Operating margin in 2003 was 17.1% of revenues, compared with 17.0% in 2002. Operating income in 2003 of $761 million included $27 million of non-cash charges, as discussed earlier. Operating income in 2002 of $674 million included $22 million of special charges, as discussed earlier. Excluding these charges, operating margin was about the same in both years.

Non-Operating Income and Expenses

Net interest expense was $37 million in 2003, compared with $33 million in 2002. This increase was primarily due to higher long-term debt levels and a reduction in capitalized interest, partially offset by lower short-term interest rates and lower short-term debt levels.

     Other expense, net of $3 million in 2003 consisted primarily of write downs of investments and intangible assets of $5 million, which were partially offset by foreign exchange gains of $2 million. Other expense, net of $14 million in 2002 included net losses on investments of $19 million, which reflect declines in fair values that were deemed other than temporary. Also included in other expense, net in 2002 were foreign exchange gains of $16 million that were substantially offset by write downs of assets held for sale and asset abandonments of $14 million.

Income Taxes

The effective tax rate in 2003 was 23.1%, which includes the impact from the 2003 non-cash charges, compared to 23.6% in 2002, which includes the impact from the 2002 special charges.

Income and Diluted Earnings per Share from Continuing Operations

Income and diluted earnings per share from continuing operations in 2003 were $555 million and $2.10 respectively. Non-cash charges in 2003, as discussed earlier, reduced income from continuing operations by $16 million and diluted earnings per share from continuing operations by 6 cents. Income and diluted earnings per share from continuing operations in 2002 were $479 million and $1.79, respectively. Special charges reduced income from continuing operations by $17 million and diluted earnings per share from continuing operations by 6 cents in 2002.

Discontinued Operations

Loss and diluted earnings per share from discontinued operations in 2003 were $8 million and 3 cents, respectively. Fiscal 2003 results included a $4 million after-tax charge relating to the write down of certain inventory and intellectual property. Income from discontinued operations in 2002 was $.6 million, which was less than 1 cent per diluted share.

Liquidity and Capital Resources

Cash Flows from Continuing Operating Activities

Cash provided by continuing operations was $903 million in 2003 compared to $829 million in 2002. Cash provided by continuing operations was reduced by $112 million and $110 million in 2003 and 2002, respectively, reflecting the impact of cash contributions to pension plans. Inventories increased by $114 million during 2003 to $776 million, due primarily to foreign currency translation adjustments and increases in inventory of blood glucose monitoring products in anticipation of future sales.

Cash Flows from Continuing Investing Activities

Capital expenditures were $259 million in 2003, compared to $256 million in 2002. Medical and Diagnostics capital spending, which totaled $167 million and $62 million, respectively in 2003, included spending for various capacity expansions as well as safety-engineered devices. Biosciences capital spending, which totaled $20 million in 2003, included spending on new products and manufacturing capacity expansions.

Cash Flows from Continuing Financing Activities

Net cash used for continuing financing activities was $289 million in 2003 as compared to $313 million during 2002. Total debt at September 30, 2003, was $1.3 billion compared with $1.2 billion at September 30, 2002. Short-term debt declined to 9% of total debt at the end of 2003, from 35% at the end of 2002. This change was attributable to the issuance to the public in April 2003 of $200 million of 10-year 4.55% Notes and $200 million of 15-year 4.9% Notes, the net proceeds from which were used to repay commercial paper. Floating rate debt was 55% of total debt at the end of 2003 and 59% of total debt at the end of 2002. Our weighted average cost of total debt at the end of 2003 was 3.8%, down slightly from 4% at the end of 2002 due to lower short-term interest rates. Debt-to-capitalization at September 30, 2003, improved to 30.4% from 32.6% in 2002. Cash and equivalents were $520 million and $243 million at September 30, 2003 and 2002, respectively.

Long-Term Incentive Program

In February 2004, our shareholders approved a long-term incentive program for employees consisting of stock options, restricted stock units, and stock appreciation rights. Restricted stock units represent the right to receive a share of BD’s common stock upon vesting and, in 2005, are expected to be awarded in three varieties: time-vested restricted stock units, which vest after three years from the date of grant; performance restricted stock units which vest after three years from the date of grant and whose award value is directly linked to BD’s three-year financial performance in certain areas; and career restricted stock units, which vest one year after the employee’s retirement.

     In addition, beginning in our first quarter of fiscal 2005, we plan to voluntarily adopt the recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation.” We expect to use the modified prospective method as described in SFAS No. 148, “Accounting for Stock-Based Compensation–Transition and Disclosure,” to adopt this accounting. Under this method, stock-based employee compensation cost will be recognized from the beginning of fiscal 2005 as if the fair value based accounting method had been used to account for all unvested stock options.

     We expect compensation expense associated with the long-term incentive plan and the SFAS No. 123 adoption to impact the full year fiscal 2005 diluted earnings per share from continuing operations by approximately $.15 to $.17.

Critical Accounting Policies

The Financial Review discusses our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as the disclosure of contingent assets and liabilities at the date of the financial statements. Some of those judgments can be subjective and complex and consequently, actual results could differ from those estimates. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. For any given estimate or assumption made by management, there may also be other estimates or assumptions that are reasonable. However, we believe that given the current facts and circumstances, it is unlikely that applying any such alternative judgments would materially impact the accompanying financial statements. Management believes the following critical accounting policies affect the more significant judgments and estimates used in the preparation of BD’s consolidated financial statements.

Revenue Recognition

We recognize revenue for certain instruments sold from the Biosciences segment upon installation at a customer’s site. Based upon terms of the sales agreements, the Biosciences segment recognizes revenue in accordance with Emerging Issues Task Force No. 00-21, “Revenue Arrangements with Multiple Deliverables.” These sales agreements have multiple deliverables, and as such are divided into separate units of accounting. Revenue is recognized upon the completion of each deliverable. Substantially all other revenue is recognized when products are shipped and title passes to customers.

     A large part of BD’s domestic businesses sell products to distributors who resell the products to the end-user customers. We provide rebates to distributors that sell to end-user customers at prices determined under a contract between BD and the end-user customer or distributor. We estimate the amount of the rebate that will be paid, and record the liability as a reduction of revenues when we record the sale of the product.

Impairment of Assets

Pursuant to SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill and indefinite-lived intangible assets are subject to impairment reviews at least annually, or whenever indicators of impairment arise. Intangible assets other than goodwill and indefinite-lived intangible assets and other long-lived assets are reviewed for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Refer to Note 1 of the Notes to Consolidated Financial Statements for further information. Impairment reviews are based on a cash flow approach that requires significant management judgment with respect to future volume, revenue and expense growth rates, changes in working capital use, appropriate discount rates and other assumptions and estimates. The estimates and assumptions used are consistent with BD’s business plans. The use of alternative estimates and assumptions could increase or decrease the estimated fair value of the asset, and potentially result in different impacts to BD’s results of operations. Actual results may differ from management’s estimates.

Investments

We hold minority interests in companies having operations or technology in areas within or adjacent to BD’s strategic focus. Some of these companies are publicly traded, and for them market prices are available. Some, however, are non-publicly traded and their fair value is difficult to determine. We write down an investment when management believes an investment has experienced a decline in value that is other than temporary. Future adverse changes in market conditions or poor operating results of the underlying investments could result in an inability to recover the carrying value of the investments, thereby possibly requiring impairment charges in the future.

Tax Valuation Allowances

BD maintains valuation allowances where it is likely that all or a portion of a deferred tax asset will not be realized. Changes in valuation allowances are included in our tax provision in the period of change. In determining whether a valuation allowance is warranted, management evaluates factors such as prior earnings history, expected future earnings, carry-back and carry-forward periods, and tax strategies that could potentially enhance the likelihood of realization of a deferred tax asset.

Contingencies

We are involved, both as a plaintiff and a defendant, in various legal proceedings that arise in the ordinary course of business, including, without limitation, product liability and environmental matters, as further discussed in Note 13 of the Notes to Consolidated Financial Statements. We assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. In accordance with U.S. generally accepted accounting principles, we establish accruals to the extent probable future losses are estimable. A determination of the amount of accruals, if any, for these contingencies is made after careful analysis of each individual issue and, when appropriate, is developed after consultation with outside counsel. The accruals may change in the future due to new developments in each matter or changes in our strategy in dealing with these matters.

Benefit Plans

We have significant pension and postretirement benefit costs and credits that are developed from actuarial valuations. Inherent in these valuations are key assumptions including discount rates and expected return on plan assets. We consider current market conditions, including changes in interest rates and market returns, in selecting these assumptions. Changes in the related pension and postretirement benefit costs or credits may occur in the future due to changes in the assumptions.

Stock-Based Compensation

As permitted by SFAS No. 123, “Accounting for Stock-Based Compensation,” we currently account for stock options by the disclosure-only provision of this Statement, and, therefore, we use the intrinsic value method as prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” for accounting for stock-based compensation. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of our stock at the date of the option grant over the exercise price. We have not incurred any such compensation expense during the last three fiscal years.

     If we had elected to account for our stock-based compensation awards issued subsequent to October 1, 1995, using the fair value method, the estimated fair value of awards would have been charged against income on a straight-line basis over the vesting period, which generally ranges from zero to four years. For the year ended September 30, 2004, our net income and diluted earnings per share would have been lower by an estimated $32 million and 11 cents, respectively, under the fair value method. This effect may not be representative of the pro forma effect on net income in future years. See discussion above regarding our planned adoption of the recognition provisions of SFAS No. 123 in fiscal 2005.

Cautionary Statement Pursuant to Private Securities Litigation Reform Act of 1995–”Safe Harbor” for Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 (the “Act”) provides a safe harbor for forward-looking statements made by or on behalf of BD. BD and its representatives may from time to time make certain forward-looking statements in publicly released materials, both written and oral, including statements contained in this report and filings with the Securities and Exchange Commission and in our other reports to shareowners. Forward-looking statements may be identified by the use of words like “plan,” “expect,” “believe,” “intend,” “will,” “anticipate,” “estimate” and other words of similar meaning in conjunction with, among other things, discussions of future operations and financial performance, as well as our strategy for growth, product development, regulatory approvals, market position and expenditures. All statements that address operating performance or events or developments that we expect or anticipate will occur in the future–including statements relating to volume growth, sales and earnings per share growth and statements expressing views about future operating results–are forward-looking statements within the meaning of the Act.

     Forward-looking statements are based on current expectations of future events. The forward-looking statements are and will be based on management’s then-current views and assumptions regarding future events and operating performance, and speak only as of their dates. Investors should realize that if underlying assumptions prove inaccurate or unknown risks or uncertainties materialize, actual results could vary materially from our expectations and projections. Investors are therefore cautioned not to place undue reliance on any forward-looking statements. Furthermore, we undertake no obligation to update or revise any forward-looking statements whether as a result of new information, future events and developments or otherwise.