Table of Contents

 

 

** **

**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, 2008**                                                                                                                                    |
|                                                                                                                                                                                     |   |   |
| **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. 1-31946**                                                                                                                                                     |

 

**HOSPIRA, INC.**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**                                                     | ** ** | **20-0504497**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction  of incorporation or organization) | ** ** | (I.R.S. Employer  Identification No.) |

 

**275 North Field Drive**

**Lake Forest, Illinois 60045**

(Address of principal executive offices, including zip code)

 

**(224) 212-2000**

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (l) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of l934 during the preceding l2 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90days.     Yes  x  No o

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See definitions of “large accelerated filer,” “accelerated filer,” and“smaller reporting company” in Rule 12b-2 of the Exchange Act.

 
| Large accelerated filerx |   | Accelerated filer o |   | Non-accelerated filer o    |   | Smaller reporting companyo |
|--------------------------|--------|---------------------|--------|----------------------------|--------|----------------------------|
|                     |   |                |   | (Do not check if a smaller |   |                       |
|                     |   |                |   | reporting company)         |   |                       |

 

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

 

As of July 31, 2008, Registrant had outstanding 159,450,493 sharesof common stock, par value $0.01 per share.

 

 

 

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Table of Contents

 

**Hospira, Inc.**

 

**Quarterly Report on Form 10-Q**

 

**Index**

 
| **Part I – Financial Information** |
|----------------------------------------------|
|                                         |   |   |
| Item 1.                                      | Financial Statements |   |
|                                         |   |   |
| ** **                                   | Condensed Consolidated  Statements of Income (Unaudited) – Three and Six Months Ended June 30,  2008 and June 30, 2007 | 3 |
|                                         |   |   |
|                                         | Condensed Consolidated  Statements of Cash Flows (Unaudited) – Six Months Ended June 30, 2008  and June 30, 2007 | 4 |
|                                         |   |   |
| ** **                                   | Condensed Consolidated Balance  Sheets (Unaudited) – June 30, 2008 and December 31, 2007 | 5 |
|                                         |   |   |
|                                         | Condensed Consolidated  Statement of Changes in Shareholders’ Equity (Unaudited) – Six Months Ended  June 30, 2008 | 6 |
|                                         |   |   |
|                                         | Notes to Condensed Consolidated Financial Statements  (Unaudited) | 7 |
|                                         |   |   |
| Item 2.                                      | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 18 |
|                                         |   |   |
| Item 3.                                      | Quantitative  and Qualitative Disclosures about Market Risk | 27 |
|                                         |   |   |
| Item 4.                                      | Controls and  Procedures | 27 |
|                                         |   |   |
| **Part II  – Other Information**   |
|                                         |   |   |
| Item 1.                                      | Legal Proceedings | 28 |
|                                         |   |   |
| Item  1A.                                    | Risk Factors | 28 |
|                                         |   |   |
| Item 2.                                      | Unregistered  Sales of Equity Securities and Use of Proceeds | 28 |
|                                         |   |   |
| Item 4.                                      | Submission  of Matters to a Vote of Security Holders | 28 |
|                                         |   |   |
| Item  6.                                     | Exhibits | 28 |

 

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**PART I.  FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

**Hospira, Inc.**

 

**Condensed Consolidated Statements ofIncome**

 

**(Unaudited)**

 

***(dollars and shares in millions,except for per share amounts)***

* *
| ** **                                    | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                    | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net sales                                     |       | $                                                   | 901.6      |                                              | $          | 869.3 |   | $ | 1,790.3 |   | $ | 1,652.1 |   |
| Cost of products sold                         |       | 572.2                                               |       | 603.1                                             |       | 1,146.9 |   | 1,111.3 |   |
| Gross Profit                                  |       | 329.4                                               |       | 266.2                                             |       | 643.4 |   | 540.8 |   |
|                                          |       |                                                |       |                                              |       |   |   |   |   |
| Research and development                      |       | 58.5                                                |       | 52.6                                              |       | 108.4 |   | 96.1 |   |
| Acquired in-process research and  development |       | 0.5                                                 |       | —                                            |       | 0.5 |   | 84.8 |   |
| Selling, general and administrative           |       | 152.7                                               |       | 146.0                                             |       | 305.1 |   | 277.9 |   |
| Income From Operations                        |       | 117.7                                               |       | 67.6                                              |       | 229.4 |   | 82.0 |   |
|                                          |       |                                                |       |                                              |       |   |   |   |   |
| Interest expense                              |       | 28.2                                                |       | 37.3                                              |       | 59.6 |   | 67.8 |   |
| Other income, net                             |       | —                                              |       | (5.2                                              | )          | (4.1 | ) | (5.8 | ) |
| Income Before Income Taxes                    |       | 89.5                                                |       | 35.5                                              |       | 173.9 |   | 20.0 |   |
|                                          |       |                                                |       |                                              |       |   |   |   |   |
| Income tax expense                            |       | 20.4                                                |       | 4.8                                               |       | 39.4 |   | 18.7 |   |
| Net Income                                    |       | $                                                   | 69.1       |                                              | $          | 30.7 |   | $ | 134.5 |   | $ | 1.3 |   |
|                                          |       |                                                |       |                                              |       |   |   |   |   |
| Earnings Per Common Share:                    |       |                                                |       |                                              |       |   |   |   |   |
| Basic                                         |       | $                                                   | 0.43       |                                              | $          | 0.20 |   | $ | 0.85 |   | $ | 0.01 |   |
| Diluted                                       |       | $                                                   | 0.43       |                                              | $          | 0.20 |   | $ | 0.83 |   | $ | 0.01 |   |
| Weighted Average Common Shares Outstanding:   |       |                                                |       |                                              |       |   |   |   |   |
| Basic                                         |       | 159.1                                               |       | 156.7                                             |       | 158.9 |   | 156.4 |   |
| Diluted                                       |       | 161.5                                               |       | 159.5                                             |       | 161.2 |   | 159.0 |   |

 

The accompanying notes are an integral partof these condensed consolidated financial statements.

 

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**Hospira, Inc.**

 

**Condensed Consolidated Statements ofCash Flows**

 

**(Unaudited)**

 

***(dollars in millions)***

** **
| ** **                                                                         | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2008**                                          | ** ** | **2007** | ** ** |
| Cash Flow From Operating Activities:                                               |       |                                              |       |   |   |
| Net income                                                                         |       | $                                                 | 134.5      |   | $ | 1.3 |   |
| Adjustments to reconcile net income to net  cash from operating activities-        |       |                                              |       |   |   |
| Depreciation                                                                       |       | 93.9                                              |       | 90.1 |   |
| Amortization of intangibles                                                        |       | 34.4                                              |       | 22.9 |   |
| Write-off of acquired in-process research  and development                         |       | 0.5                                               |       | 84.8 |   |
| Step-up value of acquired inventories sold                                         |       | —                                            |       | 53.1 |   |
| Stock-based compensation expense                                                   |       | 24.5                                              |       | 23.5 |   |
| Net gains on sales of assets                                                       |       | (0.5                                              | )          | — |   |
| Changes in assets and liabilities-                                                 |       |                                              |       |   |   |
| Trade receivables                                                                  |       | (44.5                                             | )          | (55.4 | ) |
| Inventories                                                                        |       | (51.2                                             | )          | 4.9 |   |
| Prepaid expenses and other assets                                                  |       | 13.5                                              |       | (7.3 | ) |
| Trade accounts payable                                                             |       | 9.8                                               |       | 10.3 |   |
| Other liabilities                                                                  |       | (41.5                                             | )          | (41.7 | ) |
| Other, net                                                                         |       | 9.2                                               |       | (14.9 | ) |
| Net Cash Provided by Operating Activities                                          |       | 182.6                                             |       | 171.6 |   |
| Cash Flow From Investing Activities:                                               |       |                                              |       |   |   |
| Capital expenditures (including instruments  placed with or leased to customers)   |       | (86.7                                             | )          | (88.5 | ) |
| Acquisitions, net of cash acquired,  including payments for deferred consideration |       | (20.4                                             | )          | (1,961.3 | ) |
| Purchases of intangibles and other  investments                                    |       | (42.3                                             | )          | — |   |
| Purchases of marketable securities                                                 |       | (24.5                                             | )          | — |   |
| Settlements of foreign currency contracts                                          |       | —                                            |       | (55.7 | ) |
| Proceeds from dispositions of product  rights                                      |       | —                                            |       | 13.8 |   |
| Proceeds from disposal of facilities                                               |       | 0.8                                               |       | — |   |
| Net Cash Used in Investing Activities                                              |       | (173.1                                            | )          | (2,091.7 | ) |
| Cash Flow From Financing Activities:                                               |       |                                              |       |   |   |
| Issuance of long-term debt, net of fees  paid                                      |       | —                                            |       | 3,336.2 |   |
| Repayment of long-term debt                                                        |       | (85.1                                             | )          | (1,575.1 | ) |
| Other borrowings, net                                                              |       | 7.0                                               |       | (0.3 | ) |
| Excess tax benefit from stock-based  compensation arrangements                     |       | 1.0                                               |       | 0.6 |   |
| Proceeds from stock options exercised                                              |       | 22.5                                              |       | 27.5 |   |
| Net Cash (Used in) Provided by Financing  Activities                               |       | (54.6                                             | )          | 1,788.9 |   |
| Effect of exchange rate changes on cash and  cash equivalents                      |       | 5.4                                               |       | 12.2 |   |
| Net change in cash and cash equivalents                                            |       | (39.7                                             | )          | (119.0 | ) |
| Cash and cash equivalents at beginning of  period                                  |       | 241.1                                             |       | 322.0 |   |
| Cash and cash equivalents at end of period                                         |       | $                                                 | 201.4      |   | $ | 203.0 |   |
|                                                                               |       |                                              |       |   |   |
| Supplemental Cash Flow Information:                                                |       |                                              |       |   |   |
| Cash paid during the period-                                                       |       |                                              |       |   |   |
| Interest                                                                           |       | $                                                 | 62.4       |   | $ | 45.8 |   |
| Income taxes, net                                                                  |       | $                                                 | 27.7       |   | $ | 36.1 |   |

 

The accompanying notes are an integral partof these condensed consolidated financial statements.

 

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**Hospira, Inc.**

 

**Condensed Consolidated Balance Sheets**

 

**(Unaudited)**

 

***(dollars inmillions)***

*** ***
| ** **                                                             | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                             | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| **Assets**                                                             |       |              |       |                  |       |
| Current Assets:                                                        |       |              |       |                  |       |
| Cash and cash equivalents                                              |       | $                 | 201.4      |                  | $          | 241.1 |   |
| Trade receivables, less allowances of $12.3  in 2008 and $14.1 in 2007 |       | 620.1             |       | 559.0                 |       |
| Inventories                                                            |       | 838.6             |       | 766.6                 |       |
| Deferred income taxes                                                  |       | 128.3             |       | 176.7                 |       |
| Prepaid expenses                                                       |       | 30.8              |       | 23.8                  |       |
| Other receivables                                                      |       | 79.5              |       | 73.8                  |       |
| Total Current Assets                                                   |       | 1,898.7           |       | 1,841.0               |       |
| Property and equipment, net                                            |       | 1,282.9           |       | 1,276.9               |       |
| Intangible assets, net                                                 |       | 558.7             |       | 554.0                 |       |
| Goodwill                                                               |       | 1,242.4           |       | 1,240.9               |       |
| Deferred income taxes                                                  |       | 139.7             |       | 79.4                  |       |
| Investments                                                            |       | 46.4              |       | 23.7                  |       |
| Other assets                                                           |       | 61.3              |       | 68.8                  |       |
| Total Assets                                                           |       | $                 | 5,230.1    |                  | $          | 5,084.7 |   |
| **Liabilities and Shareholders’ Equity**                          |       |              |       |                  |       |
| Current Liabilities:                                                   |       |              |       |                  |       |
| Short-term borrowings                                                  |       | $                 | 330.0      |                  | $          | 58.5 |   |
| Trade accounts payable                                                 |       | 202.1             |       | 190.3                 |       |
| Salaries, wages and commissions                                        |       | 122.2             |       | 143.6                 |       |
| Deferred income taxes                                                  |       | 9.8               |       | 8.4                   |       |
| Other accrued liabilities                                              |       | 341.1             |       | 393.5                 |       |
| Total Current Liabilities                                              |       | 1,005.2           |       | 794.3                 |       |
| Long-term debt                                                         |       | 1,835.7           |       | 2,184.4               |       |
| Deferred income taxes                                                  |       | 30.9              |       | 50.7                  |       |
| Post-retirement obligations and other  long-term liabilities           |       | 326.4             |       | 310.1                 |       |
| Commitments and Contingencies                                          |       |              |       |                  |       |
| Total Shareholders’ Equity                                        |       | 2,031.9           |       | 1,745.2               |       |
| Total Liabilities and Shareholders’ Equity                        |       | $                 | 5,230.1    |                  | $          | 5,084.7 |   |

 

The accompanying notes are an integral partof these condensed consolidated financial statements.

 

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**Hospira, Inc.**

 

**Condensed Consolidated Statement ofChanges in Shareholders’ Equity**

 

**(Unaudited)**

 

***(dollars and shares in millions)***

 
| ** **                                                          | ** ** | **Common Stock** | ** ** | **Treasury** | ** ** | **Additional  Paid-in** | ** ** | **Retained** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------|------------|-----------------------|------------|--------------|------------|-------------------------|------------|--------------|------------|---------------------------------------|------------|------------|------------|
| ** **                                                          | ** ** | **Shares**            | ** ** | **Amount**   | ** ** | **Stock**               | ** ** | **Capital**  | ** ** | **Earnings**                          | ** ** | **Income** | ** ** | **Total** | ** ** |
| **Balances at December 31, 2007**                              |       | 158.6                 |       | $            | 1.7        |                    | $          | (299.8       | )          | $                                     | 1,160.2    |       | $          | 815.5 |   | $ | 67.6 |   | $ | 1,745.2 |   |
| Net income                                                          |       | —                |       | —       |       | —                  |       | —       |       | 134.5                                 |       | —     |       | 134.5 |   |
|                                                                |       |                  |       |         |       |                    |       |         |       |                                  |       |       |       |   |   |
| Other comprehensive income                                          |       | —                |       | —       |       | —                  |       | —       |       | —                                |       | 101.7      |       | 101.7 |   |
|                                                                |       |                  |       |         |       |                    |       |         |       |                                  |       |       |       |   |   |
| Changes in shareholders’ equity related to  incentive programs |       | 0.8                   |       | —       |       | —                  |       | 50.5         |       | —                                |       | —     |       | 50.5 |   |
| **Balances at June 30, 2008**                                  |       | 159.4                 |       | $            | 1.7        |                    | $          | (299.8       | )          | $                                     | 1,210.7    |       | $          | 950.0 |   | $ | 169.3 |   | $ | 2,031.9 |   |

 

The accompanying notes are an integral partof these condensed consolidated financial statements.

 

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**Hospira, Inc.**

 

**Notes to Condensed ConsolidatedFinancial Statements**

 

**(Unaudited)**

 

**Note 1– Basis of Presentation and Accounting Policies**

 

The accompanying unaudited condensed consolidated financialstatements have been prepared pursuant to the rules and regulations of theSecurities and Exchange Commission (“SEC”) and, therefore, do not include allinformation and footnote disclosures normally included in audited financialstatements in conformity with accounting principles generallyaccepted in the United States (GAAP). However, in the opinion of management, all adjustments,consisting only of normal recurring adjustments, unless otherwise noted herein,necessary to present fairly the results of operations, financial position andcash flows have been made. These condensed consolidated financial statementsshould be read in conjunction with the consolidated financial statements andnotes thereto included in the Hospira, Inc. (“Hospira”) Annual Report on Form 10-Kfor the year ended December 31, 2007. The results of operations for anyinterim period are not necessarily indicative of the results of operations tobe expected for the full year.

 

In 2008, Hospira hasre-aligned its segment presentation to better reflect how the business iscurrently managed. Hospira has three reportable segments: Americas; Europe,Middle East and Africa (“EMEA”) and Asia Pacific (“APAC”). Prior year segmentdisclosure has been reclassified to conform to the current year presentation.

 

OnFebruary 2, 2007, Hospira acquired all the outstanding ordinary shares ofMayne Pharma Limited (“Mayne Pharma”), an Australian public company listed onthe Australian Stock Exchange. The results of operations of Mayne Pharma areincluded in Hospira’s results for periods on and after that date, which hasaffected comparability of the financial statements for the periods presented inthis report. For a more detailed description of Hospira’sacquisition of Mayne Pharma, see Note 2 to Hospira’s consolidated financialstatements included in Hospira’s Annual Report on Form 10-K for the yearended December 31, 2007.

 

For comparative purposes,Hospira made certain reclassifications to prior period amounts. The reclassificationsdid not affect net income or shareholders’ equity.

 

*Recently Issued Accounting Standards*

 

In March 2008, the Financial Accounting Standards Board (“FASB”)issued Statement of Financial Accounting Standards (“SFAS”) No. 161, “DisclosuresAbout Derivative Instruments and Hedging Activities – an amendment of FASBStatement No. 133” (“SFAS No. 161”). SFAS No. 161 expands thedisclosure requirements for derivative instruments and hedging activities. Theprovisions will be effective for financial statements issued for fiscal yearsbeginning after November 15, 2008. Hospira is currently evaluating thepotential impact of SFAS No. 161 on its financial statements.

 

In December 2007, the FASB issued SFAS No. 160, “NoncontrollingInterests in Consolidated Financial Statements – an amendment of ARB No. 51”(“SFAS No. 160”). SFAS No. 160 states that accounting and reportingfor minority interests will be recharacterized as noncontrolling interests andclassified as a component of equity. SFAS No. 160 also establishesreporting requirements that provide sufficient disclosures that clearlyidentify and distinguish between the interests of the parent and the interestsof the noncontrolling owners. SFAS No. 160 applies to all entities thatprepare consolidated financial statements, except not-for-profit organizations,but will affect only those entities that have an outstanding noncontrollinginterest in one or more subsidiaries or that deconsolidate a subsidiary. SFAS No. 160is effective for financial statements issued for fiscal years beginning after December 15,2008. Hospira does not anticipate that the impact from the adoption of SFAS No. 160will be significant to its financial statements.

 

In December 2007, the FASB ratified EmergingIssues Task Force (“EITF”) Issue No. 07-1, “Accounting for CollaborativeArrangements” (“EITF 07-1”). EITF 07-1 provides guidance on how to determinewhether an arrangement constitutes a collaborative arrangement, how costsincurred and revenue generated on sales to third parties should be reported bythe participants in a collaborative arrangement, how payments made betweenparticipants in a collaborative arrangement should be characterized, and whatparticipants should disclose in the notes to the financial statements about acollaborative arrangement. EITF 07-1 is effective for financial statementsissued for fiscal years beginning after December 15, 2008. Hospira iscurrently evaluating the potential impact of EITF 07-1 on its financialstatements.

 

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “BusinessCombinations” (“SFAS No. 141R”). SFAS No. 141R establishes principlesand requirements for the reporting entity in a business combination, includingrecognition and measurement in the financial statements of the identifiableassets acquired, the liabilities assumed, and any noncontrolling interest inthe acquiree. This statement also establishes disclosure requirements to enablefinancial statement users to evaluate the nature and financial effects of thebusiness combination. SFAS No. 141R is effective for business combinationsthat close in years beginning on or after 

 

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December 15, 2008. Hospira is currently evaluating the potentialimpact of SFAS No. 141R on its financial statements.

 

In September 2006,the FASB issued SFASNo. 158, “Employers’ Accounting for DefinedBenefit Pension and Other Postretirement Plans – an amendment of FASBStatements No. 87, 88, 106, and 132(R)” (“SFAS No. 158”). Oneprovision of SFAS No. 158 requiresthe measurement of Hospira’s defined benefit plan’s assets and its obligationsto determine the funded status be made as of the end of the fiscal year. This provision of SFAS No. 158 is effective forfiscal years ending after December 15, 2008. Hospira does not anticipate that the impact from the adoption of thisprovision of SFAS No. 158 will be significant to its financial statements.

 

*Adoption of New Accounting Standards*

 

Hospira adopted the required provisions of SFAS No. 157, “Fair ValueMeasurements” (“SFAS No. 157”) on January 1, 2008. SFAS No. 157clarifies the principle that fair value should be based on the assumptionsmarket participants would use when pricing an asset or liability andestablishes a fair value hierarchy that prioritizes the information used todevelop those assumptions. There was no impact to the condensed consolidatedfinancial statements upon the adoption of SFAS No. 157.

 

FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157”(“FSP 157-2”) delays the effective date of the application of SFAS No. 157to fiscal years beginning after November 15, 2008 for all nonfinancialassets and nonfinancial liabilities that are recognized or disclosed at fairvalue in the financial statements on a non-recurring basis. Hospira adoptedSFAS No. 157 with the exception of the application of the statement tonon-recurring nonfinancial assets and liabilities. Non-recurring nonfinancialassets and nonfinancial liabilities for which Hospira has not applied theprovisions of SFAS No. 157 primarily include those measured at fair valuein goodwill and long-lived asset impairment testing, those initially measuredat fair value in a business combination, and nonfinancial liabilities for exitor disposal activities.

 

Hospira adopted the provisions of SFAS No. 159, “The Fair Value Optionfor Financial Assets and Financial Liabilities – Including an amendment of FASBStatement No. 115” (“SFAS No. 159”) on January 1, 2008. SFAS No. 159provides a company with the option to measure selected financial instrumentsand certain other items at fair value at specified election dates. Uponadoption, Hospira has not elected to apply SFAS No. 159 to measureselected financial instruments and certain other items, therefore, there was noimpact to the condensed consolidated financial statements upon adoption of SFASNo. 159. Subsequent to the initial adoption of SFAS No. 159 on January 1,2008, Hospira has not made any elections to apply SFAS No. 159 during thesix months ended June 30, 2008.

 

**Note 2 – Acquisitions and OtherInvestment Activity**

 

In 2008, Hospira madepayments for deferred consideration related to acquisitions made by Mayne Pharmain prior years and acquired a developer of bar code and radio-frequencyidentification (“RFID”) point-of-care technology. Based on the preliminaryallocation of purchase price, the acquisition primarily resulted in intangibleassets of $5.5 million, primarily technology based, that will be amortized over4 years, acquired in-process research and development of $0.5 million that wasexpensed at the date of acquisition and non-tax deductible goodwill of $6.1million. The impact of the acquisition is not expected to be material toHospira’s results of operations in 2008.

 

Hospira acquiredintangible assets, primarily product rights, in the fourth quarter of 2007,which were paid in 2008, and also made other investments including $24.5million of marketable equity securities during the six months ended June 30,2008.

 

**Note 3 –Fair Value Measures**

 

Hospiraadopted the required provisions of SFAS No. 157 on January 1, 2008,as amended by FSP 157-2.

 

SFAS No. 157establishes a fair value hierarchy for disclosure of the inputs used to measurefair values. This hierarchy prioritizes the inputs into three broad levels.Level 1 inputs are quoted prices (unadjusted) in active markets for identicalassets or liabilities. Level 2 inputs are quoted prices for similar assets andliabilities in active markets or inputs that are observable for similar assetsor liabilities, either directly or indirectly through market corroboration, forsubstantially the full term of the financial instrument. Level 3 inputs areunobservable inputs which reflect assumptions developed by management tomeasure assets and liabilities at fair value. A financial asset or liability’sclassification within the hierarchy is determined based on the lowest levelinput that is significant to the fair value measurement.

 

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Thefollowing table summarizes the basis used to measure certain assets andliabilities at fair value on a recurring basis, under the applicable provisionsof SFAS No. 157, in the balance sheet:

 
| ** **                                           | ** ** | ** **                  | ** ** | **Fair Value Measurements at Reporting Date, Using:**            | ** ** |
|------------------------------------------------------|------------|-----------------------------|------------|------------------------------------------------------------------------------------------------|------------|
| **Description (dollars in millions)** | ** ** | **June 30, 2008** | ** ** | **Quoted Prices  in Active  Markets for  Identical Items  (Level 1)** | ** ** | **Significant  Other  Observable  Inputs  (Level 2)** | ** ** | **Significant  Unobservable  Inputs  (Level 3)** | ** ** |
| Financial Assets:                                    |       |                        |       |                                                                                           |       |   |   |   |   |
| Interest rate swap derivative financial  instruments |       | $                           | 0.5        |                                                                                           | $          | — |   | $ | 0.5 |   | $ | — |   |
| Available-for-sale marketable securities             |       | 16.4                        |       | 16.4                                                                                           |       | — |   | — |   |
|                                                 |       |                        |       |                                                                                           |       |   |   |   |   |
| Financial Liabilities:                               | ** ** | ** **                  | ** ** | ** **                                                                                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Foreign currency forward exchange contracts          |       | $                           | 4.5        |                                                                                           | $          | — |   | $ | 4.5 |   | $ | — |   |

 

At June 30, 2008, the fairvalue of the marketable equity securities purchased in April 2008 was $16.4million. Hospira assessed this decline in the market value to be temporary andrecorded the decline as an unrealized loss in accumulated other comprehensiveincome, net of taxes.

 

**Note 4 –Restructuring Costs**

 

*2008 Actions*

 

InApril 2008, Hospira announced a plan to exit its manufacturing operationsat its Morgan Hill, California plant over the next two to three years.Hospira expects to incur aggregate restructuring charges related to theseactions in the range of $29 million to $35 million on a pre-tax basis through2011. Restructuring costs consist primarily of costs related to severance andcertain other employee benefit costs, additional depreciation resulting fromthe decreased useful lives of the buildings and certain equipment, and otherexit costs.

 

During the three months ended June 30, 2008, Hospira recorded inthe Americas segment pre-tax restructuring charges of $2.1 million in cost ofproducts sold and $0.5 million in research and development.

 

The following summarizes the Morgan Hill restructuring activity for thesix months ended June 30, 2008:

* *
| ** **                          | ** ** | **Balance at**             | ** ** | **Costs**    | ** ** | ** **   | ** ** | **Non cash** | ** ** | **Balance at**         | ** ** |
|-------------------------------------|------------|---------------------------------|------------|--------------|------------|--------------|------------|-------------------|------------|-----------------------------|------------|
| **(dollars in millions)** | ** ** | **December 31, 2007** | ** ** | **Incurred** | ** ** | **Payments** | ** ** | **Items**         | ** ** | **June 30, 2008** | ** ** |
| Employee-related benefit costs      |       | $                               | —     |         | $          | 2.2          |       | $                 | (0.1       | )                           | $          | — |   | $ | 2.1 |   |
| Accelerated depreciation            |       | —                          |       | 0.4          |       | —       |       | (0.4              | )          | —                      |       |
|                                |       | $                               | —     |         | $          | 2.6          |       | $                 | (0.1       | )                           | $          | (0.4 | ) | $ | 2.1 |   |

 

*2006 and 2005 Actions*

 

In August 2005, Hospiraannounced plans to close its manufacturing plant in Donegal, Ireland. In February 2006,Hospira further announced plans to close plants in Ashland, Ohio and Montreal,Canada, and also provided the planned timeline for phasing out production at aleased facility in North Chicago, Illinois. Hospira expects to incur aggregaterestructuring charges related to these actions in the range of $75 million to$95 million on a pre-tax basis through 2009. Restructuring costs consistprimarily of costs related to severance and certain other employee benefitcosts, additional depreciation resulting from the decreased useful lives of thebuildings and certain equipment, and other exit costs.

 

Hospira recorded pre-tax restructuring charges in the followingsegments to cost of products sold:

 
| ** **                          | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| **(dollars in millions)** | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| Americas                            |       | $                                                   | 3.6        |                                              | $          | 6.2 |   | $ | 6.7 |   | $ | 11.6 |   |
| EMEA                                |       | —                                              |       | 0.4                                               |       | — |   | 0.7 |   |
| APAC                                |       | —                                              |       | —                                            |       | — |   | — |   |
| Total pre-tax restructuring charges |       | $                                                   | 3.6        |                                              | $          | 6.6 |   | $ | 6.7 |   | $ | 12.3 |   |

 

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To date, Hospira hasincurred pre-tax restructuring charges of $73.2 million related to theseactions. Product transfers from the Donegal, Ireland manufacturing plant werecompleted in 2006. Hospira ceased production at the Ashland, Ohio locationduring the three months ended September 30, 2007. Hospira is in theprocess of disposing of its Ashland, Ohio location, including conductingenvironmental studies. At June 30, 2008, Hospira has $0.5 million in otheraccrued liabilities for environmental clean-up costs related to these studiesand actions. Hospira completed all product transfers relating to the Montreal,Canada manufacturing plant during the three months ended June 30, 2008. InSeptember 2006, the Montreal manufacturing plant was sold for $7.8million, resulting in a pre-tax gain of $3.1 million, of which the full amountis being deferred until the end of the lease-back term and all environmentalmatters are remediated.

 

The following summarizes the Ashland, Ohio; Montreal, Canada; and NorthChicago, Illinois activity for the six months ended June 30, 2008:

 
| ** **                          | ** ** | **Balance at**             | ** ** | **Costs**    | ** ** | ** **   | ** ** | **Non cash** | ** ** | **Balance at**         | ** ** |
|-------------------------------------|------------|---------------------------------|------------|--------------|------------|--------------|------------|-------------------|------------|-----------------------------|------------|
| **(dollars in millions)** | ** ** | **December 31, 2007** | ** ** | **Incurred** | ** ** | **Payments** | ** ** | **Items**         | ** ** | **June 30, 2008** | ** ** |
| Employee-related benefit costs      |       | $                               | 17.8       |         | $          | 4.0          |       | $                 | (9.4       | )                           | $          | — |   | $ | 12.4 |   |
| Accelerated depreciation            |       | —                          |       | 0.5          |       | —       |       | (0.5              | )          | —                      |       |
| Other                               |       | 0.6                             |       | 2.2          |       | (2.1         | )          | —            |       | 0.7                         |       |
|                                |       | $                               | 18.4       |         | $          | 6.7          |       | $                 | (9.4       | )                           | $          | (0.5 | ) | $ | 13.5 |   |

 

**Note 5 –Stock-Based Compensation**

 

Hospira’s 2004 Long-Term Incentive Plan provides for the grant ofshares of stock options, stock appreciation rights, stock awards (restrictedstock, restricted stock units, performance shares, performance units), andcash-based awards to employees and non-employee directors. Costs resulting fromshare-based payment transactions are recognized as compensation cost over thevesting period based on the fair value of the instrument on the date of grant.Stock-based compensation expense of $10.1 million and $16.3 million wasrecognized for the three months ended June 30, 2008 and 2007,respectively, primarily resulting from stock option awards. The related incometax benefit recognized was $3.3 million and $6.2 million, respectively.Stock-based compensation expense of $24.5 million and $23.5 million wasrecognized for the six months ended June 30, 2008 and 2007, respectively,primarily resulting from stock option awards. The related income tax benefitrecognized was $8.7 million and $8.8 million, respectively. Stock-based compensationcosts are not allocated for segment reporting purposes.

 

In March 2008, 2.3 million options were granted to certainemployees for the 2008 annual stock options grant. These options were awardedat the fair market value at the time of grant, generally vest over three years,and have a seven-year term. The annual stock options grant was awarded in thefirst quarter of 2008 as compared to the second quarter in 2007.

 

The fair values are estimated using the Black-Scholes option-pricingmodel based on the weighted average assumptions utilized for option grantsduring the periods presented are as follows:

 
| ** **                  | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                  | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| Volatility                  |       | 28.0                                                | %          | 34.0                                              | %          | 28.0 | % | 33.8 | % |
| Expected life (years)       |       | 3.4                                                 |       | 4.5                                               |       | 4.5 |   | 4.5 |   |
| Risk-free interest rate     |       | 2.7                                                 | %          | 4.7                                               | %          | 2.3 | % | 4.6 | % |
| Dividend yield              |       | 0.0                                                 | %          | 0.0                                               | %          | 0.0 | % | 0.0 | % |
| Fair value per stock option |       | $                                                   | 9.36       |                                              | $          | 14.27 |   | $ | 11.73 |   | $ | 14.07 |   |
|                             |            |                                                     |            |                                                   |            |  |  |  |  |  |  |  |  |

 

In March 2008, approximately 195,000 performance share awards weregranted to key members of management. The performance share awards vest at theend of the three-year performance cycle. The 2008 performance share award isbased on a formula that measures performance using relative total shareholderreturn over the three-year performance cycle compared to an industry peergroup. Based on the actual performance, at interim periods, and at the end ofthe performance cycle, the number of performance share awards earned, which canrange between 0% and 200% of the target awards granted, will be satisfied withHospira common stock.

 

The 2008 performance share award fair value was $62.39 per share,measured using a Monte Carlo simulation model. The Monte Carlo simulation modeluses multiple input variables that determine the probability of satisfyingperformance measures stipulated in the performance award grant.

 

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The valuation model for the March 2008 performance share awardused the following assumptions:

 
| **Weighted-Average  Expected Volatility** | ** ** | **Risk-Free  Interest Rate** | ** ** | **Expected  Dividend Yield** | ** ** |
|-------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| 27.9                                      | %          | 2.0                          | %          | 0.0                          | %          |

 

As of June 30, 2008, there was $58.4 million of total unrecognizedcompensation cost related to non-vested share-based compensation arrangements.That cost is expected to be recognized over a weighted average period of 2.2years.

 

For a more detailed description of Hospira’s stock-based compensationplan, see Note 14 to Hospira’s consolidated financial statements included inHospira’s Annual Report on Form 10-K for the year ended December 31,2007.

 

**Note 6– Post-Retirement Benefits**

 

Retirement plans consist ofdefined benefit (“pension”), defined contribution, and post-retirement medicaland dental plans. Plans cover certain employees both in and outside of theUnited States.

 

Net costrecognized for the pension and post-retirement medical and dental benefit plansis as follows:

* *
| ** **                                        | ** ** | **Pension Plans**                         | ** ** |
|---------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                        | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
| **(dollars in millions)**               | ** ** | **2008**                                       | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| Service cost for benefits earned during the  year |       | $                                              | 0.5        |   | $ | 0.4 |   | $ | 1.0 |   | $ | 0.8 |   |
| Interest cost on projected benefit  obligations   |       | 6.2                                            |       | 6.1 |   | 12.4 |   | 12.3 |   |
| Expected return on plans’ assets             |       | (7.2                                           | )          | (7.1 | ) | (14.4 | ) | (14.2 | ) |
| Net amortization                                  |       | 0.9                                            |       | 1.2 |   | 1.7 |   | 2.3 |   |
| Net cost                                          |       | $                                              | 0.4        |   | $ | 0.6 |   | $ | 0.7 |   | $ | 1.2 |   |

 
| ** **                                        | ** ** | **Medical and Dental Plans**                   | ** ** |
|---------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                        | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
| **(dollars in millions)**               | ** ** | **2008**                                       | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| Service cost for benefits earned during the  year |       | $                                              | 0.1        |   | $ | — |   | $ | 0.2 |   | $ | — |   |
| Interest cost on projected benefit  obligations   |       | 1.0                                            |       | 0.7 |   | 1.9 |   | 1.4 |   |
| Net amortization                                  |       | 0.3                                            |       | 0.2 |   | 0.6 |   | 0.4 |   |
| Net cost                                          |       | $                                              | 1.4        |   | $ | 0.9 |   | $ | 2.7 |   | $ | 1.8 |   |

 

Certain Hospira employeesparticipate in the Hospira 401(k) Retirement Savings Plan. Hospira’scontributions to this defined contribution plan for the three months ended June 30,2008 and 2007 were $9.6 million and $8.2 million, respectively. For the sixmonths ended June 30, 2008 and 2007 contributions were $18.7 million and$16.8 million, respectively.

 

**Note 7 –Income Taxes**

 

Taxes on income reflectthe estimated annual effective rates, excluding the effect of significantunusual items. The effective tax rates are less than the statutory U.S. federalincome tax rate principally due to the benefit of tax exemptions, of varyingdurations, in several non-U.S. taxing jurisdictions.

 

The gross amount of unrecognized tax benefits at June 30, 2008 is$161.7 million. The amount, if recognized, that would affect the effective taxrate is $145.9 million.

 

Hospira recognizes interest and penalties accrued in relation tounrecognized tax benefits in income tax expense, which is consistent with thereporting in prior periods.  As of June 30,2008, Hospira has recorded liabilities of $14.9 million for the payment ofinterest and penalties.

 

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Hospira began operations as a new taxpayer on May 1, 2004, and theU.S. federal tax returns for 2004 and 2005 are currently under examination bythe Internal Revenue Service (“IRS”). Hospira expects the auditfieldwork and the issuance of the initial IRS audit report to be completedwithin the next 6 months, with final IRS approval within 12 months. However,the ultimate resolution of the 2004 – 2005 IRS audit is dependent on a numberof factors and procedures that can not be predicted at this time. In addition, certain tax statutes are also expected toclose within the next 12 months. Accordingly, it is reasonably possible that achange in unrecognized tax benefits will occur within the next 12 months;however, quantification of a range cannot be made at this time.

 

Hospira remains open to taxexamination in all major tax-paying jurisdictions, including Australia, Canada,Italy, United Kingdom and the United States. Pre-acquisition audit orprocedural tax adjustments reducing income tax or deferred tax liabilities foracquired entities are recorded as adjustments to goodwill as applicable.

 

**Note 8 –Earningsper Share**

 

Basic earnings per shareare computed by dividing net income by the number of weighted average commonshares outstanding during the reporting period. Diluted earnings per share are calculated to give effect to allpotentially dilutive common shares that were outstanding during the reportingperiod. The following table shows the effect of stock-based awards on theweighted average number of shares outstanding used in calculating dilutedearnings per share:

 
| ** **                                                    | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| **(shares in millions)**                            | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| Weighted average basic common shares  outstanding             |       | 159.1                                               |       | 156.7                                             |       | 158.9 |   | 156.4 |   |
| Incremental shares outstanding related to  stock-based awards |       | 2.4                                                 |       | 2.8                                               |       | 2.3 |   | 2.6 |   |
| Weighted average dilutive common shares  outstanding          |       | 161.5                                               |       | 159.5                                             |       | 161.2 |   | 159.0 |   |

 

The number of outstanding options to purchase Hospirastock for which the exercise price of the options exceeded the market averagestock price was 5.4 million and 5.5 million for the three and six months ended June 30,2008, respectively, and 2.7 million and 5.3 million for the three and sixmonths ended June 30, 2007, respectively. Accordingly, these options areexcluded from the diluted earnings per share calculation for these periods.

 

**Note 9 –Inventories and Property and Equipment, Net**

 

Inventories consist ofthe following:

 
| ** **                          | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(dollars in millions)** | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| Finished products                   |       | $                 | 517.0      |                  | $          | 465.4 |   |
| Work in process                     |       | 147.9             |       | 128.2                 |       |
| Materials                           |       | 173.7             |       | 173.0                 |       |
| Total inventories                   |       | $                 | 838.6      |                  | $          | 766.6 |   |

 

Property and equipment,net consists of the following:

 
| ** **                          | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(dollars in millions)** | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| Property and equipment, at cost     |       | $                 | 2,649.3    |                  | $          | 2,620.2 |   |
| Accumulated depreciation            |       | (1,366.4          | )          | (1,343.3              | )          |
| Total property and equipment, net   |       | $                 | 1,282.9    |                  | $          | 1,276.9 |   |

 

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**Note 10 –Goodwill and Intangible Assets, Net**

 

The following summarizesgoodwill and intangible assets, net activity for the six months ended June 30,2008:

 
| ** **                          | ** ** | ** **                      | ** ** | ** **       | ** ** | ** **       | ** ** | **Currency**                | ** ** | ** **                  | ** ** |
|-------------------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                          | ** ** | **Balance at**             | ** ** | ** **       | ** ** | ** **       | ** ** | **Translation Effect** | ** ** | **Balance at**         | ** ** |
| **(dollars in millions)** | ** ** | **December 31, 2007** | ** ** | **Acquisitions** | ** ** | **Amortization** | ** ** | **and Other**          | ** ** | **June 30, 2008** | ** ** |
| Goodwill                            |       | $                               | 1,240.9    |             | $          | 6.1              |       | $                           | —     |                        | $          | (4.6 | ) | $ | 1,242.4 |   |
| Intangible assets, net              |       | 554.0                           |       | 5.5              |       | (34.4            | )          | 33.6                        |       | 558.7                       |       |
|                                     |            |                                 |            |                  |            |                  |            |                             |            |                             |            |  |  |  |  |  |

 

The additions to goodwill andintangible assets, net are related to the acquisition in the Americas segmentfurther described in Note 2.  Currencytranslation effect and other includes a $35.3 million reduction in goodwill inthe APAC segment related to Mayne Pharma deferred tax liabilities for pre-acquisitiontax return settlements and the adjusted tax basis of certain acquired MaynePharma assets. There were no reductions from goodwill relating to impairmentsor disposal of all or a portion of a business.

 

Goodwill is not amortized, butis tested for impairment at least annually on September 30, or morefrequently if an event occurs or circumstances change that would reduce thefair value of a reporting unit below its carrying value.

 

Intangible assets have definitelives and are amortized on a straight-line basis over their estimated usefullives (3 to 12 years, weighted average 10 years). Intangible asset amortizationexpense was $17.5 million and $13.7 million for the three months ended June 30,2008 and 2007, respectively. Intangible asset amortization expense was $34.4million and $22.9 million for the six months ended June 30, 2008 and 2007,respectively. Intangible asset amortization is estimated at $31.9 million forthe remainder of 2008, $63.8 million for 2009 and 2010, $61.4 million for 2011,and $49.9 million for 2012.

 

Inthe fourth quarter of 2007, Hospira acquired product rights, primarily relatedto an oncology compound, which were paid in 2008.

 

Additionally, intangibleassets, net consist of the following:

 
| ** **                          | ** ** | **June 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|-------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| **(dollars in millions)** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization**   | ** ** | **Net Intangible  Assets** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net Intangible  Assets** | ** ** |
| Product rights                      |       | $                           | 602.9      |                            | $          | (81.5 | ) | $ | 521.4 |   | $ | 565.4 |   | $ | (46.2 | ) | $ | 519.2 |   |
| Customer relationships              |       | 36.6                        |       | (7.0                            | )          | 29.6 |   | 36.0 |   | (4.2 | ) | 31.8 |   |
| Technology                          |       | 10.3                        |       | (2.6                            | )          | 7.7 |   | 4.8 |   | (1.8 | ) | 3.0 |   |
|                                |       | $                           | 649.8      |                            | $          | (91.1 | ) | $ | 558.7 |   | $ | 606.2 |   | $ | (52.2 | ) | $ | 554.0 |   |

 

**Note 11– Short-term Borrowings and Long-term Debt**

 

For a more detailed description of Hospira’s short-term borrowings andlong-term debt, see Note 10 to Hospira’s consolidated financial statementsincluded in Hospira’s Annual Report on Form 10-K for the year ended December 31,2007.

 

Underthe $500.0 million three-year term loan facility due 2010, Hospira was requiredto repay $50.0 million in principal at the end of each quarter in 2008 and$62.5 million for the four remaining payments. Hospira is permitted to prepayamounts borrowed under the facility from time to time without penalty.Prepayments are prorated against future payments under the facility reducingthe future obligations. Principal prepayments made in 2007 of $359.7 millionand an additional $64.5 million in the six months ended June 30, 2008,reduce the amounts required to be repaid to $2.1 million at the end of thethird and fourth quarters of 2008 and $2.7 million for the four remainingpayments. As a result of the prepayments made, the amount due within one yearis $9.6 million, and is recorded as short-term borrowings.

 

InJune 2008, Hospira entered into interest rate swap transactions whereby$300.0 million of the $400.0 million ten-year senior unsecured notes due in June 2014were effectively converted from fixed to floating rate debt. Hospira recordsthe interest rate swap contracts at fair value and offsets the carrying amountof the fixed-rate debt by the same amount. Changes in fair value are offsetagainst the carrying amount of the fixed-rate debt through earnings and theineffective portion of the derivative’s change in fair value will beimmediately recognized in earnings.

 

Hospirahas a five-year $375.0 million unsecured revolving credit facility (the “Revolver”).The Revolver is available for working capital and other requirements. As of June 30,2008, Hospira had no amounts outstanding under the Revolver.

 

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Certain of our borrowing agreements contain covenantsthat require compliance, for example, a debt to earnings ratio and a minimuminterest coverage ratio. As of June 30, 2008, Hospira was in compliancewith all applicable covenants.

 

**Note**** 12****– Litigation**

 

Hospira is involved invarious claims and legal proceedings, as well as product liability claims andproceedings related to Hospira’s business, including in some instances whenHospira operated as part of Abbott Laboratories (“Abbott”).

 

Various state and federalagencies, including the U.S. Department of Justice and various state attorneysgeneral, are investigating a number of pharmaceutical companies, includingAbbott, for allegedly engaging in improper marketing and pricing practices withrespect to certain Medicare and Medicaid reimbursable products, includingpractices relating to average wholesale price (“AWP”).  These are civilinvestigations that are seeking to identify the practices and determine whetherthose practices violated any laws, including federal and state false claimsacts, or constituted fraud in connection with the Medicare and/or Medicaidreimbursement paid to third parties.  In addition, Abbott is a defendantin a number of purported class actions on behalf of individuals or entities,including healthcare insurers and other third-party payors, that allegegenerally that Abbott and numerous other pharmaceutical companies reportedfalse or misleading pricing information in connection with federal, state andprivate reimbursement for certain drugs.  Many of the products involved inthese investigations and lawsuits are Hospira products.  Hospira iscooperating with the authorities in these investigations. There may beadditional investigations or lawsuits, or additional claims in the existing investigationsor lawsuits, initiated with respect to these matters in the future. Hospira cannot be certain that it will not be named as a subject or defendantin these investigations or lawsuits. Hospira is a named defendant in two suchlawsuits: *The State of Texas ex rel.Ven-A-Care of the Florida Keys, Inc. v. Abbott Laboratories Inc., AbbottLaboratories and Hospira, Inc,*Case No. GV-04-001286, pendingin the District Court of Travis County, Texas (Hospira added as a defendant inAugust, 2004) and *State of Hawaii v. AbbottLaboratories, Inc., et al.*, Case No. 06-1-0720-04, pendingin the Circuit Court of the First Circuit, Hawaii, filed April, 2006. Hospiradenies all material allegations asserted against it in these two lawsuits.Abbott will indemnify Hospira for liabilities associated with pending or futureAWP investigations and lawsuits only to the extent that they are of the samenature as the lawsuits and investigations that existed against Abbott as of thespin-off date and relate to the sale of Hospira products prior to thespin-off.  Hospira will assume any other losses that may result from theseinvestigations and lawsuits related to Hospira’s products, including any lossesassociated with post-spin-off activities. These investigations and lawsuitscould result in changes to Hospira’s business practices or pricing policies,civil or criminal monetary damages, penalties or fines, imprisonment and/orexclusion of Hospira products from participation in federal and statehealthcare programs, including Medicare, Medicaid and Veterans’ Administrationhealth programs, any of which could have a material adverse effect on itsbusiness, profitability and financial condition.

 

Hospira has been named as adefendant in a lawsuit alleging generally that the spin-off of Hospira fromAbbott interfered with employee benefits in violation of the EmployeeRetirement Security Act of 1974 (“ERISA”).  The lawsuit was filed on November 8,2004 in the United States District Court for the Northern District of Illinois,and is captioned:  *Myla Nauman, JaneRoller and Michael Loughery v. Abbott Laboratories and Hospira, Inc.* Plaintiffs generally seek reinstatement in Abbott benefit plans, disgorgementof profits and attorneys fees. On November 18, 2005, the complaint wasamended to assert an additional claim against Abbott and Hospira for breach offiduciary duty under ERISA.  Hospira has been dismissed as a defendantwith respect to the fiduciary duty claim.  By Order dated December 30,2005, the Court granted class action status to the lawsuit. As to the soleclaim against Hospira in the original complaint, the court certified a classdefined as:  “all employees of Abbott who were participants in the AbbottBenefit Plans and whose employment with Abbott was terminated between August 22,2003 and April 30, 2004, as a result of the spin-off of the HPD/creationof Hospira announced by Abbott on August 22, 2003, and who were eligiblefor retirement under the Abbott Benefit Plans on the date of theirterminations.” In July, 2008, the court denied defendants’ motions forsummary judgment. Hospira denies all material allegations asserted against itin the complaint.

 

On August 12, 2005, Retractable Technologies, Inc. (“RTI”)filed a lawsuit against Abbott alleging breach of contract and fraud inconnection with a National Marketing and Distribution Agreement (“Agreement”)between Abbott and RTI signed in May 2000. *Retractable Technologies, Inc. v. Abbott Laboratories, Inc.*,Case No. 505CV157, pending in U.S. District Court for the Eastern Districtof Texas. RTI purported to terminate the contract for breach in 2003. Thelawsuit alleges that Abbott misled RTI and breached the Agreement in connectionwith Abbott’s marketing efforts. RTI seeks unspecified monetary damages as wellas punitive damages. Hospira has conditionally agreed to defend and indemnifyAbbott in connection with this lawsuit, which involves a contract carried outby Abbott’s former Hospital Products Division. Abbott denies all materialallegations in the complaint. Abbott intends to pursue claims against RTI forbreach of the Agreement. Hospira is entitled, pursuant to its agreements withAbbott, to any amounts recovered due to RTI’s breach of the Agreement. On February 9,2007, the court ruled that RTI could not be compelled to arbitrate its claims.On June 2, 2008, the Fifth Circuit Court of Appeals upheld that decisionin a 2-1 ruling. The case will now proceed in the U.S. District Court for theEastern District.

 

Hospira’s litigationexposure, including product liability claims, are evaluated each reportingperiod. Hospira’s reserves, which are not significant at June 30, 2008 andDecember 31, 2007, are the best estimate of loss, as defined by SFAS No. 5,“Accounting for Contingencies.” Based upon information that is currentlyavailable, management believes that the likelihood of a material loss in

 

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excess of recorded amountsis remote.

 

Additional legalproceedings may occur that may result in a change in the estimated reservesrecorded by Hospira. It is not feasible to predict the outcome of suchproceedings with certainty and there can be no assurance that their ultimate dispositionwill not have a material adverse effect on Hospira’s financial position, cashflows, or results of operations.

 

**Note 13****– Shareholders’ Equity**

 

Common Stock

 

Hospira is authorized to issue400.0 million shares of common stock, par value $0.01 per share, and50.0 million shares of preferred stock, par value $0.01 per share. As of June 30,2008 and December 31, 2007, 167.0 million and 166.2 million common shareswere issued and 159.4 million and 158.6 million common shares wereoutstanding, respectively.

 

Treasury Stock

 

Hospira hasrepurchased 7.6 million shares for $299.8 million in the aggregate under the2006 board authorization, all of which were purchased during 2006. Hospira doesnot expect to repurchase any shares in 2008 under this program.

 

**Note 14****–****Comprehensive Income andAccumulated Other Comprehensive Income, Net of Taxes**

 

Comprehensive income, netof taxes consists of the following:

 
| ** **                                                                                                                                                                                                                                                                      | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| **(dollars in millions)**                                                                                                                                                                                                                                             | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| Foreign currency translation adjustments                                                                                                                                                                                                                                        |       | $                                                   | 47.3       |                                              | $          | 43.3 |   | $ | 105.9 |   | $ | 52.2 |   |
| Pension liability adjustments, net of taxes  of $(0.4) million and $(0.5) million for the three months ended June 30,  2008 and 2007, respectively, and $(1.1) million for each of the six months  ended June 30, 2008 and 2007, respectively                         |       | 0.7                                                 |       | 0.7                                               |       | 1.9 |   | 1.5 |   |
| Unrealized losses on marketable equity  securities, net of taxes of $1.6 million and $0.7 million for the three  months ended June 30, 2008 and 2007, respectively, and $1.6 million and  $0.3 million for the six months ended June 30, 2008 and 2007,  respectively |       | (6.2                                                | )          | (1.1                                              | )          | (6.2 | ) | (0.4 | ) |
| Unrealized gains (losses) on cash flow  hedges, net of taxes of $0.0 million and $0.8 million for the six months  ended June 30, 2008 and 2007, respectively                                                                                                               |       | —                                              |       | —                                            |       | 0.1 |   | (1.2 | ) |
| Other comprehensive income                                                                                                                                                                                                                                                      |       | 41.8                                                |       | 42.9                                              |       | 101.7 |   | 52.1 |   |
| Net Income                                                                                                                                                                                                                                                                      |       | 69.1                                                |       | 30.7                                              |       | 134.5 |   | 1.3 |   |
| Comprehensive Income                                                                                                                                                                                                                                                            |       | $                                                   | 110.9      |                                              | $          | 73.6 |   | $ | 236.2 |   | $ | 53.4 |   |

 

Accumulated othercomprehensive income, net of taxes consists of the following:

 
| ** **                                                                | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(dollars in millions)**                                       | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| Cumulative foreign currency translation  adjustments                      |       | $                 | 235.6      |                  | $          | 129.7 |   |
| Cumulative retirement plans unrealized  losses, net of tax                |       | (58.1             | )          | (60.0                 | )          |
| Cumulative unrealized losses on marketable  equity securities, net of tax |       | (6.5              | )          | (0.3                  | )          |
| Cumulative unrealized losses on cash flow  hedges, net of tax             |       | (1.7              | )          | (1.8                  | )          |
| Accumulated Other Comprehensive Income                                    |       | $                 | 169.3      |                  | $          | 67.6 |   |

 

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**Note 15****–****Segment Information**

 

Hospira conducts operations worldwide and is managedin three reportable segments: Americas, EMEA and APAC. The Americas segment includesthe United States, Canada and Latin America; the EMEA segment includes Europe,the Middle East and Africa; and the APAC segment includes Asia, Japan,Australia and New Zealand. In all segments, Hospira sells a broad line ofhospital products, including specialty injectable and other pharmaceuticals andmedication management systems and other devices. Specialty Injectables includegeneric injectables (including biogenerics) and proprietary specialtyinjectables (such as Precedex®). Other Pharmaceuticals include large volume IVsolutions, nutritionals and contract manufacturing services (including former “Salesto Abbott”). Medication Management Systems include infusion pumps, relatedsoftware, services and administration sets. Other Devices include gravityadministration sets, critical care products and other device products. In 2008,Hospira has re-aligned its segment presentation to better reflect how thebusiness is currently managed. Previously, Hospira operated in two reportablesegments: U.S. and International. Prior year segment disclosure has beenreclassified to conform to the current year presentation.

 

Hospira’s underlyingaccounting records are maintained on a legal entity basis for government andpublic reporting requirements. Segment disclosures are on a performance basisconsistent with internal management reporting. For internal managementreporting, intersegment transfers of inventory are recorded at standard costand are not a measure of segment income from operations. The costs of certaincorporate functions, stock-based compensation, interest expense, and otherincome, net that benefit the entire organization are not allocated. Thefollowing segment information has been prepared in accordance with the internalaccounting policies of Hospira, as described above.

 
| ** **                             | ** ** | **Three Months Ended June 30,** | ** ** |
|----------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                             | ** ** | **Net Sales**                                  | ** ** | **Income from Operations** | ** ** |
| **(dollars in millions)**    | ** ** | **2008**                                            | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                   |       |                                                |       |   |   |   |   |   |   |
| Americas                               |       | $                                                   | 677.2      |   | $ | 661.2 |   | $ | 140.1 |   | $ | 111.5 |   |
| EMEA                                   |       | 156.6                                               |       | 146.7 |   | 5.7 |   | 1.8 |   |
| APAC                                   |       | 67.8                                                |       | 61.4 |   | (0.3 | ) | (11.0 | ) |
|                                   |       |                                                |       |   |   |   |   |   |   |
| Total reportable segments              |       | $                                                   | 901.6      |   | $ | 869.3 |   | 145.5 |   | 102.3 |   |
|                                   |       |                                                |       |   |   |   |   |   |   |
| Corporate functions                    |       |                                                |       |   |   | (17.7 | ) | (18.4 | ) |
| Stock-based compensation               |       |                                                |       |   |   | (10.1 | ) | (16.3 | ) |
| Income from operations                 |       |                                                |       |   |   | 117.7 |   | 67.6 |   |
| Interest expense and other income, net |       |                                                |       |   |   | (28.2 | ) | (32.1 | ) |
|                                   |       |                                                |       |   |   |   |   |   |   |
| Income before income taxes             |       |                                                |       |   |   | $ | 89.5 |   | $ | 35.5 |   |

 
| ** **                             | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------|------------|---------------------------------------------------|------------|
| ** **                             | ** ** | **Net Sales**                                | ** ** | **Income from Operations** | ** ** |
| **(dollars in millions)**    | ** ** | **2008**                                          | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                   |       |                                              |       |   |   |   |   |   |   |
| Americas                               |       | $                                                 | 1,351.4    |   | $ | 1,285.7 |   | $ | 278.1 |   | $ | 176.3 |   |
| EMEA                                   |       | 309.4                                             |       | 262.7 |   | 13.8 |   | (11.5 | ) |
| APAC                                   |       | 129.5                                             |       | 103.7 |   | (3.5 | ) | (21.8 | ) |
|                                   |       |                                              |       |   |   |   |   |   |   |
| Total reportable segments              |       | $                                                 | 1,790.3    |   | $ | 1,652.1 |   | 288.4 |   | 143.0 |   |
|                                   |       |                                              |       |   |   |   |   |   |   |
| Corporate functions                    |       |                                              |       |   |   | (34.5 | ) | (37.5 | ) |
| Stock-based compensation               |       |                                              |       |   |   | (24.5 | ) | (23.5 | ) |
| Income from operations                 |       |                                              |       |   |   | 229.4 |   | 82.0 |   |
| Interest expense and other income, net |       |                                              |       |   |   | (55.5 | ) | (62.0 | ) |
|                                   |       |                                              |       |   |   |   |   |   |   |
| Income before income taxes             |       |                                              |       |   |   | $ | 173.9 |   | $ | 20.0 |   |

 

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| ** **                          | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                          | ** ** | **Depreciation and  Amortization**             | ** ** | **Additions to  Long-Term Assets**      | ** ** | **Depreciation and  Amortization** | ** ** | **Additions to  Long-Term Assets** | ** ** |
| **(dollars in millions)** | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Americas                            |       | $                                                   | 38.9       |                                              | $          | 38.7 |   | $ | 36.3 |   | $ | 34.2 |   | $ | 78.4 |   | $ | 74.9 |   | $ | 72.7 |   | $ | 75.3 |   |
| EMEA                                |       | 9.8                                                 |       | 7.7                                               |       | 6.7 |   | 1.9 |   | 18.0 |   | 12.5 |   | 7.6 |   | 4.6 |   |
| APAC                                |       | 15.6                                                |       | 16.1                                              |       | 2.1 |   | 1.5 |   | 31.9 |   | 25.6 |   | 4.7 |   | 3.7 |   |
|                                |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total reportable segments           |       | $                                                   | 64.3       |                                              | $          | 62.5 |   | $ | 45.1 |   | $ | 37.6 |   | $ | 128.3 |   | $ | 113.0 |   | $ | 85.0 |   | $ | 83.6 |   |

 
| ** **                          | ** ** | **Goodwill**      | ** ** | **Total Assets** | ** ** |
|-------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                          | ** ** | **June 30,** | ** ** | **December 31,** | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
| **(dollars in millions)** | ** ** | **2008**          | ** ** | **2007**              | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                |       |              |       |                  |       |   |   |   |   |
| Americas                            |       | $                 | 755.1      |                  | $          | 749.0 |   | $ | 3,205.3 |   | $ | 3,157.0 |   |
| EMEA                                |       | 273.2             |       | 263.8                 |       | 1,055.0 |   | 951.3 |   |
| APAC                                |       | 214.1             |       | 228.1                 |       | 969.8 |   | 976.4 |   |
|                                |       |              |       |                  |       |   |   |   |   |
| Total reportable segments           |       | $                 | 1,242.4    |                  | $          | 1,240.9 |   | $ | 5,230.1 |   | $ | 5,084.7 |   |

 

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**Item2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

**Forward-LookingStatements**

 

This report containsforward-looking statements within the meaning of the federal securities laws.Hospira intends that these forward-looking statements be covered by the safeharbor provisions for forward-looking words such as “may,” “will,” “should,” “anticipate,”“estimate,” “expect,” “plan,” “believe,” “predict,” “potential,” “project,” “intend,”“could,” or similar expressions. In particular, statements regarding Hospira’splans, strategies, prospects and expectations regarding its business andindustry are forward-looking statements. Investors should be aware that thesestatements and any other forward-looking statements in this document onlyreflect Hospira’s expectations and are not guarantees of performance. Thesestatements involve risks, uncertainties and assumptions. Many of these risks,uncertainties and assumptions are beyond Hospira’s control, and may causeactual results and performance to differ materially from expectations.Important factors that could cause Hospira’s actual results to be materiallydifferent from its expectations include (i) the risks and uncertaintiesdescribed in “Item 1A. Risk Factors” in Hospira’s Annual Report on Form 10-Kfor the year ended December 31, 2007 (the “2007 Form 10-K”), and (ii) thefactors described in “Item 7. Management’s Discussion and Analysis of FinancialCondition and Results of Operations” in the 2007 Form 10-K, and thefactors described in “Item 2. Management’s Discussion and Analysis of FinancialCondition and Results of Operations” in the report on Form 10-Q for thethree month period ended March 31, 2008, as may be updated by this Item 2.Accordingly, one should not place undue reliance on the forward-lookingstatements contained in this report. These forward-looking statements speakonly as of the date on which the statements were made. Hospira undertakes noobligation to update or revise publicly any forward-looking statements, whetheras a result of new information, future events or otherwise.

 

**Overview**

 

Hospira is a globalspecialty pharmaceutical and medication delivery company that develops,manufactures and markets products that help improve the safety, cost andproductivity of patient care. Hospira’s portfolio includes one of the industry’sbroadest lines of generic acute-care and oncology injectables, as well asintegrated infusion therapy and medication management solutions. Hospira’sbroad portfolio of products is used by hospitals and alternate site providers,such as clinics, home healthcare providers and long-term care facilities. In February 2007,Hospira acquired Mayne Pharma Limited (“Mayne Pharma”) to increase its globalpresence in specialty generic injectable pharmaceuticals.

 

In 2008, Hospira hasre-aligned its segment presentation to better reflect how the business iscurrently managed. Hospira has three reportable segments: Americas; Europe,Middle East and Africa (“EMEA”); and Asia Pacific (“APAC”). Prior year segmentdisclosure has been reclassified to conform to the current year presentation.

 

**MaynePharma Acquisition**

 

On February 2, 2007,Hospira completed its acquisition of Mayne Pharma for $2,055.0 million. Theresults of operations of Mayne Pharma are included in Hospira’s results forperiods on and after that date, which has affected comparability of thefinancial statements for the periods presented in this report and will affectcomparability in future periods. Hospira financed the acquisition and relatedexpenses through borrowing approximately $1,925.0 million, and the remainderwas funded with cash on hand. Net sales of Mayne Pharma products, which areprincipally specialty injectable pharmaceutical products, are reported withineach of Hospira’s reportable segments.

 

In connection with theacquisition, Hospira recorded $137.9 million of charges relating to purchaseaccounting during the six months ended June 30, 2007, including $84.8million of acquired in-process research and development, all of which wasrecorded in the first quarter, and $53.1 million of inventory step-up charges,of which $21.4 million was expensed in the first quarter and $31.7 million wasexpensed in the second quarter. Hospira also recorded $518.2 million ofintangible assets in connection with the acquisition, which will be amortizedover their estimated useful lives (which have a weighted average life of 10years).

 

In connection with theintegration of Mayne Pharma into its operations, Hospira reported that itexpected to incur approximately $95 million to $110 million of cashexpenditures for the two-year period after the closing, of which $60 million to$75 million will be recorded as expense with the remainder related to purchaseaccounting items and capital projects. These expenses relate to the closureof facilities, termination of lease agreements and employee-related benefitarrangements during the two-year period after the closing. Hospira expects toincur cash expenditures at the high end of the range due to the impact offoreign currency fluctuations and other considerations. To date, approximately$100.8 million of cash expenditures have been made, of which $61.8 million ofexpenses have been incurred. Approximately $7.8 million and $17.6million of integration expenses were recorded during the three and six monthsended June 30, 2008, respectively. Approximately $13.2 million and $23.7million of integration expenses were recorded during the three and six monthsended June 30, 2007.  In additionto integration expenses, Hospira recorded other acquisition-related expenses of$7.9 million in the three months ended March 31, 2007.

 

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**Critical Accounting Policies**

 

The preparation offinancial statements in accordance with generally accepted accountingprinciples in the United States (GAAP) requires management to make estimatesand judgments that affect the reported amounts of assets, liabilities, revenuesand expenses. A summary of Hospira’s significant accounting policies isincluded in Note 1 to the company’s consolidated financial statements, whichare included in Hospira’s Annual Report on Form 10-K for the year ended December 31,2007. Certain of Hospira’s accounting policies are considered critical, asthese policies require significant, difficult or complex judgments bymanagement, often employing the use of estimates about the effects of mattersthat are inherently uncertain. Such policies are summarized in “Item 7.Management’s Discussion and Analysis of Financial Condition and Results ofOperations” in the 2007 Form 10-K.

 

**Recently Issued Accounting Standards**

 

In March 2008, the Financial Accounting Standards Board (“FASB”)issued Statement of Financial Accounting Standards (“SFAS”) No. 161, “DisclosuresAbout Derivative Instruments and Hedging Activities – an amendment of FASBStatement No. 133” (“SFAS No. 161”). SFAS No. 161 expands thedisclosure requirements for derivative instruments and hedging activities. Theprovisions will be effective for financial statements issued for fiscal yearsbeginning after November 15, 2008. Hospira is currently evaluating thepotential impact of SFAS No. 161 on its financial statements.

 

In December 2007, the FASB issued SFAS No. 160, “NoncontrollingInterests in Consolidated Financial Statements – an amendment of ARB No. 51”(“SFAS No. 160”). SFAS No. 160 states that accounting and reportingfor minority interests will be recharacterized as noncontrolling interests andclassified as a component of equity. SFAS No. 160 also establishesreporting requirements that provide sufficient disclosures that clearlyidentify and distinguish between the interests of the parent and the interestsof the noncontrolling owners. SFAS No. 160 applies to all entities thatprepare consolidated financial statements, except not-for-profit organizations,but will affect only those entities that have an outstanding noncontrollinginterest in one or more subsidiaries or that deconsolidate a subsidiary. SFAS No. 160is effective for financial statements issued for fiscal years beginning after December 15,2008. Hospira does not anticipate that the impact from the adoption of SFAS No. 160will be significant to its financial statements.

 

In December 2007, the FASB ratified EmergingIssues Task Force (“EITF”) Issue No. 07-1, “Accounting for CollaborativeArrangements” (“EITF 07-1”). EITF 07-1 provides guidance on how to determinewhether an arrangement constitutes a collaborative arrangement, how costsincurred and revenue generated on sales to third parties should be reported bythe participants in a collaborative arrangement, how payments made betweenparticipants in a collaborative arrangement should be characterized, and whatparticipants should disclose in the notes to the financial statements about acollaborative arrangement. EITF 07-1 is effective for financial statementsissued for fiscal years beginning after December 15, 2008. Hospira iscurrently evaluating the potential impact of EITF 07-1 on its financialstatements.

 

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “BusinessCombinations” (“SFAS No. 141R”). SFAS No. 141R establishes principlesand requirements for the reporting entity in a business combination, includingrecognition and measurement in the financial statements of the identifiableassets acquired, the liabilities assumed, and any noncontrolling interest inthe acquiree. This statement also establishes disclosure requirements to enablefinancial statement users to evaluate the nature and financial effects of thebusiness combination. SFAS No. 141R is effective for business combinationsthat close in years beginning on or after December 15, 2008. Hospira iscurrently evaluating the potential impact of SFAS No. 141R on itsfinancial statements.

 

In September 2006,the FASB issued SFASNo. 158, “Employers’ Accounting for DefinedBenefit Pension and Other Postretirement Plans – an amendment of FASBStatements No. 87, 88, 106, and 132(R)” (“SFAS No. 158”). Oneprovision of SFAS No. 158 requiresthe measurement of Hospira’s defined benefit plan’s assets and its obligationsto determine the funded status be made as of the end of the fiscal year. This provision of SFAS No. 158 is effective forfiscal years ending after December 15, 2008. Hospira does not anticipate that the impactfrom the adoption of this provision of SFAS No. 158 will be significant toits financial statements.

 

**Adoption of New Accounting Standards**

 

Hospira adopted the required provisions of SFAS No. 157, “Fair ValueMeasurements” (“SFAS No. 157”) on January 1, 2008. SFAS No. 157clarifies the principle that fair value should be based on the assumptionsmarket participants would use when pricing an asset or liability andestablishes a fair value hierarchy that prioritizes the information used todevelop those assumptions. There was no impact to the condensed consolidatedfinancial statements upon the adoption of SFAS No. 157.

 

FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157”(“FSP 157-2”) delays the effective date of the application of SFAS No. 157to fiscal years beginning after November 15, 2008 for all nonfinancialassets and nonfinancial liabilities that are recognized or disclosed at fairvalue in the financial statements on a non-recurring basis. Hospira adoptedSFAS No. 157 with the exception of the application of the statement tonon-recurring nonfinancial assets and liabilities. Non-recurring nonfinancialassets and nonfinancial liabilities for which Hospira has not applied theprovisions of SFAS No. 157 primarily include 

 

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those measured at fair value in goodwill and long-lived asset impairmenttesting, those initially measured at fair value in a business combination, andnonfinancial liabilities for exit or disposal activities.

 

Hospira adopted the provisions of SFAS No. 159, “The Fair Value Optionfor Financial Assets and Financial Liabilities – Including an amendment of FASBStatement No. 115” (“SFAS No. 159”) on January 1, 2008. SFAS No. 159provides a company with the option to measure selected financial instrumentsand certain other items at fair value at specified election dates. Uponadoption, Hospira has not elected to apply SFAS No. 159 to measureselected financial instruments and certain other items, therefore, there was noimpact to the condensed consolidated financial statements upon adoption of SFASNo. 159. Subsequent to the initial adoption of SFAS No. 159 on January 1,2008, Hospira has not made any elections to apply SFAS No. 159 during thesix months ended June 30, 2008.

 

**Results ofoperations for the three months ended June 30, 2008 compared to June 30,2007**

 

*Net Sales*

 

Net sales increased 3.7%or 0.2% excluding the impact of foreign exchange in the three months ended June 30,2008 compared to the three months ended June 30, 2007.

 

A comparison of product line net sales is as follows:

 

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**Hospira, Inc.**

**Net Sales by Product Line**

**(Unaudited)**

**(dollars in millions)**

 
| ** **                    | ** ** | **Three Months Ended June 30,** | ** ** |
|-------------------------------|------------|-----------------------------------------------------|------------|
| ** **                    | ** ** | **2008**                                            | ** ** | **2007** | ** ** | **Percent  Change  vs. Prior  Year** | ** ** |
| Americas—                |       |                                                |       |   |   |   |   |
| Pharmaceuticals               |       |                                                |       |   |   |   |   |
| Specialty Injectables         |       | $                                                   | 299.9      |   | $ | 300.5 |   | (0.2 | )% |
| Other Pharma                  |       | 122.7                                               |       | 136.1 |   | (9.8 | )% |
|                          |       | 422.6                                               |       | 436.6 |   | (3.2 | )% |
| Devices                       |       |                                                |       |   |   |   |   |
| Medication Management Systems |       | 161.7                                               |       | 132.8 |   | 21.8 | % |
| Other Devices                 |       | 92.9                                                |       | 91.8 |   | 1.2 | % |
|                          |       | 254.6                                               |       | 224.6 |   | 13.4 | % |
| Total Americas                |       | 677.2                                               |       | 661.2 |   | 2.4 | % |
|                          |       |                                                |       |   |   |   |   |
| EMEA—                    |       |                                                |       |   |   |   |   |
| Pharmaceuticals               |       |                                                |       |   |   |   |   |
| Specialty Injectables         |       | 78.4                                                |       | 70.4 |   | 11.4 | % |
| Other Pharma                  |       | 42.4                                                |       | 40.5 |   | 4.7 | % |
|                          |       | 120.8                                               |       | 110.9 |   | 8.9 | % |
| Devices                       |       |                                                |       |   |   |   |   |
| Medication Management Systems |       | 19.3                                                |       | 17.2 |   | 12.2 | % |
| Other Devices                 |       | 16.5                                                |       | 18.6 |   | (11.3 | )% |
|                          |       | 35.8                                                |       | 35.8 |   | 0.0 | % |
| Total EMEA                    |       | 156.6                                               |       | 146.7 |   | 6.7 | % |
|                          |       |                                                |       |   |   |   |   |
| APAC—                    |       |                                                |       |   |   |   |   |
| Pharmaceuticals               |       |                                                |       |   |   |   |   |
| Specialty Injectables         |       | 52.4                                                |       | 46.5 |   | 12.7 | % |
| Other Pharma                  |       | 3.5                                                 |       | 4.5 |   | (22.2 | )% |
|                          |       | 55.9                                                |       | 51.0 |   | 9.6 | % |
| Devices                       |       |                                                |       |   |   |   |   |
| Medication Management Systems |       | 5.0                                                 |       | 4.0 |   | 25.0 | % |
| Other Devices                 |       | 6.9                                                 |       | 6.4 |   | 7.8 | % |
|                          |       | 11.9                                                |       | 10.4 |   | 14.4 | % |
| Total APAC                    |       | 67.8                                                |       | 61.4 |   | 10.4 | % |
|                          |       |                                                |       |   |   |   |   |
| Net Sales                     |       | $                                                   | 901.6      |   | $ | 869.3 |   | 3.7 | % |

----

Specialty Injectablesinclude generic injectables (including biogenerics) and proprietary specialtyinjectables (such as Precedex®). Other Pharmaceuticals include large volume IVsolutions, nutritionals and contract manufacturing services (including former “Salesto Abbott”). Medication Management Systems include infusion pumps, relatedsoftware, services and administration sets. Other Devices include gravityadministration sets, critical care products and other device products.

 

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Americas

 

Netsales in the Americas segment increased 2.4% including 1.0% of favorableforeign exchange impact.  Net sales ofSpecialty Injectable Pharmaceuticals were essentially even with sales in thesecond quarter of 2007 as increased volumes from additional Group PurchasingOrganization (“GPO”) pharmacy contract awards, benefits from competitor supplyissues and new product introductions were offset by decreases related towholesaler buying patterns and some expected oncology price. Other Pharma netsales decreased due to lower demand from certain contract manufacturingcustomers, partially offset by increased large volume IV solutions sales. Netsales in Medication Management Systems increased due to strong demand andpenetration for Symbiq® as well as improvements in our implementationprocesses. Other Device net sales increased 1.2% over the second quarter of2007.

 

EMEA

 

Netsales in the EMEA segment increased 6.7%. Foreign exchange impactof 10.5%, combined with strong growth in compounding, and sales of newlylaunched biogenerics more than offset declines in Other Pharma andDevices.

 

APAC

 

Netsales in the APAC segment increased 10.4%, which included 12.0% impact offoreign exchange. Decreases in Other Pharma and Devices accounted for themajority of the remaining change compared to 2007.

 

*Gross Profit*

 
| **Three months ended June 30 (dollars in millions)** | ** ** | **2008** | ** ** | **2007** | ** ** | **Percent  change** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|---------------------|------------|
| Gross profit                                                                            |       | $        | 329.4      |     | $          | 266.2               |       | 23.7 | % |
| As a percent of net sales                                                               |       | 36.5     | %          | 30.6     | %          |                |       |
|                                                                                         |            |          |            |          |            |                     |            |  |  |

 

Gross profit increased$63.2 million, or 23.7%, for the three months ended June 30, 2008,compared with the same period in 2007.

 

The gross profit increaseis primarily the result of the impact of foreign exchange and lower costsrelated to the absence of purchase accounting charges for Mayne Pharma which inthe prior year included inventory step-up charges of $31.7 million. Inaddition, favorable product mix, including Medication Management Systems,improved manufacturing utilization, and adjustments relating to intercompanyprofit which should have been recorded in prior periods was partially offset byhigher freight and distribution expenses. Gross margin increased by 5.9 pointsto 36.5% for the three months ended June 30, 2008, from 30.6% for thethree months ended June 30, 2007.

 

*Research and Development*

 
| **Three months ended June 30 (dollars in millions)** | ** ** | **2008** | ** ** | **2007** | ** ** | **Percent  change** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|---------------------|------------|
| Research and development expense                                                        |       | $        | 58.5       |     | $          | 52.6                |       | 11.2 | % |
| As a percent of net sales                                                               |       | 6.5      | %          | 6.0      | %          |                |       |
|                                                                                         |            |          |            |          |            |                     |            |  |  |

 

Research and development(“R&D”) expenses increased $5.9 million, or 11.2%, for the three monthsended June 30, 2008, compared with the same period in 2007. The expenseincrease was primarily related to higher spending on product developmentrelated to new compounds in Hospira’s generic injectable drug pipeline and theimpact of foreign exchange.

 

*Acquired In-Process Research and Development*

 

In the three months ended June 30, 2008, as partof the acquisition purchase price allocation further described in Note 2,Hospira expensed $0.5 million to acquired in-process research and developmentrelated to pipeline products.

 

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*Selling, General and Administrative*

 
| **Three months ended June 30 (dollars in millions)** | ** ** | **2008** | ** ** | **2007** | ** ** | **Percent  change** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|---------------------|------------|
| Selling, general and administrative expense                                             |       | $        | 152.7      |     | $          | 146.0               |       | 4.6 | % |
| As a percent of net sales                                                               |       | 16.9     | %          | 16.8     | %          |                |       |
|                                                                                         |            |          |            |          |            |                     |            |  |  |

 

Selling, general andadministrative (“SG&A”) expenses increased $6.7 million, or 4.6%, for thethree months ended June 30, 2008, compared with the same period in 2007.The expense increase was primarily due to sales and marketing support for newproducts primarily outside the United States and the impact of foreignexchange. This increase was partially offset by a decrease in stock-basedcompensation since the annual stock options grant was awarded in the firstquarter of 2008 as compared to the second quarter of 2007.

 

*Interest Expense and Other Income,Net*

 

Interest expense was$28.2 million for the three months ended June 30, 2008, compared to $37.3million in the same period in 2007. The decrease was primarily due to lowerdebt outstanding in the 2008 period, and lower interest rates on floating ratenotes. Other income, net was zero for the three months ended June 30, 2008compared to $(5.2) million for the three months ended June 30, 2007. Thedecrease reflects lower interest income and foreign exchange transaction gains.

 

*IncomeTax Expense*

 

The effective tax ratewas 22.8% for the three months ended June 30, 2008, compared to 13.5% forthe same period in 2007. The increase in the effective tax rate for the threemonths ended June 30, 2008 compared to 2007, was due primarily todecreased expenses in higher tax rate jurisdictions in connection with theMayne Pharma acquisition purchase accounting charges in the 2007 period. Theeffective tax rates are less than the statutory U.S. federal income tax rateprincipally due to the benefit of tax exemptions, of varying durations, incertain jurisdictions outside the United States.

 

**Results ofoperations for the six months ended June 30, 2008 compared to June 30,2007**

 

*Net Sales*

 

Net sales increased 8.4%,or 4.6% excluding the impact of foreign exchange and the impact of an additionalmonth of Mayne Pharma net sales in 2008 in the six months ended June 30,2008 compared to the six months ended June 30, 2007.

 

A comparison of product line net sales is as follows:

 

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**Hospira, Inc.**

**Net Sales by Product Line**

**(Unaudited)**

**(dollars in millions)**

 
| ** **                    | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------|------------|---------------------------------------------------|------------|
| ** **                    | ** ** | **2008**                                          | ** ** | **2007** | ** ** | **Percent  Change  vs. Prior  Year** | ** ** |
| Americas—                |       |                                              |       |   |   |   |   |
| Pharmaceuticals               |       |                                              |       |   |   |   |   |
| Specialty Injectables         |       | $                                                 | 640.6      |   | $ | 591.3 |   | 8.3 | % |
| Other Pharma                  |       | 244.6                                             |       | 262.3 |   | (6.7 | )% |
|                          |       | 885.2                                             |       | 853.6 |   | 3.7 | % |
| Devices                       |       |                                              |       |   |   |   |   |
| Medication Management Systems |       | 279.8                                             |       | 249.2 |   | 12.3 | % |
| Other Devices                 |       | 186.4                                             |       | 182.9 |   | 1.9 | % |
|                          |       | 466.2                                             |       | 432.1 |   | 7.9 | % |
| Total Americas                |       | 1,351.4                                           |       | 1,285.7 |   | 5.1 | % |
|                          |       |                                              |       |   |   |   |   |
| EMEA—                    |       |                                              |       |   |   |   |   |
| Pharmaceuticals               |       |                                              |       |   |   |   |   |
| Specialty Injectables         |       | 156.7                                             |       | 119.3 |   | 31.3 | % |
| Other Pharma                  |       | 79.0                                              |       | 73.5 |   | 7.5 | % |
|                          |       | 235.7                                             |       | 192.8 |   | 22.3 | % |
| Devices                       |       |                                              |       |   |   |   |   |
| Medication Management Systems |       | 39.7                                              |       | 33.7 |   | 17.8 | % |
| Other Devices                 |       | 34.0                                              |       | 36.2 |   | (6.1 | )% |
|                          |       | 73.7                                              |       | 69.9 |   | 5.4 | % |
| Total EMEA                    |       | 309.4                                             |       | 262.7 |   | 17.8 | % |
|                          |       |                                              |       |   |   |   |   |
| APAC—                    |       |                                              |       |   |   |   |   |
| Pharmaceuticals               |       |                                              |       |   |   |   |   |
| Specialty Injectables         |       | 98.0                                              |       | 75.9 |   | 29.1 | % |
| Other Pharma                  |       | 7.6                                               |       | 6.6 |   | 15.2 | % |
|                          |       | 105.6                                             |       | 82.5 |   | 28.0 | % |
| Devices                       |       |                                              |       |   |   |   |   |
| Medication Management Systems |       | 10.7                                              |       | 8.3 |   | 28.9 | % |
| Other Devices                 |       | 13.2                                              |       | 12.9 |   | 2.3 | % |
|                          |       | 23.9                                              |       | 21.2 |   | 12.7 | % |
| Total APAC                    |       | 129.5                                             |       | 103.7 |   | 24.9 | % |
|                          |       |                                              |       |   |   |   |   |
| Net Sales                     |       | $                                                 | 1,790.3    |   | $ | 1,652.1 |   | 8.4 | % |

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Specialty Injectablesinclude generic injectables (including biogenerics) and proprietary specialtyinjectables (such as Precedex®). Other Pharmaceuticals include large volume IVsolutions, nutritionals and contract manufacturing services (including former “Salesto Abbott”). Medication Management Systems include infusion pumps, relatedsoftware, services and administration sets. Other Devices include gravityadministration sets, critical care products and other device products.

 

Net sales for the sixmonths ended June 30, 2008 and 2007 include six and five months,respectively, of Mayne Pharma net sales.

 

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Americas

 

Net sales in the Americassegment increased 5.1% including 1.2% of foreign exchange impact.  Net sales of Specialty InjectablePharmaceuticals increased due to higher volumes from additional GroupPurchasing Organization (“GPO”) pharmacy contract awards, benefits fromcompetitor supply issues and new product introductions. Other Pharma net salesdecreased due to lower demand from certain contract manufacturing customers,partially offset by increased large volume IV solutions sales. Net sales inMedication Management Systems increased due to strong demand and penetration forSymbiq® as well as improvements in our implementation processes. Other Devicenet sales increased 1.9% over the second quarter of 2007.

 

EMEA

 

Netsales in the EMEA segment increased 17.8%. Foreign exchange impactof 12.1%, combined with an additional month of Mayne Pharma net sales in2008, strong growth in compounding, higher ambulatory systems volume, and salesof newly launched biogenerics more than offset declines in demandfrom existing contract manufacturing customers, and Other Pharma and Devices.

 

APAC

 

Netsales in the APAC segment increased 24.9%. Foreign exchange impact of 14.0%,combined with an additional month of Mayne Pharma net sales in 2008, wereoffset by decreases in Other Pharma and Devices.

 

*Gross Profit*

 
| **Six months ended June 30 (dollars in millions)** | ** ** | **2008** | ** ** | **2007** | ** ** | **Percent  change** | ** ** |
|---------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|---------------------|------------|
| Gross profit                                                                          |       | $        | 643.4      |     | $          | 540.8               |       | 19.0 | % |
| As a percent of net sales                                                             |       | 35.9     | %          | 32.7     | %          |                |       |
|                                                                                       |            |          |            |          |            |                     |            |  |  |

 

Gross profit increased$102.6 million, or 19.0%, for the six months ended June 30, 2008, comparedwith the same period in 2007.

 

The gross profit increaseis primarily the result of higher volume, inclusive of an additional month ofMayne Pharma gross profit in 2008 and the impact of foreign exchange. Inaddition, lower costs related to the absence of purchase accounting charges forMayne Pharma which in the prior year included inventory step-up charges of$53.1 million andfavorable product mix, including Medication Management Systems, werepartially offset by higher freight and distribution expenses. Gross marginincreased by 3.2 points to 35.9% for the six months ended June 30, 2008,from 32.7% for the six months ended June 30, 2007.

 

*Research and Development*

 
| **Six months ended June 30 (dollars in millions)** | ** ** | **2008** | ** ** | **2007** | ** ** | **Percent  change** | ** ** |
|---------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|---------------------|------------|
| Research and development expense                                                      |       | $        | 108.4      |     | $          | 96.1                |       | 12.8 | % |
| As a percent of net sales                                                             |       | 6.1      | %          | 5.8      | %          |                |       |
|                                                                                       |            |          |            |          |            |                     |            |  |  |

 

Research and development(“R&D”) expenses increased $12.3 million, or 12.8%, for the six monthsended June 30, 2008, compared with the same period in 2007. The expenseincrease was primarily related to higher spending on product developmentrelated to new compounds in Hospira’s generic injectable drug pipeline, theadditional month of Mayne Pharma, the impact of foreign exchange, partiallyoffset by lower spending in 2008 for clinical trials on Hospira’s brandedsedative, Precedex®.

 

*Acquired In-Process Research and Development*

 

In the three months ended June 30, 2008, as partof the acquisition purchase price allocation further described in Note 2,Hospira expensed $0.5 million to acquired in-process research and developmentrelated to pipeline products.

 

In the three months ended March 31, 2007, as partof the Mayne Pharma purchase price allocation, Hospira allocated and expensed$84.8 million to acquired in-process research and development related to MaynePharma’s pipeline products.

 

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*Selling, General and Administrative*

 
| **Six months ended June 30 (dollars in millions)** | ** ** | **2008** | ** ** | **2007** | ** ** | **Percent  change** | ** ** |
|---------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|---------------------|------------|
| Selling, general and administrative expense                                           |       | $        | 305.1      |     | $          | 277.9               |       | 9.8 | % |
| As a percent of net sales                                                             |       | 17.0     | %          | 16.8     | %          |                |       |
|                                                                                       |            |          |            |          |            |                     |            |  |  |

 

Selling, general andadministrative (“SG&A”) expenses increased $27.2 million, or 9.8%, for thesix months ended June 30, 2008, compared with the same period in 2007. Theexpense increase was primarily due to sales and marketing support for newproducts primarily outside the United States, and the impact of foreignexchange.

 

*Interest Expense and Other Income,Net*

 

Interest expense was$59.6 million for the six months ended June 30, 2008, compared to $67.8million in the same period in 2007. The decrease was primarily due to lowerdebt outstanding in the 2008 period, the additional debt issue cost incurred in2007 related to the Mayne Pharma acquisition, and lower interest rates onfloating rate notes. Other income, net was $(4.1) million for the six monthsended June 30, 2008 compared to $(5.8) million for the six months ended June 30,2007. The decrease reflects lower interest income and foreign exchangetransaction gains.

 

*IncomeTax Expense*

 

The effective tax ratewas 22.7% for the six months ended June 30, 2008, compared to 93.4% forthe same period in 2007. The effective tax rate for 2007 included the impact ofa significant unusual item, the expensing of acquired in-process research anddevelopment. Excluding the effect of this item, the 2007 effective tax rate was17.8%. The increase in the effective tax rate for the six months ended June 30,2008 compared to 2007, excluding the significant unusual item, was due primarilyto decreased expenses in higher tax rate jurisdictions in connection with theMayne Pharma acquisition purchase accounting charges in the 2007 period. Theeffective tax rates are less than the statutory U.S. federal income tax rateprincipally due to the benefit of tax exemptions, of varying durations, incertain jurisdictions outside the United States.

 

**Liquidityand Capital Resources at June 30, 2008 compared with December 31,2007**

 

Net Cash Provided byOperating Activities continues to be Hospira’s primary source of funds tofinance operating needs, capital expenditures and repayment of debt. Othercapital resources include cash on hand, borrowing availability under Hospira’s$375.0 million revolving credit facility and access to capital markets. Beginningon February 2, 2007, Hospira’s operating cash flows include operating cashflows generated by Mayne Pharma. During the two-year period after the closing,Hospira expects to incur approximately $95 million to $110 million of cashexpenditures relating to the integration of Mayne Pharma, which will reduceoperating and investing cash flows and to date, approximately $100.8 millionof cash expenditures have been incurred. In addition, as a result of thedebt incurred during the first quarter of 2007 to finance the Mayne Pharmaacquisition, Hospira must dedicate substantially greater cash to service debtobligations (including interest expense and mandatory principal payments on theterm loan described below) on an ongoing basis compared to past periods.Hospira believes that its current capital resources, including cash and cashequivalents, cash generated from operations, funds available from its revolvingcredit facility and access to the capital markets will be sufficient to financeits operations, including debt service obligations, capital expenditures,product development and Mayne Pharma integration expenditures for theforeseeable future.

 

*Summary of Cash Flows*

 

Operating activities for the six months ended June 30, 2008provided net cash of $182.6 million driven by net income of $134.5 million.Non-cash charges related to depreciation, amortization of intangibles, thewrite-off of acquired in-process research and development, stock-basedcompensation expense and the net gains on the sales of assets totaled $152.8million. Changes in operating assets and liabilities and Other, net of $(104.7)million consist primarily of higher inventories, which reflect increases forplanned plant maintenance and demand from increased awards in GPO pharmacycontracts, and higher trade receivables.

 

Net Cash Used in Investing Activities of $173.1 million for the sixmonths ended June 30, 2008 includes capital expenditures of $86.7 millionand $42.3 million of payments for certain intangible assets including product rights,primarily acquired in the prior year but paid in the current year, and otherinvestments. Hospira paid $20.4 million for acquisitions and deferredconsideration related to acquisitions made by Mayne Pharma in prior years.Also, Hospira purchased $24.5 million of marketable equity securitiesand received proceeds of $0.8 million from disposal of facilities.

 

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Net Cash Used inFinancing Activities of $54.6 million for the six months ended June 30,2008 includes prepayments of $64.5 million in principal amount of the termloan, in addition to the rescheduled $20.5 million in principal, for a total of$85.0 million. In addition, financing activities includes proceeds fromemployee stock option exercises and related tax benefits of $23.5 million andadditional net borrowing of $7.0 million.

 

*Debt and Capital*

 

Underthe $500.0 million three-year term loan facility due 2010, Hospira was requiredto repay $50.0 million in principal at the end of each quarter in 2008 and$62.5 million for the four remaining payments. Hospira is permitted to prepayamounts borrowed under the facility from time to time without penalty. Prepaymentsare prorated against future payments under the facility reducing the futureobligations. Principal prepayments made in 2007 of $359.7 million and anadditional $64.5 million in the six months ended June 30, 2008, reduce theamounts required to be repaid to $2.1 million at the end of the third andfourth quarters of 2008 and $2.7 million for the four remaining payments. As aresult of the prepayments, the amount due within one year is $9.6 million, andis recorded as short-term borrowings.

 

InJune 2008, Hospira entered into interest rate swap transactions whereby$300.0 million of the $400.0 million ten-year senior unsecured notes due in June 2014were effectively converted from fixed to floating rate debt. Hospira recordsthe interest rate swap contracts at fair value and offsets the carrying amountof the fixed-rate debt by the same amount. Changes in fair value are offsetagainst the carrying amount of the fixed-rate debt through earnings and theineffective portion of the derivative’s change in fair value will beimmediately recognized in earnings.

 

Hospirahas a five-year $375.0 million unsecured revolving credit facility (the “Revolver”).The Revolver is available for working capital and other requirements. As of June 30,2008, Hospira had no amounts outstanding under the Revolver.

 

Certain of our borrowing agreements contain covenantsthat require compliance, for example, a debt to earnings ratio and a minimuminterest coverage ratio. As of June 30, 2008, Hospira was incompliance with all applicable covenants.

 

**Item3.****       Quantitativeand Qualitative Disclosures About Market Risk**

 

In June 2008, Hospira entered into interest rate swap transactionswhereby $300.0 million of the $400.0 million ten-year senior unsecured notesdue in June 2014 were effectively converted from fixed to floating ratedebt. As a result of converting from fixed to floating rate debt, ahypothetical one percentage point increase/(decrease) in interest rates wouldincrease/(decrease) interest expense by $3.0 million.

 

There have been no othermaterial changes to the information provided in Item 7A. to Hospira’s AnnualReport on Form 10-K for the year ended December 31, 2007.

 

**Item 4.****      ****Controls and Procedures**

 

*Evaluation of disclosure controlsand procedures.*  The Chairman and Chief Executive Officer,Christopher B. Begley, and Senior Vice President, Finance and Chief FinancialOfficer, Thomas E. Werner, evaluated the effectiveness of Hospira’s disclosurecontrols and procedures (as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934) as of the end of the period covered bythis report, and concluded that Hospira’s disclosure controls and procedureswere effective.

 

*Changes in internal controls.* There was no change in Hospira’sinternal control over financial reporting that has materially affected, or isreasonably likely to materially affect, Hospira’s internal control overfinancial reporting.

 

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**PART II.  OTHER INFORMATION**

 

**Item1.****       LegalProceedings**

 

The disclosure containedin Note 12 to the condensed consolidated financial statements included in Part I.Item 1 hereof is incorporated herein by reference.

 

**Item1A.****    RiskFactors**

 

Please refer to Item 1A. in Hospira’s Annual Report on Form 10-Kfor the year ended December 31, 2007 for a discussion of risks to whichHospira’s business, financial condition, results of operations and cash flowsare subject.

 

**Item2.****       UnregisteredSales of Equity Securities and Use of Proceeds**

 

(c)**  **Issuer Purchases of Equity Securities

 

The table below gives information on a monthly basis regardingpurchases made by Hospira of its common stock.

 
| **Period**                     | ** ** | **Total Number  of Shares  Purchased (1)** | ** ** | **Average Price  Paid per Share** | ** ** | **Total Number  of Shares  Purchased as  Part of  Publicly  Announced  Plans or  Programs** | ** ** | **Maximum Number  (or Approximate  Dollar Value) of  Shares that May  Yet be Purchased  Under the Plans or  Programs (2)** | ** ** |
|--------------------------------|------------|-----------------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| April 1-April 30, 2008    |       | 2,586                                                     |       | $                                                | 42.26      |                                                                                                                 | —     |                                                                                                                                                                                   | $          | 100,233,606 |   |
| May 1-May 31, 2008   |       | 39,863                                                    |       | $                                                | 39.94      |                                                                                                                 | —     |                                                                                                                                                                                   | $          | 100,233,606 |   |
| June 1-June 30, 2008 |       | 6,566                                                     |       | $                                                | 40.80      |                                                                                                                 | —     |                                                                                                                                                                                   | $          | 100,233,606 |   |
| Total                          |       | 49,015                                                    |       | $                                                | 40.18      |                                                                                                                 | —     |                                                                                                                                                                                   | $          | 100,233,606 |   |

 

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(1)**  **These shares represent the shares deemed surrenderedto Hospira to pay the exercise price and satisfy minimum statutory taxwithholding obligations in connection with the exercise of employee stockoptions.

 

(2)**  **In February 2006, Hospira’s board ofdirectors authorized the repurchase of up to $400.0 million of Hospira’s commonstock in accordance with Rule 10b-18 under the Securities Exchange Act of1934. The repurchase of shares commenced in early March 2006. As of June 30,2008, Hospira had purchased 7.6 million shares for $299.8 million in the aggregateunder the 2006 board authority, all of which were purchased during 2006.Hospira does not expect to repurchase any shares in 2008 under this program.

 

**Item4.****       Submissionof Matters to a Vote of Security Holders**

 

The information required by this item has been previously reported inthe first paragraph (and following table) of Item 8.01 of Hospira’s CurrentReport on Form 8-K filed with the Securities and Exchange Commission on May 14,2008.  Such information is incorporated by reference herein.

 

**Item6.****       Exhibits**

 

Alist of exhibits filed herewith or incorporated by reference herein immediatelyprecedes such exhibits and is incorporated herein by reference.

 

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SIGNATURE

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 
|   | HOSPIRA, INC. |
|--------|--------------------|
|   |               |
|   | By                 | /s/ THOMAS E. WERNER |
|   |               | Thomas E. Werner,Senior Vice President, Finance  and Chief Financial Officer |
|   |               | Date: August 6, 2008 |

 

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EXHIBIT INDEX

 
| **Exhibit No.** | ** ** | **Exhibit**                                                                                                                                                    |
|----------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                           |
| 10.1                 |       | Hospira, Inc. Non-Employee Directors’  Fee Plan, as amended.                                                                                         |
|                 |       |                                                                                                                                                           |
| 10.2                 |       | Form of Non-Employee Director Restricted Stock Agreement, as amended.                                                                                     |
|                 |       |                                                                                                                                                           |
| 12.1                 |       | Statement regarding Computation of Ratios.                                                                                                                     |
|                 |       |                                                                                                                                                           |
| 31.1                 |       | Certification of Chief Executive Officer  pursuant to Rule 13a-14(a).                                                                                     |
|                 |       |                                                                                                                                                           |
| 31.2                 |       | Certification of Chief Financial Officer  pursuant to Rule 13a-14(a).                                                                                     |
|                 |       |                                                                                                                                                           |
| 32.1                 |       | Certification of Chief Executive Officer  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. |
|                 |       |                                                                                                                                                           |
| 32.2                 |       | Certification of Chief Financial Officer  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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