UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
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, 2008





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





For
the transition period from  to





Commission
File No. 1-5438





FOREST LABORATORIES,
INC.


(Exact
name of registrant as specified in its charter)





Delaware
              (State
      or other jurisdiction of incorporation or organization)
            
            11-1798614
              (I.R.S.
      Employer
              Identification
      Number)909
      Third Avenue
              New
      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 fiscal year, if changed since last
report)





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





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):





Large
      accelerated filer x
            Accelerated
      filer o
            Non-accelerated
      filer o
            Smaller
      reporting company o(Do
      not check if a smaller reporting company)





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





Number of
shares outstanding of Registrant's Common Stock as of February 5, 2009:
301,612,811


Table of Contents





TABLE OF CONTENTS


(Quick Links)





PART I -
      FINANCIAL INFORMATIONITEM 1.
      CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:BALANCESHEETSSTATEMENTSOF INCOMESTATEMENTSOF COMPREHENSIVE INCOMESTATEMENTSOF CASHFLOWSNOTES TOFINANCIAL STATEMENTSITEM 2. MANAGEMENT’S DISCUSSION
      AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONSITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
      ABOUT MARKET RISKITEM 4.
      CONTROLSAND
      PROCEDURESPART II -
      OTHERINFORMATIONITEM 1.
      LEGALPROCEEDINGSITEM 1A. RISK
      FACTORSITEM 2.
      UNREGISTEREDSALES OF EQUITY
      SECURITIES, USE OF PROCEEDSAND ISSUER REPURCHASES OF EQUITY
      SECURITIESITEM 6. EXHIBITSEXHIBIT
      10.1EXHIBIT
      10.2EXHIBIT
      10.3EXHIBIT
      10.4EXHIBIT
      10.5EXHIBIT
      10.6EXHIBIT
      10.7EXHIBIT
      10.8EXHIBIT
      10.9EXHIBIT31.1EXHIBIT31.2EXHIBIT
      32.1EXHIBIT32.2





Table of Contents





PART I - FINANCIAL
INFORMATION





FOREST
LABORATORIES, INC. AND SUBSIDIARIES


Condensed
Consolidated Balance Sheets


(In
      thousands)
                    
                    December
      31, 2008
                      (Unaudited)
                    
                    
                    March 31, 2008AssetsCurrent
      assets:Cash
      (including cash equivalent investments of $1,326,337 in December and
      $833,018 in March)
                    
                    $
                    1,326,951
                    
                    
                    $
                    833,052Marketable
      securities
                    
                    
                    862,886
                    
                    
                    
                    943,972Accounts
      receivable, less allowance for doubtful accounts of $18,423 in December
      and $19,882 in March
                    
                    
                    428,892
                    
                    
                    
                    445,987Inventories,
      net
                    
                    
                    396,352
                    
                    
                    
                    425,138Deferred
      income taxes
                    
                    
                    219,872
                    
                    
                    
                    226,095Other
      current assets
                    
                    
                    57,826
                    
                    
                    
                    33,260Total
      current assets
                    
                    
                    3,292,779
                    
                    
                    
                    2,907,504Marketable
      securities
                    
                    
                    673,180
                    
                    
                    
                    663,625Property,
      plant and equipment
                    
                    
                    595,097
                    
                    
                    
                    567,331Less:
      accumulated depreciation
                    
                    
                    245,606
                    
                    
                    
                    217,294349,491
                    
                    
                    
                    350,037Other
      assets:Goodwill
                    
                    
                    14,965
                    
                    
                    
                    14,965License
      agreements, product rights and other intangibles, less accumulated
      amortization of $465,994 in December and $421,719 in March
                    
                    
                    481,903
                    
                    
                    
                    527,787Deferred
      income taxes
                    
                    
                    90,911
                    
                    
                    
                    59,778Other
      assets
                    
                    
                    1,596
                    
                    
                    
                    1,671Total
      other assets
                    
                    
                    589,375
                    
                    
                    
                    604,201Total
      assets
                    
                    $
                    4,904,825
                    
                    
                    $
                    4,525,367See
      notes to condensed consolidated financial statements.











Table of Contents


FOREST
LABORATORIES, INC. AND SUBSIDIARIES


Condensed
Consolidated Balance Sheets





(In
      thousands, except for par values)
                
                December
      31, 2008
                  (Unaudited)
                
                
                March 31, 2008Liabilities and Stockholders'
      EquityCurrent
      liabilities:Accounts
      payable
                
                $
                61,407
                
                
                $
                223,720Accrued
      expenses
                
                
                542,536
                
                
                
                387,105Total
      current liabilities
                
                
                603,943
                
                
                
                610,825Long-term
      liabilities:Income
      tax liabilities
                
                
                257,980
                
                
                
                198,410Deferred
      income taxes
                
                
                833
                
                
                
                815258,813
                
                
                
                199,225Stockholders'
      equity:Series
      preferred stock, $1.00 par; shares authorized 1,000; no shares issued or
      outstandingCommon
      stock, $.10 par; shares authorized 1,000,000; issued 422,266 shares in
      December and 421,421 shares in March
                
                
                42,226
                
                
                
                42,142Additional
      paid-in capital
                
                
                1,478,679
                
                
                
                1,434,172Retained
      earnings
                
                
                6,286,474
                
                
                
                5,611,493Accumulated
      other comprehensive (loss) income
                
                
                ( 14,368
                )
                
                
                34,592Treasury
      stock, at cost (120,653 shares in December and 110,014 shares in
      March)
                
                
                (3,750,942
                )
                
                
                (3,407,082
                )Total
      stockholders' equity
                
                
                4,042,069
                
                
                
                3,715,317Total
      liabilities and stockholders' equity
                
                $
                4,904,825
                
                
                $
                4,525,367See
      notes to condensed consolidated financial statements.








Table of Contents





FOREST LABORATORIES, INC. AND
SUBSIDIARIES


Condensed
Consolidated Statements of Income


(Unaudited)





Three
      Months Ended
                    
                    
                    Nine
      Months Ended(In
      thousands, except per share amounts)
                    
                    December 31,
                    
                    
                    December 31,2008
                    
                    
                    2007
                    
                    
                    2008
                    
                    
                    2007Net
      sales
                    
                    $
                    920,013
                    
                    
                    $
                    918,146
                    
                    
                    $
                    2,739,329
                    
                    
                    $
                    2,603,099Contract
      revenue
                    
                    
                    52,433
                    
                    
                    
                    52,705
                    
                    
                    
                    153,796
                    
                    
                    
                    156,395Interest
      income
                    
                    
                    24,235
                    
                    
                    
                    25,862
                    
                    
                    
                    61,658
                    
                    
                    
                    77,532Other
      income
                    
                    
                    1,274
                    
                    
                    
                    1,529
                    
                    
                    
                    2,522
                    
                    
                    
                    8,450997,955
                    
                    
                    
                    998,242
                    
                    
                    
                    2,957,305
                    
                    
                    
                    2,845,476Costs
      and expenses:Cost
      of sales
                    
                    
                    206,654
                    
                    
                    
                    213,506
                    
                    
                    
                    608,995
                    
                    
                    
                    589,738Selling,
      general and administrative
                    
                    
                    289,968
                    
                    
                    
                    285,652
                    
                    
                    
                    959,184
                    
                    
                    
                    827,419Research
      and development
                    
                    
                    279,051
                    
                    
                    
                    108,246
                    
                    
                    
                    537,520
                    
                    
                    
                    415,892775,673
                    
                    
                    
                    607,404
                    
                    
                    
                    2,105,699
                    
                    
                    
                    1,833,049Income
      before income tax expense
                    
                    
                    222,282
                    
                    
                    
                    390,838
                    
                    
                    
                    851,606
                    
                    
                    
                    1,012,427Income
      tax expense
                    
                    
                    34,307
                    
                    
                    
                    89,081
                    
                    
                    
                    176,625
                    
                    
                    
                    217,264Net
      income
                    
                    $
                    187,975
                    
                    
                    $
                    301,757
                    
                    
                    $
                    674,981
                    
                    
                    $
                    795,163Net
      income per common share:Basic
                    
                    $
                    0.62
                    
                    
                    $
                    0.97
                    
                    
                    $
                    2.22
                    
                    
                    $
                    2.52Diluted
                    
                    $
                    0.62
                    
                    
                    $
                    0.96
                    
                    
                    $
                    2.21
                    
                    
                    $
                    2.51Weighted
      average number of common shares outstanding:Basic
                    
                    
                    301,428
                    
                    
                    
                    312,140
                    
                    
                    
                    304,262
                    
                    
                    
                    315,729Diluted
                    
                    
                    302,056
                    
                    
                    
                    313,107
                    
                    
                    
                    305,147
                    
                    
                    
                    317,279See
      notes to condensed consolidated financial statements.








Table of Contents


FOREST LABORATORIES, INC. AND
SUBSIDIARIES


Condensed
Consolidated Statements of Comprehensive Income


(Unaudited)





Three
      Months Ended
                
                
                Nine
      Months Ended(In
      thousands)
                
                December 31,
                
                
                December 31,2008
                
                
                2007
                
                
                2008
                
                
                2007Net
      income
                
                $
                187,975
                
                
                $
                301,757
                
                
                $
                674,981
                
                
                $
                795,163Other
      comprehensive (loss) income:Foreign
      currency translation (losses) gains
                
                
                ( 7,299
                )
                
                
                4,622
                
                
                
                ( 25,112
                )
                
                
                12,812Unrealized
      losses on securities:Unrealized
      holding loss arisingduring
      the period, net of tax
                
                
                (12,775
                )
                
                
                (5,699
                )
                
                
                (23,848
                )
                
                
                (5,412
                )Other
      comprehensive (loss) income
                
                
                (20,074
                )
                
                
                (1,077
                )
                
                
                (48,960
                )
                
                
                7,400Comprehensive
      income
                
                $
                167,901
                
                
                $
                300,680
                
                
                $
                626,021
                
                
                $
                802,563See
      notes to condensed consolidated financial statements.








Table of Contents





FOREST LABORATORIES, INC. AND
SUBSIDIARIES


Condensed
Consolidated Statements of Cash Flows


(Unaudited)





Nine
      Months Ended(In
      thousands)
                
                December 31,2008
                
                
                2007Cash
      flows from operating activities:Net
      income
                
                $
                674,981
                
                
                $
                795,163Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
                
                
                32,383
                
                
                
                34,988Amortization
      and impairments
                
                
                44,275
                
                
                
                31,789Stock-based
      compensation expense
                
                
                31,516
                
                
                
                30,719Deferred
      income tax benefit
                
                
                ( 24,892
                )
                
                
                ( 24,209
                )Foreign
      currency transaction gain
                
                
                ( 1,392
                )
                
                
                ( 1,420
                )Net
      change in operating assets and liabilities:Decrease
      (increase) in:Accounts
      receivable, net
                
                
                17,095
                
                
                
                ( 21,732
                )Inventories,
      net
                
                
                28,786
                
                
                
                ( 3,979
                )Other
      current assets
                
                
                ( 24,566
                )
                
                
                ( 8,476
                )Other
      assets
                
                
                75
                
                
                
                7,889Increase
      (decrease) inAccounts
      payable
                
                
                ( 162,313
                )
                
                
                11,146Accrued
      expenses
                
                
                155,431
                
                
                
                23,471Income
      taxes liabilities
                
                
                59,570
                
                
                
                80,574Net
      cash provided by operating activities
                
                
                830,949
                
                
                
                955,923Cash
      flows from investing activities:Purchase
      of property, plant and equipment
                
                
                ( 33,026
                )
                
                
                ( 23,906
                )Purchase
      of marketable securities
                
                
                ( 1,646,523
                )
                
                
                ( 2,062,330
                )Redemption
      of marketable securities
                
                
                1,718,054
                
                
                
                1,720,777Purchase
      of license agreements, product rights and other
intangibles
                
                
                
                
                
                
                (45,000
                )Net
      cash provided by (used in) investing activities
                
                
                38,505
                
                
                
                (410,459
                )Cash
      flows from financing activities:Net
      proceeds from common stock options exercised by employees under stock
      option plans
                
                
                10,629
                
                
                
                25,672Tax
      benefit realized from the exercise of stock options by
      employees
                
                
                2,446
                
                
                
                3,442Purchase
      of treasury stock
                
                
                (343,860
                )
                
                
                (356,327
                )Net
      cash used in financing activities
                
                
                (330,785
                )
                
                
                (327,213
                )Effect
      of exchange rate changes on cash
                
                
                (44,770
                )
                
                
                7,795Increase
      in cash and cash equivalents
                
                
                493,899
                
                
                
                226,046Cash
      and cash equivalents, beginning of period
                
                
                833,052
                
                
                
                563,663Cash
      and cash equivalents, end of period
                
                $
                1,326,951
                
                
                $
                789,709





Supplemental
      disclosures of cash flow information:Cash
      paid during the period for:Income
      taxes
                
                $
                141,691
                
                
                $
                157,512See
      notes to condensed consolidated financial statements.








Table of Contents








FOREST
LABORATORIES, INC. AND SUBSIDIARIES


Notes to Condensed Consolidated Financial
Statements


(Unaudited)





1.   Basis
of Presentation:





The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with U.S. generally accepted accounting principles (or
GAAP) for interim financial information and with the instructions to Form 10-Q
and Rule 10-01 of Regulation S-X.  Accordingly, they do not include
all of the information and footnotes required by GAAP for complete financial
statements.  In the opinion of Management, all adjustments (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, 2008 are not necessarily indicative of the results that may be
expected for the year ending March 31, 2009.  For further information
refer to the consolidated financial statements and footnotes thereto
incorporated by reference in the Company's Annual Report on Form 10-K for the
year ended March 31, 2008.





2.   Accounts
Receivable(In
thousands):





Accounts
receivable, net, consists of the following:





December
      31, 2008
                  (Unaudited)
                
                
                March 31, 2008Trade
                
                $
                326,472
                
                
                $
                377,779Other
                
                
                102,420
                
                
                
                68,208$
                428,892
                
                
                $
                445,987





3.   Inventories(In
thousands):





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





December
      31, 2008
                  (Unaudited)
                
                
                March 31, 2008Raw
      materials
                
                $
                146,891
                
                
                $
                234,288Work
      in process
                
                
                936
                
                
                
                1,360Finished
      goods
                
                
                248,525
                
                
                
                189,490$
                396,352
                
                
                $
                425,138





4.Fair ValueMeasurements(In thousands):





In the
first quarter of fiscal 2009, the Company adopted Statement of Financial
Accounting Standards No. 157 (or SFAS 157), “Fair Value Measurements.”
 This pronouncement defines fair value, establishes a framework for
measuring fair value under GAAP and requires expanded disclosures about fair
value measurements.  SFAS 157 does not require any new fair value
measurements, but rather generally applies to other accounting pronouncements
that require or permit fair value measurements.  SFAS 157 emphasizes that
fair value is a market-based measurement, not an entity-specific measurement,
and defines fair value as the price that would be received to sell an asset or
transfer a liability in an orderly transaction between market participants at
the measurement date.  SFAS 157 discusses valuation techniques, such as the
market approach (comparable market prices), the income approach (present value
of future income or cash flow) and the cost approach (cost to replace the
service capacity of an asset or replacement cost).  These valuation
techniques are based upon observable and unobservable inputs.  Observable
inputs reflect market data obtained from independent sources, while unobservable
inputs reflect the Company’s market assumptions.  SFAS 157 utilizes a fair
value hierarchy that prioritizes inputs to fair value measurement techniques
into three broad levels.  The following is a brief description of those
three levels:





Level
      1:
            Observable
      inputs such as quoted prices for identical assets or liabilities in active
      markets.Level
      2:
            Observable
      inputs other than quoted prices that are directly or indirectly observable
      for the asset or liability, including quoted prices for similar assets or
      liabilities in active markets; quoted prices for similar or identical
      assets or liabilities in markets that are not active; and model-derived
      valuations whose inputs are observable or whose significant value drivers
      are observable.Level
      3:
            Unobservable
      inputs that reflect the reporting entity’s own
  assumptions.





The
Financial Accounting Standards Board (or FASB) issued FSP 157-2 which delayed
the effective date of SFAS 157 for all non-financial assets and liabilities,
except those that are recognized or disclosed at fair value in the financial
statements on a recurring basis, until the beginning of fiscal
2010.  In October 2008, the FASB issued FSP 157-3, “Determining the
Fair Value of a Financial Asset When the Market for That Asset Is Not
Active.”  FSP 157-3 clarifies the application of SFAS 157 in a market that
is not active and provides an example to illustrate key considerations in
determining the fair value of a financial asset when the market for that
financial asset is not active.  FSP 157-3 is effective upon issuance,
including prior periods for which financial statements have not been
issued.  The Company’s financial assets adjusted to fair value
at December 31, 2008 are its commercial paper investments included in cash
and cash equivalents, money market accounts, municipal bonds and notes, variable
rate demand notes, floating rate notes and auction rate securities (or
ARS).  These assets are subject to the measurement and disclosure
requirements of SFAS 157.  The Company adjusts the value of these
instruments to fair value each reporting period.  No adjustment to retained
earnings resulted from the adoption of SFAS 157.





The
following table presents the level within the fair value hierarchy at which the
Company’s financial assets are carried at fair value and measured on a recurring
basis:





Description
                                      
                                      Fair
      Value at
                                        December 31,2008
                                      
                                      
                                      Quoted
      Prices in Active Markets for Identical Assets
                                        (Level 1)
                                      
                                      
                                      Significant
      Other Observable Market Inputs
                                        (Level
      2)
                                      
                                      
                                      Unobservable
      Market Inputs
                                        (Level 3)Money
      market accounts
                                      
                                      $
                                      1,090,410
                                      
                                      
                                      $
                                      1,090,410Municipal
      bonds and notes
                                      
                                      
                                      196,125
                                      
                                      
                                      
                                      
                                      
                                      
                                      $
                                      196,125Commercial
      paper
                                      
                                      
                                      782,950
                                      
                                      
                                      
                                      394,663
                                      
                                      
                                      
                                      388,287Variable
      rate demand notes
                                      
                                      
                                      162,864
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      162,864Floating
      rate notes
                                      
                                      
                                      411,959
                                      
                                      
                                      
                                      248,473
                                      
                                      
                                      
                                      163,486Auction
      rate securities
                                      
                                      
                                      36,889
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      $
                                      36,889





As of
December 31, 2008, the Company has determined the value of the
ARS portfolio based upon a discounted cash flow model.  The
assumptions used in the valuation model include estimates for interest rates,
timing and the amount of cash flows and expected holding periods for the
ARS.  As a result of this analysis, for the three months ended
December 31, 2008, the Company recorded a temporary impairment loss of $1,906
relating to the ARS portfolio.  The following table presents a
reconciliation of the Level 3 investments measured at fair value on a recurring
basis using unobservable inputs.





Three
      Months Ended December 31, 2008Transfers
      to Level 3
                                      
                                      $
                                      38,795Gains
      and losses reported in accumulated other comprehensive
    income
                                      
                                      
                                      (1,906
                                      )Balance
      at December 31, 2008
                                      
                                      $
                                      36,889





There
were no purchases, sales or material realized gains or losses associated within
the Level 3 ARS during the three or nine months ended December 31,
2008.





Money
market accounts are included in cash and cash equivalents on the accompanying
balance sheets and are classified as Level 1 assets.  Certain commercial
paper and floating rate note investments are also classified as Level 1 assets
because they consist of publicly traded securities which are priced and actively
traded on a daily basis.




Certain
of the Company’s commercial paper and floating rate notes and all of the
Company’s variable rate notes and municipal bonds and notes are based on Level 2
inputs in the SFAS 157 fair value hierarchy.





The
Company holds investments in ARS amounting to $36,889 (with underlying
maturities from 23 to 33.4 years) of which $23,500 are collateralized by student
loans.  Substantially all such collateral in the aggregate is
guaranteed by the U.S. government under the Federal Family Education Loan
Program.  The balance of the ARS investments of $13,389 are issued by local
municipal governments.  Liquidity for these securities was normally
dependent on an auction process that resets the applicable interest rate at
pre-determined intervals, ranging from 7 to 35 days.  Beginning in
February 2008, the auctions for the ARS held by the Company and others were
unsuccessful, requiring the Company to continue to hold them beyond their
typical auction reset dates.  Auctions fail when there is insufficient
demand.  However, this does not represent a default by the issuer of the
security.  Upon an auction’s failure, the interest rates reset based on a
formula contained in the security.  The rate is generally equal to or
higher than the current market rate for similar securities.  The securities
will continue to accrue interest and be auctioned until one of the following
occurs:  the auction succeeds; the issuer calls the securities; or the
securities mature.





The
Company classifies the ARS as non-current assets held for sale under the heading
“Marketable securities” in the Company’s balance sheets at fair
value.  As of December 31, 2008, the Company has changed the
classification of the ARS portfolio from Level 2 to Level 3 within the fair
value hierarchy due to the lack of observable inputs and continued absence of
trading activity during the three-month period.








5.   Net Income Per
Share(In
thousands):





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





Three
      Months Ended
                
                
                Nine
      Months EndedDecember 31,
                
                
                December 31,2008
                
                
                2007
                
                
                2008
                
                
                2007Basic
                
                
                301,428
                
                
                
                312,140
                
                
                
                304,262
                
                
                
                315,729Effect
      of assumed conversion of employee stock options and restricted
      stock
                
                
                628
                
                
                
                967
                
                
                
                885
                
                
                
                1,550Diluted
                
                
                302,056
                
                
                
                313,107
                
                
                
                305,147
                
                
                
                317,279





Options
to purchase approximately 18,176 shares of common stock at exercise prices
ranging from $24.12 to $76.66 per share and options to purchase approximately
16,041 shares of common stock at exercise prices ranging from $24.12 to $76.66
per share that were outstanding during a portion of the three and nine-month
periods ended December 31, 2008, respectively, were not included in the
computation of diluted net income per share because they were
anti-dilutive.  These options expire through 2018.  Options
to purchase approximately 14,516 shares of common stock at exercise prices
ranging from $36.50 to $76.66 per share and options to purchase approximately
11,604 shares of common stock at exercise prices ranging from $36.50 to $76.66
per share that were outstanding during a portion of the three and nine-month
periods ended December 31, 2007, respectively, were not included in the
computation of diluted net income per share because they were
anti-dilutive.  These options expire through 2017.





6.   Stock-Based
Compensation (In
thousands):





In August
2007 the stockholders of the Company voted to adopt the 2007 Equity Incentive
Plan (or the 2007 Plan) which replaces and supersedes all prior stock option
plans.  Under the 2007 Plan, 13,950 shares were authorized to be issued to
employees of the Company and its subsidiaries at prices not less than the fair
market value of the common stock at the date of grant.  The 2007 Plan
provides for the granting of incentive and nonqualified stock options,
restricted stock, stock appreciation rights and stock equivalent units. 
These awards generally vest in three to five years.  Stock option grants
may be exercisable for up to ten years from the date of issuance.  As of
December 31, 2008, 6,343 shares were available for grant.





Compensation
expense of $11,262 ($9,270 net of tax) and $31,516 ($26,314 net of tax) was
recorded for the three and nine-month periods ended December 31, 2008,
respectively.  For the three and nine-month periods ended December 31,
2007, compensation expense of $10,641 ($8,968 net of tax) and $30,719 ($25,964
net of tax) was recorded.  This expense was charged to cost of sales,
selling, general and administrative and research and development expense, as
appropriate.





The
weighted average number of diluted common shares outstanding is reduced by the
treasury stock method which, in accordance with the provisions of Statement of
Financial Accounting Standards No. 123(R), “Share-Based Payment” takes into
consideration the compensation cost attributed to future services not yet
recognized.





7.   Business Segment
Information(In
thousands):





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





Three
      Months Ended
                
                
                Nine
      Months EndedDecember 31,
                
                
                December 31,2008
                
                
                2007
                
                
                2008
                
                
                2007Central
      nervous system
                
                $
                829,384
                
                
                $
                825,843
                
                
                $
                2,472,816
                
                
                $
                2,330,320Cardiovascular
                
                
                25,501
                
                
                
                6,478
                
                
                
                54,909
                
                
                
                21,746Other
                
                
                65,128
                
                
                
                85,825
                
                
                
                211,604
                
                
                
                251,033$
                920,013
                
                
                $
                918,146
                
                
                $
                2,739,329
                
                
                $
                2,603,099





8.   Long-Term
Debt:





On
December 7, 2007, the Company established a $500 million revolving credit
facility for the purpose of providing additional financial liquidity for the
financing of business development and corporate strategic
initiatives.  The facility can be increased up to $750 million based
upon agreement with the participating lenders and expires on December 7,
2012.  As of February 5, 2009, the Company has not drawn any funds
from the available credit.  The utilization of the revolving credit
facility is subject to the adherence to certain financial covenants such as
leverage and interest coverage ratios.





9.   Income Taxes(In
thousands):





The
Company files income tax returns in the United States and certain foreign
jurisdictions including Ireland.  The Company’s income tax returns for
fiscal years prior to 1999 in most jurisdictions and prior to 2002 in Ireland
are no longer subject to review as such fiscal years are generally
closed.  Tax authorities in various jurisdictions are in the process
of reviewing the Company’s income tax returns for various post-1999 fiscal
years, including the Internal Revenue Service (or IRS), which has recently
concluded its examination of the Company’s U.S. federal income tax returns for
fiscal years 2002 and 2003.





In
connection with that examination, in July 2007, the IRS issued a notice of
proposed adjustment primarily relating to the Company’s intercompany transfer
pricing methodology.  On November 5, 2007, the IRS issued a Revenue
Agent Report which seeks to assess approximately $207 million of additional U.S.
corporation income tax relating to the examination period, excluding interest
and penalties.





The
Company continues to disagree with the IRS position and adjustment because it
believes that it is inconsistent with applicable tax laws and the Company
intends to defend its position vigorously.  In accordance with the
Company’s taxpayer appeals rights, a formal written protest of the proposed
adjustment has been filed with the IRS and the matter is in administrative
appeals.





While the
resolution of this issue may result in tax liabilities that are greater or less
than the reserves established, Management believes that the ultimate resolution
will not have a material effect on the Company’s financial position or
liquidity.  If the IRS prevails in a position that increases the U.S.
income tax liability in excess of established reserves, it is likely that the
IRS could make similar claims for years subsequent to fiscal 2003 which could be
material.  However, at this time Management believes that it is
unlikely that the ultimate outcome will be determined within the next 12
months.  The Company’s continuing practice is to recognize net
interest related to income tax matters in income tax expense.  As of
December 31, 2008, the Company had accrued an additional $7,161 in interest for
a total of $27,100 related to the resolution of various income tax
matters.





The
Company’s effective tax rate was 15.4% and 20.7% for the three and nine-month
periods ended December 31, 2008, as compared to 22.8% and 21.5% for the same
periods last year.  The decrease resulted primarily from the termination of
the Company’s co-promotion agreement for AzorTM and other tax matters including
the reenactment of the U.S. Federal research and experimentation tax credit on
October 3, 2008, which resulted in a favorable impact on the Company's current
three and nine-month periods. This was offset by the net impact of one-time
discrete tax adjustments related principally to stock-based compensation in
prior years and a lower tax benefit on combined upfront licensing fees to
Phenomix Corporation (or Phenomix) for dutogliptin and Pierre Fabre Médicament
(or Pierre Fabre) for the compound F2695.  Effective tax rates may be
affected by ongoing tax audits.





10.   License
Agreements(In
thousands):





During
the quarter ended June 30, 2008, the Company and its licensing partner Daiichi
Sankyo, terminated their co-promotion agreement for Azor.  As a result of
terminating the agreement, the Company recorded a one-time charge of
approximately $44,100 to selling, general and administrative expense which was
composed of a termination fee of approximately $26,600 and $17,500 related to
the unamortized portion of the initial upfront payment.





In
October 2008, the Company entered into a collaboration agreement with Phenomix
to co-develop and co-promote dutogliptin.  Dutogliptin is Phenomix’
proprietary orally administered, small molecule dipeptidyl-peptidase-4 (DPP-4)
inhibitor being developed for the treatment of Type II diabetes. Under the terms
of the agreement, the Company made a $75,000 upfront payment to Phenomix, which
was recorded to research and development expense.





In
December 2008, the Company entered into a collaboration agreement with Pierre
Fabre to develop and commercialize F2695, in the United States and Canada for
the treatment of depression.  F2695 is a propriety selective
norepinephrine and serotonin reuptake inhibitor that is being developed by
Pierre Fabre for the treatment of depression and other central nervous system
disorders.  Under the terms of the agreement, the Company made an
upfront payment to Pierre Fabre of $75,000, which was recorded to research and
development expense.





11.   Contingencies -
Securities Litigation(In thousands):





The
Company and certain of its officers have been named as defendants in
consolidated securities cases brought in the U.S. District Court for the
Southern District of New York on behalf of a class of all purchasers of the
Company’s securities from August 15, 2002 through July 2, 2004 and consolidated
under the caption “In re
Forest Laboratories, Inc. Securities Litigation.”  On September
22, 2008, the Company entered into a Memorandum of Understanding (or MOU)
setting forth an agreement in principle to settle all claims against all
defendants for $65,000.  While the Company expects a majority of such
settlement to be funded by insurance and is engaged in discussions with the
carriers concerning their liability for the payment, during the September 2008
quarter the Company recorded a reserve of $25,000 in connection with the
MOU.  In January 2009, pursuant to a formal Stipulation of Settlement
dated December 12, 2008, the Company paid the full amount of the settlement into
escrow pending final Court approval of the settlement.  A hearing with
respect to such approval is scheduled for April 2009.


Table of Contents


FOREST LABORATORIES, INC. AND SUBSIDIARIES


MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION


AND
RESULTS OF OPERATIONS


(Dollar
amounts in thousands)





Total net
revenues were $997,955 for the quarter, essentially unchanged as compared to the
same period last year.  For the nine months ended December 2008, net
revenues increased due to the continued growth of our key marketed products
Lexapro® and Namenda® despite a modest decrease in Lexapro’s market share in the
current quarter.  Contributing to this increase were sales of our
newest product BystolicTM, a beta-blocker for the treatment of hypertension
launched in January 2008.  Net income decreased 37.7% for the quarter
and 15.1% for the nine months ended December 2008 primarily due to $150,000 in
combined upfront licensing fees in the current quarter to Phenomix Corporation
(or Phenomix) for dutogliptin and Pierre Fabre Médicament (or Pierre Fabre) for
the compound F2695.  The current nine month period also included a
one-time charge in the June quarter of approximately $44,100 as a result of
terminating the AzorTM co-promotion agreement with Daiichi Sankyo, (or
Sankyo).  The prior nine month period includes a $70,000 upfront
licensing payment to Ironwood Pharmaceuticals, Inc. (or Ironwood), for
linaclotide.





In
October 2008, we entered into a collaboration agreement with Phenomix to
co-develop and co-promote dutogliptin.  Dutogliptin is Phenomix’
proprietary orally administered, small molecule dipeptidyl-peptidase-4 (DPP-4)
inhibitor currently in Phase III clinical development for Type II diabetes.
Under the terms of the agreement, we made a $75,000 upfront payment to Phenomix
and are subject to future milestone payments.





In
December 2008, we entered into a collaboration agreement with Pierre Fabre to
develop and commercialize F2695 in the United States and Canada for the
treatment of depression.  F2695 is a propriety selective
norepinephrine and serotonin reuptake inhibitor that is being developed by
Pierre Fabre for the treatment of depression and other central nervous system
disorders.  We will
initiate Phase III studies with F2695 in calendar 2009.Under the
terms of the agreement, we made an upfront payment to Pierre Fabre of $75,000
and are subject to future milestone payments.





On
January 14, 2009, we received marketing approval for SavellaTM (milnacipran HCl),
a selective serotonin and norepinephrine dual reuptake inhibitor for the
management of fibromyalgia.  Fibromyalgia is a chronic condition
characterized by widespread pain and decreased physical function, afflicting as
many as six million people in the United States.  We expect Savella to
be available in pharmacies by March 2009.




Financial Condition and
Liquidity





Net
current assets increased by $392,157 from March 31, 2008.  Cash and
cash equivalents increased from ongoing operations while short-term marketable
securities decreased in order to fund the 2007 Repurchase
Program.  During the June 2008 quarter, we repurchased 6.6 million
shares of common stock at a cost of $231,185 and in the September 2008 quarter
we repurchased 3.5 million shares of common stock at a cost of
$100,917.  There were no repurchases in the current quarter, leaving
5.7 million shares still available for repurchase under the
program.  Short-term marketable securities also decreased due to new
product licensing fees of $150,000 in connection with product collaboration
agreements with Phenomix and Pierre Fabre.  Of our total cash and
marketable securities position at December 31, 2008, 25%, or about $717,000, is
domiciled domestically, with the remainder held by our international
subsidiaries.  We currently invest funds in variable rate demand notes
that have major bank liquidity agreements, municipal bonds and notes, commercial
paper including money market instruments, auction rate securities and bank
floating rate notes.  These investments are subject to general credit,
liquidity and market risks and have been affected by the global credit
crisis.  As a result, we have recorded unrealized losses on certain of
these investments to Other Comprehensive Income.  We believe these
unrealized losses to be temporary in nature.  Trade accounts
receivable decreased primarily due to the timing of receipts.  Other
accounts receivable increased primarily due to an insurance claim receivable
relating to a securities litigation against the Company and certain of our
officers, for which all claims have been settled subject to final Court
approval, and the settlement amount paid into escrow in January
2009.  Raw materials inventory decreased as we are bringing these
balances to more normalized levels.  Finished goods inventory
increased in order to support continued demand for our products, including our
recently launched beta-blocker, Bystolic. We believe that current inventory
levels are adequate to support the growth of our ongoing
business.  License agreements, product rights and other intangibles
net of accumulated amortization decreased primarily due to the write-off of the
Azor license in the June quarter as well as normal amortization.  The
change in other current assets and current liabilities was primarily due to
timing and normal operating activities.





Property,
plant and equipment before accumulated depreciation increased from March 31,
2008, as we continued to make technology investments to expand our principal
operating systems to enhance supply chain and salesforce
applications.





Management
believes that current cash levels, coupled with funds to be generated by ongoing
operations, will continue to provide adequate liquidity to facilitate potential
acquisitions of products, payment of achieved milestones, capital investments
and continued share repurchases.





Results of
Operations





Net sales
for the current three-month period increased to $920,013 as compared to $918,146
for the same period last year.  Net sales for the nine months ended
December 31, 2008 grew 5% to $2,739,329, primarily due to strong sales of
Lexapro, Namenda and Bystolic.


Lexapro,
our SSRI for the treatment of major depressive disorder and generalized anxiety
disorder, and our most significant product, had sales of $585,473 and $1,752,466
for the quarter and nine months.  While sales decreased 3% for the
current three-month period, sales for the current nine-month period grew 2% as
compared to the same periods last year.  The decrease in the current
quarter was primarily due to a modest decline in market share.  The
Lexapro sales contribution resulted in a decrease of $17,981 and an increase of
$37,636 to the net sales change for the respective three and nine-month periods,
of which $47,838 and $48,978 were due to volume decreases offset by $29,857 and
$86,614 of price increases.  During fiscal 2007 Caraco Pharmaceutical
Laboratories, Ltd. (or Caraco), filed an Abbreviated New Drug Application (or
ANDA) with a Paragraph IV Certification for a generic equivalent to
Lexapro.  We along with our licensing partner H. Lundbeck A/S (or
Lundbeck) have filed a lawsuit in the U.S. District Court for the Eastern
District of Michigan against Caraco for patent infringement.  A trial
date has been established for April 2009.





On
January 26, 2009, Caraco filed a single-count declaratory judgment action
against us and Lundbeck in the U.S. District Court for the Eastern District of
Michigan for non-infringement of U.S. Patent No. 7,420,069 (or the ‘069 patent),
which is listed in the FDA’s Orange Book for Lexapro.  This action is
similar in nature to the declaratory judgment action that Caraco filed against
us and Lundbeck in February 2007 for non-infringement of U.S. patent No.
6,916,941 (or the ‘941 patent).  The ‘069 and ‘941 patents are related
to crystalline particles of escitalopram (the active ingredient in Lexapro)
having a specific median particle size.  Those cases are distinct from
the ongoing litigation between the parties involving U.S. Patent No. RE 34,712
(or the ‘712 patent) which is directed to the escitalopram compound itself and
do not impact Forest’s exclusive rights to escitalopram under the ‘712 patent
which expires in March 2012.





Sales of
Namenda, an N-methyl-D-aspartate (or NMDA) receptor antagonist for the treatment
of moderate and severe Alzheimer's disease, grew 10% and 17% in the current
quarter and nine months, respectively, and totaled $240,851 and
$705,530.  This represents an increase of $22,117 and $102,205 as
compared to the same periods last year, of which $9,363 and $58,448 was due to
volume and $12,754 and $43,757 was due to price.  During the third
quarter of fiscal 2008, we received notification from several companies that
they filed ANDAs with Paragraph IV Certifications to obtain approval to market
generic equivalents of Namenda.  In January 2008, we along with our
licensing partner Merz Pharma GmbH & Co. KgaA filed lawsuits in the U.S.
District Court of Delaware against several companies for patent
infringement.  Namenda’s patent is set to expire in April
2010.  We have applied for patent term extension which, if granted,
would extend Namenda’s patent protection until September 2013.





Bystolic
(nebivolol hydrochloride), a beta-blocker indicated for the treatment of
hypertension, launched in January 2008, achieved sales of $20,961 and $39,498 in
the current quarter and nine months, respectively.  The U.S.
composition of matter patent covering nebivolol hydrochloride is licensed from
Mylan Inc. and expires in 2020 (Forest has submitted a patent term extension
application to extend this patent until 2021).  On January 26, 2007,
Janssen Pharmaceutica N.V., the owner of the patent, filed a request with the
U.S. Patent and Trademark Office (or USPTO) for re-examination of the patent
covering nebivolol hydrochloride.  On November 24, 2008, the USPTO
confirmed the validity of all of the previously granted claims.





The
remainder of the net sales change for the periods presented was due principally
to volume and price fluctuations of our older and non-promoted product
lines.




Contract
revenue for the three and nine months ended December 31, 2008 was $52,433 and
$153,796 respectively, compared to $52,705 and $156,395 in the same periods last
year primarily due to a decrease in co-promotion income from our co-marketing
agreement with Sankyo for Benicar.  Fiscal 2008 was the final year of
our active co-promotion activities and we will receive a reduced share of
product profits over the remaining six-year term of the agreement, as
defined.  Going forward, we will not incur salesforce expenses for
this product.





Interest
income for the three and nine-month periods ended December 31, 2008 decreased as
compared to the same periods last year primarily due to lower average rates of
return offset by higher levels of invested funds.  Other income in
last year’s nine-month period included a milestone payment received related to
our European development program for an inhaled cystic fibrosis
product.





Cost of
sales as a percentage of net sales was 22.5% and 22.2% for the three and
nine-month periods of the current year, respectively as compared with 23.3% and
22.7% for the prior year’s three and nine-month periods.





Selling,
general and administrative expenses increased $4,316 and $131,765 for the three
and nine-month periods ended December 31, 2008 as compared to the same periods
last year.  These increases were primarily due to launch costs for
Bystolic and pre-launch costs for Savella, as well as the one-time charge of
approximately $44,100 relating to the termination of the Azor co-promotion
agreement in the June 2008 quarter.  Additionally, during the
September 2008 quarter, we reserved $25,000 in connection with a Memorandum of
Understanding setting forth an agreement in principle to settle all claims
against all defendants in a securities litigation pending against the Company
and certain of our officers.  In January 2009, pursuant to a formal
Stipulation of Settlement dated December 12, 2008, we paid the full amount of
the settlement into escrow pending final Court approval of the
settlement.  A hearing with respect to such approval is scheduled for
April 2009.  We expect
a majority of such settlement to be funded by insurance.




Research
and development expense increased $170,805 and $121,628 in the three and
nine-month periods ended December 31, 2008 as compared to the same periods last
year.  During the current quarter we made two $75,000 upfront
licensing payments; the first to Phenomix for dutogliptin and the second to
Pierre Fabre for F2695.  Dutogliptin is Phenomix’ proprietary orally
administered small molecule dipeptidyl-peptidase-4 (DPP-4) inhibitor currently
in Phase III clinical development for Type II diabetes. F2695 is a selective
norepinephrine and serotonin reuptake inhibitor for the treatment of patients
with depression.  In September 2007 we recorded a $70,000 licensing
charge in connection with the collaboration agreement with Ironwood for the
right to co-develop and co-market linaclotide.  Linaclotide, which
recently began Phase III testing, is being investigated for the treatment of
constipation-predominant irritable bowel syndrome and chronic
constipation.





Research
and development expense also reflects the following:





·
            In
      December 2007, we submitted a New Drug Application (or NDA) to the FDA for
      milnacipran in the treatment of fibromyalgia syndrome based on data from
      two Phase III studies which demonstrated significant therapeutic
      effects.  On January 14, 2009 we received FDA approval for
      Savella (milnacipran HCl) for the management of
      fibromyalgia.  In December 2008, we received positive top-line
      results from an additional randomized Phase III study completed post NDA
      submission.




·
            In
      May 2008, we filed a supplemental New Drug Application (or sNDA) for
      Lexapro for the additional indication of adolescent
      depression.  The filing included the results from a Phase III
      study of Lexapro in the treatment of adolescents aged 12-17, with Major
      Depressive Disorder, which indicate that patients treated with Lexapro
      experienced statistically significant improvement in symptoms of
      depression.  The FDA has set an action date for March 2009 for
      this sNDA.





·
            In
      connection with our acquisition of Cerexa, Inc. in January 2007, we
      acquired worldwide development and marketing rights (excluding Japan) to
      ceftaroline, a next generation, broad-spectrum, hospital-based injectable
      cephalosporin antibiotic with activity against gram-positive bacteria such
      as MRSA and gram-negative bacteria.  In June 2008, we reported
      positive results from two globally conducted, multi-center Phase III
      studies of ceftaroline for complicated skin and skin structure
      infections.  We are also conducting two Phase III studies for
      community acquired pneumonia and we anticipate those results by the second
      quarter of calendar 2009.  The data from these two indications,
      if supportive, will serve as our planned submission package to the FDA for
      initial marketing approval.





·
            In
      April 2006, we entered into a collaboration agreement with Laboratorios
      Almirall, S.A. (or Almirall) for the U.S. rights to aclidinium, a novel
      long-acting muscarinic antagonist which is being developed as an inhaled
      therapy for the treatment of chronic obstructive pulmonary disease (or
      COPD).  In September 2008 we received positive results from two
      Phase III studies assessing the safety and efficacy of aclidinium in
      moderate to severe COPD.  We expect to meet with the FDA in
      early calendar 2009 to review these results.  Pending FDA
      feedback, we plan to file an NDA in late calendar 2009 or early calendar
      2010.  We and Almirall are also pursuing the development of a
      fixed-dose combination of aclidinium and the beta-agonist formoterol,
      which is currently in Phase II
testing.





·
            During
      the September 2007 quarter, we entered into a partnership with Ironwood to
      co-develop and co-market the compound linaclotide for North
      America.  Linaclotide is currently being investigated for the
      treatment of constipation-predominant irritable bowel syndrome (or IBS-C)
      and chronic constipation (or CC).  Based on positive results of
      a Phase II(b) randomized, double-blind, placebo-controlled studies
      assessing the safety and efficacy of linaclotide in patients with CC and
      IBS-C, we have initiated a comprehensive Phase III clinical
      program.  The CC studies have been initiated and we expect to
      report top-line data in the fourth quarter of calendar
      2009.  The IBS-C trials are anticipated to begin during the
      first quarter of calendar 2009.





·
            During
      the third quarter of fiscal 2005, Forest entered into a collaboration
      agreement with Gedeon Richter Ltd. (or Richter) for the North American
      rights to cariprazine and related compounds, being developed as an
      atypical antipsychotic for the treatment of schizophrenia, bipolar mania
      and other psychiatric conditions.  In September 2008, we
      received positive preliminary top-line results from an additional Phase II
      study of cariprazine in patients with acute mania associated with bipolar
      disorder.  A review of top-line results of a Phase II study in
      schizophrenia indicated that cariprazine demonstrated a nominally
      statistical significant (i.e., not adjusted for multiple comparisons)
      therapeutic effect compared to placebo in a low-dose arm and a numerical
      improvement compared to placebo in a high-dose arm that did not reach
      nominal statistical significance.  Based on the review of the
      results, we and Richter initiated a Phase II(b) dose-ranging study in
      schizophrenia patients.  This study is being performed in order
      to better determine an optimal dose to take into the planned Phase III
      program.  We expect to report this data in the second half of
      calendar 2009.





·
            Regarding
      Bystolic (nebivolol hydrochloride), we plan to file an sNDA in the first
      half of calendar 2009 for a new indication of congestive heart failure
      based on the results of the Phase III Seniors
  study.





·
            In
      February 2008, we received preliminary results of a Phase III study of
      memantine HCl in a novel once-daily formulation of Namenda for the
      treatment of moderate to severe Alzheimer’s disease.  The results
      indicated that patients treated with this formulation experienced
      statistically significant benefits in cognition and clinical global status
      compared to placebo.  Based on the results of this study, we intend
      to prepare an NDA for this new once-daily formulation in the first half of
      calendar 2009.





·
            During
      the second quarter of fiscal 2005, Forest entered into a collaboration
      agreement with Glenmark Pharmaceuticals Ltd. for the North American
      development and marketing of GRC 3886, a PDE4 inhibitor for the treatment
      of asthma and COPD.  We have commenced a Phase II study of this
      compound for the COPD indication with results expected in the second half
      of calendar 2009.





Among
other research and development projects we continue to support are the
following: RGH-896, a compound being developed for the treatment of chronic pain
and other CNS conditions; a series of novel compounds that target group 1
metabotropic glutamate receptors (mGLUR1/5) and NXL104, a novel intravenous
beta-lactamase inhibitor being developed in combination with ceftaroline. 
In addition, we have entered into several collaborations to conduct pre-clinical
drug discovery.





Our
effective tax rate was 15.4% and 20.7% for the respective three and nine-month
periods ended December 31, 2008, as compared to 22.8% and 21.5% for the same
periods last year.  The decrease resulted primarily from the
termination of our co-promotion agreement for Azor and other tax matters
including the reenactment of the U.S. Federal research and experimentation tax
credit on October 3, 2008, which resulted in a favorable impact on our current
three and nine-month periods. This was offset by the net impact of one-time
discrete tax adjustments related principally to stock-based compensation in
prior years and a lower tax benefit on combined upfront licensing fees to
Phenomix for dutogliptin and Pierre Fabre for the compound
F2695.  Effective tax rates can be affected by ongoing tax
audits.





In
connection with our previously reported adoption of the provisions of Financial
Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes - an interpretation of FASB Statement No. 109”, we accrued an
additional $7,161 in interest related to unrecognized tax matters totaling
$27,100 for the resolution of various income tax matters.





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





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




Critical Accounting
Policies





The
following accounting policies are important in understanding our financial
condition and results of operations and should be considered an integral part of
the financial review.  Refer to the notes to the consolidated
financial statements for additional policies.





Estimates and
Assumptions





The
preparation of financial statements in conformity with generally accepted
accounting principles requires us to make estimates and assumptions that affect
the reported amounts of assets and liabilities and of revenues and expenses
during the reporting period.  Estimates are made when accounting for
sales allowances, returns, rebates and other pricing adjustments, depreciation,
amortization and certain contingencies.  Forest is subject to risks
and uncertainties, which may include but are not limited to competition, federal
or local legislation and regulations, litigation and overall changes in the
healthcare environment that may cause actual results to vary from
estimates.  We review all significant estimates affecting the
financial statements on a recurring basis and record the effect of any
adjustments when necessary.  Certain of these risks, uncertainties and
assumptions are discussed further under the section entitled "Forward Looking
Statements."





Revenue
Recognition





Revenues
are recorded in the period the merchandise is shipped.  As is typical
in the pharmaceutical industry, gross product sales are subject to a variety of
deductions, primarily representing rebates and discounts to government agencies,
wholesalers and managed care organizations.  These deductions
represent estimates of the related liabilities and, as such, judgment is
required when estimating the impact of these sales deductions on gross sales for
a reporting period.  Historically, our adjustments for actual future
settlements have not been material, and have resulted in either a net increase
or a net decrease to net income.  If estimates are not representative
of actual settlement, results could be materially
affected.  Provisions for estimated sales allowances, returns, rebates
and other pricing adjustments are accrued at the time revenues are recognized as
a direct reduction of such revenue.





The
accruals are estimated based on available information, including third party
data, regarding the portion of sales on which rebates and discounts can be
earned, adjusted as appropriate for specific known events and the prevailing
contractual discount rate.  Provisions are reflected either as a
direct reduction to accounts receivable or, to the extent that they are due to
entities other than customers, as accrued expenses.  Adjustments to
estimates are recorded when customer credits are issued or payments are made to
third parties.





The
sensitivity of estimates can vary by program and type of
customer.  However, estimates associated with Medicaid and contract
rebates are most at risk for adjustment because of the extensive time delay
between the recording of the accrual and its ultimate settlement, an interval
that can range up to one year.  Because of this time lag, in any given
quarter, adjustments to actual may incorporate revisions of prior
quarters.




Provisions
for Medicaid and contract rebates during a period are recorded based upon the
actual historical experience ratio of rebates paid and actual prescriptions
written.  The experience ratio is applied to the period's sales to
determine the rebate accrual and related expense.  This experience
ratio is evaluated regularly to ensure that the historical trends are as current
as practicable.  As appropriate, we will adjust the ratio to more
closely match the current experience or expected future
experience.  In assessing this ratio, we consider current contract
terms, such as the effect of changes in formulary status, discount rate and
utilization trends.  Periodically, the accrual is adjusted based upon
actual payments made for rebates.  If the ratio is not indicative of
future experience, results could be affected.  Rebate accruals for
Medicaid were $27,463 at December 31, 2008 and $26,910 at December 31,
2007.  Commercial discounts and other rebate accruals were $164,655 at
December 31, 2008 and $130,409 at December 31, 2007.  These and other
rebate accruals are established in the period the related revenue was
recognized, resulting in a reduction to sales and the establishment of a
liability, which is included in accrued expenses.





The
following table summarizes the activity for the nine-month period in the
accounts related to accrued rebates, sales returns and discounts (In thousands):





December 31, 2008
                
                
                December 31, 2007Beginning
      balance
                
                $
                229,681
                
                
                $
                208,063Provision
      for rebates
                
                
                375,892
                
                
                
                317,947Changes
      in estimates
                
                
                
                
                
                
                2,500Settlements
                
                
                (356,734
                )
                
                
                (306,782
                )19,158
                
                
                
                13,665Provision
      for returns
                
                
                22,432
                
                
                
                24,134Changes
      in estimatesSettlements
                
                
                (17,967
                )
                
                
                (22,704
                )4,465
                
                
                
                1,430Provision
      for chargebacks and discounts
                
                
                225,189
                
                
                
                262,915Changes
      in estimates
                
                
                
                
                
                
                ( 7,700
                )Settlements
                
                
                (226,225
                )
                
                
                (266,145
                )( 1,036
                )
                
                
                ( 10,930
                )Ending
      balance
                
                $
                252,268
                
                
                $
                212,228





Deductions
for chargebacks (primarily discounts to group purchasing organizations and
federal government agencies) closely approximate actual as these deductions are
settled generally within 2-3 weeks of incurring the liability.





Forest's
policy relating to the supply of inventory at wholesalers is to maintain
stocking levels of up to three weeks and to keep monthly levels consistent from
year to year, based on patterns of utilization.  We have historically
closely monitored wholesale customer stocking levels by purchasing information
directly from customers and by obtaining other third party
information.  Unusual or unexpected variations in buying patterns or
utilizations are investigated.





Sales
incentives are generally given in connection with a new product
launch.  These sales incentives are recorded as a reduction of
revenues and are based on terms fixed at the time goods are
shipped.  New product launches may result in expected temporary
increases in wholesaler inventories, which as described above, are closely
monitored and historically have not resulted in increased product
returns.





Forward Looking
Statements





Except
for the historical information contained herein, the Management Discussion and
other portions of this Form 10-Q contain forward looking statements that involve
a number of risks and uncertainties, including the difficulty of predicting FDA
approvals, acceptance and demand for new pharmaceutical products, the impact of
competitive products and pricing, the timely development and launch of new
products, changes in laws and regulations affecting the healthcare industry, and
the risk factors listed from time to time in our filings with the SEC, including
the Annual Report on Form 10-K for the fiscal year ended March 31,
2008.





Table
of Contents


Quantitative and Qualitative
Disclosures About Market Risk





In the
normal course of business, operations may be exposed to fluctuations in currency
values and interest rates.  These fluctuations can vary the costs of
financing, investing and operating transactions.  Because we had no
debt and only minimal foreign currency transactions, there was no material
impact on earnings due to fluctuations in interest and currency exchange
rates.


Table
of Contents


Controls and
Procedures





As of the
end of the period covered by this report, the Company conducted an evaluation,
under the supervision and with the participation of the principal executive
officer and principal financial officer, of the Company's disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934 (the Exchange Act)).  Based on this evaluation,
the principal executive officer and principal financial officer concluded that
the Company's disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms.  There was no change in the Company's internal control over
financial reporting during the Company's most recently completed fiscal quarter
that has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.





Table of Contents


Part II - Other
Information





Item 1.  Legal
Proceedings





Forest is
party to certain legal proceedings described in our Annual Report on Form 10-K
for the fiscal year ended March 31, 2008 and our Quarterly Reports on Form 10-Q
for the quarters ended June 30, 2008 and September 30, 2008.





We have
previously reported reaching an agreement in principle to settle the litigation
described in our periodic reports and captioned “In re Forest Laboratories, Inc.
Securities Litigation” for a payment of $65 million.  On
December 12, 2008, we entered into a definitive Stipulation of Settlement
pursuant to which we have agreed to such settlement, subject to final Court
approval, and have paid the full amount of such settlement into escrow in
January 2009.  A hearing with respect to such approval is scheduled
for April 2009.  While we believe a majority of the settlement will be
covered by our insurance and we are engaged in discussions with the carriers
concerning their liability for the payment, during the September 2008 quarter we
recorded a $25 million reserve in connection with the Memorandum of
Understanding.








Item 1A. Risk
Factors





There
have been no material changes with respect to the risk factors disclosed in our
Annual Report on Form 10-K for the fiscal year ended March 31, 2008 and our
Quarterly Reports on Form 10-Q for the quarters ended June 30, 2008 and
September 30, 2008.








Item 2.  Unregistered Sales of Equity
Securities, Use of Proceeds and Issuer Repurchases of Equity
Securities





In May
2006 our Board of Directors (or the Board) authorized a share repurchase program
(or the 2007 Repurchase Program) for up to 25 million shares of our common
stock.  On August 13, 2007 the Board authorized an additional 10
million shares to be available for repurchase.  No shares were
repurchased during the quarter ended December 31, 2008.  As of
February 5, 2009, 5.7 million shares were available for repurchase under the
2007 Repurchase Program.





Item
      6.
                      ExhibitsExhibit 10.1
                      Amended
      and Restated Change of Control Employment Agreement between Forest and
      Howard Solomon dated October 29, 2008.Exhibit 10.2
                      Amended
      and Restated Change of Control Employment Agreement between Forest and
      Lawrence S. Olanoff, M.D., Ph.D dated October 29, 2008.Exhibit 10.3
                      Amended
      and Restated Change of Control Employment Agreement between Forest and
      Elaine Hochberg dated October 29, 2008.Exhibit 10.4
                      Amended
      and Restated Change of Control Employment Agreement between Forest and
      Francis I. Perier, Jr. dated October 29, 2008.Exhibit 10.5
                      Amended
      and Restated Change of Control Employment Agreement between Forest and
      Marco Taglietti dated October 29, 2008.Exhibit 10.6
                      Amended
      and Restated Change of Control Employment Agreement between Forest and
      Herschel Weinstein dated October 29, 2008.Exhibit 10.7
                      Amended
      and Restated Change of Control Employment Agreement between Forest and
      Frank Murdolo dated October 29, 2008.Exhibit 10.8
                      Amended
      and Restated Change of Control Employment Agreement between Forest and
      David Solomon dated October 29, 2008.Exhibit 10.9
                      Amended
      and Restated Change of Control Employment Agreement between Forest and
      Raymond Stafford dated October 29, 2008.Exhibit 31.1
                      Certification
      Pursuant to Section 302 of the Sarbanes-Oxley Act of
  2002Exhibit 31.2
                      Certification
      Pursuant to Section 302 of the Sarbanes-Oxley Act of
  2002Exhibit 32.1
                      Certification
      Pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002Exhibit 32.2
                      Certification
      Pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002








Table of Contents


SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.





Date:  February
6, 2009











Forest Laboratories,
Inc.


(Registrant)











/s/ Howard
Solomon


Howard
Solomon


Chief
Executive Officer











/s/ Francis I. Perier,
Jr.


Francis
I. Perier, Jr.


Senior
Vice President - Finance and


Chief
Financial Officer