UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

(Mark One)

x                              QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2007

OR

o                                 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                          to                               

Commission File No. 1-2189

ABBOTT LABORATORIES

 

100 Abbott Park Road
Abbott Park, Illinois 60064-6400

Telephone: (847) 937-6l00

Indicate by check mark whether the registrant (l) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of l934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes x   No o

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes o   No x

As of June 30, 2007, Abbott Laboratories had 1,545,452,757 common shares without par value outstanding.

PART  I.  FINANCIAL INFORMATION

Abbott Laboratories and Subsidiaries

Condensed Consolidated Financial Statements

(Unaudited)

---

Abbott Laboratories and Subsidiaries

Condensed Consolidated Statement of Earnings

(Unaudited)

(dollars and shares in thousands except per share data)

		Three Months Ended						Six Months Ended
		June 30						June 30
		2007			2006			2007			2006
Net Sales		$	6,370,620		$	5,501,124		$	12,316,181		$	10,684,583
Cost of products sold		2,804,326			2,388,613			5,396,337			4,558,317
Research and development		583,474			556,337			1,202,530			1,041,479
Acquired in-process and collaborations research and development		—			493,000			—			493,000
Selling, general and administrative		1,796,456			1,520,397			3,583,325			2,984,812
Total Operating Cost and Expenses		5,184,256			4,958,347			10,182,192			9,077,608
Operating Earnings		1,186,364			542,777			2,133,989			1,606,975
Interest expense		153,349			110,663			300,891			183,634
Interest (income)		(28,533		)	(28,980		)	(51,870		)	(67,432		)
(Income) from TAP Pharmaceutical Products Inc. joint venture		(115,726		)	(134,503		)	(262,358		)	(235,814		)
Net foreign exchange loss		6,248			8,017			11,099			7,407
Other (income) expense, net		(81,612		)	(69,556		)	42,924			(72,973		)
Earnings Before Taxes		1,252,638			657,136			2,093,303			1,792,153
Taxes on Earnings		263,894			44,892			407,022			315,026
Net Earnings		$	988,744		$	612,244		$	1,686,281		$	1,477,127
Basic Earnings Per Common Share		$	0.64		$	0.40		$	1.09		$	0.97
Diluted Earnings Per Common Share		$	0.63		$	0.40		$	1.08		$	0.96
Cash Dividends Declared Per Common Share		$	0.325		$	0.295		$	0.65		$	0.59
Average Number of Common Shares Outstanding Used for Basic Earnings Per Common Share		1,541,717			1,524,589			1,541,339			1,527,681
Dilutive Common Stock Options		18,950			7,048			18,435			7,441
Average Number of Common Shares Outstanding Plus Dilutive Common Stock Options		1,560,667			1,531,637			1,559,774			1,535,122
Outstanding Common Stock Options Having No Dilutive Effect		4,639			96,071			4,639			86,456

 

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

2

---

Abbott Laboratories and Subsidiaries

Condensed Consolidated Statement of Cash Flows

(Unaudited)

(dollars in thousands)

		Six Months Ended
		June 30
		2007			2006
Cash Flow From (Used in) Operating Activities:
Net earnings		$	1,686,281		$	1,477,127
Adjustments to reconcile earnings to net cash from operating activities —
Depreciation		463,724			494,862
Amortization of intangibles		404,201			271,341
Share-based compensation		250,198			210,957
Acquired in-process research and development		—			452,000
Trade receivables		38,724			311,014
Inventories		1,001			189,214
Other, net		(248,387		)	(717,858		)
Net Cash From Operating Activities		2,595,742			2,688,657
Cash Flow From (Used in) Investing Activities:
Acquisition of businesses		—			(4,321,016		)
Sales of (investment in) Boston Scientific common stock; and (investment in) note receivable and derivative financial instruments		302,015			(2,095,780		)
Acquisitions of property and equipment		(839,850		)	(671,358		)
Other		(11,804		)	(24,332		)
Net Cash (Used in) Investing Activities		(549,639		)	(7,112,486		)
Cash Flow From (Used in) Financing Activities:
Net proceeds from issuance of short-term debt and other		212,721			167,373
Proceeds from issuance of long-term debt		—			4,000,000
(Repayments) of long-term debt		(347,704		)	(501,189		)
Purchases of common shares		(863,470		)	(754,502		)
Proceeds from stock options exercised, including tax benefit		914,134			155,946
Dividends paid		(954,559		)	(873,616		)
Net Cash (Used in) From Financing Activities		(1,038,878		)	2,194,012
Effect of exchange rate changes on cash and cash equivalents		10,514			59,880
Net cash provided by operating activities of discontinued operations of Hospira, Inc.		—			67,152
Net Increase (Decrease) in Cash and Cash Equivalents		1,017,739			(2,102,785		)
Cash and Cash Equivalents, Beginning of Year		521,192			2,893,687
Cash and Cash Equivalents, End of Period		$	1,538,931		$	790,902

 

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

3

Abbott Laboratories and Subsidiaries

 

Condensed Consolidated Balance Sheet

 

(Unaudited)

 

(dollars in thousands)

 

		June 30			December 31
		2007			2006
Assets
Current Assets:
Cash and cash equivalents		$	1,538,931		$	521,192
Investments, including $626,525 of investments measured at fair value at June 30, 2007		698,143			852,243
Trade receivables, less allowances of $192,912 in 2007 and $215,443 in 2006		3,395,031			4,231,142
Inventories:
Finished products		1,347,161			1,338,349
Work in process		284,347			686,425
Materials		514,552			781,647
Total inventories		2,146,060			2,806,421
Prepaid expenses, deferred income taxes, and other receivables		2,930,381			2,870,885
Assets held for sale		1,630,363			—
Total Current Assets		12,338,909			11,281,883
Investments		1,005,232			1,229,873
Property and Equipment, at Cost		11,754,396			14,401,939
Less: accumulated depreciation and amortization		5,929,789			7,455,504
Net Property and Equipment		5,824,607			6,946,435
Intangible Assets, net of amortization		5,814,378			6,403,619
Goodwill		9,347,839			9,449,281
Deferred Income Taxes and Other Assets		967,787			867,081
Assets Held for Sale		1,854,470			—
		$	37,153,222		$	36,178,172
Liabilities and Shareholders’ Investment
Current Liabilities:
Short-term borrowings		$	5,470,180		$	5,305,985
Trade accounts payable		1,061,499			1,175,590
Salaries, dividends payable, and other accruals		4,494,364			5,112,000
Income taxes payable		276,945			262,344
Current portion of long-term debt		250,662			95,276
Liabilities of operations held for sale		456,567			—
Total Current Liabilities		12,010,217			11,951,195
Post-employment Obligations and Other Long-term Liabilities		3,051,298			3,163,127
Long-term Debt		6,606,005			7,009,664
Liabilities of Operations Held for Sale		151,549			—
Commitments and Contingencies
Shareholders’ Investment:
Preferred shares, one dollar par value Authorized — 1,000,000 shares, none issued		—			—
Common shares, without par value Authorized — 2,400,000,000 shares Issued at stated capital amount - Shares: 2007: 1,573,032,674; 2006: 1,550,590,438		5,546,647			4,290,929
Common shares held in treasury, at cost - Shares: 2007: 27,579,917; 2006: 13,347,272		(1,029,015)			(195,237)
Earnings employed in the business		9,949,525			9,568,728
Accumulated other comprehensive income (loss)		866,996			389,766
Total Shareholders’ Investment		15,334,153			14,054,186
		$	37,153,222		$	36,178,172

 

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

 

4

Notes to Condensed Consolidated Financial Statements

June 30, 2007

(Unaudited)

Note 1 — Basis of Presentation

The accompanying unaudited, condensed consolidated financial statements have been prepared pursuant to rules and regulations of the Securities and Exchange Commission and, therefore, do not include all information and footnote disclosures normally included in audited financial statements.  However, in the opinion of management, all adjustments (which include only normal adjustments) necessary to present fairly the results of operations, financial position and cash flows have been made.  It is suggested that these statements be read in conjunction with the financial statements included in Abbott’s Annual Report on Form 10-K for the year ended December 31, 2006.

Note 2 — Assets and Liabilities Classified as Held for Sale

On July 11, 2007, Abbott announced that Abbott and GE mutually agreed to terminate the previously announced contract to sell Abbott’s core laboratory diagnostics business, including Abbott Point of Care, to GE.  The assets of the operations held for sale and the liabilities to be assumed in the intended sale have been classified as held for sale in the Condensed Consolidated Balance Sheet as of June 30, 2007.  These assets and liabilities will no longer be classified as held for sale beginning in the third quarter of 2007.  Prior years’ balance sheets have not been adjusted.

Effective on the date that Abbott agreed to sell its core laboratory diagnostics businesses to GE, depreciation of property and equipment and amortization of intangible assets was discontinued.  Accordingly, the consolidated results of operations for the six months ended June 30, 2006, include six months of depreciation and amortization and the consolidated results of operations for the six months ended June 30, 2007, include depreciation and amortization through January 17, 2007.   The amount of depreciation and amortization that was discontinued amounted to approximately $99 million for the six months ended June 30, 2007.  This depreciation and amortization will be recorded in the third quarter of 2007 as these operations will no longer be classified as held for sale.

The assets and liabilities classified as held for sale as of June 30, 2007, consist of the following:

(dollars in thousands)

 

5

---

Notes to Condensed Consolidated Financial Statements
June 30, 2007
(Unaudited), continued

Note 3 — Adoption of New Accounting Standards

Effective January 1, 2007, Abbott adopted Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements,” SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” and FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes.”   Adoption of these Standards and Interpretation did not have a material impact on Abbott’s financial position.

SFAS No. 157 applies to all fair measurements not otherwise specified in an existing standard, it clarifies how to measure fair value, and it expands fair value disclosures.  For Abbott, SFAS No. 157 does not significantly change the valuation of assets versus previous practice.  However, for liabilities, SFAS No. 157 requires that a fair value measurement be the amount that a company would pay to transfer a liability to a third party.  Under previous practice, liabilities were valued under a number of different methods.

SFAS No. 159 allows companies to measure specific financial assets and liabilities at fair value, such as debt or equity investments.   The fair value option for the investment in Boston Scientific common stock was applied effective January 1, 2007.  Abbott applied the fair value option to its investment in Boston Scientific stock under SFAS No. 159 because, unlike its other equity investments, the Boston Scientific stock is not a strategic investment and Abbott is required to dispose of the stock no later than October 2008.  Abbott remains subject to a limitation on the amount of shares it may sell in any one month through October 2007 and Abbott will not reacquire the Boston Scientific shares it sells.  Accordingly, since at adoption, realized gains or losses were expected in the near future, the fair value option better represented the near-term expected earnings impact from sales of the stock.   Under the fair value option, any cumulative unrealized gains or losses on an equity investment previously accounted for as an available-for-sale security is recorded as a cumulative effect adjustment to retained earnings as of the date of adoption of the standard.  The pretax and after tax adjustment to Earnings employed in the business upon adoption was $297 million and $189 million, respectively, and the fair value and carrying amount of the investment before and after adoption was $1.0 billion.  The pretax and after tax adjustment to Accumulated other comprehensive income was $303 million and $182 million, respectively.   The effect of the adoption on deferred income taxes was not significant.

FASB Interpretation No. 48 requires that a recorded tax benefit must be more likely than not of being sustained upon examination by tax authorities based upon its technical merits. The amount of benefit recorded is the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement.

Note 4 — Business Combinations and Related Transactions

On April 21, 2006, Abbott acquired Guidant’s vascular intervention and endovascular solutions businesses for approximately $4.1 billion, in cash, in connection with Boston Scientific’s acquisition of Guidant.  In addition, Abbott will also pay to Boston Scientific $250 million each upon government approvals to market the Xience V drug-eluting stent in the U.S. and in Japan.  Each $250 million payment will result in additional consideration for the acquisition of Guidant’s vascular intervention and endovascular solutions businesses.  The allocation of the purchase price as of June 30, 2006 resulted in a charge of $452 million in the second quarter of 2006 for acquired in-process research and development, intangible assets of $1.2 billion, goodwill (primarily deductible) of $1.8 billion and tangible net assets of $620 million.

A substantial amount of the acquired in-process research and development charge relating to the Guidant acquisition related to drug eluting and bioabsorbable stents.  The research efforts ranged from 35 percent to 85 percent complete at the date of acquisition.  The valuation method used to fair value the projects was the Multi-period Excess Earnings Method (Income Approach) and the risk-adjusted discount rates used ranged from 16 percent to 25 percent.  In developing assumptions for the valuation model, comparable Abbott products or products marketed by competitors were used to estimate pricing, margins and expense levels.  As of June 30, 2007, the research efforts were primarily on schedule.  The estimated projected costs to complete totaled approximately $520 million as of June 30, 2007, with anticipated product launch dates from 2008 through 2013.  There have been no significant changes in the development plans for the acquired incomplete projects.  Significant net cash inflows will commence within one to two years after product launch.

6

---

Notes to Condensed Consolidated Financial Statements
June 30, 2007
(Unaudited), continued

In order to facilitate Boston Scientific’s acquisition of Guidant, Abbott also acquired 64.6 million shares of Boston Scientific common stock directly from Boston Scientific and loaned $900 million to a wholly-owned subsidiary of Boston Scientific.  The common stock was valued at $1.3 billion and the note receivable was valued at $829 million at the acquisition date.  In connection with the acquisition of the shares, Boston Scientific is entitled to certain after-tax gains upon Abbott’s sale of the shares.  In addition, Boston Scientific agreed to reimburse Abbott for certain borrowing costs on debt incurred to acquire the Boston Scientific shares. Abbott recorded a net derivative financial instruments liability of $59 million for the gain-sharing derivative financial instrument liability and the interest derivative financial instrument asset.  The effect of recording the shares, the loan to Boston Scientific and the derivative financial instruments at fair value on the date of acquisition resulted in the recording of additional goodwill of approximately $204 million.

In December 2006, Abbott acquired Kos Pharmaceuticals Inc. for cash of approximately $3.8 billion, net of cash held by Kos Pharmaceuticals Inc.  The valuation of certain tangible assets and liabilities related to the acquisition of Kos Pharmaceuticals Inc. is preliminary.

A charge of approximately $1.3 billion for acquired in-process research and development was recorded relating to the Kos Pharmaceuticals Inc. acquisition, which related primarily to cholesterol treatment drugs.  The research efforts ranged from 70 percent to 80 percent complete at the date of acquisition.  The valuation method used to fair value the projects was the Multi-period Excess Earnings Method (Income Approach) and the risk-adjusted discount rate used was 16 percent.  In developing assumptions for the valuation model, comparable Abbott products or products marketed by competitors were used to estimate pricing, margins and expense levels.  As of June 30, 2007, one drug was approved for marketing in the U.S. and the remaining research efforts were primarily on schedule.  The estimated projected costs to complete the projects totaled approximately $71 million as of June 30, 2007 with anticipated product launches in 2008.  There have been no significant changes in the development plans for the acquired incomplete projects.  Significant net cash inflows will commence with the launches of the products.

Note 5 — Supplemental Financial Information

Other (income) expense, net for the second quarter of 2007 includes a $48 million fair market value gain adjustment to Abbott’s investment in Boston Scientific common stock and a realized gain of $37 million on the sales of Boston Scientific stock.  Other (income) expense, net for the first six months of 2007 includes a $101 million fair market value loss adjustment to Abbott’s investment in Boston Scientific common stock and a realized gain of $37 million on the sales of Boston Scientific stock.  Other (income) expense, net for the second quarter and first six months of 2006 includes fair value gain adjustments of $75 million to certain derivative financial instruments included with the investment in Boston Scientific common stock.

Investments at June 30, 2007 and December 31, 2006 consist of the following:

(dollars in thousands)

 

7

---

Notes to Condensed Consolidated Financial Statements
June 30, 2007
(Unaudited), continued

Note 6 — Taxes on Earnings

Taxes on earnings reflect the estimated annual effective rates and include charges for interest and penalties.  The effective tax rate for the six months ended June 30, 2006 includes the effect of discrete tax events that occurred in the second quarter of 2006.  For the six months ended June 30, 2006, 6.2 percentage points of tax benefit was attributed to discrete items, primarily the tax benefit on acquired in-process and collaborations research and development.  The effective tax rates are less than the statutory U.S. federal income tax rate principally due to the domestic dividend exclusion and the benefit of lower statutory tax rates and tax exemptions in several taxing jurisdictions.

Unrecognized tax benefits as of the adoption of FASB Interpretation No. 48 on January 1, 2007 were approximately $579 million, which if recognized, would decrease taxes on earnings.  The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate in 2007 totaled approximately $143 million.  Abbott does not expect the total amount of unrecognized tax benefits as of June 30, 2007, to change significantly within the next twelve months.  Reserves for interest and penalties are not significant.  In the U.S., Abbott’s federal income tax returns through 2003 are settled, and the income tax returns for years after 2003 are open.  There are numerous other income tax jurisdictions for which tax returns are not yet settled, none of which are individually significant.

Note 7 — Litigation and Environmental Matters

Abbott has been identified as a potentially responsible party for investigation and cleanup costs at a number of locations in the United States and Puerto Rico under federal and state remediation laws and is investigating potential contamination at a number of company-owned locations.  Abbott has recorded an estimated cleanup cost for each site for which management believes Abbott has a probable loss exposure.  No individual site cleanup exposure is expected to exceed $3 million, and the aggregate cleanup exposure is not expected to exceed $15 million.

There are two patent disputes with third parties who claim Abbott’s products infringe their patents.  In the first dispute, which Abbott assumed as part of the Guidant acquisition, reserves equal to the expected resolution have been recorded.  In the second dispute, filed in April 2007, Abbott is unable to estimate a range of possible loss, if any, and no reserve has been recorded.

There are several civil actions pending brought by individuals or entities that allege generally that Abbott and numerous pharmaceutical companies reported false or misleading pricing information relating to the average wholesale price of certain pharmaceutical products in connection with federal, state and private reimbursement.  Civil actions have also been brought against Abbott, and in some cases other members of the pharmaceutical industry, by state attorneys general seeking to recover alleged damages on behalf of state Medicaid programs.  In May 2006, Abbott was notified that the U.S. Department of Justice intervened in a civil whistle-blower lawsuit alleging that Abbott inflated prices for Medicaid and Medicare reimbursable drugs.  The outcome of these investigations and litigation could include the imposition of fines or penalties.  Abbott is unable to estimate the amount of possible loss, and no loss reserves have been recorded for these exposures.  Many of the products involved in these cases are Hospira products.  Hospira, Abbott’s former hospital products business, was spun off to Abbott’s shareholders in 2004.  Abbott retained liability for losses that result from these cases and investigations to the extent any such losses both relate to the sale of Hospira’s products prior to the spin-off of Hospira and relate to allegations that were made in such pending and future cases and investigations that were the same as allegations existing at the date of the spin-off.

Within the next year, legal proceedings may occur that may result in a change in the estimated reserves recorded by Abbott.  For its legal proceedings and environmental exposures, except as noted in the second and third paragraphs of this footnote, Abbott estimates the range of possible loss to be from approximately $160 million to $290 million.  The recorded reserve balance at June 30, 2007 for these proceedings and exposures was approximately $190 million.  These reserves represent management’s best estimate of probable loss, as defined by Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies.”

While it is not feasible to predict the outcome of all such proceedings and exposures with certainty, management believes that their ultimate disposition should not have a material adverse effect on Abbott’s financial position, cash flows, or results of operations, except for the cases and investigations discussed in the third paragraph of this footnote, the resolution of which could be material to cash flows or results of operations for a quarter.

8

---

Notes to Condensed Consolidated Financial Statements
June 30, 2007
(Unaudited), continued

Note 8 — Post-Employment Benefits

(dollars in millions)

Retirement plans consist of defined benefit, defined contribution, and medical and dental plans.  Net cost for the three and six months ended June 30 for Abbott’s major defined benefit plans and post-employment medical and dental benefit plans is as follows:

		Defined Benefit Plans												Medical and Dental Plans
		Three Months Ended June 30						Six Months Ended June 30						Three Months Ended June 30						Six Months Ended June 30
		2007			2006			2007			2006			2007			2006			2007			2006
Service cost — benefits earned during the period		$	60.5		$	54.7		$	121.0		$	109.4		$	14.8		$	13.1		$	29.6		$	26.2
Interest cost on projected benefit obligations		75.6			69.4			151.2			138.9			24.5			19.5			49.0			39.0
Expected return on plans’ assets		(102.6		)	(93.8		)	(205.2		)	(187.7		)	(6.3		)	(3.9		)	(12.6		)	(7.8		)
Net amortization		22.1			20.6			44.2			41.2			8.5			5.3			17.0			10.6
Net Cost		$	55.6		$	50.9		$	111.2		$	101.8		$	41.5		$	34.0		$	83.0		$	68.0

 

Abbott funds its domestic defined benefit plans according to IRS funding limitations.  In the first quarters of 2007 and 2006, $200 was contributed to the main domestic defined benefit plan and $75 and $40, respectively, was contributed to the post-employment medical and dental benefit plans.

Note 9 — Comprehensive Income, net of tax

(dollars in thousands)

		Three Months Ended						Six Months Ended
		June 30						June 30
		2007			2006			2007			2006
Foreign currency translation gain adjustments		$	247,388		$	637,659		$	263,370		$	735,385
Unrealized (losses) gain on marketable equity securities, net of income taxes of $(107,700) and $(106,000) for the three months and six months ended June 30, 2006, respectively		(5,684		)	(161,519		)	1,278			(158,972		)
Amortization of net actuarial losses and prior service cost and credits		20,117			—			40,295			—
Net adjustments for derivative financial instruments designated as cash flow hedges		(15,551		)	(19,816		)	(9,549		)	(3,060		)
Other comprehensive income, net of tax		246,270			456,324			295,394			573,353
Net Earnings		988,744			612,244			1,686,281			1,477,127
Comprehensive Income		$	1,235,014		$	1,068,568		$	1,981,675		$	2,050,480
Supplemental Comprehensive Income Information, net of tax:
Cumulative foreign currency translation (gain) adjustments								$	(2,058,513	)	$	(1,496,560	)
Net actuarial losses and prior service cost and credits, net								1,217,273			—
Minimum pension liability adjustments								—			8,931
Cumulative unrealized (gains) losses on marketable equity securities								(13,838		)	150,525
Cumulative (gains) losses on derivative financial instruments designated as cash flow hedges								(11,918		)	18,253

 

Note 10 — Segment Information

(dollars in millions)

Revenue Segments — Abbott’s principal business is the discovery, development, manufacture and sale of a broad line of health care products.  Abbott’s products are generally sold directly to retailers, wholesalers, hospitals, health care facilities, laboratories, physicians’ offices and government agencies throughout the world.  Abbott’s reportable segments are as follows:

9

---

Notes to Condensed Consolidated Financial Statements
June 30, 2007
(Unaudited), continued

Pharmaceutical Products — Worldwide sales of a broad line of pharmaceuticals.  For segment reporting purposes, two pharmaceutical divisions are aggregated and reported as the Pharmaceutical Products segment.

Nutritional Products — Worldwide sales of a broad line of adult and pediatric nutritional products.

Diagnostic Products — Worldwide sales of diagnostic systems and tests for blood banks, hospitals, commercial laboratories and alternate-care testing sites.  For segment reporting purposes, three diagnostic divisions are aggregated and reported as the Diagnostic Products segment.

Vascular Products — Worldwide sales of coronary, endovascular and vessel closure products.

Abbott’s underlying accounting records are maintained on a legal entity basis for government and public reporting requirements.  Segment disclosures are on a performance basis consistent with internal management reporting.  Intersegment transfers of inventory are recorded at standard cost and are not a measure of segment operating earnings.  The cost of some corporate functions and the cost of certain employee benefits are charged to segments at predetermined rates that approximate cost.  Remaining costs, if any, are not allocated to segments.  Effective in the second quarter of 2007, the Diagnostic segment was reorganized.  Prior period segment information has been adjusted to reflect this change.  For acquisitions prior to 2006, substantially all intangible assets and related amortization are not allocated to segments.  The following segment information has been prepared in accordance with the internal accounting policies of Abbott, as described above, and are not presented in accordance with generally accepted accounting principles applied to the consolidated financial statements.

 

		Net Sales to External Customers												Operating Earnings (Loss)
		Three Months Ended						Six Months Ended						Three Months Ended						Six Months Ended
		June 30						June 30						June 30						June 30
		2007			2006			2007			2006			2007			2006			2007			2006
Pharmaceuticals		$	3,532		$	3,013		$	6,904		$	5,907		$	1,330		$	1,066		$	2,493		$	2,081
Nutritionals (a)		1,097			1,049			2,099			2,191			229			265			410			652
Diagnostics		799			717			1,509			1,362			68			67			94			91
Vascular (b)		423			259			844			342			(29		)	(52		)	(52		)	(90		)
Total Reportable Segments		5,851			5,038			11,356			9,802			1,598			1,346			2,945			2,734
Other (c)		520			463			960			883
Net Sales		$	6,371		$	5,501		$	12,316		$	10,685
Corporate functions and benefit plans costs														(137		)	(92		)	(226		)	(170		)
Non-reportable segments														114			74			178			132
Net interest expense														(125		)	(82		)	(249		)	(116		)
Acquired in-process and collaborations research and development														—			(493		)	—			(493		)
Income from TAP Pharmaceutical Products Inc. joint venture														116			135			262			236
Share-based compensation (d)														(87		)	(65		)	(250		)	(211		)
Other, net (e)														(226		)	(166		)	(567		)	(320		)
Consolidated Earnings Before Taxes														$	1,253		$	657		$	2,093		$	1,792

(a)          The decrease in Nutritional Products segment sales and operating earnings for the six months ended June 30, 2007 was due to the completion of the U.S. co-promotion of Synagis in 2006.

(b)         The increase in Vascular Product segment sales for the six months ended June 30, 2007, is primarily due to the acquisition of Guidant’s vascular intervention and endovascular solutions businesses on April 21, 2006.

(c)          Sales from the diabetes, bulk pharmaceuticals, spine and animal health businesses are included in Other sales.

(d)         Approximately 40 to 45 percent of the annual cost of share-based awards will typically be recognized in the first quarter due to the timing of the granting of share-based awards.

(e)          Other, net for the three months and six months ended June 30, 2007, includes acquisition integration expenses related to the acquisitions of Guidant’s vascular intervention and endovascular solutions businesses and Kos Pharmaceuticals Inc. and the reversal of depreciation on property and equipment classified as held for sale that was recorded by the Diagnostics segment.

10

---

Notes to Condensed Consolidated Financial Statements
June 30, 2007
(Unaudited), continued

Note 11 — Incentive Stock Programs

In the first six months of 2007, Abbott granted 17,481,056 stock options, 12,594,154 replacement stock options, 1,503,100 (net of forfeitures of 37,400 shares) restricted stock awards and 549,230 restricted stock units under the programs.  At June 30, 2007, approximately 30 million shares were reserved for future grants.  Information regarding the number of options outstanding and exercisable at June 30, 2007 is as follows:

 

The total unrecognized compensation cost related to all share-based compensation plans at June 30, 2007, amounted to approximately $364 million which is expected to be recognized over the next three years.

Note 12 — Equity Method Investment

(dollars in millions)

Abbott’s 50 percent-owned joint venture, TAP Pharmaceutical Products Inc. (TAP), is accounted for under the equity method of accounting.  Summarized financial information for TAP is as follows:

 

 

 

Note 13 — Goodwill and Intangible Assets

(dollars in millions)

Foreign currency translation adjustments and other adjustments increased goodwill in the first six months of 2007 and 2006 by approximately $129 and $394, respectively.  Abbott recorded total goodwill of approximately $2,011 related to the acquisition of Guidant’s vascular intervention and endovascular solutions businesses in the second quarter of 2006.  There were no reductions of goodwill relating to impairments or disposal of all or a portion of a business.  The amount of goodwill related to reportable segments at June 30, 2007 was $5,334 for the Pharmaceutical Products segment, $353 for the Nutritional Products segment, $322 for the Diagnostics Products segment and $1,958 for the Vascular Products segment.

The gross amount of amortizable intangible assets, primarily product rights and technology was $9,022 as of June 30, 2007 and $8,988 as of December 31, 2006, and accumulated amortization was $2,991 as of June 30, 2007 and $2,602 as of December 31, 2006.  The estimated annual amortization expense for intangible assets is $764 in 2007, $688 in 2008, $691 in 2009, $692 in 2010 and $672 in 2011.  Intangible assets are amortized primarily on a straight-line basis over 1 to 25 years (average 11 years).

11

---

Notes to Condensed Consolidated Financial Statements
June 30, 2007
(Unaudited), continued

Note 14 — Restructuring Plans

(dollars in millions)

In 2007, 2006 and 2005, Abbott management approved plans to realign its worldwide pharmaceutical manufacturing operations and selected domestic and international commercial and research and development operations in order to reduce costs.  Additional charges of $67 and $22 were subsequently recorded in the first six months of 2007 and 2006, respectively, relating to these restructurings, primarily for accelerated depreciation.  In addition, Abbott implemented facilities restructuring plans in the second quarter of 2007 related to the acquired operations of Kos Pharmaceuticals Inc., which resulted in an increase to goodwill of approximately $52.  The following summarizes the activity for restructurings:

 

 

Note 15 — Fair Value Measures

(dollars in thousands)

The following table summarizes the bases used to measure certain assets and liabilities at fair value on a recurring basis in the balance sheet:

					Basis of Fair Value Measurements
		Balance at June 30 2007			Quoted Prices in Active Markets for Identical Items			Significant Other Observable Inputs			Significant Unobservable Inputs
Assets:
Trading securities		$	626,525		$	—		$	626,525		$	—
Marketable available for sale securities		110,921			110,921			—			—
Commodity contracts		3,650			3,650			—			—
Foreign currency forward exchange contracts		15,448			—			15,448			—
		$	756,544		$	114,571		$	641,973		$	—
Liabilities:
Gain sharing derivative financial instrument liability		$	900		$	—		$	—		$	900
Interest rate swap derivative financial instruments		93,623			—			93,623			—
Fair value of hedged long-term debt		1,406,377			—			1,406,377			—
Foreign currency forward exchange contracts		34,851			—			34,851			—
		$	1,535,751		$	—		$	1,534,851		$	900

 

12

---

Notes to Condensed Consolidated Financial Statements
June 30, 2007
(Unaudited), continued

The following table summarizes the activity for the gain sharing derivative financial instrument liability.  The adjustment to record this liability at fair value has been recorded in Other (income) expense, net for the six months ended June 30, 2007.

 

For assets and liabilities that are measured using quoted prices in active markets, the total fair value is the published market price per unit multiplied by the number of units held without consideration of transaction costs.  Assets and liabilities that are measured using significant other observable inputs are valued by reference to similar assets or liabilities, adjusted for contract restrictions and other terms specific to that asset or liability.  For these items, a significant portion of fair value is derived by reference to quoted prices of similar assets or liabilities in active markets.  For all remaining assets and liabilities, fair value is derived using a fair value model, such as a discounted cash flow model or Black-Scholes model.

13

FINANCIAL REVIEW

Results of Operations

The following table details sales by reportable segment for the three months and six months ended June 30, 2007.  Percent changes are versus the prior year and are based on unrounded numbers.

(dollars in millions)

		Three Months Ended June 30												Six Months Ended June 30
		2007			Percent Change		2006			Absolute Percent Change		Percent Change Excluding BI Products (a)		2007			Percent Change		2006			Absolute Percent Change		Percent Change Excluding BI Products (a)
Pharmaceutical Products		$	3,532		17.2		$	3,013		(9.9	)	9.3		$	6,904		16.9		$	5,907		(11.1	)	5.4
Nutritional Products		1,097			4.6		1,049			10.5		10.5		2,099			(4.2	)	2,191			12.7		12.7
Diagnostic Products		799			11.4		717			3.5		3.5		1,509			10.8		1,362			2.2		2.2
Vascular Products		423			63.3		259			323.0		323.0		844			146.6		342			195.7		195.7
Total Reportable Segments		5,851			16.1		5,038			(0.1	)	13.0		11,356			15.9		9,802			(2.4	)	9.0
Other		520			12.2		463			(3.2	)	(3.2	)	960			8.8		883			1.7		1.7
Net Sales		$	6,371		15.8		$	5,501		(0.4	)	11.4		$	12,316		15.3		$	10,685		(2.0	)	8.3
Total U.S		$	3,225		17.7		$	2,739		(9.2	)	12.6		$	6,158		13.8		$	5,414		(9.5	)	9.6
Total International		$	3,146		13.9		$	2,762		10.1		10.1		$	6,158		16.8		$	5,271		7.0		7.0

(a)                 The Pharmaceutical Products segment had an agreement with Boehringer Ingelheim (BI) to co-promote and distribute three of its products in the U.S.  In 2005, Abbott and BI amended the agreement and effective January 1, 2006, Abbott no longer distributed or recorded sales for distribution activities for the BI products, although Abbott recorded a small amount of co-promotion revenue in the first quarter of 2006.

Worldwide sales for the second quarter and six months 2007 compared to 2006 reflects the acquisitions of Guidant’s vascular intervention and endovascular solutions businesses on April 21, 2006 and Kos Pharmaceuticals Inc. in the fourth quarter of 2006. The sales growth in 2007 also reflects unit growth and the positive effect of the relatively weaker U.S. dollar.  The relatively weaker U.S. dollar increased second quarter 2007 consolidated net sales by 2.7 percent, Total International sales by 5.3 percent, Pharmaceutical Products segment sales by 2.7 percent and Diagnostic Products segment sales by 3.8 percent over the second quarter of 2006.  The relatively weaker U.S. dollar also increased the first six months 2007 consolidated net sales by 2.7 percent, Total International sales by 5.4 percent, Pharmaceutical Products segment sales by 2.7 percent and Diagnostic Products segment sales by 3.9 percent over the first six months of 2006.  The sales growth for the second quarter and six months 2006 compared to 2005, excluding sales of BI products, reflects the acquisition of Guidant’s vascular intervention and endovascular solutions businesses on April 21, 2006. The sales growth in 2006 also reflects unit growth, partially offset by the negative effect of the relatively stronger U.S. dollar.  The relatively stronger U.S. dollar decreased second quarter 2006 consolidated net sales by 0.9 percent, Total International sales by 2.0 percent, Pharmaceutical Products segment sales by 0.9 percent and  Diagnostic Products segment sales by 1.9 percent over the second quarter of 2005. The relatively stronger U.S. dollar also decreased the first six months 2006 consolidated net sales by 1.8 percent, Total International sales by 3.9 percent, Pharmaceutical Products segment sales by 1.9 percent and Diagnostic Products segment sales by 3.2 percent over the first six months of 2005.  Sales growth in 2007 for the Nutritional Products segment was unfavorably impacted by the completion of the U.S. co-promotion of Synagis in 2006.

14

---

FINANCIAL REVIEW
(continued)

A comparison of significant product group sales for the six months ended June 30 is as follows.  Percent changes are versus the prior year and are based on unrounded numbers.

(dollars in millions)

 

Increased sales of HUMIRA and Depakote accounted for the majority of the sales increase for U.S. Specialty products in both 2007 and 2006.  U.S. sales of HUMIRA were $696 million, $501 million and $353 million for the six months ended June 30, 2007, 2006 and 2005, respectively.  U.S. Primary Care sales in 2007 were favorably impacted by sales of Niaspan, a new product from the acquisition of Kos Pharmaceuticals Inc. in the fourth quarter of 2006.  U.S. Primary Care sales were also favorably impacted by increased sales of TriCor in both periods and were unfavorably impacted by decreased sales of Omnicef in 2007 and Biaxin in 2007 and 2006 due to the introduction of generic competition.  Sales of Omnicef were $203 million and $244 million for the six months ended June 30, 2007 and 2006, respectively, and sales of Biaxin were $12 million, $80 million and $173 million for the six months ended June 30, 2007, 2006 and 2005, respectively.   Increased sales of HUMIRA favorably impacted International Pharmaceutical sales in 2007 and 2006.  International sales of HUMIRA were $611 million, $382 million and $250 million for the six months ended June 30, 2007, 2006 and 2005, respectively.  The relatively weaker U.S. dollar increased International Pharmaceutical sales by 5.6 percent in 2007 and the relatively stronger U.S. dollar decreased International Pharmaceutical sales by 4.5 percent in 2006.  The decrease in sales of U.S. Pediatric Nutritional sales in 2006 was due to overall infant nutritionals non-WIC category decline and competitive share loss.  International Pediatric Nutritionals sales increases in 2007 and 2006 were due primarily to volume growth in developing countries.  The relatively weaker U.S. dollar increased Immunochemistry sales by 4.2 percent in 2007 and the relatively stronger U.S. dollar decreased Immunochemistry sales by 3.5 percent in 2006.

The gross profit margin was 56.0 percent for the second quarter 2007, compared to 56.6 percent for the second quarter 2006.  First six months 2007 gross profit margin was 56.2 percent, compared to 57.3 percent for the first six months 2006.  The decreases in the gross profit margins in 2007 were due, in part, to the effect of the unfavorable impact in 2007 from the completion of the U.S. co-promotion of Synagis in 2006 as well as generic competition for Omnicef and Biaxin sales in 2007.  Increased amortization of intangible assets acquired in 2006 also had an unfavorable impact on the gross profit margins in 2007.  Suspended depreciation for the operations classified as held for sale favorably impacted the gross profit margins in both periods of 2007.

Research and development expenses increased 4.9 percent in the second quarter 2007 and 15.5 percent for the first six months 2007 over comparable 2006 periods.  These increases reflect the effect of the acquisitions of Guidant’s vascular intervention and endovascular solutions businesses on April 21, 2006 and Kos Pharmaceuticals Inc. in the fourth quarter of 2006.  These increases also reflect increased spending to support pipeline programs, including follow-on indications for HUMIRA, and ABT-335, ABT-874, controlled-release Vicodin and Xience V.  The majority of research and development expenditures is concentrated on pharmaceutical products.

15

---

FINANCIAL REVIEW
(continued)

Selling, general and administrative expenses for the second quarter and first six months 2007 increased 18.2 percent and 20.1 percent, respectively, over the comparable 2006 periods.   These increases reflect the effect of the acquisitions of Guidant’s vascular intervention and endovascular solutions businesses on April 21, 2006 and Kos Pharmaceuticals Inc. in the fourth quarter of 2006.  The increases also reflect increased selling and marketing support for new and existing products, including continued spending for HUMIRA and the continuing international launch of Xience V, as well as spending on other marketed pharmaceutical products.  In the third quarter of 2007, Abbott terminated a contract that will result in a third quarter non-recurring charge of approximately $94 million, net of income taxes.

Assets and Liabilities Classified as Held for Sale

On July 11, 2007, Abbott announced that Abbott and GE mutually agreed to terminate the previously announced contract to sell Abbott’s core laboratory diagnostics business, including Abbott Point of Care, to GE.  The assets of the operations held for sale and the liabilities to be assumed in the intended sale have been classified as held for sale in the Condensed Consolidated Balance Sheet as of June 30, 2007.  These assets and liabilities will no longer be classified as held for sale beginning in the third quarter of 2007.  Prior years’ balance sheets have not been adjusted.

Effective on the date that Abbott agreed to sell its core laboratory diagnostics businesses to GE, depreciation of property and equipment and amortization of intangible assets was discontinued.  Accordingly, the consolidated results of operations for the six months ended June 30, 2006, include six months of depreciation and amortization and the consolidated results of operations for the six months ended June 30, 2007, include depreciation and amortization through January 17, 2007.   The amount of depreciation and amortization that was discontinued amounted to approximately $99 million for the six months ended June 30, 2007.  This depreciation and amortization will be recorded in the third quarter of 2007, as these operations will no longer be classified as held for sale.

The assets and liabilities classified as held for sale as of June 30, 2007, consist of the following:

(dollars in thousands)

 

Restructurings

(dollars in millions)

In 2007, 2006 and 2005, Abbott management approved plans to realign its worldwide pharmaceutical manufacturing operations and selected domestic and international commercial and research and development operations in order to reduce costs.  Additional charges of $67 and $22 were subsequently recorded in the first six months of 2007 and 2006, respectively, relating to these restructurings, primarily for accelerated depreciation.  In addition, Abbott implemented facilities restructuring plans in the second quarter of 2007 related to the acquired operations of Kos Pharmaceuticals Inc., which resulted in an increase to goodwill of approximately $52.  The following summarizes the activity for restructurings:

 

16

---

FINANCIAL REVIEW
(continued)

Business Combinations and Related Transactions

On April 21, 2006, Abbott acquired Guidant’s vascular intervention and endovascular solutions businesses for approximately $4.1 billion, in cash, in connection with Boston Scientific’s acquisition of Guidant.  In addition, Abbott will also pay to Boston Scientific $250 million each upon government approvals to market the Xience V drug-eluting stent in the U.S. and in Japan.  Each $250 million payment will result in additional consideration for the acquisition of Guidant’s vascular intervention and endovascular solutions businesses.  The allocation of the purchase price as of June 30, 2006 resulted in a charge of $452 million in the second quarter of 2006 for acquired in-process research and development, intangible assets of $1.2 billion, goodwill (primarily deductible) of $1.8 billion and tangible net assets of $620 million.

A substantial amount of the acquired in-process research and development charge relating to the Guidant acquisition related to drug eluting and bioabsorbable stents.  The research efforts ranged from 35 percent to 85 percent complete at the date of acquisition.  The valuation method used to fair value the projects was the Multi-period Excess Earnings Method (Income Approach) and the risk-adjusted discount rates used ranged from 16 percent to 25 percent.  In developing assumptions for the valuation model, comparable Abbott products or products marketed by competitors were used to estimate pricing, margins and expense levels.  As of June 30, 2007, the research efforts were primarily on schedule.  The estimated projected costs to complete totaled approximately $520 million as of June 30, 2007, with anticipated product launch dates from 2008 through 2013.  There have been no significant changes in the development plans for the acquired incomplete projects.  Significant net cash inflows will commence within one to two years after product launch.

In order to facilitate Boston Scientific’s acquisition of Guidant, Abbott also acquired 64.6 million shares of Boston Scientific common stock directly from Boston Scientific and loaned $900 million to a wholly-owned subsidiary of Boston Scientific.  The common stock was valued at $1.3 billion and the note receivable was valued at $829 million at the acquisition date.  In connection with the acquisition of the shares, Boston Scientific is entitled to certain after-tax gains upon Abbott’s sale of the shares.  In addition, Boston Scientific agreed to reimburse Abbott for certain borrowing costs on debt incurred to acquire the Boston Scientific shares.   Abbott recorded a net derivative financial instruments liability of $59 million for the gain-sharing derivative financial instrument liability and the interest derivative financial instrument asset.  The effect of recording the shares, the loan to Boston Scientific and the derivative financial instruments at fair value on the date of acquisition resulted in the recording of additional goodwill of approximately $204 million.

In December 2006, Abbott acquired Kos Pharmaceuticals Inc. for cash of approximately $3.8 billion, net of cash held by Kos Pharmaceuticals Inc.  The valuation of certain tangible assets and liabilities related to the acquisition of Kos Pharmaceuticals Inc. are preliminary.

A charge of approximately $1.3 billion for acquired in-process research and development was recorded relating to the Kos Pharmaceuticals Inc. acquisition, which related primarily to cholesterol treatment drugs.  The research efforts ranged from 70 percent to 80 percent complete at the date of acquisition.  The valuation method used to fair value the projects was the Multi-period Excess Earnings Method (Income Approach) and the risk-adjusted discount rate used was 16 percent.  In developing assumptions for the valuation model, comparable Abbott products or products marketed by competitors were used to estimate pricing, margins and expense levels.  As of June 30, 2007, one drug was approved for marketing in the U.S. and the remaining research efforts were primarily on schedule.  The estimated projected costs to complete the projects totaled approximately $71 million as of June 30, 2007 with anticipated product launches in 2008.  There have been no significant changes in the development plans for the acquired incomplete projects.  Significant net cash inflows will commence with the launches of the products.

Interest expense

Interest expense increased in the second quarter and first six months of 2007 due primarily to higher borrowings as a result of the acquisitions of Guidant’s vascular intervention and endovascular solutions businesses and Kos Pharmaceuticals Inc. and Abbott’s investment in the Boston Scientific common stock and note receivable.

17

---

FINANCIAL REVIEW
(continued)

(Income) from TAP Pharmaceutical Products Inc. Joint Venture

Abbott’s income from the TAP Pharmaceutical Products Inc. joint venture is higher in the first six months of 2007 compared to 2006 due primarily to a favorable outcome in a patent dispute recorded by TAP Pharmaceutical Products Inc. in the first quarter of 2007.  In addition, the second quarter of 2006 was favorably impacted by the sales of certain product rights.

Other (income) expense, net

Other (income) expense, net for the second quarter of 2007 includes a $48 million fair market value gain adjustment to Abbott’s investment in Boston Scientific common stock and a realized gain of $37 million on the sales of Boston Scientific stock.  Other (income) expense, net for the first six months of 2007 includes a $101 million fair market value loss adjustment to Abbott’s investment in Boston Scientific common stock and a realized gain of $37 million on the sales of Boston Scientific stock.  Other (income) expense, net for the second quarter and first six months of 2006 includes fair value gain adjustments of $75 million to certain derivative financial instruments included with the investment in Boston Scientific common stock.

Effective January 1, 2007, Abbott adopted Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements,” and SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.”  Adoption of these Standards did not have a material impact on Abbott’s financial position.  However, adoption of SFAS No.159 and SFAS No. 157 resulted in a decrease to Earnings employed in the business of approximately $189 million, substantially offset by an increase to Accumulated other comprehensive income of approximately $182 million as of January 1, 2007.

Taxes on Earnings

Taxes on earnings reflect the estimated annual effective rates and the effect of discrete tax events that occurred in the second quarter of 2006.  For the six months ended June 30, 2006, 6.2 percentage points of tax benefit was attributed to discrete items, primarily the tax benefit on acquired in-process and collaborations research and development.  The effective tax rates are less than the statutory U.S. federal income tax rate principally due to the domestic dividend exclusion and the benefit of lower statutory tax rates and tax exemptions in several taxing jurisdictions.

Liquidity and Capital Resources at June 30, 2007 Compared with December 31, 2006

Net cash from operating activities for the first six months 2007 totaled approximately $2.6 billion.  Abbott expects annual cash flow from operating activities to continue to exceed Abbott’s capital expenditures and cash dividends.

At June 30, 2007 current assets exceeded current liabilities by approximately $329 million.  At December 31, 2006 current liabilities exceeded current assets by approximately $669 million as a result of increased short-term borrowings used to acquire Kos Pharmaceuticals Inc. in December 2006.

At June 30, 2007, Abbott’s long-term debt rating was AA by Standard & Poor’s Corporation and A1 by Moody’s Investors Service.  Abbott has readily available financial resources, including unused lines of credit of $7.0 billion, including a $4.0 billion short-term facility, that support commercial paper borrowing arrangements.

In October 2006, the board of directors authorized the purchase of $2.5 billion of Abbott’s common shares from time to time and no shares were purchased under this authorization in 2006.  During the first six months of 2007, Abbott purchased approximately 15.4 million of its common shares at a cost of approximately $827 million.  In the first six months of 2006, Abbott purchased approximately 17.3 million of its common shares under a prior authorization at a cost of approximately $755 million.

Under a registration statement filed with the Securities and Exchange Commission in February 2006, Abbott may offer and sell from time to time debt securities in one or more offerings through February 2009.

18

---

FINANCIAL REVIEW
(continued)

Legislative Issues

Abbott’s primary markets are highly competitive and subject to substantial government regulation throughout the world.  Abbott expects debate to continue over the availability, method of delivery, and payment for health care products and services.  Abbott believes that if legislation is enacted, it could have the effect of reducing access to health care products and services, or reducing prices or the rate of price increases for health care products and services.  It is not possible to predict the extent to which Abbott or the health care industry in general might be adversely affected by these factors in the future.  A more complete discussion of these factors is contained in Item 1, Business, and Item 1A, Risk Factors on Form 10-K for the year ended December 31, 2006.

Private Securities Litigation Reform Act of 1995 — A Caution Concerning Forward-Looking Statements

Under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, Abbott cautions investors that any forward-looking statements or projections made by Abbott, including those made in this document, are subject to risks and uncertainties that may cause actual results to differ materially from those projected. Economic, competitive, governmental, technological and other factors that may affect Abbott’s operations are discussed in Item 1A, Risk Factors to the Annual Report on Form 10-K for the year ended December 31, 2006.

19