Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

The number of shares of the registrant’s Common Stock, par value $1.00 per share,

outstanding as of ~~July~~October 31, 2004 was ~~614,790,270~~616,448,448 shares.

The accompanying notes are an integral part of these condensed consolidated financial statements.

The unaudited interim condensed consolidated financial statements of Baxter International Inc. and its subsidiaries (the company or Baxter) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These interim condensed consolidated financial statements should be read in conjunction with the ~~restated~~ consolidated financial statements and notes included in the company’s ~~Annual Report on~~ Form 10-K/A ~~for the year ended December 31, 2003. Refer to Note 2 regarding the amendments made to the company’s Form 10-K~~ for the year ended December 31, 2003.

In the opinion of management, the interim condensed consolidated financial statements reflect all adjustments necessary for a fair presentation of the interim periods. All such adjustments, unless otherwise noted herein, are of a normal, recurring nature (refer to Note 32 for certain special charges recorded during the second quarter of 2004). The results of operations for the interim period are not necessarily indicative of the results of operations to be expected for the full year.

Certain reclassifications have been made to conform the 2003 financial statements and notes to the 2004 presentation.

The company has a number of stock-based employee compensation plans, including stock option, stock purchase and restricted stock plans. The company applies the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for these plans. In accordance with this intrinsic value method, no compensation expense is recognized for the company’s fixed stock options that have an exercise price equal to or greater than the market price on the date of grant, and employee stock purchase subscriptions. The following table illustrates the effect on net income and earnings per share (EPS) if the company had applied the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure, an Amendment of FASB Statement No. 123,” to all stock-based employee compensation.

Financial Accounting Standards Board (FASB) Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46), was adopted July 1, 2003. Refer to the company’s 2003 ~~Annual Report~~Form 10-K/A for further information. In December 2003 the FASB revised and reissued FIN 46 (FIN 46-R). The provisions of FIN 46-R were required to be adopted no later than March 31, 2004. Baxter adopted FIN 46-R on March 31, 2004, and adoption of the revised standard did not have a material impact on the company’s consolidated financial statements.

The company has restated its previously issued financial statements for 2001 through 2003 and the first quarter of 2004, primarily the result of the inappropriate application of accounting principles for revenue recognition and inadequate provisions for bad debts in Brazil during this period. Specifically, the company has restated previously issued financial information for 2001 through 2003 contained in its previously filed Form 10-Ks for the years ended December 31, 2003, 2002 and 2001 by filing a Form 10-K/A for the year ended December 31, 2003. The company’s previously reported quarterly information in its Form 10-Qs for the quarters ended March 31, 2004, September 30, 2003, June 30, 2003 and March 31, 2003 have also been restated by filing this Form 10-Q and Form 10-Q/As for the quarters ended March 31, 2004 and September 30, 2003. As a result of the restatement, in aggregate, net sales decreased $37 million (0.2% of the originally reported amount) and net income decreased $33 million (1.5% of the originally reported amount) over the three-year period ended December 31, 2003. For the first quarter of 2004, net sales were unchanged as a result of the restatement and net income decreased $2 million (1.1% of the originally reported amount).

~~The following is a summary of the impact of the restatement on the previously issued consolidated income statements and consolidated balance sheet included in this filing.~~

~~Consolidated Statements of Income for the Three- and Six-Month Periods Ended June 30, 2003~~

Senior management became aware of these issues in 2004 through the reporting procedures established under Baxter’s Global Business Practice Standards. Upon becoming aware of the issues in Brazil, senior management, with the assistance of the company’s internal audit team, conducted a preliminary investigation. This preliminary investigation was followed by a more comprehensive investigation by the Audit Committee of Baxter’s Board of Directors with the assistance of independent legal counsel and forensic and other accountants. As a result of the issues in Brazil, the company is implementing changes to its internal control over financial reporting. Refer to “Part I. Item 4. Controls and Procedures” for further information.

Financial results for the second quarter of 2004 include several special charges in addition to the restructuring charge discussed in Note 5. These special charges, as summarized below, reduced pre-tax income from continuing operations by $115 million, and reduced net income by $20 million or $0.04 per diluted share. By line item, cost of goods sold increased $45 million, marketing and administrative expenses increased $55 million, other expense, net increased $15 million, and income tax expense decreased $95 million.

The company established a reserve due to the uncertain collectibility of a loan from Cerus Corporation (Cerus). This reserve was determined based on Cerus’ current financial position. Also, based on the lengthening age of accounts receivables and more current market data in certain markets, the company increased the allowance for doubtful accounts. In addition, certain Shared Investment Plan participants have defaulted on their loans, which were due and payable in May 2004, requiring the company to make payments to the bank under its guarantee arrangement. Refer to Note 10 for further information regarding the Shared Investment Plan. While the company has not forgiven any of these loans and is pursuing repayment of the defaulted amounts, a reserve was recorded for potential losses, representing the amount that the company paid to the bank under the loan guarantee as a result of the defaulted loans. These adjustments, which were recorded in marketing and administrative expenses, totaled $55 million.

Based upon second quarter 2004 restructuring decisions in the Bioscience segment, which will reduce inventory production in an effort to focus on more profitable sales in the plasma market, the company expects that future sales in this market will be less than previously expected. As a result, the company increased inventory reserves (a charge to cost of goods sold) by $28 million.

As discussed in the 2003 Annual Report, the company uses forwards to hedge the risk to earnings relating to anticipated intercompany sales denominated in foreign currencies (cash flow hedges). Based on a current analysis, intercompany sales from the United States to Europe (denominated in Euros) are expected to be lower than originally projected. In particular, due to the strong European sales launch of ADVATE (Antihemophilic Factor (Recombinant), Plasma/Albumin-Free Method) rAHF-PFM, the company’s advanced recombinant therapy (which is manufactured in Europe), current forecasts of intercompany sales of Recombinate Antihemophilic Factor (rAHF) from the United States into Europe have been reduced. Because it is probable that these originally forecasted sales will no longer occur, the related deferred hedge loss was recorded as a $17 million charge to cost of goods sold.

Based on lower than expected sales from the company’s Pathogen Inactivation (PI) programs, strategic decisions announced by Cerus, Baxter’s strategic partner in PI development, during the second quarter of 2004, along with a current assessment of future market potential for these products, the company performed an impairment review of its fixed assets in this program and recorded a $15 million impairment charge, which was classified as other expense.

The income tax benefit relating to the above-mentioned charges totaled $40 million. In addition, as a result of the completion of tax audits in the second quarter of 2004, $55 million of reserves for matters previously under review were reversed into income in the quarter.

Other income and expense typically includes amounts relating to fluctuations in currency exchange rates, minority interests, income and losses relating to equity method investments, ~~divestitures~~divestiture gains and asset impairment charges.

The increase in other expense for the three months ended September 30, 2004 principally related to foreign currency fluctuations. The increase in other expense for the nine months ended September 30, 2004 principally related to foreign currency fluctuations and lower equity method income. Equity method income was lower in 2004 because Baxter divested its equity method investment in Acambis, Inc. in late 2003.

~~Asset~~In addition, asset impairment charges totaled $18 million inand $13 million for the ~~three- and six-month~~nine-month periods ended ~~June~~September 30, 2004 ~~(including the $15 million PI charge discussed above),~~ and ~~totaled $13 million in the six months ended June 30, 2003.~~2003, respectively. The charges related to investments whose declines in value were deemed to be other than temporary, with the investments written down to estimated fair value, as determined by reference to quoted market values, where ~~available. Expense~~available (see below for more information regarding the second quarter ~~and~~2004 special charge). Other expense for the year-to-date period ended ~~June~~September 30, 2004 also included ~~$6 million~~a charge relating to the application of FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (FIN 45), to the company’s guarantee of the Shared Investment Plan loans, ~~(which were extended during the second quarter of 2004),~~ as further discussed in Note ~~10.~~9. Included in other expense in the ~~quarter and~~ year-to-date period ended ~~June~~September 30, 2003 were $11 million in costs associated with the redemption of the company’s convertible bonds. Partially offsetting these expenses in 2003 was income relating to the company’s investment in Acambis, Inc. Baxter divested its equity method investment in Acambis, Inc. in late 2003. In addition, expense relating to fluctuations in currency exchange rates increased significantly in both the quarter and year-to-date period ended June 30, 2004.

Total comprehensive ~~loss~~income was ~~$237~~$352 million and ~~$46~~$306 million for the three and ~~six~~nine months ended ~~June~~September 30, 2004, respectively, and ~~total comprehensive income was $98~~$257 million ~~(as restated)~~ and ~~$281~~$539 million ~~(as restated)~~ for the three and ~~six~~nine months ended ~~June~~September 30, 2003, respectively. The increase in comprehensive income during the quarter was principally related to favorable currency translation adjustments and higher net income. The decrease in comprehensive income during the ~~quarter and~~ year-to-date period was principally related to unfavorable currency translation adjustments and lower net income, partially offset by changes in the value of the company’s net investment and foreign currency cash flow hedges.

The numerator for both basic and diluted EPS is net earnings available to common shareholders. The denominator for basic EPS is the weighted-average number of common shares outstanding during the period. The dilutive effect of outstanding employee stock options, employee stock purchase subscriptions and the purchase contracts in the company’s equity units is reflected in the denominator for diluted EPS by application of the treasury stock method under SFAS No. 128, “Earnings per Share.” Prior to the adoption of SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” on July 1, 2003, the dilutive effect of equity forward agreements was reflected in the denominator for diluted EPS by application of the reverse treasury stock method. Refer to the 2003 ~~Annual Report~~Form 10-K/A for additional information regarding the company’s equity units (which did not have a

dilutive effect in either 2004 or 2003), as well as the equity forward agreements (which were terminated during the third quarter of 2003). The following is a reconciliation of the shares (denominator) of the basic and diluted per-share computations.

~~Diluted shares were the same as basic shares for the quarter ended June 30, 2004 as the impact of the common stock equivalents would be anti-dilutive.~~

Goodwill was ~~$864~~$871 million, ~~$603~~$602 million and ~~$166~~$167 million for the Medication Delivery, BioScience and Renal segments, respectively, at ~~June~~September 30, 2004. Goodwill was $872 million, $605 million and $171 million for the Medication Delivery, BioScience and Renal segments, respectively, at December 31, 2003. The change in the goodwill balance for each segment principally related to fluctuations in currency exchange rates.

The following is a summary of the company’s intangible assets subject to amortization at ~~June~~September 30, 2004 and December 31, 2003. Intangible assets with indefinite useful lives are not material to the company.

The amortization expense for these intangible assets was $16 million and ~~$15~~$11 million for the three months ended ~~June~~September 30, 2004 and 2003, respectively, and ~~$32~~$48 million and ~~$27~~$38 million for the ~~six~~nine months ended ~~June~~September 30, 2004 and 2003, respectively. At ~~June~~September 30, 2004, the anticipated annual amortization expense for these intangible assets is ~~$63~~$67 million, ~~$57~~$60 million, ~~$54~~$56 million, ~~$47~~$45 million, ~~$42~~$41 million and ~~$41~~$39 million in 2004, 2005, 2006, 2007, 2008 and 2009, respectively.

Financial results for the nine-month period ended September 30, 2004 include several special charges recorded during the second quarter, in addition to the restructuring charge discussed in Note 4. These special charges, as summarized below, reduced pre-tax income from continuing

operations by $115 million, and reduced net income for the nine months ended September 30, 2004 by $20 million or $0.03 per diluted share. By line item, cost of goods sold increased $45 million, marketing and administrative expenses increased $55 million, other expense, net increased $15 million, and income tax expense decreased $95 million.

The company established a reserve due to the uncertain collectibility of a loan from Cerus Corporation (Cerus). This reserve was determined based on Cerus’ current financial position. Also, based on the lengthening age of accounts receivables and more current market data in certain markets, the company increased the allowance for doubtful accounts. In addition, certain Shared Investment Plan participants defaulted on their loans, which were due and payable in May 2004, requiring the company to make payments to the bank under its guarantee arrangement. Refer to Note 9 for further information regarding the Shared Investment Plan. While the company has not forgiven any of these loans and is pursuing repayment of the defaulted amounts, a reserve was recorded for potential losses, representing the amount that the company paid to the bank under the loan guarantee as a result of the defaulted loans. These adjustments, which were recorded in marketing and administrative expenses, totaled $55 million.

As discussed in the 2003 Form 10-K/A, the company uses forwards to hedge the risk to earnings relating to anticipated intercompany sales denominated in foreign currencies (cash flow hedges). Based on a second quarter 2004 analysis, intercompany sales from the United States to Europe (denominated in Euros) are expected to be lower than originally projected. In particular, due to the strong European sales launch of ADVATE (Antihemophilic Factor (Recombinant), Plasma/Albumin-Free Method) rAHF-PFM, the company’s advanced recombinant therapy (which is manufactured in Europe), the second quarter 2004 forecasts of intercompany sales of Recombinate Antihemophilic Factor (rAHF) from the United States into Europe had been reduced. Because it was probable that these originally forecasted sales would no longer occur, the related deferred hedge loss was recorded as a $17 million charge to cost of goods sold.

As a result of lower than expected sales from the company’s Pathogen Inactivation programs, strategic decisions announced in the second quarter of 2004 by Cerus, along with an assessment of future market potential for these products, the company performed an impairment review of its fixed assets in this program and recorded a $15 million impairment charge, which was classified as other expense.

During the fourth quarter of 2002, the company recorded a $294 million pre-tax charge ($229 million on an after-tax basis) principally associated with management’s decision to divest the majority of the services businesses included in the Renal segment. Refer to the 2003 ~~Annual Report~~Form 10-K/A for further information.

During 2003, the company sold RMS Lifeline, Inc. and RMS Disease Management, Inc. and the Medication Delivery segment’s offsite pharmacy admixture products and services business, and closed or had under contract the majority of transactions in connection with the divestiture of the Renal Therapy Services centers. Management expects the divestiture plan to be completed during 2004.

Net revenues relating to the discontinued businesses were $3$2 million and ~~$51~~$42 million for the three months ended ~~June~~September 30, 2004 and 2003, respectively, and ~~$20~~$22 million and ~~$100~~$142 million for the ~~six~~nine months ended ~~June~~September 30, 2004 and 2003, respectively. ~~The losses from the~~During 2004, discontinued operations ~~were $1~~generated income of $17 million and ~~$11~~$5 million for the ~~three months~~three- and nine-month periods ended ~~June~~September 30, ~~2004 and 2003,~~ respectively ~~(net of tax benefit of $1 million in 2003), and $12 million for the first six months of both 2004 and 2003~~ (net of tax benefits of $4$24 million ~~in both year-to-date periods)~~and $28 million, respectively). The income was principally related to tax and other adjustments, as the company completes divestitures. During 2003, discontinued operations generated losses of $5 million and $17 million for the three- and nine-month periods ended September 30, respectively (net of tax benefits of $3 million and $6 million, respectively).

Included in the pre-tax charge was $269 million pertaining to asset impairments, principally relating to goodwill and property and equipment. Also included in the charge was $25 million for cash costs, principally relating to severance and other employee-related costs associated with the elimination of approximately 75 positions, as well as legal and contractual commitment costs. ~~During the second quarter of 2004,~~Approximately $2 million of the reserve for cash costs was ~~utilized.~~utilized during 2004. The remaining reserve is insignificant and is expected to be substantially utilized in 2004.

In January 2004, management announced plans (which were finalized during the second quarter of 2004) to implement restructuring initiatives (in addition to the actions initiated in 2003, as discussed below). Management undertook these actions in order to reduce the company’s overall cost structure and to drive sustainable improvements in financial performance.

These actions include the elimination of ~~approximately~~over 4,000 positions, or 8% of the global workforce, as management reorganizes and streamlines the company. Approximately 50% of the positions being eliminated are in the United States. Approximately three quarters of the estimated savings ~~will~~ impact general and administrative expenses, with the remainder primarily impacting cost of sales. The eliminations impact all three of the company’s segments, along with the corporate headquarters and functions. Baxter is also further reducing plasma production and closing additional plasma collection centers. In addition, the company is exiting certain other facilities and activities. As a result, management recorded a restructuring charge in the second quarter of 2004 totaling $543 million ($394 million, or $0.64 per diluted share, on an after-tax basis), principally for severance and costs associated with the closing of facilities and the exiting of contracts.

Included in the 2004 pre-tax charge was $196 million relating to asset impairments, almost all of which was to write down property, plant and equipment (PP&E), based on market data for the assets. Also included in the 2004 pre-tax charge was $347 million for cash costs, principally pertaining to severance and other employee-related costs. Approximately one third of the targeted positions have been eliminated as of September 30, 2004.

During the second quarter of 2003, the company recorded a $337 million restructuring charge ($202 million, or $0.33 per diluted share, on an after-tax basis) principally associated with management’s decision to close certain facilities and reduce headcount on a global basis. Management decided to take these actions in order to position the company more competitively and to enhance profitability. The company has closed 26 plasma collection centers across the United States, as well as a plasma fractionation facility located in Rochester, Michigan. In addition, the company ~~is consolidating~~has consolidated and ~~integrating~~integrated several facilities, including facilities in Maryland; Frankfurt, Germany; Issoire, France; and Mirandola, Italy. Management discontinued Baxter’s recombinant hemoglobin protein program because it did not meet expected clinical milestones. Also included in the charge were costs related to other reductions in the company’s workforce.

Included in the 2003 pre-tax charge was $128 million relating to asset impairments, principally to write down PP&E, and goodwill and other intangible assets. The impairment loss relating to the PP&E was based on market data for the assets. The impairment loss relating to goodwill and other intangible assets was based on management’s assessment of the value of the related

businesses. Also included in the 2003 pre-tax charge was $209 million for cash costs, principally pertaining to severance and other employee-related costs associated with the elimination of approximately 3,200 positions worldwide. ~~Approximately 94%~~Virtually all of the targeted positions have been eliminated as of ~~June~~September 30, ~~2004.~~2004, and the program is substantially complete, except for remaining severance and other cash payments to be made in the future.

The following summarizes activity in the company’s restructuring reserves for cash costs for the ~~six-month~~nine-month period ended ~~June~~September 30, 2004.

With respect to the 2003 restructuring charge, the majority of the severance and other costs are expected to be paid ~~and the remaining positions are expected to be eliminated~~ in 2004. With respect to the 2004 restructuring charge, approximately ~~$100~~$50 million ~~and $150 million of the costs are~~is expected to be paid ~~in 2004 and 2005, respectively, with~~during the remainder ~~to be paid~~of 2004, approximately $150 million in 2005, and the remainder in 2006.

Where economical, the company has entered into agreements with various financial institutions in which undivided interest in certain pools of receivables are sold. Refer to the 2003 ~~Annual Report~~Form 10-K/A for further information regarding these arrangements. There have been no material changes in the company’s accounting policies with respect to its securitization arrangements. The key assumptions used in measuring the fair values of the retained interests are substantially unchanged from ~~that~~those disclosed in the 2003 ~~Annual Report.~~Form 10-K/A.

~~The~~Baxter’s securitization arrangements resulted in net cash outflows of ~~$77~~$84 million and ~~$120~~$274 million for the three and ~~six~~nine months ended ~~June~~September 30, 2004, respectively, and generated net cash inflows of ~~$19~~$10 million and net cash outflows of ~~$54~~$44 million for the three and ~~six~~nine months ended ~~June~~September 30, 2003, respectively.

The following is a summary of net expense relating to the company’s pension and other postretirement benefit plans.

In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act (the Act) was signed into law. The Act introduces a prescription drug benefit under Medicare (Part D) 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). Detailed final regulations necessary to implement the Act have not yet been issued. The effects of the Act are not recognized in the company’s net expense and benefit obligation as management is not yet able to determine whether the company’s benefits are actuarially equivalent to Medicare (Part D). However, based on preliminary analyses, management ~~does not expect~~has determined that any impact of the Act ~~to have a material impact~~ on the company’s consolidated financial ~~statements.~~statements will not be material.

The company operates in three segments, each of which are strategic businesses that are managed separately because each business develops, manufactures and sells distinct products and services. The segments and a description of their businesses are as follows:

Medication Delivery, which provides a range of intravenous solutions and specialty products that are used in combination for fluid replenishment, general anesthesia, nutrition therapy, pain management, and antibiotic therapy;BioScience, which develops biopharmaceuticals, biosurgery products, vaccines and blood collection, processing and storage products and technologies for transfusion therapies; andRenal, which develops products and provides services to treat end-stage kidney disease.

Certain items are maintained at corporate headquarters (Corporate) and are not allocated to the segments. They primarily include most of the company’s debt and cash and equivalents and related net interest expense, corporate headquarters costs, certain non-strategic investments and related income and expense, certain nonrecurring gains and losses, certain special charges (such as in-process research and development and restructuring), deferred income taxes, certain foreign currency fluctuations, certain employee benefit costs, the majority of foreign currency and interest rate hedging activities, and certain litigation liabilities and related insurance receivables.

Financial information for the company’s segments for the quarter and year-to-date period ended ~~June~~September 30 is as follows.

The following is a reconciliation of segment pre-tax income to income from continuing operations before income taxes per the consolidated income statements.

As discussed in the 2003 ~~Annual Report,~~Form 10-K/A, in order to align management and shareholder interests, in 1999 the company sold 6.1 million shares of the company’s stock to 142 of Baxter’s senior managers for $198 million in cash. The participants used five-year full-recourse personal bank loans to purchase the stock at the May 3, 1999 closing price (adjusted for the company’s stock split) of $31.81. Baxter guaranteed repayment to the banks in the event a participant in the plan defaulted on his or her obligations, which were due on May 6, 2004. The plan also included certain risk-sharing provisions, which terminated on May 6, 2004. The company was entitled to 50% of any gain relating to stock sold on or before May 3, 2002. For stock sold after May 3, 2002 and through May 6, 2004, the company shared 50% in any loss incurred by the participants relating to a stock price decline.

In May 2003, management announced that, in order to continue to align management and shareholder interests and to balance both the short- and long-term needs of Baxter, the board of directors authorized the company to provide a new three-year guarantee at the May 6, 2004 loan due date for the non-executive officer employees who remain in the plan, should they elect to extend their loans. As noted above, as of May 6, 2004, the 50% risk-sharing provision included in the original plan terminated. The amount under the company’s loan guarantee at ~~June~~September 30, 2004 relating to the 7270 eligible employees who have extended their loans was ~~$100~~$95 million. In accordance with FIN 45 (which was effective for guarantees issued or modified after December 31, 2002), the company has recorded a $6$5 million liability for the fair value of these ~~guarantees in the consolidated balance sheet as of June 30, 2004.~~guarantees. As with the guarantee issued in 1999, the company may take actions relating to participants and their assets to obtain full reimbursement for any amounts the company pays to the banks pursuant to the loan guarantee.

With respect to the participants who were either not eligible or did not elect to extend their loans on the May 6, 2004 due date, the majority paid their principal and interest obligations in full. However, seven participants ~~have~~did not ~~paid~~pay their principal and interest ~~obligations. The company is pursuing repayment of~~obligations in full on the ~~defaulted loans, in order to obtain reimbursement for amounts the company paid to the bank pursuant to the loan guarantee.~~due date. While the company has not forgiven any of these loans, a reserve of $10 million, which ~~represents~~represented the amount that the company paid to the banks under the loan guarantee, was recorded during the second quarter of 2004 for potential losses (as discussed in Note 32 above).

The company collected monies during the third quarter from certain of the participants, and the reserve balance totaled $8 million at September 30, 2004. The company is pursuing repayment of the remaining defaulted loan balance in order to obtain full reimbursement for amounts the company paid to the bank pursuant to the loan guarantee.

As discussed in Note 2 to the consolidated financial statements, the company has restated its previously issued financial statements for the years ended December 31, 2001, 2002 and 2003 and the first quarter of 2004. The restatement is primarily the result of the inappropriate application of accounting principles for revenue recognition and inadequate provisions for bad debts in Brazil during this period. As a result of the restatement, in aggregate, net sales decreased $37 million (0.2% of the originally reported amount) and net income decreased $33 million (1.5% of the originally reported amount) over the three-year period ended December 31, 2003. For the first quarter of 2004, net sales were unchanged as a result of the restatement and net income decreased $2 million (1.1% of the originally reported amount). Refer to Note 2 for further information, including the impact of the restatement for each of the periods included in this filing.

Refer to the company’s Form 10-K/A for the year ended December 31, 2003 ~~(which reflects the above-mentioned restatement)~~ for management’s discussion and analysis of financial condition and results of operations of Baxter International Inc. and its subsidiaries (the company or Baxter) for the year ended December 31, 2003. The following is management’s discussion and analysis of the financial condition and results of operations of the company for the quarter and year-to-date period ended ~~June~~September 30, ~~2004 (with the prior year information restated, as applicable).~~2004.

Currency exchange rate fluctuations benefited sales growth by 43 points and 54 points during the three and ~~six~~nine months ended ~~June~~September 30, 2004, respectively, principally because the United States Dollar weakened since the prior year ~~period~~periods relative to the Euro. These fluctuations impacted sales growth for all three segments. Refer to Note 98 for a summary of net sales by segment.

The Medication Delivery segment generated 7%4% and 8%7% sales growth for the three- and ~~six-month~~nine-month periods ended ~~June~~September 30, 2004, respectively (including 2 and 43 percentage points ~~due~~relating to the favorable impact of foreign currency fluctuations for the quarter and year-to-date period, respectively)~~, with the strongest sales growth in international markets.~~.

Increased sales of certain generic and branded pre-mixed drugs, as well as increased contract services revenues, contributed 1 point and 2 points of sales growth for ~~both~~ the quarter and year-to-date ~~period.~~period, respectively. Sales of intravenous therapies, which principally include intravenous solutions and nutritional products, were flat for the quarter and contributed 2 ~~points and 3~~ points to the segment’s growth rate for the ~~quarter and~~ year-to-date ~~period, respectively, and principally related to growth outside the United States.~~period. Sales of anesthesia and critical care products were ~~relatively~~ flat for the quarter and contributed 1 point to the segment’s growth rate for the ~~six-month~~nine-month period, with ~~sales growth~~pricing stable for ~~the quarter~~both periods, and volume impacted by domestic wholesaler inventory reduction actions. Sales of electronic infusion pumps and related tubing sets ~~also~~ contributed 3 points and 2 points ~~and 1 point~~ to the growth rate for the quarter and year-to-date periods, respectively, with device sales the primary contributors. Increased device volume in the United States during the quarter, and in the United States and Canada during the ~~primary contributor. Impacting~~year-to-date period, was partially offset by reduced pricing. The growth in volume in the ~~segment’s~~United States in 2004 was partially due to the timing of group purchasing organization (GPO) contract awards, as certain customers delayed capital purchases in the prior year in anticipation of a new contract award. The reduced pricing, which is expected to impact growth for ~~both~~ the ~~quarter and six-month period was~~remainder of

2004, is primarily due to the renegotiated long-term contracts with ~~group purchasing organizations,~~certain GPOs, principally Premier Purchasing Partners L. P. (Premier)~~, the~~. The most significant ~~of which~~renegotiated Premier contract became effective in February 2004. ~~While sales growth during the remainder of 2004 is expected to continue to be impacted by the reduced pricing included in these contracts, management~~Management believes that over time, the impact of reduced pricing will be substantially offset by increased sales volumes and product mix upgrades.

Sales in the BioScience segment increased ~~16%~~4% and ~~13%~~9% for the three- and ~~six-month~~nine-month periods ended ~~June~~September 30, 2004, respectively (including 54 and 75 percentage points due to the favorable impact of foreign currency fluctuations for the quarter and year-to-date period, respectively)~~, with sales growth strongest in the United States.~~.

The primary driver of the segment’s growth rate for the quarter and year-to-date ~~periods~~period was increased sales of recombinant Factor VIII products, contributing 96 points and 7 points of growth in the three- and ~~six-month~~nine-month periods, respectively. Growth in sales of recombinant products in both the quarter and year-to-date period was principally fueled by ~~higher demand for Recombinate Antihemophilic Factor (rAHF) (Recombinate), as well as~~ the launch of the advanced recombinant therapy, ADVATE (Antihemophilic Factor (Recombinant), Plasma/Albumin-Free Method) rAHF-PFM, which received regulatory approval in the United States in July 2003 and in Europe in March 2004. OfPartially offsetting the ~~contribution~~growth in sales volume relating to ~~recombinants, sales of~~the ADVATE ~~contributed 7 points and 5 points~~launch in the ~~quarter and six-month~~year-to-date period ~~respectively, with~~was the impact of reductions in wholesaler inventory levels of recombinant products in the United States, which management expects will continue for the remainder of the year. Management expects an increased sales contribution ~~expected~~from ADVATE during the ~~second half~~remainder of 2004 as the launch of this new product ~~continues and broadens in the United States and Europe. These factors were partially offset by the impact of the entry or re-entry into this marketplace in 2003 by certain competitors.~~continues.

Sales of plasma-based products (excluding anti-body therapies) increased slightly during the quarter and contributed ~~5 points and 3~~2 points to the segment’s growth rate in the year-to-date period. The increase in the quarter ~~and six-month period, respectively.~~was due solely to foreign currency fluctuations. The growth in the year-to-date period was primarily due to increased sales volume of FEIBA, an anti-inhibitor coagulant complex, ~~and Tisseel, a fibrin sealant~~along with increased pricing of this product, partially offset by reduced pricing in other product lines. Increased sales of FEIBA were partially offset by the impact of competitive pressures across certain product lines, as well as a continuing shift in the market from plasma-based to recombinant hemophilia products. As discussed further below, as a result of these competitive pressures, the company closed 26 plasma collection centers and a plasma fractionation plant during 2003, and is reducing plasma production and closing additional centers during 2004, to improve the ~~economics~~profitability of the business.

Higher sales of anti-body therapies, including IGIV (immune globulin intravenous) for immune deficiencies, contributed 1 point and 2 points to the growth rate for ~~both~~ the quarter and year-to-date period, respectively, principally due to ~~increased volume and~~ improved pricing in the United ~~States. Increased sales~~States and, in the year-to-date period, higher product availability due to cycle time reduction initiatives.

of non-plasma-based biosurgery products (CoSeal and FloSeal) contributed 1 point to the growth rate for both the quarter and year-to-date period. Sales of transfusion therapies products were flat for the quarter and contributed 1 point of growth for the six-month period. Partially offsetting the growth in these product lines was the impact of lower sales of transfusion therapies products and vaccines ~~principally due to~~in both the quarter and year-to-date period. The lower sales of vaccines principally related to smallpox ~~vaccines~~ and Neis-Vac-C ~~which is for~~(for the prevention of meningitis C.C) vaccines. Sales of vaccines are impacted by the timing of government tenders, and there were no significant tenders filled during the first ~~half~~nine months of 2004. Management expects that the segment’s growth for the remainder of the year will continue to be ~~negatively~~ impacted by ~~expected reductions in wholesaler inventory levels, and~~ lower sales of plasma and transfusion therapies products due to consolidation in the plasma industry.

Sales from continuing operations in the Renal segment increased 6%8% and ~~11%~~10% for the three- and ~~six-month~~nine-month periods ended ~~June~~September 30, 2004, respectively (including 54 and 6 percentage points, respectively, due to the favorable impact of foreign currency fluctuations)~~, with sales growth strongest in international markets.~~. Increased sales of products for peritoneal dialysis contributed 45 points and 7 points to the segment’s growth rate for the quarter and year-to-date periods, ~~respectively, with~~respectively. In addition to the favorable impact of foreign currency fluctuations, the sales growth in both periods was primarily driven by an increased number of peritoneal dialysis patients, principally in Europe, Japan and Asia. Changes in the pricing of the segment’s peritoneal dialysis products were not a significant factor. Increased penetration of products for peritoneal dialysis continues to be strongest in emerging markets, where many people with end-stage renal disease are currently under-treated. The ~~majority of the~~ remaining ~~2 points and 4~~3 points of growth ~~during~~for both the quarter and ~~six months~~the nine-month period ended ~~June~~September 30, 2004, respectively, was primarily related to increased sales of hemodialysis hardware and related products.

The following table shows key ratios of certain income statement items as a percent of sales.

~~Foreign~~The decline in gross margin in both the quarter and year-to-date period was impacted by changes in product mix. In the BioScience segment, the gross margin declined in the year-to-date period principally because increased margins in certain product lines, such as recombinants, were offset by lower sales of other high-margin products. In the Medication Delivery segment, the above-mentioned pricing pressures associated with the renegotiated contracts with Premier contributed to Baxter’s margin decline in both the quarter and year-to-date period. In the Renal segment, the margin declined in both the quarter and nine-month period due to an unfavorable mix of sales of peritoneal and hemodialysis products. In addition, while 2004 sales benefited from the effect of foreign currency fluctuations, ~~(including the impact of hedging activities),~~ principally relating to the strengthened Euro, ~~accounted for approximately 1 point and 2 points of~~ the gross margin ~~decline for~~was unfavorably impacted by the ~~three and six-month periods~~company’s foreign currency hedging activities, especially in the year-to-date period ended ~~June~~September 30, ~~2004, respectively. The increased~~2004. Increased inventory reserves and foreign currency hedge adjustments totaling $45 million (included in the second quarter 2004 special charges, which are discussed in Note 3)2) accounted for ~~approximately 2 points and~~almost 1 point of the decline during the quarter and six-month period, respectively. In the BioScience segment, a higher mix of plasma-based product sales, coupled with competition and pricing pressures across certain product lines, unfavorably affected the company’s gross margin during both the second quarter and first half of 2004. In the Medication Delivery segment, the above-mentioned pricing pressures associated with the renegotiated contracts with Premier also contributed to Baxter’s margin decline, particularly during the second quarter.year-to-date period. In addition, costs associated with the company’s employee pension and other postretirement benefit plans have increased since the prior year periods (as further discussed

below). These factors, which unfavorably impacted the company’s gross margin, were partially offset by cost savings relating to the company’s 2003 and 2004 restructuring programs (as further discussed below).

Marketing and administrative expenses as a percent of sales ~~increased during both~~were flat for the quarter and increased during the year-to-date period. Increased receivable reserves totaling $55 million (discussed in Note 3)2) increased the expense ratio by approximately ~~3 points and~~ 1 point in the ~~quarter and~~ year-to-date ~~period ended June 30, 2004, respectively. Apart from these~~period. Expenses also increased ~~receivable reserves, increased expenses relating primarily to~~because of foreign currency fluctuations, employee pension and other postretirement benefit plan costs, and the impact of reduced costs in the prior year

due to a change in the employee vacation ~~policy,~~policy. Offsetting these increases were ~~more than offset by~~ the benefits of the company’s restructuring programs. See further discussion below regarding the restructuring initiatives.

Expenses associated with the company’s pension and other postretirement benefit plans increased ~~$15~~$13 million and ~~$32~~$45 million during the ~~second~~third quarter and first ~~half~~nine months of 2004, respectively, as detailed in Note 7,6, principally due to a reduction in the discount rate and the amortization of unrecognized losses. Refer to the 2003 ~~Annual Report~~Form 10-K/A for further information. Expenses associated with Baxter’s pension and other postretirement benefit plans are expected to further increase in 2005, by approximately $40 million, primarily due to changes in pension assumptions. The 2005 assumptions for the domestic plans, which represent over three-quarters of the company’s total pension assets and obligation, will be reduced from 6.00% to 5.75% (discount rate) and from 10% to 8.5% (expected return on assets). The discount rate assumption change is due to reductions in market interest rates used to determine the appropriate pension discount rate. The change in the expected return on assets assumption is a result of anticipated changes in the company’s pension trust asset allocation.

R&D expenses declined in both the ~~second~~third quarter and first ~~six~~nine months of 2004, with increased spending on certain projects across the three segments more than offset by the cost savings generated by the restructuring initiatives and the termination of certain programs (such as the recombinant hemoglobin protein project, which was terminated in the second quarter of 2003). Management ~~does not expect growth~~expects a similar decline in ~~full year~~ R&D spending ~~in 2004 as compared to full year 2003.~~during the fourth quarter of 2004.

impacting cost of sales. The eliminations impact all three of the company’s segments, along with the corporate headquarters and functions. Baxter is also further reducing plasma production and closing additional plasma collection centers. In addition, the company is exiting certain other

facilities and activities. As a result, management recorded a restructuring charge in the second quarter of 2004 totaling $543 million ($394 million, or $0.64 per diluted share, on an after-tax basis), principally for severance and costs associated with the closing of facilities and the exiting of contracts. Refer to Note 54 for additional information.

During the ~~three-month~~three- and nine-month period ended ~~June~~September 30, 2004, $4$47 million and $51 million, respectively, of the reserve for cash costs was utilized. Approximately ~~$100~~$50 million ~~and $150 million of the costs are~~is expected to be paid ~~in 2004 and 2005, respectively, with~~during the remainder ~~to be paid~~of 2004, approximately $150 million in 2005, and the remainder in 2006. The cash expenditures are being funded with cash generated from operations. Approximately one third of the targeted positions have been eliminated as of September 30, 2004, and management expects that approximately half of the targeted positions will be eliminated by the end of the year. The program is proceeding on plan.

Management ~~anticipates~~estimates that these additional initiatives will yield savings of approximately $0.05 per diluted share in the second half of 2004, and anticipates that the initiatives will yield savings of approximately $0.20 to $0.25 per diluted share in 2005, ~~and~~an incremental $0.15 to $0.20 per diluted share as compared to 2004. Once fully implemented in 2006, management anticipates total annual savings will be approximately $0.30 to $0.35 per diluted ~~share when fully implemented in 2006.~~share.

During the three- and ~~six-month~~nine-month period ended ~~June~~September 30, 2004, ~~$20~~$26 million and ~~$57~~$83 million, respectively, of the reserve for cash costs was utilized. ~~Approximately 94%~~Virtually all of the targeted positions have been eliminated as of ~~June~~September 30, ~~2004.~~2004, and the program is substantially complete. The majority of the severance and other costs are expected to be paid ~~and the majority of the remaining positions are expected to be eliminated~~ by the end of 2004. The cash expenditures are being funded with cash generated from operations.

Management expects that the actions initiated in 2003 will generate incremental annual savings of approximately $0.15 to $0.20 per diluted share when fully implemented. ~~The cost savings principally relate to employee compensation and primarily benefit general and administrative expenses. The restructuring program is proceeding on plan.~~ Management estimates that the cost savings in the three- and ~~six-month~~nine-month periods ended ~~June~~September 30, 2004 were approximately $0.04 and ~~$0.08~~$0.12 per diluted share, respectively, and expects that the full year 2004 savings will total approximately $0.15 per diluted share. As mentioned above, these benefits are offset by increased employee benefit costs.

Net interest expense decreased $2$5 million for both the quarter and ~~was flat for the six-month~~year-to-date period ended September 30, 2004, principally due to a lower average net debt level, partially offset by lower capitalized interest, as the company completed certain projects and placed assets into service.

~~Other~~The increase in other expense ~~net increased~~for the three months ended September 30, 2004 principally related to foreign currency fluctuations. The increase in ~~both~~other expense for the ~~quarter~~nine months ended September 30, 2004 principally related to foreign currency fluctuations and ~~year-to-date period principally due to higher asset impairment charges, reduced income from~~lower equity method ~~investments, primarily relating to~~income. Equity method income was lower in 2004 because Baxter divested its equity method investment in Acambis, Inc. ~~(which was divested~~ in late 2003), an expense relating to the Shared Investment Plan (SIP) guarantee, and increased expense relating to fluctuations in currency exchange rates. These increased expenses were partially offset by an $11 million expense in the quarter and year-to-date period ended June 30, 2003 associated with the redemption of the company’s convertible bonds.2003. Refer to Note 32 for further information.

Refer to Note 98 to the condensed consolidated financial statements for a summary of financial results by segment. Certain items are maintained at the company’s corporate headquarters and are not allocated to the segments. They primarily include certain foreign currency fluctuations, the majority of the foreign currency and interest rate hedging activities, net interest expense, income and expense related to certain non-strategic investments, corporate headquarters costs, certain employee benefit costs, certain nonrecurring gains and losses and certain special charges (such as in-process research and development and restructuring). ~~In addition, the above-mentioned increased costs associated with the pension and other postretirement benefit plans have not been completely allocated to the segments.~~ The following is a summary of significant factors impacting the segments’ financial results.

Pre-tax income increased ~~12%~~4% and ~~13%~~9% for the three and ~~six~~nine months ended ~~June~~September 30, 2004, respectively. The growth in pre-tax income was primarily the result of ~~solid~~ sales growth (especially in the year-to-date period), the close management of costs, the benefits of the ~~2003~~ restructuring initiatives, and changes in currency exchange rates (as noted above, foreign currency hedging activities for all segments are recorded at corporate, and are not included in segment results). As noted above, these factors were partially offset by the impact of reduced pricing in the renegotiated long-term contracts with ~~group purchasing organizations,~~GPOs, principally ~~Premier, particularly during the second quarter.~~Premier. Earnings growth is expected to continue to be impacted by the reduced pricing in these contracts during the remainder of 2004.

Pre-tax income increased 12% and decreased ~~22% and 13%~~4% for the three and ~~six~~nine months ended ~~June~~September 30, 2004, respectively. The ~~decline~~increase in pre-tax income for the quarter was primarily due to increased inventory reserves and an asset impairment charge (recorded in the second quarter of 2004, as discussed in Note 3), changes in currency exchange rates, lower sales of higher-margin vaccines, and a higher mix of plasma-based product sales, partially offset by lower R&D spending as a result of the recent prioritization initiatives (including the termination of the recombinant hemoglobin protein project in 2003), the close management of costs, ~~and~~ the benefits of the recent restructuring ~~initiatives.~~initiatives, and changes in currency exchange rates. While many of these factors also impacted the year-to-date period, pre-tax income for the nine months ended September 30, 2004 declined primarily due to increased inventory reserves and an asset impairment charge (recorded as special charges in the second quarter of 2004, as discussed in Note 2) and lower sales of certain high-margin products. In addition, ~~the~~both prior year periods, particularly the year-to-date period, include income from the company’s investment in Acambis, Inc. As noted above, ~~the~~this investment was divested in late 2003.

Pre-tax income increased ~~18%~~7% and ~~19%~~15% for the three and ~~six~~nine months ended ~~June~~September 30, 2004, respectively. The increase in pre-tax income was primarily due to solid sales growth, particularly in the year-to-date period, changes in currency exchange rates, ~~an improved sales~~

~~mix,~~ the close management of costs, and the benefits of the recent restructuring initiatives, partially offset by an unfavorable change in mix, particularly during the ~~six-month period, by increased R&D spending.~~quarter.

As discussed in Note 3,2, as a result of the completion of tax audits in the second quarter of 2004, $55 million of reserves for matters previously under review were reversed into income induring the ~~quarter.~~second quarter of 2004. In addition, the effective tax rates for both the three- and ~~six-month~~nine-month periods of both 2004 and 2003 were impacted by the restructuring charges and the special charges discussed in Notes 54 and 3,2, respectively, which were tax-effected at different (generally higher) rates, depending on the particular tax jurisdictions. There were no other significant changes to the company’s effective income tax rate.

In October 2004, the American Jobs Creation Act of 2004 (the Act) was enacted. The Act includes numerous provisions, including the creation of a temporary incentive for U.S. multinationals to repatriate accumulated income earned abroad. The temporary tax deduction is subject to a number of limitations. Management is analyzing the provisions of the Act and has not yet determined the effects on the company’s plans or its consolidated financial statements.

Income ~~(loss)~~ from continuing operations before the cumulative effect of accounting changes was ~~($169)~~$259 million and ~~$46~~$275 million ~~(as restated)~~ for the three months ended ~~June~~September 30, 2004 and 2003, respectively, and ~~$18~~$277 million and ~~$261~~$536 million ~~(as restated)~~ for the ~~six~~nine months ended ~~June~~September 30, 2004 and 2003, respectively. Income ~~(loss)~~ from continuing operations per diluted share was ~~($0.28)~~$0.42 and ~~$0.08~~$0.46 in the three months ended ~~June~~September 30, 2004 and 2003, respectively, and ~~$0.03~~$0.45 and ~~$0.43 (as restated)~~$0.89 for the ~~three and six~~nine months ended ~~June~~September 30, 2004 and 2003, respectively. The significant factors and events causing the declines from 2003 to 2004 are discussed above.

~~Discontinued~~During 2004, discontinued operations generated ~~a net-of-tax loss~~income of $1$17 million and ~~$11~~$5 million for the ~~three months~~three- and nine-month periods ended ~~June~~September 30, ~~2004~~respectively (net of tax benefits of $24 million and ~~2003, respectively.~~$28 million, respectively). The ~~net-of-tax loss from~~income was principally related to tax and other adjustments, as the company completes divestitures. During 2003, discontinued operations generated losses of $5 million and $17 million for the ~~six-month period~~three- and nine-month periods ended ~~June~~September 30, ~~was $12~~respectively (net of tax benefits of $3 million ~~in both 2004~~ and ~~2003.~~$6 million, respectively). Refer to Note 43 for further discussion of the discontinued operations. Management expects the divestiture plan will be completed ~~during~~by the end of 2004.

The preparation of financial statements in accordance with generally accepted accounting principles (GAAP) requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. A summary of the company’s significant accounting policies is included in Note 1 to the company’s consolidated financial statements for the year ended December 31, 2003, which are included in the 2003 ~~Annual Report.~~Form 10-K/A. Certain of the company’s accounting policies are considered critical, as these policies are the most important to the depiction of the company’s financial statements and require significant, difficult or complex judgments by management, often employing the use of estimates about the effects of matters that are inherently uncertain. Such policies are summarized in the Management’s Discussion and Analysis section of the 2003 ~~Annual Report.~~Form 10-K/A. There have been no

significant changes in the application of the critical accounting policies since December 31, 2003.

The company reported cash flows from continuing operations of ~~$252~~$529 million for the ~~six~~nine months ended ~~June~~September 30, 2004, ~~an increase~~a decrease of ~~$46~~$141 million from the prior year. The ~~increase~~decrease in cash flows was principally due to increased ~~earnings before non-cash items and improved inventory management, partially offset by lower cash flows relating to accounts receivables, increased~~ payments related to the restructuring programs, ~~and~~ higher contributions to the pension ~~trusts.~~trusts, and reduced accounts receivables securitization cash flows, partially offset by improved inventory management.

The decrease in cash flows relating to accounts receivable was ~~partially~~primarily due to ~~$66~~$87 million in reduced cash flows from the company’s securitization and factoring activities, with $230 million in reduced cash flows from securitization arrangements, ~~as detailed in Note 6. Accounts receivable collections have improved, with~~partially offset by $143 million of increased cash flows relating to factoring activities. In addition, days sales outstanding ~~declining~~increased from ~~63.6 (as restated)~~62.4 days at ~~June~~September 30, 2003 to ~~60.5~~63.9 days at ~~June~~September 30, 2004. ~~Management continues to increase its focus on working capital efficiency.~~

The following is a summary of inventories at ~~June~~September 30, 2004 and December 31, 2003, as well as inventory turns for the first ~~six~~nine months of 2004 and 2003, by segment.

Inventory balances ~~increased slightly~~were relatively flat from December 31, 2003 to ~~June~~September 30, 2004. The reduction in BioScience inventories principally related to the planned reduction in plasma inventories. Inventory turns are impacted by seasonality and the timing of facility shutdowns for planned maintenance in certain of the company’s businesses, and are generally highest in the fourth quarter of the year, and lower earlier in the year, for these businesses. Inventory turns increased in total and for ~~most~~all of the businesses as management continues to focus on working capital efficiency.

Liabilities, Including Restructuring Payments and Contributions to the Pension Trusts

~~Cash~~As noted above, the most significant reasons for the decline in cash flows from continuing operations during the nine-month period were increased payments associated with restructuring programs and increased ~~$53~~contributions to the company’s pension trusts. Restructuring payments

increased $98 million, ~~in the first half of 2004, as the company continued its 2003 restructuring initiatives and began implementing the 2004 initiatives. The company also contributed $54~~from $38 million to ~~its~~$136 million. Contributions to Baxter’s pension trusts ~~during the first six months of 2004, versus~~increased $84 million, from $11 million ~~in contributions in the prior year period.~~to $95 million.

Cash flows relating to discontinued operations increased ~~$25~~$12 million during the first ~~six~~nine months of 2004, from ~~a $10~~$5 million ~~outflow~~ in 2003 to ~~a $15~~$17 million ~~inflow~~ in 2004, with the increased cash ~~flow~~flows primarily relating to divestiture proceeds. As discussed in Note 43 and above, the company has divested the majority of the discontinued operations and plans to complete the divestiture plan in 2004.

Capital expenditures decreased for the ~~six~~nine months ended ~~June~~September 30, 2004 by ~~$129~~$201 million, from ~~$358~~$564 million in 2003 to ~~$229~~$363 million in 2004. As discussed in the 2003 ~~Annual Report,~~Form 10-K/A, management is reducing its level of investments in capital expenditures in 2004 as certain significant long-term projects are ~~completed.~~completed and as management more aggressively manages capital spending. Management currently anticipates that the company’s capital expenditures will not exceed $650 million in 2004. Construction in progress ~~also~~ decreased ~~over 10%~~9% from December 31, 2003 to ~~June~~September 30, 2004, as major projects were completed and the company placed assets into service.

Net cash outflows relating to acquisitions and investments in and advances to affiliates decreased by ~~$64~~$86 million during the first ~~six~~nine months of 2004, from ~~$84~~$106 million in 2003 to $20 million in 2004. The current period included outflows relating to the 2003 acquisition of certain assets of Alpha Therapeutic Corporation, which are included in the BioScience segment. The 2003 outflows included the funding of a $50 million loan to Cerus Corporation, a minority investment holding ~~which~~(which is included in the BioScience ~~segment. Also~~segment), a $24 million additional purchase price payment relating to the December 2002 acquisition of ESI Lederle (which is included in ~~net cash outflows in 2003 was~~the Medication Delivery segment), an $11 million common stock investment in Acambis, Inc., which was divested later in 2003, and an $11 million payment for an icodextrin manufacturing facility in England ~~which~~(which is included in the Renal ~~segment.~~segment).

Net cash flows relating to divestitures and other totaled $31 million in the first ~~half~~nine months of 2004, and principally related to the sale of a building and the return of collateral.

Debt issuances, net of redemptions and other payments of financing obligations, ~~decreased $108 million in~~were relatively flat for the first ~~six~~nine months of 2004 ~~from $185 million in 2003~~as compared to ~~$77 million in 2004.~~the prior year period. Included in the ~~second quarter 2004~~year-to-date outflows was a $40 million payment to exit one of the company’s cross-currency swap agreements.

Common stock cash dividends increased in 2004 by $15 million due to a higher level of common shares outstanding. Cash received for stock issued under employee benefit plans increased by ~~$43~~$48 million principally due to a higher level of stock option exercises and purchases under the company’s employee stock purchase plans. There were no common stock

issuances in 2004. In September 2003, the company issued 22 million shares of common stock and received net proceeds of $644 million. The net proceeds were used to settle equity forward agreements, to fund the company’s acquisition of certain assets of Alpha Therapeutic Corporation, and for other general corporate purposes. Stock repurchases decreased from 2003 to 2004. In the first ~~six~~nine months of 2004 the company paid $18 million to repurchase stock from ~~SIP~~Shared Investment Plan participants. Refer to Note ~~10 and Part II, Item 2(e), Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities, of this report~~9 for further information regarding the ~~SIP and these repurchases.~~Shared Investment Plan. In the first ~~six~~nine months of 2003 the company purchased ~~3.1~~15 million shares of common stock for ~~$153~~$714 million from counterparty financial institutions in conjunction with the settlement of equity forward agreements. Refer to the 2003 ~~Annual Report~~Form 10-K/A for further information.

Refer to the 2003 ~~Annual Report~~Form 10-K/A for further discussion of the company’s credit facilities, access to capital, and commitments and contingencies.

The company had ~~$760~~$822 million of cash and equivalents at ~~June~~September 30, 2004. The company also maintains two revolving credit facilities, which totaled ~~$1.4~~$1.44 billion at ~~June~~September 30, ~~2004,~~2004. One of the facilities totals $640 million and ~~which have funding expiration dates through November 2007.~~matures in October 2007, and the other facility totals $800 million and matures in September 2009. The facilities enable the company to borrow funds on an unsecured basis at variable interest rates. The company has never drawn on these facilities. Management believes these credit facilities are adequate to support ongoing operational requirements. The credit facilities contain certain covenants, including a maximum net-debt-to-capital ratio and a minimum interest coverage ratio. At ~~June~~September 30, 2004, as in prior periods, the company was in compliance with all financial covenants. The company’s net-debt-to-capital ratio, as defined below, of ~~41.8%~~38.8% at ~~June~~September 30, 2004 was well below the credit facilities’ net-debt-to-capital covenant. Similarly, the company’s actual interest coverage ratio of ~~7.7~~7.8 to 1 in the ~~second~~third quarter of 2004 was well in excess of the minimum interest coverage ratio covenant. The net-debt-to-capital ratio, which is calculated in accordance with the company’s primary credit agreements, and is not a measure defined by GAAP, is calculated as net debt (short-term and long-term debt and lease obligations, less cash and equivalents) divided by capital (the total of net debt and stockholders’ equity). The net-debt-to-capital ratio at ~~June~~September 30, 2004 and the corresponding covenant in the company’s credit agreements give 70% equity credit to the company’s equity units. Refer to the 2003 ~~Annual Report~~Form 10-K/A for a description of the equity units, which were issued in December 2002. The minimum interest coverage ratio is a four-quarter rolling calculation of the total of income from continuing operations before income taxes plus interest expense (before interest income), divided by interest expense (before interest income). Baxter also maintains certain other ~~short-term~~ credit arrangements. ~~The above-mentioned financial statement restatement had no impact on the company’s compliance with the financial covenants in its debt agreements.~~

The company intends to fund its short-term and long-term obligations as they mature through cash on hand, future cash flows from operations, by issuing additional debt, or by issuing common stock. As of ~~June~~September 30, 2004, the company can issue up to $399 million of securities, including debt, common stock and other securities, under an effective registration statement filed with the Securities and Exchange Commission. The company’s debt ratings at June 30, 2004 were Baa1 by Moody’s, A- by Standard & Poor’s and A- by Fitch on senior debt, and P2 by Moody’s, A2 by Standard & Poor’s and F2 by Fitch on short-term debt. The outlooks were stable by Moody’s, and negative by Standard & Poor’s and Fitch. In July 2004 Standard & Poor’s changed its outlook to negative credit watch. The 2004 downgrades and any future downgrades of Baxter’s credit ratings unfavorably impact the financing costs associated with the company’s credit arrangements and future debt issuances. Certain specified downgrades, if they occur in the future, would also require the company to post additional collateral pursuant to certain of its arrangements. However, any future downgrades would not affect the company’s ability to draw on its credit facilities, and would result in an acceleration of the scheduled maturities of any of the company’s outstanding debt.

The company’s ability to generate cash flows from operations, issue debt, enter into other financing arrangements and attract long-term capital on acceptable terms could be adversely affected in the event there is a material decline in the demand for the company’s products, deterioration in the company’s key financial ratios or credit ratings, or other significantly unfavorable changes in conditions. Management believes it has sufficient financial flexibility in the future to issue debt, enter into other financing arrangements, and attract long-term capital on acceptable terms as may be needed to support the company’s growth objectives.

The company’s credit ratings at September 30, 2004 were Baa1 by Moody’s, A- by Standard & Poor’s and BBB+ by Fitch on senior debt, and P2 by Moody’s, A2 by Standard & Poor’s and F2 by Fitch on short-term debt. The outlooks were negative by Moody’s and Standard & Poor’s and stable by Fitch. The company’s credit ratings and outlooks have been downgraded during 2004. Refer to the 2003 Form 10-K/A for a summary of the company’s ratings and outlooks at December 31, 2003.

The rating agency downgrades in 2004 and any future downgrades of Baxter’s credit ratings unfavorably impact the financing costs associated with the company’s credit arrangements and future debt issuances. Management believes that the actual and anticipated impact of the recent downgrades and changes in outlook is not material. Management believes that the impact of reasonably possible future changes in credit ratings or outlook would also not be material.

Any future credit rating downgrades or changes in outlook would not affect the company’s ability to draw on its credit facilities, and would not result in an acceleration of the scheduled maturities of any of the company’s outstanding debt.

Certain specified rating agency downgrades, if they occur in the future, would require the company to post additional collateral pursuant to certain of its arrangements. These arrangements principally pertain to the company’s foreign currency and interest rate derivatives, which Baxter uses for hedging purposes. For risk-management purposes, certain of the company’s counterparty financial institutions require that collateral be posted under specified circumstances. The terms of the arrangements vary, but generally, the level of collateral postings is dependent upon the mark-to-market liability (if any) with the financial institution and the company’s credit ratings. It is not possible to know with certainty what each of these variables will be in the future. However, if Baxter’s credit rating on its senior unsecured debt declined to Baa2 or BBB (i.e., a one-rating or two-rating downgrade, depending upon the rating agency), the amount of collateral that would currently be required (holding the mark-to-market liability balance of outstanding derivative instruments constant) would total less than $100 million.

As discussed in the company’s 2003 Form 10-K/A, the company has historically used cross-currency swaps to hedge the net assets of certain of its foreign operations. These swaps have served as effective hedges for accounting purposes and have reduced volatility in the company’s stockholders’ equity balance and net-debt-to-capital ratio (as any increase or decrease in the fair value of the swaps relating to changes in spot currency exchange rates is offset by the change in value of the hedged net assets of the foreign operations relating to changes in spot currency exchange rates).

Because the United States Dollar has weakened relative to the hedged currency, the hedged net assets have increased in value over time, while the cross-currency swaps have decreased in value over time. At September 30, 2004, the company had a liability in its consolidated balance sheet of $956 million relating to these cross-currency swap agreements (before consideration of deferred tax benefits).

Management has reevaluated its net investment hedge strategy and has decided to reduce the use of these instruments as a risk-management tool as the current portfolio matures. At this time, management does not intend to extend the current maturity dates of the instruments. Management intends to settle the swaps that mature in 2005 as they mature, from cash flow from operations. Management anticipates that the remaining swaps will be settled as they mature, or possibly sooner, depending on the level of the company’s future cash flows.

In addition, in order to reduce financial risk and uncertainty through the maturity (or cash settlement) dates of the cross-currency swaps, the company is executing offsetting or mirror cross-currency swaps relating to approximately 50% of the existing portfolio. These mirror swaps will effectively fix the net amount that the company will ultimately pay to settle the cross-currency swap agreements subject to this strategy. The mirror swaps will be settled when the offsetting existing swaps are settled. Of the pre-tax liability of $956 million at September 30, 2004 relating to the cross-currency swaps, the company has fixed $296 million by entering into mirror swaps as of October 31, 2004. The maturity by year of the $956 million cross-currency swaps portfolio, as well as the portion that is fixed via October 2004 executions of mirror swaps, is as follows:

For the mirrored swaps, the company will no longer realize the favorable interest rate differential between the two currencies, and this will result in increased net interest expense in the future. The amount of increased net interest expense will vary based on floating interest rates and the timing of the company’s settlements. Based on interest rates at September 30, 2004, the increase in net interest expense is estimated to be approximately $15 million on an annual basis.

See “Part II – Item 1. Legal Proceedings” for a discussion of the company’s legal contingencies. Upon resolution of any of these uncertainties, the company may incur charges in excess of

presently established reserves. While such a future charge could have a material adverse impact on the company’s net income or cash flows in the period in which it is recorded or paid, based on the advise of counsel, management believes that any outcome of these actions, individually or in the aggregate, will not have a material adverse effect on the company’s consolidated financial position.

The matters discussed in this report that are not historical facts include forward-looking statements. These statements are based on the company’s current expectations and involve numerous risks and uncertainties. Some of these risks and uncertainties are factors that affect all international businesses, while some are specific to the company and the health-care arenas in which it operates. Many factors could affect the company’s actual results, causing results to differ, and possibly differ materially, from those expressed in any such forward-looking statements. These factors include, but are not limited to, interest rates; technological advances in the medical field; economic conditions; demand and market acceptance risks for new and existing products, technologies and health-care services; the impact of competitive products and pricing; to:

the company’s ability to realize in a timely manner the anticipated benefits ~~from any~~of restructuring ~~programs that~~ initiatives;

the ~~company undertakes,~~ effect of economic conditions;

the impact of geographic and/or ~~acquisitions, alliances or other transactions; the geographic~~product mix ofon the company’s sales;

actions of regulatory bodies and other government authorities, including the FDA and foreign counterparts;

unexpected product quality and/or patient safety concerns, leading to product recalls, withdrawals, launch delays or declining sales;

product development risks;

technological advances in the medical field;

demand for and market acceptance risks for new and existing products, such as ADVATE, and other technologies;

the impact of competitive products and pricing, including generic competition, drug reimportation and disruptive technologies;

inventory reductions or fluctuations in buying patterns by wholesalers or distributors;

foreign currency exchange rates;

the availability of acceptable raw materials and component supply;

global regulatory, trade and tax policies;

regulatory, legal or other developments relating to the company’s A, AF and AX series dialyzers;

the ability to obtain adequate insurance coverage at reasonable cost; ~~continued price competition; product development risks, including technological difficulties;~~

ability to enforce patents;

patents of third parties preventing or restricting the company’s manufacture, sale or use of affected products or technology; ~~actions of regulatory bodies and other government authorities;~~

reimbursement policies of government agencies and private payers; ~~commercialization factors;~~

internal and external factors that could impact commercialization;

results of product testing; ~~unexpected quality or safety concerns, whether or not justified, leading to product launch delays, recalls, withdrawals, or declining sales; and~~

other factors described elsewhere in this report or in the company’s other filings with the Securities and Exchange Commission.

Additionally, as discussed in Part II – Item 1. Legal Proceedings, upon the resolution of certain legal matters, the company may incur charges in excess of presently established reserves. Any such charge could have a material adverse effect on the company’s results of operations or cash flows in the period in which it is recorded.

Currency fluctuations are also a significant variable for global companies, especially fluctuations in local currencies where hedging opportunities are not economic or not available. If the United States Dollar strengthens significantly against foreign currencies, the company’s ability to

realize projected growth rates in its sales and net earnings outside the United States could be negatively impacted.

Management believes that its expectations with respect to forward-looking statements are based upon reasonable assumptions within the bounds of its knowledge of the company’s business and operations, but there can be no assurance that the actual results or performance of the company will conform to any future results or performance expressed or implied by such forward-looking statements. The company does not undertake any obligation to update any forward-looking statements as a result of new information, future events, changed assumptions or otherwise, and all forward-looking statements speak only as of the time when made.

For a more complete discussion, refer to the caption “Financial Instrument Market Risk” in the company’s 2003 ~~Annual Report.~~Form 10-K/A. As part of its risk-management program, the company performs sensitivity analyses to assess potential changes in the fair value of its foreign exchange financial instruments relating to hypothetical and reasonably possible near-term movements in currency exchange rates.

A sensitivity analysis of changes in the fair value of foreign exchange forward and option contracts outstanding at ~~June~~September 30, 2004, while not predictive in nature, indicated that if the United States Dollar uniformly fluctuated unfavorably by 10% against all currencies, the net liability balance (net of tax) of ~~$66~~$54 million with respect to those contracts would increase by approximately ~~$121~~$85 million.

With respect to the company’s cross-currency swap agreements, ~~used to hedge the net assets of certain consolidated foreign affiliates,~~ if the United States Dollar uniformly ~~weakened~~fluctuated unfavorably by 10%, the net liability balance (net of tax) of ~~$608~~$597 million with respect to those contracts would increase by approximately ~~$255~~$265 million. Any increase or decrease in the fair value of cross-currency swap agreements relating to changes in spot currency exchange rates is completely offset by the change in the value of the designated hedged net assets. ~~During~~Refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-Q for further discussion of the ~~second quarter of 2004, the company exited one of its~~company’s cross-currency swap agreements and made a payment of $40 million. At June 30, 2004 approximately 75% of the net investment hedges have contractual maturity dates beyond one year in the future (with over 80% of these long-term contracts having maturity dates in 2007 and beyond).agreements.

The sensitivity analysis model calculates the fair value of the foreign currency forward, option and swap contracts outstanding at ~~June~~September 30, 2004 by replacing the actual exchange rates at ~~June~~September 30, 2004 with exchange rates that are 10% unfavorable to the actual exchange rates for each applicable currency. All other factors are held constant. These sensitivity analyses disregard the possibility that currency exchange rates can move in opposite directions and that gains from one currency may or may not be offset by losses from another currency. The analyses also disregard the offsetting change in value of the underlying hedged transactions and balances.

For a complete discussion, refer to the caption “Financial Instrument Market Risk” in the company’s 2003 ~~Annual Report.~~Form 10-K/A. There have been no significant changes from the information discussed therein.

The company carried out an evaluation, under the supervision and with the participation of the company’s Disclosure Committee and the company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the quarterly period covered by this report. The company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported on a timely basis. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that ~~except as noted below,~~ the company’s disclosure controls and procedures are ~~effective in alerting them in a timely fashion to material information relating to Baxter required to be included in the reports that the company files under the Exchange Act.~~effective.

~~The~~There has been no change in Baxter’s internal control over financial reporting that occurred during the quarter ended September 30, 2004 that has materially affected, or is reasonably likely to materially affect, Baxter’s internal control over financial reporting, except for the aggregate effect of the changes to internal controls discussed below.

As previously reported, the company ~~has~~ restated its previously issued financial results for the years 2001 through 2003, and for the first quarter of 2004. This restatement was primarily the result of the inappropriate application of accounting principles for revenue recognition and inadequate provisions for bad debts in Brazil during this period. Senior management became aware of these issues in 2004 through the reporting procedures established under Baxter’s Global Business Practice Standards. Upon becoming aware of the issues in Brazil, senior management, with the assistance of the company’s internal audit team, conducted a preliminary investigation. This preliminary investigation was followed by a more comprehensive investigation by the Audit Committee of Baxter’s Board of Directors, with the assistance of independent legal counsel and forensic and other accountants. Refer to Note 2 to the consolidated financial statements for further information regarding this restatement.

~~The investigations described above identified~~Management previously concluded that the following ~~which collectively constitute a material weakness~~weaknesses in the company’s internal control over financial ~~reporting:~~reporting collectively constituted a material weakness:

an ineffective control environment maintained by senior management in Brazil, including intentional overrides by senior management in Brazil of internal controls;

inadequate revenue recognition controls in Brazil;

inadequate controls in Brazil to ensure adherence to generally accepted accounting principles for loss contingencies, including bad debts; and

ineffective financial review by management responsible for the Intercontinental region, which includes Latin America.

~~As a result, two~~During the third quarter of 2004, the company took several actions that it believes has remediated this material weakness. These actions include:

Terminated four members of senior management in the company’s Brazilian operations ~~have been terminated. In addition,~~and replaced the Vice President, Finance responsible for the Intercontinental ~~region has been replaced.In July 2004, the company began~~region;

Completed monthly detailed internal audits of the ~~company’s~~ Brazilian operations, ~~including on-site reviews of accounting policies and practices~~beginning in July 2004, with ~~accounting personnel and management in Brazil. In addition,~~an emphasis on the ~~company is in the process of implementing the following actions to improve its internal control over financial reporting:~~

~~a comprehensive review of internal control over financial reporting in Brazil, including additional remediation as necessary;~~

~~implementation of new controls in Brazil relating~~areas that gave rise to the ~~recording of revenues and loss contingencies, including improved documentation requirements;~~inaccurate financial reporting;

Completed additional training for finance, accounting and sales personnel in Brazil on appropriate accounting for revenue recognition;

Completed additional training for finance and accounting personnel in Brazil on accounting and reporting policies, including those relating to accounting in accordance with Statement of Financial Accounting Standards No. 5 “Accounting for Contingencies” and SEC Staff Accounting Bulletin No. 99 “Materiality;”

Completed enhanced training for employees in Brazil regarding Baxter’s Global Business Practice Standards, including obligations to maintain accurate books and records and to report wrongdoing promptly;

Implemented enhanced financial review procedures at the Intercontinental region ~~level; and~~level, including quarterly financial reviews for each significant country;

Initiated a recruiting process for hiring a director of internal control for the Intercontinental region;

Implemented improved procedures ~~and additional training~~ for reporting legal contingencies and establishing appropriate legal ~~reserves.~~reserves, and commenced training on these procedures;

~~The changes~~

Engaged a prominent independent public accounting firm (other than PricewaterhouseCoopers LLP) to perform a comprehensive review of internal control over financial reporting ~~described above were implemented~~in Brazil, which began in the third quarter of ~~2004 or are~~2004;

Began implementing new controls in Brazil relating to the ~~process~~recording of ~~being implemented. There has been no change~~revenues and loss contingencies, including new revenue recognition procedures with enhanced documentation requirements, monitoring of inventory levels at distributors and specific tracking of equipment installation; and

Implemented new procedures in Baxter’s internal control over financial reporting that occurred during the fiscal quarter ended June 30, 2004 that has materially affected, or is reasonably likely to materially affect, Baxter’s internal control over financial reporting.

Brazil for determining bad debt reserve requirements.

31The Company intends to continue its remediation efforts throughout the fourth quarter of 2004.

Review by Independent Registered Public Accounting Firm

Reviews of the interim condensed consolidated financial information included in this Quarterly Report on Form 10-Q for the three and ~~six~~nine months ended ~~June~~September 30, 2004 and 2003 have been performed by PricewaterhouseCoopers LLP, the company’s independent registered public accounting firm. Their report on the interim condensed consolidated financial information follows. This report is not considered a report within the meaning of Sections 7 and 11 of the Securities Act of 1933 and therefore, the independent accountants’ liability under Section 11 does not extend to it.

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of

Baxter International Inc.:

We have reviewed the accompanying condensed consolidated balance sheet of Baxter International Inc. and its subsidiaries as of ~~June~~September 30, 2004, and the related condensed consolidated statements of income for each of the three-month and ~~six-month~~nine-month periods ended ~~June~~September 30, 2004 and 2003 and the condensed consolidated statements of cash flows for the ~~six-month~~nine-month periods ended ~~June~~September 30, 2004 and 2003. These interim financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, ~~(United States),~~ the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2003 and the related consolidated statements of income, cash flows and stockholders’ equity for the year then ended (not presented herein), and in our report dated February 20, 2004, except for Note 1A which is as of August 9, 2004, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2003, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.

~~As described in Note 2, the Company has restated its previously issued consolidated financial statements.~~

/s/ PricewaterhouseCoopersLLP

PricewaterhouseCoopers LLP

Chicago, Illinois

~~August 9,~~November 4, 2004

PART II. OTHER INFORMATION

Baxter International Inc. and Subsidiaries

Item 1.

Legal ~~Proceedings.~~Proceedings

Baxter International Inc. (Baxter International) and certain of its subsidiaries are named as defendants in a number of lawsuits, claims and ~~proceedings, including product liability claims involving products now or formerly manufactured or sold by the company or by companies that were acquired by the company.~~proceedings. The most significant of these are reported in the company’s ~~Annual Report on~~ Form ~~10-K~~10-K/A for the year ended December 31, 2003 and below, and material developments for the quarter ended ~~June~~September 30, 2004 are described below. These cases and claims raise difficult and complex factual and legal issues and are subject to many uncertainties and complexities, including, but not limited to, the facts and circumstances of each particular case and claim, the jurisdiction in which each suit is brought, and differences in applicable law. Baxter has established reserves in accordance with generally accepted accounting principles for certain of the matters discussed below. For these matters, there is a possibility that resolution of the matters could result in an additional loss in excess of presently established reserves. Also, there is a possibility that resolution of certain of the company’s legal contingencies for which there is no reserve could result in a loss. Management is not able to estimate the amount of such loss or additional loss (or range of loss or additional loss). However, management believes that, while such a future charge could have a material adverse impact on the company’s net income and net cash flows in the period in which it is recorded or paid, no such charge would have a material adverse effect on Baxter’s consolidated financial position.

Mammary Implant Litigation

As previously reported in the company’s ~~Annual Report on~~2003 Form ~~10-K,~~10-K/A, Baxter International, together with certain of its subsidiaries, is currently a defendant in various courts in a number of lawsuits seeking damages for injuries of various types allegedly caused by silicone mammary implants previously manufactured by the Heyer-Schulte division of American Hospital Supply Corporation (AHSC). AHSC, which was acquired by Baxter in 1985, divested its Heyer-Schulte division in 1984. It is not known how many of these claims and lawsuits involve products manufactured and sold by Heyer-Schulte, as opposed to other manufacturers. In December 1998, a panel of independent medical experts appointed by a federal judge announced its findings that reported medical studies contained no clear evidence of a connection between silicone mammary implants and traditional or atypical systemic diseases. In June 1999, a similar conclusion was announced by a committee of independent medical experts from the Institute of Medicine, an arm of the National Academy of Sciences.

As of ~~June~~September 30, 2004, Baxter International, together with certain of its subsidiaries, was named as a defendant or co-defendant in 7671 lawsuits relating to mammary implants, brought by approximately 159 plaintiffs, of which 129 are implant plaintiffs and the remainder are consortium or second generation plaintiffs. Of those plaintiffs, eleven currently are included in the Lindsey class action Revised Settlement described below, which accounts for approximately ten of the pending lawsuits against the company. Additionally, 61 plaintiffs have opted out of the Revised Settlement (representing approximately 48 pending lawsuits), and the status of the remaining plaintiffs with pending lawsuits is unknown. Some of the opt-out plaintiffs filed their cases naming multiple defendants and without product identification; thus, not all of the opt-out plaintiffs will have viable claims against the company. As of ~~June~~September 30, 2004, 31 of the opt-out plaintiffs had confirmed Heyer-Schulte mammary implant product identification. ~~Furthermore,~~

Furthermore, during the ~~second~~third quarter of 2004, Baxter obtained dismissals, or agreements for dismissals, with respect to ~~27 plaintiffs.~~one plaintiff.

In addition to the individual suits against the company, a class action on behalf of all women with silicone mammary implants was filed on March 23, 1994 and is pending in the United States District Court (U.S.D.C.) for the Northern District of Alabama involving most manufacturers of such implants, including Baxter as successor to AHSC (Lindsey, et al., v. Dow Corning, et al.,U.S.D.C., N. Dist. Ala., CV 94-P-11558-S). The class action was certified for settlement purposes only by the court on September 1, 1994, and the settlement terms were subsequently revised and approved on December 22, 1995 (the Revised Settlement). All appeals directly challenging the Revised Settlement have been dismissed. In addition to the Lindsey class action, the company also has been named in three other purported class actions in various state and provincial courts, only one of which is certified.

On March 31, 2000, the United States Department of Justice filed an action in the federal district court in Birmingham, Alabama against Baxter and other manufacturers of breast implants, as well as the escrow agent for the revised settlement fund, seeking reimbursement under various federal statutes for medical care provided to various women with mammary implants. On September 26, 2001 the district court granted the motion of all defendants, including Baxter, to dismiss the action. The federal government appealed the dismissal and on September 15, 2003 the Eleventh Circuit Court of Appeals reversed the order of dismissal and remanded the case to the district court. The defendants, including Baxter, filed a petition for a writ of certiorari in the United States Supreme Court, which petition was denied in June 2004. In October 2004, the district court approved a settlement between all defendants, including Baxter, and the Department of Justice.

Plasma-Based Therapies Litigation

As previously reported in the company’s ~~Annual Report on~~2003 Form ~~10-K,~~10-K/A, Baxter currently is a defendant in a number of claims and lawsuits brought by individuals who have hemophilia, all seeking damages for injuries allegedly caused by anti-hemophilic factor concentrates VIII or IX derived from human blood plasma (factor concentrates) processed by the company from the late 1970s to the mid-1980s. The typical case or claim alleges that the individual was infected with the HIV virus by factor concentrates, which contained the HIV virus. None of these cases involves factor concentrates currently processed by the company.

As of ~~June~~September 30, 2004, Baxter was named as a defendant in 2425 lawsuits and ~~140~~has received notice of 149 claims in the United States, France, Ireland, Italy, Japan and ~~France.~~Spain. The U.S.D.C. for the Northern District of Illinois has approved a settlement of U.S. federal court factor concentrate cases. As of ~~June~~September 30, 2004, approximately 6,246 claimant groups had been found eligible to participate in the settlement. Approximately ~~6,243~~6,244 of the claimant groups had received payments as of ~~June~~September 30, 2004. In addition, the company and other manufacturers have been named as defendants in two purported class actions pending in the U.S.D.C. for the Northern District of Illinois on behalf of claimants, who are primarily non-U.S. residents, seeking unspecified damages for HIV and/or Hepatitis C infections.

In addition, Immuno International AG (Immuno), acquired by Baxter in 1996, has unsettled claims for damages for injuries allegedly caused by its plasma-based therapies. The typical claim alleges that the individual with hemophilia was infected with HIV and/or Hepatitis C by factor concentrates. Additionally, Immuno faces multiple claims stemming from its vaccines and other biologically derived therapies. A portion of the liability and defense costs related to these

claims will be covered by insurance, subject to exclusions, conditions, policy limits and other factors. Pursuant to the stock purchase agreement between the company and Immuno, as

revised in April 1999, approximately 26 million Swiss Francs, which is the equivalent of approximately $20 million based on the exchange rate as of ~~June~~September 30, 2004, of the purchase price is being withheld to cover these contingent liabilities.

As previously reported in the company’s ~~Annual Report on~~2003 Form ~~10-K,~~10-K/A, Baxter is currently ~~a defendant~~named in a number of claims and lawsuits brought by individuals who infused the company’s Gammagard IVIG (intravenous immuno-globulin), all of whom are seeking damages for Hepatitis C infections allegedly caused by infusing Gammagard IVIG. As of ~~June~~September 30, 2004, Baxter was a defendant in ~~nine~~ten lawsuits and has received notice of five claims in the United States, France, Denmark, Italy, Germany and Spain. One class action in the United States has been certified. In September 2000, the U.S.D.C. for the Central District of California approved a settlement of the class action that would provide financial compensation for U.S. individuals who used Gammagard IVIG between January 1993 and February 1994.

Other

In July 2003, Baxter International received a request from the Midwest Regional Office of the Securities and Exchange Commission for the voluntary production of documents and information concerning revisions to the company’s growth and earnings forecasts for 2003. The company has also been requested to voluntarily provide information as to the events in connection with the restatement of its financial statements, previously announced on July 22, 2004. The company is cooperating fully with the SEC.

In August 2002, six purported class action lawsuits were filed in the U.S.D.C. for the Northern District of Illinois naming Baxter International and its then Chief Executive Officer and then Chief Financial Officer as defendants. These lawsuits, which were consolidated and sought recovery of unspecified damages, alleged that the defendants violated the federal securities laws by making misleading statements that allegedly caused Baxter International common stock to trade at inflated levels. In December 2002, plaintiffs filed their consolidated amended class action complaint which named nine additional Baxter officers as defendants. In July 2003, the U.S.D.C. for the Northern District of Illinois dismissed in its entirety the consolidated amended class action complaint. In July 2004, the Seventh Circuit Court of Appeals reversed the order of dismissal and remanded the case to the District Court. In September 2004, the Seventh Circuit Court of Appeals denied motions by Baxter for rehearing, rehearing en banc and to stay the order to remand the case pending a petition for a writ of certiorari to the U.S. Supreme Court.

In July 2004, a purported class action lawsuit was filed in the U.S.D.C. for the Northern District of Illinois, in connection with the previously disclosed restatement, naming Baxter International and its current Chief Executive Officer and Chief Financial Officer and their predecessors as defendants. The lawsuit, which seeks recovery of unspecified damages, alleges that the defendants violated the federal securities laws by making false and misleading statements regarding the company’s financial results, which allegedly caused Baxter International common stock to trade at inflated levels during the period between April 2001 and July 2004. Three similar purported class action lawsuits were filed in the third quarter of 2004 in the U.S.D.C. for the Northern District of Illinois against the same defendants. These cases are in the process of being consolidated before a single judge.

In October 2004, a sole plaintiff filed a purported class action in the U.S.D.C. for the Northern District of Illinois against Baxter International and its current Chief Executive Officer and Chief

Financial Officer and their predecessors for alleged violations of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). Plaintiff alleges that these defendants, along with the Administrative and Investment Committees of the company’s Incentive Investment Plan and Puerto Rico Savings and Investment Plan, which are the company’s 401(k) plans, breached their fiduciary duties to the plans’ participants by offering Baxter International common stock as an investment option in each of these plans during the period of January 2001 to October 2004. Plaintiff alleges that Baxter International common stock traded at artificially inflated prices during this period and seeks unspecified damages and declaratory and equitable relief.

In August and September 2004, three plaintiffs filed separate derivative lawsuits in the Circuit Court of Cook County, Illinois against the company’s Chief Executive Officer and Chief Financial Officer and certain other current and former officers and directors of the company. These actions, which plaintiffs purport to bring on the company’s behalf, seek unspecified damages for alleged breaches of fiduciary duty in connection with the company’s disclosures of its financial results between April 2001 and July 2004.

In October 2004, a solitary plaintiff filed a purported class action against Baxter International in the Circuit Court of Cook County, Illinois alleging a breach of federal securities law through Baxter International’s secondary offering of common stock in September 2003. The plaintiff alleges that the offering price of these shares was artificially inflated by virtue of the financial statements that the company filed prior to and concurrent with the offering, which the company later amended in connection with the restatement, and seeks unspecified damages.

The company believes that it may be subject to additional class action litigation and regulatory proceedings in connection with the events preceding the ~~restatement.~~restatement announced in the third quarter of 2004.

Baxter International and certain of its subsidiaries are defendants in one civil lawsuit seeking unspecified damages on behalf of a person who allegedly was injured as a result of exposure to Baxter’s Althane series dialyzers, as well as a separate civil lawsuit seeking unspecified damages brought by the former distributor of Althane series dialyzers in Croatia. The company has reached settlements with a number of the families of patients who died in Spain, Sweden, Croatia and the United States after undergoing hemodialysis on Baxter Althane series dialyzers. The U.S. Government is investigating the matter and Baxter has received a subpoena to provide documents. Other lawsuits and claims may be filed in the United States and elsewhere.

As of ~~June~~September 30, 2004, Baxter International and certain of its subsidiaries have been named as defendants, along with others, in seventeen lawsuits brought in various state and U.S. federal

courts which allege that Baxter and other defendants reported artificially inflated average wholesale prices for Medicare and Medicaid eligible drugs. These cases have been brought by private parties on behalf of various purported classes of purchasers of Medicare and Medicaid eligible drugs, as well as by state attorneys general. As further explained below, all but five of these cases have been consolidated and are currently pending in the U.S.D.C. for the District of Massachusetts for pretrial case management under Multi District Litigation rules. Claimants seek unspecified damages and declaratory and injunctive relief under various state and/or federal statutes. In May 2003, the U.S.D.C. for the District of Massachusetts granted in part defendants’ motion to dismiss the consolidated amended complaint. Plaintiffs filed an amended master consolidated class action complaint and the defendants, including Baxter, moved to dismiss the complaint. In February 2004, the court granted in part and denied in part defendants’ motion to dismiss. The lawsuits against Baxter include five lawsuits brought by

state attorneys general, which allege that prices for Medicare and Medicaid eligible drugs were artificially inflated and seek unspecified damages, injunctive relief, civil penalties, disgorgement, forfeiture and restitution. Specifically, in January 2002, the Attorney General of Nevada filed a civil suit in the Second Judicial District Court of Washoe County, Nevada. In February 2002, the Attorney General of Montana filed a civil suit in the First Judicial District Court of Lewis and Clark County, Montana. In June 2003, the U.S.D.C. for the District of Massachusetts remanded the Nevada case to Washoe County, Nevada and denied plaintiffs’ motion to remand the Montana case. In January 2004, the District Court remanded another case filed in state court to the Superior Court of Maricopa County, Arizona. In March 2004, the Attorney General of Pennsylvania filed a civil suit in the Commonwealth Court of Pennsylvania. In May 2004, the Attorney General of Texas filed a civil suit in the District Court of Travis County, Texas. In June 2004, the Attorney General of Wisconsin filed a civil suit in the Circuit Court of Dane County, Wisconsin. Various state and federal agencies are conducting civil investigations into the marketing and pricing practices of Baxter and others with respect to Medicare and Medicaid reimbursement.

As of ~~June~~September 30, 2004, Baxter International and certain of its subsidiaries have been served as defendants, along with others, in ~~151~~142 lawsuits filed in various state and U.S. federal courts, one of which is a purported class action, seeking damages, injunctive relief and medical monitoring for claimants alleged to have contracted autism or other attention deficit disorders as a result of exposure to vaccines for childhood diseases containing Thimerosal. These vaccines were formerly manufactured and sold by North American Vaccine, Inc., which was acquired by Baxter in June 2000, as well as others. As of ~~June~~September 30, 2004, ~~four~~seven suits have been dismissed based on the application of the National Vaccine Injury Compensation ~~Act.~~Act, five of which are pending on appeal. Additional Thimerosal cases may be filed in the future against Baxter and companies that marketed Thimerosal-containing products.

As of September 30, 1996, the date of the spin-off of Allegiance Corporation (Allegiance) from Baxter, Allegiance assumed the defense of litigation involving claims related to Allegiance’s businesses, including certain claims of alleged personal injuries as a result of exposure to natural rubber latex gloves. Allegiance has not been named in most of this litigation but will be defending and indemnifying Baxter pursuant to certain contractual obligations for all expenses and potential liabilities associated with claims pertaining to latex gloves. As of ~~June~~September 30, 2004, the company was named as a defendant in 3730 lawsuits.

In addition to the cases discussed above, Baxter is a defendant in a number of other claims, investigations and lawsuits. Based on the advice of counsel, management does not believe that, individually or in the aggregate, these other claims, investigations and lawsuits will have a material adverse effect on the company’s results of operations, cash flows or consolidated financial position.

~~Item 2(e).~~

~~Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities.~~

~~The following table includes information about the company’s common stock repurchases during the second quarter of 2004.~~

~~ISSUER PURCHASES OF EQUITY SECURITIES~~

Period
   Total
Number Of
Shares
Purchased ⁽¹⁾
   Average
Price
Paid per
Share⁽¹⁾
   Total
Number of
Shares
Purchased
As Part of
Publicly
Announced
Program

Approximate
Dollar
Value of Shares
That May Yet
Be Purchased
Under the
Program⁽²⁾
April 1, 2004 through April 30, 2004
   197,400    $ 31.57    —
May 1, 2004 through May 31, 2004
   —      —      —
June 1, 2004 through June 30, 2004
   —      —      —




Total
   197,400    $ 31.57    —      $ 243,000,000

⁽¹⁾

There were no share repurchases during the quarter pursuant to the company’s publicly announced repurchase program (see Note 2 below). The shares were repurchased from Shared Investment Plan participants in private transactions, and the price paid per share reported above includes settlements of the company’s risk-sharing obligation, totaling $49,000 in the aggregate. Refer to Note 10 to the consolidated financial statements for further information regarding the Shared Investment Plan.

⁽²⁾

In October 2002 the board of directors authorized the company to repurchase up to $500 million of its stock on the open market, of which $257 million (5,114,570 shares) has been repurchased to date. This program was announced in the company’s third quarter 2002 Form 10-Q, which was filed on November 12, 2002. As of June 30, 2004, $243 million has not yet been repurchased. The program does not have an expiration date.

~~Item 4.~~

~~Submission of Matters to a Vote of Security Holders.~~

The company’s annual meeting of stockholders was held on May 4, 2004, for the purpose of electing directors, ratifying the appointment of PricewaterhouseCoopers LLP as independent auditors and voting on the stockholder proposal listed below. Proxies for the meeting were solicited pursuant to Section 14(a) of the Securities Exchange Act of 1934 and there was no solicitation in opposition to management’s solicitation. Each of management’s nominees for directors, as listed in the proxy statement, was elected with the number of votes set forth below.

NAME
   IN FAVOR
     ABSTAINED/WITHHELD
John D. Forsyth
   516,750,979        7,662,109
Gail D. Fosler
   467,978,764      56,434,324
Carole J. Uhrich
   516,682,633        7,730,455

~~The results of the other matters voted upon at the annual meeting are as follows:~~

PROPOSAL
   IN FAVOR
   AGAINST
   ABSTAINED
   BROKER
NON-VOTES
The appointment of PricewaterhouseCoopers LLP as independent auditors for the company in 2004 was approved.
   453,402,622    67,887,366    3,123,100    -0-
The stockholder proposal relating to cumulative voting in the election of directors was not approved.
   146,921,137    240,275,662    58,019,559    79,196,730

Item 6.

Exhibits ~~and Reports of Form 8-K.~~

~~(a)~~

Exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index hereto.

~~Exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index hereto.~~

~~(b)~~

~~Reports on Form 8-K~~

On June 21, 2004, Baxter International furnished a current report on Form 8-K under Item 9, “Regulation FD Disclosure,” attaching a press release announcing the election of John Greisch as Senior Vice President and Chief Financial Officer of the company.

On April 22, 2004, Baxter International furnished a current report on Form 8-K under Item 12, “Results of Operations and Financial Condition,” attaching a press release reporting financial results for the first quarter of 2004 and providing an update on restructuring measures.

On April 19, 2004, Baxter International filed a current report on Form 8-K under Item 5, “Other Events and Regulation FD Disclosure,” attaching a press release announcing the election of Robert L. Parkinson, Jr. as Chairman and Chief Executive Officer of the company, effective April 26, 2004.

Signature

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


��	BAXTER INTERNATIONAL INC.
			~~BAXTER INTERNATIONAL INC.~~ (Registrant)

Date: ~~August 6,~~November 4, 2004	By:	/s/ JOHN J. GREISCH
		John J. Greisch
		~~Senior~~Corporate Vice President and Chief Financial Officer (Chief Accounting Officer)

~~EXHIBITS FILED WITH SECURITIES AND EXCHANGE COMMISSION~~EXHIBIT INDEX


Number		Description of Exhibit

~~10.31A~~		~~Amendment No. 1 to Baxter International Inc. Non-Employee Director Compensation Plan~~

~~10.36~~ 10.39		Separation Agreement with ~~Harry M. Jansen Kraemer, Jr.~~Brian Anderson dated ~~June 30,~~August 2, 2004

10.40		Form of Stock Option Plan Terms and Conditions

15		Letter Re Unaudited Interim Financial Information

31.1		Certification of Chief Executive Officer ~~Pursuant~~pursuant to ~~Section 302~~Rule 13a-14(a)/15d-14(a) of the ~~Sarbanes-Oxley~~Securities Exchange Act of ~~2002~~1934

31.2		Certification of Chief Financial Officer ~~Pursuant~~pursuant to ~~Section 302~~Rule 13a-14(a)/15d-14(a) of the ~~Sarbanes-Oxley~~Securities Exchange Act of ~~2002~~1934

32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. 1350

32.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C. 1350

4344


Delaware		36-0781620
(State of other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

One Baxter Parkway, Deerfield, Illinois		60015-4633
(Address of principal executive offices)		(Zip Code)


		Page Number

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)

	Condensed Consolidated Statements of Income	2

	Condensed Consolidated Balance Sheets	3

	Condensed Consolidated Statements of Cash Flows	4

	Notes to Condensed Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2932

Item 4.	Controls and Procedures	3033

Review by Independent Registered Public Accounting Firm		3235

Report of Independent Registered Public Accounting Firm		3336

PART II.		OTHER INFORMATION

Item 1.	Legal Proceedings	34

~~Item 2(e).~~	~~Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities~~	39

~~Item 4.~~	~~Submission of Matters to a Vote of Security Holders~~	4037

Item 6.	Exhibits ~~and Reports on Form 8-K~~	4142

Signature			4243

Exhibits			4344


	Three months ended June 30,						Six months ended June 30,						Three months ended September 30,			Nine months ended September 30,
	2004			2003 (restated)			2004			2003 (restated)			2004	2003		2004		2003
Net sales	$	2,379		$	2,162		$	4,588		$	4,157		$2,320	$2,216		$6,908		$6,373
Cost and expenses
Cost of goods sold		1,440			1,191			2,756			2,308		1,357	1,247		4,113		3,555
Marketing and administrative expenses		532			466			998			880		462	440		1,460		1,320
Research and development expenses		129			139			265			275		124	137		389		412
Restructuring charges		543			337			543			337		—	—		543		337
Net interest expense		25			27			46			46		20	25		66		71
Other expense, net		42			14			63			40		11	6		74		46

Total costs and expenses		2,711			2,174			4,671			3,886		1,974	1,855		6,645		5,741

Income (loss) from continuing operations before income taxes		(332	)		(12	)		(83	)		271
Income from continuing operations before income taxes and cumulative effect of accounting changes													346	361		263		632
Income tax expense (benefit)		(163	)		(58	)		(101	)		10		87	86		(14	)	96

Income (loss) from continuing operations		(169	)		46			18			261
Income before cumulative effect of accounting changes													259	275		277		536
Discontinued operations		(1	)		(11	)		(12	)		(12	)	17	(5	)	5		(17	)

Net income (loss)	($	170	)	$	35		$	6		$	249
Income from continuing operations before cumulative effect of accounting changes													276	270		282		519
Cumulative effect of accounting changes, net of income tax benefit of $5													—	(17	)	—		(17	)

Earnings (loss) per basic common share
Net income													$ 276	$ 253		$ 282		$ 502

Earnings per basic common share
Continuing operations	($	0.28	)	$	0.08		$	0.03		$	0.44		$ 0.42	$ 0.47		$ 0.45		$ 0.90
Discontinued operations		—			(0.02	)		(0.02	)		(0.02	)	0.03	(0.01	)	0.01		(0.02	)
Cumulative effect of accounting changes													—	(0.03	)	—		(0.03	)

Net income (loss)	($	0.28	)	$	0.06		$	0.01		$	0.42
Net income													$ 0.45	$ 0.43		$ 0.46		$ 0.85

Earnings (loss) per diluted common share
Earnings per diluted common share
Continuing operations	($	0.28	)	$	0.08		$	0.03		$	0.43		$ 0.42	$ 0.46		$ 0.45		$ 0.89
Discontinued operations		—			(0.02	)		(0.02	)		(0.02	)	0.03	(0.01	)	0.01		(0.03	)
Cumulative effect of accounting changes													—	(0.03	)	—		(0.03	)

Net income (loss)	($	0.28	)	$	0.06		$	0.01		$	0.41
Net income													$ 0.45	$ 0.42		$ 0.46		$ 0.83

Weighted average number of common shares outstanding
Basic		613			598			613			598		615	589		613		595

Diluted		613			613			617			611		619	592		617		604


				June 30, 2004			December 31, 2003 (restated)

												September 30, 2004			December 31, 2003
Current assets			Cash and equivalents		$	760		$	925			Cash and equivalents		$ 822			$ 925
			Accounts and other current receivables			2,069			1,914			Accounts and other current receivables		2,108			1,914
		Inventories			2,117			2,104			Inventories		2,106			2,104
		Short-term deferred income taxes			464			140			Short-term deferred income taxes		405			140
		Prepaid expenses and other			294			277			Prepaid expenses and other		282			277

		Total current assets			5,704			5,360			Total current assets		5,723			5,360

Property, plant		At cost			7,799			7,791			At cost		7,840			7,791
and equipment		Accumulated depreciation and amortization			(3,469	)		(3,199	)		Accumulated depreciation and amortization		(3,494	)		(3,199	)

		Net property, plant and equipment			4,330			4,592			Net property, plant and equipment		4,346			4,592

Other assets		Goodwill			1,633			1,648			Goodwill		1,640			1,648
		Other intangible assets			588			611			Other intangible assets		572			611
		Other			1,405			1,498			Other		1,488			1,498

		Total other assets			3,626			3,757			Total other assets		3,700			3,757

Total assets				$	13,660		$	13,709					$13,769			$13,709

Current liabilities		Short-term debt		$	205		$	153			Short-term debt		$ 178			$ 153
		Accounts payable and accrued liabilities			2,839			3,107			Accounts payable and accrued liabilities		2,800			3,107
		Income taxes payable			586			538			Income taxes payable		648			538

		Total current liabilities			3,630			3,798			Total current liabilities		3,626			3,798

Long-term debt and lease obligations	Long-term debt and lease obligations				4,429			4,421		Long-term debt and lease obligations			4,411			4,421

Other long-term liabilities	Other long-term liabilities				2,299			2,216		Other long-term liabilities			2,046			2,216

Commitments and contingencies	Commitments and contingencies									Commitments and contingencies

Stockholders’ equity		Common stock, $1 par value, authorized 2,000,000,000 shares, issued 648,574,109 shares in 2004 and 2003			649			649			Common stock, $1 par value, authorized 2,000,000,000 shares, 648,417,007 issued in 2004 and 648,574,109 in 2003		648			649
		Common stock in treasury, at cost, 34,202,479 shares in 2004 and 37,273,424 shares in 2003			(1,696	)		(1,863	)		Common stock in treasury, at cost, 32,539,304 shares in 2004 and 37,273,424 shares in 2003		(1,613	)		(1,863	)
		Additional contributed capital			3,680			3,773			Additional contributed capital		3,630			3,773
		Retained earnings			2,151			2,145			Retained earnings		2,427			2,145
		Accumulated other comprehensive loss			(1,482	)		(1,430	)		Accumulated other comprehensive loss		(1,406	)		(1,430	)

		Total stockholders’ equity			3,302			3,274			Total stockholders’ equity		3,686			3,274

		Total liabilities and stockholders’ equity		$	13,660		$	13,709			Total liabilities and stockholders’ equity		$13,769			$13,709


			Six months ended June 30,
			2004			2003 (restated)					Nine months ended September 30,
			2004			2003 (restated)					2004			2003
Cash flows from		Income from continuing operations	$	18		$	261			Income from continuing operations	$	277		$	536
operations		Adjustments								Adjustments
		Depreciation and amortization		295			259			Depreciation and amortization		445			400
		Deferred income taxes		(203	)		(161	)		Deferred income taxes		(238	)		(135	)
		Restructuring charges		543			337			Restructuring charges		543			337
		Other		147			6			Other		151			34
		Changes in balance sheet items								Changes in balance sheet items
		Accounts receivable		(162	)		(25	)		Accounts receivable		(155	)		16
		Inventories		(75	)		(201	)		Inventories		(44	)		(233	)
		Accounts payable and accrued liabilities		(175	)		(185	)		Accounts payable and accrued liabilities		(175	)		(160	)
		Restructuring payments		(62	)		(9	)		Restructuring payments		(136	)		(38	)
		Contributions to pension trusts		(54	)		(11	)		Contributions to pension trusts		(95	)		(11	)
		Other		(20	)		(65	)		Other		(44	)		(76	)

		Cash flows from continuing operations		252			206			Cash flows from continuing operations		529			670
		Cash flows from discontinued operations		15			(10	)		Cash flows from discontinued operations		17			5

		Cash flows from operations		267			196			Cash flows from operations		546			675

Cash flows from		Capital expenditures		(229	)		(358	)		Capital expenditures		(363	)		(564	)
investing activities		Acquisitions (net of cash received) and investments in and advances to affiliates		(20	)		(84	)		Acquisitions (net of cash received) and investments in and advances to affiliates		(20	)		(106	)
		Divestitures and other		31			—			Divestitures and other		31			—

		Cash flows from investing activities		(218	)		(442	)		Cash flows from investing activities		(352	)		(670	)

Cash flows from		Issuances of debt		333			649			Issuances of debt		519			654
financing activities		Redemptions of financing obligations		(337	)		(988	)		Redemptions of financing obligations		(596	)		(1,001	)
		Increase in debt with maturities of three months or less, net		81			524			Increase in debt with maturities of three months or less, net		64			335
		Common stock cash dividends		(361	)		(346	)		Common stock cash dividends		(361	)		(346	)
		Proceeds from stock issued under employee benefit plans		75			32			Proceeds from stock issued under employee benefit plans		108			60
		Purchases of treasury stock		(18	)		(153	)		Issuance of stock		—			644
										Purchases of treasury stock		(18	)		(714	)
		Cash flows from financing activities		(227	)		(282	)
										Cash flows from financing activities		(284	)		(368	)

Effect of currency exchange rate changes on cash and equivalents	Effect of currency exchange rate changes on cash and equivalents			13			(33	)	Effect of currency exchange rate changes on cash and equivalents			(13	)		24

Decrease in cash and equivalents	Decrease in cash and equivalents			(165	)		(561	)	Decrease in cash and equivalents			(103	)		(339	)
Cash and equivalents at beginning of period	Cash and equivalents at beginning of period			925			1,169		Cash and equivalents at beginning of period			925			1,169

Cash and equivalents at end of period	Cash and equivalents at end of period		$	760		$	608		Cash and equivalents at end of period		$	822		$	830


	Three months ended June 30, 2003					Six months ended June 30, 2003
(in millions, except per share data)	As originally reported		As restated		MMM	As originally reported		As restated
Net sales	$2,163		$2,162			$4,160		$4,157
Cost and expenses
Cost of goods sold	1,190		1,191			2,307		2,308
Marketing and administrative expenses	464		466			877		880
Research and development expenses	139		139			275		275
Restructuring charges	337		337			337		337
Net interest expense	27		27			46		46
Other expense, net	14		14			40		40

Total costs and expenses	2,171		2,174			3,882		3,886

Income (loss) from continuing operations before income taxes	(8	)	(12	)		278		271
Income tax expense (benefit)	(57	)	(58	)		12		10

Income from continuing operations	49		46			266		261
Discontinued operations	(11	)	(11	)		(12	)	(12	)

Net income	$ 38		$ 35			$ 254		$ 249

Earnings (loss) per basic common share
Continuing operations	$ 0.08		$ 0.08			$ 0.45		$ 0.44
Discontinued operations	(0.02	)	(0.02	)		(0.02	)	(0.02	)

Net income	$ 0.06		$ 0.06			$ 0.43		$ 0.42

Earnings (loss) per diluted common share
Continuing operations	$ 0.08		$ 0.08			$ 0.44		$ 0.43
Discontinued operations	(0.02	)	(0.02	)		(0.02	)	(0.02	)

Net income	$ 0.06		$ 0.06			$ 0.42		$ 0.41


	December 31, 2003
(in millions, except shares)	As originally reported			As restated
Assets
Current assets
Cash and equivalents	$	927		$	925
Accounts and other current receivables		1,979			1,914
Inventories		2,101			2,104
Short-term deferred income taxes		140			140
Prepaid expenses and other		290			277

Total current assets		5,437			5,360

Property, plant and equipment
At cost		7,781			7,791
Accumulated depreciation and amortization		(3,196	)		(3,199	)

Net property, plant and equipment		4,585			4,592

Other assets
Goodwill		1,648			1,648
Other intangible assets		611			611
Other		1,498			1,498

Total other assets		3,757			3,757

Total assets	$	13,779		$	13,709

Liabilities
Current liabilities
Short-term debt	$	153		$	153
Accounts payable and accrued liabilities		3,105			3,107
Income taxes payable		561			538

Total current liabilities		3,819			3,798

Long-term debt and lease obligations		4,421			4,421
Other long-term liabilities		2,216			2,216
Commitments and contingencies

Stockholders’ equity
Common stock, $1 par value, authorized 2,000,000,000 shares, issued 648,574,109 shares		649			649
Common stock in treasury, at cost, 37,273,424 shares		(1,863	)		(1,863	)
Additional contributed capital		3,773			3,773
Retained earnings		2,194			2,145
Accumulated other comprehensive loss		(1,430	)		(1,430	)

Total stockholders’ equity		3,323			3,274

Total liabilities and stockholders’ equity	$	13,779		$	13,709


	Three months ended June 30,				Six months ended June 30,				Three months ended September 30,		Nine months ended September 30,
(in millions)	2004		2003		2004		2003		2004	2003	2004	2003
Interest expense	$ 30		$ 31		$ 58		$61		$ 29	$33	$ 87	$94
Interest income	(5	)	(4	)	(12	)	(14	)	(9)	(7)	(21)	(21)

Interest expense, net	$ 25		$ 27		$ 46		$47
Net interest expense									$ 20	$26	$ 66	$73

Continuing operations	$ 25		$ 27		$ 46		$46		$ 20	$25	$ 66	$71
Discontinued operations	$—		$—		$—		$ 1		$—	$ 1	$—	$ 2


(in millions, except amortization period data)	Developed technology, including patents	Manufacturing, distribution and other contracts	Other	Total		Developed technology, including patents	Manufacturing, distribution and other contracts	Other	Total
June 30, 2004
September 30, 2004
Gross intangible assets	$798	$46	$74	$	918	$804	$46	$72	$922
Accumulated amortization	296	21	20		337	308	28	21	357

Net intangible assets	$502	$25	$54	$	581	$496	$18	$51	$565

Weighted-average amortization period (in years)	15	8	20		15	15	8	20	15

December 31, 2003
Gross intangible assets	$802	$39	$74	$	915	$802	$39	$74	$915
Accumulated amortization	279	14	18		311	279	14	18	311

Net intangible assets	$523	$25	$56	$	604	$523	$25	$56	$604

Weighted-average amortization period (in years)	15	9	20		15	15	9	20	15


	As of and for the three months ended June 30,				As of and for the six months ended June 30,				As of and for the three months ended September 30,				As of and for the nine months ended September 30,
(in millions)	2004		2003		2004		2003		2004		2003		2004		2003
Beginning of period	$50		$53		$53		$53		$52		$52		$53		$53
New warranties and adjustments to existing warranties	7		5		10		13		6		7		16		20
Payments in cash or in kind	(5	)	(6	)	(11	)	(14	)	(6	)	(8	)	(17	)	(22	)

End of period	$52		$52		$52		$52		$52		$51		$52		$51


(in millions)	Employee- related costs		Contractual and other costs		Total		Employee- related costs		Contractual and other costs		Total
2003 Restructuring Charge
Reserve at December 31, 2003	$ 97		$43		$140		$ 97		$ 43		$140
Utilization	(25	)	(12	)	(37	)	(25	)	(12	)	(37	)

Reserve at March 31, 2004	$ 72		$31		$103		$ 72		$ 31		$103
Utilization	(19	)	(1	)	(20	)	(19	)	(1	)	(20	)

Reserve at June 30, 2004	$ 53		$30		$ 83		$ 53		$ 30		$ 83
Utilization							(23	)	(3	)	(26	)

Reserve at September 30, 2004							$ 30		$ 27		$ 57

2004 Restructuring Charge
Charge	$212		$135		$347		$212		$135		$347
Utilization	(4	)	—		(4	)	(4	)	—		(4	)

Reserve at June 30, 2004	$208		$135		$343		$208		$135		$343
Utilization							(29	)	(18	)	(47	)

Reserve at September 30, 2004							$179		$117		$296


	Three months ended June 30,		Percent increase			Six months ended June 30,						Three months ended September 30,				Percent increase		Nine months ended September 30,				Percent increase
(in millions)	2004	2003 (restated)			2004		2003 (restated)		Percent increase		2004		2003			Percent increase	2004		2003			Percent increase
International	$1,285	$1,165	Percent increase	10%			$2,475		$2,204		12%		$1,218		$1,149		6%		$3,693		$3,353		10%
United States	1,094	997	10%			2,113		1,953		8%		1,102		1,067		3%		3,215		3,020		6%

Total net sales	$2,379	$2,162	10%			$4,588		$4,157		10%		$2,320		$2,216		5%		$6,908		$6,373		8%


	Three months ended June 30					Percent decrease		Six months ended June 30						Percent decrease
(in millions)		2004		2003					2004		2003			Percent decrease	Three months ended September 30,			Percent decrease		Nine months ended September 30,			Percent decrease
Research and development (R&D) expenses		$	129	$	139	Percent decrease	(7%)			$	265	$	275		(4%)								Percent decrease
(in millions)																2004	2003	Percent decrease		Percent decrease		2004		2003	Percent decrease
(in millions)																td24	td37		$389	Percent decrease		$412			Percent decrease
As a percent of sales			5.4%		6.4%					5.8%		6.6%				5.3%	6.2%				5.6%	6.5%


	Inventories				Inventory Turns		Inventories			Inventory Turns
	June 30, 2004		December 31, 2003 (restated)	Six months ended June 30,			September 30, 2004		December 31, 2003	Nine months ended September 30,
(in millions, except inventory turn data)			December 31, 2003 (restated)	2004	2003 (restated)		September 30, 2004	2004	December 31, 2003	2003
	June 30, 2004
BioScience	$	1,290	$1,378		1.66	1.25	$1,271		$1,378	1.51	1.39
Medication Delivery		605	528		3.83	3.71	620		528	3.70	3.64
Renal		222	198		3.71	3.94	215		198	4.13	3.95

Total	$	2,117	$2,104		2.61	2.24	$2,106		$2,104	2.48	2.31


Maturity Date	Swaps Liability As of September 30, 2004	Portion Fixed by Mirror Swaps As of October 31, 2004
2005	$338 million	$296 million
2007	44 million	—
2008	232 million	—
2009	342 million	—

Total	$956 million	$296 million


	Three months ended June 30,				Six months ended June 30,				Three months ended September 30,		Change		Nine months ended September 30,		Change
	2004	2003 (restated)	Change		2004	2003 (restated)	Change		2004	2003	Change		2004	2003	Change
Gross margin	39.5%	44.9%	(5.4 pts	)	39.9%	44.5%	(4.6 pts	)	41.5%	43.7%	(2.2 pts	)	40.5%	44.2%	(3.7 pts	)
Marketing and administrative expenses	22.4%	21.6%	0.8 pts		21.8%	21.2%	0.6 pts		19.9%	19.9%	— pts		21.1%	20.7%	0.4 pts


Period	Total Number Of Shares Purchased ⁽¹⁾	Average Price Paid per Share⁽¹⁾		Total Number of Shares Purchased As Part of Publicly Announced Program	Approximate Dollar Value of Shares That May Yet Be Purchased Under the Program⁽²⁾
April 1, 2004 through April 30, 2004	197,400	$	31.57	—
May 1, 2004 through May 31, 2004	—		—	—
June 1, 2004 through June 30, 2004	—		—	—

Total	197,400	$	31.57	—	$	243,000,000


NAME	IN FAVOR	ABSTAINED/WITHHELD
John D. Forsyth	516,750,979	7,662,109
Gail D. Fosler	467,978,764	56,434,324
Carole J. Uhrich	516,682,633	7,730,455


PROPOSAL	IN FAVOR	AGAINST	ABSTAINED	BROKER NON-VOTES
The appointment of PricewaterhouseCoopers LLP as independent auditors for the company in 2004 was approved.	453,402,622	67,887,366	3,123,100	-0-
The stockholder proposal relating to cumulative voting in the election of directors was not approved.	146,921,137	240,275,662	58,019,559	79,196,730