tenq2ndqtr2008.htm
 
UNITED STATES
               SECURITIES AND EXCHANGE COMMISSION
                     Washington, D.C.  20549
 
FORM 10-Q
 
(X)  Quarterly Report Pursuant to Section 13 or 15(d) of the  Securities Exchange Act of 1934 for the quarterly period ended June 29, 2008
 
or
 
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from           to
 
Commission file number 1-3215
 

 
(Exact name of registrant as specified in its charter)
 
 
 NEW JERSEY
(State or other jurisdiction of
incorporation or organization)
 22-1024240
(I.R.S. Employer
Identification No.)
 
 
One Johnson & Johnson Plaza
New Brunswick, New Jersey 08933
(Address of principal executive offices)
 
Registrant's telephone number, including area code (732) 524-0400
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.            (X) Yes     ( )No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer (X)Accelerated filer (  ) Non-accelerated filer (  ) Smaller reporting company  (  )
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).(  ) Yes(X) No
 
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
 
On July 27, 2008 2,794,495,628 shares of Common Stock, $1.00 par value, were outstanding.

1

JOHNSON & JOHNSON AND SUBSIDIARIES


  TABLE OF CONTENTS

 
 Part I - Financial Information
 Page No.
Item 1.  Financial Statements (unaudited)

Consolidated Balance Sheets - June 29, 2008 and December 30, 2007 

Consolidated Statements of Earnings for the Fiscal Second Quarters Ended June 29, 2008 and July 1, 2007

Consolidated Statements of Earnings for the Fiscal Six Months Ended June 29, 2008 and July 1, 2007

Consolidated Statements of Cash Flows for the Fiscal Six Months Ended June 29, 2008 and July 1, 2007

Notes to Consolidated Financial Statements

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Item 4. Controls and Procedures
 
 
Part II - Other Information

Item 1 - Legal Proceedings

Item 2 – Unregistered Sales of Equity Securities and Use of  Proceeds

Item 4 – Submission of Matters to a Vote of Security Holders

Item 6 - Exhibits

Signatures
 
 
 
 
3
 
5
 
6
 
7
 
9
 
31
 
44
 
45
 
 
 
 
45
 
45
 
46
 
47
 
48
 

2


Part I - FINANCIAL INFORMATION

Item 1 – FINANCIAL STATEMENTS



JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 (Unaudited; Dollars in Millions)

 
ASSETS

   
June 29, 2008
   
December 30, 2007
 
Current assets:
           
Cash & cash equivalents
  $ 12,646     $ 7,770  
 
Marketable securities
    412       1,545  
 
Accounts receivable, trade, less allowances for doubtful accounts $216 (2007,$193)
    10,539       9,444  
 
Inventories (Note 4)
    5,700       5,110  
 
Deferred taxes on income
    2,612       2,609  
 
Prepaid expenses and other receivables
    3,908       3,467  
 
Total current assets
    35,817       29,945  
 
Marketable securities, non-current
    3       2  
 
Property, plant and equipment at cost
    27,989       26,466  
 
Less: accumulated depreciation
    (13,362 )     (12,281 )
 
Property, plant and equipment, net
    14,627       14,185  
 
Intangible assets, net (Note 5)
    14,675       14,640  
 
Goodwill, net (Note 5)
    14,526       14,123  
 
Deferred taxes on income
    5,422       4,889  
 
Other assets
    3,043       3,170  
 
Total assets
  $ 88,113     $ 80,954  



See Notes to Consolidated Financial Statements

3




JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 (Unaudited; Dollars in Millions)

              LIABILITIES AND SHAREHOLDERS' EQUITY

   
June 29, 2008
   
December 30, 2007
 
Current liabilities:
           
Loans and notes payable
  $ 5,156     $ 2,463  
 
Accounts payable
    6,623       6,909  
 
Accrued liabilities
    5,631       6,412  
 
Accrued rebates, returns and promotions
    2,693       2,318  
 
Accrued salaries, wages and commissions
    1,292       1,512  
 
Accrued taxes on income
    385       223  
 
Total current liabilities
    21,780       19,837  
 
Long-term debt
    8,770       7,074  
 
Deferred taxes on income
    1,454       1,493  
 
Employee related obligations
    5,572       5,402  
 
Other liabilities
    4,102       3,829  
 
Total liabilities
    41,678       37,635  
 
Shareholders’ equity:
               
 
Common stock – par value $1.00 per share (authorized 4,320,000,000 shares; issued 3,119,842,548 shares)
    3,120       3,120  
 
Accumulated other comprehensive income (Note 8)
    561       (693 )
 
Retained earnings
    59,960       55,280  
 
Less: common stock held in treasury, at cost (323,420,000 and 279,620,000 shares)
    17,206       14,388  
 
Total shareholders’ equity
    46,435       43,319  
 
Total liabilities and shareholders’ equity
  $ 88,113     $ 80,954  


See Notes to Consolidated Financial Statements
 
4


JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited; dollars & shares in millions
except per share amounts)


   
Fiscal Quarters Ended
 
   
June 29, 2008
   
Percent to Sales
   
July 1, 2007
   
Percent to Sales
 
 
Sales to customers (Note 6)
  $ 16,450       100.0 %   $ 15,131       100.0 %
 
Cost of products sold
    4,751       28.9       4,358       28.8  
 
Gross profit
    11,699       71.1       10,773       71.2  
 
Selling, marketing and
administrative expenses
    5,507       33.5       5,029       33.3  
 
Research expense
    1,896       11.5       1,866       12.3  
 
In-process research & development (IPR&D)
    40       0.2       -       -  
 
Interest income
    (89 )     (0.5 )     (95 )     (0.6 )
 
Interest expense, net of portion capitalized
    105       0.6       59       0.4  
 
Other income, net
    (135 )     (0.8 )     (117 )     (0.8 )
 
Earnings before provision for taxes on income
    4,375       26.6       4,031       26.6  
 
Provision for taxes on income (Note 3)
    1,048       6.4       950       6.2  
 
NET EARNINGS
  $ 3,327       20.2 %   $ 3,081       20.4 %
`
NET EARNINGS PER SHARE (Note 7)
                               
Basic
  $ 1.18             $ 1.06          
Diluted
  $ 1.17             $ 1.05          
 
CASH DIVIDENDS PER SHARE
  $ 0.460             $ 0.415          
 
AVG. SHARES OUTSTANDING
                               
Basic
    2,809.8               2,895.1          
Diluted
    2,844.8               2,922.5          


         See Notes to Consolidated Financial Statements

5



 
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited; dollars & shares in millions
except per share amounts)


   
Fiscal Six Months Ended
 
   
June 29, 2008
   
Percent to Sales
   
July 1, 2007
   
Percent to Sales
 
 
Sales to customers (Note 6)
  $ 32,644       100.0 %   $ 30,168       100.0 %
 
Cost of products sold
    9,365       28.7       8,743       29.0  
 
Gross profit
    23,279       71.3       21,425       71.0  
 
Selling, marketing and
administrative expenses
    10,630       32.6       9,831       32.5  
 
Research expense
    3,608       11.1       3,518       11.7  
 
In-process research & development (IPR&D)
    40       0.1       807       2.7  
 
Interest income
    (171 )     (0.5 )     (190 )     (0.6 )
 
Interest expense, net of portion capitalized
    203       0.6       121       0.4  
 
Other income, net
    (153 )     (0.5 )     (345 )     (1.1 )
 
Earnings before provision for taxes on income
    9,122       27.9       7,683       25.4  
 
Provision for taxes on income (Note 3)
    2,197       6.7       2,029       6.7  
 
NET EARNINGS
  $ 6,925       21.2 %   $ 5,654       18.7 %
`
NET EARNINGS PER SHARE (Note 7)
                               
Basic
  $ 2.45             $ 1.95          
Diluted
  $ 2.43             $ 1.93          
 
CASH DIVIDENDS PER SHARE
  $ 0.875             $ 0.790          
 
AVG. SHARES OUTSTANDING
                               
Basic
    2,821.6               2,894.8          
Diluted
    2,856.1               2,924.9          




         See Notes to Consolidated Financial Statements

6




JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; Dollars in Millions)


   
Fiscal Six Months Ended
 
   
June 29, 2008
   
July 1, 2007
 
CASH FLOW FROM OPERATING ACTIVITIES
           
Net earnings
  $ 6,925     $ 5,654  
Adjustment to reconcile net earnings to cash flows from operating activities:
               
 Depreciation and amortization of property and intangibles
    1,349       1,305  
 Stock based compensation
    356       360  
 Purchased in-process research and development
    40       807  
 Deferred tax provision
    (322 )     (405 )
 Accounts receivable allowances
    15       1  
Changes in assets and liabilities, net of effects from acquisitions:
               
 Increase in accounts receivable
    (732 )     (659 )
 Increase in inventories
    (379 )     (190 )
 Decrease in accounts payable and accrued liabilities
    (1,160 )     (306 )
 Increase in other current and non-current assets
    (756 )     (424 )
 Increase in other current and non-current liabilities
    742       591  
 
NET CASH FLOWS FROM OPERATING ACTIVITIES
    6,078       6,734  
 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Additions to property, plant and equipment
    (1,166 )     (1,045 )
Proceeds from the disposal of assets
    47       214  
Acquisitions, net of cash acquired
    (46 )     (1,368 )
Purchases of investments
    (687 )     (566 )
Sales of investments
    1,786       103  
Other (primarily intangibles)
    (46 )     (49 )
 
NET CASH USED BY INVESTING ACTIVITIES
    (112 )     (2,711 )
 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Dividends to shareholders
    (2,466 )     (2,287 )
Repurchase of common stock
    (3,617 )     (739 )
Proceeds from short-term debt
    3,376       15,296  
Retirement of short-term debt
    (837 )     (15,449 )
Proceeds from long-term debt
    1,641       1  
Retirement of long-term debt
    (5 )     (6 )
Proceeds from the exercise of stock
options/excess tax benefits
    610       564  
                 
NET CASH USED BY FINANCING ACTIVITIES
    (1,298 )     (2,620 )
                 
Effect of exchange rate changes on cash and cash equivalents 
   
208
      85  
Increase/(decrease) in cash and cash equivalents     4,876       1,488  
Cash and Cash equivalents, beginning of period      7,770       4,083  
                 
CASH AND CASH EQUIVALENTS, END OF PERIOD       $12,646        $5,571  
 

 
7

 

Acquisitions
   
Fair value of assets acquired
$51
$1,599
Fair value of liabilities assumed
(5)
(231)
 
Net cash paid for acquisitions
$46
$1,368

 
See Notes to Consolidated Financial Statements
 
8


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - The accompanying unaudited interim consolidated financial statements and related notes should be read in conjunction with the audited Consolidated Financial Statements of Johnson & Johnson and its Subsidiaries  (the  "Company") and related notes as contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 30, 2007. The unaudited interim financial statements include all adjustments (consisting only of normal recurring adjustments) and accruals necessary in the judgment of management for a fair statement of the results for the periods presented.

During the fiscal first quarter of 2008, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements. This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This statement was adopted in the fiscal first quarter of 2008 except for non-financial assets and liabilities recognized or disclosed at fair value on a non-recurring basis, for which the effective date is fiscal years beginning after November 15, 2008. See Note 13 for more details.

During the fiscal first quarter of 2008, the Company adopted SFAS No.159, Fair Value Option for Financial Assets and Financial Liabilities, which permits an entity to measure financial assets and financial liabilities at fair value. See Note 13 for more details.

During the fiscal first quarter of 2008, the Company adopted EITF Issue 07-03 Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities. This issue requires nonrefundable advance payments for research and development to be capitalized and recognized as an expense as related goods are delivered or services are performed. The adoption of EITF Issue 07-03 did not have a significant impact on the Company’s results of operation, cash flows or financial position.

NOTE 2 - FINANCIAL INSTRUMENTS
The Company follows the provisions of Statement of Financial Accounting Standards (SFAS) 133, SFAS 138 and SFAS 149 requiring that all derivative instruments be recorded on the balance sheet at fair value.

As of June 29, 2008, the balance of deferred net gains on derivatives included in accumulated other comprehensive income was $50 million after-tax. For additional information, see Note 8. The Company expects that substantially all of this amount will be reclassified into earnings over the next 12 months as a result of transactions that are expected to occur over that period. The amount ultimately realized in earnings will differ as foreign exchange rates change. Realized gains and losses are ultimately determined by actual exchange rates at maturity of the derivative. Transactions with third parties will cause the amount in accumulated other comprehensive income to affect net earnings. The length of time over which the Company is hedging typically does not exceed 18 months.  The Company also uses currency swaps to manage currency risk primarily related to borrowings, which may exceed 18 months.

9

For the fiscal second quarters ended June 29, 2008 and July 1, 2007, the net impact of the hedges' ineffectiveness, transactions not qualifying for hedge accounting and discontinuance of hedges, to the Company's financial statements was insignificant. Refer to Note 8 for disclosures of movements in Accumulated Other Comprehensive Income.

NOTE 3 - INCOME TAXES
The worldwide effective income tax rates for the first fiscal six months of 2008 and 2007 were 24.1% and 26.4%, respectively. The decrease in the effective tax rate of 2.3% was primarily due to the lower in-process research and development (IPR&D) charge of $40 million with no tax benefit recorded in the first fiscal six months of 2008 versus the IPR&D charge of $807 million with no tax benefit recorded in the first fiscal six months of 2007.


NOTE 4 - INVENTORIES
(Dollars in Millions)

   
June 29, 2008
   
December 30, 2007
 
Raw materials and supplies
  $ 1,137     $ 905  
Goods in process
    1,764       1,384  
Finished goods
    2,799       2,821  
Total
  $ 5,700     $ 5,110  



NOTE 5 - INTANGIBLE ASSETS AND GOODWILL
Intangible assets that have finite useful lives are amortized over their estimated useful lives. Goodwill and indefinite lived intangible assets are assessed annually for impairment.  The latest impairment assessment of goodwill and indefinite lived intangible assets was completed in the fiscal fourth quarter of 2007.  Future impairment tests will be performed annually in the fiscal fourth quarter, or sooner if warranted.


10

(Dollars in Millions)
 
 
June 29, 2008
   
December 30, 2007
 
 
Trademarks (non-amortizable)
  $ 6,400     $ 6,457  
Less accumulated amortization
    143       144  
Trademarks (non-amortizable)- net
    6,257       6,313  
 
Patents and trademarks
    4,775       4,597  
Less accumulated amortization
    1,716       1,615  
Patents and trademarks – net
    3,059       2,982  
 
Other amortizable intangibles
    7,636       7,399  
Less accumulated amortization
    2,277       2,054  
Other intangibles – net
    5,359       5,345  
 
Total intangible assets - gross
    18,811       18,453  
Less accumulated amortization
    4,136       3,813  
Total intangible assets - net
    14,675       14,640  
 
Goodwill – gross
    15,280       14,866  
Less accumulated amortization
    754       743  
Goodwill – net
  $ 14,526     $ 14,123  

Goodwill as of June 29, 2008 as allocated by segment of business is as follows:


(Dollars in Millions)
 
Consumer
   
Pharm
   
Med Dev & Diag
   
Total
 
Goodwill, net of accumulated amortization at December 30, 2007
  $ 8,125     $ 964     $ 5,034     $ 14,123  
Acquisitions
    -       -       6       6  
Translation & Other
    347       29       21       397  
Goodwill, net as of
June 29, 2008
  $ 8,472     $ 993     $ 5,061     $ 14,526  


The weighted average amortization periods for patents and trademarks and other intangible assets are 16 years and 28 years, respectively.  The amortization expense of amortizable intangible assets for the fiscal six months ended June 29, 2008 was $376 million and the estimated amortization expense for the five succeeding years approximates $750 million, per year.


11


 

NOTE 6 - SEGMENTS OF BUSINESS AND GEOGRAPHIC AREAS
(Dollars in Millions)

SALES BY SEGMENT OF BUSINESS (1)

   
Fiscal Quarters Ended
 
(Dollars in Millions)
 
June 29, 2008
   
July 1, 2007
   
Percent Change
 
Consumer
                 
U.S.
  $ 1,694     $ 1,562       8.5 %
International
    2,342       2,002       17.0  
Total
    4,036       3,564       13.2  
 
Pharmaceutical
                       
U.S.
    3,793       3,860       (1.7 )
International
    2,547       2,289       11.3  
Total
    6,340       6,149       3.1  
 
Medical Devices & Diagnostics
                       
U.S.
    2,723       2,619       4.0  
International
    3,351       2,799       19.7  
Total
    6,074       5,418       12.1  
 
Worldwide
                       
U.S.
    8,210       8,041       2.1  
International
    8,240       7,090       16.2  
Total
  $ 16,450     $ 15,131       8.7 %



 
   
Fiscal Six Months Ended
 
(Dollars in Millions)
 
June 29, 2008
   
July 1, 2007
   
Percent Change
 
Consumer
                 
U.S.
  $ 3,513     $ 3,191       10.1 %
International
    4,587       3,869       18.6  
Total
    8,100       7,060       14.7  
 
Pharmaceutical
                       
U.S.
    7,863       7,894       (0.4 )
International
    4,906       4,476       9.6  
Total
    12,769       12,370       3.2  
 
Medical Devices & Diagnostics
                       
U.S.
    5,311       5,203       2.1  
International
    6,464       5,535       16.8  
Total
    11,775       10,738       9.7  
 
Worldwide
                       
U.S.
    16,687       16,288       2.4  
International
    15,957       13,880       15.0  
Total
  $ 32,644     $ 30,168       8.2 %

(1) Export sales are not significant.

12

OPERATING PROFIT BY SEGMENT OF BUSINESS

   
Fiscal Quarters Ended
 
(Dollars in Millions)
 
June 29, 2008
   
July 1, 2007
   
Percent Change
 
Consumer
  $ 683     $ 482       41.7 %
Pharmaceutical
    2,143       2,131       0.6  
Medical Devices & Diagnostics (1)
    1,702       1,523       11.8  
  Segments total
    4,528       4,136       9.5  
Income/(expense) not allocated to segments
    (153 )     (105 )        
Worldwide total
  $ 4,375     $ 4,031       8.5 %


   
Fiscal Six Months Ended
 
(Dollars in Millions)
 
June 29, 2008
   
July 1, 2007
   
Percent Change
 
Consumer
  $ 1,411     $ 1,242       13.6 %
Pharmaceutical
    4,510       4,412       2.2  
Medical Devices & Diagnostics(2)
    3,502       2,238       56.5  
  Segments total
    9,423       7,892       19.4  
Income/(expense) not allocated to segments
    (301 )     (209 )        
Worldwide total
  $ 9,122     $ 7,683       18.7 %

(1)Includes $40 million of in-process research and development (IPR&D) charges related to the acquisition of Amic AB completed in the fiscal second quarter of 2008.

(2)Includes $40 million and $807 million of IPR&D charges related   to acquisitions completed in the first fiscal six months of 2008 and first fiscal six months of 2007, respectively.

SALES BY GEOGRAPHIC AREA
(Dollars in Millions)


   
Fiscal Quarters Ended
 
(Dollars in Millions)
 
June 29, 2008
   
July 1, 2007
   
Percent Change
 
U.S.
  $ 8,210     $ 8,041       2.1 %
Europe
    4,547       3,907       16.4  
Western Hemisphere, excluding U.S.
    1,280       1,131       13.2  
Asia-Pacific, Africa
    2,413       2,052       17.6  
 
Total
  $ 16,450     $ 15,131       8.7 %


13



 
   
Fiscal Six Months Ended
 
(Dollars in Millions)
 
June 29, 2008
   
July 1, 2007
   
Percent Change
 
U.S.
  $ 16,687     $ 16,288       2.4 %
Europe
    8,855       7,720       14.7  
Western Hemisphere, excluding U.S.
    2,525       2,177       16.0  
Asia-Pacific, Africa
    4,577       3,983       14.9  
 
Total
  $ 32,644     $ 30,168       8.2 %



NOTE 7 - EARNINGS PER SHARE
The following is a reconciliation of basic net earnings per share to diluted net earnings per share for the fiscal second quarters ended June 29, 2008 and July 1, 2007.

(Shares in Millions)
 
Fiscal Quarters Ended
 
   
June 29, 2008
   
July 1, 2007
 
Basic net earnings per share
  $ 1.18     $ 1.06  
Average shares outstanding – basic
    2,809.8       2,895.1  
Potential shares exercisable under  stock option plans
    197.4       201.2  
Less: shares which could be repurchased under treasury stock method
    (166.1 )     (177.7 )
Convertible debt shares
    3.7       3.9  
Average shares outstanding – diluted
    2,844.8       2,922.5  
Diluted earnings per share
  $ 1.17     $ 1.05  


The diluted earnings per share calculation included the dilutive effect of convertible debt that was offset by the related reduction in interest expense of $1 million for both the fiscal second quarters ended June 29, 2008 and July 1, 2007.

The diluted earnings per share calculation for the fiscal second quarters ended June 29, 2008 and July 1, 2007, excluded 61 million and 67 million shares, respectively, related to stock options as the exercise price of these options was greater than their average market value, which would result in an anti-dilutive effect on diluted earnings per share.


The following is a reconciliation of basic net earnings per share to diluted net earnings per share for the  fiscal six months ended June 29, 2008 and July 1, 2007.


14





(Shares in Millions)
 
Fiscal Six Months Ended
 
   
June 29, 2008
   
July 1, 2007
 
Basic net earnings per share
  $ 2.45     $ 1.95  
Average shares outstanding – basic
    2,821.6       2,894.8  
Potential shares exercisable under  stock option plans
    197.4       201.4  
Less: shares which could be repurchased under treasury stock method
    (166.6 )     (175.2 )
Convertible debt shares
    3.7       3.9  
Average shares outstanding – diluted
    2,856.1       2,924.9  
Diluted earnings per share
  $ 2.43     $ 1.93  

The diluted earnings per share calculation included the dilutive effect of convertible debt that was offset by the related reduction in interest expense of $2 million for both the fiscal six months ended June 29, 2008 and July 1, 2007.

The diluted earnings per share calculation for the first fiscal six months ended June 29, 2008 and July 1, 2007, excluded 61 million and 66 million shares, respectively, related to stock options as the exercise price of these options was greater than their average market value, which would result in an anti-dilutive effect on diluted earnings per share.

NOTE 8 - ACCUMULATED OTHER COMPREHENSIVE INCOME
Total comprehensive income for the first fiscal six months ended June 29, 2008 was $8.2 billion, compared with $5.9 billion for the same period a year ago. Total comprehensive income for the fiscal second quarter ended June 29, 2008 was $3.4 billion, compared with $3.3 billion for the same period a year ago. Total comprehensive income included net earnings, net unrealized currency gains and losses on translation, adjustments related to Employee Benefit Plans, net unrealized gains and losses on securities available for sale and net gains and losses on derivative instruments qualifying and designated as cash flow hedges. The following table sets forth the components of accumulated other comprehensive income.

(Dollars in Millions)
 
For. Cur. Trans.
   
Unrld Gains/
(Losses) on Sec
     
Employee Benefit Plans
Gains/(Losses) on Deriv & Hedges
 
Total Accum Other Comp Inc/(Loss)
 
 
December 30, 2007
  $ 628       84       (1,360 )
 (45
 )   (693 )
2008 six months changes
                                   
 Net change associated
 with current period
 hedging transactions
                       
 (1
 )      
 Net amount reclassed to
 net earnings
                       
 96
 *      
 Net six months changes
    1,120       (46 )     85  
 95
    1,254  
June 29, 2008
  $ 1,748       38       (1,275 )
 50
    561  
 
Amounts in accumulated other comprehensive income are presented net of the related tax impact.  Foreign currency translation adjustments are not currently adjusted for income taxes, as they relate to permanent investments in international subsidiaries.

*Substantially offset in net earnings by changes in value of the underlying transactions.



15


NOTE 9 – MERGERS, ACQUISITIONS AND DIVESTITURES
During the fiscal second quarter of 2008 the Company acquired Amic AB for a purchase price of $44 million in cash and debt. Amic AB, is a Swedish developer of in vitro diagnostic technologies for use in point-of-care and near-patient settings (outside the physical facilities of the clinical laboratory). An in-process research & development (IPR&D) charge of $40 million before and after tax was recorded related to the acquisition of Amic AB.

During the fiscal first quarter of 2007, the Company acquired Conor Medsystems, Inc. for a purchase price of $1.4 billion in cash. Conor Medsystems, Inc., is a cardiovascular device company, with new drug delivery technology. An IPR&D charge of $807 million before and after tax was recorded related to the acquisition of Conor Medsystems, Inc. 

During the fiscal first quarter of 2007, the Company completed the divestiture of the KAOPECTATEâ, UNISOMâ, CORTIZONEâ, BALMEXâ and ACTâ consumer products to Chattem, Inc. for $410 million in cash.


NOTE 10 – PENSIONS AND OTHER POSTRETIREMENT BENEFITS
Components of Net Periodic Benefit Cost
Net periodic benefit cost for the Company’s defined benefit retirement plans and other benefit plans for the fiscal second quarters of 2008 and 2007 include the following components:


   
Retirement Plans
   
Other Benefit Plans
 
   
Fiscal Quarters Ended
 
(Dollars in Millions)
 
June 29, 2008
   
July 1, 2007
   
June 29, 2008
   
July 1, 2007
 
Service cost
  $ 126       134       35       33  
Interest cost
    178       160       42       37  
Expected return on
plan assets
    (222 )     (198 )     -       -  
Amortization of prior service cost
    3       3       (2 )     (1 )
Amortization of net transition asset
    1       -       -       -  
Recognized actuarial
losses
    16       48       17       16  
                                 
Net periodic benefit cost
  $ 102       147       92       85  


16

Net periodic benefit cost for the Company’s defined benefit retirement plans and other benefit plans for the first fiscal six months of 2008 and 2007 include the following components:


   
Retirement Plans
   
Other Benefit Plans
 
   
Fiscal Six Months Ended
 
(Dollars in Millions)
 
June 29, 2008
   
July 1, 2007
   
June 29, 2008
   
July 1, 2007
 
Service cost
  $ 255       269       71       70  
Interest cost
    357       320       83       74  
Expected return on
plan assets
    (446 )     (395 )     (1 )     (1 )
Amortization of prior service cost
    6       5       (3 )     (3 )
Amortization of net transition asset
    1       -       -       -  
Recognized actuarial
losses
    35       95       33       33  
                                 
Net periodic benefit cost
  $ 208       294       183       173  


Company Contributions

For the fiscal six months ended June 29, 2008, the Company contributed $14 million and $12 million to its U.S. and international retirement plans, respectively.  The Company does not anticipate a minimum statutory funding requirement for its U.S. retirement plans in 2008. International plans will be funded in accordance with local regulations.



NOTE 11 – RESTRUCTURING
 
In the third quarter of 2007, the Company announced restructuring initiatives in an effort to improve its overall cost structure. This action was taken to offset the anticipated negative impacts associated with generic competition in the Pharmaceutical segment and challenges in the drug-eluting stent market. The Company's Pharmaceuticals segment will reduce its cost base by consolidating certain operations, while continuing to invest in recently launched products and its late-stage pipeline of new products. The Cordis franchise is moving to a more integrated business model to address the market changes underway with drug-eluting stents and to better serve the broad spectrum of its patients' cardiovascular needs, while reducing its cost base. Additionally, as part of this program the Company plans to eliminate approximately 4,400 positions of which 2,700 have been eliminated since the plan’s inception. The Company is also accelerating steps to standardize and streamline certain aspects of its enterprise-wide functions such as human resources, finance and information technology to support growth across the business, while also leveraging its scale more effectively in areas such as procurement to benefit its operating companies.

17

During the fiscal third quarter of 2007, the Company recorded $745 million in pre-tax charges of which, approximately, $500 million of the pre-tax restructuring charges are expected to require cash payments. The $745 million of restructuring charges consists of severance costs of $450 million, asset write-offs of $272 million and $23 million related to leasehold obligations. The $272 million of asset write offs relate to property, plant and equipment of $166 million, intangible assets of $48 million and other assets of $58 million.

The following table summarizes the severance reserve and the associated spending for the program through the second quarter of 2008:

 
 (Dollars in Millions)
Reserve balance as of:
December 30, 2007
Cash outlays*
June 29, 2008
 
Severance
 
$404
(144)
$260

*Cash outlays for severance are expected to be substantially paid out over the next 12 months in accordance with the Company’s plans and local laws.



NOTE 12 - LEGAL PROCEEDINGS
PRODUCT LIABILITY

The Company is involved in numerous product liability cases in the United States, many of which concern adverse reactions to drugs and medical devices. The damages claimed are substantial, and while the Company is confident of the adequacy of the warnings and instructions for use that accompany such products, it is not feasible to predict the ultimate outcome of litigation. However, the Company believes that if any product liability results from such cases, it will be substantially covered by existing amounts accrued in the Company’s balance sheet and, where available, by third-party product liability insurance.

Multiple products of Johnson & Johnson subsidiaries are subject to numerous product liability claims and lawsuits, including ORTHO EVRA®, RISPERDAL®, DURAGESIC® and the CHARITÉ™ Artificial Disc. There are approximately 2,000 claimants who have pending lawsuits or claims regarding injuries allegedly due to ORTHO EVRA®, 570 with respect to RISPERDAL®, 280 with respect to CHARITÉ™ and 60 with respect to DURAGESIC®. These claimants seek substantial compensatory and, where available, punitive damages.

With respect to RISPERDAL®, the Attorneys General of seven states and the Office of General Counsel of the Commonwealth of Pennsylvania have filed actions seeking reimbursement of Medicaid or other public funds for RISPERDAL® prescriptions written for off-label use, compensation for treating their citizens for alleged adverse reactions to RISPERDAL®, civil fines or penalties, punitive damages, or other relief. The Attorney General of Texas has joined a qui tam action in that state seeking similar relief. Certain of these actions also seek injunctive relief relating to the promotion of RISPERDAL®. The Attorneys General of more than 30 other states have indicated a potential interest in pursuing similar litigation against the company’s Janssen subsidiary, and have obtained a tolling agreement staying the running of the statute of limitations while they inquire into the issues. In addition, there are six cases filed by union health plans seeking damages for alleged overpayments for RISPERDAL®, several of which seek certification as class actions.  The case brought by the Attorney General of West Virginia, which also includes claims for alleged consumer fraud as to DURAGESIC® as well as RISPERDAL®, is scheduled for trial in September 2008.

18

Numerous claims and lawsuits in the United States relating to the drug PROPULSID®, withdrawn from general sale by the Company’s Janssen subsidiary in 2000, have been resolved or are currently enrolled in settlement programs with an aggregate cap below $100 million. Litigation concerning PROPULSID® is pending in Canada, where a class action of persons alleging adverse reactions to the drug has been certified.


AFFIRMATIVE STENT PATENT LITIGATION

In patent infringement actions tried in Delaware Federal District Court in late 2000, Cordis Corporation (Cordis), a subsidiary of Johnson & Johnson, obtained verdicts of infringement and patent validity, and damage awards against Boston Scientific Corporation (Boston Scientific) and Medtronic AVE, Inc. (Medtronic) based on a number of Cordis vascular stent patents. In December 2000, the jury in the damage action against Boston Scientific returned a verdict of $324 million and the jury in the Medtronic action returned a verdict of $271 million. The Court of Appeals for the Federal Circuit has upheld liability in these cases.  The cases have been returned to the District Court for further proceedings and Cordis has moved the District Court to re-instate the original damage verdicts.

Cordis also has an arbitration claim against Medtronic accusing Medtronic of infringement by sale of stent products introduced by Medtronic subsequent to its products subject to the earlier action referenced above. Those subsequent products were found to have been licensed to Medtronic pursuant to a 1997 license by an arbitration panel in March 2005. Further arbitration proceedings will determine whether royalties are owed for those products.

In January 2003, Cordis filed a patent infringement action against Boston Scientific in Delaware Federal District Court accusing its Express2™, Taxus® and Liberte® stents of infringing the Palmaz patent that expired in November 2005. The Liberte® stent was also accused of infringing Cordis’ Gray patent that expires in 2016. In June 2005, a jury found that the Express2™, Taxus® and Liberte® stents infringed the Palmaz patent and that the Liberte® stent also infringed the Gray patent. Boston Scientific has appealed to the U.S. Court of Appeals for the Federal Circuit.

Cordis has filed several lawsuits in New Jersey Federal District Court against Guidant Corporation, Abbott Laboratories, Inc., Boston Scientific and Medtronic alleging that the Xience V™ (Abbott), Promus™ (Boston Scientific) and Endeavor® (Medtronic) drug eluting stents infringe several patents owned by or licensed to Cordis.

19


PATENT LITIGATION AGAINST VARIOUS JOHNSON & JOHNSON SUBSIDIARIES

The products of various Johnson & Johnson subsidiaries are the subject of various patent lawsuits, the outcomes of which could potentially adversely affect the ability of those subsidiaries to sell those products, or require the payment of past damages and future royalties.

In July 2005, a jury in Federal District Court in Delaware found that the Cordis CYPHER® Stent infringed Boston Scientific’s Ding ’536 patent and that the Cordis CYPHER® and BX VELOCITY® Stents also infringed Boston Scientific’s Jang ’021 patent. The jury also found both of those patents valid. Boston Scientific seeks substantial damages and an injunction in that action. The District Court denied motions by Cordis to overturn the jury verdicts or grant a new trial. Cordis has appealed to the Court of Appeals for the Federal Circuit. The District Court indicated it will consider damages, willfulness and injunctive relief after the appeals have been decided.

Boston Scientific has brought actions in Belgium, the Netherlands, Germany, France and Italy under its Kastenhofer patent, which purports to cover two-layer catheters such as those used to deliver the CYPHER® Stent, to enjoin the manufacture and sale of allegedly infringing catheters in those countries, and to recover damages. A decision by the lower court in the Netherlands in Boston Scientific’s favor was reversed on appeal in April 2007. Boston Scientific has filed an appeal to the Dutch Supreme Court. In October 2007, Boston Scientific prevailed in the nullity action challenging the validity of the Kastenhofer patent filed by Cordis in Germany. Cordis has appealed.  No substantive hearings have been scheduled in the French or Italian actions.

Trial in Boston Scientific’s U.S. case based on the Kastenhofer patent in Federal District Court in California concluded in October 2007 with a jury finding that the patent was invalid.  The jury also found for Cordis on its counterclaim that sale by Boston Scientific of its balloon catheters and stent delivery systems infringe Cordis’ Fontirroche patent.  The Court has denied Boston Scientific’s post trial motions and is considering the appropriate remedy for future infringement.

In Germany, Boston Scientific has several actions based on its Ding patents pending against the Cordis CYPHER® Stent. Cordis was successful in these actions at the trial level, but Boston Scientific has appealed.

20

The following chart summarizes various patent lawsuits concerning products of Johnson & Johnson subsidiaries that have yet to proceed to trial:

J&J
   
Plaintiff/
         
Product
Company
Patents
Patent Holder
Court                                             
 Trial Date
 
Date Filed
 
Two-layer
Cordis
Kasten-
Boston Scientific
Multiple European
 *
    09/07  
Catheters
 
hofer
Corp.
           
                   
Contact Lenses
Vision Care
Nicolson
CIBA  Vision
M.D.FL
 02/09
 
  09/03  
       
Multiple European
 *
    09/07  
                   
Stents
Cordis
Ricci
Medtronic and Evysio
E.D.TX
 *
    03/07  
                    
CYPHERâ Stent
Cordis
Wall
Wall
E.D.TX
 *
    11/07  
                   
CYPHERâ Stent
Cordis
Bonutti
MarcTec
S.D.IL
 *
    11/07  
                   
CYPHERâ Stent
Cordis
Saffran
Saffran
E.D.TX
 *
    10/07  
                   
Stent/Catheter
Delivery Systems
Cordis/ Ethicon
Schock
Cardio Access LLC
E.D.TX
 *
    06/08  
                   
LISTERINEâ Tooth Whitening Strips
McNeil-PPC
Sagel
Procter & Gamble
W.D. WI
 *
    05/08  
                   
Blood Glucose Meters and Strips
Lifescan
Wilsey
Roche Diagnostics
D. DE
 *
    11/07  

* Trial date to be scheduled.

LITIGATION AGAINST FILERS OF ABBREVIATED NEW DRUG APPLICATIONS (ANDAs)

The following chart indicates lawsuits pending against generic firms that filed Abbreviated New Drug Applications (ANDAs) seeking to market generic forms of products sold by various subsidiaries of the Company prior to expiration of the applicable patents covering those products. These ANDAs typically include allegations of non-infringement, invalidity and unenforceability of these patents. In the event the subsidiary of the Company involved is not successful in these actions, or the statutory 30-month stay expires before a ruling from the district court is obtained, the firms involved will have the ability, upon FDA approval, to introduce generic versions of the product at issue resulting in very substantial market share and revenue losses for the product of the Company’s subsidiary.
 
21

As noted in the following chart, 30-month stays expired during 2006 and 2007, and will expire in 2008, 2009 and 2010 with respect to ANDA challenges regarding various products:
 
Brand Name Product
Patent/NDA Holder
Generic Challenger
Court
 
Trial Date
   
Date Filed
   
30-Month Stay Expiration
 
                         
ACIPHEX®
Eisai (for Janssen)
Teva
S.D.NY
    03/07       11/03       02/07  
  20 mg delay release tablet  
Dr. Reddy’s
S.D.NY
    03/07       11/03       02/07  
                               
CONCERTA®
18,27,36 and 54 mg controlled release tablet
McNeil-PPC ALZA
Andrx
D.DE
    12/07       09/05    
None
 
                               
LEVAQUINâ
250, 500, 750 mg tablets
Ortho-McNeil
Lupin
D.NJ
    *       10/06       03/09  
                               
ORTHO TRI CYCLEN® LO
0.18 mg/0.025 mg
0.215 mg/0.025 mg
and 0.25 mg/0.025 mg
Ortho-McNeil
Barr
D.NJ
    *       10/03       02/06  
                               
MONISTAT® 1
Combination
McNeil-PPC
Perrigo
D.NJ
    *       04/08       09/10  
                               
RAZADYNE™
Janssen
Teva
D.DE
    05/07       07/05       08/08  
   
Mylan
D.DE
    05/07       07/05       08/08  
   
Dr.  Reddy's
D.DE
    05/07       07/05       08/08  
   
Purepac
D.DE
    05/07       07/05       08/08  
   
Barr
D.DE
    05/07       07/05       08/08  
   
AlphaPharm
D.DE
    05/07       07/05       08/08  
                               
RAZADYNE™ ER
Janssen
Barr
D.NJ
    *       06/06       11/08  
   
Sandoz
D.NJ
    *       05/07       09/09  
   
KV Pharma
D.NJ
    *       12/07       05/10  
                               
ULTRACET
Ortho-McNeil
Apotex
N.D.IL
    *       07/07       12/09  
                               
ULTRAM ER®
100, 200, 300 mg tablet
 
Ortho-McNeil
Par
D.DE
    11/08       05/07       09/09  
 * Trial date to be scheduled

22

Trial in the action against Teva, Dr. Reddy’s and Mylan with respect to their ANDA challenges to the patent on ACIPHEX® of Eisai Inc., marketing partner of the Company’s subsidiary Ortho-McNeil Pharmaceutical, Inc. (Ortho-McNeil), proceeded before the Federal District Court in New York in March 2007. In May 2007, the Court held that the ACIPHEX® compound patent is enforceable. The Court had previously held that the patent is valid. Teva and Dr. Reddy’s appealed both decisions to the Court of Appeals for the Federal Circuit. Mylan withdrew its appeal. On July 21, 2008 the Court of Appeals affirmed the decision of the Federal District Court.

In the action against Barr regarding ORTHO TRICYCLEN® LO, on January 22, 2008, the Company’s subsidiary Ortho Women’s Health & Urology, a Division of Ortho-McNeil-Janssen Pharmaceuticals, Inc., and Barr agreed to a non-binding term sheet to settle the litigation, which settlement discussions are still underway.  The trial court postponed the January 22, 2008 trial without setting a new trial date.

In the action against Barr and AlphaPharm with respect to their ANDA challenges to the RAZADYNE® patent that Janssen licenses from Synaptech, Inc., a four-day non-jury trial was held in the Federal District Court in Delaware in May 2007. The Court has yet to issue its ruling in that action.  As noted in the above chart, the 30-month stay in the RAZADYNE® cases expires in late August 2008.  Absent a decision by the district court favorable to Janssen, or the issuance of a preliminary injunction, the generic company defendants could launch at risk. One generic company, Teva, has stated its intent to launch a generic version of RAZADYNEâ at risk once the thirty month stay expires in late August 2008, absent a contrary ruling from the Federal District Court.

In the action against Andrx with respect to its ANDA challenge to the CONCERTA® patents, a five-day non-jury trial was held in the Federal District Court in Delaware in December 2007. The Court has yet to issue its ruling in that action.

In the action against Sandoz with respect to its ANDA challenge to a RAZADYNE® ER patent that Janssen licenses from Synaptech, Inc., the action has been stayed pending the outcome in the above litigation in Delaware Federal District Court. Sandoz originally challenged only one of two patents for RAZADYNE® ER, and certified that it will await expiration of the second patent in 2019 before marketing its generic version of RAZADYNE® ER. In April 2008, Sandoz notified Janssen that it has now challenged the second patent in its ANDA and seeks to market the product before that patent expires in 2019.

McNEIL-PPC, Inc. filed suit in April 2008 in Federal District Court in New Jersey against Perrigo Company with respect to its ANDA regarding MONISTAT® 1 Combination Pack.

In the Ultracet actions, Ortho-McNeil filed suit against Kali/Par in 2002, separately against Caraco in 2004, and separately against Teva/Barr in 2004 based on the patent then in force.  In October 2005, Caraco’s motion for summary judgment of non-infringement of the original patent was granted and subsequently affirmed by the Federal Circuit.  In August 2006, the PTO granted a reissue patent. Ortho-McNeil thereafter amended its pending claims against Kali/Par and Teva/Bar to assert claim 6 of the reissue patent.  Ortho-McNeil also brought a new lawsuit against Kali/Par, Caraco, and Teva/Barr based on other claims of the reissue patent. In April 2007, certain of Kali/Par's and Teva/Barr’s motions for summary judgment of invalidity of the original patent were granted.  In July 2007, Kali/Par settled all pending claims, acknowledging that the asserted claims of the reissue patent are valid, enforceable, and infringed.  Also in July 2007, Ortho-McNeil filed suit against Apotex on the reissue patent.  In March 2008, Ortho-McNeil filed suit against Mylan and AlphaPharm on the reissue patent.  In April 2008, Caraco’s motion for summary judgment of invalidity of the reissue patent was granted. The Mylan/AlphaPharm case was dismissed on collateral estoppel grounds in light of the summary judgment finding of invalidity of the reissue patent in the Caraco case, and Apotex has filed a motion for summary judgment on similar grounds.  Ortho-McNeil intends to appeal the summary judgment decision invalidating the claims of the reissue patent.

23

AVERAGE WHOLESALE PRICE (AWP) LITIGATION

Johnson & Johnson and several of its pharmaceutical subsidiaries, along with numerous other pharmaceutical companies, are defendants in a series of lawsuits in state and federal courts involving allegations that the pricing and marketing of certain pharmaceutical products amounted to fraudulent and otherwise actionable conduct because, among other things, the companies allegedly reported an inflated Average Wholesale Price (AWP) for the drugs at issue. Most of these cases, both federal actions and state actions removed to federal court, have been consolidated for pre-trial purposes in a Multi-District Litigation (MDL) in Federal District Court in Boston, Massachusetts. The plaintiffs in these cases include classes of private persons or entities that paid for any portion of the purchase of the drugs at issue based on AWP, and state government entities that made Medicaid payments for the drugs at issue based on AWP.

The MDL Court identified classes of Massachusetts-only private insurers providing “Medi-gap” insurance coverage and private payers for physician-administered drugs where payments were based on AWP (“Class 2” and “Class 3”), and a national class of individuals who made co-payments for physician-administered drugs covered by Medicare (“Class 1”). A trial of the two Massachusetts-only class actions concluded before the MDL Court in December 2006. In June 2007, the MDL Court issued post-trial rulings, dismissing the Johnson & Johnson defendants from the case regarding all claims of Classes 2 and 3, and subsequently of Class 1 as well. AWP cases brought by various Attorneys General are expected to be set for trial in 2009.

OTHER

In July 2003, Centocor Inc., a Johnson & Johnson subsidiary, received a request that it voluntarily provide documents and information to the criminal division of the U.S. Attorney’s Office, District of New Jersey, in connection with its investigation into various Centocor marketing practices. Subsequent requests for documents have been received from the U.S. Attorney’s Office. Both the Company and Centocor have responded to these requests for documents and information.

24

In December 2003, Ortho-McNeil received a subpoena from the U.S. Attorney’s Office in Boston, Massachusetts seeking documents relating to the marketing, including alleged off-label marketing, of the drug TOPAMAX® (topiramate). Additional subpoenas for documents have been received. Ortho-McNeil is cooperating in responding to the subpoenas. In October 2004, the U.S. Attorney’s Office in Boston asked attorneys for Ortho-McNeil to cooperate in facilitating the subpoenaed testimony of several present and former Ortho-McNeil employees before a federal grand jury in Boston. Cooperation in securing the testimony of additional witnesses before the grand jury has been requested and is being provided.

In January 2004, Janssen received a subpoena from the Office of the Inspector General of the U.S. Office of Personnel Management seeking documents concerning sales and marketing of, any and all payments to physicians in connection with sales and marketing of, and clinical trials for, RISPERDAL® (risperidone) from 1997 to 2002. Documents subsequent to 2002 have also been requested. An additional subpoena seeking information about marketing of and adverse reactions to RISPERDAL® was received from the U.S. Attorney’s Office for the Eastern District of Pennsylvania in November 2005. Subpoenas seeking testimony from various witnesses before a grand jury have also been received. Janssen is cooperating in responding to these subpoenas.

In August 2004, Johnson & Johnson Health Care Systems, Inc. (HCS), a Johnson & Johnson subsidiary, received a subpoena from the Dallas, Texas U.S. Attorney’s Office seeking documents relating to the relationships between the group purchasing organization, Novation, and HCS and other Johnson & Johnson subsidiaries. The Company’s subsidiaries involved have responded to the subpoena.

In September 2004, Ortho Biotech Inc. (Ortho Biotech), received a subpoena from the U.S. Office of Inspector General’s Denver, Colorado field office seeking documents directed to sales and marketing of PROCRIT® (Epoetin alfa) from 1997 to the present, as well as to dealings with U.S. Oncology Inc., a healthcare services network for oncologists. Ortho Biotech has responded to the subpoena.

In September 2004, plaintiffs in an employment discrimination litigation initiated against the Company in 2001 in Federal District Court in New Jersey moved to certify a class of all African American and Hispanic salaried employees of the Company and its affiliates in the U.S., who were employed at any time from November 1997 to the present. Plaintiffs seek monetary damages for the period 1997 through the present (including punitive damages) and equitable relief. The Court denied plaintiffs’ class certification motion in December 2006 and their motion for reconsideration in April 2007. Plaintiffs sought to appeal these decisions and, in April 2008, the Court of Appeals ruled that plaintiffs’ appeal of the denial of class certification was untimely.  Plaintiffs are now seeking further discovery of class issues and individual plaintiffs’ claims.

25

In March 2005, DePuy Orthopaedics, Inc. (DePuy), a Johnson & Johnson subsidiary, received a subpoena from the U.S. Attorney’s Office, District of New Jersey, seeking records concerning contractual relationships between DePuy and surgeons or surgeons-in-training involved in hip and knee replacement and reconstructive surgery. This investigation was resolved by DePuy and the four other leading suppliers of hip and knee implants in late September 2007 by agreements with the U.S. Attorney’s Office for the District of New Jersey. The settlements include an 18-month Deferred Prosecution Agreement (DPA), acceptance by each company of a monitor to assure compliance with the DPA and, with respect to four of the five companies, payment of settlement monies and entry into five year Corporate Integrity Agreements. DePuy paid $85 million as its settlement.  In November 2007, the Attorney General of the Commonwealth of Massachusetts issued a civil investigative demand to DePuy seeking information regarding financial relationships between a number of Massachusetts-based orthopedic surgeons and providers and DePuy, which relationships had been publicly disclosed by DePuy pursuant to the DPA. In February 2008, DePuy received a written request for information from the U.S. Senate Special Committee on Aging, as a follow-up to earlier inquiries, concerning a number of aspects of the DPA.

In June 2005, the U.S. Senate Committee on Finance requested the Company to produce information regarding use by several of its pharmaceutical subsidiaries of educational grants. A similar request was sent to other major pharmaceutical companies. In July 2005, the Committee specifically requested information about educational grants in connection with the drug PROPULSID®. A follow up request was received from the Committee for additional information in January 2006. On October 30, 2007 another letter was received from the U.S. Senate Committee on Finance requesting information concerning payments to a list of physicians, and specification as to whether any such payments were for continuing medical education, honoraria, research support, etc. The Company has responded to these requests.

In July 2005, Scios Inc. (Scios), a Johnson & Johnson subsidiary, received a subpoena from the U.S. Attorney’s Office, District of Massachusetts, seeking documents related to the sales and marketing of NATRECOR®. Scios is responding to the subpoena. In early August 2005, Scios was advised that the investigation would be handled by the U.S. Attorney’s Office for the Northern District of California in San Francisco.

In September 2005, Johnson & Johnson received a subpoena from the U.S. Attorney’s Office, District of Massachusetts, seeking documents related to sales and marketing of eight drugs to Omnicare, Inc., a manager of pharmaceutical benefits for long-term care facilities. The Johnson & Johnson subsidiaries involved responded to the subpoena. Several employees of the Company’s pharmaceutical subsidiaries have been subpoenaed to testify before a grand jury in connection with this investigation.

26

In November 2005, Amgen filed suit against Hoffmann-LaRoche, Inc. in the U.S. District Court for the District of Massachusetts seeking a declaration that the Roche product CERA, which Roche has indicated it would seek to introduce into the United States, infringes a number of Amgen patents concerning EPO. Amgen licenses EPO for sale in the United States to Ortho Biotech for non-dialysis indications. Trial in this action concluded in October 2007 with a verdict in Amgen’s favor, finding the patents valid and infringed.  The judge issued a preliminary injunction blocking the CERA launch, but said he was considering modifying that injunction to grant Roche a compulsory license that would allow it to launch in the U.S. if it paid a 22.5 percent royalty.  Before the judge decided whether to grant Roche the compulsory license, however, Roche appealed the original granting of the preliminary injunction to the U.S. Court of Appeals for the Federal Circuit.

In late December 2005 and early 2006, three purported class actions were filed on behalf of purchasers of endo-mechanical instruments against the Company and its wholly-owned subsidiaries, Ethicon, Inc., Ethicon Endo-Surgery, Inc., and Johnson & Johnson Health Care Systems, Inc. These cases challenge suture and endo-mechanical contracts with Group Purchasing Organizations and hospitals, in which discounts are predicated on a hospital achieving specified market share targets for both categories of products. These actions have been filed in the United States District Court for the Central District of California.

In February 2006, Johnson & Johnson received a subpoena from the U.S. Securities & Exchange Commission (SEC) requesting documents relating to the participation by several Johnson & Johnson subsidiaries in the United Nations Iraq Oil for Food Program.  The subsidiaries are cooperating with the SEC and U.S. Department of Justice (DOJ) in producing responsive documents.

In September 2006, Janssen received a subpoena from the Attorney General of the State of California seeking documents regarding sales and marketing and side-effects of RISPERDAL®, as well as interactions with State officials regarding the State’s formulary for Medicaid-reimbursed drugs. Janssen has responded to the subpoena.

In February 2007, Johnson & Johnson voluntarily disclosed to the DOJ and the SEC that subsidiaries outside the United States are believed to have made improper payments in connection with the sale of medical devices in two small-market countries, which payments may fall within the jurisdiction of the Foreign Corrupt Practices Act (FCPA). In the course of continuing dialogues with the agencies, other issues potentially rising to the level of FCPA violations in additional markets have been brought to the attention of the agencies by the Company. The Company has provided and will continue to provide additional information to DOJ and SEC, and will cooperate with the agencies’ reviews of these matters.  Law enforcement agencies of a number of other countries are also pursuing investigations of matters voluntarily disclosed by the Company to DOJ and SEC.

27

In March 2007, Cordis received a letter request for documents from the Committee on Oversight and Government Reform of the U.S. House of Representatives regarding marketing and safety of drug-eluting stents. Cordis has responded to the request.

In March 2007, the Company received separate subpoenas from the U.S. Attorney’s Office in Philadelphia, the U.S. Attorney’s Office in Boston and the U.S. Attorney’s Office in San Francisco. The subpoenas relate to investigations by these three offices referenced above concerning, respectively, sales and marketing of RISPERDAL® by Janssen, TOPAMAX® by Ortho-McNeil and NATRECOR® by Scios. The subpoenas request information regarding the Company’s corporate supervision and oversight of these three subsidiaries, including their sales and marketing of these drugs. The Company  responded to these requests. In addition, the U.S. Attorney’s office in Boston has issued subpoenas for grand jury testimony to several employees of Johnson & Johnson.

In March 2007, the Company received a letter from the Committee on Energy and Commerce of the U.S. House of Representatives seeking answers to several questions regarding marketing and safety of PROCRIT®, the erythropoietin product sold by Ortho-Biotech. In March 2008, the Committee on Energy and Commerce sent the Company a second letter focused on direct-to-consumer advertising for PROCRITâ. In May 2007, Senator Grassley, the ranking member of the U.S. Senate Committee on Finance, sent the Company a letter seeking information relating to PROCRIT®. The Company provided its initial response in July 2007.  By letter dated February 11, 2008, the Senate Finance Committee requested further rebate information for Ortho Biotech’s five largest physicians and/or group practices in each state.  In May 2007, the New York State Attorney General issued a subpoena seeking information relating to PROCRIT®. Like the House and Senate requests, the subpoena asks for materials relating to PROCRIT® safety, marketing and pricing. The Company is responding to these requests.

In April 2007, the Company received two subpoenas from the Office of the Attorney General of the State of Delaware. The subpoenas seek documents and information relating to nominal pricing agreements. For purposes of the subpoenas, nominal pricing agreements are defined as agreements under which the Company agreed to provide a pharmaceutical product for less than ten percent of the Average Manufacturer Price for the product. The Company responded to these requests.

In August 2007, the Company received a request for documents and interviews of witnesses from the Committee on Energy and Commerce of the U.S. House of Representatives concerning GMP (Good Manufacturing Practice) issues involving the CYPHER® Stent. The letter states that FDA inspectors in 2003 identified “numerous systemic violations” of GMP’s in connection with CYPHER® manufacturing but nonetheless allowed Cordis to continue marketing CYPHER® Stents. Cordis has responded to this request.

28

In October 2007, the Company received a request for documents from Senator Grassley on behalf of the Committee on Finance of the U.S. Senate concerning continuing medical education payments to specific physicians. The Company responded to this request.

In November 2007, the Company received a request from United States Senators Byron Dorgan and Olympia Snowe seeking information relating to the Company’s oversight of foreign manufacturing facilities.  The Company responded in January 2008.

In December 2007, the Company and its subsidiary Janssen received a request from Senator Grassley on behalf of the Committee on Finance of the U.S. Senate for documents and information concerning the marketing and promotion of RISPERDAL® for use by nursing home patients. The companies responded to this request.

In January 2008, the European Commission (“EC”) began an industry-wide antitrust inquiry concerning competitive conditions within the pharmaceutical sector.  Because this is a sector inquiry, it is not based on any specific allegation that the company has violated EC competition law.  The inquiry began with unannounced raids of a substantial number of pharmaceutical companies throughout Europe, including Johnson & Johnson affiliates.  In March 2008, the EC issued detailed questionnaires to approximately 100 companies, including Johnson & Johnson affiliates.

In March 2008, the Company received a letter request from the Attorney General of the State of Michigan. The request seeks documents and information relating to nominal price transactions.  The Company is responding to the request and will cooperate with the inquiry.

In June 2008 Johnson & Johnson received a subpoena from the United States Attorneys Office for the District of Massachusetts relating to the marketing of biliary stents by the company’s Cordis subsidiary.  Cordis is cooperating in responding to the subpoena.

With respect to all the above matters, the Company and its subsidiaries are vigorously contesting the allegations asserted against them and otherwise pursuing defenses to maximize the prospect of success. The Company and its subsidiaries involved in these matters continually evaluate their strategies in managing these matters and, where appropriate, pursue settlements and other resolutions where those are in the best interest of the Company.

The Company is also involved in a number of other patent, trademark and other lawsuits incidental to its business. The ultimate legal and financial liability of the Company in respect to all claims, lawsuits and proceedings referred to above cannot be estimated with any certainty. However, in the Company’s opinion, based on its examination of these matters, its experience to date and discussions with counsel, the ultimate outcome of legal proceedings, net of liabilities accrued in the Company’s balance sheet, is not expected to have a material adverse effect on the Company’s financial position, although the resolution in any reporting period of one or more of these matters could have a significant impact on the Company’s results of operations and cash flows for that period.

29

NOTE 13 Fair Value Measurements

During the fiscal first quarter of 2008, the Company adopted SFAS No. 157, Fair Value Measurements, except for non-financial assets and liabilities recognized or disclosed at fair value on a non-recurring basis, for which the effective date is fiscal years beginning after November 15, 2008.  SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. During the fiscal first quarter of 2008, the Company adopted SFAS No. 159, Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits the Company to measure certain financial assets and financial liabilities at fair value. The Company assessed the fair value option made available upon adopting SFAS No. 159, and has elected not to apply the fair value option to any financial instruments that were not already recognized at fair value.

SFAS No. 157 defines fair value as the exit price that would be received to sell an asset or paid to transfer a liability. Fair value is a market-based measurement that should be determined using assumptions that market participants would use in pricing an asset or liability. The statement establishes a three-level hierarchy to prioritize the inputs used in measuring fair value.  The levels within the hierarchy are described in the table below with level 1 having the highest priority and level 3 having the lowest.

The following table provides a summary of the significant assets and liabilities that are measured at fair value as of June 29, 2008.

(Dollars in Millions)
     
Quoted prices in active markets for identical assets
 
Significant other observable inputs
 
Significant unobservable inputs
   
June 29, 2008
 
Level 1
 
Level 2
 
Level 3
Assets
               
Derivative instruments
  $ 973       $ 973    
                     
Liabilities
                   
Derivative instruments
  $ 1,860       $ 1,860    

The Company uses forward exchange contracts to manage its exposure to the variability of cash flows, primarily related to the foreign exchange rate changes on future intercompany and third party purchases of raw materials denominated in foreign currency.  The Company also uses currency swaps to manage currency risk primarily related to borrowings. The fair value of derivative instruments is the aggregation, by currency, of all future cash flows discounted to present value at prevailing market interest rates, and subsequently converted to the United States dollar at the current spot foreign exchange rate. The Company does not believe that fair values of these derivative instruments materially differs from the amounts that could be realized upon settlement or maturity, or that the changes in fair value will have a material effect on the Company’s results of operations, cash flows or financial position.

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The Company did not have any other significant financial assets or liabilities, which would require revised valuations under SFAS No. 157 that are recognized at fair value.

NOTE 14    Subsequent Events
The Company has reached a settlement with Amgen concerning litigation regarding Amgen’s contracting practices that had an impact on the Company’s sales of PROCRITâ in certain markets. The settlement included a $200 million payment made by Amgen in the third quarter of 2008.

On July 30, 2008 the Company completed the acquisition of Beijing Dabao Cosmetics Co., LTD, a company that sells personal care brands in China.


Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
         FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations
Analysis of Consolidated Sales
For the first fiscal six months of 2008, worldwide sales were $32.6 billion, a total increase of 8.2% including an operational increase of 2.8% over 2007 first fiscal six months sales of $30.2 billion. Currency had a positive impact of 5.4% for the period.

Sales by U.S. companies were $16.7 billion in the first fiscal six months of 2008, which represented an increase of 2.4% over the same period last year.  Sales by international companies were $15.9 billion, which represented a total increase of 15.0% including an operational increase of 3.4%, and a positive impact from currency of 11.6% over the first fiscal six months of 2007.

Sales by companies in Europe achieved total growth of 14.7%, including an operational growth of 1.6% and a positive impact from currency of 13.1%.  Sales by companies in the Western Hemisphere, excluding the U.S., achieved total growth of 16.0% including operational growth of 4.7% and a positive impact from currency of 11.3%. Sales by companies in the Asia-Pacific, Africa region posted sales growth of 14.9%, with operational growth of 5.9% and a positive impact from currency of 9.0%.

For the fiscal second quarter of 2008, worldwide sales were $16.4 billion, a total increase of 8.7% and an operational increase of 3.1%, over 2007 fiscal second quarter sales of $15.1 billion.  Currency fluctuations positively impacted sales by 5.6% for the period.

Sales by U.S. companies were $8.2 billion in the fiscal second quarter of 2008, which represented an increase of 2.1%. Sales by international companies were $8.2 billion, which represented a total increase of 16.2%, including an operational increase of 4.3%, and a positive impact from currency of 11.9% over the fiscal second quarter of 2007.

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Sales by companies in Europe achieved total growth of 16.4%, with operational growth of 2.4% and a positive impact from currency of 14.0%.  Sales by companies in the Western Hemisphere, excluding the U.S., achieved total growth of 13.2%, operational growth of 3.3% and a positive impact from currency of 9.9%.  Sales by companies in the Asia-Pacific, Africa region posted sales growth of 17.6%, with operational growth of 8.5% and a positive impact from currency of 9.1%.


Analysis of Sales by Business Segments

Consumer
Consumer segment sales in the first fiscal six months of 2008 were  $8.1 billion, an increase of 14.7% over the same period a year ago, with 8.3% of operational growth and a positive currency impact of 6.4%. U.S. Consumer segment sales increased by 10.1% while international sales achieved growth of 18.6%, an operational increase of 7.0%, with a positive currency impact of 11.6%.


Major Consumer Franchise Sales – First Fiscal Six Months
       
(Dollars in Millions)
 
June 29, 2008
   
July 1, 2007
   
Total Change
   
Operations Change
   
Currency Change
 
OTC Pharm & Nutr
  $ 2,999     $ 2,463       21.8 %     15.7 %     6.1 %
Skin Care
    1,679       1,521       10.4       4.4       6.0  
Baby Care
    1,105       934       18.3       10.1       8.2  
Women’s Health
    965       884       9.2       1.5       7.7  
Oral Care
    794       713       11.4       6.3       5.1  
Wound Care/Other
    558       545       2.4       (2.3 )     4.7  
 
Total
  $ 8,100     $ 7,060       14.7 %     8.3 %     6.4 %



Consumer segment sales in the fiscal second quarter of 2008 were  $4.0 billion, an increase of 13.2% over the same period a year ago with 6.8% of operational growth and a positive currency impact of 6.4%. U.S. Consumer segment sales increased by 8.5% while international sales achieved growth of 17.0%, an operational increase of 5.6%, with a positive currency impact of 11.4%.


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Major Consumer Franchise Sales – Fiscal Second Quarter
       
(Dollars in Millions)
 
June 29, 2008
   
July 1, 2007
   
Total Change
   
Operations Change
   
Currency Change
 
OTC Pharm & Nutr
  $ 1,405     $ 1,206       16.5 %     10.5 %     6.0 %
Skin Care
    839       757       10.8       4.7       6.1  
Baby Care
    572       487       17.5       9.3       8.2  
Women’s Health
    504       463       8.9       1.1       7.8  
Oral Care
    408       354       15.3       9.7       5.6  
Wound Care/Other
    308       297       3.7       (0.8 )     4.5  
 
Total
  $ 4,036     $ 3,564       13.2 %     6.8 %     6.4 %


The OTC Pharmaceuticals and Nutritionals franchise achieved operational growth of 10.5% over prior year fiscal second quarter. A major contributor was the successful launch of over-the-counter ZYRTECâ in the U.S. during the fiscal first quarter of 2008. Additional contributors to the growth were Adult TYLENOLâ and SPLENDAâ products.

The Skin Care franchise operational growth of 4.7% over prior year fiscal second quarter was attributable to strong performances from the AVEENO®, CLEAN & CLEAR®, and NEUTROGENAâ product lines due to new product launches and strength in the core business. This growth was partially offset by lower sales of RoCâ products and the discontinuation of EVIANâ, a line of facial refreshers marketed in Europe.

The Baby Care franchise operational growth of 9.3% over prior year fiscal second quarter was the result of strong sales performance by wipes, haircare, lotion and oil product lines primarily in emerging markets.

The Women’s Health franchise operational growth was 1.1% over the prior year fiscal second quarter. International sales growth was partially offset by declines in the U.S. due to competition in the market place.

The Oral Care franchise operational growth of 9.7% was achieved by strong performance of LISTERINEâ mouthwash and dissolvable whitening strips, launched in the third quarter of 2007, partially offset by sales declines of other products.


Pharmaceutical
Pharmaceutical segment sales in the first fiscal six months of 2008 were $12.7 billion, a total increase of 3.2% over the same period a year ago with an operational decline of 0.9% and an increase of 4.1% related to the positive impact of currency. The U.S. Pharmaceutical sales decreased by 0.4% over the same period a year ago. Total growth in international Pharmaceutical sales was 9.6%, which reflected an operational sales decline of 1.8% and an increase of 11.4% related to the positive impact of currency.

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Major Pharmaceutical Product Revenues* – First Fiscal Six Months
(Dollars in Millions)
 
June 29, 2008
   
July 1, 2007
   
Total Change
   
Operations Change
   
Currency Change
 
 
REMICADE®
  $ 1,884     $ 1,600       17.8 %     17.8 %     - %
RISPERDALâ
    1,521       1,715       (11.3 )     (14.1 )     2.8  
TOPAMAX®
    1,323       1,188       11.4       9.3       2.1  
PROCRIT®/EPREX®
    1,281       1,575       (18.7 )     (23.2 )     4.5  
LEVAQUIN®/FLOXIN®
    847       843       0.5       0.2       0.3  
RISPERDALâ CONSTAâ
    652       539       21.0       12.0       9.0  
ACIPHEXâ/PARIETâ
    602       672       (10.4 )     (15.8 )     5.4  
CONCERTAâ
    569       508       12.0       9.4       2.6  
DURAGESIC®/Fentanyl Transdermal
    505       591       (14.6 )     (21.2 )     6.6  
Other
    3,585       3,139       14.2       6.9       7.3  
 
Total
  $ 12,769     $ 12,370       3.2 %     (0.9 )%     4.1 %

*Prior year amounts have been reclassified to conform to current presentation.

Pharmaceutical segment sales in the fiscal second quarter of 2008 were $6.3 billion, a total increase of 3.1% over the same period a year ago with an operational decline of 1.3% and an increase of 4.4% related to the positive impact of currency. U.S. Pharmaceutical sales decreased by 1.7% over the same period a year ago. Total growth in international Pharmaceutical sales was 11.3%, which reflected an operational sales decline of 0.6% and an increase of 11.9% related to the positive impact of currency.

Major Pharmaceutical Product Revenues* – Fiscal Second Quarter
(Dollars in Millions)
 
June 29, 2008
   
July 1, 2007
   
Total Change
   
Operations Change
   
Currency Change
 
 
REMICADE®
  $ 886     $ 869       2.0 %     2.0 %     - %
RISPERDALâ
    712       848       (16.0 )     (18.9 )     2.9  
TOPAMAX®
    677       578       17.1       14.8       2.3  
PROCRIT®/EPREX®
    652       758       (14.0 )     (18.8 )     4.8  
LEVAQUIN®/FLOXIN®
    351       364       (3.6 )     (3.9 )     0.3  
RISPERDALâ CONSTAâ
    343       278       23.4       14.2       9.2  
ACIPHEX®/PARIETâ
    325       336       (3.3 )     (8.6 )     5.3  
CONCERTAâ
    279       256       9.0       6.3       2.7  
DURAGESIC®/Fentanyl Transdermal
    272       288       (5.6 )     (13.5 )     7.9  
Other
    1,843       1,574       17.1       9.9       7.2  
 
Total
  $ 6,340     $ 6,149       3.1 %     (1.3 )%     4.4 %

*Prior year amounts have been reclassified to conform to current presentation.


REMICADE® (infliximab), a biologic approved for the treatment of Crohn’s disease, ankylosing spondylitis, psoriasis, psoriatic arthritis, ulcerative colitis and use in the treatment of rheumatoid arthritis, achieved operational growth of 2.0% over prior year fiscal second quarter. This growth was driven by market growth partially offset by a decrease in export sales due to customer production planning needs. Operational growth for the first fiscal six months of 2008 versus the same period a year ago was 17.8%, which the Company believes is more reflective of actual consumption in the first two fiscal quarters of 2008. REMICADE® is competing in a market which is experiencing increased competition due to new entrants and the expansion of indications for existing competitors.

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RISPERDAL® (risperidone), a medication that treats the symptoms of schizophrenia, bipolar mania and irritability associated with autistic behavior in indicated patients, experienced an operational decline of 18.9% versus the prior year. Sales outside the U.S. declined due to generic competition in most markets. Sales in the U.S. declined primarily due to lower inventory levels as wholesalers and retailers prepare for the entry of the generic product. For most major markets outside the U.S. the patent for the RISPERDAL® compound expired in December 2007. Market exclusivity for RISPERDAL® oral in the U.S. expired on June 29, 2008 and Janssen, a Johnson & Johnson subsidiary, launched an authorized generic version of RISPERDAL® oral on June 30, 2008. Loss of market exclusivity for RISPERDAL® oral patent is likely to result in a significant reduction in sales in the U.S. In the first fiscal six months of 2008, U.S. sales of RISPERDAL® oral were $1.1 billion.

TOPAMAX® (topiramate), which has been approved for adjunctive and monotherapy use in epilepsy, as well as for the prophylactic treatment of migraines, achieved strong operational growth of 14.8% as compared to prior year fiscal second quarter. The growth was primarily due to increases in the migraine category partially offset by generic competition in certain markets outside the U.S. The patent for TOPAMAX® (topiramate) in the U.S. will expire in September 2008. In July 2008, the U.S. Food and Drug Administration (FDA) granted pediatric exclusivity for TOPAMAXâ, which extends market exclusivity in the U.S. until March 2009. The expiration of a product patent or loss of market exclusivity is likely to result in a significant reduction in sales. In the first fiscal six months of 2008, U.S. sales of TOPAMAX® were $1.1 billion.

PROCRITâ (Epoetin alfa)/EPREXâ (Epoetin alfa) experienced an operational sales decline of 18.8%, as compared to prior year fiscal second quarter. The decline in PROCRITâ sales was due to the declining markets for Erythropoiesis Stimulating Agents (ESAs) in the U.S. Outside the U.S., new competition and label reviews have contributed to the lower sales results for EPREXâ. Discussions with European regulators regarding potential changes to the label for ESAs, including EPREXâ, are underway. The FDA issued an order requiring a labeling supplement making specific revisions to the label for ESAs, including PROCRITâ. The order requires this labeling supplement to be submitted to the FDA by August 14, 2008.

LEVAQUIN® (levofloxacin)/FLOXINâ experienced an operational decline of 3.9% over prior year fiscal second quarter, primarily due to the impact of generic competition in the category.

35

RISPERDAL® CONSTA® (risperidone), a long acting injectable for the treatment of schizophrenia, achieved operational growth of 14.2% over the prior year fiscal second quarter of 2007. Strong growth was due to a positive shift from oral to injectable therapies outside the U.S. The U.S. sales growth was due to higher market share and market growth.

ACIPHEXâ/PARIETâ, a proton pump inhibitor, experienced an operational decline of 8.6% as compared to prior year fiscal second quarter, primarily due to increased generic competition in the category.

CONCERTAâ (methylphenidate HCl), a product for the treatment of attention deficit hyperactivity disorder, achieved operational sales growth of 6.3% over the fiscal second quarter of 2007. The sales increase was due to market growth. Although the original CONCERTAâ patent expired in 2004, the FDA has not approved any generic version that is substitutable for CONCERTAâ. Two parties have filed Abbreviated New Drug Applications (ANDAs) for generic versions of CONCERTAâ, which are pending and may be approved at any time.

DURAGESIC®/Fentanyl Transdermal (fentanyl transdermal system) experienced an operational sales decline of 13.5% over the fiscal second quarter of 2007 due to continued generic erosion.

In the fiscal second quarter of 2008, Other Pharmaceutical sales achieved operational growth of 9.9% versus the prior year. The biggest contributor to the increase was VELCADEâ, a treatment for relapse multiple myeloma, which was co-developed with Millenium Pharmaceuticals.


Medical Devices and Diagnostics
Medical Devices and Diagnostics segment sales in the first fiscal six months of 2008 were $11.8 billion, an increase of 9.7% over the same period a year ago, with 3.6% of this change due to operational increases and the remaining 6.1% increase related to the positive impact of currency.  The U.S. Medical Devices and Diagnostics sales increase was 2.1% and the growth in international Medical Devices and Diagnostics sales was 16.8%, which included operational increases of 5.0% and an increase of 11.8% related to the positive impact of currency.


36


 
Major Medical Devices and Diagnostics Franchise Sales* – First Fiscal Six Months
(Dollars in Millions)
 
June 29, 2008
   
July 1, 2007
   
Total Change
   
Operations Change
   
Currency Change
 
DEPUY®
  $ 2,542     $ 2,292       10.9 %     6.1 %     4.8 %
ETHICON ENDO-SURGERY®
    2,127       1,848       15.1       8.3       6.8  
ETHICON®
    1,965       1,778       10.5       3.5       7.0  
CORDIS®
    1,687       1,780       (5.2 )     (11.0 )     5.8  
Diabetes Care
    1,289       1,145       12.6       6.2       6.4  
Vision Care
    1,246       1,066       16.9       10.0       6.9  
ORTHO-CLINICAL DIAGNOSTICS®
    919       829       10.9       5.5       5.4  
 
Total
  $ 11,775     $ 10,738       9.7 %     3.6 %     6.1 %

 *Prior year amounts have been reclassified to conform to current presentation.


 
Medical Devices and Diagnostics segment sales in the fiscal second quarter of 2008 were $6.1 billion, an increase of 12.1% over the same period a year ago, with 5.7% of this change due to operational growth and the remaining 6.4% increase related to the positive impact of currency.  The U.S. Medical Devices and Diagnostics sales increase was 4.0% and the growth in international Medical Devices and Diagnostics sales was 19.7%, which included operational growth of 7.3% and an increase of 12.4% related to the positive impact of currency.

Major Medical Devices and Diagnostics Franchise Sales* – Fiscal Second Quarter

(Dollars in Millions)
 
June 29, 2008
   
July 1, 2007
   
Total Change
   
Operations Change
   
Currency Change
 
DEPUY®
  $ 1,289     $ 1,135       13.6 %     8.5 %     5.1 %
ETHICON ENDO-SURGERY®
    1,124       957       17.5       10.4       7.1  
ETHICON®
    1,020       904       12.8       5.7       7.1  
CORDIS®
    852       852       -       (6.4 )     6.4  
Diabetes Care
    674       596       13.1       6.7       6.4  
Vision Care
    639       553       15.6       8.4       7.2  
ORTHO-CLINICAL DIAGNOSTICS®
    476       421       13.1       7.4       5.7  
 
Total
  $ 6,074     $ 5,418       12.1 %     5.7 %     6.4 %

 *Prior year amounts have been reclassified to conform to current presentation.


The DePuy franchise’s operational growth of 8.5% over the same period a year ago was primarily due to DePuy's orthopaedic joint reconstruction products including the hip and knee product lines and strong performance in the Mitek sports medicine products.

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The Ethicon Endo-Surgery franchise achieved operational growth of 10.4% over prior year fiscal second quarter. This growth was mainly driven by the continued success of the HARMONICâä business, and the Endocutter, a key product used in performing bariatric procedures for the treatment of obesity. Additional contributors to the growth were the REALIZEâ Gastric Band and Advanced Sterilization Products line.

The Ethicon franchise achieved operational growth of 5.7% from the same period in the prior year resulting from solid growth in Hemostasis, sutures, and mesh product lines.

The Cordis franchise experienced an operational sales decline of 6.4% over the fiscal second quarter of 2007. This decline was caused by loss of market share for the CYPHER® Sirolimus-eluting Coronary Stent due to market entry of a new competitor in the U.S. These results were partially offset by strong growth of the Biosense Webster business.


The Diabetes Care franchise achieved operational growth of 6.7% over the fiscal second quarter of 2007 reflecting the continued success of the ONETOUCHâ ULTRAâ product lines and the growth of the Animas business.

The Vision Care franchise achieved operational sales growth of 8.4%. ACUVUE® OASYS™, 1-DAY ACUVUE®MOISTTM, and ACUVUE® ADVANCETM for Astigmatism were the major contributors to this growth.

The Ortho-Clinical Diagnostics franchise achieved operational growth of 7.4% with the Immunohematology product line being the major contributor.

Cost of Products Sold and Selling, Marketing and Administrative Expenses
Consolidated costs of products sold for the first fiscal six months of 2008 decreased to 28.7% from 29.0% of sales as compared to the same period a year ago.  The cost of products sold for the fiscal second quarter of 2008 increased to 28.9% from 28.8% of sales in the same period a year ago. The increase in the fiscal second quarter was primarily due to the change in the mix of businesses, with stronger sales growth in the Consumer business and slower sales growth in the Pharmaceutical business.

Consolidated selling, marketing and administrative expenses for the first fiscal six months of 2008 increased to 32.6% from 32.5% as compared to the same period a year ago. Consolidated selling, marketing and administrative expenses for the fiscal second quarter of 2008 increased to 33.5% from 33.3% of sales in the same period a year ago. Increases in the quarterly and six month periods were primarily due to the change in the mix of businesses and increased promotional expenses associated with new product launches in the Medical Devices and Diagnostics business. The increase was partially offset by the impact of restructuring initiatives and cost containment efforts primarily in the Pharmaceutical business and lower integration costs in the Consumer business.

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Research & Development
Research activities represent a significant part of the Company’s business.  These expenditures relate to the development of new products, improvement of existing products, technical support of products and compliance with governmental regulations for the protection of the consumer. Worldwide costs of research activities, for the first fiscal six months of 2008 were $3.6 billion, an increase of 2.6% over the same period a year ago.    Research and development spending in the fiscal second quarter of 2008 was $1.9 billion, an increase of 1.6% over the fiscal second quarter of 2007. As a percent to sales, the level of research and development spending decreased for both the fiscal second quarter and the first fiscal six months of 2008 as compared to the same period a year ago. The decreases as a percent to sales in the quarterly and six month periods were primarily due to changes to the mix of businesses.


In-Process Research & Development(IPR&D)
In the fiscal second quarter and the first fiscal six months of 2008, the Company had $40 million of IPR&D charges with no tax benefit associated with the acquisition of Amic AB.

In the fiscal second quarter of 2007, the Company had no IPR&D charges. IPR&D charges of $807 million before and after tax were recorded during the first fiscal six months of 2007 related to the acquisitions of Conor Medsystems Inc.


Other (Income) Expense, Net
Other  (income) expense, net is the account where the Company records gains and losses related to the sale and write-down of certain equity securities of the Johnson & Johnson Development Corporation, gains and losses on the disposal of fixed assets, currency gains and losses, minority interests, litigation settlements, as well as royalty income. As a percent to sales, other (income) expense, net for the fiscal second quarter of 2008 was similar to the fiscal second quarter of 2007. The unfavorable change in other (income) expense, net for the first fiscal six months of 2008 as compared to the same period a year ago was $192 million. This was primarily due to the net gain of $175 million before tax related to the divestiture of certain brands recorded in the fiscal first quarter of 2007.

OPERATING PROFIT BY SEGMENT
Consumer Segment
Operating profit for the Consumer segment as a percent to sales in the first fiscal six months of 2008 was 17.4% versus 17.6% over the same period a year ago. This decrease was primarily due to the net gain of $175 million before tax related to the divestitures of certain brands recorded in the fiscal first quarter of 2007. Operating profit as a percent to sales in the fiscal second quarter of 2008 was 16.9% versus 13.5% over the same period a year ago. The increase in the fiscal second quarter was due to cost synergies, lower integration costs related to the acquisition of the Consumer Healthcare Business of Pfizer Inc. and other cost containment initiatives.

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Pharmaceutical Segment
Operating profit for the Pharmaceutical segment as a percent to sales in the first fiscal six months of 2008 was 35.3% versus 35.7% over the same period a year ago. Operating profit as a percent to sales in the fiscal second quarter of 2008 was 33.8% versus 34.7% over the same period a year ago.  For both periods in 2008, operating profit margin declined, as compared to the same periods a year ago. This was due to the change in product mix, primarily the RISPERDALâ oral loss of exclusivity outside the U.S. during 2008.


Medical Devices and Diagnostics Segment
Operating profit for the Medical Devices and Diagnostics segment as a percent to sales in the first fiscal six months of 2008 was 29.7% versus 20.8% over the same period a year ago. The primary driver of the improvement in the operating profit margin in the Medical Devices and Diagnostics segment for the fiscal six months over the same period a year ago was the acquisition related IPR&D charges of $40 million incurred during the fiscal six months of 2008 versus IPR&D charges of $807 million incurred during the fiscal six months of 2007. Operating profit as a percent to sales in the fiscal second quarter of 2008 was 28.0% versus 28.1% over the same period a year ago. The decrease was primarily due to the acquisition related IPR&D charges of $40 million incurred during the fiscal second quarter of 2008.

Interest (Income) Expense
Interest income decreased in both the first fiscal six months and fiscal second quarter of 2008 as compared to the same periods a year ago, due to lower rates of interest earned, despite higher average cash balances. The ending balance of cash, cash equivalents and marketable securities, was $13.1 billion at the end of the fiscal second quarter of 2008.  This is an increase of $7.1 billion from the same period a year ago. The increase was primarily due to cash generated from operating activities.

Interest expense increased in both the first fiscal six months and fiscal second quarter of 2008 as compared to the same periods a year ago, due to a higher debt position of $13.9 billion at the end of the fiscal second quarter of 2008, compared to $6.5 billion from the same period a year ago. The higher debt balance was due to increased borrowings primarily to purchase common stock under the ongoing Common Stock repurchase program announced on July 9, 2007.

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Provision For Taxes on Income
The worldwide effective income tax rates for the first fiscal six months of 2008 and 2007 were 24.1% and 26.4%, respectively. The decrease in the effective tax rate of 2.3% was primarily due to the lower in-process research and development (IPR&D) charge of $40 million with no tax benefit recorded in the first fiscal six months of 2008 versus the higher IPR&D charges of $807 million with no tax benefit recorded in the first fiscal six months of 2007.

At June 29, 2008 the Company had approximately $1.8 billion of liabilities from unrecognized tax benefits. The Company does not expect that the total amount of unrecognized tax benefits will significantly change during the next twelve months.

See Note 8 to the Consolidated Financial Statements in the Annual Report on Form 10-K for the fiscal year ended December 30, 2007 for more detailed information regarding unrecognized tax benefits.


LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Cash generated from business operations provided the major sources of funds for the growth of the business, including working capital, capital expenditures, and acquisitions. In the first fiscal six months of 2008, cash flow from operations was $6.1 billion, a decrease of $0.7 billion over the same period a year ago. The decrease was primarily due to the change of $0.9 billion in accounts payable and accrued liabilities versus the same period a year ago. Net cash used by investing activities decreased by $2.6 billion primarily due to a decrease of $1.3 billion in acquisition activity and an increase of $1.6 billion in the maturity and sales of investments, net of purchases. This decrease was partially offset by a $0.2 billion decrease in proceeds from the disposal of assets versus the same period a year ago which included the divestitures of certain products related to the acquisition of Consumer Healthcare business of Pfizer Inc in the first quarter of 2007. Net cash used by financing activities decreased by $1.3 billion versus the same period a year ago. An increase of $4.3 billion in net proceeds from short and long-term debt was partially offset by an increase of $2.9 billion for the repurchase of common stock primarily associated with the stock repurchase program announced on July 9, 2007. Cash and current marketable securities were $13.1 billion at the end of the fiscal second quarter of 2008 as compared with $6.0 billion at fiscal second quarter of 2007, an increase of $7.1 billion, primarily due to cash generated from operating activities.

On June 18, 2008 the Company issued an aggregate of $1.6 billion in long-term notes, comprised of $0.9 billion of 5.150% Notes due in 2018 and $0.7 billion of 5.850% Notes due in 2038. The proceeds of the notes issuances were principally used to convert short-term debt to long-term debt as market conditions presented an opportunity to issue long-term debt at reasonable rates.

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