Executive Overview

The company designs, manufacturers, packages, distributes and sells medical, surgical, diagnostic and patient care devices. The company sells a broad, diversified portfolio of products to hospitals, individual healthcare professionals, extended care health facilities and alternate site facilities in the United States and abroad, principally in Europe and Japan. In general, the company's products are intended to be used once and then discarded or implanted either temporarily or permanently. The company reports sales in four major product group categories: vascular, urology, oncology and surgical specialties. The company also has a product group of other products.

The company's earnings are driven by its ability to continue to generate sales of its products and improve operating efficiency. Bard's ability to increase sales over time depends upon its success in developing, acquiring and marketing innovative and differentiated products that meet the needs of clinicians and their patients. In 2008, the company's research and development ("R&D") expense, including purchased R&D, was $199.1 million. The company expects R&D expense to continue to increase in the future. The company also makes selective acquisitions of businesses, products and technologies, generally focusing on small to medium sized transactions to provide ongoing growth opportunities. In addition, the company may from time-to-time consider acquisitions of larger, established companies under appropriate circumstances. The company may also periodically divest lines of business in which it is not able to reasonably attain or maintain a leadership position or for other strategic reasons. The company spent $185.2 million in 2008, including purchased R&D, for the acquisition and license of products and technologies.

Acquisitions and Divestitures

On June 12, 2008, the company decided to discontinue the sale of its Salute II hernia fixation device. This decision was based on a strategic review, which considered the continued technical challenges associated with the product's manufacture and its overall profitability, as well as an assessment of the timing and impact of alternative devices under development. In connection with this decision, the company recorded a non-cash charge of $40.5 million ($34.9 million after tax).

On June 5, 2008, the company acquired all of the outstanding shares of Specialized Health Products International, Inc. ("Specialized Health Products") for a purchase price of $1.00 per share in cash, totalling $68.4 million, plus direct acquisition costs of $2.3 million. Specialized Health Products manufactures and markets vascular access products, including winged infusion sets, which are used to deliver therapeutic agents through vascular access ports. The acquisition represents a strategic addition to Bard's port franchise.

On January 11, 2008, the company acquired the assets of the LifeStent ® family of stents from Edwards Lifesciences Corporation ("Edwards Lifesciences") for a net cash payment of $73.3 million, plus direct acquisition costs of $3.6 million, and up to $65.0 million in contingent milestone payments, of which $23.0 million was paid in December 2008. In addition, the company received Pre-Market Approval from the FDA in February 2009 for use of the LifeStent® in the superficial femoral artery and proximal popliteal artery, which resulted in a contingent milestone payment of $27.0 million. The acquisition represents a strategic addition to Bard's portfolio of non-coronary stent and stent graft products that is complementary to the company's current products, call points and technology platforms.

See Note 2 Acquisitions and Divestitures of the notes to consolidated financial statements for more information.

Results of Operations

Net Sales

Bard's 2008 consolidated net sales were $2,452.1 million, an increase of 11% on a reported basis (10% on a constant currency basis) over 2007 consolidated net sales of $2,202.0 million. Bard's 2007 consolidated net sales increased 11% on a reported basis (9% on a constant currency basis) over 2006 consolidated net sales of $1,979.6 million. "Net sales on a constant currency basis" is a non-GAAP financial measure and should not be viewed as a replacement of GAAP results. See "Management's Use of Non-GAAP Measures" below.

Price changes had the effect of increasing consolidated net sales by 0.2% and 0.1% for 2008 and 2007, respectively, compared to the prior years. Exchange rate fluctuations had the effect of increasing consolidated net sales by 1.0% and 2.0% for 2008 and 2007, respectively, compared to the prior years. The primary exchange rate movement that impacts net sales is the movement of the Euro compared to the U.S. dollar. The impact of exchange rate movements on net sales is not indicative of the impact on net earnings due to the offsetting impact of exchange rate movements on operating costs and expenses, costs incurred in other currencies and the company's hedging activities.

Bard's 2008 United States net sales of $1,661.3 million increased 9% over 2007 United States net sales of $1,520.6 million. Bard's 2008 international net sales of $790.8 million increased 16% on a reported basis and 12% on a constant currency basis over 2007 international net sales of $681.4 million. Bard's 2007 United States net sales increased 10% over 2006 United States net sales of $1,383.0 million. Bard's 2007 international net sales increased 14% on a reported basis and 7% on a constant currency basis over 2006 international net sales of $596.6 million.

Presented below is a summary of consolidated net sales by disease state.

                                                    For the Years Ended December 31,
                                                                 Constant                           Constant
                               2008         2007       Change    Currency      2006       Change    Currency
(dollars in millions)
Vascular                     $   643.1    $   539.6       19%         17%    $   479.6       13%          9%
Urology                          708.5        658.9        8%          7%        582.0       13%         11%
Oncology                         646.6        558.6       16%         15%        481.3       16%         14%
Surgical Specialties             368.2        363.5        1%           -        357.4        2%           -
Other                             85.7         81.4        5%          5%         79.3        3%          1%

Total net sales              $ 2,452.1    $ 2,202.0       11%         10%    $ 1,979.6       11%          9%

Vascular Products - Bard markets a wide range of products for the peripheral vascular market, including endovascular products, electrophysiology products and graft products. Consolidated net sales in 2008 of vascular products increased 19% on a reported basis (17% on a constant currency basis) compared to the prior year. United States net sales in 2008 increased 14% compared to the prior year. International net sales in 2008 increased 25% on a reported basis (19% on a constant currency basis) compared to the prior year. Consolidated net sales in 2007 of vascular products increased 13% on a reported basis (9% on a constant currency basis) compared to the prior year. United States net sales in 2007 grew 11% compared to the prior year. International net sales in 2007 increased 15% on a reported basis (7% on a constant currency basis) compared to the prior year. The vascular group is the company's most global business, with international net sales comprising 48% and 45% of consolidated net sales of vascular products in 2008 and 2007, respectively.

Consolidated net sales of endovascular products in 2008 increased 25% on a reported basis (23% on a constant currency basis) compared to the prior year. Endovascular products comprised 65% of 2008 consolidated net sales of vascular products. Consolidated net sales of endovascular products in 2007 increased 17% on a reported basis (14% on a constant currency basis) compared to the prior year. The company's percutaneous transluminal angioplasty balloon catheters, vena cava filters, stents and biopsy products contributed to the growth in this category in 2008 and 2007. Sales from the LifeStent® family of stents acquired in January 2008 also contributed to growth in 2008.

Consolidated net sales in 2008 of electrophysiology products increased 18% on a reported basis (15% on a constant currency basis) compared to the prior year. Consolidated net sales in 2007 of electrophysiology products increased 13% on a reported basis (8% on a constant currency basis) compared to the prior year. The company's electrophysiology laboratory system, steerable diagnostic catheter and atrial fibrillation catheter lines were growth drivers in both 2008 and 2007.

Consolidated net sales in 2008 of graft products decreased 1% on a reported basis (4% on a constant currency basis) compared to the prior year. Consolidated net sales in 2007 of graft products decreased 3% on a reported basis (6% on a constant currency basis) compared to the prior year. Declining sales in the company's line of peripheral vascular grafts impacted both 2008 and 2007 results. Declining sales in the company's line of dialysis access grafts also impacted 2007 results.

Urology Products - Bard markets a wide range of products for the urology market, including basic drainage products, continence products, urological specialty products and infection control products. Bard also markets StatLock® catheter stabilization products, which are used to secure many types of catheters sold by Bard and other companies. Consolidated net sales in 2008 of urology products increased 8% on a reported basis (7% on a constant currency basis) compared to the prior year. United States net sales represented 72% of consolidated net sales in 2008 and grew 7% compared to the prior year. International net sales in 2008 increased 8% on a reported basis (7% on a constant currency basis) compared to the prior year. Consolidated net sales in 2007 of urology products increased 13% on a reported basis (11% on a constant currency basis) compared to the prior year. United States net sales represented 72% of consolidated net sales in 2007 and grew 13% compared to the prior year. International net sales in 2007 increased 14% on a reported basis (8% on a constant currency basis) compared to the prior year. The StatLock® catheter stabilization product line was acquired in April 2006.

Basic drainage products represent the core of the company's urology business. Consolidated net sales in 2008 of basic drainage products increased 9% on both a reported basis and constant currency basis compared to the prior year. Consolidated net sales in 2008 of infection control Foley catheter products grew 16% on both a reported basis and constant currency basis. Consolidated net sales in 2007 of basic drainage products increased 7% on a reported basis (6% on a constant currency basis) compared to the prior year. Consolidated net sales in 2007 of infection control Foley catheter products grew 12% on both a reported basis and a constant currency basis compared to the prior year.

Consolidated net sales in 2008 of urological specialty products, which include brachytherapy products and services, decreased 4% on a reported basis (5% on a constant currency basis) compared to the prior year. Consolidated net sales in 2007 of urological specialty products grew 5% on a reported basis (3% on a constant currency basis) compared to the prior year. The decrease in 2008 in sales of urological specialty products was primarily driven by a decline in brachytherapy sales. The company believes that the brachytherapy market has been losing procedural share to alternative therapies, a trend that may continue.

Consolidated net sales in 2008 of continence products increased 4% on both a reported basis and constant currency basis compared to the prior year. Consolidated net sales in 2007 of continence products increased 13% on a reported basis (10% on a constant currency basis) compared to the prior year. The company's surgical sling line was a primary growth driver in the category in both 2008 and 2007. The company's pelvic floor reconstruction product line was also a growth driver in 2007.

Consolidated net sales in 2008 of the Statlock ® catheter stabilization product line increased 26% on a reported basis (25% on a constant currency basis) compared to the prior year. Consolidated net sales in 2007 of the StatLock ® catheter stabilization product line increased 110% on a reported basis (109% on a constant currency basis) compared to the prior year. The StatLock® catheter stabilization product line was acquired in April 2006.

Oncology Products - The company's oncology products include specialty access products used primarily for chemotherapy. Consolidated net sales in 2008 of oncology products grew 16% on a reported basis (15% on a constant currency basis) compared to the prior year. United States net sales in 2008 grew 16% compared to the prior year. International net sales in 2008 grew 14% on a reported basis (10% on a constant currency basis) compared to the prior year. Consolidated net sales in 2007 of oncology products grew 16% on a reported basis (14% on a constant currency basis) compared to the prior year. United States net sales in 2007 grew 16% compared to the prior year. International net sales in 2007 grew 15% on a reported basis (8% on a constant

currency basis) compared to the prior year. Sales of specialty access ports, peripherally inserted central catheters ("PICC") and vascular access ultrasound devices were the primary growth drivers in the oncology category in both 2008 and 2007.

Surgical Specialty Products - Surgical specialty products include soft tissue repair, performance irrigation and hemostasis product lines. Consolidated net sales in 2008 of surgical specialty products increased 1% on a reported basis (flat on a constant currency basis) compared to the prior year. United States net sales in 2008 decreased 2% compared to the prior year. International net sales in 2008 increased 12% on a reported basis (8% on a constant currency basis) compared to the prior year. Consolidated net sales in 2007 of surgical specialty products increased 2% on a reported basis (flat on a constant currency basis) compared to the prior year. United States net sales in 2007 decreased 1% compared to the prior year. International net sales in 2007 increased 12% on a reported basis (5% on a constant currency basis) compared to the prior year.

The company's soft tissue repair product line, which includes hernia repair implants and hernia fixation products, comprised 74% of 2008 consolidated net sales of surgical specialty products. Consolidated net sales in 2008 of soft tissue repair products decreased 1% on a reported basis (2% on a constant currency basis) compared to the prior year due primarily to: (i) the effect of the hold on the manufacture and the subsequent discontinuance of the sale of the company's Salute II hernia fixation device; and (ii) low growth of the company's hernia repair implants. Consolidated net sales in 2007 of soft tissue repair products grew 2% on a reported basis (1% on a constant currency basis) compared to the prior year due primarily to: (i) the effect of the company's decision in 2007 to initiate both a voluntary recall and a withdrawal of the company's reusable Salute hernia fixation device from the market; (ii) a constrained supply of the company's disposable Salute II hernia fixation device due to product component issues; and (iii) low growth of the company's hernia repair implants following the Composix® Kugel® patch recall in 2005 and expansions of that recall. The challenges in the soft tissue repair product line may continue.

On December 29, 2005, the company initiated a voluntary Class I product recall of its Bard® Composix® Kugel ® Mesh X-Large Patch intended for ventral hernia repair. Following the recall, the FDA conducted an inspection and issued a Form-483 notice to the company's Davol, Inc. subsidiary identifying certain observations. The company completed corrective actions to address the observations.

On March 15, 2006, the company voluntarily expanded the December 29, 2005 recall to include certain manufacturing lots of the large Composix® Kugel ® patch and large Composix® circle. In December 2006, the company decided to voluntarily expand the March recall to include additional manufacturing lots and initiated the expanded recall on January 10, 2007.

Following the expanded recall, the FDA conducted a follow-up inspection and issued a Form-483 notice to Davol identifying certain observations regarding Davol's quality systems. The company completed corrective actions to address the observations. On April 25, 2007, Davol received a Warning Letter from the New England District Office of the FDA resulting from the follow-up inspection. The Warning Letter related specifically to non-conformances in Davol's quality systems previously identified in the related Form-483. The Warning Letter stated that, until Davol resolves the outstanding issues covered by the Warning Letter, no premarket submissions for Class III devices to which the non-conformances are reasonably related will be cleared or approved. Davol presently has no such submissions before the FDA. The company responded to the Warning Letter and completed corrective actions to address the observations. The FDA conducted a planned re-inspection of the Davol facility in 2008, which resulted in the issuance of a Form-483 notice. The company responded to the FDA's observations and has completed corrective actions to address them. The FDA recently notified the company that it was satisfied with the company's responses to the Form-483 notices. The company cannot, however, give any assurance as to the expected date of resolution of the matters included in the Warning Letter. For more information, see Item 1A. "Risk Factors."

On February 13, 2008, the FDA issued a Form-483 notice to the company in connection with an inspection of the company's manufacturing facility located in Humacao, Puerto Rico. The Form-483 notice identified certain observations regarding the facility's quality systems. The facility manufactures products for many of the company's divisions and subsidiaries, including soft tissue repair products for the company's Davol subsidiary. The company has responded to the FDA and completed corrective actions to these observations. On July 28, 2008, the company received a Warning Letter from the San Juan District office of the FDA. The Warning Letter related specifically to non-conformances in quality systems previously identified in the related Form-483 notice. The Warning Letter stated that, until the company resolves the outstanding issues covered by the Warning Letter, no premarket submissions for Class III devices to which the non-conformances are reasonably related will be cleared or approved. The company presently has no such submissions before the FDA. The company has responded to the Warning Letter and completed corrective actions to address the observations. However, the company cannot give any assurances that the FDA will be satisfied with its response to the Warning Letter and the associated corrective actions or as to the expected date of resolution of the matters included in the Warning Letter. For more information, see Item 1A. "Risk Factors."

Other Products - The other product group includes irrigation, wound drainage and certain original equipment manufacturers' products. Consolidated net sales in 2008 of other products increased 5% on both a reported basis and constant currency basis compared to the prior year. Consolidated net sales in 2007 of other products increased 3% on a reported basis (1% on a constant currency basis) compared to the prior year.

Costs and Expenses

The following is a summary of major costs and expenses as a percentage of net
sales for the following years ended December 31:



                                                        2008     2007      2006
        Cost of goods sold                              38.9 %   39.3 %    38.8 %
        Marketing, selling and administrative expense   28.9 %   29.3 %    31.1 %
        Research and development expense                 8.1 %    6.2 %     7.3 %
        Interest expense                                 0.5 %    0.5 %     0.9 %
        Other expense (income), net                      1.2 %   (1.5 )%    2.0 %

        Total costs and expenses                        77.6 %   73.8 %    80.1 %

Cost of goods sold - Cost of goods sold consists principally of the manufacturing and distribution costs of the company's products. The category also includes royalties and the amortization of intangible assets. The company's cost of goods sold as a percentage of net sales for 2008 was 38.9%, a decrease of 40 basis points from the cost of goods sold as a percentage of net sales for 2007 of 39.3%. Reductions in cost of goods sold as a percentage of net sales were attributed primarily to cost improvements partially offset by the impact of incremental amortization of intangible assets acquired in 2008 of approximately 40 basis points. The company's cost of goods sold as a percentage of net sales for 2007 was 39.3%, an increase of 50 basis points from the cost of goods sold as a percentage of net sales for 2006 of 38.8%. The impact of incremental amortization of intangible assets acquired in 2007 contributed approximately 20 basis points of this increase.

Marketing, selling and administrative expense - Marketing, selling and administrative expense consists principally of the costs associated with the company's sales and administrative organizations. The company's marketing, selling and administrative costs as a percentage of net sales for 2008 were 28.9%, a decrease of 40 basis points from the prior year due primarily to controlled administrative spending. The company's marketing, selling and administrative costs as a percentage of net sales for 2007 was 29.3%, a decrease of 180 basis points from the prior year due primarily to controlled administrative spending.

Research and development expense - Research and development expense consists principally of the costs related to internal research and development activities, milestone payments for third-party research and development activities and purchased R&D arising from the company's business development activities. Purchased

R&D payments may impact the comparability of the company's results of operations between periods. All research and development costs are expensed as incurred. The following table presents the breakdown of the company's research and development expense for the following years ended December 31:

                                                    2008      2007      2006
          (dollars in millions)
          Research and development                 $ 149.8   $ 134.2   $ 120.9
          Purchased research and development          49.3       1.6      24.0

          Total research and development expense   $ 199.1   $ 135.8   $ 144.9

Research and development expense in 2008 of $199.1 million represented an 47% increase versus the prior year's expense of $135.8 million. Included in the research and development expense for 2008 was purchased R&D of approximately $49.3 million primarily associated with the acquisition of the Lifestent ® family of stents from Edwards Lifesciences. Research and development expense in 2007 of $135.8 million represented a 6.3% decrease versus the prior year's expenditures of $144.9 million. Included in the research and development expense for 2006 was purchased R&D of approximately $24.0 million.

Interest expense - Interest expense in 2008 was $12.1 million as compared with 2007 interest expense of $11.9 million and 2006 interest expense of $16.9 million. The decline in interest expense in 2007 was the result of decreased borrowings outside the United States.

Other expense (income), net - Other expense (income), net was $29.4 million, $(32.3) million and $40.4 million for 2008, 2007 and 2006, respectively. These amounts include interest income of $16.5 million, $30.7 million and $27.9 million in 2008, 2007 and 2006, respectively. The decrease in 2008 was primarily due to lower interest rates. The increase in 2007 was due primarily to higher balance of cash and cash equivalents. Other expense (income), net in 2008 also included a non-cash charge of $36.8 million related to the write-off of certain assets as a result of the company's decision to discontinue the sales of the Salute II hernia fixation device. See Note 2 Acquisitions and Divestitures of the notes to consolidated financial statements. Other expense (income), net in 2006 also included charges associated with legal settlements of approximately $69.0 million for previously disclosed legal actions. See Note 12, Other Expense (Income), Net of the notes to consolidated financial statements.

Income tax provision

The company's effective tax rate for 2008 decreased to approximately 24% compared to approximately 30% for 2007. The decrease was due to certain tax positions being effectively settled or remeasured as a result of completion of the U.S. Internal Revenue Service ("IRS") examination for the tax years of 2003 and 2004. Two tax positions remain under review through the IRS administrative appeals process related to these years. The lower tax rate also reflected the tax effect of purchased R&D charges, primarily associated with the acquisition of the assets of the Lifestent® family of stents from Edwards Lifesciences, partially offset by the tax effect of the Salute II charge. The tax effect of the Salute II charge reflected the write-off of assets, which were primarily located in a low tax jurisdiction. See Note 2 Acquisitions and Divestitures of the notes to consolidated financial statements.

As a result of the retroactive application of the research tax credit under the Emergency Economic Stabilization Act of 2008, the income tax provision for the year was reduced by approximately $2.5 million in the fourth quarter of 2008.

The company's effective tax rate increased by approximately 10% in 2007 from approximately 20% in 2006 primarily related to the impact of the reduction of the income tax provision in 2006 of approximately $23.8 million due to the expiration of the statute of limitations in the United States for the 2000 through 2002 tax years and the resolution of the U.K. audit for the 1999 through 2003 tax years, as well as changes in the mix of income among tax jurisdictions.

Net Income and Earnings per Share

The company reported 2008 consolidated net income of $416.5 million, an increase of 2% from 2007 consolidated net income of $406.4 million. The company reported 2008 diluted earnings per share of $4.06, an increase of 6% from 2007 diluted earnings per share of $3.84. Net income in 2008 reflected a non-cash charge for . . .