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 Bystolic™, 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 Azor™ 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 Savella™ (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, 2007

Beginning balance                         $           229,681     $           208,063

Provision for rebates                                 375,892                 317,947
Changes in estimates                                                            2,500
Settlements                                         ( 356,734 )             ( 306,782 )
                                                       19,158                  13,665

Provision for returns                                  22,432                  24,134
Changes in estimates
Settlements                                          ( 17,967 )              ( 22,704 )
                                                        4,465                   1,430

Provision for chargebacks and discounts               225,189                 262,915
Changes 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 . . .