Dollar Amounts in Millions - Except Per Share Data

NOTE A:    Inventories

NOTE B:    Property, Plant and Equipment

NOTE C:    Comprehensive Income

NOTE D:    Restructuring and Exit Activities

In December 2000, the company's board of directors approved a comprehensive restructuring plan that would facilitate the company's realignment as an integrated operating company with centralized management of R&D and supply chain operations and with commercial operations managed on a regional basis. The restructuring plan was implemented in two phases due to the anticipated timing of communication to employees and overall implementation schedule. As a result, a pre-tax amount of $42.7 was recorded during the fourth quarter of 2000 for Phase I of the restructuring and for asset write-offs. During the first quarter of 2001 a pre-tax amount of $16.9 was recorded for Phase II of the restructuring and additional asset write-offs.
     The following table summarizes the activity for the 2000 program:

     The restructuring actions will result in the termination of approximately 800 employees in Phase I and Phase II combined. As of March 31, 2001, 383 employees have been terminated under this restructuring plan with $5.8 of related costs being charged against the liability. The majority of the outflows are expected to occur in the second and third quarters of 2001. Actions in this restructuring plan are expected to be completed by the end of 2001.
     In addition to employee terminations, the above actions resulted in $20.4 of asset write-offs for machinery and equipment ($11.1), facilities ($6.9) and abandoned software ($2.4). The disposition and/or decommissioning of these assets occurred in the fourth quarter of 2000. During 2001 the company wrote off its $6.5 investment in a business-to-business e-commerce venture for the vision care industry.

As part of the integration of Groupe Chauvin, management developed a plan that included the shutdown of duplicate facilities in Europe and the consolidation of certain functional areas. The exit activities were committed to by management and formally communicated to the affected employees during the fourth quarter of 2000 and the first quarter of 2001. The major components of the accrual were as follows:

The acquisition accrual at December 30, 2000 related to the cost of terminating approximately 64 employees in R&D, selling and administration. The other costs represented leasehold and vehicle lease termination payments. As of the quarter ended March 31, 2001, 39 employees had been terminated. Closures and consolidations began in 2000 and are expected to be completed in 2001.
     An additional accrual was recorded for the quarter ended March 31, 2001, resulting in an adjustment to goodwill representing additional closures and consolidations of functions and locations to occur primarily in the second quarter of 2001 and to be completed by December of 2001. It is anticipated that approximately 90 employees will be terminated, primarily in the areas of R&D and administration.

NOTE E:    Business Segment Information

In the prior year, the company announced a reorganization from a product line structure to a regionally based management structure for commercial operations. The research and development and product supply functions were also realigned and are managed on a global basis. The change in the structure was effective on January 1, 2001. The company's segments are comprised of the Americas Region, the Europe, Middle East and Africa region, the Asia region, the Research, Development and Engineering organization and the Global Supply Chain organization.
     Operating income is the primary measure of segment income. No items below operating income are allocated to segments. The accounting policies used to generate segment results are the same as the company's overall accounting policies. Inter-segment sales were $131.2 for the quarter ended March 31, 2001.
     The following table presents sales and operating earnings by business segment for the quarters ended March 31, 2001 and March 25, 2000. The prior year has been restated to conform to the new management reporting structure. The restructuring reserve adjustment is described in Note D: Restructuring and Exit Activities.

NOTE F:    Minority Interest

The minority interest in subsidiaries primarily represents the outside partnership interest in Wilmington Partners L.P., (the Partnership). The remaining partnership interests are held by four wholly owned subsidiaries of the company along with an outside partner with a 22% interest. The Partnership is a separate legal entity from the company, but for financial reporting purposes, assets, liabilities and earnings from the Partnership are included in the company's consolidated financial results. The outside investor's limited partnership interest is recorded as minority interest in the company's consolidated financial statements.

NOTE G:    Acquisition

On August 8, 2000, Bausch & Lomb completed the acquisition of Groupe Chauvin, a European-based ophthalmic pharmaceuticals company headquartered in Montpellier, France, and several related companies, for a total of approximately $218.0 net of cash acquired. The privately-held companies combined have historically generated sales of nearly $100, employ nearly 800 people, and have operations in France, Germany, the U.K., Switzerland, the Benelux countries, and Portugal. Bausch & Lomb financed the acquisition through the use of cash reserves generated offshore.
     The acquisition was accounted for as a purchase, whereby the purchase price, including acquisition costs, was allocated to identified assets, including tangible and intangible assets, purchased in process research and development (IPR&D) and liabilities based upon their respective fair values. The excess of the purchase price over the value of identified assets and liabilities has been recorded as goodwill and is being amortized on a straight-line basis over twenty-five years.
     The useful lives of identifiable intangibles and goodwill were determined based upon an evaluation of pertinent factors, including consideration of legal, regulatory and contractual provisions which could limit the maximum useful life and management's judgement and in some instances, the reports of independent appraisers. After the evaluation of these factors identified previously, it was determined that the associated goodwill related explicitly to the earnings potential of the business and that the future periods to benefit from these earnings were closely associated with the acquired physician information, customer databases and trade names.
     As required under generally accepted accounting principles, IPR&D of $23.8 was expensed immediately in the prior year quarter ended September 23, 2000, resulting in a non-cash charge to earnings, since the underlying R&D projects had not reached technological feasibility and the assets to be used in such projects had no alternative future use. There have been no significant changes to the projects or the assumptions and estimates associated with IPR&D.
     Management is primarily responsible for estimating the fair value of assets and liabilities obtained through acquisitions and has conducted due diligence in determining fair values. Management made estimates and assumptions at the time of the acquisition that affect the reported amounts of assets, liabilities and expenses, including IPR&D, resulting from such an acquisition. Actual results could differ from those amounts.

NOTE H:    Other Investments, Short-Term

Under SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, certain investments are classified as available-for-sale. Accordingly, unrealized holding gains and losses, net of taxes, are excluded from income and recognized as a component of accumulated other comprehensive income. Fair value of these investments is determined based on market prices. At the end of the first quarter, the company owned common stock in Charles River Laboratories, Inc. which represents the retention of a minority equity interest from the sale of the Charles River Laboratories business during 1999, as reported in the company's Form 10-K for the year ended December 25, 1999. During the first quarter of 2001, approximately 500,000 shares or 22% of the company's equity interest, were sold resulting in a realized gain of $3.5, net of taxes. At the end of the first quarter of 2001, the remaining investment was valued at $31.4. A resulting unrealized holding loss, net of taxes, of $6.5 for the quarter was recorded as reflected in Note C: Comprehensive Income.

NOTE I:    New Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133). This standard was amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133" and changed the effective date for SFAS No. 133 to all fiscal quarters of fiscal years beginning after June 15, 2000. In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of SFAS No. 133". SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their respective fair values. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on their designation as a hedge of a particular exposure. The company adopted SFAS No.133 effective January 1, 2001. A transition gain of $0.3, net of taxes, was recorded as a cumulative adjustment to income for marking foreign currency forward contracts to fair value. Substantially all of this amount pertains to contracts which are utilized to offset foreign exchange exposures related to foreign currency denominated assets and liabilities. The company does not apply hedge accounting to these contracts because they are marked to market through earnings at the same time that the exposed asset/liability is remeasured through earnings; both in foreign exchange income (loss). Less than $0.1 relates to contracts designated as net investment hedges of equity investments in non-U.S. subsidiaries and cash flow hedge contracts designated to offset risks associated with intercompany loans with non-U.S. subsidiaries. A transition adjustment loss of $1.8 was recorded in other comprehensive income related primarily to an interest rate swap designated as a cash flow hedge to offset risks associated with interest payments on a variable-rate lease.
     For effective fair value hedge transactions in which the company is hedging changes in the fair value of assets, liabilities or firm commitments, changes in the fair value of the derivative instrument will generally be offset by changes in the hedged item's fair value. As of January 1, 2001, the company had one interest rate swap agreement with a notional amount of $85.0 that was designated as a fair value hedge of floating interest rate exposures. This interest rate swap was terminated in the current quarter ended March 31, 2001.
     For cash flow hedge transactions in which the company is hedging the variability of cash flows related to a variable rate asset, liability or forecasted transaction, changes in the fair value of the derivative instrument will be reported in other comprehensive income. The gains and losses on the derivative instrument that are reported in other comprehensive income will be recognized in earnings in the periods in which earnings are impacted by the variability of the cash flows of the hedged item. In the first quarter, a net gain of $0.1 was reclassified from other comprehensive income. This is comprised of a $0.2 gain which was reclassified into foreign currency gains related to foreign exchange forward contracts used to hedge intercompany loans and a $(0.1) loss reclassified into interest income on an interest rate swap on a variable-rate lease. The company expects to reclassify additional cash flow hedges related net gains of $1.0 into earnings within the next twelve month period. In general, the forward exchange contracts have varying maturities up to, but not exceeding, one year with cash settlements made at maturity based upon rates agreed to at contract inception. For derivatives designated as hedging instruments for hedges of foreign currency exposures of net investments in non-U.S. subsidiaries, a net after-tax gain of $13 for the quarter ended March 31, 2001, was included in the cumulative translation adjustment.

NOTE J:    Other Matters

During fiscal 1999, the company completed the sale of its sunglass business to Luxottica Group S.p.A for $636.0 in cash. The company recorded an after-tax gain on the disposal of discontinued operations of $126.3 or $2.16 per diluted share. Luxottica Group S.p.A. has proposed certain adjustments to the closing balance sheet in connection with their purchase that could potentially impact the resulting gain on the sale. It is too early to estimate with any certainty the potential adjustment, if any, to the gain. This matter has been referred to arbitration. The company does not believe that the outcome of these proceedings will have a material adverse effect on its financial condition.
     On April 13, 2001, a shareholder class action lawsuit was filed in the U.S. District for the Western District of New York, naming the company and its Chairman and Chief Executive Officer, William M. Carpenter. The complaint alleges that the value of the company's stock was inflated artificially by alleged false and misleading statements about expected financial results. The plaintiff seeks to represent a class of shareholders who purchased company common stock between April 13, 2000 and August 24, 2000. No substantive action has taken place in this matter. The company intends to defend itself vigorously against these claims.
     The company is engaged in various lawsuits, claims, investigations and proceedings including patent, commercial and environmental matters that are in the ordinary course of business. The company cannot at this time estimate with any certainty the impact of these matters on its financial position.

Dollar Amounts in Millions - Except Per Share Data

This financial review, which should be read in conjunction with the accompanying financial statements, contains management's discussion and analysis of the company's results of operations, liquidity and an updated 2001 outlook. References within this financial review to earnings per share refer to diluted earnings per share.

When used in this discussion, the words "anticipate," "should," "expect," "estimate," "project" "will" and similar expressions are intended to identify forward-looking statements. The forward-looking statements contained in this report under the heading "Outlook" and elsewhere are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements involve predictions of future company performance, and are thus dependent on a number of factors affecting the company's performance. Where possible, specific factors that may impact performance materially have been identified in connection with specific forward-looking statements. Additional risks and uncertainties include, without limitation, the impact of competition, seasonality and general economic conditions in the global vision care and ophthalmic surgical and pharmaceutical markets where the company's businesses compete, changes in global and localized economic and political conditions, changing trends in practitioner and consumer preferences and tastes, changes in technology, medical developments relating to the use of the company's products, legal proceedings initiated by or against the company, changes in government regulation of the company's products and operations, changes in private and regulatory schemes providing for the reimbursement of patient medical expenses, difficulties or delays in the development, production, testing, regulatory approval or marketing of products, the successful completion and integration of acquisitions announced by the company, the effect of changes within the company's organization, and such other factors as are described in greater detail in the company's filings with the Securities and Exchange Commission, including its 2000 Annual Report on Form 10-K.