10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)
þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2008
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from          to

Commission file number: 1-11397

Valeant Pharmaceuticals International

(Exact name of registrant as specified in its charter)

Delaware	33-0628076
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
One Enterprise Aliso Viejo, California (Address of principal executive offices)	92656 (Zip Code)

(949) 461-6000

(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 a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ Accelerated filer o Non-accelerated filer o Smaller reporting company o

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ

The number of outstanding shares of the registrant’s Common Stock, $0.01 par value, as of November 3, 2008 was 81,497,493.

VALEANT PHARMACEUTICALS INTERNATIONAL

INDEX

		Page
		Number
PART I — FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)		2
	Consolidated Condensed Balance Sheets as of September 30, 2008 and December 31, 2007		2
	Consolidated Condensed Statements of Operations for the three and nine months ended September 30, 2008 and 2007		3
	Consolidated Condensed Statements of Comprehensive Income for the three and nine months ended September 30, 2008 and 2007		4
	Consolidated Condensed Statements of Cash Flows for the nine months ended September 30, 2008 and 2007		5
	Notes to Consolidated Condensed Financial Statements		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		28
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		45
Item 4.	Controls and Procedures		45
PART II — OTHER INFORMATION
Item 1.	Legal Proceedings		47
Item 1A.	Risk Factors		47
Item 2.	Purchases of Equity Securities by the Issuer and Affiliated Purchasers		48
Item 6.	Exhibits		48
SIGNATURES			50
EX-10.6
EX-10.7
EX-15.1
EX-15.2
EX-31.1
EX-31.2
EX-32.1

1

PART I — FINANCIAL INFORMATION

Item 1.   Financial Statements

VALEANT PHARMACEUTICALS INTERNATIONAL

CONSOLIDATED CONDENSED BALANCE SHEETS

As of September 30, 2008 and December 31, 2007

	September 30,			December 31,
	2008			2007
	(Unaudited)
	(In thousands, except par value data)
ASSETS
Current Assets:
Cash and cash equivalents	$	521,263		$	287,728
Marketable securities		49,749			51,292
Accounts receivable, net		121,161			147,863
Inventories, net		73,478			80,150
Assets held for sale and assets of discontinued operations		—			326,270
Prepaid expenses and other current assets		14,518			19,119
Current deferred tax assets, net		16,811			13,092
Income taxes		15,350			25,684
Total current assets		812,330			951,198
Property, plant and equipment, net		103,279			109,991
Deferred tax assets, net		35,927			58,887
Goodwill		76,798			80,346
Intangible assets, net		214,761			260,802
Other assets		32,032			33,038
Total non-current assets		462,797			543,064
	$	1,275,127		$	1,494,262
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Trade payables	$	55,732		$	34,385
Accrued liabilities		132,817			118,834
Notes payable and current portion of long-term debt		586			1,655
Income taxes payable		20,532			276
Current deferred tax liabilities, net		2,326			2,252
Liabilities held for sale and liabilities of discontinued operations		—			50,358
Current liabilities for uncertain tax positions		445			616
Total current liabilities		212,438			208,376
Long-term debt, less current portion		481,060			782,552
Deferred tax liabilities, net		215			4,878
Liabilities for uncertain tax positions		54,739			68,749
Other liabilities		27,323			15,604
Total non-current liabilities		563,337			871,783
Total liabilities		775,775			1,080,159
Commitments and contingencies
Stockholders’ Equity:
Common stock, $0.01 par value; 200,000 shares authorized; 85,873 (September 30, 2008) and 89,286 (December 31, 2007) shares outstanding (after deducting shares in treasury of 12,236 as of September 30, 2008 and 7,585 as of December 31, 2007)		859			893
Additional capital		1,134,279			1,192,559
Accumulated deficit		(718,025	)		(859,559	)
Accumulated other comprehensive income		82,239			80,210
Total stockholders’ equity		499,352			414,103
	$	1,275,127		$	1,494,262

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

2

VALEANT PHARMACEUTICALS INTERNATIONAL

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

For the three and nine months ended September 30, 2008 and 2007

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
	(Unaudited, in thousands, except per share data)
Revenues:
Product sales	$	153,181		$	150,181		$	431,142		$	431,060
Alliance revenue (including ribavirin royalties)		15,243			14,078			42,821			69,503
Total revenues		168,424			164,259			473,963			500,563
Costs and expenses:
Cost of goods sold (excluding amortization)		42,698			41,848			126,327			113,084
Selling expenses		45,343			46,950			134,040			142,892
General and administrative expenses		26,114			26,534			77,629			77,631
Research and development costs		23,239			24,865			75,100			68,528
Restructuring, asset impairments and dispositions		3,527			—			4,294			18,074
Amortization expense		11,488			14,024			37,616			42,547
Total costs and expenses		152,409			154,221			455,006			462,756
Income from operations		16,015			10,038			18,957			37,807
Other income (expense), net including translation and exchange		(1,555	)		(887	)		(3,384	)		2,503
Loss on early extinguishment of debt		(14,882	)		—			(14,882	)		—
Interest income		3,066			3,545			13,026			12,748
Interest expense		(6,255	)		(10,395	)		(25,585	)		(32,221	)
Income (loss) from continuing operations before income taxes and minority interest		(3,611	)		2,301			(11,868	)		20,837
Provision (benefit) for income taxes		(146	)		7,491			33,727			2,311
Minority interest, net		1			1			5			2
Income (loss) from continuing operations		(3,466	)		(5,191	)		(45,600	)		18,524
Income (loss) from discontinued operations		210,154			(6,899	)		187,134			(4,377	)
Net income (loss)	$	206,688		$	(12,090	)	$	141,534		$	14,147
Basic income (loss) per share:
Income (loss) from continuing operations	$	(0.04	)	$	(0.06	)	$	(0.51	)	$	0.20
Income (loss) from discontinued operations		2.39			(0.07	)		2.10			(0.05	)
Net income (loss) per share	$	2.35		$	(0.13	)	$	1.59		$	0.15
Diluted income (loss) per share:
Income (loss) from continuing operations	$	(0.04	)	$	(0.06	)	$	(0.51	)	$	0.19
Income (loss) from discontinued operations		2.39			(0.07	)		2.10			(0.04	)
Net income (loss) per share	$	2.35		$	(0.13	)	$	1.59		$	0.15
Shares used in per share computation — Basic		87,988			91,889			89,123			93,896
Shares used in per share computation — Diluted		87,988			91,889			89,123			95,003

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

3

VALEANT PHARMACEUTICALS INTERNATIONAL

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

For the three and nine months ended September 30, 2008 and 2007

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
	(Unaudited, in thousands)
Net income (loss)	$	206,688		$	(12,090	)	$	141,534		$	14,147
Other comprehensive income (loss):
Foreign currency translation adjustments		(75,089	)		25,257			21			37,307
Unrealized gain (loss) on marketable equity securities		—			(1,088	)		1,084			(458	)
Unrealized gain (loss) on hedges		2,731			(174	)		(1,813	)		6,833
Pension liability adjustment		2,576			638			2,737			(1,345	)
Comprehensive income	$	136,906		$	12,543		$	143,563		$	56,484

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

4

VALEANT PHARMACEUTICALS INTERNATIONAL

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

For the nine months ended September 30, 2008 and 2007

	Nine Months Ended
	September 30,
	2008			2007
	(Unaudited, in thousands)
Cash flows from operating activities:
Net income	$	141,534		$	14,147
Income (loss) from discontinued operations		187,134			(4,377	)
Income (loss) from continuing operations		(45,600	)		18,524
Adjustments to reconcile income (loss) from continuing operations to net cash provided by operating activities in continuing operations:
Depreciation and amortization		51,798			53,924
Provision for losses on accounts receivable and inventory		20,293			5,815
Stock compensation expense		1,341			10,104
Translation and exchange (gains) losses, net		3,384			(2,503	)
Impairment charges and other non-cash items		(12,167	)		15,151
Deferred income taxes		(22,582	)		14,522
Loss on extinguishment of debt		2,842			—
Change in assets and liabilities, net of effects of acquisitions:
Accounts receivable		30,723			26,606
Inventories		(17,620	)		(608	)
Prepaid expenses and other assets		8,859			992
Trade payables and accrued liabilities		(1,935	)		(20,545	)
Income taxes		36,626			(43,581	)
Other liabilities		2,684			119
Cash flow from operating activities in continuing operations		58,646			78,520
Cash flow from operating activities in discontinued operations		9,632			6,467
Net cash provided by operating activities		68,278			84,987
Cash flows from investing activities:
Capital expenditures		(9,456	)		(22,368	)
Proceeds from sale of assets		728			37,918
Proceeds from sale of businesses		48,575			2,453
Proceeds from investments		151,047			18,598
Purchase of investments		(139,722	)		(22,100	)
Acquisition of businesses, license rights and product lines		(1,306	)		(22,091	)
Cash flow from investing activities in continuing operations		49,866			(7,590	)
Cash flow from investing activities in discontinued operations		462,418			7,388
Net cash provided by (used in) investing activities		512,284			(202	)
Cash flows from financing activities:
Payments on long-term debt and notes payable		(300,712	)		(1,545	)
Proceeds from capitalized lease financing, long-term debt and notes payable		125			1,716
Stock option exercises and employee stock purchases		18,589			14,517
Purchase of treasury stock		(91,422	)		(79,599	)
Cash flow from financing activities in continuing operations		(373,420	)		(64,911	)
Cash flow from financing activities in discontinued operations		(43	)		(6,610	)
Net cash used in financing activities		(373,463	)		(71,521	)
Effect of exchange rate changes on cash and cash equivalents		4,799			15,475
Net increase in cash and cash equivalents		211,898			28,739
Cash and cash equivalents at beginning of period		309,365			325,579
Cash and cash equivalents at end of period		521,263			354,318
Cash and cash equivalents classified as part of discontinued operations		—			(31,244	)
Cash and cash equivalents of continuing operations	$	521,263		$	323,074

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

5

VALEANT PHARMACEUTICALS INTERNATIONAL

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

September 30, 2008

(Unaudited)

In the consolidated condensed financial statements included herein, “we,” “us,” “our,” “Valeant” and the “Company” refer to Valeant Pharmaceuticals International and its subsidiaries. The consolidated condensed financial statements have been prepared by us, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). 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 we believe 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 our annual report on Form 10-K for the year ended December 31, 2007. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

1.   Organization and Summary of Significant Accounting Policies

Organization:  We are a multinational pharmaceutical company that develops, manufactures and markets a broad range of pharmaceutical products. Additionally, we generate alliance revenue, including royalties from the sale of ribavirin by Schering-Plough Ltd. (“Schering-Plough”).

Principles of Consolidation:  The accompanying consolidated condensed financial statements include the accounts of Valeant Pharmaceuticals International, its wholly owned subsidiaries and its majority-owned subsidiary in Poland. All significant intercompany account balances and transactions have been eliminated.

Marketable Securities:  Marketable securities include short-term commercial paper, government agency securities and variable rate demand notes (“VRDNs”) which, at the time of purchase, have maturities of greater than three months. Short-term commercial paper and government agency securities are generally categorized as held-to-maturity and are thus carried at amortized cost, because we have both the intent and the ability to hold these investments until they mature. As of September 30, 2008 and December 31, 2007, the fair value of these marketable securities approximated cost. VRDNs are categorized as available for sale and are carried at fair value.

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

Comprehensive Income:  We have adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 130, Reporting Comprehensive Income. Accumulated other comprehensive income consists of accumulated foreign currency translation adjustments, unrealized losses on marketable equity securities, pension funded status and changes in the fair value of derivative financial instruments.

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

6

VALEANT PHARMACEUTICALS INTERNATIONAL

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

Stock-Based Compensation Expense:  We have adopted SFAS No. 123 (revised 2004), Share-Based Payment, (“SFAS 123(R)”) which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options and employee stock purchases under our Employee Stock Purchase Plan based on estimated fair values. In order to estimate the fair value of stock options, we use the Black-Scholes option valuation model, which was developed for use in estimating the fair value of publicly traded options which have no vesting restrictions and are fully transferable. Option valuation models require the input of subjective assumptions which can vary over time.

Assets Held for Sale:  We have classified certain assets as assets held for sale in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-lived Assets (“SFAS 144”). We have reclassified our consolidated condensed balance sheet as of December 31, 2007 to reflect the sale of certain assets and the capital stock of certain subsidiaries in Western and Eastern Europe, Middle East and Africa (the “WEEMEA business”) to Meda AB, an international specialty pharmaceutical company located in Stockholm, Sweden (“Meda”). As of December 31, 2007, assets and liabilities held for sale included amounts related to our sale of our WEEMEA business to Meda which we completed on September 11, 2008, our sale of certain subsidiaries and assets in Asia to Invida Pharmaceutical Holdings Pte. Ltd which we completed on March 3, 2008, and our sale of our Infergen operations to Three Rivers Pharmaceuticals, LLC which we completed on January 14, 2008.

Discontinued Operations:  We have reclassified our consolidated condensed financial statements for all fiscal periods presented to reflect the sale of the WEEMEA business to Meda. The results of operations and the related financial position for Infergen and the WEEMEA business have been reflected as discontinued operations in our consolidated condensed financial statements in accordance with SFAS 144 and Emerging Issues Task Force (“EITF”) Issue No. 03-13, Applying the Conditions in Paragraph 42 of FASB Statement No. 144 in Determining Whether to Report Discontinued Operations. For more details regarding our discontinued operations see Note 5, Discontinued Operations.

Use of Estimates:  The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us 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. Actual results could differ materially from those estimates.

Out of Period Adjustments:  In the third quarter of 2008, we recorded an adjustment related to value-added tax in Mexico that increased general and administrative expenses and reduced income from continuing operations before income taxes by approximately $1,789,000, comprised of approximately $434,000, $408,000 and $947,000 related to 2002, 2003 and 2004, respectively. This correction was to write off unrecoverable value-added tax receivables arising in the years affected. Because this error was not material to any of the prior years’ financial statements, and the impact of correcting this error in the current year is not expected to be material to the full year 2008 financial statements, we recorded the correction of this error in the third quarter of 2008 financial statements.

In the second quarter of 2008, we recorded adjustments related to stock compensation expense and foreign taxes that affected costs of goods sold, selling expenses, research and development expenses, and general and administrative expenses, and that in the aggregate increased income from continuing operations before income taxes by approximately $786,000, comprising an increase of $1,925,000 related to 2007 and 2006 and a decrease of $1,139,000 related to the first quarter of 2008. These corrections were a reversal of stock compensation expense to adjust our historical estimated forfeiture rate for actual forfeitures which occurred in 2006, 2007 and the first quarter of 2008, and a foreign tax error recorded in 2007 and the first quarter of 2008. Correcting the stock compensation error increased income from continuing operations before income taxes by $3,740,000 and correcting the foreign tax error decreased income from continuing operations before income taxes by $2,954,000. Correcting the stock compensation error also increased income from discontinued operations by $130,000. Because these errors, both individually and in the aggregate, were not material to any of the prior years’ financial statements, and the impact of

7

VALEANT PHARMACEUTICALS INTERNATIONAL

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

correcting these errors is not expected to be material to the full year 2008 financial statements, we recorded the correction of these errors in the second quarter of 2008 financial statements.

Recent Accounting Pronouncements:

In September 2006, the Financial Accounting Standards Board (the “FASB”) issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements, but does not change the requirements to apply fair value in existing accounting standards. Under SFAS 157, fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts. The standard clarifies that fair value should be based on the assumptions market participants would use when pricing the asset or liability. SFAS 157 became effective for Valeant as of January 1, 2008. In February 2008, the FASB issued FASB Staff Positions (“FSP”) 157-1 and 157-2. FSP 157-1 amends SFAS 157 to exclude SFAS No. 13, Accounting for Leases (“SFAS 13”) and its related interpretive accounting pronouncements that address leasing transactions, while FSP 157-2 delays the effective date of the application of SFAS 157 to fiscal years beginning after November 15, 2008 for all nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. For more details regarding our implementation of SFAS 157, see Note 3, Fair Value Measurements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”), which provides companies with an option to report selected financial assets and liabilities at fair value. The objective of SFAS 159 is to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 does not eliminate any disclosure requirements included in other accounting standards. SFAS 159 permitted us to choose to measure many financial instruments and certain other items at fair value and established presentation and disclosure requirements. SFAS 159 became effective for Valeant as of January 1, 2008. The implementation of SFAS 159 did not have a material effect on our financial statements as we did not elect the fair value option for any new financial instruments or other assets and liabilities.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS 141(R)”). SFAS 141(R) establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree. SFAS 141(R) also provides guidance for recognizing and measuring goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. Among other requirements, SFAS 141(R) expands the definition of a business combination, requires acquisitions to be accounted for at fair value, and requires transaction costs and restructuring charges to be expensed. SFAS 141(R) is effective for fiscal years beginning on or after December 15, 2008. When implemented, SFAS 141(R) will require that any reduction to a tax valuation allowance established in purchase accounting that does not qualify as a measurement period adjustment will be accounted for as a reduction to income tax expense, rather than a reduction of goodwill.

In December 2007, the FASB ratified the consensus reached by the EITF in EITF Issue No. 07-1, Accounting for Collaborative Arrangements (“EITF 07-1”). EITF 07-1 defines collaborative arrangements and establishes reporting requirements for transactions between participants in a collaborative arrangement and between participants in the arrangement and third parties. EITF 07-1 also establishes the appropriate income statement presentation and classification for joint operating activities and payments between participants, as well as the sufficiency of the disclosures related to these arrangements. EITF 07-1 is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Retrospective application to all prior periods presented is required for all collaborative arrangements existing as of the effective date. We do not expect the

8

VALEANT PHARMACEUTICALS INTERNATIONAL

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

adoption of EITF 07-1 to have a material impact on our accounting for any collaborative arrangements existing as of September 30, 2008 in our consolidated condensed financial statements.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133 (“SFAS 161”). SFAS 161 requires enhanced disclosures about an entity’s derivative and hedging activities, including (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedged items are accounted for under SFAS 133, and (iii) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. This standard becomes effective for Valeant on January 1, 2009. Earlier adoption of SFAS 161 and, separately, comparative disclosures for earlier periods at initial adoption are encouraged. We are currently assessing the impact that SFAS 161 may have on our financial statements.

In April 2008, the FASB issued FASB Statement of Position No. FAS 142-3, Determination of the Useful Life of Intangible Assets (“FSP FAS 142-3”). FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets, (“SFAS 142”) in order to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141(R). FSP FAS 142-3 becomes effective for Valeant on January 1, 2009. We are currently assessing the impact that FSP FAS 142-3 may have on our financial statements.

In May 2008, the FASB issued FASB Statement of Position No. APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (“FSP APB 14-1”). FSP APB 14-1 requires the liability and equity components of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) to be separately accounted for in a manner that reflects the issuer’s nonconvertible debt borrowing rate. FSP APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. The guidance in FSP APB 14-1 will be applied retrospectively to all periods presented. The implementation of FSP APB 14-1 will materially increase our reported interest expense.

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (“SFAS 162”). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used (order of authority) in the preparation of financial statements that are presented in conformity with generally accepted accounting principles in the United States. SFAS 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. We do not expect the adoption of SFAS 162 to have a material impact on our financial statements.

2.   Restructuring

Our restructuring charges include severance costs, contract cancellation costs, the abandonment of capitalized assets such as software systems, the impairment of manufacturing and research facilities, and other associated costs, including legal and professional costs. We have accounted for statutory and contractual severance obligations when they are estimable and probable, pursuant to SFAS No. 112, Employers’ Accounting for Postemployment Benefits. For one-time severance arrangements, we have applied the methodology defined in SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (“SFAS 146”). Pursuant to these requirements, these benefits are detailed in an approved severance plan, which is specific as to number, position, location and timing. In addition, the benefits are communicated in specific detail to affected employees and it is unlikely that the plan will change when the costs are recorded. If service requirements exceed a minimum retention period, the costs are spread over the service period, otherwise they are recognized when they are communicated to the employees. Contract cancellation costs are recorded in accordance with SFAS 146. We have followed the requirements of SFAS No. 144, Accounting for the Impairment or Disposal of Long-lived Assets (“SFAS 144”), in recognizing the abandonment of capitalized assets such as software and the impairment of manufacturing and research facilities. For a further description of the

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

accounting for impairment of long-lived assets under SFAS 144, see Note 1, Organization and Summary of Significant Accounting Policies, in our annual report on Form 10-K for the year ended December 31, 2007. Other associated costs, such as legal and professional fees, have been expensed as incurred, pursuant to SFAS 146.

2008 Restructuring

In October 2007, our board of directors initiated a strategic review of our business direction, geographic operations, product portfolio, growth opportunities and acquisition strategy. As announced on March 27, 2008, we have completed this strategic review and announced a strategic plan which includes a restructuring program (the “2008 Restructuring”). The 2008 Restructuring is expected to reduce our geographic footprint and product focus by restructuring our business in order to focus on the pharmaceutical markets in our core geographies of the United States, Canada and Australia and on the branded generics markets in Europe (Poland, Hungary, Czech Republic and Slovakia) and Latin America (Mexico and Brazil). Our restructuring plans include actions to divest our operations in markets outside of these core geographic areas through sales of subsidiaries or assets or other strategic alternatives, to seek partners for taribavirin and retigabine and to make selective acquisitions. During the third quarter of 2008, we completed the sale of the WEEMEA business operations to Meda, as discussed in Note 5, Discontinued Operations. In the fourth quarter of 2008, we also completed a worldwide License and Collaboration Agreement with Glaxo Group Limited to develop and commercialize retigabine and completed an Agreement and Plan of Merger with Coria Laboratories Ltd., as discussed in Note 14, Subsequent Events.

On August 4, 2008, we signed an agreement to sell the WEEMEA business to Meda and completed the sale on September 11, 2008. We recorded a gain of $178,506,000 in discontinued operations from the sale of the WEEMEA business, net of charges for professional fees, severance costs and income taxes.

In December 2007, we signed an agreement with Invida Pharmaceutical Holdings Pte. Ltd. (“Invida”) to sell to Invida certain Valeant subsidiaries and product rights in Asia in a transaction that included certain of our subsidiaries, branch offices and commercial rights in Singapore, the Philippines, Thailand, Indonesia, Vietnam, Taiwan, Korea, China, Hong Kong, Malaysia and Macau. This transaction also included certain product rights in Japan. We closed this transaction on March 3, 2008. The assets sold to Invida were classified as “held for sale” as of December 31, 2007 in accordance with SFAS 144. During the three months ended March 31, 2008, we received initial proceeds of $37,855,000 and recorded a gain of $36,922,000 in this transaction. During the three months ended June 30, 2008 and the three months ended September 30, 2008, we recorded $1,017,000 and $829,000, respectively, of net asset adjustments and additional closing costs resulting in a reduced gain of $35,076,000 on the transaction. We expect to receive additional proceeds of approximately $3,841,000 subject to net asset settlement provisions in the agreement.

As of March 31, 2008, we classified our subsidiaries in Argentina and Uruguay as “held for sale” in accordance with SFAS 144. In the three months ended March 31, 2008, we recorded an impairment charge of $7,852,000 related to this anticipated sale. We sold these subsidiaries on June 5, 2008 and recorded a loss on the sale of $2,926,000.

The net restructuring, asset impairments and dispositions charge of $3,527,000 in the three months ended September 30, 2008 included the $829,000 of net asset adjustments and additional closing costs recorded as reductions of the gain originally recorded in the three months ended March 31, 2008 in the Invida transaction and $220,000 of severance charges for a total of 16 affected employees. The charge also included $1,511,000 for professional service fees related to the strategic review of our business, $694,000 of contract termination costs and $273,000 of other cash costs.

The net restructuring, asset impairments and dispositions charge of $4,294,000 in the nine months ended September 30, 2008 included $12,290,000 of employee severance costs for a total of 160 affected employees who were part of the supply, selling, general and administrative and research and development workforce in the United States, Mexico and Brazil. The charges also included $9,774,000 for professional service fees related to our strategic review of our business, $694,000 of contract termination costs and $562,000 of other cash costs.

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

Additional amounts incurred included a stock compensation charge for the accelerated vesting of the stock options of our former chief executive officer of $4,778,000, impairment charges relating to the sale of our subsidiaries in Argentina and Uruguay and certain fixed assets in Mexico of $8,346,000, and the loss of $2,926,000 in the sale of our subsidiaries in Argentina and Uruguay, offset in part by the gain of $35,076,000 in the transaction with Invida.

The following table summarizes the restructuring costs recorded in the three and nine months ended September 30, 2008 (in thousands):

	Three Months		Nine Months
	Ended		Ended
	September 30,		September 30,
2008 Restructuring Program	2008		2008
Cash-related charges:
Employee severances (160 employees, cumulatively)	$	220	$	12,290
Professional services, contract cancellation and other cash costs		2,478		11,030
Subtotal: cash charges		2,698		23,320
Stock compensation		—		4,778
Impairment of long-lived assets		—		8,346
Loss on sale of long-lived assets		—		2,926
Subtotal: non-cash charges		—		16,050
Subtotal: restructuring expenses		2,698		39,370
Gain on Invida transaction		829		(35,076	)
Restructurings, asset impairments and dispositions	$	3,527	$	4,294

In the three and nine months ended September 30, 2008, we recorded inventory obsolescence charges of $2,216,000 and $20,214,000, respectively, resulting primarily from decisions to cease promotion of or discontinue certain products, decisions to discontinue certain manufacturing transfers and product quality failures. These inventory obsolescence charges were recorded in cost of goods sold, in accordance with EITF Issue No. 96-9, Classification of Inventory Markdowns and Other Costs Associated with a Restructuring.

2006 Restructuring

In April 2006, we announced a restructuring program (the “2006 Restructuring”) which was primarily focused on our research and development and manufacturing operations. The objective of the 2006 Restructuring program as it related to research and development activities was to focus our efforts and expenditures on retigabine and taribavirin, our two late-stage projects in development. The 2006 Restructuring was designed to rationalize our investments in research and development efforts in line with our financial resources. In December 2006, we sold our HIV and cancer development programs and certain discovery and pre-clinical assets to Ardea Biosciences, Inc. (“Ardea”), with an option for us to reacquire rights to commercialize the HIV program outside of the United States and Canada upon Ardea’s completion of Phase 2b trials. In March 2007, we sold our former headquarters building in Costa Mesa, California, where our former research laboratories were located, for net proceeds of $36,758,000.

The objective of the 2006 Restructuring as it related to manufacturing was to further rationalize our manufacturing operations to reflect the regional nature of our existing products and further reduce our excess capacity after considering the delay in the development of taribavirin. The impairment charges included the charges related to estimated future losses expected upon the disposition of specific assets related to our manufacturing operations in Switzerland and Puerto Rico. We completed the 2006 Restructuring in June 2007 with the sale of our former manufacturing facilities in Humacao, Puerto Rico and Basel, Switzerland to Legacy Pharmaceuticals International.

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

We did not record a restructuring provision in the three months ended September 30, 2007. In the nine months ended September 30, 2007, we recorded charges of $18,074,000 related to the 2006 Restructuring.

The following table summarizes the restructuring costs recorded in the three and nine months ended September 30, 2007 (in thousands):

	Three Months		Nine Months
	Ended		Ended
	September 30,		September 30,
2006 Restructuring Program	2007		2007
Employee severances (417 employees, cumulatively)	$	—	$	3,788
Contract cancellation and other cash costs		—		2,076
Subtotal: cash charges		—		5,864
Write-off of accumulated foreign currency translation adjustments		—		2,891
Impairment of manufacturing and research facilities		—		9,319
Subtotal: non-cash charges		—		12,210
Restructurings, asset impairments and dispositions	$	—	$	18,074

Reconciliation of Cash Restructuring Payments with Restructuring Accrual

Cash-related charges in the above tables relate to severance payments and other costs which have been either paid with cash expenditures or have been accrued and will be paid with cash in future quarters. As of September 30, 2008, the restructuring accrual for the 2006 Restructuring was $1,000,000 and relates to ongoing contractual payments to Legacy Pharmaceuticals International relating to the sale of our former site in Puerto Rico. These payment obligations last until June 30, 2009.

As of September 30, 2008, the restructuring accrual for the 2008 Restructuring was $13,243,000 and relates to severance, professional service fees and other obligations and is expected to be paid primarily during the remainder of 2008. A summary of accruals and expenditures of restructuring costs which will be paid in cash is as follows (in thousands):

2006 Restructuring: Reconciliation of Cash Payments and Accruals
Restructuring accrual, June 30, 2008	$	1,375
Cash paid		(375	)
Restructuring accrual, September 30, 2008	$	1,000
2008 Restructuring: Reconciliation of Cash Payments and Accruals
Restructuring accrual, June 30, 2008	$	11,799
Charges to earnings in continuing operations		2,698
Charges to earnings in discontinued operations		11,202
Cash paid		(12,456	)
Restructuring accrual, September 30, 2008	$	13,243

3.   Fair Value Measurements

We adopted SFAS 157 as of January 1, 2008, with the exception of the application of the statement to nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis including those measured at fair value in goodwill impairment testing, indefinite-lived intangible assets measured at fair value for impairment testing and those initially measured at fair value in a

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

business combination. We are currently assessing the impact SFAS 157 will have on such nonfinancial assets and liabilities. SFAS 157 establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows:

Level 1 — Quoted market prices in active markets for identical assets or liabilities.

Level 2 — Inputs, other than quoted prices in active markets, that are observable, either directly or indirectly.

Level 3 — Unobservable inputs that are not corroborated by market data.

The following table provides the assets and liabilities carried at fair value measured on a recurring basis as of September 30, 2008 (in thousands):

	September 30, 2008
	Level 1		Level 2			Level 3
Available-for-sale securities	$	44,142		—			—
Undesignated hedges		—	$	(213	)		—
Net investment derivative contracts		—	$	1,592			—
Cash flow derivative contracts		—	$	63			—

Available-for-sale securities are measured at fair value using quoted market prices and are classified within Level 1 of the valuation hierarchy. Available-for-sale securities at September 30, 2008, include VRDNs classified as marketable securities and an investment in a publicly traded investment fund, which is included in other assets, carried at fair value of $39,676,000 and $4,466,000, respectively. Derivative contracts used as hedges are valued based on observable inputs such as changes in interest rates and currency fluctuations and are classified within Level 2 of the valuation hierarchy.

For a derivative instrument in an asset position, we analyze the credit standing of the counterparty and factor it into the fair value measurement. SFAS 157 states that the fair value measurement of a liability must reflect the nonperformance risk of the reporting entity. Therefore, the impact of our creditworthiness has also been factored into the fair value measurement of the derivative instruments in a liability position.

4.   Acquisitions

In the nine months ended September 30, 2008, we acquired product rights in Poland for $1,306,000 in cash and $256,000 in other consideration.

In the nine months ended September 30, 2007, we acquired product rights in the United States, Europe and Argentina for aggregate consideration of $26,388,000. In the nine months ended September 30, 2007, (i) in the United States we acquired a paid-up license to Kinetin and Zeatin, the active ingredients of Kinerase, for cash consideration of $21,000,000 and other consideration of $4,170,000; and (ii) we acquired the rights to certain products in Poland and Argentina for $1,218,000.

5.   Discontinued Operations

In the three and nine months ended September 30, 2008 and 2007, the results of the WEEMEA business and the Infergen operations have been reflected as discontinued operations in our consolidated condensed financial statements in accordance with SFAS 144 and EITF Issue No. 03-13, Applying the Conditions in Paragraph 42 of FASB Statement No. 144 in Determining Whether to Report Discontinued Operations.

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

On August 4, 2008, we entered into an agreement to sell our business operations located in Western and Eastern Europe, Middle East and Africa to Meda and completed the sale on September 11, 2008. Meda acquired our operating subsidiaries in those markets, and the rights to all products and licenses currently marketed by Valeant in those divested regions. Excluded from this transaction are Valeant’s Central European operations, defined as the business in Poland, Hungary, Slovakia and the Czech Republic. Under the terms of the agreement, we received initial cash proceeds of $428,432,000, which will be reduced by approximately $11,757,000 based upon the estimated levels of cash, indebtedness and working capital as of the closing date, subject to certain further post-closing adjustments. We recorded a net gain on this sale of $178,506,000 after deducting the carrying value of the net assets sold, transaction-related expenses and income taxes.

In September 2007, we decided to divest our Infergen product rights. We sold these Infergen rights to Three Rivers Pharmaceuticals, LLC on January 14, 2008. We received $70,800,000 as the initial payment for our Infergen product rights, with additional payments due of up to $20,500,000. We recorded a net gain in this transaction of $27,536,000 after deducting the carrying value of the net assets sold from the proceeds received.

The $682,000 credit to general and administrative expense in the nine months ended September 30, 2007 relates to an insurance recovery for damaged Infergen inventory. Other expense of discontinued operations in the nine months ended September 30, 2007 was primarily related to a legal judgment with respect to the discontinued biomedicals business.

Summarized selected financial information for discontinued operations for the three and nine months ended September 30, 2008 and 2007, respectively, is as follows (in thousands):

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2008		2007			2008			2007
WEEMEA Business:
Product sales	$	40,856	$	42,796		$	136,767		$	131,436
Costs and expenses:
Cost of goods sold (excluding amortization)		15,640		16,015			56,380			49,295
Selling expenses		13,352		17,448			48,052			47,590
General and administrative expenses		2,734		2,625			18,807			6,386
Research and development costs		142		21			365			85
Restructuring, asset impairments and dispositions		50		—			1,309			(4,499	)
Amortization expense		4,322		4,106			14,372			11,730
Total costs and expenses		36,240		40,215			139,285			110,587
Other income		1,983		711			744			209
Income (loss) from discontinued operations, WEEMEA		6,599		3,292			(1,774	)		21,058
Infergen:
Product sales		—		8,636			1,000			26,959
Costs and expenses:
Cost of goods sold (excluding amortization)		—		8,365			2,007			14,523
Selling expenses		—		6,586			1,306			19,619
General and administrative expenses		—		679			(682	)		1,367
Research and development costs		—		1,279			9,752			5,279
Amortization expense		—		1,650			—			4,950
Total costs and expenses		—		18,559			12,383			45,738
Loss from discontinued operations, Infergen		—		(9,923	)		(11,383	)		(18,779	)

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
Other discontinued operations:
Other income (expense)		376			—			1,168			—
Consolidated discontinued operations:
Income (loss) from discontinued operations		6,975			(6,631	)		(11,989	)		2,279
Provision (benefit) for income taxes		(3,479	)		218			18,685			6,225
Income (loss) from discontinued operations		10,454			(6,849	)		(30,674	)		(3,946	)
Disposal of discontinued operations, net		199,700			(50	)		217,808			(431	)
Income (loss) from discontinued operations, net	$	210,154		$	(6,899	)	$	187,134		$	(4,377	)

The assets and liabilities of discontinued operations are stated separately as of September 30, 2008 and December 31, 2007 on the accompanying consolidated condensed balance sheets. The major assets and liabilities categories are as follows (in thousands):

	September 30,		December 31,
	2008		2007
ASSETS
Cash	$	—	$	21,637
Marketable securities		—		830
Accounts receivable, net		—		43,933
Inventories, net		—		36,078
Prepaid expenses and other current assets		—		2,594
Current deferred tax assets, net		—		(1,273	)
Income taxes		—		749
Property, plant and equipment, net		—		6,517
Deferred tax assets, net		—		7,063
Goodwill		—		4,816
Intangible assets, net		—		195,223
Other assets		—		2,305
Assets of discontinued operations	$	—	$	320,472
LIABILITIES
Trade payables	$	—	$	14,818
Accrued liabilities		—		22,817
Income taxes		—		7,711
Deferred tax liabilities, net		—		459
Other liabilities		—		2,256
Liabilities of discontinued operations	$	—	$	48,061

The assets held for sale and assets of discontinued operations as of December 31, 2007 were $326,270,000, which included the assets of the discontinued operations of the WEEMEA business of $260,023,000, $60,449,000 related to assets of the Infergen discontinued operations and $5,798,000 of assets sold to Invida on March 3, 2008.

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VALEANT PHARMACEUTICALS INTERNATIONAL

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

The liabilities held for sale and liabilities of discontinued operations as of December 31, 2007 were $50,358,000, which included the liabilities of discontinued operations of the WEEMEA business of $46,164,000, $1,897,000 related to the liabilities of the discontinued biomedicals business and $2,297,000 of liabilities sold to Invida on March 3, 2008.

6.   Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2008 and 2007 (in thousands, except per share data):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
Income:
Numerator for basic and diluted earnings per share:
Income (loss) from continuing operations	$	(3,466	)	$	(5,191	)	$	(45,600	)	$	18,524
Income (loss) from discontinued operations		210,154			(6,899	)		187,134			(4,377	)
Net income (loss)	$	206,688		$	(12,090	)	$	141,534		$	14,147
Shares:
Denominator for basic earnings per share:
Weighted shares outstanding		87,703			91,705			88,800			93,705
Vested stock equivalents (not issued)		285			184			323			191
Denominator for basic earnings per share		87,988			91,889			89,123			93,896
Denominator for diluted earnings per share:
Employee stock options		—			—			—			1,046
Other dilutive securities		—			—			—			61
Dilutive potential common shares		—			—			—			1,107
Denominator for diluted earnings per share		87,988			91,889			89,123			95,003
Basic income (loss) per share:
Income (loss) from continuing operations	$	(0.04	)	$	(0.06	)	$	(0.51	)	$	0.20
Income (loss) from discontinued operations		2.39			(0.07	)		2.10			(0.05	)
Net income (loss) per share	$	2.35		$	(0.13	)	$	1.59		$	0.15
Diluted income (loss) per share:
Income (loss) from continuing operations	$	(0.04	)	$	(0.06	)	$	(0.51	)	$	0.19
Income (loss) from discontinued operations		2.39			(0.07	)		2.10			(0.04	)
Net income (loss) per share	$	2.35		$	(0.13	)	$	1.59		$	0.15

For the three and nine months ended September 30, 2008 and three months ended September 30, 2007, options to purchase 1,393,000, 898,000 and 840,000 weighted average shares of common stock, respectively, were not included in the computation of earnings per share because we incurred a loss from continuing operations and the effect would have been anti-dilutive. For the three months ended September 30, 2008 and 2007, options to purchase 5,041,000 and 8,669,000 weighted average shares of common stock, respectively, were also not included in the computation of earnings per share because the option exercise prices were greater than the average market price of our common stock and, therefore, the effect would have been anti-dilutive. For the nine months ended September 30,

16

VALEANT PHARMACEUTICALS INTERNATIONAL

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

2008 and 2007, options to purchase 7,173,000 and 9,093,000 weighted average shares of common stock, respectively, were also not included in the computation of earnings per share because the option exercise prices were greater than the average market price of our common stock and, therefore, the effect would have been anti-dilutive.

7.   Detail of Certain Accounts

The following tables present the details of certain amounts included in our consolidated balance sheet as of September 30, 2008 and December 31, 2007 (in thousands):

	September 30,			December 31,
	2008			2007
Accounts receivable, net:
Trade accounts receivable	$	82,305		$	118,696
Royalties receivable		14,872			18,620
Other receivables		28,534			19,301
		125,711			156,617
Allowance for doubtful accounts		(4,550	)		(8,754	)
	$	121,161		$	147,863
Inventories, net:
Raw materials and supplies	$	20,680		$	24,337
Work-in-process		12,470			11,667
Finished goods		61,724			56,622
		94,874			92,626
Allowance for inventory obsolescence		(21,396	)		(12,476	)
	$	73,478		$	80,150
Property, plant and equipment, net:
Property, plant and equipment, at cost	$	205,183		$	202,577
Accumulated depreciation and amortization		(101,904	)		(92,586	)
	$	103,279		$	109,991

The increase in other receivables includes receivables of $7,000,000 and $3,975,000 related to the transactions with Three Rivers Pharmaceuticals, LLC and Invida, respectively.

Intangible assets:  As of September 30, 2008 and December 31, 2007, intangible assets were as follows (in thousands, except life data):

	Weighted		September 30, 2008							December 31, 2007
	Average		Gross		Accumulated			Net		Gross		Accumulated			Net
	Lives (Years)		Amount		Amortization			Amount		Amount		Amortization			Amount
Product rights
Neurology		12	$	278,265	$	(141,087	)	$	137,178	$	281,327	$	(122,622	)	$	158,705
Dermatology		13		95,213		(51,533	)		43,680		108,491		(52,067	)		56,424
Other		17		79,249		(45,346	)		33,903		94,321		(54,820	)		39,501
Total product rights		14		452,727		(237,966	)		214,761		484,139		(229,509	)		254,630
License agreement		5		67,376		(67,376	)		—		67,376		(61,204	)		6,172
Total intangible assets			$	520,103	$	(305,342	)	$	214,761	$	551,515	$	(290,713	)	$	260,802

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VALEANT PHARMACEUTICALS INTERNATIONAL

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

Estimated future amortization expenses are as follows (in thousands):

	Scheduled Future Amortization Expense
	Remaining
	Three
	Months of
	2008		2009		2010		2011		2012		Thereafter		Total
Product rights
Neurology	$	6,529	$	26,115	$	24,787	$	19,284	$	17,866	$	42,597	$	137,178
Dermatology		2,232		8,929		8,929		8,918		3,890		10,782		43,680
Other		1,202		5,107		5,145		4,861		4,715		12,873		33,903
Total	$	9,963	$	40,151	$	38,861	$	33,063	$	26,471	$	66,252	$	214,761

Amortization expense for the three and nine months ended September 30, 2008 was $11,488,000 and $37,616,000, respectively, of which $10,043,000 and $31,444,000, respectively, related to amortization of acquired product rights.

8.   Long-term Debt

In December 2003, we issued $300,000,000 aggregate principal amount of 7.0% Senior Notes due 2011 (the “7% Senior Notes”). At the Company’s option, the Company could redeem some or all of the 7% Senior Notes at any time on or after December 15, 2007, at a redemption price of 103.50%, 101.75% and 100.00% of the principal amount during the twelve-month period beginning December 15, 2007, 2008 and 2009 and thereafter, respectively. In January 2004, we entered into an interest rate swap agreement with respect to $150,000,000 in principal amount of the 7% Senior Notes, with the objective of initially lowering our effective interest rate by exchanging fixed rate payments for floating rate payments. The interest rate swap agreement provided that we would exchange our 7.0% fixed-rate payment obligation for variable-rate payments of six-month London Interbank Offer Rate (“LIBOR”) plus 2.409%.

In July 2008, we redeemed the 7% Senior Notes at an aggregate redemption price of $310,500,000. In connection with this redemption, we recorded a $14,882,000 loss on early extinguishment of debt during the three months ended September 30, 2008, including a redemption premium of $10,500,000, unamortized loan costs of $2,842,000 and an interest rate swap agreement termination fee of $1,540,000.

9.   Income Taxes

We incur losses in the United States, where our research and development activities are conducted and our corporate offices are located. We anticipate that we will realize the tax benefits associated with these losses by offsetting such losses against future taxable income resulting from products in our development pipeline, further growth in U.S. product sales, dividends paid by our foreign subsidiaries, the sale of our foreign subsidiaries or assets, and other measures. However, at this time there is insufficient objective evidence of the timing and amounts of such future U.S. taxable income to assure realization of the tax benefits, and valuation allowances have been established to reserve U.S. deferred tax assets.

During the quarter ended June 30, 2008, the Company reversed its position that all unremitted earnings of its foreign subsidiaries would be indefinitely reinvested and is now required to provide U.S. tax on these earnings. As of September 30, 2008, we repatriated $260,000,000 of these earnings which is being offset by current U.S. operating losses and foreign tax credits. We paid $7,782,000 of withholding tax on the repatriation of these earnings. As of September 30, 2008, a deferred tax liability of $38,202,000 was established to provide tax on unrepatriated earnings which includes $2,914,000 of withholding tax that will be due upon repatriation. Setting up the deferred tax liability has allowed the Company to release $35,308,000 of its U.S. valuation allowance. The release of valuation allowance includes $9,242,000 and $3,548,000 in benefits that were credited to additional paid-in capital

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and goodwill, respectively. As of September 30, 2008, there is insufficient objective evidence as to the timing and amount of future U.S. taxable income to allow for the release of the remaining U.S. valuation allowance which is primarily offsetting future benefits of foreign tax credits. The valuation allowance was recorded because it is more likely than not that such benefits could not be utilized. Ultimate realization of these tax benefits is dependent upon generating sufficient taxable income in the United States. Based on our historic losses, we could not demonstrate that we would utilize these tax benefits with sufficient objective evidence.

Our effective tax rate for the nine months ended September 30, 2008 was affected by taxes provided on repatriated and unrepatriated foreign earnings, net of the benefit of releasing a portion of the U.S. valuation allowance, pre-tax losses resulting from the sale of our Argentina subsidiaries of $9,602,000 for which we do not expect to realize income tax benefits, and pre-tax income resulting from restructuring associated with the sale of assets in Asia of $8,962,000 and the sale of the WEEMEA business of $187,336,000 which we do not expect to be subject to tax in certain jurisdictions. A benefit for income taxes of $146,000 was recorded for the three months ended September 30, 2008, comprising the following amounts (in thousands):

	Three Months Ended
	September 30,
	2008
Release of reserves for U.S. liabilities upon settlement of I.R.S. examination	$	(2,356	)
Reduction to withholding tax on unremitted earnings due to restructuring		(1,997	)
Tax provision on current earnings outside the U.S		9,504
Benefit of current U.S. losses		(5,297	)
	$	(146	)

Due to ownership changes in the stock of the company, the benefit of U.S. losses are subject to a yearly limitation. However, the limitation is sufficient to allow for utilization of all losses through the reversal of taxable temporary differences.

During the quarter ended March 31, 2008, we recorded a net pre-tax gain from discontinued operations from the sale of our Infergen product line in the United States. During the quarter ended September 30, 2008, we recorded a pre-tax gain from discontinued operations from the sale of our the WEEMEA business. These gains were considered in determining the amount of income tax benefit to be allocated to current year losses from continuing operations in the United States. As a result, we recorded income tax expense of $18,113,000 in discontinued operations for the nine months ended September 30, 2008 and this same amount will be recorded as an income tax benefit in continuing operations for the full year 2008. Of this amount, $16,924,000 was included in the provision for income taxes in continuing operations for the nine months ended September 30, 2008 based on an allocation of the full year impact to the nine months ended September 30, 2008.

As of September 30, 2008, we had $45,688,000 of unrecognized tax benefits (FIN 48), of which $5,994,000 would reduce our effective tax rate, if recognized. Of the total unrecognized tax benefits, $4,873,000 was recorded as an offset against a valuation allowance. To the extent such portion of unrecognized tax benefits is recognized at a time when a valuation allowance no longer exists, the recognition would affect our tax rate. We believe it is reasonably possible that $200,000 of unrecognized tax benefits will be reversed within the next twelve months.

Our continuing practice is to recognize interest and penalties related to income tax matters in income tax expense. As of September 30, 2008, we had recorded $5,586,000 for interest and $1,109,000 for penalties. We reversed $2,836,000 of accrued interest and penalties during the quarter ended September 30, 2008.

We are currently under audit by the IRS for the 2005 and 2006 tax years. In the third quarter of 2008, the IRS examination of the U.S. income tax returns for the years ended December 31, 2002 through 2004 was resolved. As a result, the related unrecognized tax benefits were reversed in the third quarter. The provision for income tax

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was reduced by $2,356,000 related to interest and penalties. In addition, the following accounts were affected: taxes payable increased $2,678,000, income tax liability for uncertain tax positions decreased $14,031,000 and net deferred tax assets decreased $8,997,000. In the second quarter of 2007, the IRS examination of the U.S. income tax returns for the years ended December 31, 1997 through 2001 was resolved. All years prior to 1997 are closed under the statute of limitations in the United States. Our significant subsidiaries are open to tax examinations for years ending in 2001 and later.

10.   Common Stock and Share Compensation

In June 2007, our board of directors authorized a stock repurchase program. This program authorized us to repurchase up to $200 million of our outstanding common stock in a 24-month period. In June 2008, our board of directors increased the authorization to $300 million, over the original 24-month period. Under the program, purchases may be made from time to time on the open market, in privately negotiated transactions, and in amounts as we see appropriate. The number of shares to be purchased and the timing of such purchases are subject to various factors, which may include the price of our common stock, general market conditions, corporate requirements, and alternate investment opportunities. The share repurchase program may be modified or discontinued at any time. In the three months ended September 30, 2008, we purchased 4,563,921 shares, for a total of $84,602,000. In total, we have used $190,979,000 of the $300,000,000 authorized to repurchase 11,466,600 shares as of September 30, 2008.

We apply SFAS 123(R), Share-Based Payment which requires the measurement and recognition of compensation expense for all share-based payment awards made to our employees and directors, including employee stock options and employee stock purchases related to the Employee Stock Purchase Plan, based on estimated fair values. We estimate the fair value of employee stock options on the date of grant using the Black-Scholes model. The determination of the fair value of share-based payments on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables.

The variables used in our share-based compensation expense calculations include our estimation of the forfeiture rate related to share-based payments. In 2006, 2007 and continuing into 2008, we experienced significant turnover at both the executive and management levels, which affected our actual forfeiture rate. We increased the estimated forfeiture rate in the three months ended December 31, 2007 from 5% to 35%. As described in Note 1, Organization and Summary of Significant Accounting Policies, during the second quarter of 2008, we recorded a correction to adjust our historical estimated forfeiture rate for actual forfeitures which took place in 2006, 2007 and the first quarter of 2008. The correction recorded in the second quarter of 2008 resulted in a $3,870,000 decrease in stock compensation expense comprising a $782,000 reduction in cost of goods sold, a $987,000 reduction in selling expenses, a $1,190,000 reduction in research and development expenses, a $781,000 reduction in general and administrative expenses and a $130,000 increase in income from discontinued operations.

Also during the second quarter of 2008, we recognized a change in estimate related to our estimated forfeiture rate for share-based payments of $2,835,000 for forfeitures which occurred in the second quarter of 2008. This change in estimate related to forfeitures which occurred in the second quarter of 2008 resulted in a $218,000 reduction in cost of goods sold, a $715,000 reduction in selling expenses, an $11,000 reduction in research and development expenses and a $1,891,000 reduction in general and administrative expenses.

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

A summary of stock compensation expense for our stock incentive plans for the three and nine months ended September 30, 2008 and 2007, is presented below (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2008		2007		2008			2007
Employee stock options	$	638	$	2,714	$	(3,484	)	$	8,854
Restricted stock units		1,693		368		3,416			1,092
Performance stock units		641		—		1,219			—
Employee stock purchase plan		57		79		190			158
Total stock-based compensation expense	$	3,029	$	3,161	$	1,341		$	10,104

Future stock compensation expense for restricted stock units and stock option incentive awards outstanding as of September 30, 2008 is as follows (in thousands):

Remainder of 2008	$	3,365
2009		8,360
2010		5,217
2011 and thereafter		1,119
	$	18,061

11.   Commitments and Contingencies

We are involved in several legal proceedings, including the following matters:

SEC Investigation:  We are the subject of a Formal Order of Investigation with respect to events and circumstances surrounding trading in our common stock, the public release of data from our first pivotal Phase III trial for taribavirin in March 2006, statements made in connection with the public release of data and matters regarding our stock option grants since January 1, 2000 and our restatement of certain historical financial statements announced in March 2008. In September 2006, our board of directors established a Special Committee to review our historical stock option practices and related accounting, and informed the SEC of these efforts. We have cooperated fully and will continue to cooperate with the SEC in its investigation. We cannot predict the outcome of the investigation.

Derivative Actions Related to Stock Options:  We are a nominal defendant in two shareholder derivative lawsuits pending in state court in Orange County, California, styled (i) Michael Pronko v. Timothy C. Tyson et al., and (ii) Kenneth Lawson v. Timothy C. Tyson et al. These lawsuits, which were filed on October 27, 2006 and November 16, 2006, respectively, purport to assert derivative claims on our behalf against certain of our current and/or former officers and directors. The lawsuits assert claims for breach of fiduciary duties, abuse of control, gross mismanagement, waste of corporate assets, unjust enrichment, and violations of the California Corporations Code related to the purported backdating of employee stock options. The plaintiffs seek, among other things, damages, an accounting, the rescission of stock options, and a constructive trust over amounts acquired by the defendants who have exercised Valeant stock options. On January 16, 2007, the court issued an order consolidating the two cases before Judge Ronald L. Bauer. On February 6, 2007, the court issued a further order abating the Lawson action due to a procedural defect while the Pronko action proceeds to conclusion. On July 10, 2008, the parties in the Pronko action reached an agreement in principle to settle the plaintiff’s claims. The agreement, which is intended to resolve the claims raised in the Pronko and Lawson actions, requires us to adopt certain corporate governance reforms aimed at improving our process for granting stock options. It also provides for an award of fees to counsel for the plaintiffs of $1,300,000, which amount is covered by insurance and remains subject to court approval.

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We are also a nominal defendant in a shareholder derivative action pending in the Court of Chancery of the state of Delaware, styled Sherwood v. Tyson, et. al., filed on March 20, 2007. This complaint also purports to assert derivative claims on the Company’s behalf for breach of fiduciary duties, gross mismanagement and waste, constructive fraud and unjust enrichment related to the alleged backdating of employee stock options. The plaintiff seeks, among other things, damages, an accounting, disgorgement, rescission and/or repricing of stock options, and imposition of a constructive trust for the benefit of the Company on amounts by which the defendants were unjustly enriched. The plaintiff has agreed to a stay pending resolution of the Pronko action in California.

Permax Product Liability Cases:  On February 8, 2007, we were served a complaint in a case captioned Kathleen M. O’Connor v. Eli Lilly & Company, Valeant Pharmaceuticals International, Amarin Corporation plc, Amarin Pharmaceuticals, Inc., Elan Pharmaceuticals, Inc., and Athena Neurosciences, Inc., Case No. 07 L 47 in the Circuit Court of the 17th Judicial Circuit, Winnebago County, Illinois. This case, which was removed to federal court in the Northern District of Illinois, alleged that the use of Permax for restless leg syndrome caused the plaintiff to have valvular heart disease, and as a result, she suffered damages, including extensive pain and suffering, emotional distress and mental anguish. On August 6, 2008, the court granted Valeant’s motion for summary judgment on all claims, finding that plaintiff did not use Permax after February 25, 2004, when Valeant acquired the right to market and sell Permax in the United States. Valeant has been dismissed from this case, which subsequently was settled by Eli Lilly. On April 23, 2008, we were served a complaint in a case captioned Barbara M. Shows v. Eli Lilly and Company, Elan Corporation, PLC, Amarin Corporation, PLC, and Valeant Pharmaceuticals International in the Circuit Court of Jefferson Davis County, Mississippi, which has been removed to federal court in the Southern District of Mississippi. On August 27, 2008, we were served complaints in six separate cases by plaintiffs Prentiss and Carol Harvey; Robert and Barbara Branson; Dan and Mary Ellen Leach; Eugene and Bertha Nelson; Beverly Polin; and Ira and Michael Price v. Eli Lilly and Company and Valeant Pharmaceuticals International in Superior Court, Orange County, California. On September 15, 2008, we were served a complaint in a case captioned Linda R. O’Brien v. Eli Lilly and Company, Valeant Pharmaceuticals International, Amarin Corporation, plc, Amarin Pharmaceuticals, Inc., Elan Pharmaceuticals, Inc., Athena Neurosciences, Inc., Teva Pharmaceutical Industries, Ltd., Par Pharmaceutical Companies, Inc., and Ivax Corporation in the Circuit Court of the 11th Judicial Circuit, Miami-Dade County, Florida. We are in the process of defending these matters. Eli Lilly, holder of the right granted by the Food and Drug Administration (“FDA”) to market and sell Permax in the United States, which right was licensed to Amarin and the source of the manufactured product, has also been named in the suits. Under an agreement between Valeant and Eli Lilly, Eli Lilly will bear a portion of the liability, if any, associated with these claims. Product liability insurance exists with respect to these claims. Although it is expected that the insurance proceeds will be sufficient to cover any material liability which might arise from these claims, there can be no assurance that defending against any future similar claims and any resulting settlements or judgments will not, individually or in the aggregate, have a material adverse effect on our consolidated financial position, results of operation or liquidity.

Alfa Wasserman:  On December 29, 2005, Alfa Wassermann (“Alfa”) filed suit against our Spanish subsidiary in the Commercial Court of Barcelona, Spain, alleging that our Calcitonina Hubber Nasal 200 UI Monodosis product infringes Alfa’s European patent EP 363.876 (ES 2.053.905) and demanded that we cease selling our product in the Spanish market and pay damages for lost profits caused by competition in the amount of approximately 9 million Euros. We filed a successful counter-claim; however, Alfa filed an appeal. The Court of Appeals held a hearing in February 2008 and on July 14, 2008 ruled that we infringed Alfa’s patent. Pursuant to the ruling, we would be required to: (i) cease manufacturing and selling certain Calcitonina products, (ii) withdraw such products from the market, (iii) pay Alfa’s legal costs and (iv) pay damages suffered by Alfa between January 1, 2001 through the date that the applicable products are withdrawn from the market. The specific amount of damages to be paid would be determined in separate enforcement proceedings. We have filed a writ to the Court of Appeals announcing our intention to appeal to the Supreme Court. In late July 2008, the parties agreed in principle to settle the matter and the settlement documents have been duly

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

executed and submitted by the parties on August 12, 2008. In settlement of Alfa’s alleged claims, we paid Alfa $10,448,000 and agreed to pay a 10% royalty on future product sales until the expiration of Alfa’s patent in 2009. On October 14, 2008, this matter was resolved with the approval of the joint writ/settlement by the Barcelona Court of Appeal.

Spear Pharmaceuticals, Inc.: On December 17, 2007, Spear Pharmaceuticals, Inc. and Spear Dermatology Products, Inc. filed a complaint in federal court for the District of Delaware, Case No. 07-821, against Valeant and investment firm William Blair & Company, LLC. Plaintiffs allege that while William Blair was engaged in connection with the possible sale of plaintiffs’ generic tretinoin business, plaintiffs disclosed to William Blair the development of generic Efudex in their product pipeline. Plaintiffs further allege that William Blair, while under confidentiality obligations to plaintiffs, shared such information with Valeant and that Valeant then filed a Citizen Petition with the FDA requesting that any abbreviated new drug application for generic Efudex include a study on superficial basal cell carcinoma. Arguing that Valeant’s Citizen Petition caused the FDA to delay approval of their generic Efudex, plaintiffs seek damages for Valeant’s alleged breach of contract, trade secret misappropriation and unjust enrichment, in addition to other causes of action against William Blair. We believe this case is without merit and are vigorously defending ourselves in this matter.

On April 11, 2008, the FDA approved an Abbreviated New Drug Application (“ANDA”) for a 5% fluorouracil cream sponsored by Spear Pharmaceuticals. On April 11, 2008, the FDA also responded to our Citizen Petition that was filed on December 21, 2004 and denied our request that the FDA refrain from approving any ANDA for a generic version of Efudex unless the application contains data from an adequately designed comparative clinical study conducted in patients with superficial basal cell carcinoma. On April 25, 2008, Valeant filed an application for a temporary restraining order (“TRO”) against Michael O. Leavitt and Andrew C. Von Eschenbach, in their official capacities at the FDA, in the United States District Court for the Central District of California, seeking to suspend the FDA’s approval of Spear’s ANDA. On May 1, 2008, the Court granted the FDA’s request to stay proceedings on Valeant’s application for a TRO until May 14, 2008. On May 14, 2008, the FDA entered an administrative order staying the approval of the Spear ANDA and initiating a process for reconsidering the approval of the Spear ANDA. Spear Pharmaceuticals agreed to the stay and to the prohibition on marketing, sale and shipment of its product until May 30, 2008. On May 31, 2008, the Court granted our application for a TRO suspending approval of the Spear ANDA. On June 18, 2008 the Court denied our request for a preliminary injunction to continue the suspension of the Spear ANDA and extinguished the TRO. The stay on the Spear ANDA has been removed and the Spear product may be marketed, sold and shipped. Our case against Messrs. Leavitt and Von Eschenbach remains pending before the court.

Other:  We are a party to other pending lawsuits and 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 us, at this time in the opinion of management, the ultimate resolution of these matters will not have a material effect on our consolidated financial position, results of operations or liquidity.

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12.   Business Segments

The following table sets forth the amounts of our segment revenues and operating income for the three and nine months ended September 30, 2008 and 2007 (in thousands):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
Revenues
Product sales:
North America	$	63,740		$	65,295		$	190,723		$	196,504
International		49,011			54,290			123,536			145,394
Europe		40,430			30,596			116,883			89,162
Total product sales		153,181			150,181			431,142			431,060
Alliance revenue (including ribavirin royalties)		15,243			14,078			42,821			69,503
Consolidated revenues	$	168,424		$	164,259		$	473,963		$	500,563
Operating Income
North America	$	18,182		$	21,139		$	53,629		$	64,934
International		10,624			12,726			15,039			21,340
Europe		15,688			8,855			31,639			29,275
		44,494			42,720			100,307			115,549
Corporate expenses(1)		(16,432	)		(20,220	)		(40,078	)		(55,706	)
Subtotal		28,062			22,500			60,229			59,843
Restructuring, asset impairments and dispositions		(3,527	)		—			(4,294	)		(18,074	)
Research and development(2)		(8,520	)		(12,462	)		(36,978	)		(3,962	)
Consolidated segment operating income		16,015			10,038			18,957			37,807
Interest income		3,066			3,545			13,026			12,748
Interest expense		(6,255	)		(10,395	)		(25,585	)		(32,221	)
Loss on early extinguishment of debt		(14,882	)		—			(14,882	)		—
Other, net		(1,555	)		(887	)		(3,384	)		2,503
Income (loss) from continuing operations before income taxes and minority interest	$	(3,611	)	$	2,301		$	(11,868	)	$	20,837

(1)	Stock-based compensation expense has been considered a corporate cost as management excludes this item in assessing the financial performance of individual business segments and considers it a function of valuation factors that pertain to overall corporate stock performance.
(2)	The research and development expense above represents the operating loss of the research and development segment.

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

The following table sets forth our total assets by segment as of September 30, 2008 and December 31, 2007 (in thousands):

	September 30,		December 31,
Total Assets	2008		2007
North America	$	331,391	$	353,395
International		142,095		200,955
Europe		274,758		247,903
Corporate		486,503		319,336
Research and development division		40,380		52,201
Discontinued operations		—		320,472
Total	$	1,275,127	$	1,494,262

During the three and nine months ended September 30, 2008 and 2007, two customers each accounted for more than 10% of consolidated product sales. Sales to McKesson Corporation and its affiliates and to Cardinal Health in the United States, Canada and Mexico are detailed in the following table (in thousands):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
Sales:
McKesson	$	29,280		$	30,760		$	78,533		$	109,949
Cardinal		15,887			17,638			47,973			53,236
Percentage of total product sales:
McKesson		19	%		20	%		18	%		26	%
Cardinal		10	%		12	%		11	%		12	%

13.   Alliance Revenue

We report the royalties received from the sale of ribavirin by Schering-Plough and Roche separately from our pharmaceuticals product sales revenue. Roche discontinued paying royalties to us in June 2007. In 2007, we began presenting these royalty revenues within a new category of revenues, “alliance revenue”. The following table provides the details of our alliance revenue in the three and nine months ended September 30, 2008 and 2007 (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2008		2007		2008		2007
Ribavirin royalty	$	15,243	$	14,078	$	42,771	$	50,253
Licensing payment		—		—		—		19,200
Other		—		—		50		50
Total alliance revenue	$	15,243	$	14,078	$	42,821	$	69,503

In the nine months ended September 30, 2007, we received $19,200,000 from Schering-Plough for the licensing of pradefovir. Alliance revenue for the nine months ended September 30, 2008 and 2007 also included $50,000 payments for a license to certain intellectual property assets.

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14.   Subsequent Events

On October 15, 2008, Valeant and its wholly owned subsidiary, CL Acquisition Corp., completed an Agreement and Plan of Merger (the “Merger Agreement”) with Coria Laboratories, Ltd. (“Coria”), DFB Pharmaceuticals, Inc. and the other shareholders of Coria. Under the terms of the Merger Agreement, Valeant paid $95,000,000 in cash at the closing, a portion of which was deposited into escrows for certain potential liabilities, for all outstanding shares of capital stock of Coria. The purchase price is subject to certain post-closing adjustments. We will account for the acquisition as a business combination under SFAS No. 141, Business Combinations. In the fourth quarter of 2008, we will allocate the purchase price to the net assets acquired. Goodwill, if any, arising from the acquisition will not be deductible for tax purposes.

On August 27, 2008, we entered into a worldwide License and Collaboration Agreement (the “Collaboration Agreement”) with Glaxo Group Limited, a wholly owned subsidiary of GlaxoSmithKline plc, (“GSK”), to collaborate with GSK to develop and commercialize retigabine, an investigational drug for treatment of adult epilepsy patients with refractory partial onset seizures (“retigabine”). The Collaboration Agreement became effective on October 17, 2008.

Pursuant to the terms of the Collaboration Agreement, we granted co-development rights and worldwide commercialization rights to GSK. We have agreed to collaborate with GSK on the development and marketing of retigabine in the United States, Australia, New Zealand, Canada and Puerto Rico (the “Collaboration Territory”). In addition, we granted GSK an exclusive license to develop and commercialize retigabine in countries outside of the Collaboration Territory and certain backup compounds to retigabine worldwide.

GSK paid us $125,000,000 in upfront fees upon effectiveness of the transaction. In addition, GSK has agreed to pay us up to $545,000,000 based upon the achievement of certain regulatory, commercialization and sales milestones and the development of additional indications for retigabine. GSK has also agreed to pay us up to an additional $150,000,000 if certain regulatory and commercialization milestones are achieved for backup compounds to retigabine. We will share up to 50% of net profits within the United States, Australia, New Zealand, Canada and Puerto Rico, and will receive up to a 20% royalty on net sales of retigabine outside those regions. In addition, if backup compounds are developed and commercialized by GSK, GSK will pay us royalties of up to 20% of net sales of products based upon such backup compounds.

We will jointly fund research and development and pre-commercialization expenses for retigabine with GSK. Our share of such expenses in the Collaboration Territory is limited to $100,000,000, provided that GSK will be entitled to credit our share of any such expenses in excess of such amount against payments owed to us under the Collaboration Agreement. GSK will solely fund the development of any backup compound and will be responsible for all expenses outside of the Collaboration Territory. Following the launch of a retigabine product, we will share equally operating expenses with respect to retigabine in the Collaboration Territory.

GSK has the right to terminate the Collaboration Agreement at any time prior to the receipt of the approval by the United States Food and Drug Administration of a new drug application (“NDA”) for a retigabine product, which right may be irrevocably waived at any time by GSK. The period of time prior to such termination or waiver is referred to as the “Review Period”. If GSK terminates the Collaboration Agreement prior to the expiration of the Review Period, we would be required to refund to GSK up to $95,000,000 of the upfront fee; however, the refundable portion will be reduced for every quarter that the Collaboration Agreement is in effect. Unless otherwise terminated, the Collaboration Agreement will continue on a country-by-country basis until GSK has no remaining payment obligations with respect to such country.

Our rights to retigabine are subject to an Asset Purchase Agreement between Meda Pharma GmbH & Co. KG (“Meda Pharma”), the successor to Viatris GmbH & Co. KG, and Xcel Pharmaceuticals, Inc., which was acquired by Valeant in 2005 (the “Meda Pharma Agreement”). Under the terms of the Meda Pharma Agreement, we are required to pay Meda Pharma milestone payments of $8,000,000 upon acceptance of the filing of an NDA and $6,000,000 upon approval of the NDA for retigabine. We are also required to pay royalty rates which, depending on

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the geographic market and sales levels, vary from 3% to 8% of net sales. Under the Collaboration Agreement with GSK, these royalties will be treated in the Collaboration Territory as an operating expense and shared by GSK and the Company pursuant to the profit sharing percentage then in effect. In the rest of the world, we will be responsible for the payment of these royalties to Meda Pharma from the royalty payments we receive from GSK. We are required to make additional milestone payments to Meda Pharma of up to $5,250,000 depending on certain licensing activity. Upon effectiveness of the Collaboration Agreement with GSK, we paid Meda Pharma a milestone payment of $3,750,000 on October 30, 2008. An additional payment of $1,500,000 could become due if a certain indication for retigabine is developed and licensed to GSK.

We anticipate that up to $100,000,000 of the upfront payment will be recognized as an offset to the cost of our research and development and pre commercialization obligations, subject to the limitations imposed by GSK’s right to terminate the Collaboration Agreement during the Review Period. We expect to complete our research and development and pre commercialization obligations by mid to late 2010. The remainder of the upfront payment will be recognized as alliance revenue over the same period.

On October 24, 2008, we signed an agreement with GSK, for the promotion of Diastat^® and Diastat^® AcuDial. Under the terms of the agreement, GSK will exclusively promote Diastat and Diastat AcuDial to U.S. physicians in 2009, with an option to extend the term by mutual agreement. We will continue to record the sales of Diastat and Diastat AcuDial and will be responsible for ongoing brand development.

In October 2008, our board of directors approved a plan to further eliminate 174 employee positions in the U.S. in connection with the 2008 Restructuring Plan across commercial, research and development and general and administrative positions. Severance costs of approximately $6 million will be recorded in connection with this phase of the restructuring.

In October 2008, our board of directors authorized us to repurchase up to $200 million of our outstanding common stock or debt. This securities repurchase program is in addition to the share repurchase program authorized in June 2007 and June 2008 to repurchase up to $300 million of outstanding common stock.

As of November 3, 2008, we have used a total of $275,922,000 to purchase 16,293,784 shares in the stock repurchase program authorized by our board of directors in June 2007. For more details on this program, see Note 10, Common Stock and Share Compensation.

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

This discussion of our results of operations should be read in conjunction with our consolidated condensed financial statements included elsewhere in this quarterly report.

Overview

We are a multinational pharmaceutical company that develops, manufactures and markets a broad range of pharmaceutical products.

Although historically we have focused most of our efforts on neurology, dermatology, and infectious disease, our prescription products also treat, among other things, neuromuscular disorders, cancer, cardiovascular disease, diabetes and psychiatric disorders. In the second quarter of 2008, we discontinued our historical practice of reporting sales of products treating infectious disease as a separate classification of products. Our products are sold through three pharmaceutical segments comprising: North America, International (Latin America and Australia) and Europe, formerly EMEA (Europe, Middle East and Africa), prior to the sale of the WEEMEA business (Western and Eastern Europe, Middle East and Africa). In addition, we receive alliance revenue in the form of royalties from the sale of ribavirin by Schering-Plough. We expect that this royalty revenue will decline significantly in 2009 in that royalty payments from Schering-Plough continue for European sales only until the ten-year anniversary of the launch of the product, which varied by country and started in May 1999. We expect that royalties from Schering-Plough in Japan will continue after 2009.

Company Strategy and Restructuring

In October 2007, our board of directors initiated a strategic review (the “2008 Strategic Review”) of our business direction, geographic and commercial operations, product and business portfolio, growth opportunities and acquisition strategy. On March 26, 2008, our board of directors approved a new strategic plan for our company. The key elements of this strategy include the following:

Focus the business.  We are restructuring our business in order to focus on the pharmaceutical markets in our core geographies of the United States, Canada and Australia and on the branded generics markets in Europe (Poland, Hungary, Czech Republic and Slovakia) and Latin America (Mexico and Brazil).

Maximize the pipeline.  We expect to find strategic partners to help us optimize the value of our two late-stage development projects, retigabine, a potential treatment for partial onset seizures in patients with epilepsy and for neuropathic pain, and taribavirin, a potential treatment for hepatitis C. On October 17, 2008, we completed a worldwide License and Collaboration Agreement (the “Collaboration Agreement”) with Glaxo Group Limited, a wholly owned subsidiary of GlaxoSmithKline plc, (“GSK”), to collaborate with GSK to develop and commercialize retigabine. See further discussion of the Collaboration Agreement in Products in Development section below. We are identifying potential partnering opportunities for taribavirin.

Rebase and grow.  With our focus on the therapeutic areas of neurology and dermatology in our core geographies, we plan to invest in our business and pursue selective acquisitions in order to deliver returns to our shareholders. Our strategic plan is designed to streamline our business, reduce expenses and align our infrastructure with the reduced scale of our operations.

Prior to the start of the 2008 Strategic Review, we reviewed our portfolio for products and geographies that did not meet our growth and profitability expectations and divested or discontinued certain non-strategic products as a result. We sold our rights to Infergen to Three Rivers Pharmaceuticals, LLC on January 14, 2008. In 2007, we also sold product rights to Reptilase, Solcoseryl in Japan, our opthalmic business in Holland, and certain other products. On March 3, 2008, we sold certain of our subsidiaries and product rights in Asia to Invida Pharmaceutical Holdings Pte. Ltd. in a transaction that included certain of our subsidiaries, branch offices and commercial rights in Singapore, the Philippines, Thailand, Indonesia, Vietnam, Korea, China, Hong Kong, Malaysia and Macau. This transaction also included certain product rights in Japan. On June 5, 2008 we sold our subsidiaries in Argentina and Uruguay.

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On September 11, 2008, we sold our business operations located in Western and Eastern Europe, Middle East and Africa to Meda AB, an international specialty pharmaceutical company located in Stockholm, Sweden (“Meda”). Meda acquired our operating subsidiaries in those markets, and the rights to all products and licenses currently marketed by Valeant in the divested region. Excluded from this transaction are Valeant’s Central European operations, defined as our business in Poland, Hungary, Slovakia and the Czech Republic. Under the terms of the agreement, we received initial cash proceeds of $428,432,000, which will be reduced by approximately $11,757,000 based upon the estimated levels of cash, indebtedness and working capital as of the closing date, subject to certain further post-closing adjustments.

On October 15, 2008, we completed an Agreement and Plan of Merger with Coria Laboratories, Ltd. (“Coria”), DFB Pharmaceuticals, Inc. and the other shareholders of Coria. We paid $95,000,000 in cash at the closing, a portion of which was deposited into escrows for certain potential liabilities, for all outstanding shares of capital stock of Coria. The purchase price is subject to certain post-closing adjustments.

Pharmaceutical Products

Product sales from our pharmaceutical segments accounted for 91% of our total revenue from continuing operations for the three and nine months ended September 30, 2008, compared with 91% and 86% for the corresponding periods in 2007, and increased $3,000,000 (2%) and $82,000 (0%) for the three and nine months ended September 30, 2008, respectively, compared with the corresponding periods in 2007.

The 2% increase in pharmaceutical sales for the three months ended September 30, 2008 was due to a 7% benefit from currency fluctuations, offset in part by a 1% reduction in volume and a 4% price decrease. Pharmaceutical sales for the nine months ended September 30, 2008 were flat due to an 8% benefit from currency fluctuations offset by an 8% decline in volume. The decline in volume in the nine months ended September 30, 2008 resulted in part from a planned reduction of shipments to wholesaler customers in North America of $17,400,000 to reduce the amount of product in the wholesale channel. The decline in volume is also a result of the divestment of operations in Asia, Argentina and Uruguay, which resulted in revenue decreases of $6,357,000 and $17,334,000 in the three and nine months ended September 30, 2008, respectively. Product price increases in the three and nine-month periods were offset by a $7,665,000 increase in estimated reserves for future product returns to reflect the effect of recent actual product returns attributable to product changes implemented 3 to 4 years ago.

On April 11, 2008, the Food and Drug Administration (“FDA”) approved an Abbreviated New Drug Application (“ANDA”) for a 5% fluorouracil cream sponsored by Spear Pharmaceuticals. On April 11, 2008, the FDA also responded to our Citizen Petition that was filed on December 21, 2004 and denied our request that the FDA refrain from approving any ANDA for a generic version of Efudex unless the application contains data from an adequately designed comparative clinical study conducted in patients with superficial basal cell carcinoma. On April 25, 2008, Valeant filed an application for a temporary restraining order (“TRO”) against Michael O. Leavitt and Andrew C. Von Eschenbach, in their official capacities at the FDA, in the United States District Court for the Central District of California, seeking to suspend the FDA’s approval of Spear’s ANDA. On May 1, 2008, the Court granted the FDA’s request to stay proceedings on Valeant’s application for a TRO until May 14, 2008. On May 14, 2008, the FDA entered an administrative order staying the approval of the Spear ANDA and initiating a process for reconsidering the approval of the Spear ANDA. Spear Pharmaceuticals agreed to the stay and to the prohibition on marketing, sale and shipment of its product until May 30, 2008. On May 31, 2008, the Court granted our application for a TRO suspending approval of the Spear ANDA. On June 18, 2008 the Court denied our request for a preliminary injunction to continue the suspension of the Spear ANDA and extinguished the TRO. The stay on the Spear ANDA has been removed and the Spear product may be marketed, sold and shipped. Our case against Messrs. Leavitt and Von Eschenbach remains pending before the court.

Clinical Development

We seek to develop and commercialize innovative products for the treatment of significant unmet medical needs, principally in the areas of neurology and infectious disease. Research and development expenses were $23,239,000 and $75,100,000 for the three and nine months ended September 30, 2008, respectively, compared

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with $24,865,000 and $68,528,000 for the corresponding periods in 2007, reflecting a decrease of $1,626,000 (7%) in the three months ended September 30, 2008 and an increase of $6,572,000 (10%) in the nine months ended September 30, 2008. The decrease in the three-month period is primarily due to the completion of the retigabine clinical trials in the first half of 2008, offset in part by expenditures for the retigabine New Drug Application (“NDA”) submission and the retigabine open label study. The increase in the nine-month period resulted from the expenditures for the retigabine NDA submission, clinical development program and inventory production for validation testing. See the Products in Development section below for further discussion of the retigabine clinical development program.

Alliance Revenue

Alliance revenue for the three months and nine months ended September 30, 2008 was $15,243,000 and $42,821,000, respectively, compared with $14,078,000 and $69,503,000 for the corresponding periods in 2007. Alliance revenue in the three months ended September 30, 2008 and 2007 consisted exclusively of ribavirin royalty revenue. Alliance revenue for the nine months ended September 30, 2007 included a $19,200,000 pradefovir licensing payment from Schering-Plough. Alliance revenue in the nine months ended September 30, 2008 and 2007 included licensing payments of $50,000 for a license to certain intellectual property assets.

Ribavirin royalty revenues increased $1,165,000 (8%) and accounted for 9% of our total revenues from continuing operations for the three months ended September 30, 2008 and 2007. Ribavirin royalty revenues decreased $7,482,000 (15%) and accounted for 9% of our total revenues from continuing operations for the nine months ended September 30, 2008 as compared with 10% for the corresponding period in 2007.

The increase in ribavirin royalties in the three-month period ended September 30, 2008 reflects Schering-Plough’s increase in market share in ribavirin sales in Japan. The decrease in ribavirin royalties in the nine-month period reflects Schering-Plough’s global market share losses in ribavirin sales and Roche’s discontinuation of royalty payments to us in June 2007. We expect ribavirin royalties to continue to decline in 2008. The royalty will decline significantly in 2009 in that royalty payments from Schering-Plough continue for European sales only until the ten-year anniversary of the launch of the product, which varied by country and started in May 1999. We expect that royalties from Schering-Plough in Japan will continue after 2009.

Results of Operations

As part of the 2008 Strategic Review, we announced on March 27, 2008 that we would focus on the pharmaceutical markets in the United States, Canada, and Australia and the branded generics markets in Europe (Poland, Hungary, Czech Republic and Slovakia) and Latin America (Mexico and Brazil) and intend to stop organizing our company by geographic regions. In the three and nine months ended September 30, 2008; however, we were still operating in our three reportable pharmaceutical segments, comprising pharmaceuticals operations in North America, International, and Europe. In addition, we have a research and development division. Certain financial information for our business segments is set forth below. For additional financial information by business segment, see Note 12, Business Segments, of the notes to consolidated condensed financial statements included elsewhere in this quarterly report.

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The following tables compare 2008 and 2007 revenues by reportable segments and operating expenses for the three and nine months ended September 30, 2008 and 2007 (in thousands):

	Three Months Ended
	September 30,						Increase/			Percent
	2008			2007			(Decrease)			Change
Revenues
Product sales:
North America	$	63,740		$	65,295		$	(1,555	)		(2	)%
International		49,011			54,290			(5,279	)		(10	)%
Europe		40,430			30,596			9,834			32	%
Total product sales		153,181			150,181			3,000			2	%
Alliance revenue (including ribavirin royalties)		15,243			14,078			1,165			8	%
Total revenues		168,424			164,259			4,165			3	%
Costs and Expenses
Cost of goods sold (excluding amortization)		42,698			41,848			850			2	%
Selling expenses		45,343			46,950			(1,607	)		(3	)%
General and administrative expenses		26,114			26,534			(420	)		(2	)%
Research and development costs		23,239			24,865			(1,626	)		(7	)%
Restructuring, asset impairments and dispositions		3,527			—			3,527			—
Amortization expense		11,488			14,024			(2,536	)		(18	)%
Income from operations	$	16,015		$	10,038		$	5,977			60	%
Gross profit on product sales (excluding amortization)	$	110,483		$	108,333		$	2,150			2	%
Gross margin on product sales, excluding amortization		72	%		72	%
Gross profit on product sales (net of amortization)	$	100,440		$	97,114		$	3,326			3	%
Gross margin on product sales, net of amortization		66	%		65	%

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	Nine Months Ended
	September 30,						Increase/			Percent
	2008			2007			(Decrease)			Change
Revenues
Product sales:
North America	$	190,723		$	196,504		$	(5,781	)		(3	)%
International		123,536			145,394			(21,858	)		(15	)%
Europe		116,883			89,162			27,721			31	%
Total product sales		431,142			431,060			82			0	%
Alliance revenue (including ribavirin royalties)		42,821			69,503			(26,682	)		(38	)%
Total revenues		473,963			500,563			(26,600	)		(5	)%
Costs and Expenses
Cost of goods sold (excluding amortization)		126,327			113,084			13,243			12	%
Selling expenses		134,040			142,892			(8,852	)		(6	)%
General and administrative expenses		77,629			77,631			(2	)		0	%
Research and development costs		75,100			68,528			6,572			10	%
Restructuring, asset impairments and dispositions		4,294			18,074			(13,780	)		(76	)%
Amortization expense		37,616			42,547			(4,931	)		(12	)%
Income from operations	$	18,957		$	37,807		$	(18,850	)		(50	)%
Gross profit on product sales (excluding amortization)	$	304,815		$	317,976		$	(13,161	)		(4	)%
Gross margin on product sales, excluding amortization		71	%		74	%
Gross profit on product sales (net of amortization)	$	273,371		$	284,404		$	(11,033	)		(4	)%
Gross margin on product sales, net of amortization		63	%		66	%

Revenues:  In the North America pharmaceuticals segment, revenues for the three months ended September 30, 2008 were $63,740,000, compared with $65,295,000 for the corresponding period in 2007, representing a decrease of $1,555,000 (2%). Revenues for the nine months ended September 30, 2008 were $190,723,000 compared with $196,504,000 for the corresponding period in 2007, a decrease of $5,781,000 (3%). In the three-month period ended September 30, 2008, the 2% decrease in North America pharmaceuticals sales resulted from a 1% reduction in volume and a 1% price decrease, partly offset by a negligible benefit from the appreciation of the Canadian dollar. In the nine-month period ended September 30, 2008, the 3% decrease in sales resulted from a 8% decrease in volume, partly offset by a 3% price increase and a 2% benefit from the appreciation of the Canadian dollar. The reported decline in volume in the nine months ended September 30, 2008 principally resulted from a planned reduction of shipments to wholesaler customers of $17,400,000 to reduce the amount of product in the wholesale channel. The revenue reduction in the three-month period was primarily attributable to reductions in net sales of Diastat and Efudex, partly offset by increases in net sales of Kinerase and Cesamet, which is sold exclusively in Canada. The decrease in Efudex revenue is attributable to the introduction of a competing generic product in 2008. The revenue reduction in the nine-month period included reductions in net sales of Diastat, Kinerase and other products, offset in part by increases in Cesamet and Efudex. Price increases in the three and nine months ended September 30, 2008, were offset by a $7,665,000 increase in estimated reserves for future product returns to reflect the effect of recent actual product returns attributable to product changes implemented 3 to 4 years ago. The increased strength of the Canadian dollar relative to the U.S. dollar resulted in revenue increases of $107,000 and $3,224,000 in the three and nine months ended September 30, 2008, respectively.

In the International pharmaceuticals segment, revenues for the three months ended September 30, 2008 were $49,011,000 compared with $54,290,000 for the corresponding period in 2007, a decrease of $5,279,000 (10%).

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Revenues for the nine months ended September 30, 2008 were $123,536,000 compared with $145,394,000 for the corresponding period in 2007, representing a decrease of $21,858,000 (15%). In the three-month period ended September 30, 2008, the 10% decrease in International pharmaceuticals sales resulted from an 8% decrease in volume and an 8% price decrease, partly offset by a 6% benefit from currency fluctuations. In the nine-month period ended September 30, 2008, the 15% decrease in sales resulted from an 18% decrease in volume and a 2% price decrease, partly offset by a 5% benefit from currency. The volume decline in the International segment in the three and nine-month periods relates primarily to our sale of certain subsidiaries and business operations in Asia to Invida on March 3, 2008 and our sale of our subsidiaries in Argentina and Uruguay on June 5, 2008. The sale of these subsidiaries resulted in revenue decreases of $6,357,000 and $17,334,000 in the three and nine-month periods, respectively. The reported decline in volume in the nine months ended September 30, 2008 also resulted in part from a planned reduction of shipments to wholesaler customers in Mexico to reduce the amount of product in the wholesale channel. The positive effects of foreign currency exchange rates resulted in revenue increases of $3,135,000 and $7,843,000 in the three and nine months ended September 30, 2008, respectively.

In the Europe pharmaceuticals segment, revenues for the three months ended September 30, 2008 were $40,430,000, compared with $30,596,000 for the corresponding period in 2007, an increase of $9,834,000 (32%). Revenues for the nine months ended September 30, 2008 were $116,883,000 compared with $89,162,000 for the corresponding period in 2007, an increase of $27,721,000 (31%). In the three-month period ended September 30, 2008, the 32% increase in Europe revenues resulted from a 24% benefit from currency and an 11% increase in volume, partly offset by a 3% decrease in prices. In the nine-month period ended September 30, 2008, the 31% increase in revenues resulted from a 25% benefit from currency and a 7% increase in volume, partly offset by a 1% decrease in price. The appreciation of foreign currencies relative to the U.S. Dollar contributed $7,443,000 and $22,431,000 to the reported increase in sales revenue in the three and nine months ended September 30, 2008, respectively.

Gross Profit Margin:  Gross profit margin on product sales, net of pharmaceutical product amortization, was 66% and 63% for the three and nine months ended September 30, 2008, respectively, compared with 65% and 66% for the corresponding periods in 2007, respectively. The pharmaceutical product amortization included in this calculation of gross margin excluded the amortization of the ribavirin intangible. The pharmaceutical product amortization was $10,043,000 and $31,444,000 for the three and nine months ended September 30, 2008, respectively, compared with $11,219,000 and $33,572,000 for the corresponding periods in 2007, respectively.

Gross profit margin on product sales (excluding pharmaceutical product amortization) was 72% and 71% for the three and nine months ended September 30, 2008, respectively, compared with 72% and 74% for the three months and nine months ended September 30, 2007, respectively.

In the three and nine months ended September 30, 2008, we recorded inventory obsolescence charges of $2,216,000 and $20,214,000, respectively, resulting primarily from decisions to cease promotion of or discontinue certain products, decisions to discontinue certain manufacturing transfers, and product quality failures. These inventory obsolescence charges were recorded in cost of goods sold, in accordance with EITF Issue No. 96-9, Classification of Inventory Markdowns and Other Costs Associated with a Restructuring.

Declining gross margins in the nine months ended September 30, 2008 were offset in part by the reduction in costs of goods sold related to a $782,000 credit from our historical underestimation of stock option forfeitures and a $218,000 credit related to the stock option forfeitures recognized in the second quarter of 2008.

Selling Expenses:  Selling expenses were $45,343,000 and $134,040,000 for the three and nine months ended September 30, 2008, respectively, compared with $46,950,000 and $142,892,000 for the corresponding periods in 2007, respectively, resulting in decreases of $1,607,000 (3%) and $8,852,000 (6%), respectively. As a percent of product sales, selling expenses were 30% and 31% in the three and nine months ended September 30, 2008, respectively, compared with 31% and 33% for the corresponding periods in 2007, respectively. The decrease in selling expenses for the three and nine months ended September 30, 2008 primarily reflects savings from our restructuring initiatives. Selling expenses in the nine months ended September 30, 2008 were also favorably impacted by the $987,000 credit related to our historical underestimation of stock option forfeitures and the $715,000 credit related to stock option forfeitures recognized in the second quarter of 2008.

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General and Administrative Expenses:  General and administrative expenses were $26,114,000 and $77,629,000 for the three and nine months ended September 30, 2008, respectively, compared with $26,534,000 and $77,631,000 for the corresponding periods in 2007, respectively, resulting in decreases of $420,000 (2%) and $2,000 (0%), respectively. The decreases in the three and nine months ended September 30, 2008 primarily reflects savings from our restructuring initiatives, offset in the three and nine-month periods by a $1,789,000 write off of unrecoverable value-added tax receivable in Mexico arising in 2002 through 2004. The restructuring initiatives were additionally offset in the nine-month period by the recognition of an other-than-temporary impairment of $3,587,000 in an investment in a publicly traded investment fund, a $2,954,000 reversal of a tax benefit in Mexico and an expense of $800,000 we recorded in the Spear Pharmaceuticals ANDA matter, offset in part by a $2,672,000 credit related to stock-based compensation forfeitures. This $2,672,000 credit is primarily due to a reduction of $781,000 in expenses related to forfeitures which occurred in 2006, 2007 and the first quarter of 2008 and a $1,891,000 reduction in expenses related to forfeitures which occurred in the second quarter of 2008. As a percent of product sales, general and administrative expenses were 17% and 18% for the three and nine months ended September 30, 2008, respectively, compared with 18% in the corresponding periods in 2007.

Research and Development Costs:  Research and development expenses were $23,239,000 and $75,100,000 for the three and nine months ended September 30, 2008, respectively, compared with $24,865,000 and $68,528,000 for the corresponding periods in 2007, respectively, reflecting a decrease of $1,626,000 (7%) in the three months ended September 30, 2008 and an increase of $6,572,000 (10%) in the nine months ended September 30, 2008. The decrease in the three-month period is primarily due to the completion of the retigabine clinical trials in the first half of 2008, offset in part by expenditures for the retigabine NDA submission. The increase in the nine-month period resulted from the expenditures for the retigabine NDA submission, clinical development program and inventory production for validation testing. See the Products in Development section below for further discussion of the retigabine clinical development program. Research and development expenses in the nine months ended September 30, 2008 were also offset in part by a $1,190,000 credit related to our historical underestimation of stock option forfeitures and an $11,000 credit related to stock option forfeitures recognized in the second quarter of 2008.

Restructuring, Asset Impairments and Dispositions:

2008 Restructuring

In October 2007, our board of directors initiated a strategic review of our business direction, geographic operations, product portfolio, growth opportunities and acquisition strategy. As announced on March 27, 2008, we have completed this strategic review and announced a strategic plan which includes a restructuring program (the “2008 Restructuring”). The 2008 Restructuring is expected to reduce our geographic footprint and product focus by restructuring our business in order to focus on the pharmaceutical markets in our core geographies of the United States, Canada and Australia and on the branded generics markets in Europe (Poland, Hungary, Czech Republic and Slovakia) and Latin America (Mexico and Brazil). Our restructuring plans include actions to divest our operations in markets outside of these core geographic areas through sales of subsidiaries or assets or other strategic alternatives, to seek partners for taribavirin and retigabine and to make selective acquisitions. During the third quarter of 2008, we completed the sale of the WEEMEA business operations to Meda, as discussed in Note 5, Discontinued Operations. In the fourth quarter of 2008, we also completed a worldwide License and Collaboration Agreement with Glaxo Group Limited to develop and commercialize retigabine and completed an Agreement and Plan of Merger with Coria Laboratories Ltd., as discussed in Note 14, Subsequent Events.

On August 4, 2008, we signed an agreement to sell the WEEMEA business to Meda and completed the sale on September 11, 2008. We recorded a gain of $178,506,000 in discontinued operations from the sale of the WEEMEA business, net of charges for professional fees, severance costs and income taxes.

In December 2007, we signed an agreement with Invida Pharmaceutical Holdings Pte. Ltd. (“Invida”) to sell to Invida certain Valeant subsidiaries and product rights in Asia in a transaction that included certain of our subsidiaries, branch offices and commercial rights in Singapore, the Philippines, Thailand, Indonesia, Vietnam, Taiwan, Korea, China, Hong Kong, Malaysia and Macau. This transaction also included certain product rights in Japan. We closed this transaction on March 3, 2008. The assets sold to Invida were classified as “held for sale” as of December 31, 2007 in accordance with SFAS 144. During the three months ended March 31, 2008, we received

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initial proceeds of $37,855,000 and recorded a gain of $36,922,000 in this transaction. During the three months ended June 30, 2008 and the three months ended September 30, 2008, we recorded $1,017,000 and $829,000, respectively, of net asset adjustments and additional closing costs resulting in a reduced gain of $35,076,000 on the transaction. We expect to receive additional proceeds of approximately $3,841,000 subject to net asset settlement provisions in the agreement.

As of March 31, 2008, we classified our subsidiaries in Argentina and Uruguay as “held for sale” in accordance with SFAS 144. In the three months ended March 31, 2008, we recorded an impairment charge of $7,852,000 related to this anticipated sale. We sold these subsidiaries on June 5, 2008 and recorded a loss on the sale of $2,926,000.

The net restructuring, asset impairments and dispositions charge of $3,527,000 in the three months ended September 30, 2008 included the $829,000 of net asset adjustments and additional closing costs recorded as reductions of the gain originally recorded in the three months ended March 31, 2008 in the Invida transaction and $220,000 of severance charges for a total of 16 affected employees. The charge also included $1,511,000 for professional service fees related to the strategic review of our business, $694,000 of contract termination costs and $273,000 of other cash costs.

The net restructuring, asset impairments and dispositions charge of $4,294,000 in the nine months ended September 30, 2008 included $12,290,000 of employee severance costs for a total of 160 affected employees who were part of the supply, selling, general and administrative and research and development workforce in the United States, Mexico and Brazil. The charges also included $9,774,000 for professional service fees related to our strategic review of our business, $694,000 of contract termination costs and $562,000 of other cash costs. Additional amounts incurred included a stock compensation charge for the accelerated vesting of the stock options of our former chief executive officer of $4,778,000, impairment charges relating to the sale of our subsidiaries in Argentina and Uruguay and certain fixed assets in Mexico of $8,346,000, and the loss of $2,926,000 in the sale of our subsidiaries in Argentina and Uruguay, offset in part by the gain of $35,076,000 in the transaction with Invida.

The following table summarizes the restructuring costs recorded in the three and nine months ended September 30, 2008 (in thousands):

	Three Months		Nine Months
	Ended		Ended
	September 30,		September 30,
2008 Restructuring Program	2008		2008
Cash-related charges:
Employee severances (160 employees, cumulatively)	$	220	$	12,290
Professional services, contract cancellation and other cash costs		2,478		11,030
Subtotal: cash charges		2,698		23,320
Stock compensation		—		4,778
Impairment of long-lived assets		—		8,346
Loss on sale of long-lived assets		—		2,926
Subtotal: non-cash charges		—		16,050
Subtotal: restructuring expenses		2,698		39,370
Gain on Invida transaction		829		(35,076	)
Restructurings, asset impairments and dispositions	$	3,527	$	4,294

In the three and nine months ended September 30, 2008, we recorded inventory obsolescence charges of $2,216,000 and $20,214,000, respectively, resulting primarily from decisions to cease promotion of or discontinue certain products, decisions to discontinue certain manufacturing transfers and product quality failures. These inventory obsolescence charges were recorded in cost of goods sold, in accordance with EITF Issue No. 96-9, Classification of Inventory Markdowns and Other Costs Associated with a Restructuring.

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As of the date of filing of this quarterly report on Form 10-Q, we are not able to estimate the total restructuring charges that will occur in the 2008 Restructuring.

2006 Restructuring

In April 2006, we announced a restructuring program (the “2006 Restructuring”) which was primarily focused on our research and development and manufacturing operations. The objective of the 2006 Restructuring program as it related to research and development activities was to focus our efforts and expenditures on retigabine and taribavirin, our two late-stage projects in development. The 2006 Restructuring was designed to rationalize our investments in research and development efforts in line with our financial resources. In December 2006, we sold our HIV and cancer development programs and certain discovery and pre-clinical assets to Ardea Biosciences, Inc. (“Ardea”), with an option for us to reacquire rights to commercialize the HIV program outside of the United States and Canada upon Ardea’s completion of Phase 2b trials. In March 2007, we sold our former headquarters building in Costa Mesa, California, where our former research laboratories were located, for net proceeds of $36,758,000.

The objective of the 2006 Restructuring as it related to manufacturing was to further rationalize our manufacturing operations to reflect the regional nature of our existing products and further reduce our excess capacity after considering the delay in the development of taribavirin. The impairment charges included the charges related to estimated future losses expected upon the disposition of specific assets related to our manufacturing operations in Switzerland and Puerto Rico. We completed the 2006 Restructuring in June 2007 with the sale of our former manufacturing facilities in Humacao, Puerto Rico and Basel, Switzerland to Legacy Pharmaceuticals International.

We did not record a restructuring provision in the three months ended September 30, 2007. In the nine months ended September 30, 2007, we recorded charges of $18,074,000 related to the 2006 Restructuring.

The following table summarizes the restructuring costs recorded in the three and nine months ended September 30, 2007 (in thousands):

	Three Months		Nine Months
	Ended		Ended
	September 30,		September 30,
2006 Restructuring Program	2007		2007
Employee severances (417 employees, cumulatively)	$	—	$	3,788
Contract cancellation and other cash costs		—		2,076
Subtotal: cash charges		—		5,864
Write-off of accumulated foreign currency translation adjustments		—		2,891
Impairment of manufacturing and research facilities		—		9,319
Subtotal: non-cash charges		—		12,210
Restructurings, asset impairments and dispositions	$	—	$	18,074

Reconciliation of Cash Restructuring Payments with Restructuring Accrual

Cash-related charges in the above tables relate to severance payments and other costs which have been either paid with cash expenditures or have been accrued and will be paid with cash in future quarters. As of September 30, 2008, the restructuring accrual for the 2006 Restructuring was $1,000,000 and relates to ongoing contractual payments to Legacy Pharmaceuticals International relating to the sale of our former site in Puerto Rico. These payment obligations last until June 30, 2009.

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As of September 30, 2008, the restructuring accrual for the 2008 Restructuring was $13,243,000 and relates to severance, professional service fees and other obligations and is expected to be paid primarily during the remainder of 2008. A summary of accruals and expenditures of restructuring costs which will be paid in cash is as follows (in thousands):

2006 Restructuring: Reconciliation of Cash Payments and Accruals
Restructuring accrual, June 30, 2008	$	1,375
Cash paid		(375	)
Restructuring accrual, September 30, 2008	$	1,000
2008 Restructuring: Reconciliation of Cash Payments and Accruals
Restructuring accrual, June 30, 2008	$	11,799
Charges to earnings in continuing operations		2,698
Charges to earnings in discontinued operations		11,202
Cash paid		(12,456	)
Restructuring accrual, September 30, 2008	$	13,243

Amortization:  Amortization expense was $11,488,000 and $37,616,000 for the three and nine months ended September 30, 2008, respectively, compared with $14,024,000 and $42,547,000 for the corresponding periods in 2007, respectively, resulting in decreases of $2,536,000 (18%) and $4,931,000 (12%), respectively. The decrease is the result of the declining amortization of the rights to the ribavirin royalty intangible, which has been amortized using an accelerated method and was fully amortized as of September 30, 2008.

Other Income (Expense), Net, Including Translation and Exchange:  Other income (expense), net, including translation and exchange was expense of $1,555,000 and $3,384,000 for the three and nine months ended September 30, 2008, respectively, compared with expense of $887,000 and income of $2,503,000 for the corresponding periods in 2007, respectively. These increases in expense resulted primarily from the depreciation of the U.S. Dollar relative to the Polish Zloty and other foreign currencies.

Loss on Early Extinguishment of Debt:  Loss on early extinguishment of debt of $14,882,000 in the three and nine months ended September 30, 2008 resulted from the July 2008 redemption of our 7% Senior Notes and includes redemption premium of $10,500,000, unamortized loan costs of $2,842,000 and an interest rate swap agreement termination fee of $1,540,000.

Interest Expense, Net:  Interest expense, net of interest income was $3,189,000 and $12,559,000 in the three and nine months ended September 30, 2008, respectively, compared with $6,850,000 and $19,473,000 for the corresponding periods in 2007, respectively. Interest expense net of interest income decreased $3,661,000 (53%) and $6,914,000 (36%) during the three and nine months ended September 30, 2008, respectively, compared with the corresponding periods in 2007, respectively, due primarily to lower interest expense resulting from the July 2008 redemption of the 7% Senior Notes.

Income Taxes:  The income tax provisions in the three months ended September 30, 2008 and 2007 relate to the profits of our foreign operations, foreign withholding taxes, penalties and interest associated with U.S. liabilities and state and local taxes in the United States. In addition, during the second quarter of 2008 we reversed our APB 23 representation with respect to unrepatriated foreign earnings and have provided U.S. tax on these earnings. As of September 30, 2008, we repatriated $260,000,000 of these earnings which were offset by cumulative U.S. operating losses and related foreign tax credits. We paid $7,782,000 of withholding tax on the repatriation of these earnings. As of September 30, 2008, a deferred tax liability equal to $38,202,000 was established to provide for taxes on these unrepatriated earnings. Setting up the deferred tax liability has allowed us to benefit 2008 U.S. losses, release $35,308,000 of U.S. valuation allowance, which includes $9,242,000 and $3,548,000 in benefits that were credited to additional paid-in capital and goodwill, respectively. At this time, there is insufficient objective evidence as to the timing and amount of future U.S. taxable income to allow for the release of the remaining U.S. valuation allowance which is primarily offsetting future benefits of foreign tax credits.

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Income (Loss) from Discontinued Operations, Net of Taxes:  The results from discontinued operations relate primarily to the WEEMEA business and our Infergen operations, and include the gain on sale of the WEEMEA business of $178,506,000 in the three and nine months ended September 30, 2008.

Liquidity and Capital Resources

On June 20, 2008, we announced that we would redeem all of our $300,000,000 aggregate principal amount 7.0% Senior Notes due 2011 (the “7% Senior Notes”). We completed this redemption on July 21, 2008, paying $300,000,000 to redeem the aggregate principal amount of the 7% Senior Notes and $10,500,000 as a redemption premium. The redemption premium was recorded as loss on early extinguishment of debt in the three months ending September 30, 2008. We terminated the interest rate swap agreement with respect to the 7% Senior Notes upon their redemption. This swap agreement was terminated for $1,540,000, the fair value of the swap as of the termination date. We also released the collateral related to the swap of $4,513,000 with the termination of the swap agreement.

Cash and cash equivalents and marketable securities totaled $571,012,000 as of September 30, 2008 compared with $339,020,000 as of December 31, 2007. The increase of $231,992,000 resulted in part from the receipt of $428,432,000 from Meda as payment for the sale of the WEEMEA business, $70,800,000 from Three Rivers Pharmaceuticals, LLC as the initial payment for our Infergen rights, $37,855,000 received from Invida for the sale of certain of our businesses in Asia, and cash flow from operations, offset in part by $310,500,000 paid to redeem the 7% Senior Notes and treasury stock purchases of $91,422,000. Working capital (excluding assets held for sale and assets of discontinued operations) was $599,892,000 as of September 30, 2008 compared with $416,552,000 as of December 31, 2007. The increase in working capital of $183,430,000 primarily resulted from the increase in cash and marketable securities, offset in part by a decrease in accounts receivable and income taxes receivable and an increase in income taxes payable and trade payables and accrued liabilities.

Cash provided by operating activities in continuing operations is expected to be a sufficient source of funds for operations in 2008. During the nine months ended September 30, 2008, cash provided by operating activities in continuing operations totaled $58,646,000 compared with $78,520,000 for the corresponding period in 2007, representing a decrease of $19,874,000. The cash provided by operating activities in continuing operations was a result of the reduction in accounts receivable and the increase in income taxes payable, offset in part by the redemption premium of $10,500,000, termination of the swap agreement of $1,540,000 and an increase in inventories. The cash provided by operating activities in continuing operations for the nine months ended September 30, 2007 included receipt of $19,200,000 related to the pradefovir licensing payment from Schering-Plough and $6,000,000 from the Republic of Serbia.

Cash provided by investing activities in continuing operations was $49,866,000 for the nine months ended September 30, 2008 compared with cash used in investing of $7,590,000 for the corresponding period in 2007, representing an increase of $57,456,000. The cash provided by investing activities in continuing operations for the nine months ended September 30, 2008 included the net proceeds of $48,575,000 we received in aggregate from the Invida transaction and the sale of Argentina and Uruguay, and net proceeds from investments of $11,325,000, offset in part by capital expenditures of $9,456,000. Cash provided by investing activities in discontinued operations of $462,418,000 consisted primarily of the net proceeds of $394,591,000 from the sale of the WEEMEA business to Meda and $70,800,000 of cash proceeds received as the initial payment in the sale of our Infergen operations to Three Rivers Pharmaceuticals LLC. In 2007, cash used in investing activities in continuing operations was $7,590,000 and included cash used for product acquisitions of $22,091,000 and capital expenditures of $22,368,000, offset in part by proceeds from the sale of assets of $37,918,000, primarily related to the sale of our former headquarters building in California.

Cash used in financing activities in continuing operations was $373,420,000 in the nine months ended September 30, 2008 and principally consisted of the payment of debt and notes payable of $300,712,000 and purchase of treasury stock of $91,422,000, offset in part by proceeds from stock option exercises and employee stock purchases of $18,589,000. Cash used in financing activities in continuing operations was $64,911,000 in the nine months ended September 30, 2007 and principally consisted of the purchase of treasury stock of $79,599,000, offset in part by proceeds from stock option exercises and employee stock purchases of $14,517,000.

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If GSK terminates the Collaboration Agreement prior to the expiration of the Review Period, we would be required to refund to GSK up to $95,000,000 of the upfront fee; however, the refundable portion will be reduced for every quarter that the Collaboration Agreement is in effect.

We believe that our existing cash and cash equivalents and funds generated from operations will be sufficient to meet our operating requirements at least through September 30, 2009, and to provide cash needed to fund capital expenditures and our clinical development program. While we have no current intent to issue additional debt or equity securities, we may seek additional debt financing or issue additional equity securities to finance future acquisitions or for other purposes. There can be no assurance we would be able to secure such financing on acceptable terms, if at all, especially in light of current economic and market conditions. We fund our operating cash requirements primarily from cash provided by operating activities. Our sources of liquidity are cash and cash equivalent balances, cash flow from operations, and cash provided by investing activities.

We did not pay dividends for either the first nine months of 2008 or 2007. The amount and timing of any future dividends will depend upon our financial condition and profitability, the need to retain earnings for use in the development of our business, contractual restrictions, including covenants and other factors. The contractual limitations on our ability to pay dividends under the terms of the indenture governing our 7% Senior Notes ceased with the redemption of those notes on July 21, 2008. We do not intend to pay dividends for the foreseeable future.

Off-Balance Sheet Arrangements

We do not use special purpose entities or other off-balance sheet financing techniques except for operating leases disclosed in our annual report on Form 10-K. Our 3% and 4% convertible subordinated notes include conversion features that are considered off-balance sheet arrangements under SEC requirements.

Products in Development

Late Stage Development of New Chemical Entities

Retigabine:  Subject to the terms of the Collaboration Agreement with GSK, we are developing retigabine as an adjunctive treatment for partial-onset seizures in patients with epilepsy. Retigabine stabilizes hyper-excited neurons primarily by opening neuronal potassium channels. The results of the key Phase II study indicated that the compound is potentially efficacious with a demonstrated reduction in monthly seizure rates of 23% to 35% as adjunctive therapy in patients with partial seizures. Response rates in the two higher doses were statistically significant compared with placebo (p< 0.001).

Following a Special Protocol Assessment by the FDA, two Phase III trials of retigabine were initiated in 2005. One Phase III trial (“RESTORE 1”; RESTORE stands for Retigabine Efficacy and Safety Trial for partial Onset Epilepsy) was conducted at approximately 50 sites, mainly in the Americas (U.S., Central/South America); the second Phase III trial (“RESTORE 2”) was conducted at approximately 70 sites, mainly in Europe.

We announced clinical data results for RESTORE 1 on February 12, 2008. RESTORE 1 evaluated the 1200 mg daily dose of retigabine (the highest dose in the RESTORE program) versus placebo in patients taking stable doses of one to three additional anti-epileptic drugs (“AEDs”). Retigabine demonstrated statistically significant (p< 0.001) results on the primary efficacy endpoints important for regulatory review by both the FDA and the European Medicines Evaluation Agency (“EMEA”).

The intent-to-treat (“ITT”) median reduction in 28-day total partial seizure frequency from baseline to the end of the double-blind period (the FDA primary efficacy endpoint), was 44.3% (n=153) and 17.5% (n=152) for the retigabine arm and placebo arm of the trial, respectively. The responder rate, defined as ³ a 50% reduction in 28-day total partial seizure frequency compared with the baseline period, during maintenance (the dual primary efficacy endpoint required for the EMEA submission) was 55.5% (n=119) and 22.6% (n=137) for the retigabine arm and the placebo arm of the trial, respectively.

During RESTORE 1, 26.8% of patients in the retigabine arm and 8.6% of patients in the placebo arm withdrew due to adverse events. The most common side effects associated with retigabine in RESTORE 1 included dizziness, somnolence, fatigue, confusion, dysarthria (slurring of speech), ataxia (loss of muscle coordination), blurred vision,

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tremor, and nausea. Results of the study were presented at the 8^th European Congress on Epileptology, Berlin, Germany in September 2008. More details on the RESTORE 1 data announcement are provided in our annual report on Form 10-K for the year ended December 31, 2007, filed on March 17, 2008. See Item 7, Products in Development.

We announced clinical data results for RESTORE 2 on May 13, 2008. RESTORE 2 evaluated the 600 and 900 mg daily doses of retigabine versus placebo in patients taking stable doses of one to three additional anti-epileptic drugs (“AEDs”). Retigabine at both the 600 mg and 900 mg doses demonstrated highly statistically significant results on the primary efficacy endpoints important for regulatory review by both the FDA and the EMEA.

The ITT median reduction in 28-day total partial seizure frequency from baseline to the end of the double-blind period (the FDA primary efficacy endpoint), was 15.9% (n=179), 27.9% (n=181) and 39.9% (n=178) for the placebo, retigabine 600 mg and retigabine 900 mg arms of the trial, respectively. The responder rate, defined as ³ a 50% reduction in 28-day total partial seizure frequency compared with the baseline period, during maintenance (the dual primary efficacy endpoint required for the EMEA submission) was 18.9% (n=164), 38.6% (n=158) and 47.0% (n=149) for the placebo, retigabine 600 mg and retigabine 900 mg and placebo arms of the trial, respectively.

During RESTORE 2, 14.4% and 25.8% of patients in the retigabine 600 mg and 900 mg arms, respectively, and 7.8% of patients in the placebo arm withdrew due to adverse events. As expected, the most common side effects associated with retigabine in RESTORE 2 included dizziness, somnolence, and fatigue and were generally seen at much lower rates than at a 1200 mg dose in the RESTORE 1 trial. We will present comprehensive efficacy and safety results from RESTORE 2 at an upcoming scientific meeting in the United States.

A number of standard supportive Phase I trials necessary for successful registration of retigabine were completed in 2008. In March 2007, we initiated development of a modified release formulation of retigabine. In addition, in November 2007, we began enrolling patients into a randomized, double-blind, placebo-controlled phase IIa study to evaluate the efficacy and tolerability of retigabine as a treatment for neuropathic pain resulting from post-herpetic neuralgia. We anticipate completing enrollment at the end of 2008.

In August 2008, we entered into a worldwide Collaboration Agreement with GSK for the continued development and commercialization of retigabine and its backup compounds. The Collaboration Agreement became effective on October 17, 2008. We received $125,000,000 upon effectiveness of this transaction of which, up to $100,000,000 will be used to fund our commitments to the collaboration, which are expected to be incurred through mid to late 2010. The parties will jointly develop and commercialize retigabine in the Collaboration Territory (U.S., Canada, Australia, New Zealand and Puerto Rico) and GSK will develop and commercialize in the rest of the world. If GSK terminates the Collaboration Agreement prior to the expiration of the Review Period, we would be required to refund to GSK up to $95,000,000 of the upfront fee; however, the refundable portion will be reduced for every quarter that the Collaboration Agreement is in effect. Under the Collaboration Agreement, we could receive up to $545,000,000 in additional milestone payments on the development and launch of retigabine worldwide. In the Collaboration Territory, we will receive a share of the profits from retigabine starting at 50% at launch and adjusting downward and upward based on the achievement of certain development and commercial milestones. GSK will pay us royalties of up to 20% on net sales outside the Collaboration Territory. We could receive up to $150,000,000 in milestones and royalties of up to 20% on the development and commercialization of the retigabine backup compounds.

Our rights to retigabine are subject to the Asset Purchase Agreement between Meda Pharma GmbH & Co KG (“Meda Pharma”) (as successor to Viatris GmbH & Co KG) and Xcel Pharmaceuticals, Inc., which we acquired in 2005. The provisions of that agreement require milestone payments of $8,000,000 upon acceptance of filing of the NDA and $6,000,000 upon approval of the NDA for retigabine. In addition, earn out payments are due to Meda Pharma on sales of retigabine. Depending on the geographic market and sales levels, royalty rates vary from 3% to 8% of net sales. Under the Collaboration Agreement with GSK, these royalties will be treated in the Collaboration Territory as an operating expense and shared by GSK and the Company pursuant to the profit sharing percentage then in effect. In the rest of the world, we will be responsible for the payment of these royalties to Meda Pharma from the royalty payments we receive from GSK. Upon effectiveness of the Collaboration Agreement with GSK,

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we paid Meda Pharma a milestone payment of $3,750,000 on October 30, 2008. An additional payment of $1,500,000 could become due if a certain indication for retigabine is developed and licensed to GSK.

External research and development expenses for retigabine for the three and nine months ended September 30, 2008 were $11,925,000 and $40,545,000, respectively, compared with $12,964,000 and $33,168,000 for the corresponding periods in 2007, respectively.

Taribavirin:  Taribavirin (formerly referred to as viramidine) is a nucleoside (guanosine) analog that is converted into ribavirin by adenosine deaminase in the liver and intestine. We are developing taribavirin in oral form for the treatment of hepatitis C.

Preclinical studies indicated that taribavirin, a prodrug of ribavirin, has antiviral and immunological activities (properties) similar to ribavirin. In 2006, we reported the results of two pivotal Phase III trials for taribavirin. The VISER (Viramidine Safety and Efficacy Versus Ribavirin) trials included two co-primary endpoints: one for safety (superiority to ribavirin in incidence of anemia) and one for efficacy (non-inferiority to ribavirin in sustained viral response, SVR). The results of the VISER trials met the safety endpoint but did not meet the efficacy endpoint.

The studies demonstrated that 38-40% of patients treated with taribavirin achieved SVR and that the drug has a safety advantage over ribavirin, but that it was not comparable to ribavirin in efficacy at the doses studied. We believe that the results of the studies were significantly impacted by the dosing methodology which employed a fixed dose of taribavirin for all patients and a variable dose of ribavirin based on a patient’s weight. Our analysis of the study results led us to believe that the dosage of taribavirin, like ribavirin, likely needs to be based on a patient’s weight to achieve efficacy equal or superior to that of ribavirin. Additionally we think that higher doses of taribavirin than those studied in the VISER program may be necessary to achieve our efficacy objectives.

Based on our analysis, we initiated a Phase IIb study to evaluate the efficacy of taribavirin at 20, 25 and 30 mg/kg in combination with pegylated interferon, as compared with ribavirin in combination with pegylated interferon. In the VISER program, taribavirin was administered in a fixed dose of 600 mg BID (approximately equivalent to 13-18 mg/kg).

The Phase IIb study is a U.S. multi-center, randomized, parallel, open-label study in 278 treatment naïve, genotype 1 patients evaluating taribavirin at 20 mg/kg, 25 mg/kg, and 30 mg/kg per day in combination with pegylated interferon alfa-2b. The control group is being administered weight-based dosed ribavirin (800/1,000/1,200/1,400 mg daily) and pegylated interferon alfa-2b. Overall treatment duration will be 48 weeks with a post-treatment follow-up period of 24 weeks. The primary endpoints for this study are viral load reduction at treatment week 12 and anemia rates throughout the study.

On March 17, 2008, we reported the results of the 12-week analysis of the taribavirin Phase IIb study. The 12-week early viral response (“EVR”) data from the Phase IIb study showed comparable reductions in viral load for weight-based doses of taribavirin and ribavirin. The anemia rate was statistically significantly lower for patients receiving taribavirin in the 20mg/kg and 25mg/kg arms versus the ribavirin control arm. The most common adverse events were fatigue, nausea, flu-like symptoms, headache and diarrhea. The incidence rates among treatment arms were generally comparable except with respect to diarrhea, where diarrhea was approximately twice as common in taribavirin patients as ribavirin patients. However, the diarrhea was not treatment limiting for taribavirin or ribavirin patients.

More details on the 12-week analysis of the taribavirin Phase IIb study are provided in our annual report on Form 10-K for the year ended December 31, 2007, filed on March 17, 2008. See Item 7, Products in Development.

We presented treatment week 24 results from our Phase IIb study evaluating weight-based dosing with taribavirin vs. weight-based ribavirin (both in combination with Peginterferon alfa-2b in naïve, chronic hepatitis C, genotype 1 patients) at the 59^th annual American Academy for the Study of Liver Diseases, San Francisco, CA in November 2008. While the treatment week 24 data continues to support our belief that weight based dosing of taribavirin is a key component in the program, the timeline and path to regulatory approval of taribavirin remains uncertain at this time. We are identifying potential partnering opportunities for taribavirin. For the three and nine months ended September 30, 2008, external research and development expenses for taribavirin were

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$1,303,000 and $6,398,000, respectively, compared with $1,911,000 and $5,433,000 for the corresponding periods in 2007, respectively.

Other Development Activities

Diastat Intranasal:  Our product Diastat AcuDial is a gel formulation of diazepam administered rectally in the management of selected, refractory patients with epilepsy, who require intermittent use of diazepam to control bouts of increased seizure activity. In order to improve the convenience of this product, we have initiated the development of a novel intranasal delivery of diazepam. Our external research and development expenses for Diastat Intranasal were $266,000 and $2,685,000 for the three and nine months ended September 30, 2008, respectively, compared with $189,000 and $532,000 for the corresponding periods in 2007, respectively.

Foreign Operations

Approximately 69% of our revenues from continuing operations, which includes royalties, for the nine months ended September 30, 2008 and 2007, were generated from operations outside the United States. All of our 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 our results of operations. The effect of these risks remains difficult to predict.

Critical Accounting Estimates

The consolidated condensed financial statements appearing elsewhere in this quarterly report have been prepared in conformity with accounting principles generally accepted in the United States. The preparation of these statements requires us 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, we evaluate our estimates, including those related to product returns, collectibility of receivables, inventories, intangible assets, income taxes and contingencies and litigation. The actual results could differ materially from those estimates. See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations in our annual report on Form 10-K for the year ended December 31, 2007 for a discussion of our critical accounting estimates.

Other Financial Information

With respect to the unaudited consolidated condensed financial information of Valeant Pharmaceuticals International for the three and nine months ended September 30, 2008 and 2007, PricewaterhouseCoopers LLP reported that they have applied limited procedures in accordance with professional standards for a review of such information. However, their report dated November 7, 2008, appearing herein, states that they did not audit and they do not express an opinion on that unaudited consolidated condensed financial information. Accordingly, the degree of reliance on their report on such information should be restricted in light of the limited nature of the review procedures applied. PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933, as amended (the “Act”) for their report on the unaudited consolidated condensed financial information because that report is not a “report” or a “part” of a registration statement prepared or certified by PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Act.

Forward-Looking Statements

Except for the historical information contained herein, the matters addressed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this quarterly report on Form 10-Q constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. These 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 our

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management. 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. We undertake 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.

Forward-looking statements may be identified by the use of the words “anticipates,” “expects,” “intends,” “plans,” and variations or similar expressions. You should understand that various important factors and assumptions, including those set forth below, could cause our actual results to differ materially from those anticipated in this report.

•  The results from the initial 12 and 24 weeks of our Phase IIb study for taribavirin may not be predictive of the final results of the Phase IIb study or of any subsequent clinical trial necessary for approval of taribavirin. Thus we give no assurance that taribavirin will ultimately meet its clinical efficacy or safety endpoints, that we will conduct additional trials necessary for approval of taribavirin or that, if we conduct such additional trials, the results will lead to approval of taribavirin by the FDA or similar authority or any foreign government.

•  We have identified a material weakness in our internal control over financial reporting that could adversely affect our stock price and ability to prepare complete and accurate financial statements in a timely manner.

•  We are involved in several legal proceedings, including the current SEC investigation and those other proceedings described in Note 11, Commitments and Contingencies, of the notes to consolidated condensed financial statements included elsewhere in this quarterly report, any of which could result in substantial cost and divert management’s attention and resources.

•  Adverse U.S and international economic and market conditions may adversely affect our product sales and business.

•  We may have to withdraw those products that cause, or are alleged to cause, serious or widespread personal injury from the market and/or incur significant costs, including payment of substantial sums in damages.

•  Our future growth will depend, in large part, upon our ability or the ability of our partners or licensees to develop or obtain and commercialize new products and new formulations of, or indications for, current products.

•  We can protect our products from generic substitution by third parties only to the extent that our technologies are covered by valid and enforceable patents, are effectively maintained as trade secrets or are protected by data exclusivity. However, our pending or future patent applications may not issue as patents. Any patent issued may be challenged, invalidated, held unenforceable or circumvented. Furthermore, our patents may not be sufficiently broad to prevent third parties’ competing products. The expiration of patent protection for ribavirin has resulted in significant competition from generic substitutes and declining royalty revenues and may negatively impact future financial results.

•  Trade secret protection is less effective than patent protection because competitors may discover our technology or develop parallel technology.

•  The scope of protection afforded by a patent can be highly uncertain. A pending claim or a result unfavorable to us in a patent dispute may preclude development or commercialization of products or impact sales of existing products, result in cessation of royalty payments to us and/or result in payment of monetary damages.

•  Obtaining drug approval in the United States and other countries is costly and time consuming. Uncertainties and delays inherent in the process can preclude or delay development and commercialization of our products.

•  Our restructuring plans are intended to improve operational efficiencies and our competitiveness. If we are unable to realize the benefits from our restructuring plans, our business prospects may suffer and our operating results and financial condition would be adversely affected.

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•  We and our competitors are always striving to develop products that are more effective, safer, more easily tolerated or less costly. If our competitors succeed in developing better alternatives to our current products before we do, we will lose sales and revenues to their alternative products. If vaccines are introduced to prevent the diseases treated by our products, our potential sales and revenues will decrease.

•  The pharmaceutical industry is subject to substantial government regulation, including the approval of new pharmaceutical products, labeling, advertising and, in most countries, pricing, as well as inspection and approval of manufacturing facilities. The costs of complying with these regulations are high, and failure to comply could result in fines or interruption in our business.

•  We collect and pay a substantial portion of our sales and expenditures in currencies other than the U.S. dollar. As a result, fluctuations in foreign currency exchange rates affect our operating results. Additionally, future exchange rate movements, inflation or other related factors may have a material adverse effect on our sales, gross profit or operating expenses. As of September 30, 2008 we have in place foreign currency hedge transactions to reduce our exposure to variability in the Polish Zloty. We continue to evaluate the possibility of entering into additional hedge arrangements.

•  A significant part of our revenue is derived from products manufactured by third parties. We rely on their quality level, compliance with the FDA regulations or similar regulatory requirements enforced by regulatory agencies in other countries and continuity of supply. Any failure by them in these areas could disrupt our product supply and negatively impact our revenues.

•  Our flexibility in maximizing commercialization opportunities for our compounds may be limited by our obligations to Schering-Plough. In November 2000, we entered into an agreement that provides Schering-Plough with an option to acquire the rights to up to three of our products intended to treat hepatitis C that Schering-Plough designates prior to our entering Phase 2 clinical trials and a right for first/last refusal to license various compounds we may develop and elect to license to others. Taribavirin was not subject to the option of Schering-Plough, but it would be subject to their right of first/last refusal if we elected to license it to a third party. The interest of potential collaborators in obtaining rights to our compounds or the terms of any agreement we ultimately enter into for these rights may be hindered by our agreement with Schering-Plough.

•  To purchase our products, many patients rely on reimbursement by third party payors such as insurance companies, HMOs and government agencies. These third party payors are increasingly attempting to contain costs by limiting both coverage and the level of reimbursement of new drug products. The reimbursement levels established by third party payors in the future may not be sufficient for us to realize an appropriate return on our investment in product development and our continued manufacture and sale of existing drugs.

•  All drugs have potential harmful side effects and can expose drug manufacturers and distributors to liability. In the event one or more of our products is found to have harmed an individual or individuals, we may be responsible for paying all or substantially all damages awarded. A successful product liability claim against us could have a material negative impact on our financial position and results of operations.

•  Our stockholder rights plan, provisions of our certificate of incorporation and provisions of the Delaware General Corporation Law could provide our Board of Directors with the ability to deter hostile takeovers or delay, deter or prevent a change in control of our company, including transactions in which stockholders might otherwise receive a premium for their shares over then current market prices.

•  We are authorized to issue, without stockholder approval, approximately 10,000,000 shares of preferred stock, 200,000,000 shares of common stock and securities convertible into either shares of common stock or preferred stock. If we issue additional equity securities, the price of our securities may be materially and adversely affected. The Board of Directors can also use issuances of preferred or common stock to deter a hostile takeover or change in control of our company.

•  We are subject to a consent order with the Securities and Exchange Commission, which permanently enjoins us from violating securities laws and regulations. The consent order also precludes protection for forward-looking statements under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995

44

with respect to forward-looking statements we made prior to November 28, 2005. The existence of the permanent injunction under the consent order, and the lack of protection under the safe harbor with respect to forward-looking statements made prior to November 28, 2005 may limit our ability to defend against future allegations.

Item 3.   Quantitative and Qualitative Disclosures About Market Risk

Our business and financial results are affected by fluctuations in world financial markets. We evaluate our exposure to such risks on an ongoing basis, and seek ways to manage these risks to an acceptable level, based on management’s judgment of the appropriate trade-off between risk, opportunity and cost. We do not hold any significant amount of market risk sensitive instruments whose value is subject to market price risk. Our significant foreign currency exposure relates to the Euro, Mexican Peso, Polish Zloty, Swiss Franc and Canadian Dollar. We believe the sale of the WEEMEA business will reduce our exposure to the Euro and Swiss Franc. We seek to manage our foreign currency exposure through operational means by managing local currency revenues in relation to local currency costs. We take steps to mitigate the impact of foreign currency on the income statement, which include hedging our foreign currency exposure.

In the normal course of business, we also face 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. As of September 30, 2008, the fair values of our derivative contracts and fixed-rate debt were as follows (in thousands):

	Notional/		Assets (Liabilities)
	Contract		Carrying			Fair
Description	Amount		Value			Value
Undesignated hedges	$	94,200	$	(213	)	$	(213	)
Net investment hedges	$	24,695	$	1,592		$	1,592
Cash flow hedges	$	750	$	63		$	63
Outstanding fixed-rate debt	$	480,000	$	(480,000	)	$	(444,446	)

We currently do not hold financial instruments for trading or speculative purposes. Our financial assets are not subject to significant interest rate risk due to their short duration. A 100 basis-point increase in interest rates affecting our financial instruments would not have had a material effect on our third quarter 2008 pretax earnings. We had $480,000,000 of fixed rate debt as of September 30, 2008 that required U.S. dollar repayment. We completed the redemption of all of our $300,000,000 aggregate principal amount 7.0% Senior Notes due 2011 on July 21, 2008. To the extent that we access foreign earnings, we are subject to risk of changes in the value of certain currencies relative to the U.S. dollar. However, the increase of 100 basis-points in interest rates would have reduced the fair value of our remaining fixed-rate debt instruments by approximately $13,900,000 as of September 30, 2008.

Item 4.   Controls and Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our 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 our management, including our 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 is of necessity required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures. Based on their evaluation, our chief executive officer and

45

chief financial officer concluded that as a result of the unremediated material weakness discussed below, our disclosure controls and procedures were not effective as of the end of the period covered by this report.

As of September 30, 2008, management determined that we had an unremediated material weakness in internal control over financial reporting identified in the preparation of our annual report on Form 10-K for the year ended December 31, 2007. We did not maintain a sufficient complement of personnel in our foreign locations with the appropriate skills, training and experience to identify and address the application of generally accepted accounting principles and effective controls with respect to locations undergoing change or experiencing staff turnover. Further, the monitoring controls over accounting for pension plans and product returns in foreign locations did not operate at a sufficient level of precision to identify the accounting errors in the foreign operations on a timely basis and did not include a process for obtaining corroborating information to support the analysis and conclusions regarding individually significant transactions. This control deficiency resulted in the restatement of our consolidated financial statements as of and for the years ended December 31, 2006, 2005, 2004 and 2003 and for each of the three quarters in the period ended September 30, 2007 affecting the completeness and accuracy of revenues, accounts receivable, cost of goods sold, inventory, general and administrative expenses, cash and cash equivalents, marketable securities, other assets, income taxes, deferred taxes, other liabilities, other comprehensive income, discontinued operations, and accumulated deficit. Additionally, this control deficiency could result in misstatements of the aforementioned accounts and disclosures that would result in a material misstatement of our consolidated financial statements that would not be prevented or detected.

Remediation Plan

We are in the process of identifying and implementing a plan to address the material weakness in internal control over financial reporting described above. Elements of our remediation plan are expected to be accomplished over time. We are taking the following actions to remediate the material weakness described above:

•  We engaged professional actuarial and accounting consultants to review our accounting for our foreign pension plans. Such review was conducted for the first quarter of 2008 and will continue for the foreseeable future. We have also developed modified controls with regard to our accounting for pension obligations.

•  We have implemented enhancements to our accounting for product returns and credit memos in foreign markets.

•  We have reviewed the qualifications and performance of our accounting staff in key roles in our foreign locations and identified some critical roles in certain foreign markets where accounting staff will be retrained or new accounting staff will be recruited. We have assigned qualified accounting staff from Corporate and our North American offices to review accounting procedures in certain foreign countries and have begun to enhance our accounting staff in various foreign locales.

•  We have modified our revenue recognition procedures in Italy and other locations in order to ensure that, when required by specific circumstances, we recognize revenue on a cash basis.

•  We have implemented revised review procedures over tax accounting.

In addition, we have completed a comprehensive strategic review and announced a strategic plan. As announced on March 27, 2008, this strategic plan is expected to involve a significant reduction in our geographic footprint and product focus, which will have the effect of reducing the number of foreign locations where remediation actions are required. On September 11, 2008, we completed the sale of our business operations located in Western and Eastern Europe, Middle East and Africa to Meda.

Management has developed a plan for the implementation of the remediation procedures described above (to the extent not already implemented), which has been discussed with our Finance and Audit Committee. This committee will monitor our implementation of remediation measures. We believe that the controls that we are implementing will improve the effectiveness of our internal control over financial reporting. As we improve our internal control over financial reporting and implement remediation measures, we may determine to supplement or modify the remediation measures described above.

46

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during the quarter ended September 30, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1.   Legal Proceedings

See Note 11, Commitments and Contingencies, of the notes to consolidated condensed financial statements in Item 1 of Part I of this quarterly report, which is incorporated herein by reference.

Item 1A.   Risk Factors

Our annual report on Form 10-K for the year ended December 31, 2007 includes a detailed discussion of our risk factors. Pursuant to the instructions to Form 10-Q, we have provided below only those risk factors that are new or that have been materially amended since the time that we filed our most recent annual report on Form 10-K. Accordingly, the information presented below should be read in conjunction with the risk factors and information disclosed in our most recent Form 10-K and the other risks described in this Form 10-Q.

The current SEC investigation could adversely affect our business and the trading price of our securities.

The SEC is conducting an investigation regarding events and circumstances surrounding trading in our common stock and the public release of data from our first pivotal Phase III trial for taribavirin in March 2006. In addition, the SEC requested information regarding our restatement of certain historical financial statements announced in March 2008, data regarding our stock option grants since January 1, 2000 and information about our pursuit in the Delaware Chancery Court of the return of certain bonuses paid to Milan Panic, a former chairman and chief executive officer, and others. In September 2006, our board of directors established the Special Committee to review our historical stock option practices and related accounting. The Special Committee concluded its investigation in January 2007. We have briefed the SEC with the results of the Special Committee’s investigation. We have cooperated fully and will continue to cooperate with the SEC on its investigation. We cannot predict the outcome of the investigation. In the event that the investigation leads to SEC action against any current or former officer or director, our business (including our ability to complete financing transactions) and the trading price of our securities may be adversely impacted. In addition, if the SEC investigation continues for a prolonged period of time, it may have an adverse impact on our business or the trading price of our securities regardless of the ultimate outcome of the investigation. In addition, the SEC inquiry has resulted in the incurrence of significant legal expenses and the diversion of management’s attention from our business, and this may continue, or increase, until the investigation is concluded.

Adverse U.S. and international economic and market conditions may adversely affect our product sales and business.

Current U.S. and international economic and market conditions are uncertain. Our revenues and operating results may be affected by uncertain or changing economic and market conditions, including the recent crisis in the credit markets and financial services industry. If domestic and global economic and market conditions remain uncertain or persist or deteriorate further, we may experience material impacts on our business, operating results and financial condition. Adverse economic conditions impacting our customers, including among others, increased taxation, higher unemployment, lower customer confidence in the economy, higher customer debt levels, lower availability of customer credit, higher interest rates and hardships relating to declines in the stock markets, could cause purchases of our products to decline, which could adversely affect our revenues and operating results.

Moreover, our projected revenues and operating results are based on assumptions concerning certain levels of customer spending. Any failure to attain our projected revenues and operating results as a result of adverse

47

economic or market conditions estimated by us, our investors or the securities analysts that follow our common stock, could have a material adverse effect on our business and result in a decline in the price of our common stock.

Adverse economic and market conditions could also negatively impact our business by negatively impacting the parties with whom we do business, including among others, our business partners (including our customers as well as our alliance partners from whom we receive royalties and milestone payments), our manufacturers and our suppliers.

Item 2.   Purchases of Equity Securities by the Issuer and Affiliated Purchasers

In June 2007, our board of directors authorized a stock repurchase program. This program authorized us to repurchase up to $200 million of our outstanding common stock in a 24-month period. In June 2008, our board of directors increased the authorization to $300 million, over the original 24-month period. Under the program, purchases may be made from time to time on the open market, in privately negotiated transactions, and in amounts as we see appropriate. The number of shares to be purchased and the timing of such purchases are subject to various factors, which may include the price of our common stock, general market conditions, corporate requirements and alternate investment opportunities. The share repurchase program may be modified or discontinued at any time. The total number of shares repurchased pursuant to this program was 11,466,600 as of September 30, 2008. We have used $190,979,000 to repurchase these shares. In addition, as of September 30, 2008, we have sold 324,474 treasury shares to certain executives pursuant to executive employment agreements.

Set forth below is the information regarding shares repurchased under the stock repurchase program during the three months ended September 30, 2008:

							Approximate Dollar
					Total Number of		Value of Shares that
					Shares Purchased as		may yet be
	Total Number of		Average Price		Part of Publicly		Purchased under the
Period	Shares Repurchased		Paid per Share		Announced Plan		Plan
							(In thousands)
7/1/08 - 7/31/08		1,361,641	$	17.43		8,264,320	$	169,858
8/1/08 - 8/31/08		1,732,825	$	18.88		9,997,145	$	137,108
9/1/08 - 9/30/08		1,469,455	$	19.09		11,466,600	$	109,020
Total		4,563,921	$	18.52

Item 6.   Exhibits

Exhibit
	3	.1	Restated Certificate of Incorporation, as amended to date, previously filed as Exhibit 3.1 to the Registrant’s Form 10-Q for the quarter ended September 30, 2003, which is incorporated herein by reference.
	3	.2	Certificate of Designation, Preferences and Rights of Series A Participating Preferred Stock previously filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, dated October 6, 2004, which is incorporated herein by reference.
	3	.3	Certificate of Correction to Restated Certificate of Incorporation, dated April 3, 2006, previously filed as Exhibit 3.3 to the Registrant’s Form 10-Q for the quarter ended September 30, 2007, which is incorporated herein by reference.
	3	.4	Amended and Restated Bylaws of the Registrant previously filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, dated February 25, 2008, which is incorporated herein by reference.
	10	.1†	Separation and Release Agreement dated as of July 11, 2008 between Valeant Pharmaceuticals International and Charles J. Bramlage, previously filed as Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, dated July 16, 2008, which is incorporated herein by reference.
	10	.2	Acquisition Agreement dated August 4, 2008 between Valeant Pharmaceuticals International, and Meda AB, previously filed as Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, dated August 5, 2008, which is incorporated herein by reference.

48

Exhibit
	10	.3	Asset Transfer and License Agreement dated August 4, 2008 between Valeant Pharmaceuticals International, and Meda AB, previously filed as Exhibit 99.2 to the Registrant’s Current Report on Form 8-K, dated August 5, 2008, which is incorporated herein by reference.
	10	.4†	Performance Restricted Stock Unit and Matching RSU Award Agreement between Valeant Pharmaceuticals International and Peter J. Blott, previously filed as Exhibit 99.2 to the Registrant’s Current Report on Form 8-K, dated August 27, 2008, which is incorporated herein by reference.
	10	.5**	License and Collaboration Agreement, dated August 27, 2008 between Valeant Pharmaceuticals North America and Glaxo Group Limited, previously filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K/A, dated August 29, 2008, which is incorporated herein by reference.
	10	.6**	Agreement and Plan of Merger, dated as of September 16, 2008, among Coria Laboratories, Ltd., the Shareholders of Coria Laboratories, Ltd., Valeant Pharmaceuticals International and CL Acquistion Corp. (the “Coria Merger Agreement”).
	10	.7	Amendment to the Coria Merger Agreement, dated as of October 15, 2008, among Coria Laboratories, Ltd., the Shareholders of Coria Laboratories, Ltd., Valeant Pharmaceuticals International and CL Acquistion Corp.
	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.

**	Portions of this exhibit have been omitted pursuant to a request for confidential treatment.
†	Management contract or compensatory plan or arrangement.

49

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/  J. Michael Pearson

J. Michael Pearson

Chairman and Chief Executive Officer

Date: November 7, 2008

/s/  Peter J. Blott

Peter J. Blott

Executive Vice President and Chief Financial Officer

(Principal Financial and Accounting Officer)

Date: November 7, 2008

50

EXHIBIT INDEX

Exhibit
	3	.1	Restated Certificate of Incorporation, as amended to date, previously filed as Exhibit 3.1 to the Registrant’s Form 10-Q for the quarter ended September 30, 2003, which is incorporated herein by reference.
	3	.2	Certificate of Designation, Preferences and Rights of Series A Participating Preferred Stock previously filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, dated October 6, 2004, which is incorporated herein by reference.
	3	.3	Certificate of Correction to Restated Certificate of Incorporation, dated April 3, 2006, previously filed as Exhibit 3.3 to the Registrant’s Form 10-Q for the quarter ended September 30, 2007, which is incorporated herein by reference.
	3	.4	Amended and Restated Bylaws of the Registrant previously filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, dated February 25, 2008, which is incorporated herein by reference.
	10	.1†	Separation and Release Agreement dated as of July 11, 2008 between Valeant Pharmaceuticals International and Charles J. Bramlage, previously filed as Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, dated July 16, 2008, which is incorporated herein by reference.
	10	.2	Acquisition Agreement dated August 4, 2008 between Valeant Pharmaceuticals International, and Meda AB, previously filed as Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, dated August 5, 2008, which is incorporated herein by reference.
	10	.3	Asset Transfer and License Agreement dated August 4, 2008 between Valeant Pharmaceuticals International, and Meda AB, previously filed as Exhibit 99.2 to the Registrant’s Current Report on Form 8-K, dated August 5, 2008, which is incorporated herein by reference.
	10	.4†	Performance Restricted Stock Unit and Matching RSU Award Agreement between Valeant Pharmaceuticals International and Peter J. Blott, previously filed as Exhibit 99.2 to the Registrant’s Current Report on Form 8-K, dated August 27, 2008, which is incorporated herein by reference.
	10	.5**	License and Collaboration Agreement, dated August 27, 2008 between Valeant Pharmaceuticals North America and Glaxo Group Limited, previously filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K/A, dated August 29, 2008, which is incorporated herein by reference.
	10	.6**	Agreement and Plan of Merger, dated as of September 16, 2008, among Coria Laboratories, Ltd., the Shareholders of Coria Laboratories, Ltd., Valeant Pharmaceuticals International and CL Acquistion Corp. (the “Coria Merger Agreement”).
	10	.7	Amendment to the Coria Merger Agreement, dated as of October 15, 2008, among Coria Laboratories, Ltd., the Shareholders of Coria Laboratories, Ltd., Valeant Pharmaceuticals International and CL Acquistion Corp.
	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.

**	Portions of this exhibit have been omitted pursuant to a request for confidential treatment.
†	Management contract or compensatory plan or arrangement.

EX-10.6

***Text Omitted and Filed Separately with the Securities and Exchange
Commission. Confidential Treatment Requested Under
17 C.F.R. Sections 200.80(b)(4) and 240.24b-2

Agreement and Plan of Merger

dated as of September 16, 2008

among

Coria Laboratories, Ltd.,

the Shareholders of Coria Laboratories, Ltd.,

Valeant pharmaceuticals international

and

CL Acquisition Corp.

***Text Omitted and Filed Separately with the Securities and Exchange
Commission. Confidential Treatment Requested Under
17 C.F.R. Sections 200.80(b)(4) and 240.24b-2

TABLE OF CONTENTS

	Page
ARTICLE 1 DEFINITIONS		2
ARTICLE 2 THE MERGER; CLOSING		13
2.1 The Merger		13
2.2 Certain Events Immediately Prior to the Closing		15
2.3 Closing		15
2.4 Adjustments to Base Merger Consideration		17
2.5 Post-Closing Reconciliation of Net Working Capital		17
2.6 Post-Closing Reconciliation of Product Returns		19
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE SELLERS		20
3.1 Organization, Good Standing and Authority		20
3.2 Enforceability of Transaction Documents		21
3.3 No Conflicts		22
3.4 Capitalization		22
3.5 Financial Statements		22
3.6 Real Property		23
3.7 Tangible Personal Property		24
3.8 Brokers or Finders		24
3.9 Environmental, Health and Safety Matters		24
3.10 No Undisclosed Liabilities		25
3.11 Employee Benefit Plans		25
3.12 Company Products; Compliance with Legal Requirements; Permits		27
3.13 Legal Proceedings		30
3.14 Insurance		30
3.15 Absence of Certain Changes and Events		31
3.16 Material Contracts		32
3.17 Labor and Employment Matters		33
3.18 Intellectual Property		34
3.19 Suppliers and Customers		37
3.20 Related Party Transactions		38
3.21 No Product Liabilities; Product Warranties		38

-i-

***Text Omitted and Filed Separately with the Securities and Exchange
Commission. Confidential Treatment Requested Under
17 C.F.R. Sections 200.80(b)(4) and 240.24b-2

TABLE OF CONTENTS
(Continued)

	Page
3.22 Inventory		38
3.23 Accounts Receivable		39
3.24 Taxes		39
3.25 Books and Records		41
3.26 Product Registration Files		41
3.27 Brokers or Finders		41
3.28 Vote Required		42
3.29 Full Disclosure		42
3.30 Certain Business Practices		42
3.31 Board Recommendation		42
3.32 Sufficiency of Assets		42
3.33 Hart-Scott-Rodino		42
3.34 Seller Representations		42
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF BUYER		43
4.1 Organization and Good Standing		43
4.2 Authority; Validity; Consents		44
4.3 No Conflict		44
4.4 Legal Proceedings		44
4.5 Brokers or Finders		45
4.6 Financing		45
4.7 No Knowledge of Misrepresentations or Omissions		45
4.8 Solvency		45
ARTICLE 5 PRE-CLOSING COVENANTS OF THE SELLERS		45
5.1 Access and Investigation		45
5.2 Operation of the Business		46
5.3 Negative Covenants		46
5.4 Required Approvals		46
5.5 Commercially Reasonable Efforts		46
5.6 Notice of Developments		47
5.7 Exclusivity		47

-ii-

***Text Omitted and Filed Separately with the Securities and Exchange
Commission. Confidential Treatment Requested Under
17 C.F.R. Sections 200.80(b)(4) and 240.24b-2

TABLE OF CONTENTS
(Continued)

	Page
5.8 Closing Obligation		47
ARTICLE 6 PRE-CLOSING COVENANTS OF BUYER		47
6.1 Required Approvals		47
6.2 Non-Disclosure Obligations		48
6.3 Commercially Reasonable Efforts		48
6.4 Closing Obligation		48
ARTICLE 7 CONDITIONS PRECEDENT TO OBLIGATION OF BUYER		49
7.1 Accuracy of Representations		49
7.2 Sellers’ Performance		49
7.3 No Order		49
7.4 Governmental Authorizations		49
7.5 Required Consents		49
7.6 Agreements		49
7.7 No Material Adverse Effect		50
7.8 Contributed Contracts		50
7.9 Release of Encumbrances		50
7.10 280G Approvals		50
7.11 Termination of Certain Existing Agreements		50
7.12 Assignment of [...***...]		51
ARTICLE 8 CONDITIONS PRECEDENT TO THE OBLIGATION OF THE COMPANY AND THE SELLERS		51
8.1 Accuracy of Representations		51
8.2 Buyer’s Performance		51
8.3 No Order		51
8.4 Governmental Authorizations		51
8.5 Agreements		52
ARTICLE 9 POST-CLOSING COVENANTS		52
9.1 Access to Books, Records, Etc		52
9.2 Further Assurances		52
9.3 Litigation Support; Attorney-Client Privilege		52

***Confidential Treatment Requested***

-iii-

***Text Omitted and Filed Separately with the Securities and Exchange
Commission. Confidential Treatment Requested Under
17 C.F.R. Sections 200.80(b)(4) and 240.24b-2

TABLE OF CONTENTS
(Continued)

	Page
9.4 Employee Benefit Arrangements		53
9.5 Cooperation on Tax Matters; Transfer Taxes		53
9.6 Restrictive Covenants		55
9.7 Confidential Information		56
9.8 Negotiation of Property Purchase		57
9.9 Certain Company Liabilities		57
ARTICLE 10 TERMINATION		57
10.1 Termination Events		57
10.2 Effect of Termination		58
ARTICLE 11 INDEMNIFICATION; REMEDIES		58
11.1 Survival		58
11.2 Indemnification by the Sellers		59
11.3 Indemnification by Buyer		61
11.4 Notice of Potential Claims for Indemnification		62
11.5 Claims Not Involving Third Parties		62
11.6 Third Party Claims		63
11.7 Subrogation		63
11.8 Insurance and Other Recoveries		63
11.9 Acknowledgement of Buyer		64
11.10 Stockholder Representative		64
11.11 [...***...]		65
ARTICLE 12 GENERAL PROVISIONS		65
12.1 Public Announcements		65
12.2 Notices		65
12.3 Waiver		67
12.4 Entire Agreement; Amendment		67
12.5 Assignments		67
12.6 Severability		67
12.7 Section Headings; Construction		67

***Confidential Treatment Requested***

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***Text Omitted and Filed Separately with the Securities and Exchange
Commission. Confidential Treatment Requested Under
17 C.F.R. Sections 200.80(b)(4) and 240.24b-2

TABLE OF CONTENTS
(Continued)

	Page
12.8 Governing Law; Consent to Jurisdiction and Venue; Jury Trial Waiver		68
12.9 Counterparts		68
12.10 Time of Essence		68
12.11 No Third Party Beneficiaries		68
12.12 Expenses		68

-v-

***Text Omitted and Filed Separately with the Securities and Exchange
Commission. Confidential Treatment Requested Under
17 C.F.R. Sections 200.80(b)(4) and 240.24b-2

Schedules and Exhibits

Schedule I:	Allocation of Product Returns for Specified Lot Numbers
Exhibit A:	Ownership of Company Common
Exhibit B:	Working Capital Methodology
Exhibit C:	Form of Transition Services Agreement
Exhibit D:	Form of Amended and Restated Manufacturing Agreement
Exhibit E:	Form of Assignment of Claims
Exhibit F:	Form of Product Development Agreement

***Text Omitted and Filed Separately with the Securities and Exchange
Commission. Confidential Treatment Requested Under
17 C.F.R. Sections 200.80(b)(4) and 240.24b-2

Agreement and Plan of Merger

     This Agreement and Plan of Merger (“Agreement”) is made as of September 16, 2008 (the “Effective Date”), among (a) Coria Laboratories, Ltd., a Delaware corporation (the “Company”); (b) the stockholders of the Company (collectively, the “Sellers”): DFB Pharmaceuticals, Inc., a Texas corporation (“DFB”), H. Paul Dorman, John W. Feik, Anne Burnett Windfohr, John L. Marion and John W. Mason; (c) Valeant Pharmaceuticals International, a Delaware corporation (“Buyer”); and (d) CL Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of Buyer (“Newco”). The Company, the Sellers, Buyer and Newco are sometimes referred to herein individually as a “Party” and collectively as the “Parties.”

Recitals

     The Sellers, collectively, hold of record and own beneficially all of the issued and outstanding capital stock of the Company, which consists solely of the Common Stock, par value $0.01 per share, of the Company (“Company Common”). The number of shares of Company Common, and the percentage of the outstanding Company Common, held and owned by each Seller is set forth adjacent to such Seller’s name on Exhibit A.

     Buyer holds of record and owns beneficially all of the issued and outstanding capital stock of Newco, which consists solely of the Common Stock, par value $0.001 per share, of Newco (“Newco Common”).

     The Board of Directors of Newco, Buyer, and the Company have each approved the merger of Newco with and into the Company (the “Merger”), with the Company continuing as the surviving corporation in the merger (the “Surviving Corporation”), on the terms and subject to the conditions set forth in this Agreement.

     Pursuant to the Merger, the Company Common held by the Sellers will be converted into the right to receive the Merger Consideration (as defined herein), and all of the outstanding shares of Newco Common will continue as the outstanding capital stock of the Surviving Corporation.

     The Parties desire to make certain representations, warranties, covenants and agreements in connection with the Merger.

Agreement

     Now, Therefore, in consideration of the premises and the mutual promises herein made, and in consideration of the representations, warranties and covenants herein contained, the Parties agree as follows.

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ARTICLE 1
DEFINITIONS

     For purposes of this Agreement, the following terms have the meanings specified or referenced below.

     “1933 Act” means the Securities Act of 1933, as amended.

     “280G Approval” has the meaning set forth in Section 7.10.

     “Acquired Person” has the meaning set forth in Section 3.33.

     “Adjusted Current Assets” means the aggregate amount of the current assets of the Company shown on the Closing Date Balance Sheet as such current assets are calculated in accordance with the Working Capital Methodology, but excluding Cash.

     “Adjusted Current Liabilities” means the aggregate amount of the current liabilities of the Company shown on the Closing Date Balance Sheet as such current liabilities are calculated in accordance with the Working Capital Methodology, but excluding (i) any Indebtedness of the Company and (ii) any of the Company’s Transaction Expenses.

     “Adjusted Net Working Capital” means an amount equal to the Adjusted Current Assets less the Adjusted Current Liabilities.

     “Affiliate” means with respect to any specified Person, a Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the Person specified.

     “Aggregate Accounting Fees” has the meaning set forth in Section 2.5(c).

     “Agreement” has the meaning set forth in the introductory paragraph.

     “Amended and Restated Facility Lease” has the meaning set forth in Section 2.3(d)(viii).

     “Amended and Restated Manufacturing Agreement” has the meaning set forth in Section 2.3(d)(vi).

     “Asserted Liability” has the meaning set forth in Section 11.4.

     “Assignment of Claims” has the meaning set forth in Section 2.3(d)(vii).

     “Audited Financial Statements” has the meaning set forth in Section 3.5(a).

     “Base Merger Consideration” means $95,000,000 in cash.

     “Benefit Plans” has the meaning set forth in Section 3.11.

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     “Business” means the business of developing, labeling, marketing, selling and otherwise distributing the Company Products from the Facilities, and all ancillary activities and business operations in connection therewith.

     “Buyer” has the meaning set forth in the introductory paragraph.

     “Buyer Cap” has the meaning set forth in Section 11.3(c).

     “Buyer Indemnitees” has the meaning set forth in Section 11.2(a).

     “Buyer Severance Expenses” means any severance disclosed on Schedule 3.17 for employees terminated by the Buyer or the Surviving Corporation without cause on or within one (1) year following the Closing Date.

     “Buyer’s Transaction Expenses” means all costs and expenses incurred by or on behalf of Buyer and its affiliates in connection with the preparation, execution and performance of this Agreement and the other Transaction Documents and the transactions contemplated hereby and thereby, including, without limitation, all fees and out-of-pocket expenses of such entities’ Representatives, the fees and expenses due in connection with any debt or equity financing arranged by or for the benefit of Buyer or Newco and any fees or expenses paid or incurred by Buyer in connection with the notifications and approvals required under the HSR Act, including the HSR Act filing fee.

     “Cash” means the cash and cash equivalents of the Company on the Closing Date as shown on the Closing Date Balance Sheet and calculated in accordance with GAAP. For avoidance of doubt, Cash shall (i) be reduced by checks and drafts written by the Company but not yet cleared and (ii) be increased by checks and drafts deposited for the account of the Company but not yet cleared.

     “CERCLA” means the United States Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. §§ 9601 et. seq., as amended.

     “Closing” has the meaning set forth in Section 2.3(a).

     “Closing Date” has the meaning set forth in Section 2.3(a).

     “Closing Date Balance Sheet” has the meaning set forth in Section 2.5(a)(i).

     “Closing Merger Consideration” means the Base Merger Consideration less the Escrow Amounts.

     “COBRA” means the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended from time to time.

     “Code” means the Internal Revenue Code of 1986, as amended.

     “Company” has the meaning set forth in the introductory paragraph.

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     “Company Common” has the meaning set forth in the Recitals.

     “Company Intellectual Property means all Intellectual Property Rights owned by, under obligation or assignment to, licensed or used by the Company in the Business as previously conducted or as currently conducted.

     “Company Organizational Documents” has the meaning set forth in Section 3.1.

     “Company Product” means each of the pharmaceutical products listed on Schedule 3.12(a) together with each other pharmaceutical product subject to the Federal Food, Drug, and Cosmetic Act, the U.S. Food and Drug Administration regulations promulgated thereunder, or similar legal provisions in any domestic or foreign jurisdiction that is developed, manufactured, tested, packaged, labeled, marketed, sold, and/or distributed by the Company.

     “Company’s Transaction Expenses” means all costs and expenses incurred by the Company or the Sellers, or on their behalf, in connection with the preparation, execution and performance of this Agreement and the other Transaction Documents and the transactions contemplated hereby and thereby (including fees, expenses and indemnification obligations owed by the Sellers to William Blair & Company, L.L.C.), but specifically excluding Buyer’s Transaction Expenses.

     “Contract” means any agreement, contract, obligation, promise, or undertaking (whether written or oral) that is legally binding.

     “Deductible” has the meaning set forth in Section 11.2(d).

     “DFB” has the meaning set forth in the introductory paragraph.

     “DGCL” has the meaning set forth in Section 2.1(a).

     “Disclosure Schedules” means the disclosure schedules of the Sellers delivered to Buyer on the Effective Date.

     “Dispute Resolution Period” has the meaning set forth in Section 11.5.

     “DPT” means DPT Laboratories, Ltd., a Texas limited partnership.

     “Effective Date” means the date as of which this Agreement was executed as set forth in the first sentence of this Agreement.

     “Effective Time” has the meaning set forth in Section 2.1(a).

     “Encumbrance” means any charge, lien, mortgage, deed of trust, pledge, security interest, option, right of first refusal, easement, servitude, restrictive covenant, encroachment, encumbrance, or other similar restriction.

     “End Date” has the meaning set forth in Section 10.1(b).

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     “Environmental Law” means and includes any Legal Requirement in effect on the Closing Date relating to pollution or protection of the environment including, without limitation: (i) CERCLA; (ii) the Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act, 42 U.S.C. §§6901 et seq., (“RCRA”); (iii) the Emergency Planning and Community Right to Know Act (42 U.S.C. §§11001 et seq.); (iv) the Clean Air Act (42 U.S.C. §§ 7401 et seq.); (v) the Clean Water Act (33 U.S.C. §§1251 et seq.); (vi) the Toxic Substances Control Act (15 U.S.C. §§2601 et seq.); (vii) the Hazardous Materials Transportation Act (49 U.S.C. §§ 5101 et seq.); (viii) the Safe Drinking Water Act (41 U.S.C. §§300f et seq.); and (ix) any state, county, municipal or local statues, laws or ordinances similar or analogous to the federal statutes listed in parts (i) through (viii) of this subparagraph; in each case as in effect on the Closing Date.

     “Environmental Permits” has the meaning set forth in Section 3.9(b).

     “Equity Interests” means any capital stock, partnership or limited liability company interest or other equity or voting interest; or any security or evidence of indebtedness convertible into or exchangeable for any capital stock, partnership or limited liability company interest or other equity or voting interest; or any right, warrant or option to acquire any of the foregoing; or any commitment, agreement, or other arrangement, whether written or oral, to acquire, issue, sell, transfer, or otherwise dispose of any of the foregoing.

     “ERISA” means the Employee Retirement Income Security Act of 1974, as amended, and the regulations and rules issued thereunder.

     “ERISA Affiliate” means any person that, together with the Company, is or was at any time treated as a single employer under Section 414 of the Code or Section 4001 of ERISA and any general partnership of which the Company is or has been a general partner.

     “Escrow Agent” means U.S. Bank National Association.

     “Escrow Amounts” means the Indemnity Escrow Amount plus the Return Escrow Amount.

     “Facility” means the portion of the building located at 3801 Hulen St., Fort Worth, Texas, that is leased by the Company from Healthpoint pursuant to the Facility Lease and at which the Company has its principal office.

     “Facility Lease” means the Lease Agreement, dated June 1, 2007, by and between Healthpoint, as landlord, and the Company, as tenant, pursuant to which the Company has leased the Facility from Healthpoint.

     “Facilities” has the meaning set forth in Section 3.9(a).

     “FDA” has the meaning set forth in Section 3.12(a)(i).

     “FFDCA” has the meaning set forth in Section 3.12(a)(i).

     “Financial Statements” has the meaning set forth in Section 3.5(a).

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17 C.F.R. Sections 200.80(b)(4) and 240.24b-2

     “GAAP” means United States generally accepted accounting principles as in effect on the Effective Date.

     “Governmental Authority” means any:

(1)	nation, state, county, city, town, village, district, or other jurisdiction of any nature;
(2)	federal, state, local, municipal, foreign, or other government;
(3)	governmental or quasi-governmental authority of any nature (including any governmental agency, branch, department, official, or entity and any court or other tribunal);
(4)	multinational organization or body; or
(5)	body exercising, or entitled to exercise, any administrative, executive, judicial, legislative, police, regulatory, or taxing authority or power of any nature.

     “Governmental Authorization” means any approval, consent, license, permit, waiver, or other authorization issued, granted, given, or otherwise made available by or under the authority of any Governmental Authority or pursuant to any Legal Requirement.

     "[...***...]” has the meaning set forth in [...***...].

     “Hazardous Activities” means the generation, handling, importing, management, manufacturing, processing, production, refinement, storage, transfer, transportation, treatment or use (including any withdrawal or other use of groundwater) of Hazardous Materials in, on, under, about, or from the Facilities or any part thereof.

     “Hazardous Materials” means any waste or other substance that is listed, defined, designated, classified as, or determined to be, hazardous, radioactive, or toxic or a pollutant or a contaminant or otherwise regulated under or pursuant to any Environmental Law, including, without limitation, RCRA hazardous wastes, CERCLA hazardous substances, oil and petroleum and all derivatives and constituents thereof, polychlorinated biphenyls (PCBs), and asbestos or asbestos-containing materials.

     “Healthpoint” means Healthpoint Ltd., a Texas limited partnership.

     “HSR Act” means Section 7A of the Clayton Act, as added by Title II of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations promulgated thereunder.

     “Indebtedness” means with respect to the Company, whether recourse as to all or a portion of the Company’s assets, (i) the principal of and premium, if any, in respect of any indebtedness of the Company for money borrowed, (ii) the principal, premium, if any, and interest with respect to obligations of the Company evidenced by bonds, debentures, notes or other similar instruments,

***Confidential Treatment Requested***

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17 C.F.R. Sections 200.80(b)(4) and 240.24b-2

including obligations incurred in connection with the acquisition of property, assets or businesses, (iii) all obligations of the Company in respect of letters of credit or other similar instruments (including reimbursement obligations with respect thereto) but only to the extent of drawings thereunder, (iv) every obligation of the Company issued or assumed as the deferred purchase price of property or services (excluding trade accounts payable or accrued liabilities arising in the ordinary course of business which are not overdue or in default), (v) every capital lease obligation (determined in accordance with GAAP) of the Company, except for capital lease obligations arising in the ordinary course of business, (vi) every obligation to pay rent or other payment amounts of the Company with respect to any sale-leaseback transaction to which the Company is a party, payable through the stated maturity of such sale-leaseback transaction, (vii) factoring arrangements of the Company, whether or not such arrangements appear on the balance sheet of the Company, and (viii) every obligation of the type referred to in clauses (i) through (vii) of another Person the payment of which (A) the Company has guaranteed or is responsible or liable for, directly or indirectly, as obligor, guarantor or otherwise, or (B) is secured by an Encumbrance on any asset of the Company, whether or not such obligation is assumed by the Company.

     “Indemnification Notice” has the meaning set forth in Section 11.4.

     “Indemnifying Party” has the meaning set forth in Section 11.4.

     “Indemnitee” has the meaning set forth in Section 11.4.

     “Indemnity Escrow Agreement” has the meaning set forth in Section 2.3(d)(iii).

     “Indemnity Escrow Amount” means $[...***...].

     “Independent Accounting Firm” has the meaning set forth in Section 2.5(c).

     “Individual Seller” means, individually or collectively, H. Paul Dorman, John W. Feik, Anne Burnett Windfohr, John L. Marion and John W. Mason.

     “Intellectual Property Rights” means all intellectual property or proprietary rights of any description of any Person, including all rights of any Person in and to (i) inventions, invention disclosures, patents, patent applications and patent disclosures, together with all reissues, continuations, continuations in part, revisions, extensions, reexams, provisionals, divisions, renewals, revivals, and foreign counterparts thereof and all registrations and renewals in connection therewith, and any documents and filings claiming priority to or serving as the basis for priority thereof, (ii) trademarks, service marks, trade dress, logos, trade names and corporate names, together with all translations, adaptations, derivations and combinations thereof and including all goodwill associated therewith, and all applications, registrations and renewals in connection therewith, (iii) works of authorship, copyrights and all applications, registrations and renewals in connection therewith, (iv) industrial designs and mask works and all applications, registrations and renewals in connection therewith, (v) trade secrets, confidential business information (including ideas, concepts, research and development, know-how, show-how, formulas, algorithms, models, methodologies, molds, compositions, manufacturing and production processes and techniques, technical data, designs, drawings, specifications, customer and supplier lists, pricing and cost information, business and marketing plans and proposals, assembly, test, installation, service and

***Confidential Treatment Requested***

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17 C.F.R. Sections 200.80(b)(4) and 240.24b-2

inspection instructions and procedures, technical, operating and service and maintenance manuals, databases and data, hardware reference manuals and engineering, programming, service and maintenance notes and logs), (vi) computer software (including all source code, object code, data and related documentation) and technology, (vii) Internet addresses, URL, domain names, websites and web pages, (viii) all moral and economic rights of authors and investors, however denominated, (ix) goodwill related to all of the foregoing, and (x) any similar or equivalent rights to any of the foregoing anywhere in the world.

     “Inventory” means all finished goods inventory of the Company Products.

     “IP Licenses” means all licenses, sublicenses and other agreements or permissions related to Company Intellectual Property under which the Company is a licensor or licensee or escrow beneficiary.

     “IRS” means the United States Internal Revenue Service or any successor agency and, to the extent relevant, the United States Department of the Treasury.

     “Key Customers” has the meaning set forth in Section 3.19(a).

     “Legal Requirement” means any federal, state, provincial, local, municipal, foreign, international, multinational, or other administrative Order, constitution, law, ordinance, principle of common law, regulation, statute or treaty.

     “Liability” means all liabilities and obligations (whether known or unknown, whether asserted or unasserted, whether absolute or contingent, whether accrued or unaccrued, whether liquidated or unliquidated, and whether due or to become due).

     “Losses” of a Person means any liabilities, losses, damages, deficiencies, assessments, penalties, judgments and costs or expenses (including out-of-pocket expenses for investigation and defense and reasonable attorneys’ fees) actually incurred or sustained by the indemnified party, but specifically excluding any punitive damages.

     “Material Adverse Effect” means any change, event, effect or condition that, individually or together with any other change, event, effect or condition, is, or is reasonably likely to be, materially adverse to a Person or its assets, results of operations or financial condition, or on the ability of the Parties to consummate timely the transactions contemplated hereby; provided, however, that none of the following shall constitute a Material Adverse Effect: (i) any adverse change, event, effect or condition (A) arising from or relating to national or international political or social conditions, including the engagement by the United States in hostilities, whether or not pursuant to the declaration of a national emergency or war, or the occurrence of any military or terrorist attack anywhere in the world or (B) as a result of or related to this Agreement or the transactions contemplated hereby or the announcement hereof, (ii) any existing event, occurrence, or circumstance that was disclosed in the Disclosure Schedules as of the Effective Date and (iii) with respect to a Material Adverse Effect on the Company, any adverse change in or effect on the business, assets, financial condition or results of operations of the Company that is cured to the reasonable satisfaction of Buyer before the earlier of (A) the Closing Date and (B) the date on which this Agreement is terminated pursuant to Article 10 hereof.

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17 C.F.R. Sections 200.80(b)(4) and 240.24b-2

     “Material Contracts” has the meaning set forth in Section 3.16(a).

     “Merger” has the meaning set forth in the Recitals.

     “Merger Consideration” means the Base Merger Consideration, as such amount may be increased or decreased on a dollar-for-dollar basis for the adjustments required by Section 2.4.

     “Merger Documents” has the meaning set forth in Section 2.1(a).

     “Multiemployer Plan” means any “multiemployer plan” within the meaning of Section 3(37) or Section 4001(a)(3) of ERISA.

     “Net Worth” means, for any Person, the amount obtained by subtracting (i) the liabilities of such Person (together with its consolidated Subsidiaries, if applicable), calculated in accordance with GAAP, from (ii) the assets of such Person (together with its consolidated Subsidiaries, if applicable), calculated in accordance with GAAP, after deducting adequate reserves in each case where, in accordance with GAAP, a reserve is proper.

     “Newco” has the meaning set forth in the introductory paragraph.

     “Newco Common” has the meaning set forth in the Recitals.

     “Non-Disclosure Agreement” means the non-disclosure agreement entered into between the Company and Buyer dated June 1, 2007.

     “Non-Patent IP” has the meaning set forth in Section 3.18(a).

     “Noncompetition Period” means the period of time which commences at the Effective Time and runs for a period of five (5) years after the Effective Time.

     “Objection” has the meaning set forth in Section 11.5.

     “Occupational Safety and Health Law” means any Legal Requirement in effect on the Closing Date designed to provide safe and healthful working conditions and to reduce occupational safety and health hazards.

     “Order” means any award, writ, injunction, judgment, order or decree entered, issued, made, or rendered by any Governmental Authority.

     “Party” or “Parties” has the meaning set forth in the introductory paragraph.

     “Patent IP” has the meaning set forth in Section 3.18(b).

     “Permitted Encumbrances” means (i) Encumbrances for Taxes not yet due or payable or that are being contested in good faith by appropriate Proceedings for which adequate reserves in accordance with GAAP are maintained and are reflected on the Closing Date Balance Sheet; (ii) Encumbrances in favor of vendors, carriers, warehousemen, repairmen, mechanics, workers, materialmen, construction or other Encumbrances arising by operation of law or in the ordinary

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17 C.F.R. Sections 200.80(b)(4) and 240.24b-2

course of business in respect of obligations that are not yet due or that are being contested in good faith by appropriate Proceedings, for which adequate reserves in accordance with GAAP are maintained and are reflected on the Closing Date Balance Sheet; (iii) Encumbrances arising pursuant to Indebtedness that will be released at or prior to the Closing; (iv) easements, servitudes, reservations, rights-of-way, restrictions, covenants, conditions and other similar encumbrances whether of record or apparent on the premises, including but not limited to road, highway, pipeline, railroad and utility easements and servitudes, and municipal, zoning and building by-laws that do not, individually or in the aggregate, materially interfere with the use, occupancy or operation of the real property as currently used, occupied and operated or as intended to be used, occupied and operated by the Company in the Business; (v) statutory Encumbrances incurred or deposits made in the ordinary course of business in connection with workers’ compensation, employment insurance and other social security legislation; (vi) deposits to secure the performance of bids, trade contracts and leases, statutory obligations, surety bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; (vii) Encumbrances encumbering customary deposit accounts or brokerage accounts incurred in the ordinary course of business; (viii) Encumbrances that arise under Article 4 of the Uniform Commercial Code of any applicable jurisdiction on items in collection and documents and proceeds related thereto; (ix) leases, licenses, subleases or sublicenses granted to other Persons in the ordinary course of business and set forth on the Disclosure Schedules as of the Effective Date that, individually or in the aggregate, do not interfere materially with the ordinary conduct of the Business; (x) Encumbrances encumbering deposits made to secure obligations arising from statutory, regulatory, contractual or warranty requirements, including rights of setoff; (xi) Encumbrances of bailees on assets entrusted to the bailees in the ordinary course of business, consistent with past practices, as set forth on the Disclosure Schedules as of the Effective Date; (xii) Encumbrances in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods; and (xiii) other Encumbrances arising in the ordinary course of business and not incurred in connection with the borrowing of money or other Indebtedness and set forth on the Disclosure Schedules.

     “Person” means any individual, corporation (including any non-profit corporation), partnership, limited liability company, joint venture, estate, trust, association, organization, labor union or other entity or Governmental Authority.

     “Pre-Closing Tax Period” has the meaning set forth in Section 9.5(a).

     “Proceeding” means any action, arbitration, audit, hearing, investigation, litigation, or suit (whether civil, criminal, administrative or investigative) involving the Company commenced, brought, conducted, or heard by or before, or otherwise involving, any Governmental Authority.

     “Product Development Agreement” has the meaning set forth in Section 2.3(d)(ix).

     “Product Return Amount” means the aggregate sales price of all products sold by the Company prior to the Effective Time that are returned by customers to the Surviving Corporation following the Effective Time. The sales price for any returned products included within the lot numbers set forth on Schedule I shall be allocated between the pre-Effective Time and post-Effective Time periods in the proportion set forth for such lot number on such Schedule I. DFB and

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17 C.F.R. Sections 200.80(b)(4) and 240.24b-2

the Surviving Corporation shall mutually agree on Schedule I within sixty (60) days after the Closing Date.

     “Proposal” means any actions through which a party who is not a party to the Agreement seeks to initiate, encourage, solicit or seek, directly or indirectly, any inquiries or the making or implementation of any proposal or offer (including any proposal or offer to its stockholders or any of them) with respect to a merger, acquisition, consolidation, recapitalization, liquidation, dissolution, equity investment or similar transaction involving, or any purchase of all or any substantial portion of the assets or any securities of the Company.

     “Publicly Available Software” means each of (i) any software that contains, or is derived in any manner (in whole or in part) from, any software that is distributed as free software, open source software (e.g., GNU General Public License, Apache Software License, MIT License), or pursuant to similar licensing and distribution models; and (ii) any software that requires as a condition of use, modification, hosting and/or distribution of such software or of other software used or developed with, incorporated into, derived from, or distributed with such software, that such software or other software (A) be disclosed or distributed in source code form; (B) be licensed for the purpose of making derivative works; (C) be redistributed, hosted or otherwise made available at no or minimal charge; or (D) be licensed, sold or otherwise made available on terms that (x) limit in any manner the ability to charge license fees or otherwise seek compensation in connection with marketing, licensing or distribution of such software or other software or (y) grant the right to decompile, disassemble, reverse engineer or otherwise derive the source code or underlying structure of such software or other software.

     “Related Party” means any partner, shareholder, director, officer, employee, trustee, beneficiary or Affiliate (meaning a wife, husband, or other Person controlled by, controlling or under common control with another Person) of the Company or any Seller.

     “Related Party Transactions” has the meaning set forth in Section 3.20(a).

     “Release” has the same meaning ascribed thereto under CERCLA Section 101(22), except that it shall apply to any and all Hazardous Materials, not just CERCLA hazardous substances, including, without limitation, any spilling, leaking, emitting, discharging, depositing, escaping, leaching, dumping or other releasing into the environment, whether intentional or unintentional.

     “Representative” means with respect to a particular Person, any director, officer, employee, agent, consultant, advisor, or other representative of such Person, including legal counsel, accountants and financial advisors.

     “Restricted Business” has the meaning set forth in Section 9.6(a).

     “Return Escrow Agreement” has the meaning set forth in Section 2.3(d)(iv).

     “Return Escrow Amount” means $ [...***...]

     “Seller Indemnitees” has the meaning set forth in Section 11.3(a).

***Confidential Treatment Requested***

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     “Seller Severance Expenses” means (i) all transaction, sale or retention bonus payments, or phantom stock due to senior executives or other employees or former employees, as applicable, of the Company as a result of the transactions contemplated by this Agreement which are not otherwise Buyer Severance Expenses and (ii) all severance payments due and owing to Steve Clark as a result of the transactions contemplated by this Agreement.

     “Sellers” has the meaning set forth in the introductory paragraph.

     “Sellers Cap” has the meaning set forth in Section 11.2(d).

     “Sellers’ Knowledge” means with respect to any matter in question, the actual knowledge of the matter of question by (i) Anne Burnett Windfohr, John L. Marion or John W. Mason or (ii) H. Paul Dorman, John W. Feik, Paul Johnson, William Clark, Michael Steadman, Steve Clark, Michael A. Patterson or Mark A. Mitchell, or any of their respective direct reports.

     “Stockholder Representative” has the meaning set forth in Section 11.10.

     “Subsidiaries” means all those corporations, associations, or other business entities of which the entity in question either (i) owns or controls 50% or more of the outstanding equity securities either directly or through an unbroken chain of entities as to each of which 50% or more of the outstanding equity securities is owned directly or indirectly by its parent (provided, there shall not be included any such entity the equity securities of which are owned or controlled in a fiduciary capacity), (ii) in the case of partnerships, serves as a general partner, (iii) in the case of a limited liability company, serves as a managing member, or (iv) otherwise has the ability to elect a majority of the directors, trustees or managing members thereof.

     “Surviving Corporation” has the meaning set forth in the Recitals.

     “Tangible Personal Property” has the meaning set forth in Section 3.7.

     “Target Net Working Capital” means $5,850,000.

     “Tax” or “Taxes” means any federal, state, provincial, local, foreign or other income, alternative, minimum, add-on minimum, accumulated earnings, personal holding company, franchise, capital stock, net worth, capital, profits, intangibles, windfall profits, gross receipts, value added, sales, use, goods and services, excise, customs duties, transfer, conveyance, mortgage, registration, stamp, documentary, recording, premium, severance, environmental (including taxes under Section 59A of the Code), natural resources, real property, personal property, ad valorem, intangibles, rent, occupancy, license, occupational, employment, unemployment insurance, social security, disability, workers’ compensation, payroll, health care, withholding, estimated or other similar taxes, duty, levy or assessment or deficiencies thereof (including all interest and penalties thereon and additions thereto, whether disputed or not).

     “Tax Claim” has the meaning set forth in Section 9.5(c).

     “Tax Indemnified Party” has the meaning set forth in Section 9.5(c).

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     “Tax Indemnifying Party” has the meaning set forth in Section 9.5(c).

     “Tax Notice” has the meaning set forth in Section 9.5(c).

     “Tax Return” means any return, declaration, report, claim for refund, information return, or other document (including any related or supporting estimates, elections, schedules, statements, or information) filed or required to be filed in connection with the determination, assessment, or collection of any Tax.

     “Taxing Authority” means any Governmental Authority with administrative or judicial authority and responsibility for enforcing the payment of Taxes.

     “Third Party Claim” means any Proceeding that is instituted against an Indemnitee by a Person other than a Buyer Indemnitee or a Seller Indemnitee.

     “Transaction Documents” means this Agreement, the Amended and Restated Manufacturing Agreement, the Assignment of Claims, the Transition Services Agreement, and any other agreements, instruments, or documents entered into pursuant to this Agreement.

     “Transition Services Agreement” has the meaning set forth in Section 2.3(d)(v).

     “Ultimate Parent” has the meaning set forth in Section 3.33.

     “Unaudited Financial Statements” has the meaning set forth in Section 3.5(a).

     “Unlimited Representations” has the meaning set forth in Section 11.1.

     “Working Capital Methodology” means in accordance with GAAP consistently applied, except as modified by any applicable definitions herein or as otherwise described on Exhibit B.

ARTICLE 2
THE MERGER; CLOSING

          2.1 The Merger.

     The plan of merger for the Merger is as follows:

     (a) Filing of Merger Documents; Effective Time. On the Closing Date, and subject to the terms and conditions of this Agreement, the Company and Newco shall duly execute and file a certificate of merger and/or such other documents as may be required by the General Corporation Law of the State of Delaware (“DGCL”) to effect the Merger (the “Merger Documents”) with the Secretary of State of the State of Delaware. The Merger shall become effective at the time specified in the Merger Documents (the “Effective Time”).

     (b) Merger; Surviving Corporation. At the Effective Time, in accordance with this Agreement and in accordance with provisions of the DGCL, Newco shall be merged with and into the Company. Following the Merger, the separate corporate existence of Newco shall cease and the Company shall continue as the Surviving Corporation and shall succeed to and assume

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all the rights, properties, liabilities and obligations of the Company and Newco in accordance with the DGCL.

     (c) Effects of the Merger. Upon the Effective Time, the Merger shall have the effects provided for in the DGCL.

     (d) Conversion of Company Common. At the Effective Time, by virtue of the Merger and without any action on the part of the Company, Newco, the Surviving Corporation, Buyer, any Seller or any other Person, the Company Common outstanding immediately prior to the Effective Time shall automatically be canceled and extinguished and be converted into and become a right to receive the Merger Consideration. Upon such conversion of Company Common upon consummation of the Merger, each Seller shall be entitled to receive the portion of the Merger Consideration that is equal to the percentage of the outstanding Company Common owned by such Seller (as set forth in Exhibit A).

     (e) Conversion of Newco Common. Each share of Newco Common issued and outstanding immediately prior to the Effective Time shall be converted into one fully paid and non-assessable share of the common stock, par value $0.001 per share, of the Surviving Corporation.

     (f) Surviving Corporation Organizational Documents. At the Effective Time, the Certificate of Incorporation of the Company shall be amended and restated in its entirety to be identical to the Certificate of Incorporation of Newco as in effect immediately prior to the Effective Time and in the form consistent with the provisions of the DGCL. As so amended and restated, the Certificate of Incorporation of the Company shall be the Certificate of Incorporation of the Surviving Corporation, until amended thereafter in accordance with applicable Legal Requirement. At the Effective Time, the By-laws of the Company shall be amended and restated in its entirety to be identical to the By-Laws of Newco as in effect immediately prior to the Effective Time.

     (g) Directors and Officers of the Surviving Corporation. The directors of Newco holding office immediately prior to the Effective Time shall become the directors of the Surviving Corporation at and as of the Effective Time (retaining their respective terms of office). The officers of Newco holding office immediately prior to the Effective Time shall become the officers of the Surviving Corporation at and as of the Effective Time (retaining their respective positions and terms of office).

     (h) Termination of Agreements. Any and all voting agreements, restrictions on transfer, preemptive rights, rights of first refusal, management rights, rights to repurchase, rights to indemnification, parallel exit rights and registration rights held by or imposed upon the Sellers or associated with the Company Common shall terminate with regard to the Company Common at the Effective Time.

     (i) Waiver of Appraisal Rights. Each of the Sellers hereby waives, and hereby covenants and agrees not to assert, exercise or perfect, any and all appraisal or dissenters’ rights that it may have with respect to the Merger or the Company Common.

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          2.2 Certain Events Immediately Prior to the Closing.

     Immediately prior to the Closing, in addition to such other actions as may be provided for in this Agreement:

     (a) Releases. The Sellers shall obtain discharges of all Encumbrances (other than Permitted Encumbrances), each in form and substance satisfactory to Buyer, with respect to the Company Common and the Assets, as well as a release of any Indebtedness of the Company in form and substance reasonably satisfactory to Buyer.

     (b) Wire Instructions. The Stockholder Representative shall provide Buyer with wire transfer instructions at least two (2) business days prior to the Closing.

     (c) Transaction Expenses. The Sellers shall provide Buyer with a schedule setting forth the aggregate amount of the unpaid Company’s Transaction Expenses through the Closing at least two (2) business days prior to the Closing.

     (d) Cash Distribution. The Company shall distribute all Cash to the Sellers.

          2.3 Closing.

     (a) Closing Location and Date. The closing of the Merger (the “Closing”) and the other transactions provided for in this Agreement shall take place at the offices of DFB, 3909 Hulen St., Fort Worth, Texas 76107, at 10:00 a.m. on the date that is three (3) business days following the satisfaction (or waiver by the Party entitled to the benefit thereof) of each of the conditions set forth in Article 7 and Article 8 (other than conditions that are to be satisfied by actions taken at the Closing), or at such other time and place as the Parties may agree (the date on which the Closing shall occur is referred to herein as the “Closing Date”).

     (b) Funding and Disbursement at Closing. At the Closing, in addition to such other actions as may be provided for in this Agreement:

          (i) Buyer shall deliver the Closing Merger Consideration to the Sellers by paying to each Seller an amount of cash equal to the aggregate Closing Merger Consideration multiplied by the percentage of the outstanding Company Common owned by such Seller (as set forth in Exhibit A) by wire transfer of immediately available funds to the account or accounts designated by the Stockholder Representative (on behalf of the Sellers) to Buyer;

          (ii) The Sellers or their Affiliates, as appropriate, shall pay the Company’s Transaction Expenses to the extent remaining unpaid at the Closing;

          (iii) The Sellers or their Affiliates, as appropriate, shall pay the Seller Severance Expenses, whether or not previously accrued; and

          (iv) Buyer shall deliver the Escrow Amounts to the Escrow Agent.

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     (c) Closing Deliveries Relating to the Merger. At the Closing, in addition to such other actions as may be provided for in this Agreement:

          (i) The Company and Newco shall duly execute and file the Merger Documents with the Secretary of State of the State of Delaware, as provided in Section 2.1(a); and

          (ii) The Sellers shall deliver to Newco any and all certificates representing shares of the Company Common outstanding immediately prior to the Effective Time, duly endorsed in blank or accompanied by appropriate stock transfer powers duly endorsed.

     (d) Other Closing Deliveries. At the Closing, in addition to such other actions as may be provided for in this Agreement:

          (i) The Stockholder Representative shall execute and deliver to Buyer the certificates provided for in Section 7.1 and Section 7.2;

          (ii) Buyer shall execute and deliver to the Sellers the certificates provided for in Section 8.1 and Section 8.2;

          (iii) Buyer, the Stockholder Representative and the Escrow Agent shall execute and deliver to one another an Escrow Agreement to be negotiated in good faith by the parties between the Effective Date and the Closing (the “Indemnity Escrow Agreement”);

          (iv) Buyer, the Stockholder Representative and the Escrow Agent shall execute and deliver to one another an Escrow Agreement to be negotiated in good faith by the parties between the Effective Date and the Closing (the “Return Escrow Agreement”);

          (v) The Buyer and Healthpoint shall execute and deliver to one another a Transition Services Agreement substantially in the form attached hereto as Exhibit C (the “Transition Services Agreement”);

          (vi) The Company and DPT shall execute and deliver to one another an Amended and Restated Manufacturing Agreement substantially in the form attached hereto as Exhibit D (the “Amended and Restated Manufacturing Agreement”);

          (vii) The Company and DFB shall execute and deliver to one another an Assignment of Claims substantially in the form attached hereto as Exhibit E (the “Assignment of Claims”);

          (viii) The Company and Healthpoint shall execute and deliver to one another an Amended and Restated Facility Lease to be negotiated in good faith by the parties between the Effective Date and the Closing (the “Amended and Restated Facility Lease”);

          (ix) Buyer and DFB shall execute and deliver to one another a Product Development Agreement substantially in the form attached hereto as Exhibit F (the “Product Development Agreement”);

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          (x) [...***...] shall deliver to the Buyer [...***...],[...***...] to [...***...], with respect to (A) [...***...] ([...***...]), (B) [...***...] ([...***...]) and (C) [...***...] ([...***...]); and

          (xi) The Sellers and the Company shall each execute all documents and take all other actions that, in either case, are reasonably requested by any of them to evidence the termination of the agreements that are to terminate as of the Effective Time pursuant to Section 2.1(h).

       2.4 Adjustments to Base Merger Consideration.

     To determine the aggregate amount of the Merger Consideration, the Base Merger Consideration shall be adjusted as follows:

     (a) the Base Merger Consideration shall be increased by the amount, if any, by which the Adjusted Net Working Capital exceeds the Target Net Working Capital; and

     (b) the Base Merger Consideration shall be decreased by the amount, if any, by which the Adjusted Net Working Capital is less than the Target Net Working Capital.

       2.5 Post-Closing Reconciliation of Net Working Capital.

     (a) Post-Closing Determinations. As promptly as practicable, but in any event within ninety (90) days following the Closing Date, Buyer shall cause to be prepared and delivered to the Stockholder Representative, together with all relevant working papers and supporting documentation:

          (i) An unaudited balance sheet of the assets and liabilities of the Company dated as of the Closing Date prepared in accordance with the Working Capital Methodology (the “Closing Date Balance Sheet”). The Closing Date Balance Sheet shall be dated as of 11:59 p.m. on the Closing Date and shall not take into account or otherwise give effect to the transactions contemplated by this Agreement to occur after the Closing Date.

          (ii) A statement setting forth the Buyer’s calculation of Adjusted Net Working Capital and the Merger Consideration. The Parties agree that the purpose of preparing the Closing Date Balance Sheet is to determine the amount of the Adjusted Net Working Capital and to reconcile any differences between such amount and the Target Net Working Capital. Such process is not intended to permit the introduction of different components, judgments, accounting methods, policies, principles, practices, procedures, classifications or estimation methodologies for the purpose of preparing the Closing Date Balance Sheet or determining the Adjusted Net Working Capital from the judgments, accounting methods, policies, principles, practices, procedures, classifications or estimation methodologies described in the Working Capital Methodology or used in determining the Target Working Capital, except to the extent that any existing accounting methods, policies, principles, practices, procedures, classifications or estimation methodologies are not in accordance with GAAP (other than such differences set forth on Exhibit B).

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     (b) Access to Records. The Stockholder Representative shall be given timely access to all supporting documents and work papers used in the preparation of the Closing Date Balance Sheet, as reasonably requested in connection with its review of the Closing Date Balance Sheet and the calculation of the Adjusted Net Working Capital.

     (c) Resolution of Disputes. The Stockholder Representative may dispute any amounts reflected on the Closing Date Balance Sheet or the calculation of the Adjusted Net Working Capital; provided, however, that the Stockholder Representative shall have notified Buyer in writing of each disputed item, specifying the amount thereof in dispute and setting forth, in reasonable detail, the basis for such dispute, as promptly as practicable but in any event no later than the 30th day following receipt by the Stockholder Representative of the items described in Section 2.5(a). In the event of such a dispute, Buyer and the Stockholder Representative shall attempt to reconcile their differences. If Buyer and the Stockholder Representative are unable to reach a resolution with such effect within thirty (30) days after receipt by Buyer of the Stockholder Representative’s written notice of dispute, Buyer and the Stockholder Representative shall submit the items remaining in dispute for resolution to the accounting firm of KPMG LLP (the “Independent Accounting Firm”), which shall, within thirty (30) days after such submission, determine and report to Buyer and the Stockholder Representative upon such remaining disputed items, and such report shall be final and binding on the Parties absent fraud or intentional misconduct. The fees and disbursements of the Independent Accounting Firm (the “Aggregate Accounting Fees”) shall be allocated between Buyer, on the one hand, and the Sellers, on the other hand, as follows: a portion of the Aggregate Accounting Fees equal to the product of the Aggregate Accounting Fees and a fraction, the numerator of which is the aggregate dollar amount of the disputed items resolved by the Independent Accounting Firm in favor of Buyer and the denominator of which is the aggregate dollar amount of all disputed items submitted to the Independent Accounting Firm for resolution, shall be allocated to the Sellers, and the remainder shall be allocated to Buyer (in each case as finally determined by the Independent Accounting Firm). In acting under this Agreement, the Independent Accounting Firm shall be entitled to the privileges and immunities of arbitrators.

     (d) Adjustments Final. The Merger Consideration, the Closing Date Balance Sheet and the Adjusted Net Working Capital shall be deemed final for the purposes of this Agreement upon the earlier of (i) the failure of the Stockholder Representative to notify Buyer of a dispute by the 30th day following receipt by the Stockholder Representative of the items described in Section 2.5(a), (ii) the resolution of all disputes pursuant to Section 2.5(c) by the Stockholder Representative and Buyer and (iii) the resolution of all disputes pursuant to Section 2.5(c) by the Independent Accounting Firm. The final determinations of such matters shall be non-appealable and incontestable by the Parties and each of their respective Affiliates and successors and assigns and not subject to collateral attack for any reason other than manifest error or fraud.

     (e) Reconciliation Payments.

          (i) If the Adjusted Net Working Capital, as determined pursuant to this Section 2.5, exceeds the Target Net Working Capital, then Buyer shall pay to the Sellers, in the aggregate, an amount equal to such excess by wire transfer in immediately available funds to the account or accounts designated by the Stockholder Representative no later than five (5) business

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days following the final determination of the Adjusted Net Working Capital in accordance with Section 2.5(d).

          (ii) If the Target Net Working Capital exceeds the Adjusted Net Working Capital, as determined pursuant to this Section 2.5, then such excess shall be paid by the Escrow Agent to the Buyer from the Indemnity Escrow Amount by wire transfer of immediately available funds to the account designated by Buyer no later than five (5) business days following the final determination of the Adjusted Net Working Capital in accordance with Section 2.5(d).

       2.6 Post-Closing Reconciliation of Product Returns.

     (a) Buyer Return Statements. At any time and from time to time following the Effective Time, the Buyer may deliver to the Stockholder Representative a statement setting forth the aggregate Product Return Amount as of the date specified in such statement (each, a “Return Statement”); provided, however, that the Buyer may not deliver a Return Statement (i) until the aggregate Product Return Amount exceeds $[...***...], (ii) more frequently than once per calendar quarter or (iii) with respect to any returns received after the three (3) year anniversary of the Effective Time. The final Return Statement shall be delivered within sixty (60) days after the three (3) year anniversary of the Effective Time.

     (b) Access to Records. The Stockholder Representative shall be given timely access to all supporting documents and work papers used in the preparation of the Return Statement, as reasonably requested in connection with its review of the Return Statement and the calculation of the aggregate Product Return Amount.

     (c) Resolution of Disputes. The Stockholder Representative may dispute any amounts reflected on a Return Statement or the calculation of the Product Return Amount set forth thereon; provided, however, that the Stockholder Representative shall have notified Buyer in writing of each disputed item, specifying the amount thereof in dispute and setting forth, in reasonable detail, the basis for such dispute, as promptly as practicable but in any event no later than the 30th day following receipt by the Stockholder Representative of the Return Statement. In the event of such a dispute, Buyer and the Stockholder Representative shall attempt to reconcile their differences. If Buyer and the Stockholder Representative are unable to reach a resolution with such effect within thirty (30) days after receipt by Buyer of the Stockholder Representative’s written notice of dispute, Buyer and the Stockholder Representative shall submit the items remaining in dispute for resolution to the Independent Accounting Firm, which shall, within thirty (30) days after such submission, determine and report to Buyer and the Stockholder Representative upon such remaining disputed items, and such report shall be final and binding on the Parties absent fraud or intentional misconduct. The Aggregate Accounting Fees relating to such dispute shall be allocated between Buyer, on the one hand, and the Sellers, on the other hand, as follows: a portion of the Aggregate Accounting Fees equal to the product of the Aggregate Accounting Fees and a fraction, the numerator of which is the aggregate dollar amount of the disputed items resolved by the Independent Accounting Firm in favor of Buyer and the denominator of which is the aggregate dollar amount of all disputed items submitted to the Independent Accounting Firm for resolution, shall be allocated to the Sellers, and the remainder shall be allocated to Buyer (in each case as finally determined by the Independent

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Accounting Firm). In acting under this Agreement, the Independent Accounting Firm shall be entitled to the privileges and immunities of arbitrators.

     (d) Adjustments Final. A Return Statement and the aggregate Product Return Amount as of the date of such Return Statement shall be deemed final for the purposes of this Agreement upon the earlier of (i) the failure of the Stockholder Representative to notify Buyer of a dispute by the 30^th day following receipt by the Stockholder Representative of such Return Statement, (ii) the resolution of all disputes pursuant to Section 2.6(c) by the Stockholder Representative and Buyer and (iii) the resolution of all disputes pursuant to Section 2.6(c) by the Independent Accounting Firm. The final determinations of such matters shall be non-appealable and incontestable by the Parties and each of their respective Affiliates and successors and assigns and not subject to collateral attack for any reason other than manifest error or fraud.

     (e) Reconciliation Payments. If the aggregate Product Return Amount as of the date of a Return Statement, as determined pursuant to this Section 2.6, exceeds the sum of $[...***...] plus the aggregate amount of all previous payments to the Buyer pursuant to this Section 2.6(e), then such excess shall be paid by the Escrow Agent to the Buyer from the Return Escrow Amount by wire transfer of immediately available funds to the account designated by Buyer no later than five (5) business days following the final determination of such Product Return Amount in accordance with Section 2.6(d). Amounts held by the Escrow Agent pursuant to the Return Escrow Agreement shall be the sole and exclusive remedy of the Buyer and its Affiliates (including the Surviving Corporation) in respect of any Product Return Amount. For the purposes of clarity, the Buyer shall not be entitled to any payment, pursuant to this Section 2.6 or otherwise, with respect to any portion of the aggregate Product Return Amount that is less than $[...***...] or with respect to any portion of the aggregate Product Return Amount that is in excess of $[...***...]. Any portion of the Return Escrow Amount not required to be disbursed to the Buyer pursuant to this Section 2.6(e) in respect of Return Statements delivered on or before the three (3) year anniversary of the Effective Time shall be promptly disbursed by the Escrow Agent to the Stockholder Representative (on behalf of the Sellers).

ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE SELLERS

     The Sellers hereby jointly and severally represent and warrant to Buyer as follows (except that the representations and warranties set forth in Section 3.34 are made by each Seller severally as to himself or herself and not jointly):

       3.1 Organization, Good Standing and Authority.

     (a) The Company is a corporation, duly organized, validly existing and in good standing under the laws of the State of Delaware. The Company has full corporate power and authority to own its property and carry on its business as now being conducted, to enter into and perform its obligations under this Agreement and the other Transaction Documents to which it is a party, and to consummate the transactions contemplated hereby and thereby. The execution, delivery and performance of this Agreement and the other Transaction Documents to which the Company is a party, and the consummation of the transactions contemplated hereby and thereby, have been duly authorized by all necessary action on the part of the Company. Complete copies of the Certificate

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of Incorporation and Bylaws of the Company, in each case as amended as of the Effective Date (collectively, the “Company Organizational Documents”), have been made available for review by Buyer. The Company is duly qualified or licensed to do business and is in good standing in each jurisdiction where the character of its business or the nature of its properties makes such qualification or licensing necessary, except where the failure to be so qualified or be licensed would not have a Material Adverse Effect on the Company.

     (b) DPT is a limited partnership, duly organized, validly existing and in good standing under the laws of the State of Texas. DPT has full power and authority to enter into and perform its obligations under the Amended and Restated Manufacturing Agreement and the other Transaction Documents, if any, to which it is a party, and to consummate the transactions contemplated thereby. The execution, delivery and performance of the Amended and Restated Manufacturing Agreement and the other Transaction Documents, if any, to which DPT is a party, and the consummation of the transactions contemplated thereby, have been duly authorized by all necessary action on the part of DPT.

     (c) Healthpoint is a limited partnership, duly organized, validly existing and in good standing under the laws of the State of Texas. Healthpoint has full power and authority to enter into and perform its obligations under the Transition Services Agreement and the other Transaction Documents, if any, to which it is a party, and to consummate the transactions contemplated thereby. The execution, delivery and performance of the Transition Services Agreement and the other Transaction Documents, if any, to which Healthpoint is a party, and the consummation of the transactions contemplated thereby, have been duly authorized by all necessary action on the part of Healthpoint.

       3.2 Enforceability of Transaction Documents.

     (a) This Agreement has been, and the other Transaction Documents to which the Company is a party will be at Closing, duly executed and delivered by the Company. This Agreement is, and the other Transaction Documents to which the Company is a party will be, at Closing, the legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their respective terms, except as such enforceability is limited by bankruptcy, insolvency, reorganization, moratorium or similar laws now or hereafter in effect relating to creditors’ rights generally or general principles of equity.

     (b) The Amended and Restated Manufacturing Agreement and the other Transaction Documents, if any, to which DPT is a party, will be, at Closing, duly executed and delivered by DPT. The Amended and Restated Manufacturing Agreement and the other Transaction Documents, if any, to which DPT is a party will be at Closing, the legal, valid and binding obligations of DPT, enforceable against DPT in accordance with their respective terms, except as such enforceability is limited by bankruptcy, insolvency, reorganization, moratorium or similar laws now or hereafter in effect relating to creditors’ rights generally or general principles of equity.

     (c) The Transition Services Agreement and the other Transaction Documents, if any, to which Healthpoint is a party, will be, at Closing, duly executed and delivered by Healthpoint. The Transition Services Agreement and the other Transaction Documents, if any, to which

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Healthpoint is a party will be at Closing, the legal, valid and binding obligations of Healthpoint, enforceable against Healthpoint in accordance with their respective terms, except as such enforceability is limited by bankruptcy, insolvency, reorganization, moratorium or similar laws now or hereafter in effect relating to creditors’ rights generally or general principles of equity.

     3.3 No Conflicts.

     Except as set forth in Schedule 3.3, the execution and delivery by the Company of this Agreement and each of the other Transaction Documents to which the Company is a party, and the consummation by the Company of the transactions contemplated hereby and thereby, will not (a) conflict with, violate, result in a breach of, or otherwise contravene any provision contained in the Company Organizational Documents, (b) violate or conflict with any material Legal Requirement or any Order applicable to the Company, (c) require the Company to give any notice to, make any filing with or obtain any consent from any Person (including any Governmental Authority) or (d) result in a breach of, or constitute a default under, any Material Contract.

       3.4 Capitalization.

     (a) The authorized capital stock of the Company consists solely of One Hundred Thousand (100,000) shares of Company Common, of which, as of the Effective Date, One Hundred Thousand (100,000) shares are issued and outstanding, all of which are held of record and owned beneficially by the Sellers as set forth on Exhibit A. The Sellers have good and legal title to all of the issued and outstanding shares of Company Common, free and clear of all Encumbrances, other than (i) any Encumbrances arising out of, under or in connection with this Agreement, (ii) Encumbrances to be released at the Closing pursuant to Section 2.2(a) or (iii) restrictions on resale and transfer pursuant to the 1933 Act and similar state Legal Requirements. The issued and outstanding shares of the Company Common are validly issued and are fully paid and nonassessable. The Company has no other outstanding Equity Interests.

     (b) The Company has no Subsidiaries. The Company does not own of record or beneficially, either directly or indirectly, any Equity Interests in any other Person.

       3.5 Financial Statements.

     (a) The Company has delivered to Buyer the audited financial statements of the Company as of and for each of the twelve-month periods ended December 31, 2005, December 31, 2006 and December 31, 2007, prepared in accordance with GAAP consistently applied and based upon the operations of the Company as a division of Healthpoint without restatement as though the Company were a separate entity taxed as a corporation for federal income tax purposes (collectively, the “Audited Financial Statements”). The Audited Financial Statements fairly present in accordance with GAAP the financial condition, results of operations, owners’ equity and cash flows of the Company as a division of Healthpoint as of the dates, and for the periods, indicated therein. The Company has also delivered to Buyer the unaudited financial statements for the six-month period ending June 30, 2008 (collectively, the “Unaudited Financial Statements” and, together with the Audited Financial Statements, hereinafter referred to as the “Financial Statements”). No event has occurred and nothing has come to the attention of the

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Commission. Confidential Treatment Requested Under
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Company since December 31, 2007 to indicate that the Financial Statements were not true and correct in all material respects as of the dates, and for the periods, indicated therein.

     (b) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management’s general or specific authorization; (ii) transactions are recorded as necessary (A) to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and (B) to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management’s general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.

       3.6 Real Property.

     (a) The Company owns no real property, and has no contracts, options, rights, agreements or other arrangements to acquire any real property.

     (b) The Company leases the Facility from Healthpoint under the Facility Lease. The Company has made available to Buyer a true and complete copy of the Facility Lease as of the Effective Date.

     (c) With respect to the Facility Lease: (i) such lease is legal, valid, binding, enforceable and in full force and effect, and is the entire agreement between the Company and Healthpoint with respect thereto; (ii) Healthpoint holds good and marketable title to the Facility; (iii) the execution of this Agreement and the consummation of the transactions contemplated hereby will not result in a breach of or default under the Facility Lease, and will not otherwise cause such lease to cease to be legal, valid, binding, enforceable and in full force and effect; (iv) the Company’s possession and quiet enjoyment of the Facility under the Facility Lease has not been disturbed and there are no material disputes with respect to such lease; (v) neither the Company nor, to the Sellers’ Knowledge, Healthpoint is in breach or default under the Facility Lease, and no event has occurred or circumstance exists which, with the delivery of notice, the passage of time or both, would constitute such a breach or default, or permit the termination, modification or acceleration of rent under the Facility Lease; (vi) the Company has not assigned the Facility Lease or subleased, licensed or otherwise granted any Person the right to use or occupy the Facility or any portion thereof; and (vii) the Facility Lease has not been amended or modified since the time it was first made available to Buyer.

     (d) Except for the Facility and the Facility Lease, the Company does not own or otherwise hold any leasehold interests under any leases with respect to any other real property.

     (e) With respect to the Facility (which, for purposes of clarity, does not include the entire building located at 3801 Hulen St., Fort Worth, Texas, but only the portion thereof leased pursuant to the Facility Lease): (i) the Facility is in adequate and suitable condition for the operation of the Business as currently conducted, ordinary wear and tear excepted; (ii) there exists no pending or, to Sellers’ Knowledge, threatened condemnation, foreclosure or similar proceedings with respect to all or any portion of the Facility; (iii) neither Sellers nor the

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Commission. Confidential Treatment Requested Under
17 C.F.R. Sections 200.80(b)(4) and 240.24b-2

Company has received any notice of any violation of any Legal Requirement related to the Facility with which it has not complied; and (iv) at Closing, the Facility will be in the possession and control of Buyer pursuant to the Amended and Restated Facility Lease and no other Person shall have any right by or through the Company or Healthpoint to possession of all or any part of the Facility.

          3.7 Tangible Personal Property.

     The Company owns, leases or otherwise has the legal right to use all of the tangible personal property, including but not limited to the equipment, machinery and other tangible personal property reflected on the Company’s Financial Statements (the “Tangible Personal Property”), used by the Company in the conduct of the Business. The Company holds good and marketable title to each item of such Tangible Personal Property, free and clear of all Encumbrances, except for the Permitted Encumbrances. Each material item of such Tangible Personal Property is free from material defects and is in good working order and repair, normal wear and tear excepted.

          3.8 Brokers or Finders.

     Except as set forth on Schedule 3.8, neither the Company nor the Sellers has incurred or will have any Liability for brokerage or finders’ fees or agents’ commissions or other similar payment in connection with this Agreement or the other Transaction Documents or the transactions contemplated hereby or thereby.

          3.9 Environmental, Health and Safety Matters.

     (a) The Company is in compliance with each, and is not in violation of any, applicable Environmental Law and Occupational Safety and Health Law, except for such non-compliances as would not, individually or in the aggregate, have a Material Adverse Effect on the Company. The Company has not received any written notice from any Governmental Authority or Person of any violation or failure to comply with any Environmental Laws or Occupational Safety and Health Laws with respect to any of the facilities or any other properties or assets in which the Company has an interest (“Facilities”).

     (b) The Company has obtained all Governmental Authorizations that are required under Environmental Laws (“Environmental Permits”) in connection with the operation of the Business and the ownership, use, or lease of the Facilities, a complete list of which is attached hereto on Schedule 3.9(b). The Company is in compliance with each such Environmental Permit, and to the Sellers’ Knowledge the Company’s predecessors were in compliance with each such Environmental Permit, except for such non-compliances as would not, individually or in the aggregate, have a Material Adverse Effect on the Company.

     (c) The Company has not received any written notice of any pending or, to the Sellers’ Knowledge, threatened claims, actions, suits, proceedings, investigations, assessments or complaints by any Governmental Authority arising under or pursuant to any Environmental Law or Occupational Safety and Health Law with respect to or affecting any of the Facilities.

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     (d) There are no underground storage tanks located on the Facilities and now or previously operated by the Company or, to the Sellers’ Knowledge, its predecessors.

     (e) To the Sellers’ Knowledge, no building or other improvement located on the Facilities contains any asbestos or asbestos-containing materials in a friable or damaged form or condition.

     (f) There has been no Release of any Hazardous Materials, or the engagement in Hazardous Activities, by the Company or, to the Sellers’ Knowledge, its predecessors on, in, or at the Facilities in violation of the Environmental Permits or Environmental Laws, except for such Releases as would not, individually or in the aggregate, have a Material Adverse Effect on the Company.

     (g) To the Sellers’ Knowledge, there are no Hazardous Materials in the soil or groundwater at the Facilities in concentrations above regulatory action levels which require either remediation under Environmental Laws or the reporting of the same to environmental regulatory agencies having jurisdiction over the Facilities.

          3.10 No Undisclosed Liabilities.

     The Company has no Liabilities of any nature, except for (a) those Liabilities set forth in the Financial Statements; and (b) those Liabilities incurred in the ordinary course of business subsequent to June 30, 2008.

          3.11 Employee Benefit Plans.

     Schedule 3.11 sets forth a list of all bonus, deferred or incentive compensation, profit sharing, retirement, vacation, sick leave, disability, unemployment, accident, hospitalization or severance plans and agreements, “employee benefit plans” (as defined in Section 3(3) of ERISA), employment and consulting agreements, change in control agreements, retention and fringe benefit plans sponsored, maintained or contributed to by the Company or any ERISA Affiliate and in which the employees (or former employees) of the Company participate or are entitled to participate as of the Effective Date or within the six-year period ending on the Effective Date, whether or not in writing, funded or unfunded (including, without limitation, any “voluntary employees’ beneficiary association” as defined in Section 501(c)(9) of the Code) (the “Benefit Plans”). The Company is neither a plan sponsor nor a “named fiduciary” of any Benefit Plan. The Company has made available to Buyer copies of all documents (including the most recent plan document incorporating all plan amendments, the most recent summary plan description and, if applicable, the most recent IRS determination or opinion letter) embodying the Benefit Plans, as well as annual reports (IRS Form 5500 series or the alternative filing, if applicable, under ERISA Regulation Section 2520.104-23) and certified financial statements for the most recently completed three fiscal years for each Benefit Plan required to file such form, copies of all documentation relating to the correction of any Benefit Plan defects under the IRS Employee Benefits Compliance Resolution System, Department of Labor Voluntary Fiduciary Correction program, Department of Labor Delinquent Filer Program or any other voluntary correction program. Each of the Benefit Plans and each related trust agreement, annuity contract or other funding instrument is, and has at all times been, in compliance in all material respects with its terms and the applicable provisions of ERISA and the Code, except

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Commission. Confidential Treatment Requested Under
17 C.F.R. Sections 200.80(b)(4) and 240.24b-2

where the failure to comply would not have a Material Adverse Effect on the Company. Each Benefit Plan that is subject to Section 401(a) or 408, as applicable, of the Code and each related trust agreement, annuity contract or other funding instrument is qualified and tax exempt under the applicable provisions of the Code. No Benefit Plan is a Multiemployer Plan, nor has the Company or any ERISA Affiliate incurred any withdrawal liability with respect to any Multiemployer Plan or any liability in connection with the termination or reorganization of any Multiemployer Plan. Except as otherwise set forth on Schedule 3.11, all contributions, premiums or payments under or with respect to each Benefit Plan are current and will have been paid as of the Closing Date or accrued on the Closing Date Balance Sheet. For this purpose, “current” and “accrued” shall include pro rata contributions, premiums and payments to each Benefit Plan for that portion of a plan year or other applicable period that precedes the Closing Date. No action is pending or, to the Sellers’ Knowledge, threatened with respect to any Benefit Plan (other than claims for benefits in the ordinary course) and, to the Sellers’ Knowledge, no fact or event exists that could give rise to any such action.

     Except as otherwise set forth on Schedule 3.11, neither the execution of this Agreement nor the consummation of the transactions contemplated hereby will result in any payment (whether for separation pay or otherwise) becoming due from any of the Sellers, the Company or any ERISA Affiliate to any current or former employee, director, or consultant, or result in the vesting, acceleration of payment or increase in the amount of any benefit payable to or in respect of any such current or former employee, director, or consultant of any of the Sellers, the Company or any ERISA Affiliate. Other than agreements for which the Company will obtain the necessary stockholder approval pursuant to Section 7.10, there is no contract, agreement, plan or arrangement covering any current or former employee, director, or consultant of the Sellers, the Company or any ERISA Affiliate that individually or collectively could give rise to the payment of any amount that would not be deductible pursuant to the terms of Sections 162(a)(1), 162(m), and/or 280G of the Code or would require the payment of an excise tax imposed by Section 4999 of the Code or of any “gross up” of any such excise tax. None of the Benefit Plans provides for payment of “parachute payments” (as defined in Section 280G(b)(2) of the Code), separation, severance, termination or similar type benefits to any person or obligates the Sellers or the Company to pay separation, severance, termination or similar type benefits solely as a result of any transaction contemplated by this Agreement or as a result of an event occurring under Section 280G(b)(2)(A)(i) of the Code. Except as required by applicable Legal Requirements, none of the Benefit Plans provides for or promises retiree medical, disability or life insurance benefits for any current or former employee, officer or director of the Company or any ERISA Affiliate or provides continuation coverage to any individual following termination of employment or service with the Company. Neither the Sellers nor any ERISA Affiliate have the right to modify or terminate any Benefit Plan that provides coverage or benefits for either or both retired and active employees and/or their beneficiaries. Each of the Benefit Plans is subject only to the laws of the United States or a political subdivision thereof. No Benefit Plan is an “employee stock ownership plan” (as defined in Section 4975(e)(7) of the Code) or a plan that is or was subject to Title IV of ERISA, Section 412 of the Code or Section 302 of ERISA.

     All persons classified by the Company as independent contractors satisfy and have at all times satisfied the requirements of applicable law to be so classified; the Company has fully and accurately reported their compensation on IRS Forms 1099 when required to do so; and the

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Commission. Confidential Treatment Requested Under
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Company has no obligations to provide benefits with respect to such persons under Benefit Plans or otherwise. The Company does not employ and has not employed any “leased employees” as defined in Section 414(n) of the Code.

     Each Benefit Plan that is subject to Section 409A of the Code has been maintained and operated in good faith based on the proposed or final regulations (as permitted by applicable guidance) and related IRS guidance issued and in effect with respect to Section 409A of the Code and has been, or will be prior to the Closing Date, amended to comply with Section 409A of the Code, and no Benefit Plan subject to Section 409A of the Code would, as a result of its form, trigger the imposition of penalty taxes under Section 409A of the Code.

     There has been no prohibited transaction (within the meaning of Section 406 of ERISA or Section 4975 of the Code) with respect to any Benefit Plan (for which an exemption does not exist under Section 408 of ERISA or Section 4975(d) of the Code), which could result in the imposition of any material liability on the Company. Neither the Company nor any ERISA Affiliate has incurred any liability for any material penalty or tax arising under Section 4971, 4972, 4980, 4980B or 6652 of the Code or any material liability under Section 502 of ERISA, and, to the Sellers’ Knowledge, no fact or event exists which could give rise to any such liability. To the Sellers’ Knowledge, none of Sellers, the Company nor any ERISA Affiliate has participated in a violation of Part 4 of Title I, Subtitle B of ERISA by any fiduciary of a Benefit Plan or has any unpaid civil penalty under Section 502(l) of ERISA.

          3.12 Company Products; Compliance with Legal Requirements; Permits.

     (a) Except as set forth on Schedule 3.12(a):

               (i) the Company possesses all regulatory authorizations required to be held by it for the conduct of the Business as currently conducted, and has complied and is in compliance with each Legal Requirement that is applicable to it or to the conduct or operation of the Business or the ownership or use of any of their assets, including, but not limited to, compliance with the Federal Food, Drug and Cosmetic Act (the “FFDCA”) and the United States Food and Drug Administration (“FDA”) regulations promulgated thereunder, or similar legal provisions in any domestic or foreign jurisdiction where such Company Product is currently being sold;

               (ii) each Company Product is being developed, manufactured, tested, packaged, labeled, marketed, sold, and/or distributed in compliance with all applicable requirements under the FFDCA or other applicable Legal Requirements;

               (iii) all required notices, supplemental applications, and reports (including adverse experience and medical device reports) with respect to the Company Products have been filed with the FDA and all other applicable Governmental Authorities;

               (iv) the Company Product registration files have been maintained in accordance with reasonable industry standards and the Company has in its possession or control, or has access to, copies of all the material documentation filed in connection with filings made by the Company for regulatory approval or registration of the Company Products, including the

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Commission. Confidential Treatment Requested Under
17 C.F.R. Sections 200.80(b)(4) and 240.24b-2

complete regulatory chronology for each NDA or sNDA for each Company Product for which an NDA or sNDA has been filed;

               (v) the Company has not received any written notice, or to the Sellers’ Knowledge any oral notice, of any Proceedings or Orders from any Governmental Authority or any other Person regarding any actual, alleged, possible, or potential material violation of, or failure to comply in any material respect with, any material Legal Requirement;

               (vi) the Company has not received any Paragraph IV Notification under U.S.C. 355(j)(2)(B) relative to any patents listed in any NDA held by the Company nor has the Company received any notice regarding any, and to Sellers’ Knowledge there are no, plans by any third party to file an ANDA relative to an NDA held by the Company;

               (vii) to the Sellers’ Knowledge, there is no safety, quality, efficacy, labeling or advertising, regulatory, legal or other issue concerning any Company Product or components thereof, including any basis upon which adverse regulatory enforcement action or claims may be brought against the Company by any Governmental Authority; and

               (viii) no Company Product has been recalled, withdrawn, suspended, or discontinued (whether voluntarily or otherwise).

     (b) Schedule 3.12(b) contains a list, which is complete and accurate in all material respects, of the material Governmental Authorizations (other than the Environmental Permits) that are held by the Company that relate to the Company Products, the Business or any of the assets owned or used by the Company. Each Governmental Authorization listed in Schedule 3.12(b) is valid and in full force and effect. Except as set forth in Schedule 3.12(b):

               (i) the Company is in compliance with all of the material terms and requirements of each Governmental Authorization identified on Schedule 3.12(b);

               (ii) the Company has not received any written notice or other written communication, or to the Sellers’ Knowledge any oral notice, by any Governmental Authority or any other Person regarding (A) actual, alleged, possible, or potential violation of or failure to comply with any term or requirement of any Governmental Authorization, or (B) actual, proposed, possible, or potential revocation, withdrawal, suspension, cancellation, termination of, or modification to any Governmental Authorization;

               (iii) the Company has made available to the Buyer all (A) approved and pending new drug applications (including section 505(b)(2) applications), abbreviated new drug applications as of the date hereof, specifying related reference-listed drugs, Paragraph IV patent certifications, premarket approval applications, 510(K) premarket notifications, and the status and results of all associated pre-clinical and clinical testing, investigational new drug applications, and investigational device exemptions; (B) all pre-clinical and clinical studies and trials and bioequivalence studies referenced in the Company’s investigational device exemptions, investigational new drug applications, pending new drug applications (including section 505(b)(2) applications) and abbreviated new drug applications as of the date hereof, specifying related reference-listed drugs, and Paragraph IV patent certifications, premarket approval

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Commission. Confidential Treatment Requested Under
17 C.F.R. Sections 200.80(b)(4) and 240.24b-2

applications and/or clearances, and 510(K) premarket notifications filed with the FDA, together with the dates and brief descriptions of such studies, previously or currently undertaken or sponsored by (1) the Company or any Affiliate, (2) to the Sellers’ Knowledge, its licensors and their respective Affiliates and (3) to the Sellers’ Knowledge, any third party investigator and such third party’s licensors, or any similar authorizations, applications, certifications, study results and information in any domestic or foreign jurisdiction, each as amended from time to time;

               (iv) the Company has made available to the Buyer true, complete and accurate copies of all material data and reports with respect to such applications, studies and trials, and all other material information regarding the quality, efficacy and safety of the Company Products;

               (v) the Company has made available to the Buyer all material correspondence and contact information between the Company, the FDA and other Governmental Authorities regarding the Company Products;

               (vi) to the Sellers’ Knowledge, there are no safety or regulatory issues that would preclude the Company from researching or conducting clinical trials for pharmaceutical drugs or medical devices, including, but not limited to, issues relating to the system for maintaining relevant documents, internal audit systems, and any other regulatory-related matter;

               (vii) no Proceedings seeking the recall, withdrawal, suspension, or seizure of any such Company Product are pending or, to the Sellers’ Knowledge, threatened against the Company or any of its Affiliates, nor have any such Proceedings been pending at any time;

               (viii) none of the Company, its Affiliates or any officers or employees of the Company or its Affiliates has been convicted of any crime or engaged in any conduct for which debarment is mandated by 21 U.S.C. § 335a(a) or any similar law or authorized by 21 U.S.C. § 335a(b) or, to the Sellers’ Knowledge, has been charged with or convicted under U.S. law for conduct relating to the development or approval of pharmaceuticals, or otherwise relating to the regulation of any Company Product or any other relevant or analogous law in any comparable jurisdiction; and

               (ix) to the Sellers’ Knowledge, neither the Company nor any of its Affiliates has used in any capacity the services of any Person that is or has been excluded or threatened with exclusion under state or federal statutes or regulations, including under 42 U.S.C. § 1320a-7 or relevant regulations in 42 C.F.R. Part 1001, or assessed or threatened with assessment of civil money penalties pursuant to 42 C.F.R. Part 1003.

     (c) The Company has not made any untrue statement of material fact or fraudulent statement to the FDA or any other Governmental Authority.

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          3.13 Legal Proceedings.

     (a) Except as set forth in Schedule 3.13(a), there is no Proceeding pending or, to the Sellers’ Knowledge, threatened that:

               (i) relates to or that would be reasonably likely to materially affect the Company Products, the Business or any of the assets owned or used by the Company;

               (ii) challenges, or that would be reasonably likely to have the effect of preventing, delaying, or making illegal, or otherwise interfering with, any of the transactions contemplated by this Agreement; or

               (iii) relates to any warranty claims regarding the Business.

     (b) Except as set forth in Schedule 3.13(b):

               (i) there is no Order to which the Company, or any of the assets owned or used by the Company, is subject; and

               (ii) to the Sellers’ Knowledge, no senior executive of the Company is subject to any Order or Contract that prohibits such senior executive from engaging in or continuing any conduct, activity, or practice relating to the Business.

     (c) Except as set forth in Schedule 3.13(c):

               (i) the Company is in full compliance with all of the material terms and requirements of each Order to which it, or any of the assets owned or used by it, is or has been subject; and

               (ii) the Company has not received any written notice, or to the Sellers’ Knowledge any oral notice, from any Governmental Authority or any other Person regarding any actual, alleged or potential violation of, or failure to comply with, any material term or requirement of any Order to which the Company, or any of the assets owned or used by the Company, are or have been subject.

          3.14 Insurance.

     (a) Schedule 3.14(a) sets forth a list, as of the Effective Date, of all insurance policies with respect to which the Company is a named insured or that provide coverage to the Company or to any director or any officer of the Company, in his or her capacity as such, and, except as otherwise specified in Schedule 3.14(a), such coverages are in full force and effect on the Effective Date, shall be maintained in full force and effect through the Closing, and all premiums due have been paid.

     (b) Except as set forth on Schedule 3.14(b), there are no pending claims in excess of $25,000 against such insurance policies as to which insurers have denied liability as of the Effective Date and there exist no claims in excess of $25,000 that have not been timely submitted by the Company to the related insurers.

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Commission. Confidential Treatment Requested Under
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          3.15 Absence of Certain Changes and Events.

     Since December 31, 2007, except as disclosed in the Financial Statements or on Schedule 3.15 and except for the transactions contemplated hereby:

     (a) there has not been any material adverse change in the business, financial condition, operations, prospects or results of operations of the Company taken as a whole;

     (b) the Company has not declared, set aside or paid any dividend or other distribution (whether in cash, stock or property) with respect to any of its securities;

     (c) the Company has not split, combined or reclassified any of its securities or altered the terms of any outstanding securities;

     (d) the Company has not issued any Equity Interest;

     (e) there has not been any amendment to the Company’s Organizational Documents;

     (f) except in the ordinary course of business, the Company has not (i) incurred any Indebtedness, (ii) issued any debt securities, or (iii) assumed or guaranteed or otherwise become responsible for any Indebtedness of any Person, in the case of (i), (ii) and (iii) above;

     (g) the Company has not made any acquisition (by merger, consolidation, or acquisition of stock or assets) of any corporation, partnership or other business organization or division thereof;

     (h) the Company has not canceled or compromised any material Indebtedness or claim, or waived or released any material right of value or collected or compromised any material accounts receivable other than in the ordinary course of business;

     (i) except in the ordinary course of business, the Company has not created or permitted to be imposed any Encumbrances, other than Permitted Encumbrances, on any of its assets;

     (j) the Company has not sold, assigned or transferred any of its tangible assets except in the ordinary course of business and except for any such assets having an aggregate value of less than $250,000;

     (k) except in the ordinary course of business or as otherwise provided for in this Agreement, the Company has not entered into or altered any contract that would be a Material Contract or into any written employment or severance agreement with any of the employees of the Company or any collective bargaining agreement, nor made any changes in the rate of compensation, benefits, commission, bonus or other direct or indirect remuneration payable, whether as bonus, extra compensation, pension or severance or vacation pay or otherwise, to any director, officer, employee, salesman, distributor, consultant or agent;

     (l) there has not been any material violation of or conflict with any law to which the Company Products or the Business, operations, assets or properties of the Company are subject;

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     (m) there has not been any material damage, destruction or loss with respect to the property and assets of the Company, whether or not covered by insurance;

     (n) the Company has not made any tax election nor changed its method of tax accounting;

     (o) the Company has not made any material change in any method of accounting, other than any such changes required by GAAP; and

     (p) the Company has not entered into any agreement or made any commitment to take any of the types of actions described in any of subsections set forth above.

          3.16 Material Contracts.

     (a) Schedule 3.16(a) contains a list of each of the following written Contracts and a description of each of the following oral Contracts in effect as of the Effective Date to which the Company is a party (“Material Contracts”):

               (i) all Contracts that Sellers reasonably anticipate will, in accordance with their terms, involve aggregate payments by the Company of more than $[...***...] within the twelve-month period following the Effective Date and that are not cancelable by the Company without Liability on ninety (90) or less days notice to the other Party thereto;

               (ii) all Contracts that Sellers reasonably anticipate will, in accordance with their terms, involve aggregate payments to the Company of more than $[...***...] within the twelve-month period following the Effective Date;

               (iii) all Contracts for the lease of personal property by the Company anticipated to involve annual payments in excess of $[...***...] by the Company and that are not cancelable without Liability on ninety (90) or less days notice to the lessor;

               (iv) all employment Contracts;

               (v) all Contracts that limit or purport to limit the ability of the Company to compete in any line of business or with any Person or in any geographic area or during any period of time;

               (vi) all IP Licenses (excluding any licenses to generally available, off-the-shelf software programs licensed to the Company on standard terms, the cost of which does not exceed $[...***...]);

               (vii) all Contracts under which the Company has incurred any Indebtedness or has directly or indirectly guaranteed indebtedness, liabilities or obligations of any other Person;

               (viii) all Contracts under which the Company has directly or indirectly made any advance, loan, extension of credit or capital contribution to, or other investment in, any Person in excess of $[...***...];

*** Confidential Treatment Requested ***

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               (ix) all Contracts entered into since the Company’s incorporation relating to the sale or purchase by the Company of any properties, assets or business operations of any Person for a price in excess of $[...***...], other than the purchase and sale of inventory in the ordinary course of the Business;

               (x) all Contracts regarding any partnership, joint venture, strategic alliance or business combination that could reasonably be anticipated to involve assets or liabilities in excess of $[...***...], other than this Agreement and the other Transaction Documents; and

               (xi) all Contracts with any Related Party.

     (b) Except as specifically noted on Schedule 3.16(a), all Material Contracts are in the name of the Company or have been specifically assigned to the Company in compliance with the terms of such Material Contract. As of the Effective Date, each Material Contract is valid and binding on the Company and, to the Sellers’ Knowledge, on the other parties thereto, and is in full force and effect. The Company is not in breach of, or default under, any Material Contract and, to the Sellers’ Knowledge, no other party to any Material Contract is in breach thereof or default thereunder. The Company has made available to Buyer correct and complete copies of all Material Contracts, together with all modifications or supplements thereto. Except as set forth on Schedule 3.16(b), to Sellers’ Knowledge, no Material Contract is likely to not be renewed upon current expiration of the term stated therein.

          3.17 Labor and Employment Matters.

     (a) Schedule 3.17(a) attached hereto contains:

               (i) a true, complete and correct list as of the Effective Date of all employees of the Company, their job title, date of commencement of employment, current compensation paid or payable, actual bonus for the year ended December 31, 2007, any change in compensation since December 31, 2007, and service credited for purposes of vesting and eligibility to participate under any employee benefit plans;

               (ii) a true and complete list of any retired employees (or any dependents of any retired employee) who are receiving or are scheduled to receive any benefits from the Company; and

               (iii) a true and correct list as of the Effective Date of all severance agreements or policies (whether written or oral) and any non-competition agreements with current employees or any former senior management employees who departed service with the Company within one year prior to the Effective Date (copies of which have been made available to Buyer prior to the date hereof).

     (b) As of the Effective Date, there is no pending, or to the Sellers’ Knowledge, threatened, lawsuit, strike, slowdown, picketing, work stoppage or, to the Sellers’ Knowledge, any pending petition for certification of a collective bargaining agent involving the Company.

*** Confidential Treatment Requested ***

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     (c) As of the Effective Date, there is no pending, or to the Sellers’ Knowledge, threatened claim by any existing or former employee for violation of any federal or state employment law.

     (d) Schedule 3.17(d) states the number of employees terminated by the Company since December 31, 2007 and contains a complete and accurate list of the following information for each employee of the Company who has been terminated or laid off, or whose hours of work have been reduced by more than fifty percent (50%) by the Company since December 31, 2007: (i) the date of such termination, layoff or reduction in hours; (ii) the reason for such termination, layoff or reduction in hours; (iii) the location to which the employee was assigned; and (iv) any claim, or to Sellers’ Knowledge, threatened claim by any former employee related to such employee’s employment with the Company.

     (e) The Company has not violated the Worker Adjustment and Retraining Notification Act and related regulations, as amended, or any similar federal, state, or local law, and will comply with and be responsible for any liability under such laws prior to the Closing Date.

     (f) To the Sellers’ Knowledge, no officer, agent, employee, consultant or contractor of the Company is bound by any contract that purports to limit the ability of such officer, agent, employee, consultant or contractor (i) to engage in or continue or perform any conduct, activity, duties or practice relating to the Business, or (ii) to assign to the Company or to any other Person any rights to any invention, improvement or discovery. To the Sellers’ Knowledge, no former or current employee of the Company is a party to, or is otherwise bound by, any contract that in any way restricts the ability of the Company or Buyer to conduct the Business as heretofore carried on by the Company.

     (g) The Benefit Plans have complied in all material respects with all of their obligations under COBRA and DFB maintains a group health plan for all qualified beneficiaries who elect or had elected COBRA continuation coverage under a Benefit Plan that is a group health plan.

     (h) The Company is in compliance with the employment provisions of the Immigration Reform Act.

     (i) The Company is calculating and paying all hours worked by each and every employee, and has paid all former employees, as required by the applicable wage and hours laws and regulations.

          3.18 Intellectual Property.

     (a) Schedule 3.18(a) contains a complete and accurate list of the following non-patent Company Intellectual Property (“Non-Patent IP”):

               (i) all common law and registered trademarks, service marks, registered copyrights, trade names, fictitious names, domain names, logotypes and designs owned by the

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Company, showing with respect to each the registration numbers of any state, federal, or foreign registration of any such registered Non-Patent IP;

               (ii) all Non-Patent IP licensed to or used by the Company (copies of which licenses or similar agreements relating thereto have been made available to Buyer prior to the date hereof); and

               (iii) all Non-Patent IP used by any other Person under license or similar agreement from the Company, including without limitation all Non-Patent IP Licenses (other than those listed under Section 3.18(c)) setting forth the names of the parties, a brief description of the subject matter thereof and the exclusive or non-exclusive nature thereof (copies of which agreements relating thereto have been made available to Buyer prior to the date hereof).

     (b) Schedule 3.18(b) contains a complete and accurate list, along with applicable descriptions required herein, of all Company Intellectual Property comprising domestic and foreign provisional patent applications and patents owned or licensed by the Company and pending domestic and foreign patent applications owned or licensed or used by the Company (“Patent IP”):

               (i) all Patent IP owned by the Company setting forth: (A) any product, device, article, method of use or process covered thereby and (B) a brief description of the use of the device, article or process in the Business;

               (ii) all Patent IP licensed to the Company or used by the Company in the Business or in which the Company holds any other non-ownership right or interest (copies of which agreements relating thereto have been made available to Buyer prior to the date hereof); and

               (iii) all agreements whereby the Company has granted an ownership interest in, or licensed to other Persons, any Patent IP (copies of which agreements relating thereto have been made available to Buyer prior to the date hereof).

     (c) Schedule 3.18(c) sets forth a complete and accurate list, along with applicable descriptions required herein, of (i) all computer software comprising Company Intellectual Property (excluding any generally available, off-the-shelf software programs licensed to the Company on standard terms, the cost of which does not exceed $[...***...]), and (ii) with respect to any such computer software owned in whole or in part by or used in the operation of the Business by the Company any third party Intellectual Property sold with, incorporated into or used in the development of, such computer software, including without limitation any Publicly Available Software.

     (d) As of the Effective Date: (i) the Company owns the entire right, title and interest in, or possesses valid IP Licenses or other rights to, the Company Intellectual Property; (ii) the Company Intellectual Property is valid and enforceable and is not subject to any outstanding lien, judgment, injunction, order, decree or agreement threatening the ownership, validity or use of the Company Intellectual Property except as indicated on Schedule 3.18(d) and Schedule 3.18(f); (iii) the Company Intellectual Property has not been and is not being violated, infringed or

*** Confidential Treatment Requested ***

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misappropriated by any third party except as set forth on Schedule 3.18(e); (iv) with respect to all applications for and registrations of Company Intellectual Property, such applications and registrations are valid and in full force and effect; (v) there is no pending or, to the Sellers’ Knowledge, threatened Proceeding to which the Company is a party claiming that the Company has violated, misappropriated or infringed any Intellectual Property Rights of any third party or committed an act of unfair competition in the operation of the Business; (vi) neither the use of the Company Intellectual Property by the Company, nor the making or the sale of the Company Products by the Company, has violated, misappropriated or infringed, and neither is violating, misappropriating or infringing, the Intellectual Property Rights of any third party or has given rise to any claim of unfair competition under any applicable law except as set forth on Schedule 3.18(d); (vii) with respect to each item of Company Intellectual Property, the Company has the right to use such Company Intellectual Property in the continued operation of the Business, and the Company Intellectual Property constitutes all of the Intellectual Property necessary to conduct the business of the Company as previously conducted or as currently conducted; (viii) all IP Licenses are valid and enforceable and the Company is in compliance with and has not breached, violated or defaulted under, or received written notice that it has breached, violated or defaulted under, any of the terms or conditions of any IP License, nor, to the Sellers’ Knowledge, has there been any event or occurrence that would reasonably be expected to constitute such a breach, violation or default (with or without the lapse of time, giving of notice or both); (ix) the Company has not ever agreed to indemnify any Person for or against any interference, infringement, misappropriation, or other conflict with respect to any of the Company Intellectual Property or any Intellectual Property Rights that were formerly Company Intellectual Property except with respect to existing license agreements between the Company and Healthpoint; (x) other than IP Licenses entered into by the Company in the ordinary course of business, there are no settlements, forbearances to sue, consent judgments or orders or similar obligations binding upon the Company, or, to the Sellers’ Knowledge, upon any third party, that restrict the Company’s rights to use any Company Intellectual Property or that restrict the Company’s Business in order to accommodate a third party’s Intellectual Property rights; and (xi) the execution, delivery and performance of this Agreement and the other Transaction Documents by the Sellers and the consummation of the transactions contemplated hereby and thereby will not breach, violate or conflict with, in any material respect, any Intellectual Property Right of any third party or any instrument or agreement concerning the Company Intellectual Property or otherwise require the payment of any additional amounts or consideration other than fees, royalties or payments which the Company would otherwise have been required to pay had the Transactions not occurred.

     (e) To the Sellers’ Knowledge, none of the Company’s respective current or former employees, officers, directors, agents or consultants is in breach of confidentiality restrictions in favor of any third person, the breach of which could subject the Company to any Material Adverse Effect. The Company has obtained from all parties (including employees and current or former consultants and subcontractors) who have created any portion of, or otherwise who would have any rights in or to, the Company Intellectual Property owned by the Company valid and enforceable written assignments of any such work, invention, improvement or other rights to the Company and have delivered true and complete copies of such assignments to Buyer. To the Sellers’ Knowledge, no Employee, former employee, consultant or former consultant of the Company has retained any Intellectual Property from any written assignment executed by any

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such Person in connection with work performed for or on behalf of the Company. All amounts payable by the Company to any such Employees, consultants and former consultants have been paid in full.

     (f) With respect to all Patent IP, the Company has complied with all the requirements of all United States and foreign patent offices and all other applicable Governmental Authorities to maintain the Patent IP in full force and effect, including payment of all required fees when due to such offices or agencies. Other than prior art references cited in the applicable patent office file history of any Patent IP (a complete copy of which the Company has provided to Buyer), to the Sellers’ Knowledge, there are no prior art references or prior public uses, sales, offers for sale or disclosures that are likely to invalidate the Patent IP or any claim thereof except as set forth on Schedule 3.18(f), or of any conduct the result of which is likely to render the Patent IP or any claim thereof invalid or unenforceable. The original, first and joint inventors of the subject matter claimed in the Patent IP are properly named, and the applicable statutes governing marking of products covered by the inventions in the Patent IP have been fully complied with by the Company in the Business.

     (g) The Company has taken commercially reasonable measures to protect its ownership of, and rights in, all Company Intellectual Property. Without limiting the foregoing, the Company has not made any of its trade secrets or other confidential or proprietary information that it intended to maintain as confidential (including source code with respect to Company Intellectual Property) available to any other Person except pursuant to written agreements requiring such Person to maintain the confidentiality of such information.

     (h) No funding, facilities or personnel of any educational institution or Governmental Authority were used, directly or indirectly, to develop or create, in whole or in part, any Company Intellectual Property owned in whole or in part by the Company, including any portion of a Company Product. The Company is not or has not ever been a member or promoter of, or a contributor to, any industry standards body or similar organization that could compel the Company to grant or offer to any third party any license or right to such Company Intellectual Property. There is no governmental prohibition or restriction on the use of any Company Intellectual Property by the Company in any jurisdiction in which the Company currently conducts or has conducted business or on the export or import of any of the Company Intellectual Property from or to any such jurisdiction, and no Governmental Authorization is required to be obtained for such export or import.

          3.19 Suppliers and Customers.

     (a) Schedule 3.19 lists (i) the ten (10) largest suppliers of the Company for the twelve (12) months ended December 31, 2007, and for the six (6) months ended June 30, 2008, based on and listing the dollar volume (rounded to the nearest $1,000), and (ii) the ten (10) largest customers of the Company for the twelve (12) months ended December 31, 2007, and for the six (6) months ended June 30, 2008, based on and listing the gross sales (rounded to the nearest $1,000) (collectively, the “Key Customers”).

     (b) As of the Effective Date, none of the customers or suppliers listed on Schedule 3.19 has delivered written notice, or to the Sellers’ Knowledge any oral notice, to the

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Company that it intends to (i) cease or materially decrease purchasing from, selling to or dealing with the Company, (ii) materially and adversely modify its relationship (including any price increases) with the Company, or (iii) alter any purchases, sales or dealings with the Company in the event of the consummation of the transactions contemplated hereunder.

     (c) Schedule 3.19 sets forth all trade deals, trade promotions or programs, trade refunds or cooperative programs or any consumer promotions and programs involving the Company and the Key Customers.

     (d) Except with regard to initial launch quantities of new products or new SKUs, sales of Company Product to wholesale customers is not reasonably expected to exceed a thirty (30) day supply.

          3.20 Related Party Transactions.

     (a) Except for the transactions and arrangements as set forth on Schedule 3.20(a) (each a “Related Party Transaction”), no Related Party (i) has borrowed money from or loaned money to the Company that is currently outstanding or otherwise has any cause of action or claim against the Company, (ii) has any ownership interest in any property or asset used by the Company in the conduct of the Business, or (iii) is a party to any Contract or is engaged in any ongoing transaction with the Company (including any arrangements related to the payment of royalties).

     (b) Schedule 3.16(a) sets forth a list of the Material Contracts which will be required to be either assigned to the Company or subcontracted by the Company from an Affiliate of the Sellers in order to continue the Company’s business in accordance with past practice.

          3.21 No Product Liabilities; Product Warranties.

     There is no pending or, to the Sellers’ Knowledge, threatened Proceeding alleging any material Liability of the Company as a result of any defect or other deficiency with respect to any product sold or distributed by the Company prior to the Effective Date. As of the Effective Date, no product manufactured or sold by the Company has been the subject of any material recall or similar action instituted by any Governmental Authority or undertaken by the Company on a voluntary basis.

          3.22 Inventory.

     (a) Schedule 3.22(a) sets forth a complete and correct list of the Inventory of the Company as of September 15, 2008. Such Inventory is currently maintained at a DPT warehouse pursuant to that certain Warehousing and Distribution Agreement, dated June 1, 2007, by and between the Company and DPT. The Company has good and marketable title to the Inventory, free and clear of any Encumbrances, except for the Encumbrances set forth on Schedule 3.22(a).

     (b) All Inventory of the Company reflected on the Closing Date Balance Sheet, net of reserves set forth therein, consists of a quality and quantity usable and salable in the ordinary

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course of business. The quantities of each item of Inventory are not excessive and are reasonable in the present circumstances of the Company. All work in process and finished goods Inventory is free of any material defect or other deficiency. No Inventory is held on a consignment basis.

     (c) Other than Inventory for which an appropriate reserve is reflected on the Closing Date Balance Sheet, none of such Inventory is obsolete and, as of the Effective Time, each item of Inventory will, based upon the current forecast, be shipped with at least twelve (12) months remaining until its expiry date (for trade inventory). Other than Inventory for which an appropriate reserve is reflected on the Closing Date Balance Sheet, none of such Inventory is obsolete and, as of the Effective Time, each item of Inventory will have at least three (3) months remaining until its expiry date (for sample inventory).

     (d) The Company Products that are in the process of being manufactured are being manufactured, processed, packaged, labeled, stored, treated, tested, distributed, transported, disposed and otherwise handled in material compliance with all cGMPs and all Legal Requirements.

     (e) Since December 31, 2007, the Company has not (i) materially altered its distribution practices or terms with respect to the Company Products, or (ii) caused or effected a material increase in the inventory level of the Company Products in the wholesale channel, other than in connection with the launch of a new product.

     (f) The Company’s two (2) main wholesalers have provided to the Company information which, to the Sellers’ Knowledge, reflects the Inventory level of the Company Products maintained by such wholesalers as of July 31, 2008, and the Company has delivered or made available to Buyer copies of such information.

          3.23 Accounts Receivable.

     Except as set forth on Schedule 3.23, the accounts receivable of the Company as set forth on the Closing Date Balance Sheet or arising since the date thereof are, to the extent not paid in full by the account debtor prior to the date hereof, (a) valid and genuine and have arisen solely out of bona fide sales and deliveries of goods, performance of services and other business transactions in the ordinary course of business consistent with past practice and (b) not subject to valid defenses, set-offs or counterclaims. The allowance for collection losses on the Closing Date Balance Sheet and, with respect to accounts receivable arising since the date of the Closing Date Balance Sheet, the allowance for collection losses shown on the accounting records of the Company have been determined in accordance with GAAP consistent with past practice.

          3.24 Taxes.

     Except as set forth on Schedule 3.24,

     (a) the Company has timely filed or will have timely filed all Tax Returns for the periods or portions thereof ending on or prior to the Closing Date that are required to be filed on or prior to the Closing Date with any Taxing Authority (taking timely requested extensions into account);

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     (b) such Tax Returns are complete and correct in all material respects;

     (c) all Taxes shown to be due and payable on such Tax Returns have been paid or will be paid prior to Closing;

     (d) the Company has not received from any Governmental Authority any written notice of proposed adjustment, deficiency or underpayment of any Taxes, which notice has not been satisfied by payment or been withdrawn, and there are no material claims that to the Sellers’ Knowledge have been threatened relating to such Taxes against the Company, and to the Sellers’ Knowledge there are no grounds for any such adjustments;

     (e) the Company is not a party to any pending audit, investigation, action or proceeding with any Taxing Authority, nor to the Sellers’ Knowledge is any such audit, investigation, action or proceeding by any Taxing Authority threatened;

     (f) the Company is not a party to or bound by any Tax sharing agreement, Tax allocation agreement or Tax indemnity agreement that will survive the Closing;

     (g) the Company has not distributed stock of another Person, or has had its stock distributed by another Person, in a transaction that was purported or intended to be governed in whole or in part by Sections of 355 and 361 of the Code;

     (h) there are no Tax liens upon any of the assets or properties of the Company, other than with respect to Taxes not yet due and payable;

     (i) there are no outstanding agreements, waivers or arrangements extending the statutory period of limitation applicable to any claim for, or the period for the collection or assessment of, Taxes due from or with respect to the Company for any taxable period;

     (j) no power of attorney granted by or with respect to the Company relating to Taxes as currently in force and no closing agreement pursuant to Section 7121 of the Code (or any similar provision of any state or local law) has been entered into by or with respect to the Company;

     (k) the Company is not and has never been a member of an affiliated group of corporations filing a consolidated federal income Tax return and the Company does not have any liability for the Taxes of any other Person under Treasury Regulation Section 1.1502-6 (or any similar provision of any state or local law), as a transferee or successor, by contract, or otherwise;

     (l) the Company has duly and timely withheld from employee salaries, wages and other compensation and other amounts subject to withholding under applicable Tax laws, and paid over to the appropriate Governmental Authority, all amounts required to be so withheld and paid over for all periods under all applicable Legal Requirements;

     (m) the Company has collected all sales and use, goods and services, and similar Taxes required to be collected, and has remitted, or will remit on a timely basis, such amounts to the appropriate Governmental Authority, or has been furnished properly completed exemption

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certificates and has maintained all such records and supporting documents in the manner required by all applicable sales and use Tax statutes and regulations;

     (n) the Company has not engaged in any transaction that could give rise to (i) a reporting obligation under Section 6111 of the Code or the regulations thereunder, (ii) a list maintenance obligation under Section 6112 of the Code or the regulations thereunder, (iii) a disclosure obligation of a “reportable transaction” under Section 6011 of the Code and the regulations thereunder, or (iv) any similar obligation under any predecessor or successor law or regulation or comparable provision of state or local law;

     (o) each asset with respect to which the Company claims depreciation, amortization or similar expense for Tax purposes is owned for Tax purposes by the Company; and

     (p) the Company has no outstanding rulings of, or requests for rulings with, any Governmental Authority with respect to any Tax matter.

          3.25 Books and Records.

     The books, records and accounts of the Company accurately and fairly reflect, in reasonable detail, the material transactions and the assets and Liabilities of the Company. The Company has not engaged in any material transaction, maintained any bank account or used any of the funds of the Company other than transactions, bank accounts and funds which have been and are reflected in the normally maintained books and records of the business. The minute books (containing the records of the meetings, or written consents in lieu of such meetings, of the stockholders, the board of directors and any committees of the board of directors), the stock certificate books, and the stock record books of the Company are correct and complete, in all material respects, and have been maintained in accordance with sound business practices. There are no resolutions or other actions of the stockholders, the board of directors or any committee of the board of directors other than as disclosed in the records of the meetings and written consents contained in the minute books. At the Closing, all of those books and records will be in the possession of the Company. At the Closing, the Company will deliver, or cause to be delivered, to Buyer or its designee all of the minute books of the Company.

          3.26 Product Registration Files.

     The product registration files and dossiers of the Company have been maintained, in all material respects, in accordance with applicable Legal Requirements. The filings made by the Company for regulatory approval or registration of the candidates, compounds or products of the Company were, at the time of such filings, true and correct in all material respects.

          3.27 Brokers or Finders.

     Except for William Blair & Company, there is no investment banker, broker, finder, financial advisor or other intermediary which has been retained by or is authorized to act on behalf of the Company or its stockholders who is entitled to any fee or commission in connection with the transactions contemplated by this Agreement.

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          3.28 Vote Required.

     The approval of the stockholders set forth on Exhibit A is the only vote of any class of securities of the capital stock of the Company required to approve this Agreement and the transactions contemplated by this Agreement.

          3.29 Full Disclosure.

     No representation or warranty made under any provision of this Agreement, or the Disclosure Schedules, contains any untrue statement of material fact or omits to state a material fact necessary to make the statement herein or therein not misleading.

          3.30 Certain Business Practices.

     Within the past three (3) years, neither the Company nor, to the Sellers’ Knowledge, any director, officer, agent or employee of the Company has used any Company funds for (a) unlawful contributions, gifts, entertainment or other unlawful expenses related to political activity, (b) unlawful payments to foreign or domestic government officials or employees or to foreign or domestic political parties or campaigns, or for making any payments which violate any provision of the Foreign Corrupt Practices Act of 1977, as amended, or (c) any other unlawful payment.

          3.31 Board Recommendation.

     The Board of Directors of the Company has (a) approved of the transactions contemplated by this Agreement; and (b) recommended that the stockholders of the Company vote in favor of the approval of this Agreement and Plan of Merger.

          3.32 Sufficiency of Assets.

     Except as set forth on Schedule 3.32, the assets of the Company constitute all of the tangible assets reasonably necessary to operate the Business in the manner and to the extent presently operated by the Company.

          3.33 Hart-Scott-Rodino.

     The Company is the Ultimate Parent of the Acquired Person. “Ultimate Parent” and “Acquired Person” have the meanings set forth in the HSR Act.

          3.34 Seller Representations.

     Each Seller, severally as to himself or herself but not jointly, represents and warrants to the Buyer that:

     (a) if the Seller is a corporation, (i) the Seller is duly organized, validly existing and in good standing under the laws of the state of its incorporation, (ii) the Seller has full corporate power and authority to enter into, and perform its obligations under, this Agreement and the other Transaction Documents, if any, to which it is a party, and to consummate the transactions contemplated hereby and thereby, (iii) the execution, delivery and performance of this

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Agreement and the other Transaction Documents, if any, to which the Seller is a party, and the consummation of the transactions contemplated hereby and thereby, have been duly authorized by all necessary action on the part of the Seller, and (iv) this Agreement and each of the other Transaction Documents, if any, to which the Seller is a party, have been duly executed and delivered by the Seller, and assuming the due authorization, execution and delivery of this Agreement and such other Transaction Documents by the other parties hereto or thereto, this Agreement and such other Transaction Documents constitute the valid and binding obligations of the Seller, enforceable against the Seller in accordance with their respective terms;

     (b) if the Seller is an individual, (i) the Seller has the requisite legal capacity to enter into this Agreement, (ii) the Seller has the power and authority to perform its obligations under this Agreement and to consummate the transactions contemplated hereby, and (iii) this Agreement has been duly executed and delivered by the Seller, and assuming the due authorization, execution and delivery of this Agreement by the other parties hereto, this Agreement constitutes the valid and binding obligation of the Seller, enforceable against the Seller in accordance with its terms;

     (c) the execution and delivery of this Agreement by the Seller does not, and the consummation of the transactions contemplated hereunder will not, (i) violate the provisions of any of the charter, bylaws or other corporate documents of the Seller, if applicable, (ii) violate any Contract to which the Seller is a party, or (iii) violate any Legal Requirements applicable to the Seller;

     (d) no notice to any Governmental Authority is required by the Seller in connection with the execution and delivery of this Agreement and the consummation of the transactions contemplated hereunder; and

     (e) there is no action pending or, to the Sellers’ Knowledge, threatened against the Seller which challenges or seeks to enjoin, alter or materially delay the consummation of the transactions contemplated by this Agreement.

ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF BUYER

     Buyer represents and warrants to the Sellers as follows:

          4.1 Organization and Good Standing.

     (a) Buyer is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation. Buyer has the full corporate power and authority to own its property, to carry on its business as now being conducted, and to carry out the transactions contemplated hereby.

     (b) Newco is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Newco has full corporate power and authority to own its property and to carry out the transactions contemplated hereby. Newco has been formed solely for the purpose of engaging in the transactions contemplated by this Agreement and has

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not engaged in, and will not prior to the Effective Time engage in, any business or other operations or activities, other than as required or contemplated by this Agreement.

          4.2 Authority; Validity; Consents.

     Each of Buyer and Newco has the requisite power, capacity and authority necessary to enter into and perform its obligations under this Agreement and the other Transaction Documents to which it is a party and to consummate the transactions contemplated hereby and thereby. The execution, delivery and performance of this Agreement and the other Transaction Documents by Buyer and Newco and the consummation of the transactions contemplated herein and therein have been duly and validly authorized by all necessary corporate actions in respect thereof. This Agreement and the other Transaction Documents to which Buyer or Newco is a party constitute legal, valid and binding obligations of such party, enforceable against such party in accordance with their respective terms except as such enforceability is limited by bankruptcy, insolvency, reorganization, moratorium or similar laws now or hereafter in effect relating to creditors’ rights generally or general principles of public policy. Except for any required filing of a notification under the HSR Act, neither Buyer nor Newco is required to give any notice to or obtain any consent from any Person in connection with its execution and delivery of this Agreement or its consummation or performance of any of the transactions contemplated hereby.

          4.3 No Conflict.

     Once the consents and other actions described in Section 4.2 have been obtained and taken, the execution and delivery of this Agreement and the other Transaction Documents and the consummation of the transactions provided for herein and therein by Buyer and Newco will not result in the breach of any of the terms and provisions of, or constitute a default under, or conflict with, or cause any acceleration of any obligation of Buyer or Newco under (a) any agreement, indenture, or other instrument to which it is bound, (b) the organizational documents of Buyer, (c) the Certificate of Incorporation of Newco, (d) any Order of any Governmental Authority or (e) any material Legal Requirement.

          4.4 Legal Proceedings.

     There is no pending Proceeding that has been commenced or that has been threatened, against or otherwise relating to or involving Buyer or any of its subsidiaries (including Newco), or any of their respective assets or any of their respective equity holders, officers or directors (in their capacities as such), at law or in equity, that, individually or in the aggregate, (a) challenges, or may have the effect of preventing, delaying, making illegal, or otherwise interfering with, any of the transactions contemplated hereby or (b) could reasonably be expected to have a Material Adverse Effect on the Buyer. There is no Order in effect against Buyer or any of its subsidiaries (including Newco), or any of their respective assets or any of their respective equity holders, officers or directors (in their capacities as such) that could have the effect of preventing, delaying, making illegal, materially altering or otherwise interfering with, any of the transactions contemplated hereby, or that could reasonably be expected to have a Material Adverse Effect on the Buyer.

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          4.5 Brokers or Finders.

     Except as set forth on Schedule 4.5, neither Buyer nor Newco, nor any of their respective officers, agents or affiliates, has any Liability for brokerage or finders’ fees or agents’ commissions or other similar payment in connection with this Agreement or the transactions contemplated hereby.

          4.6 Financing.

     Buyer has, and shall have as of the Closing, sufficient cash, available lines of credit and other sources of immediately available funds to make payments of the Merger Consideration and all other amounts to be paid by it hereunder on and after the Closing Date.

          4.7 No Knowledge of Misrepresentations or Omissions.

     Buyer has no knowledge that the representations and warranties of the Sellers in this Agreement and the Disclosure Schedules attached hereto are not true and correct in all material respects, and Buyer has no knowledge of any material errors in, or material omissions from, any Disclosure Schedule to this Agreement.

          4.8 Solvency.

     Immediately after giving effect to the transactions contemplated by this Agreement, Buyer and the Surviving Corporation shall be able to pay their respective debts as they become due and shall own property which has a fair saleable value greater than the amounts required to pay their respective debts (including a reasonable estimate of the amount of all contingent liabilities). Immediately after giving effect to the transactions contemplated by this Agreement, Buyer and the Surviving Corporation shall have adequate capital to carry on their respective businesses. No transfer of property is being made and no obligation is being incurred in connection with the transactions contemplated by this Agreement with the intent to hinder, delay or defraud either present or future creditors of Buyer, the Surviving Corporation or any of their respective Subsidiaries.

ARTICLE 5
PRE-CLOSING COVENANTS OF THE SELLERS

          5.1 Access and Investigation.

     Between the Effective Date and the Closing Date, the Company shall: (a) afford Buyer and its Representatives access to, during normal business hours, in a manner so as not to interfere with the normal business operations of the Company and upon reasonable prior written notice, the properties, contracts, books and records and other documents and data pertaining to the Company and the operation of the Business, and (b) furnish Buyer and its Representatives with such additional financial, operating and other data and information as they may reasonably request. Buyer will treat and hold as strictly confidential any such data or information it receives in the course of the reviews contemplated by this Section 5.1, will not use any such data or information except in connection with this Agreement, and, if this Agreement is terminated for any reason

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whatsoever, will return to the Company all tangible embodiments (and all copies) of the same which are in its possession or control.

          5.2 Operation of the Business.

     Except as otherwise contemplated or permitted by this Agreement or with the prior consent of Buyer (such consent not to be unreasonably withheld or delayed), between the Effective Date and the Closing Date, the Company shall operate the Business only in the ordinary course of business consistent with past practices (including, without limitation, with respect to accounts receivable collection and accounts payable payment practices) and comply in all material respects with all material Legal Requirements applicable to the Company. The Company shall have the exclusive authority to manage and operate the Business during the period between the Effective Date and the Closing Date.

          5.3 Negative Covenants.

     Except as otherwise contemplated or permitted by this Agreement, between the Effective Date and the Closing Date, the Sellers and the Company shall not, without the prior consent of Buyer (which shall not be unreasonably conditioned, withheld or delayed), take any action that would cause the representations contained in Section 3.15 to be untrue, as of the Closing Date, with respect to the period from the Effective Date to the Closing Date.

          5.4 Required Approvals.

     The Sellers and the Company shall make all filings required by any Legal Requirement to be made by them or it in order to consummate the transactions contemplated hereby. Between the Effective Date and the Closing Date, the Sellers and the Company shall reasonably cooperate with Buyer: (a) with respect to all filings that Buyer is required by any Legal Requirement to make in connection with the transactions contemplated hereby, (b) in obtaining all consents identified in Schedule 3.3 to the extent requested by Buyer in writing, and (c) to the extent required by the HSR Act, in filing within ten (10) days of the Effective Date with the United States Federal Trade Commission and the United States Department of Justice the notification and report form required for the transactions contemplated hereby (which form shall request “early termination”) and any supplemental or additional information which may reasonably be requested in connection therewith pursuant to the HSR Act and will comply in all material respects with the requirements of the HSR Act.

          5.5 Commercially Reasonable Efforts.

     Subject to the terms and conditions of this Agreement, between the Effective Date and the Closing Date, the Sellers and the Company shall (a) use commercially reasonable efforts (i) to cause the conditions in Article 7 to be satisfied and (ii) to take all other actions to consummate the transactions contemplated hereby, and (b) not take any action that will have the effect of unreasonably delaying, impairing or impeding the receipt of any authorizations, consents, orders or approvals to be sought pursuant to this Agreement.

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          5.6 Notice of Developments.

     Prior to the Closing, the Company shall notify Buyer of any change or development which, to the Sellers’ Knowledge, would cause any of the representations and warranties in Article 3 above not to be true and correct. Any notice pursuant to this Section 5.6 shall not be deemed to amend the Disclosure Schedules for purposes of determining whether (a) the conditions set forth in Article 7 have been satisfied or (b) there has been a breach of a representation or warranty subject to indemnification pursuant to Article 11 of this Agreement; provided, however, any such update with respect to an event, change or development that first occurred or that first became known to the Sellers after the Effective Date shall be deemed to amend the Disclosure Schedules for purposes of determining whether there has been a breach of a representation or warranty subject to indemnification pursuant to Article 11 of this Agreement.

          5.7 Exclusivity.

     Between the Effective Date and the Closing, the Sellers and the Company shall not solicit, initiate, encourage or entertain the submission of any Proposal or offer from any Person relating to the acquisition of all or substantially all of the equity or the assets of the Company (including any acquisition structured as a merger, consolidation, or exchange) or participate in any discussions or negotiations regarding, furnishing any information with respect to, assisting or participating in, or facilitating in any other manner any effort or attempt by any Person to do or seek any of the foregoing.

          5.8 Closing Obligation.

     If Buyer has completed all of its obligations hereunder, and all of the conditions precedent to the obligations of the Company and the Sellers to Closing under Article 8 are satisfied (other than obligations and conditions that are to be satisfied by actions taken at the Closing), and the Company and the Sellers do not proceed with the Closing, then Buyer shall be entitled to pursue any right or remedy available to Buyer under the circumstances, in equity, including, without limitation, the right of specific performance to enforce the closing of this Agreement.

ARTICLE 6
PRE-CLOSING COVENANTS OF BUYER

          6.1 Required Approvals.

     As promptly as practicable after the Effective Date, Buyer shall, and shall cause its Affiliates to, make all filings required by any Legal Requirement to be made by it to consummate the transactions contemplated hereby. Between the Effective Date and the Closing Date, Buyer shall cooperate with the Sellers (a) with respect to all filings that the Company or the Sellers are required by any Legal Requirement to make in connection with the transactions contemplated hereby, (b) in obtaining all consents identified in Schedule 3.3 to the extent requested by the Sellers in writing, and (c) to the extent required by the HSR Act (or any comparable foreign jurisdiction’s acts or requirements) and not otherwise completed prior to the Effective Date, in filing within ten (10) days after the Effective Date with the United States Federal Trade Commission and the United States Department of Justice (or any applicable foreign jurisdiction’s counterpart) the

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notification and report form (which form shall request “early termination”) required for the transactions contemplated hereby and any supplemental or additional information that may reasonably be requested in connection therewith pursuant to the HSR Act (or any foreign jurisdiction’s requirements) and will comply in all material respects with the requirements of the HSR Act (or such foreign jurisdiction’s counterpart requirements). Buyer shall promptly deliver to the Sellers copies of all filings, correspondence and Orders to and from any Governmental Authority in connection with the transactions contemplated hereby.

          6.2 Non-Disclosure Obligations.

     The terms of the Non-Disclosure Agreement relating to preservation of the confidentiality of information regarding the Company are hereby incorporated by reference and shall continue in full force and effect until the Closing, at which time such Non-Disclosure Agreement and the obligations of Buyer under this Section 6.2 shall terminate. The Parties hereto acknowledge that the confidentiality provisions of the Non-Disclosure Agreement shall cover all information provided by the Sellers, the Company or their Representatives to Buyer or any of its Representatives in connection with or pursuant to the terms of this Agreement. Without limiting the provisions of the Non-Disclosure Agreement, if, for any reason, the transactions contemplated by this Agreement are not consummated, Buyer agrees that it will not disclose to any third person or use for its benefit any confidential information relating to the Company, the Sellers or the operation of the Business that it may have acquired in the course of such examination and investigation and that it will promptly return and cause its Representatives to return to the Company or its designee any property, books, records or papers relating to the Company, the Sellers or the operation of the Business and any copies thereof that Buyer or its Representatives may then have in its or their possession.

          6.3 Commercially Reasonable Efforts.

     Subject to the terms and conditions of this Agreement, between the Effective Date and the Closing Date, Buyer shall (a) use its commercially reasonable efforts (i) to cause the conditions in Article 8 to be satisfied and (ii) to take all other actions necessary to consummate the transactions contemplated hereby, and (b) not take any action that will have the effect of unreasonably delaying, impairing or impeding the receipt of any authorizations, consents, orders or approvals to be sought pursuant to this Agreement.

          6.4 Closing Obligation.

     If the Company and the Sellers have completed all of their respective obligations hereunder, and all of the conditions precedent to the obligations of Buyer to Closing under Article 7 are satisfied (other than obligations and conditions that are to be satisfied by actions taken at the Closing), and Buyer does not proceed with the Closing, then the Company and the Sellers shall be entitled to pursue any right or remedy available to them under the circumstances, in equity, including, without limitation, the right of specific performance to enforce the closing of this Agreement.

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ARTICLE 7
CONDITIONS PRECEDENT TO OBLIGATION OF BUYER

     The obligation of Buyer and Newco to consummate the transactions contemplated by this Agreement is subject to the satisfaction, at or prior to the Closing, of each of the following conditions (any of which may be waived by Buyer in whole or in part):

          7.1 Accuracy of Representations.

     The representations and warranties of the Sellers set forth in Article 3 shall be true and correct in all material respects (except that those representations and warranties which are qualified as to material, materiality, Material Adverse Effect or similar expressions shall be true and correct in all respects) as of the Closing Date with the same effect as though such representations and warranties had been made on and as of the Closing Date (provided that representations and warranties which speak as of a specified date shall speak only as of such date).

          7.2 Sellers’ Performance.

     Each covenant and obligation that the Sellers are required to perform or to comply with pursuant to this Agreement at or prior to the Closing shall have been duly performed and complied with in all material respects (except that those covenants and obligations which are qualified as to material, materiality, Material Adverse Effect or similar expressions shall have been duly performed or complied with in all respects), and Buyer shall have received a certificate of the Sellers to such effect.

          7.3 No Order.

     No Governmental Authority shall have enacted, issued, promulgated or entered any Order which is in effect and has the effect of making illegal or otherwise prohibiting the consummation of the transactions contemplated by this Agreement.

          7.4 Governmental Authorizations.

     All requisite Governmental Authorizations or waiting periods following governmental filings shall have been obtained or expired (including expiration of the applicable waiting periods under the HSR Act).

          7.5 Required Consents.

     The consents and waivers described on Schedule 7.5 shall have been obtained.

          7.6 Agreements.

     Each of the documents referred to in Section 2.3 to be executed by the Company, the Sellers, DPT and/or the Escrow Agent shall have been executed and delivered by such Person.

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          7.7 No Material Adverse Effect.

     Since the Effective Date, no event, change, effect or condition shall have occurred and exist that has had a Material Adverse Effect on the Company.

          7.8 Contributed Contracts.

     Affiliates of the Sellers shall specifically evidence the assignment or subcontract to the Company of the contracts described on Schedule 7.8, and provide evidence of any required third-party consents thereto.

          7.9 Release of Encumbrances.

     The Company shall deliver to the Buyer written evidence that the Company has secured releases for all Encumbrances other than Permitted Encumbrances, and guarantees by the Company of third-party indebtedness, including, without limitation, existing encumbrances in favor of Bank of America, N.A.

          7.10 280G Approvals.

     The Company shall obtain the necessary stockholder approval of any payments or benefits under any Benefit Plan or other agreement which the Company or Buyer (by notice to the Company at least three business days prior to the Closing) reasonably determines may constitute an “excess parachute payment” under Section 280G of the Code as a result of the transactions contemplated by this Agreement; provided that any communications to the stockholders regarding such approval shall be made available to the Buyer and the Buyer shall have the right to review and approve (which approval shall not be unreasonably withheld) such communications before they are distributed to the stockholders. The Company shall deliver to the Buyer prior to the Closing reasonable evidence either (a) that the stockholder approval was solicited in conformance with Section 280G and the regulations promulgated thereunder and the necessary stockholder approval was obtained with respect to any payments and/or benefits that were subject to the stockholder vote (the “280G Approval”), or (b) that the 280G Approval was not obtained and, as a consequence, that such “excess parachute payments” shall not be made or provided, as authorized under the waivers of those payments and/or benefits which were executed by all of the affected individuals.

          7.11 Termination of Certain Existing Agreements.

     Each of the following existing agreements shall have been terminated on terms reasonably acceptable to Buyer: (i) the Intercompany Services Agreement, dated June 1, 2007, by and between the Company and Healthpoint, (ii) the Warehousing and Distribution Agreement, dated June 1, 2007, by and between the Company and DPT, (iii) the Amended and Restated Shareholders Agreement, dated as of August 29, 2006, by and among the Company and the shareholders of the Company, and (iv) the Amended and Restated Transfer Restriction Agreement, dated as of August 29, 2006, by and among the Company and the shareholders of the Company.

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          7.12 Assignment of [...***...].

     Healthpoint shall have transferred the [...***...] to the Company, and Healthpoint and the Company shall have entered into a [...***...] pursuant to which [...***...] will [...***...] a [...***...] with respect to the [...***...], all pursuant to documentation in a form mutually agreeable to each of the Parties.

ARTICLE 8
CONDITIONS PRECEDENT TO THE OBLIGATION OF
THE COMPANY AND THE SELLERS

     The obligation of the Company and the Sellers to consummate the transactions contemplated by this Agreement is subject to the satisfaction, at or prior to the Closing, of each of the following conditions (any of which may be waived by the Company, in whole or in part):

          8.1 Accuracy of Representations.

     The representations and warranties of Buyer set forth in Article 4 shall be true and correct in all material respects (except that those representations and warranties which are qualified as to material, materiality, Material Adverse Effect or similar expressions shall be true and correct in all respects) as of the Closing Date with the same effect as though such representations and warranties had been made on and as of the Closing Date (provided that representations and warranties which speak as of a specified date shall speak only as of such date) and the Sellers shall have received a certificate of Buyer to such effect signed by a duly authorized officer thereof.

          8.2 Buyer’s Performance.

     The covenants and obligations that Buyer or Newco is required to perform or to comply with pursuant to this Agreement at or prior to the Closing shall have been performed and complied with in all material respects (except that those covenants and obligations which are qualified as to material, materiality, Material Adverse Effect or similar expressions, or are subject to the same or similar type exceptions, shall have been performed and complied with in all material respects), and the Sellers shall have received a certificate from Buyer to such effect signed by a duly authorized officer thereof.

          8.3 No Order.

     No Governmental Authority shall have enacted, issued, promulgated or entered any Order which is in effect and which has the effect of making illegal or otherwise prohibiting the consummation of the transactions contemplated by this Agreement.

          8.4 Governmental Authorizations.

     All requisite Governmental Authorizations or waiting periods following governmental filings shall have been obtained or expired (including, if applicable, expiration of the applicable waiting periods under the HSR Act).

***Confidential Treatment Requested***

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          8.5 Agreements.

     Each of the documents referred to in Section 2.3 to be executed by Buyer, Newco and/or the Escrow Agent shall have been executed and delivered by such Person. Each of the actions referred to in Section 2.3 to be performed by Buyer or Newco shall have been performed by such Person.

ARTICLE 9
POST-CLOSING COVENANTS

          9.1 Access to Books, Records, Etc.

     Buyer agrees that, after the Closing, it will, and will cause the Surviving Corporation to, cooperate with and make available to the Sellers during normal business hours and upon reasonable notice, all books and records, information and employees (without substantial disruption of employment) retained and remaining in existence after the Closing Date that are necessary or useful in connection with any inquiry, audit, investigation, dispute, litigation or other proceeding or similar matter, including the preparation of the Closing Date Balance Sheet. Buyer agrees that it shall, and shall cause the Surviving Corporation to, preserve and keep all books and records of Buyer, Newco and the Company for a period of at least seven (7) years from the Closing Date.

     The Sellers agree that, after the Closing, they will cause Healthpoint to make available to the Sellers during normal business hours and upon reasonable notice, all books and records and information relating to the Business retained and remaining in existence after the Closing Date that is necessary or useful in connection with any inquiry, audit, investigation, dispute, litigation or other proceeding or similar matter. The Sellers agree that they shall cause Healthpoint to preserve and keep all such books and records for a period of at least seven (7) years from the Closing Date.

          9.2 Further Assurances.

     In case at any time after the Closing any further action is necessary to carry out the purposes of this Agreement, each of the Parties shall (and shall cause their subsidiaries to) take such further action (including the execution and delivery of such further instruments and documents) as any other Party reasonably may request, all at the sole cost and expense of the requesting Party (unless the requesting Party is entitled to indemnification therefor under Article 11).

          9.3 Litigation Support; Attorney-Client Privilege.

     In the event and for so long as any Party actively is contesting or defending against any action, suit, proceeding, hearing, investigation, charge, complaint, claim, or demand in connection with (a) any transaction contemplated under this Agreement or (b) any fact, situation, circumstance, status, condition, activity, practice, plan, occurrence, event, incident, action, failure to act, or transaction on or prior to the Closing Date involving the Company, each of the other Parties shall (and shall cause their subsidiaries to) cooperate with him, her, or it and his, her, or its counsel in the defense or contest, make available their personnel, and provide such testimony and access to their books and records as shall be necessary in connection with the defense or contest, all at the sole cost and expense of the contesting or defending Party (unless the contesting or defending Party is entitled to indemnification therefor under Article 11).

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          9.4 Employee Benefit Arrangements.

     Buyer shall have no liability with respect to any of the Benefit Plans and the Sellers and the Company shall terminate all Benefit Plans sponsored by the Company immediately prior to the Closing Date or take all necessary action to cause the Company to cease to be a participating employer in any Benefit Plans sponsored by the Sellers. However, for a period of at least one year after the Closing Date, for so long as the Surviving Corporation continues to employ an individual who was an employee of the Company at Closing, Buyer agrees to cause the Surviving Corporation to pay to such employee substantially similar compensation (including base salary and a comparable bonus plan, but excluding equity or phantom equity awards and 401(k) match contributions) as that paid by the Company to such employee immediately prior to the Closing, and to provide such employee with Buyer benefits that are substantially similar in the aggregate to the benefits provided to such employee under the Benefit Plans immediately prior to the Closing. In addition, Buyer shall cause the Surviving Corporation to (a) grant credit to each employee of the Company for all unused vacation and sick leave existing as of the Closing and (b) recognize service with the Company prior to the Closing as deemed service with the Surviving Corporation for purposes of any length of service requirements, waiting periods, vesting periods (other than with respect to any Buyer equity incentives) and differential benefits based on length of service, and with credit under any welfare benefit plan for any deductibles or co-insurance paid for the current plan year under any plan maintained by the Company, to the extent permitted by such plan. To the extent any amounts payable to or for the benefit of the employees of the Company with respect to any Benefit Plan or otherwise is set forth on the Closing Date Balance Sheet, Buyer agrees to cause the Surviving Corporation to pay such amounts to or for the benefit of the employees of the Company. In the event that the Buyer or the Surviving Corporation terminates any employee after the Closing without cause, the Buyer shall be responsible for the payment of any applicable Buyer Severance Expenses.

          9.5 Cooperation on Tax Matters; Transfer Taxes.

     (a) The Sellers shall cause to be prepared and submit to the Buyer for timely filing all Tax Returns of the Company for the taxable periods ending on or prior to the Closing Date (“Pre-Closing Tax Period”) that are due after the Closing Date and Sellers shall pay any Taxes due thereon. After the Closing and in connection with the preparation of any such Tax Returns, Buyer and the Surviving Corporation shall grant or cause to be granted to the Sellers, or their representatives, access to all of the information, books and records relating to the Company within Buyer’s or the Surviving Corporation’s possession or control and shall furnish the assistance and cooperation of such personnel of Buyer and the Surviving Corporation as may reasonably be requested in connection therewith. Sellers shall be entitled to any credits or refunds of income Taxes of the Company with respect to any taxable periods of the Company ending before the Closing Date. Buyer shall prepare or cause to be prepared and file or cause to be filed any Tax Returns of the Surviving Corporation for periods that end after the Closing Date; it being understood that all Taxes shown as due and payable on such Tax Returns shall be the responsibility of Buyer. The Parties further agree and acknowledge that (i) the Company’s Transaction Expenses not subject to capitalization shall be expenses of the Company reported on its Tax Returns for the short taxable year ending on the Closing Date, and (ii) neither the

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Surviving Corporation nor Buyer shall deduct the Company’s Transaction Expenses not subject to capitalization on any Tax Return for any taxable period beginning after the Closing Date.

     (b) The Sellers shall be liable for, and shall pay any and all transfer, sales, use, excise, goods and services, health services, conveyance, recording or any other similar fees or Taxes (including, without limitation, title recording or filing fees, transfer Taxes and other amounts payable in respect of transfer filings), and all documentary or other stamp Taxes, arising out of or related to the Merger and the other transactions contemplated by this Agreement. The Parties shall consult with each other in good faith and shall cooperate fully with each other in planning for the reduction or elimination of any such Taxes.

     (c) If a claim for Taxes, including, without limitation, notice of a pending or threatened audit, shall be made by any Taxing Authority in writing (a “Tax Claim”), which, if successful, might result in an indemnity payment pursuant to this Agreement, the party seeking indemnification (the “Tax Indemnified Party”) shall notify the other party (the “Tax Indemnifying Party”) in writing of the Tax Claim within 15 business days of receipt of such Tax Claim. If notice of a Tax Claim (a “Tax Notice”) is not given to the Tax Indemnifying Party within such 15 day period, the Tax Indemnifying Party shall not be liable to the Tax Indemnified Party to the extent the Tax Indemnified Party was materially prejudiced by such delay. The Sellers shall have the sole right to represent the interests of the Surviving Corporation in any Tax audit or administrative or court proceeding relating to the Pre-Closing Tax Period, and to employ counsel of their choice; provided, however, if any issue or potential adjustment in such proceeding would or could result in an increase in the Surviving Corporation’s Taxes for any period following the Closing Date, then the Surviving Corporation shall have the right to participate in such proceeding (as it relates to such issue or adjustment) and Sellers shall not be entitled to settle or compromise such issue or adjustment without the prior consent of the Surviving Corporation. If the Sellers decide not exercise such right, the Sellers shall be entitled to participate in the defense of any claim for Taxes for the Pre-Closing Tax Period that may be subject to indemnification by the Sellers pursuant to this Section 9.5. Notwithstanding the foregoing, neither Buyer nor the Surviving Corporation shall be entitled to settle, either administratively or after the commencement of litigation, any claim for Taxes that would result in a claim for indemnification pursuant to Section 9.5 without the prior written consent of the Stockholder Representative.

     (d) Until the Closing Date, the Company shall not make or change any material election in respect to Taxes, adopt or change any accounting method in respect to Taxes, enter into any closing agreement settle any claim or assessment in respect of Taxes, file any amended Tax return, surrender any refund claim, or consent to any extension or waiver of the limitation period or period of assessment or reassessment applicable to any claim or assessment in respect of Taxes, except with the prior written consent of Buyer, which consent shall not be unreasonably withheld or delayed.

     (e) The Stockholder Representative shall be entitled, where permitted by law, to elect to carry back to a Pre-Closing Tax Period or Periods any net operating loss, net capital loss, charitable contribution or other Tax item attributable to the Pre-Closing Tax Period. In connection therewith, the Buyer or the Surviving Corporation shall permit the Stockholder

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Representative to control the prosecution of any such refund claim at the Sellers’ expense and, where deemed appropriate by the Stockholder Representative, shall cause the Surviving Corporation and any of its successors to authorize by appropriate powers of attorney such persons as the Stockholder Representative shall designate to represent the Surviving Corporation or any of their successors with respect to such refund claim. Any refunds or credits of Taxes of the Company received from the applicable Taxing Authority for the Pre-Closing Tax Period (including, without limitation, refunds or credits arising by reason of amended Tax Returns filed after the Closing Date) shall be for the account of the Sellers and shall be paid by Buyer or the Surviving Corporation to the Stockholder Representative within 10 days after Buyer or the Surviving Corporation receives such refund or after the relevant Tax Return is filed in which the credit is applied against the Surviving Corporation’s or Buyer’s or their Affiliates’ liability for Taxes.

     (f) Except for the offset rights set forth in Section 11.8, this Section 9.5 shall govern the procedures with respect to Taxes. Notwithstanding any provision of this Agreement to the contrary, the covenants, agreements and obligations of the Parties in this Section 9.5 shall survive the Closing.

          9.6 Restrictive Covenants.

     (a) Each Seller covenants that, during the Noncompetition Period, such Seller shall not, and it shall cause its Affiliates not to, directly or indirectly, in any capacity, work for, engage in or have any direct or indirect ownership interest in, or permit such Seller’s or any such Affiliate’s name to be used in connection with, any business anywhere in the United States which is engaged, either directly or indirectly, in the business of developing, marketing or selling any dermatologic products that are competitive with products manufactured, marketed, and sold by, or services provided by, the Company as of the Effective Date; provided, however, such Seller and its Affiliates shall be able to sell skin products in the acute care (i.e., hospital, wound care clinics, surgery centers, outpatient clinics and home health) and extended care (i.e., nursing home and retirement home) markets as well as wound care products in the dermatology market for the treatment, prevention or healing of wounds; and, provided further, such Seller and its Affiliates shall continue to have the ability to manufacture and perform research and development and other services related to such products as well as dermatologic products of any kind or nature, including dermatologic products substantially similar to and in direct competition with any of the Company Products or future products to be developed by the Buyer or its Affiliates, provided that the Sellers do not use or otherwise disclose any Company Intellectual Property in the process of performing and/or providing such services, and provided further, that such manufacturing, research and development activities or other related services are for the sole benefit of and on behalf of unaffiliated independent third parties (the “Restricted Business”). It is recognized that the Restricted Business is expected to be conducted throughout the United States and that more narrow geographical limitations of any nature on this non-competition covenant (and the non-solicitation covenant set forth in Section 9.6(b)) are therefore not appropriate.

     (b) Each Seller covenants that, commencing on the Closing Date and for a period of 24 months after the Closing Date, such Seller shall not, and it shall cause its Affiliates not to,

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solicit the employment or engagement of services of any person who is or was employed as an employee, consultant or contractor of the Company on the Effective Time or at any time within the twelve (12) months preceding the Effective Time; provided, however, the Sellers and their Affiliates shall be permitted to (i) solicit the employment or engagement of services of any such person who is affirmatively terminated by the Surviving Corporation after the Closing Date, (ii) solicit the employment or engagement of services of any such person who resigns from the Surviving Corporation if such person is required by the Surviving Corporation to relocate to a place of employment that is more than 30 miles away from their place of employment as of the Effective Time, (iii) engage in any advertisement for, or general solicitation of, employment that is not specifically targeted at such persons or (iv) hire any such person who responds to any solicitation permitted by clause (i), clause (ii) or clause (iii); and provided further, that the Surviving Corporation shall not be obligated to pay severance to any employee hired by any Seller or their Affiliates, as permitted by this Section 9.6, during the period in which such employee is also employed by any Seller or its Affiliates.

     (c) The Sellers acknowledge that the restrictions contained in this Section 9.6 are reasonable and necessary to protect the legitimate interests of the Buyer and constitute a material inducement to Buyer to enter into this Agreement and consummate the transactions contemplated by this Agreement. The Sellers acknowledge that any violation of this Section 9.6 will result in irreparable injury to Buyer and agree that Buyer shall be entitled to preliminary and permanent injunctive relief without the necessity of proving actual damages.

     (d) In the event that any covenant contained in this Section 9.6 should ever be adjudicated to exceed the time, geographic, product or service or other limitations permitted by applicable Legal Requirements in any jurisdiction, then any court is expressly empowered to reform such covenant, and such covenant shall be deemed reformed, in such jurisdiction to the maximum time, geographic, product or service or other limitations permitted by applicable Legal Requirements. The covenants contained in this Section 9.6 and each provision thereof are severable and distinct covenants and provisions. The invalidity or unenforceability of any such covenant or provision as written shall not invalidate or render unenforceable the remaining covenants or provisions hereof, and any such invalidity or unenforceability in any jurisdiction shall not invalidate or render unenforceable such covenant or provision in any other jurisdiction.

          9.7 Confidential Information.

               The Sellers covenant that they shall, and shall cause their Affiliates to, hold confidential all Company Intellectual Property and all other proprietary technical, financial and business information relating to the Company, which may include, but is not limited to, technical data, trade secrets, know-how, intellectual property or other materials owned or controlled by the Company at the time of Closing, including, but not limited to, research, product plans, products, samples, specifications, service plans, services, customer lists, customers, markets, software, developments, inventions, processes, formulas, chemical applications, laboratory instruments, laboratory methods of analysis, interpretation of lab results, techniques, technology, manufacturing methods, designs, drawings, engineering, marketing, distribution and sales methods and systems, sales and profit figures, finances and other business information, and all analyses, compilations, studies or other materials prepared by or on behalf of the Company.

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          9.8 Negotiation of Property Purchase.

               For a period of six (6) months following the Effective Time, the Parties will negotiate in good faith with respect to the purchase by the Surviving Corporation (or such other Affiliate of the Buyer as the Buyer may designate) of the real property that is subject to the Amended and Restated Facility Lease.

          9.9 Certain Company Liabilities.

               DFB acknowledges and agrees that it shall be obligated to pay, and shall pay within a reasonable time after the Closing Date, all amounts arising through the Closing Date with respect to Company employee bonuses, 401(k) matching payments and self-insured medical claims.

ARTICLE 10
TERMINATION

          10.1 Termination Events.

     This Agreement may be terminated prior to the Closing:

     (a) by mutual written consent of the Company and Buyer;

     (b) by written notice from the Company to Buyer if the transactions contemplated hereunder shall not have been consummated by November 15, 2008 (as such date may be extended as provided below, the “End Date”) (unless the failure to consummate the transactions contemplated hereunder is attributable to the breach of any representations or a failure on the part of the Company or the Sellers or their respective Affiliates to perform any obligation required to be performed by such Party or its Affiliates at or prior to the Closing);

     (c) by written notice from Buyer to the Company if the transactions contemplated hereunder shall not have been consummated by the End Date (unless the failure to consummate the transactions contemplated hereunder is attributable to the breach of any representations or a failure on the part of Buyer or its Affiliates to perform any obligation required to be performed by Buyer or its Affiliates at or prior to the Closing);

     (d) by written notice from Buyer to the Company, unless Buyer is then in material default or breach of this Agreement, following a material breach of any covenant or agreement of the Sellers or the Company contained in this Agreement, or if any representation or warranty of the Sellers contained in this Agreement shall be or shall have become inaccurate, in either case such that any of the conditions set forth in Section 7.1 and Section 7.2 would not be satisfied as of the time of such breach or as of the time such representation or warranty was or shall have become inaccurate; provided, however, that: (i) if such breach or inaccuracy is curable by the Sellers or the Company, then Buyer may not terminate this Agreement under this Section 10.1(d) with respect to the particular breach or inaccuracy provided the Sellers or the Company cures such breach or inaccuracy within thirty (30) days after written notice of such breach from Buyer is received by the Company; and (ii) the right to terminate this Agreement under this

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Section 10.1(d) shall not be available to Buyer if the breach is the result of any willful act on the part of Buyer designed to impede the consummation of any transaction contemplated hereby; or

     (e) by written notice from the Company to Buyer, unless the Company or any Seller is then in material default or breach of this Agreement, following a material breach of any covenant or agreement of Buyer or Newco contained in this Agreement, or if any representation or warranty of Buyer contained in this Agreement shall be or shall have become inaccurate, in either case such that any of the conditions set forth in Section 8.1 and Section 8.2 would not be satisfied as of the time of such breach or as of the time such representation or warranty was or shall have become inaccurate; provided, however, that: (i) if such breach or inaccuracy is curable by Buyer or Newco, then the Company may not terminate this Agreement under this Section 10.1(e) with respect to the particular breach or inaccuracy provided Buyer or Newco cures such breach or inaccuracy within thirty (30) days after written notice of such breach from the Company is received by Buyer and (ii) the right to terminate this Agreement under this Section 10.1(e) shall not be available to the Company if the breach is the result of any willful act on the part of the Company or the Sellers designed to impede the consummation of any transaction contemplated hereby.

Notwithstanding the foregoing, in the event that, as of the End Date, all conditions to the obligations of the Parties set forth in Article 7 and Article 8 have been satisfied or waived (other than those that are to be satisfied by action taken at the Closing) other than the condition that all Governmental Authorizations or waiting periods following governmental filings required under the HSR Act have been obtained or expired (as set forth in Section 7.4 and Section 8.4), then the End Date shall automatically be extended to January 15, 2009.

          10.2 Effect of Termination.

     In the event of any termination of this Agreement pursuant to Section 10.1, this Agreement shall immediately become void and there shall be no liability or obligation on the part of any Party to consummate the transactions contemplated hereby; provided, however, that (a) no such termination shall relieve any Party from liability for damages arising out of or with respect to the breach of this Agreement by such Party prior to such termination and (b) the confidentiality provisions of Section 6.2, and the expense responsibility provisions of Section 12.12 shall remain in full force and effect and survive any termination of this Agreement.

ARTICLE 11
INDEMNIFICATION; REMEDIES

          11.1 Survival.

     The representations and warranties contained in Section 3.[...***...], Section 3.[...***...] and Section 3.[...***...] shall survive in perpetuity; the representations and warranties contained in Section 3.[...***...], Section 3.[...***...] and Section 3.[...***...] shall survive until the expiration of the statute of limitations applicable thereto (without regard to any extensions thereof); and the other representations and warranties of the Parties contained in this Agreement shall survive the Closing until the date that is eighteen (18) months following the Closing. (The representations and warranties contained in Section 3.[...***...], Section 3.[...***...], Section 3.[...***...], Section

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3.[...***...], Section 3.[...***...] and Section 3.[...***...] are collectively hereinafter referred to as the “Unlimited Representations.”) The covenants and other agreements made by the Parties in this Agreement shall survive the execution and delivery of this Agreement and the Closing and continue in full force and effect thereafter for the time period specified in the respective covenant or, if no time period is specified, for so long as such covenants remain executory in nature. Notwithstanding anything to the contrary contained in this Agreement, no claim with respect to a breach of any representation or warranty may be asserted nor any action commenced against any Party obligated to provide indemnification pursuant to this Article 11 unless written notice describing in reasonable detail the facts and circumstances with respect to the subject matter of such claim or action is received by such Party on or prior to the date on which the representation or warranty on which such claim or action is based ceases to survive as set forth in this Section 11.1; provided, however, that any written notice of a claim submitted in accordance herewith (including the requirement that the facts and circumstances of such claim be described in reasonable detail) shall be deemed to preserve the subject matter of such claim for indemnification for purposes hereof even if the Losses attributable to such claim have not, as of the date the claim is submitted, been paid or even definitively quantified so long as the amount of such claim has been accrued for, in accordance with GAAP, on the balance sheet of the party suffering such Losses.

          11.2 Indemnification by the Sellers.

     (a) Subject to the limitations set forth below, including specifically, the limitations contained in Section 11.2(b), Section 11.2(c) and Section 11.2(d), the Sellers agree, subject to the other terms and conditions of this Article 11, to indemnify, defend and hold harmless Buyer and Newco (and with respect to any period after the Effective Time, the Surviving Corporation), and each of their respective directors, officers, employees and Affiliates (collectively, the “Buyer Indemnitees”), from and against any and all Losses incurred or suffered by any such Buyer Indemnitee that are related to or arise, directly or indirectly, out of (i) the breach of any representation or warranty of the Sellers contained in Article 3 of this Agreement or in any certificate delivered by the Stockholder Representative at the Closing pursuant to Section 7.1 as it related to such representations and warranties, (ii) any breach by the Sellers of any covenants or agreements to be performed by the Sellers pursuant to this Agreement, (iii) any breach by the Company of any covenants or agreement to be performed by it pursuant to this Agreement on or prior to the Closing Date, (iv) [...***...] arising from the [...***...] or [...***...] of the [...***...] or [...***...] of the [...***...] prior to the [...***...], (v) any claim that arises out of facts which occurred prior to the formation of the Company that would have constituted a breach of any representation and warranty of the Sellers contained in Article 3 of this Agreement if the Company had been formed prior to the occurrence of such facts, which facts are not otherwise rectified prior to the Closing Date, (vi) any claim made by any Seller or any Affiliate of any Seller against the Company relating to facts arising prior to the Closing, (vii) any Third Party Claim for [...***...] of a [...***...] arising from [...***...] which [...***...] and (viii) any Third Party Claim for [...***...] of a [...***...] by the [...***...] that arises out of or in connection with the [...***...] of [...***...] the [...***...].

     (b) Notwithstanding anything to the contrary contained in this Agreement, the sole and exclusive remedies of the Buyer Indemnitees or any other Person for any breach by the Company prior to the Closing or the Sellers of any provision of this Agreement, or otherwise

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arising out of or in connection with the transactions contemplated hereby, shall consist solely of (i) the rights of the Buyer Indemnitees to indemnification by the Sellers (including the Individual Sellers), subject to the limitations set forth in Section 11.2(d), for any Losses indemnifiable under Section 11.2(a) solely from funds held by the Escrow Agent pursuant to the Indemnity Escrow Agreement, (ii) the rights of the Buyer Indemnitees to indemnification by DFB, subject to the limitations set forth in Section 11.2(d), for any Losses indemnifiable under Section 11.2(a), (iii) the right to pursue any available remedies at law or in equity against any Seller for any fraud or intentional misrepresentation committed by such Seller and (iv) the right to pursue specific performance and other equitable remedies for any matter that is indemnifiable under Section 11.2(a)(ii) or Section 11.2(a)(iii). In no event shall any Buyer Indemnitee or any other Person be entitled to punitive damages or the like for any breach of any term hereunder.

     (c) Notwithstanding anything to the contrary contained in this Agreement, no Individual Seller shall be liable for any indemnity obligation under this Section 11.2 or under any other provision of this Agreement or for any other liability otherwise arising out of or in connection with the transactions contemplated hereby, except that each Individual Seller shall be severally, and not jointly and severally, liable for his or her own fraud or intentional misrepresentation in an amount not to exceed the Merger Consideration received by such Individual Seller.

     (d) The indemnification obligations of the Sellers pursuant to Section 11.2(a) shall not be effective until the aggregate dollar amount of all Losses that would otherwise be indemnifiable pursuant thereto exceeds $[...***...] (the “Deductible”), and then only to the extent such aggregate amount of Losses exceeds the Deductible; provided, however, in the case of (i) fraud or intentional misrepresentation or (ii) an indemnity claim with respect to any Unlimited Representation, the Deductible shall not apply. The indemnification obligations of the Sellers pursuant to Section 11.2(a) shall be limited, in the aggregate, to $[...***...] (the “Sellers Cap”), and no indemnification pursuant to such provisions shall be payable in excess of the Sellers Cap; provided, however, that in the case of (A) fraud or intentional misrepresentation or (B) an indemnity claim with respect to any Unlimited Representation, the Sellers Cap shall not apply and such aggregate limitation on indemnification shall be 100% of the Merger Consideration. For so long as the Indemnity Escrow Agreement is in effect and to the extent that sufficient funds are held pursuant thereto, the Buyer Indemnitees shall first make a claim against the funds held pursuant to the Indemnity Escrow Agreement in accordance with its terms for payment of any indemnification obligation to which any Buyer Indemnitee is entitled pursuant to Section 11.2(a).

     (e) The Sellers shall have no obligation to indemnify the Buyer Indemnitees with respect to any liabilities or assets of the Company (or the Surviving Corporation) to the extent included as a liability in the calculation of the Adjusted Net Working Capital, as finally determined under the procedures set forth in Section 2.5.

     (f) If an indemnification obligation exists under Section 11.2(a) due to the inaccuracy of any representation or warranty or breach of any covenant under this Agreement, the amount of any Losses related to such inaccuracy will be calculated without regard to any qualifications as to materiality or Material Adverse Effect contained in such representation or warranty or

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covenant; provided, however, that no individual claim by a Buyer Indemnitee may be asserted, and the Sellers shall have no indemnification obligation under Section 11.2(a)(i) with respect to any such claim for breach of representation or warranty qualified by materiality or Material Adverse Effect, unless the aggregate amount of Losses that would be payable with respect to such claim exceeds an amount equal to $[...***...] (it being understood that similar individual claims will be aggregated for purposes of this Section 11.2(f)).

          11.3 Indemnification by Buyer.

     (a) Buyer agrees, subject to the other terms and conditions of this Article 11, to indemnify, defend and hold harmless the Company (prior to the Closing), each Seller and their respective directors, officers, employees and Affiliates (collectively, the “Seller Indemnitees”), from and against any and all Losses incurred or suffered by any such Seller Indemnitee that are related to or arise, directly or indirectly, out of (i) the breach of any representation or warranty of Buyer contained in Article 4 of this Agreement or in any certificate delivered by Buyer at the Closing pursuant to Section 8.1 as it related to such representations and warranties and (ii) any breach by Buyer or Newco (or with respect to any period after the Effective Time, the Surviving Corporation) of any covenants or agreements to be performed by such Person pursuant to this Agreement.

     (b) Notwithstanding anything to the contrary contained in this Agreement, the sole and exclusive remedies of the Seller Indemnitees or any other Person for any breach by Buyer or Newco (or with respect to any period after the Effective Time, the Surviving Corporation) of any provision of this Agreement, or otherwise arising out of or in connection with the transactions contemplated hereby, shall consist solely of (i) the rights of the Seller Indemnitees to reimbursement by Buyer, subject to the limitations set forth in Section 11.3(c), for any Losses indemnifiable under Section 11.3(a), (ii) the right to pursue any available remedies at law or in equity against Buyer for any fraud or intentional misrepresentation committed by Buyer and (iii) the right to pursue specific performance and other equitable remedies for any matter that is indemnifiable under Section 11.3(a)(ii). In no event shall any Seller Indemnitee or any other Person be entitled to punitive damages or the like for any breach of any term hereunder.

     (c) The indemnification obligations of Buyer pursuant to Section 11.3(a) shall not be effective until the aggregate dollar amount of all Losses that would otherwise be indemnifiable pursuant thereto exceeds the Deductible, and then only to the extent such aggregate amount of Losses exceeds the Deductible; provided, however, in the case of fraud or intentional misrepresentation or in the case of an indemnity claim under Section 4.1 or Section 4.2, the Deductible shall not apply. The indemnification obligations of Buyer pursuant to Section 11.3(a) shall be limited, in the aggregate, to $[...***...] (the “Buyer Cap”), and no indemnification pursuant to such provisions shall be payable in excess of the Buyer Cap; provided, however, that in the case of fraud or intentional misrepresentation, the Buyer Cap shall not apply and such aggregate limitation on indemnification shall be 100% of the Merger Consideration.

     (d) If an indemnification obligation exists under Section 11.3(a) due to the inaccuracy of any representation or warranty or breach of any covenant under this Agreement, the amount of any Losses related to such inaccuracy will be calculated without regard to any qualifications as

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to materiality or Material Adverse Effect contained in such representation or warranty or covenant; provided, however, that no individual claim by a Seller Indemnitee may be asserted, and Buyer and Newco (and with respect to any period after the Effective Time, the Surviving Corporation) shall have no indemnification obligation under Section 11.3(a)(i) with respect to any such claim for breach of representation or warranty qualified by materiality or Material Adverse Effect, unless the aggregate amount of Losses that would be payable with respect to such claim exceeds an amount equal to $[...***...] (it being understood that similar individual claims will be aggregated for purposes of this Section 11.3(d)).

          11.4 Notice of Potential Claims for Indemnification.

     Except as otherwise provided in Section 9.5(c), a party entitled to indemnification under Section 11.2 or Section 11.3 (the “Indemnitee”) shall give the party obligated to provide such indemnification (the “Indemnifying Party”) prompt written notice (an “Indemnification Notice”) of any matter or event that could give rise to any Losses for which indemnification under this Article 11 may be due, including but not limited to any Third Party Claim, which, with the lapse of time, the giving of notice or both, would give rise to a claim or the commencement of any litigation that may result in Losses (an “Asserted Liability”). Each Indemnification Notice shall specify with particularity the basis on which indemnification is sought and the Indemnitee’s good faith estimate of the amount of its Losses and/or Asserted Liability and, in the case of a Third Party Claim, contain (by attachment or otherwise) all such other information as such Indemnitee may have concerning such Third Party Claim. After the delivery of an Indemnification Notice, the Indemnitee shall provide prompt written notice to the Indemnifying Party of all developments relating to the related Losses or Asserted Liability and any material changes in the Indemnitee’s good faith estimate of the amount of its Losses or Asserted Liability. The Indemnitee shall provide the Indemnifying Party with access, upon reasonable notice and during normal business hours, to its books and records, properties and personnel relating to the Losses or Asserted Liability. The Indemnitee will not be entitled to indemnification for Losses or Asserted Liabilities of the Indemnitee to the extent that any unreasonable delay in providing an Indemnification Notice or notice of future developments or other failure to follow the procedures set forth in this Article 11 prejudices the Indemnifying Party’s ability to defend a Third Party Claim or otherwise affects the Indemnifying Party’s ability to reduce the amount of indemnifiable Losses.

          11.5 Claims Not Involving Third Parties.

     Upon receipt of an Indemnification Notice not involving a Third Party Claim, the Indemnifying Party shall have twenty (20) business days to object to the claim set forth in the Indemnification Notice by delivery of a written objection (an “Objection”) to the Indemnitee specifying in reasonable detail the basis for such objection. Failure to timely deliver an Objection shall constitute a final and binding acceptance of the claim by the Indemnifying Party. If the Indemnifying Party timely delivers an Objection, the parties shall in good faith seek to resolve any dispute within the twenty (20) business day period following the Objection (the “Dispute Resolution Period”). If the parties have not resolved their dispute within the Dispute Resolution Period, either Party may bring an action pursuant to Section 12.8 and the parties shall proceed in accordance therewith. Upon resolution of a dispute and the determination of indemnifiable Losses pursuant to a final, non-appealable order in favor of an Indemnitee, such Indemnitee shall be entitled to be paid

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by the Indemnifying Party an aggregate amount equal to such Losses within five (5) business days of such order by wire transfer of immediately available funds to such account as such Indemnitee may specify in writing to the Indemnifying Party.

          11.6 Third Party Claims.

     The obligations and liabilities of an Indemnifying Party hereunder with respect to a Third Party Claim for which an Indemnitee is entitled to indemnification pursuant to this Article 11 shall be subject to the terms and conditions set forth in this Article 11. An Indemnifying Party shall have the right to contest any Asserted Liability so long as it shall within thirty (30) days (or sooner, if the nature of the Asserted Liability so requires) notify the Indemnitee of its intent to do so by sending a notice to the Indemnitee. An Indemnifying Party shall not consent to the entry of any judgment or enter into any settlement with respect to the Asserted Liability without the prior written consent of the Indemnitee, which consent shall not unreasonably be withheld. So long as the Indemnifying Party is contesting any Asserted Liability, the Indemnitee shall not consent to the entry of any judgment or enter into any settlement with respect to the Asserted Liability. If the Indemnifying Party elects not to contest the Asserted Liability, the Indemnitee (upon further notice to the Indemnifying Party) shall have the right to pay, compromise or contest such Asserted Liability, provided that Indemnitee obtains the prior written consent of the Indemnifying Party, which consent shall not unreasonably be withheld. In any event, the Indemnifying Party and the Indemnitee may participate, at their own expense, in the contest of an Asserted Liability. The Indemnifying Party and the Indemnitee shall cooperate fully with each other as to all Asserted Liabilities, shall make available to each other as reasonably requested all information, records, and documents relating to all Asserted Liabilities and shall preserve all such information, records, and documents until the termination of any Asserted Liability.

          11.7 Subrogation.

     Upon payment of any Losses or the payment of any judgment or settlement with respect to a Third Party Claim, the Indemnifying Party shall be subrogated to the extent of such payment to the rights of the Indemnitee against any person or entity with respect to the subject matter of such Losses or Third Party Claim. The Indemnitee shall assign or otherwise cooperate with the Indemnifying Party, at the cost and expense of the Indemnifying Party, to pursue any claims against, or otherwise recover amounts from, any Person liable or responsible for any Losses for which indemnification has been received pursuant to this Agreement.

          11.8 Insurance and Other Recoveries.

     Losses and all indemnification payments payable hereunder shall be reduced by the amount of insurance proceeds actually received by the Indemnitee or its Affiliates (net of any applicable deductible) as a result of the Losses for which the Indemnitee is seeking indemnification.

          11.9 Acknowledgement of Buyer.

     Buyer acknowledges that it has (a) conducted to its satisfaction an independent investigation and verification of the financial condition, results of operations, assets, liabilities, properties and projected operations of the Company and (b) relied on the results of its own independent

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investigation and verification and the representations and warranties of the Sellers expressly and specifically set forth in this Agreement, including the Disclosure Schedules (and updated Disclosure Schedules), in making its determination to proceed with the transactions contemplated by this Agreement. The representations and warranties of the Sellers expressly and specifically set forth in this Agreement, including the Disclosure Schedules (and updated Disclosure Schedules), constitute the sole and exclusive representations and warranties of the Sellers and the Company to Buyer in connection with the transactions contemplated hereby, and Buyer understands, acknowledges and agrees that all other representations and warranties of any kind or nature expressed or implied (including, but not limited to, any relating to the future or historical financial condition, results of operations, assets or liabilities of the Company, or the quality, quantity or condition of the Company’s assets) are specifically disclaimed by the Sellers (on behalf of themselves and the Company). The Sellers and the Company do not make or provide, and Buyer hereby waives, any warranty or representation, express or implied, as to the quality, merchantability, fitness as for a particular purpose, conformity to samples, or condition of the Company’s assets or any part thereto, except as expressly set forth in Section 3.7. In connection with Buyer’s investigation of the Company, Buyer has received certain projections, pro forma financials or adjustments, including projected statements of operating revenues and income from operations of the Company and certain business plan information. Buyer acknowledges that there are uncertainties inherent in attempting to make such estimates, projections, forecasts, pro forma financials, adjustments and plans, that Buyer is familiar with such uncertainties and that Buyer is taking full responsibility for such estimates, projections, forecasts, pro forma financials, adjustments and plans so furnished to it, including, without limitation, the reasonableness of the assumptions underlying such estimates, projections, forecasts, pro forma financials, adjustments and plans Accordingly, Buyer hereby acknowledges that neither the Company nor the Sellers is making any representation or warranty with respect to such estimates, projections, forecasts, pro forma financials, adjustments and plans, including, without limitation, the reasonableness of the assumptions underlying same.

          11.10 Stockholder Representative.

     Each of the Sellers hereby appoint DFB or its agents, successors or assigns as their exclusive agent and attorney-in-fact to act on its behalf with respect to any claims, controversies, or disputes arising out of the terms of this Agreement (the “Stockholder Representative”). The Sellers further agree that the Stockholder Representative shall have the power to (a) receive all notices and communications directed to the Sellers with respect to any claims, controversies, or disputes arising out of the terms of this Agreement and to take any action or no action in connection therewith as it may deem appropriate, and (b) to take any action (or determine to take no action) with respect to the foregoing appointment and authority as it may deem appropriate as effectively as the Sellers could act themselves, including the settlement or compromise of any dispute or controversy under the indemnification provisions hereof, the Indemnity Escrow Agreement, the Return Escrow Agreement or any other document entered into in connection herewith. The authority granted hereunder is deemed to be coupled with an interest. For purposes of clarity, the adoption of this Agreement by the Sellers constitutes approval of the appointment of DFB to serve as the Sellers’ representative on such indemnification matters and to have sole power with respect to the authorization of disbursements of funds from the Escrow Amounts to Buyer.

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          11.11 [***].

     The [***] hereby [***] to the [***] the [***] of its [***] pursuant to the terms, and subject to the limitations, set forth in this Article 11. The [***] hereby [***] of [***] of any [***], any [***], [***] whatsoever in connection with the [***] set forth in this Section 11.11. This [***] shall continue in full force and effect until [***] with respect to any [***] that are [***] herewith prior to the [***] of the [***] have been [***], at which time this [***] shall automatically expire and terminate. The [***] hereby covenant and agree with the [***] that the [***] shall at all times prior to the [***] of the [***], maintain, in the aggregate, a [***] of not less than $[***]. [***] shall mean [***]; provided, however, that at any time after the [***] of the [***], the [***] shall have the [***], by giving written notice thereof to the [***], to [***] one or more [***] as [***] hereunder if such [***] (i) satisfy the [***] set forth in the [***] as of the date of such [***] and (ii) execute and deliver to the [***] a written [***] in the form of this Section 11.11. Upon any such [***] of [***] pursuant to the preceding sentence, the [***] given by the [***] so [***] shall be [***] and of [***] or [***].

ARTICLE 12
GENERAL PROVISIONS

          12.1 Public Announcements.

     The initial press release relating to the transactions contemplated by this Agreement shall be a joint press release, the text of which has been agreed to by the Sellers and Buyer.

          12.2 Notices.

     All notices, consents, waivers and other communications under this Agreement must be in writing and shall be deemed to have been duly given when: (a) delivered by hand (with written confirmation of receipt), or (b) when received by the addressee, if sent by a delivery service (prepaid, receipt requested) or (c) when received by the addressee, if sent by registered or certified mail (postage prepaid, return receipt requested), in each case to the appropriate addresses set forth below (or to such other addresses, representative and telecopier numbers as a Party may designate by notice to the other Parties):

(i) If to Buyer or Newco:

Valeant Pharmaceuticals International
One Enterprise
Aliso Viejo, CA 92656
Attention:                     
Facsimile:                     

***Confidential Treatment Requested***

65

***Text Omitted and Filed Separately with the Securities and Exchange
Commission. Confidential Treatment Requested Under
17 C.F.R. Sections 200.80(b)(4) and 240.24b-2

with a copy (which shall not constitute notice) to:

                                                            
                                                            
                                                            
Attention:                     
Facsimile:                     

(ii) If to the Stockholder Representative:

DFB Pharmaceuticals, Inc.
3909 Hulen St.
Fort Worth, Texas 76107
Attention: H. Paul Dorman
Facsimile: (817) 900-4101

with a copy (which shall not constitute notice) to:

Mark A. Mitchell
Vice President and General Counsel
DFB Pharmaceuticals, Inc.
318 McCullough
San Antonio, Texas 78215
Facsimile: (210) 227-6132

(iii) If to any other Seller:

To the address for such Seller set forth on Exhibit A

with a copy (which shall not constitute notice) to:

Mark A. Mitchell
Vice President and General Counsel
DFB Pharmaceuticals, Inc.
318 McCullough
San Antonio, Texas 78215
Facsimile: (210) 227-6132

          12.3 Waiver.

     Except as explicitly provided in this Agreement (including Section 11.2 and Section 11.3), the rights and remedies of the Parties under this Agreement are cumulative and not alternative and are not exclusive of any right or remedies that any Party may otherwise have at law or in equity. Except as set forth in Article 11, neither the failure nor any delay by any Party in exercising any right, power, or privilege under this Agreement or the documents referred to in this Agreement shall operate as a waiver of such right, power or privilege, and no single or partial exercise of any such right, power, or privilege shall preclude any other or further exercise of such right, power, or

66

***Text Omitted and Filed Separately with the Securities and Exchange
Commission. Confidential Treatment Requested Under
17 C.F.R. Sections 200.80(b)(4) and 240.24b-2

privilege or the exercise of any other right, power, or privilege. To the maximum extent permitted by applicable law, (a) no waiver that may be given by a Party shall be applicable except in the specific instance for which it is given; and (b) no notice to or demand on one Party shall be deemed to be a waiver of any right of the Party giving such notice or demand to take further action without notice or demand.

          12.4 Entire Agreement; Amendment.

     This Agreement (including the Disclosure Schedules and the Exhibits hereto) and the other Transaction Documents supersede all prior agreements between the Parties with respect to its subject matter and constitute (along with the Non-Disclosure Agreement) a complete and exclusive statement of the terms of the agreements between the Parties with respect to their subject matter. This Agreement may not be amended except by a written agreement executed by all of the Parties hereto.

          12.5 Assignments.

     This Agreement, and the rights, interests and obligations hereunder, shall not be assigned by any Party hereto, by operation of law or otherwise, without the express written consent of each other Party (which consent may be granted or withheld in the sole discretion of each such other Party).

          12.6 Severability.

     If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any Legal Requirement or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any Party in any material respect. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the Parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the Parties as closely as possible in a mutually acceptable manner in order that the transactions contemplated hereby be consummated as originally contemplated to the greatest extent possible.

          12.7 Section Headings; Construction.

     The headings of Sections in this Agreement are provided for convenience only and shall not affect its construction or interpretation. All references to “Article,” “Section” or “Sections” refer to the corresponding Article, Section or Sections of this Agreement. All words used in this Agreement shall be construed to be of such gender or number as the circumstances require. Unless otherwise expressly provided, the word “including” does not limit the preceding words or terms. The Exhibits attached hereto and the Disclosure Schedules referred to herein and attached hereto are hereby incorporated herein and made a part hereof as if fully set forth herein.

          12.8 Governing Law; Consent to Jurisdiction and Venue; Jury Trial Waiver.

     (a) This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware applicable to contracts executed in and to be performed in that State.

67

***Text Omitted and Filed Separately with the Securities and Exchange
Commission. Confidential Treatment Requested Under
17 C.F.R. Sections 200.80(b)(4) and 240.24b-2

     (b) All actions and proceedings arising out of or relating to this Agreement, including any actions for specific performance or other equitable relief, shall be heard and determined in a state or federal court sitting in Fort Worth, Texas, and the Parties to this Agreement hereby irrevocably submit to the exclusive jurisdiction of such courts in any such action or proceeding and irrevocably waive the defense of an inconvenient forum to the maintenance of any such action or proceeding. The Parties hereto hereby consent to service of process by mail (in accordance with Section 12.2) or any other manner permitted by law.

     (c) THE PARTIES HEREBY IRREVOCABLY WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED IN CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE ACTIONS OF THE SELLERS, BUYER OR THEIR RESPECTIVE REPRESENTATIVES IN THE NEGOTIATION OR PERFORMANCE HEREOF.

          12.9 Counterparts.

     This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original of this Agreement and all of which, when taken together, shall be deemed to constitute one and the same agreement. Delivery of an executed counterpart of a signature page to this Agreement by electronic or facsimile transmission shall be effective as delivery of a manually executed counterpart of this Agreement.

          12.10 Time of Essence.

     Time is of the essence in this Agreement.

          12.11 No Third Party Beneficiaries.

     This Agreement is for the sole benefit of the Parties hereto and nothing herein, express or implied, is intended to or shall confer upon any other Person any legal or equitable benefit, claim, cause of action, remedy or right of any kind.

          12.12 Expenses.

     All expenses of the preparation, negotiation and execution of this Agreement and the consummation of the transactions contemplated hereby, including, without limitation, attorneys’, accountants’ and outside advisers’ fees and disbursements, shall be borne by the Party incurring such expenses. Without limiting the foregoing, (a) Buyer shall pay all of the Buyer’s Transaction Expenses and (b) the Sellers shall pay all of the Company’s Transaction Expenses.

(Signatures Appear on Next Page)

68

***Text Omitted and Filed Separately with the Securities and Exchange
Commission. Confidential Treatment Requested Under
17 C.F.R. Sections 200.80(b)(4) and 240.24b-2

     In Witness Whereof, the Parties have caused this Agreement and Plan of Merger to be executed and delivered as of the Effective Date.

COMPANY:		BUYER:
Coria Laboratories, Ltd.		Valeant Pharmaceuticals International
By:	/s/ H. Paul Dorman	By:	/s/ J. Michael Pearson
Name:	H. Paul Dorman	Name:	J. Michael Pearson
Title:	Chairman and CEO	Title:	Chairman and CEO
SELLERS:		NEWCO:
DFB Pharmaceuticals, Inc.		CL Acquisition Corp.
By:	/s/ H. Paul Dorman	By:	/s/ Robert Chai-Onn
Name:	H. Paul Dorman	Name:	Robert Chai-Onn
Title:	Chairman and CEO	Title:	Vice President, Assistant General Counsel
H. Paul Dorman		[...***...]
/s/ H. Paul Dorman		[...***...]
John W. Feik		By:	[...***...]
		Name:	[...***...]
/s/ John W. Feik		Title:	[...***...]
Anne Burnett Windfohr
/s/ Anne Burnett Windfohr
John L. Marion
/s/ John L. Marion
John W. Mason
/s/ John W. Mason

***Text Omitted and Filed Separately with the Securities and Exchange
Commission. Confidential Treatment Requested Under
17 C.F.R. Sections 200.80(b)(4) and 240.24b-2

Schedule I

Allocation of Product Returns for Specified Lot Numbers

See Attached

***Text Omitted and Filed Separately with the Securities and Exchange
Commission. Confidential Treatment Requested Under
17 C.F.R. Sections 200.80(b)(4) and 240.24b-2

Exhibit A

Ownership of Company Common

See Attached

***Text Omitted and Filed Separately with the Securities and Exchange
Commission. Confidential Treatment Requested Under
17 C.F.R. Sections 200.80(b)(4) and 240.24b-2

Exhibit B

Working Capital Methodology

The parties acknowledge and agree that because DFB has agreed pursuant to Section 9.9 of the Agreement to pay all amounts arising through the Closing Date with respect to Company employee bonuses, 401(k) matching payments and self-insured medical claims, all such amounts shall have a value of zero in the calculation of Adjusted Net Working Capital as part of the working capital adjustment pursuant to Section 2.5.

The Reserve for Returns account will be fixed at $[...***...] for purposes of calculating Adjusted Net Working Capital and in the Final Closing Balance Sheet.

***Confidential Treatment Requested***

***Text Omitted and Filed Separately with the Securities and Exchange
Commission. Confidential Treatment Requested Under
17 C.F.R. Sections 200.80(b)(4) and 240.24b-2

Exhibit C

Form of Transition Services Agreement

See Attached

***Text Omitted and Filed Separately with the Securities and Exchange
Commission. Confidential Treatment Requested Under
17 C.F.R. Sections 200.80(b)(4) and 240.24b-2

Exhibit D

Form of Amended and Restated Manufacturing Agreement

See Attached

***Text Omitted and Filed Separately with the Securities and Exchange
Commission. Confidential Treatment Requested Under
17 C.F.R. Sections 200.80(b)(4) and 240.24b-2

Exhibit E

Form of Assignment of Claims

See Attached

***Text Omitted and Filed Separately with the Securities and Exchange
Commission. Confidential Treatment Requested Under
17 C.F.R. Sections 200.80(b)(4) and 240.24b-2

Exhibit F

Form of Product Development Agreement

See Attached

EX-10.7

Exhibit 10.7

AMENDMENT TO AGREEMENT AND PLAN OF MERGER

     This Amendment (the “Amendment”), dated as of October 15, 2008, amends that certain Agreement and Plan of Merger (the “Merger Agreement”) by and among Coria Laboratories, Ltd., a Delaware corporation (the “Company”), its stockholders (i) DFB Pharmaceuticals, Inc., a Texas corporation, (ii) H. Paul Dorman, (iii) John W. Feik, (iv) Anne Burnett Windfohr, (v) John L. Marion and (vi) John W. Mason (collectively, the “Sellers”), Valeant Pharmaceuticals International, a Delaware corporation (“Buyer”), and CL Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of Buyer (“Newco”). All capitalized terms used in this Amendment but not otherwise defined herein shall have the respective meanings ascribed to such terms in the Merger Agreement.

     WHEREAS, pursuant to Section 12.4 of the Merger Agreement, the parties to the Merger Agreement desire that the Merger Agreement be amended.

     NOW, THEREFORE, in consideration of the foregoing and the promises and covenants contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged and intending to be legally bound hereby, the undersigned hereby agree as follows:

     1. Amendment.

          A. Until such time as the parties shall negotiate and execute an Amended and Restated Facility Lease, the term “Amended and Restated Facility Lease” as used throughout the Merger Agreement shall mean that certain Lease Term Sheet, dated October 15, 2008, by and between the Company and Healthpoint, Ltd.

          B. Section 9.8 of the Merger Agreement is hereby deleted in its entirety and replaced with the following:

          “Intentionally Deleted.”

     2. Consent to Assignment. The parties hereto agree that the Successor Corporations may assign to Valeant Pharmaceuticals North America, or any of its other affiliates, any and all of its rights under the Transaction Documents.

     3. Governing Law. This Amendment shall be governed by and construed in accordance with the internal laws of the State of Delaware without regard to the laws of such jurisdiction that would require the substantive laws of another jurisdiction to apply.

     4. Full Force and Effect. Except as amended hereby, the Merger Agreement shall remain in full force and effect.

     5. Counterparts. This Amendment may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument, it being understood that the parties need not sign the same counterpart and a facsimile signature shall be valid.

     6. Headings. Headings in this Amendment are included for reference only and shall have no effect upon the construction or interpretation of any part of this Amendment.

     IN WITNESS WHEREOF, the undersigned have executed this Amendment to the Merger Agreement as of the date first above written.

COMPANY:		BUYER:
CORIA LABORATORIES, LTD.		VALEANT PHARMACEUTICALS
		INTERNATIONAL
By:	/s/ Mark A. Mitchell	By:	/s/ Steve T. Min
Name:	Mark A. Mitchell	Name:	Steve T. Min
Title:	Vice President & General Counsel	Title:	Executive Vice President and General Counsel
SELLERS:		NEWCO:
DFB PHARMACEUTICALS, INC.		CL ACQUISITION CORP.
By:	/s/ Mark A. Mitchell	By:	/s/ Steve T. Min
Name:	Mark A. Mitchell	Name:	Steve T. Min
Title:	Vice President & General Counsel	Title:	Executive Vice President and General Counsel
H. Paul Dorman		John W. Mason
/s/ H. Paul Dorman		/s/ John W. Mason
John W. Feik		John L. Marion
/s/ John W. Feik		/s/ John L. Marion
Anne Burnett Windfohr
/s/ Anne Burnett Windfohr

Signature Page to Amendment to Agreement and Plan of Merger

EX-15.1

Exhibit 15.1

Report of Independent Registered Public Accounting Firm

To the Board of Directors and

Stockholders of Valeant Pharmaceuticals International:

We have reviewed the accompanying consolidated condensed balance sheet of Valeant Pharmaceuticals International and its subsidiaries as of September 30, 2008, and the related consolidated condensed statements of operations, the consolidated condensed statements of comprehensive income for each of the three-month and nine-month periods ended September 30, 2008 and 2007 and the consolidated condensed statements of cash flows for the nine-month periods ended September 30, 2008 and 2007. These interim financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated condensed interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2007, and the related consolidated statements of operations, of stockholders’ equity, and of cash flows for the year then ended (not presented herein), and in our report dated March 17, 2008 we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated condensed balance sheet as of December 31, 2007, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.

PricewaterhouseCoopers LLP

Orange County, California

November 7, 2008

EX-15.2

Exhibit 15.2

November 7, 2008

Securities and Exchange Commission

100 F Street, N.E.

Washington, D.C. 20549

Commissioners:

We are aware that our report dated November 7, 2008 on our review of interim financial information of Valeant Pharmaceuticals International (the “Company”) for the three-month and nine-month periods ended September 30, 2008 and 2007 and included in the Company’s quarterly report on Form 10-Q for the quarter ended September 30, 2008 is incorporated by reference in its Registration Statements on Form S-3 (File No. 333-112904) and Form S-8 (No. 33-56971, 333-81383, 333-73098, 333-85572, 333-109877, 333-109879 and 333-142651).

Very truly yours,

PricewaterhouseCoopers LLP

EX-31.1

Exhibit 31.1

CERTIFICATION

I, J. Michael Pearson, Chief Executive Officer, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Valeant Pharmaceuticals International;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in the Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision to provide reasonable assurance regarding the reliability of financial reporting and preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/  J. Michael Pearson

J. Michael Pearson

Chairman and Chief Executive Officer

Date: November 7, 2008

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Peter J. Blott, Chief Financial Officer, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Valeant Pharmaceuticals International;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in the Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision to provide reasonable assurance regarding the reliability of financial reporting and preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/  Peter J. Blott

Peter J. Blott

Executive Vice President and

Chief Financial Officer

Date: November 7, 2008

EX-32.1

Exhibit 32.1

Certification pursuant to 18 U.S.C. Section 1350,
As adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Pursuant to 18 U.S.C. Section 1350, each of the undersigned officers of Valeant Pharmaceuticals International hereby certifies, to the best of such officer’s knowledge, that:

1. The Registrant’s quarterly report on Form 10-Q for the quarter ended September 30, 2008 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Registrant as of and for the periods presented in the Report.

/s/  J. Michael Pearson

J. Michael Pearson

Chairman and Chief Executive Officer

Date: November 7, 2008

/s/  Peter J. Blott

Peter J. Blott

Executive Vice President and Chief

Financial Officer

Date: November 7, 2008

A signed original of this written statement required by Section 906 has been provided to Valeant Pharmaceuticals International and will be furnished to the Securities and Exchange Commission or its staff upon request.