SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarter ended June 30, 2004

Commission File Number 1-6926

(Exact name of registrant as specified in its charter)

730 Central Avenue, Murray Hill, New Jersey 07974

(Address of principal executive offices)

The accompanying notes to condensed consolidated financial statements are an

integral part of these statements.

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

(1) Restated for the company's 2-for-1 stock split.

Continued on the next page.

(1) Restated for the company's 2-for-1 stock split.

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

Continued on the next page.

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

C. R. BARD, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Nature of Operations - C. R. Bard, Inc. (the "company" or "Bard") is engaged in the design, manufacture, packaging, distribution and sales of medical, surgical, diagnostic and patient care devices. The company markets its products worldwide to hospitals, individual health care professionals, extended care facilities and alternate site facilities. Bard holds strong market positions in vascular, urology, oncology and surgical specialty products. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes to consolidated financial statements as filed by the company in its 2003 Annual Report on Form 10-K.

Consolidation - The consolidated financial statements as of June 30, 2004 include the accounts of the company, its majority-owned subsidiaries that are not considered variable interest entities, and variable interest entities for which the company is the primary beneficiary. All significant intercompany accounts and transactions are eliminated in consolidation. The accounts of most foreign subsidiaries are consolidated as of and for the three and six months ended May 31, 2004 and as of November 30, 2003. No events occurred related to these foreign subsidiaries during the months of June 2004, December 2003 or June 2003 that materially affected the financial position or results of operations of the company as of the date, or for the periods for which financial information is presented in these financial statements. See below for the impact of the company's adoption of Financial Accounting Standards Board ("FASB") Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin ("ARB") No. 51 (revised December 2003).

Use of Estimates in the Preparation of Financial Statements - The preparation of these financial statements in conformity with accounting principles generally accepted in the United States of America requires the company to make estimates and judgments that affect reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities at the date of the financial statements. The company evaluates these estimates and judgments on an ongoing basis and bases its estimates on historical experience, current conditions and various other assumptions that are believed to be reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities as well as identifying and assessing the accounting treatment with respect to commitments and contingencies. Actual results may differ from these estimates under different assumptions or conditions.

Reclassifications - Certain prior year amounts have been reclassified to conform to the current year presentation.

Revenue Recognition - Bard markets its products worldwide to hospitals, health care professionals, extended care facilities and alternate site facilities. The company sells directly to these end-users as well as to independent distributors and other equipment manufacturers ("OEM").

The company's net sales represent gross sales invoiced to both end-users and independent distributors, less certain related charges, including discounts, returns, rebates and other allowances. The company recognizes product revenue when persuasive evidence of a sales arrangement exists, title and risk of loss has transferred, the selling price is fixed or determinable, contractual obligations have been satisfied and collectibility is reasonably assured. Unless agreed otherwise, the company's terms with domestic distributors provide that title and risk of loss passes F.O.B. origin. Certain sales to domestic and European distributors are F.O.B. destination. For arrangements where the company's terms state F.O.B. destination, the company records sales on this basis.

In certain circumstances, end-users may require the company to maintain consignment inventory at the end-user's location. In the case of consignment inventories, revenues and associated costs are recognized upon the notification of usage by the customer.

Charges for discounts, returns, rebates and other allowances are recognized as a deduction from revenue on an accrual basis in the period in which the revenue is recorded. The accrual for product returns, discounts and other allowances is based on the company's history. The company allows customers to return defective or damaged products. Historically, product returns have not been material. The company grants sales rebates to independent distributors based upon the distributor's reporting of end-user sales and pricing. Sales rebates are accrued by the company in the period in which the sale is recorded. The company's rebate accrual is based on its history of actual rebates paid. In estimating rebate accruals, the company considers the lag time between the point of sale and the payment of the distributor's rebate claim, distributor-specific trend analysis and contractual commitments including stated rebate rates. The company's reserves for rebates are reviewed at each reporting period and adjusted to refl ect data available at that time. The company adjusts reserves to reflect any differences between estimated and actual amounts. Such adjustments impact the amount of net product sales revenue recognized by the company in the period of adjustment.

Shipping and Handling Costs - Shipping and handling costs are included in cost of sales.

Research and Development - Research and development expenses comprise expenses related to internal research and development activities, milestone payments for third-party research and development activities and acquired in-process research and development costs arising from the company's business development activities. The components of internal research and development expense include: salary and benefits, allocated overhead and occupancy costs, clinical trial and related clinical manufacturing costs, contract services and other costs. All research and development costs are expensed as incurred.

Stock-Based Compensation - The company maintains various stock-based employee and director compensation plans. The company accounts for those plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations. Compensation costs that have been charged against income related to certain of the company's plans would not be materially different under Statement of Financial Accounting Standards ("FAS") No. 123 "Accounting for Stock-Based Compensation" ("FAS 123"). No stock-based employee compensation cost is reflected in net income for employee option grants, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Additionally, in accordance with APB 25 and related interpretations, the company recognizes no compensation expense for the discount associated with the 1998 Employee Stock Purchase Plan o f C. R. Bard, Inc. ("ESPP"). The following table illustrates the effect on net income and earnings per share if the company had applied the fair market value recognition provisions of FAS 123.

The fair market value of stock options is estimated on the date of grant using the Black-Scholes option-pricing model. The following table outlines the assumptions used in the Black-Scholes model.

For the six months ended June 30, 2004, the per share fair market value of stock options granted was $17.31, reflecting the company's stock split. For the six months ended June 30, 2003, the per share fair market value of stock options granted, without reflecting the company's stock split, was $16.54. The pro forma after-tax adjustment for options assumes vesting periods between two to four years. The fair market value of the ESPP discount is based upon the difference between the market price at the time of purchase and the participant's purchase price. The ESPP pro forma adjustment assumes immediate expense recognition at the time of purchase. All pro forma adjustments have been tax-affected at 35%. No other pro forma adjustments are required because the company records compensation expense for all other stock awards.

Defined Benefit Pension Plans - The company has both tax qualified and nonqualified noncontributory defined benefit pension plans ("nonqualified plans") that together cover substantially all domestic and certain foreign employees. These plans provide benefits based upon a participant's compensation and years of service. The nonqualified plans are made up of the following arrangements: a nonqualified supplemental deferred compensation arrangement and a nonqualified excess pension deferred compensation arrangement. The nonqualified supplemental deferred compensation arrangement is noncontributory and provides supplemental income to key executives of the company. The benefit is determined by the accumulation of an account balance that results from a percentage of pay credit and interest. No deferrals of pay are required from participants. The balance is paid to a participant after retirement over a 15-year period. The nonqualified excess pension deferred compensation arrangement pr ovides benefits to key employees that cannot be provided by the qualified plan due to IRS limitations. The company uses a September 30 measurement date for all of its defined benefit pension plans. The components of net periodic benefit expense for the six months ended June 30, 2004 and 2003 are as follows.

Stock Split - On April 21, 2004, the company announced that its Board of Directors approved a two-for-one stock split, which was effected in the form of a 100 percent stock dividend. The two-for-one stock split was distributed on May 28, 2004 to shareholders of record as of May 17, 2004. Unless indicated otherwise, all historical weighted average share and earnings per share amounts have been restated to reflect the stock split.

Earnings Per Share - "Basic earnings per share" represents net income divided by the weighted average shares outstanding. "Diluted earnings per share" represents net income divided by weighted average shares outstanding adjusted for the incremental dilution of outstanding employee stock options and awards. Unless indicated otherwise, per share amounts are calculated on a diluted basis. A reconciliation of weighted average common shares outstanding to weighted average common shares outstanding assuming dilution follows:

For the quarter ended June 30, 2004 and 2003, common stock equivalents from stock options and stock awards of approximately 19,000 shares and 70,000 shares, respectively, were not included in the diluted earnings per share calculation since their effect is antidilutive. For the six months ended June 30, 2004 and 2003, common stock equivalents from stock options and stock awards of approximately 29,000 shares and 100,000 shares, respectively, were not included in the diluted earnings per share calculation since their effect is antidilutive.

Inventories - Inventories are stated at the lower of cost or market. Cost components include material, labor and manufacturing overhead. For most domestic divisions, cost is determined using the last-in-first-out ("LIFO") method. For all other inventories cost is determined using the first-in-first-out ("FIFO") method. Due to changing technologies and cost containment the difference between the valuation under the LIFO method and the FIFO method is not significant. The following is a summary of inventories at June 30, 2004 and December, 31, 2003:

Property, Plant and Equipment - Property, plant and equipment are stated at cost. Major renewals and improvements are capitalized, while maintenance and repairs are expensed when incurred. Depreciation is computed over the estimated useful lives of depreciable assets using the straight-line method. Useful lives for property and equipment are as follows:

Depreciation expense was approximately $19.0 million and $14.6 million for the six months ended June 30, 2004 and 2003, respectively.

Software Capitalization - Internally used software, whether purchased or developed, is capitalized and amortized using the straight-line method over an estimated useful life of five to seven years. Capitalized software costs are included in machinery and equipment. In accordance with Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," the company capitalizes certain costs associated with internal-use software such as the payroll costs of employees devoting time to the projects and external direct costs for materials and services. Costs associated with internal-use software are expensed until the point at which the project has reached the development stage. Subsequent additions, modifications or upgrades to internal-use software are capitalized only to the extent that they allow the software to perform a task it previously did not perform. Software maintenance and training costs are expensed in the pe riod in which they are incurred. The capitalization of software requires judgment in determining when a project has reached the development stage and the period over which the company expects to benefit from the use of that software. The company capitalized $17.6 million and $9.5 million of internal-use software for the six months ended June 30, 2004 and 2003, respectively.

Impairment of Long-Lived Assets - The company reviews long-lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization for impairment, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The company evaluates the recoverability of assets to be held and used by comparing the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated discounted future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the discounted cash flows. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair market value less costs to sell, and would no longer depreciated.

Acquisitions - The company spent approximately $83.2 million in the first six months of 2004 and $62.8 million in the first six months of 2003 for the acquisition of businesses, patents, trademarks, purchase rights and other related items to augment its existing product lines. Unaudited pro forma financial information for the transactions described below has not been presented because the effects of these acquisitions were not material on either an individual or aggregate basis. Results of operations from these transactions are included in the company's consolidated results from the respective dates of acquisition. Several of the company's recent acquisitions and investments involve milestone payments associated with the achievement of certain targets associated either with research and development, regulatory approval or the transfer of manufacturing capabilities. A summary of contingent milestone payments associated with these acquisitions is included below.

The company records in-process research and development in research and development expense in its consolidated statements of income. The value assigned to in-process research and development is determined by identifying an acquired specific in-process research and development project that will be continued and for which (a) technological feasibility has not been established at the acquisition date, (b) there is no alternative future use, and (c) the fair market value is estimable with reasonable reliability. The company considered a variety of factors, including appraisals when appropriate, in making determining the value of in-process research and development. The company's and third-party's appraisals are based on comparable transactions, relief from royalty analyses and other discounted cash-flow approaches.

Onux, Inc. - On June 30, 2004, the company acquired substantially all of the assets from Onux, Inc., a manufacturer of a hernia repair fixation system. The company recorded approximately $47.1 million in patents which will be amortized over their useful lives, approximately 15 years. In addition, the company recorded approximately $2.7 million in tax deductible goodwill and approximately $6.0 million in in-process research and development. The company has not finalized the purchase price allocation for the Onux acquisition; however, the company does not expect any change in the Onux purchase price allocation to have a material impact on its financial statements.

Bridger, Inc. - On June 30, 2004, the company acquired the stock of Bridger, Inc., a supplier of components for the company's soft tissue repair franchise. The acquisition agreement called for a cash payment of $8.1 million plus two anniversary payments of $8.1 million each payable in eighteen and thirty-six months and the assumption of certain liabilities. The company recorded the anniversary payments in "other long-term liabilities". The company recorded approximately $21.2 million in patents which will be amortized over their useful lives, approximately 15 years. In addition, the company recorded approximately $9.3 million in non-tax deductible goodwill, approximately $0.7 million in in-process research and development and miscellaneous assets and liabilities, primarily consisting of a deferred tax liability. The company has not finalized the purchase price allocation for the Bridger acquisition; however, the company does not expect any change in the Bridger purchase price allocation to have a m aterial impact on its financial statements.

Source Tech Medical, L.L.C. - In June 2003, Bard acquired the assets of Source Tech Medical, L.L.C. ("Source Tech"), a manufacturer and distributor of radioactive iodine seeds, for approximately $35.0 million in cash and assumed liabilities. The acquisition expanded and integrated the company's presence in the brachytherapy market. The company allocated approximately $7.0 million to tangible assets (primarily equipment and inventory), $17.0 million to technology-related intangible assets, $10 million to tax-deductible goodwill and $1.0 million to in-process research and development. In addition, $2.0 million of pre-existing Source Tech licenses were reclassified to tax-deductible goodwill. Intangible assets will be amortized over a 10-15 year period. The company took into consideration its pre-existing distribution agreement with Source Tech when determining the purchase price allocation and residual goodwill.

Goodwill and Acquired Intangible Assets - In July 2001, the FASB issued FAS No. 142, "Goodwill and Other Intangible Assets" ("FAS 142"). FAS 142 was effective for the company as of January 1, 2002. FAS 142 specifies the financial accounting and reporting for acquired goodwill and other intangible assets. Goodwill and intangible assets that have indefinite useful lives are no longer required to be amortized but rather are to be tested for impairment annually or more frequently if impairment indicators arise. Intangible assets with finite lives continue to be amortized on a straight-line basis over their useful lives. Goodwill and intangible assets have been recorded at either incurred or allocated cost. Allocated costs were based on respective fair market values at the date of acquisition.

As a result of adopting FAS 142, the company identified four reporting units. Each of these reporting units is one level below the company's single reporting segment and meets the following criteria:

- It is a business for which discrete financial information is available.

- Management regularly reviews the operating results.

The company has generally assigned goodwill recorded in connection with an acquisition to its four reporting units based on the reporting unit which sponsored the acquisition. Goodwill and intangible assets not subject to amortization are tested annually for impairment, and are tested more frequently if impairment indicators arise.

Goodwill and Intangible Assets - The balances of goodwill and intangible assets are as follows:

Annual estimated amortization expense for the years 2004 through 2009 is as follows:

Short-Term Borrowings and Long-Term Debt - The company maintains a commercial paper program and a committed credit facility that supports the company's commercial paper program. The committed facility may also be used for other corporate purposes. In the second quarter, the company replaced its $200.0 million five-year committed credit facility that would have matured in May of 2005 and its $100.00 million 364-day committed credit facility that matured in May of 2004 with a new $400.0 million committed credit facility that matures in May of 2009. A pricing grid based on the company's long-term credit ratings determines interest rates and facility fees for the new facility. The new facility does not require compensating balances. Total commercial paper borrowings were approximately $60.8 million at June 30, 2004. At December 31, 2003 there were commercial paper borrowings of $15.7 million. Certain of the company's debt agreements contain customary representations, warranties and default provisions as w ell as restrictions that, among other things, require the maintenance of a minimum ratio of operating cash flow to interest expense and limit the amount of debt that the company may have outstanding. As of June 30, 2004, the company was in compliance with all such financial covenants.

In December 1996, the company issued $150.0 million of 6.70% notes due 2026. These notes may be redeemed at the option of the note holders on December 1, 2006, at a redemption price equal to the principal amount. The market value of these notes approximates $157.2 million at June 30, 2004, assuming the notes are held to 2026. Cash payments on interest equal $5.3 million and $5.1 million for the six-month periods ended June 30, 2004 and June 30, 2003, respectively.

Legal - In the ordinary course of business, the company is subject to various legal proceedings and claims, including claims of alleged personal injuries as a result of exposure to natural rubber latex gloves distributed by the company and other product liability matters, environmental matters, employment disputes, disputes on agreements and other commercial disputes. In addition, the company operates in an industry susceptible to significant patent legal claims. At any given time, the company generally is involved as both a plaintiff and defendant in a number of patent infringement actions. If infringement of a third party's patent were to be determined against the company, the company may be required to make significant royalty or other payments or may be subject to an injunction or other limitation on its ability to manufacture or distribute one or more products. If a company patent were to be determined to be invalid or unenforceable, the company may be required to reduce the value of the paten t on the company's balance sheet and to record a corresponding noncash charge, which could be significant in amount.

The company is subject to numerous federal, state, local and foreign environmental protection laws governing, among other things, the generation, storage, use and transportation of hazardous materials and emissions or discharges into the ground, air or water. The company is or may become a party to proceedings brought under the Comprehensive Environmental Response, Compensation and Liability Act, commonly known as Superfund, the Resource Conservation and Recovery Act and similar state laws. These proceedings seek to require the owners or operators of contaminated sites, transporters of hazardous materials to the sites and generators of hazardous materials disposed of at the sites to clean up the sites or to reimburse the government for cleanup costs. In most cases, there are other potentially responsible parties that may be liable for any remediation costs. In these cases, the government alleges that the defendants are jointly and severally liable for the cleanup costs; however, these proceedings are freq uently resolved so that the allocation of cleanup costs among the parties more nearly reflects the relative contributions of the parties to the site situation. The company's potential liability varies greatly from site to site. For some sites the potential liability is de minimis and for others the costs of cleanup have not yet been determined.

The company believes that the outcomes of the proceedings and claims described above will likely be disposed of over an extended period of time. However, while it is not feasible to predict the outcome of many of these proceedings, based upon the company's experience, current information and applicable law, the company does not expect these proceedings to have a material adverse effect on consolidated financial position or liquidity, but one or more of the proceedings could be material to the consolidated results of operations for a future period.

On April 14, 2004, the company announced that in connection with its brachytherapy business and the commercial litigation entitled Nelson N. Stone, M.D., et al. v. C. R. Bard, Inc., et ano., filed in the United States District Court for the Southern District of New York, it had agreed with the plaintiffs to settle the litigation for $23.0 million. Under the terms of this agreement, the company also paid $19.0 million to terminate its ongoing commercial arrangements under an asset purchase agreement with the plaintiffs that otherwise would have expired in 2008. In connection with the settlement, in the first quarter of 2004 the company reversed $16.0 million of the $58.0 million charge previously recorded in the fourth quarter of 2003 in connection with the litigation.

On March 16, 2004, Rochester Medical Corporation, Inc., filed a complaint against the company, another manufacturer and two group purchasing organizations under the caption Rochester Medical Corporation, Inc. v. C. R. Bard, Inc., et al. (Civil Action No. 304 CV 060, United States District Court, Eastern District of Texas). The plaintiff alleges that the company and the other defendants conspired to exclude it from the market and to maintain the company's market share by engaging in a variety of conduct in violation of state and federal antitrust laws. The plaintiff also has asserted claims for business disparagement, common law conspiracy and tortious interference with business relationships. The plaintiff seeks injunctive relief and money damages in an unspecified amount. The company intends to vigorously defend this matter. Because the litigation is in a preliminary stage, the company cannot assess the likelihood of an adverse outcome or an estimate, or a range of estimates, of potential damages. The co mpany cannot give any assurances that this matter will not have a material adverse impact on the company's results of operations in a future period or the company's financial condition.

Product Warranty - The majority of the company's products are intended for single use; therefore, the company requires limited product warranty accruals. Certain of the company's products carry limited warranties that in general do not exceed one year from sale. The company accrues estimated product warranty costs at the time of sale; and any additional amounts are recorded when such costs are probable and can be reasonably estimated.

Environmental Remediation Policy - The company accrues for losses associated with environmental remediation obligations when such losses are probable and reasonably estimable. Accruals for estimated losses from environmental remediation obligations generally are recognized no later than completion of the remedial feasibility study. Such accruals are adjusted as further information develops or circumstances change. Costs of future expenditures for environment remediation obligations are not discounted to their present value. Recoveries of environmental remediation costs from other parties are recorded as assets when their receipt is deemed probable.

Income Taxes - All income tax amounts reflect the use of the liability method. Under this method, deferred tax assets and liabilities are determined based on the expected future tax consequences of temporary differences between the carrying amounts of assets and liabilities for financial and income tax reporting purposes. In certain situations, a taxing authority may challenge positions that the company has adopted in its income tax filings. Accordingly, the company may apply different tax treatment for these selected transactions in filing its tax return than for income tax financial reporting purposes. The company regularly assesses its tax position for such transactions and includes reserves for those differences in position. The reserves are utilized or reversed once the statute of limitations has expired or the matter is otherwise resolved.

Concentration Risks - Financial instruments, which potentially subject the company to significant concentrations of credit risk, consist principally of cash investments and trade accounts receivable. The company maintains cash and cash equivalents, investments and certain other financial instruments with various major financial institutions. The company performs periodic evaluations of the relative credit standing of these financial institutions and limits the amount of credit exposure with any one institution. Concentrations of risk with respect to trade accounts receivable are limited due to the large number of customers and their dispersion across many geographic areas. However, a significant amount of trade receivables are with national health care systems in several countries. Although the company does not currently foresee a credit risk associated with these receivables, repayment is dependent upon the financial stability of those countries' national economies. Sales to distributors, which su pply the company's products to many end-users, accounted for approximately 35% of the company's net sales in 2003, and sales to the five largest distributors, including the company's Medicon joint venture, combined accounted for approximately 71% of such sales.

Financial Instruments - The fair market value of cash and cash equivalents, receivables and short-term debt approximate their carrying value due to their short-term maturities. Short-term investments that have original maturities of ninety days or less are considered cash equivalents and amounted to $404.8 million and $388.4 million as of June 30, 2004 and December 31, 2003, respectively. Short-term investments that are not cash equivalents are stated at cost, which approximates their market value.

Investments in equity securities that have readily determinable fair market values are classified and accounted for as available-for-sale in other current assets or other assets. Available-for-sale securities are recorded at fair market value, with the change in fair market value recorded, net of taxes, as a component of accumulated other comprehensive income. The fair market value of available-for-sale securities was approximately $7.7 million and $1.9 million at June 30, 2004 and December 31, 2003, respectively. At June 30, 2004, the company owned approximately 1.4 million shares of common stock of Endologix, Inc.

Derivative Instruments - Bard's objective in managing its exposures to foreign currency fluctuations is to minimize earnings and cash flow volatility associated with assets, liabilities and anticipated commitments denominated in foreign currencies. The company does not utilize derivative instruments for trading or speculation purposes. No derivative instruments extend beyond December 2005. The company has formally documented the relationships between hedging instruments and hedged items, as well as its risk management objectives. All derivative instruments are recognized on the balance sheet at fair market value. Hedge accounting is followed for derivatives that have been designated and qualify as fair market value and cash flow hedges. For derivatives that have been designated and qualify as fair market value hedges, the changes in the fair market value of highly effective derivatives, along with changes in the fair market value of the hedged assets that are attributable to the hedged risks, are r ecorded in current period earnings. For derivatives that have been designated and qualify as cash flow hedges, changes in the fair market value of the effective portion of the derivatives' gains or losses are reported in other comprehensive income. The company believes that all derivative instruments utilized are highly effective hedging instruments because they are denominated in the same currency as the hedged item and because the maturities of the derivative instruments match the timing of the hedged items. It is the company's policy that when a derivative instrument settles, the associated amounts in accumulated other comprehensive income are reversed to cost of goods sold or other (income) expense, net as appropriate. It is the company's policy that in the event that (1) an anticipated hedged transaction is determined to be not likely to occur or (2) it is determined that a derivative instrument is no longer effective in offsetting changes in the hedged item, the company would reverse the associated amo unts in accumulated other comprehensive income to other (income) expense, net.

The company enters into readily marketable traded forward contracts and options with financial institutions to help reduce the exposure to fluctuations between certain currencies. These contracts create limited earnings volatility because gains and losses associated with exchange rate movements are generally offset by movements in the underlying hedged item.

A roll forward of the company's derivative financial instruments for the first six months ended June 30, 2004 is as follows:

The fair market value of financial instruments was estimated by discounting expected cash flows using quoted foreign exchange rates as of June 30, 2004 and December 31, 2003. Judgment was employed in developing estimates of fair market value; accordingly, the estimates presented herein are not necessarily indicative of the amounts that the company could realize in a current market exchange. The use of different market assumptions or valuation methodologies could have an effect on the estimated fair market value amounts. At June 30, 2004, the net fair market value of option-based contracts and the incremental market-to-market value of forward currency agreements are recorded in either other current assets or accrued expenses in the Consolidated Balance Sheet. For the six months ended June 30, 2004, the company reclassified a loss of approximately $0.8 million from accumulated other comprehensive loss to other (income) expense, net or cost of goods sold in the Consolidated Statement of Income as hedged intercompany balances were settled and as anticipated currency needs arose. This reclassification was net of approximately $0.3 million of associated tax effects.

Segment Information - The company's management considers its business to be a single segment entity - the manufacture and sale of medical devices. The company's products generally share similar distribution channels and customers. The company designs, manufactures, packages, distributes and sells medical, surgical, diagnostic and patient care devices that are purchased by hospitals, individual health care professionals, extended care facilities and alternate site facilities, many of which are used once and discarded. The company's chief operating decision makers evaluate their various global product portfolios on a net sales basis. The company's chief operating decision makers generally evaluate profitability and associated investment on an enterprise-wide basis due to shared infrastructures. The following table represents net sales by geographic region based on the location of the external customer.

 The following table represents net sales by disease state management.

New Accounting Pronouncements -

In December 2002, the FASB issued FAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" ("FAS 148"). FAS 148 provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation as originally provided by FAS 123. Additionally, FAS 148 amends the disclosure requirements of FAS 123 to require prominent disclosure in both the annual and interim financial statements about the method of accounting for stock-based compensation and the effect of the method used on reported results. The transitional requirements of FAS 148 are effective for all financial statements for fiscal years ending after December 15, 2002. The company adopted the disclosure portion of this statement beginning in the fiscal quarter ended June 30, 2003. The application of the disclosure portion of this standard had no impact on the company's consolidated financial position or results of operations. On April 22, 2003, the FASB determine d that stock-based compensation should be recognized as a cost in the financial statements and that such cost should be measured according to the fair value of stock options. The FASB issued an exposure draft, "Share-Based Payment, an Amendment of FASB Statements No. 123 and 95" on June 30, 2004. This proposed statement, if formally issued by the FASB, will have a material effect on the company's consolidated financial statements.

C. R. Bard, Inc., is engaged in the design, manufacture, packaging and sale of medical, surgical, diagnostic and patient care devices. The company markets its products to hospitals, individual healthcare professionals, extended care health facilities and alternative site facilities in the United States and abroad, principally Europe and Japan. In general, the company's products are intended to be used once and discarded.

The company reports its results of operations around the concept of disease state management in four major product group categories: vascular, urology, oncology and surgical specialties. The company also has a product group of other products. The company strives to have a leadership position in all of its products. Approximately 80% of the company's net sales in 2003 were derived from products in which the company has a number one or number two market leadership position.

The company's revenues are generated from sales of the company's products, net of discounts, returns, rebates and other allowances. The company's costs and expenses consist of costs of goods sold, marketing, selling and administrative expense, research and development expense, interest expense and other (income) expense, net. Costs of goods sold consist principally of the manufacturing and distribution costs of the company's products. Marketing, selling and administrative expense consists principally of the costs associated with the company's sales and administrative organizations. Research and development expense consists principally of expenses incurred with respect to internal research and development activities, milestone payments for third-party research and development activities and acquired in-process research and development costs arising from the company's business development activities. Interest expense consists of interest charges on indebtedness. Other (income) expense, net consists principa lly of interest income, foreign exchange gains and losses and other items, some of which may impact the comparability of the company's results of operations between periods.

The company's margins and net income are driven by the company's ability to generate sales of its products and improve operating efficiency. The company's ability to improve sales over time depends in part upon its ability to successfully develop and market new products. In this regard, the company has strategically increased funding of research and development activities, with a focus on products and markets that are growing faster than 8%. For the quarter ended June 30, 2004, the company spent approximately $31.6 million on research and development, an increase of approximately 45% from research and development spending of approximately $21.8 million in the second quarter ended June 30, 2003. For the six months ended June 30, 2004, the company spent approximately $54.8 million on research and development, an increase of approximately 33% from research and development spending of approximately $41.3 million for the six months ended June 30, 2003. In light of the complexity of the process of developing an d bringing new products to market, the company expects a lag of as much as several years before the results of the increased research and development spending are reflected in increased net sales. In addition, there can be no assurance that research and development activities will successfully generate new products at all or that new products will be successful.

In a further effort to increase sales, the company has commenced an initiative to increase its sales force. In 2003, the company increased its U.S. sales force by approximately 10% and is currently considering further expansion in both the United States and Europe.

The company also plans to generate increased sales through selective acquisitions of businesses, products and technologies. In general, the company focuses on small to medium size acquisitions of products and technologies that complement the company's existing product portfolio. In addition, the company may from time to time selectively consider acquisitions of larger, established companies under appropriate circumstances. From time to time, the company may divest lines of business in which the company is not able to profitably maintain a leadership position or for other strategic reasons.

The company has an extensive program of improving manufacturing efficiencies. The company's program of improved manufacturing efficiency and its past restructuring activities have resulted in sustained improvement of both margins and cash flow. Gross margins improved by 23% in the quarter ended June 30, 2004 as compared to the quarter ended June 30, 2003. Gross margins improved by 23% for the six months ended June 30, 2004 as compared to the six months ended June 30, 2003. The improved cash flow associated with these activities provides additional funding for the company's research and development activities and other spending initiatives discussed above.

The company has taken advantage of strong cash flow over the past several years to strengthen its balance sheet, reducing total debt to total capitalization from approximately 25% at the end of 2000 to approximately 15% at June 30, 2004. Working capital increased from approximately $302.0 million to approximately $530.0 million over the same period. The company's strong financial position facilitates the company's ability to pursue the strategic initiatives discussed above.

Bard reported consolidated net sales for the quarter ended June 30, 2004 of $416.3 million, an increase of 18% on a reported basis (15% on a constant currency basis) over consolidated net sales for the quarter ended June 30, 2003 of $354.2 million. Bard reported consolidated net sales for the six months ended June 30, 2004 of $810.1 million, an increase of 17% on a reported basis (14% on a constant currency basis) over consolidated net sales for the six months June 30, 2003 of $690.1 million. The geographic breakdown of net sales by customer location for the three and six months ended June 30, 2004 and 2003 is presented below:

The growth in consolidated net sales in the second quarter of 2004 was partially offset by price reductions resulting in a 0.6% decrease in net sales as compared to the same period in the prior year. The growth in consolidated net sales for the six months ended June 30, 2004 were partially offset by price reductions resulting in a 0.6% decrease in net sales as compared to the same period in the prior year. Consolidated net sales were also affected by the impact of exchange rate fluctuations. Exchange rate fluctuations had the effect of increasing consolidated net sales for the quarter ended June 30, 2004 by 2.5% as compared to the quarter ended June 30, 2003. Exchange rate fluctuations had the effect of increasing consolidated net sales for the six months ended June 30, 2004 by 3.2% as compared to first six months of 2003. The primary exchange rate movement that impacts net sales is the movement of the Euro compared to the United States dollar. The impact of exchange rate movements on net sales is not ind icative of the impact on net earnings due to the offsetting impact of exchange rate movements on operating costs and expenses, costs incurred in other currencies and the company's hedging activities.

For the quarter ended June 30, 2004, Bard's United States net sales of $290.6 million increased 16% over United States net sales for the quarter ended June 30, 2003 of $250.4 million. For the six months ended June 30, 2004, Bard's United States net sales of $566.4 million increased 15% over United States net sales for the first six months of 2003 of $493.1 million. For the quarter ended June 30, 2004, Bard's international net sales of $125.7 million increased 21% on a reported basis (13% on a constant currency basis) over international net sales for the quarter ended June 30, 2003 of $103.8 million. For the six months ended June 30, 2004, Bard's international net sales of $243.7 million increased 24% on a reported basis (13% on a constant currency basis) over international net sales for the six months June 30, 2003 of $197.0 million.

Presented below is a discussion of consolidated net sales by disease state for the three and six months ended June 30, 2004 and 2003.

Vascular Products - Bard markets a wide range of products for the peripheral vascular market, including endovascular products, electrophysiology products and graft products. Consolidated net sales for the quarter ended June 30, 2004 of vascular products increased 32% on a reported basis (27% on a constant currency basis) compared to the prior year's second quarter. United States net sales for the quarter ended June 30, 2004 of vascular products grew 43% compared to the prior year's second quarter. International net sales for the quarter ended June 30, 2004 increased 22% on a reported basis (13% on a constant currency basis) compared to the prior year's second quarter. Consolidated net sales for the six months ended June 30, 2004 of vascular products increased 34% on a reported basis (27% on a constant currency basis) compared to the prior year's first six months. United States net sales for the first six months ended June 30, 2004 of vascular products grew 40% compared to the prior year's first six months. International net sales for the six months ended June 30, 2004 increased 28% on a reported basis (16% on a constant currency basis) compared to the prior year's first six months. The vascular group is the company's most global business, with international net sales comprising 47% of consolidated net sales of vascular products for both the three and six months ended June 30, 2004.

Consolidated net sales for the quarter ended June 30, 2004 of electrophysiology products increased 8% on a reported basis (4% on a constant currency basis) compared to the same period in the prior year. United States net sales for the quarter ended June 30, 2004 of electrophysiology products grew 0.4% compared to the prior year's second quarter. Consolidated net sales for the six months ended June 30, 2004 of electrophysiology products increased 12% on a reported basis (6% on a constant currency basis) compared to the prior-year period. United States net sales for the six months ended June 30, 2004 of electrophysiology products grew 0.5% compared to the prior year's first six months.

Consolidated net sales for the quarter ended June 30, 2004 of graft products increased 19% on a reported basis (16% on a constant currency basis) compared to the prior year's second quarter. United States net sales for the quarter ended June 30, 2004 of graft products grew 20% compared to the prior year's second quarter. Consolidated net sales for the six months ended June 30, 2004 of graft products increased 19% on a reported basis (14% on a constant currency basis) compared to the prior year's first six months. United States net sales for the six months ended June 30, 2004 of graft products grew 17% compared to the prior year's first six months.

Urology Products - Bard markets a wide range of products for the urology market, including basic drainage products, continence products and urological specialty products. Consolidated net sales for the quarter ended June 30, 2004 of urology products were $121.5 million, an increase of 6% on a reported basis (4% on a constant currency basis) compared to the prior year's second quarter. United States net sales of urology products represented 72% of consolidated net sales of urology products for the quarter ended June 30, 2004 and grew 4% compared to the prior year's second quarter. International net sales for the quarter ended June 30, 2004 of urology products increased 13% on a reported basis (5% on a constant currency basis) compared to the prior year's second quarter. Consolidated net sales for the six months ended June 30, 2004 of urology products were $238.0 million, an increase of 6% on a reported basis (4% on a constant currency basis) compared to the prior year's first six months. United Stat es net sales of urology products represented 72% of consolidated net sales of urology products for the six months ended June 30, 2004 and grew 4% compared to the prior year's first six months. International net sales for the six months ended June 30, 2004 of urology products increased 12% on a reported basis (3% on a constant currency basis) compared to the prior year's first six months.

Consolidated net sales for the quarter ended June 30, 2004 of basic drainage products increased 6% on a reported basis (5% on a constant currency basis) compared to the prior year's second quarter. Consolidated net sales for the quarter ended June 30, 2004 of infection control products grew 15% on a reported basis and constant currency basis compared to the prior year's second quarter. Consolidated net sales for the six months ended June 30, 2004 of basic drainage products increased 7% on a reported basis (5% on a constant currency basis) compared to the prior year's first six months. Consolidated net sales for the six months ended June 30, 2004 of infection control products grew 13% on a reported basis and constant currency basis compared to the prior year's first six months.

Consolidated net sales for the quarter ended June 30, 2004 of urological specialties, which includes brachytherapy products and services, grew 2% on a reported basis (1% on a constant currency basis) compared to the prior year's second quarter. Consolidated net sales for the quarter ended June 30, 2004 of brachytherapy products decreased 1% on a reported basis (-2% on a constant currency basis) compared to the prior year's second quarter. Consolidated net sales for the six months ended June 30, 2004 of urological specialties, which includes brachytherapy products and services, grew 2% on a reported basis (0.2% on a constant currency basis) compared to the prior year's first six months. Consolidated net sales for the six months ended June 30, 2004 of brachytherapy products decreased 3% on a reported basis (-4% on a constant currency basis) compared to the prior year's first six months. The company's brachytherapy case volume grew for the three and six months ended June 30, 2004 as compared to the same peri ods in the prior year as a result of the company's roll-up strategy. However, pricing remains a challenge in this market due to aggressive pricing by competitors.

Continence is the smallest category in urology products. Consolidated net sales for the three and six months ended June 30, 2004 of continence products comprised 15% and 14%, respectively, of consolidated net sales of urology products. Consolidated net sales for the quarter ended June 30, 2004 of continence products increased 12% on a reported basis (8% on a constant currency basis) compared to the prior year's second quarter. The company's surgical incontinence product line continues to provide the momentum in the continence category for the quarter ended June 30, 2004, growing 41% on a reported basis (38% on a constant currency basis) compared to the prior year's second quarter. Consolidated net sales for the six months ended June 30, 2004 of continence products increased 11% on a reported basis (6% on a constant currency basis) compared to the prior year's first six months. Consolidated net sales for the six months ended June 30, 2004 of surgical incontinence products grew 34% on a reported basis (31% on a constant currency basis) compared to the prior year's first six months.

Oncology Products - The company's oncology products include specialty access products and gastrointestinal products. Consolidated net sales for the quarter ended June 30, 2004 of oncology products grew 25% on a reported basis (23% on a constant currency basis) compared to the prior year's second quarter. United States net sales for the quarter ended June 30, 2004 of oncology products grew 23% compared to the prior year's second quarter. International net sales for the quarter ended June 30, 2004 of oncology products grew 34% on a reported basis (23% on a constant currency basis) compared to the prior year's second quarter. Consolidated net sales for the six months ended June 30, 2004 of oncology products grew 23% on a reported basis (20% on a constant currency basis) compared to prior year's first six months. United States net sales for the six months ended June 30, 2004 of oncology products grew 20% compared to the prior year's first six months. International net sales for the six months ended Jun e 30, 2004 of oncology products grew 34% on a reported basis (22% on a constant currency basis) compared to the prior year's first six months.

Consolidated net sales of specialty access products of $74.6 million comprised 74% of the oncology product group for the quarter ended June 30, 2004 and increased 28% on a reported basis (26% on a constant currency basis) compared to the prior year's second quarter. For the quarter ended June 30, 2004, peripherally inserted central catheters ("PICCs") continued their strong performance with growth of approximately 42% on a reported basis (41% on a constant currency basis) compared to the prior year's second quarter. PICCs are catheters that are placed into a large vein in the arm and allow clinicians to access a patient's central venous system primarily for administration of chemotherapeutic agents, antibiotics, intravenous fluids and blood sampling. The company continues to see the PICC market expand as these products are being used more frequently in place of intravenous catheters. In 2003, the company introduced its new Hemosplit® dialysis access catheter with its proprietary split tip design. This catheter entered the market in June of 2003 and has met with strong demand. Consolidated net sales for the quarter ended June 30, 2004 of dialysis catheters grew 43% on a reported basis (42% on a constant currency basis) compared to the prior year's second quarter. For the first six months ended June 30, 2004, consolidated net sales of specialty access products were $144.8 million and comprised 74% of the oncology product group. Consolidated net sales of specialty access products for the first six months ended June 30, 2004 increased 26% on a reported basis (23% on a constant currency basis) compared to the prior year's first six months. For the six months ended June 30, 2004, PICCs grew approximately 36% on a reported basis (35% on a constant currency basis) compared to the prior year's first six months.

Consolidated net sales for the quarter ended June 30, 2004 of gastrointestinal products increased 18% on a reported basis (15% on a constant currency basis) compared to the prior year's second quarter. Consolidated net sales for the six months ended June 30, 2004 of gastrointestinal products increased 17% on a reported basis (13% on a constant currency basis) compared to the prior year's first six months.

Surgical Specialty Products - Consolidated net sales for the quarter ended June 30, 2004 of surgical specialty products increased 14% on a reported basis (13% on a constant currency basis) compared to the prior year's second quarter. United States net sales for the quarter ended June 30, 2004 of surgical specialty products increased 12% compared to the prior year's second quarter. International net sales for the quarter ended June 30, 2004 of surgical specialty products increased 24% on a reported basis (17% on a constant currency basis) compared to the prior year's second quarter. Consolidated net sales for the six months ended June 30, 2004 of surgical specialty products increased 15% on a reported basis (14% on a constant currency basis) compared to the prior year's first six months. United States net sales for the six months ended June 30, 2004 of surgical specialty products increased 13% compared to the prior year's first six months. International net sales for the six months ended June 30, 20 04 of surgical specialty products increased 28% on a reported basis (18% on a constant currency basis) compared to the prior year's first six months.

For the quarter ended June 30, 2004, the company's soft tissue repair product offerings comprised 72% of consolidated net sales of surgical specialty products. The company's ventral hernia repair franchise, led by the Ventralex® and Composix® Kugel® products, was the primary contributor to this category's growth. Consolidated net sales for the quarter ended June 30, 2004 of hernia products grew 18% on a reported basis (16% on a constant currency basis) compared to the prior year's second quarter. For the six months ended June 30, 2004, the company's soft tissue repair product offerings comprised 72% of consolidated net sales of surgical specialty products. Consolidated net sales for the six months ended June 30, 2004 of hernia products grew 20% on a reported basis (18% on a constant currency basis) compared to the prior year's first six months.

Other Products - The other product group includes irrigation, wound drainage and certain OEM products. Consolidated net sales for the quarter ended June 30, 2004 of other products were $17.5 million, an increase of 6% on a reported basis (4% on a constant currency basis) compared to the prior year's second quarter. Consolidated net sales for the six months ended June 30, 2004 of other products were $33.3 million, essentially flat on a reported basis (-2% on a constant currency basis) compared to the prior year's first six months.

The following is a summary of major costs and expenses as a percentage of net sales for the three and six months ended June 30, 2004 and 2003.

Cost of goods sold - The company's cost of goods sold as a percentage of net sales for the quarter ended June 30, 2004 was 40.6%, a reduction of 2.5% from the cost of goods sold as a percentage of net sales for the quarter ended June 30, 2003 of 43.1%. The company's cost of goods sold as a percentage of net sales for the six months ended June 30, 2004 was 40.8%, a reduction of 2.5% from the cost of goods sold as a percentage of net sales for the six months ended June 30, 2003 of 43.3%. The primary reason for this lower cost of goods sold was manufacturing efficiencies driven by higher production volumes and continued manufacturing cost improvement projects. Due to continuing manufacturing efficiencies, the company expects its cost of goods sold as a percentage of net sales to modestly decline in 2004.

Marketing, selling and administrative expense - The company's marketing, selling and administrative costs as a percentage of net sales for the quarter ended June 30, 2004 was 31.3%, an increase of 0.3% over the marketing, selling and administrative costs for the quarter ended June 30, 2003 of 31.0%. The company's marketing, selling and administrative costs as a percentage of net sales for the six months ended June 30, 2004 was 31.0%, consistent with the marketing, selling and administrative costs as a percentage of net sales for the six months ended June 30, 2003 of 31.0%.

Research and development expense - Research and development expenses comprise expenses related to internal research and development activities, milestone payments for third-party research and development activities and acquired in-process research and development costs arising from the company's business development activities. The components of internal research and development expense include: salary and benefits, allocated overhead and occupancy costs, clinical trial and related clinical manufacturing costs, contract services and other costs. All research and development costs are expensed as incurred except in the case when there is a future alternative use. Research and development expenditures for the quarter ended June 30, 2004 of $31.6 represented a 45% increase over the prior year's quarter expenditures of $21.8 million. Research and development expenditures for the first six months ended June 30, 2004 of $54.8 represented a 33% increase over the prior year's first six months expenditures of $41.3 million.

For the quarter ended June 30, 2004 the company recorded in-process research and development expense of $6.7 million related to the acquisition of the assets of Onux, Inc. and the stock of Bridger, Inc. For the quarter ended June 30, 2003 the company recorded in-process research and development expense of $1.0 million related to the acquisition of the assets of Sourcetech, Inc. See the discussion in Acquisitions in the Notes to Condensed Consolidated Financial Statements.

For the six months ended June 30, 2003, the company made three milestone payments for third-party research and development milestones. The company paid $3.0 million in connection with a milestone related to its urethral bulking project in the second quarter of 2003. In the first quarter of 2003, the company paid $3.0 million in connection with its PTA catheter development project and $1.6 million in connection with its pain management pump program.

Interest expense - Interest expense for the quarter ended June 30, 2004 decreased slightly to $3.0 million from $3.2 million for the quarter ended June 30, 2003. Interest expense for the six months ended June 30, 2004 increased slightly to $6.4 million from $6.3 million for the six months ended June 30, 2003.

Other (income) expense, net - The table below presents the components of other (income) expense, net for the three and six month periods ended June 30, 2004 and 2003.

Legal settlements - In the second quarter of 2004, the company paid $10.5 million to settle an intellectual property dispute related to certain of the company's laparoscopic irrigators. In the first quarter of 2004, the company settled certain commercial litigation related to the company's brachytheraphy business and, accordingly, reversed $16.0 million of a $58.0 million charge recorded in the fourth quarter of 2003 related to this litigation. In addition, during the first quarter of 2004, the company recorded $3.9 million related to an unrelated legal settlement.

Investment gain - On April 23, 2004, Zimmer Holdings, Inc. ("Zimmer") announced that it had completed its acquisition of privately-held Implex Corp. ("Implex") for $98.6 million in cash. Bard held Implex shares at a zero basis and accordingly recorded a $6.2 million pretax gain arising from the company's cash proceeds associated with this transaction during the second quarter of 2004.

 Taxes - The following is a reconciliation between the effective tax rates and the statutory rates for the quarter and six months ended June 30, 2004 and 2003: