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2001 Compared With 2000
Worldwide revenues in 2001 were $3.7 billion, an increase of 4% over 2000. Unfavorable foreign currency translation impacted revenue growth by 3%. Underlying revenue growth of 7%, which excludes the effects of foreign currency translation, resulted primarily from volume increases in all segments.
    Medical revenues in 2001 increased 2% over 2000 to $2.0 billion. Excluding unfavorable foreign currency translation of an estimated 4%, underlying revenue growth was 6%. The primary growth drivers were the conversion to safety-engineered devices, which contributed approximately 4% to the underlying revenue growth, and prefillable syringes and other related devices, which contributed approximately 2%. Medical revenue growth also benefited from a favorable comparison with 2000, which reflected the impact of the discontinuance of U.S. medical surgical distributor incentive programs in that year. In addition, revenue growth was offset by a $28 million decline in sales of consumer healthcare products compared with 2000, primarily as a result of our beginning to redirect promotional efforts in the United States toward branded syringe sales at the retail level.
    Clinical Lab revenues in 2001 rose 5% over 2000 to $1.2 billion. Excluding unfavorable foreign currency translation of an estimated 3%, underlying revenue growth was 8%. The conversion to safety-engineered products in the United States was the primary growth driver, contributing approximately 3% to underlying revenue growth. In addition, increased worldwide sales of the molecular diagnostic platform, the BD ProbeTec ET System, contributed 1% to underlying revenue growth. Clinical Lab revenue growth also benefited from a favorable comparison with 2000, which reflected the impact of the discontinuance of U.S. distributor incentive programs in that year.
    Biosciences revenues in 2001 increased 7% over 2000 to $590 million. Excluding unfavorable foreign currency translation of an estimated 4%, underlying revenue growth was 11%. Such growth was led by sales of immunocytometry products, particularly the BD FACS brand flow cytometry systems, which contributed 5% of the underlying revenue growth. In addition, sales of immunology/cell biology and molecular biology reagents contributed 4% of the underlying revenue growth. We believe that the events of September 11 adversely affected fourth quarter 2001 revenues by as much as $5 million due to disruptions to air shipments and research and business activities at several private and government sector customers.
    Special charges of $58 million were recorded in 2000. These charges included $32 million relating to severance costs and $6 million of impaired assets and other exit costs associated with a worldwide organizational restructuring plan to align our existing infrastructure with our projected growth programs. The annual savings from the reduction in salaries and wages expense were estimated to be $30 million. As anticipated, these savings, beginning in 2001, offset incremental costs relating to programs, such as advanced protection technologies, blood glucose monitoring, molecular oncology and Genesis. Special charges in 2000 also included $20 million for estimated litigation defense costs associated with our divested latex gloves business. See "Litigation-Other than Environmental" section above for additional discussion. We also recorded other charges of $13 million in cost of products sold in 2000 relating to the recall of certain manufacturing lots of the BD Insyte Autoguard Shielded IV catheter. These charges consisted primarily of costs associated with product returns, disposal of the affected product and other direct recall costs. In 1998, we recorded special charges of $91 million, primarily associated with the restructuring of certain manufacturing operations and the write-down of impaired assets. For the 1998 restructuring plan, the estimated annual benefits of $4 million related to reduced manufacturing costs and tax savings associated with the move of a surgical blade plant are expected to be realized in 2003. Beginning in 1999, we realized a reduction in amortization expense of $5 million, resulting from the write-down of certain assets, which offset incremental costs associated with Genesis. For additional discussion of these charges, see Note 5 of the Notes to Consolidated Financial Statements.
    Gross profit margin was 48.9% in 2001. Excluding the unfavorable impact of the previously discussed other charges in 2000, gross profit margin would have been 49.3% in 2000. Gross profit margin in 2001 reflects the impact of lower sales of consumer healthcare products and unfavorable foreign exchange, offset largely by the higher gross margin from our safety-engineered products.
    Selling and administrative expense of $983 million in 2001 was 26.2% of revenues, compared to $974 million in 2000, or 26.9% of revenues. Incremental spending for growth initiatives was offset, in part, by favorable foreign currency translation and savings associated with the 2000 worldwide organizational restructuring plan.
    Investment in research and development in 2001 was $212 million, or 5.7% of revenues. Research and development expense in 2000 was $219 million, or 6% of revenues, excluding an in-process research and development charge of $5 million. This charge represented the fair value of certain acquired research and development projects in the area of cancer diagnostics, which were determined not to have reached technological feasibility and which do not have alternative future uses. Incremental spending was primarily in the Biosciences segment and in key initiatives, including blood glucose monitoring. Investment in research and development in 2001 reflects lower spending than in 2000, which included clinical trial costs for the BD Phoenix instrument platform and costs relating to the transdermal business unit that was divested in the first quarter of 2001.
    Operating margin in 2001 was 17% of revenues. Excluding special and other charges and purchased in-process research and development charges in 2000, operating margin would have been 16.3% in 2000. The increase in operating margin reflects the revenue growth, along with the favorable effect of continued control over costs.
    Net interest expense of $55 million in 2001 was $19 million lower than in 2000, primarily due to lower debt levels and lower short-term interest rates.
    Other income, net in 2000 of $79 million included gains on investments of $73 million relating to the sale of two equity investments, which are described more fully in Note 8 of the Notes to Consolidated Financial Statements. Other income, net in 2000 also included the favorable effect of legal settlements and a gain on an investment hedge that more than offset foreign exchange losses and net losses relating to assets held for sale.
    The effective tax rate in 2001 was 24% compared to 24.4% in 2000, reflecting a favorable mix in income among tax jurisdictions.
    Net income and diluted earnings per share before the cumulative effect of accounting change in 2001 were $438 million, or $1.63, respectively, compared with $393 million, or $1.49 in 2000. Earnings per share in 2000 would have remained about the same, excluding special and other charges, purchased in-process research and development charges, investment gains and a favorable tax benefit from the conclusion of a number of tax examinations in 2000.
    As discussed above, we adopted SAB 101, effective October 1, 2000 and recorded a cumulative effect of change in accounting principle of $37 million, net of income tax benefit of $25 million. See Note 2 of the Notes to Consolidated Financial Statements for additional discussion.
    Net income in 2001 was $402 million, or $1.49 per share, after reflecting the after-tax cumulative effect of accounting change of $.14 per share.
    Capital expenditures were $371 million in 2001, compared to $376 million in 2000, reflecting continued spending for safetyengineered devices. Medical, Clinical Lab and Biosciences capital spending totaled $266 million, $62 million and $24 million, respectively, in 2001. Funds expended outside the above segments included amounts related to Genesis.
    Net cash used for financing activities was $201 million in 2001 as compared to $219 million during 2000. During 2001, total debt decreased $180 million, primarily as a result of increased funds from operations that were used to pay down short-term debt. Shortterm debt was 37% of total debt at year end, compared to 45% at the end of 2000. Our weighted average cost of total debt at the end of 2001 was 4.8%, down from 7.0% at the end of 2000 due to the reduction in interest rates of short-term borrowings and the impact of interest rate swaps entered into in 2001.
    Return on equity was 18.7% in 2001, or 20.3% excluding the 2001 cumulative effect of change in accounting principle, compared with 21.1% in 2000.

Future Impact of Currently Known Trends
Pension Plan Assets and Assumptions - We have experienced a reduction in the market value of assets held by our U.S. pension plan primarily as a result of the decline in the U.S. equity markets. Our pension plan assets also were reduced by normally scheduled benefit payments to plan participants. As previously discussed, because of these declines, we made a $100 million funding contribution to the U.S. pension plan early in fiscal 2003, in addition to the $100 million contribution made in fiscal 2002. The market value decline is expected to negatively impact pension expense in 2003. In addition, based on an annual internal study of actuarial assumptions, the expected long-term rate of return on plan assets was reduced to 8.00% from 9.75%, the discount rate was reduced to 6.75% from 7.50% and the salary rate was reduced to 4% from 4.25%. As a result of these developments, the 2003 net periodic benefit cost for the U.S. pension plan is anticipated to be approximately $24 million higher than in 2002.

Pending Adoption of New Accounting Standards - The Financial Accounting Standards Board (FASB) issued, in August 2001, SFAS No. 144, "Accounting for the Impairment or Disposal of Long- Lived Assets." This Statement requires that one accounting model be used for long-lived assets to be disposed of by sale and it broadens the presentation of discontinued operations to include more disposal transactions. The provisions relating to long-lived assets to be disposed of by sale or otherwise are effective for disposal activities initiated by a commitment to a plan after the effective date of the Statement. We have adopted the provisions of this Statement effective October 1, 2002, and do not expect that the Statement will have a material impact on our consolidated financial position or results of operations in 2003.
    In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This Statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Previous guidance had required that liabilities for exit costs be recognized at the date of an entity's commitment to an exit plan. We are required to adopt the provisions of this Statement for any exit or disposal activities that are initiated after December 31, 2002, and do not expect that this Statement will have a material impact on our consolidated financial position or results of operations in 2003.

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