**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 10-Q**__________________________________________

(Mark One)

**
[X] 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
  
SECURITIES EXCHANGE ACT OF 1934
**

**For the Quarterly Period Ended June 30,2007**

**
[   ]
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
  
SECURITIES EXCHANGE ACT OF 1934
**

**For the transition periodfrom          to        **

**Commission File No. 1-5438**

**    FOREST LABORATORIES,INC.    ** (Exact name of registrant as specified in itscharter)

**
**Delaware***(State or other jurisdiction ofincorporation or organization)*

 

**11-1798614***(I.R.S. EmployerIdentification Number)*
   
**909 Third AvenueNew York, New York***(Address of principal executive offices)*

 

**10022-4731***(Zip code)*
**

**(212) 421-7850***(Registrant's telephone number, including area code)*

*(Former name, former address and former fiscalyear, if changed since last report)*

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed bySection 13 or 15 (d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.Yes    X       No        .. 

Indicate by a check mark whetherthe registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer. See definition of "accelerated filerand large accelerated filer" in Rule 12b-2 of the Exchange Act.(Check one):

Large acceleratedfiler    X                               Acceleratedfiler                                   Non-acceleratedfiler        

Indicate by check mark whetherthe registrant is a shell company (as defined in Rule 12b-2 of theExchangeAct).  Yes           No    X   ..

Number of shares outstanding of Registrant'sCommon Stock as of August 8, 2007: 316,150,004.

** **

**TABLE OFCONTENTS (Q*uick Links*)**

PART I -FINANCIAL INFORMATION

**            **ITEM 1.CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:

                           BALANCE SHEETS                           STATEMENTS OF INCOME                           STATEMENTS OF COMPREHENSIVE INCOME                           STATEMENTS OF CASH FLOWS                           NOTES TO FINANCIAL STATEMENTS

            ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL            CONDITION AND RESULTS OF OPERATIONS

            ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT            MARKET RISK

            ITEM 4. CONTROLS AND PROCEDURES

PART II -OTHER INFORMATION

            ITEM 1. LEGAL PROCEEDINGS

            ITEM 1A. RISK FACTORS

            ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES, USE OFPROCEEDS            AND ISSUER REPURCHASES OF EQUITY SECURITIES

            ITEM 6. EXHIBITS            EXHIBIT 31.1            EXHIBIT 31.2            EXHIBIT 32.1            EXHIBIT 32.2

 

**PART I- FINANCIAL INFORMATION**

**FOREST LABORATORIES, INC. AND SUBSIDIARIESCondensed Consolidated Balance Sheets**

| *(In thousands)*                                                                                                                                                                                                                                     | June 30, 2007   (Unaudited)              | March 31, 2007                                               |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------|-------------------------------------------------------------------|
|                                                                                                                                                                                                                                                 |                                                              |                                                              |
| **Assets**                                                                                                                                                                                                                                           |                                                              |                                                              |
|                                                                                                                                                                                                                                                 |                                                              |                                                              |
| Current assets:    Cash (including cash equivalentinvestments        of $618,384 in Juneand $556,586 in March)                                                                           |  

$   621,897                           | $   563,663                                   |
|     Marketable securities                                                                                                                                                                                                        | 909,418                                                      | 788,951                                                      |
|     Accounts receivable, less allowance fordoubtful accounts        of $19,580 in Juneand $20,033 in March                                                                               | 398,702                                                      | 382,655                                                      |
|     Inventories, net                                                                                                                                                                                                             | 466,776                                                      | 434,163                                                      |
|     Deferred income taxes                                                                                                                                                                                                        | 212,276                                                      | 226,433                                                      |
|     Other current assets                                                                                                                                                                                                         |        49,877             |        26,852             |
|         Total currentassets                                                                                                                                                                                  |   2,658,946                                        |   2,422,717                                        |
|                                                                                                                                                                                                                                                 |                                                              |                                                              |
| Marketable securities                                                                                                                                                                                                                                |      759,429                        |      660,392                        |
|                                                                                                                                                                                                                                                 |                                                              |                                                              |
| Property, plant and equipment                                                                                                                                                                                                                        | 541,712                                                      | 532,861                                                      |
|     Less: accumulated depreciation                                                                                                                                                                                               |      182,203                        |      171,775                        |
|                                                                                                                                                                                                                                                 |      359,509                        |      361,086                        |
| Other assets:    Goodwill                                                                                                                                                                                                        | 14,965                                                       | 14,965                                                       |
|     License agreements, product rights andother        intangibles, lessaccumulated amortization        of $386,384 in Juneand $377,219 in March |  

148,022                                              | 157,049                                                      |
|     Deferred income taxes                                                                                                                                                                                                        | 27,731                                                       | 27,681                                                       |
|     Other                                                                                                                                                                                                                        |          9,428  |          9,482  |
|         Total otherassets                                                                                                                                                                                    |      200,146                        |      209,177                        |
|                                                                                                                                                                                                                                                 |                                                              |                                                              |
|              Totalassets                                                                                                                                                            | $3,978,030                                                   | $3,653,372                                                   |
|                                                                                                                                                                                                                                                 | ========                                                     | ========                                                     |

*See notes to condensed consolidated financialstatements.*

** **

**FOREST LABORATORIES, INC. AND SUBSIDIARIESCondensed Consolidated Balance Sheets**

| *(In thousands, except for par values)*                                                                                                                                               | June 30, 2007   (Unaudited)                              | March 31, 2007                                                               |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------|-----------------------------------------------------------------------------------|
|                                                                                                                                                                                  |                                                                              |                                                                              |
| **Liabilities and Stockholders' Equity**                                                                                                                                              |                                                                              |                                                                              |
|                                                                                                                                                                                  |                                                                              |                                                                              |
| Current liabilities:    Accounts payable                                                                                                                          | $   202,371                                                   | $   154,614                                                   |
|     Accrued expenses                                                                                                                                              | 372,206                                                                      | 332,995                                                                      |
|     Income taxes payable                                                                                                                                          |        17,548                             |      139,999                                        |
|        Total currentliabilities                                                                                                                    |      592,125                                        |      627,608                                        |
|                                                                                                                                                                                  |                                                                              |                                                                              |
| Long-term income taxes payable                                                                                                                                                        | 152,695                                                                      |                                                                              |
| Deferred income taxes                                                                                                                                                                 |             965  |             951  |
|                                                                                                                                                                                  |      153,660                                        |             951  |
|                                                                                                                                                                                  |                                                                              |                                                                              |
| Stockholders' equity:    Series preferred stock, $1.00 par; sharesauthorized 1,000;        no shares issued oroutstanding |                                                                              |                                                                              |
|     Common stock, $.10 par; sharesauthorized 1,000,000; issued        421,191 shares inJune and 420,695 shares in March   | 42,119                                                                       | 42,069                                                                       |
|     Additional paid-in capital                                                                                                                                    | 1,391,355                                                                    | 1,354,264                                                                    |
|     Retained earnings                                                                                                                                             | 4,911,722                                                                    | 4,657,356                                                                    |
|     Accumulated other comprehensiveincome                                                                                                                         |         23,858                       | 21,879                                                                       |
|     Treasury stock, at cost                                                                                                                                       |                                                                              |                                                                              |
|       (102,944 shares in Juneand 101,143 shares in March)                                                                                          | (  3,136,809)                                                           | (  3,050,755)                                                           |
|             Totalstockholders' equity                                                                                     |   3,232,245                                                        |   3,024,813                                                        |
|                                                                                                                                                                                  |                                                                              |                                                                              |
|                 Totalliabilities and stockholders' equity                                             | $3,978,030                                                                   | $3,653,372                                                                   |
|                                                                                                                                                                                       | ========                                                                     | ========                                                                     |

*See notes to condensed consolidated financialstatements.*

 

**FORESTLABORATORIES, INC. AND SUBSIDIARIESCondensed Consolidated Statements of Income(Unaudited)**

| *(In thousands, except per share amounts)*                              |   |    Three MonthsEnded                June30,               |
|------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                         |   |                                                                                                                                                                                                                      |        2007  |        2006  |
|                                                                         |   |                                                                                                                                                                                                                      |   |   |
| Net sales                                                                    |   |                                                                                                                                                                                                                      | $842,616  | $758,768  |
| Contract revenue                                                             |   |                                                                                                                                                                                                                      | 53,377  | 42,662  |
| Other income                                                                 |   |                                                                                                                                                                                                                      |     32,281  |     14,908  |
|                                                                         |   |                                                                                                                                                                                                                      |   928,274  |   816,338  |
|                                                                         |   |                                                                                                                                                                                                                      |   |   |
| Costs and expenses:    Cost of sales                     |   |                                                                                                                                                                                                                      | 186,240  | 175,685  |
|     Selling, general and administrative                  |   |                                                                                                                                                                                                                      | 261,328  | 244,383  |
|     Research and development                             |   |                                                                                                                                                                                                                      |   136,908  |   139,082  |
|                                                                         |   |                                                                                                                                                                                                                      |   584,476  |   559,150  |
|                                                                         |   |                                                                                                                                                                                                                      |   |   |
| Income before income tax expense                                             |   |                                                                                                                                                                                                                      | 343,798  | 257,188  |
|                                                                         |   |                                                                                                                                                                                                                      |   |   |
| Income tax expense                                                           |   |                                                                                                                                                                                                                      |     75,636  |     56,581  |
|                                                                         |   |                                                                                                                                                                                                                      |   |   |
| Net income                                                                   |   |                                                                                                                                                                                                                      | $268,162  | $200,607  |
|                                                                         |   |                                                                                                                                                                                                                      | =======  | =======  |
| Net income per common share:                                                 |   |                                                                                                                                                                                                                      |   |   |
|                                                                         |   |                                                                                                                                                                                                                      |   |   |
|     Basic                                                |   |                                                                                                                                                                                                                      | $0.84  | $0.62  |
|                                                                         |   |                                                                                                                                                                                                                      | ====  | ====  |
|     Diluted                                              |   |                                                                                                                                                                                                                      | $0.83  | $0.62  |
|                                                                         |   |                                                                                                                                                                                                                      | ====  | ====  |
| Weighted average number of common    shares outstanding: |   |                                                                                                                                                                                                                      |   |   |
|                                                                         |   |                                                                                                                                                                                                                      |   |   |
|     Basic                                                |   |                                                                                                                                                                                                                      | 319,580  | 321,503  |
|                                                                         |   |                                                                                                                                                                                                                      | ======  | ======  |
|     Diluted                                              |   |                                                                                                                                                                                                                      | 321,921  | 325,915  |
|                                                                         |   |                                                                                                                                                                                                                      | ======  | ======  |

*See notes to condensed consolidated financialstatements.*

** **

**FOREST LABORATORIES, INC.AND SUBSIDIARIESCondensed Consolidated Statements of Comprehensive Income(Unaudited)**

| *(In thousands)*           |   |      Three MonthsEnded                June30,                |
|----------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                       |   |                                                                                                                                                                                                                                        |       2007  |        2006  |
|                       |   |                                                                                                                                                                                                                                        |   |   |
| Net income                 |   |                                                                                                                                                                                                                                        | $268,162  | $200,607  |
| Other comprehensive income |   |                                                                                                                                                                                                                                        |       1,979  |       7,000  |
|                       |   |                                                                                                                                                                                                                                        |   |   |
| Comprehensive income       |   |                                                                                                                                                                                                                                        | $270,141  | $207,607  |
|                       |   |                                                                                                                                                                                                                                        | =======  | =======  |

*See notes to condensed consolidated financialstatements.*

** **

**FORESTLABORATORIES, INC. AND SUBSIDIARIESCondensed Consolidated Statements of Cash Flows(Unaudited)**

|                                                                                                                                      |     Three MonthsEnded                                                                                                                                           |
|-------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *(In thousands)*                                                                                                                          |                   June30,                    |
|                                                                                                                                      |            2007                                                                                                                                                      |             2006 |
| Cash flows from operating activities:                                                                                                     |                                                                                                                                                                                                                        |   |
|    Net income                                                                                                              | $268,162                                                                                                                                                                                                               | $200,607  |
|    Adjustments to reconcile net income to                                                                                  |                                                                                                                                                                                                                        |   |
|      net cash provided by operatingactivities:                                                                   |                                                                                                                                                                                                                        |   |
|        Depreciation                                                                                    | 11,317                                                                                                                                                                                                                 | 11,211  |
|        Amortization andimpairments                                                                     | 9,165                                                                                                                                                                                                                  | 14,549  |
|        Stock-basedcompensation expense                                                                 | 10,676                                                                                                                                                                                                                 | 8,759  |
|        Deferred income taxexpense (benefit)                                                            | 18,584                                                                                                                                                                                                                 | (         673) |
|        Foreign currencytransaction gain                                                                | (         170)                                                                                                                                                                 | (         144) |
|        Net change inoperating assets and liabilities:                                                  |                                                                                                                                                                                                                        |   |
|           Decrease(increase) in:                                                        |                                                                                                                                                                                                                        |   |
|              Accountsreceivable, net                                     | (    16,047)                                                                                                                                                                                            | 11,608  |
|              Inventories,net                                             | (    32,613)                                                                                                                                                                                            | 76,583  |
|              Othercurrent assets                                         | (    23,025)                                                                                                                                                                                            | (   22,218) |
|              Otherassets                                                 |            54                                                                                                                                                   |   |
|           Increase(decrease) in:                                                        |                                                                                                                                                                                                                        |   |
|              Accountspayable                                             | 47,757                                                                                                                                                                                                                 | (     3,201) |
|              Accruedexpenses                                             |     39,211                                                                                                                                                                                         |    25,605  |
|              Incometaxes payable                                         |     16,448                                                                                                                                                                                         |     30,202  |
|                 Netcash provided by operating activities  |   349,519                                                                                                                                                                                                    |   352,888  |
|                                                                                                                                      |                                                                                                                                                                                                                        |   |
| Cash flows from investing activities:                                                                                                     |                                                                                                                                                                                                                        |   |
|    Purchase of property, plant and equipment                                                                               | (      9,604)                                                                                                                                                                                 | (    10,332) |
|    Purchase of marketable securities                                                                                       | (  827,325)                                                                                                                                                                                                       | (  485,980) |
|    Redemption of marketable securities                                                                                     |   607,821                                                                                                                                                                                                    |   324,188  |
|                 Netcash used in investing activities      | (  229,108)                                                                                                                                                                                                       | (  172,124) |
|                                                                                                                                      |                                                                                                                                                                                                                        |   |
| Cash flows from financing activities:                                                                                                     |                                                                                                                                                                                                                        |   |
|    Net proceeds from common stock optionsexercised      by employees under stock optionplans | 18,580                                                                                                                                                                                                                 | 21,972  |
|    Tax benefit realized from the exercise ofstock      options by employees                  |         3,372                                                                                                                                                                  | 9,411  |
|    Purchase of treasury stock                                                                                              | (    86,003)                                                                                                                                                                                            | (    69,621) |
|                 Netcash used in financing activities      | (    64,051)                                                                                                                                                                                            | (    38,238) |
|                                                                                                                                      |                                                                                                                                                                                                                        |   |
| Effect of exchange rate changes on cash                                                                                                   |       1,874                                                                                                                                                                              |       6,190  |
| Increase in cash and cash equivalents                                                                                                     |     58,234                                                                                                                                                                                         | 148,716  |
| Cash and cash equivalents, beginning of period                                                                                            |   563,663                                                                                                                                                                                                    |   718,974  |
| Cash and cash equivalents, end of period                                                                                                  | $621,897                                                                                                                                                                                                               | $867,690  |
|                                                                                                                                      | =======                                                                                                                                                                                                                | =======  |

|                                               |          |          |
|----------------------------------------------------|---------------|---------------|
| Supplemental disclosures of cash flow information: |          |          |
|                                               |          |          |
| Cash paid during the period for:                   |          |          |
|     Income taxes               | $37,517  | $17,658  |
|                                               |          |          |
|                                               |          |          |
|                                               |          |          |
|                                               |          |          |

*See notes to condensed consolidated financialstatements.*

 

**FOREST LABORATORIES, INC. ANDSUBSIDIARIESNotes to Condensed Consolidated Financial Statements(Unaudited)**

**1.   Basis of Presentation:**

The accompanying unaudited condensed consolidated financialstatements have been prepared in accordance with U.S. generallyaccepted accounting principles for interim financial informationand with the instructions to Form 10-Q and Rule 10-01 of RegulationS-X. Accordingly, they do not include all of the information andfootnotes required by generally accepted accounting principles forcomplete financial statements. In the opinion of Management, alladjustments (consisting of only normal recurring accruals)considered necessary for a fair presentation have been included.Operating results for the three-month period ended June 30, 2007are not necessarily indicative of the results that may be expectedfor the year ending March 31, 2008. For further information referto the consolidated financial statements and footnotes theretoincorporated by reference in the Company's Annual Report on Form10-K for the year ended March 31, 2007.

**2.   AccountsReceivable:**

Accounts receivable, net, consists of thefollowing:

|             | June 30, 2007                                                           |                             |
|------------------|-------------------------------------------------------------------------|----------------------------------|
| *(In thousands)* |   (Unaudited)         | March 31, 2007    |
|             |                                                                    |                             |
| Trade            | $336,958                                                                | $330,580                         |
| Other            |     61,744                                          |     52,075   |
|             | $398,702                                                                | $382,655                         |
|             |  =======                                                      | =======                     |

**3.   Inventories:**

Inventories, net of reserves for obsolescence,consist of the following:

|             | June 30, 2007                                                           |                                      |
|------------------|-------------------------------------------------------------------------|-------------------------------------------|
| *(In thousands)* |   (Unaudited)         | March 31, 2007             |
|             |                                                                    |                                      |
| Raw materials    | $242,201                                                                | $257,042                                  |
| Work in process  |       9,995                               |       8,449 |
| Finished goods   |   214,580                                                     |   168,672                       |
|             | $466,776                                                                | $434,163                                  |
|             |  =======                                                      | =======                              |

**4.   Net Income Per Share***(Inthousands)***:**

A reconciliation of shares used in calculating basic and dilutednet income per share follows:

|                                                               | Three Months Ended              June30,             |
|-------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                    |      2007                                                                                                                                          |      2006 |
| Basic                                                                   | 319,580                                                                                                                                                                     | 321,503 |
| Effect of assumed conversion of   employee stock options |     2,341                                                                                                                                               |     4,412 |
| Diluted                                                                 | 321,921                                                                                                                                                                     | 325,915 |
|                                                                    | ======                                                                                                                                                                      | ====== |

Options to purchase approximately 8,059 shares of common stockat exercise prices ranging from $38.94 to $76.66 per share thatwere outstanding during a portion of the three-month period endedJune 30, 2007 were not included in the computation of diluted netincome per share because they were anti-dilutive. These optionsexpire through 2017. Options to purchase approximately 10,058shares of common stock at exercise prices ranging from $40.00 to$76.66 per share that were outstanding during a portion of thethree-month period ended June 30, 2006 were not included in thecomputation of diluted net income per share because they wereanti-dilutive. These options expire through 2016.

**5.   Stock-Based Compensation***(Inthousands)***:**

The Company has various employee stock option plans from whichoptions are granted to certain employees and non-employee directorswhich entitle the purchase of shares of common stock at prices notless than the fair market value of the common stock at the date ofgrant. Both incentive and non-qualified options may be issued underthe plans. The options generally vest in three to five years andare exercisable for five to ten years from the date of issuance.Awards are granted by the Board of Directors under the terms of theCompany’s 1998, 2000 and 2004 stock option plans, all ofwhich expire after 10 years. As of June 30, 2007, 38,000 shareswere authorized and 5,104 were available for grant.

Effective April 1, 2006, the Company adopted the provisions ofStatement of Financial Accounting Standards No. 123(R),"Share-Based Payment" (SFAS 123R) whereby stock option expense iscalculated at fair value using the Black-Scholes valuation modeland amortized on an even basis (net of estimated forfeitures) overthe requisite service period. The Company previously accounted forits stock option awards to employees under the intrinsic valuebased method of accounting prescribed by Accounting PrinciplesBoard Opinion No. 25, "Accounting for Stock Issued to Employees."Under the intrinsic value based method, compensation cost is theexcess, if any, of the quoted market price of the stock at grantdate or other measurement date over the amount an employee must payto acquire the stock. The Company has never granted options belowmarket price on the date of grant.

The Company elected to adopt the modified prospectiveapplication method provided by SFAS 123R, and accordingly, $10,676of compensation expense ($8,892 net of tax) and $8,759 ($7,426 netof tax) was recorded for the quarters ended June 30, 2007 and 2006,respectively, to cost of sales, selling, general and administrativeand research and development expense, as appropriate. Amountscapitalized as part of inventory costs were not significant.

**6.   Business Segment Information:**

The Company operates in only one segment. Below is a breakdownof net sales by therapeutic class:

| *(In thousands)*             |   Three Months Ended             June30,            |
|------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                         |        2007                                                                                                                                        |        2006 |
|                         |                                                                                                                                                                                  |   |
| Central nervous system (CNS) | $747,508                                                                                                                                                                              | $663,929 |
| Cardiovascular               | 8,419                                                                                                                                                                                 | 14,785 |
| Other                        |     86,689                                                                                                                                                        |     80,054 |
|                         | $842,616                                                                                                                                                                              | $758,768 |
|                         | =======                                                                                                                                                                               | ======= |

**7.   RecentlyIssued Accounting Standard; Certain Tax Matters:**

On April 1, 2007, the Company adopted the provisions ofFinancial Accounting Standards Board (FASB) Interpretation (FIN48), "Accounting for Uncertainty in Income Taxes - aninterpretation of FASB Statement No. 109". As a result of theadoption of FIN 48, the Company increased its tax liabilities by$13,796 with a corresponding reduction to the April 1, 2007 balanceof retained earnings. In addition, accrued interest related tounrecognized tax benefits totaled $11,576 as of April 1, 2007.Interest and penalties, if any, are recorded in income tax expenseand are classified on the balance sheet with the related taxliability. Unrecognized tax benefits totaling $152,695 have beenreclassified from current income taxes payable to long-term incometaxes payable based on the Company’s expectation of cashpayments within the next twelve months.

The Company and its subsidiaries file a consolidated U.S.federal income tax return.

The Company is subject to income taxes both in the United Statesand several foreign jurisdictions. Significant judgment is requiredin determining the worldwide provision for income taxes. TheCompany’s tax returns are routinely audited by U.S. federaland state as well as foreign tax authorities. The Company accruesliabilities for identified tax contingencies that result frompositions taken by the Company that are being challenged or couldbe challenged by tax authorities. The Company believes that itsaccrual for tax liabilities is adequate for all open years, basedon management’s assessment of many factors, including itsinterpretations of the tax law and judgments about potentialactions by tax authorities. However, it is possible that theultimate resolution of any tax audit may be materially greater orless than the amount accrued.

The Company’s income tax returns for fiscal years prior to1999 generally are no longer subject to review as such fiscal yearsare generally closed. Tax authorities in various jurisdictions arein the process of reviewing the Company’s tax returns forvarious post-1999 fiscal years, including the Internal RevenueService (IRS), which is currently examining the Company’sU.S. federal income tax returns for fiscal years 2002 and 2003. Inconnection with the examination, on July 24, 2007, the IRS issued anotice of proposed adjustment for the tax years under examinationrelated to the Company’s intercompany transfer pricingmethodology, which seeks to increase the Company’s U.S.taxable income by approximately $600 million for those yearscombined.

The Company disagrees with the proposed IRS adjustment (whichthe Company believes is inconsistent with applicable tax laws) andintends to oppose the proposed adjustment vigorously. While theresolution of this issue may result in tax liabilities that aregreater or less than the reserves established with respect to thisissue, management believes that the ultimate resolution will nothave a material adverse effect on the Company’s financialposition or liquidity. If the IRS prevails in a position thatincreases U.S. taxable income, it is likely that the IRS could makesimilar claims for years subsequent to fiscal 2003.

**FOREST LABORATORIES,INC. AND SUBSIDIARIESMANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS*(Dollar amounts in thousands)***

Total net revenues increased to $928,274 for the period endedJune 30, 2007 as compared to $816,338 for the June 30, 2006quarter. This was due to strong sales growth of our key marketedproducts, Lexapro® and Namenda®, and higher co-promotionincome from Benicar®. Net income increased by $67,555 duringthe current quarter as compared to the same quarter last year.While increases in net revenues account for a portion of suchincrease, the increase is primarily due to the effect of the$60,000 upfront license payment made and expensed in the prioryear’s quarter to Laboratorios Almirall, S.A.. (Almirall) inconnection with a collaboration agreement for the U.S. rights toaclidinium, a long-acting muscarinic antagonist being developed forthe treatment of chronic obstructive pulmonary disease (COPD).

**Financial Condition and Liquidity**

Net current assets increased by $271,712 from March 31, 2007.Cash and cash equivalents, marketable securities and accountsreceivable increased due to ongoing operations. During the June2007 quarter, pursuant to the 2007 Repurchase Program, werepurchased 1.8 million shares at a cost of $86,003, leaving 12.9million shares still available for repurchase. Long-term marketablesecurities increased as well, as certain funds, not required tofund the share repurchase program, were shifted to longer-term inorder to receive more favorable rates of return. Trade accountsreceivable increased due to higher sales of our principal brandedproducts and other accounts receivable increased due to highercontract revenue from Daiichi Sankyo for our co-promotion ofBenicar. Finished goods inventory increased in order to supportcontinued demand for our products. We believe that currentinventory levels are adequate to support the growth in our ongoingbusiness. Other current assets increased due principally to therenewal of our insurance programs, which are paid in full at thetime of renewal and expensed over the life of the policy years.Increases in accounts payable and accrued expenses were due tonormal operating activities.

Property, plant and equipment before accumulated depreciationincreased slightly from March 31, 2007. We currently have one majorfacilities expansion underway, the refurbishing of a 90,000 squarefoot plant in Ireland which will provide redundancy for themanufacture of Lexapro and Namenda and additional capacity forfuture products. We expect the completion of this facility by theend of the second quarter of fiscal 2008. During the currentperiod, we also continued to make technology investments to expandour principal operating systems to include salesforce applications.We also expect to complete the sale of our Inwood property,buildings and certain machinery and equipment prior to the end ofthe second quarter of fiscal 2008. The value of these idle assetsavailable for sale are classified in other assets.

On April 1, 2007, we adopted the provisions of FinancialAccounting Standards Board (FASB) Interpretation (FIN 48),"Accounting for Uncertainty in Income Taxes - an interpretation ofFASB Statement No. 109". As a result of the adoption of FIN 48, weincreased our tax liabilities by $13,796 with a correspondingreduction to the April 1, 2007 balance in retained earnings. Inaddition, accrued interest, related to unrecognized tax benefitstotaled $11,576 as of April 1, 2007. Interest and penalties, ifany, are recorded in income tax expense and are classified on thebalance sheet with the related tax liability. Unrecognized taxbenefits totaling $152,695 have been reclassified from currentincome taxes payable to long-term income taxes payable based on ourexpectation of cash payments within the next twelve months.

During fiscal 2007 our Board of Directors approved the 2007Repurchase Program which authorized the purchase of up to 25million shares of common stock. In the June 2007 quarter, werepurchased 1.8 million shares at a cost of $86,003 and as ofAugust 8, 2007, we have repurchased a total of 14.3 million sharesat a cost of $644,631 under the 2007 Repurchase Program.

Management believes that current cash levels, coupled with fundsto be generated by ongoing operations, will continue to provideadequate liquidity to facilitate potential acquisitions ofproducts, payment of achieved milestones, capital investments andthe continued share repurchases.

**Results of Operations**

For the quarter ended June 30, 2007, net sales increased $83,848to $842,616, an 11% increase from the June 30, 2006 quarter,primarily due to strong sales of Lexapro and Namenda. Lexapro, ourSSRI for the treatment of depression and anxiety in adults and ourmost significant product, with net sales of $552,313, grew 9% andcontributed $45,280 to the net sales change, of which $16,969 wasdue to volume and $28,311 was due to price. In fiscal 2004, we,along with our licensing partner, H. Lundbeck A/S (Lundbeck) filedsuit against Teva Pharmaceuticals (Teva) for patent infringementrelated to our Lexapro patent. A trial was held regarding thepatent litigation with Teva in March 2006 and on July 13, 2006, theU.S. District Court for the District of Delaware determined thatthe patent covering Lexapro is valid and enforceable.Lexapro’s patent is set to expire in March 2012. Teva hasfiled an appeal of the court’s ruling. Briefing and oralargument have been completed and a decision is expected prior tothe end of calendar 2007. Another generic manufacturer, CaracoPharmaceuticals Laboratories, Ltd. (Caraco), has filed an ANDA witha Paragraph IV Certification for a generic equivalent to Lexapro.Forest and Lundbeck have filed a lawsuit in the U.S. District Courtfor the Eastern District of Michigan against Caraco for patentinfringement.

Net sales of Namenda, our N-methyl-D-aspartate (NMDA) receptorantagonist for the treatment of moderate to severe Alzheimer'sdisease, grew 27%, an increase of $40,637 as compared to the sameperiod last year to $191,719 for the current quarter, of which$33,317 was due to volume and $7,320 was due to price. Namenda isindicated for the treatment of moderate to severe Alzheimer'sdisease and has generated significant new prescriptions in theretail and long-term care markets. We anticipate Namenda continuingpositive growth through fiscal 2008. The remainder of the net saleschange for the period was due principally to volume fluctuations ofour older non-promoted product lines.

Contract revenue for the current quarter was $53,377 compared to$42,662 in the same period last year primarily due to co-promotionincome from our co-marketing agreement with Daiichi Sankyo forBenicar of $52,543 as compared to $41,717 last year.

Other income for the current quarter increased over the sameperiod last year primarily due to higher interest income receivedon higher levels of invested funds and more favorable rates ofreturn. Also included in other income was a milestone paymentreceived related to our European development program for an inhaledcystic fibrosis product.

Cost of sales as a percentage of net sales was 22.1% for theJune 2007 as compared with 23.2% for the June 2006 quarter. Thisdecrease was due in large measure to manufacturing and operationalefficiency gains.

Selling, general and administrative expenses increased $16,945in the current quarter as compared to the same period last year.The increase is primarily attributable to salesforce activity andpromotional support for products currently marketed and pre-launchcosts for nebivolol.

Research and development expense decreased $2,174 as the currentquarter included approximately $28,000 in milestone expensesrelated to the aclidinium and milnacipran development programs ascompared with the June 2006 quarter which included a $60,000upfront license payment to Almirall for the U.S. rights toaclidinium. Excluding these milestone expenses and upfront licensepayments, research and development expense increased due to theprogression of our current pipeline development programs.

Research and development expense also reflects thefollowing:

> 
· During the fourth quarter offiscal 2006, we entered into an agreement with Mylan Laboratories,Inc. (Mylan) for the commercialization, development anddistribution rights for nebivolol, a novel beta blocker. In May2005, Mylan received an "approvable" letter from the FDA fornebivolol for the treatment of hypertension. Final approval iscontingent upon the review of certain additional data requested bythe FDA. We and Mylan expect the FDA to complete its review priorto the end of calendar 2007. Nebivolol is also being studied forthe treatment of congestive heart failure (CHF). We have completedthe data analysis of a Phase III study and are continuing to assessthe appropriate timing of a submission for this indication.

· On May 22, 2007 we announcedthat top-line results of a Phase III study demonstratedstatistically significant therapeutic effects of milnacipran as atreatment of fibromyalgia syndrome (FMS). Subject to a favorablereview of the full study results and based in part on communicationwith the FDA, we plan to submit an NDA including data from thisstudy and an earlier Phase III study around the end of calendar2007. A third randomized pivotal Phase III study, which wascommenced in early 2006, is expected to have results in the middleof 2008.

· In connection with ouracquisition of Cerexa, Inc. in January 2007, we acquired worldwidedevelopment and marketing rights (excluding Japan) to ceftaroline,a next generation, broad spectrum, hospital-based injectablecephalosporin antibiotic. Two Phase III studies for ceftarolinecontinue to enroll patients with complicated skin and structureinfections and we will soon begin enrollment in two studies forcommunity acquired pneumonia (CAP). We anticipate the skin and skinstructure results by the end of 2008 and the CAP results in2009.

· In April 2006, we enteredinto a collaboration agreement with Almirall for the U.S. rights toaclidinium, a long-acting muscarinic antagonist which is beingdeveloped as an inhaled therapy for the treatment of chronicobstructive pulmonary disease (COPD). Enrollment of two large PhaseIII international studies has been completed and we expect to havetopline results for these studies in the second half of calendar2008.

· A once-daily formulation ofNamenda is currently in a Phase III Alzheimer’s disease studyas to which results are expected to be available in early calendar2008.

· During the third quarter offiscal 2005, Forest entered into a collaboration agreement withGedeon Richter Limited for the North American rights to RGH-188, acompound which is being developed for the treatment ofschizophrenia, bipolar mania and other psychiatric conditions.Phase II testing in schizophrenia has been initiated and weanticipate results prior to the end of calendar 2007. A secondPhase II bipolar study was commenced in April 2007 and expectresults sometime in 2008.

· During the first quarter offiscal 2006, we received the results of a recently completedplacebo-controlled proof of concept study of neramexane in thetreatment of Alzheimer’s disease. We anticipate starting anadditional proof of concept study of neramexane inAlzheimer’s disease later in calendar 2007.

· During the second quarter offiscal 2005, Forest entered into a collaboration agreement withGlenmark Pharmaceuticals S.A. for the North American developmentand marketing of GRC3886, a PDE4 inhibitor for the treatment ofasthma and COPD. We have now completed additional preclinical workrequested by the FDA and will soon submit the data for its review.We must receive FDA concurrence before we can move to a largerPhase II proof of concept study.

· During the third quarter offiscal 2006, we entered into an agreement with Gedeon RichterLimited for the U.S. and Canadian rights to RGH-896, a compoundbeing developed for the treatment of chronic pain and other CNSconditions and a group of novel compounds that target the group 1metabotropic glutamate receptors (mGLUR1/5).

· During the first quarter offiscal 2005, we entered into an agreement with PAION GmbH for thedevelopment and marketing of desmoteplase for the treatment ofacute ischemic stroke. On May 31, 2007 we announced topline resultsof the DIAS-2 (Phase III) study in patients with acute ischemicstroke. The primary efficacy endpoint (difference between activetreatment and placebo in percentage of composite responders) wasnot met. We are currently reviewing the complete study database todetermine the appropriate next steps.

The effective tax rate was 22% in the current quarter unchangedfrom the same period last year. Effective tax rates can be affectedby ongoing tax audits. See Note 7 to the Condensed ConsolidatedFinancial Statements (Unaudited).

We expect to continue our profitability in the current fiscalyear with continued growth in our principal promoted products.

Inflation has not had a material effect on our operations forthe periods presented.

**Critical Accounting Policies**

The following accounting policies are important in understandingour financial condition and results of operations and should beconsidered an integral part of the financial review. Refer to thenotes to the consolidated financial statements for additionalpolicies.

Estimates and Assumptions

The preparation of financial statements in conformity withgenerally accepted accounting principles requires us to makeestimates and assumptions that affect the reported amounts ofassets and liabilities and of revenues and expenses during thereporting period. Estimates are made when accounting for salesallowances, returns, rebates and other pricing adjustments,depreciation, amortization and certain contingencies. Forest issubject to risks and uncertainties, which may include but are notlimited to competition, federal or local legislation andregulations, litigation and overall changes in the healthcareenvironment that may cause actual results to vary from estimates.We review all significant estimates affecting the financialstatements on a recurring basis and record the effect of anyadjustments when necessary. Certain of these risks, uncertaintiesand assumptions are discussed further under the section entitled"Forward Looking Statements".

Revenue Recognition

Revenues are recorded in the period the merchandise is shipped.As is typical in the pharmaceutical industry, gross product salesare subject to a variety of deductions, primarily representingrebates and discounts to government agencies, wholesalers andmanaged care organizations. These deductions represent estimates ofthe related liabilities and, as such, judgment is required whenestimating the impact of these sales deductions on gross sales fora reporting period. Historically, our adjustments for actual futuresettlements have not been material, and have resulted in either anet increase or a net decrease to net income. If estimates are notrepresentative of actual settlement, results could be materiallyaffected. Provisions for estimated sales allowances, returns,rebates and other pricing adjustments are accrued at the timerevenues are recognized as a direct reduction of such revenue.

The accruals are estimated based on available information,including third party data, regarding the portion of sales on whichrebates and discounts can be earned, adjusted as appropriate forspecific known events and the prevailing contractual discount rate.Provisions are reflected either as a direct reduction to accountsreceivable or, to the extent that they are due to entities otherthan customers, as accrued expense. Adjustments to estimates arerecorded when customer credits are issued or payments are made tothird parties.

The sensitivity of estimates can vary by program and type ofcustomer. However, estimates associated with Medicaid and contractrebates are most at risk for adjustment because of the extensivetime delay between the recording of the accrual and its ultimatesettlement, an interval that can range up to one year. Because ofthis time lag, in any given quarter, adjustments to actual mayincorporate revisions of prior quarters.

Provisions for Medicaid and contract rebates during a period arerecorded based upon the actual historical experience ratio ofrebates paid and actual prescriptions written. The experience ratiois applied to the period's sales to determine the rebate accrualand related expense. This experience ratio is evaluated regularlyto ensure that the historical trends are as current as practicable.As appropriate, we will adjust the ratio to more closely match thecurrent experience or expected future experience. In assessing thisratio, we consider current contract terms, such as the effect ofchanges in formulary status, discount rate and utilization trends.Periodically, the accrual is adjusted based upon actual paymentsmade for rebates. If the ratio is not indicative of futureexperience, results could be affected. Rebate accruals for Medicaidwere $26,890 at June 30, 2007 and $30,411 at June 30, 2006.Commercial discounts and other rebate accruals were $137,111 atJune 30, 2007 and $77,961 at June 30, 2006. These and other rebateaccruals are established in the period the related revenue wasrecognized, resulting in a reduction to sales and the establishmentof a liability, which is included in accrued expenses.

The following table summarizes the activity for the three-monthperiod in the accounts related to accrued rebates, sales returnsand discounts *(In thousands)*:

                

  Beginning balance Provision for rebatesChanges in estimatesSettlements  Provision for returnsChanges in estimatesSettlements  Provision for chargebacks and discountsChanges in estimatesSettlements  Ending balance

    June 30, 2007        $208,063          100,159       (    83,523)            16,636              9,239       (      9,559)       (         320)            81,501       (      7,700)       (    85,578)       (    11,777)        $212,602        =======

    June 30, 2006        $158,277            88,512       (    75,534)            12,978              5,974       (      4,443)              1,531          102,943       (    95,332)              7,611        $180,397        =======

Deductions for chargebacks (primarily discounts to grouppurchasing organizations and federal government agencies) aregenerally settled within 2-3 weeks of incurring the liability.Based on current contracting trends and chargeback activity, theCompany reduced the estimated liability at June 30, 2007 to moreclosely reflect management’s estimate of future chargebacksettlements.Forest's policy relating to the supply of inventory at wholesalersis to maintain stocking levels of up to three weeks and to keepmonthly levels consistent from year to year, based on patterns ofutilization. We have historically closely monitored wholesalecustomer stocking levels by purchasing information directly fromcustomers and by obtaining other third party information. Unusualor unexpected variations in buying patterns or utilizations areinvestigated.Sales incentives are generally given in connection with a newproduct launch. These sales incentives are recorded as a reductionof revenues and are based on terms fixed at the time goods areshipped. New product launches may result in expected temporaryincreases in wholesaler inventories, which as described above, areclosely monitored and have not resulted in increased productreturns.

** **

**Forward Looking Statements**

Except for the historical information contained herein, theManagement Discussion and other portions of this Form 10-Q containforward looking statements that involve a number of risks anduncertainties, including the difficulty of predicting FDAapprovals, acceptance and demand for new pharmaceutical products,the impact of competitive products and pricing, the timelydevelopment and launch of new products, changes in laws andregulations affecting the healthcare industry, and the risk factorslisted from time to time in our filings with the SEC, including theAnnual Report on Form 10-K for the fiscal year ended March 31,2007.

**Quantitative andQualitative Disclosures About Market Risk**

In the normal course of business, operations may be exposed tofluctuations in currency values and interest rates. Thesefluctuations can vary the costs of financing, investing andoperating transactions. Because we had no debt and only minimalforeign currency transactions, there was no material impact onearnings due to fluctuations in interest and currency exchangerates.

**Controls andProcedures**

As of the end of the period covered by this report, the Companyconducted an evaluation, under the supervision and with theparticipation of the principal executive officer and principalfinancial officer, of the Company's disclosure controls andprocedures (as defined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934 (the Exchange Act)). Based on thisevaluation, the principal executive officer and principal financialofficer concluded that the Company's disclosure controls andprocedures are effective to ensure that information required to bedisclosed by the Company in reports that it files or submits underthe Exchange Act is recorded, processed, summarized and reportedwithin the time periods specified in Securities and ExchangeCommission rules and forms. There was no change in the Company'sinternal control over financial reporting during the Company's mostrecently completed fiscal quarter that has materially affected, oris reasonably likely to materially affect, the Company's internalcontrol over financial reporting.

**Part II -Other Information**

Item 1.  LegalProceedings                          Forest is party to certain legalproceedings disclosed in our Annual Report on Form 10-K             forthe fiscal year ended March 31, 2007.

 

Item 1A. Risk Factors

              Therehave been no material changes with respect to the risk factorsdisclosed in our Annual              Reporton Form 10-K for the fiscal year ended March 31, 2007, except thatthe risk factor              captioned*The Effective Rate of Taxation upon Our Results of Operations isDependent on*              *Multi-National Tax Considerations* is hereby revised to read asfollows:

              Aportion of our earnings is taxed at more favorable rates applicableto the activities              undertakenby our subsidiaries based or incorporated in the Republic ofIreland. Changes              intax laws or in their application or interpretation, such as to thetransfer pricing between              Forest’snon-U.S. operations and the United States, could increase oureffective tax rate and              negativelyaffect our results of operations. The transfer pricing issue is thesubject of an              ongoingaudit by the Internal Revenue Service. See Note 7 to the CondensedConsolidated              FinancialStatements (Unaudited).

 

Item2.  Unregistered Sales of Equity Securities, Use ofProceeds and Issuer Repurchases of Equity             Securities

*             Purchaseof equity securities by Forest:*

             InMay 2006 our Board of Directors authorized a new share repurchaseprogram (the 2007             RepurchaseProgram) for up to 25 million shares of our common stock. As ofAugust 8, 2007,             10.7million shares were available for repurchase under the 2007Repurchase Program.

             Thefollowing table summarizes the repurchase of common stock under the2007 Repurchase             Programduring the first quarter of the fiscal year covered by thisreport:
 
**Period**

**Totalnumber ofsharespurchased(1)**

**Averageprice paidper share**

**Total number ofshares purchased aspart of publiclyannounced plans orprograms**

**Maximumnumber ofshares that mayyet be purchasedunder theprogram**
 
4/1/07through4/30/07

       -

    -

      -

        -
 
5/1/07through5/31/07

       -

    -

      -

        -
 
6/1/07through6/30/07

1,800,000

$47.78

1,800,000

12,884,700

 (1)  Shares were purchased pursuantto the publicly announced 2007 Repurchase Program, which        was effective as ofMay 18, 2006 and has no set expiration date. We are authorized topurchase        up to 25 millionshares of our common stock under the 2007 Repurchase Program.

 

Item 6.  Exhibits

             Exhibit31.1   Certification Pursuant to Section 302 of theSarbanes-Oxley Act of 2002             Exhibit31.2  Certification Pursuant to Section 302 of theSarbanes-Oxley Act of 2002             Exhibit32.1   Certification Pursuant to Section 906 of theSarbanes-Oxley Act of 2002             Exhibit32.2  Certification Pursuant to Section 906 of theSarbanes-Oxley Act of 2002

 

 

 

                                                                                                   SIGNATURES

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto dulyauthorized.

Date: August 9, 2007

Forest Laboratories, Inc.(Registrant)

/s/ HowardSolomon       Howard SolomonChairman of the Board,Chief Executive Officerand Director

/s/ Francis I. Perier,Jr.               Francis I. Perier, Jr.Senior Vice President - Finance andChief Financial Officer