  |        |                  | $ | 4,126   |         |         | $ | 7,722  |        |        | $ | 9,648   |        
|                                                     |                                        |                                   |        |        |                  |   |         |         |         |   |        |       
|Loss before income taxes                             |                                        | $                                 | (2,421 | )      |                  | $ | (18,102 | )       |         | $ | (3,706 | )      |        | $ | (20,515 | )      
|Provision for income taxes                           |                                        |                                   |       |        |                  |   | 5,920   |         |         |   |       |        |        |   | 5,920   |        
|                                                     |                                        |                                   |        |        |                  |   |         |         |         |   |        |       
|                                                     | Loss from discontinued operations, net |                                   |        | (2,421 | )                |   |         | (12,182 | )       |   |        | (3,706 | )      |   |         | (14,595 | )      
|Income (loss) on disposal of discontinued operations |                                        |                                   | 433    |        |                  |   | (1,784  | )       |         |   | 215    |        |        |   | (2,432  | )      
|                                                     |                                        |                                   |        |        |                  |   |         |         |         |   |        |       
|                                                     |                                        | Loss from discontinued operations |        | $      | (1,988           | ) |         | $       | (13,966 | ) |        | $      | (3,491 | ) |         | $       | (17,027 | )
|                                                     |                                        |                                   |        |        |                  |   |         |         |         |   |        |       



|                                   |                                        |          |        |        |              |   |        |        | 
|---------------------------------- | -------------------------------------- | -------- | ------ | ------ | ------------ | - | ------ | ------ | 
|                                   |                                        | June 30, |        |        | December 31, |  
|                                   |                                        | 2005     |        |        | 2004         |  
|                                   |                                        |          |        |        |              |  
|Cash                               |                                        | $        | 995    |        |              | $ | 129    |       
|Accounts receivable, net           |                                        |          | 3,668  |        |              |   | 3,352  |       
|Inventories, net                   |                                        |          | 5,790  |        |              |   | 12,624 |       
|Property, plant and equipment, net |                                        |          | 886    |        |              |   | 3,659  |       
|Other assets                       |                                        |          | 1,544  |        |              |   | 4,130  |       
|                                   |                                        |          |        |        |              |  
|                                   | Assets of discontinued operations      |          | $      | 12,883 |              |   | $      | 23,894 | 
|                                   |                                        |          |        |        |              |  
|Accounts payable                   |                                        | $        | 2,036  |        |              | $ | 2,042  |       
|Accrued liabilities                |                                        |          | 22,165 |        |              |   | 22,932 |       
|Other liabilities                  |                                        |          | 6,030  |        |              |   | 7,082  |       
|                                   |                                        |          |        |        |              |  
|                                   | Liabilities of discontinued operations |          | $      | 30,231 |              |   | $      | 32,056 | 
|                                   |                                        |          |        |        |              |  



11



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##### Table of Contents



VALEANT PHARMACEUTICALS INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)






|   |                            
|-- | ---------------------------
|4. | Manufacturing Restructuring





|   |                                
|-- | -------------------------------
|5. | Derivative and Hedging Activity



Foreign Currency Hedge Transaction:




12



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##### Table of Contents



VALEANT PHARMACEUTICALS INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)




|   |                   
|-- | ------------------
|6. | Earnings Per Share



|                                           |                                                                                                             |                    |   |        |                  |  |   |         |   |  |      |          |   |  |   |         |  
|------------------------------------------ | ----------------------------------------------------------------------------------------------------------- | ------------------ | - | ------ | ---------------- |  | - | ------- | - |  | ---- | -------- | - |  | - | ------- | -
|                                           |                                                                                                             | Three Months Ended |   |        | Six Months Ended | 
|                                           |                                                                                                             | June 30,           |   |        | June 30,         | 
|                                           |                                                                                                             |                    |   |        |                  | 
|                                           |                                                                                                             | 2005               |   |        | 2004             |  |   | 2005    |   |  | 2004 |         
|                                           |                                                                                                             |                    |   |        |                  |  |   |         |   |  |      |         
|Income (loss):                             |                                                                                                             |                    |   |        |                  |  |   |         |   |  |      |          |   |  |   |        
|                                           | Numerator for basic and dilutive earnings per share 
    income (loss) available to stockholders           |                    | $ | (547   | )                |  | $ | (41,291 | ) |  | $    | (139,806 | ) |  | $ | (54,864 | )
|                                           |                                                                                                             |                    |   |        |                  |  |   |         |   |  |      |         
|Shares:                                    |                                                                                                             |                    |   |        |                  |  |   |         |   |  |      |          |   |  |   |        
|                                           | Denominator for basic earnings per share 
    weighted-average shares outstanding                          |                    |   | 92,568 |                  |  |   | 83,880  |   |  |      | 90,712   |   |  |   | 83,663  |  
|                                           | Employee stock options                                                                                      |                    |   | 2,912  |                  |  |   |        |   |  |      |         |   |  |   |        |  
|                                           | Other dilutive securities                                                                                   |                    |   | 111    |                  |  |   |        |   |  |      |         |   |  |   |        |  
|                                           |                                                                                                             |                    |   |        |                  |  |   |         |   |  |      |         
|                                           | Denominator for diluted earnings per share  adjusted
    weighted-average shares after assumed conversions |                    |   | 95,591 |                  |  |   | 83,880  |   |  |      | 90,712   |   |  |   | 83,663  |  
|                                           |                                                                                                             |                    |   |        |                  |  |   |         |   |  |      |         
|Basic and diluted income (loss) per share: |                                                                                                             |                    |   |        |                  |  |   |         |   |  |      |          |   |  |   |        
|                                           | Income (loss) from continuing operations                                                                    |                    | $ | 0.02   |                  |  | $ | (0.32   | ) |  | $    | (1.50    | ) |  | $ | (0.45   | )
|                                           | Loss from discontinued operations                                                                           |                    |   | (0.03  | )                |  |   | (0.17   | ) |  |      | (0.04    | ) |  |   | (0.21   | )
|                                           |                                                                                                             |                    |   |        |                  |  |   |         |   |  |      |         
|                                           | Basic and diluted loss per share                                                                            |                    | $ | (0.01  | )                |  | $ | (0.49   | ) |  | $    | (1.54    | ) |  | $ | (0.66   | )
|                                           |                                                                                                             |                    |   |        |                  |  |   |         |   |  |      |         





13



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##### Table of Contents



VALEANT PHARMACEUTICALS INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)




|   |                           
|-- | --------------------------
|7. | Detail of Certain Accounts

|                                    |                                           |          |         |          |              |   |         |          |  
|----------------------------------- | ----------------------------------------- | -------- | ------- | -------- | ------------ | - | ------- | -------- | -
|                                    |                                           | June 30, |         |          | December 31, |  
|                                    |                                           | 2005     |         |          | 2004         |  
|                                    |                                           |          |         |          |              |  
|Accounts receivable, net:           |                                           |          |         |          |              |   |         |         
|                                    | Trade accounts receivable                 |          | $       | 137,497  |              |   | $       | 142,925  |  
|                                    | Royalties receivable                      |          |         | 24,361   |              |   |         | 17,329   |  
|                                    | Other receivables                         |          |         | 15,889   |              |   |         | 17,620   |  
|                                    |                                           |          |         |          |              |  
|                                    |                                           |          | 177,747 |          |              |   | 177,874 |         
|                                    | Allowance for doubtful accounts           |          |         | (5,984   | )            |   |         | (6,014   | )
|                                    |                                           |          |         |          |              |  
|                                    |                                           | $        | 171,763 |          |              | $ | 171,860 |         
|                                    |                                           |          |         |          |              |  
|Inventories, net:                   |                                           |          |         |          |              |   |         |         
|                                    | Raw materials and supplies                |          | $       | 31,270   |              |   | $       | 42,568   |  
|                                    | Work-in-process                           |          |         | 24,443   |              |   |         | 24,002   |  
|                                    | Finished goods                            |          |         | 78,112   |              |   |         | 59,612   |  
|                                    |                                           |          |         |          |              |  
|                                    |                                           |          | 133,825 |          |              |   | 126,182 |         
|                                    | Allowance for inventory obsolescence      |          |         | (11,152  | )            |   |         | (13,932  | )
|                                    |                                           |          |         |          |              |  
|                                    |                                           | $        | 122,673 |          |              | $ | 112,250 |         
|                                    |                                           |          |         |          |              |  
|Property, plant and equipment, net: |                                           |          |         |          |              |   |         |         
|                                    | Property, plant and equipment, at cost    |          | $       | 404,554  |              |   | $       | 416,398  |  
|                                    | Accumulated depreciation and amortization |          |         | (184,147 | )            |   |         | (183,140 | )
|                                    |                                           |          |         |          |              |  
|                                    |                                           | $        | 220,407 |          |              | $ | 233,258 |         
|                                    |                                           |          |         |          |              |  

Intangible assets:


|                   |                   |                         |   |         |                   |  |   |          |          |   |              |         |         |  |   |          |          |  
|------------------ | ----------------- | ----------------------- | - | ------- | ----------------- |  | - | -------- | -------- | - | ------------ | ------- | ------- |  | - | -------- | -------- | -
|                   |                   | June 30, 2005           |   |         | December 31, 2004 | 
|                   |                   |                         |   |         |                   | 
|                   |                   | Gross                   |   |         | Accumulated       |  |   | Gross    |          |   | Accumulated  |        
|                   |                   | Amount                  |   |         | Amortization      |  |   | Amount   |          |   | Amortization |        
|                   |                   |                         |   |         |                   |  |   |          |          |   |              |        
|Intangible assets: |                   |                         |   |         |                   |  |   |          |          |   |              |         |         |  |   |         
|                   | Product rights    |                         | $ | 692,346 |                   |  | $ | (227,836 | )        |   | $            | 595,699 |         |  | $ | (206,367 | )       
|                   | License agreement |                         |   | 67,376  |                   |  |   | (30,950  | )        |   |              | 67,376  |         |  |   | (24,431  | )       
|                   |                   |                         |   |         |                   |  |   |          |          |   |              |        
|                   |                   | Total intangible assets |   | $       | 759,722           |  |   | $        | (258,786 | ) |              | $       | 663,075 |  |   | $        | (230,798 | )
|                   |                   |                         |   |         |                   |  |   |          |          |   |              |        



14



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##### Table of Contents



VALEANT PHARMACEUTICALS INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)




|   |             
|-- | ------------
|8. | Income Taxes



|                                                                                                               |                                                       |   |             |            | 
|-------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------- | - | ----------- | ---------- | 
|Increase in reserves due to IRS audit for tax years 1997 to 2001                                               |                                                       | $ | 56,680,000  |           
|Reversal of valuation allowance for losses that would be
    recognized if IRS adjustments above are realized  |                                                       |   | (34,939,000 | )         
|                                                                                                               |                                                       |   |            
|                                                                                                               | Net impact to tax provision from U.S. tax adjustments |   |             | 21,741,000 | 
|Reversal of valuation allowance on deferred tax assets on
    foreign operations net of prior year adjustments |                                                       |   | (12,533,000 | )         
|                                                                                                               |                                                       |   |            
|                                                                                                               | Net impact to tax provision from all adjustments      |   | $           | 9,208,000  | 
|                                                                                                               |                                                       |   |            







15



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##### Table of Contents



VALEANT PHARMACEUTICALS INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)








|   |                                    
|-- | -----------------------------------
|9. | Legal Proceedings and Contingencies





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

Section 10b-5 Litigation:




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


Paul Gerstley v. Norman
Barker, Jr. et al.


16



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##### Table of Contents



VALEANT PHARMACEUTICALS INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)








Patent Oppositions:




17



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##### Table of Contents



VALEANT PHARMACEUTICALS INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)


Serbia & Montenegro: de facto


Argentina Antitrust Matter:


Permax Product Liability Cases: Debra Ann Blackstone v.
Amarin Pharmaceuticals, Inc., Amarin International Company, Eli
Lilly & Company, Health Net, Inc., Blue Shield of
California, Inc., Walgreen Co., Gaye Swenn, R.Ph., and John
Lowhon, R.Ph. Case No. 017 201332 03 Jerry G. Miller and Karren M. Miller v. Eli
Lilly and Company, Elan Pharmaceuticals, Inc., Valeant
Pharmaceuticals International, Amarin Corporation PLC, Amarin
Pharmaceuticals, Inc., Reasors, Inc., Reasors LLC
and Athena Neurosciences, Inc., Case No. CJ-2004-6757 Jimmy Ruth Carson v. Eli Lilly and Company, Elan
Pharmaceuticals, Inc., and Valeant Pharmaceuticals
International,


18



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##### Table of Contents



VALEANT PHARMACEUTICALS INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)


Case No., 05CV106 Beverly
Hover and Philip Hover, Plaintiffs, against Eli Lilly and
Company, Elan Pharmaceuticals, Inc., Athena Neurosciences, Inc.,
Amarin Corporation PLC, Amarin Pharmaceuticals, Inc., and
Valeant Pharmaceuticals International, Case No. 101859/05 Martha Putney and Gordon W. Putney
against Eli Lilly and Company, Elan Pharmaceuticals, Inc.,
Athena Neurosciences, Inc., Amarin Corporation PLC, Amarin
Pharmaceuticals, Inc., and Valeant Pharmaceuticals
International, Case No. 101860/05


Kali Litigation:




Trademark litigation:


19



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##### Table of Contents



VALEANT PHARMACEUTICALS INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)




Other:




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





|                          |               |                                 |        |        |                  |  |        |        |         |  |        |         |         |  |        |         |         | 
|------------------------- | ------------- | ------------------------------- | ------ | ------ | ---------------- |  | ------ | ------ | ------- |  | ------ | ------- | ------- |  | ------ | ------- | ------- | 
|                          |               | Three Months Ended              |        |        | Six Months Ended | 
|                          |               | June 30,                        |        |        | June 30,         | 
|                          |               |                                 |        |        |                  | 
|                          |               | 2005                            |        |        | 2004             |  |        | 2005   |         |  | 2004   |        
|                          |               |                                 |        |        |                  |  |        |        |         |  |        |        
|Revenues                  |               |                                 |        |        |                  |  |        |        |         |  |        |         |         |  |        |        
|Specialty pharmaceuticals |               |                                 |        |        |                  |  |        |        |         |  |        |         |         |  |        |        
|                          | North America |                                 | $      | 60,398 |                  |  | $      | 35,258 |         |  | $      | 109,341 |         |  | $      | 62,887  |        
|                          | Latin America |                                 |        | 41,397 |                  |  |        | 36,491 |         |  |        | 73,457  |         |  |        | 65,644  |        
|                          | Europe        |                                 |        | 61,753 |                  |  |        | 60,080 |         |  |        | 127,628 |         |  |        | 123,199 |        
|                          | AAA           |                                 |        | 17,280 |                  |  |        | 15,805 |         |  |        | 32,205  |         |  |        | 28,229  |        
|                          |               |                                 |        |        |                  |  |        |        |         |  |        |        
|                          |               | Total specialty pharmaceuticals |        |        | 180,828          |  |        |        | 147,634 |  |        |         | 342,631 |  |        |         | 279,959 | 
|Ribavirin royalties       |               |                                 | 24,206 |        |                  |  | 22,734 |        |         |  | 43,541 |         |         |  | 48,111 |        
|                          |               |                                 |        |        |                  |  |        |        |         |  |        |        
|                          |               | Consolidated revenues           |        | $      | 205,034          |  |        | $      | 170,368 |  |        | $       | 386,172 |  |        | $       | 328,070 | 
|                          |               |                                 |        |        |                  |  |        |        |         |  |        |        

20



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VALEANT PHARMACEUTICALS INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)


|                                                                                                     |               |                                 |         |        |                  |   |         |        |        |   |          |        |        |   |         |        |        | 
|---------------------------------------------------------------------------------------------------- | ------------- | ------------------------------- | ------- | ------ | ---------------- | - | ------- | ------ | ------ | - | -------- | ------ | ------ | - | ------- | ------ | ------ | 
|                                                                                                     |               | Three Months Ended              |         |        | Six Months Ended |  
|                                                                                                     |               | June 30,                        |         |        | June 30,         |  
|                                                                                                     |               |                                 |         |        |                  |  
|                                                                                                     |               | 2005                            |         |        | 2004             |   |         | 2005   |        |   | 2004     |       
|                                                                                                     |               |                                 |         |        |                  |   |         |        |        |   |          |       
|Operating Income (Loss)                                                                              |               |                                 |         |        |                  |   |         |        |        |   |          |        |        |   |         |       
|Specialty pharmaceuticals                                                                            |               |                                 |         |        |                  |   |         |        |        |   |          |        |        |   |         |       
|                                                                                                     | North America |                                 |         | 16,552 |                  |   |         | 10,903 |        |   |          | 33,246 |        |   |         | 17,787 |       
|                                                                                                     | Latin America |                                 |         | 13,032 |                  |   |         | 12,891 |        |   |          | 22,850 |        |   |         | 18,704 |       
|                                                                                                     | Europe        |                                 |         | 9,137  |                  |   |         | 2,913  |        |   |          | 20,871 |        |   |         | 11,527 |       
|                                                                                                     | AAA           |                                 |         | 2,129  |                  |   |         | 1,619  |        |   |          | 2,919  |        |   |         | 1,496  |       
|                                                                                                     |               |                                 |         |        |                  |   |         |        |        |   |          |       
|                                                                                                     |               |                                 | 40,850  |        |                  |   | 28,326  |        |        |   | 79,886   |        |        |   | 49,514  |       
|Corporate expenses                                                                                   |               |                                 | (14,344 | )      |                  |   | (12,059 | )      |        |   | (28,711  | )      |        |   | (24,652 | )     
|                                                                                                     |               |                                 |         |        |                  |   |         |        |        |   |          |       
|                                                                                                     |               | Total specialty pharmaceuticals |         |        | 26,506           |   |         |        | 16,267 |   |          |        | 51,175 |   |         |        | 24,862 | 
|Restructuring charges(1)                                                                             |               |                                 | 1,324   |        |                  |   | (20,185 | )      |        |   | (371     | )      |        |   | (20,185 | )     
|Research and development                                                                             |               |                                 | (6,621  | )      |                  |   | (5,315  | )      |        |   | (15,957  | )      |        |   | (6,287  | )     
|Acquired IPR&D(1)                                                                                    |               |                                 |        |        |                  |   | (384    | )      |        |   | (126,399 | )      |        |   | (11,770 | )     
|                                                                                                     |               |                                 |         |        |                  |   |         |        |        |   |          |       
|Consolidated segment operating income (loss)                                                         |               |                                 | 21,209  |        |                  |   | (9,617  | )      |        |   | (91,552  | )      |        |   | (13,380 | )     
|Interest income                                                                                      |               |                                 | 3,119   |        |                  |   | 3,110   |        |        |   | 6,134    |        |        |   | 6,170   |       
|Interest expense                                                                                     |               |                                 | (10,063 | )      |                  |   | (14,284 | )      |        |   | (19,744  | )      |        |   | (29,243 | )     
|Other, net                                                                                           |               |                                 | (2,631  | )      |                  |   | (6,530  | )      |        |   | (4,422   | )      |        |   | (7,576  | )     
|                                                                                                     |               |                                 |         |        |                  |   |         |        |        |   |          |       
|Income (loss) from continuing operations before provision for
    income taxes and minority interest |               | $                               | 11,634  |        |                  | $ | (27,321 | )      |        | $ | (109,584 | )      |        | $ | (44,029 | )     
|                                                                                                     |               |                                 |         |        |                  |   |         |        |        |   |          |       






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | 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. For the three and six
    months ended June 30, 2005 and 2004, restructuring charges
    were incurred in the Latin America, Europe and AAA
    pharmaceutical segments. All IPR&D was incurred in the North
    America pharmaceutical segment.



|                                  |               |                                 |           |         |              |   |           |         |           | 
|--------------------------------- | ------------- | ------------------------------- | --------- | ------- | ------------ | - | --------- | ------- | --------- | 
|                                  |               | Total Assets                    |          
|                                  |               |                                 |          
|                                  |               | June 30,                        |           |         | December 31, |  
|                                  |               | 2005                            |           |         | 2004         |  
|                                  |               |                                 |           |         |              |  
|Specialty pharmaceuticals         |               |                                 |           |         |              |   |           |        
|                                  | North America |                                 | $         | 622,464 |              |   | $         | 439,084 |          
|                                  | Latin America |                                 |           | 167,559 |              |   |           | 153,050 |          
|                                  | Europe        |                                 |           | 357,041 |              |   |           | 375,086 |          
|                                  | AAA           |                                 |           | 62,443  |              |   |           | 60,221  |          
|                                  | Corporate     |                                 |           | 191,505 |              |   |           | 270,777 |          
|                                  |               |                                 |           |         |              |  
|                                  |               | Total specialty pharmaceuticals |           |         | 1,401,012    |   |           |         | 1,298,218 | 
|Research and development division |               |                                 | 114,806   |         |              |   | 199,763   |        
|Discontinued operations           |               |                                 | 12,883    |         |              |   | 23,894    |        
|                                  |               |                                 |           |         |              |  
|Total                             |               | $                               | 1,528,701 |         |              | $ | 1,521,875 |        
|                                  |               |                                 |           |         |              |  

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VALEANT PHARMACEUTICALS INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)




|                                          |  |          |        |  |              |   |        | 
|----------------------------------------- |  | -------- | ------ |  | ------------ | - | ------ | 
|                                          |  | Goodwill |       
|                                          |  |          |       
|                                          |  | June 30, |        |  | December 31, |  
|                                          |  | 2005     |        |  | 2004         |  
|                                          |  |          |        |  |              |  
|Specialty Pharmaceuticals  North America |  | $        | 61,529 |  |              | $ | 7,398  | 
|Research and development division         |  |          | 13,101 |  |              |   | 13,101 | 
|                                          |  |          |        |  |              |  
|Total                                     |  | $        | 74,630 |  |              | $ | 20,499 | 
|                                          |  |          |        |  |              |  





|                                    |  |                    |         |  |                  |   |         |      |  |   |         |  |  |   |         |  
|----------------------------------- |  | ------------------ | ------- |  | ---------------- | - | ------- | ---- |  | - | ------- |  |  | - | ------- | -
|                                    |  | Three Months Ended |         |  | Six Months Ended |  
|                                    |  | June 30,           |         |  | June 30,         |  
|                                    |  |                    |         |  |                  |  
|                                    |  | 2005               |         |  | 2004             |   |         | 2005 |  |   | 2004    | 
|                                    |  |                    |         |  |                  |   |         |      |  |   |         | 
|Neurology                           |  |                    |         |  |                  |   |         |      |  |   |         |  |  |   |         |  
|Mestinon®(G)(T)                     |  | $                  | 10,434  |  |                  | $ | 10,274  |      |  | $ | 20,294  |  |  | $ | 19,260  |  
|Diastat(T)(b)                       |  |                    | 14,291  |  |                  |   |        |      |  |   | 19,468  |  |  |   |        |  
|TASMAR®(G)(c)                       |  |                    | 1,533   |  |                  |   | 584     |      |  |   | 2,472   |  |  |   | 584     |  
|Other Neurology                     |  |                    | 28,196  |  |                  |   | (a      | )    |  |   | 49,609  |  |  |   | (a      | )
|Infectious Disease                  |  |                    |         |  |                  |   |         |      |  |   |         |  |  |   |         |  
|Virazole®(G)(T)                     |  |                    | 4,039   |  |                  |   | 3,674   |      |  |   | 8,234   |  |  |   | 8,491   |  
|Other Infectious Disease            |  |                    | 4,245   |  |                  |   | (a      | )    |  |   | 10,098  |  |  |   | (a      | )
|Dermatology                         |  |                    |         |  |                  |   |         |      |  |   |         |  |  |   |         |  
|Efudix/ Efudex®(G)(T)               |  |                    | 12,231  |  |                  |   | 6,852   |      |  |   | 31,507  |  |  |   | 18,774  |  
|Kinerase®(G)(T)                     |  |                    | 5,821   |  |                  |   | 4,161   |      |  |   | 10,256  |  |  |   | 8,098   |  
|Oxsoralen-Ultra®(G)(T)              |  |                    | 4,126   |  |                  |   | 5,224   |      |  |   | 7,094   |  |  |   | 6,612   |  
|Dermatix®(G)                        |  |                    | 2,566   |  |                  |   | 1,927   |      |  |   | 4,462   |  |  |   | 3,304   |  
|Other Dermatology                   |  |                    | 10,162  |  |                  |   | (a      | )    |  |   | 20,341  |  |  |   | (a      | )
|Other Therapeutic Classes           |  |                    |         |  |                  |   |         |      |  |   |         |  |  |   |         |  
|Bedoyecta®(T)                       |  |                    | 10,976  |  |                  |   | 5,579   |      |  |   | 20,220  |  |  |   | 11,102  |  
|Solcoseryl(T)                       |  |                    | 3,911   |  |                  |   | 5,159   |      |  |   | 8,105   |  |  |   | 9,212   |  
|Nyal(T)                             |  |                    | 5,366   |  |                  |   | 4,270   |      |  |   | 7,840   |  |  |   | 6,514   |  
|Vision Care(T)                      |  |                    | 2,911   |  |                  |   | 2,779   |      |  |   | 6,746   |  |  |   | 5,685   |  
|Other Pharmaceutical Products       |  |                    | 60,020  |  |                  |   | 97,151  |      |  |   | 115,885 |  |  |   | 182,323 |  
|                                    |  |                    |         |  |                  |   |         |      |  |   |         | 
|Total product sales                 |  | $                  | 180,828 |  |                  | $ | 147,634 |      |  | $ | 342,631 |  |  | $ | 279,959 |  
|                                    |  |                    |         |  |                  |   |         |      |  |   |         | 
|Total top ten product sales(T)      |  | $                  | 74,106  |  |                  |   | 47,972  |      |  | $ | 139,764 |  |  |   | 93,748  |  
|                                    |  |                    |         |  |                  |   |         |      |  |   |         | 
|Total global brand product sales(G) |  | $                  | 40,750  |  |                  | $ | 32,696  |      |  | $ | 84,319  |  |  | $ | 65,123  |  
|                                    |  |                    |         |  |                  |   |         |      |  |   |         | 






|    |  |                                                                                                                                                                                                   
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | In 2004, the Company tracked other products, but not by
    therapeutic classes; therefore, its ability to provide
    additional data by therapeutic classes is not practicable at
    this time.
|   
|(b) |  | Diastat was acquired in March 2005.                                                                                                                                                               
|   
|(c) |  | TASMAR was acquired in April 2004.                                                                                                                                                                
|   
|(T) |  | Indicates ten largest products based on sales.                                                                                                                                                    
|   
|(G) |  | Indicates global brand.                                                                                                                                                                           

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##### Table of Contents








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

The following discussion and analysis of the Companys
financial condition and results of operations should be read in
conjunction with the Companys financial statements and the
related notes provided under Item 1 
Financial Statements above.


The matters discussed in Managements Discussion
and Analysis of Financial Condition and Results of
Operations and elsewhere in this quarterly report on
Form 10-Q that are not historical are forward-looking
statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These statements
may also be identified by the use of words such an
anticipate, believe,
continue, estimate, expect,
intend, may, project,
will and similar expressions, as they relate to the
Company, its management and its industry. Investors and
prospective investors are cautioned that these forward-looking
statements are not guarantees of future performance and involve
risks and uncertainties. Actual results could differ materially
from those described in this report because of numerous factors,
many of which are beyond the Companys control. These
factors include, without limitation, those described below under
the heading Forward-Looking Statements  Risk
Factors. The Company does not undertake to update its
forward-looking statement to reflect later events and
circumstances or actual outcomes.




Overview








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



23



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##### Table of Contents







| |                         
| | ------------------------
| | Research and Development







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



Company Strategy






| |               
| | --------------
| | Transformation



| |                                     
| | ------------------------------------
| | Targeted Growth of Existing Products





| |                                                      
| | -----------------------------------------------------
| | Efficient Manufacturing and Supply Chain Organization



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| |                  
| | -----------------
| | Innovate and Grow



| |                                                                                 
| | --------------------------------------------------------------------------------
| | Development of New Products via Internal Research and
    Development Activities





| |                     
| | --------------------
| | Product Acquisitions





Results of Operations




25



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##### Table of Contents





|                                                       |                         |                                 |         |        |           |   |         |            |         |   |         |        |        |  |    |    |    | 
|------------------------------------------------------ | ----------------------- | ------------------------------- | ------- | ------ | --------- | - | ------- | ---------- | ------- | - | ------- | ------ | ------ |  | -- | -- | -- | 
|                                                       |                         | Three Months Ended              |         |        |           |   |        
|                                                       |                         | June 30,                        |         |        |           |   |        
|                                                       |                         |                                 |         |        | Increase/ |   |         | Percent    |        
|                                                       |                         | 2005                            |         |        | 2004      |   |         | (Decrease) |         |   | Change  |       
|                                                       |                         |                                 |         |        |           |   |         |            |         |   |         |       
|Revenues                                               |                         |                                 |         |        |           |   |         |            |         |   |         |        |        |  |    |   
|Specialty pharmaceuticals                              |                         |                                 |         |        |           |   |         |            |         |   |         |        |        |  |    |   
|                                                       | North America           |                                 | $       | 60,398 |           |   | $       | 35,258     |         |   | $       | 25,140 |        |  |    | 71 | % 
|                                                       | Latin America           |                                 |         | 41,397 |           |   |         | 36,491     |         |   |         | 4,906  |        |  |    | 13 |   
|                                                       | Europe                  |                                 |         | 61,753 |           |   |         | 60,080     |         |   |         | 1,673  |        |  |    | 3  |   
|                                                       | AAA                     |                                 |         | 17,280 |           |   |         | 15,805     |         |   |         | 1,475  |        |  |    | 9  |   
|                                                       |                         |                                 |         |        |           |   |         |            |         |   |         |       
|                                                       |                         | Total specialty pharmaceuticals |         |        | 180,828   |   |         |            | 147,634 |   |         |        | 33,194 |  |    |    | 22 | 
|Ribavirin royalties                                    |                         |                                 | 24,206  |        |           |   | 22,734  |            |         |   | 1,472   |        |        |  | 6  |   
|                                                       |                         |                                 |         |        |           |   |         |            |         |   |         |       
|Total revenues                                         |                         |                                 | 205,034 |        |           |   | 170,368 |            |         |   | 34,666  |        |        |  | 20 |   
|Costs and Expenses                                     |                         |                                 |         |        |           |   |         |            |         |   |         |        |        |  |    |   
|Cost of goods sold (excluding amortization)            |                         |                                 | 52,940  |        |           |   | 45,938  |            |         |   | 7,002   |        |        |  | 15 |   
|Selling expenses                                       |                         |                                 | 61,454  |        |           |   | 53,575  |            |         |   | 7,879   |        |        |  | 15 |   
|General and administrative expenses                    |                         |                                 | 25,985  |        |           |   | 24,849  |            |         |   | 1,136   |        |        |  | 5  |   
|Research and development costs                         |                         |                                 | 27,559  |        |           |   | 20,921  |            |         |   | 6,638   |        |        |  | 32 |   
|IPR&D                                                  |                         |                                 |        |        |           |   | 384     |            |         |   | (384    | )      |        |  |   |   
|Restructuring charges                                  |                         |                                 | (1,324  | )      |           |   | 20,185  |            |         |   | (21,509 | )      |        |  |   |   
|Amortization expense                                   |                         |                                 | 17,211  |        |           |   | 14,133  |            |         |   | 3,078   |        |        |  | 22 |   
|                                                       |                         |                                 |         |        |           |   |         |            |         |   |         |       
|                                                       | Operating income (loss) |                                 | $       | 21,209 |           |   | $       | (9,617     | )       |   | $       | 30,826 |        |  |    |   |   
|                                                       |                         |                                 |         |        |           |   |         |            |         |   |         |       
|Gross profit on product sales (excluding amortization) |                         | $                               | 127,888 |        |           | $ | 101,696 |            |         | $ | 26,192  |        |        |  | 26 |   
|                                                       |                         |                                 |         |        |           |   |         |            |         |   |         |       
|Gross profit margin on product sales                   |                         |                                 | 71      | %      |           |   | 69      | %          |         |   |         |        |        |  |    |   
|                                                       |                         |                                 |         |        |           |   |         |            |         |   |         |       

|                                                       |                |                                 |         |         |           |   |         |            |         |   |         |         |        |  |     |    |    | 
|------------------------------------------------------ | -------------- | ------------------------------- | ------- | ------- | --------- | - | ------- | ---------- | ------- | - | ------- | ------- | ------ |  | --- | -- | -- | 
|                                                       |                | Six Months Ended                |         |         |           |   |        
|                                                       |                | June 30,                        |         |         |           |   |        
|                                                       |                |                                 |         |         | Increase/ |   |         | Percent    |        
|                                                       |                | 2005                            |         |         | 2004      |   |         | (Decrease) |         |   | Change  |        
|                                                       |                |                                 |         |         |           |   |         |            |         |   |         |        
|Revenues                                               |                |                                 |         |         |           |   |         |            |         |   |         |         |        |  |     |   
|Specialty pharmaceuticals                              |                |                                 |         |         |           |   |         |            |         |   |         |         |        |  |     |   
|                                                       | North America  |                                 | $       | 109,341 |           |   | $       | 62,887     |         |   | $       | 46,454  |        |  |     | 74 | % 
|                                                       | Latin America  |                                 |         | 73,457  |           |   |         | 65,644     |         |   |         | 7,813   |        |  |     | 12 |   
|                                                       | Europe         |                                 |         | 127,628 |           |   |         | 123,199    |         |   |         | 4,429   |        |  |     | 4  |   
|                                                       | AAA            |                                 |         | 32,205  |           |   |         | 28,229     |         |   |         | 3,976   |        |  |     | 14 |   
|                                                       |                |                                 |         |         |           |   |         |            |         |   |         |        
|                                                       |                | Total specialty pharmaceuticals |         |         | 342,631   |   |         |            | 279,959 |   |         |         | 62,672 |  |     |    | 22 | 
|Ribavirin royalties                                    |                |                                 | 43,541  |         |           |   | 48,111  |            |         |   | (4,570  | )       |        |  | (9  | ) 
|                                                       |                |                                 |         |         |           |   |         |            |         |   |         |        
|Total revenues                                         |                |                                 | 386,172 |         |           |   | 328,070 |            |         |   | 58,102  |         |        |  | 18  |   
|Costs and Expenses                                     |                |                                 |         |         |           |   |         |            |         |   |         |         |        |  |     |   
|Cost of goods sold (excluding amortization)            |                |                                 | 101,661 |         |           |   | 92,650  |            |         |   | 9,011   |         |        |  | 10  |   
|Selling expenses                                       |                |                                 | 114,269 |         |           |   | 101,317 |            |         |   | 12,952  |         |        |  | 13  |   
|General and administrative expenses                    |                |                                 | 50,562  |         |           |   | 48,724  |            |         |   | 1,838   |         |        |  | 4   |   
|Research and development costs                         |                |                                 | 53,283  |         |           |   | 39,384  |            |         |   | 13,899  |         |        |  | 35  |   
|IPR&D                                                  |                |                                 | 126,399 |         |           |   | 11,770  |            |         |   | 114,629 |         |        |  |    |   
|Restructuring charges                                  |                |                                 | 371     |         |           |   | 20,185  |            |         |   | (19,814 | )       |        |  | (98 | ) 
|Amortization expense                                   |                |                                 | 31,179  |         |           |   | 27,420  |            |         |   | 3,759   |         |        |  | 14  |   
|                                                       |                |                                 |         |         |           |   |         |            |         |   |         |        
|                                                       | Operating loss |                                 | $       | (91,552 | )         |   | $       | (13,380    | )       |   | $       | (78,172 | )      |  |     |   |   
|                                                       |                |                                 |         |         |           |   |         |            |         |   |         |        
|Gross profit on product sales (excluding amortization) |                | $                               | 240,970 |         |           | $ | 187,309 |            |         | $ | 53,661  |         |        |  | 29  |   
|                                                       |                |                                 |         |         |           |   |         |            |         |   |         |        
|Gross profit margin on product sales                   |                |                                 | 70      | %       |           |   | 67      | %          |         |   |         |         |        |  |     |   
|                                                       |                |                                 |         |         |           |   |         |            |         |   |         |        

26



---



##### Table of Contents



Specialty Pharmaceutical Revenues:










Ribavirin Royalties:


27



---



##### Table of Contents





Gross Profit Margin (excluding amortization):


Selling Expenses:


General and Administrative Expenses:


Research and Development:


Acquired In-Process Research and Development:


Restructuring Charges:


Amortization:


28



---



##### Table of Contents





Other Loss, Net, Including Translation and Exchange:


Interest Expense: 1 2


Income Taxes:


|                                                                                                               |                                                       |   |             |            | 
|-------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------- | - | ----------- | ---------- | 
|Increase in reserves due to IRS audit for tax years 1997 to 2001                                               |                                                       | $ | 56,680,000  |           
|Reversal of valuation allowance for losses that would be
    recognized if IRS adjustments above are realized  |                                                       |   | (34,939,000 | )         
|                                                                                                               |                                                       |   |            
|                                                                                                               | Net impact to tax provision from U.S. tax adjustments |   |             | 21,741,000 | 
|Reversal of valuation allowance on deferred tax assets on
    foreign operations net of prior year adjustments |                                                       |   | (12,533,000 | )         
|                                                                                                               |                                                       |   |            
|                                                                                                               | Net impact to tax provision from all adjustments      |   | $           | 9,208,000  | 
|                                                                                                               |                                                       |   |            





Loss from Discontinued Operations, Net of Taxes:


29



---



##### Table of Contents





Liquidity and Capital Resources








1 2






30



---



##### Table of Contents















| |                        
| | -----------------------
| | Contractual Obligations





31



---



##### Table of Contents









Products in Development










32



---



##### Table of Contents







Foreign Operations




Critical Accounting Estimates








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





| |                
| | ---------------
| | Sales Incentive



33



---



##### Table of Contents







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







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





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







34



---



##### Table of Contents





| |                                                                                     
| | ------------------------------------------------------------------------------------
| | 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.






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

Accounting for Contingencies


Other Financial Information




35



---



##### Table of Contents








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





|                    |  |           |         |                      |          |   |          |            |  |   |          |  
|------------------- |  | --------- | ------- | -------------------- | -------- | - | -------- | ---------- |  | - | -------- | -
|                    |  |           |         | Assets (Liabilities) |         
|                    |  | Notional/ |         |                      |          |  
|                    |  | Contract  |         |                      | Carrying |   |          |           
|Description         |  | Amount    |         |                      | Value    |   |          | Fair Value | 
|                    |  |           |         |                      |          |   |          |            | 
|Forward contracts   |  | $         | 42,134  |                      |          | $ | 19,762   |            |  | $ | 19,762   |  
|Interest rate swaps |  |           | 150,000 |                      |          |   | (83      | )          |  |   | (83      | )
|Outstanding debt    |  |           | 780,000 |                      |          |   | (780,000 | )          |  |   | (722,400 | )





36



---



##### Table of Contents








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







37



---



##### Table of Contents



FORWARD LOOKING STATEMENTS




RISK FACTORS






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The future growth of the Companys 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. Although certain of the
    Companys research compounds show promise at their current
    stages of development, the Company may fail to commercialize
    them for various reasons. For example, they may turn out to be
    ineffective or unsafe in clinical or pre-clinical testing; their
    patent protection may become compromised; other therapies may
    prove safer or more effective; or the prevalence of the disease
    for which they are being developed may decrease. The
    Companys inability to successfully develop its products
    due to these or other factors could have a material adverse
    effect on future revenues.
|
| |  | The Company can protect its products from generic substitution
    by third parties only to the extent that its technologies are
    covered by valid and enforceable patents, are effectively
    maintained as trade secrets or are protected by data
    exclusivity. However, the Companys presently pending or
    future patent applications may not issue as patents. Any patent
    issued may be challenged, invalidated, held unenforceable or
    circumvented. Furthermore, the Companys patents may not be
    sufficiently broad to prevent third parties competing
    products. The expiration of patent protection for ribavirin has
    resulted in significant competition from generic substitutes and
    declining royalty revenues.                                                                                                                                    
|
| |  | Trade secret protection is less effective than patent protection
    because competitors may discover the Companys technology
    or develop parallel technology.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | The scope of protection afforded by a patent can be highly
    uncertain. A pending claim or a result unfavorable to the
    Company in a patent dispute may preclude development or
    commercialization of products or impact sales of existing
    products, and result in payment of monetary damages.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Obtaining drug approval in the United States and other countries
    is costly and time consuming. Uncertainties and delays inherent
    in the process can preclude or delay development and
    commercialization of the Companys products.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

38



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##### Table of Contents





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Companys current business plan includes expansion
    through acquisitions, in addition to the development of new
    products. If the Company is unable to successfully execute on
    its expansion plans to find attractive acquisition candidates at
    appropriate prices, and to integrate successfully any acquired
    companies or products, the expected growth of the Companys
    business may be negatively affected.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | The Company and its competitors are always striving to develop
    products that are more effective, safer, more easily tolerated
    or less costly. If the Companys competitors succeed in
    developing better alternatives to the Companys current
    products before it does, the Company will lose sales and
    revenues to their alternative products. If vaccines are
    introduced to prevent the diseases treated by the Companys
    products, the Companys potential sales and revenues will
    decrease.                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | The pharmaceutical industry is subject to substantial government
    regulation, including the approval of new pharmaceutical
    products, labeling, advertising and, in most countries, pricing,
    as well as inspection and approval of manufacturing facilities.
    The costs of complying with these regulations is high, and
    failure to comply could result in fines or interruption in our
    business.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | The Company collects and pays a substantial portion of its sales
    and expenditures in currencies other than the U.S. dollar.
    As a result, fluctuations in foreign currency exchange rates
    affect the Companys operating results. Additionally,
    future exchange rate movements, inflation or other related
    factors may have a material adverse effect on the Companys
    sales, gross profit or operating expenses. The Company entered
    into foreign currency hedge transactions to reduce its exposure
    to variability in the euro. The Company continues to evaluate
    the possibility of entering into additional hedge arrangements.                                                                                                                                                                                                                                                                                        
|
| |  | A significant part of the Companys revenue is derived from
    products manufactured by third parties. The Company relies on
    their quality level, compliance with the FDA regulations and
    continuity of supply. Any failure by them in these areas could
    disrupt the Companys product supply and negatively impact
    its revenues.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | The Companys flexibility in maximizing commercialization
    opportunities for its compounds may be limited by its
    obligations to Schering-Plough. In November 2000, the Company
    entered into an agreement that provides Schering-Plough with an
    option to acquire the rights to up to three of its products that
    they designate at an early stage of product development and a
    right for first/last refusal to license various compounds the
    Company may develop and elect to license to others. Viramidine
    was not subject to the option of Schering-Plough, but it would
    be subject to their right of first/last refusal if the Company
    elected to license it to a third party. The interest of
    potential collaborators in obtaining rights to the
    Companys compounds or the terms of any agreement it
    ultimately enters into for these rights may be hindered by its
    agreement with Schering-Plough.
|
| |  | To purchase the Companys products, many patients rely on
    reimbursement by third party payors such as insurance companies,
    HMOs and government agencies. These third party payors are
    increasingly attempting to contain costs by limiting both
    coverage and the level of reimbursement of new drug products.
    The reimbursement levels established by third party payors in
    the future may not be sufficient for the Company to realize an
    appropriate return on its investment in product development.                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | Some of the Companys development programs are based on the
    library of nucleoside compounds it has developed. It is not
    practicable to create backups for the Companys nucleoside
    library, and accordingly it is at risk of loss in earthquakes,
    fire and other natural disasters.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | All drugs have potential harmful side effects and can expose
    drug manufacturers and distributors to liability. In the event
    one or more of the Companys products is found to have
    harmed an individual or individuals, it may be responsible for
    paying all or substantially all damages awarded. A successful
    product liability claim against the Company could have a
    material negative impact on its financial position and results
    of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

39



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##### Table of Contents





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Company is allowed by its senior note indenture to borrow
    money from third parties, subject to certain restrictions, but
    there is no guaranty that it will actually be able to borrow any
    money should the need for it arise.                                                                                                                                                                                                                                                                                                                              
|
| |  | The Company is involved in several legal proceedings, including
    those described in Note 9 to notes to consolidated
    condensed financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Dependence on key personnel leaves the Company vulnerable to a
    negative impact if they leave. The Companys continued
    success will depend, to a significant extent, upon the efforts
    and abilities of the key members of management. The loss of
    their services could have a negative impact on the Company.                                                                                                                                                                                                                                               
|
| |  | The Companys research and development activities involve
    the controlled use of potentially harmful biological materials
    as wells as hazardous materials, chemicals and various
    radioactive compounds. The Company cannot completely eliminate
    the risk of accidental contamination or injury from the use,
    storage, handling or disposal of these materials. In the event
    of contamination or injury, the Company could be held liable for
    damages that result. Any liability could exceed the
    Companys resources.                       
|
| |  | The Companys stockholder rights plan, provisions of its
    certificate of incorporation and provisions of the Delaware
    General Corporation Law could provide its Board of Directors
    with the ability to deter hostile takeovers or delay, deter or
    prevent a change in control of the Company, including
    transactions in which stockholders might otherwise receive a
    premium for their shares over then current market prices.                                                                                                                      
|
| |  | The Company is authorized to issue, without stockholder
    approval, 10,000,000 shares of preferred stock,
    200,000,000 shares of common stock and securities
    convertible into either shares of common stock or preferred
    stock. If the Company issues additional equity securities, the
    price of its securities may be materially and adversely
    affected. The Board of Directors can also use issuances of
    preferred or common stock to deter a hostile takeover or change
    in control of the Company.                                         
|
| |  | The Company is subject to a Consent Order with the Securities
    and Exchange Commission, which permanently enjoins the Company
    from violating securities laws and regulations. The Consent
    Order also precludes protection for forward-looking statements
    under the Safe Harbor provisions of the Private Securities
    Litigation Reform Act of 1995. The existence of the permanent
    injunction under the Consent Order, and the lack of protection
    under the Safe Harbor may limit the Companys ability to
    defend against future allegations.

40



---



##### Table of Contents






PART II  OTHER INFORMATION







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








|        |                                                    
|------- | ---------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security Holders



|                                                                                          |                   |     |            |            |         |           |         |             |  |  |        |         | 
|----------------------------------------------------------------------------------------- | ----------------- | --- | ---------- | ---------- | ------- | --------- | ------- | ----------- |  |  | ------ | ------- | 
|                                                                                          |                   |     |            |            |         | Withheld/ |        
|                                                                                          |                   | For |            |            | Against |           |         | Abstentions | 
|                                                                                          |                   |     |            |            |         |           |         |             | 
|Election of Directors:                                                                    |                   |     |            |            |         |           |         |             |  |  |        |        
|                                                                                          | Richard H. Koppes |     |            | 83,865,717 |         |           |         |             |  |  |        | 833,326 | 
|                                                                                          | Robert W. OLeary |     |            | 83,725,206 |         |           |         |             |  |  |        | 973,837 | 
|                                                                                          | Randy H. Thurman  |     |            | 83,865,125 |         |           |         |             |  |  |        | 833,918 | 
|Ratification of PricewaterhouseCoopers LLP as Independent
    Accountants for the Company |                   |     | 84,300,772 |            |         |           | 352,036 |             |  |  | 46,235 |        






|        |                  
|------- | -----------------
|Item 5. | Other Information








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



|    |         
|--- | --------
|(a) | Exhibits

| |    |      |  |                                                                                                                                                                                                                                                                                         
| | -- | ---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3  | .1   |  | Restated Certificate of Incorporation of the Company, as amended
    to date, previously filed as Exhibit 3.2 to the
    Companys Current Report on Form 8-K dated
    November 12, 2003, and incorporated herein by reference.                                                        
|
| | 3  | .2   |  | Amended and Restated Bylaws of the Company, previously filed as
    Exhibit 4.2 to the Companys registration statement on
    Form S-3 (file number 333-88040), and incorporated
    herein by reference.                                                                              
|
| | 10 | .1   |  | Executive Severance Agreement, dated as of April 22, 2005,
    between Valeant Pharmaceuticals International and Eileen C.
    Pruette, previously filed as Exhibit 10.1 to the
    Companys Current Report on Form 8-K dated
    April 27, 2005, and incorporated herein by reference.
|
| | 10 | .2   |  | Executive Severance Agreement, dated as of June 16, 2005,
    between Valeant Pharmaceuticals International and Charles
    Bramlage, previously filed as Exhibit 10.1 to the
    Companys Current Report on Form 8-K dated
    June 17, 2005, and incorporated herein by reference.   
|
| | 10 | .3   |  | Executive Severance Agreement, dated as of June 16, 2005,
    between Valeant Pharmaceuticals International and John Cooper,
    previously filed as Exhibit 10.1 to the Companys
    Current Report on Form 8-K dated June 17, 2005, and
    incorporated herein by reference.        
|
| | 10 | .4   |  | Executive Severance Agreement, dated as of June 16, 2005,
    between Valeant Pharmaceuticals International and Wesley
    Wheeler, previously filed as Exhibit 10.1 to the
    Companys Current Report on Form 8-K dated
    June 17, 2005, and incorporated herein by reference.     
|
| | 10 | .5* |  | Development and License Agreement between Metabasis
    Therapeutics, Inc. and Valeant Pharmaceuticals International,
    dated as of October 1, 2001.                                                                                                                                  
|
| | 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.                                                                                                                                   

41



---



##### Table of Contents



| |    |     |  |                                                                                                                                                                                            
| | -- | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.






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



|  |                                                                                                                                                                                        
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Portions of this exhibit have been omitted pursuant to an
    application for confidential treatment pursuant to
    Rule 24b-2 of the Securities Exchange Act of 1934, as
    amended.

42



---



##### Table of Contents






SIGNATURES






| |                                          
| | -----------------------------------------
| | Valeant Pharmaceuticals
    International
| | Registrant                               
|
| | /s/ Timothy C. Tyson                     
| |                                          
| | Timothy C. Tyson                         
| | President and Chief Executive Officer    
| | (Principal Executive Officer)            





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



43



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##### Table of Contents



EXHIBIT INDEX


|        |    |      |  |                                                                                                                                                                                                                                                                                         
|------- | -- | ---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |     
|        |    |     
|        | 3  | .1   |  | Restated Certificate of Incorporation of the Company, as amended
    to date, previously filed as Exhibit 3.2 to the
    Companys Current Report on Form 8-K dated
    November 12, 2003, and incorporated herein by reference.                                                        
|       
|        | 3  | .2   |  | Amended and Restated Bylaws of the Company, previously filed as
    Exhibit 4.2 to the Companys registration statement on
    Form S-3 (file number 333-88040), and incorporated
    herein by reference.                                                                              
|       
|        | 10 | .1   |  | Executive Severance Agreement, dated as of April 22, 2005,
    between Valeant Pharmaceuticals International and Eileen C.
    Pruette, previously filed as Exhibit 10.1 to the
    Companys Current Report on Form 8-K dated
    April 27, 2005, and incorporated herein by reference.
|       
|        | 10 | .2   |  | Executive Severance Agreement, dated as of June 16, 2005,
    between Valeant Pharmaceuticals International and Charles
    Bramlage, previously filed as Exhibit 10.1 to the
    Companys Current Report on Form 8-K dated
    June 17, 2005, and incorporated herein by reference.   
|       
|        | 10 | .3   |  | Executive Severance Agreement, dated as of June 16, 2005,
    between Valeant Pharmaceuticals International and John Cooper,
    previously filed as Exhibit 10.1 to the Companys
    Current Report on Form 8-K dated June 17, 2005, and
    incorporated herein by reference.        
|       
|        | 10 | .4   |  | Executive Severance Agreement, dated as of June 16, 2005,
    between Valeant Pharmaceuticals International and Wesley
    Wheeler, previously filed as Exhibit 10.1 to the
    Companys Current Report on Form 8-K dated
    June 17, 2005, and incorporated herein by reference.     
|       
|        | 10 | .5* |  | Development and License Agreement between Metabasis
    Therapeutics, Inc. and Valeant Pharmaceuticals International,
    dated as of October 1, 2001.                                                                                                                                  
|       
|        | 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.                                                                                             






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



|  |                                                                                                                                                                                        
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Portions of this exhibit have been omitted pursuant to an
    application for confidential treatment pursuant to
    Rule 24b-2 of the Securities Exchange Act of 1934, as
    amended.