NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1. Basis of Presentation and New Accounting Standards

Bristol-Myers Squibb Company (the Company) prepared these unaudited consolidated financial statements following the requirements of the Securities and Exchange Commission (SEC) and U.S. generally accepted accounting principles (GAAP) for interim reporting. Under those rules, certain notes and other financial information that are normally required by GAAP for annual financial statements can be condensed or omitted. The Company is responsible for the consolidated financial statements included in this Form 10-Q. These consolidated financial statements include all normal and recurring adjustments necessary for a fair presentation of the Company’s financial position at September 30, 2004 and December 31, 2003, the results of its operations for the three and nine months ended September 30, 2004 and 2003 and cash flows for the nine months ended September 30, 2004 and 2003. These consolidated financial statements and the related notes should be read in conjunction with the consolidated financial statements and the related notes included in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2003 (2003 Form 10-K/A). PricewaterhouseCoopers LLP (PwC), an independent registered public accounting firm, has performed a review of the unaudited consolidated financial statements included in this Form 10-Q, and their review report thereon accompanies this Form 10-Q.

Revenues, expenses, assets and liabilities can vary during each quarter of the year. Accordingly, the results and trends in these unaudited consolidated financial statements may not be the same as those for the full year.

The Company recognizes revenue when substantially all the risks and rewards of ownership have transferred to the customer, primarily at the time of shipment of products. In the case of certain sales made by the Nutritionals and Other Healthcare segments and certain non-U.S. businesses within the Pharmaceuticals segment, revenue is recognized on the date of receipt by the purchaser. Revenues are reduced at the time of sale to reflect expected returns that are estimated based on historical experience. Additionally, provisions are made at the time of sale for all discounts, rebates and estimated sales allowances based on historical experience updated for changes in facts and circumstances, as appropriate. Such provisions are recorded as a reduction of revenue.

In the case of sales made to wholesalers (i) as a result of incentives, (ii) in excess of the wholesaler’s ordinary course of business inventory level, (iii) at a time when there was an understanding, agreement, course of dealing or consistent business practice that the Company would extend incentives based on levels of excess inventory in connection with future purchases and (iv) at a time when such incentives would cover substantially all, and vary directly with, the wholesaler’s cost of carrying inventory in excess of the wholesaler’s ordinary course of business inventory level, substantially all the risks and rewards of ownership do not transfer upon shipment and, accordingly, such sales are accounted for using the consignment model. The determination of when, if at all, sales to a wholesaler meet the foregoing criteria involves evaluation of a variety of factors and a number of complex judgments. Under the consignment model, the Company does not recognize revenue upon shipment of product. Rather, upon shipment of product the Company invoices the wholesaler, records deferred revenue at gross invoice sales price and classifies the inventory held by the wholesaler as consignment inventory at the Company’s cost of such inventory. The Company recognizes revenue when the consignment inventory is no longer subject to the incentive arrangements described above, but not later than when such inventory is sold through to the wholesalers’ customers, on a first-in first-out (FIFO) basis. Sales of the Company’s oncology products through the Oncology Therapeutics Network (OTN) business are also accounted for on a consignment basis. OTN uses a third-party distributor to ship these products to its customers. Upon shipment of the products to the distributor, the Company records deferred revenue at gross invoice sales price and classifies the inventory held by the distributor as consignment inventory at the Company’s cost of such inventory. The Company recognizes the revenue (net of the gross to net sales adjustments discussed in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies,” all of which involve significant estimates and judgements) when the consignment inventory is sold to OTN’s customers.

The Company’s estimates of inventory at the wholesalers and deferred revenue on consigned inventory are based on the projected prescription demand-based sales for its products, as well as the Company’s analysis of third-party information, including information obtained from certain wholesalers with respect to their inventory levels and sell-through to customers and third-party market research data, and the Company’s internal information. The Company’s estimates are subject to inherent limitations of estimates that rely on third-party data, as certain third-party information was itself in the form of estimates, and reflect other limitations.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1. Basis of Presentation and New Accounting Standards (Continued)

The preparation of financial statements in conformity with GAAP requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant assumptions are employed in estimates used in determining values of intangible assets, restructuring charges and accruals, sales rebate and return accruals, legal contingencies and tax assets and liabilities, as well as in estimates used in applying the revenue recognition policy and accounting for retirement and postretirement benefits (including the actuarial assumptions). Actual results could differ from the estimated results.

Certain prior period amounts have been reclassified to conform to the current period presentation.

In June 2004, the Financial Accounting Standards Board (FASB) issued a final Staff Position (FSP) No. 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Medicare Act). The Medicare Act introduces a prescription drug benefit under Medicare as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. FSP No. 106-2 requires that the effects of the new law be accounted for under Statement of Financial Accounting Standards (SFAS) No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions. The Company adopted FSP No. 106-2 in the third quarter of 2004, retroactive to January 1, 2004. There is an expected reduction in net periodic benefit cost for other benefits of $8 million for the full year of 2004, based on the remeasurement of the accumulated postretirement benefit obligation as of January 1, 2004. The effect of the adoption of FSP No. 106-2 is not material to the Company’s consolidated financial statements, and in accordance with FSP No. 106-2, the Company recorded the year-to-date portion of $6 million as a reduction of third quarter expense. (see “Item 1. Financial Statements—Note 14. Pension and Other Postretirement Benefit Plans”).

In March 2004, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 03-06, Participating Securities and the Two-Class Method Under FAS 128 , which requires the use of the two-class method of computing earnings per share for those enterprises with participating securities or multiple classes of common stock. The consensus is effective for fiscal periods beginning after the date of Board ratification on March 31, 2004. The adoption of EITF No. 03-06 did not affect the Company’s consolidated financial statements.

In December 2003, the SEC issued Staff Accounting Bulletin No. 104 (SAB 104), Revenue Recognition , which supersedes SAB 101, Revenue Recognition in Financial Statements . SAB 104’s primary purpose is to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements, superseded as a result of the issuance of EITF 00-21, Accounting for Revenue Arrangements with Multiple Deliverables. Additionally, SAB 104 rescinds the SEC’s Revenue Recognition in Financial Statements Frequently Asked Questions and Answers (the FAQ) issued with SAB 101 that had been codified in SEC Topic 13, Revenue Recognition . While the wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104. The initial adoption of this accounting pronouncement did not have a material effect on the Company’s consolidated financial statements.

In December 2003, the FASB amended SFAS No. 132, Employer’s Disclosures about Pensions and Other Post Retirement Benefits . The amended Statement revises employer’s disclosures about pension plans and other post-retirement benefit plans. It does not change the measurement or recognition of those plans required by FASB Statements No. 87, Employers’ Accounting for Pensions , No. 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits , and No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions . Revisions included in the amended Statement are effective for financial statements for the fiscal years ended after December 15, 2003. The Company has provided the required disclosures (see “Item 1. Financial Statements—Note 14. Pension and Other Postretirement Benefit Plans” and “—Note 15. Legal Proceedings and Contingencies”).

In December 2003, the FASB revised Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46). FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. FIN 46 also requires disclosures about variable interest entities that a company is not required to consolidate but in which it has a significant variable interest. The consolidation requirements of FIN 46 (as revised) apply immediately to variable interest entities created after January 31, 2003 and to existing entities in the first fiscal year or interim period ending after March 15, 2004. Certain of the disclosure requirements apply to all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The initial adoption of this accounting pronouncement did not have a material effect on the consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note1. Basis of Presentation and New Accounting Standards (Continued)

Investments in securities, comprised of marketable equity securities and securities and investments for which market values are not readily available, are included in other assets. Marketable equity securities are classified as available-for-sale and reported at fair value. Fair value is based on quoted market prices as of the end of the reporting period. Securities and investments for which market values are not readily available are carried at cost. Unrealized gains and losses are reported, net of their related tax effects, as a component of accumulated other comprehensive income (loss) in stockholders’ equity until sold. At the time of sale, any gains or losses are calculated by the specific identification method and recognized in other income or expense, respectively. Losses are also recognized in other expense when a decline in market value is deemed to be other than temporary.

In accordance with SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, the following table summarizes the Company’s results on a pro forma basis as if it had recorded compensation expense based upon the fair value at the grant date for awards under these plans consistent with the methodology prescribed under SFAS No. 123, Accounting for Stock-Based Compensation , for the three and nine months ended September 30, 2004 and 2003:

Note 2. Alliances and Investments

Sanofi-Aventis

The Company has agreements with Sanofi-Aventis (Sanofi) for the codevelopment and cocommercialization of AVAPRO*/AVALIDE* (irbesartan), an angiotensin II receptor antagonist indicated for the treatment of hypertension, and PLAVIX* (clopidogrel), a platelet aggregation inhibitor. The worldwide alliance operates under the framework of two geographic territories; one in the Americas (principally the United States, Canada, Puerto Rico and Latin American countries) and Australia and the other in Europe and Asia. Accordingly, two territory partnerships were formed to manage central expenses, such as marketing, research and development and royalties, and to supply finished products to the individual countries. In general, at the country level, agreements either to copromote (whereby a partnership was formed between the parties to sell each brand) or to comarket (whereby the parties operate and sell their brands independently of each other) are in place. The agreements expire on the later of (i) with respect to PLAVIX*, 2013 and, with respect to AVAPRO*/AVALIDE*, 2012 in the Americas and Australia and 2013 in Europe and Asia and (ii) the expiration of all patents and other exclusivity rights in the applicable territory.

The Company acts as the operating partner for the territory covering the Americas and Australia and owns a 50.1% majority controlling interest in this territory. Sanofi’s ownership interest in this territory is 49.9%. As such, the Company consolidates all country partnership results for this territory and records Sanofi’s share of the results as a minority interest, net of taxes, which was $149 million and $108 million for the three months ended September 30, 2004 and 2003, respectively, and $371 million and $230 million for the nine months ended September 30, 2004 and 2003, respectively. For the three months ended September 30, 2004 and 2003, the Company recorded sales in this territory and in comarketing countries (Germany, Italy, Spain and Greece) of $1,144 million

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Note 2. Alliances and Investments (Continued)

and $876 million, respectively, and $3,040 million and $2,186 million for the nine months ended September 30, 2004 and 2003, respectively.

Sanofi acts as the operating partner of the territory covering Europe and Asia and owns a 50.1% majority financial controlling interest in this territory. The Company’s ownership interest in this territory is 49.9%. The Company accounts for the investment in partnership entities in this territory under the equity method and records its share of the results in equity in net income of affiliates in the consolidated statement of earnings. The Company’s share of net income from these partnership entities before taxes was $67 million and $61 million for the three months ended September 30, 2004 and 2003, respectively, and $201 million and $157 million for the nine months ended September 30, 2004 and 2003, respectively.

In 2001, the Company and Sanofi formed an alliance for the copromotion of irbesartan, as part of which the Company contributed the irbesartan distribution rights in the United States and Sanofi paid the Company $150 million in 2002 and $200 million in 2001. The Company accounted for this transaction as a sale of an interest in a license and deferred and amortized the $350 million into other income over the expected useful life of the license, which is approximately eleven years. The Company recognized in other income $8 million in each of the three-month periods ended September 30, 2004 and 2003 and $24 million in each of the nine-month periods ended September 30, 2004 and 2003.

Otsuka

The Company has a worldwide commercialization agreement with Otsuka Pharmaceutical Co., Ltd. (Otsuka), to codevelop and copromote ABILIFY* (aripiprazole) for the treatment of schizophrenia and related psychotic disorders, except in Japan, China, Taiwan, North Korea, South Korea, the Philippines, Thailand, Indonesia, Pakistan and Egypt. The Company began copromoting the product with Otsuka in the U.S. and Puerto Rico in November 2002. In the U.S. and Puerto Rico, the Company purchases products from Otsuka and performs finish manufacturing for supply to Otsuka’s U.S. affiliates. In June 2004, the Company received marketing approval from the European Commission. The product is currently copromoted with Otsuka in the United Kingdom and Germany, and will also copromote it in France and Spain. The Company records alliance revenue for its contractual share of the net sales in these copromotion countries, excluding the United Kingdom, and records all expenses related to the product. Alliance revenue is recorded by the Company as net sales based upon 65% of Otsuka’s net sales in the copromotion countries. The Company recognizes this alliance revenue when ABILIFY* is shipped and all risks and rewards of ownership have transferred to Otsuka’s customers.

The Company also has an exclusive right to sell ABILIFY* in a number of other countries in Europe, the Americas and Asia. In these countries, as sales commence, the Company will record 100% of the net sales and related cost of products sold. Under the terms of the agreement, the Company purchases the product from Otsuka and performs finish manufacturing for sale by the Company to its customers. The agreement expires in November 2012 in the U.S. and Puerto Rico. For the countries in the European Union where the Company has the exclusive right to sell ABILIFY*, the agreement expires on the tenth anniversary of the first commercial sale. In each other country where the Company has the exclusive right to sell ABILIFY*, the agreement expires on the later of the tenth anniversary of the first commercial sale in such country or expiration of the applicable patent in such country.

The Company recorded revenue for ABILIFY* of $165 million and $101 million for the three months ended September 30, 2004 and 2003, respectively, and $402 million and $203 million for the nine months ended September 30, 2004 and 2003, respectively. Total milestone payments made to Otsuka from 1999 through September 2004 were $217 million, of which $157 million was expensed as acquired in-process research and development in 1999. The $60 million of capitalized payments are amortized into cost of products sold over the remaining life of the agreement in the U.S., which is approximately eight years. Included in the $60 million of capitalized payments is a $10 million payment made in July 2004 for attainment of marketing approval by the European Union.

ImClone

The Company has a commercialization agreement expiring in September 2018 with ImClone Systems, Inc. (ImClone), a biopharmaceutical company focused on developing targeted cancer treatments, for the codevelopment and copromotion of ERBITUX* in the United States. In February 2004, the U.S. Food and Drug Administration (FDA) approved the Biologics License Application (BLA) for ERBITUX* for use in combination with irinotecan in the treatment of patients with Epidermal Growth Factor Receptor (EGFR)-expressing, metastatic colorectal cancer who are refractory to irinotecan-based chemotherapy and for use as a single agent in the treatment of patients with EGFR-expressing, metastatic colorectal cancer who are intolerant to irinotecan-based chemotherapy. In June 2004, the FDA approved ImClone’s Chemistry, Manufacturing and Controls supplemental BLA for licensure of its BB36 manufacturing facility. In accordance with the terms of the agreement, the Company paid ImClone $200 million, of

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 2. Alliances and Investments (Continued)

which $140 million was paid in March 2002 and $60 million was paid in March 2003. The Company paid $250 million in March 2004 as a milestone payment for the initial approval of ERBITUX*. An additional $250 million is payable upon FDA approval for use in treating an additional tumor type. Under the agreement, ImClone receives a distribution fee based on a flat rate of 39% of product revenues in North America. In addition, the Company also has codevelopment and copromotion rights in Canada and Japan to the extent the product is commercialized in such countries.

With respect to the $200 million of milestone payments the Company paid ImClone in 2002 and 2003, $160 million was expensed in the first quarter of 2002 as acquired in-process research and development, and $40 million was recorded as an additional equity investment to eliminate the income statement effect of the portion of the milestone payment for which the Company has an economic claim through its ownership interest in ImClone. The Company accounts for the $250 million approval milestone paid in March 2004 as a license acquisition and amortizes the payment into cost of products sold over the expected useful life of the license, which is approximately fourteen years. The Company amortized into cost of products sold $4 million for the three months ended September 30, 2004 and $10 million for the nine months ended September 30, 2004.

The Company determines its equity share in ImClone’s net income or loss by eliminating from ImClone’s results the milestone revenue ImClone recognizes for the pre-approval milestone payments that were recorded by the Company as additional equity investment. For the three and nine month periods ended September 30, 2004, the Company recorded net income of $4 million and $2 million, respectively, for its share of ImClone’s net income. For the three and nine month periods ended September 30, 2003 the Company recorded a net loss of $7 million and $33 million, respectively, for its share of ImClone’s net losses. The Company records its share of the results in equity in net income of affiliates in the consolidated statement of earnings. The Company recorded net sales for ERBITUX* of $84 million in the three months ended September 30, 2004 and $173 million since its approval by the FDA in February 2004.

The Company’s recorded investment in ImClone common stock as of September 30, 2004 was $65 million. On a per share basis, the carrying value of the ImClone investment and the closing market price of the ImClone shares as of September 30, 2004 were $4.51 and $52.85, respectively.

Merck

In April 2004, the Company entered into a collaboration agreement with Merck & Co., Inc. (Merck) for worldwide codevelopment and copromotion for muraglitazar, the Company’s dual PPAR (peroxisome proliferator activated receptor) agonist, currently in Phase III clinical development for use in treating Type 2 diabetes. Under the terms of the agreement, the Company received a $100 million upfront payment in May 2004, and is entitled to receive $275 million in additional payments upon achievement of certain regulatory milestones. The Company and Merck will jointly develop the clinical and marketing strategy for muraglitazar, share equally in future development and commercialization costs and copromote the product to physicians on a global basis, with Merck to receive payments based on net sales levels. A New Drug Application (NDA) for muraglitazar is expected to be submitted to the FDA by the end of 2004 for United States regulatory approval.

The upfront payment of $100 million received was deferred and is being amortized into other income over the expected useful life of the agreement, which is approximately sixteen years. In the three and nine months ended September 30, 2004, the Company recognized $2 million and $3 million in other income, respectively. In addition, the Company records Merck’s share of codevelopment costs as a reduction to research and development expense and Merck’s share of copromotion costs as a reduction to advertising and product promotion expense. For the three months ended September 30, 2004, the Company recorded $23 million and $1 million as a reduction to its research and development and advertising and product promotion expenses, respectively. For the nine months ended September 30, 2004, the Company recorded $56 million and $3 million as a reduction to its research and development and advertising and product promotion expenses, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 3. Restructuring and Other Items

In the third quarter of 2004, the Company recorded a pre-tax charge of $59 million related to the termination benefits and other related costs for workforce reductions and downsizing and streamlining of worldwide operations primarily in Europe, the United States, Canada and Puerto Rico. Of this charge, $58 million relates to employee termination benefits and related expenses for approximately 1,060 selling, administrative, manufacturing and research and development personnel, and $1 million relates to the consolidation of certain research facilities. These charges were partially offset by an adjustment to prior period restructuring reserve of $2 million, primarily due to a reduction of estimated separation expenses.

The following table presents a detail of the charges by segment and type for the three months ended September 30, 2004. The Company expects to substantially complete these activities by late 2004.

In addition, the Company also recorded $48 million in accelerated depreciation, including $47 million as cost of products sold, and $1 million as research and development related to the closure of certain manufacturing facilities in North America and Europe expected to be closed by the end of 2006. The Company also recorded a $10 million upfront milestone payment, as research and development expense, to Solvay Pharmaceuticals (Solvay) as part of a worldwide codevelopment and cocommercialization agreement.

In the second quarter of 2004, the Company recorded a pre-tax charge of $11 million related to the termination benefits and other related costs for workforce reductions and downsizing and streamlining of worldwide operations primarily in the United States, Canada, Europe, and Puerto Rico. Of this charge, $9 million was related to employee termination benefits and related expenses for approximately 120 selling, administrative and manufacturing personnel, and $2 million related to the consolidation of certain research facilities. These charges were partially offset by an adjustment to prior period restructuring reserve of $5 million, primarily due to a reduction of estimated separation expenses. In addition, the Company also recorded $11 million in accelerated depreciation as cost of products sold related to the closure of certain manufacturing facilities in North America expected to be closed by the end of 2006, and a $25 million milestone payment to Pierre Fabre Medicament S.A. (Pierre Fabre) as part of an in-license agreement related to JAVLOR*, a novel investigational anti-cancer agent, as research and development expense.

In the first quarter of 2004, the Company recorded a pre-tax charge of $12 million related to termination benefits and other related costs for workforce reductions and downsizing and streamlining of worldwide operations primarily in Israel and the United States. Of this charge, $9 million was primarily related to employee termination benefits and related expenses for approximately 90 selling and administrative personnel and $3 million related to relocation expenses and retention benefits. Additionally, the Company also recorded $17 million in accelerated depreciation and asset impairments, of which $13 million was recorded to cost of products sold, and $4 million to other expense, net, related to the closure of certain manufacturing facilities in North America expected to be closed by the end of 2006. These assets will continue to be depreciated until the facility closures are complete. The Company also paid $5 million to Flamel Technologies S.A. (Flamel) as part of an in-license agreement related to the product Basulin, which was recorded as research and development expense. The in-license agreement with Flamel was terminated in September 2004.

In the third quarter of 2003, the Company recorded $31 million of pre-tax charges related to the downsizing and streamlining of worldwide operations and $7 million related to relocation expenses. The charges related to downsizing and streamlining of worldwide operations included $9 million related to termination benefits for workforce reductions of approximately 100 employees in the Other Healthcare and Pharmaceuticals segments due to the rationalization of worldwide operations in Europe, North America, and Central America, $21 million of accelerated depreciation of assets in manufacturing facilities in North America expected to be closed by the end of 2006 recorded in cost of products sold and $1 million for retention benefits. The charge of $9 million was partially offset by a gain of $3 million from the sale of assets previously written off. In addition, the Company recorded $21 million in research and development related to the up-front payments for two licensing agreements. The Company also reported $1 million for a milestone payment received related to a developmental project sold in previous years.

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Note 3. Restructuring and Other Items (Continued)

In the second quarter of 2003, the Company recorded $18 million of pre-tax charges related to the rationalization of its manufacturing facilities, including $13 million related to termination benefits for workforce reductions of approximately 430 manufacturing employees in the Pharmaceutical segment and downsizing and streamlining of worldwide manufacturing operations and $5 million related to relocation expenses and retention benefits. The charge of $18 million was offset by an adjustment to prior period restructuring reserves of $25 million primarily due to higher than anticipated recovery on assets previously written off as restructuring, and a reduction of estimated separation expenses. The Company also recorded $11 million primarily related to accelerated depreciation for certain manufacturing facilities in North America expected to be closed by the end of 2006 recorded in cost of products sold. These assets will continue to be depreciated until the facility closures are complete.

In the first quarter of 2003, the Company recorded a pre-tax charge of $12 million, related to termination benefits for workforce reductions of 340 manufacturing employees in the Pharmaceuticals segment and downsizing and streamlining of worldwide manufacturing operations. In addition, the Company recorded $10 million in cost of products sold for asset impairments and $4 million in cost of products sold for accelerated depreciation of certain manufacturing facilities in North America that were closed in April 2004.

Restructuring charges and spending against accrued liabilities associated with prior and current actions are as follows:

Note 4. Acquisitions and Divestitures

In February 2004, the Company completed the divestiture of its Adult Nutritional Business to Novartis for $387 million, including $20 million contingent on the achievement of contractual requirements and a $22 million upfront payment for a supply agreement. The Company recorded a preliminary pre-tax gain of $316 million, which included the $20 million payment received as a result of the satisfaction of contractual requirements, and a $5 million reduction in Company goodwill associated with the Mead Johnson product lines. The Company will record future adjustments to the gain upon the satisfaction of other post-closing matters.

In April 2004, the Company completed the acquisition of Acordis Speciality Fibres (Acordis), which is headquartered in the United Kingdom and supplies materials to ConvaTec for its Wound Therapeutics line. The acquisition is expected to strengthen the Company’s leadership position in wound therapies. The Company purchased all the stock of Acordis for $150 million, and incurred $8 million of acquisition costs in connection with the transaction. An additional $10 million payment is contingent on the achievement of future sales volumes. The purchase price for the acquisition was allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. Of the $158 million, $63 million was allocated to in-process research and development, which represents the estimated fair value of acquired in-process projects, consisting primarily of Medicel, a wound therapeutics product, which had not yet reached technological feasibility and had no alternative future use, and was therefore written off. The estimated fair value of these projects was determined by employment of a discounted cash flow model; and $22 million was assigned to identifiable intangible assets, predominantly patents. The excess of the purchase price over the estimated fair values of net assets acquired was approximately $73 million and was recorded as goodwill. This acquisition was accounted for by the purchase method, and, accordingly, results of operations have been included in the accompanying consolidated financial statements from the date of acquisition.

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Note 5. Earnings Per Share

The numerator for basic earnings per share is net earnings less preferred stock dividends. The numerator for diluted earnings per share is net earnings, plus interest expense on convertible debt, net of tax, less preferred stock dividends. The denominator for basic earnings per common share is the weighted average number of common shares outstanding during the period. The denominator for diluted earnings per common share is the weighted average number of common shares outstanding during the period, plus the incremental shares outstanding assuming the exercise of dilutive stock options and assumed conversion of convertible debt bonds. The computations for basic and diluted earnings per common share are as follows:

Weighted-average shares issuable upon the exercise of stock options, which were not included in the diluted earnings per share calculation because they were not dilutive, were 129 million for the three and nine month periods ended September 30, 2004 and 116 million for the three and nine month periods ended September 30, 2003.

Note 6. Other Expense, Net

The components of other expense, net are:

Interest expense was reduced by net interest rate swap gains of $39 million and $33 million for the three months ended September 30, 2004 and 2003, respectively, and $120 million and $79 million for the nine months ended September 30, 2004 and 2003, respectively. Interest income relates primarily to cash, cash equivalents and investments in marketable debt securities.

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Note 7. Income Taxes

The effective income tax rate on earnings before minority interest and income taxes was 20.9% and 22.4% for the three and nine months ended September 30, 2004, respectively, compared with 25.4% and 24.5% for the three and nine months ended September 30, 2003, respectively. The lower effective tax rate was primarily driven by lower earnings in the U.S. as a result of increased reserves for litigation and restructuring, and product exclusivity losses. The rate was also affected by the favorable resolution of certain tax contingencies.

Congress recently approved the American Jobs Creation Act of 2004 (the “Jobs Creation Act”). The Jobs Creation Act contains a number of provisions that might affect the Company’s future effective tax rate. The most significant provision would allow the Company to elect to deduct from its taxable income 85% of certain eligible dividends received by the Company from non-U.S. subsidiaries before the end of 2005 if those dividends are reinvested in the U.S. for eligible purposes. The Company estimates that up to approximately $9 billion in dividends from its non-U.S. subsidiaries could potentially be eligible for this deduction. The Company is currently evaluating the amount of such eligible dividends that its non-U.S. subsidiaries will remit. The Company anticipates accruing a provision for taxes associated with eligible dividends in the fourth quarter of 2004. Pending resolution of certain matters, and subject to further guidance from the Department of the Treasury, the Company estimates that such provision for taxes would be 5.25% of the amount of eligible dividends. The Company is also evaluating the impact the Jobs Creation Act will have on its effective tax rate for 2004, 2005 and later years.

To the extent the Company determines that it will make qualifying remittances, income taxes will not be provided on the balance of unremitted earnings since it continues to be management’s practice and intent to keep these earnings permanently invested offshore.

Note 8. Inventories

The major categories of inventories follow:

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(UNAUDITED)