Three months ended June 30,								Six months ended June 30,
(in millions, except per share data)		2005				2004				2005				2004
Net income (loss), as reported		$	322			$	(170	)		$	548			$	6
Add:
Stock-based employee compensation expense included in reported net income, net of tax			2				12				2				12
Deduct:
Total stock-based employee compensation expense determined under the fair value method, net of tax			(18	)			(32	)			(30	)			(60	)
Pro forma net income (loss)		$	306			$	(190	)		$	520			$	(42	)
Earnings (loss) per basic share
As reported		$	0.52			$	(0.28	)		$	0.88			$	0.01
Pro forma		$	0.49			$	(0.31	)		$	0.84			$	(0.07	)
Earnings (loss) per diluted share
As reported		$	0.51			$	(0.28	)		$	0.88			$	0.01
Pro forma		$	0.49			$	(0.31	)		$	0.83			$	(0.07	)

New accounting standardstandards

In December 2004, the Financial Accounting Standards Board (FASB) revised and reissued FASBStatement of Financial Accounting Standards (SFAS) No. 123, “Share-Based Payment” (FASB(SFAS No. 123-R), which requires companies to expense the value of employee stock options and similar awards. The standard wasDue to become effective July 1, 2005. Inan SEC amendment to Regulation S-X in April 2005, the SEC amended Regulation S-X to provide a six-month adoption deferral period for public companies. Therefore, FASBSFAS No. 123-R will not become effective untilfor the company on January 1, 2006. The new rules provide for one of two transition elections, either prospective application or restatement (back to January 1, 1995). The company plans to adopt FASBSFAS No. 123-R on January 1, 2006 and has not yet decided which transition option the company will use. Management is in the process of analyzing the provisions of FASBSFAS No. 123-R and assessing the impact on the company’s future consolidated financial statements.

In December 2004, the FASB issued SFAS No. 151, “Inventory Costs” (SFAS No. 151), which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and spoilage. SFAS No. 151 requires that those items be recognized as current period charges. In addition, the new standard requires that the allocation of fixed production overhead costs be based on the normal capacity of the production facilities. The pro forma effectcompany plans to adopt SFAS No. 151 on its effective date of expensing employee stock optionsJanuary 1, 2006. Management is in the process of analyzing the new standard and similar awards under existing rules is presented above.has not yet determined the impact on the company’s consolidated financial statements.

2. SUPPLEMENTAL FINANCIAL INFORMATION

Net pension and other postemployment benefits expense

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

In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act (the Medicare Act) was signed into law. The Medicare 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). The final regulations for determining whether plans are actuarially equivalent to Medicare (Part D) were issued in January 2005. Based on these final regulations, management expects the company’s OPEB plan to be actuarially equivalent to Medicare (Part D), and that the company will be eligible for the federal subsidy. In accordance with GAAP, the estimated reduction in the accumulated OPEB obligation due to the federal subsidy will beis reflected as an actuarial gain. The actuarial

gain, will be amortized, reducing OPEB plan expense inand the future.gain is being amortized. The effect on the company’s consolidated financial statements is not expected to be material.

Second quarter 2004 charges

Financial results for the second quarter of 2004 included several charges. These 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.

Cost of goods sold included $45 million relating to inventory reserve and foreign currency hedge adjustments (principally due to certain changes within the BioScience segment), marketing and administrative expenses included $55 million relating to adjustments to the allowance for doubtful accounts (principally related to the company’s loan to Cerus Corporation), other expense included a $15 million impairment charge (related to the company’s Pathogen Inactivation program), and income tax expense reflected a $95 million benefit relating to these charges, as well as a reversal of reserves based on the completion of tax audits. Refer to the 2004 Annual Report for a more complete discussion of each of these adjustments.

Net interest expense

Net interest expense consisted of the following.

Other expense, net

Other income and expense principally includes amounts relating to foreign exchange, minority interests and equity method investments. Other income and expense may also include other items, such as legal settlement gains and losses, relating to equity method investments,asset impairment charges and divestituredivestitures gains and losses.

Charges relating to legal matters totaled $9 million in both the three- and six-month periods ended June 30, 2005. Asset impairment charges totaled $18 million in the three- and six-month periods ended June 30, 2004, including the $15 million Pathogen Inactivation program charge discussed above. Expense for the quarter and year-to-date period ended June 30, 2004 also included $6 million 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). Refer to the 2004 Annual Report for further information regarding the Shared Investment Plan.

Comprehensive income

Total comprehensive income was $247$153 million and $400 million for the three and six months ended March 31,June 30, 2005, respectively, and $191total comprehensive loss was $237 million and $46 million for the three and six months ended March 31, 2004.June 30, 2004, respectively. The increase in comprehensive income during 2005the quarter and year-to-date period was principally related to increased net income and favorable movements in the company’s net investment hedges, partially offset by unfavorable currency translation adjustments.

Earnings per share

The numerator for both basic and diluted EPS is net income. 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 other common stock equivalents is reflected in the denominator for diluted EPS using the treasury stock method. The following is a reconciliation of basic shares to diluted shares.

Inventories

Inventories consisted of the following.

Goodwill

Goodwill was $895 million, $578 million and $144at June 30, 2005 totaled $859 million for the Medication Delivery segment, $567 million for the BioScience segment and $134 million for the Renal segments, respectively,segment. Goodwill at MarchDecember 31, 2005. Goodwill was2004 totaled $895 million for the Medication Delivery segment, $583 million for the BioScience segment and $170 million for the Medication Delivery, BioScience and Renal segments, respectively, at December 31, 2004.segments. The changereduction in the goodwill balance for each segment related to foreign currency fluctuations and for the Renal segment, a first quarter 2005 divestiture (which resulted in a $28 million reduction in the Renal segment.segment’s goodwill balance).

Other intangible assets

The following is a summary of the company’s intangible assets subject to amortization at March 31,June 30, 2005 and December 31, 2004. Intangible assets with indefinite useful lives are not material.

The amortization expense for these intangible assets was $14$15 million for the three months ended March 31, 2005 and $16 million for the three months ended March 31, 2004.June 30, 2005 and 2004, respectively, and $29 million and $32 million for the six months ended June 30, 2005 and 2004, respectively. At March 31,June 30, 2005, the anticipated annual amortization expense for these intangible assets is $56 million $54in 2005, $53 million $46in 2006, $45 million in 2007, $41 million $40 million and $39in 2008, $38 million in 2005, 2006, 2007, 2008, 2009 and 2010, respectively.$38 million in 2010.

Product warranties

The following is a summary of activity in the product warranty liability.

Securitization arrangements

The company’s securitization arrangements resulted in net cash outflows of $52$34 million and $86 million for the three and six months ended March 31,June 30, 2005, respectively, and $43$147 million and $190 million for the three and six months ended March 31, 2004.June 30, 2004, respectively. A summary of the activity is as follows.

Income taxes

The American Jobs Creation Act of 2004

No provision has been made for U.S. income taxes on the undistributed earnings of non-U.S. subsidiaries, as these earnings are currently deemed to be permanently invested.

In October 2004, the American Jobs Creation Act of 2004 (the Jobs Creation Act) was enacted. The Act includes numerous provisions, including the creation ofallows U.S. companies a temporary incentive for United States multinationalsone-time opportunity to repatriate accumulated income earned abroad. The temporarynon-U.S. earnings through 2005 at a 5.25% tax deductionrate rather than the normal U.S. tax rate of 85%35%, provided that certain criteria, including qualified reinvestment, are met. Management is analyzing the provisions of certain repatriated foreign earnings is subject to a number of limitations.the Act. Detailed final guidance necessary to implement the Jobs Creation Act has not yet been issued by the Internal Revenue Service. Management is analyzing the provisions of the Jobs Creation Act and has not yet determined the effects if any, on the company’s plans or its consolidated financial statements. Management expects to complete its evaluation by the end of the third quarter of 2005. Refer

Effective income tax rate

As discussed in Notes 1, 3 and 4, included in results of operations in both 2005 and 2004 were certain unusual or nonrecurring charges and income items. The company’s effective tax rate was impacted by these items, which were tax-effected at

varying rates, depending on the particular tax jurisdictions. In addition, during the second quarter of 2005, principally due to ongoing improvements to the company’s geographic product sourcing, the company revised its estimate and recorded a year-to-date income tax adjustment totaling approximately $20 million, to reflect a lower full-year 2005 projected effective income tax rate (reducing the expected full-year 2005 effective income tax rate from 25%, as disclosed in the 2004 Annual Report, for further information.to approximately 22%).

3. RESTRUCTURING INITIATIVES

Second quarter 2004 Restructuring Chargerestructuring charge

During the second quarter of 2004, the company recorded a $543 million restructuring charge principally associated with management’s decision to implement actions to reduce the company’s overall cost structure and to drive sustainable improvements in financial performance. The charge was primarily for severance and costs associated with the closing of facilities (including the closure of additional plasma collection centers) and the exiting of contracts.

These actions include the elimination of 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 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.

Included in the 2004 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 charge was $347 million for cash costs, principally pertaining to severance and other employee-related costs. Approximately three-quarters80% of the targeted positions have been eliminated as of March 31,June 30, 2005. As discussed below, management adjusted the restructuring charge during the second quarter of 2005 based on changes in estimates.

Second quarter 2003 Restructuring Chargerestructuring charge

During the second quarter of 2003, the company recorded a $337 million restructuring charge principally associated with management’s decision to close certain facilities and reduce headcount on a global basis. Management undertook these actions in order to position the company more competitively and to enhance profitability. The company closed plasma collection centers and a plasma fractionation facility. In addition, the company consolidated and integrated several facilities. 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 charge was $128 million relating to asset impairments, principally to write down PP&E, 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 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. VirtuallySubstantially all of the targeted positions have been eliminated as of March 31,June 30, 2005, and the program is substantially complete, except for remaining severance and other cash payments to be madecomplete. As discussed below, management adjusted the restructuring charge during the second quarter of 2005 based on changes in the future.estimates.

Restructuring Reservesreserves

The following summarizes activity in the company’s restructuring reserves through March 31,June 30, 2005.

With respect to the 2003 restructuring charge, the remaining reserve is expected to be utilized during 2005. With respect to the 2004 restructuring charge, approximately $150$50 million of the reserve is expected to be utilized during full-yearthe second half of 2005, with the remainder to be utilized in 2006.

Second quarter 2005 adjustments to restructuring charges

During the second quarter of 2005, the company recorded a $104 million pre-tax benefit relating to the adjustment of restructuring charges recorded in 2004 and 2003. As detailed in the table above, $84 million of the adjustment related to improved estimates of restructuring reserves. The remaining $20 million represented asset disposal proceeds in excess of original estimates and finalization of certain employment termination arrangements.

The restructuring reserve adjustments principally related to severance and other employee-related costs. The company’s targeted headcount reductions are being achieved with a higher level of attrition than originally anticipated. Accordingly, the company’s severance payments are now projected to be lower than originally estimated. The remaining reserve adjustment principally related to changes in estimates regarding certain contract termination costs.

4. INFUSION PUMP CHARGE

On July 21, 2005, the company announced that the United States Food and Drug Adminstration (FDA) had classified a March 15, 2005 company voluntary notice to customers regarding certain user interface and failure code issues relating to the company’s COLLEAGUE® Volumetric Infusion Pump as a Class I recall (FDA’s highest priority level) and that there had been reports of three deaths and six serious injuries that may have been associated with the issues identified in the March 15, 2005 voluntary notice. The same announcement also described a field corrective action letter sent to customers on July 20, 2005 (also designated a Class I recall), notifying customers that the company is in the process of developing an action plan to address design issues relating to COLLEAGUE pump failure codes (with which one of the three previously described deaths may have been associated). While these actions do not require customers to return their COLLEAGUE pumps, the company will voluntarily hold shipments of new COLLEAGUE pumps until design issues are resolved.

During the second quarter of 2005 the company recorded a $77 million charge for costs associated with correcting the COLLEAGUE infusion pump design issues. The charge recorded during the quarter represents management’s current estimate of the costs to be incurred to remediate these issues. The charge principally consists of materials, labor and freight costs. The actual costs relating to this matter may differ from management’s estimate. It is possible that additional charges may be required in future periods. It is also possible that actual costs relating to this matter may be less than estimated costs.

5. LEGAL PROCEEDINGS

Refer to “Part“Part II - Item 1. Legal Proceedings” below.is incorporated herein by reference.

5.6. SEGMENT INFORMATION

The company operates in three segments, each of which is a strategic business that is managed separately because each business develops, manufactures and sells distinct products and services. The segments and a description of their products and services 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, antibiotic therapy and chemotherapy;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 the corporate level (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, restructuring and certain asset impairments), deferred income taxes, certain foreign currency fluctuations, certain employee benefit costs, the majority of the foreign currency and interest rate hedging activities, and certain litigation liabilities and related insurance receivables.

The $77 million second quarter 2005 charge associated with the COLLEAGUE infusion pump is reflected in the Medication Delivery segment’s pre-tax income for the three- and six-month periods ended June 30, 2005 in the table below. Refer to Note 4 for further information.

Financial information for the company’s segments for the quarters and year-to-date periods ended March 31June 30 is as follows.

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

		Three months ended June 30,								Six months ended June 30,
(in millions)		2005				2004				2005				2004
Total pre-tax income from segments		$	479			$	412			$	937			$	764
Unallocated amounts
Interest expense, net			(33	)			(25	)			(64	)			(46	)
Restructuring			104				(543	)			104				(543	)
Certain currency exchange rate fluctuations and hedging activities			(19	)			(39	)			(43	)			(73	)
Asset dispositions and impairments, net			—				(56	)			—				(56	)
Other corporate items			(119	)			(81	)			(224	)			(129	)
Income (loss) from continuing operations before income taxes		$	412			$	(332	)		$	710			$	(83	)