** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D. C. 20549**

**FORM 10-Q**

**(Mark One)**

**ý**                                 QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

** **

**For the quarterly period ended June 30, 2006**

** **

**OR**

** **

**o**                                 TRANSITIONREPORT 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.**
| **A Delaware corporation**                           | I.R.S. Employer Identification |
|------------------------------------------------------|--------------------------------|
|                                                 | No.**20-0504497**              |
|                                                 |                           |
| **275 N.  Field Drive  Lake Forest, Illinois 60045** |
| ** **                                           |
| Telephone:**(224) 212-2000**                         |

 

Indicate by check mark whether the registrant (l) hasfiled all reports 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 90 days. Yes ý.No o.

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

| Large accelerated filer ý | Accelerated  filer o | Non-accelerated  filer o |
|--------------------------------|----------------------|--------------------------|

 

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

As of July 31, 2006, Hospira, Inc. had outstanding157,002,189 shares of common stock, par value $0.01 per share.

 

 

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Table of Contents

**Hospira, Inc.**

**Quarterly Reporton 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, 2006 and June 30, 2005  |   | 3      |   |
|          |   |                                                                                                                                   |   |   |   |
|          |   | Condensed  Consolidated Statements of Cash Flows (Unaudited) — Six Months Ended June 30,  2006 and June 30, 2005        |   | 4      |   |
|          |   |                                                                                                                                   |   |   |   |
|          |   | Condensed  Consolidated Balance Sheets (Unaudited) — June 30, 2006 and December 31, 2005                                          |   | 5      |   |
|          |   |                                                                                                                                   |   |   |   |
|          |   | Condensed  Consolidated Statement of Changes in Shareholders’ Equity (Unaudited) — Six  Months Ended June 30, 2006 |   | 6      |   |
|          |   |                                                                                                                                   |   |   |   |
|          |   | Notes to  Condensed Consolidated Financial Statements (Unaudited)                                                                      |   | 7      |   |
|          |   |                                                                                                                                   |   |   |   |
| Item 2.  |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                            |   | 16     |   |
|          |   |                                                                                                                                   |   |   |   |
| Item 3.  |   | Quantitative  and Qualitative Disclosures about Market Risk                                                                            |   | 25     |   |
|          |   |                                                                                                                                   |   |   |   |
| Item 4.  |   | Controls and  Procedures                                                                                                               |   | 25     |   |
|          |   |                                                                                                                                   |   |   |   |
|          |   | **Part II — Other  Information**                                                                                                  |   |   |   |
|          |   |                                                                                                                                   |   |   |   |
| Item 1.  |   | Legal Proceedings                                                                                                                      |   | 26     |   |
|          |   |                                                                                                                                   |   |   |   |
| Item 1A. |   | Risk Factors                                                                                                                           |   | 26     |   |
|          |   |                                                                                                                                   |   |   |   |
| Item 2.  |   | Changes in  Securities and Use of Proceeds                                                                                             |   | 26     |   |
|          |   |                                                                                                                                   |   |   |   |
| Item 4.  |   | Submission of  Matters to a Vote of Security Holders                                                                                   |   | 26     |   |
|          |   |                                                                                                                                   |   |   |   |
| Item 6.  |   | Exhibits                                                                                                                               |   | 27     |   |

 

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Tableof Contents

**PARTI. FINANCIAL INFORMATION**

**Item1.**                          FinancialStatements

**Hospira, Inc.**

**CondensedConsolidated Statements of Income**

**(Unaudited)**

***(dollars and shares in thousands, except for per shareamounts)***
| ** **                                   | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
|----------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                   | ** ** | **2006**                                           | ** ** | **2005**                                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net sales                                    |       | $                                                  | 629,903    |                                             | $          | 618,510 |   | $ | 1,254,009 |   | $ | 1,235,205 |   |
| Net sales to Abbott  Laboratories            |       | 41,198                                             |       | 43,405                                           |       | 81,386 |   | 88,771 |   |
| Total Net Sales                              |       | 671,101                                            |       | 661,915                                          |       | 1,335,395 |   | 1,323,976 |   |
|                                         |       |                                               |       |                                             |       |   |   |   |   |
| Cost of products sold                        |       | 446,015                                            |       | 443,497                                          |       | 865,513 |   | 887,782 |   |
| Gross Profit                                 |       | 225,086                                            |       | 218,418                                          |       | 469,882 |   | 436,194 |   |
|                                         |       |                                               |       |                                             |       |   |   |   |   |
| Research and  development                    |       | 39,055                                             |       | 32,851                                           |       | 70,056 |   | 61,242 |   |
| Selling, general and  administrative         |       | 111,073                                            |       | 87,409                                           |       | 212,867 |   | 169,284 |   |
| Income From  Operations                      |       | 74,958                                             |       | 98,158                                           |       | 186,959 |   | 205,668 |   |
|                                         |       |                                               |       |                                             |       |   |   |   |   |
| Interest expense                             |       | 7,283                                              |       | 6,857                                            |       | 14,940 |   | 14,026 |   |
| Other (income), net                          |       | (3,549                                             | )          | (3,476                                           | )          | (8,295 | ) | (4,681 | ) |
| Income Before  Income Taxes                  |       | 71,224                                             |       | 94,777                                           |       | 180,314 |   | 196,323 |   |
|                                         |       |                                               |       |                                             |       |   |   |   |   |
| Income tax expense                           |       | 17,074                                             |       | 22,746                                           |       | 45,981 |   | 47,117 |   |
| Net Income                                   |       | $                                                  | 54,150     |                                             | $          | 72,031 |   | $ | 134,333 |   | $ | 149,206 |   |
|                                         |       |                                               |       |                                             |       |   |   |   |   |
| Earnings Per Common  Share:                  |       |                                               |       |                                             |       |   |   |   |   |
| Basic                                        |       | $                                                  | 0.35       |                                             | $          | 0.45 |   | $ | 0.85 |   | $ | 0.94 |   |
| Diluted                                      |       | $                                                  | 0.34       |                                             | $          | 0.44 |   | $ | 0.83 |   | $ | 0.93 |   |
|                                         |       |                                               |       |                                             |       |   |   |   |   |
| Weighted Average Common  Shares Outstanding: |       |                                               |       |                                             |       |   |   |   |   |
| Basic                                        |       | 156,448                                            |       | 158,568                                          |       | 158,673 |   | 157,896 |   |
| Diluted                                      |       | 159,655                                            |       | 160,908                                          |       | 162,026 |   | 159,757 |   |

 

The accompanyingnotes are an integral part of these condensed consolidated financial statements.

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**Hospira, Inc.**

**CondensedConsolidated Statements of Cash Flows**

**(Unaudited)**

***(dollars in thousands)***
| ** **                                                                       | ** ** | **Six Months Ended June 30** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                       | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| Cash Flow From (Used  in) Operating Activities:                                  |       |                                             |       |   |   |
|                                                                             |       |                                             |       |   |   |
| Net income                                                                       |       | $                                                | 134,333    |   | $ | 149,206 |   |
| Adjustments to  reconcile net income to net cash from operating activities— |       |                                             |       |   |   |
| Depreciation                                                                     |       | 77,909                                           |       | 79,606 |   |
| Amortization of  intangibles                                                     |       | 964                                              |       | 936 |   |
| Stock-based  compensation expense                                                |       | 19,584                                           |       | — |   |
| Gain on sale of  facility                                                        |       | (7,851                                           | )          | — |   |
| Changes in  assets and liabilities—                                         |       |                                             |       |   |   |
| Trade  receivables                                                               |       | (32,595                                          | )          | (812 | ) |
| Inventories                                                                      |       | (71,669                                          | )          | 5,339 |   |
| Prepaid expenses  and other assets                                               |       | (6,017                                           | )          | (5,721 | ) |
| Trade accounts  payable and other liabilities                                    |       | 17,530                                           |       | 70,974 |   |
| Other, net                                                                       |       | 47,744                                           |       | 630 |   |
| Net Cash From  Operating Activities                                              |       | 179,932                                          |       | 300,158 |   |
|                                                                             |       |                                             |       |   |   |
| Cash Flow From (Used  in) Investing Activities:                                  |       |                                             |       |   |   |
|                                                                             |       |                                             |       |   |   |
| Acquisitions of  property and equipment                                          |       | (139,784                                         | )          | (131,089 | ) |
| Proceeds from  sale of facility                                                  |       | 11,500                                           |       | 31,818 |   |
| Investments                                                                      |       | (12,045                                          | )          | — |   |
| Sales of  marketable securities                                                  |       | —                                           |       | 72,438 |   |
| Net Cash (Used  in) Investing Activities                                         |       | (140,329                                         | )          | (26,833 | ) |
|                                                                             |       |                                             |       |   |   |
| Cash Flow From (Used  in) Financing Activities:                                  |       |                                             |       |   |   |
|                                                                             |       |                                             |       |   |   |
| Payment to  Abbott for international net assets                                  |       | (98,536                                          | )          | (45,768 | ) |
| Common stock  repurchased                                                        |       | (250,178                                         | )          | — |   |
| Issuance of  long-term debt, net of fees paid                                    |       | —                                           |       | 1,750 |   |
| Repayment of  long-term debt                                                     |       | (71                                              | )          | (44 | ) |
| Other  borrowings, net                                                           |       | 4,069                                            |       | — |   |
| Excess tax benefit  from stock-based compensation arrangements                   |       | 3,159                                            |       | — |   |
| Proceeds from  stock options exercised                                           |       | 34,851                                           |       | 70,255 |   |
| Net Cash (Used  in) From Financing Activities                                    |       | (306,706                                         | )          | 26,193 |   |
|                                                                             |       |                                             |       |   |   |
| Effect of exchange rate  changes on cash and cash equivalents                    |       | 2,938                                            |       | (2,532 | ) |
|                                                                             |       |                                             |       |   |   |
| Net change in cash and  cash equivalents                                         |       | (264,165                                         | )          | 296,986 |   |
| Cash and cash  equivalents at beginning of period                                |       | 520,610                                          |       | 127,695 |   |
| Cash and cash  equivalents at end of period                                      |       | $                                                | 256,445    |   | $ | 424,681 |   |
|                                                                             |       |                                             |       |   |   |
| Supplemental Cash Flow  Information                                              |       |                                             |       |   |   |
|                                                                             |       |                                             |       |   |   |
| Cash paid during the  period for:                                                |       |                                             |       |   |   |
| Interest                                                                         |       | $                                                | 21,376     |   | $ | 18,271 |   |
| Income taxes, net                                                                |       | $                                                | 14,714     |   | $ | 3,128 |   |

 

The accompanyingnotes are an integral part of these condensed consolidated financialstatements.

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**Hospira, Inc.**

**CondensedConsolidated Balance Sheets**

**(Unaudited)**

***(dollars in thousands except for share data)***
| ** **                                                                                                                            | ** ** | **June 30** | ** ** | **December 31** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|----------------------|------------|
| ** **                                                                                                                            | ** ** | **2006**         | ** ** | **2005**             | ** ** |
| **Assets**                                                                                                                            |       |             |       |                 |       |
| Current Assets:                                                                                                                       |       |             |       |                 |       |
| Cash and cash  equivalents                                                                                                            |       | $                | 256,445    |                 | $          | 520,610 |   |
| Trade  receivables, less allowances of $15,556 in 2006 and $16,887 in 2005                                                            |       | 364,696          |       | 327,146              |       |
| Inventories:                                                                                                                          |       |             |       |                 |       |
| Finished  products                                                                                                                    |       | 376,828          |       | 300,860              |       |
| Work in process                                                                                                                       |       | 86,104           |       | 71,449               |       |
| Materials                                                                                                                             |       | 128,277          |       | 137,959              |       |
| Total  inventories                                                                                                                    |       | 591,209          |       | 510,268              |       |
| Prepaid  expenses, deferred income taxes and other receivables                                                                        |       | 209,626          |       | 203,141              |       |
| Total Current  Assets                                                                                                                 |       | 1,421,976        |       | 1,561,165            |       |
| Property and equipment,  at cost                                                                                                      |       | 2,226,875        |       | 2,181,022            |       |
| Less:  accumulated depreciation                                                                                                       |       | 1,203,667        |       | 1,190,209            |       |
| Net Property and  Equipment                                                                                                           |       | 1,023,208        |       | 990,813              |       |
| Intangible assets, net  of amortization                                                                                               |       | 13,962           |       | 14,926               |       |
| Goodwill                                                                                                                              |       | 89,197           |       | 89,197               |       |
| Deferred income taxes                                                                                                                 |       | 11,355           |       | 17,692               |       |
| Other assets                                                                                                                          |       | 121,356          |       | 115,389              |       |
| Total Assets                                                                                                                          |       | $                | 2,681,054  |                 | $          | 2,789,182 |   |
|                                                                                                                                  |       |             |       |                 |       |
| **Liabilities  and Shareholders’ Equity**                                                                                        |       |             |       |                 |       |
| Current Liabilities:                                                                                                                  |       |             |       |                 |       |
| Short-term  borrowings                                                                                                                |       | $                | 9,490      |                 | $          | 2,579 |   |
| Trade accounts  payable                                                                                                               |       | 140,038          |       | 129,865              |       |
| Salaries payable  and other accruals                                                                                                  |       | 381,261          |       | 384,713              |       |
| Due to Abbott,  net                                                                                                                   |       | 13,307           |       | 79,079               |       |
| Total Current  Liabilities                                                                                                            |       | 544,096          |       | 596,236              |       |
| Long-term debt                                                                                                                        |       | 687,632          |       | 695,285              |       |
| Post-retirement  obligations, deferred income taxes and other long-term liabilities                                                   |       | 151,726          |       | 169,794              |       |
| Commitments and  Contingencies                                                                                                        |       |             |       |                 |       |
|                                                                                                                                  |       |             |       |                 |       |
| Shareholders’ Equity:                                                                                                            |       |             |       |                 |       |
| Common stock,  par value $0.01 - authorized: 400,000,000 shares; issued and outstanding  shares: 2006: 156,949,136; 2005: 161,668,083 |       | 1,632            |       | 1,617                |       |
| Preferred stock,  par value $0.01 - authorized: 50,000,000 shares; issued and outstanding: 0  shares                                  |       | —           |       | —               |       |
| Treasury stock,  at cost - Shares: 2006: 6,203,500                                                                                    |       | (250,178         | )          | —               |       |
| Unearned  compensation                                                                                                                |       | —           |       | (263                 | )          |
| Additional  paid-in capital                                                                                                           |       | 1,007,620        |       | 943,577              |       |
| Retained  earnings                                                                                                                    |       | 573,293          |       | 438,960              |       |
| Accumulated  other comprehensive (loss)                                                                                               |       | (34,767          | )          | (56,024              | )          |
| Total  Shareholders’ Equity                                                                                                      |       | 1,297,600        |       | 1,327,867            |       |
| Total Liabilities and Shareholders’ Equity                                                                                       |       | $                | 2,681,054  |                 | $          | 2,789,182 |   |

 

The accompanyingnotes are an integral part of these condensed consolidated financialstatements.

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**Hospira, Inc.**

**CondensedConsolidated Statement of Changes in Shareholders’ Equity**

**(Unaudited)**

***(dollars and shares in thousands)***
| ** **                                                                         | ** ** | ** **            | ** ** | ** **        | ** ** | **Accumulated**        | ** ** | ** **     | ** ** | ** **   | ** ** | ** **       | ** ** | ** **   | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------|------------|------------------------|------------|----------------|------------|--------------|------------|------------------|------------|--------------|------------|------------|------------|
| ** **                                                                         | ** ** | ** **            | ** ** | ** **        | ** ** | **Other**              | ** ** | **Additional** | ** ** | ** **   | ** ** | ** **       | ** ** | ** **   | ** ** | ** ** | ** ** |
| ** **                                                                         | ** ** | **Common Stock** | ** ** | **Comprehensive** | ** ** | **Paid-in**            | ** ** | **Treasury**   | ** ** | **Unearned** | ** ** | **Retained**     | ** ** | ** **   | ** ** |
| ** **                                                                         | ** ** | **Shares**            | ** ** | **Amount**        | ** ** | **Income (Loss)** | ** ** | **Capital**    | ** ** | **Stock**    | ** ** | **Compensation** | ** ** | **Earnings** | ** ** | **Total**  | ** ** |
|                                                                               |       |                  |       |              |       |                   |       |           |       |         |       |             |       |         |       |       |       |
| **Balances at December 31, 2005**                                                  |       | 161,668               |       | $                 | 1,617      |                   | $          | (56,024        | )          | $            | 943,577    |             | $          | —       |       | $          | (263       | ) | $ | 438,960 |   | $ | 1,327,867 |   |
| ** **                                                                         |       |                  |       |              |       |                   |       |           |       |         |       |             |       |         |       |       |       |
| Net Income                                                                         |       | —                |       | —            |       | —                 |       | —         |       | —       |       | —           |       | 134,333      |       | 134,333    |       |
|                                                                               |       |                  |       |              |       |                   |       |           |       |         |       |             |       |         |       |       |       |
| Other comprehensive  income                                                        |       | —                |       | —            |       | 21,257                 |       | —         |       | —       |       | —           |       | —       |       | 21,257     |       |
|                                                                               |       |                  |       |              |       |                   |       |           |       |         |       |             |       |         |       |       |       |
| Common stock repurchases                                                           |       | (6,204                | )          | —            |       | —                 |       | —         |       | (250,178     | )          | —           |       | —       |       | (250,178   | )          |
|                                                                               |       |                  |       |              |       |                   |       |           |       |         |       |             |       |         |       |       |       |
| Changes in shareholders’  equity related to stock-based compensation programs |       | 1,485                 |       | 15                |       | —                 |       | 64,043         |       | —       |       | 263              |       | —       |       | 64,321     |       |
|                                                                               |       |                  |       |              |       |                   |       |           |       |         |       |             |       |         |       |       |       |
| **Balances at June 30, 2006**                                                      |       | 156,949               |       | $                 | 1,632      |                   | $          | (34,767        | )          | $            | 1,007,620  |             | $          | (250,178     | )          | $          | —     |   | $ | 573,293 |   | $ | 1,297,600 |   |

 

The accompanyingnotes are an integral part of these condensed consolidated financialstatements.

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**Hospira, Inc.**

**Notesto Condensed Consolidated Financial Statements**

**June 30, 2006**

**(Unaudited)**

**Note 1 — Basis of Presentation**

These condensedconsolidated financial statements have been prepared pursuant to the rules andregulations of the Securities and Exchange Commission (“SEC”) and, therefore,do not include all information and footnote disclosures normally included inaudited financial statements. However, in the opinion of management, alladjustments, consisting only of normal recurring adjustments, unless otherwisenoted herein, necessary to present fairly the results of operations, financialposition and cash flows have been made. These condensed consolidated financialstatements should be read in conjunction with the consolidated financialstatements and notes thereto included in Hospira’s Annual Report on Form 10-Kfor the year ended December 31, 2005. The results of operations for any interimperiod are not necessarily indicative of the results of operations to beexpected for the full year.

Hospira became a separate public company pursuant to aspin-off from Abbott Laboratories (“Abbott”) on April 30, 2004 (the “spin-offdate”). In connection with the spin-off, Hospira and Abbott agreed that thelegal transfer of certain operations and assets (net of liabilities) outsidethe United States would occur, and be completed, within two years after thespin-off. During the transition period, these operations and assets were used inthe conduct of Hospira’s international business and Hospira was subject to therisks and entitled to the benefits generated by such operations and assets.Hospira was dependent on Abbott’s international infrastructure until such legaltransfers occurred in each international country. These transfers werecompleted in the second quarter of 2006.

**Note 2 — Recently Issued Accounting Standards**

In July 2006, the Financial Accounting Standards Board(“FASB”), issued FASB Interpretation No. 48,*“Accounting for Uncertainty in Income Taxes**— aninterpretation of FASB Statement No. 109”* (“FIN 48”). FIN 48prescribes a recognition threshold and measurement attribute for financialstatement recognition and measurement of a tax position taken or expected to betaken in a tax return. The interpretation also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure, and transition of uncertain tax positions. The provisionsof FIN 48 are effective at the beginning of the first fiscal year that beginsafter December 15, 2006, with the cumulative effect of the change in accountingprinciple recorded as an adjustment to opening retained earnings for that year.Hospira is currently evaluating the potential impact of FIN 48 on its financialstatements.

**Note 3 — Significant Accounting Policies**

The preparation of financial statements in accordancewith generally accepted accounting principles in the United States (GAAP)requires management to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues and expenses. A summary of Hospira’ssignificant accounting policies is included in Note 1 to the company’sconsolidated financial statements included in Hospira’s Annual Report on Form10-K for the year ended December 31, 2005.

In 2006, Hospira expanded its revenue recognitionpolicy to incorporate changes related to new product offerings, which include aserver-based suite of software applications and related maintenance andimplementation services. In addition, Hospira adopted Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-BasedPayment” on January 1, 2006. All other significant accounting policiesremain unchanged. The updated policies are as follows.

*Revenue Recognition*— Hospira recognizes revenues from product sales when persuasive evidence of anarrangement exists, delivery has occurred, the price is fixed and determinable,and collectibility is reasonably assured. For other than certain drug deliverypumps and injectable pharmaceutical contract manufacturing, product revenue isrecognized when products are delivered to customers and title passes. Incertain circumstances, Hospira enters into arrangements in which it providesmultiple elements to its customers. In these cases, total revenue is dividedamong the separate units of accounting (deliverables) based on their relativefair value and is recognized for each deliverable in accordance with theapplicable revenue recognition criteria. The recognition of revenue is delayedif there are significant post-delivery obligations, such as installation orcustomer acceptance.

For drug delivery pumps, revenue is typically derivedunder one of three types of arrangements: outright sales of the drug deliverypump; placements under lease arrangements; and placements under contracts thatinclude associated disposable set purchases. For pump placements, certainarrangements for which Hospira’s warranty obligation extends through the entireterm are accounted for as operating leases. For these, Hospira recognizesrevenue over the lease term, which averages five years. For leases under whichHospira’s warranty obligation is limited to approximately one year, Hospiraaccounts for these as sales-type leases, under which the discounted sales valueof the drug delivery pump is recorded as revenue upon delivery to the customeror completion of post-delivery obligations, if significant.

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Hospira has introduced a server-based suite ofsoftware applications designed to connect data from a hospital’s druginformation library to drug delivery pumps throughout the hospital. Thearrangements related to such applications typically include a perpetualsoftware license, software maintenance and implementation services. Hospirarecognizes revenue related to these arrangements in accordance with theprovisions of Statement of Position (SOP) 97-2, “Software Revenue Recognition,”as amended. Software license revenue and implementation service revenue aregenerally recognized upon completion of related obligations or customeracceptance and software maintenance revenue is recognized ratably over thecontract period.

Injectable pharmaceutical contract manufacturinginvolves filling customers’ active pharmaceutical ingredients (“API”) intodelivery systems. Under these arrangements, customers’ API is often consignedto Hospira and revenue is recorded for the materials and labor provided byHospira, plus a profit, upon shipment to the customer.

A large part of Hospira’s sales are throughwholesalers and to group purchasing organization (“GPO”) member hospitals.These sales typically include provisions for chargebacks, rebates and otheradjustments, which are provided for as a reduction in gross sales at the timethe related sales are recorded. Historical data is readily available andreliable, and is used for estimating the amounts of the reduction in grosssales. See “Chargebacks and Rebates” in Note 1 to the company’s consolidated financialstatements included in Hospira’s Annual Report on Form 10-K for the year endedDecember 31, 2005 for further detail.

*Stock-Based Compensation —*OnJanuary 1, 2006, Hospira adopted SFAS No. 123R, “Share-Based Payment,” whichrequires, among other changes, that the cost resulting from all share-basedpayment transactions be recognized as compensation cost over the vesting periodbased on the fair value of the instrument on the date of grant. Under SFAS No.123R, Hospira uses the Black-Scholes option valuation model to determine thefair value of stock options. The fair value model includes various assumptions,including the expected volatility and expected life of the awards. Theseassumptions reflect Hospira’s best estimates, but they involve inherentuncertainties based on market conditions generally outside of Hospira’scontrol. As a result, if other assumptions had been used, stock-basedcompensation expense, as calculated and recorded under SFAS No. 123R, couldhave been materially impacted. Furthermore, if Hospira uses differentassumptions in future periods, stock-based compensation expense could bematerially impacted in future periods. See Note 5 for additional informationregarding stock-based compensation.

**Note 4 —Restructuring Costs**

In August 2005 and February 2006, Hospira announcedplans to close manufacturing plants in Donegal, Ireland; Ashland, Ohio; andMontreal, Canada. Hospira also provided the planned timeline for phasing outproduction at a facility in Abbott Laboratories’ North Chicago, Illinoiscampus, where it has leased space since the spin-off in April 2004. Theaggregate restructuring charges that Hospira will incur related to theseactions are expected to be in the range of $75 million to $95 million on apre-tax basis. The restructuring costs are expected to be incurred through 2009and consist primarily of costs related to severance and certain other employeebenefit costs, additional depreciation resulting from the decreased usefullives of the buildings and certain equipment, and other exit costs.

During the three months ended June 30, 2006, Hospirarecorded pre-tax restructuring charges of $12.4 million in cost of productssold. Of the total charges, $4.2 million was recorded in the U.S. segment and$8.2 million in the International segment.

During the six months ended June 30, 2006, Hospirarecorded pre-tax restructuring charges of $24.3 million in cost of productssold. Of the total charges, $8.1 million was recorded in the U.S. segment and$16.2 million in the International segment. Hospira has incurred $32.8 millionto date for restructuring charges related to these actions. In May 2006, theDonegal manufacturing plant was sold for $11.5 million, resulting in a pre-taxgain of $7.9 million, which is reported in cost of products sold in theInternational segment. Hospira will continue to occupy the plant under ashort-term lease until all product transfers are completed.

Hospira is currently evaluating the potentialdisposition of its Ashland manufacturing plant and is planning to take thesteps necessary to prepare for such disposition, including environmentalstudies. At this time, Hospira cannot estimate what incremental costs, if any,might be incurred.

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The followingsummarizes the restructuring activity for the six months ended June 30, 2006:

(dollars inthousands)
| ** **                          | ** ** | **Balance at  January 1, 2006** | ** ** | **Costs  incurred** | ** ** | **Payments** | ** ** | **Non cash  items** | ** ** | **Balance at  June 30, 2006** | ** ** |
|-------------------------------------|------------|------------------------------------------------|------------|---------------------|------------|--------------|------------|--------------------------|------------|----------------------------------------------|------------|
| Employee-related  benefit costs (1) |       | $                                              | 7,264      |                | $          | 20,333       |       | $                        | (4,103     | )                                            | $          | (1,518 | ) | $ | 21,976 |   |
| Accelerated  Depreciation           |       | —                                         |       | 2,876               |       | —       |       | (2,876                   | )          | —                                       |       |
| Other                               |       | —                                         |       | 1,091               |       | (435         | )          | (18                      | )          | 638                                          |       |
|                                |       | $                                              | 7,264      |                | $          | 24,300       |       | $                        | (4,538     | )                                            | $          | (4,412 | ) | $ | 22,614 |   |

 

(1)            Includes pension plan curtailmentcharge of $1.5 million related to the announcement in the first quarter 2006 ofthe Ashland plant shutdown.

**Note 5 —Stock-Based Compensation**

On January 1, 2006, Hospira adopted SFAS No. 123Rwhich requires, among other changes, that the cost resulting from allshare-based payment transactions be recognized as compensation cost over thevesting period based on the fair value of the instrument on the date of grant.SFAS No. 123R revises SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFASNo. 123”), which previously allowed pro forma disclosure of certain share-basedcompensation expense. Further, SFAS No. 123R supercedes Accounting PrinciplesBoard Opinion No. 25, “Accounting for Stock Issued to Employees,” whichpreviously allowed the intrinsic value method of accounting for stock options.Such method was applied by Hospira, and accordingly, Hospira’s reported netincome has not included recognition of stock-based compensation expense priorto the adoption of SFAS No. 123R.

Hospira adopted SFAS No. 123R as of January 1, 2006,using the modified prospective transition method. In accordance with themodified prospective transition method, Hospira’s condensed consolidatedfinancial statements for the prior periods have not been restated to reflect,and do not include, the impact of SFAS No. 123R. Stock-based compensationexpense of $13.1 million and $19.6 million was recognized under SFAS No. 123Rfor the three and six months ended June 30, 2006, respectively. The relatedincome tax benefit recognized was $4.7 million and $6.8 million, respectively.As noted above, there was no stock-based compensation expense related toemployee stock options recognized in the statement of income during the threeand six months ended June 30, 2005.

For a more detailed descriptionof Hospira’s stock-based compensation plan, see Note 13 to the company’sconsolidated financial statements included in Hospira’s Annual Report on Form10-K for the year ended December 31, 2005.

The following table illustrates the pro forma effecton net income and earnings per share if Hospira had applied the fair valuerecognition provisions of SFAS 123 during the three and six months ended June30, 2005.

(dollars in thousands, except per share amounts):
| ** **                                                                                      | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                      | ** ** | **June 30, 2005**      | ** ** | **June 30, 2005**    | ** ** |
| Net Income, as  reported                                                                        |       | $                                | 72,031     |                           | $          | 149,206 |   |
| Deduct: Total  stock-based compensation expense determined under fair value method, net of  tax |       | (5,129                           | )          | (7,513                         | )          |
| Pro forma net  income                                                                           |       | $                                | 66,902     |                           | $          | 141,693 |   |
|                                                                                            |       |                             |       |                           |       |
| Basic EPS, as  reported                                                                         |       | $                                | 0.45       |                           | $          | 0.94 |   |
| Basic EPS, pro  forma                                                                           |       | $                                | 0.42       |                           | $          | 0.90 |   |
| Diluted EPS, as  reported                                                                       |       | $                                | 0.44       |                           | $          | 0.93 |   |
| Diluted EPS, pro forma                                                                          |       | $                                | 0.42       |                           | $          | 0.89 |   |

 

SFAS No. 123R requires that cash flows relating to thebenefits of tax deductions in excess of recognized compensation cost bereported as financing cash flow, rather than as an operating cash flow, aspreviously required. For options exercised during the three and six monthsended June 30, 2006, this excess tax benefit was $0.8 million and $3.2 million,respectively.

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In May 2006, 2.2 million options were granted tocertain employees for the 2006 annual stock option grant. These options wereawarded at the fair market value at the time of grant, generally vest overthree years and have a ten-year term. A summary of information related to stockoptions is as follows:
| **Hospira Stock Options** | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Life (Years)** | ** ** | **Aggregate  Intrinsic  Value  (dollars in  thousands)** | ** ** |
|-------------------------------------|------------|------------|------------|----------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------------------|------------|
| Outstanding at  December 31, 2005   |       | 13,111,691 |       | $                                      | 29.65      |                                                |       |                                                          |       |   |
| Granted                             |       | 2,577,990  |       | 41.96                                  |       |                                                |       |                                                          |       |
| Exercised                           |       | (1,820,492 | )          | 27.12                                  |       |                                                |       |                                                          |       |
| Lapsed  (forfeited or cancelled)    |       | (108,682   | )          | 27.22                                  |       |                                                |       |                                                          |       |
| Outstanding at  June 30, 2006       |       | 13,760,507 |       | $                                      | 32.28      |                                                | 5.63       |                                                          | $          | 147,210 |   |
| Exercisable at June 30,  2006       |       | 8,364,308  |       | $                                      | 29.42      |                                                | 4.70       |                                                          | $          | 113,287 |   |

 

The total intrinsic value of options exercised duringthe three and six months ended June 30, 2006 was $14.2 million and $29.8million, respectively.

As of June 30, 2006, there was $50.8 million of totalunrecognized compensation cost related to non-vested share-based compensationarrangements. That cost is expected to be recognized over a weighted averageperiod of 1.8 years. The total fair value of shares becoming fully vestedduring the three months and six months ended June 30, 2006 was $1.3 million and$7.6 million, respectively.

The weighted average fair value for the Hospiraoptions granted in the three and six months ended June 30, 2006 was $16.40 and$15.97, respectively. The weighted average fair value for the Hospira optionsgranted in the three and six months ended June 30, 2005 was $11.29 and $11.26,respectively. The fair value was estimated using the Black-Scholes option-pricingmodel based on the weighted average market price at the grant date and theweighted average assumptions specific to the underlying options. Expectedvolatility assumptions are based on a combination of historical volatility ofHospira’s stock and historical volatility of peer companies. Expected lifeassumptions for 2006 are based on the “simplified” method as described in SECStaff Accounting Bulletin No. 107, which is the midpoint between the vestingdate and the end of the contractual term. The risk-free interest rate wasselected based upon yields of U.S. Treasury issues with a term equal to theexpected life of the option being valued. The weighted average assumptionsutilized for option grants during the periods presented are as follows:
| ** **                                                           | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                           | ** ** | **2006**                                           | ** ** | **2005**                                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| Hospira Stock  Options Black-Scholes assumptions (weighted average): |       |                                               |       |                                             |       |   |   |   |   |
| Volatility                                                           |       | 31.0%                                              |       | 30.0%                                            |       | 31.0% |   | 30.0% |   |
| Expected life  (years)                                               |       | 5.8                                                |       | 5.2                                              |       | 5.7 |   | 5.1 |   |
| Risk-free  interest rate                                             |       | 5.0%                                               |       | 3.9%                                             |       | 5.0% |   | 3.9% |   |
| Dividend yield                                                       |       | 0.0%                                               |       | 0.0%                                             |       | 0.0% |   | 0.0% |   |

 

**Note 6 — IncomeTaxes**

Taxes on income reflect the estimated annual effectiverates, excluding the effect of significant unusual items. During the secondquarter 2006, Hospira decreased its annual effective tax rate from 26.5% to25.5% due primarily to an anticipated higher proportion of income fromlower-tax jurisdictions. The effective tax rates are less than the statutoryU.S. federal income tax rate principally due to the benefit of tax exemptions,of varying durations, in several non-U.S. taxing jurisdictions.

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**Note 7 — Earningsper Share**

Basic earnings per share are computed by dividing netincome by the number of weighted average common shares outstanding during thereporting period. Diluted earnings per share are calculated to give effect toall potentially dilutive common shares that were outstanding during thereporting period. The following table shows the effect of stock options on theweighted average number of shares outstanding used in calculating dilutedearnings per share:

*(shares in thousands)*
| ** **                                           | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
|------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                           | ** ** | **2006**                                           | ** ** | **2005**                                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| Weighted average  common shares outstanding          |       | 156,448                                            |       | 158,568                                          |       | 158,673 |   | 157,896 |   |
| Assumed exercise  of stock options                   |       | 3,207                                              |       | 2,340                                            |       | 3,353 |   | 1,861 |   |
| Weighted average  dilutive common shares outstanding |       | 159,655                                            |       | 160,908                                          |       | 162,026 |   | 159,757 |   |

 

The number of outstanding options to purchase Hospirastock for which the exercise price of the options exceeded the average stockprice was 2.7 million for both the three and six months ended June 30, 2006,and 1.4 million and 1.5 million for the three and six months ended June 30,2005, respectively. Accordingly, these options are excluded from the dilutedearnings per share calculation for these periods.

**Note** 8 — Litigation

Hospira, Abbott, or in some instances both, areinvolved in various claims and legal proceedings, including product liabilityclaims and proceedings related to Hospira’s business.

Various state and federal agencies, including the U.S.Department of Justice and various state attorneys general, are investigating anumber of pharmaceutical companies, including Abbott, for allegedly engaging inimproper marketing and pricing practices with respect to certain Medicare andMedicaid reimbursable products, including practices relating to averagewholesale price (“AWP”). These are civil investigations that are seeking toidentify the practices and determine whether those practices violated any laws,including federal and state false claims acts, or constituted fraud inconnection with the Medicare and/or Medicaid reimbursement paid to thirdparties. In addition, Abbott is a defendant in a number of purported classactions on behalf of individuals or entities, including healthcare insurers andother third-party payors, that allege generally that Abbott and numerous otherpharmaceutical companies reported false or misleading pricing information inconnection with federal, state and private reimbursement for certain drugs.Many of the products involved in these investigations and lawsuits are Hospiraproducts. Hospira is cooperating with the authorities in these investigations.There may be additional investigations or lawsuits, or additional claims in theexisting investigations or lawsuits, initiated with respect to these matters inthe future. Hospira cannot be certain that it will not be named as a subject ordefendant in these investigations or lawsuits. Hospira is a named defendant inthree such lawsuits: *The State of Texas exrel. Ven-A-Care of the Florida Keys, Inc. v. Abbott Laboratories Inc., Hospira,Inc., B. Braun Medical Inc. and Baxter Healthcare Corporation,*CaseNo. GV401286, pending in the District Court of Travis County, Texas; *State of Hawaii v. Abbott Laboratories, Inc., et al.*,CaseNo. 06-1-0720-04, pending in the Circuit Court of the First Circuit, Hawaii;and *United States of America ex rel. Ven-A-Care of theFlorida Keys, Inc. v. Abbott Laboratories, Inc.,* Case No. 95-1354,pending in the United States District Court for the Southern District ofFlorida. Abbott will indemnify Hospira for liabilities associated with pendingor future AWP investigations and lawsuits only to the extent that they are ofthe same nature as the lawsuits and investigations that existed against Abbottas of the spin-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 a defendant in a lawsuitalleging generally that the spin-off of Hospira from Abbott Laboratoriesadversely affected employee benefits in violation of the Employee Retirement SecurityAct of 1974 (ERISA). The lawsuit was filed on November 8, 2004 in the UnitedStates District Court for the Northern District of Illinois, and is captioned: *Myla Nauman, Jane Roller and Michael Loughery v. Abbott Laboratoriesand Hospira, Inc.* On November 18, 2005, the complaint was amended toassert an additional claim against Abbott and Hospira for breach of fiduciaryduty under ERISA. Hospira has moved to dismiss the new claim. By Order datedDecember 30, 2005, the Court granted class action status to the lawsuit. Thenew claim in the amended complaint is not subject to the class certificationruling. As to the sole claim against Hospira in the original complaint, thecourt certified a class defined as: “all employees of Abbott who wereparticipants in the Abbott Benefit Plans and whose employment with Abbott wasterminated between August 22, 2003 and April 30, 2004, as a result of thespin-off of the HPD/creation of Hospira announced by Abbott on August 22, 2003,and who were eligible for retirement under the Abbott Benefit Plans on the dateof their terminations.” Hospira denies all material allegations assertedagainst it in the complaint.

On August 12, 2005, Retractable Technologies, Inc. (“RTI”)filed a lawsuit against Abbott Laboratories, Inc. alleging breach of contractand fraud in connection 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 District of Texas. RTI purported to terminatethe contract for breach in 2003. The lawsuit alleges that Abbott misled RTI andbreached the Agreement in connection with Abbott’s marketing efforts. RTI seeksunspecified monetary damages as 

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well as punitive damages. Hospira has conditionallyagreed to defend and indemnify Abbott in connection with this lawsuit, whichinvolves a contract carried out by Abbott’s former Hospital Products Division.Abbott denies all material allegations in the complaint. Additionally, Abbottmaintains that the dispute must be resolved by arbitration, in accordance withthe terms of the Agreement. Abbott intends to pursue claims against RTI forbreach of the Agreement in arbitration or in federal court. Hospira isentitled, pursuant to its agreements with Abbott, to any amounts recovered dueto RTI’s breach of the Agreement.

Hospira’s product liability claim exposures areevaluated each reporting period. Hospira’s reserves, which are not significantat June 30, 2006 and 2005, are the best estimate of loss, as defined by SFASNo. 5, “Accounting for Contingencies.”

Based upon information that is currently available,management believes that the likelihood of a material loss in excess ofrecorded amounts is remote.

Additional legal proceedings may occur that may resultin a change in the estimated reserves recorded by Hospira. It is not feasibleto predict the outcome of such proceedings with certainty and there can be noassurance that their ultimate disposition will not have a material adverseeffect on Hospira’s financial position, cash flows, or results of operations.

**Note 9 —Post-Retirement Benefits**

Retirement plans consist of defined benefit (“pension”),defined contribution, and post-retirement medical and dental plans. The pensionand post-retirement medical and dental plans cover certain employees both inand outside of the United States.

Net cost (benefit) recognized for the three and sixmonths ended June 30, 2006 and 2005 for the major pension plans andpost-retirement medical and dental benefit plans, is as follows:

*(dollars in thousands)*
| ** **                                        | ** ** | **Pension Plans**                         | ** ** |
|---------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                        | ** ** | **Three Months Ended  June 30** | ** ** | **Six Months Ended  June 30** | ** ** |
| ** **                                        | ** ** | **2006**                                       | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Service cost for  benefits earned during the year |       | $                                              | 650        |   | $ | 529 |   | $ | 1,294 |   | $ | 1,058 |   |
| Interest cost on  projected benefit obligations   |       | 6,117                                          |       | 5,508 |   | 12,140 |   | 11,016 |   |
| Expected return  on plans' assets                 |       | (7,427                                         | )          | (7,345 | ) | (14,723 | ) | (14,690 | ) |
| Net amortization                                  |       | 754                                            |       | 306 |   | 1,722 |   | 612 |   |
| Curtailment of  benefits (1)                      |       | —                                         |       | — |   | 1,518 |   | — |   |
| Net cost (benefit)                                |       | $                                              | 94         |   | $ | (1,002 | ) | $ | 1,951 |   | $ | (2,004 | ) |

 

(1)            Relates to the planned shutdown ofthe Ashland plant.

*(dollars in thousands)*
| ** **                                        | ** ** | **Medical and Dental Plans**    | ** ** |
|---------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                        | ** ** | **Three Months Ended  June 30** | ** ** | **Six Months Ended  June 30** | ** ** |
| ** **                                        | ** ** | **2006**                                       | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Service cost for  benefits earned during the year |       | $                                              | 525        |   | $ | 359 |   | $ | 1,051 |   | $ | 718 |   |
| Interest cost on  projected benefit obligations   |       | 843                                            |       | 789 |   | 1,686 |   | 1,578 |   |
| Net amortization                                  |       | 436                                            |       | 483 |   | 873 |   | 966 |   |
| Net cost                                          |       | $                                              | 1,804      |   | $ | 1,631 |   | $ | 3,610 |   | $ | 3,262 |   |

 

The pension plan for employees of the Ashland plantwas merged with the Hospira Annuity Retirement Plan (Hospira’s primary pensionplan) on April 1, 2006. As a result of the merger, the plan obligations of bothplans were re-measured during the quarter. This resulted in a decrease in theadditional minimum pension liability of $24.4 million ($12.9 millionnet-of-tax). The reduction of the minimum pension liability is reflected inaccumulated other comprehensive income.

Hospira’s employees participate in the Hospira 401(k)Retirement Savings Plan. Hospira’s contributions to this defined contributionplan for the three months ended June 30, 2006 and 2005 were $9.0 million and$8.2 million, respectively. For the six months ended June 30, 2006 and 2005contributions were $17.5 million and $30.3 million, respectively. Included inthe six months ended June 30, 2005 is a $13.8 million one-time companycontribution that was announced and accrued in 2004.

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Hospira funds its domestic pension plans according toIRS funding limitations. Based on those limitations, Hospira does not expect tocontribute to its U.S. pension plans in 2006.

**Note 10 —Intangible Assets**

Intangible assets,primarily technology and product rights, are as follows:

*(dollars in thousands)*
| ** **                      | ** ** | **June 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|---------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| Cost                            |       | $                           | 40,768     |                            | $          | 40,768 |   |
| Less:  accumulated amortization |       | (26,806                     | )          | (25,842                         | )          |
| Intangible assets, net          |       | $                           | 13,962     |                            | $          | 14,926 |   |

 

Intangible assets have definite lives and areamortized on a straight-line basis over their estimated useful lives (3 to 10years, average 9 years). Intangible asset amortization for each of the fivesucceeding fiscal years is estimated at $1.0 million for 2006, $1.9 million for2007, $1.8 million for 2008, $1.5 million for 2009, and $1.4 million for 2010.

**Note 11 — Short-termBorrowings and Long-term Debt**

Hospira’s debt consists of the following at June 30,2006 and December 31, 2005:

*(dollars in thousands)*
| ** **                                           | ** ** | **June 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|------------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| Long-term debt:                                      |       |                        |       |                            |       |
| Senior unsecured notes due 2009                      |       | $                           | 300,000    |                            | $          | 300,000 |   |
| Senior unsecured notes due 2014                      |       | 400,000                     |       | 400,000                         |       |
| Economic development promissory notes due 2015       |       | 1,393                       |       | 1,465                           |       |
| International borrowings due 2007                    |       | —                      |       | 3,502                           |       |
| Fair value of interest rate swap instruments         |       | (12,811                     | )          | (8,662                          | )          |
| Total long-term debt                                 |       | 688,582                     |       | 696,305                         |       |
| Unamortized debt  discount on senior unsecured notes |       | (950                        | )          | (1,020                          | )          |
| Long-term debt                                       |       | 687,632                     |       | 695,285                         |       |
| Short-term  borrowings                               |       | 9,490                       |       | 2,579                           |       |
| Total debt                                           |       | $                           | 697,122    |                            | $          | 697,864 |   |

 

Hospira has a five-year $375 million unsecuredrevolving credit facility, which it entered into on December 16, 2005 (the “Revolver”),and which is available for working capital and other requirements. The Revolverallows Hospira to borrow funds at variable interest rates as short-term cashneeds dictate. As of June 30, 2006, Hospira had no amounts outstanding underthe Revolver.

The Revolver and the Senior Unsecured Notes contain,among other provisions, covenants with which Hospira must comply while they arein force. The covenants limit Hospira’s ability to allow liens on itsproperties or assets, or merge or consolidate with other entities. Under theRevolver, among other things, Hospira must also comply with certain financialcovenants, including a minimum interest coverage ratio and a maximum leverageratio. As of June 30, 2006, Hospira was in compliance with all covenants underthe Revolver and the Senior Unsecured Notes.

**Note 12 —Comprehensive Income, net of tax**

*(dollars in thousands)*
| ** **                                                 | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
|------------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                 | ** ** | **2006**                                           | ** ** | **2005**                                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| Foreign currency  translation gains (losses)               |       | $                                                  | 6,282      |                                             | $          | (6,668 | ) | $ | 8,237 |   | $ | (10,886 | ) |
| Unrealized  (losses) gains on marketable equity securities |       | (1,309                                             | )          | (127                                             | )          | 125 |   | (420 | ) |
| Minimum pension  liability adjustment                      |       | 12,895                                             |       | —                                           |       | 12,895 |   | — |   |
| Total other  comprehensive income (loss)                   |       | 17,868                                             |       | (6,795                                           | )          | 21,257 |   | (11,306 | ) |
| Net Income                                                 |       | 54,150                                             |       | 72,031                                           |       | 134,333 |   | 149,206 |   |
| Total Comprehensive  Income                                |       | $                                                  | 72,018     |                                             | $          | 65,236 |   | $ | 155,590 |   | $ | 137,900 |   |

 

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| ** **                                                               | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                               | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| Cumulative  foreign currency translation gains                           |       | $                 | 8,459      |                  | $          | 222 |   |
| Cumulative  unrealized gains on marketable equity securities, net of tax |       | 4,310             |       | 4,185                 |       |
| Cumulative  minimum pension liability adjustments, net of tax            |       | (47,536           | )          | (60,431               | )          |
| Accumulated Other  Comprehensive (Loss)                                  |       | $                 | (34,767    | )                     | $          | (56,024 | ) |

 

**Note 13 — SegmentInformation**

Hospira’s principal business is the development,manufacture and sale of a broad line of hospital products, including specialtyinjectable pharmaceuticals and medication delivery systems, and the provisionof injectable pharmaceutical contract manufacturing services. Hospira has tworeportable segments: U.S. and International.

Hospira’s underlying accounting records are maintainedon a legal entity basis for government and public reporting requirements.Segment disclosures are on a performance basis consistent with internalmanagement reporting. For internal management reporting, intersegment transfersof inventory are recorded at standard cost and are not a measure of segmentincome from operations. The costs of certain corporate functions that benefitthe entire organization are not allocated. The following segment informationhas been prepared in accordance with the internal accounting policies ofHospira, as described above.

*(dollars in thousands)*
| ** **                  | ** ** | **Three Months Ended June 30** | ** ** | ** **                           | ** ** | **Six Months Ended June 30** | ** ** |
|-----------------------------|------------|----------------------------------------------------|------------|--------------------------------------|------------|--------------------------------------------------|------------|
| ** **                  | ** ** | **Net Sales**                                 | ** ** | **Income from Operations** | ** ** | ** **                                       | ** ** | **Net Sales** | ** ** | **Income from Operations** | ** ** |
| ** **                  | ** ** | **2006**                                           | ** ** | **2005**                             | ** ** | **2006**                                         | ** ** | **2005** | ** ** | ** ** | ** ** | **2006** | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
|                        |       |                                               |       |                                 |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S.                        |       | $                                                  | 557,682    |                                 | $          | 549,380                                          |       | $ | 83,070 |   | $ | 92,674 |   |   |   | $ | 1,106,876 |   | $ | 1,099,770 |   | $ | 197,115 |   | $ | 190,826 |   |
|                        |       |                                               |       |                                 |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| International               |       | 113,419                                            |       | 112,535                              |       | 6,700                                            |       | 20,539 |   |   |   | 228,519 |   | 224,206 |   | 18,614 |   | 42,192 |   |
|                        |       |                                               |       |                                 |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total reportable  segments  |       | $                                                  | 671,101    |                                 | $          | 661,915                                          |       | 89,770 |   | 113,213 |   |   |   | $ | 1,335,395 |   | $ | 1,323,976 |   | 215,729 |   | 233,018 |   |
|                        |       |                                               |       |                                 |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Corporate  functions        |       |                                               |       |                                 |       | (14,812                                          | )          | (15,055 | ) |   |   |   |   |   |   | (28,770 | ) | (27,350 | ) |
| Income from  operations     |       |                                               |       |                                 |       | 74,958                                           |       | 98,158 |   |   |   |   |   |   |   | 186,959 |   | 205,668 |   |
| Other                       |       |                                               |       |                                 |       | (3,734                                           | )          | (3,381 | ) |   |   |   |   |   |   | (6,645 | ) | (9,345 | ) |
|                        |       |                                               |       |                                 |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Income before income  taxes |       |                                               |       |                                 |       | $                                                | 71,224     |   | $ | 94,777 |   |   |   |   |   |   |   | $ | 180,314 |   | $ | 196,323 |   |

 

**Note 14 —Relationship with Abbott**

In connection with the spin-off, Hospira and Abbottentered into agreements pursuant to which Hospira and Abbott provided to theother, on an interim, transitional basis, various services. The agreed-uponcharges for such services were generally intended to allow the servicing partyto recover all out-of-pocket costs plus a mark up. The services generallycommenced on the spin-off date and terminated no later than 24 months followingthe spin-off date. The net cost of these various services to Hospira was notsignificant for the three months ended June 30, 2006 and $0.5 million for thesix months ended June 30, 2006. For the three and six months ended June 30,2005, the net cost was $1.1 million and $2.7 million, respectively.

In addition, Hospira leases floor space in certainAbbott facilities. The terms of the leases range from two to ten years from thespin-off date, unless terminated earlier by Hospira, and include additionalservices provided by Abbott. These additional services are integral to thefacilities and primarily include manufacturing support functions, qualityassurance and information technology systems. The cost for the leases andadditional services was $5.6 million and $11.2 million for the three and sixmonths ended June 30, 2006, and $7.2 million and $13.5 million for the threeand six months ended June 30, 2005, respectively.

Both Hospira and Abbott have provided and willcontinue to provide manufacturing services to the other. For manufacturingservices provided to Abbott, Hospira records as revenue its costs plus athird-party manufacturing profit and, for certain products, Hospira receivesthe bulk material from Abbott and the mark up is on the value-added portiononly. Inventory that Hospira purchases from Abbott is at Abbott’s cost plus athird-party manufacturing profit. Sales to Abbott amounted to $41 million and$81 million for the three and six months ended June 30, 2006, and $43 millionand $89 million for the three and six months ended June 30, 2005, respectively.Product purchases from Abbott were $20 million and $42 million for the threeand six months ended June 30, 

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2006, and $20 million and $39 million for the threeand six months ended June 30, 2005, respectively.

In connection with the spin-off, Hospira and Abbottagreed that the legal transfer of certain operations and assets (net ofliabilities) outside the United States would occur, and be completed, withintwo years after the spin-off. During the transition period, these operationsand assets were used in the conduct of Hospira’s international business andHospira was subject to the risks and entitled to the benefits generated by suchoperations and assets. Hospira was obligated to pay Abbott for these operationsand assets, and assume the corresponding liabilities, over a two-year periodafter the spin-off date as Hospira established its business infrastructureoutside the United States and obtained regulatory approval for the transfer ofthe marketing authorizations for Hospira products to local Hospira affiliatesor third-party distributors. The total amounts paid were $72.4 million and$98.5 million in the second quarter and for the six months ended June 30, 2006,respectively, and $215.3 million to date. As of April 30, 2006, the net assetsof all countries have transferred to Hospira. As of June 30, 2006, Hospira hasamounts due to Abbott in the amount of $27.8 million for settlement of certaintransfers of net assets. The amount due to Abbott for these settlements isoffset by $23.0 million due from Abbott for items that are related to theinternational business. These items include amounts due for operating profitsand inventory purchases of Hospira products to support the internationalbusiness. All amounts outstanding between Hospira and Abbott are included inDue to Abbott, Net on the balance sheet.

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**Item 2.**                          Management’sDiscussion and Analysis of Financial Condition and Results of Operations

**Overview**

Hospira is a global specialty pharmaceutical andmedication delivery company that is focused on products that improve theproductivity, safety and efficacy of patient care in the acute care setting.Hospira is a leader in the development, manufacture and marketing of specialtyinjectable pharmaceuticals and medication delivery systems that deliver drugsand intravenous (I.V.) fluids. Hospira is also a leading provider of contractmanufacturing services to pharmaceutical and biotechnology companies forformulation development, filling and finishing of injectable pharmaceuticals. Hospira’sbroad portfolio of products is used by hospitals and alternate site providers,such as clinics, home healthcare providers and long-term care facilities.

Please refer to the overview of “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” inHospira’s Annual Report on Form 10-K for the year ended December 31, 2005,which was filed with the Securities and Exchange Commission on March 15, 2006.Except as discussed in this Item 2, Hospira is not aware of any material changesto such information.

**Transition fromAbbott**

Hospira completed its separation from Abbott duringthe quarter as the operations and net assets in all remaining countries outsidethe United States were transferred to Hospira from Abbott. For further informationregarding such transfers, and the amount remaining payable for settlements ofcertain transfers, please see “Liquidity and Capital Resources at June 30, 2006compared with December 31, 2005.”

During the three and six months ended June 30,2006, Hospira incurred $11.0 million and $26.3 million, respectively, ofnon-recurring transition costs. These costs relate to the establishment of newfacilities, the build-out of independent information technology systems, andproduct registration and re-labeling. Hospira had previously estimated that$100 million (pre-tax) of such costs would be incurred over the 24-month periodsubsequent to the spin-off. Hospira has incurred $104.8 million of these costs inthe aggregate through June 30, 2006. However, the company determined thatcompleting the remaining transition-related matters, the majority of which relatesto the company’s independent information technology system, would require $7million to $10 million of estimated expenditures in the second half of 2006.The company now expects the aggregate non-recurring transition expenses tototal approximately $112 million to $115 million (pre-tax) through December 31,2006. The remaining transition activities are subject to risks anduncertainties, including the possibility of incurring higher than expectedcosts to complete the transition and possible difficulties implementing andoperating the information technology system.

**Other Factors**

*GPO Contracts.*Approximately 50%of Hospira’s net sales are made under these contracts. Typically, thesecontracts cover a portion of Hospira’s product lines, specify the prices forHospira’s products, and are effective for three to five years. Generally, thecontracts are extended or competitively bid prior to contract expiration.Hospira has four GPO pharmacy contracts scheduled to be renewed or renegotiatedduring 2006. As of June 30, 2006, three of these GPO pharmacy contracts weresigned as new contracts and the remaining one is up for renewal in late 2006.

*Share Repurchase.*In February2006, Hospira’s board of directors approved a $400 million share repurchaseprogram. As of June 30, 2006, Hospira repurchased 6,203,500 shares for $250.2million. Hospira expects to fund any future repurchases under this program fromoperating cash flows.

*Stock-Based Compensation Expense.*BeginningJanuary 1, 2006, expenses relating to stock options issued to Hospira’semployees have been reflected in Hospira’s results of operations. For the threeand six months ended June 30, 2006, such expense was $13.1 million and $19.6million, respectively. The amount of stock-based compensation expense in thefuture will depend on the number of options (or other share-based awards)granted, the terms of those awards and their fair values. For furtherinformation, see Note 5 to the condensed consolidated financial statementsincluded in Item 1.

*Drug Delivery Pumps.* Hospiraexpects to achieve sales growth in 2006 and beyond in part due to increasedsales of its drug delivery pumps and related products. Hospira believes thatthe features and functionality offered by its newer technology products, alongwith the absence of a significant competitor from the general infusion pumpmarket, position it to achieve such growth. As a result, Hospira isaggressively competing to upgrade its current customer base as well as tocapture competitive business. Because of changes in technology, it may takemore time and effort to sell newer-technology products to its customers ascustomers must accept more expensive and more complex products. Hospira alsoexpects intense competition for existing and potential customers from othercompetitors. The timing and amount of purchases made by customers during theyear cannot be predicted with certainty.

*International Operations*. AsHospira’s international operations have transitioned from Abbott, Hospira hasexperienced some disruptions in the international business as a result ofestablishing its global supply chain, systems, structure and processes. Thesedisruptions led to inability to supply customers on a timely basis in certaincountries and lower customer service levels. Hospira is 

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working to resolve these transition-relateddisruptions and improve its customer service levels internationally. However,if Hospira does not successfully resolve these issues, Hospira may losecustomers and incur additional operating costs, which would adversely affectits sales and profitability.

**CriticalAccounting Policies**

The preparation of financial statements in accordancewith generally accepted accounting principles in the United States (GAAP)requires management to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues and expenses. A summary of Hospira’ssignificant accounting policies is included in Note 1 to the company’s consolidatedfinancial statements, which are included in Hospira’s Annual Report on Form10-K for the year ended December 31, 2005. Certain of Hospira’s accountingpolicies are considered critical, as these policies require significant,difficult or complex judgments by management, often employing the use ofestimates about the effects of matters that are inherently uncertain. Suchpolicies are summarized in “Item 7. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” of Hospira’s Annual Report onForm 10-K for the year ended December 31, 2005.

In 2006, Hospira expanded its revenue recognitionpolicy to incorporate changes related to new product offerings, which include aserver-based suite of software applications and related maintenance andimplementation services. In addition, Hospira adopted Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-BasedPayment” on January 1, 2006. All other critical accounting policiesremain unchanged. The updated policies are as follows.

*Revenue Recognition*— Hospira recognizes revenues from product sales when persuasive evidence of anarrangement exists, delivery has occurred, the price is fixed and determinable,and collectibility is reasonably assured. For other than certain drug deliverypumps and injectable pharmaceutical contract manufacturing, product revenue isrecognized when products are delivered to customers and title passes. Incertain circumstances, Hospira enters into arrangements in which it providesmultiple elements to its customers. In these cases, total revenue is dividedamong the separate units of accounting (deliverables) based on their relativefair value and is recognized for each deliverable in accordance with theapplicable revenue recognition criteria. The recognition of revenue is delayedif there are significant post-delivery obligations, such as installation orcustomer acceptance.

For drug delivery pumps, revenue is typically derivedunder one of three types of arrangements: outright sales of the drug deliverypump; placements under lease arrangements; and placements under contracts thatinclude associated disposable set purchases. For pump placements, certainarrangements for which Hospira’s warranty obligation extends through the entireterm are accounted for as operating leases. For these, Hospira recognizesrevenue over the lease term, which averages five years. For leases under whichHospira’s warranty obligation is limited to approximately one year, Hospiraaccounts for these as sales-type leases, under which the discounted sales valueof the drug delivery pump is recorded as revenue upon placement with thecustomer.

Hospira has introduced a server-based suite ofsoftware applications designed to connect data from a hospital’s druginformation library to drug delivery pumps throughout the hospital. Thearrangements related to such applications typically include a perpetualsoftware license, software maintenance and implementation services. Hospirarecognizes revenue related to these arrangements in accordance with theprovisions of Statement of Position (SOP) 97-2, “Software Revenue Recognition,”as amended. Software license revenue and implementation service revenue aregenerally recognized upon completion of related obligations or customer acceptanceand software maintenance revenue is recognized ratably over the contractperiod.

Injectable pharmaceutical contract manufacturinginvolves filling customers’ active pharmaceutical ingredients (“API”) intodelivery systems. Under these arrangements, customers’ API is often consignedto Hospira and revenue is recorded for the materials and labor provided byHospira, plus a profit, upon shipment to the customer.

A large part of Hospira’s sales are throughwholesalers and to GPO member hospitals. These sales typically includeprovisions for chargebacks, rebates and other adjustments, which are providedfor as a reduction in gross sales at the time the related sales are recorded.Historical data is readily available and reliable, and is used for estimatingthe amounts of the reduction in gross sales. See “Chargebacks and Rebates” in “Item7. Management’s Discussion and Analysis of Financial Condition and Results ofOperations” of Hospira’s Annual Report on Form 10-K for the year ended December31, 2005 for further detail.

*Stock-Based Compensation —*OnJanuary 1, 2006, Hospira adopted SFAS No. 123R, “Share-Based Payment,” whichrequires, among other changes, that the cost resulting from all share-basedpayment transactions be recognized as compensation cost over the vesting periodbased on the fair value of the instrument on the date of grant. Under SFAS No.123R, Hospira uses the Black-Scholes option valuation model to determine thefair value of stock options. The fair value model includes various assumptions,including the expected volatility and expected life of the awards. Theseassumptions reflect Hospira’s best estimates, but they involve inherentuncertainties based on market conditions generally outside of Hospira’scontrol. As a result, if other assumptions had been used, stock-basedcompensation expense, as calculated and recorded under SFAS No. 123R, couldhave been materially impacted. Furthermore, if Hospira uses differentassumptions in future periods, stock-based compensation expense could be materiallyimpacted in future periods. See Note 5 to the condensed consolidated financialstatements included in Item 1 for additional information regarding stock-basedcompensation.

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**Recently IssuedAccounting Standards**

In July 2006, the Financial Accounting Standards Board(“FASB”), issued FASB Interpretation No. 48,*“Accounting for Uncertainty in Income Taxes**— aninterpretation of FASB Statement No. 109*” (“FIN 48”). FIN 48 prescribesa recognition threshold and measurement attribute for financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return. The interpretation also provides guidance on derecognition,classification, interest and penalties, accounting in interim periods,disclosure, and transition of uncertain tax positions. The provisions of FIN 48are effective at the beginning of the first fiscal year that begins afterDecember 15, 2006, with the cumulative effect of the change in accountingprinciple recorded as an adjustment to opening retained earnings for that year.Hospira is currently evaluating the potential impact of FIN 48 on its financialstatements.

**2006 SecondQuarter Events**

·                    Launchedseveral new injectable generic products, including propofol, sodium bicarbonatein Hospira’s proprietary Ansyr® syringe delivery system, and ceftazidime inHospira’s proprietary ADD-Vantage® delivery system.

·                    Introduced theVisIVTM next-generation intravenous (I.V.) container, an I.V. bag withheightened safety and environmentally friendly features.

·                    Effectivelycompleted the legal separation from Abbott, including the transition of theremaining countries to Hospira. Hospira now has its own sales forces in 18 countriesand distributor relationships in 38 others.

**Results ofoperations for the three months ended June 30, 2006 compared to June 30, 2005**

*Net Sales*

Net sales increased 1.4% in the second quarter of 2006compared to the second quarter of 2005. Sales to third parties represented a1.7% increase in overall sales, driven by price of 1.6% in the U.S. and theimpact of exchange of 0.4%, partially offset by volume/mix of (0.3%), whichincludes the unfavorable impact of the Berlex contract termination of (2.5%).Sales to Abbott had an unfavorable impact of (0.3%) on overall sales, drivenprimarily by demand.

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A comparison of product line sales is as follows:

**Hospira, Inc.Sales by Product Line(Unaudited)(dollars in thousands)**
| ** **                                        | ** ** | **Three Months Ended June 30** | ** ** |
|---------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                        | ** ** | **2006**                                           | ** ** | **2005** | ** ** | **Percent Change  vs. Prior Year** | ** ** |
| U.S. —                                       |       |                                               |       |   |   |   |   |
| Specialty  Injectable Pharmaceuticals             |       | $                                                  | 207,317    |   | $ | 201,284 |   | 3.0 |   |
| Medication  Delivery Systems                      |       | 214,443                                            |       | 204,536 |   | 4.8 |   |
| Injectable  Pharmaceutical Contract Manufacturing |       | 49,687                                             |       | 52,058 |   | (4.6) |   |
| Sales to Abbott  Laboratories                     |       | 21,441                                             |       | 26,776 |   | (19.9) |   |
| Other                                             |       | 64,794                                             |       | 64,726 |   | 0.1 |   |
|                                              |       |                                               |       |   |   |   |   |
| Total U.S.                                        |       | 557,682                                            |       | 549,380 |   | 1.5 |   |
|                                              |       |                                               |       |   |   |   |   |
| International —                              |       |                                               |       |   |   |   |   |
|                                              |       |                                               |       |   |   |   |   |
| Sales to Third  Parties                           |       | 93,662                                             |       | 95,906 |   | (2.3) |   |
| Sales to Abbott  Laboratories                     |       | 19,757                                             |       | 16,629 |   | 18.8 |   |
|                                              |       |                                               |       |   |   |   |   |
| Total  International Sales                        |       | 113,419                                            |       | 112,535 |   | 0.8 |   |
|                                              |       |                                               |       |   |   |   |   |
| Consolidated Net Sales                            |       | $                                                  | 671,101    |   | $ | 661,915 |   | 1.4 |   |

 

Sales in Specialty Injectable Pharmaceuticalsincreased, driven by the impact of sales of ceftriaxone, launched in the thirdquarter of 2005, and increased sales of certain anti-infective products,increased sales of syringe products, and favorable price, partially offset bythe termination of the Berlex imaging agents distribution agreement. The salesincrease in Medication Delivery Systems was driven primarily by growth inmedication management systems. The growth in medication management systems wasdue primarily to placements of Hospira’s LifeCare PCA® infusion system, launched in the first quarterof 2006.

The sales decline in Injectable PharmaceuticalContract Manufacturing was primarily due to the impact of the termination ofcertain lower-margin contracts, partially offset by growth in demand forseveral existing supply agreements and new contracts.

The decrease in U.S. Sales to Abbott was primarily dueto decreased demand by Abbott for several of its products.

Other U.S. sales were up slightly compared to lastyear, reflecting increased sales to alternate site healthcare customersincluding increased sales of ceftriaxone, launched in the third quarter of2005, and increased sales of certain anti-infective products and increasedsales of anesthesia products, including the impact of the launch of propofol,partially offset by decreased sales of deferoxamine due to a competitiveproduct launch. In addition, weakness in critical care product sales offset thegains noted above.

International Sales to Third Parties reflect favorableexchange and continued growth in Canada, more than offset by reduced volumesdue to transition-related supply chain disruptions and lower pricing todistributors compared to the prior Abbott direct sales model. InternationalSales to Abbott increased primarily due to increased demand.

*Gross Profit*

Gross profit increased $6.7 million, or 3.1%, for thequarter ended June 30, 2006, compared with the same period in 2005. Grossprofit margin increased to 33.5% for the three months ended June 30, 2006, from33.0% for the three months ended June 30, 2005. The increase is primarily theresult of volume/product mix improvement of 1.2%, which includes the impact ofBerlex of 0.7%; price in the U.S. of 1.1%; gain on sale of the Donegal, Irelandmanufacturing plant of 1.2%, and a charge in 2005 of 2.2% relating to the saleof 

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the Salt Lake City manufacturing facility. Theseimprovements were partially offset by costs associated with the plannedmanufacturing plant closures of (2.4)%; incremental freight and distributioncosts, primarily in the International segment, of (1.4)%; incrementalmanufacturing costs of (0.5)%; stock option expense of (0.4)%; and other netchanges of (0.5)%.

*Research andDevelopment*

Research and development (R&D) expenses increased$6.2 million, or 18.9%, for the quarter ended June 30, 2006, compared with thesame period in 2005. Of the 18.9% increase, 5.0% is related to stock optionexpense as a result of the adoption of SFAS No. 123R. The remainder of theincrease was primarily due to costs associated with the move to our new R&Dbuilding and spending on new product development. R&D spending on newproduct development in the quarter primarily related to new compounds inHospira’s generic injectable drug pipeline and medication delivery devices.R&D expenses increased to 5.8% of net sales for the quarter ended June 30,2006, compared with 5.0% of net sales for the same period in 2005.

*Selling, Generaland Administrative*

Selling, general and administrative (SG&A)expenses increased $23.7 million, or 27.1%, for the quarter ended June 30,2006, compared with the same period in 2005. Of the 27.1% increase, 9.8% isrelated to stock option expense as a result of the adoption of SFAS No. 123R.The remainder of the increase was primarily due to additional costs related toHospira’s business infrastructure outside the United States and costsassociated with the implementation of SAP as Hospira’s global enterpriseresource planning (ERP) system. SG&A expenses increased to 16.6% of netsales for the quarter ended June 30, 2006, compared with 13.2% of net sales forthe same period in 2005.

*Interest and Other(Income), Net*

Interest expense was $7.3 million for the quarterended June 30, 2006, compared to $6.9 million in the same period in 2005. Theincrease was primarily due to the interest rate swap entered into in 2005,offset by higher capitalized interest in 2006. Other (income), net was $(3.5)million for both the quarters ended June 30, 2006 and June 30, 2005.

*Income Tax Expense*

The effective tax rate was 24.0% for both the quartersended June 30, 2006 and June 30, 2005. In the second quarter of 2006, Hospiradecreased its annual effective tax rate from 26.5% to 25.5% due primarily to ananticipated higher proportion of income from lower-tax jurisdictions. 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, 2006 compared to June 30, 2005**

*Net Sales*

Net sales increased 0.9% in the six months ended June30, 2006 compared to the six months ended June 30, 2005. Sales to third partiesrepresented a 1.4% increase in overall sales, driven by price of 1.2% in theU.S. and volume/mix of 0.1%, which includes the unfavorable impact of theBerlex contract termination of (5.1%); and the impact of exchange of 0.1%.Sales to Abbott had an unfavorable impact of (0.5%) on overall sales, drivenprimarily by demand.

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A comparison of product line sales is as follows:

**Hospira, Inc.Sales by Product Line(Unaudited)(dollars in thousands)**
| ** **                                        | ** ** | **Six Months Ended June 30** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                        | ** ** | **2006**                                         | ** ** | **2005** | ** ** | **Percent Change  vs. Prior Year** | ** ** |
| U.S. —                                       |       |                                             |       |   |   |   |   |
| Specialty Injectable  Pharmaceuticals             |       | $                                                | 392,553    |   | $ | 425,764 |   | (7.8) |   |
| Medication  Delivery Systems                      |       | 427,469                                          |       | 392,607 |   | 8.9 |   |
| Injectable  Pharmaceutical Contract Manufacturing |       | 101,789                                          |       | 102,146 |   | (0.3) |   |
| Sales to Abbott  Laboratories                     |       | 45,822                                           |       | 54,984 |   | (16.7) |   |
| Other                                             |       | 139,243                                          |       | 124,269 |   | 12.0 |   |
|                                              |       |                                             |       |   |   |   |   |
| Total U.S.                                        |       | 1,106,876                                        |       | 1,099,770 |   | 0.6 |   |
|                                              |       |                                             |       |   |   |   |   |
| International —                              |       |                                             |       |   |   |   |   |
|                                              |       |                                             |       |   |   |   |   |
| Sales to Third  Parties                           |       | 192,955                                          |       | 190,419 |   | 1.3 |   |
| Sales to Abbott  Laboratories                     |       | 35,564                                           |       | 33,787 |   | 5.3 |   |
|                                              |       |                                             |       |   |   |   |   |
| Total  International Sales                        |       | 228,519                                          |       | 224,206 |   | 1.9 |   |
|                                              |       |                                             |       |   |   |   |   |
| Consolidated Net Sales                            |       | $                                                | 1,335,395  |   | $ | 1,323,976 |   | 0.9 |   |

 

Sales in Specialty Injectable Pharmaceuticalsdeclined, reflecting the termination of the Berlex imaging agents distributionagreement. Excluding Berlex, sales within this product line increased, drivenby the impact of sales of ceftriaxone, launched in the third quarter of 2005,and increased sales of certain anti-infective products (which Hospira believeswas partially driven by a competitor’s inability to supply product earlier inthe year), and favorable price. The sales increase in Medication DeliverySystems was driven primarily by growth in medication management systems. Thegrowth in medication management systems was due primarily to placements ofHospira’s newer technology Plum A+® pumps with Hospira MedNet® coupled with the impact of increasedplacements of Hospira’s LifeCare PCA® infusion system, launched in the first quarterof 2006.

Sales in Injectable Pharmaceutical ContractManufacturing were down slightly, due to the impact of the termination ofcertain lower-margin contracts, partially offset by growth in demand forseveral existing supply agreements.

The decrease in U.S. Sales to Abbott was primarily dueto decreased demand by Abbott for several of its products.

The increase in Other U.S. sales was primarily due toincreased sales to alternate site healthcare customers including increasedceftriaxone sales, launched in the third quarter of 2005, and increased salesof certain anti-infective products (which Hospira believes was partially drivenby a competitor’s inability to supply product earlier in the year) andincreased sales of anesthesia products, including the impact of the U.S. launchof propofol, partially offset by decreased sales of deferoxamine due to acompetitive product launch.

International Sales to Third Parties were up,primarily reflecting continued growth in Canada, increased sales on a thirdparty manufacturing contract, and favorable exchange, offset by reduced volumesdue to transition-related supply chain disruptions and lower pricing todistributors compared to the prior Abbott direct sales model*.* International Sales to Abbott increased primarily due toincreased demand.

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*Gross Profit*

Gross profit increased $33.7 million, or 7.7%, for thesix months ended June 30, 2006, compared with the same period in 2005. Grossprofit margin increased to 35.2% for the six months ended June 30, 2006, from32.9% for the six months ended June 30, 2005. The increased margin is primarilythe result of volume/product mix improvement of 3.0%, which includes the impactof Berlex of 1.4%; price in the U.S. of 0.8%; gain on sale of the Donegal,Ireland manufacturing plant of 0.6%; an asset impairment and obligationsassumed in 2005 of 1.3% relating to the sale of the Salt Lake Citymanufacturing facility, and other net changes of 0.1%. These improvements werepartially offset by costs associated with the planned manufacturing plantclosures of (2.4)% and incremental freight and distribution costs, primarily inthe International segment, of (1.1)%.

*Research andDevelopment*

Research and development (R&D) expenses increased$8.8 million, or 14.4%, for the six months ended June 30, 2006, compared withthe same period in 2005. Of the 14.4% increase, 3.9% is related to stock optionexpense as a result of the adoption of SFAS No. 123R. The remainder of theincrease was primarily due to costs associated with the move to our new R&Dbuilding and spending on new product development. R&D spending on newproduct development in the six months primarily related to new compounds inHospira’s generic injectable drug pipeline and medication delivery devices.R&D expenses increased to 5.2% of net sales for the six months ended June30, 2006, compared with 4.6% of net sales for the same period in 2005.

*Selling, Generaland Administrative*

Selling, general and administrative (SG&A)expenses increased $43.6 million, or 25.7%, for the six months ended June 30,2006, compared with the same period in 2005. Of the 25.7% increase, 7.9% isrelated to stock option expense as a result of the adoption of SFAS No. 123R.The remainder of the increase was primarily due to additional costs related toHospira’s business infrastructure outside the United States, costs associatedwith the implementation of SAP as Hospira’s global enterprise resource planning(ERP) system and incremental corporate infrastructure costs. SG&A expensesincreased to 15.9% of net sales for the six months ended June 30, 2006,compared with 12.8% of net sales for the same period in 2005.

*Interest and Other(Income), Net*

Interest expense was $14.9 million for the six monthsended June 30, 2006, compared to $14.0 million in the same period in 2005. Theincrease was primarily due to the interest rate swap entered into in 2005,offset by higher capitalized interest in 2006. Other (income), net was $(8.3)million for the six months ended June 30, 2006 compared to $(4.7) million forthe six months ended June 30, 2005. The change was primarily related to higherinterest income in 2006.

*Income Tax Expense*

The effective tax rate was 25.5% for the six monthsended June 30, 2006, compared to 24.0% for the same period in 2005. In the secondquarter of 2006, Hospira decreased its annual effective tax rate from 26.5% to25.5% due primarily to an anticipated higher proportion of income fromlower-tax jurisdictions. The increase in effective tax rate for the six monthsended June 30, 2006 compared to June 30, 2005 is due primarily to increasedincome generated in the United States, which has higher tax rates than foreignjurisdictions. 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 certain jurisdictions outside the United States.

**Liquidity andCapital Resources at June 30, 2006 compared with December 31, 2005**

Net Cash from Operating Activities continues to beHospira’s primary source of funds to finance operating needs and capitalexpenditures. Other capital resources include cash on hand and borrowingavailability under Hospira’s $375 million revolving credit facility.

Operating activities provided net cash of $179.9million, primarily driven by net income of $134.3 million, non-cashdepreciation and amortization charges of $78.9 million, non-cash stock-basedcompensation expense of $19.6 million, offset by a pre-tax gain on the sale ofthe Donegal, Ireland facility of $7.9 million, and changes in operating assetsand liabilities of $45.0 million. The changes in operating assets andliabilities consist primarily of an increase in trade receivables andinventories, offset by an increase in trade accounts payable and other liabilitiesand changes in Other, net. The increase in trade receivables resulted fromsales growth and the increase in inventory reflected planned normal inventorybuilds and additional safety stock to support the business as manufacturingproduction transfers occur.

Net Cash Used in Investing Activities of $140.3million includes capital expenditures of $139.8 million for upgrading andexpanding manufacturing and administrative support facilities and informationtechnology systems. In addition, investing activities includes proceeds fromthe sale of the Donegal, Ireland facility of $11.5 million and the use of cashof $12.0 million for other investments.

Net Cash Used in Financing Activities of $306.7million consists primarily of common stock repurchases of $250.2 million and 

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payments to Abbott for international net assets of$98.5 million, offset by proceeds from employee stock option exercises andrelated tax benefits of $38.0 million and an increase in other borrowings, netof $4.0 million.

Hospira believes that its current capital resources,including cash and cash equivalents, cash generated from operations, and fundsavailable from its revolving credit facility will be sufficient to finance itsoperations, including product development, transition costs, international netasset transfers and capital expenditures, for the foreseeable future.

In February 2006, Hospiraannounced that its board of directors authorized the repurchase of up to$400 million of the company’s common stock. The new program authorizes thecompany to repurchase common shares from time to time through the open marketin compliance with securities regulations and other legal requirements. Thesize and timing of any purchases are at the discretion of company management,based on factors such as alternative uses of cash, and business and marketconditions. As of June 30, 2006, Hospira repurchased 6,203,500 shares for$250.2 million.

Hospira has a five-year $375 million unsecuredrevolving credit facility, which it entered into on December 16, 2005 (the “Revolver”),and which is available for working capital and other requirements. The Revolverallows Hospira to borrow funds at variable interest rates as short-term cashneeds dictate. As of June 30, 2006, Hospira had no amounts outstanding underthe Revolver.

Hospira has entered into various loan agreementsrelated to the legal transfer of certain international operations from Abbott.These borrowings are made by Hospira’s foreign affiliates in their localcurrency and are used to optimize the capital structure. As of June 30, 2006,Hospira had $9.3 million of such loans outstanding, all of which are classifiedas short-term.

The Revolver and the Senior Unsecured Notes contain,among other provisions, covenants with which Hospira must comply while they arein force. The covenants limit Hospira’s ability to allow liens on itsproperties or assets, or merge or consolidate with other entities. Under theRevolver, among other things, Hospira must also comply with certain financialcovenants, including a minimum interest coverage ratio and a maximum leverageratio. As of June 30, 2006, Hospira was in compliance with all covenants underthe Revolver and the Senior Unsecured Notes.

In connection with the spin-off, Hospira and Abbottagreed that the legal transfer of certain operations and assets (net ofliabilities) outside the United States would occur, and be completed, withintwo years after the spin-off. During the transition period, these operationsand assets were used in the conduct of Hospira’s international business andHospira was subject to the risks and entitled to the benefits generated by suchoperations and assets. Hospira was obligated to pay Abbott for these operationsand assets, and assume the corresponding liabilities, over a two-year periodafter the spin-off date as Hospira established its business infrastructureoutside the United States and obtained regulatory approval for the transfer ofthe marketing authorizations for Hospira products to local Hospira affiliatesor third-party distributors. The total amounts paid were $72.4 million and$98.5 million in the second quarter and for the six months ended June 30, 2006,respectively, and $215.3 million to date. As of April 30, 2006, the net assetsof all countries have transferred to Hospira. As of June 30, 2006, Hospira hasamounts due to Abbott in the amount of $27.8 million for settlement of certaintransfers of net assets. The amount due to Abbott for these settlements isoffset by $23.0 million due from Abbott for items that are related to theinternational business. These items include amounts due for operating profitsand inventory purchases of Hospira products to support the internationalbusiness. All amounts outstanding between Hospira and Abbott are included inDue to Abbott, Net on the balance sheet.

**Contractual Obligations and Off-Balance Sheet Arrangements**

The followingtable summarizes Hospira’s estimated contractual obligations as of June 30,2006:

*(dollars in millions)*
| ** **                                                                                  | ** ** | **Payment Due by Period** | ** ** |
|---------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                  | ** ** | **Total**                                | ** ** | **2006** | ** ** | **2007-2008** | ** ** | **2009-2010** | ** ** | **2011 and**  Thereafter | ** ** |
| Long-term debt  and interest payments.                                                      |       | $                                        | 944.4      |   | $ | 28.7 |   | $ | 77.2 |   | $ | 355.0 |   | $ | 483.5 |   |
| Lease  obligations                                                                          |       | 185.4                                    |       | 14.1 |   | 47.7 |   | 43.0 |   | 80.6 |   |
| Purchase  commitments (1)                                                              |       | 351.8                                    |       | 324.0 |   | 27.4 |   | 0.4 |   | — |   |
| Other long-term  liabilities reflected on the consolidated balance sheet (2)           |       | 26.7                                     |       | 26.7 |   | — |   | — |   | — |   |
| Amounts due to  Abbott for settlement of certain international net asset transfers (3) |       | 27.8                                     |       | 27.8 |   | — |   | — |   | — |   |
| Total                                                                                       |       | $                                        | 1,536.1    |   | $ | 421.3 |   | $ | 152.3 |   | $ | 398.4 |   | $ | 564.1 |   |

 

(1)            Purchase commitments consistprimarily of inventory purchases made in the normal course of business to meetoperational requirements. Contractual capital commitments are also includedhere, but these commitments represent only a portion of expected capitalspending.

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(2)             Excludes $125.0 million of otherlong-term liabilities related primarily to post-retirement benefit obligations.

(3)             The amount due to Abbott for theacquisition of certain international net assets excludes an offsetting amountof $23.0 million for items that are due from Abbott related to theinternational business. These include amounts due for operating profits andinventory purchases of Hospira products to support the international business.

Hospira has nomaterial exposures to off-balance sheet arrangements, no special purposeentities, and no activities that include non-exchange-traded contractsaccounted for at fair value.

***Legislative Issues***

Hospira’s primary markets are highly competitive andsubject to substantial government regulation. Hospira expects debate tocontinue at both the federal and state levels over the availability, method ofdelivery and payment for healthcare products and services. If additionallegislation is enacted, it could have the effect of reducing prices, orreducing the rate of price increases, for medical products and services.International operations are also subject to a significant degree of governmentregulation. It is not possible to predict the extent to which Hospira or thehealthcare industry in general might be adversely affected by these factors inthe future.

**Private SecuritiesLitigation Reform Act of 1995 — A Caution Concerning Forward-Looking Statements**

Under the safe harbor provisions of the PrivateSecurities Litigation Reform Act of 1995, Hospira cautions investors that anyforward-looking statements or projections made by Hospira, including those madein this document, are subject to risks and uncertainties that may cause actualresults to differ materially from those projected. In some cases, thesestatements can be identified by the use of forward-looking words such as “may,”“will,” “should,” “anticipate,” “estimate,” “expect,” “plan,” “believe,” “predict,”“potential,” “project,” “intend,” “could,” or similar expressions. Inparticular, statements regarding Hospira’s plans, strategies, prospects andexpectations regarding Hospira’s business are forward-looking statements.Please be aware that these statements and any other forward-looking statementsin this document only reflect Hospira’s expectations and are not guarantees ofperformance. These statements involve risks, uncertainties and assumptions.Many of these risks, uncertainties and assumptions are beyond Hospira’scontrol, and may cause actual results and performance to differ materially fromHospira’s expectations.

Economic, competitive, governmental, technological andother factors that may affect Hospira’s operations are discussed in Hospira’sAnnual Report on Form 10-K for the year ended December 31, 2005, and elsewherein this document. Accordingly, undue reliance should not be placed on theforward-looking statements contained in this document. These forward-lookingstatements speak only as of the date on which the statements were made. Hospiraundertakes no obligation to update or revise publicly any forward-lookingstatements, whether as a result of new information, future events or otherwise.

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**Item 3.**                          QuantitativeAnd Qualitative Disclosures About Market Risk

There have been no material changes to the informationprovided in Hospira’s Annual Report on Form 10-K for the year ended December31, 2005.

**Item 4.**                          Controlsand Procedures

*Evaluation of disclosure controls and procedures.*The Chief Executive Officer, Christopher B. Begley, and Chief Operating Officerand Acting Chief Financial Officer, Terrence C. Kearney, evaluated theeffectiveness of Hospira’s disclosure controls and procedures (as defined inRules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934) asof the end of the period covered by this report, and concluded that Hospira’sdisclosure controls and procedures were effective.

*Changes in internal controls.*Hospira is implementing its independent information technology system (SAP)both in and outside the United States. All modules of SAP that Hospira plannedto implement in connection with its separation from Abbott have beenimplemented as of June 30, 2006. Ongoing processes and controls have beenmodified during the implementation period as is expected with a major systemimplementation. Also during the period, business operations in severalcountries have transitioned from Abbott to Hospira. Inherent in suchtransitions are changes in Hospira’s internal controls, as processes that werepreviously performed by Abbott personnel, utilizing Abbott systems, are nowbeing performed by Hospira personnel, utilizing Hospira systems (includingSAP). In connection with the implementation of SAP and the transition of theinternational operations, Hospira has updated, and will continue to update, itsinternal control over financial reporting as necessary to accommodatemodifications to its business processes and accounting procedures. There havebeen no other changes in internal control over financial reporting thatoccurred during the period that have materially affected or are reasonablylikely to materially affect Hospira’s internal control over financialreporting.

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**PART II. OTHERINFORMATION**

**Item 1.**                          LegalProceedings

Incorporated by reference is the disclosure containedin Note 8 to the condensed consolidated financial statements included in PartI. Item 1 hereof.

**Item 1A.**                 RiskFactors

Please refer to Item 1A. in Hospira’s Annual Report onForm 10-K for the year ended December 31, 2005 for a discussion of risks towhich Hospira’s business, financial condition, results of operations and cash flowsare subject. There have been no material changes to such risk factors sinceDecember 31, 2005.

**Item 2.**                          Changesin Securities and Use of Proceeds

(c)            Issuer Purchases ofEquity Securities

The table below gives information on a monthly basisregarding purchases 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, 2006 |       | 681,670                                                   |       | $                                                | 40.25      |                                                                                                                             | 658,000    |                                                                                                                                                                                   | $           | 149,822,266 |   |
| May 1- May 31, 2006     |       | 36,819                                                    |       | 40.82                                            |       | —                                                                                                                           |       | $                                                                                                                                                                                      | 149,822,266 |   |
| June 1- June 30, 2006   |       | 111,606                                                   |       | 43.31                                            |       | —                                                                                                                           |       | $                                                                                                                                                                                      | 149,822,266 |   |
| Total                   |       | 830,095                                                   |       | $                                                | 40.69      |                                                                                                                             | 658,000    |                                                                                                                                                                                   | $           | 149,822,266 |   |

 

(1)            Theseshares include:

a.                  theshares deemed surrendered to Hospira to pay the exercise price and satisfy taxwithholding obligations in connection with the exercise of employee stockoptions — 23,670 in April, 36,819 in May, and 111,606 in June; and

b.                 theshares purchased on the open market relating to footnote (2) below — 658,000shares in April, and no shares for May and June.

(2)            InFebruary 2006, Hospira’s board of directors authorized the repurchase of up to $400million of the company’s common stock in accordance with Rule 10b-18 under theSecurities Exchange Act of 1934. The repurchase of shares commenced in earlyMarch 2006.

**Item 4.**                          Submissionof Matters to a Vote of Security Holders

The information required by this item has beenpreviously reported in subsection (a) of Item 8.01 of Hospira’s Current Reporton Form 8-K filed with the Securities and Exchange Commission on May 19, 2006.Such information is incorporated by reference herein.

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**Item 6.**                          Exhibits

(a)    Exhibits
| EXHIBIT NO. | ** ** | **DESCRIPTION**                                                                                                                                                                                                                                                                                                          |
|------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       |                                                                                                                                                                                                                                                                                                                     |
| 3.1              |       | Amended and Restated By-laws of Hospira, Inc.  (incorporated by reference to Exhibit 3.1 to Hospira’s Current Report on Form  8-K filed with the Securities and Exchange Commission on May 19, 2006).                                                                                                               |
| 10.1             |       | Summary of terms of employment of Terrence C.  Kearney (incorporated by reference to Item 5.02 of Hospira’s Current Report  on Form 8-K filed with the Securities and Exchange Commission on April 25,  2006 and Exhibit 10.15 to Hospira’s Annual Report on Form 10-K for the year  ended December 31, 2005). |
| 12               |       | Computation of Ratio of Earnings to Fixed Charges.                                                                                                                                                                                                                                                                       |
| 31.1             |       | Certificate of Chief Executive Officer pursuant to  Rule 13a-14(a).                                                                                                                                                                                                                                                      |
| 31.2             |       | Certificate of Chief Financial Officer pursuant to  Rule 13a-14(a).                                                                                                                                                                                                                                                      |
| 32.1             |       | Certificate 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             |       | Certificate 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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**SIGNATURE**

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
|        | HOSPIRA, INC. |
|--------|---------------|
|   |          |
|   | By            | /s/ TERRENCE C. KEARNEY |
|   |          | Terrence C. Kearney,  Chief Operating Officer and  Acting Chief Financial Officer |
|   |          | Date: August 9, 2006 |

 

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