Total net revenues increased for the quarter and six months ended September 2008 due to the continued growth of our key marketed products Lexapro® and Namenda® and sales of our newest product Bystolic™, a beta-blocker for the treatment of hypertension launched in January 2008. Net income increased 8.4% for the September 2008 quarter as compared to the same period last year. While increases in net revenues account for a portion of such increase, the increase was primarily due to the effect in September 2007 of a $70,000 licensing fee to Ironwood Pharmaceuticals, Inc. (or Ironwood), to co-develop and co-market the compound linaclotide. The current quarter included approximately $36,500 in development milestone expenses. For the six months ended September 2008 net income decreased 1.3% principally due to the termination of the Azor™ co-promotion agreement. As a result of terminating the agreement in the June quarter, we recorded a one-time charge of $44,100. This charge was comprised of a termination fee of approximately $26,600 to our licensing partner Daiichi Sankyo, (or Sankyo) and $17,500 related to the unamortized portion of the initial upfront payment.

In October 2008, we entered into a collaboration agreement with Phenomix Corporation (or Phenomix) to co-develop and co-promote dutogliptin (PHX1149). Dutogliptin is Phenomix' proprietary orally administered, small molecule dipeptidyl-peptidase-4 (DPP-4) inhibitor currently in Phase III clinical development in Type 2 diabetes. Under the terms of the agreement, we made a $75,000 upfront payment to Phenomix and may be obligated to pay up to $340,000 in milestone payments for the successful development and commercialization of dutogliptin in the United States over the term of the collaboration. The $75,000 payment will be expensed in our third fiscal quarter to research and development expense.

Financial Condition and Liquidity

Net current assets increased by $151,561 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, leaving 5.7 million shares still available for repurchase under the program. Of our total cash and marketable securities position at September 30, 2008, 25%, or about $641,000, is domiciled domestically, with the remainder held by our international subsidiaries. We currently invest funds in variable rate demand notes, municipal bonds and notes, commercial paper including money market instruments, auction rate securities and European bank floating rate notes that have major bank liquidity agreements. These investments, which are subject to general credit, liquidity and market risks, have not been materially affected by the U.S. sub-prime mortgage defaults that have affected certain sectors of the financial markets and caused credit and liquidity issues. Trade accounts receivable decreased primarily due to the timing of receipts. Finished goods inventory increased in order to support continued demand for our products, including our recently launched beta-blocker, Bystolic. 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. Other current assets increased principally due to the renewal of insurance programs in the June 2008 quarter, which are paid in full at the time of renewal and expensed over the life of the policy. The change in current liabilities was primarily due to the timing of escitalopram inventory purchases from Lundbeck.

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.

During fiscal 2007 our Board of Directors (or Board) approved the 2007 Repurchase Program which authorized the purchase of up to 25 million shares of common stock. On August 13, 2007 the Board authorized the purchase of an additional 10 million shares of common stock. In the June 2008 quarter, we repurchased a total of 6.6 million shares at a cost of $231,185 and in the current quarter we repurchased 3.5 million shares at a cost of $100,917. As of November 7, 2008, under the 2007 Repurchase Program, we have cumulatively repurchased a total of 29.3 million shares at a cost of $1,160,708, leaving us the authority to purchase 5.7 million more shares.

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 the continued share repurchases.

Results of Operations

Net sales for the three and six-month periods ended September 30, 2008 increased 10% and 8%, respectively, from the same periods last year to $925,570 and $1,819,315, 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 $583,896 and $1,166,993 for the quarter and six months, grew 4% and 5%, respectively, and contributed $24,833 and $55,617 to the net sales change, of which $26,480 and $56,757 was due to price increases slightly offset by $1,647 and $1,140 of volume decreases. 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 have filed a lawsuit in the U.S. District Court for the Eastern District of Michigan against Caraco for patent infringement. Lexapro's patent is set to expire 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 28% and 21% in the current quarter and six months, respectively, and totaled $246,061 and $464,679. This represents an increase of $53,189 and $80,088 as compared to the same periods last year, of which $40,172 and $49,085 was due to volume and $13,017 and $31,003 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 restoration 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 $14,163 and $18,537 in the current quarter and six 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. (or Janssen), 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. In September 2008, Janssen received an Office Action from the USPTO rejecting all of the pending claims as unpatentable in view of the cited prior art. We will continue to prosecute the re-examination application and although there can be no assurance we will prevail in this matter, we remain confident in the strength of the patent covering nebivolol.

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

Contract revenue for the three and six months ended September 30, 2008 was $47,210 and $101,363 respectively, compared to $50,313 and $103,690 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 six-month periods ended September 30, 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 six-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 22.1% for the three and six-month periods of the current year as compared with 22.6% and 22.3% for the prior year's three and six-month periods.

Selling, general and administrative expenses increased $45,822 and $127,448 for the three and six-month periods ended September 30, 2008 as compared to the same periods last year. The increase was primarily due to launch costs for Bystolic and pre-launch costs for milnacipran, as well as the one-time charge of $44,100 relating to the termination of the Azor co-promotion agreement in the June 2008 quarter. Also during the September 2008 quarter, we entered into a Memorandum of Understanding (or MOU) setting forth an agreement in principle to settle all claims against all defendants in securities litigation pending against the Company and certain of our officers, for $65,000. While we expect such settlement to be fully funded by insurance, we have reserved $25,000 in connection with this MOU.

Research and development expense decreased $24,381 and $49,177 in the three and six-month periods ended September 30, 2008. 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. During the June 2007 quarter we recorded approximately $28,000 in milestone expenses related to the aclidinium and milnacipran development programs. For the September 2008 quarter, we recorded approximately $36,500 in developmental milestone expenses related to aclidinium and linaclotide.

Research and development expense also reflects the following:

· In May 2008, we filed a supplemental New Drug Application (or sNDA) for Lexapro for the additional indication of adolescent depression. The filing was based on 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.

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

· 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. In October 2008, the FDA advised us and our partner Cypress Bioscience, Inc. (or Cypress) that is was not able to take final action by the scheduled Prescription Drug User Fee Act action date of October 18, 2008. The FDA has not requested any additional information from Forest or Cypress but did indicate that a clinical data question related to the NDA submission required confirmation. The FDA further indicated that its assessment could be completed in a matter of weeks, but could not confirm specific timing. The FDA could not provide further information regarding the reason for the delay. We and Cypress continue to plan for a product launch meeting in the first quarter of calendar 2009. We also expect results from a third randomized Phase III study in late calendar 2008.

· 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 have initiated 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 50/50 partnership with Ironwood to co-develop and co-market the compound linaclotide. 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 study 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 the IBS-C trials are anticipated to begin in January 2009.

· 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 and file an NDA for this new once-daily formulation.

· 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 (RGH-188) and related compounds, being developed as an atypical antipsychotic for the treatment of schizophrenia, bipolar mania and other psychiatric conditions. 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. 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.

· 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); NXL104, a novel intravenous beta-lactamase inhibitor being developed in combination with ceftaroline; and ME1036, an injectable carbapenem antibiotic which has demonstrated pre-clinical activity against both gram-positive and gram-negative bacteria. In addition, we have entered into several collaborations to conduct pre-clinical drug discovery.

Our effective tax rate was 22.5% and 22.6% for the respective three and six-month periods ended September 30, 2008, as compared to 18.9% and 20.6% for the same periods last year. The increase resulted primarily from the net impact of one-time discrete tax adjustments related principally to stock-based compensation in prior years offset for the most part by the termination of our co-promotion agreement for Azor and other tax matters including the expiration of the U.S. Federal research and experimentation tax credit on December 31, 2007. The federal tax credit was re-enacted on October 3, 2008 and will have a favorable impact on our third and fourth quarter effective tax rates. 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 $3,223 in interest related to unrecognized tax benefits totaling $23,162 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.

Table of Contents 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 $36,394 at September 30, 2008 and $27,877 at September 30, 2007. Commercial discounts and other rebate accruals were $150,319 at September 30, 2008 and $146,203 at September 30, 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 six-month period in the accounts related to accrued rebates, sales returns and discounts (In thousands):

                                    September        September
                                     30, 2008         30, 2007

Beginning balance                  $    229,681     $    208,063

Provision for rebates                   247,957          203,261
Changes in estimates
Settlements                           ( 233,276 )      ( 175,888 )
                                         14,681           27,373

Provision for returns                    13,720           16,406
Changes in estimates
Settlements                            ( 11,904 )       ( 17,900 )
                                          1,816          ( 1,494 )

Provision for chargebacks and
discounts                               151,700          168,801
Changes in estimates                                     ( 7,700 )
Settlements                           ( 153,747 )      ( 172,020 )
                                        ( 2,047 )       ( 10,919 )

Ending balance                     $    244,131     $    223,023

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.