EXHIBIT 99.2

WATSON PHARMACEUTICALS, INC.

TABLE OF CONTENTS

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003

(UNAUDITED)

PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements:

	Consolidated Balance Sheets as of March 31, 2003 and December 31, 2002

	Consolidated Statements of Income for the Three Months Ended March 31, 2003 and 2002

	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2003 and 2002

	Notes to Consolidated Financial Statements

WATSON PHARMACEUTICALS, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited; in thousands, except share amounts)

	March 31, 2003		December 31, 2002
ASSETS
Current assets:
Cash and cash equivalents	$	415,676	$	230,155
Marketable securities	34,659		42,649
Accounts receivable, net	157,075		178,563
Inventories	364,740		348,773
Prepaid expenses and other current assets	27,787		35,895
Deferred tax assets	81,959		77,416
Total current assets	1,081,896		913,451

Property and equipment, net	317,880		304,667
Investments and other assets	83,462		75,435
Deferred tax assets	33,919		34,596
Product rights and other intangibles, net	1,048,830		889,027
Goodwill	446,288		446,288
Total assets	$	3,012,275	$	2,663,464

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	200,457	$	177,812
Income taxes payable	83,421		111,565
Current portion of long-term debt	—		83,360
Other current liabilities	1,719		2,728
Total current liabilities	285,597		375,465

Long-term debt	722,426		331,877
Other long-term liabilities	7,881		5,948
Deferred tax liabilities	142,252		151,890
Total liabilities	1,158,156		865,180

Commitments and contingencies

Stockholders’ equity:
Preferred stock; no par value per share; 2,500,000 shares authorized; none issued	—		—
Common stock; $0.0033 par value per share; 500,000,000 shares authorized; 106,964,800 and 106,878,900 shares outstanding	353		353
Additional paid-in capital	799,067		797,097
Retained earnings	1,046,679		998,850
Accumulated other comprehensive income	8,020		1,984
Total stockholders’ equity	1,854,119		1,798,284
Total liabilities and stockholders’ equity	$	3,012,275	$	2,663,464

See accompanying Notes to Consolidated Financial Statements.

WATSON PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited; in thousands, except per share amounts)

	Three Months Ended March 31,
	2003			2002

Net revenues	$	336,922		$	285,690
Cost of sales	149,601			135,687
Gross profit	187,321			150,003

Operating expenses:
Research and development	22,484			18,519
Selling, general and administrative	67,659			62,263
Amortization	18,435			13,294
Total operating expenses	108,578			94,076
Operating income	78,743			55,927

Other income (expense):
Equity in earnings (losses) of joint ventures	117			(1,059		)
Impairment of securities	(13,042		)	—
Gain on sale of securities	1,089			—
Gain on sale of subsidiary	15,676			—
Loss on early extinguishment of debt	(2,807		)	—
Interest income	1,242			1,599
Interest expense	(5,341		)	(5,160		)
Other income (expense)	(594		)	29
Total other income (expense), net	(3,660		)	(4,591		)

Income before income taxes	75,083			51,336
Provision for income taxes	27,254			19,251
Net income	$	47,829		$	32,085

Earnings per share:
Basic	$	0.45		$	0.30
Diluted	$	0.44		$	0.30

Weighted average shares outstanding:
Basic	106,942			106,467
Diluted	107,622			107,423

See accompanying Notes to Consolidated Financial Statements.

WATSON PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; in thousands)

	Three Months Ended March 31,
	2003			2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	47,829		$	32,085
Reconciliation to net cash provided by operating activites:
Depreciation	6,926			6,026
Amortization	18,435			13,294
Deferred income tax benefit	(9,019		)	(1,272		)
Equity in (earnings) losses of joint ventures	(117		)	1,101
Gain on sale of securities	(1,089		)	—
Gain on sale of subsidiary	(15,676		)	—
Loss on early extinguishment of debt	2,807			—
Charge for impairment of securities	13,042			—
Tax benefits related to exercises of stock options	50			140
Other	(1,005		)	317
Changes in assets and liabilities:
Accounts receivable	19,292			(1,335		)
Inventories	(16,941		)	3,276
Prepaid expenses and other current assets	8,071			(850		)
Accounts payable and accrued expenses	24,629			(6,774		)
Income taxes payable	(28,172		)	43,160
Other assets	(778		)	2,703
Total adjustments	20,455			59,786
Net cash provided by operating activities	68,284			91,871
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment	(21,580		)	(14,750		)
Acquisitions of product rights	(178,238		)	(70,204		)
Proceeds from sales of securities	3,829			—
Proceeds from sale of subsidiary	16,368			—
Other investing activities, net	1,212			1,060
Net cash used in investing activities	(178,409		)	(83,894		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt, net of issuance costs	560,625			—
Proceeds from borrowings under revolving credit facility	60,000			—
Principal payments on credit facility	(325,940		)	(31,604		)
Principal payments on acquisition liabilities	(1,009		)	—
Proceeds from stock plans	1,970			387
Net cash provided by (used in) financing activities	295,646			(31,217		)
Net increase (decrease) in cash and cash equivalents	185,521			(23,240		)
Cash and cash equivalents at beginning of period	230,155			193,731
Cash and cash equivalents at end of period	$	415,676		$	170,491

See accompanying Notes to Consolidated Financial Statements.

WATSON PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE A – GENERAL

Watson Pharmaceuticals, Inc. (Watson or the Company) is primarily engaged in the development, manufacture, marketing, sale and distribution of branded and off-patent (generic) pharmaceutical products. Watson was incorporated in 1985 and began operations as a manufacturer and marketer of generic pharmaceuticals. The Company also develops advanced drug delivery systems designed to enhance the therapeutic benefits of existing drug forms. Watson operates manufacturing, distribution, research and development and administrative facilities primarily in the United States of America (U.S.).

The accompanying consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2002. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted from the accompanying consolidated financial statements. The accompanying interim financial statements are unaudited, but reflect all adjustments which are, in the opinion of management, necessary to present fairly Watson’s consolidated financial position, results of operations and cash flows for the periods presented. Unless otherwise noted, all such adjustments are of a normal, recurring nature. Certain reclassifications, none of which affected net income or retained earnings, have been made to prior period amounts to conform to current period presentation. The Company’s results of operations and cash flows for the interim periods are not necessarily indicative of the results of operations and cash flows that it may achieve in future periods or for the full year.

Comprehensive income

Comprehensive income includes all changes in equity during a period except those that resulted from investments by or distributions to the Company’s stockholders. Other comprehensive income refers to revenues, expenses, gains and losses that, under generally accepted accounting principles, are included in comprehensive income, but excluded from net income as these amounts are recorded directly as an adjustment to stockholders’ equity. Watson’s other comprehensive income (loss) is comprised of unrealized gains (losses) on its holdings of publicly traded equity securities, net of realized gains included in net income. The components of comprehensive income and related income taxes consisted of the following (in thousands):

	Three Months Ended March 31,
	2003			2002

Net income	$	47,829		$	32,085

Other comprehensive income (loss):
Unrealized holding gain (loss) on securities	(2,632		)	(46,617		)
Less related income taxes	1,053			18,647
Total unrealized gain (loss) on securities, net	(1,579		)	(27,970		)

Reclassification for losses included in net income	11,953			—
Less related income taxes	(4,338		)	—
Total reclassification, net	7,615			—
Total other comprehensive income (loss)	6,036			(27,970		)
Total comprehensive income	$	53,865		$	4,115

Earnings per share

Basic earnings per share is computed by dividing net income by the weighted average common shares outstanding during a period. Diluted earnings per share is based on the treasury stock method and is computed by dividing net income by the weighted average number of common shares and common share equivalents outstanding during the periods presented assuming the exercise of all in-the-money stock options. Common share equivalents have been excluded where their inclusion would be anti-dilutive. A reconciliation of the numerators and denominators of basic and diluted earnings per share consisted of the following (in thousands, except per share amounts):

	Three Months Ended March 31,
	2003		2002

Numerator:
Net income	$	47,829	$	32,085
Denominator:
Basic weighted average common shares outstanding	106,942		106,467
Effect of dilutive stock options	680		956
Diluted weighted average common shares outstanding	107,622		107,423

Basic earnings per share	$	0.45	$	0.30

Diluted earnings per share	$	0.44	$	0.30

Excluded from the computation of diluted earnings per share are outstanding common stock options with an exercise price greater than the average market price of the common shares for the period reported. For the three month periods ended March 31, 2003 and 2002, excluded from the computation were stock options to purchase 9.9 million and 9.7 million common shares, respectively.

If all of the convertible contingent debentures (as described in Note H) were converted as of March 31, 2003, an additional 14,357,054 shares of Watson’s common stock would be outstanding.

Stock-based compensation

The Company accounts for its stock-based employee compensation plans using the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations. No stock-based employee compensation expense has been recognized for the options in the accompanying consolidated statements of income, as all options granted under the plans had an exercise price equal to the market value of the underlying common stock on the date of grant.

Had the Company determined compensation expense for all prior periods using the fair value method prescribed by Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation”, the Company’s net income and earnings per share would have been as follows (in thousands, except EPS amounts):

	Three Months Ended March 31,
	2003			2002

Net income	$	47,829		$	32,085
Total stock-based employee compensation expense determined under fair value based method for all awards	8,338			13,931
Tax effect of compensation expense	(3,027		)	(5,224		)
Pro forma net income	$	42,518		$	23,378

Basic EPS - as reported	$	0.45		$	0.30
Basic EPS - pro forma	$	0.40		$	0.22

Diluted EPS - as reported	$	0.44		$	0.30
Diluted EPS - pro forma	$	0.40		$	0.22

Weighted average shares outstanding:
Basic	106,942			106,467
Diluted	107,622			107,423

The weighted average fair value of the options has been estimated on the date of grant using the Black-Scholes option-pricing model. Weighted averages are used because of varying assumed exercise dates. The following weighted average assumptions were used for options granted during the respective periods:

	Three Months Ended March 31,
	2003		2002

Dividend yield	None		None
Expected volatility	44	%	38	%
Risk-free interest rate	3.48	%	4.21	%
Expected term	5.2 years		5.1 years

Recent accounting pronouncements

In July 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 requires recognition of a liability for a cost associated with an exit or disposal activity when the liability is incurred, as opposed to when the entity commits to an exit plan under previous guidance. This statement is effective for exit or disposal activities initiated after December 31, 2002. The Company adopted SFAS No. 146 on January 1, 2003, which had no material impact on the Company’s results of operations or financial position.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company adopted SFAS No. 148 on January 1, 2003, which had no material impact on the Company’s results of operations or financial position.

In January 2003, the FASB issued Interpretation No. (FIN) 46, “Consolidation of Variable Interest Entities.” FIN 46 requires reporting entities to perform an evaluation in order to determine whether the reporting entity has a controlling financial interest in a variable interest entity, and if that interest requires consolidation and/or disclosure by the reporting entity. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The Company does not believe that the adoption of FIN 46 will have a material impact on its results of operations or financial position.

NOTE B – ACQUISITIONS OF PRODUCT RIGHTS

In February 2003, Watson acquired the U.S. rights to the Fioricetâ and Fiorinalâ product lines from Novartis Pharmaceuticals Corporation (Novartis). These products are indicated for the treatment of tension headaches. The Company paid approximately $178 million in cash for the rights to these products.

NOTE C – MARKETABLE SECURITIES

Marketable securities include Watson’s investment in the common stock of Andrx Corporation – Andrx Group (Andrx) and Dr. Reddy’s Laboratories, Limited (Dr. Reddy). The Company accounts for these investments at fair market value as available-for-sale securities.

Andrx is primarily engaged in the formulation and commercialization of controlled-release pharmaceutical products using proprietary drug delivery technologies. Andrx common stock trades on the Nasdaq National Market System under the symbol ADRX. As of March 31, 2003, Watson owned approximately 1.5 million shares of Andrx common stock (approximately 2% of the total Andrx common stock then outstanding) with a market value of $18.1 million. The unrealized gain on the Company’s investment in Andrx was $8.4 million and $11.0 million (net of income taxes of $5.6 million and $7.4 million) at March 31, 2003 and December 31, 2002, respectively. Watson sold no shares of Andrx common stock during the three months ended March 31, 2003 and 2002.

Dr. Reddy is a developer and manufacturer of active pharmaceutical ingredients and pharmaceutical products. Dr. Reddy’s shares trade on the Bombay Stock Exchange and on the New York Stock Exchange in the form of American Depositary Shares. As of March 31, 2003, Watson owned approximately 850,000 shares of Dr. Reddy common stock (approximately 1% of the total Dr. Reddy common shares then outstanding) with a market value of $16.5 million. The unrealized gain on the Company’s investment in Dr. Reddy was $2.6 million

and $3.0 million (net of income taxes of $1.7 million and $2.0 million), at March 31, 2003 and December 31, 2002, respectively.

During the three months ended March 31, 2003, Watson sold 190,000 shares of Dr. Reddy common stock and recorded a pre-tax gain of $1.1 million. The Company did not sell any of its shares of Dr. Reddy common stock during the three months ended March 31, 2002.

NOTE D – OPERATING SEGMENTS

Watson has two reportable operating segments: branded and generic pharmaceutical products. The branded products segment includes the Company’s lines of Women’s Health, Urology/General Products and Nephrology products. Watson has aggregated its branded product lines in a single segment because of similarities in regulatory environment, manufacturing processes, methods of distribution and types of customer. This segment includes patent-protected products and trademarked generic products that Watson promotes directly to healthcare professionals as branded pharmaceutical products. The generic products segment includes off-patent pharmaceutical products that are therapeutically equivalent to proprietary products. The Company sells its branded and generic products primarily to pharmaceutical wholesalers, drug distributors and chain drug stores.

The accounting policies of the segments are the same as those described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002. Watson primarily evaluates the performance of its segments based on net revenues and gross profit. The “other” classification consists primarily of contingent payments received from the settlement of a legal dispute and revenues from research, development and licensing fees. The Company does not report depreciation expense, total assets, and capital expenditures by segment as such information is not used by management, nor accounted for at the segment level. Net revenues and gross profit information for the Company’s segments consisted of the following (in thousands):

	Three Months Ended March 31,
	2003		2002

Net revenues:
Branded pharmaceutical products	$	183,761	$	161,527
Generic pharmaceutical products	143,199		116,083
Other	9,962		8,080
Total net revenues	$	336,922	$	285,690
Gross profit:
Branded pharmaceutical products	$	140,697	$	120,581
Generic pharmaceutical products	36,662		21,342
Other	9,962		8,080
Total gross profit	$	187,321	$	150,003

NOTE E – INVENTORIES

Inventories consist of finished goods held for distribution, raw materials and work in process. Additionally, at March 31, 2003, the Company held approximately $29 million in inventory relating to products that are pending approval by the FDA or have not been launched due to contractual restrictions. Inventories are stated at the lower of cost (first-in, first-out method) or market (net realizable value) and consisted of the following (in thousands):

	March 31, 2003		December 31, 2002

Raw materials	$	119,227	$	116,806
Work-in-process	86,981		80,062
Finished goods	158,532		151,905
Total inventories	$	364,740	$	348,773

NOTE F – ASSETS HELD FOR DISPOSITION

In connection with the acquisition of Schein Pharmaceutical, Inc. (Schein), Watson acquired two injectable pharmaceutical manufacturing facilities, Steris Laboratories, Inc. (Steris), located in Phoenix, Arizona and Marsam Pharmaceuticals, Inc. (Marsam), located in Cherry Hill, New Jersey. Upon acquisition, Watson’s intent was to dispose of these facilities, and therefore these assets were reported as assets held for disposition in the Company’s Consolidated Balance Sheets. Watson recorded these assets held for disposition at estimated fair value. The operating expenses associated with the facilities were recorded separately in the Company’s Consolidated Statements of Income as loss on assets held for disposition.

At December 31, 2002, the Company had approximately $6 million of property related to Marsam and approximately $22 million of inventories and approximately $1 million of fixed assets related to Steris.

On January 1, 2003 Watson reclassified its assets held for disposition as held and used. This reclassification was made as a result of the absence of a completed sale transaction or binding offer for each of the facilities, in accordance with SFAS No. 144. The related assets were reclassified as inventories and property and equipment, as appropriate, in the Company’s Consolidated Balance Sheets. The operating expenses of the Steris facility for the first quarter of 2003 were recorded in the Company’s Consolidated Statements of Income as cost of sales, research and development expenses and selling, general and administrative expenses, as appropriate.

The following table illustrates the changes made to the consolidated balance sheet as of December 31, 2002 and the consolidated statement of income for the three months ended March 31, 2002, included in this Quarterly Report, as a result of the reclassification (in thousands):

	As Previously Reported		As Currently Reported
Consolidated Balance Sheet:

Assets held for disposition	$	29,362	$	—
Inventories	$	326,741	$	348,773
Property and equipment, net	$	297,337	$	304,667

Consolidated Statement of Income:

Loss on assets held for disposition	$	6,986	$	—
Cost of sales	$	129,535	$	135,687
Gross profit	$	156,155	$	150,003
Research and development expenses	$	18,382	$	18,519
Selling, general and administrative expenses	$	61,566	$	62,263

Although the assets were reclassified as held and used, the Company continues its efforts to dispose of the remaining Marsam property and the Steris facility through sale or otherwise.

NOTE G – GOODWILL AND OTHER INTANGIBLE ASSETS

Watson tests its goodwill and intangible assets with indefinite lives by comparing the fair value of each of the Company’s reporting units to the respective carrying value of the reporting units. The Company performs this impairment testing annually during the second quarter. The Company’s reporting units have been identified by Watson as branded and generic pharmaceutical products. The carrying value of each reporting unit is determined by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units. Goodwill is considered impaired if the carrying amount exceeds the fair value of the asset.

There was no impairment of or additions to goodwill recorded during the three months ended March 31, 2003. At March 31, 2003, goodwill for the Company’s reporting units consisted of the following (in thousands):

Branded pharmaceutical products	$	358,798
Generic pharmaceutical products	87,490
Total goodwill	$	446,288

Other intangible assets consist primarily of product rights. The original cost and accumulated amortization of these intangible assets is as follows (in thousands):

	March 31, 2003			December 31, 2002

Product rights and related intangibles	$	1,285,438		$	1,107,200
Less accumulated amortization	(236,608		)	(218,173		)
Total product rights and related intangibles, net	$	1,048,830		$	889,027

Assuming no additions, disposals or adjustments are made to the carrying values and/or useful lives of the assets, annual amortization expense on product rights and related intangibles is estimated to be approximately $71.7 million in 2003, $71.4 million in 2004 and $71.7 million in each of 2005, 2006 and 2007. The Company’s current product rights and related intangibles have a weighted average useful life of approximately nineteen years.

NOTE H – LONG-TERM DEBT

Long-term debt consisted of the following (in thousands):

	March 31, 2003			December 31, 2002

Senior unsecured notes, 7.125%, face amount of $150 million, due 2008	$	149,062		$	149,023
Term loan facility, due 2005	—			265,928
Convertible contingent debentures, face amount of $575 million due 2023	575,000			—
Less: Unamortized discount on debentures	(1,910		)	—
Convertible contingent debentures, face amount of $575 million due 2023, net	573,090			—
Other notes payable	274			286
Total debt	$	722,426		$	415,237
Less current portion	—			(83,360		)
Total long-term debt	$	722,426		$	331,877

In May 1998, Watson issued $150 million of senior unsecured notes (1998 Senior Notes). These notes are due in May 2008, with interest only payments due semi-annually in May and November at an effective rate of 7.2%, but may be redeemed earlier under certain circumstances.

The 1998 Senior Notes were issued pursuant to a shelf registration statement authorizing up to $300 million in debt securities, preferred stock or common stock. On April 2, 2003, the Company determined that it did not intend to offer any additional debt securities, preferred stock or common stock under the registration statement, and filed an amendment with the Securities and Exchange Commission deregistering the remaining unsold $150 million aggregate amount of debt securities, preferred stock and common stock covered by the registration statement.

In March 2003, the Company issued $575 million of convertible contingent senior debentures (CODES). These CODES, which are convertible into shares of Watson’s common stock upon the occurrence of certain events, are due in March 2023, with interest payments due semi-annually in March and September at an effective annual interest rate of 2.1%.

The CODES are convertible into Watson’s common stock at a conversion price of approximately $40.05 per share (subject to certain adjustments). These CODES may be converted, at the option of the holders, prior to maturity under any of the following circumstances:

• during any quarterly conversion period (period from and including the thirtieth trading day in a fiscal quarter to, but not including, the thirtieth trading day in the immediately following fiscal quarter) if the closing sale price per share of Watson’s common stock for a period of at least 20 consecutive trading days during the 30 consecutive trading-day period ending on the first day of such conversion period is more than 125% of the conversion price in effect on that thirtieth day;

• on or before March 15, 2018, during the five business-day period following any 10 consecutive trading-day period in which the daily average trading price for the CODES for such ten-day period was less than 105% of the average conversion value for the debentures during that period. This conversion feature represents an embedded derivative. However, based on the de minimis value associated with this feature, no value has been assigned at issuance and at March 31, 2003;

• during any period, following the earlier of (a) the date the CODES are rated by both Standard & Poor’s Rating Services and Moody’s Investor Services, Inc., and (b) April 21, 2003, when the long-term credit rating assigned to the CODES by either Standard & Poor’s or Moody’s (or any successors to these entities) is lower than “BB” or “Ba3”, respectively, or when either of these rating agencies does not have a rating then assigned to the CODES for any reason, including any withdrawal or suspension of a rating assigned to the CODES. This conversion feature represents an embedded derivative. However, based on the de minimis value associated with this feature, no value has been assigned at issuance and at March 31, 2003;

• if the CODES have been called for redemption; or

• upon the occurrence of specified corporate transactions.

The Company may redeem some or all of the CODES for cash, on or after March 20, 2008 for a price equal to 100% of the principal amount of the CODES plus accrued and unpaid interest (including contingent interest) to, but excluding, the redemption date.

The CODES contain put options which may require the Company to repurchase for cash all or a portion of the CODES on March 15 of 2010, 2015 and 2018 at a repurchase price equal to 100% of the principal amount of the CODES plus any accrued and unpaid interest (including contingent interest) to, but excluding, the date of repurchase.

In addition, the holders have the right to receive contingent interest payments during any six-month period from March 15 to September 14 and from September 15 to March 14, commencing on September 15, 2003, if the average trading price of the CODES for the five trading days ending on the second trading day immediately preceding the relevant six-month period equals 120% or more of the principal amount of the CODES. The interest rate used to calculate the contingent interest is the greater of 5% of the Company’s then-current estimated per annum borrowing rate for senior non-convertible fixed-rate debt with a maturity date and other terms comparable to that of the CODES or 0.33% per annum. This contingent interest payment feature is an embedded derivative and has been bifurcated and recorded separately in the Consolidated Balance Sheets in other long-term liabilities. The initial fair value assigned to the embedded derivative was $1.9 million, which is recorded as a discount to the CODES.

The Company used a portion of the proceeds from the issuance of the CODES to retire the outstanding balance of the Company’s term loan and revolving credit facility it entered into in July 2000 (2000 Facility). The total outstanding balance of the 2000 Facility consisted of a $246 million term loan balance and a $60 million revolving credit balance. The Company terminated the 2000 Facility in March 2003 upon repayment of the outstanding balance. As a result of the early retirement of the 2000 Facility, the Company incurred a charge in the amount of $2.8 million for the unamortized bank fees associated with this debt. This charge is reported separately in the Consolidated Statements of Income.

NOTE I – FINANCIAL INSTRUMENTS

Fair value of financial instruments

The Company’s financial instruments consist primarily of cash and cash equivalents, marketable securities, accounts and other receivables, investments, trade accounts payable, senior subordinated notes, CODES and embedded derivatives related to the issuance of the CODES. The carrying amounts of cash and cash equivalents, marketable securities, accounts and other receivables and trade accounts payable are representative of their respective fair values due to their relatively short maturities. The fair values of investments in companies that are publicly traded are based on quoted market prices. The fair value of investments in privately held companies, or cost-method investments, are based on historical cost, adjusted for any write-down related to impairment. The Company estimates the fair value of its fixed rate long-term obligations based on quoted market rates of interest and maturity schedules for similar issues. The carrying value of these obligations

approximates their fair value. The fair value of the embedded derivatives related to the CODES is based on a present value technique using discounted expected future cash flows.

Derivative financial instruments

The Company’s derivative financial instruments consist of embedded derivatives related to its CODES. These embedded derivatives include certain conversion features and a contingent interest feature. See Note H for a more detailed description of these features of the CODES. Although the conversion features represent embedded derivative financial instruments, based on the de minimis value of these features at the time of issuance and at March 31, 2003, no value has been assigned to these instruments. The contingent interest feature provides unique tax treatment under the Internal Revenue Service’s Contingent Debt Regulations. In essence, interest accrues, for tax purposes, on the basis of the instrument’s comparable yield (the yield at which the issuer would issue a fixed rate instrument with similar terms). This embedded derivative is reported on the Company’s consolidated balance sheets at fair value and the changes in the fair value of the embedded derivative are reported as gains or losses in the Company’s Consolidated Statements of Income.

At March 31, 2003 and 2002, the carrying amounts and estimated fair values of the Company’s derivative financial instruments were as follows (in thousands):

	March 31,
	2003				2002
	Carrying Amount		Fair Value		Carrying Amount		Fair Value

Embedded derivative	$	1,993	$	1,993	$	—	$	—

NOTE J – ASSET IMPAIRMENT CHARGE

At March 31, 2003, investments and other assets included an investment in 3 million shares of the common stock of Genelabs Technologies, Inc. (Genelabs), a publicly traded company, with an adjusted cost basis of $3.9 million. This investment has been classified as available-for-sale, pursuant to SFAS No. 115, “Accounting for certain Investments in Debt and Equity Securities.” Available-for-sale securities are carried at fair value, based on quoted market prices, with unrealized gains and losses reported as a separate component of stockholders’ equity. During the first quarter of 2003, in accordance with SFAS No. 115, management determined that an other than temporary decline in the fair value of Genelabs common stock existed and, as a result, wrote down the initial cost basis of the investment to its fair value at March 31, 2003 of $3.9 million. In connection with this write-down, an asset impairment charge of $13.0 million was recorded and recognized in earnings.

NOTE K – SALE OF SUBSIDIARY

During the first quarter of 2003, the Company completed the sale of its subsidiary located in the United Kingdom (UK). The Company received proceeds from this sale of approximately $16.4 million and recorded a pre-tax gain of approximately $15.7 million. During 2002, the subsidiary had net revenues, gross profit and net income of $10.8 million, $6.3 million and $3.2 million, respectively.

In connection with the sale, the Company has provided certain warranties and indemnifications to the buyer including an indemnification relating to web-site content. The buyer must give written notice to the Company within 18 months of the completion of the sale transaction of any claim arising out of these indemnifications. The Company does not expect any liability arising out of a claim, if any, to have a material adverse impact on its results of operations, financial position or cash flows. No liability has been recorded in relation to these indemnifications at March 31, 2003.

NOTE L – SUBSEQUENT EVENT

On May 30, 2003, Watson entered into an agreement with a syndicate of lenders for a five-year, $300 million senior, unsecured revolving credit facility which it intends to use for working capital and other general corporate purposes. Watson’s assets generally are held by, and its operations generally are conducted through, its subsidiaries. Within the meaning of Regulation S-X, Rule 3-10, the Company has no assets or operations independent of its subsidiaries. The terms of the new credit facility require each subsidiary, other than minor subsidiaries, to provide full and unconditional guarantees on a joint and several basis. In order to provide subsidiary guarantees in connection with this credit facility, the Company is also required by the terms of the Indenture for the 1998 Senior Notes to grant similar subsidiary guarantees in favor of the 1998 Senior Note holders. The subsidiary guarantees related to both the new credit facility and the 1998 Senior Notes are full and unconditional, on a joint and several basis, and are given by all subsidiaries other than minor subsidiaries.