• Approximately 16.9 million restricted shares of Common Stock of Watson issued at the Closing;

• $200.0 million face amount of newly designated non-voting Series A Preferred Stock of Watson issued at the Closing; and

• Certain contingent payments made after the Closing based on the after-tax gross profits on sales of Atorvastatin in the U.S. as described in the Acquisition Agreement.

The Company intends to fund the cash portion of the consideration by using available cash and additional borrowings. The following discussion does not include or incorporate the anticipated impact of the Arrow Acquisition on our business, results of operations, financial condition, cash flows or expectations for the remainder of 2009.
Results of Operations
Prescription pharmaceutical products in the U.S. are generally marketed as either generic or brand pharmaceuticals. Generic pharmaceutical products are bioequivalents of their respective brand products and provide a cost-efficient alternative to brand products. Brand pharmaceutical products are marketed under brand names through programs that are designed to generate physician and consumer loyalty.
Watson has three reportable operating segments: Generic, Brand and Distribution. The Generic segment includes pharmaceutical products that are therapeutically equivalent to proprietary products. The Brand segment includes the Company's Specialty Products and Nephrology/Medical product lines. Watson has aggregated its brand product lines in a single segment because of similarities in regulatory environment, methods of distribution and types of customer. This segment includes patent-protected products and certain trademarked off-patent products that Watson sells and markets as brand pharmaceutical products. The Company sells its brand and generic products primarily to pharmaceutical wholesalers, drug distributors and chain drug stores. The Distribution segment mainly distributes generic pharmaceutical products manufactured by third parties, as well as by Watson, primarily to independent pharmacies, pharmacy chains, pharmacy buying groups and physicians' offices under the "Anda" trade name. Sales are principally generated through an in-house telemarketing staff and

through internally developed ordering systems. The Distribution segment operating results exclude sales of Watson products, which are included in their respective Generic and Brand segment results.
The Company evaluates segment performance based on segment net revenues, net revenues less cost of sales and contribution. Segment contribution represents segment net revenues less cost of sales, direct R&D expenses and selling and marketing expenses. The Company has not allocated corporate general and administrative expenses or amortization as such information has not been used by management, or has not been accounted for at the segment level. Three Months Ended September 30, 2009 Compared to Three Months Ended

September 30, 2008

                                                    Three Months Ended September 30, 2009                                Three Months Ended September 30, 2008
         ($ in millions):                Generic            Brand          Distribution         Total         Generic            Brand          Distribution         Total
Product sales                           $    392.3        $     96.1       $       151.4       $ 639.8       $    352.2        $     94.3       $       170.9       $ 617.4
Other                                          5.7              16.6                   -          22.3             11.6              11.7                   -          23.3

Net revenues                                 398.0             112.7               151.4         662.1            363.8             106.0               170.9         640.7
Operating expenses:
Cost of sales(1)                             204.1              20.7               128.9         353.7            212.4              30.2               144.1         386.7
Research and development                      37.0              14.9                   -          51.9             31.7              13.6                   -          45.3
Selling and marketing                         11.7              32.5                15.8          60.0             14.0              29.0                15.6          58.6

Contribution                            $    145.2        $     44.6       $         6.7         196.5       $    105.7        $     33.2       $        11.2         150.1

Contibution margin                            36.5 %            39.6 %               4.4 %        29.7 %           29.1 %            31.3 %               6.6 %        23.4 %

General and administrative                                                                        60.1                                                                 42.6
Amortization                                                                                      22.2                                                                 20.2
Loss on asset sales and impairments                                                                3.5                                                                  0.3

Operating income                                                                               $ 110.7                                                              $  87.0

Operating margin                                                                                  16.7 %                                                               13.6 %

(1) Excludes amortization of acquired intangibles including product rights.

Generic Segment
Net Revenues
Our Generic segment develops, manufactures, markets, sells and distributes generic products that are the therapeutic equivalent to their brand name counterparts and are generally sold at prices significantly less than the brand product. As such, generic products provide an effective and cost-efficient alternative to brand products. When patents or other regulatory exclusivity no longer protect a brand product, opportunities exist to introduce off-patent or generic counterparts to the brand product. Additionally, we distribute generic versions of third parties' brand products (sometimes known as "Authorized Generics") to the extent such arrangements are complementary to our core business. Our portfolio of generic products includes products we have internally developed, products we have licensed from third parties, and products we distribute for third parties.
Net revenues in our Generic segment include product sales and other revenue. Our Generic segment product line includes a variety of products and dosage forms. Indications for this line include pregnancy prevention, pain management, depression, hypertension and smoking cessation. Dosage forms include oral solids, transdermals, injectables and transmucosals.
Other revenues consist primarily of royalties and commission revenue. Net revenues from our Generic segment for the three months ended September 30, 2009 increased 9.4% or $34.2 million to $398.0 million compared to net revenues of $363.8 million from the prior year period. This increase in net revenues was mainly attributable to new product launches and products acquired subsequent to

the third quarter of 2008 ($76.0 million) offset in part by a decrease in other revenue ($5.9 million) and lower sales of certain products introduced in the prior year ($26.1 million).
Cost of Sales
Cost of sales includes production and packaging costs for the products we manufacture, third party acquisition costs for products manufactured by others, profit-sharing or royalty payments for products sold pursuant to licensing agreements, inventory reserve charges and excess capacity utilization charges, where applicable. Cost of sales does not include amortization costs for acquired product rights or other acquired intangibles.
Cost of sales for our Generic segment decreased 3.9% or $8.3 million to $204.1 million in the three months ended September 30, 2009 compared to $212.4 million in the prior year quarter. The decrease in cost of sales was primarily due to lower manufacturing costs as a result of the implementation of our Global Supply Chain Initiative.
Research and Development Expenses
Generic segment R&D expenses consist predominantly of personnel-related costs, active pharmaceutical ingredient ("API") costs, contract research, biostudy and facilities costs associated with the development of our products.
Generic segment R&D expenses increased 16.6% or $5.3 million to $37.0 million in the three months ended September 30, 2009 compared to $31.7 million in the prior year quarter primarily due to higher biostudy costs ($5.6 million). Selling and Marketing Expenses
Selling and marketing expenses consist mainly of personnel costs, facilities costs, insurance and professional services costs.
Generic segment selling and marketing expenses decreased 16.6% or $2.3 million to $11.7 million in the three months ended September 30, 2009 compared to $14.0 million in the prior year period due primarily to cost savings as a result of the implementation of our Global Supply Chain Initiative. Brand Segment
Net Revenues
Our brand pharmaceutical business develops, manufactures, markets, sells and distributes products within two sales and marketing groups: Specialty Products and Nephrology/Medical.
Our Specialty Products product line includes our promoted urology products such as, Rapaflo®, Gelnique®, and Trelstar® and a number of non-promoted products.
Our Nephrology/Medical product line consists of products for the treatment of iron deficiency anemia and is generally marketed to nephrologists and dialysis centers. The major products of the Nephrology/Medical group are Ferrlecit® and INFeD®, which are used to treat low iron levels in patients undergoing hemodialysis in conjunction with erythropoietin therapy.
Other revenues in the Brand segment consist primarily of co-promotion revenue, royalties and the recognition of deferred revenue relating to our obligation to manufacture and supply brand products to third parties. Other revenues also include revenue recognized from R&D and licensing agreements.

Net revenues from our Brand segment for the three months ended September 30, 2009 increased 6.4% or $6.7 million to $112.7 million compared to net revenues of $106.0 million in the prior year period. The increase was primarily attributable to higher sales within the Specialty Products product line ($7.4 million) and higher other revenues ($4.9 million). These increases were partially offset by lower sales within the Nephrology/Medical product line ($5.6 million).
The increase within the Specialty Products product line is primarily related to new product launches during 2009 including Rapaflo® and Gelnique® and increased sales of Androderm®transdermal patch during the period. Other revenues increased primarily due to increased revenues from the Company's promotion of AndroGel® and Femring®. The Nephrology/Medical product line continued to experience declines in sales of Ferrlecit® during the current year quarter due to a customer transitioning to a competing product. Further declines in sales to this customer are anticipated until December 31, 2009 at which time our distribution rights for Ferrlecit® will terminate. Cost of Sales
Cost of sales includes production and packaging costs for the products we manufacture, third party acquisition costs for products manufactured by others, profit-sharing or royalty payments for products sold pursuant to licensing agreements, inventory reserve charges and excess capacity utilization charges, where applicable. Cost of sales does not include amortization costs for acquired product rights or other acquired intangibles.
Cost of sales for our Brand segment decreased 31.6% or $9.5 million to $20.7 million in the three months ended September 30, 2009 compared to $30.2 million in the prior year period. The decrease in cost of sales was primary related to a $7.7 million inventory reserve recorded in the third quarter of 2008 for potential quality issues involving certain batches of API for INFeD®.
Research and Development Expenses
Brand segment R&D expenses consist predominantly of personnel-related costs, contract research, clinical costs and facilities costs associated with the development of our products.
Brand segment R&D expenses increased 9.7% or $1.3 million to $14.9 million in the three months ended September 30, 2009 compared to $13.6 million in the prior year period primarily due to increased clinical spending. Selling and Marketing Expenses
Brand segment selling and marketing expenses consist mainly of personnel-related costs, product promotion costs, distribution costs, professional services costs, insurance and depreciation.
Brand segment selling and marketing expenses increased 12.1% or $3.5 million to $32.5 million in the three months ended September 30, 2009 as compared to $29.0 million in the prior year period primarily related to increased product promotion, field force and marketing costs to support launch activities related to Rapaflo® and Gelnique®.

Distribution Segment
Net Revenues
Our Distribution segment mainly distributes generic pharmaceutical products manufactured by third parties, as well as by Watson, primarily to independent pharmacies, pharmacy chains, pharmacy buying groups and physicians' offices. Sales are principally generated through an in-house telemarketing staff and through internally developed ordering systems. The Distribution segment operating results exclude Watson generic and brand products, which are included in their respective segment results.
Net revenues from our Distribution segment for the three months ended September 30, 2009 decreased 11.4% or $19.5 million to $151.4 million compared to net revenues of $170.9 million in the prior year period. The decrease was primarily due to lower levels of new product launches in the current year quarter ($15.8 million) compared to the prior year period along with price erosion and volume decreases in the current quarter. This reduction in net revenues was partially offset by higher levels of sales in the third party brand product category ($24.4 million).
Cost of Sales
Cost of sales for our Distribution segment decreased 10.5% or $15.2 million to $128.9 million in the three months ended September 30, 2009 compared to $144.1 million in the prior year period. Distribution segment cost of sales decreased in the current quarter in conjunction with the decrease in net revenues for the period.
Selling and Marketing Expenses
Selling and marketing expenses consist mainly of personnel costs, facilities costs, insurance and freight costs, which support the Distribution segment sales and marketing functions.
Distribution segment selling and marketing expenses increased 1.7% or $0.2 million to $15.8 million in the three months ended September 30, 2009 as compared to $15.6 million in the prior year period.

Segment Contribution

                              Three Months Ended September 30,                 Change
       ($ in millions):         2009                     2008            Dollars         %
Segment contribution
Generic                   $          145.2         $          105.7     $    39.5        37.4 %
Brand                                 44.6                     33.2          11.4        34.3 %
Distribution                           6.7                     11.2          (4.5 )     (40.2 )%

                          $          196.5         $          150.1     $    46.4        30.9 %

as % of net revenues                  29.7 %                   23.4 %

For more information on segment contribution, refer to above Management's Discussion and Analysis of Financial Condition and Results of Operations and "NOTE 3 - OPERATING SEGMENTS" in the accompanying "Notes to Condensed Consolidated Financial Statements" in this Quarterly Report.

Corporate General and Administrative Expenses

                                                       Three Months Ended September 30,                     Change
          ($ in millions):                                2009                   2008              Dollars            %
Corporate general and administrative expenses        $       60.1            $       42.6          $ 17.5            41.1 %
as a % of net revenues                                        9.1 %                   6.6 %

Corporate general and administrative expenses consists mainly of the cost of personnel, facilities, insurance, professional services and litigation, which is general in nature and not directly related to specific segment operations.
Corporate general and administrative expenses increased during the three months ended September 30, 2009 as the prior year period was favorably impacted by the settlement of a tax-related liability ($5.9 million) and the current year period included higher litigation expenses ($3.9 million), a legal settlement ($3.5 million) and higher acquisition costs ($2.4 million).

Amortization

                                  Three Months Ended September 30,              Change
            ($ in millions):          2009                  2008          Dollars        %
  Amortization                   $       22.2           $       20.2      $   2.0       9.9 %
  as a % of net revenues                  3.4 %                  3.2 %

The Company's amortizable assets consist primarily of acquired product rights. For the three months ended September 30, 2009 amortization expense increased $2.0 million primarily as a result of the amortization of product rights the Company acquired in the fourth quarter of 2008 as a result of the merger between Teva Pharmaceutical Industries, Ltd. ("Teva") and Barr Pharmaceuticals, Inc. ("Barr").

Loss on Asset Sales and Impairment

                                                   Three Months Ended September 30,                      Change
          ($ in millions):                           2009                   2008               Dollars              %
Loss on asset sales and impairment               $       3.5            $       0.3           $   3.2            1,066.7 %
as a % of net revenues                                   0.5 %                  0.0 %

In the three months ended September 30, 2009, we recognized a $3.5 million impairment on an API manufacturing facility in China.
In the three months ended September 30, 2008, we recognized a $0.3 million loss on the disposal of certain property and equipment related to our business restructuring and facility rationalization activities.

Loss on Early Extinguishment of Debt

                                                   Three Months Ended September 30,                     Change
             ($ in millions):                        2009                   2008               Dollars             %
Loss on early extinguishment of debt             $       2.0            $         -           $   2.0            100.0 %
as a % of net revenues                                   0.3 %                  0.0 %

In November 2006, we entered into a Senior Credit Facility with Canadian Imperial Bank of Commerce, acting through its New York agency, as Administrative Agent, (the "2006 Credit Facility") in connection with the acquisition of the Andrx Corporation. On July 1, 2009, the Company entered into an amendment to the 2006 Credit Facility. The terms of the amendment included the repayment of $100.0 million on the term facility under the 2006 Credit Agreement not later than December 16, 2009. As a result of the $100.0 million repayment in the three months ended September 30, 2009 under the term facility, the Company's results reflect a $0.8 million charge for losses on the early extinguishment of debt in respect of the 2006 Credit Facility.
On September 14, 2009 the convertible contingent senior debentures (the "CODES") were redeemed in accordance with the terms of the CODES. As a result of the redemption of the CODES, the Company's results for the three months ended September 30, 2009 reflect a $1.2 million charge for losses on the early extinguishment of debt in respect of the CODES.

Interest Income

                                   Three Months Ended September 30,               Change
             ($ in millions):         2009                  2008           Dollars        %
Interest income                   $       1.0           $       2.2        $ (1.2 )     (54.5 )%
as a % of net revenues                    0.2 %                 0.3 %

Interest income decreased for the three months ended September 30, 2009 primarily due to the decrease in interest rates over the prior year period.

Interest Expense

                                                     Three Months Ended September 30,                     Change
             ($ in millions):                         2009                      2008               Dollars           %
Interest expense - $850.0 million Senior
Notes due 2014 (the "2014 Notes") and due
2019 (the "2019 Notes"), together the
"Senior Notes"                                   $           5.2           $             -        $     5.2
Interest expense - 2006 Credit Facility due
2011                                                         1.0                       3.7             (2.7 )
Interest expense - CODES                                     2.6                       3.2             (0.6 )
Interest expense - other                                     0.2                       0.1              0.1

Interest expense                                 $           9.0           $           7.0        $     2.0          28.6 %

as a % of net revenues                                       1.4 %                     1.1 %

Interest expense increased for the three months ended September 30, 2009 due to interest charges on the Senior Notes issued during the quarter which was partially offset by reduced interest on the CODES (redeemed

in the quarter) and reduced interest on the 2006 Credit Facility (as a $150.0 million repayment was made in the quarter and due to reduced LIBOR interest rates).

Other Income

                                                   Three Months Ended September 30,                    Change
             ($ in millions):                       2009                     2008              Dollars            %
Earnings on equity method investments           $         1.5          $            3.7        $   (2.2 )
Gain on securities                                          -                       8.2            (8.2 )
Other income                                              0.1                         -             0.1

                                                $         1.6          $           11.9        $  (10.3 )        (86.6 )%

as a % of net revenues                                    0.2 %                     1.9 %

Earnings on Equity Method Investments
The Company's equity investments are accounted for under the equity method when the Company's ownership does not exceed 50% and when the Company can exert significant influence over the management of the investee. Earnings on equity method investments primarily represent our share of equity earnings in Scinopharm Taiwan Ltd. ("Scinopharm").
Scinopharm results for the three months ended September 30, 2009 were lower than the prior year period due to higher inventory reserves and higher unit costs as a result of lower manufacturing utilization during the current year period.
Gain on Sale of Securities
On July 28, 2008 the Company sold its fifty percent interest in Somerset Pharmaceuticals, Inc. ("Somerset") to Mylan Inc.

Provision for Income Taxes

                                  Three Months Ended September 30,              Change
          ($ in millions):            2009                  2008          Dollars       %
  Provision for income taxes     $       39.3           $       23.0      $ 16.3       70.9 %
  Effective tax rate                     38.4 %                 24.4 %

The provision for income taxes differs from the amount computed by applying the statutory U.S. federal income tax rate primarily due to state taxes, non-deductible transaction costs and other factors which, when combined, can . . .