Notes to Consolidated Financial Statements

Becton, Dickinson and Company

13 Share-Based Compensation

The Company grants share-based awards under the 2004 Plan, which provides for long-term incentive compensation to employees and directors consisting of: stock appreciation rights (“SARs”), stock options, performance-based restricted stock units, time-vested restricted stock units and other stock awards. The Company believes such awards align the interest of its employees and directors with those of its shareholders. Prior to the adoption of the 2004 Plan, the Company had employee and director stock option plans, which were terminated with respect to future grants effective upon shareholder approval of the 2004 Plan in February 2004. In 2006, 2005 and 2004, the compensation expense for these plans charged to income was $108,613, $70,199 and $2,466, respectively, and the associated income tax benefit recognized was $35,155, $19,941 and $937, respectively.

Stock Appreciation Rights
Beginning with the annual share-based grant in November 2005, the Company granted SARs and discontinued the issuance of stock options. SARs represent the right to receive, upon exercise, shares of common stock having a value equal to the difference between the market price of common stock on the date of exercise and the exercise price on the date of grant. SARs vest over a four-year period and have a ten-year term, similar to the previously granted stock options. The fair value was estimated on the date of grant using a lattice-based binomial option valuation model that uses the following weighted-average assumptions: risk-free interest rate of 4.48%; expected volatility of 28%; expected dividend yield of 1.46% and expected life of 6.5 years. Expected volatility is based upon historical volatility for the Company’s common stock and other factors. The expected term of SARs granted is derived from the output of the model, using assumed exercise rates based on historical exercise and termination patterns, and represents the period of time that options granted are expected to be outstanding. The risk-free interest rate used is based upon the published U.S. Treasury yield curve in effect at the time of grant for instruments with a similar life. The dividend yield is based upon the most recently declared quarterly dividend as of the grant date. The weighted average grant date fair value of SARs granted during 2006 was $18.43.

A summary of SARs outstanding as of September 30, 2006, and changes during the year then ended is as follows:

	SARs			Weighted Average Exercise Price			Weighted Average Remaining Contractual Term (Years)			Aggregate Intrinsic Value
Balance at October 1		—		$	—
Granted		1,737,863			59.16
Exercised		(188	)		59.16
Forfeited, canceled    or expired		(53,134	)		59.16
Balance at    September 30		1,684,541		$	59.16			9.14		$	19,397
Vested and expected to    vest at September 30		1,517,533		$	59.16			9.14		$	17,474
Exercisable at    September 30		14,459		$	59.16			9.14		$	166

Stock options
All stock option grants are for a ten-year term. Stock options issued after November 2001 vest over a four-year period. Stock options issued prior to November 2001 vested over a three-year period. Stock options granted in 2005 were valued based on the grant date fair value of those awards, using a lattice-based binomial option valuation model that used the following weighted-average assumptions: risk-free interest rate of 3.93%; expected volatility of 29%; expected dividend yield of 1.28% and expected life of 6.5 years.

     The weighted average grant date fair value of stock options granted during the years 2005 and 2004 was $17.16 and $13.25, respectively. Stock options granted in 2004 were valued based on the grant date fair value of those awards, using the Black-Scholes option pricing model. See Note 2 for further discussion.

     A summary of stock options outstanding as of September 30, 2006, and changes during the year then ended is as follows:

	Stock Options			Weighted Average Exercise Price			Weighted Average Remaining Contractual Term (Years)			Aggregate Intrinsic Value
Balance at October 1		23,727,924		$	33.68
Granted		—			—
Exercised		(5,060,992	)		29.21
Forfeited, canceled    or expired		(412,942	)		34.69
Balance at    September 30		18,253,990		$	34.90			5.31		$	652,923
Vested and expected to    vest at September 30		17,825,685		$	34.75			5.26		$	640,329
Exercisable at    September 30		13,970,936		$	32.95			4.72		$	527,027

     Cash received from the exercising of stock options in 2006, 2005 and 2004 was $147,831, $123,613 and $173,883, respectively. The actual tax benefit realized for tax deductions from stock option exercises totaled $48,751, $44,958 and $52,131, respectively. The total intrinsic value of stock options exercised during the years 2006, 2005 and 2004 was $168,752, $134,342 and $157,293, respectively.

Performance-Based Restricted Stock Units
Performance-based restricted stock units cliff vest three years after the date of grant, and are tied to the Company’s performance against pre-established targets, including its compound growth rate of consolidated revenues and average return on invested capital, over a three-year performance period. Under the Company’s long-term incentive program, the actual payout under these awards may vary from zero to 250% of an employee’s target payout, based on the Company’s actual performance over the three-year performance period. The fair value is based on the market price of the Company’s stock on the date of grant. Compensation cost initially recognized assumes that the target payout level will be achieved and is adjusted for subsequent changes in the expected outcome of performance-related conditions.

     A summary of performance-based restricted stock units outstanding as of September 30, 2006, and changes during the year then ended is as follows:

	Stock Units			Weighted Average Conversion Price
Balance at October 1		1,750,660		$	51.16
Granted		1,368,368			59.16
Converted		(1,500	)		55.18
Forfeited or canceled		(104,415	)		56.04
Balance at September 30(A)		3,013,113		$	54.62
Expected to vest at September 30(B)		1,709,621		$	53.87

     The weighted average grant date fair value of performance-based restricted stock units granted during the years 2005 and 2004 was $54.41 and $38.93, respectively. At September 30, 2006, the weighted average remaining contractual term of performance-based restricted stock units is 1.47 years.

Time-Vested Restricted Stock Units
Time-vested restricted stock units generally cliff vest three years after the date of grant, except for certain key executives of the Company, including the executive officers, for which such units generally vest one year following the employee’s retirement. The related share-based compensation expense is recorded over the requisite service period, which is the vesting period or in the case of certain key executives is based on retirement eligibility. The fair value of all time-vested restricted stock units is based on the market value of the Company’s stock on the date of grant.

     A summary of time-vested restricted stock units outstanding as of September 30, 2006, and changes during the year then ended is as follows:

	Stock Units			Weighted Average Conversion Price
Balance at October 1		630,057		$	52.54
Granted		599,152			59.62
Converted		(8,330	)		56.13
Forfeited or canceled		(54,161	)		56.91
Balance at September 30		1,166,718		$	55.95
Expected to vest at September 30		1,050,046		$	55.95

     The weighted average grant date fair value of time-vested restricted stock units granted during the years 2005 and 2004 was $54.48 and $38.78, respectively. At September 30, 2006, the weighted average remaining contractual term of the time-vested restricted stock units is 2.55 years.

     The amount of unrecognized compensation expense for all non-vested share-based awards as of September 30, 2006, is approximately $120.7 million, which is expected to be recognized over a weighted-average remaining life of approximately 1.9 years. At September 30, 2006, 3,308,995 shares were authorized for future grants under the 2004 Plan.

     The Company has a policy of satisfying share-based payments through either open market purchases or shares held in treasury. At September 30, 2006, the Company estimates that it has sufficient shares held in treasury to satisfy these payments in 2007.

Other Stock Plans
     The Company has a Stock Award Plan, which allows for grants of common shares to certain key employees. Distribution of 25% or more of each award is deferred until after retirement or involuntary termination, upon which the deferred portion of the award is distributable in five equal annual installments. The balance of the award is distributable over five years from the grant date, subject to certain conditions. In February 2004, this plan was terminated with respect to future grants upon the adoption of the 2004 Plan. At September 30, 2006 and 2005, awards for 270,762 and 283,003 shares, respectively were outstanding.

     The Company has a Restricted Stock Plan for Non-Employee Directors which reserves for issuance 300,000 shares of the Company’s common stock. No restricted shares were issued in 2006.

     The Company has a Directors’ Deferral Plan, which provides a means to defer director compensation, from time to time, on a deferred stock or cash basis. As of September 30, 2006, 119,701 shares were held in trust, of which 9,979 shares represented Directors’ compensation in 2006, in accordance with the provisions of the plan. Under this plan, which is unfunded, directors have an unsecured contractual commitment from the Company.

     The Company also has a Deferred Compensation Plan that allows certain highly-compensated employees, including executive officers, to defer salary, annual incentive awards and certain equity-based compensation. As of September 30, 2006, 192,647 shares were issuable under this plan.