**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 December 31,2006**

**
[   ]
 
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 February 9, 2007: 317,858,558.

** **

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

PART I-FINANCIAL INFORMATION

**            **ITEM1.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 ANDPROCEDURES

PART II-OTHER INFORMATION

            ITEM 1.LEGAL PROCEEDINGS

            ITEM 1A. RISK FACTORS

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

            ITEM 6.EXHIBITS

            EXHIBIT 10.22            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)*                                                                                                                                                                                                                                         | December 31, 2006       (Unaudited)        | March 31, 2006                                               |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------|
|                                                                                                                                                                                                                                                     |                                                                                                             |                                                              |
| **Assets**                                                                                                                                                                                                                                               |                                                                                                             |                                                              |
|                                                                                                                                                                                                                                                     |                                                                                                             |                                                              |
| Current assets:    Cash (including cash equivalentinvestments        of $948,871 inDecember and $413,347 in March)                                                                           |  

$   951,302                                                                          | $   414,579                                   |
|     Marketable securities                                                                                                                                                                                                            | 541,256                                                                                                     | 612,899                                                      |
|     Accounts receivable, less allowance fordoubtful accounts        of $20,027 inDecember and $18,941 in March                                                                               | 381,405                                                                                                     | 366,538                                                      |
|     Inventories, net                                                                                                                                                                                                                 | 433,550                                                                                                     | 635,719                                                      |
|     Deferred income taxes                                                                                                                                                                                                            | 175,126                                                                                                     | 157,290                                                      |
|     Other current assets                                                                                                                                                                                                             |        30,395                                                            |        20,162             |
|         Total currentassets                                                                                                                                                                                      |   2,513,034                                                                                       |   2,207,187                                        |
|                                                                                                                                                                                                                                                     |                                                                                                             |                                                              |
| Marketable securities                                                                                                                                                                                                                                    |      605,339                                                                       |      295,116                        |
|                                                                                                                                                                                                                                                     |                                                                                                             |                                                              |
| Property, plant and equipment                                                                                                                                                                                                                            | 557,119                                                                                                     | 535,047                                                      |
|     Less: accumulated depreciation                                                                                                                                                                                                   |      191,352                                                                       |      159,387                        |
|                                                                                                                                                                                                                                                     |      365,767                                                                       |      375,660                        |
| Other assets:    Goodwill                                                                                                                                                                                                            | 14,965                                                                                                      | 14,965                                                       |
|     License agreements, product rights andother        intangibles, lessaccumulated amortization        of $368,074 inDecember and $321,520 in March |  

166,161                                                                                             | 211,785                                                      |
|     Deferred income taxes                                                                                                                                                                                                            | 22,964                                                                                                      | 13,870                                                       |
|     Other                                                                                                                                                                                                                            |          1,211                                                 |          1,257  |
|         Total otherassets                                                                                                                                                                                        |      205,301                                                                       |      241,877                        |
|                                                                                                                                                                                                                                                     |                                                                                                             |                                                              |
|              Totalassets                                                                                                                                                                | $3,689,441                                                                                                  | $3,119,840                                                   |
|                                                                                                                                                                                                                                                     | ========                                                                                                    | ========                                                     |

*See notes to condensed consolidated financialstatements.*

** **

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

| *(In thousands, except for par values)*                                                                                                                                                 | December 31, 2006       (Unaudited)        | March 31, 2006                                               |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------|
|                                                                                                                                                                                    |                                                                                                             |                                                              |
| **Liabilities and Stockholders' Equity**                                                                                                                                                |                                                                                                             |                                                              |
|                                                                                                                                                                                    |                                                                                                             |                                                              |
| Current liabilities:    Accounts payable                                                                                                                            | $   135,281                                                                                       | $   140,911                                   |
|     Accrued expenses                                                                                                                                                | 309,706                                                                                                     | 242,790                                                      |
|     Income taxes payable                                                                                                                                            |        82,227                                                            |        37,266             |
|        Total currentliabilities                                                                                                                      |      527,214                                                                       |      420,967                        |
|                                                                                                                                                                                    |                                                                                                             |                                                              |
| Deferred income taxes                                                                                                                                                                   |             757                                 |          1,064  |
|                                                                                                                                                                                    |                                                                                                             |                                                              |
| Stockholders' equity:    Series preferred stock, $1.00 par; sharesauthorized 1,000;        no shares issued oroutstanding   |                                                                                                             |                                                              |
|     Common stock, $.10 par; sharesauthorized 1,000,000; issued        418,531 shares inDecember and 412,124 shares in March | 41,853                                                                                                      | 41,212                                                       |
|     Additional paid-in capital                                                                                                                                      | 1,254,072                                                                                                   | 1,023,079                                                    |
|     Retained earnings                                                                                                                                               | 4,895,272                                                                                                   | 4,203,253                                                    |
|     Accumulated other comprehensiveincome                                                                                                                           |         20,816                                                      | 6,762                                                        |
|     Treasury stock, at cost                                                                                                                                         |                                                                                                             |                                                              |
|       (101,139 shares inDecember and 90,784 shares in March)                                                                                         | (  3,050,543)                                                                                          | (  2,576,497)                                           |
|             Totalstockholders' equity                                                                                       |   3,161,470                                                                                       |   2,697,809                                        |
|                                                                                                                                                                                    |                                                                                                             |                                                              |
|                 Totalliabilities and stockholders' equity                                               | $3,689,441                                                                                                  | $3,119,840                                                   |
|                                                                                                                                                                                         | ========                                                                                                    | ========                                                     |

*See notes to condensed consolidated financialstatements.*

 

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

| *(In thousands, except per share amounts)*                              |    Three MonthsEnded         December 31,        |  Nine MonthsEnded                December31,          |
|------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                         |        2006                                                                                             |        2005                                                                                                                                |           2006  |           2005  |
|                                                                         |                                                                                                                                            |                                                                                                                                                                               |   |   |
| Net sales                                                                    | $830,431                                                                                                                                   | $714,887                                                                                                                                                                      | $2,367,875  | $2,081,173  |
| Contract revenue                                                             | 38,914                                                                                                                                     | 28,373                                                                                                                                                                        | 130,485  | 86,945  |
| Other income                                                                 |     23,686                                                                                                             |     14,570                                                                                                                                                |        57,984  |        37,950  |
|                                                                         |   893,031                                                                                                                        |   757,830                                                                                                                                                           |   2,556,344  |   2,206,068  |
|                                                                         |                                                                                                                                            |                                                                                                                                                                               |   |   |
| Costs and expenses:    Cost of sales                     | 195,539                                                                                                                                    | 165,875                                                                                                                                                                       | 556,322  | 483,136  |
|     Selling, general and administrative                  | 268,626                                                                                                                                    | 250,725                                                                                                                                                                       | 772,017  | 772,435  |
|     Research and development                             |   112,029                                                                                                                        |     94,188                                                                                                                                                |      344,863  |      216,054  |
|                                                                         |   576,194                                                                                                                        |   510,788                                                                                                                                                           |   1,673,202  |   1,471,625  |
|                                                                         |                                                                                                                                            |                                                                                                                                                                               |   |   |
| Income before income tax expense                                             | 316,837                                                                                                                                    | 247,042                                                                                                                                                                       | 883,142  | 734,443  |
|                                                                         |                                                                                                                                            |                                                                                                                                                                               |   |   |
| Income tax expense                                                           |     66,536                                                                                                             |     51,879                                                                                                                                                |      191,123  |      117,819  |
|                                                                         |                                                                                                                                            |                                                                                                                                                                               |   |   |
| Net income                                                                   | $250,301                                                                                                                                   | $195,163                                                                                                                                                                      | $   692,019  | $   616,624  |
|                                                                         | =======                                                                                                                                    | =======                                                                                                                                                                       | ========  | ========  |
| Net income per common share:                                                 |                                                                                                                                            |                                                                                                                                                                               |   |   |
|                                                                         |                                                                                                                                            |                                                                                                                                                                               |   |   |
|     Basic                                                | $0.79                                                                                                                                      | $0.58                                                                                                                                                                         | $2.17  | $1.81  |
|                                                                         | ====                                                                                                                                       | ====                                                                                                                                                                          | ====  | ====  |
|     Diluted                                              | $0.78                                                                                                                                      | $0.57                                                                                                                                                                         | $2.14  | $1.79  |
|                                                                         | ====                                                                                                                                       | ====                                                                                                                                                                          | ====  | ====  |
| Weighted average number of common    shares outstanding: |                                                                                                                                            |                                                                                                                                                                               |   |   |
|                                                                         |                                                                                                                                            |                                                                                                                                                                               |   |   |
|     Basic                                                | 316,200                                                                                                                                    | 336,890                                                                                                                                                                       | 318,512  | 340,160  |
|                                                                         | ======                                                                                                                                     | ======                                                                                                                                                                        | ======  | ======  |
|     Diluted                                              | 320,363                                                                                                                                    | 340,663                                                                                                                                                                       | 323,048  | 344,801  |
|                                                                         | ======                                                                                                                                     | ======                                                                                                                                                                        | ======  | ======  |

*See notes to condensed consolidated financialstatements.*

** **

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

| *(In thousands)*                  | Three Months Ended           December31,          |      Nine MonthsEnded             December31,          |
|-----------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                              |        2006                                                                                              |        2005                                                                                                                                      |        2006  |        2005  |
|                              |                                                                                                                                             |                                                                                                                                                                                     |   |   |
| Net income                        | $250,301                                                                                                                                    | $195,163                                                                                                                                                                            | $692,019  | $616,624  |
| Other comprehensive income (loss) |       6,083                                                                                                   | (      1,171)                                                                                                                                              |      14,054  | (      7,136) |
|                              |                                                                                                                                             |                                                                                                                                                                                     |   |   |
| Comprehensive income              | $256,384                                                                                                                                    | $193,992                                                                                                                                                                            | $706,073  | $609,488  |
|                              | =======                                                                                                                                     | =======                                                                                                                                                                             | =======  | =======  |

*See notes to condensed consolidated financialstatements.*

** **

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

|                                                                                                                                      |     Nine MonthsEnded                                                                                   |
|-------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *(In thousands)*                                                                                                                          |                December31,            |
|                                                                                                                                      |             2006                                                                                            |            2005  |
| Cash flows from operating activities:                                                                                                     |                                                                                                                                                                    |   |
|    Net income                                                                                                              | $   692,019                                                                                                                                         | $   616,624  |
|    Adjustments to reconcile net income to                                                                                  |                                                                                                                                                                    |   |
|      net cash provided by operatingactivities:                                                                   |                                                                                                                                                                    |   |
|        Depreciation                                                                                    | 33,815                                                                                                                                                             | 28,440  |
|        Amortization andimpairments                                                                     | 46,554                                                                                                                                                             | 40,088  |
|        Stock-basedcompensation expense                                                                 | 28,056                                                                                                                                                             |   |
|        Deferred income taxbenefit                                                                      | (       33,348)                                                                                                                      | (       16,108) |
|        Foreign currencytransaction loss (gain)                                                         | (            632)                                                                                           | 736  |
|        Net change inoperating assets and liabilities:                                                  |                                                                                                                                                                    |   |
|           Decrease(increase) in:                                                        |                                                                                                                                                                    |   |
|              Accountsreceivable, net                                     | (       14,868)                                                                                                                      | (         9,600) |
|              Inventories,net                                             | 202,169                                                                                                                                                            | (       41,809) |
|              Othercurrent assets                                         | (       10,233)                                                                                                                      | (         8,258) |
|           Increase(decrease) in:                                                        |                                                                                                                                                                    |   |
|              Accountspayable                                             | (         5,630)                                                                                                           | (       55,920) |
|              Accruedexpenses                                             |     66,916                                                                                                                                     | (       23,678) |
|              Incometaxes payable                                         | 44,960                                                                                                                                                             | (       63,217) |
|           Decreasein other assets                                                       |               46                                                                             |             105  |
|                 Netcash provided by operating activities  |   1,049,824                                                                                                                                              |      467,403  |
|                                                                                                                                      |                                                                                                                                                                    |   |
| Cash flows from investing activities:                                                                                                     |                                                                                                                                                                    |   |
|    Purchase of property, plant and equipment,net                                                                           | (       23,118)                                                                                                                      | (       38,969) |
|    Purchase of marketable securities                                                                                       | (  1,793,461)                                                                                                                                                 | (     837,769) |
|    Redemption of marketable securities                                                                                     |   1,554,881                                                                                                                                              |     781,544  |
|    Purchase of license agreements, product rightsand      other intangibles                  |                                                                          | (         1,397) |
|                 Netcash used in investing activities      | (     261,698)                                                                                                                                 | (       96,591) |
|                                                                                                                                      |                                                                                                                                                                    |   |
| Cash flows from financing activities:                                                                                                     |                                                                                                                                                                    |   |
|    Net proceeds from common stock optionsexercised      by employees under stock optionplans | 155,266                                                                                                                                                            | 61,955  |
|    Tax benefit realized from the exercise ofstock      options by employees                  | 52,655                                                                                                                                                             | 17,110  |
|    Purchase of treasury stock                                                                                              | (     472,279)                                                                                                                                 | (     792,115) |
|                 Netcash used in financing activities      | (     264,358)                                                                                                                                 | (     713,050) |
|                                                                                                                                      |                                                                                                                                                                    |   |
| Effect of exchange rate changes on cash                                                                                                   |        12,955                                                                                                                   | (         6,302) |
| Increase (decrease) in cash and cash equivalents                                                                                          | 536,723                                                                                                                                                            | (     348,540) |
| Cash and cash equivalents, beginning of period                                                                                            |      414,579                                                                                                                              |      788,553  |
| Cash and cash equivalents, end of period                                                                                                  | $    951,302                                                                                                                                   | $    440,013  |
|                                                                                                                                      | ========                                                                                                                                                           | ========  |

|                                               |           |           |
|----------------------------------------------------|----------------|----------------|
| Supplemental disclosures of cash flow information: |           |           |
|                                               |           |           |
| Cash paid during the period for:                   |           |           |
|     Income taxes               | $127,067  | $180,233  |
|                                               |           |           |
|                                               |           |           |
|                                               |           |           |
|                                               |           |           |

*See notes to condensed consolidated financialstatements.*

 

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

**1.   Basis of Presentation***(Inthousands)***:**

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 nine-month period ended December 31, 2006are not necessarily indicative of the results that may be expectedfor the year ending March 31, 2007. 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, 2006.

Certain variable-rate demand notes have been reclassified fromcash equivalents to current marketable securities. Based on theCompany’s re-evaluation, the Company has reclassified itsdemand notes at March 31, 2006 of $304,395 from cash equivalents tocurrent marketable securities. In addition, "Purchase of marketablesecurities" and "Redemption of marketable securities" included inthe accompanying condensed consolidated statements of cash flows,have been revised to reflect the purchase and sale of demandnotes.

**2.   AccountsReceivable:**

Accounts receivable, net, consists of thefollowing:

|             | December 31, 2006                                                                                     |                             |
|------------------|-------------------------------------------------------------------------------------------------------|----------------------------------|
| *(In thousands)* |        (Unaudited)         | March 31, 2006    |
|             |                                                                                                  |                             |
| Trade            | $335,449                                                                                              | $294,094                         |
| Other            |     45,956                                                                        |     72,444   |
|             | $381,405                                                                                              | $366,538                         |
|             |  =======                                                                                    |  =======               |

**3.   Inventories:**

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

|             | December 31, 2006                                                                                     |                                      |
|------------------|-------------------------------------------------------------------------------------------------------|-------------------------------------------|
| *(In thousands)* |        (Unaudited)         | March 31, 2006             |
|             |                                                                                                  |                                      |
| Raw materials    | $248,637                                                                                              | $397,703                                  |
| Work in process  |       6,512                                                             |       7,828 |
| Finished goods   |   178,401                                                                                   |   230,188                       |
|             | $433,550                                                                                              | $635,719                                  |
|             |  =======                                                                                    |  =======                        |

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

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

|                                                                    | Three Months Ended         December 31,      | Nine Months Ended        December31,      |
|-------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------|
|                                                                    |      2006                                                                                 |      2005                                                                    |      2006 |      2005 |
| Basic                                                                   | 316,200                                                                                                            | 336,890                                                                                               | 318,512 | 340,160 |
| Effect of assumed conversion of   employee stock options |     4,163                                                                                      |     3,773                                                                         |     4,536 |     4,641 |
| Diluted                                                                 | 320,363                                                                                                            | 340,663                                                                                               | 323,048 | 344,801 |
|                                                                    | ======                                                                                                             | ======                                                                                                | ====== | ====== |

Options to purchase approximately 3,526 shares of common stockat exercise prices ranging from $50.56 to $76.66 per share andoptions to purchase approximately 6,923 shares of common stock atexercise prices ranging from $45.76 to $76.66 per share that wereoutstanding during a portion of the three and nine-month periodsended December 31, 2006, respectively, were not included in thecomputation of diluted net income per share because they wereanti-dilutive. These options expire through 2016. Options topurchase approximately 9,956 and 9,154 shares of common stock atexercise prices ranging from $39.52 to $76.66 per share that wereoutstanding during a portion of the three and nine-month periodsended December 31, 2005, respectively, were not included in thecomputation of diluted net income per share because they wereanti-dilutive. These options expire through 2015.

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

The Company has various employee stock option plans from whichoptions are granted to certain employee 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 December 31, 2006, option planscovering 38,000 shares were authorized and options covering 5,186shares 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 made pro forma disclosures of netincome and earnings per share as if the fair value based method ofaccounting had been applied as required by Statement of FinancialAccounting Standards No. 123 (SFAS 123), "Accounting forStock-Based Compensation" by using the Black-Scholes option-pricingmodel. The Company has never granted options below market price onthe date of grant.

The Company elected to adopt the modified prospectiveapplication method provided by SFAS 123R, and accordingly,compensation expense of $10,158 ($8,597 net of tax) and $28,056($23,812 net of tax) was recorded for the three and nine-monthperiods ended December 31, 2006 to cost of sales, selling, generaland administrative and research and development expense, asappropriate, while the pro forma schedule required for SFAS 123below shows the compensation expense for the same three andnine-month periods of the prior year. Total compensation costrelated to non-vested stock option awards not yet recognized as ofDecember 31, 2006 was $96,781, pre-tax, and the weighted-averageperiod over which the cost is expected to be recognized isapproximately 2.5 years. Amounts capitalized as part of inventorycosts were not significant.

The Company’s unaudited condensed consolidated statementsof cash flows presents stock-based compensation expense as anadjustment to reconcile net income to net cash provided byoperating activities as well as a reclassification of the taxbenefit realized from the exercise of stock options by employees(in excess of the compensation costs recognized) from operatingactivities to financing activities as required by SFAS 123R.

The weighted average number of diluted common shares outstandingis reduced by the treasury stock method which, in accordance withSFAS 123R, takes into consideration the compensation costattributed to future services not yet recognized.

Under the accounting provisions of SFAS 123R, the Company'sprior period net income and net income per share would have beenreduced to the pro forma amounts indicated below:

|                                                                          | Three Months Ended    December 31, 2005    | Nine MonthsEnded    December 31, 2005    |
|-------------------------------------------------------------------------------|--------------------------------------------------------------------------|------------------------------------------------------------------------|
| *(In thousands, except per sharedata)*                                        |                                                                     |                                                                   |
| Net income:                                                                   |                                                                     |                                                                   |
|  As reported                                                             | $195,163                                                                 | $616,624                                                               |
|    Deduct: Total stock-basedemployee compensation              |                                                                     |                                                                   |
|     expense determined underfair value method, net of tax | (      8,930)                              | (    24,756)                                       |
|  Pro forma                                                               | $186,233                                                                 | $591,868                                                               |
|                                                                          | =======                                                                  | =======                                                                |
| Net income per common share:                                                  |                                                                     |                                                                   |
| Basic:                                                                        |                                                                     |                                                                   |
|   As reported                                                       | $0.58                                                                    | $1.81                                                                  |
|   Pro forma                                                         | $0.55                                                                    | $1.74                                                                  |
| Diluted:                                                                      |                                                                     |                                                                   |
|   As reported                                                       | $0.57                                                                    | $1.79                                                                  |
|   Pro forma                                                         | $0.55                                                                    | $1.72                                                                  |

The following weighted-average assumptions were used indetermining the fair values of stock options using theBlack-Scholes model:

| *Three months ended December 31,* |      2006 |      2005 |
|-----------------------------------|------------------------------------|------------------------------------|
| Expected dividend yield           | 0%                                 | 0%                                 |
| Expected stock price volatility   | 27.80%                             | 25.00%                             |
| Risk-free interest rate           | 4.6%                               | 4.5%                               |
| Expected life of options (years)  | 5                   | 5                   |

The Company has never declared a cash dividend. The expectedstock price volatility is based on implied volatilities from tradedoptions on the Company’s stock as well as historicalvolatility. The risk-free interest rate is based on the U.S.Treasury yield curve in effect at the time of grant in conjunctionwith considering the expected life of options. The expected life isbased on vesting and represents the period of time that grantedoptions are expected to be outstanding.

The total intrinsic value of stock options exercised during thethree and nine months ended December 31, 2006 was $93,372 and$142,011. The weighted-average grant date fair value per stockoption granted during the three and nine-month periods were $14.92and $14.76. The total cash received as a result of stock optionexercises for the three and nine months ended December 31, 2006 wasapproximately $92,375 and $155,266. In connection with theseexercises, the tax benefit realized was $34,620 and $49,274. TheCompany settles employee stock option exercises with newly issuedcommon shares.

The following table summarizes information about the employeestock option plans for the nine months ended December 31, 2006:

|                             | Shares  (In thousands)    | Weighted-average        exerciseprice | Weighted-average  remaining  contractual life               (Inyears) | Aggregate  intrinsic value   (In thousands) |
|----------------------------------|-------------------------------------|-------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------|
|                             |                                |                                                                          |                                                                                                                                                       |                                                            |
| Outstanding at April 1, 2006     | 24,065                         | $33.98                                                                        |                                                                                                                                                       |                                                            |
| Granted                          | 3,349                          | 49.12                                                                         |                                                                                                                                                       |                                                            |
| Exercised                        | (6,411)                             | 24.52                                                                         |                                                                                                                                                       |                                                            |
| Forfeited                        | (     698) | 36.84                                                                         |                                                                                                                                                       |                                                            |
| Outstanding at December 31, 2006 | 20,305                         | $39.12                                                                        | 4.2                                                                                                                                                        | $794,311                                                   |
|                             | =====                          | =====                                                                         | ==                                                                                                                                                         | =======                                                    |
| Exercisable at December 31, 2006 | 11,900                         | $33.98                                                                        | 3.4                                                                                                                                                        | $404,354                                                   |
|                             | =====                          | =====                                                                         | ==                                                                                                                                                         | =======                                                    |

**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         December31,        |  Nine MonthsEnded              December31,         |
|------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                         |        2006                                                                                            |        2005                                                                                                                        |           2006 |           2005 |
|                         |                                                                                                                                      |                                                                                                                                                                  |   |   |
| Central nervous system (CNS) | $728,844                                                                                                                                  | $609,709                                                                                                                                                              | $2,077,907 | $1,786,014 |
| Cardiovascular               | 11,734                                                                                                                                    | 16,416                                                                                                                                                                | 41,055 | 51,287 |
| Other                        |     89,853                                                                                                            |     88,762                                                                                                                                        |      248,913 |      243,872 |
|                         | $830,431                                                                                                                                  | $714,887                                                                                                                                                              | $2,367,875 | $2,081,173 |
|                         | =======                                                                                                                                   | =======                                                                                                                                                               | ======== | ======== |

** **

**7.   RecentlyIssued Accounting Standard:**

In July 2006, the Financial Accounting Standards Board (FASB)issued FASB Interpretation No. 48, "Accounting for Uncertainty inIncome Taxes - an interpretation of FASB Statement No. 109" (FIN48), which clarifies the accounting for uncertainty in taxpositions. This Interpretation requires the Company to recognize inthe financial statements the impact of a tax position, if thatposition is more likely than not of being sustained on audit, basedon the technical merits of the position. The provisions of FIN 48are effective as of the beginning of fiscal year 2008, with thecumulative effect of the change in accounting principle recorded asan adjustment to opening retained earnings. The Company iscurrently evaluating the impact of the adoption of FIN 48 on thefinancial statements and does not anticipate a material effect.

** **

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

On December 14, 2006 we entered into a definitive mergeragreement to acquire Cerexa, Inc., a privately heldbiopharmaceutical company based in Alameda, California. Theacquisition was completed on January 11, 2007 in a cash transactionfor $494,000. Cerexa has significant experience in the developmentof novel injectable antibiotics. Pursuant to the acquisition, wewill obtain worldwide development and marketing rights, excludingJapan, to two development stage injectable antibiotics and anoption to a third early stage injectable antibiotic.

Total net revenues and net income for the quarter and ninemonths ended December 2006 increased as compared to the quarter andnine months ended December 2005 due to strong sales growth of ourkey marketed products, Lexapro® and Namenda®, and higherco-promotion income from Benicar®. These increases wereachieved even though the following expenses were incurred: a) InApril 2006 we entered into a collaboration agreement with AlmirallProdesfarma, S.A. for the U.S. rights to LAS34273, a long-actingmuscarinic antagonist which is being developed for the treatment ofchronic obstructive pulmonary disease (COPD). In connection withthis agreement, Almirall received an upfront license payment of$60,000; b) The December 31, 2006 quarter includes $10,158 ofpretax stock-based compensation expense related to our adoption ofSFAS 123R and the nine-month period includes $28,056 of pretaxstock-based compensation expense. No such expense is included ineither period of last year; c) During the December 2006 quarter wepaid $20,000 in connection with a development milestone; and d) TheJune 30, 2005 quarter includes a one-time tax reversal of $36,414related to the repatriation of foreign funds pursuant to theAmerican Jobs Creation Act.

**Financial Condition and Liquidity**

Net current assets increased by $199,600 from March 31, 2006 dueto ongoing operations. Cash and cash equivalents increased whileshort-term marketable securities decreased in order to fund theCerexa acquisition which was completed on January 11, 2007. Duringthe period, cash was also shifted to support our share repurchasespursuant to the 2007 Repurchase Program described below. During theJune 2006 quarter, we repurchased 1.9 million shares at a cost of$69,621, in the September quarter we repurchased 7.2 million sharesat a cost of $339,604 and in the current quarter we repurchasedanother 1.3 million shares at a cost of $63,054, leaving 14.7million shares still available for repurchase. Long-term marketablesecurities increased, as certain funds, not required to fund theCerexa acquisition or share repurchase program, were shifted tolonger-term, principally auction rate notes, in order to receivemore favorable rates of return. Trade accounts receivable increaseddue to higher sales of our principal branded products, while otheraccounts receivable decreased due to the timing of receipt ofpayments from Daiichi Sankyo for our co-promotion of Benicar.Finished goods and raw materials decreased as we continue to bringinventories down to more normalized levels now that Lexapro,Namenda and Campral® are in their post-launch phases. Webelieve that current inventory levels are adequate to support thegrowth in our ongoing business. Other current assets increasedprincipally due to the renewal of insurance programs in the June2006 quarter, which are paid in full at the time of renewal andexpensed over the course of the policy years. The decrease inaccounts payable, and increases in accrued expenses and incometaxes payable were due to normal fluctuations in ongoingoperations.

Property, plant and equipment before accumulated depreciationincreased from March 31, 2006, due to the completion of severalmajor expansion and renovation projects undertaken last year. Wecurrently have only one major facilities expansion underway, therefurbishing of a 90,000 square foot plant in Ireland which willprovide redundancy for the manufacture of Lexapro and Namenda andadditional capacity for future products. During the current period,we continued to make technology investments to expand our principaloperating systems to include salesforce and warehouse managementapplications.

During fiscal 2005 our Board of Directors (the Board) approvedthe 2005 Repurchase Program which authorized the purchase of up to30 million shares of common stock and in fiscal 2006 the Boardapproved the 2006 Repurchase Program for up to 25 million shares.As of March 31, 2006, all 55 million shares of common stock underthose two plans had been repurchased. On May 18, 2006, the Boardauthorized a new share repurchase program for up to 25 millionshares of common stock (the 2007 Repurchase Program). In the June2006 quarter, we repurchased 1.9 million shares at a cost of$69,621; in the September quarter, we repurchased 7.1 millionshares at a cost of $339,604; and in the current quarter, werepurchased 1.3 million shares at a cost of $63,054. As of February9, 2007, we have repurchased a total of 10.3 million shares underthe 2007 Repurchase Program, leaving us the authority to purchase14.7 million more shares.

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 2007 Repurchase Program.

**Results of Operations**

Net sales for the three and nine-month periods ended December31, 2006 increased 16.2% and 13.8%, respectively, from the sameperiods last year to $830,431 and $2,367,875, primarily due tostrong sales of Lexapro and Namenda. Lexapro, our SSRI for thetreatment of depression and anxiety in adults and our mostsignificant product, with net sales of $545,855 and $1,575,550 forthe quarter and nine months, grew 14% and 12%, respectively, andcontributed $65,148 and $166,395 to the net sales change, of which$34,373 and $77,392 was due to volume and $30,775 and $89,003 wasdue to price. In fiscal 2004, we, along with our licensing partner,H. Lundbeck A/S (Lundbeck) filed suit against Teva Pharmaceuticals(Teva) for patent infringement related to our Lexapro patent. Atrial was held regarding the patent litigation with Teva in March2006 and on July 13, 2006, the U.S. District Court for the Districtof Delaware determined that the patent covering Lexapro is validand enforceable. Lexapro’s patent is set to expire in March2012. Teva has filed an appeal of the court’s ruling. Anothergeneric manufacturer, Caraco Pharmaceuticals Laboratories, Ltd.(Caraco), has filed an ANDA with a Paragraph IV Certification for ageneric equivalent to Lexapro. Forest and Lundbeck have filed alawsuit in the U.S. District Court for the Eastern District ofMichigan against Caraco for patent infringement.

Net sales of Namenda, an N-methyl-D-aspartate (NMDA) receptorantagonist for the treatment of moderate to severe Alzheimer'sdisease, grew 40% and 33% in the current quarter and nine months,respectively, and totaled $173,881 and $480,549. This represents anincrease of $49,859 and $117,891 as compared to the same periodslast year, of which $46,708 and $113,153 was due to volume and$3,151 and $4,738 was due to price.

Sales of Campral, which was launched in the fourth quarter offiscal 2005, amounted to $7,355 and $22,227, respectively, for thethree and nine-month periods ended December 31, 2006 as compared to$6,200 and $15,753 in the same period last year. Campral isindicated for the maintenance of abstinence from alcohol inpatients with alcohol dependence who are abstinent at treatmentinitiation. Sales of Tiazac® amounted to $11,734 and $41,055,respectively, for the three and nine-month periods ended December31, 2006 as compared to $16,416 and $51,287 in the same period lastyear. During the current quarter, a third generic equivalent toTiazac was launched into the market. This may result in reducedaverage selling prices and lower sales of Tiazac in the future. Theremainder of the net sales change for the periods presented was dueprincipally to volume fluctuations of our older non-promotedproduct lines.

Contract revenue for the three and nine months ended December31, 2006 was $38,914 and $130,485 respectively, compared to $28,373and $86,945 in the same periods last year primarily due toco-promotion income from our co-marketing agreement with DaiichiSankyo for Benicar of $38,664 and $128,695, respectively, ascompared to $28,290 and $83,751 last year. Under the terms of theagreement, Forest has been co-promoting Benicar since May 2002 andis entitled to a share of the product profits (as defined).

Other income for the current quarter and nine months increasedover the same periods last year primarily due to higher interestincome received on funds available for investment resulting frommore favorable rates of return.

Cost of sales as a percentage of net sales was 23.5% for thethree and nine-month periods of the current year as compared with23.2% for the prior year. Pretax stock-based compensation expenserelated to the adoption of SFAS 123R totaled $366 and $1,056 forthe three and nine months ended December 31, 2006. No such expensewas recorded in the same periods of last year.

Selling, general and administrative expenses increased $17,901for the quarter and decreased $418 for the nine-month period endedDecember 31, 2006 as compared to the same periods last year. Thisyear’s three and nine-month periods include pretaxstock-based compensation expense related to the adoption of SFAS123R of $7,630 and $20,491, respectively. No such expense wasrecorded in the same periods of last year. Last year’s ninemonths included expenses for sales meetings and launch expensessurrounding Campral and Combunox®.

Research and development expense increased $17,841 and $128,809in the three and nine-month periods ended December 31, 2006. Duringthe current quarter we paid $20,000 in connection with adevelopment milestone. Pretax stock-based compensation expenserelated to the adoption of SFAS 123R totaled $2,162 and $6,509 forthe three and nine months ended December 31, 2006. No such expensewas recorded in the same periods of last year. Research anddevelopment expense also included the activities reflectedbelow:

> 
In April 2006 we entered into a collaboration agreement withAlmirall Prodesfarma, S.A. for the U.S. rights to LAS34273, along-acting muscarinic antagonist which is being developed for thetreatment of chronic obstructive pulmonary disease (COPD). Inconnection with this agreement, Almirall received an upfrontlicense payment of $60,000. We are currently enrolling two largephase III international studies in COPD.

During the fourth quarter of fiscal 2006, we entered into anagreement with Mylan Laboratories Inc. (Mylan) for thecommercialization, development and distribution rights fornebivolol, a novel beta blocker. In May 2005, Mylan received an"approvable" letter from the FDA for nebivolol for the treatment ofhypertension. Final approval is contingent upon the submission ofcertain additional pre-clinical data requested by the FDA, as wellas the completion of one additional pharmacokinetic study. We andMylan expect to be able to submit the required information to theFDA around the end of this fiscal year. Nebivolol is also beingstudied for the treatment of congestive heart failure (CHF). We arecurrently analyzing the results of a recently completed study inCHF.

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

· Also during the fourthquarter of fiscal 2006, we entered into an agreement withReplidyne, Inc. for the U.S. rights to faropenem medoxomil, a novelantibiotic being developed for upper respiratory and skininfections.  Replidyne submitted an NDA in December 2005 forfour indications: acute bacterial sinusitis (ABS), communityacquired pneumonia (CAP), acute exacerbation of chronic bronchitis(AECB) and uncomplicated skin and skin structure infections (SSSI). On October 20, 2006 the FDA issued a non-approvable letterfor the NDA covering all four indications.  Effective February6, 2007, the collaboration was terminated because we believe thatthe FDA’s non-approvable letter clearly raises regulatoryuncertainty. We reached this conclusion after careful review of allthe existing data and the FDA’s pronouncements. There are nopayments associated with the termination.

· 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 second quarter offiscal 2006, we received the results of a recently completedplacebo-controlled pivotal Phase III study of milnacipran in thetreatment of fibromyalgia syndrome (FMS). The results did notachieve statistical significance; however, we were encouraged bythe strength of the data and the durability of the treatment effectout to six months. We view the results as indicative of thecompound's efficacy in a significant unmet medical need andsupportive of our continued development of the compound in a PhaseIII program. Therefore, the size of our ongoing second Phase IIIstudy was modified from approximately 800 patients to 1,200patients and has been completely enrolled with results expected bythe middle of calendar 2007, and a third randomized pivotal PhaseIII study was commenced in early 2006.

· During the first quarter offiscal 2006, we received the results of a recently completedplacebo-controlled proof of concept study of neramexane in thetreatment of moderate to severe Alzheimer's disease. The studyshowed sufficient clinical activity, safety and tolerability for usto continue development of the compound.

· 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.

· During the second quarter offiscal 2005, Forest entered into a collaboration agreement withGlenmark Pharmaceuticals S.A. for the North American developmentand marketing of GRC 3886, a PDE4 inhibitor which will be developedfor the treatment of asthma and COPD. The initiation of Phase IItesting, originally scheduled for calendar 2006, has been delayedpending the provision of certain additional preclinical data to theFDA.

· During the first quarter offiscal 2005, we entered into an agreement with PAION GmbH for thedevelopment and marketing of desmoteplase, a novel drug currentlyin a Phase IIB/III clinical study for the treatment of acuteischemic stroke. Enrollment was completed at the end of calendar2006. We expect that study results will be available by the middleof calendar 2007.

The effective tax rate was 21.0% and 21.6% for the three andnine-month periods ended December 31, 2006, respectively, ascompared to 21.0% and 16.0% in the same periods last year. The June2005 quarter included a one-time reversal of $36,414 related to theMarch 2005 charge of $90,657 for the repatriation of dividendspursuant to the American Jobs Creation Act of 2004. Excluding thisimpact, the effective tax rate would have been 21.0% and is lowerthan the U.S. statutory tax rate in both periods due to theproportion of earnings generated in lower-taxed foreignjurisdictions versus the United States. These earnings includemanufacturing and development income from our operations inIreland, which are taxed at 10% through 2010 and at 12.5%thereafter.

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".

Stock-Based Compensation

On April 1, 2006 we adopted SFAS 123R "Share-Based Payment"under the modified prospective method. Since we had previouslyaccounted for stock options under Accounting Principles Board No.25, "Accounting for Stock Issued to Employees" we recorded stockoption expense in the first three quarters of fiscal 2007 while noexpense was recorded in fiscal 2006. Also under SFAS 123R, actualtax benefits recognized in excess of tax benefits previouslyestablished upon grant are reported as financing activities on thecondensed consolidated statements of cash flows. Prior to adoption,such tax benefits were reported as an increase to operatingactivities. The adoption of SFAS 123R did not have a significantimpact on our financial position or results of operations.

We account for our employee stock option expense at the date ofgrant. All stock option grants have an exercise price equal to thefair market value of our common stock at the date of grant andgenerally have a 5 to 10 year term. The fair value of stock optiongrants is amortized to expense on an even basis over the vestingperiod.

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 actualsettlements have not been material, and have resulted in either anet increase or a net decrease to net income. Actual future resultsmay or may not differ from our estimates. If estimates are notrepresentative of actual future settlement, results could bematerially affected. Provisions for estimated sales allowances,returns, rebates and other pricing adjustments are accrued at thetime revenues are recognized as a direct reduction of suchrevenue.

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 $32,653 at December 31, 2006 and $39,027 at December 31, 2005.Commercial discounts and other rebate accruals were $119,481 atDecember 31, 2006 and $52,814 at December 31, 2005. These and otherrebate accruals are established in the period the related revenuewas recognized, resulting in a reduction to sales and theestablishment of a liability, which is included in accruedexpenses.

The following table summarizes the activity for the nine-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 | December 31, 2006        $158,277          275,702              3,301       (  226,685)            52,318            20,958       (      1,264)       (    15,915)              3,779          289,565       (      7,053)       (  279,428)              3,084        $217,458        ======= | December 31, 2005        $171,119          177,330              9,650       (  206,505)       (    19,525)            16,038              6,800       (    23,576)       (         738)          300,272              1,351       (  300,173)              1,450        $152,306        ======= |
|--------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | Deductions for chargebacks (primarily discounts to grouppurchasing organizations and federal government agencies) closelyapproximate actual as these deductions are settled generally within2-3 weeks of incurring the liability.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 31,2006.

**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

              Forestis party to certain legal proceedings previously disclosed in ourAnnual Report on Form              10-Kfor the fiscal year ended March 31, 2006 and our Quarterly Reportson Form 10-Q for the              quartersended June 30, 2006 and September 30, 2006.

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, 2006.

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

*             Purchaseof equity securities by Forest:*

             Duringfiscal 2005, our Board of Directors authorized a share repurchaseprogram for up to 30             millionshares of common stock (the 2005 Repurchase Program). As of May 11,2005, all of             theseshares were repurchased, completing the program. In May 2005, ourBoard of Directors             authorizeda share repurchase program for up to 25 million shares of commonstock (the 2006             RepurchaseProgram). As of February 27, 2006 all of these shares wererepurchased, completing             theprogram.

             OnMay 18, 2006 our Board of Directors authorized a new sharerepurchase program (the 2007             RepurchaseProgram) for up to 25 million shares of our common stock. As ofFebruary 9,             2007,14.7 million shares were available for repurchase under the 2007Repurchase Program.

             Thefollowing table summarizes the repurchase of common stock under the2007 Repurchase             Programduring the third 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** |
|--------|------------------------|---------------------------------------------------------------------------------------|---------------------------------------------------|----------------------------------------------------------------------------------|---------------------------------------------------------------------|
|   | 10/1/06through10/31/06 | 1,290,000                                                                             | $48.88                                            | 1,290,000                                                                        | 14,684,700                                                          |
|   | 11/1/06through11/30/06 |           -     |   -       |   -                  | 14,684,700                                                          |
|   | 12/1/06through12/31/06 |           -     |   -       |   -                  | 14,684,700                                                          |

 (1)  All shares were purchased pursuant to thepublicly 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.

Item6.  Exhibits

             Exhibit10.22 Agreement and Plan of Merger dated December 13, 2006 byand among                                    ForestLaboratories, Inc., FL Acquisition Corp., Cerexa, Inc., and                                    DennisPodlesak and Eckard Weber, M.D., As Stockholders’ Agent.*             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

*Certain portions of the exhibit have been omitted pursuant to arequest for confidential treatment filed separately with theSecurities and Exchange Commission (the SEC). The redacted materialhas been filed separately with the SEC.

                                                                                                   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: February 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