Biosciences Segment
Biosciences revenues in 2006 of $877 million increased $77 million, or 10%, over 2005, which reflected an estimated impact of unfavorable foreign currency translation of 1 percentage point.

     The following is a summary of revenues by organizational unit:

(millions of dollars)	2006			2005			Total Change*			Estimated Foreign Exchange Impact
Immunocytometry Systems	$	503		$	452			11%			(1%	)
Pharmingen		157			141			12%			(1%	)
Discovery Labware		216			207			5%			(1%	)
Total Revenues*	$	877		$	800			10%			(1%	)

     Revenue growth in the Immunocytometry Systems unit reflects strong sales of instruments and flow cytometry reagents, driven by increased demand for research and clinical analyzers. Revenue growth in the Immunocytometry Systems and Pharmingen units was favorably impacted by approximately $5 million and $12 million, respectively, due to the cancellation of a distribution agreement in 2005. As a result of an inventory repurchase obligation to this distributor upon termination of the arrangement, certain sales made to this distributor in the latter part of 2005 were not recognized as revenue. In addition, sales in 2006 were favorably impacted by higher average selling prices as a result of terminating the arrangement. Revenue growth in the Discovery Labware unit resulted primarily from market share gains. For 2007, we expect the full year revenue growth for the Biosciences Segment to be about 8%.

     Biosciences operating income was $213 million, or 24.3% of Biosciences revenues in 2006, compared with $175 million, or 21.9% in 2005. The increase in operating income, as a percentage of revenues, reflects gross profit improvement from the favorable impact of terminating a distribution agreement in 2005, increased operating efficiencies, as well as relatively higher sales growth of products that have higher overall gross profit margins. See further discussion on gross profit margin below. Selling and administrative expense as a percent of Biosciences revenues was lower compared with 2005, primarily due to higher revenues and the absence of $8 million of costs incurred in 2005 associated with the termination of the distribution agreement, mentioned above. Research and development expense in 2006 increased $5 million, or 8%, reflecting spending on new product development and advanced technology, particularly in the Immunocytometry Systems unit and BioImaging products.

Geographic Revenues
Revenues in the United States in 2006 of $2.8 billion increased 9%. U.S. sales of safety-engineered devices were approximately $917 million in 2006, compared with $842 million in 2005. Growth was also led by strong sales of diabetes care products, prefilled flush syringes and prefillable syringes. Revenues of immunocytometry instruments and reagents also demonstrated good growth.

     Revenues outside the United States in 2006 increased 6% to $3 billion, reflecting an estimated impact of unfavorable foreign currency translation of 2 percentage points. Growth was led by strong sales in our Asia Pacific, Canadian and European regions in 2006. International sales of safety-engineered devices were approximately $324 million in 2006, compared with $273 million in 2005.

Gross Profit Margin
     Gross profit margin was 50.5% in 2006, compared with 50.8% in 2005. Gross profit margin in the current year included BGM exit costs of $51 million, which reduced gross profit margin by 0.9%. Gross profit margin in the current year also reflected an estimated 0.7% improvement relating to relatively higher sales growth of products with higher margins, and an estimated 0.5% improvement primarily related to productivity gains. These improvements were partially offset by an estimated 0.2% impact from foreign currency translation, an estimated 0.3% unfavorable impact of higher raw material costs and 0.1% relating to an increase in share-based compensation. We expect gross profit margin to increase, on a reported basis, by about 140 basis points for 2007. This expected growth reflects a favorable comparison to 2006, which includes the BGM exit costs.

Operating Expenses
Selling and administrative expense of $1.5 billion in 2006 was 26.4% of revenues, compared with $1.4 billion or 26.8% of revenues in 2005. Aggregate expenses for 2006 reflect base spending increases of $49 million, in line with inflation. Selling and administrative expense in 2006 also reflected increases primarily in share-based compensation expense of $25 million and in expenses related to BGM of $27 million, of which $12 million represented exit costs. These increases were partially offset by a favorable foreign exchange impact of $13 million and by proceeds from insurance settlements of $17 million received in connection with our previously-owned latex glove business. Selling and administrative expense as a percentage of revenues is expected to decrease, on a reported basis, by about 80 to 100 basis points for 2007, reflecting the favorable impact of exiting the BGM product line.

     Research and development (“R&D”) expense in 2006 was $360 million, or 6.2% of revenues, compared with $272 million, or 5.0% of revenues, in 2005, and included a charge of $53 million for acquired in-process research and development associated with the GeneOhm acquisition. See Note 3 of the Notes to Consolidated Financial Statements for further discussion. The increase in R&D expenditures also reflected spending for new programs in each of our segments, as previously discussed. On a reported basis, R&D is expected to be in the $345 to $350 million range for 2007.

Operating Income
Operating margin in 2006 was 18.0% of revenues, compared with 19.0% in 2005. Operating income of $1.0 billion in 2006 included $63 million of BGM exit costs and $53 million of GeneOhm acquired in-process R&D, partially offset by $17 million of insurance settlement proceeds, all of which are discussed further above.

Non-Operating Expense and Income
Interest expense was $66 million in 2006, compared with $56 million in 2005. The increase reflected higher debt levels and the impact of higher interest rates on floating rate debt and on fixed-to-floating interest rate swap transactions. Such swap transactions consist of fair value hedges of certain fixed-rate instruments under which the difference between fixed and floating interest rates is exchanged at specified intervals. Interest income was $59 million in 2006, compared with $36 million in 2005, and reflected higher interest rates and cash balances.

Income Taxes
The effective tax rate in 2006 was 27.0% and reflected the unfavorable impact of the non-deductibility of the acquired in-process R&D charge. The effective tax rate in 2005 was 31.1% and reflected a 7.7% increase relating to the charge in 2005 attributable to the planned repatriation of earnings in 2006 under the American Jobs Creation Act of 2004. In addition, the effective tax rate in 2005 reflected a 1.0% benefit due to the reversal of tax accruals in connection with the conclusion of tax examinations in four non-U.S. jurisdictions. In 2007, we expect our effective tax rate to be about 27%.

Income and Diluted Earnings per Share from Continuing Operations
Income from continuing operations and diluted earnings per share from continuing operations in 2006 were $756 million and $2.95, respectively. The in-process R&D charge and the BGM charges decreased income from continuing operations and diluted earnings per share from continuing operations in the aggregate by $96 million and by $.38, respectively, in 2006. Income from continuing operations and diluted earnings per share from continuing operations in 2005 were $692 million and $2.66, respectively. The tax repatriation charge decreased income from continuing operations by $77 million and diluted earnings per share from continuing operations by $.30 in 2005.

Financial Instrument Market Risk
We selectively use financial instruments to manage the impact of foreign exchange rate and interest rate fluctuations on earnings. The counterparties to these contracts are highly rated financial institutions. We do not enter into financial instruments for trading or speculative purposes.

     We have foreign currency exposures throughout Europe, Asia Pacific, Canada, Japan and Latin America. We face transactional currency exposures that arise when we enter into transactions in non-hyperinflationary countries, generally on an intercompany basis, that are denominated in currencies other than our functional currency. We hedge substantially all such foreign exchange exposures primarily through the use of forward contracts and currency options. We also face currency exposure that arises from translating the results of our worldwide operations to the U.S. dollar at exchange rates that have fluctuated from the beginning of a reporting period. We purchase option and forward contracts to partially protect against adverse foreign exchange rate movements. Gains or losses on our derivative instruments are largely offset by the gains or losses on the underlying hedged transactions. For foreign currency derivative instruments, market risk is determined by calculating the impact on fair value of an assumed change in foreign exchange rates relative to the U.S. dollar. Fair values were estimated based on market prices, when available, or dealer quotes. The reduction in fair value of our purchased option contracts is limited to the option’s fair value. With respect to the derivative instruments outstanding at September 30, 2006, a 10% appreciation of the U.S. dollar over a one-year period would increase pre-tax earnings by $68 million, while a 10% depreciation of the U.S. dollar would decrease pre-tax earnings by $3 million. Comparatively, considering our derivative instruments outstanding at September 30, 2005, a 10% appreciation of the U.S. dollar over a one-year period would have increased pre-tax earnings by $29 million, while a 10% depreciation of the U.S. dollar would have increased pre-tax earnings by $15 million. These calculations do not reflect the impact of exchange gains or losses on the underlying positions that would substantially offset the results of the derivative instruments.

     Our primary interest rate exposure results from changes in short-term U.S. dollar interest rates. Our debt and interest-bearing investments at September 30, 2006, are substantially all U.S. dollar-denominated. Therefore, transaction and translation exposure relating to such instruments is minimal. When managing interest rate exposures, we strive to achieve an acceptable balance between fixed and floating rate instruments. We may enter into interest rate swaps to help maintain this balance and manage debt and interest-bearing investments in tandem, since these items have an offsetting impact on interest rate exposure. For interest rate derivative instruments, market risk is determined by calculating the impact to fair value of an assumed change in interest rates across all maturities. Fair values are estimated based on dealer quotes. A change in interest rates on short-term debt and interest-bearing investments is assumed to impact earnings and cash flow, but not fair value because of the short maturities of these instruments. A change in interest rates on long-term debt is assumed to impact fair value but not earnings or cash flow because the interest on such obligations is fixed. Based on our overall interest rate exposure at September 30, 2006 and 2005, a change of 10% in interest rates would not have a material effect on our earnings or cash flows over a one-year period. An increase of 10% in interest rates would decrease the fair value of our long-term debt and interest rate swaps at September 30, 2006 and 2005 by approximately $39 million and $40 million, respectively. A 10% decrease in interest rates would increase the fair value of our long-term debt and interest rate swaps at September 30, 2006 and 2005 by approximately $33 million and $34 million, respectively.