Liquidity and Capital Resources

Net Cash Flows from Continuing Operating Activities
Net cash provided by continuing operating activities, which continues to be our primary source of funds to finance operating needs and capital expenditures, was $1.1 billion in 2006, reduced from $1.2 billion in 2005, reflecting higher inventory levels and higher income tax payments, including taxes associated with the repatriation of earnings, as discussed further below.

Net Cash Flows from Continuing Investing Activities
Net cash used for continuing investing activities in 2006 was $787 million, compared with $382 million in 2005. Acquisitions of businesses of $231 million in 2006, represented the net cash paid for the GeneOhm acquisition. Capital expenditures were $459 million in 2006, compared with $318 million in 2005. Medical capital spending of $271 million and Diagnostics capital spending of $105 million related primarily to various capacity expansions. Biosciences capital spending of $39 million, included spending on manufacturing capacity expansions. In 2007, capital expenditures are expected to be in the $600 to $650 million range, reflecting investments in various manufacturing capacity and facility expansions.

Net Cash Flows from Continuing Financing Activities
Net cash used for financing activities was $342 million in 2006, as compared with $516 million in 2005, and included the repurchase of shares of our common stock for approximately $449 million, compared with approximately $550 million in 2005. At September 30, 2006, approximately 7.1 million common shares remained available for purchase under a November 2005 Board of Directors’ authorization to repurchase up to 10 million common shares. For 2007, we expect that cash used to repurchase common shares will be about $450 million. Total debt at September 30, 2006, was $1.4 billion compared with $1.3 billion at September 30, 2005. Short-term debt increased to 31% of total debt at year-end, from 16% at the end of 2005. Floating rate debt was 46% of total debt at the end of 2006 and 41% at the end of 2005. Our weighted average cost of total debt at the end of 2006 was 5.5%, up from 5.3% at the end of 2005, due to higher short-term interest rates. Debt-to-capitalization at year-end improved to 25.8% from 27.1% last year.

     We have in place a commercial paper borrowing program that is available to meet our short-term financing needs, including working capital requirements. Borrowings outstanding under this program were $200 million at September 30, 2006. We maintain a syndicated credit facility totaling $900 million in order to provide backup support for our commercial paper program and for other general corporate purposes. This credit facility expires in August 2009 and includes a single financial covenant that requires BD to maintain an interest expense coverage ratio (ratio of earnings before income taxes, depreciation and amortization to interest expense) of not less than 5-to-1 for the most recent four consecutive fiscal quarters. On the last eight measurement dates, this ratio had ranged from 17-to-1 to 21-to-1. The facility, under which there were no borrowings outstanding at September 30, 2006, can be used to support the commercial paper program or for general corporate purposes. In addition, we have informal lines of credit outside the United States.

     At September 30, 2006, our long-term debt was rated “A2” by Moody’s and “A+” by Standard and Poor’s, and our commercial paper ratings were “P-1” by Moody’s and “A-1” by Standard and Poor’s. Given the availability of the various credit facilities and our strong credit ratings, we continue to have a high degree of confidence in our ability to refinance maturing short-term and long-term debt, as well as to incur substantial additional debt, if required.

     BD’s ability to generate cash flow from operations, issue debt, enter into other financing arrangements and attract long-term capital on acceptable terms could be adversely affected in the event there was a material decline in the demand for BD’s products, deterioration in BD’s key financial ratios or credit ratings or other significantly unfavorable changes in conditions. While a deterioration in the Company’s credit ratings would increase the costs associated with maintaining and borrowing under its existing credit arrangements, such a downgrade would not affect the Company’s ability to draw on these credit facilities, nor would it result in an acceleration of the scheduled maturities of any outstanding debt.

     The American Jobs Creation Act of 2004 (the “AJCA”) was signed into law in October 2004. The AJCA creates a temporary incentive for U.S. multinationals to repatriate accumulated income earned outside the United States. As a result of the passage of the AJCA, we revisited our policy of indefinite reinvestment of foreign earnings and made a decision to repatriate approximately $1.3 billion in fiscal 2006 pursuant to our approved repatriation plan. We recorded a charge of $77 million in 2005 attributable to the planned repatriation of these earnings. During 2006, we repatriated approximately $1.3 billion in accordance with our planned repatriation under the AJCA. The actual tax charge associated with the repatriation was $66 million. Uses of the repatriated funds include cash expenditures for compensation and benefits to existing and newly hired U.S. workers, U.S. infrastructure and capital investments and other activities as permitted under the AJCA.

Contractual Obligations
In the normal course of business, we enter into contracts and commitments that obligate us to make payments in the future. The table below sets forth BD’s significant contractual obligations and related scheduled payments:

(millions of dollars)	Total			2007			2008 to 2009			2010 to 2011			2012 and Thereafter
Short-term debt	$	427		$	427		$	—		$	—		$	—
Long-term debt(A)		1,762			159			110			291			1,202
Operating leases		146			48			59			28			11
Purchase obligations(B)		300			243			52			5			—
Total(C)	$	2,635		$	877		$	221		$	324		$	1,213

2005 Compared With 2004
Worldwide revenues in 2005 of $5.4 billion increased 10% from the prior year and reflected estimated volume increases of 6%, an estimated increase due to favorable foreign currency translation of 3%, and estimated price increases of less than 1%.

     Income from Continuing Operations was $692 million, or $2.66 per diluted share, in 2005 as compared with $583 million, or $2.21 per diluted share, in 2004. Comparisons of Income from Continuing Operations between 2005 and 2004 are affected by the following significant items that are reflected in our financial results:

2005

• We recorded share-based compensation expense of $70 million ($50 million after taxes), or $.19 per diluted share, in connection with the adoption of Statement of Financial Accounting Standards No. 123 (revised 2004), “Share Based Payment” (“SFAS No. 123(R)”). Prior periods were not restated.
  
• We recorded a tax charge of $77 million, or $.30 per diluted share, attributable to the planned repatriation of foreign earnings under the American Jobs Creation Act of 2004.
  

2004

• We recorded a charge of $100 million ($63 million after taxes), or $.24 per diluted share, related to a litigation settlement.
  
• We recorded a charge of $45 million ($28 million after taxes), or $.11 per diluted share, related to the voluntary recall and write-off of certain blood glucose strip inventory and other actions taken with respect to our BGM products.
  

Medical Segment
Medical revenues in 2005 of $3.0 billion increased $278 million, or 10%, over 2004, which reflected an estimated impact of favorable foreign currency translation of 3 percentage points.

     The following is a summary of revenues by organizational unit:

(millions of dollars)	2005			2004			Total Change			Estimated Foreign Exchange Impact
Medical Surgical Systems	$	1,661		$	1,541			8%			3%
Diabetes Care		674			586			15%			2%
Pharmaceutical Systems		563			497			13%			4%
Ophthalmic Systems		60			56			7%			3%
Total Revenues	$	2,958		$	2,680			10%			3%

     Medical revenues reflect the continued conversion in the United States to safety-engineered products, which accounted for sales of $490 million, as compared with $459 million in the prior year. Included in Medical revenues were international sales of safety-engineered products of $81 million, as compared with $63 million in the prior year. Revenue growth in the Medical Surgical Systems unit of this segment was primarily driven by the growth in safety-engineered products and prefilled flush syringes. The Diabetes Care unit’s revenue growth reflected strong sales of BGM products in the United States and pen needles worldwide. Sales of BGM meters, test strips and related disposables in the United States and Canada were $76 million, as compared with $42 million in 2004. BGM products were introduced into the European market through the launch in Germany during the fourth quarter of 2005. Revenue growth in the Pharmaceutical Systems unit was primarily attributable to a 19% increase in international sales.

     Medical operating income was $711 million, or 24.0% of Medical revenues, in 2005, as compared with $567 million, or 21.1% in 2004, which included $45 million of BGM charges as further discussed in Note 16 of the Notes to Consolidated Financial Statements. Operating income as a percentage of revenues reflects gross margin improvement from relatively higher sales growth of products that have higher overall gross profit margins, in particular, safety-engineered products and pen needles. See further discussion on gross profit margin improvement below. Selling and administrative expense as a percent of Medical revenues in 2005 was slightly lower compared with 2004, primarily due to the favorable effects from a weaker U.S. dollar along with tight controls on base spending. Incremental investments to support the BGM initiative were about $14 million. Research and development expense in 2005 increased $14 million, or 17%, reflecting continued investment in the development of new products.

Diagnostics Segment
Diagnostics revenues in 2005 of $1.7 billion increased $125 million, or 8%, over 2004, which reflected an estimated favorable impact of foreign currency translation of 2 percentage points.

     The following is a summary of revenues by organizational unit:

(millions of dollars)	2005			2004			Total Change			Estimated Foreign Exchange Impact
Preanalytical Systems	$	855		$	788			8%			2%
Diagnostic Systems		802			744			8%			2%
Total Revenues	$	1,657		$	1,532			8%			2%

     Revenue growth in the Preanalytical Systems unit reflected the continued conversion in the United States to safety-engineered products and accounted for sales of $352 million, compared with $317 million in 2004. Sales of the BD Vacutainer Push Button Collection Sets were key to this trend. Preanalytical Systems revenues included international sales of safety-engineered products of $192 million, compared with $140 million in 2004. Geographic expansion in the Middle East and Asia Pacific regions, particularly in China, also contributed to the growth in the Preanalytical Systems unit. The Diagnostic Systems unit experienced solid worldwide sales of its automated diagnostic platforms, including the molecular BD ProbeTec ET, and the BD Phoenix Automated Microbiology System. These platforms reported combined incremental sales of $17 million over 2004.

     Diagnostics operating income was $414 million, or 25.0% of Diagnostics revenues, in 2005, compared with $359 million, or 23.5%, in 2004. The increase in operating income as a percentage of revenues reflects gross profit improvement from relatively higher sales growth of products that have higher overall gross profit margins, in particular, safety-engineered products and the BD ProbeTec ET platform. See further discussion on gross profit margin improvement below. Selling and administrative expense as a percent of Diagnostics revenues in 2005 was slightly lower compared with 2004 primarily due to the favorable impact from a weaker U.S. dollar along with tight controls on spending. Research and development expense in 2005 increased $6 million, or 8%, reflecting spending on new programs, and was partially offset by lower spending of $3 million, as a result of the completion of our cancer biomarker discovery program in 2004.

Biosciences Segment
Biosciences revenues in 2005 of $800 million increased $77 million, or 11%, over 2004, which reflected an estimated impact of favorable foreign currency translation of 2 percentage points.

     The following is a summary of revenues by organizational unit:

(millions of dollars)	2005			2004			Total Change			Estimated Foreign Exchange Impact
Immunocytometry Systems	$	452		$	397			14%			3%
Pharmingen		141			136			4%			2%
Discovery Labware		207			190			9%			3%
Total Revenues	$	800		$	723			11%			3%

     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 adversely impacted by $1.8 million and $4.5 million, respectively, as a result of terminating a distribution agreement in 2005. Revenue growth in the Discovery Labware unit resulted primarily from market share gains.

     Biosciences operating income was $175 million, or 21.9% of Biosciences revenues in 2005, compared with $156 million, or 21.6%, in 2004. The increase in operating income as a percentage of revenues reflects gross profit improvement from relatively higher sales growth of products that have higher overall gross profit margins, in particular, research instruments and reagents. See further discussion of gross profit margin improvement below. Selling and administrative expense as a percent of Biosciences revenues in 2005 was comparable with 2004. The favorable effects from a weaker U.S. dollar and tight controls on spending were offset by one-time costs of $8 million incurred in connection with the termination of a distribution agreement. Research and development expense in 2005 increased $5 million, or 10%, reflecting spending on new product development and advanced technology, particularly in the Immunocytometry Systems unit.