** **

**FORM 10-Q**

** **

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D. C.  20549**

 

**(Mark One)**

 
| **ý**                                                                                                                                                                               | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934**  |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                     |       |                                                                                                    |
| **For the quarterly period ended June 30, 2005**                                                                                                                                    |
|                                                                                                                                                                                     |       |                                                                                                    |
| **OR**                                                                                                                                                                                   |
|                                                                                                                                                                                     |       |                                                                                                    |
| **o**                                                                                                                                                                                    | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                     |       |                                                                                                    |
| **For the transition period from               to             ** |
|                                                                                                                                                                                     |       |                                                                                                    |
| **Commission File No. 1-31946**                                                                                                                                                     |

 

**HOSPIRA, INC.**

 
| **A Delaware corporation** |   | I.R.S. Employer Identification |
|----------------------------|--------|--------------------------------|
|                       |   | No.** 20-0504497**        |

 

**275 N. Field DriveLake Forest, Illinois 60045**

 

Telephone:**  (224) 212-2000**

 

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

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the ExchangeAct).     Yes  o.No  ý.

 

As of July 31, 2005, Hospira, Inc. had outstanding159,885,858 common shares, par value $0.01 per share.

 

 

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Table of Contents

 

**Hospira, Inc.**

 

**QuarterlyReport on Form 10-Q**

 

**Index**

 
| **Part I – Financial Information** |                                                                                                                                   |
|----------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------|
|                                         |                                                                                                                                   |   |
| Item 1.                                      | Financial Statements                                                                                                                   |   |
| ** **                                   |                                                                                                                                   |   |
| ** **                                   | Condensed Consolidated  Statements of Income (Unaudited) – Three and Six Months Ended June 30,  2005  and June 30, 2004 | 3 |
|                                         |                                                                                                                                   |   |
|                                         | Condensed Consolidated  Statements of Cash Flows (Unaudited) – Six Months Ended June 30, 2005  and June 30, 2004        | 4 |
|                                         |                                                                                                                                   |   |
| ** **                                   | Condensed Consolidated  Balance Sheets (Unaudited) – June 30, 2005 and December 31, 2004                                | 5 |
|                                         |                                                                                                                                   |   |
|                                         | Condensed Consolidated  Statement of Changes in Shareholders’ Equity (Unaudited) – Six Months Ended June 30,  2005      | 6 |
|                                         |                                                                                                                                   |   |
|                                         | Notes to Condensed Consolidated  Financial Statements (Unaudited)                                                                      | 7 |
|                                         |                                                                                                                                   |   |
| Item 2.                                      | Management’s Discussion and  Analysis of Financial Condition and Results of Operations                                            | 15 |
|                                         |                                                                                                                                   |   |
| Item 3.                                      | Quantitative  and Qualitative Disclosures about Market Risk                                                                            | 24 |
|                                         |                                                                                                                                   |   |
| Item 4.                                      | Controls and  Procedures                                                                                                               | 24 |
|                                         |                                                                                                                                   |   |
| **Part II  – Other Information**   |                                                                                                                                   |
|                                         |                                                                                                                                   |   |
| Item 1.                                      | Legal Proceedings                                                                                                                      | 25 |
|                                         |                                                                                                                                   |   |
| 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 |

 

2

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**PART  I.  FINANCIALINFORMATION**

 

**Item 1.****  Financial Statements**

 

**Hospira, Inc.**

 

**CondensedConsolidated Statements of Income**

 

**(Unaudited)**

 

***(dollars and shares in thousands, except forper share amounts)***

 
| ** **                                                  | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
|-------------------------------------------------------------|------------|-------------------------------------|------------|-----------------------------------|------------|
| ** **                                                  | ** ** | **2005**                            | ** ** | **2004**                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net sales                                                   |       | $                                   | 618,510    |                              | $          | 617,367 |   | $ | 1,235,205 |   | $ | 1,192,565 |   |
| Net sales to Abbott Laboratories                            |       | 43,405                              |       | 50,025                            |       | 88,771 |   | 96,045 |   |
| Total Net Sales                                             |       | 661,915                             |       | 667,392                           |       | 1,323,976 |   | 1,288,610 |   |
|                                                        |       |                                |       |                              |       |   |   |   |   |
| Cost of products sold                                       |       | 443,497                             |       | 456,765                           |       | 887,782 |   | 909,644 |   |
| Gross Profit                                                |       | 218,418                             |       | 210,627                           |       | 436,194 |   | 378,966 |   |
|                                                        |       |                                |       |                              |       |   |   |   |   |
| Research and development                                    |       | 32,851                              |       | 28,087                            |       | 61,242 |   | 52,533 |   |
| Selling, general and administrative                         |       | 87,409                              |       | 66,931                            |       | 169,284 |   | 124,441 |   |
| Curtailment of post-retirement medical and  dental benefits |       | —                              |       | (64,636                           | )          | — |   | (64,636 | ) |
| Income From Operations                                      |       | 98,158                              |       | 180,245                           |       | 205,668 |   | 266,628 |   |
|                                                        |       |                                |       |                              |       |   |   |   |   |
| Interest expense                                            |       | 6,857                               |       | 2,684                             |       | 14,026 |   | 2,684 |   |
| Other (income) expense, net                                 |       | (3,476                              | )          | 526                               |       | (4,681 | ) | 1,394 |   |
| Income Before Income Taxes                                  |       | 94,777                              |       | 177,035                           |       | 196,323 |   | 262,550 |   |
|                                                        |       |                                |       |                              |       |   |   |   |   |
| Income tax expense                                          |       | 22,746                              |       | 51,265                            |       | 47,117 |   | 71,789 |   |
| Net Income                                                  |       | $                                   | 72,031     |                              | $          | 125,770 |   | $ | 149,206 |   | $ | 190,761 |   |
|                                                        |       |                                |       |                              |       |   |   |   |   |
| Earnings Per Common Share:                                  |       |                                |       |                              |       |   |   |   |   |
| Basic                                                       |       | $                                   | 0.45       |                              | $          | 0.80 |   | $ | 0.94 |   | $ | 1.22 |   |
| Diluted                                                     |       | $                                   | 0.44       |                              | $          | 0.80 |   | $ | 0.93 |   | $ | 1.22 |   |
|                                                        |       |                                |       |                              |       |   |   |   |   |
| Weighted Average Common Shares Outstanding:                 |       |                                |       |                              |       |   |   |   |   |
| Basic                                                       |       | 158,568                             |       | 156,048                           |       | 157,896 |   | 156,048 |   |
| Diluted                                                     |       | 160,908                             |       | 156,551                           |       | 159,757 |   | 156,551 |   |

 

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

 

3

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**Hospira, Inc.**

 

**CondensedConsolidated Statements of Cash Flows**

 

**(Unaudited)**

 

***(dollars in thousands)***

 
| ** **                                                                 | ** ** | **Six Months Ended June 30** | ** ** |
|----------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                 | ** ** | **2005**                          | ** ** | **2004** | ** ** |
|                                                                       |       |                              |       |   |   |
| Cash Flow From (Used in) Operating  Activities:                            |       |                              |       |   |   |
|                                                                       |       |                              |       |   |   |
| Net income                                                                 |       | $                                 | 149,206    |   | $ | 190,761 |   |
| Adjustments to reconcile net income to net  cash from operating activities |       |                              |       |   |   |
| Depreciation                                                               |       | 79,606                            |       | 67,639 |   |
| Amortization of intangibles                                                |       | 936                               |       | 2,153 |   |
| Curtailment of post-retirement medical and  dental benefits                |       | —                            |       | (64,636 | ) |
| Trade receivables                                                          |       | (812                              | )          | (23,808 | ) |
| Inventories                                                                |       | 5,339                             |       | (37,275 | ) |
| Prepaid expenses and other assets                                          |       | (5,721                            | )          | (4,458 | ) |
| Trade accounts payable and other  liabilities                              |       | 20,729                            |       | 85,020 |   |
| Other, net                                                                 |       | 50,875                            |       | 4,161 |   |
| Net Cash From Operating Activities                                         |       | 300,158                           |       | 219,557 |   |
|                                                                       |       |                              |       |   |   |
| Cash Flow (Used in) From Investing  Activities:                            |       |                              |       |   |   |
|                                                                       |       |                              |       |   |   |
| Acquisitions of property and equipment                                     |       | (131,089                          | )          | (108,347 | ) |
| Proceeds from asset dispositions                                           |       | 31,818                            |       | — |   |
| Sales of marketable securities                                             |       | 72,438                            |       | — |   |
| Net Cash (Used in) Investing Activities                                    |       | (26,833                           | )          | (108,347 | ) |
|                                                                       |       |                              |       |   |   |
| Cash Flow From (Used in) Financing  Activities:                            |       |                              |       |   |   |
|                                                                       |       |                              |       |   |   |
| Net transactions with Abbott Laboratories  prior to spin-off               |       | —                            |       | (20,845 | ) |
| Pre-distribution dividend to Abbott                                        |       | —                            |       | (700,000 | ) |
| Payment to Abbott for international net  assets                            |       | (45,768                           | )          | — |   |
| Issuance of long-term debt, net of fees  paid                              |       | 1,750                             |       | 1,393,425 |   |
| Repayment of long-term debt                                                |       | (44                               | )          | (700,000 | ) |
| Net change in revolving credit facility                                    |       | —                            |       | 25,000 |   |
| Proceeds from stock options exercised                                      |       | 70,255                            |       | 103 |   |
| Net Cash From (Used in) Financing  Activities                              |       | 26,193                            |       | (2,317 | ) |
|                                                                       |       |                              |       |   |   |
| Effect of exchange rate changes on cash and  cash equivalents              |       | (2,532                            | )          | (13 | ) |
|                                                                       |       |                              |       |   |   |
| Net change in cash and cash equivalents                                    |       | 296,986                           |       | 108,880 |   |
| Cash and cash equivalents at beginning of  period                          |       | 127,695                           |       | — |   |
| Cash and cash equivalents at end of period                                 |       | $                                 | 424,681    |   | $ | 108,880 |   |

 

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

 

4

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**Hospira, Inc.**

 

**CondensedConsolidated Balance Sheets**

 

**(Unaudited)**

 

***(dollars in thousands except forshare data)***

 
| ** **                                                                                                   | ** ** | **June 30** | ** ** | **December 31** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|------------------|------------|----------------------|------------|
| ** **                                                                                                   | ** ** | **2005**         | ** ** | **2004**             | ** ** |
| **Assets**                                                                                                   |       |             |       |                 |       |
| Current Assets:                                                                                              |       |             |       |                 |       |
| Cash and cash equivalents                                                                                    |       | $                | 424,681    |                 | $          | 127,695 |   |
| Marketable securities                                                                                        |       | —           |       | 72,438               |       |
| Trade receivables, less allowances of  $15,174 in 2005 and $16,083 in 2004                                   |       | 317,928          |       | 326,356              |       |
| Inventories:                                                                                                 |       |             |       |                 |       |
| Finished products                                                                                            |       | 292,777          |       | 330,111              |       |
| Work in process                                                                                              |       | 82,041           |       | 70,329               |       |
| Materials                                                                                                    |       | 119,971          |       | 117,884              |       |
| Total inventories                                                                                            |       | 494,789          |       | 518,324              |       |
| Prepaid expenses, deferred income taxes and  other receivables                                               |       | 161,590          |       | 153,512              |       |
| Total Current Assets                                                                                         |       | 1,398,988        |       | 1,198,325            |       |
| Property and equipment, at cost                                                                              |       | 2,147,493        |       | 2,173,933            |       |
| Less: accumulated depreciation and  amortization                                                             |       | 1,186,767        |       | 1,227,629            |       |
| Net Property and Equipment                                                                                   |       | 960,726          |       | 946,304              |       |
| Intangible assets, net of amortization                                                                       |       | 621              |       | 1,057                |       |
| Goodwill                                                                                                     |       | 80,973           |       | 80,973               |       |
| Other assets                                                                                                 |       | 108,597          |       | 116,131              |       |
| Total Assets                                                                                                 |       | $                | 2,549,905  |                 | $          | 2,342,790 |   |
| **Liabilities and Shareholders’ Equity**                                                                |       |             |       |                 |       |
| Current Liabilities:                                                                                         |       |             |       |                 |       |
| Trade accounts payable                                                                                       |       | $                | 96,779     |                 | $          | 101,537 |   |
| Salaries payable and other accruals                                                                          |       | 330,985          |       | 268,615              |       |
| Due to Abbott, net                                                                                           |       | 122,469          |       | 166,042              |       |
| Total Current Liabilities                                                                                    |       | 550,233          |       | 536,194              |       |
| Due to Abbott, net                                                                                           |       | —           |       | 23,100               |       |
| Long-term debt                                                                                               |       | 698,618          |       | 698,841              |       |
| Post-retirement obligations, deferred  income taxes and other long-term liabilities                          |       | 99,059           |       | 100,736              |       |
| Commitments and Contingencies                                                                                |       |             |       |                 |       |
| Shareholders’ Equity:                                                                                   |       |             |       |                 |       |
| Common stock, par value $0.01 - authorized:  400,000,000 shares;  issued and outstanding: 159,699,485 shares |       | 1,597            |       | 1,570                |       |
| Preferred stock, par value $0.01 -  authorized: 50,000,000 shares;  issued and outstanding: 0 shares         |       | —           |       | —               |       |
| Unearned compensation                                                                                        |       | (263             | )          | (114                 | )          |
| Additional paid-in capital                                                                                   |       | 871,550          |       | 791,252              |       |
| Retained earnings                                                                                            |       | 352,528          |       | 203,322              |       |
| Accumulated other comprehensive (loss)                                                                       |       | (23,417          | )          | (12,111              | )          |
| Total Shareholders’ Equity                                                                              |       | 1,201,995        |       | 983,919              |       |
| Total Liabilities and Shareholders’ Equity                                                              |       | $                | 2,549,905  |                 | $          | 2,342,790 |   |

 

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

 

5

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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**     | ** ** | **Unearned**   | ** ** | **Retained**     | ** ** | ** **   | ** ** |
| ** **                                                                | ** ** | **Shares**       | ** ** | **Amount**        | ** ** | **(Loss)**      | ** ** | **Capital**    | ** ** | **Compensation** | ** ** | **Earnings** | ** ** | **Total**  | ** ** |
|                                                                      |       |             |       |              |       |            |       |           |       |             |       |         |       |       |       |
| **Balances  at December 31, 2004**                                   |       | 156,970          |       | $                 | 1,570      |            | $          | (12,111        | )          | $                | 791,252    |         | $          | (114       | )          | $ | 203,322 |   | $ | 983,919 |   |
|                                                                      |       |             |       |              |       |            |       |           |       |             |       |         |       |       |       |
| Net Income                                                                |       | —           |       | —            |       | —          |       | —         |       | —           |       | 149,206      |       | 149,206    |       |
|                                                                      |       |             |       |              |       |            |       |           |       |             |       |         |       |       |       |
| Other comprehensive loss                                                  |       | —           |       | —            |       | (11,306         | )          | —         |       | —           |       | —       |       | (11,306    | )          |
|                                                                      |       |             |       |              |       |            |       |           |       |             |       |         |       |       |       |
| Changes in shareholders’ equity related to  incentive stock programs |       | 2,729            |       | 27                |       | —          |       | 80,298         |       | (149             | )          | —       |       | 80,176     |       |
|                                                                      |       |             |       |              |       |            |       |           |       |             |       |         |       |       |       |
| **Balances  at June 30, 2005**                                       |       | 159,699          |       | $                 | 1,597      |            | $          | (23,417        | )          | $                | 871,550    |         | $          | (263       | )          | $ | 352,528 |   | $ | 1,201,995 |   |

 

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

 

6

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**Hospira, Inc.**

 

**Notesto Condensed Consolidated Financial Statements**

 

**June 30,2005**

 

**(Unaudited)**

 

**Note 1–Basis of Presentation**

 

These condensed consolidated financial statements have beenprepared pursuant to the rules and regulations of the Securities andExchange Commission (“SEC”) and, therefore, do not include all information andfootnote disclosures normally included in audited financial statements.However, in the opinion of management, all adjustments, consisting only ofnormal recurring adjustments, unless otherwise noted herein, necessary topresent fairly the results of operations, financial position and cash flowshave been made. These condensed consolidated financial statements should beread in conjunction with the consolidated financial statements and notes theretoincluded in Hospira’s Annual Report on Form 10-K for the year ended December 31,2004. The results of operations for any interim period are not necessarilyindicative of the results of operations to be expected 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”). Theaccompanying unaudited interim condensed consolidated financial statementsreflect Hospira’s operations as a separate, stand-alone entity for all periodssubsequent to April 30, 2004. For periods through April 30, 2004, thefinancial statements reflect the historical operations of Hospira when itoperated as a part of Abbott and include expense allocations related toservices provided to Hospira by Abbott. Hospira considers those allocations tobe reasonable reflections of the utilization of services provided. Asthe financial statements for the three and six months ended June 30, 2004,combine Hospira’s operations as part of Abbott prior to the spin-off and as aseparate, stand-alone entity after the spin-off, they do not reflect Hospira’sresults of operations, financial position and cash flows had Hospira been astand-alone company throughout these periods.

 

In connection with thespin-off, Hospira and Abbott agreed that the legal transfer of certainoperations and assets (net of liabilities) outside the United States wouldoccur, and be completed, within two years after the spin-off. These operationsand assets are used in the conduct of Hospira’s international business andHospira is subject to the risks and entitled to the benefits generated by suchoperations and assets. Hospira is dependent on Abbott’s internationalinfrastructure until such legal transfers occur in each international country.The first transfers, Canada and the Netherlands, occurred in the second quarterof 2005.

 

**Note 2–Recently Issued Accounting Standards**

 

In November 2004,the Financial Accounting Standards Board (‘‘FASB’’) issued Statement ofFinancial Accounting Standards (“SFAS”) No. 151,’’Inventory Costs.’’ Thisstatement clarifies the accounting for abnormal amounts of idle facilitiesexpense, freight, handling costs and wasted material. This statement requiresthat those items be recognized as current-period expenses. In addition, thestatement requires that allocation of fixed overhead to the cost of conversionbe based on the normal capacity of the production facilities. For Hospira, thisstatement is effective for inventory costs incurred after December 31,2005. Hospira is currently evaluating the potential impact of SFAS No. 151on its financial position and results of operations.

 

In December 2004,the FASB issued SFAS No. 123 (revised 2004), ‘‘Share-Based Payment,’’which 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,’’which previously allowed pro forma disclosure of certain share-basedcompensation expense. Further, SFAS No. 123R supercedes AccountingPrinciples Board Opinion No. 25, ‘‘Accounting for Stock Issued toEmployees,’’ which previously allowed the intrinsic value method of accountingfor stock options rather than the fair value method when determining optionvalue used to measure compensation cost. Since Hospira currently accounts forshare-based payments using the intrinsic value method, Hospira’s results ofoperations have not included the recognition of compensation expense. HadHospira applied the fair-value criteria established in SFAS No. 123R toprevious stock option grants, the impact to the results of operations wouldhave approximated the pro forma expense under SFAS No. 123, which isdisclosed in Note 11.

 

On April 14, 2005,the SEC adopted a rule that amended the compliance date of SFAS No. 123Rto require implementation no later than the beginning of the first fiscal yearwhich begins after June 15, 2005 (January 1, 2006 for Hospira). Theeffect of adopting SFAS No. 123R on diluted earnings per share in futureperiods is dependent on the number of options granted in the future, the termsof those awards and their fair values.

 

TheAmerican Jobs Creation Act of 2004 (‘‘Jobs Act’’), which was signed into law onOctober 22, 2004, provides for a special one-time dividends receiveddeduction on the repatriation of certain foreign earnings to a U.S. taxpayer,provided certain criteria are met. 

 

7

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Inaccordance with FASB Staff Position 109-2, ‘‘Accounting and Disclosure Guidancefor the Foreign Earnings Repatriation Provision within the American JobsCreation Act of 2004,’’ Hospira continues to evaluate the legislation andwhether it will elect to repatriate qualified undistributed foreign earnings asa result of the Jobs Act.  Based on theanalysis to date, the range of possible amounts that Hospira is considering forrepatriation is between $0 and $220 million, with the corresponding income taxeffects ranging from $0 to $12.6 million. Hospira expects to complete itsevaluation by the end of 2005.

 

In May 2005, theFASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFASNo. 154”), which changes the requirements for the accounting and reportingof a voluntary change in accounting principle. The statement requiresretrospective application to prior periods financialstatements, or the latest practicable date, as the required method forreporting a change in accounting principle. Previous rules generallyrequired that changes in accounting principles were recognized by including thecumulative effect of the change in net income in the period of change. SFAS No. 154is effective for accounting changes made in fiscal years beginning after December 15,2005. Adoption of this standard is not expected to have a material affect onHospira’s financial position or results of operations.

 

**Note 3 –Acquisition and Dispositions**

 

On July 29, 2005,Hospira acquired Physiometrix, Inc., a developer of non-invasive medicaldevices.  The acquisition will broadenHospira’s portfolio of products for the hospital operating room and intensivecare unit, providing anesthesia-monitoring devices used during surgical anddiagnostic procedures.  Hospira paid $23million in cash for all outstanding shares of Physiometrix plus the assumptionof Physiometrix’s debt of $1 million. The impact of the acquisition is notexpected to be material to Hospira’s results of operations in 2005.

 

On February 28,2005, Hospira announced a strategic manufacturing, commercialization anddevelopment agreement with ICU Medical, Inc. and the sale of relatedassets. Under the terms of the agreements, on May 1, 2005, ICU Medicalpurchased Hospira’s Salt Lake City, Utah, manufacturing facility and relatedequipment and inventory for $31.8 million in cash. As a result of theseagreements, during the first quarter of 2005, Hospira classified the propertyand equipment to be sold under the agreements, totaling $20.7 million, as heldfor sale. In accordance with SFAS No. 144, “Accounting for the Impairmentor Disposal of Long-Lived Assets,” Hospira recorded an impairment charge of$2.4 million, representing the amount by which the carrying value of the assetsexceeds the fair value less cost to sell. In addition, raw materials and work in process inventory of $10.1million were sold as part of the transaction. In connection with the closing ofthe sale in the second quarter of 2005, Hospira recorded a loss of $13.4million, which is Hospira’s best estimate of the cost of certain obligationsthat Hospira is required to reimburse ICU Medical for up to 24 months afterclosing. The total impact of the impairment in the first quarter and the lossrecorded in the second quarter is a loss of $15.8 million and is recorded incost of goods sold.

 

**Note 4 –Income Taxes**

 

Taxes on income reflectthe estimated annual effective rates and are determined on a separate-returnbasis through April 30, 2004, at which time Hospira became a separatestand-alone taxpayer. The effective tax rates are less than the statutory U.S.federal income tax rate principally due to the benefit of tax exemptions, ofvarying durations, in several taxing jurisdictions. Abbott has retainedresponsibility for all tax liabilities through April 30, 2004.

 

**Note 5 -Earnings per Share**

 

Basic earnings per shareare computed by dividing net income by the number of weighted average commonshares outstanding during the reporting period. Diluted earnings per share are calculated to give effect to allpotentially dilutive common shares that were outstanding during the reportingperiod.  For periods through April 30,2004, basic and diluted earnings per share are computed using the number of sharesof Hospira common stock outstanding on April 30, 2004, the date on whichthe Hospira common stock was distributed to the shareholders of Abbott.  On the spin-off date, outstanding Abbottawards for non-retirement eligible Hospira employees were cancelled andreplaced by new awards for Hospira common stock.  The new awards maintained both thepre-conversion aggregate intrinsic value of each award and the ratio of theexercise price per share to the market value per share.  Abbott awards granted to Hospira employeeswho were retirement eligible on the spin-off date remained options to purchaseAbbott stock and have no impact on Hospira share dilution.  The following table shows the effect of stockoptions on the weighted average number of shares outstanding used incalculating diluted earnings per share:

 

8

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*(shares inthousands)*

 
| ** **                                           | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
|------------------------------------------------------|------------|-------------------------------------|------------|-----------------------------------|------------|
| ** **                                           | ** ** | **2005**                            | ** ** | **2004**                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| Weighted average common shares outstanding           |       | 158,568                             |       | 156,048                           |       | 157,896 |   | 156,048 |   |
| Assumed exercise of stock options                    |       | 2,340                               |       | 503                               |       | 1,861 |   | 503 |   |
| Weighted average dilutive common shares  outstanding |       | 160,908                             |       | 156,551                           |       | 159,757 |   | 156,551 |   |

 

The number of outstandingoptions to purchase Hospira stock for which the exercise price of the optionsexceeded the average stock price was 1.4 million and 1.5 million for the threeand six months ended June 30, 2005, respectively, and 4.9 million for thethree and six months ended June 30, 2004. Accordingly, these options are excluded from the diluted earnings pershare calculation for these periods.

 

**Note**** ****6 – Litigation**

 

Hospira, or in someinstances Abbott, is involved in various claims and legal proceedings,including product liability claims and proceedings related to Hospira’sbusiness.

 

Various state and federalagencies, including the U.S. Department of Justice and various state attorneysgeneral, are investigating a number of pharmaceutical companies, includingAbbott, for allegedly engaging in improper marketing and pricing practices withrespect to certain Medicare and Medicaid reimbursable products, includingpractices relating to average wholesale price (“AWP”).  These are civil investigations that areseeking to identify the practices and determine whether those practicesviolated any laws, including federal and state false claims acts, orconstituted fraud in connection with the Medicare and/or Medicaid reimbursementpaid to third parties.  In addition,Abbott is a defendant in a number of purported class actions on behalf ofindividuals or entities, including healthcare insurers and other 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 certaindrugs.  Many of the products involved inthese investigations and lawsuits are Hospira products.  Hospira is cooperating with the authoritiesin these investigations. There may be additional investigations or lawsuits, oradditional claims in the existing investigations or lawsuits, initiated withrespect to these matters in the future. Hospira cannot be certain that it will not be named as a subject ordefendant in these investigations or lawsuits. Hospira has been added as a defendant in one AWP proceeding, *The State of Texas ex rel. Ven-A-Care of the FloridaKeys, Inc. v. Abbott Laboratories Inc., Hospira, Inc., B. BraunMedical Inc. and Baxter Healthcare Corporation,*Case No. GV401286,pending in the District Court of Travis County, Texas.  The lawsuit alleges generally that thedefendants made false representations of prices and costs for drugs directlyand indirectly to the Texas Medicaid Program. Abbott will indemnify Hospira for liabilities associated with pending orfuture AWP investigations and lawsuits only to the extent that they are of thesame nature as the lawsuits and investigations that existed against Abbott asof the spin-off date and relate to the sale of Hospira products prior to thespin-off.  Hospira will assume any otherlosses that may result from these investigations and lawsuits related toHospira’s products. These investigations and lawsuits could result in changesto Hospira’s business practices or pricing policies, civil or criminal monetarydamages, penalties or fines, imprisonment and/or exclusion of Hospira productsfrom participation in federal and state healthcare programs, includingMedicare, Medicaid and Veterans’ Administration health programs, any of whichcould have a material adverse effect on its business, profitability andfinancial condition.

 

Hospira has been named asa defendant in a lawsuit brought by three employees alleging generally that thespin-off of Hospira from Abbott Laboratories adversely affected employeebenefits in violation of the Employee Retirement Income Security Act of1974.  The lawsuit was filed on November 8,2004, in the United States District Court for the Northern District ofIllinois, and is captioned: *Myla Nauman,Jane Roller and Michael Loughery v. Abbott Laboratories and Hospira, Inc.*The lawsuit seeks class action certification on behalf of “All employees ofAbbott who were participants and beneficiaries of the Abbott Benefit Planswhose employment with Abbott was terminated between August 22, 2003 and April 30,2004, as a result of the spin-off announced by Abbott on August 22, 2003.”On April 27, 2005, the court issued an opinion denying the motions ofAbbott and Hospira to dismiss the complaint. The ruling is not a determinationof the merits of the plaintiffs’ claims. Hospira denies all materialallegations asserted against it in the complaint.

 

Hospira’s productliability claim exposures are evaluated each reporting period. Hospira’sreserves, which are immaterial at June 30, 2005, are the best estimate ofloss, as defined by SFAS No. 5, “Accounting for Contingencies.”

 

Based upon informationthat is currently available, management believes that the likelihood of amaterial loss in excess of recorded amounts is remote.

 

Additional legalproceedings may occur that may result in a change in the estimated reservesrecorded by Hospira. It is not feasible 

 

9

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to predict the outcome ofsuch proceedings with certainty and there can be no assurance that theirultimate disposition will not have a material adverse effect on Hospira’sfinancial position, cash flows, or results of operations.

 

**Note 7  - Post-RetirementBenefits**

 

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

 

In connection with thespin-off, Hospira and Abbott entered into an Employee Benefits Agreement, whichprovided that Abbott retain liabilities for pension benefits for U.S. non-unionand international employees who were retired as of the spin-off date andliabilities for post-retirement medical and dental benefits for U.S. non-unionemployees who were retired or eligible to retire as of the spin-off date.

 

***Net Pension and Medical and Dental Benefit Cost***

 

In the second quarter of2004, Hospira announced a series of benefit plan changes including theenhancement of its 401(k) defined contribution plan, the freezing of the U.S.non-union pension plan and the discontinuation of the U.S. non-unionpost-retirement medical and dental plan. The discontinuation of the U.S.non-union post-retirement medical and dental plan was effective May 1,2004.  Effective December 31, 2004,the U.S. non-union pension plan was frozen. Eligible employees covered by theplan will continue to age into their benefits and will be entitled to allbenefits earned when they retire. Beginning January 1, 2005, all U.S.non-union employees are eligible to receive an additional company-matchingcontribution to the 401(k) plan and employees that are age 40 and above, as of December 31,2004, are eligible to receive an additional company-matching contribution forfive years beginning in 2005.

 

Net cost (benefit)recognized for the three and six months ended June 30, 2005 and 2004 forthe major pension plans and post-retirement medical and dental benefit plans,is as follows:

 

*(dollars in thousands)*

 
| ** **                                        | ** ** | **Pension Plans**      | ** ** |
|---------------------------------------------------|------------|------------------------|------------|
| ** **                                        | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
| ** **                                        | ** ** | **June 30**       | ** ** | **June 30** | ** ** |
| ** **                                        | ** ** | **2005**               | ** ** | **2004(1)** | ** ** | **2005** | ** ** | **2004(1)** | ** ** |
| Service cost for benefits earned during the  year |       | $                      | 529        |   | $ | 6,993 |   | $ | 1,058 |   | $ | 14,767 |   |
| Interest cost on projected benefit  obligations   |       | 5,508                  |       | 8,230 |   | 11,016 |   | 19,184 |   |
| Expected return on plans’ assets             |       | (7,345                 | )          | (8,860 | ) | (14,690 | ) | (21,611 | ) |
| Net amortization                                  |       | 306                    |       | 1,380 |   | 612 |   | 2,688 |   |
| Curtailment of benefits                           |       | —                 |       | 1,500 |   | — |   | 1,500 |   |
| Net pension (benefit) cost                        |       | $                      | (1,002     | ) | $ | 9,243 |   | $ | (2,004 | ) | $ | 16,528 |   |

 

----

Notes
| (1) | The net pension cost  for the three and six months ended June 30, 2004 includes costs  allocated from Abbott for all Hospira employees, including employees who were  retired as of the spin-off date. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

*(dollars in thousands)*

 
| ** **                                        | ** ** | **Medical and Dental Plans** | ** ** |
|---------------------------------------------------|------------|------------------------------|------------|
| ** **                                        | ** ** | **Three Months Ended**       | ** ** | **Six Months Ended** | ** ** |
| ** **                                        | ** ** | **June 30**             | ** ** | **June 30** | ** ** |
| ** **                                        | ** ** | **2005**                     | ** ** | **2004(1)** | ** ** | **2005** | ** ** | **2004(1)** | ** ** |
| Service cost for benefits earned during the  year |       | $                            | 359        |   | $ | 1,563 |   | $ | 718 |   | $ | 5,891 |   |
| Interest cost on projected benefit  obligations   |       | 789                          |       | 2,185 |   | 1,578 |   | 7,811 |   |
| Net amortization                                  |       | 483                          |       | 373 |   | 966 |   | 1,181 |   |
| Curtailment                                       |       | —                       |       | (64,636 | ) | — |   | (64,636 | ) |
| Net medical and dental cost (benefit)             |       | $                            | 1,631      |   | $ | (60,515 | ) | $ | 3,262 |   | $ | (49,753 | ) |

 

10

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----

Notes
| (1) | The net medical and  dental cost for the three and six months ended June 30, 2004 includes  costs allocated from Abbott for all U.S. Hospira employees, including  employees who were retired or eligible to retire as of the spin-off date. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

Hospira’s employeesparticipated through the spin-off date in the Abbott Laboratories StockRetirement Plan that is Abbott’s principal defined contribution plan, andthereafter in the Hospira 401(k) Retirement Savings Plan. Hospira’scontributions to these defined contribution plans for the three months ended June 30,2005 and 2004 were $8.2 million and $4.8 million, respectively.  For the six months ended June 30, 2005and 2004 contributions were $30.3 million and $9.6 million, respectively.Included in the six months ended June 30, 2005 is a $13.8 million one-timecompany contribution that was announced and accrued in 2004.

 

***Cash Funding***

 

Hospira funds itsdomestic pension plans according to IRS funding limitations. Based on thoselimitations, Hospira does not expect to contribute to its U.S. pension plans in2005.

 

**Note 8 -Debt**

 

Hospira has outstanding$700 million aggregate principal amount of notes, consisting of $300 millionprincipal amount of five-year senior unsecured notes and $400 million principalamount of ten-year senior unsecured notes. The $300 million five-year notesbear interest at a rate of 4.95% per annum and mature on June 15, 2009,and the $400 million ten-year notes bear interest at a rate of 5.9% per annumand mature on June 15, 2014.

 

In January 2005,Hospira entered into interest rate swap transactions whereby the $300 millionfive-year senior unsecured notes due in June 2009 were effectivelyconverted from fixed to floating rate debt.

 

In March 2005,Hospira issued economic development promissory notes, the proceeds of whichwere used for a distribution facility expansion. The $1.75 million ten-yearnotes bear a fixed rate of interest of 2%, with principal and interest duemonthly.

 

Hospira’s revolvingcredit facility consists of an unsecured revolving credit facility of $375million (“Revolver”) that is available for working capital and otherrequirements. On April 29,2005, the Revolver was amended to reduce or eliminate certain restrictions, inorder to increase Hospira’s operating flexibility. The Revolver allowsHospira to borrow funds on an unsecured basis at variable interest rates asshort-term cash needs dictate. As of June 30, 2005, Hospira had no amountsoutstanding under the Revolver.

 

Theamended Revolver and the Senior Unsecured Notes contain, among otherprovisions, covenants with which Hospira must comply while they are in force.The covenants limit Hospira’s ability to allow liens on its properties orassets, or merge or consolidate with any other corporation.  The amended Revolver further limits Hospira’sability to sell its assets.  Under theamended Revolver, Hospira must also comply with certain financial covenants,including interest coverage ratio, leverage ratio and minimum consolidated networth. As of June 30, 2005, Hospira was in compliance with all covenantsunder the amended Revolver and the Senior Unsecured Notes.

 

**Note 9 -Comprehensive Income, net of tax**

 

*(dollars in thousands)*

 
| ** **                                                 | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
|------------------------------------------------------------|------------|-------------------------------------|------------|-----------------------------------|------------|
| ** **                                                 | ** ** | **2005**                            | ** ** | **2004**                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| Foreign currency translation (losses)                      |       | $                                   | (6,668     | )                                 | $          | (7,154 | ) | $ | (10,886 | ) | $ | (39,458 | ) |
| Unrealized (losses) gains on marketable  equity securities |       | (127                                | )          | (473                              | )          | (420 | ) | 686 |   |
| Minimum pension liability adjustment                       |       | —                              |       | 47,324                            |       | — |   | 47,324 |   |
| Total other comprehensive (loss) income                    |       | (6,795                              | )          | 39,697                            |       | (11,306 | ) | 8,552 |   |
| Less effect of distribution from Abbott                    |       | —                              |       | (48,475                           | )          | — |   | (48,475 | ) |
| Adjusted other comprehensive (loss)                        |       | (6,795                              | )          | (8,778                            | )          | (11,306 | ) | (39,923 | ) |
| Net Income                                                 |       | 72,031                              |       | 125,770                           |       | 149,206 |   | 190,761 |   |
| Total Comprehensive Income                                 |       | $                                   | 65,236     |                              | $          | 116,992 |   | $ | 137,900 |   | $ | 150,838 |   |

 

11

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| ** **                                                               | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                               | ** ** | **2005**          | ** ** | **2004**              | ** ** |
| Cumulative foreign currency translation  gains                           |       | $                 | 620        |                  | $          | 11,506 |   |
| Cumulative minimum pension liability adjustments,  net of tax            |       | (25,360           | )          | (25,360               | )          |
| Cumulative unrealized gains on marketable  equity securities, net of tax |       | 1,323             |       | 1,743                 |       |
| Accumulated Other Comprehensive (Loss)                                   |       | $                 | (23,417    | )                     | $          | (12,111 | ) |

 

**Note 10- Segment Information**

 

Hospira’s principalbusiness is the development, manufacture and sale of a broad line of hospitalproducts, including specialty injectable pharmaceuticals and medicationdelivery systems, and the provision of injectable pharmaceutical contractmanufacturing services. Hospira has two reportable segments: U.S. andInternational.

 

Hospira’s underlyingaccounting records are maintained on a legal entity basis for government andpublic reporting requirements. Segment disclosures are on a performance basisconsistent with internal management reporting. Certain immaterial reclassifications have been made to the basis ofpresentation to facilitate comparable reporting. Intersegment transfers ofinventory are recorded at standard cost and are not a measure of segment incomefrom operations. The costs of some corporate functions are sold to segments atpredetermined rates that approximate cost. Remaining costs, if any, are notallocated.  The following segmentinformation has been prepared in accordance with the internal accountingpolicies of Hospira, as described above.

 

*(dollars in thousands)*

 
| ** **                  | ** ** | **Three  Months Ended June 30** | ** ** | **SixMonths  Ended June 30** | ** ** |
|-----------------------------|------------|--------------------------------------|------------|-----------------------------------|------------|
| ** **                  | ** ** | **Net  Sales**                       | ** ** | **Income  from Operations**       | ** ** | **Net  Sales** | ** ** | **Income  from Operations** | ** ** |
| ** **                  | ** ** | **2005**                             | ** ** | **2004**                          | ** ** | **2005** | ** ** | **2004 (1)** | ** ** | **2005** | ** ** | **2004** | ** ** | **2005** | ** ** | **2004 (1)** | ** ** |
| U.S.                        |       |                                 |       |                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
|                        |       | $                                    | 549,380    |                              | $          | 555,501 |   | $ | 92,674 |   | $ | 159,515 |   | $ | 1,099,770 |   | $ | 1,076,432 |   | $ | 190,826 |   | $ | 239,639 |   |
| International               |       |                                 |       |                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  reportable segments  |       | 112,535                              |       | 111,891                           |       | $ | 20,539 |   | 34,480 |   | 224,206 |   | 212,178 |   | 42,192 |   | 51,832 |   |
| Corporate  functions        |       | $                                    | 661,915    |                              | $          | 667,392 |   | 113,213 |   | 193,995 |   | $ | 1,323,976 |   | $ | 1,288,610 |   | 233,018 |   | 291,471 |   |
| Income  from operations     |       |                                 |       |                              |       | (15,055 | ) | (13,750 | ) |   |   |   |   | (27,350 | ) | (24,843 | ) |
| Other                       |       |                                 |       |                              |       | 98,158 |   | 180,245 |   |   |   |   |   | 205,668 |   | 266,628 |   |
| Income  before income taxes |       |                                 |       |                              |       | (3,381 | ) | (3,210 | ) |   |   |   |   | (9,345 | ) | (4,078 | ) |
|                        |       |                                 |       |                              |       | $ | 94,777 |   | $ | 177,035 |   |   |   |   |   | $ | 196,323 |   | $ | 262,550 |   |

 

----

(1)          2004 U.S. Income from operations includes curtailmentbenefit of $65 million.

 

**Note 11 –Incentive Stock Programs**

 

Certain employees of  Hospira who wereAbbott employees prior to the spin-off held stock option awards granted underAbbott incentive stock programs.  Foremployees who were retirement eligible at the spin-off date, these awardsremained options to purchase Abbott stock (“unconverted options”).

 

For those employees whowere not retirement eligible at the spin-off date, the Abbott stock optionawards were cancelled and replaced by new awards of options (“converted options”)to purchase Hospira common stock under the 2004 Plan at the time of thespin-off.  The converted options maintainboth the pre-conversion aggregate intrinsic value of each award and the ratioof the exercise price per share to the market value per share.  All other terms of the converted optionsremain the same.

 

In May 2004, Hospiraawarded a Founders Grant of 8.4 million options under the 2004 Plan tosubstantially all employees in the United States and certain internationalemployees, at the fair market value at the time of grant. These optionsgenerally vested in six months and have a five-year term for all employeesexcept for corporate officers, whose options vest over three years and have aten-year term.

 

12

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In May 2005, 2.6million options were granted to certain employees for the 2005 annual stockoption grant. These options were awarded at the fair market value at the timeof grant, generally vest over three years and have a ten-year term.

 

Hospira measurescompensation cost using the intrinsic value-based method of accounting forstock options. In accordance with this intrinsic value method, no compensationexpense is recognized for Hospira’s stock option plans. If the fair valuemethod of accounting was used for the Abbott and Hospira options, net incomeand earnings per share (EPS) in the periods during 2005 and 2004 would havebeen as follows:

 

*(dollars in thousands)*

 
| ** **                                                               | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
|--------------------------------------------------------------------------|------------|-------------------------------------|------------|-----------------------------------|------------|
| ** **                                                               | ** ** | **2005**                            | ** ** | **2004**                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net Income, as reported                                                  |       | $                                   | 72,031     |                              | $          | 125,770 |   | $ | 149,206 |   | $ | 190,761 |   |
| Hospira stock-based compensation, net of  tax                            |       | (5,129                              | )          | (12,000                           | )          | (7,513 | ) | (12,000 | ) |
|                                                                     |       |                                |       |                              |       |   |   |   |   |
| Pro forma net income including Hospira  stock-based compensation expense |       | 66,902                              |       | 113,770                           |       | 141,693 |   | 178,761 |   |
| Abbott stock-based compensation, net of tax  (1)                         |       | —                              |       | (1,674                            | )          | — |   | (7,048 | ) |
| Pro forma net income including all  stock-based compensation expense     |       | $                                   | 66,902     |                              | $          | 112,096 |   | $ | 141,693 |   | $ | 171,713 |   |
|                                                                     |       |                                |       |                              |       |   |   |   |   |
| Basic EPS, as reported                                                   |       | $                                   | 0.45       |                              | $          | 0.80 |   | $ | 0.94 |   | $ | 1.22 |   |
| Basic EPS, pro forma                                                     |       | $                                   | 0.42       |                              | $          | 0.72 |   | $ | 0.90 |   | $ | 1.10 |   |
| Diluted EPS, as reported                                                 |       | $                                   | 0.44       |                              | $          | 0.80 |   | $ | 0.93 |   | $ | 1.22 |   |
| Diluted EPS, pro forma                                                   |       | $                                   | 0.42       |                              | $          | 0.72 |   | $ | 0.89 |   | $ | 1.10 |   |

 

----

Notes
| (1) | For periods prior to  the spin-off, these amounts reflect the Abbott stock-based compensation for  Hospira employees, whether or not those awards were cancelled and replaced by  Hospira awards at the time of the spin-off. For periods subsequent to the  spin-off, Abbott awards for Hospira employees who were not retirement  eligible were converted to Hospira options, and only the corresponding  unvested portion of such awards impacts pro forma income. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

The weighted average fairvalue for the Hospira options granted in the three and six months ended June 30,2005 was $11.29 and $11.26, respectively. The weighted average fair value forthe Hospira options granted in the three and six months ended June 30,2004 was $6.61. The weighted average fair value for the Abbott options grantedin the three and six months ended June 30, 2004 was $11.79. The fair valuewas estimated using the Black-Scholes option-pricing model based on theweighted average market price at the grant date and the weighted averageassumptions specific to the underlying options. The historical Abbott assumptionsrelate to Abbott stock and are therefore based on Abbott’s valuationassumptions. The assumptions utilized for option grants during the periodspresented are as follows:

 
| ** **                                                           | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
|----------------------------------------------------------------------|------------|-------------------------------------|------------|-----------------------------------|------------|
| ** **                                                           | ** ** | **2005**                            | ** ** | **2004**                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| Hospira Stock Options Black-Scholes  assumptions (weighted average): |       |                                |       |                              |       |   |   |   |   |
| Volatility                                                           |       | 30.0                                | %          | 32.0                              | %          | 30.0 | % | 32.0 | % |
| Expected life (years)                                                |       | 5.2                                 |       | 2.9                               |       | 5.1 |   | 2.9 |   |
| Risk-free interest rate                                              |       | 3.9                                 | %          | 2.9                               | %          | 3.9 | % | 2.9 | % |
| Dividend yield                                                       |       | 0.0                                 | %          | 0.0                               | %          | 0.0 | % | 0.0 | % |
|                                                                 |       |                                |       |                              |       |   |   |   |   |
| Abbott Stock Options Black-Scholes  assumptions (weighted average):  |       |                                |       |                              |       |   |   |   |   |
| Volatility                                                           |       | N/A                                 |       | 32.0                              | %          | N/A |   | 32.0 | % |
| Expected life (years)                                                |       | N/A                                 |       | 5.4                               |       | N/A |   | 5.4 |   |
| Risk-free interest rate                                              |       | N/A                                 |       | 2.9                               | %          | N/A |   | 2.9 | % |
| Dividend yield                                                       |       | N/A                                 |       | 2.2                               | %          | N/A |   | 2.2 | % |

 

13

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**Note 12 – Relationship with Abbott**

 

Hospira operated as partof Abbott through the spin-off date, during which time Abbott provided variousservices to Hospira. The cost of these services was allocated to Hospirautilizing various allocation methods which management believes were reasonable.In connection with the spin-off, Hospira and Abbott entered into agreementspursuant to which Hospira and Abbott provide to the other, on an interim,transitional basis, various services. The agreed-upon charges for such servicesare generally intended to allow the servicing party to recover allout-of-pocket costs plus a mark up.  Theservices generally commenced on the spin-off date and will terminate no laterthan 24 months following the spin-off date. The receiving party mayterminate the agreement related to such services upon prior written notice. Thenet cost of these various services to Hospira was $1 million and $3 million forthe three and six months ended June 30, 2005. Prior year amounts of $5million and $10 million for the three and six months ended June 30, 2004include those costs that were allocated to Hospira as a part of Abbott, as wellas costs charged by Abbott under transition service agreements subsequent tothe spin-off date, including the costs related to leases noted below.

 

In addition, Hospiraleases floor space in certain Abbott facilities. The terms of the leases rangefrom two to ten years from the spin-off date, unless terminated earlier byHospira, and include additional services provided by Abbott. These additionalservices are integral to the facilities and primarily include manufacturingsupport functions, quality assurance and information technology systems.  The cost for the leases and additionalservices for the three and six months ended June 30, 2005 was $7 millionand $13 million, respectively.

 

Both Hospira and Abbotthave provided and will continue to provide manufacturing services to the other.Prior to the spin-off date, under Abbott’s and Hospira’s internal reportingpractices, these services were provided at cost to the purchasing entity andHospira’s sales to Abbott included the value of the bulk material. Subsequentto the spin-off date, for manufacturing services provided to Abbott, Hospirarecords as revenue its costs plus a third-party manufacturing profit and, forcertain products, Hospira receives the bulk material from Abbott and the markup is on the value-added portion only. Inventory that Hospira purchases from Abbott isat Abbott’s cost plus a third-party manufacturing profit. Sales to Abbottamounted to $43 million and $89 million for the three and six months ended June 30,2005 and $50 million and $96 million for the three and six months ended June 30,2004, respectively. Product purchases from Abbott were $20 million and $39million for the three and six months ended June 30, 2005 and $20 millionand $40 million for the three and six months ended June 30, 2004,respectively.

 

In connection with thespin-off, Hospira and Abbott agreed that the legal transfer of certainoperations and assets (net of liabilities) outside the United States wouldoccur, and be completed, within two years after the spin-off. These operationsand assets are used in the conduct of Hospira’s international business andHospira is subject to the risks and entitled to the benefits generated by suchoperations and assets. Hospira is obligated to pay Abbott for these operationsand assets, and assume the corresponding liabilities, over a two-year periodafter the spin-off date as Hospira establishes its business infrastructureoutside the United States and obtains regulatory approval for the transfer ofthe marketing authorizations for Hospira products to local Hospira affiliatesor third-party distributors. The amount payable is equal to the net book valueof those assets and liabilities at the time of such transfer. Accordingly, thenet book value will be affected by normal operations, exchange rates and otherbusiness factors. Hospira pays Abbott interest,  at local prevailing short-term rates,in connection with Hospira’s use of certain of these assets during that period.As of June 30, 2005, the net book value of the assets and liabilities thathad not yet transferred was $223.0 million. The net book value is primarilycomprised of accounts receivable of $88.3 million, inventory of $72.7 million,equipment of $59.7 million and other, net of $2.3 million. Each amount has beenincluded in the corresponding balance sheet line item. The amount due to Abbottfor the net book value of assets and liabilities is offset by $104.9 millionfor items that are due from Abbott related to the international business. Theseitems include amounts due for operating profits and inventory purchases ofHospira products to support the international business.  All charges between Hospira and Abbott areincluded in Due to Abbott, Net on the balance sheet. In the second quarter of2005, the net assets of Canada and the Netherlands were legally transferredfrom Abbott. The total amount paid was $45.8 million. Subsequent to June 30,2005, the net assets of several additional countries were transferred toHospira from Abbott.  Hospira expects totransfer the net assets of additional countries each quarter throughout theremaining transition period.

 

14

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**Item2.****  Management’sDiscussion And Analysis Of Financial Condition And Results OfOperations**

 

**Overview**

 

Hospira is a globalspecialty pharmaceutical and medication delivery company that is focused onproducts that improve the productivity, safety and efficacy of patient care inthe acute care setting.  Hospira is aleader in the development, manufacture and marketing of specialty injectablepharmaceuticals and medication delivery systems that deliver drugs andintravenous (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’s broad portfolio of products is used by hospitals and alternate siteproviders, such as clinics, home healthcare providers and long-term carefacilities.

 

**Transitionfrom Abbott**

 

Hospira became a separate public company on April 30,2004, pursuant to a spin-off from Abbott Laboratories. For all periods prior tothe spin-off, Hospira operated as a part of Abbott’s Hospital Products andInternational segments.  References tothe historical assets, liabilities, products, businesses or activities ofHospira prior to the spin-off are generally intended to refer to the historicalassets, liabilities, products, businesses or activities of the business as itwas conducted as part of Abbott and its subsidiaries prior to the spin-off.Hospira’s condensed consolidated financial statements for the three and sixmonths ended June 30, 2005 reflect Hospira’s operations as a separate,stand-alone entity subsequent to the spin-off. The financial statements for thethree and six months ended June 30, 2004 combine Hospira’s operations aspart of Abbott prior to the spin-off and as a separate, stand-alone entityafter the spin-off, and do not reflect Hospira’s results of operations,financial position and cash flows had Hospira been a stand-alone companythroughout these periods.

 

In connection with thespin-off, Hospira and Abbott agreed that the legal transfer of certainoperations and assets (net of liabilities) outside the United States wouldoccur, and be completed, within two years after the spin-off. These operationsand assets are used in the conduct of Hospira’s international business andHospira is subject to the risks and entitled to the benefits generated by theoperations and assets. Hospira is dependent on Abbott’s internationalinfrastructure until such legal transfers occur in each international country.The first transfers, Canada and the Netherlands, occurred in the second quarterof 2005. Subsequent to June 30, 2005,  the net assets of several additionalcountries were transferred  from Abbott.Hospira expects to transfer the net assets of additional countries each quarterthroughout the remaining transition period.

 

Hospira expects tocontinue to incur increased expenses on an ongoing basis, including expensesrelating to establishing corporate functions, operating and maintaininginformation technology systems, and operating internationally on a stand-alonebasis. Additionally, Hospira expects to incur expenses on a non-recurring,transitional basis, including those related to the establishment of newfacilities, the build-out of independent information technology systems, andproduct registration and re-labeling. These non-recurring transitional costsare estimated to total approximately $100 million (pre-tax) over the 24-monthperiod subsequent to the spin-off, of which $53.3 million has been incurredthrough June 30, 2005. During the three and six months ended June 30,2005, $10.2 million and $20.9 million, respectively, of non-recurringtransition costs were incurred.

 

**Critical Accounting Policies**

 

The preparation offinancial statements in accordance with generally accepted accountingprinciples (GAAP) requires management to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenues and expenses. Asummary of Hospira’s significant accounting policies is included in Note 1 tothe company’s consolidated financial statements, which are included in Hospira’sAnnual Report on Form 10-K for the year ended December 31, 2004.Certain of Hospira’s accounting policies are considered critical, as thesepolicies require significant, difficult or complex judgments by management,often employing the use of estimates about the effects of matters that areinherently uncertain. Such policies are summarized in “Item 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations” ofHospira’s Annual Report on Form 10-K for the year ended December 31,2004. There have been no significant changes in the application of the criticalaccounting policies since December 31, 2004.

 

**RecentlyIssued Accounting Standards**

 

In November 2004,the FASB issued SFAS No. 151,’’Inventory Costs.’’ This statement clarifiesthe accounting for the abnormal amount of idle facilities expense, freight,handling costs and wasted material. This statement requires that those items berecognized as current-period expenses. In addition, the statement requires thatallocation of fixed overhead to the cost of conversion be based on the normalcapacity of the production facilities. For Hospira, this statement is effective for inventory costs incurredafter December 31, 2005. Hospira is currently evaluating the potentialimpact of SFAS No. 151 on its financial position and results ofoperations.

 

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In December 2004, the FASB issued SFAS No. 123(revised 2004), “Share-Based Payment,” which requires, among other changes,that the cost resulting from all share-based payment transactions be recognizedas compensation cost over the vesting period based on the fair value of theinstrument on the date of grant. SFAS No. 123R revises SFAS No. 123, “Accountingfor Stock-Based Compensation,” which previously allowed pro forma disclosure ofcertain share-based compensation expense. Further, SFAS No. 123R supercedesAccounting Principles Board Opinion No. 25, “Accounting for Stock Issued toEmployees,” which previously allowed the intrinsic value method of accountingfor stock options rather than the fair value method when determining optionvalue used to measure compensation cost. Since Hospira currently accounts forshare-based payments using the intrinsic value method, Hospira’s results ofoperations have not included the recognition of compensation expense. HadHospira applied the fair-value criteria established in SFAS No. 123R toprevious stock option grants, the impact to the results of operations wouldhave approximated the pro forma expense under SFAS No. 123, which is disclosedin Note 11.

 

On April 14, 2005, the SEC adopted a rule that amendedthe compliance dates of SFAS No. 123R to require implementation no later thanthe beginning of the first fiscal year which begins after June 15, 2005(January 1, 2006 for Hospira). The effect of adopting SFAS No. 123R on dilutedearnings per share in future periods is dependent on the number of optionsgranted in the future, the terms of those awards and their fair values.

 

The American Jobs CreationAct of 2004 (“Jobs Act”), which was signed into law on October 22, 2004,provides for a special one-time dividends received deduction on therepatriation of certain foreign earnings to a U.S. taxpayer, provided certaincriteria are met. In accordance with FASB Staff Position 109-2, “Accounting andDisclosure Guidance for the Foreign Earnings Repatriation Provision within theAmerican Jobs Creation Act of 2004,” Hospira continues to evaluate thelegislation and whether it will elect to repatriate qualified undistributedforeign earnings as a result of the Jobs Act. Based on the analysis to date, the range of possible amounts thatHospira is considering for repatriation is between $0 and $220 million, withthe corresponding income tax effects ranging from $0 to $12.6 million.  Hospira expects to complete its evaluation bythe end of 2005.

 

In May 2005, the FASB issued SFAS No. 154, “AccountingChanges and Error Corrections” (“SFAS No. 154”), which changes the requirementsfor the accounting and reporting of a voluntary change in accounting principle.The statement requires retrospective application to prior periods financial statements,or the latest practicable date, as the required method for reporting a changein accounting principle. Previous rules generally required that changes inaccounting principles were recognized by including the cumulative effect of thechange in net income in the period of change. SFAS No. 154 is effective foraccounting changes made in fiscal years beginning after December 15, 2005.Adoption of this standard is not expected to have a material affect on Hospira’sfinancial position or results of operations.

 

**2005 Second Quarter Highlights**

 

•                  Launched theinternational regional headquarters for Europe, the Middle East and Africa(EMEA) in Amsterdam, and for Canada in Montreal. These are the first of fourregional hubs that will support Hospira’s operations outside the United States.

 

•                  Announced anagreement to acquire Physiometrix, Inc., a NASDAQ-listed medical devicemanufacturer, which subsequently closed on July 29. The acquisition willbroaden Hospira’s portfolio of products for the hospital operating room andintensive care unit, providing anesthesia-monitoring devices used duringsurgical and diagnostic procedures.

 

•                  Launchedthe wireless version of the Hospira MedNetTM system for the Plum A+ infusionpump platform. The new wireless version also establishes real-timesend-and-receive capability and links to the hospital information systemnetwork. The Hospira MedNet medication management software system providesscalable and upgradeable options for hospitals of varying size andtechnological needs

 

•                  Completed thesale of the Salt Lake City manufacturing facility to ICU Medical. Thistransaction enables Hospira to combine its sales and marketing capabilitieswith ICU Medical’s expertise in cost-efficient custom manufacturing, allowingHospira to better address customer needs for a more specialized critical careproduct line. The transaction also reinforces Hospira’s continued commitment tooptimize manufacturing productivity and improve efficiencies across itsoperations, a critical element of the company’s stated strategy to improvemargins and cash flow.

 

**Risk Factors**

 

Pleaserefer to “Item 1. Business - Risk Factors” in Hospira’s Annual Report on Form10-K for the year ended December 31, 2004 for a discussion of risks to whichHospira’s business, financial condition, results of operations and cash flowsare subject.

 

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**Factorsthat Influence Results of Operations**

 

In “Item7. Management’s Discussion and Analysis of Financial Condition and Results ofOperation” in Hospira’s Annual Report on Form 10-K for the year ended December31, 2004, Hospira highlighted certain factors that influence its results ofoperations.  Other than as discussed below, Hospira is not aware of anysignificant changes in such factors since December 31, 2004.

 

Until thesecond quarter of 2005, Hospira had historically distributed certain imaging agentproducts of Berlex, Inc. During the fourth quarter of 2004, Hospira receivednotification from Berlex that it was exercising the “wind-down” clause in thedistribution agreement. The wind-down was completed in the second quarter of2005, and Hospira no longer distributes Berlex imaging agents. Hospirarecognized sales under the completed Berlex agreement of $67 million in thefirst half of 2005. Operating profits for the full year 2005 related to thetermination of the Berlex distribution agreement will be negatively affected by$9 million compared to 2004.

 

Some wholesalers of Hospira’s genericpharmaceutical products are attempting to implement a fee-for-service model forthe distribution of such products. Hospira is evaluating the potential impactof this possible change on its drug wholesale business model. Certain drugwholesalers have taken unilateral steps to implement service fees and areinvoicing Hospira for these fees. One wholesaler has begun to deduct these feesfrom amounts payable to Hospira.  Hospiradenies that it owes additional service fees under its existing contracts withthese drug wholesalers and has not recorded any provisions for these fees.Hospira is continuing to address this matter with the drug wholesalers, grouppurchasing organizations and its customers to resolve this matter. If Hospiradoes not reach a satisfactory resolution of this matter with the wholesalers,Hospira will consider directly distributing these products.  If these fees are successfully implemented orif Hospira uses alternative methods of distribution, including directdistribution, Hospira could experience increased costs to distribute itsproducts, which could be material.

 

Approximately 50 percent of Hospira’s net sales aremade under numerous contracts with group purchasing organizations (“GPO”).Typically, these contracts cover a portion of Hospira’s product lines, specifythe prices for Hospira’s products, and are effective for three to five years.Generally, the contracts are extended or competitively bid prior to contractexpiration. Hospira had five GPO pharmacy contracts to be renewed orrenegotiated during 2005. Of these five GPO pharmacy contracts, two have beenextended into 2006, two contracts were completed with multi-year contractssigned and one contract is nearing completion of an extension. Hospira expectsto secure its base business with respect to all contracts up for renewal.

 

**Results of operations for the threemonths ended June 30, 2005 compared to June 30, 2004**

 

The results of Hospira’s operations for the threemonths ended June 30, 2004 combine Hospira’s operations as a part of Abbott forperiods prior to the spin-off on April 30, 2004 and Hospira’s operations as aseparate, stand-alone entity after the spin-off.

 

*Net Sales*

 

Net sales decreased (0.8%) in the second quarter of2005 compared to the second quarter of 2004. Sales to third parties represented0.2% growth in overall sales, driven by exchange of 0.6% and price of 1.5%,partially offset by volume/mix of (1.9)%, which includes the unfavorable impactof the Berlex contract termination of (5.0)% as well as 1.5% related tosales-type lease accounting for pumps. In late 2004, Hospira changed itsbusiness model, which resulted in sales-type lease accounting for new pumpleases. Sales to Abbott had an unfavorable impact of (1.0%) on overall sales,driven by the exclusion of the bulk drug cost for certain products post-spinand decreased demand.

 

A comparison of product line sales is asfollows:

 

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**Hospira, Inc.**

**Sales by Product Line**

**(Unaudited)**

**(dollars in millions)**

 
| ** **                                        | ** ** | **Three Months Ended June 30** | ** ** |
|---------------------------------------------------|------------|--------------------------------|------------|
| ** **                                        | ** ** | ** **                     | ** ** | ** ** | ** ** | **Percent** | ** ** |
| ** **                                        | ** ** | ** **                     | ** ** | ** ** | ** ** | **Change** | ** ** |
| ** **                                        | ** ** | ** **                     | ** ** | ** ** | ** ** | **vs. Prior** | ** ** |
| ** **                                        | ** ** | **2005**                       | ** ** | **2004** | ** ** | **Year*** | ** ** |
| U.S. —                                       |       |                           |       |   |   |   |   |
| Specialty Injectable Pharmaceuticals              |       | $                              | 201        |   | $ | 221 |   | (9.2 | ) |
| Medication Delivery Systems                       |       | 204                            |       | 192 |   | 6.2 |   |
| Injectable Pharmaceutical Contract  Manufacturing |       | 52                             |       | 46 |   | 13.6 |   |
| Sales to Abbott Laboratories                      |       | 27                             |       | 34 |   | (21.0 | ) |
| Other                                             |       | 65                             |       | 62 |   | 5.1 |   |
|                                              |       |                           |       |   |   |   |   |
| Total U.S.                                        |       | 549                            |       | 555 |   | (1.1 | ) |
|                                              |       |                           |       |   |   |   |   |
| International —                              |       |                           |       |   |   |   |   |
|                                              |       |                           |       |   |   |   |   |
| Sales to Third Parties                            |       | 96                             |       | 96 |   | 0.1 |   |
| Sales to Abbott Laboratories                      |       | 17                             |       | 16 |   | 3.2 |   |
|                                              |       |                           |       |   |   |   |   |
| Total International Sales                         |       | 113                            |       | 112 |   | 0.6 |   |
|                                              |       |                           |       |   |   |   |   |
| Consolidated Net Sales                            |       | $                              | 662        |   | $ | 667 |   | (0.8 | ) |

 

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*                 Percent change computedbased on unrounded numbers.

 

The sales decrease in Specialty InjectablePharmaceuticals was primarily due to the termination of the Berlex imagingagents distribution agreement and the impact of increased generic competitionon Hospira’s Corlopam® product. Sales of the remainder of the SpecialtyInjectable Pharmaceuticals product line were strong, driven by the impact ofsales of new products (fluconazole and deferoxamine), increased sales ofsyringe products, and favorable price. The sales increase in MedicationDelivery Systems was driven by growth in medication management, partiallyoffset by a decline in infusion therapy products. The growth in medicationmanagement was due to increased placements of Hospira’s newer technologyPlumA+® pumps with Hospira MedNetTM and the impact of the change in businessmodel in late 2004, which resulted in sales-type lease accounting. The declinein infusion therapy product sales was driven by the expiration of a contractunder which Hospira sold product to a competitor, as well as lower pricing onsets, partially offset by other favorable volume/mix.****Thesales increase in Injectable Pharmaceutical Contract Manufacturing wasprimarily due to favorable price coupled with growth in demand for severalexisting supply agreements.

 

The decrease in U.S. Salesto Abbott was primarily due to the exclusion of the cost of the bulk drugsubsequent to the spin-off for certain products manufactured for Abbott, whileApril 2004 results included the cost of these bulk drugs.  This reflects the post spin-off manufacturingarrangement between Hospira and Abbott under which Abbott transfers the bulkdrug to Hospira for processing and Hospira’s sales include only the value-addedportion plus a markup for these products. The reduction in U.S. Sales to Abbottalso reflects decreased demand by Abbott for several of its products, partiallyoffset by the markup on product sold to Abbott after the spin-off. The increasein Other U.S. sales was primarily due to increased sales of new products toalternate site healthcare customers.

 

International Sales to ThirdParties were up slightly, reflecting favorable exchange, partially offset bylower volumes.  International Sales toAbbott increased primarily due to volume related to an additional productmanufactured for Abbott subsequent to the spin-off, coupled with the impact ofthe markup on products sold to Abbott after the spin-off, partially offset byreduced demand.

 

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*Gross Profit*

 

Gross profit increased $7.8 million, or 3.7%, for thequarter ended June 30, 2005, compared with the same period in 2004. Grossprofit margin increased to 33.0% for the second quarter of 2005, from 31.6% forthe second quarter of 2004. The increased margin is primarily the result ofvolume/product mix improvement of 2.3%, which includes the impact of Berlex of1.2%, the markup on sales to Abbott of 0.7% and an increase in price of 0.9%.These increases were partially offset by additional depreciation of (0.5)% resultingfrom the 2004 revision in the estimated useful life for certain drug deliverypumps placed with customers, a charge of (1.9)% related to the sale of the SaltLake City, Utah manufacturing facility to ICU Medical and other changes of(0.1)%.

 

*Research and Development*

 

Research and development expenses increased $4.8million, or 17.0%, for the quarter ended June 30, 2005, compared with the sameperiod in 2004. The increase in research and development expenses was primarilydue to spending on new product development related to integrated software fordrug delivery devices that help prevent medication errors, a next generationdrug delivery device and new compounds added to Hospira’s generic injectabledrug pipeline, partially offset by reduced benefit costs as a result of thechanges in benefit plans in 2004. Research and development expenses increasedto 5.0% of net sales for the quarter ended June 30, 2005, compared with 4.2% ofnet sales for the same period in 2004.

 

*Selling, General and Administrative*

 

Selling, general and administrative expenses increased$20.5 million, or 30.6%, for the quarter ended June 30, 2005, compared with thesame period in 2004. The increase was primarily due to additional costs relatedto becoming a separate stand-alone public company.  These costs include the establishment ofcorporate functions, information technology and other costs relating toestablishing business infrastructure outside the United States. Selling,general and administrative expenses increased to 13.2% of net sales for thequarter ended June 30, 2005, compared with 10.0% of net sales for the sameperiod in 2004.

 

*Curtailmentof Post-retirement Medical and Dental Benefits*

 

In the second quarter of 2004, Hospira evaluated itsretirement benefit programs and announced a series of benefit plan changes,which included the discontinuation of the U.S. non-union post-retirementmedical and dental plan. The effect of the discontinuation of thepost-retirement medical and dental plan was a non-cash pre-tax benefit of $64.6million resulting from the reversal of the related liability.

 

*Interest and Other (Income) Expense , Net*

 

Interest expense was $6.9 million for the quarterended June 30, 2005, compared to $2.7 million in the same period in 2004. Theincrease was primarily due to interest relating to the senior unsecured notes,which were issued in June 2004 to repay the senior unsecured credit facilitythat Hospira incurred as part of the spin-off. Other (income) expense, net was$(3.5) million for the three months ended June 30, 2005 compared to $0.5million for the three months ended June 30, 2004. The change was primarilyrelated to interest income in 2005. Prior to the spin-off, Hospira, as part ofAbbott, did not hold cash.

 

*Income Tax Expense*

 

The effective tax rate was 24% for the quarter endedJune 30, 2005, compared to 29% for the same period in 2004. Hospira estimatesits 2005 annual effective tax rate to be 24%. The effective tax rates are lessthan the statutory U.S. federal income tax rate principally due to the benefitof tax exemptions, of varying durations, in several taxing jurisdictions.  The effective tax rate in the second quarterof 2004 included the impact of a significant unusual item, the curtailment of thepost-retirement medical and dental plan noted above. Excluding the effect ofthe curtailment, the effective rate in the second quarter of 2004 was 24%.

 

**Results of operations for the sixmonths ended June 30, 2005 compared to June 30, 2004**

 

The results of Hospira’s operations for the six monthsended June 30, 2004 combine Hospira’s operations as a part of Abbott forperiods prior to the spin-off on April 30, 2004, and Hospira’s operations as aseparate, stand-alone entity after the spin-off.

 

*Net Sales*

 

Net sales increased 2.7% for the six months ended June30, 2005, compared to the six months ended June 30, 2004. Sales to thirdparties represented 3.3% growth in overall sales, driven by exchange of 0.6%,price of 1.0% and volume/product mix of 1.7%, which includes the unfavorableimpact of the Berlex contract termination of (2.0)% as well as 1.0% related tosales-type lease accounting 

 

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for pumps. In late 2004, Hospira changed its businessmodel, which resulted in sales-type lease accounting for new pump leases. Salesto Abbott had an unfavorable impact of (0.6%) on overall sales growth, drivenby the exclusion of the bulk drug cost for certain products post-spin,partially offset by increased demand.

 

Acomparison of product line sales is as follows:

 

**Hospira, Inc.**

**Sales by Product Line**

**(Unaudited)**

**(dollars in millions)**

 
| ** **                                        | ** ** | **Six Months Ended June 30** | ** ** |
|---------------------------------------------------|------------|------------------------------|------------|
| ** **                                        | ** ** | ** **                   | ** ** | ** ** | ** ** | **Percent** | ** ** |
| ** **                                        | ** ** | ** **                   | ** ** | ** ** | ** ** | **Change** | ** ** |
| ** **                                        | ** ** | ** **                   | ** ** | ** ** | ** ** | **vs. Prior** | ** ** |
| ** **                                        | ** ** | **2005**                     | ** ** | **2004** | ** ** | **Year*** | ** ** |
| U.S. —                                       |       |                         |       |   |   |   |   |
| Specialty Injectable Pharmaceuticals              |       | $                            | 426        |   | $ | 426 |   | (0.1 | ) |
| Medication Delivery Systems                       |       | 393                          |       | 379 |   | 3.5 |   |
| Injectable Pharmaceutical Contract  Manufacturing |       | 102                          |       | 84 |   | 22.0 |   |
| Sales to Abbott Laboratories                      |       | 55                           |       | 71 |   | (21.9 | ) |
| Other                                             |       | 124                          |       | 117 |   | 6.6 |   |
|                                              |       |                         |       |   |   |   |   |
| Total U.S.                                        |       | 1,100                        |       | 1,077 |   | 2.2 |   |
|                                              |       |                         |       |   |   |   |   |
| International —                              |       |                         |       |   |   |   |   |
|                                              |       |                         |       |   |   |   |   |
| Sales to Third Parties                            |       | 190                          |       | 187 |   | 2.1 |   |
| Sales to Abbott Laboratories                      |       | 34                           |       | 25 |   | 31.6 |   |
|                                              |       |                         |       |   |   |   |   |
| Total International Sales                         |       | 224                          |       | 212 |   | 5.7 |   |
|                                              |       |                         |       |   |   |   |   |
| Consolidated Net Sales                            |       | $                            | 1,324      |   | $ | 1,289 |   | 2.7 |   |

 

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*Percent change computed based on unrounded numbers.

 

Sales in Specialty Injectable Pharmaceuticals weredown slightly, reflecting the termination of the Berlex imaging agentsdistribution agreement and the impact of increased generic competition onHospira’s Corlopam® product. Sales of the remainder of the Specialty InjectablePharmaceuticals product line were strong, driven by the impact of sales of newproducts (fluconazole and deferoxamine), increased volumes of syringe products,anti-infectives and generic anesthesia products, and favorable price. The salesincrease in Medication Delivery Systems was driven by growth in medicationmanagement, partially offset by a decline in infusion therapy products.  The growth in medication management was dueto increased placements of Hospira’s newer technology PlumA+® pumps withHospira MedNetTM and the impact of the change in business model in late 2004,which resulted in sales-type lease accounting. The decline in infusion therapyproduct sales was driven by the expiration of a contract under which Hospirasold product to a competitor, as well as lower pricing on sets, partiallyoffset by other favorable volume/mix.****The salesincrease in Injectable Pharmaceutical Contract Manufacturing was primarily dueto growth in demand for several existing supply agreements and favorable price.

 

The decrease in U.S. Sales to Abbott was due to theexclusion of the cost of the bulk drug subsequent to the spin-off for certainproducts manufactured for Abbott, while 2004 (through April) included the costof these bulk drugs. This reflects the post spin-off manufacturing arrangementbetween Hospira and Abbott, under which Abbott transfers the bulk drug toHospira for processing and Hospira’s sales include only the value-added portionplus a markup for these products. This reduction was partially offset byincreased demand by Abbott for several of its products and by the markup onproduct sold to Abbott after the spin-off. The increase in Other U.S. sales wasprimarily due to increased sales of new products to alternate site healthcarecustomers, partially offset by a decline in critical care products.

 

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International Sales to Third Parties increasedprimarily due to favorable foreign exchange rates. International Sales toAbbott increased primarily due to volume related to an additional productmanufactured for Abbott subsequent to the spin-off, coupled with the impact ofthe markup on products sold to Abbott after the spin-off, partially offset by reduced demand.

 

*Gross Profit*

 

Gross profit increased $57.2 million, or 15.1%, forthe six months ended June 30, 2005, compared with the same period in 2004.Gross profit margin increased to 32.9% for the six months ended 2005, from29.4% for the six months ended 2004. The increased margin is primarily theresult of volume/product mix improvement of 2.0%, which includes the impact ofBerlex of 0.5%; the markup on sales to Abbott of 1.0%; reduced benefit costs of1.1% as a result of the changes in benefit plans in 2004; manufacturingproductivity of 0.9%; an increase in price of 0.7% and the impact of foreignexchange of 0.1%. These increases were partially offset by additionaldepreciation of (0.7)% resulting from the 2004 revision in the estimated usefullife for certain drug delivery pumps placed with customers; charges of (1.2)%from an asset impairment and obligations assumed related to the sale of theSalt Lake City, Utah manufacturing facility to ICU Medical; and other changesof (0.4)%.

 

*Research and Development*

 

Research and development expenses increased $8.7million, or 16.6%, for the six months ended June 30, 2005, compared with thesame period in 2004. The increase in research and development expenses wasprimarily due to spending on new product development related to integratedsoftware for drug delivery devices that help prevent medication errors, a nextgeneration drug delivery device and new compounds added to Hospira’s genericinjectable drug pipeline, partially offset by reduced benefit costs as a resultof the changes in benefit plans in 2004. Research and development expensesincreased to 4.6% of net sales for the six months ended June 30, 2005, comparedwith 4.1% of net sales for the same period in 2004.

 

*Selling, General and Administrative*

 

Selling, general and administrative expenses increased$44.8 million, or 36.0%, for the six months ended June 30, 2005, compared withthe same period in 2004. The increase was primarily due to additional costsrelated to becoming a separate stand-alone public company.  These costs include the establishment ofcorporate functions, information technology and other costs relating toestablishing business infrastructure outside the United States. Selling, generaland administrative expenses increased to 12.8% of net sales for the six monthsended June 30, 2005, compared with 9.7% of net sales for the same period in2004.

 

*Curtailmentof Post-retirement Medical and Dental Benefits*

 

In the second quarter of 2004, Hospira evaluated itsretirement benefit programs and announced a series of benefit plan changeswhich included the discontinuation of the U.S. non-union post-retirementmedical and dental plan. The effect of the discontinuation of thepost-retirement medical and dental plan was a non-cash pre-tax benefit of $64.6million resulting from the reversal of the related liability.

 

*Interest and Other (Income) Expense, Net*

 

 Interestexpense was $14.0 million for the six months ended June 30, 2005, compared to$2.7 million in the same period in 2004. The increase was primarily due tointerest relating to the senior unsecured notes, which were issued in June 2004to repay the senior unsecured credit facility that Hospira incurred as part ofthe spin-off. Other (income) expense, net was $(4.7) million for the six monthsended June 30, 2005, compared to $1.4 million for the six months ended June 30,2004. The change was primarily related to interest income in 2005. Prior to thespin-off, Hospira, as part of Abbott, did not hold cash.

 

*Income Tax Expense*

 

The effective tax rate was 24% for the six monthsended June 30, 2005, compared to 27.3% for the same period in 2004. Hospiraestimates its 2005 annual effective tax rate to be 24%. The effective tax ratesare less than the statutory U.S. federal income tax rate principally due to thebenefit of tax exemptions, of varying durations, in several taxingjurisdictions.  The effective tax ratefor the six months ended June 30, 2004 included the impact of a significantunusual item, the curtailment of the post-retirement medical and dental plannoted above. Excluding the effect of the curtailment, the effective rate forthe six months ended June 30, 2004 was 24%.

 

**Liquidity and Capital Resources atJune 30, 2005 compared with December 31, 2004**

 

Net Cash From Operating Activities continues to beHospira’s primary source of funds to finance operating needs and capitalexpenditures.  Capital resources includecash on hand and borrowing availability under Hospira’s $375 million creditfacility.

 

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Operating activities provided net cash of $300.2million, primarily driven by net income of $149.2 million, non-cashdepreciation and amortization charges of $80.5 million, and changes inoperating assets and liabilities of $70.5 million.  The changes in operating assets andliabilities consist primarily of an increase in accrued liabilities generatedby obligations assumed related to the sale of the Salt Lake City, Utahmanufacturing facility to ICU Medical, and an increase in taxes payable, net ofcash payments, which is included in Other, net.

 

Net Cash Used in Investing Activities of $26.8 millionincludes capital expenditures of $131.0 million for upgrading and expandingmanufacturing and administrative support facilities and information technologysystems, offset by $72.4 million in proceeds from the sales of marketable debtsecurities and $31.8 million in proceeds from the sale of the Salt Lake City,Utah manufacturing facility and related assets to ICU Medical.

 

Net Cash Provided by Financing Activities of $26.2million consists primarily of proceeds from employee stock option exercises of$70.3 million offset by the payment to Abbott for  international net assets of $45.8 million,which is further described below.

 

At June 30, 2005, Hospira’s working capital was $848.8million, compared to working capital of $662.1 million at December 31,2004.  The increase in working capital in2005 was mainly due to the increase in cash and cash equivalents, and adecrease in the current portion of  “Dueto Abbott, Net,” which is primarily related to the reduction in the liabilityfor the international net assets transferred from Abbott, offset by an increase in other accruedliabilities, and a decrease in trade receivables and inventory. The decrease ininventory was primarily related to the sale of the Salt Lake City facility andrelated inventory, and exiting the Berlex agreement. The increase in cash isdue primarily to operating cash flow from operations as discussed above.

 

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 March 2005, Hospira issued economic developmentpromissory notes, the proceeds of which were used for a distribution facilityexpansion. The $1.75 million ten-year notes bear a fixed rate of interest of2%, with principal and interest due monthly.

 

Hospira’s revolving credit facility consists of anunsecured revolving credit facility of $375 million (“Revolver”) that isavailable for working capital and other requirements. On April 29, 2005, the Revolver was amendedto reduce or eliminate certain restrictions, in order to increase Hospira’soperating flexibility. The Revolver allows Hospira to borrow funds on anunsecured basis at variable interest rates as short-term cash needs dictate. Asof June 30, 2005, Hospira had no amounts outstanding under the Revolver.

 

The amended Revolver and theSenior Unsecured Notes contain, among other provisions, covenants with whichHospira must comply while they are in force. The covenants limit Hospira’sability to allow liens on its properties or assets, or merge or consolidatewith any other corporation.  The amendedRevolver further limits Hospira’s ability to sell its assets.  Under the amended Revolver, Hospira must alsocomply with certain financial covenants, including interest coverage ratio,leverage ratio and minimum consolidated net worth. As of June 30, 2005, Hospirawas in compliance with all covenants under the amended Revolver and the SeniorUnsecured 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. These operations and assets are used in theconduct of Hospira’s international business and Hospira is subject to the risksand entitled to the benefits generated by such operations and assets. Hospirais obligated to pay Abbott for  theseoperations and assets, and assume the corresponding liabilities,  over a two-year period after the spin-offdate as Hospira establishes its business infrastructure outside the UnitedStates and obtains regulatory approval for the transfer of the marketing authorizationsfor Hospira products to local Hospira affiliates or third-party distributors.The amount payable is equal to the net book value of those assets andliabilities at the time of such transfer. Accordingly, the net book value willbe affected by normal operations, exchange rates and other business factors.Hospira pays Abbott interest, at local prevailing short-term rates, inconnection with Hospira’s use of certain of these assets during that period. Asof June 30, 2005, the net book value of the assets and liabilities that had notyet transferred was $223.0 million. The net book value is primarily comprisedof accounts receivable of $88.3 million, inventory of $72.7 million, equipmentof $59.7 million and other, net of $2.3 million. Each amount has been includedin the corresponding balance sheet line item. The amount due to Abbott for thenet book value of assets and liabilities is offset by $104.9 million for itemsthat are due from Abbott related to the international business. These itemsinclude amounts due for operating profits and inventory purchases of Hospiraproducts to support the international business. All charges between Hospira and Abbott are included in Due to Abbott,Net on the balance sheet. In the second quarter of 2005, the net assets ofCanada and the Netherlands were legally transferred from Abbott. The totalamount paid was $45.8 million. Subsequent to June 30, 2005, the net assets ofseveral additional countries were transferred to Hospira from Abbott.  Hospira expects to transfer the net assets ofadditional countries each quarter throughout the remaining transition period.

 

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**ContractualObligations**

 

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.

 

The followingtable summarizes Hospira’s estimated contractual obligations as of June 30,2005 (dollars in millions):

 

| ** **                                                                   | ** ** | **Payment Due by Period** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------|------------|
| ** **                                                                   | ** ** | ** **                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **2010 and** | ** ** |
| ** **                                                                   | ** ** | **Total**                 | ** ** | **2005** | ** ** | **2006-2007** | ** ** | **2008-2009** | ** ** | **Thereafter** | ** ** |
| Long-term debt and interest payments                                         |       | $                         | 992.9      |   | $ | 19.2 |   | $ | 77.0 |   | $ | 376.9 |   | $ | 519.8 |   |
| Lease obligations                                                            |       | $                         | 155.5      |   | 12.3 |   | 37.0 |   | 34.6 |   | 71.6 |   |
| Purchase commitments (1)                                                     |       | 365.0                     |       | 304.5 |   | 59.5 |   | 1.0 |   | — |   |
| Other long-term liabilities reflected on  the consolidated balance sheet (2) |       | 14.1                      |       | — |   | 14.1 |   | — |   | — |   |
| Amounts due to Abbott for transfer of  certain international net assets (3)  |       | 223.0                     |       | 116.2 |   | 106.8 |   | — |   | — |   |
| Total                                                                        |       | $                         | 1,750.5    |   | $ | 451.1 |   | $ | 294.0 |   | $ | 413.0 |   | $ | 592.4 |   |

 

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| (1) | Purchase commitments  consist primarily of inventory purchases made in the normal course of  business to meet operational requirements.                                                                                                                                                                                                            |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Excludes $85.0 million  of other long-term liabilities related primarily to post-retirement benefit  plans.                                                                                                                                                                                                                                        |
| (3) | The amount due to Abbott  for the acquisition of certain international net assets excludes an  offsetting amount of $104.9 million for items that are due from Abbott  related to the international business. These include amounts due for  operating profits and inventory purchases of Hospira products to support the  international business. |

 

**LegislativeIssues**

 

The Jobs Act, signed into law in October 2004,provides for a special one-time dividends received deduction on therepatriation of certain foreign earnings to a U.S. taxpayer, provided certaincriteria are met. Hospiracontinues to evaluate the legislation and whether it will elect to repatriatequalified undistributed foreign earnings as a result of the Jobs Act.  Based on the analysis to date, the range ofpossible amounts that Hospira is considering for repatriation is between $0 and$220 million, with the corresponding income tax effects ranging from $0 to$12.6 million. Hospira expects to complete its evaluation by the end of 2005.

 

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 additional legislationis enacted, it could have the effect of reducing prices, or reducing the rateof price increases, for medical products and services. International operationsare also subject to a significant degree of government regulation. It is notpossible to predict the extent to which Hospira or the healthcare industry ingeneral might be adversely affected by these factors in the future.

 

**Private Securities Litigation ReformAct 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’s control,and may cause actual results and performance to differ materially from Hospira’sexpectations.

 

Economic, competitive, governmental, technological andother factors that may affect Hospira’s operations are discussed in 

 

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Hospira’s Annual Report on Form 10-K for the yearended December 31, 2004.  Accordingly,undue reliance should not be placed on the forward-looking statements containedin this document. These forward-looking statements speak only as of the date onwhich the statements were made. Hospira undertakes no obligation to update orrevise publicly any forward-looking statements, whether as a result of newinformation, future events or otherwise.

 

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

 

In January 2005, Hospira entered into interest rateswap transactions whereby the $300 million five-year senior unsecured notes duein June 2009 were effectively converted from fixed to floating rate debt.  The objectives of the transactions enteredinto were to (i) maintain a capital structure containing appropriate amounts offixed and floating rate debt, and (ii) lower the interest expense on thesenotes in the near term.  Hospira does notexpect cash flows from debt related interest rate-sensitive instruments to beaffected to a significant degree by reasonable changes in market interestrates.

 

There have been no other material changes to theinformation provided in Hospira’s Annual Report on Form 10-K for the year endedDecember 31, 2004.

 

**Item4.    Controls and Procedures**

 

(a)          *Evaluation of disclosure controlsand procedures. *The Chief Executive Officer, ChristopherB. Begley, and 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.

 

(b)         *Changes in internal controls.*During Hospira’s most recent fiscalquarter, there was no change in Hospira’s internal control over financialreporting that has materially affected, or is reasonably likely to materiallyaffect, Hospira’s internal control over financial reporting.

 

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**PARTII.  OTHER INFORMATION**

 

**Item 1.****                           LegalProceedings**

 

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 civilinvestigations that are seeking to identify the practices and determine whetherthose practices violated any laws, including federal and state false claimsacts, or constituted fraud in connection with the Medicare and/or Medicaid reimbursementpaid to third parties.  In addition,Abbott is a defendant in a number of purported class actions on behalf ofindividuals or entities, including healthcare insurers and other third-partypayors, that allege generally that Abbott and numerous other pharmaceuticalcompanies reported false or misleading pricing information in connection withfederal, state and private reimbursement for certain drugs.  Many of the products involved in theseinvestigations and lawsuits are Hospira products.  Hospira is cooperating with the authoritiesin these investigations. There may be additional investigations or lawsuits, oradditional claims in the existing investigations or lawsuits, initiated withrespect to these matters in the future. Hospira cannot be certain that it will not be named as a subject ordefendant in these investigations or lawsuits. Hospira has been added as a defendant in one AWP proceeding, *The State of Texas ex rel. Ven-A-Care of the FloridaKeys, Inc. v. Abbott Laboratories Inc., Hospira, Inc., B. Braun Medical Inc.and Baxter Healthcare Corporation,*Case No. GV401286, pending in theDistrict Court of Travis County, Texas. The lawsuit alleges generally that the defendants made falserepresentations of prices and costs for drugs directly and indirectly to theTexas Medicaid Program.  Abbott willindemnify Hospira for liabilities associated with pending or future AWPinvestigations and lawsuits only to the extent that they are of the same natureas the lawsuits and investigations that existed against Abbott as of thespin-off date and relate to the sale of Hospira products prior to thespin-off.  Hospira will assume any otherlosses that may result from these investigations and lawsuits related to Hospira’sproducts. These investigations and lawsuits could result in changes to Hospira’sbusiness practices or pricing policies, civil or criminal monetary damages,penalties or fines, imprisonment and/or exclusion of Hospira products fromparticipation in federal and state healthcare programs, including Medicare,Medicaid and Veterans’ Administration health programs, any of which could havea material adverse effect on its business, profitability and financialcondition.

 

Hospira has been named as a defendant in a lawsuitbrought by three employees alleging generally that the spin-off of Hospira fromAbbott Laboratories adversely affected employee benefits in violation of theEmployee Retirement Income Security Act of 1974. The lawsuit was filed onNovember 8, 2004, in the United States District Court for the Northern Districtof Illinois, and is captioned: *Myla Nauman,Jane Roller and Michael Loughery v. Abbott Laboratories and Hospira, Inc*.The lawsuit seeks class action certification on behalf of “All employees ofAbbott who were participants and beneficiaries of the Abbott Benefit Planswhose employment with Abbott was terminated between August 22, 2003 and April30, 2004, as a result of the spin-off announced by Abbott on August 22, 2003.”On April 27, 2005, the court issued an opinion denying the motions of Abbottand Hospira to dismiss the complaint. The ruling is not a determination of themerits of the plaintiffs’ claims. Hospira denies all material allegationsasserted against it in the complaint.

 

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.

 

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

 

(c)          IssuerPurchases of Equity Securities

 

The table below givesinformation on a monthly basis regarding purchases made by Hospira of itscommon stock.

 
| ** **             | ** ** | ** **    | ** ** | ** **     | ** ** | **Total Number of**  | ** ** | ** **                | ** ** |
|------------------------|------------|---------------|------------|----------------|------------|----------------------|------------|---------------------------|------------|
| ** **             | ** ** | ** **    | ** ** | ** **     | ** ** | **Shares**           | ** ** | **Maximum Number (or**    | ** ** |
| ** **             | ** ** | **Total**     | ** ** | ** **     | ** ** | **Purchased as**     | ** ** | **Approximate Dollar**    | ** ** |
| ** **             | ** ** | **Number of** | ** ** | ** **     | ** ** | **Part of Publicly** | ** ** | **Value) of Shares that** | ** ** |
| ** **             | ** ** | **Shares**    | ** ** | **Average**    | ** ** | **Announced**        | ** ** | **May Yet be Purchased**  | ** ** |
| ** **             | ** ** | **Purchased** | ** ** | **Price Paid** | ** ** | **Plans or**         | ** ** | **Under the Plans or**    | ** ** |
| **Period**             | ** ** | **(1)**       | ** ** | **per Share**  | ** ** | **Programs**         | ** ** | **Programs**              | ** ** |
| April 1-April 30, 2005 |       | 6,530         |       | 32.77          |       | —               |       | —                    |       |
| May 1-May 31, 2005     |       | 28,281        |       | 35.95          |       | —               |       | —                    |       |
| June 1-June 30, 2005   |       | 110,031       |       | 38.85          |       | —               |       | —                    |       |
| Total                  |       | 144,842       |       | 38.01          |       |                 |       |                      |       |

 

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(1)          Theseshares represent the shares deemed surrendered to Hospira to pay the exerciseprice and satisfy tax withholding obligations in connection with the exerciseof employee stock options.

 

**Item4.    Submission of Matters to a Vote ofSecurity Holders**

 

Hospira held its Annual Meeting of Shareholders on May9, 2005. The following is a summary of the matters voted on at that meeting.

 

(a)   Theshareholders elected three Class I directors to Hospira’s board of directors.The persons elected to Hospira’s board of directors, and the number of sharescast for and the number of shares withheld, with respect to each of thesepersons, were as follows:

 
| **Director**         | ** ** | **Votes For** | ** ** | **Votes Withheld** | ** ** |
|----------------------|------------|---------------|------------|--------------------|------------|
| Irving W. Bailey, II |       | 127,907,363   |       | 9,002,140          |       |
| Judith C. Pelham     |       | 135,476,475   |       | 1,433,028          |       |
| Jacque J. Sokolov    |       | 127,908,276   |       | 9,001,227          |       |

 

(b)  Theshareholders approved the Hospira 2004 Long-Term Stock Incentive Plan. Thenumber of shares cast for and against the proposal, and abstentions and brokernon-votes  were as follows :

 
| **For**     | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker non-vote** | ** ** |
|-------------|------------|-------------|------------|-------------|------------|---------------------|------------|
| 119,083,633 |       | 16,302,584  |       | 1,523,285   |       | 1                   |       |

 

(c)   Theshareholders approved the Hospira, Inc. 2004 Performance Incentive Plan. Thenumber of shares cast for and against the proposal, and abstentions and brokernon-votes  were as follows :

 
| **For**     | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker non-vote** | ** ** |
|-------------|------------|-------------|------------|-------------|------------|---------------------|------------|
| 124,413,461 |       | 10,948,594  |       | 1,547,341   |       | 1                   |       |

 

(d)  Theshareholders ratified the appointment of Deloitte & Touche LLP as Hospira’sindependent registered public accountants. The number of shares cast for andagainst the proposal, and abstentions and broker non-votes were as follows :

 
| **For**     | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker non-vote** | ** ** |
|-------------|------------|-------------|------------|-------------|------------|---------------------|------------|
| 135,664,893 |       | 306,632     |       | 937,207     |       | 771                 |       |

 

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**Item 6.****          ****Exhibits**

 

(a)                                  Exhibits

 
| **EXHIBIT  NO.** | ** ** | **DESCRIPTION** |
|------------------|------------|-----------------|
|             | 10.1       |            | Form of Non-Qualified Stock Option Award Terms under Hospira 2004  Long-Term Stock Incentive Plan to apply to awards made on or after May 9,  2005 (incorporated by reference to Exhibit 10.1 to Hospira’s Current Report  on Form 8-K filed on May 12, 2005, describing the change in such terms). |
|             |       |            |   |
|             | 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 requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 
|                   | HOSPIRA,  INC. |
|------------------------|----------------|
|                   |           |
|                   |           |
|                   | By:            |   | /s/ Terrence  C. Kearney |
|                   |           |   | Terrence C.  Kearney, |
|                   |           |   | Senior Vice  President,  Finance and Chief Financial  Officer |
|                   |           |   |
|                   |           |   |
| Date: August  11, 2005 |           |   |

 

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