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. For the six months ended June 30, 2009, the company's research and development ("R&D") expense was $78.1 million. The company expects R&D expense 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.

Recent Developments

On June 15, 2009, the company acquired worldwide rights and related assets of the hernia products business of Brennen Medical, LLC for $17.0 million. The acquisition includes technology for a non-crosslinked xenograft device, which expands Bard's product offerings in hernia repair. In connection with this acquisition, the company decided to discontinue the sale of an existing xenograft device by the end of 2009 and recorded a related non-cash charge of $5.7 million ($5.2 million after tax). See Note 2 of the notes to condensed consolidated financial statements for additional discussion of the acquisition.

On April 22, 2009, the company announced a plan (the "Plan") to reduce its overall cost structure and improve efficiency. The Plan included the consolidation of certain businesses in the United States and the realignment of certain sales and marketing functions outside the United States. The Plan resulted in the elimination of certain positions and other employee terminations worldwide. The company recorded one-time termination costs of $5.6 million ($3.7 million after tax) in the second quarter of 2009. Activities under the Plan were substantially complete as of June 30, 2009, with the total pre-tax cost of $15.4 million ($10.2 million after tax). Substantially all of these costs are cash expenditures that are related to separation and other employee termination benefits of which the majority are expected to be paid by the end of 2009. The company expects the Plan to result in pre-tax cost savings of approximately $25 million on an annual basis. See Note 3 of the notes to condensed consolidated financial statements for additional discussion of the restructuring.

In January 2008, the company acquired the assets of the LifeStent® family of stents from Edwards Lifesciences Corporation ("Edwards Lifesciences"). The company received Pre-Market Approval from the U.S. Food and Drug Administration ("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. See Note 2 of the notes to condensed consolidated financial statements for additional discussion of the acquisition.

Results of Operations

Net Sales

Bard's consolidated net sales for the quarter ended June 30, 2009 were $624.6 million, an increase of 1% on a reported basis (6% on a constant currency basis) over the quarter ended June 30, 2008 consolidated net sales of

$617.1 million. Bard's consolidated net sales for the six months ended June 30, 2009 were $1,221.0 million, an increase of 2% on a reported basis (6% on a constant currency basis) over consolidated net sales of $1,201.1 million for the six months ended June 30, 2008. 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 for the quarter ended June 30, 2009 by less than 0.1% compared to the same period in the prior year. Exchange rate fluctuations had the effect of decreasing consolidated net sales for the quarter ended June 30, 2009 by approximately 5% as compared to the same period in the prior year. Price changes had the effect of increasing consolidated net sales for the six months ended June 30, 2009 by 0.1% compared to the same period in the prior year. Exchange rate fluctuations had the effect of decreasing consolidated net sales for the six months ended June 30, 2009 by 4% as compared to the same period in the prior year. 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 United States net sales for the quarter ended June 30, 2009 of $433.6 million increased 7% compared to $406.3 million in the prior year quarter. International net sales for the quarter ended June 30, 2009 of $191.0 million decreased 9% on a reported basis (increased 5% on a constant currency basis) compared to $210.8 million in the prior year quarter. Bard's United States net sales for the six months ended June 30, 2009 of $856.1 million increased 6% compared to $805.5 million in the prior year period. International net sales for the six months ended June 30, 2009 of $364.9 million decreased 8% on a reported basis (increased 6% on a constant currency basis) compared to $395.6 million in the prior year period.

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

Product Group Summary of Net Sales

                                                    Quarter Ended June 30,                           Six Months Ended June 30,
                                                                            Constant                                            Constant
(dollars in millions)                       2009      2008     Change       Currency         2009        2008      Change       Currency
Vascular                                   $ 169.1   $ 163.6        3 %           11 %     $   326.5   $   314.0        4 %           11 %
Urology                                      174.7     176.4       (1 )%           3 %         337.5       345.1       (2 )%           2 %
Oncology                                     167.2     163.7        2 %            6 %         328.2       313.7        5 %            8 %
Surgical Specialties                          91.9      88.9        3 %            8 %         186.0       181.9        2 %            6 %
Other                                         21.7      24.5      (11 )%          (7 )%         42.8        46.4       (8 )%          (4 )%

Total net sales                            $ 624.6   $ 617.1        1 %            6 %     $ 1,221.0   $ 1,201.1        2 %            6 %

Vascular Products - Bard markets endovascular products, and a wide range of products for the peripheral vascular market, including electrophysiology products and surgical graft products. Consolidated net sales for the quarter ended June 30, 2009 of vascular products increased 3% on a reported basis (11% on a constant currency basis) compared to the prior year quarter. U.S. net sales for the quarter ended June 30, 2009 of vascular products grew 14% compared to the prior year quarter. International net sales for the quarter ended June 30, 2009 decreased 7% on a reported basis (increased 9% on a constant currency basis) compared to the prior year quarter. Consolidated net sales for the six months ended June 30, 2009 of vascular products increased 4% on a reported basis (11% on a constant currency basis) compared to the same period in the prior year. U.S. net sales for the six months ended June 30, 2009 of vascular products grew 14% compared to the same period in the prior year. International net sales for the six months ended June 30, 2009 decreased 7% on a reported basis (increased 8% on a constant currency basis) compared to the same period in the prior year.

Consolidated net sales for the quarter and six months ended June 30, 2009 of endovascular products increased 12% on a reported basis (19% on a constant currency basis) compared to the prior year periods. The company's percutaneous transluminal angioplasty balloon catheters, vena cava filters, peripheral vascular stents and stent-graft devices contributed to the growth in this category for both the quarter and six months ended June 30, 2009.

Consolidated net sales for the quarter ended June 30, 2009 of electrophysiology products decreased 11% on a reported basis (1% on a constant currency basis) compared to the prior year quarter. Consolidated net sales for the six months ended June 30, 2009 of electrophysiology products decreased 11% on a reported basis (2% on a constant currency basis) compared to the same period in the prior year. The declines in net sales in the company's electrophysiology laboratory systems and diagnostic electrophysiology catheters were the primary contributors to the decrease in the quarter. The company experienced a slowdown in electrophysiology lab system orders for both the quarter and six months ended June 30, 2009. The company believes this is due to decreased capital spending in the hospital market in response to global economic conditions, a trend that may continue.

Consolidated net sales for the quarter ended June 30, 2009 of surgical graft products decreased 11% on a reported basis (4% on a constant currency basis) compared to the prior year quarter. Consolidated net sales for the six months ended June 30, 2009 of surgical graft products decreased 9% on a reported basis (3% on a constant currency basis) compared to the same period in the prior year.

Urology Products - Bard markets a wide range of products for the urology market, including basic drainage products, continence products and urological specialty products. Bard also markets the StatLock ® catheter stabilization products, which are used to secure many types of catheters sold by Bard and other companies. The majority of basic drainage products, StatLock® catheter stabilization devices and certain urological specialty products are sold through distributors in the United States. Consolidated net sales for the quarter ended June 30, 2009 of urology products decreased 1% on a reported basis (increased 3% on a constant currency basis) compared to the prior year quarter. U.S. net sales represented 71% of consolidated net sales of urology products for the quarter ended June 30, 2009 and increased 1% compared to the prior year quarter. International net sales for the quarter ended June 30, 2009 of urology products decreased 6% on a reported basis (increased 9% on a constant currency basis) compared to the prior year quarter. Consolidated net sales for the six months ended June 30, 2009 of urology products decreased 2% on a reported basis (increased 2% on a constant currency basis) compared to the same period in the prior year. U.S. net sales of urology products decreased 1% compared to the same period in the prior year. International net sales for the six months ended June 30, 2009 of urology products decreased 6% on a reported basis (increased 8% on a constant currency basis). In both the quarter and six months ended June 30, 2009, U.S. distributors reduced their inventory of the company's products in this category, a trend that may continue.

Basic drainage products represent the core of the company's urology business. Consolidated net sales for the quarter ended June 30, 2009 of basic drainage products were flat on a reported basis (increased 4% on a constant currency basis) compared to the prior year quarter. Consolidated net sales for the quarter ended June 30, 2009 of infection control Foley catheter products grew 4% on a reported basis (5% on a constant currency basis) compared to the prior year quarter. Consolidated net sales for the six months ended June 30, 2009 of basic drainage products decreased 1% on a reported basis (increased 2% on a constant currency basis) compared to the same period in the prior year. Consolidated net sales for the six months ended June 30, 2009 of infection control Foley catheters increased 3% on a reported basis (4% on a constant currency basis) compared to the same period in the prior year. Sales of basic drainage products for both the quarter and six months ended June 30, 2009 were impacted by inventory reductions made by distributors, a trend that may continue.

Consolidated net sales for the quarter and six months ended June 30, 2009 of urological specialty products, which include brachytherapy products and services, decreased 14% on a reported basis (10% on a constant currency basis) compared to the same periods in the prior year. The decrease in sales of urological specialty products was primarily driven by a decline in sales of brachytherapy products for both the quarter and six months ended June 30, 2009. The company believes that the brachytherapy market has been losing procedural share to alternative therapies, a trend that may continue.

Consolidated net sales for the quarter ended June 30, 2009 of continence products decreased 2% on a reported basis (increased 6% on a constant currency basis) compared to the prior year quarter. Consolidated net sales for the six months ended June 30, 2009 of continence products decreased 3% on a reported basis (increased 4% on a constant currency basis) compared to the same period in the prior year. Sales of continence products for both the quarter and six months ended June 30, 2009 were primarily impacted by a decline in sales of pelvic floor reconstruction products, a trend that may continue.

Consolidated net sales for the quarter ended June 30, 2009 of the StatLock ® catheter stabilization product line increased 16% on a reported basis (18% on a constant currency basis) compared to the prior year quarter. Consolidated net sales for the six months ended June 30, 2009 of the StatLock ® catheter stabilization product line increased 12% on a reported basis (14% on a constant currency basis) compared to the same period in the prior year. Sales of the StatLock® catheter stabilization product line for both the quarter and six months ended June 30, 2009 were impacted by inventory reductions made by distributors.

Oncology Products - The company's oncology products include specialty access products used primarily for chemotherapy. Consolidated net sales for the quarter ended June 30, 2009 of oncology products grew 2% on a reported basis (6% on a constant currency basis) compared to the prior year quarter. U.S. net sales grew 8% compared to the prior year quarter. International net sales for the quarter ended June 30, 2009 of oncology products decreased 13% on a reported basis (flat on a constant currency basis) compared to the prior year quarter. Consolidated net sales for the six months ended June 30, 2009 for oncology products increased 5% on a reported basis (8% on a constant currency basis) compared to the same period in the prior year. U.S. net sales for the six months ended June 30, 2009 increased 9% compared to the same period in the prior year. International net sales for the six months ended June 30, 2009 decreased 7% on a reported basis (increased 7% on a constant currency basis) compared to the same period in the prior year. The company's peripherally inserted central catheters ("PICCs") were the primary growth driver for the quarter. The company's specialty access ports and PICCs were the primary contributors to the growth in the oncology category for the six months ended June 30, 2009.

Surgical Specialty Products - Surgical specialty products include soft tissue repair, performance irrigation and hemostasis product lines. Consolidated net sales for the quarter ended June 30, 2009 of surgical specialty products increased 3% on a reported basis (8% on a constant currency basis) compared to the prior year quarter. U.S. net sales represented 73% of consolidated net sales of surgical specialty products for the quarter ended June 30, 2009 and increased 10% compared to the prior year quarter. International net sales for the quarter ended June 30, 2009 of surgical specialty products decreased 10% on a reported basis (increased 3% on a constant currency basis) compared to the prior year quarter. Consolidated net sales for the six months ended June 30, 2009 for surgical specialty products increased 2% on a reported basis (6% on a constant currency basis) compared to the same period in the prior year. U.S. net sales for the six months ended June 30, 2009 increased 8% compared to the same period in the prior year. International net sales for the six months ended June 30, 2009 decreased 12% on a reported basis (flat on a constant currency basis) compared to the same period in the prior year.

Consolidated net sales for the quarter ended June 30, 2009 of the company's soft tissue repair product line, which includes hernia repair implants and hernia fixation products, increased 6% on a reported basis (11% on a constant currency basis) compared to the prior year quarter. Consolidated net sales for the six months ended June 30, 2009 for soft tissue repair product line increased 2% on a reported basis (6% on a constant currency basis) compared to the same period in the prior year. Sales in this category for both the quarter and six months ended June 30, 2009 were impacted by growth in sales of both biologic hernia repair and hernia fixation products and a decline in sales of synthetic hernia products, a trend that 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 2005 recall to include certain manufacturing lots of the Composix® Kugel® large oval and large circle patches. In December 2006, the company decided to voluntarily expand the March 2006 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 relates specifically to non-conformances in Davol's quality systems previously identified in the related Form-483 notice. 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 the third quarter of 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 notified the company that it was satisfied with the company's responses to the Form-483 notices. The company cannot, however, give any assurances as to the expected date of resolution of the matters included in the Warning Letter.

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 address the 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 states 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. The company cannot, however, 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. The company expects a re-inspection by the FDA of the Puerto Rico facility in the third quarter of 2009.

Other Products - The other product group includes irrigation, wound drainage and certain original equipment manufacturers' products. Consolidated net sales of other products for the quarter ended June 30, 2009 decreased 11% on a reported basis (7% on a constant currency basis) compared to the prior year quarter. Consolidated net sales of other products for the six months ended June 30, 2009 decreased 8% on a reported basis (4% on a constant currency basis) compared to the same period in the prior year.

Costs and Expenses

The following is a summary of major costs and expenses as a percentage of net
sales for the quarters and six month periods ended June 30, 2009 and 2008,
respectively:



                                                       Quarter Ended                  Six Months Ended
                                                          June 30,                        June 30,
                                                    2009            2008            2009            2008
Cost of goods sold                                    38.2 %          39.3 %          37.9 %          39.0 %
Marketing, selling and administrative expense         27.2 %          29.3 %          27.4 %          29.1 %
Research and development expense                       6.7 %           6.2 %           6.4 %          10.3 %
Interest expense                                       0.5 %           0.5 %           0.5 %           0.5 %
Other (income) expense, net                            1.2 %           5.3 %           1.4 %           2.4 %

Total costs and expenses                              73.8 %          80.6 %          73.6 %          81.3 %

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, amortization of intangible assets, and settlement of hedging activities. The impact of incremental amortization of intangible assets acquired in the past 12 months increased cost of goods sold as a percentage of net sales by approximately 20 basis points over both the prior year quarter and six month period. Reductions in cost of goods sold were attributed primarily to cost improvements, which more than offset the impact of incremental amortization of intangible assets.

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 expense as a percentage of net sales for the quarter and six months ended June, 2009 was 27.2% and 27.4%, respectively, a decrease of 210 basis points and 170 basis points, respectively, compared to the prior year periods due to company-wide spending controls.

Research and development expense - Research and development expense consists principally of costs related to internal research and development activities, milestone payments for third-party research and development activities and purchased R&D costs 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. For the quarter ended June 30, 2009, the company spent $41.7 million on research and development activities compared to $38.2 million in the prior year quarter. For the six months ended June 30, 2009, the company spent $78.1 million on research and development activities compared to $124.0 million in the prior year period. A purchased R&D charge of $2.3 million was included for the quarter and six months ended June 30, 2009. A purchased R&D charge of $49.3 million primarily associated with the acquisition of the LifeStent® family of stents from Edwards Lifesciences was included for the six months ended June 30, 2008.

Interest expense - Interest expense was $3.0 million for both quarters ended June 30, 2009 and 2008. Interest expense was $6.0 million for both six month periods ended June 30, 2009 and 2008.

Other (income) expense, net - The table below presents the components of other (income) expense, net, for the quarters and six month periods ended June 30, 2009 and 2008, respectively:

                                                  Quarter Ended                      Six Months Ended
                                                     June 30,                            June 30,
(dollars in millions)                         2009              2008             2009               2008
Interest income                            $     (0.8 )      $     (4.2 )      $    (2.2 )       $     (9.8 )
Foreign exchange (gains) losses                  (2.7 )              -              (2.0 )              1.0
Asset dispositions                                4.5              36.8              4.5               36.8
Restructuring                                     5.6                -              15.4                 -
Other, net                                        1.0                -               1.2                0.6

Total other (income) expense, net          $      7.6        $     32.6        $    16.9         $     28.6

Interest income - For the quarter ended June 30, 2009, interest income was . . .