##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2008
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number 001-13305
 
 WATSON PHARMACEUTICALS, INC.
  
 Nevada
    
    95-3872914(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 311 Bonnie Circle
Corona, CA 92880-2882
 (951) 493-5300
 þ o
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller Reporting Company o
 o þ




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##### 



WATSON PHARMACEUTICALS, INC.
 TABLE OF CONTENTS
 FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2008
 PAGEPart I. FINANCIAL INFORMATIONItem 1.
    
    Condensed Consolidated Financial Statements (Unaudited):Condensed Consolidated Balance Sheets as of June 30, 2008 and December 31, 2007
    
    1Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2008 and 2007
    
    2Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2008 and 2007
    
    3Notes to Condensed Consolidated Financial Statements
    
    4Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations

    19Item 3.
    
    Quantitative and Qualitative Disclosure about Market Risk
    
    35Item 4.
    
    Controls and Procedures
    
    37Part II. OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    38Item 1A.
    
    Risk Factors
    
    38Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    38Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    39Item 6.
    
    Exhibits
    
    39Signatures
    
    
    
    40EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2




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##### Table of Contents



WATSON PHARMACEUTICALS, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (Unaudited; in thousands)
 June 30,
    
    
    December 31,2008
    
    
    2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    265,469
    
    
    $
    204,554Marketable securities
    
    
    12,718
    
    
    
    11,799Accounts receivable, net
    
    
    297,171
    
    
    
    267,117Inventories
    
    
    490,701
    
    
    
    490,601Prepaid expenses and other current assets
    
    
    74,101
    
    
    
    86,072Deferred tax assets
    
    
    105,199
    
    
    
    113,633Total current assets
    
    
    1,245,359
    
    
    
    1,173,776Property and equipment, net
    
    
    672,670
    
    
    
    688,185Investments and other assets
    
    
    71,488
    
    
    
    68,034Deferred tax assets
    
    
    59,897
    
    
    
    61,886Product rights and other intangibles, net
    
    
    563,924
    
    
    
    603,697Goodwill
    
    
    876,449
    
    
    
    876,449Total assets
    
    $
    3,489,787
    
    
    $
    3,472,027LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable and accrued expenses
    
    $
    382,050
    
    
    $
    398,154Income taxes payable
    
    
    898
    
    
    
    Short-term debt and current portion of long-term debt
    
    
    2,949
    
    
    
    6,241Deferred revenue
    
    
    14,592
    
    
    
    21,754Current deferred tax liabilities
    
    
    24,378
    
    
    
    18,778Total current liabilities
    
    
    424,867
    
    
    
    444,927Long-term debt
    
    
    824,540
    
    
    
    899,408Deferred revenue
    
    
    33,677
    
    
    
    39,535Other long-term liabilities
    
    
    4,693
    
    
    
    7,333Other taxes payable
    
    
    54,300
    
    
    
    52,619Deferred tax liabilities
    
    
    177,276
    
    
    
    178,740Total liabilities
    
    
    1,519,353
    
    
    
    1,622,562Commitments and contingenciesStockholders equity:Preferred stock
    
    
    
    
    
    
    Common stock
    
    
    375
    
    
    
    373Additional paid-in capital
    
    
    980,265
    
    
    
    968,739Retained earnings
    
    
    1,290,669
    
    
    
    1,179,737Accumulated other comprehensive income
    
    
    1,010
    
    
    
    2,392Treasury stock, at cost
    
    
    (301,885
    )
    
    
    (301,776
    )Total stockholders equity
    
    
    1,970,434
    
    
    
    1,849,465Total liabilities and stockholders equity
    
    $
    3,489,787
    
    
    $
    3,472,027
 See accompanying Notes to Condensed Consolidated Financial Statements.
 -1-




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WATSON PHARMACEUTICALS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited; in thousands, except per share amounts)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net revenues
    
    $
    622,636
    
    
    $
    603,005
    
    
    $
    1,249,585
    
    
    $
    1,274,610Cost of sales (excludes amortization, presented below)
    
    
    359,898
    
    
    
    360,438
    
    
    
    740,000
    
    
    
    785,158Gross profit
    
    
    262,738
    
    
    
    242,567
    
    
    
    509,585
    
    
    
    489,452Operating expenses:Research and development
    
    
    39,216
    
    
    
    35,503
    
    
    
    77,231
    
    
    
    73,311Selling and marketing
    
    
    57,504
    
    
    
    51,897
    
    
    
    113,584
    
    
    
    107,060General and administrative
    
    
    46,791
    
    
    
    45,261
    
    
    
    97,344
    
    
    
    93,316Amortization
    
    
    20,190
    
    
    
    44,159
    
    
    
    40,369
    
    
    
    88,092Total operating expenses
    
    
    163,701
    
    
    
    176,820
    
    
    
    328,528
    
    
    
    361,779Operating income
    
    
    99,037
    
    
    
    65,747
    
    
    
    181,057
    
    
    
    127,673Other (expense) income:Loss on early extinguishment of debt
    
    
    
    
    
    
    (1,681
    )
    
    
    (1,095
    )
    
    
    (4,410
    )Interest income
    
    
    1,685
    
    
    
    1,803
    
    
    
    3,994
    
    
    
    4,732Interest expense
    
    
    (6,931
    )
    
    
    (11,475
    )
    
    
    (13,727
    )
    
    
    (25,351
    )Other income
    
    
    2,080
    
    
    
    3,034
    
    
    
    7,433
    
    
    
    6,437Total other (expense) income, net
    
    
    (3,166
    )
    
    
    (8,319
    )
    
    
    (3,395
    )
    
    
    (18,592
    )Income before income taxes
    
    
    95,871
    
    
    
    57,428
    
    
    
    177,662
    
    
    
    109,081Provision for income taxes
    
    
    35,568
    
    
    
    21,019
    
    
    
    66,730
    
    
    
    41,060Net income
    
    $
    60,303
    
    
    $
    36,409
    
    
    $
    110,932
    
    
    $
    68,021Earnings per share:Basic
    
    $
    0.59
    
    
    $
    0.36
    
    
    $
    1.08
    
    
    $
    0.67Diluted
    
    $
    0.53
    
    
    $
    0.33
    
    
    $
    0.98
    
    
    $
    0.62Weighted average shares outstanding:Basic
    
    
    102,728
    
    
    
    102,093
    
    
    
    102,676
    
    
    
    102,178Diluted
    
    
    117,652
    
    
    
    117,080
    
    
    
    117,511
    
    
    
    116,909
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WATSON PHARMACEUTICALS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited; in thousands)
 Six Months EndedJune 30,2008
    
    
    2007CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    110,932
    
    
    $
    68,021Reconciliation to net cash provided by operating activities:Depreciation
    
    
    44,139
    
    
    
    37,522Amortization
    
    
    40,369
    
    
    
    88,091Deferred income tax provision (benefit)
    
    
    17,363
    
    
    
    (20,188
    )Provision for inventory reserve
    
    
    22,231
    
    
    
    26,946Restricted stock and stock option compensation
    
    
    9,256
    
    
    
    6,910Earnings on equity method investments
    
    
    (5,828
    )
    
    
    (3,723
    )Gain on sale of securities
    
    
    (1,355
    )
    
    
    (2,472
    )Loss on early extinguishment of debt
    
    
    1,095
    
    
    
    4,410Loss on sale of fixed assets
    
    
    284
    
    
    
    917Tax benefits from employee stock plans
    
    
    78
    
    
    
    767Mark to market on embedded derivative
    
    
    (3
    )
    
    
    119Other
    
    
    (1,501
    )
    
    
    2,016Changes in assets and liabilities:Accounts receivable, net
    
    
    (30,054
    )
    
    
    86,090Inventories
    
    
    (22,331
    )
    
    
    (67,980
    )Prepaid expenses and other current assets
    
    
    7,724
    
    
    
    33,873Accounts payable and accrued expenses
    
    
    (18,912
    )
    
    
    (76,366
    )Deferred revenue
    
    
    (13,020
    )
    
    
    (6,176
    )Income taxes payable
    
    
    5,145
    
    
    
    18,058Other assets
    
    
    574
    
    
    
    2,407Total adjustments
    
    
    55,254
    
    
    
    131,221Net cash provided by operating activities
    
    
    166,186
    
    
    
    199,242CASH FLOWS FROM INVESTING ACTIVITIES:Additions to property and equipment
    
    
    (28,908
    )
    
    
    (35,465
    )Acquisition of product rights and other intangibles
    
    
    (596
    )
    
    
    (368
    )Proceeds from sale of marketable equity securities
    
    
    3,878
    
    
    
    2,548Additions to marketable securities
    
    
    (3,733
    )
    
    
    (4,230
    )Additions to long-term investments
    
    
    
    
    
    
    (1,144
    )Other, net
    
    
    
    
    
    
    807Net cash used in investing activities
    
    
    (29,359
    )
    
    
    (37,852
    )CASH FLOWS FROM FINANCING ACTIVITIES:Principal payments on debt
    
    
    (95,000
    )
    
    
    (251,881
    )Repurchase of common stock
    
    
    (109
    )
    
    
    Borrowings on short-term debt and other long-term liabilities
    
    
    17,003
    
    
    
    Proceeds from stock plans
    
    
    2,194
    
    
    
    11,172Net cash used in financing activities
    
    
    (75,912
    )
    
    
    (240,709
    )Net increase (decrease) in cash and cash equivalents
    
    
    60,915
    
    
    
    (79,319
    )Cash and cash equivalents at beginning of period
    
    
    204,554
    
    
    
    154,171Cash and cash equivalents at end of period
    
    $
    265,469
    
    
    $
    74,852
 See accompanying Notes to Condensed Consolidated Financial Statements.
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WATSON PHARMACEUTICALS, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1  GENERAL
   Comprehensive Income
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income
    
    $
    60,303
    
    
    $
    36,409
    
    
    $
    110,932
    
    
    $
    68,021Other comprehensive (loss) income:Translation (loss) gain
    
    
    (1,255
    )
    
    
    867
    
    
    
    (935
    )
    
    
    1,085Unrealized loss on securities, net of tax
    
    
    (154
    )
    
    
    (510
    )
    
    
    (202
    )
    
    
    (516
    )Unrealized gain (loss) on cash flow hedge, net of tax
    
    
    1,067
    
    
    
    
    
    
    
    (245
    )
    
    
    Total other comprehensive (loss) income
    
    
    (342
    )
    
    
    357
    
    
    
    (1,382
    )
    
    
    569Total comprehensive income
    
    $
    59,961
    
    
    $
    36,766
    
    
    $
    109,550
    
    
    $
    68,590
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Preferred and Common Stock
  Provisions for Sales Returns and Allowances
    -5-




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Returns andOther
    
    
    CashChargebacks
    
    
    Rebates
    
    
    Allowances
    
    
    Discounts
    
    
    TotalBalance at December 31, 2006
    
    $
    164,480
    
    
    $
    180,538
    
    
    $
    42,489
    
    
    $
    14,072
    
    
    $
    401,579Provision related to sales in six months
ended June 30, 2007
    
    
    600,978
    
    
    
    215,883
    
    
    
    98,362
    
    
    
    35,104
    
    
    
    950,327Credits and payments
    
    
    (616,994
    )
    
    
    (229,595
    )
    
    
    (66,985
    )
    
    
    (36,072
    )
    
    
    (949,646
    )Balance at June 30, 2007
    
    
    148,464
    
    
    
    166,826
    
    
    
    73,866
    
    
    
    13,104
    
    
    
    402,260Provision related to sales in six months
ended December 31, 2007
    
    
    633,919
    
    
    
    160,615
    
    
    
    69,061
    
    
    
    32,957
    
    
    
    896,552Credits and payments
    
    
    (617,940
    )
    
    
    (173,124
    )
    
    
    (86,883
    )
    
    
    (33,149
    )
    
    
    (911,096
    )Balance at December 31, 2007
    
    
    164,443
    
    
    
    154,317
    
    
    
    56,044
    
    
    
    12,912
    
    
    
    387,716Provision related to sales in six months
ended June 30, 2008
    
    
    614,899
    
    
    
    150,773
    
    
    
    83,276
    
    
    
    32,886
    
    
    
    881,834Credits and payments
    
    
    (643,532
    )
    
    
    (167,311
    )
    
    
    (82,564
    )
    
    
    (33,380
    )
    
    
    (926,787
    )Balance at June 30, 2008
    
    $
    135,810
    
    
    $
    137,779
    
    
    $
    56,756
    
    
    $
    12,418
    
    
    $
    342,763
 Earnings Per Share (EPS)
  Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007EPS  basicNet income
    
    $
    60,303
    
    
    $
    36,409
    
    
    $
    110,932
    
    
    $
    68,021Basic weighted average common shares outstanding
    
    
    102,728
    
    
    
    102,093
    
    
    
    102,676
    
    
    
    102,178EPS  basic
    
    $
    0.59
    
    
    $
    0.36
    
    
    $
    1.08
    
    
    $
    0.67EPS  dilutedNet income
    
    $
    60,303
    
    
    $
    36,409
    
    
    $
    110,932
    
    
    $
    68,021Add: Interest expense on CODES, net of tax
    
    
    1,945
    
    
    
    2,058
    
    
    
    3,931
    
    
    
    4,001Net income, adjusted
    
    $
    62,248
    
    
    $
    38,467
    
    
    $
    114,863
    
    
    $
    72,022Basic weighted average common shares outstanding
    
    
    102,728
    
    
    
    102,093
    
    
    
    102,676
    
    
    
    102,178Effect of dilutive securities:Conversion of CODES
    
    
    14,357
    
    
    
    14,357
    
    
    
    14,357
    
    
    
    14,357Dilutive share-based compensation arrangements
    
    
    567
    
    
    
    630
    
    
    
    478
    
    
    
    374Diluted weighted average common shares outstanding
    
    
    117,652
    
    
    
    117,080
    
    
    
    117,511
    
    
    
    116,909EPS  diluted
    
    $
    0.53
    
    
    $
    0.33
    
    
    $
    0.98
    
    
    $
    0.62
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Derivatives
   Share-Based Compensation
   Recent Accounting Pronouncements
   -7-




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-8-




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NOTE 2  OTHER INCOME
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Earnings on equity method investments
    
    $
    1,845
    
    
    $
    2,284
    
    
    $
    5,828
    
    
    $
    3,723Gain on sale of securities
    
    
    
    
    
    
    683
    
    
    
    1,355
    
    
    
    2,472Other income
    
    
    235
    
    
    
    67
    
    
    
    250
    
    
    
    242$
    2,080
    
    
    $
    3,034
    
    
    $
    7,433
    
    
    $
    6,437
 NOTE 3  OPERATING SEGMENTS
   Three Months Ended June 30, 2008
    
    
    Three Months Ended June 30, 2007Generic
    
    
    Brand
    
    
    Distribution
    
    
    Total
    
    
    Generic
    
    
    Brand
    
    
    Distribution
    
    
    TotalProduct sales
    
    $
    344,289
    
    
    $
    101,466
    
    
    $
    127,987
    
    
    $
    573,742
    
    
    $
    327,446
    
    
    $
    96,924
    
    
    $
    146,631
    
    
    $
    571,001Other
    
    
    32,359
    
    
    
    16,535
    
    
    
    
    
    
    
    48,894
    
    
    
    18,195
    
    
    
    13,809
    
    
    
    
    
    
    
    32,004Net revenues
    
    
    376,648
    
    
    
    118,001
    
    
    
    127,987
    
    
    
    622,636
    
    
    
    345,641
    
    
    
    110,733
    
    
    
    146,631
    
    
    
    603,005Cost of sales(1)
    
    
    227,586
    
    
    
    24,417
    
    
    
    107,895
    
    
    
    359,898
    
    
    
    210,342
    
    
    
    26,795
    
    
    
    123,301
    
    
    
    360,438Gross profit(1)
    
    
    149,062
    
    
    
    93,584
    
    
    
    20,092
    
    
    
    262,738
    
    
    
    135,299
    
    
    
    83,938
    
    
    
    23,330
    
    
    
    242,567Gross margin(1)
    
    
    39.6
    %
    
    
    79.3
    %
    
    
    15.7
    %
    
    
    42.2
    %
    
    
    39.1
    %
    
    
    75.8
    %
    
    
    15.9
    %
    
    
    40.2
    %Research and
development
    
    
    29,125
    
    
    
    10,091
    
    
    
    
    
    
    
    39,216
    
    
    
    23,968
    
    
    
    11,535
    
    
    
    
    
    
    
    35,503Selling and
marketing
    
    
    13,825
    
    
    
    29,574
    
    
    
    14,105
    
    
    
    57,504
    
    
    
    13,197
    
    
    
    26,373
    
    
    
    12,327
    
    
    
    51,897Contribution
    
    $
    106,112
    
    
    $
    53,919
    
    
    $
    5,987
    
    
    
    166,018
    
    
    $
    98,134
    
    
    $
    46,030
    
    
    $
    11,003
    
    
    
    155,167Contibution margin
    
    
    28.2
    %
    
    
    45.7
    %
    
    
    4.7
    %
    
    
    26.7
    %
    
    
    28.4
    %
    
    
    41.6
    %
    
    
    7.5
    %
    
    
    25.7
    %General and administrative
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46,791
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45,261Amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,190
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44,159Operating income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    99,037
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    65,747Operating margin
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15.9
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10.9
    %
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##### Table of Contents



Six Months Ended June 30, 2008
    
    
    Six Months Ended June 30, 2007Generic
    
    
    Brand
    
    
    Distribution
    
    
    Total
    
    
    Generic
    
    
    Brand
    
    
    Distribution
    
    
    TotalProduct sales
    
    $
    686,748
    
    
    $
    200,458
    
    
    $
    272,889
    
    
    $
    1,160,095
    
    
    $
    738,921
    
    
    $
    187,562
    
    
    $
    292,071
    
    
    $
    1,218,554Other
    
    
    56,656
    
    
    
    32,834
    
    
    
    
    
    
    
    89,490
    
    
    
    31,345
    
    
    
    24,711
    
    
    
    
    
    
    
    56,056Net revenues
    
    
    743,404
    
    
    
    233,292
    
    
    
    272,889
    
    
    
    1,249,585
    
    
    
    770,266
    
    
    
    212,273
    
    
    
    292,071
    
    
    
    1,274,610Cost of sales(1)
    
    
    457,309
    
    
    
    51,943
    
    
    
    230,748
    
    
    
    740,000
    
    
    
    482,965
    
    
    
    52,010
    
    
    
    250,183
    
    
    
    785,158Gross profit(1)
    
    
    286,095
    
    
    
    181,349
    
    
    
    42,141
    
    
    
    509,585
    
    
    
    287,301
    
    
    
    160,263
    
    
    
    41,888
    
    
    
    489,452Gross margin(1)
    
    
    38.5
    %
    
    
    77.7
    %
    
    
    15.4
    %
    
    
    40.8
    %
    
    
    37.3
    %
    
    
    75.5
    %
    
    
    14.3
    %
    
    
    38.4
    %Research and
development
    
    
    51,722
    
    
    
    25,509
    
    
    
    
    
    
    
    77,231
    
    
    
    50,481
    
    
    
    22,830
    
    
    
    
    
    
    
    73,311Selling and
marketing
    
    
    27,878
    
    
    
    57,569
    
    
    
    28,137
    
    
    
    113,584
    
    
    
    27,746
    
    
    
    52,784
    
    
    
    26,530
    
    
    
    107,060Contribution
    
    $
    206,495
    
    
    $
    98,271
    
    
    $
    14,004
    
    
    
    318,770
    
    
    $
    209,074
    
    
    $
    84,649
    
    
    $
    15,358
    
    
    
    309,081Contibution margin
    
    
    27.8
    %
    
    
    42.1
    %
    
    
    5.1
    %
    
    
    25.5
    %
    
    
    27.1
    %
    
    
    39.9
    %
    
    
    5.3
    %
    
    
    24.2
    %General and administrative
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    97,344
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    93,316Amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40,369
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    88,092Operating income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    181,057
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    127,673Operating margin
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14.5
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10.0
    %
 
 (1)
    
    Excludes amortization of acquired intangibles including product rights. NOTE 4  INVENTORIES
   June 30,
    
    
    December 31,2008
    
    
    2007Raw materials
    
    $
    105,518
    
    
    $
    102,607Work-in-process
    
    
    53,079
    
    
    
    45,851Finished goods
    
    
    332,104
    
    
    
    342,143Total inventories
    
    $
    490,701
    
    
    $
    490,601
 -10-




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##### Table of Contents



NOTE 5  LONG-TERM DEBT
  June 30,
    
    
    December 31,2008
    
    
    2007Senior Credit Facility, due 2011, bearing
interest
at LIBOR plus 0.75% (2006 Credit Facility)
    
    $
    250,000
    
    
    $
    325,000CODES, face amount of $575 million,
due 2023, net of unamortized discount
    
    
    574,540
    
    
    
    574,402Other notes payable
    
    
    2,949
    
    
    
    6,247827,489
    
    
    
    905,649Less: Current portion
    
    
    2,949
    
    
    
    6,241Total long-term debt
    
    $
    824,540
    
    
    $
    899,408
 Senior Credit Facility
  NOTE 6  BUSINESS RESTRUCTURING CHARGES
  AccrualBalance at(in thousands)
    
    Charged
    
    
    Cash
    
    
    Non-cash
    
    
    June 30,to
Expense
    
    
    Payments
    
    
    Adjustments
    
    
    2008Cost of salesSeverence and retention
    
    $
    12,816
    
    
    $
    (718
    )
    
    $
    
    
    
    $
    12,098Product transfer costs
    
    
    677
    
    
    
    (176
    )
    
    
    
    
    
    
    501Facility decommission costs
    
    
    277
    
    
    
    (126
    )
    
    
    
    
    
    
    151Accelerated depreciation
    
    
    3,793
    
    
    
    
    
    
    
    (3,793
    )
    
    
    17,563
    
    
    
    (1,020
    )
    
    
    (3,793
    )
    
    
    12,750Operating expensesResearch and development
    
    
    905
    
    
    
    (752
    )
    
    
    
    
    
    
    153Selling, general and administrative
    
    
    695
    
    
    
    
    
    
    
    
    
    
    
    6951,600
    
    
    
    (752
    )
    
    
    
    
    
    
    848Total restructuring charges
    
    $
    19,163
    
    
    $
    (1,772
    )
    
    $
    (3,793
    )
    
    $
    13,598
  -11-




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##### Table of Contents



NOTE 7  INCOME TAXES
      NOTE 8  STOCKHOLDERS EQUITY
  Stockholders equity, December 31, 2007
    
    $
    1,849,465Common stock issued under employee plans
    
    
    2,194Increase in additional paid-in capital for share-based compensation plans
    
    
    9,256Net income
    
    
    110,932Other comprehensive loss
    
    
    (1,382
    )Tax benefit from employee stock plans
    
    
    78Repurchase of common stock
    
    
    (109
    )Stockholders equity, June 30, 2008
    
    $
    1,970,434
 NOTE 9  FAIR VALUE MEASUREMENT
  -12-




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##### Table of Contents



Fair Value Measurements as at June 30, 2008 Using:Total
    
    Level 1
    
    Level 2
    
    Level 3Marketable securities
    
    $
    12,718
    
    
    $
    12,718
    
    
    $
    
    
    
    $
    Investments
    
    
    165
    
    
    
    165
    
    
    
    
    
    
    
    Derivative liabilities
    
    
    2,022
    
    
    
    
    
    
    
    2,022
    
    
    
    
  NOTE 10  CONTINGENCIES
 Legal Matters
  Cipro Litigation. In re: Ciprofloxacin Hydrochloride
Antitrust Litigation, MDL Docket No. 001383
 -13-




---



##### Table of Contents



® In re: Cipro
Cases I & II, JCCP Proceeding Nos. 4154 & 4220
 Governmental Reimbursement Investigations and Drug Pricing Litigation qui tam qui tam qui tam qui tam qui tam qui tam
 -14-




---



##### Table of Contents



In re: Pharmaceutical
Industry Average Wholesale Price Litigation, MDL Docket No. 1456
 State of Nevada v. American Home Products, et al., Civil
Action No. 02-CV-12086-PBS, United States District Court for the District of Massachusetts; State
of Montana v. Abbott Laboratories, et al., Civil Action No. 02-CV-12084-PBS, United States District
Court for the District of Massachusetts; Commonwealth of Massachusetts v. Mylan Laboratories, et
al., Civil Action No. 03-CV-11865-PBS, United States District Court for the District of
Massachusetts; State of Wisconsin v. Abbott Laboratories, et al., Case No. 04-cv-1709, Wisconsin
Circuit Court for Dane County; Commonwealth of Kentucky v. Alpharma, Inc., et al., Case Number
04-CI-1487, Kentucky Circuit Court for Franklin County; State of Alabama v. Abbott Laboratories,
Inc. et al., Civil Action No. CV05-219, Alabama Circuit Court for Montgomery County; State of
Illinois v. Abbott Laboratories, Inc. et al., Civil Action No. 05-CH-02474, Illinois Circuit Court
for Cook County; State of Mississippi v. Abbott Laboratories, Inc. et al., Civil Action No.
G2005-2021 S/2, Mississippi Chancery Court of Hinds County; State of Florida ex rel. Ven-A-Care,
Civil Action No 98-3032G, Florida Circuit Court in Leon County; State of Arizona ex rel. Terry
Goddard, No. CV 2005-18711, Arizona Superior Court for Maricopa County; State of Missouri ex rel.
Jeremiah W. (Jay) Nixon v. Mylan Laboratories, et al, Case No. 054-2486, Missouri Circuit Court of
St. Louis; State of Alaska v. Alpharma Branded Products Division Inc., et al., In the Superior
Court for the State of Alaska Third Judicial District at Anchorage, C.A. No. 3AN-06-12026 CI; State
of Idaho v. Alpharma USPD Inc. et al., In the District Court of the Fourth Judicial District of the
State of Idaho, in and for the County of Ada, C.A. No. CV0C-0701847; State of South Carolina and
Henry D. McMaster v. Watson Pharmaceuticals (New Jersey), Inc., In the Court of Common Pleas for
the Fifth Judicial Circuit, State of South Carolina, County of Richland, C.A. No. 2006-CP-40-7152;
State of South Carolina and Henry D. McMaster v. Watson
Pharmaceuticals (New Jersey), Inc., In the Court of Common Pleas for the Fifth Judicial
Circuit, State of South Carolina, County of Richland, C.A. No. 2006-CP-40-7155; State of Hawaii v.
Abbott Laboratories, Inc. et al., In the Circuit Court of
 -15-




---



##### Table of Contents



the First Circuit, State of Hawaii, C.A.
No. 06-1-0720-04 EEH; State of Utah v. Actavis U.S., Inc., et al., In the Third Judicial District
Court of Salt Lake County, Civil No. 07-0913719; State of Iowa v. Abbott Laboratories, Inc., et
al., In the U.S. District Court for the Southern District of Iowa, Central Division, Case No.
07-CV-00461; State of Texas ex rel. Ven-A-Care of the Florida Keys, Inc. v. Alpharma Inc., et al,
Case No. 08-001565, in the District Court of Travis County, Texas; and United States of America ex
rel. Ven-A-Care of the Florida Keys, Inc., Civil Action No. 08-10852, in the U.S. District Court
for the District of Massachussetts .
  City
of New York v. Abbott Laboratories, Inc., et al., Civil Action No. 01-CV-12257-PBS, United States
District Court for the District of Massachusetts County of Orange v. Abbott
Laboratories, Inc., et al. United States District Court for the Southern District of New York,
Case No. 07-CV-2777
  FDA Matters. United States of America v. Watson Laboratories, Inc., and Allen Y.
Chao
  -16-




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##### Table of Contents



Naproxen Sodium (Naprelan). ® Elan Corporation PLC v. Andrx Pharmaceuticals, Inc., Case No. 98-7164 ® Elan Corporation PLC v. Andrx Pharmaceuticals, Inc.,
Case No. 03-1354
 ® Elan Corporation PLC v. Andrx
Pharmaceuticals, Inc., Case No. 058-60158
 -17-




---



##### Table of Contents



®
 Federal Trade Commission Investigations ® ® ®
 Department of Health and Human Services Subpoena. ®
 Hormone Replacement Therapy Litigation. In re: Prempro Products Liability
Litigation, MDL Docket No. 1507
 Levonorgestrel/Ethinyl Estradiol Tablets (Seasonale ® ) TM ® Duramed Pharmaceuticals, Inc. v.
Watson Pharmaceuticals, Inc., et. al., Case No. 07cv05941 ®
 Ferrlecit®. ®
 -18-




---



##### Table of Contents



®
   
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Overview
  -19-




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##### Table of Contents



Results of Operations
    Three Months Ended June 30, 2008 Compared to Three Months Ended June 30, 2007
 Three Months Ended June 30, 2008
    
    
    Three Months Ended June 30, 2007Generic
    
    
    Brand
    
    
    Distribution
    
    
    Total
    
    
    Generic
    
    
    Brand
    
    
    Distribution
    
    
    TotalProduct sales
    
    $
    344,289
    
    
    $
    101,466
    
    
    $
    127,987
    
    
    $
    573,742
    
    
    $
    327,446
    
    
    $
    96,924
    
    
    $
    146,631
    
    
    $
    571,001Other
    
    
    32,359
    
    
    
    16,535
    
    
    
    
    
    
    
    48,894
    
    
    
    18,195
    
    
    
    13,809
    
    
    
    
    
    
    
    32,004Net revenues
    
    
    376,648
    
    
    
    118,001
    
    
    
    127,987
    
    
    
    622,636
    
    
    
    345,641
    
    
    
    110,733
    
    
    
    146,631
    
    
    
    603,005Cost of sales(1)
    
    
    227,586
    
    
    
    24,417
    
    
    
    107,895
    
    
    
    359,898
    
    
    
    210,342
    
    
    
    26,795
    
    
    
    123,301
    
    
    
    360,438Gross profit(1)
    
    
    149,062
    
    
    
    93,584
    
    
    
    20,092
    
    
    
    262,738
    
    
    
    135,299
    
    
    
    83,938
    
    
    
    23,330
    
    
    
    242,567Gross margin(1)
    
    
    39.6
    %
    
    
    79.3
    %
    
    
    15.7
    %
    
    
    42.2
    %
    
    
    39.1
    %
    
    
    75.8
    %
    
    
    15.9
    %
    
    
    40.2
    %Research and
development
    
    
    29,125
    
    
    
    10,091
    
    
    
    
    
    
    
    39,216
    
    
    
    23,968
    
    
    
    11,535
    
    
    
    
    
    
    
    35,503Selling and
marketing
    
    
    13,825
    
    
    
    29,574
    
    
    
    14,105
    
    
    
    57,504
    
    
    
    13,197
    
    
    
    26,373
    
    
    
    12,327
    
    
    
    51,897Contribution
    
    $
    106,112
    
    
    $
    53,919
    
    
    $
    5,987
    
    
    
    166,018
    
    
    $
    98,134
    
    
    $
    46,030
    
    
    $
    11,003
    
    
    
    155,167Contibution margin
    
    
    28.2
    %
    
    
    45.7
    %
    
    
    4.7
    %
    
    
    26.7
    %
    
    
    28.4
    %
    
    
    41.6
    %
    
    
    7.5
    %
    
    
    25.7
    %General and administrative
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46,791
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45,261Amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,190
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44,159Operating income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    99,037
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    65,747Operating margin
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15.9
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10.9
    %
 
 (1)
    
    Excludes amortization of acquired intangibles including product rights. -20-




---



##### Table of Contents



Generic Segment
 Net Revenues
    TM
  Gross Profit
   Research and Development Expenses
  -21-




---



##### Table of Contents



Selling and Marketing Expenses
   Brand Segment
 Net Revenues
      Gross Profit (Gross Margin)
   -22-




---



##### Table of Contents



Research and Development Expenses
   Selling and Marketing Expenses
   Distribution Segment
 Net Revenues
   Gross Profit (Gross Margin)
  Selling and Marketing Expenses
   -23-




---



##### Table of Contents



Segment Contribution
 Three Months Ended June 30,
    
    
    Change($ in thousands):
    
    2008
    
    
    2007
    
    
    Dollars
    
    
    %Segment contributionGeneric
    
    $
    106,112
    
    
    $
    98,134
    
    
    $
    7,978
    
    
    
    8.1
    %Brand
    
    
    53,919
    
    
    
    46,030
    
    
    
    7,889
    
    
    
    17.1
    %Distribution
    
    
    5,987
    
    
    
    11,003
    
    
    
    (5,016
    )
    
    
    (45.6
    )%$
    166,018
    
    
    $
    155,167
    
    
    $
    10,851
    
    
    
    7.0
    %as % of net revenues
    
    
    26.7
    %
    
    
    25.7
    %
  Corporate General and Administrative Expenses
 Three Months Ended June 30,
    
    Change($ in thousands):
    
    2008
    
    2007
    
    Dollars
    
    %Corporate general and
administrative expenses
    
    $
    46,791
    
    
    $
    45,261
    
    
    $
    1,530
    
    
    
    3.4
    %as a % of net revenues
    
    
    7.5
    %
    
    
    7.5
    %
   Amortization
 Three Months Ended June 30,
    
    Change($ in thousands):
    
    2008
    
    2007
    
    Dollars
    
    %Amortization
    
    $
    20,190
    
    
    $
    44,159
    
    
    $
    (23,969
    )
    
    
    (54.3
    )%as a % of net revenues
    
    
    3.2
    %
    
    
    7.3
    %
  -24-




---



##### Table of Contents



Loss on Early Extinguishment of Debt
 Three Months Ended June 30,
    
    Change($ in thousands):
    
    2008
    
    2007
    
    Dollars
    
    %Loss on early extinguishment
of debt
    
    $
    
    
    
    $
    1,681
    
    
    $
    (1,681
    )
    
    
    (100.0
    )%as a % of net revenues
    
    
    0.0
    %
    
    
    0.3
    %
   Interest Income
 Three Months Ended June 30,
    
    Change($ in thousands):
    
    2008
    
    2007
    
    Dollars
    
    %Interest income
    
    $
    1,685
    
    
    $
    1,803
    
    
    $
    (118
    )
    
    
    (6.5
    )%as a % of net revenues
    
    
    0.3
    %
    
    
    0.3
    %
  Interest Expense
 Three Months Ended June 30,
    
    
    Change($ in thousands):
    
    2008
    
    
    2007
    
    
    Dollars
    
    
    %Interest expense  2006 Credit Facility
    
    $
    3,698
    
    
    $
    8,076
    
    
    $
    (4,378
    )Interest expense  convertible contingent
senior debentures due 2023 (CODES)
    
    
    3,151
    
    
    
    3,151
    
    
    
    Change in derivative value
    
    
    (60
    )
    
    
    95
    
    
    
    (155
    )Interest expense  other
    
    
    142
    
    
    
    153
    
    
    
    (11
    )Interest expense
    
    $
    6,931
    
    
    $
    11,475
    
    
    $
    (4,544
    )
    
    
    (39.6
    )%as a % of net revenues
    
    
    1.1
    %
    
    
    1.9
    %
  -25-




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##### Table of Contents



Other Income
 Three Months Ended June 30,
    
    
    Change($ in thousands):
    
    2008
    
    
    2007
    
    
    Dollars
    
    
    %Earnings on equity method
investments
    
    $
    1,845
    
    
    $
    2,284
    
    
    $
    (439
    )
    
    
    (19.2
    )%Gain on sale of securities
    
    
    
    
    
    
    683
    
    
    
    (683
    )
    
    
    (100.0
    )%Other income
    
    
    235
    
    
    
    67
    
    
    
    168
    
    
    
    250.7
    %$
    2,080
    
    
    $
    3,034
    
    
    $
    (954
    )
    
    
    (31.4
    )%as a % of net revenues
    
    
    0.3
    %
    
    
    0.5
    %
 Earnings on Equity Method Investments
   Gain on Sale of Securities
  Provision for Income Taxes
 Three Months Ended June 30,
    
    Change($ in thousands):
    
    2008
    
    2007
    
    Dollars
    
    %Provision for income taxes
    
    $
    35,568
    
    
    $
    21,019
    
    
    $
    14,549
    
    
    
    69.2
    %as a % of net revenues
    
    
    5.7
    %
    
    
    3.5
    %Effective tax rate
    
    
    37.1
    %
    
    
    36.6
    %
   -26-




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##### Table of Contents



Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007
 Six Months Ended June 30, 2008
    
    
    Six Months Ended June 30, 2007Generic
    
    
    Brand
    
    
    Distribution
    
    
    Total
    
    
    Generic
    
    
    Brand
    
    
    Distribution
    
    
    TotalProduct sales
    
    $
    686,748
    
    
    $
    200,458
    
    
    $
    272,889
    
    
    $
    1,160,095
    
    
    $
    738,921
    
    
    $
    187,562
    
    
    $
    292,071
    
    
    $
    1,218,554Other
    
    
    56,656
    
    
    
    32,834
    
    
    
    
    
    
    
    89,490
    
    
    
    31,345
    
    
    
    24,711
    
    
    
    
    
    
    
    56,056Net
revenues
    
    
    743,404
    
    
    
    233,292
    
    
    
    272,889
    
    
    
    1,249,585
    
    
    
    770,266
    
    
    
    212,273
    
    
    
    292,071
    
    
    
    1,274,610Cost of sales(1)
    
    
    457,309
    
    
    
    51,943
    
    
    
    230,748
    
    
    
    740,000
    
    
    
    482,965
    
    
    
    52,010
    
    
    
    250,183
    
    
    
    785,158Gross
profit(1)
    
    
    286,095
    
    
    
    181,349
    
    
    
    42,141
    
    
    
    509,585
    
    
    
    287,301
    
    
    
    160,263
    
    
    
    41,888
    
    
    
    489,452Gross
margin(1)
    
    
    38.5
    %
    
    
    77.7
    %
    
    
    15.4
    %
    
    
    40.8
    %
    
    
    37.3
    %
    
    
    75.5
    %
    
    
    14.3
    %
    
    
    38.4
    %Research and
development
    
    
    51,722
    
    
    
    25,509
    
    
    
    
    
    
    
    77,231
    
    
    
    50,481
    
    
    
    22,830
    
    
    
    
    
    
    
    73,311Selling and
marketing
    
    
    27,878
    
    
    
    57,569
    
    
    
    28,137
    
    
    
    113,584
    
    
    
    27,746
    
    
    
    52,784
    
    
    
    26,530
    
    
    
    107,060Contribution
    
    $
    206,495
    
    
    $
    98,271
    
    
    $
    14,004
    
    
    
    318,770
    
    
    $
    209,074
    
    
    $
    84,649
    
    
    $
    15,358
    
    
    
    309,081Contibution margin
    
    
    27.8
    %
    
    
    42.1
    %
    
    
    5.1
    %
    
    
    25.5
    %
    
    
    27.1
    %
    
    
    39.9
    %
    
    
    5.3
    %
    
    
    24.2
    %General and administrative
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    97,344
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    93,316Amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40,369
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    88,092Operating income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    181,057
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    127,673Operating margin
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14.5
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10.0
    %
 
 (1)
    
    Excludes amortization of acquired intangibles including product rights. Generic Segment
 Net Revenues
 TM
 Gross Profit (Gross Margin)
   -27-




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##### Table of Contents



Research and Development Expenses
  Selling and Marketing Expenses
  Brand Segment
 Net Revenues
 ®
 Gross Profit (Gross Margin)
   Research and Development Expenses
  Selling and Marketing Expenses
  -28-




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##### Table of Contents



Distribution Segment
 Net Revenues
  Gross Profit (Gross Margin)
  Selling and Marketing Expenses
  Segment Contribution
 Six Months Ended June 30,
    
    
    Change($ in thousands):
    
    2008
    
    
    2007
    
    
    Dollars
    
    
    %Segment contributionGeneric
    
    $
    206,495
    
    
    $
    209,074
    
    
    $
    (2,579
    )
    
    
    (1.2
    )%Brand
    
    
    98,271
    
    
    
    84,649
    
    
    
    13,622
    
    
    
    16.1
    %Distribution
    
    
    14,004
    
    
    
    15,358
    
    
    
    (1,354
    )
    
    
    (8.8
    )%$
    318,770
    
    
    $
    309,081
    
    
    $
    9,689
    
    
    
    3.1
    %as % of net revenues
    
    
    25.5
    %
    
    
    24.2
    %
  Corporate General and Administrative Expenses
 Six Months Ended June 30,
    
    Change($ in thousands):
    
    2008
    
    2007
    
    Dollars
    
    %Corporate general and
administrative expenses
    
    $
    97,344
    
    
    $
    93,316
    
    
    $
    4,028
    
    
    
    4.3
    %as a % of net revenues
    
    
    7.8
    %
    
    
    7.3
    %
  -29-




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##### Table of Contents



Amortization
 Six Months Ended June 30,
    
    Change($ in thousands):
    
    2008
    
    2007
    
    Dollars
    
    %Amortization
    
    $
    40,369
    
    
    $
    88,092
    
    
    $
    (47,723
    )
    
    
    (54.2
    )%as a % of net revenues
    
    
    3.2
    %
    
    
    6.9
    %
 ®
 Loss on Early Extinguishment of Debt
 Six Months Ended June 30,
    
    Change($ in thousands):
    
    2008
    
    2007
    
    Dollars
    
    %Loss on early extinguishment
of debt
    
    $
    1,095
    
    
    $
    4,410
    
    
    $
    (3,315
    )
    
    
    (75.2
    )%as a % of net revenues
    
    
    0.1
    %
    
    
    0.3
    %
   Interest Income
 Six Months Ended June 30,
    
    Change($ in thousands):
    
    2008
    
    2007
    
    Dollars
    
    %Interest income
    
    $
    3,994
    
    
    $
    4,732
    
    
    $
    (738
    )
    
    
    (15.6
    )%as a % of net revenues
    
    
    0.3
    %
    
    
    0.4
    %
  -30-




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##### Table of Contents



Interest Expense
 Six Months Ended June 30,
    
    
    Change($ in thousands):
    
    2008
    
    
    2007
    
    
    Dollars
    
    
    %Interest expense - 2006
Credit Facility
    
    $
    7,610
    
    
    $
    18,450
    
    
    $
    (10,840
    )Interest expense  CODES
    
    
    6,302
    
    
    
    6,302
    
    
    
    Change in derivative value
    
    
    (3
    )
    
    
    119
    
    
    
    (122
    )Interest expense  other
    
    
    (182
    )
    
    
    480
    
    
    
    (662
    )Interest expense
    
    $
    13,727
    
    
    $
    25,351
    
    
    $
    (11,624
    )
    
    
    (45.9
    )%as a % of net revenues
    
    
    1.1
    %
    
    
    2.0
    %
  Other Income
 Six Months Ended June 30,
    
    
    Change($ in thousands):
    
    2008
    
    
    2007
    
    
    Dollars
    
    
    %Earnings on equity method
investments
    
    $
    5,828
    
    
    $
    3,723
    
    
    $
    2,105
    
    
    
    56.5
    %Gain on sale of securities
    
    
    1,355
    
    
    
    2,472
    
    
    
    (1,117
    )
    
    
    (45.2
    )%Other income
    
    
    250
    
    
    
    242
    
    
    
    8
    
    
    
    3.3
    %$
    7,433
    
    
    $
    6,437
    
    
    $
    996
    
    
    
    15.5
    %as a % of net revenues
    
    
    0.6
    %
    
    
    0.5
    %
 Earnings on Equity Method Investments
  Gain on Sale of Securities
  Provision for Income Taxes
 Six Months Ended June 30,
    
    Change($ in thousands):
    
    2008
    
    2007
    
    Dollars
    
    %Provision for income taxes
    
    $
    66,730
    
    
    $
    41,060
    
    
    $
    25,670
    
    
    
    62.5
    %as a % of net revenues
    
    
    5.3
    %
    
    
    3.2
    %Effective tax rate
    
    
    37.6
    %
    
    
    37.6
    %
 -31-




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##### Table of Contents



Liquidity and Capital Resources
 Working Capital Position
  June 30,
    
    
    December 31,
    
    
    Increase($ in thousands):
    
    2008
    
    
    2007
    
    
    (Decrease)Current assets:Cash and cash equivalents
    
    $
    265,469
    
    
    $
    204,554
    
    
    $
    60,915Marketable securities
    
    
    12,718
    
    
    
    11,799
    
    
    
    919Accounts receivable, net of allowances
    
    
    297,171
    
    
    
    267,117
    
    
    
    30,054Inventories
    
    
    490,701
    
    
    
    490,601
    
    
    
    100Other
    
    
    179,300
    
    
    
    199,705
    
    
    
    (20,405
    )Total current assets
    
    
    1,245,359
    
    
    
    1,173,776
    
    
    
    71,583Current liabilities:Accounts payable and accrued expenses
    
    
    382,050
    
    
    
    398,154
    
    
    
    (16,104
    )Income taxes payable
    
    
    898
    
    
    
    
    
    
    
    898Current portion of long-term debt
    
    
    2,949
    
    
    
    6,241
    
    
    
    (3,292
    )Other
    
    
    38,970
    
    
    
    40,532
    
    
    
    (1,562
    )Total current liabilities
    
    
    424,867
    
    
    
    444,927
    
    
    
    (20,060
    )Working Capital
    
    $
    820,492
    
    
    $
    728,849
    
    
    $
    91,643Current Ratio
    
    
    2.93
    
    
    
    2.64
   Cash Flows from Operations
  Six months ended June 30,($ in thousands):
    
    2008
    
    2007Net cash provided by operating activities
    
    $
    166,186
    
    
    $
    199,242
  -32-




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##### Table of Contents



Investing Cash Flows
  Six months ended June 30,($ in thousands):
    
    2008
    
    2007Net cash used in investing activities
    
    $
    29,359
    
    
    $
    37,852
  Financing Cash Flows
  Six months ended June 30,($ in thousands):
    
    2008
    
    2007Net cash used in financing activities
    
    $
    75,912
    
    
    $
    240,709
  Debt and Borrowing Capacity
  June 30,
    
    
    December 31,
    
    
    Increase($ in thousands):
    
    2008
    
    
    2007
    
    
    (Decrease)Current portion of long-term debt
    
    $
    2,949
    
    
    $
    6,241
    
    
    $
    (3,292
    )Long-term debt
    
    
    824,540
    
    
    
    899,408
    
    
    
    (74,868
    )Total debt
    
    $
    827,489
    
    
    $
    905,649
    
    
    $
    (78,160
    )Debt to capital ratio
    
    
    29.6
    %
    
    
    32.9
    %
  -33-




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##### Table of Contents




    
    maintenance of a minimum net worth of at least $1.45 billion;
    
    maintenance of a maximum leverage ratio not greater than 3.0 to 1.0; and
    
    maintenance of a minimum interest coverage ratio of at least 5.0 to 1.0.
   Long-term Obligations
  Recent accounting pronouncements
    -34-




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
  Investment Risk
  -35-




---



##### Table of Contents



Interest Rate Risk
       -36-




---



##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES
    -37-




---



##### Table of Contents



PART II. OTHER INFORMATION AND SIGNATURES
 
 ITEM 1. LEGAL PROCEEDINGS
 Legal Matters
 
 ITEM 1A. RISK FACTORS
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 (a) Recent Sales of Unregistered Securities
  (b) Use of Proceeds
  (c) Issuer Purchases of Equity Securities
  -38-




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##### Table of Contents



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  Proposal 1.
    
    To elect four persons as Class I Directors to a three-year term and until their
successors are duly elected and qualified.
 Paul M.
    
    Michael J.
    
    Albert F.
    
    Catherine M.Bisaro
    
    Fedida
    
    Hummel
    
    KlemaVotes For
    
    
    87,340,833
    
    
    
    87,312,722
    
    
    
    87,303,319
    
    
    
    79,512,128Votes to Withhold Authority
    
    
    2,471,554
    
    
    
    2,499,665
    
    
    
    2,509,068
    
    
    
    10,300,259
  ExpirationClass II
    
    of TermJack Michelson
    
    
    2009Ronald R. Taylor
    
    
    2009Andrew L. Turner
    
    
    2009
 Class IIIAllen Chao, Ph.D.*
    
    
    2010Michel J. Feldman
    
    
    2010Fred G. Weiss
    
    
    2010
 Proposal 2.
    
    To ratify of the appointment of PricewaterhouseCoopers LLP as the Companys independent auditor for the year ending
December 31, 2008:Votes For 87,725,022 sharesVotes Against 1,182,451 sharesVotes Abstained 909,913 shares
 
  
 ITEM 6. EXHIBITS
   -39-




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##### Table of Contents



SIGNATURES
  WATSON PHARMACEUTICALS, INC.
(Registrant)By:
    /s/ Mark W. DurandMark W. DurandSenior Vice PresidentChief Financial Officer


(Principal Financial Officer) By:
    /s/ R. Todd JoyceR. Todd JoyceVice President - Corporate Controller and Treasurer


(Principal Accounting Officer)  -40-




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##### Table of Contents



WATSON PHARMACEUTICALS, INC.
 
 EXHIBIT INDEX TO FORM 10-Q
 For the Quarterly Period Ended June 30, 2008
 ExhibitNo.
    
    Description31.1
    
    Certification of President and Chief Executive Officer pursuant to
Rule 13a-14a of the Securities Exchange Act of 1934.31.2
    
    Certification of Senior Vice President and Chief Financial Officer
pursuant to Rule 13a-14a of the Securities Exchange Act of 1934.32.1
    
    Certification of President and Chief Executive Officer pursuant to
Rule 13a-14(d) of the Securities Exchange Act of 1934.32.2
    
    Certification of Senior Vice President and Chief Financial Officer
pursuant to Rule 13a-14(d) of the Securities Exchange Act of 1934.
 -41-