Allergan, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

Standards No. 123 until the effective date of SFAS No. 123R, regarding pro forma net earnings and basic and diluted earnings per share, had compensation expense for the Company’s stock options been recognized based upon the fair value for awards granted.

3.

Acceleration of Vesting of Premium Priced Stock Options

     On July 30, 2001, the Company granted non-qualified stock options to purchase up to 2,500,000 shares of its common stock to participants, including the Company’s executive officers, under the Allergan, Inc. 2001 Premium Priced Stock Option Plan. Each option was issued with three tranches:

	•		The first tranche has an exercise price equal to $88.55;
	•		The second tranche has an exercise price equal to $106.26; and
	•		The third tranche has an exercise price equal to $127.51.

The 2001 Premium Priced Stock Option Plan provided that each tranche of an option would vest and become exercisable upon the earlier of (i) the date on which the fair value of a share of the Company’s common stock equals or exceeds the applicable exercise price or (ii) five years from the grant date (July 30, 2006). The options expire six years from the grant date (July 30, 2007). The first tranche of the options vested and became exercisable on March 1, 2004 as a result of the fair value of the Company’s common stock exceeding $88.55.

In response to FAS No. 123R, on April 25, 2005, the Organization and Compensation Committee of the Company’s Board of Directors approved an acceleration of the vesting of the options issued under the Allergan, Inc. 2001 Premium Priced Stock Option Plan that are held by the Company’s current employees, including the Company’s executive officers, and certain former employees of the Company who received grants while employees prior to the June 2002 spin-off of Advanced Medical Optics, Inc. (AMO). The former employees of the Company are current employees of AMO. As a result of the acceleration, the second tranche and third tranche of each option became immediately vested and exercisable effective as of May 10, 2005. Unlike typical stock options that vest over a predetermined period, the options, pursuant to their original terms, automatically vest as soon as they are in the money. Consequently, as soon as the options have any value to the participant, they would vest according to their original terms. Therefore, early vesting does not provide any immediate benefit to participants, including the Company’s executive officers.

The acceleration of the options eliminated future compensation expense that the Company would otherwise recognize in its income statement with respect to the vesting of such options following the effectiveness of FAS No. 123R. The future expense that was eliminated is approximately $1.0 million, net of tax (of which approximately $0.1 million, net of tax, is attributable to options held by executive officers). This amount, plus an additional $0.8 million, net of tax, representing the total pro forma amount for the combined third and fourth fiscal quarters of 2005 that otherwise would have been included in that quarter’s pro forma earnings disclosures, was reflected in the Company’s pro forma footnote disclosure for the three months ended June 24, 2005. This treatment is permitted under the transition guidance provided by FAS No. 123R.

4.

Restructuring Charges and Transition/Duplicate Operating Expenses

     Restructuring and Streamlining of European Operations

Effective January 2005, the Company’s Board of Directors approved the initiation and implementation of a restructuring of certain activities related to the Company’s European operations. The restructuring seeks to optimize operations, improve resource allocation and create a scalable, lower cost and more efficient operating model for the Company’s European research and development (R&D) and commercial activities. Specifically, the restructuring anticipates moving key European R&D and select commercial functions from the Company’s Mougins, France and

Allergan, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

other European locations to the Company’s Irvine, California, High Wycombe, U.K. and Dublin, Ireland facilities and streamlining functions in the Company’s European management services group.

Under applicable law, the proposed restructuring requires consultations and, in certain cases, negotiations with European and national works councils, other management/labor organizations and local authorities, which the Company substantially completed by the end of its second fiscal quarter 2005.

The Company has incurred and anticipates that it will continue to incur restructuring charges and charges relating to severance, relocation and one-time termination benefits, payments to public employment and training programs, implementation, transition, capital and other asset-related expenses, duplicate operating expenses and contract termination costs in connection with the restructuring. The Company currently estimates that the pre-tax charges resulting from the restructuring, including transition and duplicate operating expenses, will be between $40 million and $53 million and capital expenditures will be between $5 million and $7 million. The Company began to incur these amounts beginning in the first quarter of 2005 and expects to continue to incur them up through and including the second quarter of 2006. Of the total amount of pre-tax charges and capital expenditures, approximately $45 million to $58 million are expected to be cash expenditures.

The foregoing estimates are based on assumptions relating to, among other things, a reduction of approximately 160 positions, principally R&D and selling, general and administrative positions in the affected European locations. These workforce reduction activities began in the first quarter of 2005 and are expected to be substantially completed by the close of the second quarter of 2006. Charges associated with the workforce reduction, including severance, relocation and one-time termination benefits, and payments to public employment and training programs, are currently expected to total approximately $28 million to $33 million. The Company began to incur these charges in the first quarter of 2005 and expects to continue to incur them up through and including the second quarter of 2006. Certain severance costs included in the estimates totaling approximately $2 million to $3 million for a limited number of personnel are dependent upon the employees’ future decision to continue employment after specific contractual work assignments end between 2006 and 2007. These contingent contractual severance costs will be recorded in the period when the Company determines that they become probable.

Estimated costs also include approximately $2 million to $7 million for contract and lease termination costs and asset write-offs (primarily for accelerated amortization related to leasehold improvements in facilities to be exited). These costs are currently expected to be recorded beginning in the fourth quarter of 2005 and to be completed by the close of the second quarter of 2006.

Estimated implementation and transition related expenses include, among other things, legal, consulting, recruiting, information system implementation costs and taxes. These costs are currently expected to total approximately $9 million to $11 million. The Company began to record these costs in the first quarter of 2005 and they are expected to continue up through and including the second quarter of 2006. The Company also expects to incur duplicate operating expenses during the transition period to ensure that job knowledge and skills are properly transferred to new employees. These duplicate operating expenses are currently expected to total between $1 million and $2 million. The Company began to record these costs in the first quarter of 2005 and they are expected to continue up through and including the first quarter of 2006.

The Company also expects to incur additional capital expenditures for leasehold improvements (primarily at a new facility in the United Kingdom to accommodate increased headcount). These capital expenditures are currently estimated to be between approximately $5 million and $7 million. The Company began to record these costs in the third quarter of 2005 and they are expected to continue up through and including the second quarter of 2006.

During the first nine months of 2005, the Company recorded pre-tax restructuring charges of $24.5 million related to the restructuring of the Company’s European operations. The restructuring charges primarily consist of employee

Allergan, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

severance, employee relocation and other costs. The following table presents the cumulative restructuring activities through September 30, 2005:

(in millions)		Employee				Other
		Severance				Costs				Total
Net charge during 2005		$	22.8			$	1.7			$	24.5
Spending			(7.1	)			(1.7	)			(8.8	)
Balance at September 30, 2005 (included in accrued expenses)		$	15.7			$	—			$	15.7

Employee severance in the preceding table relates to 159 employees, of which 44 were severed as of September 30, 2005. Employee severance charges were based on social plans in France and Italy, and the Company’s severance practices for employees in the other affected European countries. During the first nine months of 2005, the Company also recorded $3.1 million of transition/duplicate operating expenses associated with the European restructuring activities. Transition/duplicate operating expenses consisted primarily of salaries, travel, communications, recruitment and consulting costs. Transition/duplicate operating expenses of $0.1 million in cost of sales, $2.0 million in selling, general and administrative expenses and $1.0 million in research and development expenses have been included in the unaudited condensed consolidated statements of earnings for the nine months ended September 30, 2005.

     Termination of Manufacturing and Supply Agreement with Advanced Medical Optics

In October 2004, the Company’s Board of Directors approved certain restructuring activities related to the scheduled termination in June 2005 of the Company’s manufacturing and supply agreement with AMO. Under the manufacturing and supply agreement, which was entered into in connection with the AMO spin-off, the Company agreed to manufacture certain contact lens care products and VITRAX, a surgical viscoelastic, for AMO for a period of up to three years ending in June 2005. As part of the termination of the manufacturing and supply agreement, the Company eliminated certain manufacturing positions at the Company’s Westport, Ireland; Waco, Texas; and Guarulhos, Brazil manufacturing facilities.

The Company currently anticipates that the pre-tax restructuring charges to be incurred in connection with the termination of the manufacturing and supply agreement will total between approximately $22 million and $26 million. The Company began recording these charges in the fourth quarter of 2004 and expects to continue recording them up through and including the third quarter of 2006. Restructuring charges during 2006 primarily relate to the refurbishment of facilities previously used for contract manufacturing. The pre-tax charges are net of expected tax credits available under qualifying government-sponsored employment programs. Approximately $21 million of the restructuring charges are expected to be cash charges. The restructuring charges are expected to include approximately $18 million to $20 million associated with the reduction in the Company’s workforce of approximately 350 individuals. The workforce reduction, which began in the fourth quarter of 2004 and was substantially completed in the second quarter of 2005, impacted personnel in Europe, the United States and Latin America. The restructuring costs are also expected to include approximately $4 million to $6 million of other costs associated with the termination of the manufacturing and supply agreement.

As of September 30, 2005, the Company recorded cumulative pre-tax restructuring charges of $22.0 million related to the termination of the manufacturing and supply agreement. These charges primarily include accruals for net statutory severance costs and the ratable recognition of termination benefits to be earned by employees who are required to render service until they are terminated in order to receive the termination benefits. Cumulative charges for employees involuntarily and voluntarily terminated in the table below relate to 343 employees, of which 312 were severed as of September 30, 2005. Included in other costs within the table below is $0.3 million of inventory write-offs that have been recorded as a component of “Cost of sales” in the unaudited condensed consolidated statements of earnings.

Allergan, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

The following table presents the cumulative restructuring activities through September 30, 2005 resulting from the scheduled termination of the Company’s manufacturing and supply agreement with AMO in June 2005:

		Charges for Employees
(in millions)		Involuntarily and				Other
		Voluntarily Terminated				Costs				Total
Net charge during 2004		$	7.1			$	—			$	7.1
Spending			(0.1	)			—				(0.1	)
Balance at December 31, 2004			7.0				—				7.0
Net charge during 2005			12.3				2.6				14.9
Assets written off			—				(2.3	)			(2.3	)
Spending (net of employment tax credits received)			(17.7	)			(0.3	)			(18.0	)
Balance at September 30, 2005		$	1.6			$	—			$	1.6

The remaining balance at September 30, 2005 is comprised of accrued statutory severance and one-time termination benefits of $2.3 million (included in accrued expenses), less expected employment program tax credits receivable of $0.7 million (included in other current assets).

During the three months ended September 30, 2005, the Company reduced by $1.5 million the remaining balance of other accrued costs associated with restructuring costs and asset write-offs previously recorded in connection with the spin-off of AMO in 2002. This reduction in other accrued costs was included in the Restructuring charge (reversal) for the three and nine months ended September 30, 2005. At September 30, 2005, the remaining balance for other accrued costs associated with the 2002 spin-off of AMO was $1.3 million.

5.

Intangibles and Goodwill

     At September 30, 2005 and December 31, 2004, the components of amortizable and unamortizable intangibles and goodwill and certain other related information were as follows:

Intangibles		September 30, 2005												December 31, 2004
										Weighted												Weighted
										Average												Average
										Amortization												Amortization
		Gross				Accumulated				Period				Gross				Accumulated				Period
		Amount				Amortization				(in years)				Amount				Amortization				(in years)
		(in millions)												(in millions)
Amortizable Intangible
Assets:
Licensing		$	137.8			$	(21.1	)			8.0			$	38.5			$	(10.6	)			7.9
Trademarks			3.6				(2.3	)			15.0				3.5				(1.9	)			15.0
Core Technology			29.4				(3.6	)			15.0				29.6				(2.2	)			15.0
Other			1.1				(0.9	)			5.0				1.0				(0.7	)			5.0
			171.9				(27.9	)			9.3				72.6				(15.4	)			11.1
Unamortizable Intangible
Assets:
Foreign business license			0.9				—								0.9				—
		$	172.8			$	(27.9	)						$	73.5			$	(15.4	)

Licensing assets consist primarily of capitalized payments to third party licensors related to the achievement of regulatory approvals to commercialize products in specified markets and up-front payments associated with royalty obligations for products that have achieved regulatory approval for marketing. The increase in licensing assets at September 30, 2005 compared to December 31, 2004 primarily relates to an up-front payment associated with a royalty buy-out agreement relating to Restasis®, the Company’s drug for the treatment of chronic dry eye disease.

Allergan, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

Core technology consists of a drug delivery technology acquired in connection with the acquisition of Oculex Pharmaceuticals, Inc. in 2003.

Aggregate amortization expense for amortizable intangible assets was $5.2 million and $2.1 million for the fiscal quarters ended September 30, 2005 and September 24, 2004, respectively, and $12.3 million and $6.2 million for the nine months ended September 30, 2005 and September 24, 2004, respectively. Amortization expense related to licensing assets and core technology is primarily included in cost of sales and research and development expenses, respectively.

Estimated amortization expense is $17.5 million for 2005, $20.3 million for 2006, $19.2 million for 2007, $17.4 million for 2008, $16.8 million for 2009 and $16.7 million for 2010.

Goodwill

(in millions)		September 30,				December 31,
		2005				2004
Goodwill:
United States		$	4.6			$	4.6
Latin America			3.8				3.2
Europe and Other			0.8				0.9
		$	9.2			$	8.7

The changes in goodwill balances are the result of foreign currency translation.

6.

Inventories

     Components of inventories were:

(in millions)		September 30,				December 31,
		2005				2004
Finished goods		$	54.3			$	50.5
Work in process			22.0				23.2
Raw materials			14.2				16.2
Total		$	90.5			$	89.9

7.

Income Taxes

     Income taxes are determined using an estimated annual effective tax rate, which is generally less than the U.S. Federal statutory rate, primarily because of lower tax rates in certain non-U.S. jurisdictions and research and development (R&D) tax credits available in the United States. The Company recognizes deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities, along with net operating loss and credit carryforwards. The Company records a valuation allowance against its deferred tax assets to reduce the net carrying value to an amount that it believes is more likely than not to be realized. When the Company establishes or reduces the valuation allowance against its deferred tax assets, its income tax expense will increase or decrease, respectively, in the period such determination is made.

Valuation allowances against the Company’s deferred tax assets were $55.9 million and $51.9 million at September 30, 2005 and December 31, 2004, respectively. Material differences may result in an increase or decrease in the provision for income taxes if the actual amounts for valuation allowances required against deferred tax assets differ from the amounts estimated by management.

Allergan, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

The Company has not provided for withholding and U.S. taxes for the unremitted earnings of certain non-U.S. subsidiaries because the Company has reinvested or expects to reinvest these earnings indefinitely in such operations. In connection with the American Jobs Creation Act of 2004 (the Act), the Company determined during its second fiscal quarter of 2005 that it had sufficient information to make an informed decision regarding the repatriation of certain foreign earnings that were previously considered to be permanently reinvested. Based on that decision, the Company recorded a $32.8 million tax liability associated with the Company’s decision to repatriate $674.0 million in extraordinary dividends, as defined by the Act, from unremitted foreign earnings that were previously considered permanently reinvested by certain non-U.S. subsidiaries. The $674.0 million amount of extraordinary dividends is the qualified amount above a $53.4 million base amount determined based on the Company’s historical repatriation levels, as defined by the Act. The tax effect of the base amount of dividends is included in the Company’s estimated annual effective tax rate. The Company also decided to repatriate approximately $85.8 million in additional dividends above the base and extraordinary dividend amounts from prior and current years’ unremitted foreign earnings that were previously considered indefinitely reinvested and recorded a corresponding tax liability of $27.6 million in the second quarter of 2005. During the three months ended September 30, 2005, the Company repatriated $759.8 million in extraordinary dividends and additional dividends above the base and extraordinary dividend amounts and reduced the estimated income tax liability related to the additional dividends above the base and extraordinary dividend amounts by $6.2 million to $21.4 million. This reduction in the estimated income tax liability related to the additional dividends represents a change in estimate based upon the actual repatriation that occurred during the third quarter of 2005.

During the three months ended September 30, 2005, the Company reduced its reserves for uncertain tax positions and related provision for income taxes by $19.5 million, primarily due to a change in estimate resulting from the resolution of several significant uncertain income tax audit issues, including transfer prices, the deductibility of transaction costs associated with the 2002 spin-off of AMO and intangible asset issues related to certain assets of Bardeen Sciences Company, LLC, which we acquired in 2003. This change in estimate relates to tax years currently under examination or not yet settled through expiry of the statute of limitations.

8.

Employee Retirement and Other Benefit Plans

     The Company sponsors various qualified defined benefit pension plans covering a substantial portion of its employees. In addition, the Company sponsors two supplemental nonqualified plans covering certain management employees and officers and one retiree health plan covering United States retirees and dependents.

Components of net periodic benefit cost for the three and nine month periods ended September 30, 2005 and September 24, 2004, respectively, were as follows:

		Three months ended
										Other
										Postretirement
(in millions)		Pension Benefits								Benefits
		September 30,				September 24,				September 30,				September 24,
		2005				2004				2005				2004
Service cost		$	4.3			$	3.8			$	0.3			$	0.2
Interest cost			6.2				5.9				0.3				0.3
Expected return on plan assets			(6.7	)			(6.8	)			—				—
Amortization of prior service cost			—				—				—				(0.1	)
Recognized net actuarial loss			2.4				1.9				—				—
Net periodic benefit cost		$	6.2			$	4.8			$	0.6			$	0.4

Allergan, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

		Nine months ended
										Other
										Postretirement
(in millions)		Pension Benefits								Benefits
		September 30,				September 24,				September 30,				September 24,
		2005				2004				2005				2004
Service cost		$	13.4			$	8.5			$	1.1			$	1.0
Interest cost			18.8				11.8				1.0				0.9
Expected return on plan assets			(20.7	)			(13.8	)			—				—
Amortization of prior service cost			—				0.1				(0.1	)			(0.2	)
Recognized net actuarial loss			7.3				3.7				—				—
Net periodic benefit cost		$	18.8			$	10.3			$	2.0			$	1.7

In 2005, the Company currently expects to pay contributions in the range of $46.4 million and $48.4 million to its U.S. and non-U.S. pension plans and between $0.6 million and $0.7 million to its other postretirement plan.

9.

Litigation

     The Company is involved in various lawsuits and claims arising in the ordinary course of business. The Company follows the provisions of Statement of Financial Accounting Standards No. 5 Accounting for Contingencies (SFAS No. 5). SFAS No. 5 requires that an estimated loss from a loss contingency should be accrued for by a charge to income if it is both probable that an asset has been impaired or that a liability has been incurred and the amount of the loss can be reasonably estimated.

On June 6, 2001, after receiving paragraph 4 invalidity and noninfringement Hatch-Waxman Act certifications from Apotex indicating that Apotex had filed an Abbreviated New Drug Application with the FDA for a generic form of Acular®, the Company and Roche Palo Alto, LLC, formerly known as Syntex (U.S.A.) LLC, the holder of the Acular® patent, filed a lawsuit entitled “Syntex (U.S.A.) LLC and Allergan, Inc. v. Apotex, Inc., et al.” in the United States District Court for the Northern District of California. Following a trial, the court entered final judgment in the Company’s favor on January 27, 2004, holding that the patent at issue is valid, enforceable and infringed by Apotex’s proposed generic drug. On February 17, 2004, Apotex filed a Notice of Appeal with the United States Court of Appeals for the Federal Circuit. On May 18, 2005, the Court of Appeals for the Federal Circuit issued an opinion affirming the lower court’s ruling on inequitable conduct and claim construction and reversing and remanding the issue of obviousness. The court did not address the issue of infringement. On August 13, 2005, Apotex filed a motion to vacate the injunction pending resolution of the remand from the United States Court of Appeals for the Federal Circuit on the obviousness. On October 28, 2005, the court denied Apotex’s motion. On June 29, 2001, the Company filed a separate lawsuit in Canada against Apotex similarly relating to a generic version of Acular®. A mediation in the Canadian lawsuit was held on January 4, 2005 and a settlement conference previously scheduled for April 6, 2005 was originally continued to summer 2005. A new date for the summer 2005 status conference has not been set.

On June 2, 2003, a complaint entitled “Klein-Becker usa, LLC v. Allergan, Inc.” was filed in the United States District Court for the District of Utah — Central Division. The complaint, as later amended, contained claims against the Company for intentional interference with contractual and economic relations and unfair competition under federal and Utah law. The complaint sought declaratory and injunctive relief, based on allegations that the Company interfered with Klein-Becker’s contractual and economic relations by dissuading certain magazines from running Klein-Becker’s advertisements for its anti-wrinkle cream. On July 30, 2003, the Company filed a reply and counterclaims against Klein-Becker, asserting, as later amended, claims for false advertising, unfair competition under federal and Utah law, trade libel, trademark infringement and dilution, and seeking declaratory relief in connection with Klein-Becker’s advertisements for its anti-wrinkle cream that use the heading “Better than BOTOX®?” On July 31, 2003, the court denied Klein-Becker’s application for a temporary restraining order to

Allergan, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

restrain the Company from, among other things, contacting magazines regarding Klein-Becker’s advertisements. On October 7, 2003, the court granted in part and denied in part the Company’s motion to dismiss Klein-Becker’s complaint, dismissing Klein-Becker’s claims for unfair competition under federal and Utah law and its motion for injunctive relief. On August 14, 2004, the court denied in its entirety Klein-Becker’s motion to dismiss the Company’s claims. From July 2004 through December 2004, the case was voluntarily stayed while the parties explored settlement through mediation. The voluntary stay ended December 29, 2004, without the parties reaching settlement. On March 2, 2005, Klein-Becker filed a motion to amend the scheduling order and a motion for leave to amend the first amended complaint. On August 4, 2005, Klein-Becker filed a motion for partial summary judgment. On August 24, 2005, the court granted Klein-Becker’s motion to amend the scheduling order and Klein-Becker’s motion for leave to amend the first amended complaint. On September 16, 2005, Klein-Becker filed its second amended complaint asserting claims for cancellation of registered trademark, false advertising and unfair competition, intentional interference with potential and existing contractual relations, and declaratory relief. On October 7, 2005, the Company filed its response to the second amended complaint and a motion to dismiss certain claims in Klein-Becker’s second amended complaint. On October 25, 2005, the Company filed a motion for partial summary judgment and a motion for preliminary injunction. The hearing on Klein-Becker’s motion for partial summary judgment is set for December 19, 2005. Trial has been set for May 8, 2006.

On July 13, 2004, the Company received a paragraph 4 Hatch-Waxman Act certification from Alcon, Inc. indicating that Alcon had filed a New Drug Application with the FDA for a drug containing brimonidine tartrate ophthalmic solution in a 0.15% concentration. In the certification, Alcon contends that U.S. Patent Nos. 5,424,078; 6,562,873; 6,627,210; 6,641,834; and 6,673,337, all of which are assigned to the Company or its wholly-owned subsidiary, Allergan Sales, LLC, and are listed in the Orange Book under Alphagan® P, are invalid and/or not infringed by the proposed Alcon product. On August 24, 2004, the Company filed a complaint, entitled “Allergan, Inc., Allergan Sales, LLC v. Alcon, Inc., Alcon Laboratories, Inc., and Alcon Research, Ltd.”, against Alcon for patent infringement in the United States District Court for the District of Delaware. On September 3, 2004, Alcon filed an answer to the complaint and a counterclaim against the Company. On September 23, 2004, the Company filed a reply to Alcon’s counterclaim. On May 2, 2005, Alcon filed a Motion for Summary Judgment of Non-Infringement of U.S. Patent No. 6,673,337 and Invalidity of U.S. Patent No. 6,641,834. The court took the Motion for Summary Judgment under submission without oral argument. On July 25, 2005, Alcon filed a motion for leave to amend its answer to the complaint and counterclaim. On July 26, 2005, the court adopted the Company’s proposed claim construction. Trial is scheduled for March 6, 2006. Pursuant to the Hatch-Waxman Act, approval of Alcon’s generic New Drug Application is stayed until the earlier of (1) 30 months from the date of the paragraph 4 certification, or (2) a ruling in the patent infringement litigation in Alcon’s favor.

On August 26, 2004, a complaint entitled “Clayworth, et al. v. Allergan, Inc., et al.” was filed in the Superior Court of the State of California for the County of Alameda. The complaint, as amended, names the Company and 12 other defendants and alleges unfair business practices based upon a price fixing conspiracy in connection with the reimportation of pharmaceuticals from Canada. The complaint seeks damages, equitable relief, attorney's fees and costs. On November 22, 2004, the pharmaceutical defendants jointly filed a demurrer to the first amended complaint. On February 4, 2005, the court issued an order sustaining the pharmaceutical defendants’ demurrer and granting plaintiffs leave to further amend the first amended complaint. On February 22, 2005, the plaintiffs filed a second amended complaint to which the pharmaceutical defendants filed a demurrer. A hearing on the demurrer to the second amended complaint took place on April 8, 2005. On April 19, 2005, the court sustained the pharmaceutical defendants’ demurrer and granted the plaintiffs leave to further amend the second amended complaint. On May 6, 2005, the plaintiffs filed a third amended complaint. On May 27, 2005, the pharmaceutical defendants filed a demurrer. The hearing on the demurrer to the third amended complaint took place on June 30, 2005. On July 1, 2005, the court overruled in part and sustained without leave to amend in part the pharmaceutical defendants’ demurrer, dismissing the portion of plaintiffs’ third amended complaint alleging that the pharmaceutical defendants violated California’s Unfair Competition Law by charging plaintiffs more for pharmaceuticals than they charged others outside of the United States for the same pharmaceuticals. The court overruled the pharmaceutical defendants’ demurrer with respect to plaintiffs’ claim under the Cartwright Law that

Allergan, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

the pharmaceutical defendants conspired to maintain high, non-competitive prices for pharmaceuticals in the United States and sought to restrict the importation of lower-priced pharmaceuticals into the United States. The pharmaceutical defendants’ response to the third amended complaint was filed on July 15, 2005. Trial has been set for July 10, 2006.

On May 24, 2005, after receiving paragraph 4 invalidity and noninfringement Hatch-Waxman Act certifications from Apotex indicating that Apotex had filed an Abbreviated New Drug Application with the FDA for a generic form of Acular LS^®, the Company and Roche Palo Alto, LLC, formerly known as Syntex (U.S.A.) LLC, the holder of the Acular LS^® patent, filed a lawsuit entitled “Roche Palo Alto LLC, formerly known as Syntex (U.S.A.) LLC and Allergan, Inc. v. Apotex, Inc., et al.” in the United States District Court for the Northern District of California. In the complaint, the Company and Roche asked the court to find that the Acular LS^® patent is valid, enforceable and infringed by Apotex’s proposed generic drug. On July 25, 2005, Apotex filed an answer to the complaint and a counterclaim against the Company and Roche. On August 26, 2005, the Company filed its response to Apotex’s counterclaim. On August 30, 2005, the court ordered this case related to the action entitled “Syntex (U.S.A.) LLC and Allergan, Inc. v. Apotex, Inc., et al.” noted above.

The Company is involved in various other lawsuits and claims arising in the ordinary course of business. These other matters are, in the opinion of management, immaterial both individually and in the aggregate with respect to the Company’s consolidated financial position, liquidity or results of operations.

Because of the uncertainties related to the incurrence, amount and range of loss on any pending litigation, investigation or claim, management is currently unable to predict the ultimate outcome of any litigation, investigation or claim, determine whether a liability has been incurred or make a reasonable estimate of the liability that could result from an unfavorable outcome. The Company believes, however, that the liability, if any, resulting from the aggregate amount of uninsured damages for any outstanding litigation, investigation or claim will not have a material adverse effect on the Company’s consolidated financial position, liquidity or results of operations. However, an adverse ruling in a patent infringement lawsuit involving the Company could materially affect the Company’s ability to sell one or more of its products or could result in additional competition. In view of the unpredictable nature of such matters, the Company cannot provide any assurances regarding the outcome of any litigation, investigation or claim to which the Company is a party or the impact on the Company of an adverse ruling in such matters. As additional information becomes available, the Company will assess its potential liability and revise its estimates.

10.

Guarantees

     The Company’s Certificate of Incorporation, as amended, provides that the Company will indemnify, to the fullest extent permitted by the Delaware General Corporation Law, each person that is involved in or is, or is threatened to be, made a party to any action, suit or proceeding by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer of the Company or was serving at the request of the Company as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise. The Company has also entered into contractual indemnity agreements with each of its directors and executive officers, pursuant to which the Company has agreed to indemnify such directors and executive officers against any payments they are required to make as a result of a claim brought against such executive officer or director in such capacity, excluding claims (i) relating to the action or inaction of a director or executive officer that resulted in such director or executive officer gaining personal profit or advantage, (ii) for an accounting of profits made from the purchase or sale of securities of the Company within the meaning of Section 16(b) of the Securities Exchange Act of 1934 or similar provisions of any state law or (iii) that are based upon or arise out of such director’s or executive officer’s knowingly fraudulent, deliberately dishonest or willful misconduct. The maximum potential amount of future payments that the Company could be required to make under these indemnification provisions is unlimited. However, the Company has purchased directors’ and officers’ liability

Allergan, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

insurance policies intended to reduce the Company’s monetary exposure and to enable the Company to recover a portion of any future amounts paid. The Company has not previously paid any material amounts to defend lawsuits or settle claims as a result of these indemnification provisions. As a result, the Company believes the estimated fair value of these indemnification arrangements is minimal.

The Company customarily agrees in the ordinary course of its business to indemnification provisions in agreements with clinical trials investigators in its drug development programs, in sponsored research agreements with academic and not-for-profit institutions, in various comparable agreements involving parties performing services for the Company in the ordinary course of business, and in its real estate leases. The Company also customarily agrees to certain indemnification provisions in its drug discovery and development collaboration agreements. With respect to the Company’s clinical trials and sponsored research agreements, these indemnification provisions typically apply to any claim asserted against the investigator or the investigator’s institution relating to personal injury or property damage, violations of law or certain breaches of the Company’s contractual obligations arising out of the research or clinical testing of the Company’s compounds or drug candidates. With respect to real estate lease agreements, the indemnification provisions typically apply to claims asserted against the landlord relating to personal injury or property damage caused by the Company, to violations of law by the Company or to certain breaches of the Company’s contractual obligations. The indemnification provisions appearing in the Company’s collaboration agreements are similar, but in addition provide some limited indemnification for the collaborator in the event of third party claims alleging infringement of intellectual property rights. In each of the above cases, the term of these indemnification provisions generally survives the termination of the agreement. The maximum potential amount of future payments that the Company could be required to make under these provisions is generally unlimited. The Company has purchased insurance policies covering personal injury, property damage and general liability intended to reduce the Company’s exposure for indemnification and to enable the Company to recover a portion of any future amounts paid. The Company has not previously paid any material amounts to defend lawsuits or settle claims as a result of these indemnification provisions. As a result, the Company believes the estimated fair value of these indemnification arrangements is minimal.

Allergan, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

11.

Earnings Per Share

     The table below presents the computation of basic and diluted earnings per share:

		Three months ended								Nine months ended
		September 30,				September 24,				September 30,				September 24,
(in millions, except per share amounts)		2005				2004				2005				2004
Net earnings		$	150.5			$	92.0			$	263.8			$	264.6
Weighted average number of shares issued			131.0				131.5				130.8				131.3
Net shares assumed issued using the treasury stock method for options and non-vested equity shares and share units outstanding during each period based on average market price			2.1				0.7				1.5				1.7
Dilutive effect of assumed conversion of convertible notes outstanding			1.6				0.6				0.9				1.1
Diluted shares			134.7				132.8				133.2				134.1
Earnings per share:
Basic		$	1.15			$	0.70			$	2.02			$	2.02
Diluted		$	1.12			$	0.69			$	1.98			$	1.97

For the three and nine month periods ended September 30, 2005, options to purchase 1.3 million and 3.7 million shares of common stock at exercise prices ranging from $90.33 to $127.51 and $82.40 to $127.51 per share, respectively, were outstanding, but were not included in the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of common shares during the respective periods and, therefore, the effect would be anti-dilutive. For the three and nine month periods ended September 24, 2004, options to purchase 5.5 million and 2.2 million shares of common stock at exercise prices ranging from $76.51 to $127.51 per share and $83.79 to $127.51 per share, respectively, were outstanding, but were not included in the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of common shares during the respective periods and, therefore, the effect would be anti-dilutive.

12.

Comprehensive Income

     The following table summarizes components of comprehensive income for the three and nine month periods ended September 30, 2005, and September 24, 2004:

		Three months ended
(in millions)		September 30, 2005												September 24, 2004
						Tax												Tax
		Before-tax				(expense)				Net-of-tax				Before-tax				(expense)				Net-of-tax
		amount				or benefit				amount				amount				or benefit				amount
Foreign currency translation adjustments		$	3.2			$	—			$	3.2			$	3.8			$	—			$	3.8
Unrealized holding gains/(losses) arising during period			0.5				(0.4	)			0.1				0.2				—				0.2
Other comprehensive earnings (loss)		$	3.7			$	(0.4	)			3.3			$	4.0			$	—				4.0
Net earnings											150.5												92.0
Total comprehensive income										$	153.8											$	96.0

Allergan, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

		Nine months ended
(in millions)		September 30, 2005												September 24, 2004
						Tax												Tax
		Before-tax				(expense)				Net-of-tax				Before-tax				(expense)				Net-of-tax
		amount				or benefit				amount				amount				or benefit				amount
Foreign currency translation adjustments		$	(0.9	)		$	—			$	(0.9	)		$	(0.7	)		$	—			$	(0.7	)
Unrealized holding gains/(losses) arising during period			1.0				(0.7	)			0.3				(0.1	)			0.1				—
Other comprehensive earnings (loss)		$	0.1			$	(0.7	)			(0.6	)		$	(0.8	)		$	0.1				(0.7	)
Net earnings											263.8												264.6
Total comprehensive income										$	263.2											$	263.9

13.

Business Segment Information

     The Company currently operates its business on the basis of a single reportable segment — specialty pharmaceuticals. The Company produces a broad range of ophthalmic products for glaucoma therapy, ocular inflammation, infection, allergy and dry eye; skin care products for acne, psoriasis and other prescription and over-the-counter dermatological products; and Botox® for certain therapeutic and cosmetic indications. The Company provides global marketing strategy teams to ensure development and execution of a consistent marketing strategy for its products in all geographic regions that share similar distribution channels and customers.

Management evaluates its various global product portfolios on a revenue basis, which is presented below. The Company operates globally with principal markets in the United States, Europe, Latin America and Asia Pacific. The United States information is presented separately as it is the Company’s headquarters country. U.S. sales, including manufacturing operations, represented 69.0% and 69.2% of the Company’s total consolidated product net sales for the quarters ended September 30, 2005 and September 24, 2004, respectively, and 67.7% and 69.4% of the Company’s total consolidated product net sales for the nine month periods ended September 30, 2005 and September 24, 2004, respectively.

Sales to McKesson Drug Company for the three month periods ended September 30, 2005 and September 24, 2004 were 15.2% and 13.9%, respectively, of the Company’s total consolidated product net sales and 14.1% and 13.7% of the Company’s total consolidated product net sales for the nine month periods ended September 30, 2005 and September 24, 2004, respectively. Sales to Cardinal Healthcare for the three month periods ended September 30, 2005 and September 24, 2004 were 15.8% and 13.9%, respectively, of the Company’s total consolidated product net sales and 14.9% and 13.6% of the Company’s total consolidated product net sales for the nine month periods ended September 30, 2005 and September 24, 2004, respectively. No other country or single customer generates over 10% of total product net sales. Other product net sales and net sales for manufacturing operations primarily represent sales to AMO pursuant to the manufacturing and supply agreement entered into as part of the 2002 AMO spin-off that was terminated as scheduled in June 2005. Net sales for the Europe region also include sales to customers in Africa and the Middle East, and net sales in the Asia Pacific region also include sales to customers in Australia and New Zealand.

Allergan, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

Net Sales by Product Line

(in millions)		Three months ended								Nine months ended
		September 30,				September 24,				September 30,				September 24,
		2005				2004				2005				2004
Specialty Pharmaceuticals:
Eye Care Pharmaceuticals		$	358.1			$	285.4			$	981.1			$	835.1
Botox®/Neuromodulators			214.8				174.6				603.6				502.2
Skin Care			33.0				24.8				93.2				73.9
			605.9				484.8				1,677.9				1,411.2
Other			0.2				26.0				46.4				78.2
Net sales		$	606.1			$	510.8			$	1,724.3			$	1,489.4

Geographic Information

Net Sales

(in millions)		Three months ended								Nine months ended
		September 30,				September 24,				September 30,				September 24,
		2005				2004				2005				2004
United States		$	417.9			$	328.8			$	1,124.0			$	960.6
Europe			98.6				82.9				300.6				240.6
Latin America			32.5				25.5				91.2				72.7
Asia Pacific			35.1				31.7				102.9				90.9
Other			21.9				17.4				62.9				51.1
			606.0				486.3				1,681.6				1,415.9
Manufacturing operations			0.1				24.5				42.7				73.5
Net sales		$	606.1			$	510.8			$	1,724.3			$	1,489.4

Long-lived assets are assigned to geographic regions based upon management responsibility for such items.

Long-Lived Assets

(in millions)		September 30,				December 31,
		2005				2004
United States		$	169.2			$	76.6
Europe			20.7				24.5
Latin America			18.8				17.2
Asia Pacific			2.6				3.3
Other			0.4				0.5
			211.7				122.1
Manufacturing operations			248.2				207.9
General corporate			188.2				227.9
Total		$	648.1			$	557.9

14.

Sales Tax Contingency

     In accordance with the Company’s interpretation of current law, the Company generally does not collect or pay sales or other tax on sales of Botox® or Botox® Cosmetic in the United States. However, the Company believes that one or more states may seek to impose sales or other tax collection or payment obligations on the Company’s sales of Botox® or Botox® Cosmetic to physicians and other customers. If it is determined that the Company should collect or pay sales or other transaction tax in one or more states, the imposition and collection of sales or other transaction tax on Botox® or Botox® Cosmetic could result in a substantial tax liability, and potential penalties and

Allergan, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

interest, for prior taxable periods. The imposition and collection of sales or other transaction tax on Botox® or Botox® Cosmetic could also adversely affect the Company’s sales or its product margins on Botox® or Botox® Cosmetic due to the increased cost associated with those products.

The Company is not currently aware of any asserted claims for sales or other transaction tax liabilities for prior taxable periods. The Company intends to work with state taxing authorities in the normal course of business to ensure the proper interpretation and administration of sales and other tax regulations on sales of Botox® and Botox® Cosmetic. The Company has not recorded any accrued costs for potential unasserted claims for unpaid sales or other transaction tax. The Company does not currently believe that any individual claim or aggregate claims that might arise will ultimately have a material effect on its consolidated results of operations, financial position or cash flows.

15.

Agreement with GlaxoSmithKline and Restructuring and Streamlining of Japan Operations

     On September 30, 2005, the Company entered into a long-term agreement with GlaxoSmithKline plc (GSK) to develop and promote the Company’s Botox® (botulinum toxin type A) in Japan and China and to co-promote GSK’s products IMITREX STATdose System® (sumatriptan succinate) and AMERGE® (naratriptan hydrochloride) in the United States. Under the terms of the agreement, the Company will license to GSK all clinical development and commercial rights to Botox® in Japan and China. The Company will also manufacture Botox® for GSK as part of a long-term supply agreement and will work collaboratively to support GSK on new clinical development for Botox® and strategic marketing in those markets. The Company will receive an up-front payment, payments for research and development and marketing support, and royalties on Japan and China Botox® sales. In connection with the up-front payment, the Company expects to record deferred income and to amortize the deferred income over the expected life of the licensing agreements in Japan and China.

In addition, the Company has obtained the right to co-promote GSK’s products IMITREXSTATdose System® and AMERGE® in the U.S. to neurologists and select related specialty physicians for a five-year period. IMITREXSTATdose System® is approved for the treatment of acute migraine in adults and for the acute treatment of cluster headache episodes. AMERGE® Tablets are approved for the acute treatment of migraine attacks with and without an aura in adults. The Company will receive annual fixed and performance payments from GSK.

The Company currently estimates that it will incur pre-tax restructuring costs, consisting primarily of severance, contract termination and other costs of between approximately $6 million and $8 million, associated with a planned restructuring and streamlining of the Company’s ongoing business activities in Japan that are necessary to accommodate the Company’s recent third-party licensing and distribution arrangements.

ALLERGAN, INC.

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

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 2005

This financial review presents our operating results for the three and nine month periods ended September 30, 2005 and September 24, 2004, and our financial condition at September 30, 2005. Except for the historical information contained herein, the following discussion contains forward-looking statements which are subject to known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from those expressed or implied by such forward-looking statements. We discuss such risks, uncertainties and other factors throughout this report and specifically under the caption “Certain Factors and Trends Affecting Allergan and its Businesses” in Item 3 below. In addition, the following review should be read in connection with the information presented in our unaudited condensed consolidated financial statements and related notes for the three and nine month periods ended September 30, 2005 and our audited consolidated financial statements and related notes for the year ended December 31, 2004.

CRITICAL ACCOUNTING POLICIES

We believe that the estimates, assumptions and judgments involved in the accounting policies described below have the greatest potential impact on our consolidated financial statements, so we consider these to be our critical accounting policies. Because of the uncertainty inherent in these matters, actual results could differ materially from the estimates we use in applying our critical accounting policies.

Revenue Recognition

We recognize revenue from product sales when goods are shipped and title and risk of loss transfer to the customer. We have a policy to attempt to maintain average U.S. wholesaler inventory levels of our products at an amount less than eight weeks of our net sales. We generally offer cash discounts to customers for the early payment of receivables. Those discounts are recorded as a reduction of accounts receivable in the same period the related sale is recorded. The amounts reserved for cash discounts at September 30, 2005 and December 31, 2004 were $1.7 million and $1.3 million, respectively. Provisions for cash discounts deducted from consolidated sales in the three month periods ended September 30, 2005 and September 24, 2004 were $7.3 million and $5.6 million, respectively. Provisions for cash discounts deducted from consolidated sales in the nine month periods ended September 30, 2005 and September 24, 2004 were $19.7 million and $16.4 million, respectively. We permit returns of product from any product line by any class of customer if such product is returned in a timely manner, in good condition and from the normal distribution channels. Return policies in certain international markets provide for more stringent guidelines in accordance with the terms of contractual agreements with customers. Allowances for returns are provided for based upon our historical patterns of returns matched against the sales from which they originated, and management’s evaluation of specific factors that increase the risk of returns. The amount of allowances for sales returns accrued at September 30, 2005 and December 31, 2004 were $5.6 million and $5.8 million, respectively. Provisions for sales returns deducted from consolidated sales for the three month periods ended September 30, 2005 and September 24, 2004 were $8.5 million and $5.6 million, respectively. Provisions for sales returns deducted from consolidated sales for the nine month periods ended September 30, 2005 and September 24, 2004 were $21.7 million and $17.9 million, respectively. Historical allowances for cash discounts and product returns have been within the amounts reserved or accrued, respectively.

Additionally, we participate in various managed care sales rebate and other incentive programs, the largest of which relates to Medicaid. Sales rebates and other incentive programs also include chargebacks, which are contractual discounts given primarily to federal government agencies, health maintenance organizations, pharmacy benefits managers and group purchasing organizations. Sales rebates and incentive accruals reduce revenue in the same period the related sale is recorded and are included in “Accrued expenses” in our unaudited condensed consolidated

Allergan, Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 2005 (Continued)

balance sheets. The amounts accrued for sales rebates and other incentive programs at September 30, 2005 and December 31, 2004 were $63.3 million and $61.4 million, respectively. Provisions for sales rebates and other incentive programs deducted from consolidated sales for the three month periods ended September 30, 2005 and September 24, 2004 were $35.5 million and $35.3 million, respectively. Provisions for sales rebates and other incentive programs deducted from consolidated sales for the nine month periods ended September 30, 2005 and September 24, 2004 were $123.4 million and $105.7 million, respectively. The increase in the provision for sales rebates and other incentive programs during the first nine months of 2005 compared to the first nine months of 2004 is primarily due to an increase in the sales of U.S. pharmaceutical products, principally eye care pharmaceutical products, subject to such rebates and incentive programs. In addition, an increase in our published list prices in the United States for pharmaceutical products generally results in a higher ratio of provisions for sales rebates and other incentive programs deducted from consolidated sales. Our procedures for estimating amounts accrued for sales rebates and other incentive programs at the end of any period are based on available quantitative data and are supplemented by management’s judgment with respect to many factors, including, but not limited to, current market place dynamics, changes in contract terms, changes in sales trends, an evaluation of current laws and regulations and product pricing. Quantitatively, we use historical sales, product utilization and rebate data and apply forecasting techniques in order to estimate our liability amounts. Qualitatively, management’s judgment is applied to these items to modify, if appropriate, the estimated liability amounts. There are inherent risks in this process. For example, customers may not achieve assumed utilization levels; customers may misreport their utilization to us; and actual movements of the U.S. Consumer Price Index — Urban (CPI-U), which affect our rebate programs with U.S. federal and state government agencies, may differ from those estimated. On a quarterly basis, adjustments to our estimated liabilities for sales rebates and other incentive programs related to sales made in prior periods have not been material and have generally been less than 0.5% of consolidated net sales. An adjustment to our estimated liabilities of 0.5% of consolidated net sales on a quarterly basis would result in an increase or decrease to net sales and earnings before income taxes of approximately $3 million to $4 million. The sensitivity of our estimates can vary by program and type of customer. Additionally, there is a significant time lag between the date we determine the estimated liability and when we actually pay the liability. Due to this time lag, we record adjustments to our estimated liabilities over several periods, which can result in a net increase to earnings or a net decrease to earnings in those periods. Material differences may result in the amount of revenue we recognize from product sales if the actual amount of rebates and incentives differ materially from the amounts estimated by management.

We recognize certain license fees as other income based upon the facts and circumstances of each licensing agreement. In general, we recognize income upon the signing of a license agreement that grants rights to products or technology to a third party if we have no further obligation to provide products or services to the third party after granting the license. We defer income under license agreements when we have further obligations that indicate that a separate earnings process has not culminated.

Pensions

We sponsor various pension plans in the United States and abroad in accordance with local laws and regulations. Our pension plans in the United States account for a large majority of our pension plans’ net periodic benefit costs and projected benefit obligations. In connection with these plans, we use certain actuarial assumptions to determine the plans’ net periodic benefit costs and projected benefit obligations, the most significant of which are the expected long-term rate of return on assets and the discount rate.

Our assumption for the expected long-term rate of return on assets in our U.S. pension plan for determining the net periodic benefit cost for 2005 is 8.25%, which is the same as our 2004 expected rate of return. We determine, based upon recommendations from our pension plans’ investment advisors, the expected rate of return using a building block approach that considers diversification and rebalancing for a long-term portfolio of invested assets. Our investment advisors study historical market returns and preserve long-term historical relationships between equities

Allergan, Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 2005 (Continued)

and fixed income in a manner consistent with the widely-accepted capital market principle that assets with higher volatility generate a greater return over the long run. They also evaluate market factors such as inflation and interest rates before long-term capital market assumptions are determined. The expected rate of return is applied to the market-related value of plan assets. As a sensitivity measure, the effect of a 0.25% decline in the rate of return on assets assumption would increase our expected 2005 U.S. pre-tax pension benefit cost by approximately $0.7 million.

The discount rate used to calculate our U.S. pension benefit obligations at December 31, 2004 and our net periodic benefit costs for 2005 is 5.95%. We determine the discount rate largely based upon an index of high-quality fixed income investments (U.S. Moody’s Aa Corporate Long Bond Yield Average) at the plans’ measurement date. As a sensitivity measure, the effect of a 0.25% decline in the discount rate assumption would increase our expected 2005 U.S. pre-tax pension benefit costs by approximately $1.6 million and increase our U.S. pension plans’ projected benefit obligations at December 31, 2004 by approximately $13.1 million.

Income Taxes

Income taxes are determined using an estimated annual effective tax rate, which is generally less than the U.S. Federal statutory rate, primarily because of lower tax rates in certain non-U.S. jurisdictions and research and development, or R&D, tax credits available in the United States. Our effective tax rate may be subject to fluctuations during the fiscal year as new information is obtained, which may affect the assumptions we use to estimate our annual effective tax rate, including factors such as our mix of pre-tax earnings in the various tax jurisdictions in which we operate, valuation allowances against deferred tax assets, reserves for tax contingencies, utilization of R&D tax credits and changes in or interpretation of tax laws in jurisdictions where we conduct operations. We recognize deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of our assets and liabilities, along with net operating loss and credit carryforwards. We record a valuation allowance against our deferred tax assets to reduce the net carrying value to an amount that we believe is more likely than not to be realized. When we establish or reduce the valuation allowance against our deferred tax assets, our income tax expense will increase or decrease, respectively, in the period such determination is made.

Valuation allowances against our deferred tax assets were $55.9 million and $51.9 million at September 30, 2005 and December 31, 2004, respectively. Changes in the valuation allowances are a component of the estimated annual effective tax rate. Material differences in the estimated amount of valuation allowances may result in an increase or decrease in the provision for income taxes if the actual amounts for valuation allowances required against deferred tax assets differ from the amounts estimated by us.

We have not provided for withholding and U.S. taxes for the unremitted earnings of certain non-U.S. subsidiaries because we have currently reinvested or expect to reinvest these earnings indefinitely in such operations. In connection with the American Jobs Creation Act of 2004, or the Act, we determined during our second fiscal quarter of 2005 that we had sufficient information to make an informed decision regarding the repatriation of certain foreign earnings that were previously considered to be permanently reinvested. Based on that decision, we recorded a $32.8 million tax liability associated with our decision to repatriate $674.0 million in extraordinary dividends, as defined by the Act, from unremitted foreign earnings that were previously considered permanently reinvested by certain non-U.S. subsidiaries. The $674.0 million amount of extraordinary dividends is the qualified amount above a $53.4 million base amount determined based on our historical repatriation levels, as defined by the Act. The tax effect of the base amount of dividends is included in our estimated annual effective tax rate. We also decided to repatriate approximately $85.8 million in additional dividends above the base and extraordinary dividend amounts from prior and current years’ unremitted foreign earnings that were previously considered indefinitely reinvested and recorded a corresponding estimated tax liability of $27.6 million in our second fiscal quarter of 2005. During our third fiscal quarter of 2005, we repatriated $759.8 million in extraordinary dividends and dividends above the base and

Allergan, Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 2005 (Continued)

extraordinary dividend amounts and reduced the estimated income tax liability related to the additional dividends above the base and extraordinary dividend amounts by $6.2 million to $21.4 million. This reduction in the estimated income tax liability related to the additional dividends represents a change in estimate based upon the actual repatriation that occurred during the third quarter of 2005.

During the third fiscal quarter of 2005, we reduced our reserves for uncertain tax positions and related provision for income taxes by $19.5 million primarily due to a change in estimate resulting from the resolution of several significant uncertain income tax audit issues, including transfer prices, the deductibility of transaction costs associated with the 2002 spin-off of AMO and intangible asset issues related to certain assets of Bardeen Sciences Company, LLC, which we acquired in 2003. The change in estimate relates to tax years currently under examination or not yet settled through expiry of the statute of limitations.

OPERATIONS

Headquartered in Irvine, California, we are a technology-driven, global health care company that develops and commercializes specialty pharmaceutical products for the ophthalmic, neurological, dermatological and other specialty markets. We currently employ approximately 4,985 persons around the world. We are an innovative leader in therapeutic and over-the-counter products that are sold in more than 100 countries. Our principal markets are the United States, Europe, Latin America and Asia Pacific.

RESULTS OF OPERATIONS

We currently operate our business on the basis of a single reportable segment – specialty pharmaceuticals. We currently produce a broad range of ophthalmic products for glaucoma therapy, ocular inflammation, infection, allergy and dry eye; skin care products for acne, psoriasis and other prescription and over-the-counter dermatological products; and Botox® for certain therapeutic and cosmetic indications. We provide global marketing strategy teams to ensure development and execution of a consistent marketing strategy for our products in all geographic regions that share similar distribution channels and customers.

Management evaluates its various global product portfolios on a revenue basis, which is presented below. We also report sales performance using the non-GAAP financial measure of constant currency sales. Constant currency sales represent current period reported sales, adjusted for the translation effect of changes in average foreign exchange rates between the current period and the corresponding period in the prior year. We calculate the currency effect by comparing adjusted current period reported amounts, calculated using the monthly average foreign exchange rates for the corresponding period in the prior year, to the actual current period reported amounts. We routinely evaluate our net sales performance at constant currency so that sales results can be viewed without the impact of changing foreign currency exchange rates, thereby facilitating period-to-period comparisons of our sales. Generally, when the U.S. dollar either strengthens or weakens against other currencies, the growth at constant currency rates will be higher or lower, respectively, than growth reported at actual exchange rates.

Allergan, Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 2005 (Continued)

The following tables compare net sales by product line and certain selected products for the three and nine month periods ended September 30, 2005 and September 24, 2004:

		Three months ended
(in millions)		September 30,				September 24,				Change in Net Sales												Percent Change in Net Sales
		2005				2004				Total				Performance				Currency				Total				Performance				Currency
Net Sales by Product Line:
Eye Care Pharmaceuticals		$	358.1			$	285.4			$	72.7			$	68.7			$	4.0				25.5	%			24.1	%			1.4	%
Botox/Neuromodulator			214.8				174.6				40.2				37.7				2.5				23.0	%			21.6	%			1.4	%
Skin Care			33.0				24.8				8.2				8.2				—				33.1	%			33.1	%			—	%
Total			605.9				484.8				121.1				114.6				6.5				25.0	%			23.6	%			1.4	%
Other*			0.2				26.0				(25.8	)			(25.8	)			—				(99.2	)%			(99.2	)%			—	%
Total net sales		$	606.1			$	510.8			$	95.3			$	88.8			$	6.5				18.7	%			17.4	%			1.3	%
Domestic			69.0	%			69.2	%
International			31.0	%			30.8	%
Selected Product Sales:
Alphagan P, Alphagan and Combigan		$	75.1			$	73.2			$	1.9			$	1.3			$	0.6				2.6	%			1.8	%			0.8	%
Lumigan			72.8				60.3				12.5				11.9				0.6				20.7	%			19.8	%			0.9	%
Other Glaucoma			4.7				4.6				0.1				(0.1	)			0.2				2.0	%			(1.0	)%			3.0	%
Restasis			54.0				24.1				29.9				29.8				0.1				123.8	%			123.6	%			0.2	%

		Nine months ended
(in millions)		September 30,				September 24,				Change in Net Sales												Percent Change in Net Sales
		2005				2004				Total				Performance				Currency				Total				Performance				Currency
Net Sales by Product Line:
Eye Care Pharmaceuticals		$	981.1			$	835.1			$	146.0			$	131.1			$	14.9				17.5	%			15.7	%			1.8	%
Botox/Neuromodulator			603.6				502.2				101.4				92.3				9.1				20.2	%			18.4	%			1.8	%
Skin Care			93.2				73.9				19.3				19.2				0.1				26.1	%			26.0	%			0.1	%
Total			1,677.9				1,411.2				266.7				242.6				24.1				18.9	%			17.2	%			1.7	%
Other*			46.4				78.2				(31.8	)			(32.0	)			0.2				(40.7	)%			(40.9	)%			0.2	%
Total net sales		$	1,724.3			$	1,489.4			$	234.9			$	210.6			$	24.3				15.8	%			14.1	%			1.7	%
Domestic			67.7	%			69.4	%
International			32.3	%			30.6	%
Selected Product Sales:
Alphagan P, Alphagan and Combigan		$	206.1			$	204.9			$	1.2			$	(1.5	)		$	2.7				0.6	%			(0.7	)%			1.3	%
Lumigan			196.3				171.1				25.2				22.4				2.8				14.7	%			13.1	%			1.6	%
Other Glaucoma			13.7				14.8				(1.1	)			(1.7	)			0.6				(7.7	)%			(11.3	)%			3.6	%
Restasis			137.6				65.5				72.1				72.0				0.1				110.1	%			109.9	%			0.2	%

* Other sales primarily consist of sales to Advanced Medical Optics, Inc., or AMO, pursuant to a manufacturing and supply agreement entered into as part of the AMO spin-off that terminated as scheduled in June 2005.

The $6.5 million increase in net sales from the impact of foreign currency changes for the three month period ended September 30, 2005 was due primarily to the strengthening of the Brazilian real, Canadian dollar, Australian dollar and other Latin American currencies compared to the U.S. dollar. The $24.3 million increase in net sales from the impact of foreign currency changes for the nine month period ended September 30, 2005 was due primarily to the strengthening of the euro, Brazilian real, Canadian dollar, British pound, Australian dollar and other Latin American and Asian currencies compared to the U.S. dollar.

The $95.3 million increase in net sales in the third quarter of 2005 compared to the third quarter of 2004 was primarily the result of increases in sales of our eye care pharmaceuticals, Botox® and skin care product lines, partially offset by a decrease in other non-pharmaceutical sales. Eye care pharmaceuticals sales increased in the third

Allergan, Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 2005 (Continued)

quarter of 2005 compared to the third quarter of 2004 primarily because of strong growth in sales in the United States of Restasis®, our drug for the treatment of chronic dry eye disease, an increase in sales of our glaucoma drug Lumigan®, growth in sales of our Alphagan® franchise, primarily from our international operations and new product sales from Combigan™ which is in the launch phase in Canada and Brazil, a strong increase in sales of eye drop products, primarily Refresh®, growth in sales of Zymar®, a newer anti-infective, an increase in sales of Elestat®, our topical antihistamine used for the prevention of itching associated with allergic conjunctivitis that was launched in the United States in the first quarter of 2004 by our co-promotion partner, Inspire Pharmaceuticals, Inc., and an increase in sales of Acular LS^®, our newer non-steroidal anti-inflammatory. This increase in sales was partially offset by a decrease in sales of Ocuflox®, our older generation anti-infective that is experiencing generic competition in the United States, Acular®, our older generation anti-inflammatory, and other glaucoma products. We continue to believe that generic formulations of Alphagan® will have a negative impact on future net sales of our Alphagan® franchise. We estimate the majority of the change in our eye care pharmaceutical sales was due to mix and volume changes; however, we increased the published list prices for certain eye care pharmaceutical products in the United States, ranging from three and one-half percent to nine percent, effective February 5, 2005. We increased the published U.S. list price for Lumigan® by seven percent, Restasis® by three and one-half percent and Alphagan® P by five percent. This increase in prices had a subsequent positive net effect on our U.S. sales, but the actual net effect is difficult to determine due to the various managed care sales rebate and other incentive programs in which we participate. Wholesaler buying patterns and the change in dollar value of prescription product mix also affected our reported net sales dollars. We have a policy to attempt to maintain average U.S. wholesaler inventory levels of our products at an amount less than eight weeks of our net sales. At September 30, 2005, based on available external and internal information, we believe the amount of average U.S. wholesaler inventories of our products was near the lower end of our stated policy levels.

Botox® sales increased in the third quarter of 2005 compared to the third quarter of 2004 primarily as a result of strong growth in demand in the United States and in international markets for both therapeutic and cosmetic uses. Effective January 4, 2005, we increased the published price for Botox® and Botox® Cosmetic in the United States by approximately four percent, which we believe had a positive effect on our U.S. sales growth in 2005. International Botox® sales also benefited from strong sales growth in Europe, especially in Germany and Spain, growth in sales in smaller distribution markets serviced by our European export sales group, and an increase in sales in Canada, Japan and Australia. We believe our worldwide market share for neuromodulators, including Botox®, is currently over 85%.

Skin care sales increased in the third quarter of 2005 compared to the third quarter of 2004 primarily due to higher sales of Tazorac® in the United States and new product sales generated from Prevage™ antioxidant cream, which we launched in January 2005. Net sales of Tazorac®, Zorac® and Avage® increased $7.2 million, or 38.3%, to $26.0 million in the third quarter of 2005 compared to $18.8 million in the third quarter of 2004. We increased the published U.S. list price for Tazorac® by five percent effective July 31, 2004 and by an additional nine percent effective February 5, 2005.

The $234.9 million increase in total product net sales in the first nine months of 2005 compared to the same period in 2004 was primarily the result of the same reasons discussed in the analysis of the third quarter 2005 increase in net sales. In addition, net sales of Botox® benefited from strong sales growth in the United Kingdom and Mexico in the first nine months of 2005 compared to the first nine months of 2004. Net sales of Tazorac®, Zorac® and Avage® increased $13.5 million, or 25.0%, to $67.4 million in net sales for the first nine months of 2005 compared to $53.9 million in net sales for the first nine months of 2004.

The decrease in the percentage of U.S. sales as a percentage of total product net sales during the third quarter of 2005 compared to the third quarter of 2004 was primarily attributable to a decline in U.S. other non-pharmaceutical sales, and an increase in international Botox® sales, principally in Europe, as a percentage of total product net sales. The decrease in the percentage of U.S. sales as a percentage of total product net sales during the first nine months of

Allergan, Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 2005 (Continued)

2005 compared to the same period in 2004 was primarily attributable to a decline in U.S. other non-pharmaceutical sales and an increase in international Botox® and eye care pharmaceutical sales, principally in Europe, as a percentage of total product net sales.

Our gross margin percentage for the third quarter of 2005 was 83.7% of net sales, which represents a 3.1 percentage point increase from our gross margin percentage of 80.6% for the third quarter of 2004. The gross margin percentage for the nine months ended September 30, 2005 was 82.4% of net sales, which represents a 1.4 percentage point increase from the 81.0% rate reported for the first nine months of 2004. Our gross margin percentage increased in the third quarter of 2005 compared to the third quarter of 2004 primarily as a result of the $25.8 million decrease of other non-pharmaceutical sales, primarily contract manufacturing sales, which have a significantly lower gross margin percentage than our pharmaceutical sales, and a slight increase in the gross margin percentage for our eye care pharmaceuticals. Our gross margin percentage also benefited from our April 2005 royalty buy-out agreement with Novartis Pharmaceuticals Corporation and Novartis Pharma AG relating to the topical ophthalmic use of cyclosporine A, the active ingredient in Restasis®. This increase in gross margin percentage was partially offset by a small decline in the gross margin percentage for our Botox® product line and an increase in the mix of eye care pharmaceuticals net sales, which, despite the slight increase in the gross margin percentage for eye care pharmaceuticals, continue to generally have a lower gross margin percentage than our Botox® and skin care product lines. The gross margin percentage for our Botox® product line experienced a small decrease in the third quarter of 2005 compared to the third quarter of 2004 due primarily to an increase in the mix of international sales, which generally have a lower gross margin percentage than U.S. sales, partially offset by the four percent published price increase taken in January 2005 for Botox® and Botox® Cosmetic in the United States. The gross margin percentage for skin care sales also declined in the third quarter of 2005 compared to the third quarter of 2004 primarily due to new product sales of Prevage™, which have a lower gross margin percentage than our other prescription skin care products. Gross margin in dollars increased in the third quarter of 2005 compared to the third quarter of 2004 by $95.9 million, or 23.3%, as a result of the 18.7% increase in net sales and by the 3.1 percentage point increase in gross margin percentage.

Our gross margin percentage increased in the first nine months of 2005 compared to the first nine months of 2004 primarily as a result of the $31.8 million decrease in other non-pharmaceutical sales, primarily contract manufacturing sales, which have a significantly lower gross margin percentage than our pharmaceutical sales, a slight increase in the gross margin percentage of our Botox® product line and a small increase in the mix of Botox® net sales, which generally have a higher gross margin percentage than our other pharmaceutical product lines. The gross margin percentage for our Botox® product line increased in the first nine months of 2005 compared to the first nine months of 2004 primarily due to the published price increase in January 2005 for Botox® and Botox® Cosmetic in the United States, partially offset by an increase in the mix of international sales, which generally have a lower gross margin percentage than U.S. Botox® net sales. This increase in gross margin percentage was partially offset by a decline in gross margin percentage for eye care pharmaceuticals and skin care net sales. The gross margin percentage for eye care pharmaceuticals declined in the first nine months of 2005 compared to the same period in 2004 due primarily to an increase in the mix of international sales, which generally have a lower gross margin percentage than U.S. sales. The decline in gross margin percentage for skin care net sales in the first nine months of 2005 compared to the first nine months of 2004 is primarily due to the same reasons discussed in the analysis of the third quarter 2005 decrease in gross margin percentage for skin care net sales. Gross margin in dollars increased in the first nine months of 2005 compared to the first nine months of 2004 by $213.5 million, or 17.7%, as a result of the 15.8% increase in net sales and by the 1.4 percentage point increase in gross margin percentage.

Selling, general and administrative, or SG&A, expenses were $237.7 million, or 39.2% of net sales, in the third quarter of 2005 compared to $195.5 million, or 38.3% of net sales, in the third quarter of 2004. SG&A expenses for the first nine months of 2005 were $689.5 million, or 40.0% of net sales, compared to $572.8 million, or 38.5% of net sales, in the comparable 2004 period. The increase in SG&A expense dollars in the third quarter of 2005

Allergan, Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 2005 (Continued)

compared to the third quarter of 2004 was primarily a result of an increase in promotion costs associated with direct-to-consumer advertising in the United States for Restasis®, Botox® Cosmetic and the hyperhidrosis indication for Botox®, an increase in selling expenses, principally personnel costs, and marketing expenses supporting the increase in consolidated sales, especially for Restasis®, Botox® and Botox® Cosmetic, an increase in costs of providing product samples, and higher general and administrative expenses, primarily incentive compensation, legal costs, information services, corporate development expenses and charitable donations. We made a $2.0 million contribution to the Allergan Foundation in the third quarter of 2005. SG&A expenses also increased due to an increase in co-promotion costs related to sales of Elestat® and costs associated with expanding our contract and direct sales forces in Europe. SG&A expenses were also negatively impacted by an increase in the translated U.S. dollar value of foreign currency denominated expenses, especially in Europe and Latin America. This increase in SG&A expenses during the third quarter of 2005 compared to the third quarter of 2004 was partially offset by a $7.9 million pre-tax gain on the sale of our contact lens care and surgical products distribution business in India to a subsidiary of AMO and a $5.8 million pre-tax gain on the sale of assets primarily used for contract manufacturing and the former distribution of AMO related products at our manufacturing facility in Ireland. As a percentage of net sales, SG&A expenses increased in the third quarter of 2005 compared to the third quarter of 2004 due primarily to higher promotion and marketing expenses as a percentage of net sales, partially offset by lower selling expenses and the pre-tax gains from the sale of the assets described above.

The increase in SG&A expense dollars in the first nine months of 2005 compared to the first nine months of 2004 was primarily due to the same reasons discussed in the analysis of the third quarter 2005 increase in SG&A expenses. SG&A expenses also increased in the first nine months of 2005 compared to the same period in 2004 due to the non-recurrence of a favorable settlement of a patent dispute amounting to $2.4 million in the first quarter of 2004. As a percentage of net sales, SG&A expenses increased in the first nine months of 2005 compared to the first nine months of 2004 due primarily to higher promotion and marketing expenses as a percentage of net sales and lower miscellaneous royalty income earned, partially offset by lower selling expenses, the pre-tax gains from the sale of assets described in the analysis of the third quarter 2005 SG&A expenses, and general and administrative expenses as a percentage of net sales.

Research and development expenses were $110.2 million, or 18.2% of net sales, in the third quarter of 2005 compared to $83.0 million, or 16.2% of net sales, in the third quarter of 2004. For the nine months ended September 30, 2005, research and development expenses were $283.5 million, or 16.4% of net sales, compared to $257.6 million, or 17.3% of net sales, in the comparable 2004 period. Research and development spending increased in the third quarter of 2005 compared to the third quarter of 2004 primarily as a result of higher rates of investment in our eye care pharmaceuticals and Botox® product lines and new technologies, partially offset by lower spending for our skin care product line. Included in our spending for research and development in the third quarter of 2005 is approximately $10.4 million consisting of $7.4 million in costs associated with two new third party technology license and development agreements associated with in-process technologies and $3.0 million related to the buy-out of a license agreement with Johns Hopkins University associated with ongoing Botox® research activities. Research and development spending increased in the first nine months of 2005 compared to the first nine months of 2004 primarily due to the same reasons discussed in the analysis of the third quarter 2005 increase in research and development expenses.

Restructuring Charges and Transition/Duplicate Operating Expenses

Restructuring and Streamlining of European Operations

Effective January 2005, our Board of Directors approved the initiation and implementation of a restructuring of certain activities related to our European operations. The restructuring seeks to optimize operations, improve resource allocation and create a scalable, lower cost and more efficient operating model for our European research