UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005

FOR THE TRANSITION PERIOD FROMTO

COMMISSION FILE NUMBER:Commission file number: 1-1136

BRISTOL-MYERS SQUIBB COMPANY

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)Exact name of registrant as specified in its charter)

345 Park Avenue, New York, N.Y. 10154

(Address of principal executive offices)(Zip (Zip Code)

(212) 546-4000

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

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 the filing requirements for at least the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, (as definedor a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act).Act. (Check one):

YesLarge Accelerated filer  x                            NoAccelerated filer  ¨                            Non-accelerated filer  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ¨    No  x

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d)of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

¨  Yes    ¨  No

APPLICABLE ONLY TO CORPORATE ISSUERS:

At SeptemberJune 30, 2005,2006, there were 1,956,520,6371,966,542,358 shares outstanding of the Registrant’s $.10 par value Common Stock.

BRISTOL-MYERS SQUIBB COMPANY

INDEX TO FORM 10-Q

SEPTEMBERJUNE 30, 20052006

PART I—FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

BRISTOL-MYERS SQUIBB COMPANY

CONSOLIDATED STATEMENTSTATEMENTS OF EARNINGS

(Dollars and Shares in Millions, Except Per Share Data)

(UNAUDITED)

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

BRISTOL-MYERS SQUIBB COMPANY

CONSOLIDATED STATEMENTSTATEMENTS OF

COMPREHENSIVE INCOME AND RETAINED EARNINGS

(Dollars in Millions)

(UNAUDITED)

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

BRISTOL-MYERS SQUIBB COMPANY

CONSOLIDATED BALANCE SHEETSHEETS

(Dollars in Millions, Except Per Share Data)

(UNAUDITED)

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

BRISTOL-MYERS SQUIBB COMPANY

CONSOLIDATED STATEMENTSTATEMENTS OF CASH FLOWS

(Dollars in Millions)

(UNAUDITED)

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

Note 1. Basis of Presentation and New Accounting Standards

Bristol-Myers Squibb Company (the Company)(BMS, the Company or Bristol-Myers Squibb) prepared these unaudited consolidated financial statements following the requirements of the Securities and Exchange Commission (SEC) and U.S. generally accepted accounting principles (GAAP) for interim reporting. Under those rules, certain footnotes and other financial information that are normally required by GAAP for annual financial statements can be condensed or omitted. The Company is responsible for the consolidated financial statements included in this Form 10-Q. These consolidated financial statements include all normal and recurring adjustments necessary for a fair presentation of the Company’s financial position at SeptemberJune 30, 20052006 and December 31, 2004,2005, the results of its operations for the three and ninesix months ended SeptemberJune 30, 2006 and 2005 and 2004 andthe cash flows for the ninesix months ended SeptemberJune 30, 20052006 and 2004.2005. These consolidated financial statements and the related notes should be read in conjunction with the consolidated financial statements and the related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 (20042005 (2005 Form 10-K). PricewaterhouseCoopers LLP (PwC), an independent registered public accounting firm, has performed a review of the unaudited consolidated financial statements included in this Form 10-Q, and their review report thereon accompanies this Form 10-Q.

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

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

In addition, the Company includes alliance revenue in net sales. The Company has agreements to promote pharmaceuticals discovered by other companies. Alliance revenue is based upon a percentage of the Company’s copromotion partners’ net sales and is earned when the copromotion partners ship the related product and title passes to their customer.

The Company accounts for certain costs to obtain internal use software for significant systems projects in accordance with Statement of Position (SOP) 98-1. These costs, including external direct costs, interest costs and internal payroll and related costs for employees who are directly associated with such projects, are capitalized and amortized over the estimated useful life of the software, which ranges from three to ten years. Costs to obtain software for projects that are not significant are expensed as incurred.

The preparation of financial statements in conformity with GAAP requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant assumptions are employed in estimates used in determining values of intangible assets, restructuring charges and accruals, sales rebate and return accruals, legal contingencies and tax assets and tax liabilities, stock-based compensation, as well as in estimates used in applying the revenue recognition policy and accounting for retirement and postretirement benefits (including the actuarial assumptions). Actual results couldmay or may not differ from the estimated results.

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

In May 2005,July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. (FIN) 48,Accounting for Uncertainty in Income Taxes (FIN No. 48). FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement of Financial Accounting Standards (SFAS) No. 109,Accounting for Income Taxes. FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. The Company is evaluating any future effect of this pronouncement.

In February 2006, the FASB issued SFAS No. 155,Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140. This pronouncement primarily resolves certain issues addressed in the implementation of SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities, concerning beneficial interests in securitized financial assets. The Statement is effective for all financial instruments acquired, issued, or subject to a remeasurement event occurring after the beginning of the 2007 fiscal year. The Company is evaluating any future effect of this pronouncement.

In May 2005, the FASB issued SFAS No. 154,Accounting Changes and Error Corrections, which replaces Accounting Principles Board (APB) Opinion No. 20,Accounting Changes and SFAS No. 3,Reporting Accounting Changes in Interim Financial Statements. This pronouncement applies to all voluntary changes in accounting principle, and revises the requirements for accounting for and reporting a change in accounting principle. SFAS No. 154 requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principle, unless it is impracticable to do so. This pronouncement also requires that a change in the

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

method of depreciation, amortization, or depletion for long-lived, non-financial assets be accounted for as a change in accounting estimate that is effected by a change in accounting principle. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Statement does not change the transition provisions of any existing accounting pronouncements, including those that are in a transition phase as of the effective date of SFAS No. 154. The Company is evaluatingadoption of this accounting pronouncement did not have a material effect on the impact this statement will have on itsCompany’s consolidated financial position and results of operations.

statements.

In March 2005, the FASB issued FASB InterpretationFIN No. 47,Accounting for Conditional Asset Retirement Obligations (FIN No. 47). FIN No. 47 clarifies that an entity must record a liability for a conditional asset retirement obligation if the fair value of the obligation can be reasonably estimated. Asset retirement obligations covered by FIN No. 47 are those for which an entity has a legal obligation to perform an asset retirement activity, even if the timing and method of settling the obligation are conditional on a future event that may or may not be within the control of the entity. FIN No. 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. The Company is evaluatingadopted the impactprovisions of FIN No. 47 in the fiscal year ended December 31, 2005 and adoption of this statement willaccounting pronouncement did not have a material effect on itsthe Company’s consolidated financial position and result of operations.statements.

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

In December 2004, the FASB issued FASB Staff Position (FSP) No. 109-1—Application of SFAS No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004 (FSP No. 109-1). The FSP provides that theDeduction on Qualified Production Activities will be treated as a “special deduction” as described in SFAS No. 109,Accounting for Income Taxes. Accordingly, the tax effect of this deduction will bewas reported as a component of the Company’s tax provision and willdid not have an effect on deferred tax assets and liabilities. The Department ofOn May 24, 2006, the Treasury recentlyInternal Revenue Service issued ProposedFinal Tax Regulations with respect to theDeduction on Qualified Production Activities. under section 199 of the Internal Revenue Code. The final regulations are effective for taxable years beginning on or after June 1, 2006. For taxable years beginning prior to the effective date of the final regulations, a taxpayer may apply either: (1) the final regulations, provided the taxpayer applies all provisions in the final regulations; or (2) subject to certain limitations, the rules provided in Notice 2005-24, as well as the proposed regulations. The Company is evaluating the impact of the ProposedFinal Tax Regulations and the FSP and does not expect their adoption to have a material impact on its income tax provision and results of operations.the Company’s consolidated financial statements.

In December 2004, the FASB issued SFAS No. 153,Exchanges of Nonmonetary Assets. The provisions of this Statement are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The provisions of this Statement should be applied prospectively, and eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29,Accounting for Nonmonetary Transactions, and replaces it with an exception for exchanges that do not have commercial substance. The adoption of this accounting pronouncement isdid not expected to have a material effect on the Company’s consolidated financial position and results of operations.statements.

In November 2004, the FASB issued SFAS No. 151,Inventory Costs – an Amendment of ARB No. 43, Chapter 4. The standard requires abnormal amounts of idle facility and related expenses to be recognized as current period charges and also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company is evaluatingadoption of this accounting pronouncement did not have a material effect on the impact this statement will have on itsCompany’s consolidated financial position and results of operations.statements.

Stock-Based Compensation Expense

In December 2004, the FASB issued revisedThe Company adopted SFAS No. 123R (SFAS No. 123R)123 (revised 2004),Share-Based Payment. This standard eliminates, (SFAS No. 123(R)) which requires the abilitymeasurement and recognition of compensation expense for all stock-based payment awards made to account for share-based compensation transactions usingemployees and directors based on estimated fair values. SFAS No. 123(R) supersedes the intrinsic value-based methodCompany’s previous accounting under APB Opinion No. 25,Accounting for Stock Issued to Employees (APB No. 25), and requires instead that such transactions be accounted for using a fair-value-based method.periods beginning January 1, 2006. In AprilMarch 2005, the SEC delayedissued Staff Accounting Bulletin (SAB) No. 107 relating to SFAS No. 123(R). The Company has applied the effective dateprovisions of SAB No. 107 in its adoption of SFAS No. 123R to123(R).

The Company adopted SFAS No. 123(R) using the modified prospective transition method, which requires the application of the accounting standard as of January 1, 2006. The Company’s consolidated financial statements issuedas of and for the first annual period beginning afterthree and six months ended June 15, 2005. The Company plans to adopt and comply with30, 2006 reflect the requirementsimpact of SFAS No. 123R when it becomes effective January 1, 2006,123(R). In accordance with the modified prospective transition method, the Company’s consolidated financial statements for prior periods have not been restated to reflect, and is evaluatingdo not include, the potential impact of this statement, which could have a material impactSFAS No. 123(R). Stock-based compensation expense recognized under SFAS No. 123(R) for the three and six months ended June 30, 2006 was $34 million and $71 million ($22 million and $46 million, net of tax), respectively. Comparatively, stock-based compensation expense of $10 million and $19 million ($7 million and $13 million, net of tax), respectively, was recognized for the three and six months ended June 30, 2005 under APB No. 25.

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

SFAS No. 123(R) requires companies to estimate the fair value of stock-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s resultsconsolidated statement of operations. Currently,earnings. Prior to the adoption of SFAS No. 123(R), the Company disclosesaccounted for stock-based awards to employees and directors using the pro forma net income andintrinsic value method related pro forma income per share informationto stock options in accordance with APB No. 25 as allowed under SFAS No. 123,Accounting for Stock-Based Compensation, and SFAS No. 148,Accounting for Stock-Based Compensation Costs—Transition and Disclosure. The following table summarizesUnder the intrinsic value method, no stock-based compensation expense had been recognized in the Company’s results on a pro forma basis as if it had recordedconsolidated statement of earnings because the exercise price of the Company’s stock options granted to employees and directors equaled the fair market value of the underlying stock at the date of grant.

Stock-based compensation expense recognized during the period is based uponon the fair value atof the grant date forportion of stock-based payment awards under these plans consistent withthat is ultimately expected to vest during the methodology prescribed under SFAS No. 123, Accounting for Stock-Based Compensation,period. Stock-based compensation expense recognized in the Company’s consolidated statement of earnings for the three and ninesix months ended SeptemberJune 30, 20052006 included compensation expense for stock-based payment awards granted prior to, but not yet vested as of January 1, 2006 based on the grant date fair value estimated in accordance with the pro forma provisions of SFAS No. 123(R) and 2004:compensation expense for the stock-based payment awards granted subsequent to January 1, 2006 based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R).

In conjunction with the adoption of SFAS No. 123(R), the Company changed its method of attributing the value of stock-based compensation to expense from the accelerated multiple-option approach to the straight-line single option method. Compensation expense for all stock-based payment awards granted prior to January 1, 2006 will continue to be recognized using the accelerated multiple-option approach while compensation expense for all stock-based payment awards granted on or subsequent to January 1, 2006 is recognized using the straight-line single-option method.

With respect to the accounting treatment of retirement eligibility provisions of employee stock-based compensation awards, the Company has historically followed the nominal vesting period approach. Upon the adoption of SFAS No. 123R,123(R), the Company will follow the non-substantive vesting period approach and recognize compensation cost immediatelyover a one year period for awards granted to retirement eligible employees, or over the period from the grant date to the date retirement eligibility is achieved.achieved if more than one year, but less than the vesting period. The impact of applying the non-substantive vesting period approach willis not material to the Company’s consolidated financial statements.

As stock-based compensation expense recognized in the consolidated statement of earnings for the three months ended June 30, 2006 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS No. 123(R) requires forfeitures to be material.estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. In the Company’s pro forma information required under SFAS No. 123 for the periods prior to January 1, 2006, the Company accounted for forfeitures as they occurred.

The Company determines fair value of certain stock-based payment awards on the date of grant using an option-pricing model. This model is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the Company’s expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors.

Note 2. Alliances and Investments

Sanofi-AventisSanofi

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

The Company acts as the operating partner for the territory covering the Americas and Australia and owns a 50.1% majority controlling interest in the partnership within this territory. Sanofi’s ownership interest in the partnership within this territory is 49.9%. As such, the Company consolidates all

Note 2. Alliances and Investments (Continued)

country partnership results for this territory and records Sanofi’s share of the results as a minority interest, net of taxes, which was $152$184 million and $149$154 million for the three months ended SeptemberJune 30, 20052006 and 2004,2005, respectively, and $425$332 million and $371$273 million for the ninesix months ended SeptemberJune 30, 20052006 and 2004,2005, respectively. The Company recorded sales in this territory and in comarketing countries outside this territory (Germany, Italy, Spain and Greece) of $1,231$1,425 million and $1,143$1,227 million for the three months ended SeptemberJune 30, 20052006 and 2004,2005, respectively, and $3,467$2,644 million and $3,039$2,237 million for the ninesix months ended SeptemberJune 30, 20052006 and 2004,2005, respectively.

Cash flows from operating activities of the partnerships in the territory covering the Americas and Australia are recorded as operating activities within the Company’s consolidated statement of cash flows. Distributions of partnership profits to Sanofi and Sanofi’s funding of ongoing partnership operations occur on a routine basis and are also recorded as operating activities within the Company’s consolidated statement of cash flows.

Sanofi acts as the operating partner of the territory covering Europe and Asia and owns a 50.1% majority financial controlling interest in the partnerships within this territory. The Company’s ownership interest in the partnerships within this territory is 49.9%. The Company accounts for the investment in partnership entities in this territory under the equity method and records its share of the results in equity in net income of affiliates in the consolidated statement of earnings. The Company’s share of net income from these partnership entities before taxes was $85$102 million and $67$87 million for the three months ended SeptemberJune 30, 20052006 and 2004,2005, respectively, and was $251$197 million and $201$166 million for the ninesix months ended SeptemberJune 30, 20052006 and 2004,2005, respectively.

The Company routinely receives distributions of profits and provides funding for the ongoing operations of the partnerships in the territory covering Europe and Asia. These transactions are recorded as operating activities within the Company’s consolidated statement of cash flows.

In 2001, the Company and Sanofi formed an alliance for the copromotion of irbesartan, as part of which the Company contributed the irbesartan distribution rights in the United States and Sanofi paid the Company a total of $350 million in the two years ended December 31, 2002. The Company accounted for this transaction as a sale of an interest in a license and deferred and amortizedis amortizing the $350 million to other income over the expected useful life of the license, which is approximately eleven years.11 years from the formation of the irbesartan copromotion alliance. The Company recognized other income of $8 million in each of the three month periods ended SeptemberJune 30, 2006 and 2005 and 2004 and $24$16 million in each of the ninesix month periods ended SeptemberJune 30, 20052006 and 2004.2005. The unamortized portion of the deferred income is recorded in the liabilities section of the consolidated balance sheet and was $224$201 million as of SeptemberJune 30, 20052006 and $248$217 million as of December 31, 2004.

2005.

Otsuka

The Company has a worldwide commercialization agreement with Otsuka Pharmaceutical Co., Ltd. (Otsuka), to codevelop and copromotecocommercialize ABILIFY* (aripiprazole), for the treatment of schizophrenia and related psychiatric disorders, except in Japan, China, Taiwan, North Korea, South Korea, the Philippines, Thailand, Indonesia, Pakistan and Egypt. The Company began copromoting the product with Otsuka in the U.S. and Puerto Rico in November 2002. In June 2004, the Company received marketing approval from the European Commission. The product is currently copromoted with Otsuka in the U.S., Puerto Rico, the United Kingdom, Germany, France and Spain. In the U.S., Germany and Spain, and will also be copromoted in France. ABILIFY*where the product is currently distributed exclusivelysold by the Company in France on a temporary basis until copromotion withan Otsuka commences. Theaffiliate as distributor, the Company records alliance revenue for its 65% contractual share of Otsuka’s net sales, in these copromotion countries, excluding the United Kingdom, and records all expenses related to the product. The Company recognizes this alliance revenue when ABILIFY* is shipped and all risks and rewards of ownership have transferred to Otsuka’s customers. In the UK,United Kingdom and in France until copromotion with Otsuka commences,where the Company is presently the exclusive distributor for the product, the Company records 100% of the net sales and related cost of products sold.

The Company also has an exclusive right to sell ABILIFY* in a number of other countries in Europe, the Americas and a number of countries in Asia. In these countries, the Company records 100% of the net sales and related cost of products sold. Under the terms of the agreement, the Company purchases the product from Otsuka and performs finish manufacturing for sale by the Company to its customers. The agreement expires in November 2012 in the U.S. and Puerto Rico. For the countries in theentire European Union, where the Company has an exclusive right to sell ABILIFY*, the agreement expires in June 2014. In each other country where the Company has the exclusive right to sell ABILIFY*, the agreement expires on the later of the tenth anniversary of the first commercial sale in such country or expiration of the applicable patent in such country.

Note 2. Alliances and Investments (Continued)

The Company recorded revenue for ABILIFY* of $260$324 million and $165$240 million for the three months ended SeptemberJune 30, 20052006 and 2004,2005, respectively, and $688$607 million and $402$428 million for the ninesix months ended SeptemberJune 30, 20052006 and 2004,2005, respectively. Total milestone payments made to Otsuka under the agreement through September 2005June 2006 were $217 million, of which $157 million was expensed as acquired in-process research and development.development in 1999. The remaining $60 million was capitalized in other intangible assets and is amortized in cost of products sold over the remaining life of the agreement in the U.S., ranging from eight8 to eleven11 years. The Company amortized in cost of products sold $2 million and $1 million in each of the three monthsmonth periods ended SeptemberJune 30, 20052006 and 2004, respectively, and $5 million2005 and $3 million in each of the nine monthssix month periods ended SeptemberJune 30, 20052006 and 2004, respectively.2005. The unamortized capitalized payment balance was $42$38 million as of SeptemberJune 30, 20052006 and $47$41 million as of December 31, 2004.2005.

Note 2. Alliances and Investments (Continued)

ImClone

The Company has a commercialization agreement expiring in September 2018 with ImClone Systems IncIncorporated (ImClone), a biopharmaceutical company focused on developing targeted cancer treatments, for the codevelopment and copromotion of ERBITUX* in the United States. In February 2004, the U.S. Food and Drug Administration (FDA) approved the Biologics License Application (BLA) for ERBITUX* for use in combination with irinotecan in the treatment of patients with Epidermal Growth Factor Receptor (EGFR)-expressing, metastatic colorectal cancer who are refractory to irinotecan-based chemotherapy and for use as a single agent in the treatment of patients with EGFR-expressing, metastatic colorectal cancer who are intolerant to irinotecan-based chemotherapy. In March 2006, the FDA approved ERBITUX* for use in the treatment of squamous cell carcinoma of the head and neck in combination with radiation or as monotherapy. The Company paid ImClone $250 million in March 2004 as a milestone payment to ImClone for the initial approvaleach of ERBITUX*. An additional $250 million is payable upon FDA approval for use in treating an additional tumor type. In June 2004, the FDA approved ImClone’s Chemistry, Manufacturingapprovals in 2004 and Controls supplemental BLA for licensure of its BB36 manufacturing facility. In August 2005, ImClone submitted a supplemental Biologics License Application (sBLA) to the FDA for approval of ERBITUX* in treatment of Squamous Cell Carcinoma of the Head and Neck (SCCHN). The FDA decision is expected by February 2006, and if approved, the Company will pay ImClone the additional $250 million.2006. Under the agreement, ImClone receives a distribution fee based on a flat rate of 39% of product revenues in North America. The Company also has codevelopment and copromotion rights with ImClone in Canada. In September 2005, Health Canada’s Biologics and Genetic Therapies Directorate approved ERBITUX* as a treatment for metastatic colorectal cancer. In addition, the Company has a 50% share of the codevelopment and copromotion rightsco-exclusive right, shared with ImClone, has withto commercialize ERBITUX* in Japan (ImClone having previously granted co-exclusive right to Merck KGaA in Japan toJapan). In December 2004, the extent the product is commercializedCompany, its Japanese affiliate (BMKK), Merck KGaA, Merck Ltd., and ImClone executed a joint development agreement for ERBITUX* in that country.

Japan.

The Company accounts for the $250$500 million total approval milestonemilestones paid in March 2004 and 2006 as a license acquisitionacquisitions and amortizes the paymentpayments into cost of products sold over the expected useful lifeterm or the remaining term of the license,agreement which is approximately fourteen years.ends in 2018. The Company amortized into cost of products sold $4$10 million and $5 million for each of the three months ended SeptemberJune 30, 2006 and 2005, respectively, and 2004, and $13$16 million and $10$9 million for the ninesix months ended SeptemberJune 30, 20052006 and 2004,2005, respectively. The unamortized portion of the approval paymentpayments is recorded in other intangibles, netintangible assets, and was $223$453 million as of SeptemberJune 30, 20052006 and $236$219 million as of December 31, 2004.

2005.

The Company accounts for its investment in ImClone under the equity method and records its share of the results in equity in net income of affiliates in the consolidated statement of earnings. The Company’s recorded investment in ImClone common stock as of Septemberwas $89 million and $66 million at June 30, 20052006 and December 31, 2004 was $662005, respectively. The Company holds 14.4 million and $72 million, respectively,shares of ImClone stock, representing approximately 17% of the ImClone shares outstanding at June 30, 2006 and December 31, 2005, respectively. On a per share basis, the carrying value of the ImClone investment and the closing market price of the ImClone shares as of SeptemberJune 30, 20052006 were $4.56$6.24 and $31.45,$38.64, respectively, compared to $5.03$4.55 and $46.08,$34.24, respectively, as of December 31, 2004.

2005.

The Company determines its equity share in ImClone’s net income or loss by eliminating, from ImClone’s results, the milestone revenue ImClone recognizes for the $400 million in pre-approval milestone payments that were recordedmade by the Company from 2001 through 2003. The Company recorded $80 million of the pre-approval milestone payments as additionalan equity investment.investment and expensed the remaining $320 million as acquired in-process research and development during that period. Milestone revenue recognized by ImClone in excess of $400 million is not eliminated by the Company in determining its equity share in ImClone’s results. For its share of ImClone’s results of operations, the Company recorded netequity income of zero$24 million and $4$1 million for the three months ended SeptemberJune 30, 20052006 and 2004,2005, respectively, and a netequity income of $25 million for the six months ended June 30, 2006 and an equity loss of $6 million and net income of $1 million for the ninesix months ended SeptemberJune 30, 2005 and 2004, respectively.2005. The Company recorded net sales for ERBITUX* of $107$172 million and $84$98 million for the three months ended SeptemberJune 30, 20052006 and 2004,2005, respectively and $292$310 million and $173$185 million for the ninesix months ended SeptemberJune 30, 2006 and 2005, and 2004, respectively.

Merck

In April 2004, the Company entered into a collaboration agreement with Merck & Co., Inc. (Merck) for worldwide codevelopment and copromotion for PARGLUVA™ (muraglitazar), the Company’s dual PPAR (peroxisome proliferator activated receptor) agonist, currently in Phase III clinical development for use in treating type 2 diabetes. Under the terms of the agreement, the Company received a $100 million upfront payment in May 2004 and a $55 million milestone payment in January 2005 for submission of the

Note 2. Alliances and Investments (Continued)

New Drug Application (NDA) and is entitled to receive $220 million in additional payments upon achievement of certain regulatory milestones, including $100 million for FDA approval of muraglitazar. Under the terms of agreement, the Company and Merck agreed to jointly develop the clinical and marketing strategy for muraglitazar, share equally in future development and commercialization costs and copromote the product to physicians on a global basis, with Merck to receive payments based on net sales levels.

In December 2004 the Company submitted an NDA to the FDA for regulatory approval of muraglitazar. In September 2005, the Company and Merck announced the FDA’s Endocrinologic and Metabolic Drugs Advisory Committee voted to recommend approval of muraglitazar for the treatment of type 2 diabetes, for use as a monotherapy and in combination with metformin. On October 18, 2005, the FDA issued an approvable letter for muraglitazar requesting additional information from ongoing clinical trials to more fully address the cardiovascular safety profile of muraglitazar. The Company determined that to receive regulatory approval and to achieve commercial success, additional studies may be required because ongoing muraglitazar trials are not designed to answer the questions raised by the FDA. The additional studies may take approximately five years to complete. The Company will continue discussions with the FDA. Merck advised the Company of their intent to terminate the agreement and the Company has agreed to begin discussions to terminate the agreement. The Company is in the process of evaluating a range of options including conducting additional studies or terminating further development of muraglitazar.

The upfront and milestone payments of $155 million, which are non-refundable, were deferred and are being amortized to other income over the expected remaining useful life of the agreement which is approximately sixteen years. The Company recognized $2 million of these payments in other income for each of the three month periods ended September 30, 2005 and September 30, 2004, respectively, and $7 million and $3 million for the nine months ended September 30, 2005 and 2004, respectively. The unamortized portion of the milestone payment is recorded in other liabilities and was $144 million as of September 30, 2005 and $151 million as of December 31, 2004.

Note 3. Restructuring

In the thirdsecond quarter of 2005,2006, the Company recorded pre-tax charges of $2$4 million related to employeethe termination benefits for workforce reductions and downsizing and streamlining of approximately 13140 selling and administrative personnel, primarily in Latin America and asset impairmentCanada. These charges which were offsetdecreased by a $7$1 million adjustment reflecting a changechanges in estimateestimates for restructuring actions taken in prior periods.

The following table presents a detail of the charges by segment and type for the three months ended SeptemberJune 30, 2005.2006. The Company expects to substantially complete these activities by late 2005.2006.