Abbott Laboratories - 10-Q quarterly report FY

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)

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

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Abbott Laboratories and Subsidiaries

Condensed Consolidated Statement of Cash Flows

(Unaudited)

(dollars in thousands)

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

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Abbott Laboratories and Subsidiaries

Condensed Consolidated Balance Sheet

(Unaudited)

(dollars in thousands)

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

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Abbott Laboratories and Subsidiaries

Notes to Condensed Consolidated Financial Statements

June 30, 2008

(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, 2007.

Abbott’s core laboratory diagnostics business, including Point of Care, was accounted for as discontinued operations for the six months ended June 30, 2007.  Subsequently, a decision was made to retain the businesses.  The results for the six months ended June 30, 2007 included depreciation and amortization through January 17, 2007.  The amount of depreciation and amortization not recorded in the first six months of 2007 was $99 million, which was recorded in the third quarter of 2007.

Note 2 – Supplemental Financial Information

In connection with the dissolution of the TAP Pharmaceutical Products Inc. joint venture, Abbott recorded a gain of approximately $95 million in the second quarter 2008, which is included in Other (income) expense, net.  Other (income) expense, net for the second quarter and six months ended June 30, 2008 also includes a gain of approximately $52 million on the sale of an equity investment accounted for as an available-for-sale investment.  The remainder of Other (income) expense, net in 2008 relates primarily to contractual payments based on specified development, approval and commercial events being achieved with respect to products retained by TAP and payments from TAP based on sales of products retained by TAP.

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 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. 

Supplemental Cash Flow Information – In connection with the dissolution of the TAP Pharmaceutical Products Inc. joint venture, Abbott recorded intangible assets of approximately $700 million, goodwill of approximately $350 million, net deferred tax assets of approximately $160 million and a contingent liability of approximately $1.1 billion and derecognized its investment in the TAP Pharmaceutical Products Inc. joint venture of approximately $280 million in the second quarter of 2008.  Other, net in Net cash from operating activities for 2008 and 2007 includes the effects of contributions to the main domestic defined benefit plan of $200 million in each period and to the post-employment medical and dental plans of $65 million and $75 million, respectively. (Purchases of) proceeds from sales of other investment securities, net in 2008 reflects the acquisition of short-term investments with original maturities of over three months.

Investments at June 30, 2008 and December 31, 2007 consist of the following:

(dollars in millions)

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Notes to Condensed Consolidated Financial Statements

June 30, 2008

(Unaudited), continued

Note 3 – Conclusion of TAP Pharmaceutical Products Inc. Joint Venture

On April 30, 2008, Abbott and Takeda concluded their TAP Pharmaceutical Products Inc. (TAP) joint venture, evenly splitting the value and assets of the joint venture.  Abbott exchanged its 50 percent equity interest in TAP for the assets, liabilities and employees related to TAP’s Lupron business.  The Internal Revenue Service has issued a private letter ruling that the transaction qualifies as tax-free for U.S. income tax purposes.

Beginning on May 1, 2008, Abbott began recording U.S. Lupronnet sales and costs in its operating results and no longer records income from the TAP joint venture.  TAP’s sales of Lupron were $182 million for the four months ended April 30, 2008 and $645 million for the full year 2007.  Abbott will also receive payments based on specified development, approval and commercial events being achieved with respect to products retained by TAP and payments from TAP based on sales of products retained by TAP, which are recorded by Abbott as Other (income) expense, net as earned.  Such payments, which will be subject to tax, are expected to approximate $1.5 billion over a five-year period. 

The exchange transaction was accounted for as a sale of Abbott’s equity interest in TAP and as an acquisition of TAP’s Lupronbusiness under SFAS No. 141 “Business Combinations.”  The sale of Abbott’s equity interest in TAP resulted in the recording of net assets of approximately $225 million related to the Lupron business, primarily cash, receivables, inventory and other assets, net of accounts payable and other accrued liabilities, offset by a credit to Abbott’s investment in TAP in the amount of approximately $280 million.

For the acquired Lupron business, Abbott recorded intangible assets, primarily Lupronproduct rights, of approximately $700 million, goodwill of approximately $350 million and deferred tax liabilities related to the intangible assets of approximately $250 million.  The intangible assets are being amortized over 15 years.  Abbott has also agreed to remit cash to TAP if certain research and development events are not achieved on the development assets retained by TAP.  These amounts were recorded as a liability at closing in the amount of approximately $1.1 billion.  Related deferred tax assets of approximately $410 million were also recorded, resulting in an after-tax liability of approximately $700 million.  If these payments are not required, the liability would be reduced and a gain would be recorded.

The exchange of Abbott’s investment in TAP for TAP’s Lupronbusiness resulted in a gain at closing of approximately $95 million, which is in addition to the amounts discussed in the second paragraph above. The valuation of the assets and liabilities is preliminary and is expected to be finalized in the third quarter.

The 50 percent-owned joint venture was accounted for under the equity method of accounting.  Summarized financial information for TAP follows below (in millions).  The results for 2008 include results through April 30.

Note 4 – Acquired In-process Research and Development

In the first half of 2008, technology investments and acquired product rights resulted in charges to acquired in-process research and development of approximately $97 million.

Note 5 – Taxes on Earnings

Taxes on earnings reflect the estimated annual effective rates and include charges for interest and penalties.  The effective tax rates are less than the statutory U.S. federal income tax rate principally due to the domestic dividend exclusion in 2007 and the benefit of lower statutory tax rates and tax exemptions in several taxing jurisdictions.  In the second quarter of 2008, Abbott’s federal income tax returns for 2004 and 2005 were settled, resulting in a net reduction of income taxes of approximately $30 million.

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Notes to Condensed Consolidated Financial Statements

June 30, 2008

(Unaudited), continued

Note 6 – 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 a number of patent disputes with third parties who claim Abbott’s products infringe their patents.  In one of those disputes, filed in April 2007, Abbott is unable to estimate a range of possible loss, if any, and no reserve has been recorded.  Abbott’s acquisition of Kos Pharmaceuticals Inc. resulted in the assumption of various cases and investigations and Abbott has recorded reserves related to several of those cases and investigations.

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.  Abbott has recorded reserves for its estimated losses in a few of the cases, however, Abbott is unable to estimate the range or amount of possible loss for the majority of the cases, and no loss reserves have been recorded for them.  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.

There are several civil actions pending brought by state attorneys general and private entities alleging antitrust and unfair competition claims in connection with the sales of TriCor. Abbott licenses TriCor from a third party and the licensor has also been named as a defendant.  There are several civil actions pending brought by private payers and others alleging antitrust claims in connection with the pricing of Norvir.  Abbott is unable to estimate a range of loss, if any, and no loss reserves have been recorded.

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 above, Abbott estimates the range of possible loss to be from approximately $155 million to $345 million.  The recorded reserve balance at June 30, 2008 for these proceedings and exposures was approximately $195 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 and the patent case discussed in the second paragraph of this footnote, the resolution of which could be material to cash flows or results of operations for a quarter.

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Notes to Condensed Consolidated Financial Statements

June 30, 2008

(Unaudited), continued

Note 7 – 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:

Abbott funds its domestic defined benefit plans according to IRS funding limitations.  In the first quarters of 2008 and 2007, $200 was contributed to the main domestic defined benefit plan and $65 and $75, respectively, was contributed to the post-employment medical and dental benefit plans.

Note 8 – Comprehensive Income, net of tax

(dollars in millions)

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Notes to Condensed Consolidated Financial Statements

June 30, 2008

(Unaudited), continued

Note 10 – Incentive Stock Programs

In the first six months of 2008, Abbott granted 20,069,002 stock options, 1,797,028 replacement stock options, 809,650 restricted stock awards and 541,874 restricted stock units under this program.  At June 30, 2008, approximately 28 million shares were reserved for future grants.  Information regarding the number of options outstanding and exercisable at June 30, 2008 is as follows:

The total unrecognized share-based compensation cost at June 30, 2008 amounted to approximately $329 million which is expected to be recognized over the next three years.

Note 11 – Goodwill and Intangible Assets

(dollars in millions)

In connection with the dissolution of the TAP Pharmaceutical Products Inc. joint venture, Abbott recorded approximately $350 of goodwill.  Foreign currency translation adjustments and other adjustments increased goodwill in the first six months of 2008 and 2007 by approximately $312 and $129, respectively.  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, 2008 was $6,806 for the Pharmaceutical Products segment, $206 for the Nutritional Products segment, $262 for the Diagnostic Products segment and $2,166 for the Vascular Products segment.

The gross amount of amortizable intangible assets, primarily product rights and technology was $9,713 as of June 30, 2008 and $9,043 as of December 31, 2007, and accumulated amortization was $3,703 as of June 30, 2008 and $3,323 as of December 31, 2007.  The estimated annual amortization expense for intangible assets is approximately $775 in 2008, $785 in 2009 and approximately $770 in 2010, 2011 and 2012.  Intangible assets are amortized over 4 to 25 years (average 11 years).

Note 12 – 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 $44 and $67 were subsequently recorded in the first six months of 2008 and 2007, 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:

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Notes to Condensed Consolidated Financial Statements

June 30, 2008

(Unaudited), continued

Note 13 – Fair Value Measures

(dollars in millions)

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

In connection with the conclusion of the TAP Pharmaceutical Products Inc. joint venture, Abbott recorded derivative financial assets and liabilities related to stock options previously granted to TAP’s employees.  The amounts of these assets and liabilities were calculated using both the Black-Scholes option–pricing model and the intrinsic value of the options.  From April 30, 2008 to June 30, 2008 both the assets and liabilities decreased by approximately $11 million.  The effect of the changes in these assets and liabilities offset each other.  In addition, Abbott received investments that are valued using significant unobservable inputs. The recorded value of these investments did not change significantly during the quarter.

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FINANCIAL REVIEW

Results of Operations

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

(dollars in millions)

Worldwide sales for the second quarter and six months 2008 compared to 2007 reflects unit growth and the positive effect of the relatively weaker U.S. dollar.  The relatively weaker U.S. dollar increased second quarter 2008 consolidated net sales by 5.9 percent, Total International sales by 12.0 percent, Pharmaceutical Products segment sales by 6.0 percent, Diagnostic Products segment sales by 9.2 percent and Vascular Products segment sales by 6.4 percent over the second quarter of 2007.  The relatively weaker U.S. dollar also increased the first six months 2008 consolidated net sales by 5.7 percent, Total International sales by 11.5 percent, Pharmaceutical Products segment sales by 6.0 percent, Diagnostic Products segment sales by 8.7 percent and Vascular Products segment sales by 5.6 percent over the first six months of 2007.  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, Diagnostic Products segment sales by 3.8 percent and Vascular Products segment sales by 2.2 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, Diagnostic Products segment sales by 3.9 percent and Vascular Products segment sales by 2.3 percent over the first six months of 2006.  Sales growth in 2007 for the Nutritional Products segment was unfavorably impacted by the completion of the co-promotion of Synagis in 2006.

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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 and the addition of Lupron sales in 2008 accounted for the majority of the sales increases for U.S. Specialty products in both 2008 and 2007.  U.S. sales of HUMIRA were $927 million, $696 million and $501 million for the six months ended June 30, 2008, 2007 and 2006, respectively.  U.S. Primary Care sales in 2008 were impacted by a significant decrease in sales of Omnicefdue to generic competition, partially offset by increased sales of Niaspan and TriCor.  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, and TriCor and were unfavorably impacted by decreased sales of Biaxin.   Increased sales of HUMIRA favorably impacted International Pharmaceutical sales in both 2008 and 2007.  International sales of HUMIRAwere $1.039 billion, $611 million and $382 million for the six months ended June 30, 2008, 2007 and 2006, respectively.  International Pediatric Nutritionals sales increases in 2008 and 2007 were due primarily to volume growth in developing countries.  The favorable effect of the relatively weaker U.S. dollar favorably impacted international product sales growth in both years.

The gross profit margin was 57.3 percent for the second quarter 2008, compared to 56.0 percent for the second quarter 2007.  First six months 2008 gross profit margin was 56.8 percent, compared to 56.2 percent for the first six months 2007.  The increases in the gross profit margins in 2008 were due primarily to favorable product and business mix.

Research and development expenses increased 12.6 percent in the second quarter 2008 and 6.2 percent for the first six months 2008 over comparable 2007 periods.  These increases reflect increased spending to support pipeline programs, including oncology, immunology, hepatitis C, neuroscience and drug eluting stents.  The majority of research and development expenditures is concentrated on pharmaceutical products.

Selling, general and administrative expenses for the second quarter and first six months 2008 increased 14.2 percent and 13.6 percent, respectively, over the comparable 2007 periods.   These increases reflect increased selling and marketing support for new and existing products, including continued spending for HUMIRAand the U.S. launch of Xience V, as well as spending on other marketed pharmaceutical products. 

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FINANCIAL REVIEW

(continued)

Conclusion of TAP Pharmaceutical Products Inc. Joint Venture

On April 30, 2008, Abbott and Takeda concluded their TAP Pharmaceutical Products Inc. (TAP) joint venture, evenly splitting the value and assets of the joint venture.  Abbott exchanged its 50 percent equity interest in TAP for the assets, liabilities and employees related to TAP’s Lupron business.  The Internal Revenue Service has issued a private letter ruling that the transaction qualifies as tax-free for U.S. income tax purposes.

Beginning on May 1, 2008, Abbott began recording U.S. Lupronnet sales and costs in its operating results and no longer records income from the TAP joint venture.  TAP’s sales of Lupron were $182 million for the four months ended April 30, 2008 and $645 million for the full year 2007.  Abbott expects to record U.S. sales of Lupron of approximately $400 million in 2008.  Abbott will also receive payments based on specified development, approval and commercial events being achieved with respect to products retained by TAP and payments from TAP based on sales of products retained by TAP, which are recorded by Abbott as Other (income) expense, net as earned.  Such payments, which will be subject to tax, are expected to approximate $1.5 billion over a five-year period.

The exchange transaction was accounted for as a sale of Abbott’s equity interest in TAP and as an acquisition of TAP’s Lupronbusiness under SFAS No. 141 “Business Combinations.”  The sale of Abbott’s equity interest in TAP resulted in the recording of net assets of approximately $225 million related to the Lupron business, primarily cash, receivables, inventory and other assets, net of accounts payable and other accrued liabilities, offset by a credit to Abbott’s investment in TAP in the amount of approximately $280 million.

For the acquired Lupron business, Abbott recorded intangible assets, primarily Lupronproduct rights, of approximately $700 million, goodwill of approximately $350 million and deferred tax liabilities related to the intangible assets of approximately $250 million.  The intangible assets are being amortized over 15 years.  Abbott has also agreed to remit cash to TAP if certain research and development events are not achieved on the development assets retained by TAP.  These amounts were recorded as a liability at closing in the amount of approximately $1.1 billion.  Related deferred tax assets of approximately $410 million were also recorded, resulting in an after-tax liability of approximately $700 million.  If these payments are not required, the liability would be reduced and a gain would be recorded.

The exchange of Abbott’s investment in TAP for TAP’s Lupronbusiness resulted in a gain at closing of approximately $95 million, which is in addition to the amounts discussed in the second paragraph above.  The valuation of the assets and liabilities is preliminary and is expected to be finalized in the third quarter.

The 50 percent-owned joint venture was accounted for under the equity method of accounting.  Summarized financial information for TAP follows below (in millions).  The results for 2008 include results through April 30.

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 $44 and $67 were subsequently recorded in the first six months of 2008 and 2007, 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:

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FINANCIAL REVIEW

(continued)

Basis of Presentation

Abbott’s core laboratory diagnostics business, including Point of Care, was accounted for as discontinued operations for the six months ended June 30, 2007.  Subsequently, a decision was made to retain the businesses.  The results for the six months ended June 30, 2007 included depreciation and amortization through January 17, 2007.  The amount of depreciation and amortization not recorded in the first six months of 2007 was $99 million, which was recorded in the third quarter of 2007.

Acquired In-process Research and Development

In the first half of 2008, technology investments and acquired product rights resulted in charges to acquired in-process research and development of approximately $97 million.

Interest (Income)

Interest income increased in the second quarter and first six months of 2008 over 2007 primarily as the result of higher investment balances.

Other (income) expense, net

In connection with the dissolution of the TAP Pharmaceutical Products Inc. joint venture, Abbott recorded a gain of approximately $95 million in the second quarter 2008, which is included in Other (income) expense, net.  Other (income) expense, net for the second quarter and six months ended June 30, 2008 also includes a gain of approximately $52 million on the sale of an equity investment accounted for as an available-for-sale investment.  The remainder of Other (income) expense, net in 2008 relates primarily to contractual payments based on specified development, approval and commercial events being achieved with respect to products retained by TAP and payments from TAP based on sales of products retained by TAP.

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 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. 

Taxes on Earnings

Taxes on earnings reflect the estimated annual effective rates.  The effective tax rates are less than the statutory U.S. federal income tax rate principally due to the domestic dividend exclusion in 2007 and the benefit of lower statutory tax rates and tax exemptions in several taxing jurisdictions. In the second quarter of 2008, Abbott’s federal income tax returns for 2004 and 2005 were settled, resulting in a net reduction of income taxes of approximately $30 million.

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FINANCIAL REVIEW

(continued)

Liquidity and Capital Resources at June 30, 2008 Compared with December 31, 2007

Net cash from operating activities for the first six months 2008 totaled approximately $3.1 billion.  Abbott expects annual cash flow from operating activities to continue to exceed Abbott’s capital expenditures and cash dividends.  Subsequent to June 30, 2008, Abbott paid $250 million to Boston Scientific as a result of the FDA’s approval to market the Xience Vdrug-eluting stent in the U.S.  This payment will result in an increase in goodwill.

Working capital was $4.9 billion at June 30, 2008 and December 31, 2007.

For the acquired Lupron business, Abbott recorded intangible assets, primarily Lupronproduct rights, of approximately $700 million, goodwill of approximately $350 million and deferred tax liabilities related to the intangible assets of approximately $250 million.  Abbott also recorded a liability of approximately $1.1 billion relating to an agreement to remit cash to TAP if certain research and development events are not achieved on the development assets retained by TAP.  Related deferred tax assets of approximately $410 million were also recorded, resulting in an after-tax liability of approximately $700 million.  If these payments are not required, the liability would be reduced and a gain would be recorded.

At June 30, 2008, 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 $4.0 billion that support commercial paper borrowing arrangements.

In 2006, the board of directors authorized the purchase of $2.5 billion of Abbott’s common shares from time to time.  During the first six months of 2008 and 2007, Abbott purchased approximately 19.0 million and 15.4 million, respectively, of its common shares at a cost of approximately $1.1 billion and $827 million, respectively.

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.

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, 2007.

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, 2007.

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PART I.  FINANCIAL INFORMATION

Item 4.  Controls and Procedures

(a)     Evaluation of disclosure controls and procedures.  The Chief Executive Officer, Miles D. White, and Chief Financial Officer, Thomas C. Freyman, evaluated the effectiveness of Abbott Laboratories’ disclosure controls and procedures as of the end of the period covered by this report, and concluded that Abbott Laboratories’ disclosure controls and procedures were effective to ensure that information Abbott is required to disclose in the reports that it files or submits with the Securities and Exchange Commission under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms, and to ensure that information required to be disclosed by Abbott in the reports that it files or submits under the Exchange Act is accumulated and communicated to Abbott’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

(b)    Changes in internal control over financial reporting.  During the quarter ended June 30, 2008, there were no changes in Abbott’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, Abbott’s internal control over financial reporting.

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In June 2008, Abbott received a subpoena from the United States Department of Justice, through the United States Attorney for the District of Massachusetts.  The government is investigating the sales and marketing activities of Abbott’s biliary stent products.  The government is seeking to determine whether any of these activities violated civil and/or criminal laws, including the Federal False Claims Act, the Food and Drug Cosmetic Act and the Anti-Kickback Statute in connection with Medicare and/or Medicaid reimbursement paid to third parties.

While it is not feasible to predict with certainty the outcome of the pending claims, proceedings and investigations in which Abbott is involved, including those previously disclosed, management is of the opinion that their ultimate dispositions should not have a material adverse effect on Abbott’s financial position, cash flows, or results of operations, except for the case filed in April 2007 referred to in the second paragraph of Note 6 to Abbott’s financial statements above and the cases described in the third paragraph of such note.

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EXHIBIT INDEX

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