##### 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,
    2004                                            
|          
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|           |  | For the transition period
    from           to                                             

Commission file number: 1-11397



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Valeant Pharmaceuticals
International

(Exact name of registrant as specified in its
charter)


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

(714) 545-0100

(Registrants telephone number, including
area code)


Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the
past
90 days.     Yes þ          No o

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

The number of outstanding shares of the
registrants Common Stock, $0.01 par value, as of
August 2, 2004 was 84,001,220.



---






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VALEANT PHARMACEUTICALS
INTERNATIONAL

INDEX

|                                    |  |                                                                                                                              |    |        |    | 
|----------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------- | -- | ------ | -- | 
|                                    |  |                                                                                                                              |    | Page  
|                                    |  |                                                                                                                              |    | Number
|                                    |  |                                                                                                                              |    |       
|PART I   FINANCIAL
    INFORMATION
|Item 1.                             |  | Financial Statements                                                                                                         |    |        |    | 
|                                    |  | Consolidated Condensed
    Balance Sheets  June 30, 2004 and
    December 31, 2003                                          |    |        | 2  | 
|                                    |  | Consolidated Condensed
    Statements of Income  Three months and six months
    ended June 30, 2004 and 2003               |    |        | 3  | 
|                                    |  | Consolidated Condensed
    Statements of Comprehensive Income  Three months and
    six months ended June 30, 2004 and 2003 |    |        | 4  | 
|                                    |  | Consolidated Condensed
    Statements of Cash Flows  Six months ended
    June 30, 2004 and 2003                            |    |        | 5  | 
|                                    |  | Managements Statement
    Regarding Unaudited Financial Statements                                                          |    |        | 6  | 
|                                    |  | Notes to Consolidated
    Condensed Financial Statements                                                                     |    |        | 7  | 
|Item 2.                             |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations                                    |    |        | 20 | 
|Item 3.                             |  | Quantitative and Qualitative
    Disclosures About Market Risk                                                               |    |        | 32 | 
|Item 4.                             |  | Controls and Procedures                                                                                                      |    |        | 32 | 
|PART II   OTHER
    INFORMATION   
|Item 1.                             |  | Legal Proceedings                                                                                                            |    |        | 37 | 
|Item 2.                             |  | Unregistered Sales of Equity
    Securities and Use of Proceeds                                                              |    |        | 37 | 
|Item 4.                             |  | Submission of Matters to a
    Vote of Security Holders                                                                      |    |        | 37 | 
|Item 6.                             |  | Exhibits and Reports on Form
    8-K                                                                                         |    |        | 37 | 
|SIGNATURES                          |  |                                                                                                                              | 38 |       
|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


June 30, 2004 and December 31,
2003


(In thousands, except per share
data)


|                                                        |                                                                                                                                                                                                                                            |                               |           |              |           |   |           |          |           | 
|------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ----------------------------- | --------- | ------------ | --------- | - | --------- | -------- | --------- | 
|                                                        |                                                                                                                                                                                                                                            | June 30,                      |           | December 31,
|                                                        |                                                                                                                                                                                                                                            | 2004                          |           | 2003        
|                                                        |                                                                                                                                                                                                                                            |                               |           |             
|                                                        |                                                                                                                                                                                                                                            | (Unaudited)                   |           |             
|ASSETS                                                 
|Current Assets:                                         |                                                                                                                                                                                                                                            |                               |           |              |           |   |           |         
|                                                        | Cash and cash equivalents                                                                                                                                                                                                                  |                               | $         | 717,789      |           |   | $         | 872,056  |          
|                                                        | Restricted cash                                                                                                                                                                                                                            |                               |           | 15,401       |           |   |           | 1,925    |          
|                                                        | Accounts receivable, net                                                                                                                                                                                                                   |                               |           | 139,105      |           |   |           | 162,402  |          
|                                                        | Inventories, net                                                                                                                                                                                                                           |                               |           | 103,178      |           |   |           | 91,906   |          
|                                                        | Prepaid expenses and other current assets                                                                                                                                                                                                  |                               |           | 13,227       |           |   |           | 13,863   |          
|                                                        |                                                                                                                                                                                                                                            |                               |           |              |           |   |           |         
|                                                        |                                                                                                                                                                                                                                            | Total current assets          |           |              | 988,700   |   |           |          | 1,142,152 | 
|Property, plant and equipment, net                      |                                                                                                                                                                                                                                            |                               | 216,628   |              |           |   | 241,016   |         
|Deferred tax assets, net                                |                                                                                                                                                                                                                                            |                               | 92,930    |              |           |   | 68,601    |         
|Intangible assets, net                                  |                                                                                                                                                                                                                                            |                               | 462,682   |              |           |   | 435,029   |         
|Other assets                                            |                                                                                                                                                                                                                                            |                               | 50,074    |              |           |   | 62,145    |         
|                                                        |                                                                                                                                                                                                                                            |                               |           |              |           |   |           |         
|                                                        |                                                                                                                                                                                                                                            | Total non-current assets      |           |              | 822,314   |   |           |          | 806,791   | 
|Assets of discontinued operations                       |                                                                                                                                                                                                                                            |                               | 30,780    |              |           |   | 27,994    |         
|                                                        |                                                                                                                                                                                                                                            |                               |           |              |           |   |           |         
|                                                        |                                                                                                                                                                                                                                            | $                             | 1,841,794 |              |           | $ | 1,976,937 |         
|                                                        |                                                                                                                                                                                                                                            |                               |           |              |           |   |           |         
|LIABILITIES AND STOCKHOLDERS
    EQUITY               
|Current Liabilities:                                    |                                                                                                                                                                                                                                            |                               |           |              |           |   |           |         
|                                                        | Trade payables                                                                                                                                                                                                                             |                               | $         | 32,696       |           |   | $         | 36,073   |          
|                                                        | Accrued liabilities                                                                                                                                                                                                                        |                               |           | 114,915      |           |   |           | 109,373  |          
|                                                        | Notes payable and current portion of long-term
    debt                                                                                                                                                                                    |                               |           | 1,238        |           |   |           | 1,343    |          
|                                                        | Income taxes payable                                                                                                                                                                                                                       |                               |           | 15,001       |           |   |           | 14,962   |          
|                                                        |                                                                                                                                                                                                                                            |                               |           |              |           |   |           |         
|                                                        |                                                                                                                                                                                                                                            | Total current liabilities     |           |              | 163,850   |   |           |          | 161,751   | 
|Long-term debt, less current portion                    |                                                                                                                                                                                                                                            |                               | 1,023,662 |              |           |   | 1,119,802 |         
|Deferred income taxes and other liabilities             |                                                                                                                                                                                                                                            |                               | 72,467    |              |           |   | 66,799    |         
|Minority interest                                       |                                                                                                                                                                                                                                            |                               | 3,582     |              |           |   | 3,493     |         
|                                                        |                                                                                                                                                                                                                                            |                               |           |              |           |   |           |         
|                                                        |                                                                                                                                                                                                                                            | Total non-current liabilities |           |              | 1,099,711 |   |           |          | 1,190,094 | 
|Liabilities of discontinued operations                  |                                                                                                                                                                                                                                            |                               | 32,817    |              |           |   | 19,731    |         
|                                                        |                                                                                                                                                                                                                                            |                               |           |              |           |   |           |         
|Commitments and contingencies Stockholders
    Equity: |                                                                                                                                                                                                                                            |                               |           |              |           |   |           |         
|                                                        | Common stock, $0.01 par value;
    200,000 shares authorized; 84,015 (June 30, 2004) and
    83,185 (December 31, 2003) shares outstanding (after
    deducting shares in treasury of 1,068 as of June 30, 2004
    and December 31, 2003) |                               |           | 840          |           |   |           | 832      |          
|                                                        | Additional capital                                                                                                                                                                                                                         |                               |           | 985,762      |           |   |           | 976,773  |          
|                                                        | Accumulated deficit                                                                                                                                                                                                                        |                               |           | (406,235     | )         |   |           | (338,384 | )        
|                                                        | Accumulated other comprehensive loss                                                                                                                                                                                                       |                               |           | (34,951      | )         |   |           | (33,860  | )        
|                                                        |                                                                                                                                                                                                                                            |                               |           |              |           |   |           |         
|                                                        |                                                                                                                                                                                                                                            | Total stockholders equity    |           |              | 545,416   |   |           |          | 605,361   | 
|                                                        |                                                                                                                                                                                                                                            |                               |           |              |           |   |           |         
|                                                        |                                                                                                                                                                                                                                            | $                             | 1,841,794 |              |           | $ | 1,976,937 |         
|                                                        |                                                                                                                                                                                                                                            |                               |           |              |           |   |           |         

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

2



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##### Table of Contents



VALEANT PHARMACEUTICALS
INTERNATIONAL



CONSOLIDATED CONDENSED STATEMENTS OF
INCOME


For the three months and six months ended
June 30, 2004 and 2003


(Unaudited, in thousands, except per share
data)


|                                                                                       |                                              |                               |         |                  |         |      |        |         |         |  |         |         |         |   |         |         |         | 
|-------------------------------------------------------------------------------------- | -------------------------------------------- | ----------------------------- | ------- | ---------------- | ------- | ---- | ------ | ------- | ------- |  | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                                                                                       |                                              |                               |         |                 
|                                                                                       |                                              | Three Months Ended            |         | Six Months Ended
|                                                                                       |                                              | June 30,                      |         | June 30,        
|                                                                                       |                                              |                               |         |                 
|                                                                                       |                                              | 2004                          |         | 2003             |         | 2004 |        | 2003   
|                                                                                       |                                              |                               |         |                  |         |      |        |        
|Revenues:                                                                              |                                              |                               |         |                  |         |      |        |         |         |  |         |         |         |   |         |        
|                                                                                       | Product sales                                |                               | $       | 147,634          |         |      | $      | 131,532 |         |  | $       | 279,959 |         |   | $       | 241,666 |        
|                                                                                       | Royalties                                    |                               |         | 22,734           |         |      |        | 51,955  |         |  |         | 48,111  |         |   |         | 100,538 |        
|                                                                                       |                                              |                               |         |                  |         |      |        |         |         |  |         |         |         |   |         |        
|                                                                                       |                                              | Total revenues                |         |                  | 170,368 |      |        |         | 183,487 |  |         |         | 328,070 |   |         |         | 342,204 | 
|                                                                                       |                                              |                               |         |                  |         |      |        |         |         |  |         |         |         |   |         |        
|Costs and expenses:                                                                    |                                              |                               |         |                  |         |      |        |         |         |  |         |         |         |   |         |        
|                                                                                       | Cost of goods sold                           |                               |         | 45,938           |         |      |        | 47,321  |         |  |         | 92,650  |         |   |         | 88,560  |        
|                                                                                       | Selling expenses                             |                               |         | 53,575           |         |      |        | 43,390  |         |  |         | 101,317 |         |   |         | 80,668  |        
|                                                                                       | General and administrative expenses          |                               |         | 24,849           |         |      |        | 26,333  |         |  |         | 48,724  |         |   |         | 56,926  |        
|                                                                                       | Research and development costs               |                               |         | 20,921           |         |      |        | 9,790   |         |  |         | 39,384  |         |   |         | 18,949  |        
|                                                                                       | Acquired in-process research and development |                               |         | 384              |         |      |        |        |         |  |         | 11,770  |         |   |         |        |        
|                                                                                       | Restructuring and impairment charges         |                               |         | 20,185           |         |      |        |        |         |  |         | 20,185  |         |   |         |        |        
|                                                                                       | Amortization expense                         |                               |         | 14,133           |         |      |        | 7,817   |         |  |         | 27,420  |         |   |         | 15,884  |        
|                                                                                       |                                              |                               |         |                  |         |      |        |         |         |  |         |         |         |   |         |        
|                                                                                       |                                              | Total costs and expenses      |         |                  | 179,985 |      |        |         | 134,651 |  |         |         | 341,450 |   |         |         | 260,987 | 
|                                                                                       |                                              |                               |         |                  |         |      |        |         |         |  |         |         |         |   |         |        
|                                                                                       |                                              | Income (loss) from operations |         |                  | (9,617  | )    |        |         | 48,836  |  |         |         | (13,380 | ) |         |         | 81,217  | 
|Other income (loss), net, including translation
    and exchange                       |                                              |                               | (632    | )                |         |      | (5,803 | )       |         |  | (1,678  | )       |         |   | (1,712  | )      
|Loss on early extinguishment of debt                                                   |                                              |                               | (5,898  | )                |         |      |       |         |         |  | (5,898  | )       |         |   |        |        
|Interest income                                                                        |                                              |                               | 3,110   |                  |         |      | 1,131  |         |         |  | 6,170   |         |         |   | 2,113   |        
|Interest expense                                                                       |                                              |                               | (14,284 | )                |         |      | (7,729 | )       |         |  | (29,243 | )       |         |   | (16,021 | )      
|                                                                                       |                                              |                               |         |                  |         |      |        |         |         |  |         |         |         |   |         |        
|Income (loss) from continuing operations before
    income taxes and minority interest |                                              |                               | (27,321 | )                |         |      | 36,435 |         |         |  | (44,029 | )       |         |   | 65,597  |        
|Provision (benefit) for income taxes                                                   |                                              |                               | (99     | )                |         |      | 13,845 |         |         |  | (6,281  | )       |         |   | 24,927  |        
|Minority interest, net                                                                 |                                              |                               | 103     |                  |         |      | 5,152  |         |         |  | 89      |         |         |   | 10,011  |        
|                                                                                       |                                              |                               |         |                  |         |      |        |         |         |  |         |         |         |   |         |        
|                                                                                       | Income (loss) from continuing operations     |                               |         | (27,325          | )       |      |        | 17,438  |         |  |         | (37,837 | )       |   |         | 30,659  |        
|                                                                                       | Income (loss) from discontinued operations   |                               |         | (13,966          | )       |      |        | (2,567  | )       |  |         | (17,027 | )       |   |         | (2,118  | )      
|                                                                                       |                                              |                               |         |                  |         |      |        |         |         |  |         |         |         |   |         |        
|                                                                                       | Net income (loss)                            |                               | $       | (41,291          | )       |      | $      | 14,871  |         |  | $       | (54,864 | )       |   | $       | 28,541  |        
|                                                                                       |                                              |                               |         |                  |         |      |        |         |         |  |         |         |         |   |         |        
|Basic earnings (loss) per share:                                                       |                                              |                               |         |                  |         |      |        |         |         |  |         |         |         |   |         |        
|                                                                                       | Income (loss) from continuing operations     |                               | $       | (0.32            | )       |      | $      | 0.21    |         |  | $       | (0.45   | )       |   | $       | 0.36    |        
|                                                                                       | Discontinued operations                      |                               |         | (0.17            | )       |      |        | (0.03   | )       |  |         | (0.21   | )       |   |         | (0.02   | )      
|                                                                                       |                                              |                               |         |                  |         |      |        |         |         |  |         |         |         |   |         |        
|                                                                                       | Basic net income (loss) per share            |                               | $       | (0.49            | )       |      | $      | 0.18    |         |  | $       | (0.66   | )       |   | $       | 0.34    |        
|                                                                                       |                                              |                               |         |                  |         |      |        |         |         |  |         |         |         |   |         |        
|Diluted earnings (loss) per share:                                                     |                                              |                               |         |                  |         |      |        |         |         |  |         |         |         |   |         |        
|                                                                                       | Income (loss) from continuing operations     |                               | $       | (0.32            | )       |      | $      | 0.21    |         |  | $       | (0.45   | )       |   | $       | 0.36    |        
|                                                                                       | Discontinued operations                      |                               |         | (0.17            | )       |      |        | (0.03   | )       |  |         | (0.21   | )       |   |         | (0.02   | )      
|                                                                                       |                                              |                               |         |                  |         |      |        |         |         |  |         |         |         |   |         |        
|                                                                                       | Diluted net income (loss) per share          |                               | $       | (0.49            | )       |      | $      | 0.18    |         |  | $       | (0.66   | )       |   | $       | 0.34    |        
|                                                                                       |                                              |                               |         |                  |         |      |        |         |         |  |         |         |         |   |         |        
|Shares used in per share computation:                                                  |                                              |                               |         |                  |         |      |        |         |         |  |         |         |         |   |         |        
|                                                                                       | Basic                                        |                               |         | 83,880           |         |      |        | 84,117  |         |  |         | 83,663  |         |   |         | 84,110  |        
|                                                                                       |                                              |                               |         |                  |         |      |        |         |         |  |         |         |         |   |         |        
|                                                                                       | Diluted                                      |                               |         | 83,880           |         |      |        | 84,574  |         |  |         | 83,663  |         |   |         | 84,433  |        
|                                                                                       |                                              |                               |         |                  |         |      |        |         |         |  |         |         |         |   |         |        

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

3



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##### Table of Contents



VALEANT PHARMACEUTICALS
INTERNATIONAL



CONSOLIDATED CONDENSED STATEMENTS OF
COMPREHENSIVE INCOME


For the three months and six months ended
June 30, 2004 and 2003


(Unaudited, in thousands)


|                            |                                                                          |                    |         |                  |   |      |        |        |  |   |         |        |   |   |        |        |  
|--------------------------- | ------------------------------------------------------------------------ | ------------------ | ------- | ---------------- | - | ---- | ------ | ------ |  | - | ------- | ------ | - | - | ------ | ------ | -
|                            |                                                                          |                    |         |                 
|                            |                                                                          | Three Months Ended |         | Six Months Ended
|                            |                                                                          | June 30,           |         | June 30,        
|                            |                                                                          |                    |         |                 
|                            |                                                                          | 2004               |         | 2003             |   | 2004 |        | 2003  
|                            |                                                                          |                    |         |                  |   |      |        |       
|Net income (loss)           |                                                                          | $                  | (41,291 | )                |   | $    | 14,871 |        |  | $ | (54,864 | )      |   | $ | 28,541 |       
|Other comprehensive income: |                                                                          |                    |         |                  |   |      |        |        |  |   |         |        |   |   |        |       
|                            | Foreign currency translation adjustments                                 |                    |         | 2,981            |   |      |        | 26,251 |  |   |         | (2,020 | ) |   |        | 20,199 |  
|                            | Unrealized loss on marketable equity securities
    and other            |                    |         | (396             | ) |      |        | 285    |  |   |         | (577   | ) |   |        | (67    | )
|                            | Reclassification adjustment for loss realized
    included in net income |                    |         |                 |   |      |        |       |  |   |         | 1,506  |   |   |        |       |  
|                            |                                                                          |                    |         |                  |   |      |        |        |  |   |         |        |   |   |        |       
|Comprehensive income (loss) |                                                                          | $                  | (38,706 | )                |   | $    | 41,407 |        |  | $ | (55,955 | )      |   | $ | 48,673 |       
|                            |                                                                          |                    |         |                  |   |      |        |        |  |   |         |        |   |   |        |       

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

4



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##### Table of Contents



VALEANT PHARMACEUTICALS
INTERNATIONAL



CONSOLIDATED CONDENSED STATEMENTS OF CASH
FLOWS


For the Six Months Ended June 30, 2004
and 2003


(Unaudited, in thousands)


|                                                                            |                                                                                                        |                                                                            |                                           |          |         |        |         |         |         |         | 
|--------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------ | -------------------------------------------------------------------------- | ----------------------------------------- | -------- | ------- | ------ | ------- | ------- | ------- | ------- | 
|                                                                            |                                                                                                        |                                                                           
|                                                                            |                                                                                                        | Six Months Ended                                                          
|                                                                            |                                                                                                        | June 30,                                                                  
|                                                                            |                                                                                                        |                                                                           
|                                                                            |                                                                                                        | 2004                                                                       |                                           | 2003    
|                                                                            |                                                                                                        |                                                                            |                                           |         
|Cash flows from operating
    activities:                                   |                                                                                                        |                                                                            |                                           |          |         |        |         |        
|                                                                            | Income (loss) from continuing operations                                                               |                                                                            | $                                         | (37,837  | )       |        | $       | 30,659  |        
|                                                                            | Adjustments to reconcile net income (loss) to net
    cash provided by (used in) operating activities: |                                                                            |                                           |          |         |        |         |         |        
|                                                                            |                                                                                                        | Depreciation and amortization                                              |                                           |          | 41,869  |        |         |         | 28,021  |        
|                                                                            |                                                                                                        | Provision for losses on accounts receivable and
    inventory obsolescence |                                           |          | 74      |        |         |         | 3,104   |        
|                                                                            |                                                                                                        | Translation and exchange (gains) losses, net                               |                                           |          | 735     |        |         |         | 1,712   |        
|                                                                            |                                                                                                        | Other non-cash items                                                       |                                           |          | 3,674   |        |         |         | 730     |        
|                                                                            |                                                                                                        | Impairment charges                                                         |                                           |          | 18,000  |        |         |         |        |        
|                                                                            |                                                                                                        | Write-off of in-process R&D                                                |                                           |          | 11,770  |        |         |         |        |        
|                                                                            |                                                                                                        | Deferred income taxes                                                      |                                           |          | (21,729 | )      |         |         | (7,456  | )      
|                                                                            |                                                                                                        | Minority interest                                                          |                                           |          | 89      |        |         |         | 10,011  |        
|                                                                            |                                                                                                        | Loss on extinguishment of debt                                             |                                           |          | 5,898   |        |         |         |        |        
|                                                                            | Change in assets and liabilities, net of effects
    of acquisitions:                                  |                                                                            |                                           |          |         |        |         |         |        
|                                                                            |                                                                                                        | Accounts receivable                                                        |                                           |          | 20,186  |        |         |         | 37,971  |        
|                                                                            |                                                                                                        | Inventories                                                                |                                           |          | (8,719  | )      |         |         | (526    | )      
|                                                                            |                                                                                                        | Prepaid expenses and other assets                                          |                                           |          | 2,045   |        |         |         | (6,801  | )      
|                                                                            |                                                                                                        | Trade payables and accrued liabilities                                     |                                           |          | (11,629 | )      |         |         | (20,104 | )      
|                                                                            |                                                                                                        | Income taxes payable                                                       |                                           |          | 84      |        |         |         | 37,840  |        
|                                                                            |                                                                                                        | Other liabilities                                                          |                                           |          | 470     |        |         |         | (6,036  | )      
|                                                                            |                                                                                                        |                                                                            |                                           |          |         |        |         |        
|                                                                            |                                                                                                        | Cash flow from operating activities in continuing
    operations           |                                           |          | 24,980  |        |         |         | 109,125 |        
|                                                                            |                                                                                                        | Cash flow from operating activities in
    discontinued operations         |                                           |          | (5,641  | )      |         |         | 15,552  |        
|                                                                            |                                                                                                        |                                                                            |                                           |          |         |        |         |        
|                                                                            |                                                                                                        |                                                                            | Net cash provided by operating activities |          |         | 19,339 |         |         |         | 124,677 | 
|                                                                            |                                                                                                        |                                                                            |                                           |          |         |        |         |        
|Cash flows from investing
    activities:                                   |                                                                                                        |                                                                            |                                           |          |         |        |         |        
|                                                                            | Capital expenditures                                                                                   |                                                                            |                                           | (8,923   | )       |        |         | (6,382  | )      
|                                                                            | Proceeds from sale of assets and investments                                                           |                                                                            |                                           | 11,323   |         |        |         | 170     |        
|                                                                            | Increase in restricted cash                                                                            |                                                                            |                                           | (13,476  | )       |        |         |        |        
|                                                                            | Acquisition of license rights, product lines and
    businesses                                        |                                                                            |                                           | (63,261  | )       |        |         | (150    | )      
|                                                                            |                                                                                                        |                                                                            |                                           |          |         |        |         |        
|                                                                            | Cash flow from investing activities in continuing
    operations                                       |                                                                            |                                           | (74,337  | )       |        |         | (6,362  | )      
|                                                                            | Cash flow from investing activities in
    discontinued operations                                     |                                                                            |                                           | 395      |         |        |         | 47,085  |        
|                                                                            |                                                                                                        |                                                                            |                                           |          |         |        |         |        
|                                                                            |                                                                                                        | Net cash (used in) provided by investing
    activities                    |                                           |          | (73,942 | )      |         |         | 40,723  |        
|                                                                            |                                                                                                        |                                                                            |                                           |          |         |        |         |        
|Cash flows from financing
    activities:                                   |                                                                                                        |                                                                            |                                           |          |         |        |         |        
|                                                                            | Payments on long-term debt and notes payable                                                           |                                                                            |                                           | (95,868  | )       |        |         | (3,159  | )      
|                                                                            | Proceeds from issuance of stock                                                                        |                                                                            |                                           | 10,563   |         |        |         | 175     |        
|                                                                            | Dividends paid                                                                                         |                                                                            |                                           | (12,901  | )       |        |         | (13,000 | )      
|                                                                            | Funds (paid to) received from discontinued
    operations                                              |                                                                            |                                           | (6,417   | )       |        |         | 69,574  |        
|                                                                            |                                                                                                        |                                                                            |                                           |          |         |        |         |        
|                                                                            | Cash flow from financing activities in continuing
    operations                                       |                                                                            |                                           | (104,623 | )       |        |         | 53,590  |        
|                                                                            | Cash flow from financing activities in
    discontinued operations                                     |                                                                            |                                           | 6,417    |         |        |         | (69,870 | )      
|                                                                            |                                                                                                        |                                                                            |                                           |          |         |        |         |        
|                                                                            |                                                                                                        | Net cash used in financing activities                                      |                                           |          | (98,206 | )      |         |         | (16,280 | )      
|                                                                            |                                                                                                        |                                                                            |                                           |          |         |        |         |        
|Effect of exchange rate changes on cash and cash
    equivalents            |                                                                                                        |                                                                            | (1,675                                    | )        |         |        | 1,051   |        
|                                                                            |                                                                                                        |                                                                            |                                           |          |         |        |         |        
|Net increase (decrease) in cash and cash
    equivalents                    |                                                                                                        |                                                                            | (154,484                                  | )        |         |        | 150,171 |        
|Cash and cash equivalents at beginning of period                            |                                                                                                        |                                                                            | 872,969                                   |          |         |        | 253,664 |        
|                                                                            |                                                                                                        |                                                                            |                                           |          |         |        |         |        
|Cash and cash equivalents at end of period                                  |                                                                                                        |                                                                            | 718,485                                   |          |         |        | 403,835 |        
|Cash and cash equivalents classified as part of
    discontinued operations |                                                                                                        |                                                                            | (696                                      | )        |         |        | (1,501  | )      
|                                                                            |                                                                                                        |                                                                            |                                           |          |         |        |         |        
|Cash and cash equivalents of continuing operations                          |                                                                                                        | $                                                                          | 717,789                                   |          |         | $      | 402,334 |        
|                                                                            |                                                                                                        |                                                                            |                                           |          |         |        |         |        

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

5



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##### Table of Contents






MANAGEMENTS STATEMENT REGARDING
UNAUDITED FINANCIAL STATEMENTS

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

6



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##### Table of Contents



VALEANT PHARMACEUTICALS
INTERNATIONAL




NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS

June 30, 2004


(Unaudited)




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

Organization:Valeant Pharmaceuticals International (Valeant) and
its subsidiaries (collectively, the Company) is a
global, research-based, specialty pharmaceutical company that
discovers, develops, manufactures, and markets a broad range of
pharmaceutical products. In addition, the Company generates
royalty revenues from the sale of ribavirin by Schering-Plough
Ltd. (Schering-Plough) and F. Hoffman-LaRoche
(Roche).

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

Impairment of Property, Plant and
Equipment:The Company periodically
evaluates the carrying value of property, plant and equipment.
In evaluating property, plant and equipment, the Company
determines whether there has been impairment by comparing the
anticipated undiscounted future cash flows expected to be
generated by the property, plant and equipment with its carrying
value. If the undiscounted cash flows is less than the carrying
value, the amount of the impairment, if any, will be determined
by comparing the carrying value of the property, plant and
equipment with its fair value. Fair value is generally based on
a discounted cash flows analysis, independent appraisals or
preliminary offers from prospective buyers. In the second
quarter of 2004, the Company recorded an impairment charge of
$18,000,000 on certain of its manufacturing sites. See
Note 4.

Acquired In-Process Research and
Development:In the six months ended
June 30, 2004, the Company incurred an expense of
$11,770,000 associated with acquired in-process research and
development (IPR&D) related to the acquisition
of Amarin Pharmaceuticals, Inc. (Amarin) and all of
its U.S. product rights. The amount expensed as IPR&D
represents an estimate of the fair value of purchased in-process
technology for Zelapar® that, as of the acquisition date,
had not yet reached technological feasibility and had no
alternative future use. The data used to determine fair value
requires significant judgment. The estimated fair value was
based on the use of a discounted cash flow model (based on an
estimate of future sales and an average gross margin of 66%).
The estimated after-tax cash flows (using a tax rate of 40%)
were then discounted to a present value using a discount rate of
20%, reflecting the Companys estimated risk adjusted after
tax weighted average cost of capital for its industry. The
Company estimates that the Zelapar studies will be completed in
2004 and, if successful, revenue for Zelapar will commence in
2005. The Company does not expect to incur any significant
research and development expenditures. See Note 2 for
discussion of the acquisition of Amarin.

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

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

7



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##### Table of Contents



VALEANT PHARMACEUTICALS
INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)

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

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

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

Stock-Based
Compensation:The Company has adopted
the disclosure-only provision of SFAS No. 123 and
SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure.
Compensation cost for stock-based compensation issued to
employees has been measured using the intrinsic value method
provided by Accounting Principles Board Opinion No. 25.
Accordingly, no compensation cost has been recognized for
options granted under the Companys 2003 Equity Incentive
Plan (the Incentive Plan), as all options granted
under the Incentive Plan had an exercise price equal to the
market value of the underlying common stock on the date of
grant. Had compensation cost for the Incentive Plan been
determined based on the fair value at the grant date for awards
in the three and six months ended June 30, 2004 and 2003
consistent with the provisions of SFAS No. 123, the
Companys net income and earnings per share would have been
the unaudited pro forma amounts indicated below (in thousands,
except per share data):

|                                                                                                                       |                       |                    |         |                  |   |      |        |      |  |   |         |       |   |   |        |      | 
|---------------------------------------------------------------------------------------------------------------------- | --------------------- | ------------------ | ------- | ---------------- | - | ---- | ------ | ---- |  | - | ------- | ----- | - | - | ------ | ---- | 
|                                                                                                                       |                       |                    |         |                 
|                                                                                                                       |                       | Three Months Ended |         | Six Months Ended
|                                                                                                                       |                       | June 30,           |         | June 30,        
|                                                                                                                       |                       |                    |         |                 
|                                                                                                                       |                       | 2004               |         | 2003             |   | 2004 |        | 2003
|                                                                                                                       |                       |                    |         |                  |   |      |        |     
|Net income (loss) as reported                                                                                          |                       | $                  | (41,291 | )                |   | $    | 14,871 |      |  | $ | (54,864 | )     |   | $ | 28,541 |     
|Stock-based employee compensation expense
    included in net income, net of tax                                       |                       |                    |        |                  |   |      |       |      |  |   | 96      |       |   |   |       |     
|Stock-based employee compensation expense
    determined under fair value based method, net of related tax
    effects |                       |                    | (1,702  | )                |   |      | (880   | )    |  |   | (3,347  | )     |   |   | (1,351 | )   
|                                                                                                                       |                       |                    |         |                  |   |      |        |      |  |   |         |       |   |   |        |     
|Pro forma net income (loss)                                                                                            |                       | $                  | (42,993 | )                |   | $    | 13,991 |      |  | $ | (58,115 | )     |   | $ | 27,190 |     
|                                                                                                                       |                       |                    |         |                  |   |      |        |      |  |   |         |       |   |   |        |     
|Earnings (loss) per share:                                                                                             |                       |                    |         |                  |   |      |        |      |  |   |         |       |   |   |        |     
|                                                                                                                       | Basic  as reported   |                    | $       | (0.49            | ) |      | $      | 0.18 |  |   | $       | (0.66 | ) |   | $      | 0.34 | 
|                                                                                                                       |                       |                    |         |                  |   |      |        |      |  |   |         |       |   |   |        |     
|                                                                                                                       | Basic  pro forma     |                    | $       | (0.51            | ) |      | $      | 0.17 |  |   | $       | (0.69 | ) |   | $      | 0.32 | 
|                                                                                                                       |                       |                    |         |                  |   |      |        |      |  |   |         |       |   |   |        |     
|                                                                                                                       | Diluted  as reported |                    | $       | (0.49            | ) |      | $      | 0.18 |  |   | $       | (0.66 | ) |   | $      | 0.34 | 
|                                                                                                                       |                       |                    |         |                  |   |      |        |      |  |   |         |       |   |   |        |     
|                                                                                                                       | Diluted  pro forma   |                    | $       | (0.51            | ) |      | $      | 0.17 |  |   | $       | (0.69 | ) |   | $      | 0.32 | 
|                                                                                                                       |                       |                    |         |                  |   |      |        |      |  |   |         |       |   |   |        |     

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



|   |             
|-- | ------------
|2. | Acquisitions

Amarin Pharmaceuticals,
Inc.:On February 25, 2004, the
Company acquired from Amarin Corporation, plc its U.S.-based
subsidiary, Amarin, and all of its U.S. product rights (the
Amarin Acquisition).

8



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##### Table of Contents



VALEANT PHARMACEUTICALS
INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)

Under the terms of the transaction, the Company
paid $38,000,000 in cash at the closing for the rights to
Amarins product portfolio, which includes Permax® and
a primary care portfolio with a broad range of indications. The
Company also acquired in the transaction the rights to Zelapar,
a late-stage candidate for the treatment of Parkinsons
disease. Amarin has received an approvable letter from the FDA
for Zelapar, subject to the completion of two safety studies
which are expected to be completed in 2004. The agreement calls
for the Company to make additional milestone payments of up to
$8,000,000 to Amarin based on the successful completion of the
studies and final approval by the FDA of Zelapar. In addition,
the Company will make a milestone payment of $10,000,000 to the
developer of Zelapar upon the attainment of specified sales
thresholds.

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

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

|                |                                |   |        |         |  
|--------------- | ------------------------------ | - | ------ | ------- | -
|Purchase price: |                                |   |        |        
|                | Cash paid                      |   | $      | 38,000  |  
|                | Transaction costs              |   |        | 2,811   |  
|                | Less: Cash acquired            |   |        | (601    | )
|                |                                |   |        |        
|                |                                | $ | 40,210 |        
|                |                                |   |        |        
|Allocation:     |                                |   |        |        
|                | Current assets                 |   | $      | 2,642   |  
|                | Property, plant, and equipment |   |        | 205     |  
|                | Acquired intangible assets     |   |        | 37,113  |  
|                | Goodwill                       |   |        | 1,900   |  
|                | Acquired IPR&D                 |   |        | 11,770  |  
|                | Other liabilities assumed      |   |        | (13,420 | )
|                |                                |   |        |        
|                |                                | $ | 40,210 |        
|                |                                |   |        |        

Tasmar®: On
April 22, 2004, the Company acquired the worldwide rights,
excluding the European Union to
Tasmar®(tolcapone) from Roche. Under the terms of the
agreement, the Company paid $13,500,000 in cash plus future
additional royalty amounts. The Company accounted for the
acquisition of Tasmar as product rights.



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

In the second half of 2002, the Company made a
strategic decision to divest its Russian Pharmaceuticals
segment, biomedicals segment, Photonics business, raw materials
businesses and manufacturing capability in Central Europe and
Circe unit. During 2003, the Company disposed of its Russian
Pharmaceuticals segment, biomedicals segment, Photonics business
and Circe unit. In July 2004, the Company disposed of one of the

9



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##### Table of Contents



VALEANT PHARMACEUTICALS
INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)

raw materials business and manufacturing
capability in Central Europe. The Company is actively marketing
for sale the remaining raw materials business and manufacturing
capability in Central Europe and is working toward disposing of
these assets.

Summarized selected financial information for
discontinued operations for the three and six months ended
June 30, 2004 and 2003 is as follows (in thousands):

|                                                |                                                  |                                            |         |                  |         |      |         |        |        |   |         |        |         |   |         |        |        |  
|----------------------------------------------- | ------------------------------------------------ | ------------------------------------------ | ------- | ---------------- | ------- | ---- | ------- | ------ | ------ | - | ------- | ------ | ------- | - | ------- | ------ | ------ | -
|                                                |                                                  |                                            |         |                 
|                                                |                                                  | Three Months Ended                         |         | Six Months Ended
|                                                |                                                  | June 30,                                   |         | June 30,        
|                                                |                                                  |                                            |         |                 
|                                                |                                                  | 2004                                       |         | 2003             |         | 2004 |         | 2003  
|                                                |                                                  |                                            |         |                  |         |      |         |       
|Revenue                                         |                                                  | $                                          | 4,126   |                  |         | $    | 49,149  |        |        | $ | 9,648   |        |         | $ | 101,494 |       
|                                                |                                                  |                                            |         |                  |         |      |         |        |        |   |         |        |         |   |         |       
|Income (loss) before income taxes               |                                                  | $                                          | (18,102 | )                |         | $    | 3,739   |        |        | $ | (20,515 | )      |         | $ | 5,625   |       
|Income tax provision                            |                                                  |                                            | 5,920   |                  |         |      | 290     |        |        |   | 5,920   |        |         |   | (1,147  | )     
|                                                |                                                  |                                            |         |                  |         |      |         |        |        |   |         |        |         |   |         |       
|Income (loss) from discontinued operations, net |                                                  |                                            | (12,182 | )                |         |      | 4,029   |        |        |   | (14,595 | )      |         |   | 4,478   |       
|                                                |                                                  |                                            |         |                  |         |      |         |        |        |   |         |        |         |   |         |       
|Loss on disposal of discontinued operations     |                                                  |                                            | (1,784  | )                |         |      | (16,138 | )      |        |   | (2,432  | )      |         |   | (16,138 | )     
|Income tax provision                            |                                                  |                                            |        |                  |         |      | 9,542   |        |        |   |        |        |         |   | 9,542   |       
|                                                |                                                  |                                            |         |                  |         |      |         |        |        |   |         |        |         |   |         |       
|                                                | Loss on disposal of discontinued operations, net |                                            |         | (1,784           | )       |      |         | (6,596 | )      |   |         | (2,432 | )       |   |         | (6,596 | )     
|                                                |                                                  |                                            |         |                  |         |      |         |        |        |   |         |        |         |   |         |       
|                                                |                                                  | Income (loss) from discontinued operations |         | $                | (13,966 | )    |         | $      | (2,567 | ) |         | $      | (17,027 | ) |         | $      | (2,118 | )
|                                                |                                                  |                                            |         |                  |         |      |         |        |        |   |         |        |         |   |         |       

The assets and liabilities of discontinued
operations are stated separately as of June 30, 2004 and
December 31, 2003 on the accompanying consolidated
condensed balance sheets. The major assets and liability
categories are as follows (in thousands):

|                                   |                                        |          |        |              |  |   |        |        | 
|---------------------------------- | -------------------------------------- | -------- | ------ | ------------ |  | - | ------ | ------ | 
|                                   |                                        | June 30, |        | December 31,
|                                   |                                        | 2004     |        | 2003        
|                                   |                                        |          |        |             
|Cash                               |                                        | $        | 696    |              |  | $ | 913    |       
|Accounts receivable, net           |                                        |          | 5,975  |              |  |   | 6,422  |       
|Inventories, net                   |                                        |          | 10,302 |              |  |   | 10,756 |       
|Property, plant and equipment, net |                                        |          | 6,629  |              |  |   | 8,671  |       
|Other assets                       |                                        |          | 7,178  |              |  |   | 1,232  |       
|                                   |                                        |          |        |              |  |   |        |       
|                                   | Assets of discontinued operations      |          | $      | 30,780       |  |   | $      | 27,994 | 
|                                   |                                        |          |        |              |  |   |        |       
|Accounts payable                   |                                        | $        | 2,360  |              |  | $ | 3,127  |       
|Accrued liabilities                |                                        |          | 27,282 |              |  |   | 13,498 |       
|Other liabilities                  |                                        |          | 3,175  |              |  |   | 3,106  |       
|                                   |                                        |          |        |              |  |   |        |       
|                                   | Liabilities of discontinued operations |          | $      | 32,817       |  |   | $      | 19,731 | 
|                                   |                                        |          |        |              |  |   |        |       

Included in accumulated other comprehensive loss
are translation gains of $9,096,000 related to discontinued
operations as of June 30, 2004.

Environmental contamination has been identified
in the soil under a facility built by the Company which housed
operations of its discontinued Biomedicals division. Remediation
of the site will likely involve excavation and disposal of the
waste at appropriately licensed sites some distance from the
facility. Environmental reserves have been provided for
remediation and related costs that the Company can reasonably
estimate. Remediation costs are applied against these
environmental reserves as they are incurred. In July 2004,
preliminary supplemental site characterization information was
received. As a result of this information, the Company recorded
an additional environmental charge of $16,000,000, which is
included in loss from discontinued operations. Total
environmental reserves for this site were $20,122,000 and
$5,033,000

10



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##### Table of Contents



VALEANT PHARMACEUTICALS
INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)

as of June 30, 2004 and December 31,
2003, respectively, and are included in the liabilities of
discontinued operations. Although the Company believes that its
reserves are adequate, it is continuing to analyze the amount
required to remediate this site and there can be no assurance
that the amount of expenditures and other expenses which will be
required relating to remediation actions and compliance with
applicable environmental laws will not exceed the amounts
reflected in reserves or will not have a material adverse effect
on the Companys consolidated financial condition, results
of operations or cash flows. Any possible loss that may be
incurred in excess of amounts provided for as of June 30,
2004 cannot be reasonably estimated.



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

During the third quarter of 2003, the Company
approved restructuring plans to establish a global manufacturing
and supply chain network of five manufacturing sites, which will
result in the closing of ten of the Companys manufacturing
sites (the Manufacturing Restructuring Plan). The
Manufacturing Restructuring Plan includes a refocus of the
Companys international operations to improve profitability
and achieve greater operating efficiencies. The Company has made
significant progress towards its plans of disposing of the
manufacturing sites in the second quarter of 2004 and is
currently actively marketing the sites to prospective buyers.
The sites were tested for impairment in the second quarter of
2004, resulting in impairment of asset value on three of the
sites. Accordingly, the Company wrote these sites down to their
fair value and recorded an impairment charge of $18,000,000 for
the three and six months ended June 30, 2004. In addition
to the impairment charge, the Company recorded $2,185,000 in
restructuring and impairment charges related to severance for
the three and six months ended June 30, 2004, which the
Company expects to pay in the third quarter of 2004. The Company
will continue to depreciate the remaining sites until the
facility closures are complete. The Company intends to dispose
of each manufacturing plant by selling it to a buyer who intends
to continue to operate the plant, including assets and employee
obligations. However, the Company may not locate a buyer for
each manufacturing plant, which would require the Company to
close certain manufacturing plants and incur additional
severance charges.



|   |                       
|-- | ----------------------
|5. | Extinguishment of Debt

On May 14, 2004, the Company repurchased
$89,402,000 principal amount of its 6 1/2% Convertible
Subordinated Notes due 2008. In connection with this repurchase,
the Company recorded a loss on early extinguishment of debt of
$5,898,000.

The Company and Ribapharm, Inc.
(Ribapharm), a wholly-owned subsidiary, are jointly
and severally liable for the obligations under the
3.0% Convertible Subordinated Notes due 2010,
4.0% Convertible Subordinated Notes due 2013,
7.0% Senior Notes due 2011 and 6 1/2% Convertible
Subordinated Notes due 2008. Ribapharm is an obligor under the
3.0% Notes, 4.0% Notes and 7.0% Notes only for so
long as Ribapharm shall have obligations under the
6 1/2% Notes. On July 21, 2004, the Company
redeemed the remaining $236,599,000 of its
6 1/2% Notes and Ribapharm ceased being a co-obligor
on the above mentioned notes. In connection with this
repurchase, the Company will record a loss on early
extinguishment of debt of $13,994,000 in the third quarter of
2004. Accordingly, the consolidating financial information of
Valeant obligor subsidiaries, Ribapharm and Valeant non-obligor
subsidiaries is no longer required.



|   |                                   
|-- | ----------------------------------
|6. | Derivatives and Hedging Activities

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

Interest Rate Swap
Agreement:In January 2004, the
Company entered into an interest rate swap agreement with
respect to $150,000,000 principal amount of the 7.0% Senior
Notes due 2011 (the Interest Rate Swap), with the
objective of initially lowering the Companys effective
interest rate by exchanging fixed

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VALEANT PHARMACEUTICALS
INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)

rate payments for floating rate payments. The
agreement provides that the Company will exchange its 7.0%
fixed-rate payment obligation for variable rate payments of
six-month LIBOR plus 2.409% (5.159% as of June 30, 2004).
The Interest Rate Swap is designated as a fair value hedge and
is deemed perfectly effective. At June 30, 2004, the fair
value of the Interest Rate Swap was $5,960,000 and is included
in other long-term assets with an offsetting credit included in
long-term debt as a fair value adjustment. In support of the
Companys obligation under the Interest Rate Swap, the
Company is required to maintain a minimum level of cash and
investment collateral depending on the fair market value of the
Interest Rate Swap. As of June 30, 2004, $12,996,000 is
recorded on the balance sheet in restricted cash related to
collateral on the Interest Rate Swap.

Foreign Currency Hedge
Transactions:In March and June 2004,
the Company entered into a series of forward contracts to reduce
its exposure to variability in the Euro compared to the
U.S. Dollar (the Hedges). The Hedges will cover
the Euro denominated royalty payments on forecasted Euro royalty
revenue. The Hedges are designated and qualify as cash flow
hedges. The Hedges are consistent with the Companys risk
management policy, which allows for the hedging of risk
associated with fluctuations in foreign currency for anticipated
future transactions. The Hedges are determined to be fully
effective as a hedge in reducing the risk of the underlying
transaction. An unrealized loss of $99,000 and $666,000 has been
recorded in other comprehensive income for the three and six
months ended June 30, 2004, respectively. This unrealized
loss will be reclassified into earnings as the forward contracts
are settled on a monthly basis through December 30, 2005.
In connection with the Hedges, the Company is required to
maintain a margin account with a minimum level of cash and
investment collateral depending on the fair market value of the
Hedges. As of June 30, 2004, $1,984,000 is recorded on the
balance sheet in restricted cash related to collateral on the
Hedges.



|   |                   
|-- | ------------------
|7. | Earnings Per Share

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

|                                 |                                                                                                                 |                           |   |                  |   |      |   |        |     |  |   |         |   |  |   |        |     | 
|-------------------------------- | --------------------------------------------------------------------------------------------------------------- | ------------------------- | - | ---------------- | - | ---- | - | ------ | --- |  | - | ------- | - |  | - | ------ | --- | 
|                                 |                                                                                                                 |                           |   |                 
|                                 |                                                                                                                 | Three Months Ended        |   | Six Months Ended
|                                 |                                                                                                                 | June 30,                  |   | June 30,        
|                                 |                                                                                                                 |                           |   |                 
|                                 |                                                                                                                 | 2004                      |   | 2003             |   | 2004 |   | 2003  
|                                 |                                                                                                                 |                           |   |                  |   |      |   |       
|Income:                          |                                                                                                                 |                           |   |                  |   |      |   |        |     |  |   |         |   |  |   |       
|                                 | Numerator for basic and dilutive earnings per
    share  income (loss) available to stockholders               |                           | $ | (41,291          | ) |      | $ | 14,871 |     |  | $ | (54,864 | ) |  | $ | 28,541 |    
|                                 |                                                                                                                 |                           |   |                  |   |      |   |        |     |  |   |         |   |  |   |       
|Shares:                          |                                                                                                                 |                           |   |                  |   |      |   |        |     |  |   |         |   |  |   |       
|                                 | Denominator for basic earnings per
    share  weighted-average shares outstanding                              |                           |   | 83,880           |   |      |   | 84,117 |     |  |   | 83,663  |   |  |   | 84,110 |    
|                                 | Effect of dilutive securities:                                                                                  |                           |   |                  |   |      |   |        |     |  |   |         |   |  |   |        |    
|                                 |                                                                                                                 | Employee stock options    |   |                  |  |      |   |        | 455 |  |   |         |  |  |   |        | 322 | 
|                                 |                                                                                                                 | Other dilutive securities |   |                  |  |      |   |        | 2   |  |   |         |  |  |   |        | 1   | 
|                                 |                                                                                                                 |                           |   |                  |   |      |   |        |     |  |   |         |   |  |   |       
|                                 | Denominator for diluted earnings per
    share  adjusted weighted-average shares after assumed
    conversions |                           |   | 83,880           |   |      |   | 84,574 |     |  |   | 83,663  |   |  |   | 84,433 |    
|                                 |                                                                                                                 |                           |   |                  |   |      |   |        |     |  |   |         |   |  |   |       
|Basic earnings (loss) per share: |                                                                                                                 |                           |   |                  |   |      |   |        |     |  |   |         |   |  |   |       
|                                 | Income (loss) from continuing operations                                                                        |                           | $ | (0.32            | ) |      | $ | 0.21   |     |  | $ | (0.45   | ) |  | $ | 0.36   |    
|                                 | Discontinued operations, net of taxes                                                                           |                           |   | (0.17            | ) |      |   | (0.03  | )   |  |   | (0.21   | ) |  |   | (0.02  | )  
|                                 |                                                                                                                 |                           |   |                  |   |      |   |        |     |  |   |         |   |  |   |       
|                                 | Basic net income (loss) per share                                                                               |                           | $ | (0.49            | ) |      | $ | 0.18   |     |  | $ | (0.66   | ) |  | $ | 0.34   |    
|                                 |                                                                                                                 |                           |   |                  |   |      |   |        |     |  |   |         |   |  |   |       

12



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VALEANT PHARMACEUTICALS
INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)

|                                   |                                          |                    |   |                  |   |      |   |       |   |  |   |       |   |  |   |       |  
|---------------------------------- | ---------------------------------------- | ------------------ | - | ---------------- | - | ---- | - | ----- | - |  | - | ----- | - |  | - | ----- | -
|                                   |                                          |                    |   |                 
|                                   |                                          | Three Months Ended |   | Six Months Ended
|                                   |                                          | June 30,           |   | June 30,        
|                                   |                                          |                    |   |                 
|                                   |                                          | 2004               |   | 2003             |   | 2004 |   | 2003 
|                                   |                                          |                    |   |                  |   |      |   |      
|Diluted earnings (loss) per share: |                                          |                    |   |                  |   |      |   |       |   |  |   |       |   |  |   |      
|                                   | Income (loss) from continuing operations |                    | $ | (0.32            | ) |      | $ | 0.21  |   |  | $ | (0.45 | ) |  | $ | 0.36  |  
|                                   | Discontinued operations, net of taxes    |                    |   | (0.17            | ) |      |   | (0.03 | ) |  |   | (0.21 | ) |  |   | (0.02 | )
|                                   |                                          |                    |   |                  |   |      |   |       |   |  |   |       |   |  |   |      
|                                   | Diluted net income (loss) per share      |                    | $ | (0.49            | ) |      | $ | 0.18  |   |  | $ | (0.66 | ) |  | $ | 0.34  |  
|                                   |                                          |                    |   |                  |   |      |   |       |   |  |   |       |   |  |   |      

For the three and six months ended June 30,
2004, 2,506,000 and 2,829,000 weighted average stock options,
respectively, and the effect of convertible debt, are not
included in the computation of earnings per share as such
securities are anti-dilutive.



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

|                                    |                                           |          |         |              |   |   |         |          |  
|----------------------------------- | ----------------------------------------- | -------- | ------- | ------------ | - | - | ------- | -------- | -
|                                    |                                           | June 30, |         | December 31,
|                                    |                                           | 2004     |         | 2003        
|                                    |                                           |          |         |             
|Accounts receivable, net:           |                                           |          |         |              |   |   |         |         
|                                    | Trade accounts receivable                 |          | $       | 109,204      |   |   | $       | 121,651  |  
|                                    | Royalties receivable                      |          |         | 28,196       |   |   |         | 36,690   |  
|                                    | Other receivables                         |          |         | 8,459        |   |   |         | 10,724   |  
|                                    |                                           |          |         |              |   |   |         |         
|                                    |                                           |          | 145,859 |              |   |   | 169,065 |         
|                                    | Allowance for doubtful accounts           |          |         | (6,754       | ) |   |         | (6,663   | )
|                                    |                                           |          |         |              |   |   |         |         
|                                    |                                           | $        | 139,105 |              |   | $ | 162,402 |         
|                                    |                                           |          |         |              |   |   |         |         
|Inventories, net:                   |                                           |          |         |              |   |   |         |         
|                                    | Raw materials and supplies                |          | $       | 33,910       |   |   | $       | 36,288   |  
|                                    | Work-in-process                           |          |         | 26,782       |   |   |         | 23,731   |  
|                                    | Finished goods                            |          |         | 56,809       |   |   |         | 43,470   |  
|                                    |                                           |          |         |              |   |   |         |         
|                                    |                                           |          | 117,501 |              |   |   | 103,489 |         
|                                    | Allowance for inventory obsolescence      |          |         | (14,323      | ) |   |         | (11,583  | )
|                                    |                                           |          |         |              |   |   |         |         
|                                    |                                           | $        | 103,178 |              |   | $ | 91,906  |         
|                                    |                                           |          |         |              |   |   |         |         
|Property, plant and equipment, net: |                                           |          |         |              |   |   |         |         
|                                    | Property, plant and equipment, at cost    |          | $       | 403,513      |   |   | $       | 399,512  |  
|                                    | Accumulated depreciation and amortization |          |         | (186,885     | ) |   |         | (158,496 | )
|                                    |                                           |          |         |              |   |   |         |         
|                                    |                                           | $        | 216,628 |              |   | $ | 241,016 |         
|                                    |                                           |          |         |              |   |   |         |         

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VALEANT PHARMACEUTICALS
INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)

Goodwill and intangible
assets:As of June 30, 2004 and
December 31, 2003, goodwill and intangible assets were as
follows (in thousands):

|                   |                   |               |   |                   |         |        |   |              |          |   |   |         |         |  |   |          |          |  
|------------------ | ----------------- | ------------- | - | ----------------- | ------- | ------ | - | ------------ | -------- | - | - | ------- | ------- |  | - | -------- | -------- | -
|                   |                   |               |   |                  
|                   |                   | June 30, 2004 |   | December 31, 2003
|                   |                   |               |   |                  
|                   |                   | Gross         |   | Accumulated       |         | Gross  |   | Accumulated 
|                   |                   | Amount        |   | Amortization      |         | Amount |   | Amortization
|                   |                   |               |   |                   |         |        |   |             
|Intangible assets: |                   |               |   |                   |         |        |   |              |          |   |   |         |         |  |   |         
|                   | Product rights    |               | $ | 572,199           |         |        | $ | (175,447     | )        |   | $ | 520,025 |         |  | $ | (158,743 | )       
|                   | License agreement |               |   | 67,376            |         |        |   | (16,665      | )        |   |   | 67,376  |         |  |   | (6,911   | )       
|                   | Goodwill          |               |   | 15,219            |         |        |   |             |          |   |   | 13,282  |         |  |   |         |         
|                   |                   |               |   |                   |         |        |   |              |          |   |   |         |         |  |   |         
|                   |                   | Total         |   | $                 | 654,794 |        |   | $            | (192,112 | ) |   | $       | 600,683 |  |   | $        | (165,654 | )
|                   |                   |               |   |                   |         |        |   |              |          |   |   |         |         |  |   |         

Amortization expense for the three and six months
ended June 30, 2004 was $14,133,000 and $27,420,000,
respectively. Estimated amortization expense for the years
ending December 31, 2004, 2005, 2006, 2007 and 2008 is
$57,000,000, $58,000,000, $58,000,000, $39,000,000 and
$37,000,000, respectively.



|   |             
|-- | ------------
|9. | Income Taxes

The Companys effective tax rate for the
three and six months ended June 30, 2004 was affected by
pre-tax losses resulting from restructuring and impairment
charges ($20,185,000) and a Europe work force reduction
($4,510,000), for which the Company has recorded a minimal tax
benefit of $1,138,000 (5%). This minimal tax benefit reflects
uncertainty of the realization of tax benefits in some of the
markets that these charges were incurred. Additionally, in the
three and six months ended June 30, 2004, the Company
recorded a tax provision of $1,828,000 related to the settlement
of a tax dispute with Puerto Rico relating to tax years 1998 and
1999.



|    |                              
|--- | -----------------------------
|10. | Commitments and Contingencies

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

In June 2003, a purported class action on behalf
of certain stockholders of Ribapharm was filed against the
Company in the Delaware Court of Chancery seeking a declaration
that the shareholders rights plan is valid and enforceable. The
Company and the plaintiffs reached an agreement in principle to
settle this lawsuit which will be completed in combination with
the settlement In re Ribapharm Inc. Shareholders
Litigation, Consol. C.A. No. 20337.

In June 2003, a purported class action was filed
in the Superior Court of Orange County, California, against the
Company, Ribapharm and certain of Ribapharms officers and
directors asserting the same claims, on behalf of the same class
of plaintiffs and against the same defendants as in the seven
lawsuits filed in Delaware that are described above. The
settlement of the Delaware tender offer litigation has been
designed to release the claims brought in this lawsuit, although
the decision as to effect of that release will be subject to the
discretion of the California court.

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VALEANT PHARMACEUTICALS
INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)

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



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

Section 10b-5
litigation:Since July 25, 2002,
multiple class actions have been filed against the Company and
some of its current and former executive officers alleging that
the defendants violated Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, and Rule 10b-5 promulgated
thereunder, by issuing false and misleading financial results to
the market during different class periods ranging from
May 3, 2001 to July 10, 2002, thereby artificially
inflating the price of the Companys stock. The lawsuits
generally claim that the Company issued false and misleading
statements regarding the Companys earnings prospects and
sales figures (based upon channel stuffing
allegations), its operations in Russia, the marketing of Efudex,
and the earnings and sales of its Photonics division. The
plaintiffs generally seek to recover compensatory damages,
including interest.

All the actions have been consolidated to the
Central District of California. On June 24, 2004, the Court
dismissed the Second Amended Complaint. The plaintiffs intend to
appeal the courts ruling to the ninth circuit.

Valuepoint Bondholders
Litigation:On May 9, 2003, a
bondholder filed a class action lawsuit in Orange County
Superior Court against the Company and some of its current and
former directors and former executive officers. The lawsuit
alleges that defendants violated Sections 11 and 15 of the
Securities Act of 1933 by making false and misleading statements
in connection with an offering of 6 1/2% Convertible
Subordinated Notes due 2008 in November 2001, thereby
artificially inflating the market price of the Notes. The
plaintiffs generally seek to recover compensatory damages,
including interest.

On June 24, 2004, the Court granted the
motion to strike and permitted plaintiffs to amend the complaint
to comply with certain notice requirements. The Court also held
that plaintiffs must, but did not, provide particular facts in
the complaint to show that the defendants violated the
securities law. Ultimately, the Court dismissed most of the
claims but granted the plaintiffs until September 4, 2004
to file an amended complaint. The Court denied the
defendants motion to dismiss with respect to one claim
involving the impairment of the Companys Russian assets.

The Company expects the plaintiffs to file
another complaint in September 2004, which may attempt to allege
more facts to support the dismissed claims. If the plaintiffs
file another complaint, the Company expects to file an
additional motion to dismiss. The Company also expects further
motions and limited discovery regarding the surviving Russian
assets impairment claim.

Derivative Actions:The Company is a nominal defendant in a shareholder derivative
lawsuit pending in state court in Orange County, California.
This lawsuit, which was filed on June 6, 2002, purports to
assert derivative claims on behalf of the Company against
certain current and/or former officers and directors of the
Company. The lawsuit asserts claims for breach of fiduciary
duties, abuse of control, gross mismanagement and waste of
corporate assets. The plaintiff seeks, among other things,
damages and a constructive trust over cash bonuses paid to the
officer and director defendants in connection with the Ribapharm
Offering (the Ribapharm Bonuses).

On October 1, 2002, several former and
current directors of the Company, as individuals, as well as the
Company, as a nominal defendant, were named as defendants in a
second shareholders derivative complaint filed in Delaware
Chancery Court. The complaint purports to state causes of action
for violation of Delaware General Corporate Law
Section 144, breach of fiduciary duties and waste of
corporate assets in connection with the defendants
management of the Company. The allegations largely duplicate
those contained in the derivative lawsuit filed in Orange
County, California, but add a disclosure-based claim relating to
the allegations of federal securities law violations made in the
class actions.

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##### Table of Contents



VALEANT PHARMACEUTICALS
INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)

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

Patents:Various
parties are opposing the Companys ribavirin patents in
actions before the European Patent Office, and the Company is
responding to these oppositions. Regardless of the outcome of
these oppositions, the Company believes the combination
therapies marketed by Schering-Plough and Roche will continue to
benefit from a period of data and marketing protection in the
major markets of the European Union until 2009 for Schering and
2012 for Roche.

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

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

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

Argentina Antitrust
Matter:In July 2004, the Company was
advised that the Argentine Antitrust Agency had issued a notice
unfavorable to the Company in a proceeding against its Argentine
subsidiary. The proceeding involves allegations that the
subsidiary in Argentina abused a dominant market position in
1999 by increasing its price on Mestinon in Argentina and not
supplying the market for approximately two months. The
subsidiary filed documents with the agency offering an
explanation justifying its actions, but the agency has now
rejected the explanation. The Company is considering its
response. Argentinean law permits a fine to be levied of up to
$5,000,000 plus 20% of profits realized due to the alleged
wrongful conduct. Counsel in the

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VALEANT PHARMACEUTICALS
INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)

matter advises that the size of the transactions
alleged to have violated the law will unlikely draw the maximum
penalty.

Permax Product Liability
Cases:In February 2004, the Company
purchased the shares of Amarin Pharmaceuticals Inc. A case
captioned 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 hasbeen filed in
the District Court of Tarrant County, Texas alleging that use of
Permax, a drug for the treatment of Parkinsons Disease
marketed and sold by Amarin, caused valvular heart disease. The
plaintiff generally seeks compensatory damages. Eli Lilly,
holder of the right granted by the FDA to market and sell Permax
in the United States, though such right was licensed to Amarin
and the source of the manufactured product, has also been named
in the suit and under an agreement between the Company and
Lilly, will bear a portion of the liability associated with
these cases. Product liability insurance exists with respect to
this claim, it is expected that the insurance proceeds will be
sufficient to cover such judgment.

Other:The Company
is a party to other pending lawsuits or subject to a number of
threatened lawsuits. While the ultimate outcome of pending and
threatened lawsuits or pending violations cannot be predicted
with certainty, and an unfavorable outcome could have a negative
impact on the Company, at this time in the opinion of
management, the ultimate resolution of these matters will not
have a material effect on the Companys consolidated
financial position, results of operations or liquidity.



|    |                  
|--- | -----------------
|11. | Business Segments

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

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VALEANT PHARMACEUTICALS
INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)

restructuring char

The following table sets forth the amounts of
segment revenues and operating income of the Company for the
three and six months ended June 30, 2004 and 2003 (in
thousands):

|                        |                                                                                                      |                       |        |                  |         |      |        |         |         |  |        |         |         |  |        |         |         | 
|----------------------- | ---------------------------------------------------------------------------------------------------- | --------------------- | ------ | ---------------- | ------- | ---- | ------ | ------- | ------- |  | ------ | ------- | ------- |  | ------ | ------- | ------- | 
|                        |                                                                                                      |                       |        |                 
|                        |                                                                                                      | Three Months Ended    |        | Six Months Ended
|                        |                                                                                                      | June 30,              |        | June 30,        
|                        |                                                                                                      |                       |        |                 
|                        |                                                                                                      | 2004                  |        | 2003             |         | 2004 |        | 2003   
|                        |                                                                                                      |                       |        |                  |         |      |        |        
|Revenues                |                                                                                                      |                       |        |                  |         |      |        |         |         |  |        |         |         |  |        |        
|Pharmaceuticals         |                                                                                                      |                       |        |                  |         |      |        |         |         |  |        |         |         |  |        |        
|                        | North America                                                                                        |                       | $      | 35,258           |         |      | $      | 26,063  |         |  | $      | 62,887  |         |  | $      | 41,434  |        
|                        | Latin America                                                                                        |                       |        | 36,491           |         |      |        | 33,685  |         |  |        | 65,644  |         |  |        | 60,056  |        
|                        | Europe                                                                                               |                       |        | 60,080           |         |      |        | 59,308  |         |  |        | 123,199 |         |  |        | 114,884 |        
|                        | Asia, Africa, Australia                                                                              |                       |        | 15,805           |         |      |        | 12,476  |         |  |        | 28,229  |         |  |        | 25,292  |        
|                        |                                                                                                      |                       |        |                  |         |      |        |         |         |  |        |         |         |  |        |        
|                        |                                                                                                      | Total pharmaceuticals |        |                  | 147,634 |      |        |         | 131,532 |  |        |         | 279,959 |  |        |         | 241,666 | 
|                        | Royalty revenues                                                                                     |                       |        | 22,734           |         |      |        | 51,955  |         |  |        | 48,111  |         |  |        | 100,538 |        
|                        |                                                                                                      |                       |        |                  |         |      |        |         |         |  |        |         |         |  |        |        
|                        |                                                                                                      | Consolidated revenues |        | $                | 170,368 |      |        | $       | 183,487 |  |        | $       | 328,070 |  |        | $       | 342,204 | 
|                        |                                                                                                      |                       |        |                  |         |      |        |         |         |  |        |         |         |  |        |        
|Operating Income (Loss) |                                                                                                      |                       |        |                  |         |      |        |         |         |  |        |         |         |  |        |        
|Pharmaceuticals         |                                                                                                      |                       |        |                  |         |      |        |         |         |  |        |         |         |  |        |        
|                        | North America                                                                                        |                       | $      | 10,903           |         |      | $      | 8,706   |         |  | $      | 17,787  |         |  | $      | 5,775   |        
|                        | Latin America                                                                                        |                       |        | 12,891           |         |      |        | 11,051  |         |  |        | 18,704  |         |  |        | 17,830  |        
|                        | Europe                                                                                               |                       |        | 2,913            |         |      |        | 7,755   |         |  |        | 11,527  |         |  |        | 14,893  |        
|                        | Asia, Africa, Australia                                                                              |                       |        | 1,619            |         |      |        | (426    | )       |  |        | 1,496   |         |  |        | 1,224   |        
|                        |                                                                                                      |                       |        |                  |         |      |        |         |         |  |        |         |         |  |        |        
|                        |                                                                                                      |                       | 28,326 |                  |         |      | 27,086 |         |         |  | 49,514 |         |         |  | 39,722 |        
|                        | IPR&D(1)                                                                                             |                       |        | (384             | )       |      |        |        |         |  |        | (11,770 | )       |  |        |        |        
|                        | Restructuring and impairment charges(1)                                                              |                       |        | (20,185          | )       |      |        |        |         |  |        | (20,185 | )       |  |        |        |        
|                        |                                                                                                      |                       |        |                  |         |      |        |         |         |  |        |         |         |  |        |        
|                        |                                                                                                      | Total pharmaceuticals |        |                  | 7,757   |      |        |         | 27,086  |  |        |         | 17,559  |  |        |         | 39,722  | 
|                        | Research and development                                                                             |                       |        | (5,315           | )       |      |        | 37,266  |         |  |        | (6,287  | )       |  |        | 70,809  |        
|                        |                                                                                                      |                       |        |                  |         |      |        |         |         |  |        |         |         |  |        |        
|                        | Consolidated segment operating income                                                                |                       |        | 2,442            |         |      |        | 64,352  |         |  |        | 11,272  |         |  |        | 110,531 |        
|                        | Corporate expenses                                                                                   |                       |        | (12,059          | )       |      |        | (15,516 | )       |  |        | (24,652 | )       |  |        | (29,314 | )      
|                        | Interest income                                                                                      |                       |        | 3,110            |         |      |        | 1,131   |         |  |        | 6,170   |         |  |        | 2,113   |        
|                        | Interest expense                                                                                     |                       |        | (14,284          | )       |      |        | (7,729  | )       |  |        | (29,243 | )       |  |        | (16,021 | )      
|                        | Other, net                                                                                           |                       |        | (6,530           | )       |      |        | (5,803  | )       |  |        | (7,576  | )       |  |        | (1,712  | )      
|                        |                                                                                                      |                       |        |                  |         |      |        |         |         |  |        |         |         |  |        |        
|                        | Income (loss) from continuing operations before
    provision for income taxes and minority interest |                       | $      | (27,321          | )       |      | $      | 36,435  |         |  | $      | (44,029 | )       |  | $      | 65,597  |        
|                        |                                                                                                      |                       |        |                  |         |      |        |         |         |  |        |         |         |  |        |        



---



|    |                                                                                                                                                                                                                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | IPR&D and restructuring charges are not
    included in the North America pharmaceutical segment and Europe
    pharmaceutical segment, respectively, as the Companys
    chief decision maker excludes these items in assessing the
    financial performance of these segments, primarily due to their
    non-operational nature.

18



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##### Table of Contents



VALEANT PHARMACEUTICALS
INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)

The following table sets forth the segment total
assets of the Company as of June 30, 2004 and
December 31, 2003 (in thousands):

|                         |                         |                       |           |              |         |   |           |         |         | 
|------------------------ | ----------------------- | --------------------- | --------- | ------------ | ------- | - | --------- | ------- | ------- | 
|                         |                         |                      
|                         |                         | Total Assets         
|                         |                         |                      
|                         |                         | June 30,              |           | December 31,
|                         |                         | 2004                  |           | 2003        
|                         |                         |                       |           |             
|Pharmaceuticals          |                         |                       |           |              |         |   |           |        
|                         | North America           |                       | $         | 442,244      |         |   | $         | 400,265 |        
|                         | Latin America           |                       |           | 117,611      |         |   |           | 105,333 |        
|                         | Europe                  |                       |           | 328,934      |         |   |           | 350,142 |        
|                         | Asia, Africa, Australia |                       |           | 40,924       |         |   |           | 25,631  |        
|                         |                         |                       |           |              |         |   |           |        
|                         |                         | Total pharmaceuticals |           |              | 929,713 |   |           |         | 881,371 | 
|Corporate                |                         |                       | 652,444   |              |         |   | 853,718   |        
|Research and development |                         |                       | 228,857   |              |         |   | 213,854   |        
|Discontinued operations  |                         |                       | 30,780    |              |         |   | 27,994    |        
|                         |                         |                       |           |              |         |   |           |        
|Total                    |                         | $                     | 1,841,794 |              |         | $ | 1,976,937 |        
|                         |                         |                       |           |              |         |   |           |        



|    |             
|--- | ------------
|12. | Common Stock

On May 25, 2004, pursuant to the
Companys approved director compensation plan, the Company
granted its non-employee directors 41,996 shares of phantom
stock with a fair market value of approximately $740,000. Each
share of phantom stock vests over one year and is exchanged for
a share of the Companys common stock one year after the
director ceases to serve as a member of the Companys Board.

19



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##### Table of Contents



VALEANT PHARMACEUTICALS
INTERNATIONAL


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)





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

The following discussion relates to the
information presented in the consolidated condensed financial
statements included in this Quarterly Report. In its discussion
of the material changes in the Companys financial
condition and results of operations between the reporting
periods in the consolidated condensed financial statements,
management has sought to identify and, in some cases, quantify,
the factors that contributed to such material changes. However,
quantifying these factors may involve the presentation of
numerical measures that exclude amounts that are included in the
most directly comparable measure calculated and presented in
accordance with accounting principles generally accepted in the
United States (GAAP). Management uses this
information to assess material changes in the Companys
financial condition and results of operations and is providing
it to enable investors and potential investors to understand
these assessments. In each instance, such information is
presented immediately following (and in connection with an
explanation of) the most directly comparable financial measure
calculated in accordance with GAAP, and includes other material
information necessary to reconcile the information with the
comparable GAAP financial measure.

Overview

The Company is a global, research-based specialty
pharmaceutical company that discovers, develops, manufactures
and markets a broad range of pharmaceutical products. The
Company generates revenues from product sales and royalty
revenues. Product sales accounted for approximately 85% and 71%
of the Companys total revenues from continuing operations
for the six months ended June 30, 2004 and 2003,
respectively. The Company generates royalty revenues from the
sale of ribavirin by Schering-Plough and Roche. Royalty revenues
decreased $52,427,000 (52%) and accounted for 15% of the
Companys total revenues from continuing operations for the
six months ended June 30, 2004 compared to 29% for the same
period in 2003. Based on the Companys research and
development capability and a worldwide capacity to commercialize
its products, the Company expects to leverage its position as a
global fully integrated specialty pharmaceutical company focused
on neurology, dermatology and infectious disease both near term
with existing and acquired products and long term through
commercialization of products developed internally.

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



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



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

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



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Focus on 10 Key Geographic
    Regions.The Company has four
    pharmaceutical segments comprising its pharmaceutical operations
    in North America, Latin America, Europe and Asia, Africa and
    Australia. Within these four pharmaceutical segments, the
    Company will focus on 10 key geographic regions: the United
    States, Canada, Mexico, United Kingdom, France, Italy, Poland,
    Germany, Spain and China. In particular, as the Company pursues
    acquisition opportunities and product line extensions, it

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##### Table of Contents



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | plans to focus on North America, the largest
    pharmaceutical market worldwide and thus its biggest growth
    opportunity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| | Focus on Three Core Therapeutic
    Classes.The Company will focus on
    infectious disease, neurology and dermatology. The Company
    believes that these three therapeutic classes are positioned for
    further growth, and that it is possible for a mid-sized company,
    such as ourselves, to attain a leadership position within these
    categories.                                                                                                                                                                                                                                                                                                                                                                                                       
|
| | Focus on Nine Global
    Brands.The Company currently focuses
    on nine global brands, seven of which are currently being
    marketed. Sales of these brands accounted for 24% and 21% of its
    product sales for the six months ended June 30, 2004 and
    2003, respectively. Two of these brands, Viramidine and
    remofovir, are currently in clinical development. All of these
    nine global brands are within the Companys three targeted
    core therapeutic classes. The Company believes that these brands
    have the potential for global penetration and growth rates above
    industry averages. The Company is actively pursuing life cycle
    management strategies for all of its global brands and
    selectively for its other brands.



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

Under the Companys global manufacturing
strategy announced in October 2003, the Company plans to reduce
the number of manufacturing facilities from 15 to five by 2005,
in order to increase capacity utilization and improve
efficiencies. In conjunction with the rationalization of the
Companys manufacturing facilities, it has undertaken a
major process improvement initiative, affecting all phases of
its operations, from raw material and supply logistics, to
manufacturing, warehousing and distribution. In addition,
procurement efforts have been centralized to realize economies
of scale.

In the second quarter of 2004, the Company has
made significant progress towards its plans of disposing of
certain of the manufacturing sites and recorded a pre-tax
restructuring and impairment charge of $20,185,000 primarily for
impairment of these sites.



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



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

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



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

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

In February 2004, the Company acquired from
Amarin Corporation, plc its U.S.-based subsidiary, Amarin
Pharmaceuticals, Inc. (Amarin), and all of its
U.S. product rights, which includes Permax® and a
primary care portfolio with a broad range of indications for
$38,000,000 in cash. The Company also acquired in the
transaction the rights to Zelapar®, a late-stage candidate
for the treatment of Parkinsons disease. Amarin has
received an approvable letter from the FDA for Zelapar, subject
to the completion of two safety studies, which are expected to
be completed in 2004. See Note 2 to notes to consolidated
condensed financial statements for a discussion of this
acquisition.

21



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##### Table of Contents



In April 2004, the Company acquired the worldwide
rights, excluding the European Union, to Tasmar®
(tolcapone), an indication for the treatment of Parkinsons
disease, from Roche for $13,500,000 in cash, plus future royalty
payments.

Critical Accounting Policies and
Estimates

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

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



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

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



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

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

The Company assesses whether its is more likely
than not that it will realize the tax benefits associated with
its deferred tax assets and establishes a valuation allowance
for assets that do not meet this criteria. A significant amount
of judgment is used in this process, including preparation of
forecasts of future taxable income and evaluation of tax
planning initiatives. If the Company revises these forecasts or
determines that certain planning events will not occur, an
adjustment to the valuation allowance will be made to tax
expense in the period such determination is made. The
Companys U.S. tax returns for the period from 1997 to
2001 are currently being reviewed by the Internal Revenue
Service. While the Company believes the tax returns have been
prepared in accordance with the prevailing tax laws at the time,
interpretations of the law different from what was applied could
result in permanent and timing differences that may adversely
affect the Companys reported effective tax rate and
after-tax cash flows.



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

The Company periodically evaluates the carrying
value of property, plant and equipment. In evaluating property,
plant and equipment, the Company determines whether there has
been impairment by comparing the anticipated undiscounted future
cash flows expected to be generated by the property, plant and
equipment with its carrying value. If the undiscounted cash
flows is less than the carrying value, the amount of the
impairment, if any, will be determined by comparing the carrying
value of the property, plant and equipment with its fair value.
Fair value is generally based on a discounted cash flows
analysis, independent appraisals or preliminary offers from
prospective buyers.

22



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

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

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

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



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

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

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

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



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

The Company is exposed to contingencies in the
ordinary course of business, such as legal proceedings and
business-related claims, which range from product and
environmental liabilities to tax matters. In

23



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##### Table of Contents



accordance with SFAS No. 5,
Accounting for Contingencies, we record accruals for such
contingencies when it is probable that a liability will be
incurred and the amount of loss can be reasonably estimated. The
estimates are refined each accounting period, as additional
information is known. See Note 3 and Note 10 of Notes
to Consolidated Condensed Financial Statements for a discussion
of contingencies.


Results of Operations

The Company has four reportable pharmaceutical
segments comprising the Companys pharmaceuticals
operations in North America, Latin America, Europe and Asia,
Africa and Australia. In addition, the Company has a research
and development division. Certain financial information for the
Companys business segments is set forth below. This
discussion should be read in conjunction with the consolidated
condensed financial statements of the Company included elsewhere
in this quarterly report. For additional financial information
by business segment, see Note 11 of notes to consolidated
condensed financial statements included elsewhere in this
quarterly report.

Quarter Ended June 30, 2004 Compared to
2003

|                                     |                         |                       |         |           |         |            |         |        |         |   |         |         |        |  |     |    |    | 
|------------------------------------ | ----------------------- | --------------------- | ------- | --------- | ------- | ---------- | ------- | ------ | ------- | - | ------- | ------- | ------ |  | --- | -- | -- | 
|                                     |                         |                       |         |           |         |           
|                                     |                         | Three Months Ended    |         |           |         |           
|                                     |                         | June 30,              |         |           |         |           
|                                     |                         |                       |         | Increase/ |         | Percent   
|                                     |                         | 2004                  |         | 2003      |         | (Decrease) |         | Change
|                                     |                         |                       |         |           |         |            |         |       
|Revenues                             |                         |                       |         |           |         |            |         |        |         |   |         |         |        |  |     |   
|Pharmaceuticals                      |                         |                       |         |           |         |            |         |        |         |   |         |         |        |  |     |   
|                                     | North America           |                       | $       | 35,258    |         |            | $       | 26,063 |         |   | $       | 9,195   |        |  |     | 35 | % 
|                                     | Latin America           |                       |         | 36,491    |         |            |         | 33,685 |         |   |         | 2,806   |        |  |     | 8  |   
|                                     | Europe                  |                       |         | 60,080    |         |            |         | 59,308 |         |   |         | 772     |        |  |     | 1  |   
|                                     | Asia, Africa, Australia |                       |         | 15,805    |         |            |         | 12,476 |         |   |         | 3,329   |        |  |     | 27 |   
|                                     |                         |                       |         |           |         |            |         |        |         |   |         |         |        |  |     |   
|                                     |                         | Total pharmaceuticals |         |           | 147,634 |            |         |        | 131,532 |   |         |         | 16,102 |  |     |    | 12 | 
|Royalties                            |                         |                       | 22,734  |           |         |            | 51,955  |        |         |   | (29,221 | )       |        |  | (56 | ) 
|                                     |                         |                       |         |           |         |            |         |        |         |   |         |         |        |  |     |   
|Total revenues                       |                         |                       | 170,368 |           |         |            | 183,487 |        |         |   | (13,119 | )       |        |  | (7  | ) 
|Expenses                             |                         |                       |         |           |         |            |         |        |         |   |         |         |        |  |     |   
|Cost of goods sold                   |                         |                       | 45,938  |           |         |            | 47,321  |        |         |   | (1,383  | )       |        |  | (3  | ) 
|Selling expenses                     |                         |                       | 53,575  |           |         |            | 43,390  |        |         |   | 10,185  |         |        |  | 23  |   
|General and administrative expenses  |                         |                       | 24,849  |           |         |            | 26,333  |        |         |   | (1,484  | )       |        |  | (6  | ) 
|Research and development costs       |                         |                       | 20,921  |           |         |            | 9,790   |        |         |   | 11,131  |         |        |  | 114 |   
|Acquired IPR&D                       |                         |                       | 384     |           |         |            |        |        |         |   | 384     |         |        |  |    |   
|Restructuring and impairment charges |                         |                       | 20,185  |           |         |            |        |        |         |   | 20,185  |         |        |  |    |   
|Amortization expense                 |                         |                       | 14,133  |           |         |            | 7,817   |        |         |   | 6,316   |         |        |  | 81  |   
|                                     |                         |                       |         |           |         |            |         |        |         |   |         |         |        |  |     |   
|                                     | Operating income (loss) |                       | $       | (9,617    | )       |            | $       | 48,836 |         |   | $       | (58,453 | )      |  |     |   |   
|                                     |                         |                       |         |           |         |            |         |        |         |   |         |         |        |  |     |   
|Gross profit on product sales        |                         | $                     | 101,696 |           |         | $          | 84,211  |        |         | $ | 17,485  |         |        |  | 21  |   
|                                     |                         |                       |         |           |         |            |         |        |         |   |         |         |        |  |     |   
|Gross profit % on product sales      |                         |                       | 69      | %         |         |            | 64      | %      |         |   |         |         |        |  | 5   | % 
|                                     |                         |                       |         |           |         |            |         |        |         |   |         |         |        |  |     |   

Pharmaceutical
Revenues:Pharmaceutical product sales
increased $16,102,000 (12%) for the three months ended
June 30, 2004 over the same period in 2003. Higher prices
and sales volume, particularly in North America, contributed
$9,195,000 to the increase in overall product sales. In
addition, foreign currency contributed $1,171,000 (7%) on a net
basis to the increase in overall product sales primarily due to
the increase in the value of the Euro over the U.S. dollar.
Over the next several years, the Company expects to see industry
level growth of between 5 to 10 percent per year in
pharmaceutical revenues excluding increases due to product
acquisitions. The Company expects to see continued generic and
other competition to its products

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in 2004 and beyond, and it expects to see
continued pricing challenges through price controls in Europe
and the rest of the world as governments take steps to reduce
their overall costs of healthcare.


In the North America Pharmaceuticals segment,
revenues for the three months ended June 30, 2004 were
$35,258,000 compared to $26,063,000 for the same period in 2003,
an increase of $9,195,000 (35%). The increase reflects higher
sales volume of Oxsoralen-Ultra, Kinerase and Librax, partially
offset by a decrease in Mestinon sales. Additionally, revenues
in 2004 increased $4,380,000 due to sales related to the Amarin
and Tasmar acquisitions.

In the Latin America Pharmaceuticals segment,
revenues for the three months ended June 30, 2004 were
$36,491,000 compared to $33,685,000 for the same period in 2003,
an increase of $2,806,000 (8%). The increase is primarily due to
price increases and reduced discounts to wholesalers, partially
offset by a decrease in the value of currencies in the region of
$1,867,000.

In the Europe Pharmaceuticals segment, revenues
for the three months ended June 30, 2004 were $60,080,000
compared to $59,308,000 for the same period in 2003, an increase
of $772,000 (1%). The increase in the value of currencies in the
region as compared to the U.S. dollar contributed
$2,109,000 to the increase in revenues in the region, partially
offset by lower sales volume of $1,535,000.

In the Asia, Africa and Australia
(AAA) Pharmaceuticals segment, revenues for the
three months ended June 30, 2004 were $15,805,000 compared
to $12,476,000 for the same period in 2003, an increase of
$3,329,000 (27%). The increase is primarily due to higher sales
of Nyal of $2,994,000, a winter product in Australia.

Royalties:Royalty
revenues represent amounts earned under the license and supply
agreements with Schering-Plough and Roche. Under a license and
supply agreement, Schering-Plough licensed all oral forms of
ribavirin for the treatment of chronic hepatitis C. Roche
pays royalty fees to the Company under a license agreement on
sale of Roches version of ribavirin, Copegus, for use in
combination with interferon alfa or pegylated interferon alfa.

Royalties for the three months ended
June 30, 2004 from Schering-Plough and Roche were
$22,734,000 compared to $51,955,000 for the same period in 2003,
a decrease of $29,221,000 (56%). The decrease in royalties
include the effects of the launch of generic ribavirin in the
U.S. and increasing competition between Schering-Plough and
Roche. Approval of a generic form of oral ribavirin by the
U.S. Food and Drug Administration (FDA) in the
U.S. was announced on April 7, 2004. This approval has
had and is expected to continue to have a material negative
impact on royalty amounts. Schering-Plough announced its launch
of a generic version of ribavirin. Under the license and supply
agreement, Schering-Plough is obligated to pay the Company
royalties for sales of their generic ribavirin.

Gross Profit:Gross
profit on product sales increased to 69% for the three months
ended June 30, 2004 compared to 64% in 2003. The increase
in gross profit is primarily due to an increase in sales from
North America and higher efficiencies in the Companys
global manufacturing and supply chain operations. The increase
in gross profit was partially offset by an increase in costs
related to the manufacturing rationalization plan.

Selling Expenses:Selling expenses were $53,575,000 for the three months ended
June 30, 2004 compared to $43,390,000 for the same period
in 2003, an increase of $10,185,000 (23%). As a percent of
product sales, selling expenses increased from 33% in the three
months ended June 30, 2003 to 36% in the comparable period
in 2004. Included in selling expenses for the three months ended
June 30, 2004 are severance charges of $3,351,000 related
to a sales force reduction in Europe. The remaining increase of
$6,834,000 reflects the Companys increased promotional
efforts in North America, Europe and Latin America, which
includes costs related to new product launches and unified
promotional materials and campaigns for the Companys
global products.

General and Administrative
Expenses:General and administrative
expenses were $24,849,000 for the three months ended
June 30, 2004 compared to $26,333,000, a decrease of
$1,484,000 (6%). As a percent of product sales, general and
administrative expenses decreased from 20% in the three months
ended June 30,

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2003 to 17% in the comparable period of 2004. The
decrease is primarily due to reduced legal fees of approximately
$1,600,000, partially offset by severance charges of $1,159,000
related to workforce reductions in Spain.


Research and
Development:Research and development
expenses for the three months ended June 30, 2004 were
$20,921,000 compared to $9,790,000 for the same period in 2003.
The increase is primarily attributable to the acceleration of
clinical trials of Viramidine and remofovir. The Company
completed enrollment of one of two Phase 3 studies being
conducted for Viramidine, and began enrollment in the second
Phase 3 study for Viramidine and the initiation of a
Phase 2 study for remofovir in the second quarter of 2004.
It is expected that research and development expenses will
increase significantly in 2004 and 2005 compared to 2003 as
progress continues with the clinical trials of Viramidine and
remofovir.

Restructuring and impairment
charges:In the three and six months
ended June 30, 2004, the Company incurred an expense of
$20,185,000 related to the manufacturing rationalization plan.
The Company has made significant progress towards its plans of
disposing of the manufacturing sites in the second quarter of
2004 and is currently actively marketing the sites to
prospective buyers. The sites were tested for impairment in the
second quarter of 2004, resulting in impairment of asset value
on three of the sites. Accordingly, the Company wrote these
sites down to their fair value and recorded an impairment charge
of $18,000,000 for the three and six months ended June 30,
2004. In addition to the impairment charge, the Company recorded
$2,185,000 related to severance for the three and six months
ended June 30, 2004.

Amortization:Amortization expense for the three months ended June 30,
2004 was $14,133,000 compared to $7,817,000 for the same period
in 2003. The increase in 2004 was primarily related to
amortization of intangibles related to the acquisition of
Ribapharm of $4,777,000. The remaining increase in 2004 relates
primarily to amortization of intangibles acquired with the
Amarin acquisition.

Other Income, Net, Including Translation and
Exchange:Other income, net, including
translation and exchange was a loss of $632,000 for the three
months ended June 30, 2004 compared to a loss of $5,803,000
for the same period in 2003. In 2004, translation losses
principally consisted of translation and exchange losses in
Europe of $1,749,000, partially offset by translation and
exchange gains in Latin America of $981,000. The Companys
translation and exchange losses are primarily related to
U.S. dollar denominated assets and liabilities at its
foreign currency denominated subsidiaries.

Loss on Early Extinguishment of
Debt:Loss on early extinguishment of
debt for the three months ended June 30, 2004 was
$5,898,000 related to the repurchase of $89,402,000 principal
amount of the Companys 6 1/2% Convertible
Subordinated Notes due 2008
(6 1/2% Notes). In July 2004, the Company
redeemed the remaining portion of its outstanding
6 1/2% Notes of $236,599,000 and will record a loss on
early extinguishment of debt of $13,994,000 in the third quarter
of 2004.

Interest Expense and
Income:Interest expense during the
three months ended June 30, 2004 increased $6,555,000
compared to the same period in 2003. The increase was due to the
issuance of $480,000,000 of 3.0% and 4.0% Convertible
Subordinated Notes and $300,000,000 of 7.0% Senior Notes in
the fourth quarter of 2003. As mentioned above, the Company
repurchased and redeemed all of the 6 1/2% Notes,
which will result in lower interest expense for the remainder of
2004. Interest income increased $1,979,000 during the three
months ended June 30, 2004 compared to the same period in
2003 due primarily to higher cash balances.

Income Taxes:As a
result of the Companys loss from continuing operations for
the three months ended June 30, 2004, the Company recorded
a minimal tax benefit compared to a provision of 38% for the
same period of 2003. The Companys effective tax rate for
2004 was affected by pre-tax losses resulting from restructuring
and impairment charges ($20,185,000) and in Europe a work force
reduction ($4,510,000), for which the Company recorded a minimal
tax benefit of $1,138,000 (5%). This minimal tax benefit
reflects the uncertainty of the realization of tax benefits in
some of the markets where these charges were incurred.
Additionally, the Company recorded a tax provision of $1,828,000
related to the settlement of a tax dispute with Puerto Rico in
the three months ended June 30, 2004. Excluding the effect
of these items, the 2004 effective tax rate would have been 30%.
The lower effective tax rate in 2004 reflects a shift in the mix
of taxable income with less income from higher tax jurisdictions.

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Income (loss) from Discontinued Operations,
Net of Taxes:Income (loss) from
discontinued operations was a loss of $13,966,000 for the three
months ended June 30, 2004 compared to a loss of $2,567,000
for the same period in 2003. The loss in 2004 includes
environmental charges of $16,000,000 ($10,080,000 net of
taxes) related to a former operating site of the Companys
Biomedicals division, which the Company retained the liability
for when it sold this business, partially offset by income from
sales of products manufactured in its facilities in Central
Europe. The Company expects to sell these facilities prior to
the end of the year. In June 2003, the Company sold its Russian
Pharmaceuticals segment for cash proceeds of $55,000,000 and
certain assets of its Biomedicals segment for
727,990 shares of its common stock, which had a fair market
value of approximately $12,369,000. The loss in 2003 includes a
loss on disposal of discontinued operations of $6,596,000,
partially offset by income from discontinued operations of
$4,029,000.

Six Months Ended June 30, 2004 Compared
to 2003

|                                    |                         |                       |         |           |         |            |         |         |         |   |         |         |        |  |     |    |    | 
|----------------------------------- | ----------------------- | --------------------- | ------- | --------- | ------- | ---------- | ------- | ------- | ------- | - | ------- | ------- | ------ |  | --- | -- | -- | 
|                                    |                         |                       |         |           |         |           
|                                    |                         | Six Months Ended      |         |           |         |           
|                                    |                         | June 30,              |         |           |         |           
|                                    |                         |                       |         | Increase/ |         | Percent   
|                                    |                         | 2004                  |         | 2003      |         | (Decrease) |         | Change 
|                                    |                         |                       |         |           |         |            |         |        
|Revenues                            |                         |                       |         |           |         |            |         |         |         |   |         |         |        |  |     |   
|Pharmaceuticals                     |                         |                       |         |           |         |            |         |         |         |   |         |         |        |  |     |   
|                                    | North America           |                       | $       | 62,887    |         |            | $       | 41,434  |         |   | $       | 21,453  |        |  |     | 52 | % 
|                                    | Latin America           |                       |         | 65,644    |         |            |         | 60,056  |         |   |         | 5,588   |        |  |     | 9  |   
|                                    | Europe                  |                       |         | 123,199   |         |            |         | 114,884 |         |   |         | 8,315   |        |  |     | 7  |   
|                                    | Asia, Africa, Australia |                       |         | 28,229    |         |            |         | 25,292  |         |   |         | 2,937   |        |  |     | 12 |   
|                                    |                         |                       |         |           |         |            |         |         |         |   |         |         |        |  |     |   
|                                    |                         | Total pharmaceuticals |         |           | 279,959 |            |         |         | 241,666 |   |         |         | 38,293 |  |     |    | 16 | 
|Royalties                           |                         |                       | 48,111  |           |         |            | 100,538 |         |         |   | (52,427 | )       |        |  | (52 | ) 
|                                    |                         |                       |         |           |         |            |         |         |         |   |         |         |        |  |     |   
|Total revenues                      |                         |                       | 328,070 |           |         |            | 342,204 |         |         |   | (14,134 | )       |        |  | (4  | ) 
|Expenses                            |                         |                       |         |           |         |            |         |         |         |   |         |         |        |  |     |   
|Cost of goods sold                  |                         |                       | 92,650  |           |         |            | 88,560  |         |         |   | 4,090   |         |        |  | 5   |   
|Selling expenses                    |                         |                       | 101,317 |           |         |            | 80,668  |         |         |   | 20,649  |         |        |  | 26  |   
|General and administrative expenses |                         |                       | 48,724  |           |         |            | 56,926  |         |         |   | (8,202  | )       |        |  | (14 | ) 
|Research and development costs      |                         |                       | 39,384  |           |         |            | 18,949  |         |         |   | 20,435  |         |        |  | 108 |   
|Acquired IPR&D                      |                         |                       | 11,770  |           |         |            |        |         |         |   | 11,770  |         |        |  |    |   
|Restructuring charges               |                         |                       | 20,185  |           |         |            |        |         |         |   | 20,185  |         |        |  |    |   
|Amortization expense                |                         |                       | 27,420  |           |         |            | 15,884  |         |         |   | 11,536  |         |        |  | 73  |   
|                                    |                         |                       |         |           |         |            |         |         |         |   |         |         |        |  |     |   
|                                    | Operating income (loss) |                       | $       | (13,380   | )       |            | $       | 81,217  |         |   | $       | (94,597 | )      |  |     |   |   
|                                    |                         |                       |         |           |         |            |         |         |         |   |         |         |        |  |     |   
|Gross profit on product sales       |                         | $                     | 187,309 |           |         | $          | 153,106 |         |         | $ | 34,203  |         |        |  | 22  |   
|                                    |                         |                       |         |           |         |            |         |         |         |   |         |         |        |  |     |   
|Gross profit % on product sales     |                         |                       | 67      | %         |         |            | 63      | %       |         |   |         |         |        |  | 4   | % 
|                                    |                         |                       |         |           |         |            |         |         |         |   |         |         |        |  |     |   

Pharmaceutical
Revenues:Pharmaceutical product sales
increased $38,293,000 (16%) for the six months ended
June 30, 2004 over the same period in 2003. Higher prices
and sales volume, particularly in North America, contributed
$21,453,000 to the increase in overall product sales. A
substantial portion of this increase is attributed to the
Companys decision to reduce sales in the prior year in
order to reduce inventory levels at wholesale distributors in
the U.S. Foreign currency contributed $9,174,000 (24%) on a
net basis to the increase in overall product sales primarily due
to the increase in the value of the Euro over the
U.S. dollar.

In the North America Pharmaceuticals segment,
revenues for the six months ended June 30, 2004 were
$62,887,000 compared to $41,434,000 for the same period in 2003,
an increase of $21,453,000 (52%). The increase is primarily due
to the completion of an inventory reduction program at the
Companys wholesalers in 2003, which began in June 2002 and
was completed in April 2003. Additionally, revenues in 2004
increased $4,470,000 due to sales related to the Amarin and
Tasmar acquisitions.

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In the Latin America Pharmaceuticals segment,
revenues for the six months ended June 30, 2004 were
$65,644,000 compared to $60,056,000 for the same period in 2003,
an increase of $5,588,000 (9%). The increase is primarily due to
price increases and reduced discounts to wholesalers in the
region of $7,683,000 partially offset by a decrease in the value
of currencies in the region of $1,533,000.

In the Europe Pharmaceuticals segment, revenues
for the six months ended June 30, 2004 were $123,199,000
compared to $114,884,000 for the same period in 2003, an
increase of $8,315,000 (7%). The increase in the value of
currencies in the region as compared to the U.S. dollar
contributed $8,049,000 to the increase in revenues in the region.

In the Asia, Africa and Australia
(AAA) Pharmaceuticals segment, revenues for the six
months ended June 30, 2004 were $28,229,000 compared to
$25,292,000 for the same period in 2003, an increase of
$2,937,000 (12%). The increase is primarily due to price
increases of $1,801,000 coupled with an increase in the value of
currencies in the region of $1,714,000.

Royalties:Royalties
for the six months ended June 30, 2004 from Schering-Plough
and Roche were $48,111,000 compared to $100,538,000 for the same
period in 2003, a decrease of $52,427,000 (52%). The decrease in
royalties include the effects of the launch of generic ribavirin
in the U.S., increasing competition between Schering-Plough and
Roche, and Schering-Ploughs provision for estimated
rebates on its U.S. sales of ribavirin and changes in trade
inventory levels as reported to the Company by Schering-Plough.
The generic approval of ribavirin in the U.S. has had and
is expected to continue to have a material negative impact on
the royalty amounts.

Gross Profit:Gross
profit on product sales increased to 67% for the six months
ended June 30, 2004 compared to 63% in 2003. The increase
in gross profit is primarily due to an increase in sales from
North America and higher efficiencies in the Companys
global manufacturing and supply chain operations. The increase
in gross profit was partially offset by an increase in costs
related to the manufacturing rationalization plan.

Selling Expenses:Selling expenses were $101,317,000 for the six months ended
June 30, 2004 compared to $80,668,000 for the same period
in 2003, an increase of $20,649,000 (26%). As a percent of
product sales, selling expenses increased from 33% in the six
months ended June 30, 2003 to 36% in the same period in
2004. Included in selling expenses for the six months ended
June 30, 2004 are severance charges of $3,351,000 related
to a sales force reduction in Europe. The remaining increase of
$17,298,000 reflects the Companys increased promotional
efforts in North America, Europe and Latin America, which
includes costs related to new product launches and unified
promotional materials and campaigns for the Companys
global products.

General and Administrative
Expenses:General and administrative
expenses were $48,724,000 for the six months ended June 30,
2004 compared to $56,926,000 for the same period in 2003, a
decrease of $8,202,000 (14%). As a percent of product sales,
general and administrative expenses decreased from 24% in the
six months ended June 30, 2003 to 17% in the comparable
period of 2004. The decrease in general and administrative
expenses is primarily due to reduced legal fees of approximately
$3,400,000, partially offset by severance charges of $1,159,000
related to workforce reductions in Spain. While steps continue
to be taken to more effectively manage legal costs, legal fees
can vary period to period based on the level of activity
surrounding outstanding legal challenges.

Research and
Development:Research and development
expenses for the six months ended June 30, 2004 were
$39,384,000 compared to $18,949,000 for the same period in 2003.
The increase is primarily attributable to costs associated with
the clinical trials for Viramidine and remofovir.

Acquired In-Process Research and
Development:In the six months ended
June 30, 2004, the Company incurred an expense of
$11,770,000 associated with IPR&D related to the Amarin
Acquisition that occurred in February 2004. The amount expensed
as IPR&D represents the Companys estimate of the fair
value of purchased in-process technology for Zelapar that, as of
the acquisition date, had not yet reached technological
feasibility and had no alternative future use.

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Amortization:Amortization expense for the six months ended June 30, 2004
was $27,420,000 compared to $15,884,000 for the same period in
2003, an increase of $11,536,000. The increase in 2004 was
primarily related to amortization of intangibles related to the
acquisition of Ribapharm of $9,753,000. The remaining increase
in 2004 relates primarily to amortization of intangibles
acquired with the Amarin acquisition.

Other Income, Net, Including Translation and
Exchange:Other income, net, including
translation and exchange was a loss of $1,678,000 for the six
months ended June 30, 2004 compared to a loss of $1,712,000
for the same period in 2003. In 2004, losses principally
resulted from the sale of certain long-term investments prior
management had made in Europe and net translation losses
primarily related to U.S. dollar denominated assets and
liabilities at the Companys foreign currency denominated
subsidiaries.

Interest Expense and
Income:Interest expense during the
six months ended June 30, 2004 increased $13,222,000
compared to the same period in 2003. The increase was due
primarily to the issuance of new debt in the fourth quarter of
2003 in conjunction with the Companys refinancing
initiative. Interest income increased $4,057,000 during the six
months ended June 30, 2004 compared to the same period in
2003 due primarily to higher cash balances.

Income Taxes:As a
result of the Companys loss from continuing operations for
the six months ended June 30, 2004, its effective tax rate
was a benefit of 14% compared to a provision of 38% for the same
period in 2003. The Companys effective tax rate for 2004
was affected by pre-tax losses resulting from restructuring and
impairment charges ($20,185,000) and in Europe a work force
reduction ($4,510,000), for which the Company recorded a minimal
tax benefit of $1,138,000 (5%). This minimal tax benefit
reflects the uncertainty of the realization of tax benefits in
some of the markets where these charges were incurred.
Additionally, the Company recorded a tax provision of $1,828,000
related to the settlement of a tax dispute with Puerto Rico in
the six months ended June 30, 2004. Excluding the effect of
these items, the 2004 effective tax rate would have been 36%.
The lower effective tax rate in 2004 reflects a shift in the mix
of taxable income with less income from higher tax jurisdictions.

Income (Loss) from Discontinued Operations,
Net of Taxes:Income (loss) from
discontinued operations was a loss of $17,027,000 for the six
months ended June 30, 2004 compared to a loss of $2,118,000
for the same period in 2003. The loss in 2004 includes
environmental charges of $16,000,000 ($10,080,000 net of
taxes) related to a former operating site of the Companys
Biomedicals division, which the Company retained the liability
for when it sold this business, and loss on the Companys
sales of products manufactured in its facilities in Central
Europe. The loss for 2003 includes loss on disposal of
discontinued operations of $6,596,000, partially offset by
income from discontinued operations of $4,478,000.

Liquidity and Capital Resources

Cash and cash equivalents totaled $717,789,000 at
June 30, 2004 compared to $872,056,000 at December 31,
2003. Working capital was $824,850,000 at June 30, 2004
compared to $980,401,000 at December 31, 2003. The decrease
in working capital of $155,551,000 was primarily attributable to
payments on long-term debt and notes payable of $95,868,000, the
use of cash in the Amarin Acquisition and various other product
rights of $63,261,000, and an increase in accrued liabilities of
$11,629,000 partially offset by cash generated from operations
of $19,339,000.

Cash provided by operating activities is expected
to be the Companys primary recurring source of funds in
2004. During the six months ended June 30, 2004, cash
provided by operating activities totaled $19,339,000 compared to
$124,677,000 for the same period in 2003. Cash flow from
operating activities for the six months ended June 30, 2004
was negatively impacted by a decrease in royalty revenues and
increased spending in research and development activities. The
Company expects to see the effect of lower royalty revenues and
increased research and development for the remainder of the
year. During the six months ended June 30, 2004, the
Company recorded non-cash charges of $11,770,000 related to the
write-off of in-process research and development, $18,000,000
related to impairment charges and $5,898,000 related to the loss
on early extinguishment of debt.

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Cash (used in) provided by investing activities
was $(73,942,000) for the six months ended June 30, 2004
compared to $40,723,000 for the same period in 2003. In 2004,
net cash used in investing activities consisted of payments for
the Amarin acquisition and various other product rights of
$63,261,000, increase in restricted cash of $13,476,000 related
primarily to the interest rate swap on the 7% Senior Notes
due 2011 (the 7.0% Notes) and foreign currency
hedge and capital expenditures of $8,923,000, partially offset
by proceeds from sale of assets of $11,323,000 primarily related
to the sale of investments. In 2003, net cash provided by
investing activities consisted of cash provided by investing
activities in discontinued operations of $47,085,000 primarily
related to the sale of the Russian Pharmaceutical business,
partially offset by payments for capital expenditures of
$6,382,000.

Cash used in financing activities was $98,206,000
for the six months ended June 30, 2004, including payments
on long-term debt and notes payable of $95,868,000, principally
consisting of the repurchase of $89,402,000 principal of the
6 1/2% Notes, and cash dividends paid on common stock
of $12,901,000, partially offset by proceeds received from the
issuance of stock of $10,563,000. In 2003, cash used in
financing activities was $16,280,000 for the six months ended
June 30, 2003, including dividends paid on common stock of
$13,000,000 and payments on long-term debt and notes payable of
$3,159,000.

In January 2004, the Company entered into an
interest rate swap agreement with respect to $150,000,000
principal amount of the 7.0% Notes. The interest rate on
the swap will be variable at LIBOR plus 2.41%. The effect of
this transaction is to initially lower the Companys
effective interest rate by exchanging fixed rate payments for
floating rate payments. On a prospective basis, the effective
rate will float and correlate to the variable interest earned on
the Companys cash held. The Company has previously stated
that it expects to retain minimum cash levels of between
$100,000,000 and $150,000,000.

In May 2004, the Company repurchased $89,402,000
principal amount of the 6 1/2% Notes. In connection
with this repurchase, the Company recorded a loss on early
extinguishment of debt of $5,898,000 in the second quarter of
2004. In July 2004, the Company redeemed the remaining
$236,599,000 principal amount of its 6 1/2% Notes plus
accrued interest for $245,643,000. Upon this redemption, the
Companys wholly-owned subsidiary, Ribapharm Inc., ceased
being a co-obligor under the Companys
3.0% Convertible Subordinated Notes due 2010,
4.0% Convertible Subordinated Notes due 2013 and the
7.0% Notes. The redemption of these notes will result in a
loss on extinguishment of debt of $13,994,000 in the third
quarter of 2004.

Management believes that the Companys
existing cash and cash equivalents and funds generated from
operations will be sufficient to meet its operating requirements
at least through June 30, 2005, to fund anticipated
acquisitions, capital expenditures and its research and
development program. While the Company has no current intent to
issue additional debt or equity securities, it may also seek
additional debt financing or issue additional equity securities
to finance future acquisitions. The Company funds its cash
requirements primarily from cash provided by its operating
activities. The Companys sources of liquidity are its cash
and cash equivalent balances and its cash flow from operations.

Competition from generic pharmaceutical companies
has had and is expected to continue to have a material negative
impact on the Companys royalty revenue. With respect to
Schering-Plough, effective royalty rates increase in tiers based
on increased sales levels. As a result of reduced sales, the
likelihood of achieving the maximum effective royalty rate in
the U.S. is diminished. With respect to Roche, under the
license agreement, the introduction of generics in any market
will eliminate the obligation of Roche to pay royalties for
sales in that market. Upon the entry of generics into the
U.S. on April 17, 2004, Roche ceased paying royalties
on sales in the U.S.

While the Company has historically paid quarterly
cash dividends and has declared a dividend of $0.0775 per
share for the second quarter, there can be no assurance that it
will continue to do so in the future.

The Company currently has no product liability
insurance for a majority of its products in the United States.
In connection with the Amarin acquisition, the Company acquired
product liability insurance for Permax, which it will continue
to provide for, as a result of this product being subject to
settled and pending product liability litigation. While, to
date, no material adverse claim for personal injury resulting
from allegedly defective products has been successfully
maintained against it, a substantial claim, if successful,

30



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could have a negative impact on the
Companys liquidity and financial performance. The Company
maintains clinical trial insurance in major markets in which it
conducts clinical trials.


Products in Development

The Company expects its research and development
expenses to increase in the future, of which a large percentage
will be to support the continuing product development programs
for Viramidine and remofovir. The Company expects that it will
spend approximately $85 to $95 million on research and
development in 2004, of which $35 to $40 million is on the
product development programs for Viramidine and remofovir.

For Viramidine, the Company is continuing its
Phase 2 study in 180 patients with hepatitis C.
This study began in 2003 and has continued into 2004. The study
included an interim analysis performed on the first
160 patients who received at least 12 weeks of
therapy. In the second half of 2003, protocols for two
Phase 3 Viramidine studies were developed. The Company
decided to initiate the Phase 3 studies of Viramidine prior
to the completion of the Phase 2 clinical trials. Each of
the two Phase 3 studies will be conducted on a global
basis, and each study will consist of approximately 100
investigative sites and approximately 1,000 enrolled patients.
The studies will compare Viramidine and ribavirin, each in
conjunction with a pegylated interferon. The first of the two
global studies, known as VISER 1, began enrollment in the
fourth quarter of 2003 and completed enrollment in July 2004.
The second study, known as VISER 2, began enrollment in the
second quarter of 2004. The Companys external research and
development expenses for Viramidine were approximately
$7,495,000 and $13,262,000 for the three and six months ended
June 30, 2004, respectively, and $32,123,000 from inception
through June 30, 2004.

For remofovir, the Company has completed two
Phase 1 clinical trials in a total of 47 healthy
volunteers. Remofovir is currently being evaluated in a third
Phase 1 study, which is designed as a 28 day,
randomized, placebo-controlled, double-blind, dose-escalation
clinical trial in up to 40 patients with hepatitis B in the
U.S. The treatment phase of this study was completed and
the results are expected in late 2004. Further, a fourth
Phase 1 multiple dose study in Taiwan completed treatment
in May 2004. A 48-week dose-ranging Phase 2 study in Asia
and the US has started enrolling in July 2004. The
Companys external research and development expenses for
remofovir were approximately $2,048,000 and $3,506,000 for the
three and six months ended June 30, 2004, respectively, and
$16,628,000 (including a milestone payment of $1,100,000) from
inception through June 30, 2004.

Foreign Operations

Approximately 80% and 77% of the Companys
revenues from continuing operations for the six months ended
June 30, 2004 and 2003, respectively, were generated from
operations or earned outside the United States. All of the
Companys foreign operations are subject to risks inherent
in conducting business abroad, including possible
nationalization or expropriation, price and currency exchange
controls, fluctuations in the relative values of currencies,
political instability and restrictive governmental actions.
Changes in the relative values of currencies occur from time to
time and may, in some instances, materially affect the
Companys results of operations. The effect of these risks
remains difficult to predict.

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

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

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

Interest Rate and Currency
Risks:The Company currently does not
hold financial instruments for trading or speculative purposes.
The financial assets of the Company are not subject to
significant interest rate risk due to their short duration. At
June 30, 2004, the Company had $13,244,000 of foreign
denominated variable rate debt that would subject it to both
interest rate and currency risks. In January 2004, the Company
entered into an interest rate swap agreement with respect to
$150,000,000 principal amount of the 7.0% Notes. A 100
basis-point increase in interest rates affecting the
Companys financial instruments would have an immaterial
effect on the Companys second quarter 2004 pretax
earnings. In addition, the Company has $1,016,599,000 of fixed
rate debt as of June 30, 2004, that require
U.S. dollar repayment. In July 2004, the Company
repurchased the remaining portion of its outstanding
6 1/2% Notes of $236,599,000 (the
6 1/2% Notes Redemption). To the extent
that the Company requires, as a source of debt repayment,
earnings and cash flow from some of its units located in foreign
countries, the Company is subject to the risk of changes in the
value of certain currencies relative to the U.S. dollar.
However, including the effect of the 6 1/2% Notes
Redemption, the increase of a 100 basis-point in interest rates
would reduce the fair value of the Companys remaining
fixed-rate debt instruments by approximately $45,800,000 as of
June 30, 2004.

The Company estimated the sensitivity of the fair
value of its derivative foreign exchange contracts to a
hypothetical 10% strengthening and 10% weakening of the spot
exchange rates for the U.S. dollar against the Euro at
June 30, 2004. The analysis showed that a 10% strengthening
of the U.S. dollar would result in a gain from a fair value
change of $6,300,000 and a 10% weakening of the U.S. dollar
would result in a loss from a fair value change of $9,200,000 in
these instruments. Losses and gains on the underlying
transactions being hedged would largely offset any gains and
losses on the fair value of derivative contracts. These
offsetting gains and losses are not reflected in the above
analysis.






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

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

As of June 30, 2004, the Company conducted
an evaluation of the effectiveness of the design and operation
of the Companys disclosure controls and procedures. This
evaluation was carried out under the

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supervision and with the participation of the
Companys management, including the Companys Chief
Executive Officer and Chief Financial Officer. Based upon the
foregoing, the Companys Chief Executive Officer and Chief
Financial Officer concluded that the Companys disclosure
controls and procedures were effective in making known to them
material information relating to the Company (including its
consolidated subsidiaries) required to be included in this
report.


There has been no change in the Companys
internal controls over financial reporting, known to the Chief
Executive Officer or the Chief Financial Officer, that occurred
during the three and six months ended June 30, 2004 that
has materially affected, or is reasonably likely to materially
affect, the Companys internal controls over financial
reporting.

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FORWARD LOOKING STATEMENTS

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

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



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The future growth of the Companys business
    depends on the development and approval of new products,
    including Viramidine. The process of developing new drugs has an
    inherent risk of failure. Although certain of the Companys
    research compounds show promise at their current stages of
    development, the Company may fail to commercialize them for
    various reasons. For example, they may turn out to be
    ineffective or unsafe in clinical or pre-clinical testing; their
    patent protection may become compromised; other therapies may
    prove more safe or effective; or the prevalence of the disease
    for which they are being developed may decrease. The
    Companys inability to successfully develop its products
    due to these or other factors would reduce future revenues.
|
| |  | The Company can protect its products from generic
    substitution by third parties only to the extent that its
    technologies are covered by valid and enforceable patents, are
    effectively maintained as trade secrets or are protected by data
    exclusivity. However, the Companys presently pending or
    future patent applications may not issue as patents. Any patent
    issued may be challenged, invalidated, held unenforceable or
    circumvented. Furthermore, the Companys patents may not be
    sufficiently broad to prevent third parties competing
    products. 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 our
    technology or develop parallel technology.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | The scope of protection afforded by a patent can
    be highly uncertain. A pending claim or a result unfavorable to
    the Company in a patent dispute may preclude development or
    commercialization of products or impact sales of existing
    products, and result in payment of monetary damages.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | Obtaining drug approval in the United States and
    other countries is costly and time consuming. Uncertainties and
    delays inherent in the process can preclude or delay development
    and commercialization of the Companys products.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | The Companys current business plan includes
    expansion through acquisitions, in addition to the development
    of new products. If the Company is unable to successfully
    execute on its expansion plans to find attractive acquisition
    candidates at appropriate prices, and to integrate successfully
    any acquired companies or products, the growth of the
    Companys business will be impeded.                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | The Company and its competitors are always
    striving to develop products that are more effective, safer,
    more easily tolerated or less costly. If the Companys
    competitors succeed in developing better alternatives to the
    Companys current products before it does, the Company will
    lose sales and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | revenues to their alternative products. If
    vaccines are introduced to prevent the diseases treated by the
    Companys products, the Companys potential sales and
    revenues will decrease.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | The pharmaceutical industry is subject to
    substantial government regulation, including the approval of new
    pharmaceutical products, labeling, advertising and, in most
    countries, pricing, as well as inspection and approval of
    manufacturing facilities. The costs of complying with these
    regulations is high, and failure to comply could result in fines
    or interruption in our business.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | The Company sells products in many countries that
    are susceptible to significant foreign currency risk. The
    Company generally sells products in these countries for United
    States dollars. While this eliminates the Companys direct
    currency risk, it increases the Companys credit risk
    because if a local currency is devalued significantly, it
    becomes more expensive for customers in that market to purchase
    the Companys products in United States dollars. The
    Company entered into foreign currency hedge transactions to
    reduce its exposure to variability in the Euro. The Company
    continues to evaluate the possibility of entering arrangements
    which would result in additional expenditures.                                                                                                                                                                                                  
|
| |  | 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. The
    Company generally does not maintain product liability insurance.
    As a result, in the event one or more of the Companys
    products is found to have harmed an individual or individuals,
    it may be responsible for paying all or substantially all
    damages awarded. Any event causing product liability while the
    Company lacks insurance coverage could have a material negative
    impact on its financial position and results of operations.                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Subject to the terms of the Companys
    agreements with its existing lenders, the Company may incur
    additional indebtedness from time to time to finance working
    capital needs, acquisitions, capital expenditures or for other
    purposes. There can be no assurance that financing will continue
    to be available on terms acceptable to the Company or at all.
    The absence of such financing will reduce the Companys
    ability to respond to changing business and economic conditions,
    to fund scheduled investments and capital expenditures, to make
    future acquisitions and to absorb negative operating results.                                                                                                                                                                                                                                                                                                       

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

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##### Table of Contents






PART II  OTHER
INFORMATION






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

See Note 10 of Notes to Consolidated
Condensed Financial Statements in Item 1 of Part I of
this Quarterly Report, which is incorporated herein by reference.






|        |                                                                
|------- | ---------------------------------------------------------------
|Item 2. | Unregistered Sales of Equity Securities and
    Use of Proceeds

|                   |  |           |        |            |  |                    |         |                     |  |  |        |  |  |   |             | 
|------------------ |  | --------- | ------ | ---------- |  | ------------------ | ------- | ------------------- |  |  | ------ |  |  | - | ----------- | 
|                   |  |           |        |            |  | Total Number of    |         | Approximate Dollar 
|                   |  | Total     |        |            |  | Units Purchased as |         | Value of Units that
|                   |  | Number    |        | Average    |  | Part of Publicly   |         | May Yet Be         
|                   |  | of Units  |        | Price Paid |  | Announced Plans    |         | Purchased Under the
|Period             |  | Purchased |        | per Unit   |  | or Programs        |         | Plans or Programs  
|                   |  |           |        |            |  |                    |         |                    
|April 1  30, 2004 |  |           |       |            |  | $                  |        |                     |  |  |       |  |  | $ |            | 
|May 1  31, 2004   |  |           | 89,402 |            |  |                    | 104.325 |                     |  |  | 89,402 |  |  |   | 236,599,000 | 
|June 1  30, 2004  |  |           |       |            |  |                    |        |                     |  |  |       |  |  |   |            | 
|                   |  |           |        |            |  |                    |         |                     |  |  |        |  |  |   |             | 
|Total              |  |           | 89,402 |            |  | $                  | 104.325 |                     |  |  | 89,402 |  |  | $ | 236,599,000 | 
|                   |  |           |        |            |  |                    |         |                     |  |  |        |  |  |   |             | 

In November 2003, the Company announced its
intention to repurchase or redeem all of its
6 1/2% Convertible Subordinated Notes due 2008 on or
before July 21, 2004. On May 14, 2004, the Company
purchased 89,402 6 1/2% Convertible Subordinated Notes
due 2008 with a par value of $1,000, which are convertible into
2,609,859 shares of the Companys common stock.






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

The Companys Annual Meeting of Stockholders
was held on May 25, 2004 in Costa Mesa, California. The
results of the vote of the stockholders is as follows:

|                                                                                          |                     |     |            |            |  |             |         |  |  |  |        |         | 
|----------------------------------------------------------------------------------------- | ------------------- | --- | ---------- | ---------- |  | ----------- | ------- |  |  |  | ------ | ------- | 
|                                                                                          |                     |     |            |            |  | Withheld/  
|                                                                                          |                     | For |            | Against    |  | Abstentions
|                                                                                          |                     |     |            |            |  |            
|Election of Directors:                                                                    |                     |     |            |            |  |             |         |  |  |  |        |        
|                                                                                          | Edward A. Burkhardt |     |            | 74,204,257 |  |             |         |  |  |  |        | 435,878 | 
|                                                                                          | Timothy C. Tyson    |     |            | 74,310,428 |  |             |         |  |  |  |        | 329,707 | 
|                                                                                          | Elaine S. Ullian    |     |            | 74,314,854 |  |             |         |  |  |  |        | 325,281 | 
|Ratification of PricewaterhouseCoopers LLP as
    independent Accountants for the Company |                     |     | 73,836,193 |            |  |             | 728,705 |  |  |  | 75,237 |        






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



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

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



|    |                    
|--- | -------------------
|(b) | Reports on Form 8-K

None.

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SIGNATURES

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



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

Date: August 9, 2004



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

Date: August 9, 2004

38



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##### Table of Contents



EXHIBIT INDEX

|        |    |    |  |  |  |                                                                                                                                                                                            
|------- | -- | -- |  |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |    |  | 
|        |    |    |  | 
|        | 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.